United States: Supreme Court: State Agencies Controlled By Active Market Participants Must Have Active State Supervision To Qualify For Antitrust Immunity

In a 6–3 decision issued February 25, 2015, the Supreme Court of the United States held in North Carolina State Board of Dental Examiners v. Federal Trade Commission that if active market participants control an entity—even a state-created entity such as a state licensing board—then state-action immunity from federal antitrust liability is available only if the state actively supervises the entity and its conduct.

Background and Summary

The State of North Carolina's Dental Practice Act created a Board of Dental Examiners as "the agency of the State for the regulation of the practice of dentistry" and specified that six of its eight members must be licensed and practicing dentists, i.e., active market participants.  In response to complaints received from dentists about non-dentist competitors engaging in teeth-whitening services at low prices, in 2006 the Board began to issue official cease-and-desist letters to non-dentists offering teeth-whitening services, warning them to stop practicing dentistry.  The letters achieved their intended result, as non-dentists soon stopped offering teeth-whitening services in North Carolina.

In a 2010 complaint filed against the Board, the Federal Trade Commission (FTC) alleged the Board's actions constituted an anticompetitive and unfair method of competition in violation of Section 5 of the Federal Trade Commission Act.  15 U.S.C. § 45.  The Board responded by asserting it was immune from antitrust liability under the state-action immunity doctrine, which was first articulated in Parker v. Brown, 317 U.S. 341 (1943).  In Parker, the Supreme Court held that the anticompetitive conduct of states acting in their sovereign capacity is shielded from federal antitrust liability.  The Supreme Court concluded that Congress, in passing the federal antitrust laws to protect competition, did not intend to displace state sovereign power to promote alternate policies within their realms.

After denying the Board's motion to dismiss on the basis of state-action immunity, and after an administrative trial on the merits, the FTC's administrative law judge (ALJ) ruled that the Board's actions violated the antitrust laws.  On appeal, the FTC sustained the ALJ's ruling.  The Board then appealed to the U.S. Court of Appeals for the Fourth Circuit, which affirmed the FTC's decision.  The Board's appeal to the Supreme Court followed.

In its decision, the majority for the Supreme Court held that where active market participants control an entity—even where state legislation created the entity and gave control over it to market participants—that entity will obtain state-action antitrust immunity only if it is subject to the state's active supervision.  Because the Board's actions were not subject to North Carolina's active supervision, the Supreme Court affirmed the Fourth Circuit's holding that the Board is not entitled to immunity.

This decision is important for the many state-created entities across the United States that are controlled in whole or in part by market participants (for example, many licensing boards and other governing bodies exist for doctors, lawyers, dentists, engineers, accountants and other professionals), many of which will need to reorganize (to relinquish market-participant control) or become actively supervised to retain immunity they may have thought they had from federal antitrust law.

The Supreme Court's Opinion: Immunity Is Limited to Acts the State Actually Adopts as Its Own

The Board based its argument that it qualified for state-action immunity on the North Carolina statute that created it as "the agency of the State for the regulation of the practice of dentistry."  According to the Board, its actions should be treated as an exercise of the state's sovereign power.  Justice Kennedy, writing for the Supreme Court, disagreed.

According to the opinion, Parker applies to states acting in their sovereign capacities, but the Supreme Court also has made clear that more than a legislative grant of authority is required for non-sovereign actors to qualify for state-action immunity.  In California Retail Liquor Dealers Ass'n. v. Midcal Aluminum, Inc., 445 U.S. 97 (1980), the Supreme Court held that state-action immunity applies to certain conduct of non-sovereign private parties if they meet a two-prong test consisting of showing (1) "the challenged restraint [is] clearly articulated and affirmatively expressed as state policy," and (2) "the policy [is] actively supervised by the State."  Justice Kennedy's opinion states that, given the fact that a majority of the Board's members are practicing dentists, the Board's position "cannot be reconciled with the Court's repeated conclusion that the 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."

The opinion goes on to note that "while the Sherman Act confers immunity on the States' own anticompetitive policies out of respect for federalism, it does not always confer immunity where, as here, a State delegates control over a market to a non-sovereign actor."  Moreover, "[s]tate agencies are not simply by their governmental character sovereign actors for purposes of state-action immunity."  For antitrust immunity to apply where there is little "more than a mere facade of state involvement," the Midcal requirement of active supervision is required, because the immunity is premised on "the States accept[ing] political accountability for anticompetitive conduct they permit and control."  Active market participants, in contrast, "cannot be allowed to regulate their own markets free from antitrust accountability" and qualify for immunity only if their conduct "result[s] from procedures that suffice to make it the State's own."  Thus, "Midcal's active supervision test is an essential prerequisite of Parker immunity for any non-sovereign entity—public or private—controlled by active market participants."

The Supreme Court dismissed the Board's policy argument that this rule will dissuade members of regulated occupations from participating in state government by exposing them to money damages liability.  The Supreme Court stated that because no claim for money damages was at issue, the ruling does not address the question of whether agency officials may be immune from money damages, and that in any event states may provide for indemnification of the officials.

That the Board did not meet prong two of the Midcal test was not in dispute given that the Board did not claim that North Carolina actively supervised it.  Nevertheless, the Supreme Court addressed what active supervision requires: it is a "flexible and context-dependent" inquiry that hinges on "whether the State's review mechanisms provide 'realistic assurance' that a nonsovereign actor's anticompetitive conduct 'promotes state policy, rather than merely the party's individual interests.'"  Among the "constant requirements" of active supervision are that the "supervisor must review the substance of the anticompetitive decision, not merely the procedures followed to produce it," and must "have the power to veto or modify particular decisions to ensure they accord with state policy."  In addition, the "mere potential for state supervision is not an adequate substitute for a decision by the State," and "the state supervisor may not itself be an active market participant."

The Dissent: Concern About Encroachment on Traditional State Powers and an Uncertain Path Forward

The dissent, authored by Justice Alito and joined by Justices Scalia and Thomas, analyzed the case far differently.  According to these justices: "Under Parker, the [antitrust laws] do not apply to state agencies; the [Board] is a state agency; and that is the end of the matter."  They assert that the Board is precisely the sort of entity Parker immunizes, without the added requirement of active supervision under Midcal, because, as in Parker, a state created the agency at issue and defined its contours as part of its public health and safety regulation of a particular area.

The dissent states that the Supreme Court's opinion sacrifices states' traditional rights to protect public health and welfare, and will lead to complicated and unpredictable results.  Any inquiry into the extent of market participants' control of a state agency is improper, according to the dissent, because the Supreme Court in Parker made no such inquiry and in any event would have found that the active market participants there (California raisin growers) would have controlled the entity in question, because the state "conditioned its regulatory measures on the participation and approval of market actors in the relevant industry."

The dissent also expresses concern that, in addition to straying from Parker, the Supreme Court opinion muddies the water by creating a new test with insufficient guidance.  The dissent contends that there is difficulty in defining what constitutes "control" (e.g., is it a majority, a powerful voting bloc or an obstructionist minority?), an "active market participant" and the scope of "realistic assurances" that must exist to ensure that a quasi-public entity promotes state policy rather than its own interests.

The dissent also points out that, by subjecting the Board to both Midcal requirements, the Supreme Court relegates a full-fledged state agency to a position that bears a higher burden in qualifying for antitrust immunity than a municipality.  Under Hallie v. Eau Claire, 471 U.S. 34 (1985), a municipality, as a non-sovereign political sub-division of a state, obtains antitrust immunity only by meeting Midcal's first requirement, i.e., that the challenged conduct is pursuant to a "clearly articulated and affirmatively expressed" state policy.

Implications

For the second time in three years, the Supreme Court has imposed tighter requirements on parties that seek to assert immunity from antitrust liability under the state-action doctrine.  See also FTC v. Phoebe Putney Health Sys., 133 S. Ct. 1003 (2012) (holding that a statutory grant of general corporate powers to a public hospital authority was insufficient to show a clearly articulated and affirmatively expressed state policy to supplant competition with regulation).  In both cases, moreover, the FTC initiated the lawsuits.  These two cases should put all market participants on notice that, should they assert antitrust immunity as a defense against antitrust challenges to their conduct, they must be prepared to face strong scrutiny from both the antitrust agencies and the district and appellate courts.

The Supreme Court's decision is likely to have wide-reaching effects.  Many states regulate professions and occupations through boards controlled by experienced, active practitioners in the fields they regulate.  Any state or quasi-state entity composed, in whole or in part, of market participants should take careful note of this case and examine the entity's structure, composition and operations to assess whether its market participants have "control."  If they do, then the entities and their states must consider changes, either to eliminate the market participants' controlling role or to impose an active supervisory structure.  Finally, such entities should carefully consider their potential (non-immunized) antitrust liability before engaging in any activity that may implicate federal antitrust concerns.

Supreme Court: State Agencies Controlled By Active Market Participants Must Have Active State Supervision To Qualify For Antitrust Immunity

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