On May 31, the Federal Trade Commission (FTC) recorded yet another victory in its continuing efforts to limit the scope and application of antitrust immunity under the state action doctrine. The Fourth Circuit ruled that the North Carolina State Board of Dental Examiners’ efforts to block non-dentists from providing teeth-whitening services was not entitled to antitrust immunity because the Board’s activities were not actively supervised by the state. North Carolina State Board of Dental Examiners v. Federal Trade Commission, Case No. 12-1172 (4th Cir. May 31, 2013).

The case focused on the activities of the North Carolina state agency, which is composed of several practicing dentists, a dental hygienist and a consumer representative. The Board licenses dentists in the state and is otherwise empowered to take disciplinary measures against licensees. Beginning in approximately 2003, in response to complaints from dentists practicing in the state, the Board opened numerous investigations into teeth-whitening services provided by non-dentists. As a result of these investigations, the Board issued dozens of cease-and-desist letters to such service providers and sought to restrict the market to licensed dentists by other means.

The Board’s activity attracted the attention of the FTC, which issued an administrative complaint in 2010 charging that the Board violated the FTC Act by acting to exclude non-dentist teeth whiteners from the market in North Carolina. A trial on the merits before an administrative law judge found the Board had violated the Act. On appeal, the FTC affirmed and entered a final order enjoining the Board from, among other things, continuing to unilaterally issue extra-judicial orders to teeth-whitening services in North Carolina. The Fourth Circuit’s decision came in response to the Board’s petition for review of the FTC’s order.

The Board maintained that it was a state entity created to regulate the practice of dentistry, which encompassed the teeth-whitening services. Under the state action doctrine, private parties may claim immunity from the antitrust laws if they act according to a “clearly articulated and affirmatively expresses state policy,” and their behavior is “actively supervised by the State itself.” California Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc. (445 U.S. 97, 105 (1980). Municipalities and sub-state entities benefit from a less restrictive test. Such entities must act pursuant to a “state policy to displace competition with regulation or monopoly public service.” FTC v. Phoebe Putney Health System, Inc., 133 S. Ct. 1003, 1010 (2013). These entities are not required to demonstrate the “active state supervision” required under the two-prong Midcal test because with such entities there is little danger that their activities involve a private anti-competitive activities. Town of Hallie v. City of Eau Claire, 471 U.S. 34, 47 (1985).

Relying on its status as a state entity, the Board maintained that it was not subject to the “active supervision” prong required under Midcal. The FTC countered that entities like the Board, regulatory bodies made up of market participants, were subject to the stricter Midcal test. The FTC focused on the need to assure that such an “entity’s decision-making process was sufficiently independent from the interests of those being regulated.” Interlocutory Order In re North Carolina State Bd. Of Dental Exam’rs, 151 F.T.C. 607, 619 (FTC February 3, 2011). Because in this case, a large majority of the Board (six of eight members) was elected by North Carolina dentists, the FTC said the Board must demonstrate that it operated pursuant to active state supervision in order to justify state action immunity.

The Fourth Circuit agreed, holding that state agencies “in which a decisive coalition (usually a majority) is made up of participants in the regulated market, who are chosen by and accountable to their fellow market participants,” are private actors subject to the Midcal test. Slip. Op. at 15. The court found that the Board was unable to meet this test. Id. at 18-19. The “generic” oversight that the Board relied upon was not substitute for the required review and approval of the acts challenged by the FTC. Id.

In the wake of the Supreme Court’s recent decision in Phoebe Putney and this decision, state entities may face greater uncertainty that their activities can benefit from antitrust immunity. Judge Barbara Milano Keenan issued a concurring opinion in the case, however, to emphasize that not every state agency must always meet the active supervision test. Id. at 33. She highlighted that the differentiating factor in this case was that the members of the Board who were market participants are elected by other private participants in the market. Id. at 33-34. Had they been appointed or elected by state government officials, the case for applying the Midcal test would have been much weaker.

A lesson from this case therefore may be for regulatory boards to do more to insulate their market participant members from the interests of those they regulate. One method may be to change the method by which members are selected as the concurring opinion suggests. Another may be to diversify the board membership such that these market participants no longer for a ”decisive” majority of the board.