A Supreme Court decision from February ruled that state regulatory boards run by “a controlling number” of “active market participants” can qualify for an antitrust exemption only if they are “actively supervised” by the state. But the Court left the content of those key terms vague, leaving states to wonder about the degree of antitrust scrutiny their regulatory boards will face. The FTC staff last week issued guidance on how they believe the Supreme Court’s decision should be implemented. While that guidance does not address, nor do we discuss here, another element of state action immunity – the conduct in question must be clearly articulated and affirmatively expressed as state policy – it is a helpful starting point for understanding the Court’s decision on active supervision.
Supreme Court Limits Antitrust Exemption – But How Much?
States themselves are immune from lawsuit under the antitrust laws – what is less clear is the extent of immunity that should apply to various kinds of state entities. In North Carolina State Board of Dental Examiners v. FTC, the Supreme Court ruled that a state board of dental examiners was not immune from legal action when it threatened independent teeth whitening service providers for allegedly practicing dentistry without a license. The board’s actions succeeded in driving these providers out of the market, where they had been competing with dentists who also offered the service – but at a much higher cost. The Supreme Court ruled that even though the board was established by the state, it did not qualify for the immunity from federal antitrust laws that states themselves get for two reasons: first, the board was made up almost entirely of practicing dentists, who have a natural conflict of interest when regulating their competitors; and second: the board’s actions were not subject to any real supervision from the state, making it more likely the board members were acting in their own self-interest instead of protecting consumers. In other words, the Court said states cannot give members of a profession carte blanche to take anticompetitive action against market disruptors.
Having too large a share of market participants on a state board means it will lose antitrust immunity, and active supervision from the state will restore it—but the Court failed to clarify who counted as an “active market participant,” how large a share was too large, or what it specifically had in mind when it talked about “active supervision.” Staff at the FTC, the federal agency that took the North Carolina dental board to the Supreme Court, has now taken a first step at answering those questions. The staff was not technically speaking for the FTC itself and their answers are not binding on the FTC or the courts, but they are a very important source of guidance in this area. Moreover, the guidance is written in plain English, it comes with numerous examples, and should be accessible to individuals who don’t specialize in antitrust law.
When is “Active Supervision” Necessary?
The FTC staff defined an “active market participant” as anyone who has a license from the board, or whose work is subject to regulation by the board. For example, even if all the members of the North Carolina Dental Board that threatened independent teeth-whiteners were orthodontists who didn’t offer teeth-whitening themselves, they would still be considered “active market participants.” The guidance also includes as an “active market participant” someone who temporarily suspends her participation in the regulated occupation for the purpose of serving on the board. This addresses the question that many people were asking of whether a doctor who temporarily “retires” to serve on a medical board and then immediately goes back to her practice when she completes her service is an active market participant while on the board: yes, she is, according to the FTC staff.
The guidance also asserts that the method by which someone is selected to serve on a board – e.g., appointment by the Governor or election by the members of the occupation itself – is irrelevant to whether someone is a market participant. What a person does in the market, not how they got to the board, is what matters.
In North Carolina Dental, the Supreme Court stated that it was only when a “controlling number” of a board’s members are market participants that active supervision is required, and the FTC guidance fleshes that phrase out as well. While a majority of market participants clearly qualifies as a “controlling number” of the board, if the market participants have effective veto power over decisions, or if the other board members traditionally defer to them on substantive issues, that constitutes a controlling number as well. The FTC staff provides an example in which the state board of electricians is made up of three practicing electricians and four non-electricians; if the board requires five votes to approve an action, then because at least one electrician must agree to anything that is passed the board is considered to have a “controlling number” of market participants. Also, if the market participants, although a minority, can issue cease and desist orders on behalf of the board without the consent or knowledge of the other board members, those actions are subject to the same supervision requirements, according to the FTC guidance.
And What Constitutes “Active Supervision?” FTC Guidance: A Bit Less Clear, But Definitely Quite a Lot
The guidance on the issue of who an active market participant is, and what it means for a controlling number of them to be on a board, is relatively straightforward, with at least some clear-cut answers. The discussion of what constitutes “active supervision,” by contrast, is less clear.
The principles guiding the FTC staff here are taken from recent Supreme Court cases, and reiterate that the purpose of the active supervision requirement is to ensure that states, not unaccountable market participants, are the ones behind the policies of their boards, and that they accept political accountability for their boards’ actions. To achieve this goal, a supervisor must actually review the substance of board decisions and must have power to veto or modify board decisions. While not found explicitly in the case law, the FTC guidance also adds that the supervision “must precede implementation of the allegedly anticompetitive restraint.” The FTC staff lay out three broad factors that could be relevant to determining what “active supervision” means.
The first factor is whether the supervisor has obtained the information necessary for a proper evaluation of the board’s action. Depending on the circumstances, this could include independently gathering facts, collecting data, conducting public hearings, soliciting public comments for review, investigating market conditions, conducting studies, and reviewing documentary evidence. Although the guidance notes that the extent of this information-gathering depends “in part” on the scope of what the regulatory board itself already has done in this area, it seems that there is an expectation that the supervisor will play a relatively active role here.
Whether the supervisor has evaluated the substantive merits of the board’s recommended action is another factor. There should be an independent assessment of whether the action the board proposes is in line with the state legislature’s expressed standards.
The third factor is whether the supervisor issues a written decision approving, modifying, or denying the recommended action and explaining the rationale for the decision. This both shows that the supervisor in fact did evaluate the substance of the proposed action, and also helps ensure that the state will accept political accountability for the course taken.
The examples the FTC staff provide here set a high bar. In the realm of supervising regulations promulgated by a state board, the guidance envisions a separate “executive agency” that reviews the board’s proposals. This agency would provide notice of the recommended regulations and an opportunity to be heard to anyone affected by it, as well as the general public. This would start with a full review of the evidentiary record compiled by the board whose proposal the agency is reviewing, but would also extend to soliciting written submissions from others, obtaining published studies addressing the regulation, looking into costs and prices in the relevant market, and holding public hearings (although if the board already conducted such a hearing, it “may be unnecessary” for the supervising agency to do so again). After gathering all of this information, the exemplary agency should assess whether the proposed regulation meets the state’s health and competition goals, and then issue a written decision explaining its reasoning.
Another major function of state boards besides issuing regulations is to discipline members of the regulated occupation. To actively supervise a regulatory board’s disciplinary decisions, the FTC staff says that supervision by a single official (who is not a market participant) is sufficient. That supervisor, though, should review the evidentiary record created by the board, supplement it if appropriate, undertake an independent assessment of the merits of the proposed disciplinary action in light of the state’s established policies and standards, and issue a written decision. The guidance also notes that an individual board disciplinary action will typically have only a minimal effect on competition.
Finally, the guidance lists a few examples of situations that do not qualify as active supervision, such as supervisors who lack the power to veto or modify board decisions, review that is cursory or perfunctory, and review that only ensures that the board followed the right procedure but does not look into the substance of its decisions.
The FTC’s Guidance: A Useful Starting Point in Addressing a Complex Area
The FTC staff’s published guidance on how state boards can qualify for immunity from the antitrust laws is a very helpful development in light of the unanswered questions in North Carolina Dental. Understanding the FTC’s interpretation of that case is a crucial component to answering questions about antitrust immunity for state action, but any antitrust analysis in this area is highly dependent on each situation’s particular facts. And just because a state board is not immune from an antitrust lawsuit does not mean it has violated the antitrust laws. Indeed, some boards may conclude that their activities are not likely to result in significant antitrust exposure, and seeking an antitrust exemption is not worth the effort.