Last week, the United States Supreme Court issued an opinion that will have a broad impact on how states regulate professions through agencies and licensing boards. In North Carolina State Board of Dental Examiners v. FTC, No. 13-534, 574 U.S. __ (2015), the court ruled that the “state action immunity doctrine” does not protect a state agency from federal antitrust liability if (1) a controlling number of the agency’s decisionmakers are market participants, and (2) the state does not actively supervise the agency’s policies and actions. The court determined that when an agency is controlled by the market participants that the agency is charged with regulating, the agency’s actions must be sufficiently supervised by the state to ensure that the market participants’ actions are consistent with state policy.

Case Background

North Carolina’s Board of Dental Examiners ("Board") is the state’s agency for regulating the practice of dentistry, including the licensing of dentists. Six of the Board’s eight members are practicing dentists elected by their fellow dentists throughout the state.

When non-dentists began offering teeth whitening services in North Carolina, dentists who offered teeth whitening began to complain to the Board. The Board investigated the matter and began issuing cease-and-desist letters to non-dentists, indicating that non-dentists could not offer teeth whitening because the service constituted the practice of dentistry. The Board did not create a formal rule or regulation.

As a result of the Board’s letters, non-dentists stopped offering teeth whitening. The FTC issued a complaint against the Board, claiming that the Board’s action constituted an anticompetitve and unfair method of competition under the FTC Act. North Carolina argued that the Board’s actions were immune under the state action doctrine. The FTC rejected that argument, as did the 4th Circuit Court of Appeals.

State Action Immunity

There is an inherent conflict between the federal antitrust laws’ promotion of competition and the states’ valid interests in regulating conduct to achieve other public objectives. The Supreme Court has recognized that principles of federalism dictate that a state can establish anticompetitive regulations without violating federal antitrust law. This is known as the state action immunity doctrine. When the state is acting in its sovereign capacity, it is immune from antitrust scrutiny. State action immunity also extends to nonsovereign actors, including private parties, under certain circumstances.

Municipalities and certain other governmental entities are entitled to antitrust immunity as long as they are acting pursuant to a clearly articulated and affirmatively expressed state policy to displace competition with regulation. That was the issue considered by the Supreme Court recently in FTC v. Phoebe Putney Health System, Inc., 133 S.Ct. 1003 (2013), in which the Court ruled that a statute that generally authorized local hospital authorities to acquire other hospitals did not clearly articulate a state policy to authorize an anticompetitive merger of two hospitals.

A private actor, by contrast, must satisfy two requirements to qualify for immunity. First, the state must articulate a clear policy in favor of the anticompetitive regulation. And second, the state must actively supervise the policy under its sovereign power.

The FTC’s case against the Board raised the question of whether a board controlled by market participants should be treated like a government actor and only be required to demonstrate that it is acting pursuant to a clearly articulated policy, or whether such an agency should be treated like a private entity that must be actively supervised by the state. The Supreme Court ruled that the Board should be treated more like a private entity. If the state delegates its regulatory authority to a private association or to an agency controlled by market participants, then state action immunity is lost unless the state provides “active supervision” of the entity.

Active State Supervision

The court defined active supervision as mechanisms that provide a “realistic assurance” that the market participant regulators’ conduct “promotes state policy, rather than the party’s individual interests.” The court recognized that this is a “flexible and context-dependent” concept but noted a few “constant requirements” of active supervision. The state supervisor must:

  • “review the substance of the anticompetitive decision”; and
  • “have the power to veto or modify particular decisions to ensure they accord with state policy.”

Additionally, the state supervisor “must not itself be an active market participant,” and the mere potential for state supervision is insufficient.

Consequences

This decision could have a significant impact on professional regulation by state boards, many of which are controlled by market participants. The unavailablity of state action immunity over disciplinary actions involving individual practitioners will probably result in a number of lawsuits against many agencies that police the practice of their professions, although it is hard to see how the suspension or termination of a single professional’s license would have an impact upon competition. However, agency actions that protect a profession from competition or limit participation in a market will inevitably invite antitrust challenges if the board is controlled by market participants.