United States: Administrative Law Judge Finds That North Carolina State Board Of Dental Examiners Violated FTC Act

First published in Antitrust News & Notes, October 2011

The Federal Trade Commission's (FTC) Chief Administrative Law Judge Michael Chappelle ruled that the North Carolina State Board of Dental Examiners (the "Board") engaged in unfair competition by classifying teeth-whitening services as dentistry and sending ceaseand- desist letters to non-dentists offering such services. The importance of this litigation is that the central issue was the scope of the state action doctrine, which has been of great interest to the FTC.

The Board is an agency of the State of North Carolina entrusted with regulating the practice of dentistry in the state. The Board issues and renews licenses and takes disciplinary actions against dentists who violate the Dental Practice Act (the "Act"). To practice legally in the state, a dentist must be licensed by the Board. Under the Act, the Board can bring an action in state court to enjoin the unauthorized practice of dentistry and also refer such matters to the district attorney for criminal prosecution. Its administrative powers, however, are confined to license applications and the conduct of licensees. The Board is comprised of six practicing dentists, one practicing dental hygienist, and one consumer member. The licensed members of the respective professions elect the six dentists and one hygienist on the Board, and the governor of North Carolina appoints the consumer member. The Act prohibits the hygienist and consumer members from participating in licensing decisions. Although not legally prohibited from participating, they were also excluded from participating in investigations into the unlicensed practice of dentistry.

The key issue in the case was whether the Board limited competition for teeth-whitening services. Teeth-whitening procedures remove stains and other discoloration from teeth. There are three principal types of teeth-whitening procedures: (1) bleaching and lightening, (2) dental prosthetics like caps and crowns, and (3) stain removal through mechanical polishing and special toothpastes. The conduct at issue related to bleaching and lightening of teeth. Judge Chappelle explained that there are four types of bleaching and lightening services and products: (1) dentist in-office teeth-whitening services; (2) dentist-provided take-home teeth-whitening products; (3) over-the-counter (OTC) teeth-whitening products; and (4) non-dentist teeth-whitening services in salons, retail stores, and mall kiosks. The prices of these products range from as little as $15 for OTC toothpastes to $400 or more for whitening performed by a dentist. Non-dentist teeth-whitening services are typically available for $75 to $150.

The case arose after numerous licensed dentists complained to the Board about non-dentists offering teeth-whitening services. In response, the Board sent cease-and-desist orders to non-dentists offering teeth-whitening services and to their suppliers and landlords. The letters said that the mall kiosks, salons, and other non-dentists that offered teeth-whitening services were engaged in the "unauthorized practice of dentistry." Some letters added that "[p]racticing dentistry without a license in North Carolina is a crime." The Board also sent a notice to the North Carolina Board of Cosmetic Art Examiners (Cosmetology Board) informing it that only licensed dentists can perform teeth-whitening procedures. The Cosmetology Board placed this notice on its website. Given the gravity of the consequences, recipients of the letter ceased to offer teeth-whitening services, terminated leases with retailers offering teeth-whitening services, and refused to supply non-dentists offering teeth-whitening services with the necessary products.

The Board argued that its conduct was immune from antitrust attack because it constituted state action. In a separate opinion from February 8, 2011, the FTC, however, ruled that the Board could not assert the state action doctrine to shield itself from liability under the FTC Act and other federal antitrust laws. The U.S. Supreme Court articulated the test for this immunity in Cal. Retail Liquor Dealers Ass'n v. Midcal. To qualify for this immunity, an entity must show that the challenged restraint is "(1) pursuant to a clearly articulated and affirmatively expressed state policy; and (2) actively supervised by the state itself." Municipalities and other extensions of the sovereign are exempt from the second prong of the state action test. The Commission, however, ruled that the Board is not the sovereign in this case and must satisfy the second prong. The Commission observed that dentists control the Board's decision-making process, and thus it is not sufficiently independent form the parties being regulated to act in the public interest. Applying the second prong of the Midcal test, the Commission ruled that the generic oversight provided by the State of North Carolina does not "substitute for the required review and approval of the 'particular anticompetitive acts' that the complaint challenges."

Following the loss on the state action doctrine defense, Judge Chappelle's decision focused the competitive effects of the Board's conduct. In doing so, Judge Chappelle applied the rule of reason. He defined the relevant geographic market as the State of North Carolina and the relevant product market as one-time teeth-whitening services, constituting only dentist and non-dentist in-office teeth whitening. OTC products were not included in the relevant market because they require repeat use and cannot offer immediate results. The Board was deemed to have market power in this relevant market because it has the ability to exclude competitors. Noting that Section 5 of the Federal Trade Commission Act encompasses Section 1 of the Sherman Act, Judge Chappelle then examined whether the Board is capable of "concerted action." He ruled that the Board members are independent economic actors capable of conspiring with each other. The six dentist members controlled the Board and had full-time dental practices. In addition, several of them had an economic interest in teeth-whitening services, and all of them represented member dentists who had an interest in this service.

Judge Chappelle ruled that the Board's conduct had anticompetitive effects. He found that the Board's cease-and-desist letters excluded non-dentist providers of teeth-whitening services and eliminated a lower-cost alternative to teeth whitening by dentists. He rejected all of the Board's procompetitive justifications for its conduct. The Board asserted that it was acting as a state licensing agency and protecting the citizens of North Carolina from the unauthorized practice of dentistry. Judge Chappelle said that this was a reframing of the state action immunity, which the FTC Commission had ruled was inapplicable in a separate opinion. The Board also contended that its cease-and-desist letters protected the public from cheaper and lower-quality teeth-whitening procedures. This justification was deemed invalid because it conflicts with the purpose of the Sherman Act, which favors unfettered competition irrespective of its effect on safety or quality. Lastly, the Board argued that it was "protect[ing] legal competition within the marketplace." Judge Chappelle also rejected this defense, finding that no court in North Carolina had held teeth whitening by a non-dentist to be illegal.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.