United States: FTC Answers The Call For Guidance Regarding Antitrust Compliance For State Regulatory Boards Controlled By Market Participants

Last Updated: October 20 2015
Article by Dionne Lomax

In North Carolina State Board of Dental Examiners v. FTC, 135 S. Ct. 1101 (2015), the Supreme Court held that the North Carolina Board of Dental Examiners ("Board"), a state agency, was not exempt from federal antitrust laws when it prohibited non-dentists from providing teeth whitening services in competition with the state's licensed dentists. The Court, thus, concluded that the antitrust laws apply to state agencies and regulatory boards comprised of market participants if the Board's challenged conduct is not actively supervised by the state.

In the wake of that decision, state officials have sought advice from the FTC regarding antitrust compliance for state boards responsible for regulating occupations. In response to such requests, on October 14, 2015, the FTC Staff ("Staff") issued guidance addressing the parameters of the "active supervision" requirement under the state action doctrine and its proper application, including the Staff's perspective on when a state regulatory body requires active supervision in order to invoke the state action defense, and the factors that are relevant to determining whether the active supervision requirement is satisfied. This guidance is an important tool to help state officials assess – and perhaps revise – the structure and operation of their regulatory boards to ensure they provide the necessary antitrust protection under the more narrow scope of the state action immunity doctrine.

History of the State Action Doctrine

The state action immunity doctrine was first established by the Supreme Court in Parker v. Brown, 317 U.S. 341 (1943), where the State of California was charged with violating the Sherman Act by enacting legislation that permitted raisin growers to fix prices. The Court held there was no Sherman Act violation as the antitrust laws were not intended to restrict the sovereign capacity of states to regulate their economies. Decisions following Parker extended this immunity to political subdivisions of the state, such as municipalities, when their actions were taken pursuant to a "clearly articulated and affirmatively expressed" state policy to displace competition.

The Supreme Court further clarified that state-authorized private action may also be shielded from the antitrust laws under the state action doctrine in California Retail Liquor Dealers Ass'n v. Midcal Aluminum Inc., 445 U.S. 97 (1980), which set forth a two-prong test for determining whether private action warranted antitrust immunity: (1) the challenged conduct must be clearly articulated and affirmatively expressed as state policy, and (2) the policy must be actively supervised by the state. Over 30 years later, in FTC v. Phoebe Putney Health System, 133 S. Ct. 1003 (2013), the Court further narrowed the state action doctrine and essentially its application to political subdivisions of states, holding "clear articulation" requires that a state not only permit the conduct at issue, but also affirmatively contemplate displacing competition in order for the challenged anticompetitive effects to be attributed to the state. Prior to Phoebe Putney, state action immunity often applied if the anticompetitive effect was the foreseeable result of what the state authorized. In North Carolina State Board of Dental Examiners, the Court analyzed whether the second prong of Midcal – the active supervision requirement – applied to state regulatory bodies comprised of market participants. As noted in our prior alert, in reaching its decision, the court did not define what constituted "active supervision," instead,  characterizing it as a "flexible and context-dependent" inquiry.

Summary of FTC Staff Guidance

The Staff's guidance identifies "overarching legal principles governing when and how a state may provide active supervision for a regulatory board." It provides as follows:

When is active supervision of a state regulatory board required in order to invoke the state action defense?

When a controlling number of decision makers are active market participants in the occupation the board regulates.  According to the FTC, active market participants need not constitute a numerical majority of the members of a state regulatory board in order to trigger the requirement of active supervision. A decision that is controlled, either as a matter of law, procedure, or fact, by active participants in the regulated market (e.g., through veto power, tradition, or practice) must be actively supervised to be eligible for the state action defense. The FTC will evaluate a number of factors to determine whether a particular restraint has been imposed by a "controlling number of decisionmakers [who] are active market participants," including: (i) the structure of the regulatory board, and (ii) whether the board members who are active market participants have veto power over the board's regulatory decisions.

Under what circumstances will a member of a state regulatory board be considered an active market participant?

A member of a state regulatory board will be considered an active market participant in the occupation the board regulates if such person (i) is licensed by the board or (ii) provides any service that is subject to the regulatory authority of the board. If a board member participates in any professional or occupational subspecialty that is regulated by the board, that board member will be considered an active market participant for purposes of evaluating the active supervision requirement. This is true even if the board members themselves are not directly or personally affected by the challenged restraint. In addition, a professional who temporarily suspends his or her occupation for the purpose of serving on a state board that regulates the professional's former occupation will be considered to be an active market participant.

Does the method by which a person is selected to serve on a state regulatory board determine whether that person is an active market participant?

No. The method by which a person is selected to serve on a state regulatory board is not determinative of whether that person is an active market participant in the occupation that the board regulates. Thus, a professional can be deemed an active market participant regardless of whether he or she is appointed to the board by the governor or is elected to the board by the state's licensed professionals.

What constitutes active supervision?

Although the Staff notes that it will "evaluate each case in light of its own facts" to determine when "active supervision" exists, it provided the following principles that will guide its determination, including: (a) whether the state has exercised sufficient independent judgment and control such that the details of the regulatory scheme have been established as a product of deliberate state intervention and not simply by agreement among the members of the state board; and (b) whether the states accept political accountability for anticompetitive conduct they permit and control. Citing North Carolina State Board of Dental Examiners, the Staff also highlighted the "few constant requirements of active supervision" identified by the Supreme Court, including: (a) the supervisor must review the substance of the anticompetitive decision, not merely the procedures followed to produce it; (b) the supervisor must have the power to veto or modify particular decisions to ensure they accord with state policy; (c) the mere potential for state supervision is not an adequate substitute for a decision by the state; and (d) the state supervisor may not itself be an active market participant.

What factors are relevant to determining whether the active supervision requirement has been satisfied?

The FTC notes that it will consider the presence or the absence of the following factors in determining whether the active supervision prong of the state action defense is satisfied. When the supervisor has: (a) obtained the information necessary for a proper evaluation of the action recommended by the regulatory board and, as applicable, has ascertained relevant facts, collected data, conducted public hearings, investigated market conditions, and reviewed documentary evidence; (b) evaluated the substantive merits of the recommended action and assessed whether the recommended action comports with the standards established by the state legislature; and (c) issued a written decision approving, modifying, or disapproving the recommended action, and explaining the reasons and rationale for such decision.

Circumstances that do not constitute active supervision of a state regulatory board

The Staff also provided guidance regarding circumstances that do not constitute active supervision of a state regulatory board. They include, but are not limited to: (a) a state official monitors the actions of the regulatory board and participates in deliberations, but lacks the authority to disapprove anticompetitive acts that fail to accord with state policy; (b) a state official serves ex officio as a member of the regulatory board with full voting rights, but as one of several members of the regulatory board, lacks the authority to disapprove anticompetitive acts that fail to accord with state policy; (c) the state attorney general or another state official provides advice to the regulatory board on an ongoing basis; and (d) the independent state agency tasked with evaluating and approving or vetoing recommendations of the regulatory board, in practice, gives such recommendations only cursory review and perfunctorily approves the recommendations of the regulatory board.

In order to ensure that its guidance was viewed in the appropriate context, the Staff stressed that "vigorous competition among sellers in an open marketplace generally provides consumers with important benefits....  For this reason, a state legislature should empower a regulatory board to restrict competition only when necessary to protect against a credible risk of harm, such as health and safety risks to consumers." According to FTC Staff, "a state may avoid all conflict with the federal antitrust laws by creating regulatory boards that serve only in an advisory capacity, or by staffing a regulatory board exclusively with persons who have no financial interest in the occupation that is being regulated."

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.

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Dionne Lomax
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