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From Antitrust Law Daily, September 12, 2016

Antitrust agencies urge rejection of Texas Medical Board’s state action appeal

By Jeffrey May, J.D.

The Department of Justice and FTC are urging the U.S. Court of Appeals in New Orleans to turn away an appeal from the Texas Medical Board (TMB), questioning a decision denying its motion to dismiss an antitrust action on state action immunity grounds. The government argued in its brief, filed with the court on September 9, that orders denying a state action defense were not immediately appealable. The agencies contend that the appellate court lacks jurisdiction over the appeal. If the court were to find that it has jurisdiction, the government suggests that the court should hold that the state action doctrine did not shield the board’s rules from federal antitrust scrutiny because the "active supervision" requirement of the doctrine was not satisfied. Effectively, the government sides with Teladoc, Inc., the plaintiff in the suit (Teladoc, Inc. v. Texas Medical Board, Case No. 16-50017).

Teladoc, one of the largest telehealth services in the United States, alleged in its suit that the board unlawfully restricted telehealth services in Texas. In denying the board’s motion to dismiss, the court determined that the board was not entitled to state action immunity because it failed to demonstrate that the courts of Texas, the State Office of Administrative Hearings, or the Texas Legislature had the ability to veto or modify its rules, as required by the U.S. Supreme Court's 2015 decision in N. Carolina State Bd. of Dental Examiners v. FTC. The board filed its appeal earlier this year. In August, the district court denied the motion to certify the order for appeal under 28 U.S.C. §1292(b).

The government contended that the appellate court lacks jurisdiction because the order denying the motion to dismiss on state action grounds was not collaterally appealable. Noting that the collateral order doctrine is a narrow exception to the general rule against piecemeal, prejudgment appeals, the court pointed out the three conditions for appealing an order: (1) a conclusive determination of the disputed question, (2) resolution of an important issue completely separate from the merits of the action, and (3) effectively unreviewable on appeal from a final judgment. According to the government, state action determinations are not effectively unreviewable on appeal from a final judgment. Moreover, state action issues are not completely separate from the antitrust merits. "[T]he state action determination requires a factual analysis of the nature of economic competition in the specific market at issue, together with the regulatory constraints on that competition, and thus, it overlaps with the merits question of whether the conduct is an unreasonable restraint of trade," according to the brief.

The agencies also urged the appellate court to disregard a 1996 Fifth Circuit decision in Martin v. Memorial Hospital at Gulfport, 86 F.3d 1391, as wrongly decided. Martin should not be followed, according to the government, because the analogy it drew between the state action doctrine and absolute, qualified, and Eleventh Amendment immunities afforded to public officials was incorrect. The government explained that the protections of the state action doctrine applied to conduct by private parties as well as governmental defendants. It also was suggested that Martin was not controlling because its holding was readily distinguishable from the Teladoc case. Martin’s application of the collateral order doctrine is limited to situations in which appeal was taken by a "municipality or subdivision," and the Texas Medical Board, which was composed of market participants, was not a municipality, political subdivision, or other organ of local government. Further, Martin’s application of the collateral order doctrine should not be extended to appeals taken by state regulatory boards, the government argued.

Application of state action doctrine. In any event, the state action doctrine did not shield the board’s rules from federal antitrust scrutiny, in the government's view. The district court correctly applied the active supervision requirement where Teladoc alleged that a majority of the board’s members were active market participants. Moreover, it correctly concluded that the board did not show that its rules met the requirements of active supervision. The government explained that the legislative and judicial review mechanisms cited by the board did not satisfy the "constant requirements of active supervision" designed to ensure that the challenged actions of the state agency accord with state policy: (1) review of the substance of the anticompetitive decision, not merely the procedures by which it was adopted; (2) supervisor power to veto or modify particular decisions to ensure they accord with state policy; (3) actual occurrence (not mere possibility) of active supervision; and (4) state supervisor not being an active market participant.

Attorneys: Steven J. Mintz for Department of Justice. Drew Navikas (Cleary Gottlieb Steen & Hamilton, LLP) and Dudley D. McCalla (Jackson Walker LLP) for Teladoc, Inc. James Carlton Todd, Office of the Attorney General, for Texas Medical Board.

Companies: Teladoc, Inc.

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