North Carolina State Board of Dental Examiners v. Federal Trade Commission

Issues 

Whether state-action immunity should be given to a state regulatory board that is dominated by professionals in the regulated market.

Oral argument: 
October 14, 2014

The Federal Trade Commission (“FTC”) alleges that the North Carolina Board of Dental Examiners (“Board”) has engaged in unfair methods of competition by trying to exclude non-dentists from the teeth-whitening market. The Supreme Court will now determine two legal issues: (1) whether the Board is a public actor or private actor for purposes of federal antitrust liability; and (2) if the Board is a private actor, whether the Board is subject to active supervision by the state. The Board argues that it is a public actor and thus does not need “active supervision” to be immune from federal antitrust law. The FTC argues that the Board is a private actor and is not subject to active state supervision. The Supreme Court’s resolution of this case will impact both the efficacy of future state regulatory boards and the balance of federalism.

Questions as Framed for the Court by the Parties 

Whether, for purposes of the state-action exemption from federal antitrust law, an official state regulatory board created by state law may properly be treated as a “private” actor simply because, pursuant to state law, a majority of the board’s members are also market participants who are elected to their official positions by other market participants.

Facts 

The North Carolina State Board of Dental Examiners (“Board”), enacted by the Dental Practice Act, N.C. Gen. Stat. § 90–48, is a state agency comprised of six licensed dentists, one licensed dental hygienist, and one consumer member. North Carolina created the Board to regulate dentistry in the State. The Dental Practice Act prohibits an individual from practicing dentistry without a license and defines an individual practicing dentistry as one who “removes stains, accretions or deposits from the human teeth.”

In the 1990s, North Carolina dentists started offering cosmetic teeth-whitening services. In the early 2000s, non-dentists started providing similar services at lower rates. Dentists submitted complaints to the Board, claiming that non-dentists were providing teeth-whitening services. These complaints prompted the Board to investigate the non-dentists’ practices. The Board subsequently issued at least forty-seven cease-and-desist letters to twenty-nine non-dentist teeth-whitening providers and requested the termination of “all activity [that] constitut[es] the practice of dentistry” for all non-dentists. The cease-and-desist letters successfully terminated the non-dentists’ teeth-whitening practices in North Carolina and precluded teeth-whitening distributors and manufacturers from conducting their businesses in the State.

The Federal Trade Commission (“FTC”) filed a complaint against the Board in 2010 and alleged that the Board’s elimination of non-dentists from the teeth-whitening market constituted an “unfair method of competition,” which is a violation of the Federal Trade Commission Act, 15 U.S.C. § 45. In response, the Board argued for the state-action exemption and moved to dismiss the complaint. The state-action exemption provides that immunity from federal antitrust law for (1) public actors performing state-mandated activities or (2) private actors working under the oversight of the state. An Administrative Law Judge denied the Board’s motion, and the FTC affirmed. The United States District Court for the Eastern District of North Carolina dismissed the Board’s subsequent federal declaratory action as an “improper attempt to enjoin ongoing administrative procedure.” An Administrative Law Judge held a trial on the merits and found that the Board violated the Federal Trade Commission Act. The FTC affirmed on appeal and issued an order prohibiting the Board from taking further actions to exclude non-dentists from the teeth-whitening market.

The Board appealed to the Fourth Circuit in 2013. The Fourth Circuit held that, because the Board’s membership was composed of private dentists elected by other dentists, the Board was a private actor.And, since North Carolina was not adequately supervising the Board’s activities, the Fourth Circuit ruled that the Board was not exempt from federal antitrust liability. The Board appealed to the Supreme Court of the United States, and on March 3, 2014, the Court granted certiorari to determine whether state-action immunity should be given to a state regulatory board that is dominated by market participants who are elected by other market participants.

Analysis 

The Supreme Court will decide whether a state-created regulatory board composed of market participants who are elected by other market participants is a “private” actor for purposes of federal antitrust immunity. A public actor’s anti-competitive conduct is exempt from federal antitrust law if the conduct simply furthers a “clearly articulated” state policy. A private actor’s anti-competitive conduct is exempt from federal antitrust law only if the conduct both (1) furthers a “clearly articulated and affirmatively expressed state policy” and (2) is subject to the state’s active supervision. Though both sides agree that North Carolina has clearly articulated a state policy to displace competition in the dental industry, the Supreme Court must determine two other legal issues: (1) whether the Board is a public actor or private actor for purposes of federal antitrust liability; and (2) if the Board is a private actor, whether the Board is subject to North Carolina’s active supervision.

The Board argues that it is a public actor for purposes of federal antitrust liability. The Board also argues that, as a public actor, it does not need “active supervision” to be immune from federal antitrust law and that financial self-interest is not sufficient to require active state supervision.

The FTC argues that the Board is a private actor.The FTC also argues that, as a private actor, the Board does need “active supervision” to be immune from federal antitrust law and that financial self-interest is sufficient to require active state supervision.

PRIVATE OR PUBLIC STATE ACTOR?

The Board claims that it is a public actor, regardless of the fact that market participants both dominate the board and elect officials to the board. Specifically, the Board argues that a majority market-participant membership does not equate the Board’s conduct to a private action when the Board is enforcing a clearly articulated state policy. The Board further argues that the fact that practicing dentists elect the Board’s dentist members is irrelevant for purposes of immunity to antitrust liability. The Board believes that an intrusion upon the state’s discretion regarding the manner of selecting public officials violates the basic principles of federalism.

As substantive evidence of the board’s public status, the Board refers to its quasi-governmental powers to enact regulations governing the practice of dentistry, to investigate potential violations of those regulations, to issue licenses, and to issue subpoenas. The Board also claims that the state itself has proven that the board’s public status is more than a “label” by imposing administrative obligations, such as ethics requirements and judicial review, on the board. Furthermore, the Board cites to Hallie v. Eau Claire for the proposition that a state agency is one of the state’s “officers and agents” when the state clearly directs the agency to perform anti-competitively.

The FTC claims that the Board is a private actor and that an entity’s formal label as a state agency does not necessarily create an “antitrust shield” conferring absolute immunity upon the agency. Furthermore, the FTC claims that federal antitrust law does not grant immunity to state agencies merely because the state legislature has bestowed regulatory powers upon the agency. The FTC believes that federal antitrust law considers the substantive character, rather than the formal label, of a public entity in determining whether immunity is appropriate. Citing the Hallie Court’s analysis, the FTC argues that state-law regulatory authority does not immunize an otherwise private actor from federal antitrust scrutiny.

The FTC concludes that the board’s constituency and election process suggest that the market-participant officials are “only loosely affiliated” with the State of North Carolina. The FTC further argues that, given the dominance of market participants in the Board’s membership and the fact that the members are elected by and accountable only to other market participants, the Board is analogous to a “private trade association.” The FTC believes these structural features increase the likelihood that the Board’s anti-competitive conduct serves exclusively private interests.

ACTIVE-SUPERVISION REQUIREMENT

The Board believes that the active-supervision requirement serves a “narrow evidentiary function” to show that private actors are following an “affirmative state policy of anti-competitive regulation.” The Board cites to Hallie to emphasize that the active-supervision requirement exists only to regulate private actors and is neither “necessary nor proper” where a public actor is enforcing anti-competitive conduct authorized by the legislature. The Board also claims that the active-supervision standard is not a substitute for administrative review, which the Board claims is the proper mode of policing public officials’ allegedly defective exercise of state-law authority.

The Board further argues that the fact that its conduct may financially benefit its members as market participants is an illegitimate basis for requiring active supervision. In the Board’s view, the “clear-articulation” prong, which requires any anti-competitive conduct performed pursuant to state law to be the “inherent, logical, or ordinary result” of state-law authority, ensures that board officials act pursuant to the state’s governmental interests. Given that case precedent mandates a tight link between the anti-competitive conduct and the exercise of state-law authority, the Board argues that the state’s interests and any coexisting financial interests of its officials are “presumptively aligned.” The Board also cites Omni for the proposition that federal antitrust enforcers are precluded from basing their claims on “perceived conspiracies” among agency officials who are market participants. The Board explains that federal antitrust law does not “second-guess” whether public officials are “sufficiently independent” from the private interests of market participants when the officials are enforcing a clearly articulated anti-competitive state policy.

The FTC claims that the Board does need active state supervision to be immune from federal antitrust law because the active-supervision requirement applies to private actors. The FTC also cites to Hallie for the proposition that the purpose of the active-supervision requirement is to safeguard against the threat of public officials acting in furtherance of private interests. The FTC believes that the aim of the active-supervision requirement is to ensure that “disinterested state officials” exercise “sufficient[ly] independent judgment and control” in effecting the state’s directives.

The FTC further argues that the composition of the Board’s membership creates a substantial risk that any attempt to displace competition from non-dentists is a product of the Board’s purely private economic incentive. To that end, the FTC rejects the Board’s interpretation of Omni and argues that the Board is disentitled to state-action immunity in the first instance as a result of the board’s financial self-interests. The FTC also asserts that it has found no credible evidence to support the Board’s claim that the Board’s attempts to exclude non-dentists from the teeth-whitening market were motivated by a concern for public health and safety.

Discussion 

The Supreme Court will decide whether state-action immunity should be given to a state regulatory board that is dominated by professionals in the regulated market. The Board argues that it is a public actor and is thus exempt from federal antitrust laws without active state supervision. The FTC counters that the Board is a private actor and is thus not exempt from federal antitrust laws due to a lack of active state supervision. The Supreme Court’s resolution of this case may impact both the efficacy of future state regulatory boards and the balance of federalism.

EFFICACY OF FUTURE STATE REGULATORY BOARDS

The Board and supporting amici argue that exposing boards with private market participants to federal antitrust liability will inhibit the efficacy of future state regulatory boards. The Board and supporting amici, including the Federation of State Boards of Physical Therapy, contend that states employ market participants on boards for practical reasons, such as their expertise with industries and familiarity with current events are beneficial for consumers. The National Council of Examiners for Engineering and Surveying argues that exposing boards to antitrust liability would impair consumer protection by draining state professional regulatory agencies of the expertise provided by industry professionals. The National Governors Association further emphasizes that an industry professional’s qualifications and experience allows them to better assess proposed regulations and to better address consumer protection concerns.

The FTC and supporting amici argue that exposing boards with private market participants to federal antitrust liability will promote the efficacy of future state regulatory boards. We All Help Patients, Inc. contends that federal antitrust scrutiny will ensure that state medical boards, which are currently dominated by doctors, do not exclude other health professionals offering competitive alternatives to healthcare consumers. It further claims that promoting such competition will help to “reduce costs, increase availability, create better outcomes, and improve Americans’ quality of life” by providing a greater amount of healthcare options at more viable prices. LegalZoom.com, Inc. echoes these sentiments and argues that a state regulatory board, which better promotes competition, will help the legal industry by providing consumers with more affordable legal services. LegalZoom.com, Inc. contends that the anti-competitive practices of the current state bar regulatory authority has already caused substantial damage to small businesses and entrepreneurs, who are “the biggest drivers of new employment” and yet barred from entering the legal market. LegalZoom.com adds that this lack of competition has ultimately created an “access to justice crisis” in the United States.

BALANCE OF FEDERALISM

The Board and supporting amici claim that requiring active state supervision of state regulatory boards will obstruct the balance of federalism. As amici, twenty-three states argue that active supervision will violate federalism because state regulatory boards will be subject to intrusive federal court review to determine whether the state was sufficiently “active” in monitoring a board. The states argue that this review will impede on a their sovereign authority to uniquely structure their oversight mechanisms to ensure state bodies are properly exercising their delegated powers. The California Optometric Association adds that such active state supervision will undercut seventy years of state-action jurisprudence by altering the usual constitutional balance between the states and the federal government.

The FTC and supporting amici claim that requiring active state supervision of state regulatory boards will promote the balance of federalism. The American Antitrust Institute argues that active state supervision will ensure that a regulatory board is implementing an anti-competitive policy in the manner that the state intended. The American Antitrust Institute further explains that this federal oversight will ensure that state boards will not engage in anti-competitive conduct, even where state boards that are heavily comprised of market participants have an incentive to implement state policy that place their own interests ahead of the state’s interests.

Conclusion 

The Supreme Court will decide whether a state licensing board comprised of market participants elected by other market participants is a “private” actor subject to federal antitrust scrutiny. The Board argues that it has bona fide public status as a result of its quasi-governmental powers and that categorizing the Board’s conduct as a “private action” is an affront to the principles of federalism. The FTC claims that the Board’s formal label as a public agency does not exempt the Board from federal antitrust law and that the danger of financial self-interest is a sufficient trigger to the active-supervision requirement. The Supreme Court’s resolution of this case will impact both the efficacy of future state regulatory boards and the balance of federalism.

Edited by 

Acknowledgments 

The authors would like to thank Professor George A. Hay for his insight into this case.

Additional Resources