Antitrust and Trade Regulation Alert
October 15, 2014

Supreme Court Justices Express Concern about Antitrust Immunity for State Licensure Boards

By: Steven J. Cernak

On October 14, the Supreme Court heard oral argument in North Carolina Board of Dental Examiners v. FTC, the latest in its long line of cases interpreting the state action exemption to the antitrust laws. Clients who participate on or interact with such boards should be interested in the result of this case.

At oral argument, most of the Justices seemed highly skeptical that an entity made up almost entirely of — and elected by — practicing dentists should be deemed a state agency whose actions did not require supervision just because the State said so. The fear seemed to be that a state could allow a group of competitors to pursue their private interests and evade the federal antitrust laws merely through state designation. On the other hand, the Justices clearly were uncertain whether the FTC's proposed test properly decided this case, provided guidance for future cases, or would lead to efficient operations of such state licensure boards.

The state action exemption is easy to summarize: bona fide state regulation of the economy, even if anticompetitive, is exempt from the federal antitrust laws. Unfortunately, it is difficult to apply, as shown by the numerous Court opinions since the principle was first announced more than 70 years ago. The Court has developed a two-prong test to help organize the analysis: the 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 and, probably, state agencies, but insists on it for private actors. But what if that state agency is composed of private actors? That's the question posed in the North Carolina Board of Dental Examiners case.

Under North Carolina law, the Board is "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 governing the practice of dentistry, and investigates any potential violations of the laws it enforces. Its members must swear an oath of allegiance to the State and comply with various administrative procedure rules.

In 2006, the Board sent cease and desist letters on its official letterhead to 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 there was "clear articulation" of the policy 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.

In the North Carolina case, the parties and the numerous amicus briefs supporting each side had significantly different opinions about the costs and benefits of state licensure boards and how their actions should be treated under the antitrust laws. The argument highlighted those differences.

Justice Breyer thought the case "difficult." Justice Alito said he was "troubled" by FTC counsel's assertion that even a board composed of practicing dentists appointed by the Governor, not elected by other dentists, would need active supervision. Justice Alito feared that following the FTC rule would lead to federal review of state board actions "State by State, board by board."

Various hypotheticals were posed by the Justices and discussed: What if the Board had a bare majority of practicing dentists? Or if the dentists were retired? Or if the dentists were on temporary leave from their practices? Several Justices questioned the wisdom of a lay bureaucrat "actively supervising" the actions of a board of brain surgeons and feared that the Court's decision could drastically reduce the willingness of professionals to serve on such boards.

This case is part of the FTC's years-long effort to have courts clarify and narrow the state action exemption. In 2013's Phoebe Putney ruling, the Court clarified the "clear articulation" prong and agreed that a hospital merger in Georgia was not immune from antitrust scrutiny. While the Court's opinion here is not expected for weeks and it is impossible to always accurately predict a decision from oral argument, it appears possible that the Court will find a state agency composed of and elected by market participants will need active supervision of their actions. State licensure boards and, especially, market participant members, should begin reviewing their practices to ensure they can withstand antitrust review if necessary.

To discuss such a review or actions by such bodies, please contact Steve Cernak, Greg Curtner, Bill Hannay or any of the other attorneys in Schiff Hardin's Antitrust and Trade Regulation Group stand ready to assist in all antitrust aspects of trade association membership.

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