Today’s Supreme Court decision in North Carolina State Board of Dental Examiners v. Federal Trade Commission1 is the second time in two years that the Court has spoken on the state action exemption to the federal antitrust laws, and the Court once again has made it clear that the days of an expansive interpretation of that exemption are over.

Under the state action exemption, which is based on the principles of state sovereign immunity, restraints imposed by a state as an act of government are exempt from federal antitrust laws. Parker v. Brown, 317 U.S. 341 (1943). Private parties carrying out a state’s regulatory program are also immune as long as the private party: 1) is acting pursuant to a “clearly articulated and affirmatively expressed … state policy;” and 2) is “actively supervised by the state itself.” Cal. Retail Liquor Dealers Ass'n v. Midcal Aluminum, 445 U.S. 97 (1980).

Today’s decision in NC Dental and the 2013 Supreme Court decision in Phoebe Putney2 each focused on one of the two prongs of the Midcal test, and each decision will have the effect of making it more difficult to extend the exemption beyond the state itself.

In NC Dental, the Court focused on the “active supervision” requirement and concluded that the North Carolina Board of Dental Examiners (the Board) did not meet that test. The controversy began in 2003 when non-dentists in North Carolina began to offer teeth-whitening services. The Board, which is designed as a state agency by statute, consisted of six licensed dentists, one licensed dental hygienist, and one consumer member; with the dentists and dental hygienists elected by their peers and the consumer member appointed by the governor of the state. The Board issued nearly 50 cease-and-desist letters to non-dentist providers that effectively resulted in the end of non-dentists providing teeth-whitening services in the state. In 2010, the Federal Trade Commission (FTC) issued an administrative complaint against the Board alleging that it had violated the FTC Act by excluding the non-dentist teeth-whitening providers. The Board argued that it was acting as a state agency and thus immune from federal antitrust laws. The FTC issued a final order against the Board and enjoined it from issuing further extrajudicial orders to teeth-whitening providers in North Carolina. The 4th Circuit denied the Board’s subsequent petition seeking review of the FTC order.3

In affirming the 4th Circuit decision, the Supreme Court held that a state board on which a controlling number of decision makers are active market participants in the occupation the board regulates must satisfy Midcal’s active supervision requirement in order to invoke antitrust immunity under the state action exemption. The Court noted that “when a State empowers a group of active market participants to decide who can participate in its market, and on what terms, the need for supervision is manifest.” Furthermore, while the Board did not argue that it was actively supervised by the state, the Court concluded its decision by reiterating the requirements of active state supervision: (1) the substance of the anti-competitive decision must be reviewed by a state supervisor; (2) the state supervisor must have the power to veto or modify decisions to ensure that they align with state policy; (3) the “mere potential for state supervision” is not a sufficient substitute for an actual decision by the state; and (4) the state supervisor may not be an active market participant.

The 2013 Phoebe Putney decision focused on the “clear articulation” prong of Midcal. That case arose out of a merger of a for-profit hospital with a hospital owned and operated by a county hospital authority (Authority), which was created by the state legislature but operated independently of the state government. The FTC alleged that the transaction was technically structured as an acquisition of the for-profit by the Authority, in a specific attempt to take advantage of the state action exemption. The 11th Circuit observed that Georgia’s Hospital Authorities Law granted hospital authorities the power to “operate projects” including hospitals, to “make and execute contracts and other instruments necessary to exercise the[ir] powers,” and to “acquire by purchase, lease or otherwise … projects.” Based on this broad language, the 11th Circuit found that the legislation clearly indicated that the Georgia Legislature anticipated that the powers it granted to the Authority would produce anti-competitive effects, and thus were a foreseeable result of the legislation and sufficient to meet the Midcal “clear articulation” test. The Supreme Court reversed, holding that the Georgia Legislature did not clearly articulate or affirmatively express a state policy to displace competition in the market for hospital services. The Court noted that the Authority needed to show not just that it had been delegated authority to act, but also that it was authorized to act or regulate in an anti-competitive manner.

The combined effect of NC Dental and Phoebe Putney is that any regulatory body that is not clearly part of the executive branch of a state will have a significantly higher burden to take advantage of the state action exemption. This will require state governments to review and reconsider the structure and procedures of such bodies and should force the bodies themselves to carefully consider whether the state action exemption applies before taking any action that might implicate the federal antitrust laws.

It will also mean that industry participants regulated by such quasi-governmental bodies likely will be emboldened to challenge more adverse actions in court. Given the prevalence of quasi-government entities in states – many of which include market participants – and that they regulate a wide variety of industries including energy, professional services, health care, transportation, and many others, these decisions will likely have significant policy and legal implications for years to come.