Introduction
Supreme Court limits antitrust exemption – but how much?
When is "active supervision" necessary?

What constitutes "active supervision"?
FTC guidance: useful starting point in addressing complex area

Introduction

A February 2015 Supreme Court decision held that state regulatory boards run by "a controlling number" of "active market participants" can qualify for an antitrust exemption only if they are "actively supervised" by the state. However, the court left the content of those key terms vague, leaving states to wonder about the degree of antitrust scrutiny their regulatory boards will face. The Federal Trade Commission (FTC) staff has now issued guidance on how it believe the Supreme Court's decision should be implemented. While that guidance does not address another element of state action immunity – that the conduct in question must be clearly articulated and affirmatively expressed as state policy – it is a helpful starting point for understanding the court's decision on active supervision.

Supreme Court limits antitrust exemption – but how much?

States themselves are immune from suits under the antitrust laws, but less clear is the extent of immunity that should apply to various kinds of state entities. In North Carolina State Board of Dental Examiners v FTC the Supreme Court ruled that a state board of dental examiners was not immune from legal action when it threatened independent teeth-whitening service providers for allegedly practising dentistry without a licence. The board's actions succeeded in driving these providers out of the market, where they had been competing with dentists who also offered the service, but at a much higher cost. The Supreme Court ruled that even though the board was established by the state, it did not qualify for the immunity from federal antitrust laws that states themselves enjoy, for two reasons:

  • The board was made up almost entirely of practising dentists, who have a natural conflict of interest when regulating their competitors; and
  • The board's actions were subject to no real supervision from the state, making it more likely that the board members were acting in their own self-interest instead of protecting consumers.

In other words, the court said that states cannot give members of a profession carte blanche to take anti-competitive action against market disruptors.

Having too large a share of market participants on a state board means that it will lose antitrust immunity; active supervision from the state will restore it. However, the court failed to clarify who counts as an "active market participant", how large a share is too large or what it specifically had in mind when it talked about "active supervision". The FTC staff – the federal agency that took the North Carolina dental board to the Supreme Court – has now taken a first step at answering those questions. The staff was not technically speaking for the FTC itself and its answers are not binding on the FTC or the courts, but they constitute an important source of guidance in this area. Moreover, the guidance is written in plain English, comes with numerous examples and should be accessible to individuals who do not specialise in antitrust law.

When is "active supervision" necessary?

The FTC staff defined an 'active market participant' as anyone who has a licence from the board or whose work is subject to regulation by the board. For example, even if all members of the North Carolina Dental Board that threatened independent teeth whiteners were orthodontists who did not offer teeth-whitening themselves, they would still be considered active market participants. The guidance also includes as an active market participant someone who temporarily suspends his or her participation in the regulated occupation for the purpose of serving on the board. This addresses the question that many people were asking as to whether a doctor who temporarily 'retires' to serve on a medical board and then immediately returns to practice when he or she completes that service is an active market participant while on the board. The answer is yes, according to the FTC staff.

The guidance also asserts that the method by which someone is selected to serve on a board (eg, appointment by the governor or election by the members of the occupation itself) is irrelevant to whether that person is a market participant. What a person does in the market, not how he or she got to the board, is what matters.

In North Carolina Dental the Supreme Court stated that active supervision is required only when a "controlling number" of a board's members are market participants, and the FTC guidance also fleshes out that phrase. While a majority of market participants clearly qualifies as a 'controlling number' of the board, if the market participants have effective veto power over decisions or if the other board members traditionally defer to them on substantive issues, that also constitutes a controlling number. The FTC staff provides an example in which the state board of electricians is made up of three practising electricians and four non-electricians. If the board requires five votes to approve an action, then because at least one electrician must agree to anything that is passed, the board is considered to have a controlling number of market participants. Further, if the market participants – although a minority – can issue cease and desist orders on behalf of the board without the consent or knowledge of the other board members, those actions are subject to the same supervision requirements, according to the FTC guidance.

What constitutes "active supervision"?

The guidance on the issue of who is an active market participant and what it means for a controlling number of them to be on a board is relatively straightforward, with at least some clear-cut answers. The discussion of what constitutes 'active supervision', by contrast, is less clear.

The principles guiding the FTC staff here are taken from recent Supreme Court cases and reiterate that the purpose of the active supervision requirement is to ensure that states, not unaccountable market participants, are the ones behind the policies of their boards, and that they accept political accountability for their boards' actions. To achieve this goal, a supervisor must review the substance of board decisions and must have power to veto or modify board decisions. While not found explicitly in the case law, the FTC guidance also adds that the supervision "must precede implementation of the allegedly anticompetitive restraint". The FTC staff sets out three broad factors that could be relevant to determining what 'active supervision' means.

The first factor is whether the supervisor has obtained the information necessary for a proper evaluation of the board's action. Depending on the circumstances, this could include independently gathering facts, collecting data, conducting public hearings, soliciting public comments for review, investigating market conditions, conducting studies and reviewing documentary evidence. Although the guidance notes that the extent of this information gathering depends "in part" on the scope of what the regulatory board itself has already done in this area, it seems that there is an expectation that the supervisor will play a relatively active role here.

Whether the supervisor has evaluated the substantive merits of the board's recommended action is another factor. There should be an independent assessment of whether the action proposed by the board is in line with the state legislature's expressed standards.

The third factor is whether the supervisor issues a written decision approving, modifying or denying the recommended action and explaining the rationale for the decision. This both shows that the supervisor in fact did evaluate the substance of the proposed action and helps to ensure that the state will accept political accountability for the course taken.

The examples provided by the FTC staff set a high bar. In the realm of supervising regulations promulgated by a state board, the guidance envisions a separate "executive agency" that reviews the board's proposals. This agency would provide notice of the recommended regulations and an opportunity to be heard to anyone affected by it, as well as the general public. This would start with a full review of the evidentiary record compiled by the board whose proposal the agency is reviewing, but would also extend to soliciting written submissions from others, obtaining published studies addressing the regulation, looking into costs and prices in the relevant market and holding public hearings (although if the board already conducted such a hearing, it "may be unnecessary" for the supervising agency to do so again). After gathering all of this information, the exemplary agency should assess whether the proposed regulation meets the state's health and competition goals, and then issue a written decision explaining its reasoning.

Another major function of state boards besides issuing regulations is to discipline members of the regulated occupation. To supervise a regulatory board's disciplinary decisions actively, the FTC staff states that supervision by a single official (who is not a market participant) is sufficient. However, that supervisor should:

  • review the evidentiary record created by the board;
  • supplement it, if appropriate;
  • undertake an independent assessment of the merits of the proposed disciplinary action in light of the state's established policies and standards; and
  • issue a written decision.

The guidance also notes that an individual board disciplinary action will typically have only a minimal effect on competition.

Finally, the guidance lists some examples of situations that do not qualify as active supervision, such as:

  • supervisors who lack the power to veto or modify board decisions;
  • review that is cursory or perfunctory; and
  • review that ensures only that the board followed the right procedure, but does not look into the substance of its decisions.

?FTC guidance: useful starting point in addressing complex area

The FTC staff's published guidance on how state boards can qualify for immunity from the antitrust laws is a helpful development in light of the unanswered questions in North Carolina Dental. Understanding the FTC's interpretation of that case is a crucial component to answering questions about antitrust immunity for state action, but any antitrust analysis in this area is highly dependent on each situation's particular facts. Just because a state board is not immune from an antitrust lawsuit does not mean it has violated the antitrust laws. Indeed, some boards may conclude that their activities are unlikely to result in significant antitrust exposure, and seeking an antitrust exemption is not worth the effort.

For further information on this topic please contact Logan Breed, Robert Leibenluft or Austin Smith at Hogan Lovells US LLP by telephone (+1 202 637 5600) or email (logan.breed@hoganlovells.com, robert.leibenluft@hoganlovells.com or austin.smith@hoganlovells.com). The Hogan Lovells website can be accessed at www.hoganlovells.com.

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