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Supreme Court Finds that Regulatory Boards Composed of “Active Market Participants” are Subject to Antitrust Laws if Not Actively Supervised by the State

Yesterday, the Supreme Court issued its ruling in North Carolina State Board of Dental Examiners v. FTC, finding that North Carolina’s state board of dental examiners was subject to antitrust scrutiny under the Sherman Act and Federal Trade Commission Act. In reaching that decision, the court found that a state agency composed of “active market participants”—here, a board responsible for supervising the practice of dentistry composed primarily of practicing dentists—was not immune to federal antitrust laws as a sovereign actor unless the state “actively supervised” that agency. The Court left open, however, just what sort of active supervision might be required.

The North Carolina board of dental examiners is composed of eight members: six dentists (elected by other licensed dentists), one dental hygienist (elected by other licensed hygienists), and one “consumer,” appointed by the governor. The dispute in North Carolina State Board  related to teeth whitening, a practice that had once been the exclusive province of dentists. The Court found that over time, however, non-dental practitioners had increasingly offered that service to consumers, typically at rates lower than those charged by dentists. Several years later, certain members of the board, all of whom were dentists, began an inquiry into the practice of teeth whitening by non-dentists. The board did not issue a rule or regulation as a result of the inquiry, which would have been reviewable by the North Carolina Rules Review Commission, whose members are appointed by the legislature. Instead, the board sent cease-and-desist letters to non-dentist providers and manufacturers and engaged in other actions designed to discourage non-dentists from providing those services. In 2010, the FTC successfully sued the board to prevent these practices, in a ruling that was ultimately sustained by the Fourth Circuit. The board sought review before the Supreme Court.

The Court, in an opinion authored by Justice Kennedy, rejected the board’s argument that as a state actor it was immune from liability under Parker v. Brown, 317 U.S. 341 (1943) and its progeny. The Court noted that under its previous decisions, including California Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc., 445 U.S. 97 (1980), a “nonsovereign actor controlled by active market participants” was entitled to immunity only if (i) the restriction at issue was “clearly articulated and affirmatively expressed as state policy,” and (ii) the state “actively supervised” those restrictions. Although the parties agreed for purposes of the decision that North Carolina had articulated a clear policy in favor of the regulation of dentistry, the Court found that North Carolina had not actively supervised the conduct at issue here.

Specifically, the Court found that the laws governing dentistry in North Carolina did not explicitly extend to teeth whitening, and that the board had not been actively supervised by the state when it interpreted the laws to cover teeth whitening. Noting that “state action immunity is disfavored,” the Court further found that “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 even for market participants to discern.” The court concluded that the active supervision requirement under Midcal meant that state officials must both “have and exercise power” to review the decisions of authorities to whom it delegated regulatory authority, and disapprove any actions that failed to accord with state policy, and that no such supervision had taken place.

Although the Court held that “a state board on which a controlling number of decisionmakers are active market participants in the occupation the board regulates” must be actively supervised to receive immunity, the Court provided limited guidance on what form that active supervision might take. Although the Court found that it “suffices to note that the inquiry regarding active supervision is flexible and context dependent,” and that a state need only adopt mechanisms that provide a “realistic assurance” that such a board or similar entity “promotes state policy, rather than merely the party’s individual interests,” it is likely that a number of states will find the Court’s guidance far from sufficient in determining whether or not their own agencies are immune from antitrust suits. Indeed, Justice Alito, joined by Justices Scalia and Thomas, dissented, predicting that “[d]etermining whether a state agency is structured in a way that militates against regulatory capture is no easy task, and there is reason to fear that today’s decision will spawn confusion.”

The Court’s ruling in North Carolina State Board makes clear that the current court is willing to scrutinize actions taken by professional boards for anticompetitive effects, but leaves open what level of state review will be sufficient to grant those boards immunity from suit. Future litigation following North Carolina State Board, however, will likely be necessary to provide more guidance on just how actively a state must supervise a professional board to assure that its members enjoy that immunity.