Recently, the U.S. Supreme Court upheld the Federal Trade Commission's antitrust action against the North Carolina State Dental Board. In a 6-3 decision, written by Justice Anthony Kennedy, the Court held that the North Carolina State Dental Board could not use the State Action Immunity Doctronie to shield it from federal antitrust law. As a result, the Federal Trade Commission was permitted to continue to pursue its federal antitrust action against the State Dental Board.

State-Action-Immunity

To invoke state-action immunity (which is technically an exemption not an immunity), an entity must satisfy the Midcal test, which requires that it show:

  1. The state, as a sovereign, clearly articulated authority for the entity to engage in anticompetitive conduct; and 
  2. Active supervision by the state as sovereign

Under prior case law, municipal government was only required to show the first requirement. The issue here was whether the second prong was in play for a state licensing board and whether it was met. The Court held yes, the second prong was required and no, it was not met. Significantly, the second line of Justice Kennedy’s opinion is “A majority of the board’s members are engaged in the active practice of the profession it regulates.” 

Active state supervision by the state means:

  1. The supervisor must review the substance of the anticompetitive decision, not merely the procedures followed to product it;
  2. The supervisor must have the power to veto or modify particular decisions to ensure they accord with state policy;
  3. The mere potential for state supervision is not an adequate substitute for a decision; and
  4. The state supervisor may not itself be an active market participant.

The Court did indicate that this concept is flexible and context-dependent. In addition, it did not mean that the state supervision involved day-to-day involvement in an agency’s operations or micromanagement of its every decision. Rather, the issue was whether the State’s review mechanisms provide “realistic assurances”—formal rubber stamping is not sufficient—that a non-sovereign actor’s anticompetitive conduct promotes state policy rather than merely the party’s individual interests. In conclusion, says the Court, federalism does not allow the States to “abandon markets to the unsupervised control of active market participants, whether trade associations or hybrid agencies.”

California's Licensing Boards

So what does this mean for California's licensing boards? Well, in California, nearly one in three occupations now requires some form of license, compared with just 5% in the 1950s. And the vast majority of those professional licensing boards are staffed with established players in the very fields in which they compete. To get the position, they are almost always nominated by a professional association consisting of fellow members of the profession. And as a result, the boards have vested financial interests to prevent competition from those without a license. In North Carolina, it is teeth whitening; in California, it could be the preparation of legal documents.

However, a number of the licensing boards already appear to have met the requirements for the active state supervision. Boards with appointed Commissioners who are removed from the market to regulate it come to mind. And so long as they have been empowered by the state to have a final say over a decision which has anticompetitive components – and are not subject to override by a board filled with active market participants – then the decision will meet this new standard. However, where the board's final decisionmaker is a collection of individuals, still active in the market, then you may see an antitrust suit get beyond this initial exemption hurdle.

 


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