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Answering the call from state officials seeking advice regarding antitrust compliance for state boards responsible for regulating occupations, Federal Trade Commission (FTC) Staff have stepped up to answer two questions:

  • When does a state regulatory board require active supervision in order to invoke the state action defense?
  • What factors are relevant to determining whether the active supervision requirement is satisfied?

FTC Staff advise, of course, that a state “may avoid all conflict with the federal antitrust laws by creating regulatory boards that serve only in an advisory capacity, or by staffing a regulatory board exclusively with persons who have no financial interest in the occupation being regulated.” But first, some needed background.

Earlier this year, the U.S. Supreme Court held that the North Carolina Board of Dental Examiners (Dental Board) violated the federal antitrust laws by preventing non-dentists from providing teeth whitening services in competition with the state’s licensed dentists. The Supreme Court rejected the Dental Board’s attempt to invoke the “state action defense” by arguing that, as a state agency, it is exempt from antitrust liability. In rejecting that argument, the Supreme Court made clear that the state action defense only applies to state regulatory boards controlled by market participants, like the Dental Board, when they are actively supervised by a state official, or state agency, that is not a participant in the market being regulated. To invoke the state action defense, the Supreme Court held, such boards must demonstrate that the challenged restraint is clearly articulated and affirmatively expressed as state policy.

So, when does a state regulatory board require active supervision in order to invoke the state action defense?

According to FTC Staff guidance, when that state board has a controlling number of decision makers who are active market participants in the occupation the board regulates.

But what makes someone an “active market participant” then?

A member of a state regulatory board “will be considered to be an active market participant in the occupation the board regulates if such person (i) is licensed by the board or (ii) provides any services that is subject to the regulatory authority of the board,” so says FTC Staff. Temporarily suspending your occupation while serving on a state board that regulates your former (and intended future) occupation doesn’t mean that you’re not an active market participant, and it doesn’t matter how you are selected to serve on a state regulatory board (appointed vs. elected).

So, when is a state regulatory board “controlled” by active market participants?

FTC Staff guidance says that active market participants “need not constitute a numerical majority of the members” of the board “to trigger the requirement for active supervision.” Instead, a decision that “is controlled, either as a matter of law, procedure, or fact, by active participants in the regulated market (e.g., through veto power, tradition, or practice) must be actively supervised to be eligible for the state action defense.”

Yes, but what constitutes “active supervision”?

According to the Supreme Court, there are “a few constant requirements of active supervision: The supervisor must review the substance of the anticompetitive decision, not merely the procedures followed to produce it; the supervisor must have the power to veto or modify particular decisions to ensure they accord with state policy; and the ‘mere potential for state supervision is not an adequate substitute for a decision by the State.’ Further, the state supervisor may not itself be an active market participant.”

So, what factors are relevant to determining whether the active supervision requirement has been satisfied?

According to FTC Staff guidance, such factors include whether:

The supervisor has obtained the information necessary for a proper evaluation of the action recommended by the regulatory board. This would include whether the supervisor has ascertained relevant facts, collected data, conducted public hearings, invited and received public comments, investigated market conditions, conducted studies, and reviewed documentary evidence, as applicable.

  • The supervisor has evaluated the substantive merits of the recommended action and assessed whether the recommended action comports with the standards established by the state legislature.
  • The supervisor has issued a written decision approving, modifying, or disapproving the recommended action, and explaining the reasons and rationale for such decision.

Two examples of satisfactory active supervision of a state board are included in the FTC Staff guidance, along with six examples of what does “not constitute active supervision of a state regulatory board that is controlled by active market participants.”

So while the views of FTC Staff offer Help! for state officials seeking advice regarding antitrust compliance for state boards responsible for regulating occupations, there is a caveat: The FTC “is not bound by this Staff guidance and reserves the right to rescind it at a later date.”

*“Help!” by the Beatles