Supreme Court rules that state professional boards must be actively supervised to avoid federal antitrust scrutiny
The U.S. Supreme Court, on February 25, 2015, reaffirmed that state professional boards controlled by same-profession individuals which are not "actively supervised" do not enjoy Parker v. Brown-based state action immunity from the federal antitrust laws. The decision in North Carolina State Board of Dental Examiners v. Federal Trade Commission is important because its holding is relevant to both regulated professionals and their regulators. Under North Carolina’s Dental Practice Act, the North Carolina State Board of Dental Examiners is the North Carolina state agency which regulates the "practice of dentistry."
Sometime in the 1990s, North Carolina dentists started whitening teeth, earning substantial fees for the service. There is nothing in the Dental Practice Act ("Act") indicating that teeth whitening is within the "practice of dentistry" and thus subject to the North Carolina State Board of Dental Examiners’ ("Board") regulatory control. In 2003, nondentists started offering teeth whitening services at a lower cost. Dentists lodged complaints – mainly about the low prices – with the Board, which opened an investigation, putting one1 of its dentist members in charge of the investigation. That investigation led the Board, in 2006, to issue numerous cease-and-desist letters directing the recipients to stop engaging in the practice of dentistry. The letters also noted that the unlicensed practice of dentistry is a crime and stated unequivocally that teeth whitening is the practice of dentistry.
In 2007, the Board went further and convinced the North Carolina Board of Cosmetic Art examiners "to warn cosmetologists against providing teeth whitening services." Later that year, the Board wrote mall operators, advising them essentially to shut down and remove kiosks at which teeth whitening services were offered because that activity violated the Act. In the words of the Supreme Court, "[T]hese actions had their intended effect. Nondentists ceased offering teeth whitening services in North Carolina."
In 2010, the Federal Trade Commission ("FTC") sued, alleging that the Board’s actions were anticompetitive and that the Board’s prohibition of nondentists offering teeth whitening services was unfair competition and a restraint of trade.
The Board’s defense claimed that it was immune from antitrust scrutiny under the state action immunity doctrine. That argument was rejected by an Administrative Law Judge ("ALJ") and the FTC later sustained that ruling. The ALJ ultimately had a trial on the merits, and ruled against the Board, which was again upheld by the FTC. The FTC ordered the Board, among other things, to stop sending cease-and-desist letters. The Board filed a petition for review in the Fourth Circuit, which affirmed the FTC’s decision, and the FTC appealed to the Supreme Court.
The Supreme Court affirmed the Fourth Circuit’s decision, 6-3. The Court reasoned that when a state professional licensing board is run by a majority of members who practice the profession they regulate,2 Parker v. Brown state action immunity is only available when there is a "clearly articulated" and "affirmatively expressed" state policy to restrain competition which policy is "actively supervised" by the state.3 The Court found active supervision lacking because the Act did not specifically include teeth whitening in the practice of dentistry and because the Board did not "receive active supervision by the State when it interpreted the Act" as it did and then "enforced that policy by issuing cease-and-desist letters to nondentist teeth whiteners."
The Board’s defense was simple: it acted as the state in interpreting the Act and enforcing it as it did, and therefore state action immunity was appropriate. The Supreme Court, however, pierced through that superficiality, stating that "[I]mmunity for state agencies … requires more than a mere façade of state involvement, for it is necessary in light of Parker’s rational to ensure the States accept political accountability for anticompetitive conduct they permit and control. And further,
limits on state action immunity are most 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 for even market participants to discern. Dual allegiances are not always apparent to an actor. In consequence, active market participants cannot be allowed to regulate their own markets free from antitrust accountability.
When active market participants are the regulators, the State appointing them must insinuate itself more directly in reviewing the board’s actions. In other words, if the fox is watching the hen house, as it were, someone has to be actively watching the fox. Here, the Board argued that because it was an agency of the State, it was excused from the active supervision requirement, but the Court rejected that argument. The Board’s composition created a risk that private interests would be furthered by regulating in a way which clearly restrained competition. Given that risk, the need for active state supervision was heightened.
The Court made clear that when a state board is controlled by active market participants, active supervision is required, and rejected the contention that such a rule will discourage professionals from taking board positions which require them to regulate their own profession. It left for another day, however, a corresponding issue of whether exposure to money damages for violation of the antitrust laws would be a credible reason to find immunity.
In sum, the Court suggested that a "supervisor" must (1) look at a board’s decision and review its substance, (2) have the power to veto or modify the decision to bring it in line with state policy, and (3) actually act on that power. Most importantly, perhaps, that supervisor cannot, herself, be an active market participant. Something other than a fox must watch the fox watching the hens, as it were.
The Court noted, finally, that future "inquiry regarding active supervision is flexible and context dependent." In other words, cases like this one will present the need for case-by-case decisions under general principles, not specific sets of black and white rules. This suggests that states should, in the wake of North Carolina State Board of Dental Examiners v. Federal Trade Commission, review the composition of their professional licensing boards and determine whether they may be susceptible to anticompetitive actions, and take action to solidify the active supervision of those boards to insure the availability of Parker v. Brown state-action immunity. On the flip side of that coin, individuals and enterprises who believe they may be or have been subject to regulatory action motivated by anticompetitive self-dealing would be wise to have their counsel review the board’s composition, the substance of the decision, and whether an appropriate "supervisor" reviewed it, to determine whether the regulator’s decision is subject to challenge on antitrust grounds.
Saul Ewing lawyers represent licensed professionals and appear before state licensing boards. For more information on this case and related matters, please contact the author or the attorney at the firm with whom you are regularly in contact.
- Eight of the 10 members of the Board were licensed dentists.
- In other words, where the majority of the board members are "active market participants" in the profession they are regulating.
- Here, the Act did not say "teeth whitening is the practice of dentistry and requires licensure under the Act" or anything like that, so, implicitly, the Board’s dentists, as regulators, in taking the action they did, defined who could compete with them in providing teeth whitening services.