United States: Antitrust Immunity For State Licensing Boards: Recent Developments Following North Carolina Dental Decision

Last Updated: October 21 2015
Article by Andrew E. Bigart, Ronald M. Jacobs and Andrew L. Steinberg

In the wake of the U.S. Supreme Court's North Carolina Dental1 decision creating a "context-dependent" test to determine whether a state exercises sufficient supervision to confer antitrust immunity on state licensing boards with market participants, there has been confusion about what constitutes adequate state supervision. Several states have initiated reviews of their state licensing boards to assess the antitrust risk stemming from North Carolina Dental and identify potential steps to ensure active state supervision. In addition, the Federal Trade Commission's (FTC) Bureau of Competition just issued non-binding Staff guidance2 to help state officials in this risk assessment (the Staff guidance).

This memorandum explains the Staff guidance, the California Attorney General's Opinion explaining her view on active state supervision requirements, and the Oklahoma Governor's Executive Order making the Attorney General responsible for reviewing non-rulemaking actions by boards with a majority of members who are active market participants.

We expect states will continue to face practical challenges in ensuring that the supervision of their state boards' operations satisfies the requirements of the state action doctrine. The Staff guidance takes a broad view of when supervision is required and what is required for adequate supervision. But in some respects, states appear to have adopted different interpretations of the context-dependent requirements. Until additional clarity emerges and more states issue tailored guidance, boards should consider operating under conservative standards to limit potential antitrust exposure.

Background of North Carolina Dental

In North Carolina Dental, the FTC alleged the North Carolina State Board of Dental Examiners (NC Board) and its members harmed competition in the teeth-whitening business by sending cease-and-desist letters to non-dentist teeth-whitening service providers and product manufacturers. It also sent similar letters to shopping malls advising them to expel tenants that provided teeth-whitening services. The NC Board argued that it was a "state actor" engaged in state action and therefore was immune from antitrust prosecution.

The Supreme Court rejected the NC Board's state action immunity defense because "the Board did not receive active supervision by the State when it interpreted the Act as addressing teeth whitening and when it enforced that policy by issuing cease-and-desist letters to non-dentist teeth whiteners." The NC Board had argued that because it was a state regulatory body established under state law, it was not required to subject itself to the adequate supervision requirements, which, it argued, applied only to non-state actors tasked with state functions. The Supreme Court clarified that the active supervision requirement extends to state entities with active market participants.

Moreover, rather than providing any clear, bright-line rules as to what constitutes active supervision, the Court established a "context-dependent" test. Thus, a state board cannot know for certain that its conduct will be shielded from antitrust liability if it has active market participants. Rather, courts and enforcement agencies will look at a variety of factors. Establishing those factors, the Supreme Court identified certain "constant requirements" of active supervision to qualify a board for state action immunity:

  • The state supervisor must review the substance of the anti-competitive decision, not merely the procedures followed to produce it.
  • The state supervisor must have the power to veto or modify particular decisions to ensure that they are in accordance with state policy.
  • The "mere potential for state supervision is not an adequate substitute for a decision by the State."
  • The state supervisor may not itself be an active market participant.

Thus, active supervision requires the state to ensure that a board's actions are in accordance with the state policy displacing competition, which is different from ensuring that a board has authority to take a specific action (e.g., deny a license). Moreover, the state supervision needs to be focused on the specific activities related to the displacement of competition, and not just on general matters, such as human resources, contracting, and finance.

Federal Trade Commission's Bureau of Competition Staff Guidance (Oct. 14, 2015)3

On October 14, 2015, the FTC Staff issued the Staff guidance to address two issues following the North Carolina Dental decision: First, when FTC Staff think active supervision of a state regulatory board is required to invoke the state action defense; and, second, the factors that are relevant to determining whether the active supervision requirement has been satisfied. The Staff guidance was issued in response to requests for advice "from state officials and others as to what constitutes antitrust compliance for state boards responsible for regulating occupations."4 The Staff guidance is non-binding on the agency or courts, but reflects the understanding of the FTC Staff, and provides assistance to the regulated community.

The Staff guidance highlights legal principles governing the active supervision requirement and does not dictate a mandatory or uniform approach. The Staff guidance recommends each state regulatory board consult with its state Attorney General for board-specific compliance advice.

Board Structure: As a starting point, the Staff guidance notes state legislatures can avoid the issue of "active state supervision" by:

  • Limiting or modifying a board to provide only advisory functions;
  • Staffing the board only with persons who have no financial interest in the occupation that is being regulated; or
  • Voluntarily subjecting a board to federal antitrust standards.

Activities Not Requiring Active Supervision: The Staff guidance then explains that not every function of a state regulatory board requires active supervision, because some actions may not unreasonably harm competition. These examples include:

  • Prohibitions on regulated persons from engaging in fraudulent business practices and untruthful or deceptive advertising;
  • Non-discretionary actions that are implemented in good faith pursuant to an anti-competitive statutory regime, such as denying licensure because of an applicant's failure to submit the required filing fee or proof of educational degree with their application; and
  • Administering a disciplinary process for violations of lawful and valid standards of ethics, competency, conduct, or performance established by the state legislature, provided that the board's actions, patterns, or programs affecting multiple persons do not substantially affect competition.

Market Participants: The Staff guidance then addresses what constitutes an active market participant. According to the Staff guidance, an active market participant is a person licensed by the board or who provides any service or participates in any professional or occupational sub-specialty that is regulated by the board. A person is still an active market participant regardless of the manner in which a person is selected to serve on a state regulatory board, and is still considered an active market participant even if he or she is not affected by a particular action of the board or has suspended practice of his or her occupation while serving on the board.

Control by Market Participants: According to the Staff guidance, whether active market participants constitute a "controlling number" is a function of procedure and practice and not simply numerical composition of the board. In assessing the control exercised by market participants, the FTC Staff will consider:

  • The structure of the regulatory board;
  • The rules governing the exercise of the board's authority;
  • Whether active market participants effectively have veto power, such as through procedural rules requiring super-majority approval of actions;
  • The level of participation, engagement, knowledge, and authority of the non-market participant members in the business of the board;
  • Whether the participation, engagement, and authority of the non-market participant board members differ from those of active market participant board members; and
  • Whether the active market participants exercise or usurp the decision-making power of the board, such as by undertaking actions independent of the non-market participant members.

Active Supervision: In determining the adequacy of supervisory mechanisms, the FTC Staff will be guided by the principles of independent judgment and political accountability and consider the depth and quality of the state's review. The Staff guidance states the FTC will look to a number of factors, including whether the supervising person or entity has:

  • Independently gathered or reviewed a sufficient factual record prepared by the board containing relevant data, public comments, published studies, and other information that would enable an informed evaluation of the regulatory board's recommended action;
  • Meaningfully evaluated, as opposed to a cursory review, the substantive merits of the recommended action in light of the standards and policy established by the state legislature; and
  • Documented its decision and rationale for approving, modifying, or disapproving the recommended action at issue in writing.

The Staff guidance provides two hypothetical scenarios demonstrating satisfactory active supervision. The first involves the supervision of rulemaking by an executive agency designated by the legislature to review and approve regulations recommended by a state regulatory board. During its review, the reviewing agency provides public notice of the regulation and an opportunity for comment; evaluates the regulation by considering the evidentiary record, information, and studies addressing the potential market impact and basis for regulation, and the state legislature's expressed goal or policy; and issues a written decision explaining its rationale for accepting, rejecting, or modifying the scope of the proposed regulation.

The second scenario concerns a disciplinary adjudication. The proposed disciplinary action is substantively reviewed by the administrator who oversees the regulatory board, the Attorney General, or another state official who is not an active market participant. In addition, the reviewing official reviews the entire evidentiary record created by the regulatory board without deference to the conclusions made by the regulatory board in proposing disciplinary action. The reviewing official then issues a written decision that considers whether the proposed disciplinary action is consistent with the policies and standards established by the state legislature, and which approves, modifies, or disapproves the proposed disciplinary action.

Finally, the Staff guidance provides examples of conduct that the FTC Staff believes does not constitute active supervision of a state regulatory board that is controlled by active market participants:

  • The entity responsible for supervising the regulatory board is itself controlled by active market participants in the occupation that the board regulates.
  • A state official monitors the actions of the regulatory board and participates in deliberations, but lacks the authority to disapprove anti-competitive acts that fail to accord with state policy.
  • A state official (e.g., the secretary of health) serves ex officio as a member of the regulatory board with full voting rights. However, this state official is one of several members of the regulatory board and lacks the authority to disapprove anti-competitive acts that fail to accord with state policy.
  • The state Attorney General or another state official provides advice to the regulatory board on an ongoing basis.
  • An independent state agency is staffed, funded, and empowered by law to evaluate, and then to veto or modify, particular recommendations of the regulatory board. However, in practice such recommendations are subject to only cursory review by the independent state agency. The independent state agency perfunctorily approves the recommendations of the regulatory board.
  • An independent state agency reviews the actions of the regulatory board and approves all actions that comply with the procedural requirements of the state administrative procedure act, without undertaking a substantive review of the actions of the regulatory board.

As indicated, these suggestions reflect the current thinking of FTC Staff, but do not have the force of law. Not surprisingly, the FTC has taken a broad view of what constitutes a market participant, and what constitutes control of a board. At the same time, the Staff guidance imposes a high bar for what constitutes active supervision. Thus, the FTC Staff's views would supplant a state's decision to allow the regulated community to be involved in the regulatory process, and require far more involvement by state officials, many of whom may not have the practical experience of those in the profession.

Recent State Developments

California Attorney General Opinion No. 15-4025

On September 10, 2015, the California Attorney General issued an opinion aimed at developing an objective starting point for addressing the implications of the North Carolina Dental decision. The Opinion summarizes the case and explains the California Attorney General's interpretation of the active state supervision requirement. In addition, the Opinion addresses the potential antitrust risk of various types of boards or board activities, and consequently when active state supervision is or is not required.

The Opinion suggests that many board functions are not "market-sensitive" and therefore are unlikely to implicate federal antitrust laws. To the extent a board engages in market-sensitive decision-making, the effects of some actions will be pro-competitive or are unlikely to have an anti-competitive market effect. The Opinion states that rulemaking and disciplinary decisions do not raise a concern, because the due process procedures employed in these areas ensure adequate state supervision. In addition, the Opinion states that comprehensive and detailed anti-competitive statutory schemes that can be enforced by a licensing board without discretion or deliberation leave little room for supervision by the State, and therefore satisfy the supervision requirement.

The Opinion closes with options for ensuring active state supervision:

  • Adopt legislation to change the composition of boards. The Opinion concludes that this approach would not be "the most effective solution."
  • Establish a stand-alone office or a committee within a larger agency to review board actions (likely the Department of Consumer Affairs).
  • Modify the powers of the boards themselves, so that all of their functions (or some subset of functions) would be advisory only, with any formal action taken by a supervising state agency.
  • Enact laws expressly granting antitrust immunity to boards (the Opinion acknowledges that such laws would be of doubtful validity).
  • Indemnification for board members.

In sum, the California Opinion recognizes that the state must take steps to address the active supervision requirements of the North Carolina Dental decision. The most likely approach is for California to establish an office within the Department of Consumer Affairs responsible for reviewing board conduct.

Oklahoma's Executive Order and Attorney General Guidance

On July 17, 2015, the Governor of Oklahoma issued Executive Order 2015-33, making the Attorney General responsible for reviewing non-rulemaking actions by boards with a majority of members who are active market participants.6 Under the Executive Order, all proposed licensure or prohibition actions must be submitted to the Attorney General for review and written analysis. In addition, a board must defer to any direction from the Attorney General. Failure to follow the Attorney General's written analysis will constitute misconduct and subject the board members to removal for cause.

On August 17, 2015, the Attorney General issued guidance requiring boards subject to the Executive Order to seek approval for any proposed action that could be considered anti-competitive. This covers anything that impacts market participation, such as revoking or denying a license or disciplining a licensee.

Antitrust Claims Against Professional Boards

Several state boards are facing antitrust claims in the wake of the North Carolina Dental decision. LegalZoom, an online legal services provider, filed suit in June, alleging the North Carolina State Bar violated antitrust regulations by preventing LegalZoom from offering its services to state residents without non-attorney members overseeing its decisions.7 The State Bar has moved to dismiss, arguing that its regulations and requirements for prepaid legal service plans are subject to adequate supervision, based on the approval of the state supreme court's chief justice.

Similarly, telemedicine provider Teladoc is challenging the Texas Medical Board's new regulation restricting telemedicine practice.8 The Board's rule requires physicians to take a patient history and perform a physical examination before providing remote healthcare. Although the court issued a preliminary injunction enjoining implementation of the new rule, the Board filed a motion to dismiss, contending that the state action immunity applied. The Board claims the state actively supervises the Board, because its members are appointed by the governor and its regulations are subject to a sunset review process and legislative oversight.

Both cases are pending, and we are closely monitoring them. Others may allege similar claims of anti-competitive conduct against state professional boards, and those boards with active market participants should be prepared to evaluate and manage litigation risk accordingly.

Final Thoughts

The decision in North Carolina Dental is important because many state boards have been operating on the assumption that they are immune from the antitrust laws, based on the view that their decisions were made pursuant to a clearly articulated state policy displacing competition.

Although the Staff guidance, the California Opinion, and the Oklahoma Executive Order each attempt to clarify the contours of when and how active supervision requirement can be satisfied, the applicability of the state action defense is dependent on all relevant facts and circumstances. The Staff guidance concludes that active supervision may be required even when active market participants do not make up a majority on the board, although this question was not squarely resolved by the Supreme Court. In contrast to the FTC's position, California's Opinion notes the uncertainty in the definition of "controlling number," while Oklahoma's Executive Order assumes this standard is satisfied if non-market participants constitute a majority.

The FTC's Staff will likely scrutinize closely the chain of supervisory steps before concluding a state has actively supervised a regulatory board. However, the stated factors are capable of being selectively applied, which may encourage states to adopt standards of state agency review that are more rigorous or burdensome than necessary or practically warranted. Specific practical challenges that states will face moving forward include:

  • Determining the appropriate mechanism for active state supervision;
  • Assessing anti-competitive aspects of various board functions across many industries – as recognized by the Staff guidance, antitrust analysis is inherently fact specific;
  • Providing sufficient staffing and resources to ensure active state supervision without impacting the ability of boards to carry out their function;
  • Providing sufficient protection to avoid any potential chilling effect; and
  • The likelihood of litigation and allegations of anti-competitive conduct by those who face adverse board decisions.

The bottom line is that until state boards are confident that the supervision of their operations by the state satisfies the requirements of the state action doctrine, boards should consider operating under conservative standards to limit potential antitrust exposure.


1. North Carolina State Board of Dental Examiners v. Federal Trade Commission, 135 S. Ct. 1101 (2015).

2. Fed. Trade Comm'n, FTC Staff guidance on Active Supervision of State Regulatory Boards Controlled by Market Participants (Oct. 14, 2015), available at https://www.ftc.gov/system/files/attachments/competition-policy-guidance/active_supervision_of_state_boards.pdf.

3. Fed. Trade Comm'n, FTC Staff guidance on Active Supervision of State Regulatory Boards Controlled by Market Participants (Oct. 14, 2015), available at https://www.ftc.gov/system/files/attachments/competition-policy-guidance/active_supervision_of_state_boards.pdf.

4. Debbie Feinstein & Geoffrey Green, The When and What of Active Supervision, Fed. Trade Comm'n (Oct. 14, 2015, 12:28PM), https://www.ftc.gov/news-events/blogs/competition-matters/2015/10/when-what-active-supervision.

5. California Attorney General Opinion No. 15-402 (Sept. 10, 2015), available at http://oag.ca.gov/system/files/opinions/pdfs/15-402.pdf.

6. Executive Order 2015-33 (July 17, 2015), available at https://www.sos.ok.gov/documents/executive/993.pdf; Letter from E. Scott Pruitt, Att'y Gen, to All Boards and Commissions with Active Market Participant Majorities (Aug. 17, 2015), available at http://s3.amazonaws.com/content.newsok.com/documents/FINAL%20Letter%20to%20Agencies%2008212015.pdf.

7. LegalZoom.com,Inc. v. North Carolina State Bar, No. 1:15-cv-00439 (M.D.N.C. filed June 3, 2015).

8. Teladoc, Inc. v. Texas Med. Bd. , No. 1:15-cv-00343 (W.D. Tex. filed Apr. 29, 2015).

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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