The Fourth Circuit Court of Appeals has ruled that North Carolina’s Dental Board cannot ban non-dentists from offering teeth-whitening service, upholding the Federal Trade Commission’s finding that the practice was anticompetitive.  The ruling represents the FTC’s latest victory in its push to narrowly delineate the state action doctrine, which the dental board had raised in defense of its actions.  The case is The North Carolina State Board of Dental Examiners v. Federal Trade Commission (No. 12-1172, May 31, 2013).

The state action doctrine exempts state entities from federal antitrust scrutiny when there is a clearly articulated state regulatory policy and active state supervision over any private conduct seeking to benefit from immunity.  The dental board had claimed such immunity by virtue of being a North Carolina state entity created by a state law giving it the right to regulate the practice of dentistry.  The Fourth Circuit rejected this reasoning, asserting that the board was composed of a private consortium of individual competitors that had pushed for regulation – meaning that, without active state supervision of their conduct, the exemption is inapplicable.

Background

In June 2010, the FTC issued its original administrative complaint against the dental board.  The board’s members, who by statute were required to be practicing dentists, had sent dozens of letters to non-dentist teeth-whitening providers, stating they were practicing dentistry illegally and ordering them to stop.  According to the FTC, the board also threatened or discouraged other non-dentists who were considering opening teeth-whitening businesses.  Furthermore, the board allegedly sent letters to mall owners and property management companies urging them not to lease space to non-dentist teeth-whitening providers.

The dental board moved to dismiss the FTC’s charges based on the state action doctrine.  The FTC denied the board’s motion, and in July 2011 an administrative law judge issued an initial decision that concluded the board’s actions constituted “unreasonable restraint of trade and an unfair method of competition.”  The dental board appealed to the Commission, but in December 2011 the Commission held that the board had acted as a combination of competitors and its exclusion of non-dentist providers from the market for teeth-whitening service violated Section 1 of the Sherman Act, which prohibits agreements among competitors that unreasonably restrain competition.

The board again appealed, and this latest appeal was rejected unanimously by a three-judge panel of the Fourth Circuit.  As the court described it, “this case is about a state board run by private actors in the marketplace taking action outside of the procedures mandated by state law to expel a competitor from the market.”

Implications

Coming on the heels of the Supreme Court’s overturning of antitrust immunity in FTC v. Phoebe Putney (2013), the Fourth Circuit’s ruling hearkens back to court decisions in the 1970s and 1980s, when the state action doctrine was applied more stringently than in recent years.  Citing Phoebe Putney, the panel stated that courts should “recognize state action immunity only when it is clear that the challenged anti-competitive conduct is undertaken pursuant to a regulatory scheme that ‘is the State’s own.’”

While the Fourth Circuit in Dental Examiners dealt with the state action doctrine’s second prong (requiring state supervision) and in Phoebe Putney the Supreme Court dealt with the first prong (clear articulation of a state regulatory scheme that displaces competition), the nod to Phoebe Putney signals the possibility that circuit courts will continue to narrow the applicability of the state action doctrine.  FTC Chairwoman Edith Ramirez has asserted as much, stating, “[The Fourth Circuit’s] decision, as did the Supreme Court’s unanimous decision in FTC v. Phoebe Putney earlier this year, recognizes that exemptions to the antitrust laws are to be applied narrowly and that consumers are best off when there is vigorous competition.”

A concurring opinion provided a more nuanced insight, pointing out “the fact that the Board is comprised of private dentists elected by other private dentists.”  It offered, “if the board members here had been appointed or elected by state government officials pursuant to state statute, a much stronger case would have existed to remove the board from the reach of Midcal’s active supervision prong.”  This recommends a significant presence of non-practicing professionals on regulatory boards, and to the extent that this is not possible, significant oversight mechanisms by the state.