Antitrust and Trade Regulation Alert
February 26, 2015

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Gregory L. Curtner
Steven J. Cernak
William M. Hannay

Antitrust and Trade Regulation Group

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Supreme Court Clarifies "Active Supervision" Prong of Antitrust’s State Action Exemption

The Supreme Court's February 25, 2015 ruling in North Carolina Board of Dental Examiners v. FTC is the Court's latest attempt to clarify the scope of the state action exemption to the federal antitrust laws. In an opinion for a divided court, Justice Kennedy wrote that state agencies "on which a controlling number of decisionmakers are active market participants in the occupation the board regulates" must be actively supervised by other state actors to invoke state action antitrust immunity. Similar licensing boards and their members must now review their policies and practices to ensure they comply with the opinion. (See here for our earlier alert on this case.)

The state action exemption is easy to summarize but difficult to apply: bona fide state regulation of the economy, even if anticompetitive, is exempt from the federal antitrust laws. Mere state blessing of private cartels is not. The Court has developed a two-prong test to organize the analysis: the state's anticompetitive policy must be "clearly articulated" by the state legislature and the action must be "actively supervised" by another state entity. The Court has waived the need for "active supervision" for state subdivisions like municipalities but insists on it for private actors. This case decided whether "active supervision" is necessary for a state board composed of private actors.

Here, North Carolina law clearly designated the Board as "the agency of the State for the regulation of the practice of dentistry." Its membership consists of six practicing dentists elected by licensed dentists, one practicing hygienist elected by licensed hygienists, and one consumer member appointed by the Governor. The Board issues licenses, enacts rules and investigates any potential violations of its rules. Its members swear an oath of allegiance to the State and comply with various administrative procedure rules.

In 2006, the Board threatened non-dentist teeth-whitening providers because it found the service to be unlicensed dental practice. Some non-dentists stopped offering the service. The FTC investigated and found the Board's actions to be anticompetitive concerted activity not exempted as state action. The FTC assumed "clear articulation" but found the Board's action required "active supervision" by another state actor because the Board was "controlled by participants in the very industry it purports to regulate." The Fourth Circuit agreed that where "a decisive coalition" of the agency "is made up of participants" in the market, the agency is a "'private actor' for the purposes of the state-action exemption" and must be actively supervised to address the danger that members might act to further their private interests.

The case generated numerous amicus briefs for both sides with vastly different views on the costs and benefits of bodies like the Board and the need for antitrust review. At oral argument, the Justices also struggled with where to draw the line. While worried about lay government officials supervising professionals like brain surgeons, they were also concerned about completely shielding from antitrust oversight the activities of such competitors.

Relying on its numerous prior state action cases, the Court's majority concluded that the need for "active supervision" did not turn on state designation or other formality. Instead, courts must evaluate the risk that "active market participants" will use the state entity to pursue private interests and restrain trade. The majority found that such a risk exists when "a controlling number of decisionmakers" on such a board are "active market participants." The majority did not find such a board to be illegal, only that any actions of such a board must be actively supervised by some other state actor to qualify for antitrust immunity.

The dissent, authored by Justice Alito and joined by Justices Scalia and Thomas, relied on the same long list of prior Court cases to reach the opposite conclusion. In addition, the dissent thought the majority opinion "diminishes our traditional respect for federalism and state sovereignty" by not granting immunity to an entity clearly designated a state agency by North Carolina. More practically for such entities, the dissent complained that the majority's standard will be difficult to apply. While the terms "controlling number" and "active market participants" are clearly met in this case, the majority did not define the terms. The dissent raises three paragraphs worth of practical questions (Does "controlling number" only mean a majority? Is a professional on leave from her business still an "active market participant"?) that these boards and their members will now need to ask.

Professionals who serve on professional boards can no longer rely on a state designation of the group as a state agency for antitrust immunity. The composition of such boards, their activities and their interaction with other unrelated state actors must now be reviewed to see if antitrust immunity is still available. Such entities and their members should be conducting those reviews immediately. For assistance in that analysis, contact Steve Cernak, Greg Curtner, Bill Hannay or any of the other attorneys in Schiff Hardin's Antitrust and Trade Regulation Group.

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