The Supreme Court has ruled that when an oversight mechanism created by a State—here a State Board—is under the control of those it was supposed to be regulating (sometimes referred to by economists as “regulatory capture”)[1], anticompetitive actions taken by the State Board on its own without further official government review or approval enjoy no immunity under the state action doctrine.  North Carolina State Board of Dental Examiners v. Federal Trade Commission, 574 U.S.___, 135 S.Ct. 1101 (Feb. 25, 2015) (“N.C. State Board“).

FACTS

North Carolina’s Dental Practice Act (“Act”) created a State Board of Dental Examiners (“Board”) to regulate the practice of dentistry.  The Act provided that six of the Board’s members were dentists elected by dentists.  A seventh member was a dental hygienist.  The eighth member was the “consumer” member and appointed by the Governor.  The Board’s rules and regulations could be approved, when appropriate, by a Rules Review Commission appointed by the state legislature.  Here, the Board’s acts at issue were taken solely by its dentist members.  Its hygienist and consumer members did not participate in the challenged conduct.  Nor did the Rules Review Commission review or approve of the Board’s actions.

Dentists in North Carolina began providing teeth whitening services in the 1990s.  Eight of the Board’s ten dentist members during the relevant period earned substantial fees for that service.  In 2003, nondentists began to compete, selling teeth whitening services at lower prices than dentists.

Dentists complained to the Board about that competition.  Few of the dentists’ complaints concerned possible harm to consumers.  Most complained about the low prices being charged by nondentists.  The Board put one of its dentist members in charge of conducting an investigation.

The Board then took steps to put an end to nondentists providing teeth whitening services.  It issued cease and desist letters on its official letterhead to nondentists and shopping malls telling them to stop teeth whitening because it constituted the illegal practice of dentistry, although the Act does not specify teeth whitening as a practice of dentistry.  The Board also got another state board to issue the same type of letter to cosmetologists.  As a result, nondentists ceased to provide teeth whitening services in North Carolina.

The FTC filed an administrative complaint alleging that the Board’s actions constituted concerted, anticompetitive and unfair competition.  The Board countered that, under the state action doctrine of Parker v. Brown, 317 U.S. 341 (1943) and its progeny, its actions were immune from antitrust liability because it was a state regulatory agency.  The ALJ agreed instead with the FTC, finding that the state action doctrine did not shield the Board’s acts.  The ALJ stated that the Board was “a ‘public/private hybrid’ that must be actively supervised by the State to claim immunity,” and that such supervision was absent.  N.C. State Board, 135 S.Ct. at 1109.  The FTC affirmed on appeal.

After further proceedings the ALJ found that the Board had unreasonably restrained competition.  The FTC affirmed.  It rejected the Board’s asserted public safety justification, pointing to the wealth of evidence showing “that nondentist provided teeth whitening is a safe cosmetic procedure.”  N.C. State Board, 135 S.Ct. at 1109.  The FTC ordered the Board to stop issuing more cease and desist letters, and to send corrective letters to those who had received threatening letters.  Id.

The Fourth Circuit Court of Appeals affirmed.  The Board then petitioned for a writ of certiorari to the United States Supreme Court, which granted the petition.

THE MAJORITY OPINION

Justice Kennedy authored the majority opinion.[2]  Antitrust law is the “central safeguard for the Nation’s free market structures.”  N.C. State Board, 135 S.Ct. at 1109; see United States v. Topco Associates, Inc., 405 U.S. 596 (1972) (antitrust laws are the “Magna Carta” and “Bill of Rights” of the free enterprise system).  However, in our federal system the States are sovereigns entitled to enact regulations that limit competition.  N.C. State Boardsupra, at 1109-10.  Antitrust law cannot impose “an impermissible burden on the States’ ability to regulate.”  Id., citing Exxon Corp. v. Governor of Maryland, 437 U.S. 117, 133 (1978).  For that reason, Parker v. Brown created the state action doctrine and interpreted the antitrust laws to confer immunity on anticompetitive conduct required or done by the States when acting in their sovereign capacity.  Parker, 317 U.S. at 350-3451.

The Board here claimed entitlement to state action immunity asserting that, as a state agency, it was necessarily acting in a sovereign capacity.  The Court disagreed.  The Board consisted of “active market participants.”  N.C. State Boardsupra at 1109, citing Goldfarb v. Virginia State Bar, 421 U.S. 773, 791 (1975)(“the fact that the State Bar is a state agency . . . [does not allow] it to foster anticompetitive practices for the benefit of its members”).  The Court stated that market participants may be motivated by separate, private motives, rather than by achieving governmental goals, when taking actions that the antitrust laws may proscribe, such as setting rules for market entry, regulating prices, or limiting output when inappropriate.  N.C. State Board, 135 S.Ct. at 1111.

The Court therefore ruled that a captured agency must pass the two-part test of California Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc., 445 U.S. 97 (1980) (“Midcal“), to be entitled to state action immunity.  “The question is not whether the challenged conduct is efficient, well-functioning, or wise.”  N.C. State Boardsupra at 1111.  First, the State must have an implicit policy to allow a Board to engage in the type of anticompetitive conduct at issue and second, the State must provide active supervision of the agency’s conduct.  Midcalsupra at 105.  The second requirement demands that State officials have the power to review and disapprove of acts by a Board that are not consistent with state policy.  N.C. State Board, 135 S.Ct. at 1112.

Here, there was not even a pretense of active supervision by the State.  Indeed, the Court noted that the Board employed cease and desist letters “rather than any of the powers at its disposal that would invoke oversight by a politically accountable official.”  N.C. State Boardsupra, at 1116.  The absence of that state supervision deprived the Board of state action immunity.

The Court refused to treat the Board in the same manner as municipalities for state action purposes (Id. at 1112-14), compared trade associations’ competition issues with those of captured regulatory agencies (Id. at 1114), and emphasized that industry self-regulation can be a virtue.  Id. at 1115.  The Court declined to address what types of active supervision by the State are required because there was no state supervision present to review (Id. at 1116), but stated that “the state supervisor may not itself be a market participant.” 135 S.Ct. at 1117.  The judgment of the Court of Appeals was affirmed.

THE DISSENTING OPINION

Justice Alito authored the dissent, joined by Scalia and Thomas, J.J.  Briefly, the dissent stated that “the only issue in this case is whether the [Board] is a state agency, and the answer to that question is plainly yes.”  N.C. State Boardsupra, at 1119-20.  It pointed to the many provisions in the Act making the Board a state agency, which, standing alone, entitled the Board to state action immunity.  Id. at 1120.  The dissent was unimpressed with the presence of regulatory capture, asserting that the groundbreaking case creating state action immunity, Parker v. Brown, was also a case of regulatory capture, and yet the immunity had applied (Id. at 1117).  It also stated that determining the adequacy of state supervision would be a quagmire.  Id. at 1122.