Healthcare providers and other professionals and business people whose occupations are regulated by state boards composed of fellow practitioners must note last week's decision by the United States Supreme Court in North Carolina State Board of Dental Examiners v. FTC, No. 13–534 (U.S. Feb. 25, 2015).1 The Court ruled that the North Carolina State Board of Dental Examiners can be sued for its regulatory, and potentially anticompetitive, conduct under the federal antitrust laws, even though the Board was established by and acted under the authority of the state of North Carolina. The Court decided that the State must actively supervise the potentially anticompetitive conduct of such a board before it is entitled to immunity from antitrust liability. North Carolina did not provide such active supervision. This decision has broad implications for any occupations or professions that are regulated by state boards or agencies controlled by members of the occupation or profession.

North Carolina's Dental Practice Act established a Board composed of six dentists, one dental hygienist and one consumer appointed by the governor. It regulates the practice of dentistry in the State and has the authority to sue to enjoin anyone from unlawfully practicing dentistry. In the 1990s, many dentists in North Carolina, including members of the Board, began providing teeth-whitening services. When non-dentists began providing these services several years later, North Carolina dentists complained to the Board, often commenting on the lower prices charged by the non-dentists. The Board decided teeth-whitening services constitute the practice of dentistry under the Dental Practice Act and sent cease-and-desist letters to stop non-dentists from providing teeth-whitening services. They also convinced a cosmetology board to tell cosmetologists not to offer such services, and sent letters advising mall operators that non-dentists providing such services were violating the law and should be expelled from the malls' premises. Because of the Board's actions, non-dentists in North Carolina stopped providing these services.

In 2010, the Federal Trade Commission (FTC) filed a complaint alleging that the Board's actions to exclude non-dentists from the teeth-whitening market in North Carolina constituted an anticompetitive and unfair method of competition under federal antitrust law. The Board responded that its conduct was tantamount to action by a state and that it was entitled to immunity from antitrust liability. The FTC rejected this argument and found that the Board's actions regarding teeth-whitening were anticompetitive. The Court of Appeals agreed. At the Supreme Court, the only issue was whether the Board's actions were immune from the federal antitrust laws based upon the doctrine of state-action immunity under the Court's previous precedents.

In 1943, the Supreme Court had held that states are immune from federal antitrust suits for state conduct that impairs competition in the course of enacting legislation, rendering court decisions or taking regulatory actions. This immunity arises out of the authority of states to adopt measures that may restrain competition but are in the public interest, such as requiring a surgeon to obtain a medical license before performing heart surgery. The Board argued that, as a state licensing board acting within its jurisdiction, it should have received this same immunity.

The Supreme Court disagreed2 and found that when a state agency controlled by active market participants, such as the Board -- an entity controlled by dentists and created to regulate the practice of dentistry -- only has immunity from antitrust liability if the state: (1) clearly states the anticompetitive policy (here, prohibiting the unauthorized practice of dentistry); and (2) actively supervises the anticompetitive policy, including the Board’s actions to implement that policy. In other words, market participants that regulate their own market must show that their conduct has the blessing of the state in order to receive state-action immunity from antitrust laws.

All the parties agreed the State had established a policy that displaced competition with regulation, so the first requirement was met. The Board argued that entities designated by a state as its agencies are exempt from the second requirement. But the Court decided that where a controlling number of decisionmakers on a state board are active market participants in the occupation the board regulates, the board must show that its conduct is actively supervised by the state to gain state-action immunity from federal antitrust laws. Here, there was no active supervision from the State of the Board’s decision to restrict providers of teeth-whitening services. So, state action immunity was not available as a defense.

The Supreme Court's decision has far-ranging implications and applies to many state boards or agencies that regulate various trades and professions and are run by members of those very occupations. The Court reasoned that where market participants control the market’s regulatory board, there is a high risk of self-interested, anticompetitive conduct — i.e., those in the market will protect themselves to the detriment of outsiders. The Court believes that active state supervision of such a board’s conduct is essential to ensure that the conduct promotes the policy of the state, rather than the individual interests of the market participants.

So, for state agencies or boards run by market participants, there is no substitute for active supervision by the state, not even a good faith belief or industry consensus that a certain action protects the public. So, what must one do to comply with this active supervision requirement? The Supreme Court recognized that each case is different, but that generally this active supervision must include: (1) a review of the substance of anticompetitive decisions; (2) the power to veto or modify particular decisions to make sure they promote state policy; and (3) supervisory review by someone who is not an active market participant. Since state governments are replete with self-regulating boards and agencies similar to the North Carolina board, this case provides important guidance for states trying to protect their agencies from the threat of antitrust lawsuits. But it also leads to unanswered questions, such as: What entity within state government will provide such supervision? Will they have sufficient expertise to supervise specialized occupations and professions? And will board members have to be concerned about their own individual exposure to liability in case the supervision provided by the state is later determined to be inadequate? In sum, North Carolina Board of Dental Examiners will force states and state regulatory boards to reevaluate and in some cases revamp the extent to which the state oversees the conduct of such boards.