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From Antitrust Law Daily, February 25, 2015

State dental board not immune from FTC suit over “teeth whitening” rules

By Jeffrey May, J.D.

A divided U.S. Supreme Court today limited the state action immunity doctrine as it applies to state professional boards “controlled by active market participants.” In a decision authored by Justice Anthony Kennedy, the Court ruled that the North Carolina State Board of Dental Examiners was not immune under the state action doctrine for excluding non-dentist providers from the market for teeth whitening services in violation of Sec. 5 of the FTC Act because the Board's conduct was not actively supervised by the state (North Carolina State Board of Dental Examiners v. FTC, February 25, 2015, Kennedy, A.).

Six of the state dental board's eight members were licensed dentists engaged in the active practice of dentistry. The Court ruled that, because the board—a nonsovereign actor—was controlled by active market participants, the board was required to satisfy the two requirements for state action immunity outlined inCalifornia Retail Liquor Dealers Assn. v. Midcal Aluminum, Inc., 445 U.S. 97, 1980-1 Trade Cases ¶63,201. Under Midcal’s two-part test: (1) the challenged restraint must be clearly articulated and affirmatively expressed as state policy; and (2) the policy must be actively supervised by the state. Assuming, as the parties did, that the clear articulation requirement was satisfied, the Court ruled that the state did not actively supervise the board when it engaged in the conduct challenged by the FTC—efforts to block nondentists from offering teeth whitening services in North Carolina. The Court affirmed a decision of the U.S. Court of Appeals in Richmond, Virginia, in favor of the FTC.

“Limits on state-action immunity are most essential when the State seeks to delegate its regulatory power to active market participants, for established ethical standards may blend with private anticompetitive motives in a way difficult even for market participants to discern,” the Court explained. “The two requirements set forth in Midcal provide a proper analytical framework to resolve the ultimate question whether an anticompetitive policy is indeed the policy of a State.”

The Court rejected the board's assertion that entities designated by the states as agencies are exempt from the active-supervision requirement. “[T]he need for supervision turns not on the formal designation given by States to regulators but on the risk that active market participants will pursue private interests in restraining trade.” Also rejected was the notion that opening up state professional boards to FTC scrutiny and antitrust liability would “discourage dedicated citizens from serving on state agencies that regulate their own occupation.”

The case is a significant win for the FTC. The agency has had the state action doctrine and other antitrust exemptions and immunities on its radar for more than a decade. Today's limitation on the state action doctrine follows the Court's 2013 decision, rejecting state action immunity in an FTC suit challenging the combination of two Georgia hospitals. That case, FTC v. Phoebe Putney Health System, Inc., 133 S.Ct. 1003, 2013-1 Trade Cases ¶78,269, defined what conduct is foreseeable under a clearly articulated state policy—the first part of the Midcal test. Today, the Court reiterated its view, expressed in Phoebe Putney, that state action immunity was “disfavored.”

A number of states see the limitation on the state action doctrine as a violation of state sovereignty. Twenty-three states had urged the Court to overturn the Fourth Circuit’s decision and not impose the active-supervision requirement on state professionally-staffed boards.

The decision will have significant implications for state licensing and professional boards. States will now need to evaluate board membership to determine whether “a controlling number of decisionmakers are active market participants in the occupation the board regulates.” If so, states will need to either reconsider the board's composition or undertake efforts to “actively supervise” the board in order to ensure that state action immunity is available.

What is active supervision? The Supreme Court did offer some suggestions on what constitutes active supervision. Noting that the state need not be involved in a board's day-to-day operations, the Court explained that the state's review mechanisms must “provide `realistic assurance’ that a nonsovereign actor’s anticompetitive conduct `promotes state policy, rather than merely the party’s individual interests.’”

To demonstrate active supervision, a supervisor may not be an active market participant and must: (1) review the substance of the anticompetitive decision, not merely the procedures followed to produce it; and (2) have the power to veto or modify particular decisions to ensure they are consistent with state policy. The “mere potential for state supervision is not an adequate substitute for a decision by the State,” according to the Court.

Dissent. A dissent contended that the majority's decision was “based on a serious misunderstanding of the doctrine of state-action antitrust immunity” underParker v. Brown, 317 U. S. 341, 1940-1943 Trade Cases ¶56,250. It was suggested that the Court was heading into a “morass” by “straying from [a] simple path,” outlined in Parker, that the antitrust laws do not apply to full-fledged state agencies like the North Carolina state board. The dissent, penned by Justice Samuel Alito and joined by Justice Antonin Scalia and Clarence Thomas, concluded by noting that the majority’s decision not only diminished traditional respect for federalism and state sovereignty, but also would be difficult to apply.

FTC reaction. “Today, the Supreme Court affirmed the Federal Trade Commission’s position in recognizing that a state may not give private market participants unsupervised authority to suppress competition even if they act through a formally designated ‘state agency,’” said FTC Chairwoman Edith Ramirez in a statement, announcing the decision. “We are pleased with the Supreme Court’s recognition that the antitrust laws limit the ability of market incumbents to suppress competition through state professional boards. We will remain vigilant through our enforcement initiatives and advocacy to safeguard competition and ensure that American consumers benefit from entrepreneurial initiative.”

The case is Dkt. 13-534.

Attorneys: Glen D. Nager and Hashim M. Mooppan (Jones Day) for North Carolina State Board of Dental Examiners. Malcolm L. Stewart, Deputy Solicitor General, Department of Justice, and Donald B. Verrilli, Jr., Solicitor General, Department of Justice, for FTC.

Companies: North Carolina State Board of Dental Examiners

MainStory: TopStory Antitrust FederalTradeCommissionNews

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