U.S. Supreme Court Holds That State Action Immunity Does Not Apply to State Boards If the Board Is Controlled by Active Market Participants

On Feb. 25, 2015, the U.S. Supreme Court held, in a 6-3 decision, that a state board with a controlling number of decision-makers, who are active market participants in the occupation the board regulates, does not enjoy state action immunity from federal antitrust laws unless “the State has articulated a clear policy to allow the anticompetitive conduct, and, the State provides active supervision of [the] anticompetitive conduct.” N.C. State Bd. of Dental Exam’rs v. F.T.C., 135 S. Ct. 1101, 1112 (2015). (Click here for a copy of the opinion.)

In Parker v. Brown, 317 U.S. 341, 350-51 (1943), the Supreme Court held that state agencies acting in their sovereign capacity are immunized from liability under federal antitrust laws. Since Parker, state action immunity (also known as Parker immunity) has been extended to non-state entities in two circumstances. First, private actors seeking immunity must 1) act pursuant to a “clearly articulated and affirmatively expressed” state policy, and 2) be subject to active state supervision when advancing that policy. See, e.g., California Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc., 445 U.S. 97, 104-05 (1980). Second, municipalities and more vaguely defined “substate governmental entities” need only satisfy the clearly articulated state policy requirement to gain immunity. See, e.g., F.T.C. v. Phoebe Putney Health Sys., Inc., 133 S. Ct. 1003, 1010-11 (2013) (applying rule for substate entities); Town of Hallie v. City of Eau Claire, 471 U.S. 34, 46-47 (1985) (applying rule for municipalities); see also N.C. State Bd., 135 S. Ct. at 1112-13.

The Supreme Court used this framework in Dental Examiners to evaluate whether the North Carolina State Board of Dental Examiners (“Board”) enjoyed immunity from antitrust claims when it issued anticompetitive cease and desist letters, where it was a state agency but a majority of its members were licensed dentists regulating their own trade without active state supervision.

Background

Under the North Carolina Dental Practice Act (“Act”), North Carolina created the Board as an “agency of the State,” and entrusted to it the oversight and regulation of the practice of dentistry. See N. C. Gen. Stat. Ann. § 90-22, § 90-48 (2013) (“[The Board] shall be and is hereby vested, as an agency of the State, with full power and authority to enact rules and regulations governing the practice of dentistry within the State….”). The Board is funded by fees paid by in-state licensed dentists and dental hygienists, and is composed of eight members:  one practicing dental hygienist, one consumer, and six practicing licensed dentists, who are selected by other in-state licensed dentists. Id. at § 90-22; In the Matter of the N.C. Bd. of Dental Exam’r, No. 081-0133, 2011 WL 11798452, at *1, *12-13 (F.T.C. July 14, 2011). Individuals seeking to practice dentistry must be licensed by the Board, which has the authority to refuse to issue a license, refuse to renew a license, revoke or suspend a license, or take disciplinary actions against licensees. N.C. State Bd. of Dental Exam’rs v. F.T.C., 717 F.3d 359, 365 (4th Cir. 2013), aff’d sub nom., 135 S. Ct. 1101 (2015).

By 2003, the Board—responding to complaints from licensed dentists—had undertaken what its Chief Operating Officer coined a “battle” against non-dentists performing lower-cost teeth-whitening services in competition with licensed dentists. N.C. State Bd., 135 S. Ct. at 1108. In particular, the Board issued cease-and-desist letters on Board letterhead to non-dentists (in some cases, suggesting they committed misdemeanors) and teeth-whitening product manufacturers in order to eliminate the provision of all teeth-whitening services by non-dentists in North Carolina. The Act is silent on whether teeth-whitening services—which had begun to be sold after the Act was passed—are even included in the practice of dentistry. N.C. State Bd., 717 F.3d at 364. Additionally, the Board’s authority over unlicensed persons is limited, and extends to bringing actions to enjoin the practice of dentistry or referring a matter to the District Attorney for criminal prosecution. Id. Nonetheless, the Board’s campaign ensued and its efforts were successful. N.C. State Bd., 135 S. Ct. at 1108.

The Federal Trade Commission brought an administrative action against the Board, alleging that sending the cease-and-desist letters without state authorization or supervision constituted an unlawful restraint of trade in violation of Section 5 of the FTC Act. In the Matter of the N.C. Bd. of Dental Exam’rs, No. 81-0137, 2010 WL 2544427, at *3 (F.T.C. June 17, 2010). The Board moved to dismiss on the grounds of state action immunity, arguing that, as a state board, it needed to show a clearly articulated state policy (the first of the two Parker prongs). N.C. State Bd., 135 S. Ct. at 1109. The Administrative Law Judge found in favor of the FTC. N.C. State Bd., 2011 WL 11798452 at *1. The U.S. Circuit Court of Appeals for the 4th Circuit affirmed, holding that agencies, like the Board, in which a “decisive coalition (usually a majority)” is made up of participants in the regulated market, and who are chosen by and accountable to their fellow market constituents, are like any private party required to show both a clearly articulated state policy and active state supervision. N.C. State Bd., 717 F.3d at 368-70. The Supreme Court granted review.

The Supreme Court’s Decision

The Supreme Court affirmed in an opinion written by Justice Anthony Kennedy, who explained that Parker immunity attaches to actors operating within the scope of a state’s sovereign authority. N.C. State Bd., 135 S. Ct. at 1110. Accordingly, the Court held that non-sovereign actors entrusted by a state to perform state actions enjoy Parker immunity only when the restraint is, first, “clearly articulated and affirmatively expressed as state policy,” which requires displacement of competition in ways that the state must have foreseen and endorsed (explicitly or implicitly), and, second, “actively supervised by the state.” Id. at 1111-12. The latter must be assessed on a case-by-case basis, but at a minimum requires that:  1) the state supervisor review the substance of the anticompetitive act and not just the process that brought it about; 2) the supervisor have the power to veto or modify the act; and 3) there is active supervision and not just the mere potential for supervision. Id. at 1116.

As the Court explained, state action immunity must be bounded. Id. at 1111. State agencies “are not simply by their governmental character sovereign actors” for purposes of immunity determinations. Id. Of particular concern, private actors—lacking political accountability and yet delegated state authority to self-police their trade—can be expected to act based on self-interest and in concerted ways contrary to the precepts of the antitrust laws. Id. Moreover, “established ethical standards may blend with private anticompetitive motives in a way difficult even for market participants to discern.” Id. As such, the Court held that the supervision mandate announced in Midcal, which demands that a private party’s anticompetitive conduct actually promote state policy, must be satisfied when a state board is controlled by decision-makers who are active market participants in the occupation the Board regulates.

The Court reaffirmed that municipalities and other substate entities need only show a clearly articulated state policy. Id. at 1112-13. As explained by the Court in Hallie, “[w]here the actor is a municipality, there is little or no danger that it is involved in a private price-fixing arrangement. The only real danger is that it will seek to further purely parochial public interests at the expense of more overriding state goals.” Hallie, 471 U.S. at 35.

The Court also reaffirmed that there can be no conspiracy exception that would void immunity for state actors found to have conspired with non-sovereign parties in anticompetitive ways. N.C. State Bd., 135 S. Ct. at 1113-14; see also City of Columbia v. Omni Outdoor Adver., Inc., 499 U.S. 365, 367-68, 374 (1991). Trying to identify actionable conspiratorial corruption in this context was deemed too “unworkable.” N.C. State Bd., 135 S. Ct. at 1113-14.

Applying these considerations, the Court held that the Board was not relieved of the requirement to prove active state supervision, and that it failed to establish such supervision. Id. at 1116-17. The Court explained that North Carolina delegated authority over licensed dentistry to the Board, but was silent as to teeth-whitening services. Id. Upon receiving complaints, the Board—composed of interested and active market participants—undertook acts beyond its authority to expel competitors without state oversight. Id. The state did nothing to approve or disapprove of the Board’s actions, and there was no evidence of supervision. Id. Consequently, the Board was not immune from the antitrust laws, although the Court noted that the case did not offer the occasion to address the possibility of immunity from damages liability. Id.

The Dissent

Justice Alito (joined by Justices Scalia and Thomas) dissented based on concerns primarily regarding implementation of the Court’s decision. Id. at 1117-18. Justice Alito reasoned that the Board was an immunized agency as understood in Parker because the North Carolina legislature determined the practice of dentistry affected public health, created the Board to regulate the practice, specified the Board’s membership, defined the practice to be regulated, set out the steps the Board can take against licensees and unlicensed persons (including injunctions and investigations), and established reporting requirements the Board must follow. Id. at 1117-19, 1120. By treating the Board as something other than a bona fide state agency, Justice Alito argued, the majority created a “morass” that will require courts to engage in the difficult task of evaluating the possibility of industry capture. Id. at 1118.

Conclusion

The Court’s ruling has important implications because many professional licensing boards include active market participants. The decision clarifies that the state’s delegation of authority to a private actor, even if the state intended the actor to entirely self-regulate, is insufficient to provide immunity. Rather, there must be active interactions between the state and the private entity whereby the entity, even if pursuing a self-interested aim, advances a state interest while under state supervision. Yet, as the dissent points out, the determination of what is a state agency and how much supervision suffices will need to await development in subsequent cases.