U.S. Supreme Court Holds That to Invoke Antitrust Immunity, State Agencies Controlled by Market Participants Must Prove Active State Supervision

March.02.2015

​By Daniel A. Pincus

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 it is subject to active state supervision in accordance with a clearly articulated state policy. North Carolina State Bd. of Dental Examiners v. F.T.C., No. 13-534, 2015 WL 773331 (U.S. Feb. 25, 2015). (Click here for a copy of the opinion.)

Background

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 and granted to private actors when they 1) act pursuant to a clearly articulated state policy and 2) are subject to active state supervision when advancing that policy. See, e.g., Cal. Retail Liquor Dealers Ass'n v. Midcal Aluminum, Inc., 445 U.S. 97, 104 (1980).

In Dental Examiners, the North Carolina State Board of Dental Examiners (“the Board”)—the majority of whose members are licensed dentists—issued cease-and-desist letters to non-dentists and teeth-whitening product manufacturers (in some cases suggesting they committed misdemeanors) in order to eliminate the provision of all teeth-whitening services by non-dentists in North Carolina. These efforts were successful.

The Federal Trade Commission (FTC) 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. The Board moved to dismiss on the grounds of state action immunity, arguing that, as a state board, it needed to only show a clearly articulated state policy (the first of the two Parker prongs). The Administrative Law Judge found in favor of the FTC and the 4th U.S. Circuit Court of Appeals 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. North Carolina State Bd. of Dental Examiners v. F.T.C., 717 F.3d 359, 368-70 (4th Cir. 2013). 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 only attaches to actors operating within the scope of a state’s sovereign authority. 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.” 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.

As the Court explained, these latter requirements are crucial for any non-sovereign entity. State agencies “are not simply by their governmental character sovereign actors” for purposes of state action immunity. The immunity must be bounded, especially 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.” As a consequence, the Court wrote, active market participants cannot be allowed to regulate their own markets free from antitrust accountability. As such, the Court held that Midcals supervision mandate, which demands that a private party’s anticompetitive conduct actually promote state policy, must be satisfied when a board contains a controlling number of decision-makers, who are active market participants in the occupation the board regulates.1

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. The Court explained that North Carolina delegated authority over licensed dentistry to the Board, but was silent on teeth-whitening services. Upon receiving complaints, the Board—composed of interested and active market participants—undertook acts beyond its authority to expel competitors without state oversight. The state did nothing to approve or disapprove of the Board’s actions, and there was no evidence of supervision. Accordingly, 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.

The Dissent

Justice Samuel Alito (joined by Justices Antonin Scalia and Clarence Thomas) dissented based on concerns regarding implementation of the Court’s decision. He 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. 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.

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, determining how much supervision suffices will need to be developed in subsequent cases.

 


 

1 The Court also reaffirmed that municipalities are the sole exception to Midcal’s requirement that non-sovereign entities must establish active state supervision, and that there is no conspiracy exception for state actors found to have conspired with non-sovereign parties to create anticompetitive harms.

 


 

Daniel A. Pincus is a managing associate in Orrick's Antitrust and Competition Group, located in Washington, D.C.