In a unanimous ruling handed down on May 31, 2013, the Fourth Circuit found that state action immunity did not apply to bar the FTC’s claims that the North Carolina Dental Board’s (the Board’s) cease and desist letters to non-dentist teeth-whitening providers unreasonably restrained trade in violation of Section 1 of the Sherman Act and Section 5 of the FTC Act.1 The court affirmed the FTC’s decision that the state action doctrine did not apply because the Board was a private actor, not the state itself, and because its conduct was not actively supervised by the state. Even though the Board was a state agency under North Carolina law, the court held that it must be treated as a private entity for state action immunity purposes because most of its members were elected by North Carolina dentists, not appointed by the state, and because board members were practicing dentists.
- The FTC’s Case
The North Carolina Dental Board is a state agency comprised of six practicing dentists, a dental hygienist, and one consumer member. Although the Board is a state agency under North Carolina law, the dentist members of the Board are elected by licensed dentists in North Carolina and the dental hygienist member is elected by hygienists in the state. The Board is funded by fees paid by dentists and hygienists.
North Carolina’s Dental Practice Act provides that it is unlawful to practice dentistry in North Carolina without a license from the Board, and under the Act “a person ‘shall be deemed to be practicing dentistry’ if that person, inter alia, ‘[r]emoves stains, accretions or deposits from the human teeth.’”2 The Board is responsible for issuing licenses and for disciplinary measures against its licensees, and if the Board suspects an individual of engaging in the unlicensed practice of dentistry it may bring an action in North Carolina Superior Court seeking an injunction or refer the matter to the district attorney for prosecution.3
The FTC’s action challenged the Board’s practice of sending letters to non-dentists that offered teeth whitening (often in shopping malls) demanding that the recipient cease and desist “all activity constituting the practice of dentistry.”4 According to the FTC, these letters effectively caused recipients to stop providing teeth whitening services, forcing consumers to turn to licensed dentists, which offered teeth whitening services that were far more expensive.
While the FTC’s administrative complaint was pending, the Board moved to dismiss the complaint on the grounds that the state action doctrine gave its actions antitrust immunity. The FTC unanimously rejected the motion, holding that “‘because the Board is controlled by practicing dentists, the Board’s challenged conduct must be actively supervised by the state for it to claim state action exemption from the antitrust laws [under California Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc., 445 U.S. 97, 105 (1980)]. Because we find no such supervision, we hold that the antitrust laws reach the Board’s conduct.’”5
As a result of the ruling by the FTC that state action immunity did not apply, the case went before an Administrative Law Judge for a hearing on the merits. The Administrative Law Judge found that the Board’s conduct violated Section 5 of the FTC Act.6 On December 2, 2011, the FTC upheld the Initial Decision by the Administrative Law Judge and “adopted with minor changes the order entered by [the ALJ].”7
- The Fourth Circuit Agrees with the FTC and Ruled that the State Action Doctrine Did Not Shield the North Carolina Dental Board from Antitrust Liability
The Board appealed the FTC’s decision to the Fourth Circuit. On May 31, 2013, a three judge panel of the Fourth Circuit unanimously held that the state action doctrine did not shield the Board’s actions from antitrust liability.
According to Supreme Court precedent, “[u]nder [the state action] doctrine, the antitrust laws do not apply to anticompetitive restraints imposed by the States as an act of government.”8 The Fourth Circuit described three situations under which an entity may claim state action immunity. First, the antitrust laws do not apply to the actions of the state itself. See, e.g., Parker v. Brown, 317 U.S. 341, 350- 51 (1943) (“nothing in the language of the Sherman Act or in its history … suggests that its purpose was to restrain a state or its officers or agents from activities directed by its legislature”). Second, under California Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc.,9 private parties can claim immunity if they can show that they are acting pursuant to a clearly articulated state policy and that there is active supervision by the state. Third, as described in the Supreme Court’s recent decision in FTC v. Phoebe Putney Health Sys., Inc., “municipalities and ‘substate governmental entities do receive immunity from antitrust scrutiny when they act pursuant to state policy to displace competition with regulation or monopoly public service.’”10 However, unlike private parties, “[m]unicipalities are not required to show the active-supervision prong … because, ‘[w]here the actor is a municipality, there is little or no danger that it is involved in a private price-fixing arrangement.’”11 The Court made clear in Phoebe Putney, however, that “state-action immunity is disfavored … as are repeals by implication.”12
The Board conceded that as a state agency rather than the state itself, the Board was not entitled to absolute immunity under Parker v. Brown. Thus, the issue on appeal was whether the Board’s actions were governed by Midcal or Phoebe Putney, i.e., whether the Board needed to show that its actions had been actively supervised in order to receive antitrust immunity under the state action doctrine. The Board argued that, “as a state agency, it [was] only required to show clear articulation.”13 The Fourth Circuit disagreed, holding that the Board must be treated as a “private” actor because of its makeup, and that the Board was therefore also required to show that its activities had been actively supervised by the state.14 “[W]e agree with the FTC 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 and must meet both Midcal prongs.”15 In reaching this conclusion, the Fourth Circuit focused on the fact that the North Carolina Dental Board “appear[ed] to have the attributes of a private actor and [was] taking actions to benefit its own membership.” Further, the court noted that the state did not appoint the Board members.16
The Fourth Circuit rejected the Board’s argument that — even if it was deemed a private actor — its conduct was nonetheless immune from antitrust challenge because it was actively supervised by the state. The court held that “North Carolina has done far less ‘supervision’ in this case than the Court found wanting in Midcal. Here, the cease-and-desist letters were sent without state oversight and without the required judicial authorization.”17
Having found that the Board was not entitled to state action immunity, the Fourth Circuit proceeded to evaluate whether the Board had violated Section 1 of the Sherman Act.18 The Board had argued that, under Copperweld, it was “incapable of conspiring with itself” or, in the alternative, that “the FTC failed to prove a combination or conspiracy that imposed an unreasonable restraint of trade.”19 The Fourth Circuit looked to American Needle and its progeny and held that, “substance, not form determines whether an entity is capable of conspiring under § 1, and the key inquiry is whether there is a conspiracy between separate economic actors pursuing separate economic interests, such that the agreement deprives the marketplace of independent centers of decision making.”20 Under that standard, the Fourth Circuit found that the Board consisted of separate economic actors that were capable of conspiring with each other under Section 1. The court relied on the fact that even the Board’s own expert admitted that, “the Board members’ active-service requirement can create a conflict of interest since they serve on the Board while they remain ‘separate economic actors’ with a separate financial interest in the practice of teeth whitening.”21 Ultimately, given that the Board acted to restrict the provision of teeth whitening services by non-dentists, the Fourth Circuit held that the Board engaged in a conspiracy in violation of Section 1 of the Sherman Act.22
The Fourth Circuit agreed that the FTC’s application of the “quick look” doctrine rather than full-blown rule of reason analysis was appropriate.23 The court characterized the Board’s conduct as a group boycott, and noted that the Supreme Court “has made clear that practices like group boycotts are amenable to the quick look approach-cases in which ‘an observer with even a rudimentary understanding of economics could conclude that the arrangements in question would have an anticompetitive effect on customers and markets.’”24 While recognizing that the Supreme Court has cautioned that courts “should be hesitant to quickly condemn the actions of professional organizations because ‘certain practices by members of a learned profession might survive scrutiny … even though they would be viewed as a violation of the Sherman Act in another context,’”25 the court also recognized that “anticompetitive acts are not immune from § 1 because they are performed by a professional organization” and that the Court had condemned anticompetitive practices by physicians, dentists, and attorneys.26 Because substantial evidence supported the FTC’s findings of anticompetitive effects, those findings supported the conclusion that the Board’s conduct violated Section 1.
- Concurring Statement Clarifies the Holding
Recognizing that many state professional boards are comprised of practitioners in the field being regulated, Judge Keenan wrote a separate concurrence in which she sought to clarify the limits of the court’s holding. “We do not hold that a state agency must always satisfy the active supervision prong of the standard set forth in Midcal to qualify for immunity … Nor do we hold that a state agency comprised, in whole or in part, of members participating in the market regulated by that state agency is a private actor subject to Midcal’s active supervision prong.”27 Judge Keenan stated that the Board would have had a much stronger argument for state action immunity if the Board members had been elected by state officials pursuant to state statute or, in the alternative, if the state or the judiciary had monitored the Board’s actions.28
The Fourth Circuit’s decision is unlikely to sound the antitrust death knell for professional boards that consist of practitioners, including medical and dental boards and state bar associations responsible for attorney discipline and policing the unauthorized practice of law. As several amici pointed out, it is difficult for state officials that are not professionals in the field being regulated to “actively supervise” the work of professional boards because they lack the necessary expertise. Nevertheless, the decision and concurrence suggest a number of steps that can be taken to minimize risks. It may be that states will choose to avoid this issue by having non-practicing doctors, dentists, etc. supervise the work of professional boards and serve as the ultimate decisionmaker, just as state supreme courts are the ultimate decisionmakers on attorney admission and discipline matters.
Even where a board’s decisions are not supervised by disinterested state officials, one key to the court’s decision (and the FTC’s case) was that the Board was acting outside the scope of its authority. As the majority noted, “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.”29 Had the Board filed suit in state court or reported the unauthorized practice to a district attorney for prosecution as the statute permitted, it would have been acting within “the procedures mandated by state law,” and its actions (if not objectively baseless) would also be protected by Noerr-Pennington immunity for petitioning conduct. Where the ultimate decisionmaker is an independent court, it is not the actions of private parties that are causing the exclusion. State boards comprised of practitioners should thus be able to avoid antitrust attack if they act via judicial procedures, rather than send ultra vires “orders” to cease and desist.
The question remains, however, of how the antitrust laws will apply to the actions of state boards that are not actively supervised by a state official or the product of a judicial decision, such as state professional board licensing and discipline decisions. If the state board of cosmetologists is comprised of practitioners and decides that a score of 85 on the cosmetology exam is required for licensure, can that decision be challenged as a group boycott by those that scored an 84 and are denied licensure? If a state medical board suspends the license of a physician because of a substance abuse problem, is that decision subject to challenge as the pretextual justification of a group of physicians that simply wanted to keep a competitor out of the market?
The Fourth Circuit found the Board’s decisions unjustified because the “Board could only point to four anecdotal cases of consumer injury over a multi-year period based on products considered safe by the FDA and used over a million times over the last twenty years.”30 Where a state professional board has a substantial justification for its actions, it may be likely to defeat an antitrust challenge, but such cases seem unlikely to be amenable to resolution on a motion to dismiss, and the prospect of winning on summary judgment only after expensive discovery (or winning only after trial) seems unlikely to provide much comfort. It may be that courts will find that such actions are not subject to antitrust attack because — unlike the Board’s cease and desist letters — these actions are expressly within a professional board’s statutory authority. But it remains to be seen how courts will address this issue.