Can the actions of a state regulatory agency be improperly anticompetitive and subject to antitrust liability? On February 25, 2015, the United States Supreme Court concluded the answer is “yes.” The Court in a 6-3 majority opinion held that, where a state agency is controlled by “private market participants” and is not subject to the “active supervision” of the state itself, the regulatory decisions of the agency are not cloaked in the antitrust immunity normally accorded to conduct of states acting in a sovereign capacity. This ruling continues the Court’s trend in narrowing state-action immunity and will subject state-authorized bodies to greater antitrust scrutiny and risk.

The Underlying Conduct

The conduct underlying the Court’s decision relates to activities of North Carolina’s State Board of Dental Examiners, an organization composed primarily of practicing dentists. The board was created by the state to act as a state agency and regulate the practice of dentistry, particularly by administering and enforcing a licensing system for dentists. Starting in 2003, however, the board, in response to competitive pressure caused by non-dentists offering low-cost teeth-whitening services, began to issue cease and desist letters threatening criminal prosecution to such providers, leading to the eventual departure of those low-cost service providers from the state. In 2010, the FTC filed an administrative complaint charging the board with violating Section 5 of the Federal Trade Commission Act and alleging that the board’s concerted action to exclude non-dentist providers constituted an “anticompetitive and unfair method of competition.”

After a lengthy administrative trial, an FTC administrative law judge concluded that the board’s actions were not immunized and had unreasonably restrained competition. The FTC, in reviewing the ALJ’s decision, agreed. The Court of Appeals for the Fourth Circuit affirmed the FTC’s decision in all respects. 717 F.3d 359 (2013).

The Decision

The Supreme Court affirmed the decision of the Fourth Circuit Court of Appeals. The majority opinion (authored by Justice Kennedy) held that the board – which was comprised primarily of active market participants that might have private motives for undertaking anticompetitive activities – was not the same as the sovereign that was entitled to absolute Parker state-action immunity. Instead, because of the state’s delegation of control to the non-sovereign board, a degree of supervision by the state was required under procedures “that suffice to make [the conduct of the Board] the State’s own.” The majority termed the “active supervision” test – laid out in California Retail Liquor Dealers Assn. v. Midcal Aluminum, Inc., 445 U.S. 97 (1980) – as an “essential prerequisite” for Parker immunity “for any non-sovereign entity – public or private – controlled by active market participants” and concluded that significant parallels exist between licensing boards comprised of market participants and private trade associations. The Court found it significant that North Carolina’s Dental Practice Act was silent on the subject of teeth whitening, and there was no evidence that the state of North Carolina had approved – or was even aware of – the board’s activity that was the subject of the case. Ultimately, the Court concluded that if a state “wants to rely on active market participants as regulators, it must provide active supervision if state-action immunity under Parker is to be invoked.”

A dissent written by Justice Alito (with Justices Scalia and Thomas) concluded bluntly that the North Carolina State Board of Dental Examiners was a state agency, and as such, was entitled to immunity because its status as a state agency was “the end of the matter.” The dissent warns of the potential for “far-reaching effects on the States’ regulation of professions” as states attempt to determine how to satisfy the majority’s tests for examination for “controlling” participation by market participants and for “active supervision” by the state.

FTC Chairwoman Edith Ramirez, in a statement released by the FTC shortly after the issuance of the Supreme Court’s opinion, indicated “[w]e are pleased with the Supreme Court’s recognition that the antitrust laws limit the ability of market incumbents to suppress competition through state professional boards.”

The Door Is Open

The Supreme Court has opened the door to ex post facto scrutiny of a state agency’s actions that have anticompetitive effects by requiring sufficient state “supervision” of an agency to make the action indisputably that of the state itself, rather than that of a group of individual stakeholders with their own motives and motivations. As a result, the new reality is that certain state regulatory action will not be immune from antitrust scrutiny – the Court’s ruling will provide openings for additional suits and challenges to regulatory decisions of state licensing boards and other state agencies that receive significant input from private market participants. While ultimate antitrust liability may be avoided if there is “active supervision,” there undoubtedly will have to be significant lower court precedent in order to define the precise contours of what that “supervision” may entail. In the meantime, regulatory action that cannot be demonstrated to have been subject to state “supervision” may be subject to challenge.