More fun with the state action immunity doctrine! The Supreme Court has handed down its ruling in North Carolina Board of Dental Examiners vs. the FTC, finding that state action immunity did not protect the Board’s actions to protect dentists from non-dentist competition in teeth whitening.

The decision brings us a majority opinion from Justice Kennedy, with the chief and the liberal wing in tow, and a dissent from from Justice Alito, which Thomas and Scalia joined. All this disagreement should give us a bit more to sink our teeth into than the last state action decision, which was unanimous.

Unfortunately, I don’t like either opinion. But before we get into that, let me do a very quick overview of what the state action doctrine is. The basic question is pretty simple: in enacting the Sherman Act, did Congress intend to restrict the states from adopting anticompetitive policies? In Parker v. Brown in 1943, the Supreme Court decided that it did not and that state policies that restrict competition are immune from challenge under the federal antitrust laws.

But from there things get more complex. What about municipalities, which are not sovereign? What about state-created schemes carried out by private entities? Those questions eventually made their way to the Supreme Court, which decided that municipalities only qualify for state action immunity when acting in accordance with a “clearly articulated” state policy to displace competition and private actors only when their conduct carrying out that policy is also subject to “active supervision” by the state.

Which brings us to the present case. The Board of Dental Examiners was created pursuant to state statute, which prescribes its membership of six practicing dentists, one licensed hygienist and one “consumer” and charges it with regulating the licensing of dentists in the state. The statute also declared the Board to be a state agency.

According to the FTC, reacting to the complaints of its members about low prices, the Board engaged in a campaign to stamp out teeth whitening services being offered by non-dentists, including sending 47 cease and desist letters and otherwise acting to keep whitening weird…er… solely in the dentist’s office.

Let’s start with the dissent. If I may be excessively dismissive, the dissent seems to merely proclaim, “federalism!” and leave it at that. Sort of. Alito merely observes that the Board is part of the state (look, it says so right in the statute) and is thus immune.

That’s not terribly satisfying and seems to prove too much. Could it really be that if the Board were to decide that tax preparation can only be done by licensed dentists, that too would be immune?

Actually, I think Alito asks one very good question that could have been the center of a more persuasive dissent: why does this state board face greater scrutiny than a municipality?

If it were up to me (and no one has yet explained to my why it isn’t), that’s probably where I would have come out. Does the state have a clearly articulated policy to displace competition in teeth whitening? As there is nothing in the record to answer that question in the affirmative, the Board’s attempted regulation of teeth whitening is outside the scope of any immunity and can be challenged under the antitrust laws. Simple. No need to second-guess the legislature’s declaration of the board as part of the state.

But the majority did not keep it that simple (a fact that the FTC staff is certainly happy about). In fact, they didn’t really get the chance to. For some reason that’s not at all clear to me the parties assumed that the clear articulation requirement was met. Perhaps the FTC was gunning for what it saw as a more important win on which entities qualify as the state itself.

If so, the strategy was certainly successful. When I had the pleasure of being involved in a state action tussle with the FTC, the staff made the same argument – that only the state legislature and the state’s highest court, when acting legislatively, could adopt anticompetitive policies that are immune from federal antitrust scrutiny, not state agencies. At the time, however, the cases were not so clear on this point, including language like “not every act of a state agency is that of the State as a sovereign” or listing the legislature and state Supreme Court as a not-necessarily-exhaustive list of entities capable of acting for the state. Today, the majority adopted the FTC’s position, seemingly with little hesitation. No longer is there any question whether a state agency can adopt an anticompetitive policy without a clearly articulated directive from the legislature to do so.

Which goes to show the power of good facts. If the question was whether the approval of a public utilities commission made up of political appointees confers immunity on a merger of regulated utilities, perhaps there would be some need to stop and think about where the line between state and non-state is.

But when the “regulator” is controlled by market participants who personally stand to gain from adopting rules that protect them from competition, it’s easy to see the competitive harm and, perhaps, not worry too much whether their may be agency actions that should be immune.

Although, to be fair, the majority does allow for the possibility of immune agency action, when the legislature clearly articulates the policy. Does it have to be actively supervised?

The Board argued that like municipalities, active supervision should not be required for state agencies. There is some appeal to that argument. After all, this is a government agency we’re talking about. It should be acting in the public interest, and faces an unhappy legislature if it doesn’t. Is that really all that different from a city?

Today, the court decided that there are state agencies and there are state agencies, and state agencies need active supervision.

Okay, sorry for that bit of nonsense, but court today decided that state agencies that are controlled (what does that mean?) by active market participants must be actively supervised to qualify for state action immunity. Supervision is needed, the court concludes, to ensure that such an agency is actually acting in the public interest rather than their own professional interest.

The implication, it would seem, is that state agencies that are not controlled by active market participants need not be subject to active supervision, although personally I’d expect the FTC to argue against that inference should it encounter a state agency action it wants to challenge.

The dissent warns that the majority decision opens a can of worms that is going to create a lot of trouble for states and how they organize themselves. Perhaps.

On the one hand, I think there will be a lot of easy cases where licensing boards like this one, where the potential for regulatory capture is abundantly clear, will need state supervision if they want to be protected from antitrust scrutiny. That’s probably a good thing and should benefit consumers of licensed services.

On the other hand, I don’t think we will see FTC (or private) antitrust enforcement coming after the state department of transportation because the commission is a transportation engineer.

The thing that makes me pause just a little, though, is that this decision certainly suggests they could.