February 26, 2015

U.S. Supreme Court Decision in North Carolina Dental Board Narrows Scope of State-Action Antitrust Immunity for State Boards

6 min

On February 25, 2015, the U.S. Supreme Court (Court) issued its opinion in North Carolina State Board of Dental Examiners v. Federal Trade Commission, a case with significant potential implications for state and local government licensing boards and trade and professional associations that engage in state-regulated activity. The case involved a claim of antitrust immunity by the North Carolina State Board of Dental Examiners (Board) under the state-action doctrine established in Parker v. Brown. This doctrine, which is based on principles of federalism, confers antitrust immunity on anticompetitive conduct by states when acting in their sovereign capacity.

The decision resolves a circuit court split on the question of whether boards dominated by market participants need to be supervised, and establishes for the first time that many state boards, as currently supervised, may not be able to rely on the state-action defense to antitrust liability. The Court also established a new "context-dependent" test for determining when a state exercises sufficient supervision over a state agency or board to confer antitrust immunity. We summarize the decision below and provide an overview of the current environment and the key factors that are likely to drive the analysis of active state supervision for entities that rely on state-action immunity from the antitrust laws. The bottom line is that until state boards are confident that the supervision of their operations by the state satisfies the requirements of the state-action doctrine as set out by the Court, boards should consider operating under the antitrust standards that have governed the operations of trade and professional associations to limit antitrust exposure.

Summary of the Court's Decision

In 2010, the Federal Trade Commission (FTC) filed an administrative complaint against the Board, alleging that its concerted efforts to exclude nondentists from the market for teeth-whitening services was an unfair method of competition under Section 5 of the Federal Trade Commission Act and Section 1 of the Sherman Antitrust Act. The Board, which was established by state statute as the "agency of the State for the regulation of the practice of dentistry," is comprised of eight members, six of whom must be licensed dentists engaged in the active practice of dentistry.

According to the FTC, in 2006, the Board sent at least 47 cease-and-desist letters on official letterhead to nondentist teeth whitening service providers and product manufacturers. The Board also sent letters to shopping malls advising them to consider expelling tenants that provided teeth-whitening services. The Commission charged that the actions of the Board were motivated, in part, by the desire to prevent competition from nondentists and thus prevent the lowering of prices that dentists could charge for teeth-whitening services.

In 2011, the FTC issued an order requiring the Board to stop sending communications that stated that nondentists may not offer teeth whitening services and products in North Carolina. The Board appealed to the Fourth Circuit Court of Appeals, which upheld the FTC's administrative order in a 2013 decision.

The principal issue before the Court was whether state boards that are not subject to active state supervision can rely on the state-action defense against antitrust enforcement. A number of state and local agencies have been able to rely on the defense on a showing that the state had clearly articulated a policy displacing competition. Entities that can resort to the state-action defense without active supervision include towns and municipalities and full state agencies. Prior to this decision, the circuits were split on whether to treat state boards like those entities or to treat them like market participants. In holding that state boards need to be supervised when a controlling number of members of the board are market participants, the Court found that supervision is essential "when the State seeks to delegate its regulatory power to active market participants, for established ethical standards may blend with private anticompetitive motives in a way difficult even for market participants to discern."

Key Takeaways from the Court's Decision

The decision in North Carolina Dental is important because many state boards and related entities have been operating as if they were immune from the antitrust laws, as long as their decisions were made pursuant to a clearly articulated state policy displacing competition. By this decision, the Court makes it possible for the actions of many state boards to come under antitrust scrutiny for the first time. Because state boards often are comprised of groups of competitors or potential competitors, significant risks of antitrust liability, particularly under Section 1 of the Sherman Antitrust Act, become possible. Going forward, states will have to decide how to set up sufficient procedures to ensure that actions by its boards are supervised by appropriate personnel in order to claim state-action immunity from the antitrust laws. In the meantime, state boards should be careful to avoid actions that violate the antitrust laws under established antitrust standards.

Whether state policies for supervising the actions of licensing boards provide sufficient supervision to satisfy the state-action doctrine depends on the specific facts and circumstances underlying each state's supervision of a particular state board or agency. The Court described the relevant analysis as flexible and context-dependent, and focused on whether the state's review mechanisms provide "realistic assurance" that a nonsovereign actor's anticompetitive conduct "promotes state policy, rather than merely the party's individual interests." Reviewing prior cases, the Court identified certain "constant requirements" of active supervision:

  • The state supervisor must review the substance of the anticompetitive decision, not merely the procedures followed to produce it;
  • The state supervisor must have the power to veto or modify particular decisions to ensure that they are in accord with state policy;
  • The "mere potential for state supervision is not an adequate substitute for a decision by the State;" and
  • The state supervisor may not itself be an active market participant.

Any state licensing board, trade or professional association, or similar entity engaged in state-regulated activity and which relies on an assumption of state-action immunity should review its structure and operations in light of the North Carolina Dental decision. Unless an organization is confident that its structure satisfies the requirements of the North Carolina Dental decision, it should take care to avoid any activities that could carry significant antitrust risk. In the absence of the state-action defense, those risks are very similar to the risks that trade and professional associations have dealt with over the years. There is significant case law and FTC precedent identifying those risks, which are described in a number of prior Venable articles, which can be found by clicking here.

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The North Carolina Dental decision was a significant victory for the FTC that has fundamentally changed the scope of antitrust immunity afforded to state boards, agencies, and trade and professional associations engaged in state-regulated activities. The largest immediate challenge moving forward, particularly for state boards that have been relying on the protections of the state-action doctrine, will be to identify ways to limit the antitrust risks of their actions under their currently established antitrust standards until the states in which they operate establish active supervision under the standards articulated by the Court's ruling.