FTC State Action ImmunityIn early 2015, the U.S. Supreme Court held in North Carolina State Board of Dental Examiners v. FTC that the “active state supervision” prong of the state-action immunity from antitrust liability test applied to state licensing boards controlled by market participants. You can read my analysis of the decision here. And you can read the amicus brief that Bona Law filed in the case here.

(Besides the “active state supervision” requirement, state-action-immunity applicants must also demonstrate that the challenged restraint was clearly articulated and affirmatively expressed as state policy by a state sovereign, like a state legislature. The Supreme Court recently addressed this requirement in FTC v. Phoebe Putney Health System, Inc. I filed an amicus brief in this case, which you can review here.)

The Basics of Antitrust Liability and State-Action Immunity for State Regulatory Boards

I have written quite a bit about state action immunity and the NC Dental case, so I won’t give a lot of background here. You can read my prior articles.

But here are the basics: Not surprisingly, state and local governments often engage in anticompetitive behavior. Sometimes this includes conduct that the federal antitrust laws prohibit.

But, owing to federalism and the fact that governments get away with things they shouldn’t, sometimes state and federal governments have a get-out-of-antitrust-liability card called “state-action immunity.” Like all antitrust exemptions, Courts interpret the scope of state-action immunity narrowly.

In most situations, a state or local government seeking state-action immunity must demonstrate that (1) the state sovereign—usually the legislature or state supreme court acting legislatively—clearly articulated and affirmatively expressed the challenged restraint as state policy (See Phoebe Putney); and (2) that the state actively supervises the anticompetitive policy.

Before the US Supreme Court decided the NC Dental case, it was an open question whether state licensing or regulatory boards were required to show both prongs of what is called the Midcal test, or just the first prong. That is, it wasn’t a given that these state boards had to show active supervision. I addressed that very issue in a law review article, which you can read here. But apparently my article wasn’t enough to end discussion on the issue, so the US Supreme Court went ahead and addressed it in the NC Dental v. FTC case.

The Supreme Court in NC Dental went on to hold that a state board on which a controlling number of decision-makers are market participants in the regulated occupation must satisfy the active supervision requirement to invoke state-action antitrust immunity.

(As an aside, certain municipalities do not need to show active state supervision, but I suspect that courts will continue to narrow this exception. Luke Wake and I argued in another law review article that whenever the government entity becomes a market-participant, it should lose its state-action immunity entirely. I mention this here because it is often a local government entity that competes directly in the market and tries to invoke state-action immunity.).

So we now know that anticompetitive conduct by state regulatory boards are subject to antitrust scrutiny unless they can show both prongs of the Midcal test, including active state supervision. But what is active state supervision?

What is Active State Supervision for State-Action Immunity from Antitrust?

Active Supervision is something that the US Supreme Court has on occasion addressed, but there isn’t a clear standard. It simply hasn’t come up enough to create a dense body of law. So the guidance is slim.

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Section 5 of the FTC ActFTC Commissioner Joshua Wright recently announced his retirement from the FTC Commission to go back to George Mason University School of Law. But he did not go out quietly.

Not only was he incredibly productive during his FTC tenure, but he left right after the Federal Trade Commission issued “Principles Regarding ‘Unfair Methods of Competition’ Under Section 5 of the FTC Act.” As you may recall, this was one of his express goals when he first began his work at the FTC.

What is Section 5 of the FTC Act?

Section 5 of the FTC Act declares that “unfair methods of competition in or affecting commerce” are unlawful.

What does that mean?

For most of the FTC’s existence, those of us advising antitrust clients had to piece together inferences from a mere handful of cases that have addressed the Act, while at the same time trying to parse speeches and FTC activity by whatever set of commissioners were in power.

There were some cases—mostly decided in the 1980s—that seemed to limit the FTC’s power under the Act, but the authority is sparse. And the FTC seems to change its mind depending upon who is in power.

That is a problem when you have a client that wants to know if they can undertake some sort of activity. It is even more difficult when your client is already under investigation by the FTC and you have to try to explain to them that the standard of whether they have violated the FTC Act—regardless of the legality of their actions under the Sherman and Clayton Acts—would be determined by their adversary, the FTC.

We could advise the client that some prior cases suggested limiting principles, but it was, in reality, entirely unclear how a court would ultimately approach an enforcement action. And many courts might prefer to defer to the governing agency in interpreting the law the agency administrates.

This open-ended statute, of course, offered the FTC great leverage in its investigations and actions because its targets couldn’t effectively predict the likely scope of Section 5 of the FTC Act. This leverage can lead to forced settlements for targets that don’t know the standard by which the agency will judge them.

And the FTC had not issued any significant guidance about how it would enforce Section 5 of the FTC Act. It was clear to most people in the antitrust community that the Act was potentially broader than the Sherman and Clayton Acts—the traditional antitrust statutes—but the extent and scope were unclear.

(As an aside, the FTC does its antitrust enforcement through this FTC Act, even if it involves existing antitrust statutes, so the only real issue is how much broader is the FTC Act than the other antitrust statutes. The FTC refers to this as their “standalone” Section 5 authority).

The scope of Section 5 of the FTC Act was an important issue because when it comes to competition enforcement there is a very fine line between anticompetitive activity and strong procompetitive activity. Indeed, it isn’t always clear whether a particular type of business practice is either strongly procompetitive or actually anticompetitive.

So if Section 5 of the FTC Act is too broad it might deter conduct that in fact helps competition a great deal, which would undercut the purpose of the statute itself. This is a recurring problem for antitrust enforcement.

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Hospital Antitrust CasesWhat is great about practicing antitrust law is that you take deep dives into the intricacies of different markets from the shelf space in drug stores for condoms—an actual case from several years ago—to insurance brokerage pricing to processed eggs and everything in between.

There are, however, certain industries that repeat themselves in the antitrust world, which isn’t a surprise because some industries are more susceptible to antitrust issues than others. For example, the airline and pharmaceutical industries consistently face antitrust scrutiny because of the nature of their markets and the regulations surrounding them.

But the industry I’d like to discuss here is the health-care or medical industry, and more specifically, hospitals. I’ve found myself with many antitrust and non-antitrust cases involving health-care of one sort or another over the last couple years, so this area has become an interest of mine.

Lately, I have also spent more time than I will publicly admit consuming materials (mostly books, blogs, and podcasts) on health, nutrition, and fitness, which (combined with my health-care cases) has my family often reminding me that I am not a doctor after some well-meaning but often unwelcome advice.

If you follow antitrust, you will notice that there are a lot of cases about hospitals. Why is that? This might seem surprising at first glance because many hospitals are non-profits or government-owned and you probably don’t picture a hospital in your mind when you think of the term “monopolizing.”

(If you can make it through the explanation below, you can read about a recent Department of Justice antitrust action against some Michigan hospitals that apparently agreed not to compete with each other in particular ways).

First, non-profit status is not a defense to the antitrust laws. Whether you have stockholders or owners that keep residual profits or not, you have to play by the antitrust rules. Non-profit entities (and their officers) still seek power, influence and prestige. And, increasingly, state and local government entities are subject to the antitrust laws. I’ve written a lot about that on The Antitrust Attorney Blog; you can access those articles in the State-Action Immunity category.

In fact, after the Supreme Court’s decision in North Carolina State Board of Dental Examiners v. FTC, it seems like many litigants want to go after state boards of various sorts. Anyway, I’ve received many calls about this and there are a few active cases, including one in Texas that I’ve written about.

Second, the health-care industry encompasses a series of narrow product, service, and geographic markets. That is because, except in limited circumstances, most people don’t travel far for medical care. They want to go somewhere near their work or home. So geographic markets are usually regional to a metro area (with some exceptions).

Within each geographic region, there are usually a limited number of hospitals or other medical facilities for particular specialties. Thus, each geographic market, that is each region, has what may be considered an oligopoly, or a handful of competitors that all know and depend upon each other. Whereas the airline industry is effectively a worldwide oligopoly, the markets for hospitals and other medical facilities are often oligopolies within metro areas. From that perspective, it isn’t a surprise that we see many hospital antitrust cases because there are so many different metro areas with oligopolies.

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Teladoc antitrustIt is easier to succeed in business without competition than with it. And if you are used to practicing your profession in a particular way, it is quite uncomfortable when new approaches develop that undercut your business.

(As an aside, Aaron Gott and I just published an article for CIO Story that discussed this idea in the context of the legal profession: Disrupting the Traditional Law Firm Model.)

Indeed, the first reaction is that the “guild” scrambles to find ways to stop the newcomers, often citing health, safety, or consumer protection reasons to cover what are, in fact, really actions of self-preservation. Several years ago, I published a law review article called “The Antitrust Implications of Licensed Occupations Choosing Their Own Exclusive Jurisdiction,” that discussed the antitrust implications of this problem.

North Carolina Board of Dental Examiners v. FTC

More recently, the United States Supreme Court decided a case called North Carolina State Board of Dental Examiners v. FTC. In that case, the Supreme Court held that a state board made up of dentists was not immune from the antitrust laws when it collectively acted to limit the market for teeth-whitening to dentists.

In the NC Dental case, dentists noticed that their high-margin teeth-whitening was facing lower-priced competition from non-dentists. They predictably reacted by citing health, safety, and consumer concerns and did what they could—collectively—to destroy their competitors and thus their competition.

That they did so through what was, in fact, a state board was no concern to the US Supreme Court because when an entity—even a state entity—is made up of a group of competitors it is in many ways just like a private trade association. If the competitors collectively violate the antitrust laws by excluding competition, they must face antitrust liability.

What the Supreme Court did not do in NC Dental, however, is determine the scope of what is an antitrust violation. For that, we must turn to basic antitrust doctrine. And like any other antitrust application, doctrine develops around different types of actions and situations.

One pertinent example, of course, is the state board made up of private competitors that seek to exclude their competition. The scope of antitrust liability—separate and apart from any state-action immunity issues—is an underdeveloped area of antitrust doctrine because there weren’t a great many cases of this nature.

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Supreme Court amicus briefAn amicus curiae brief is filed by a non-party—usually in an appellate court like the US Supreme Court—that seeks to educate the court by offering facts, analysis, or a perspective that the party briefing doesn’t present. The term amicus curiae means “friend of the court,” and that is exactly what the parties that file these briefs are. They aren’t objective, but they are—without pay—helping out the court, like a friend might. Well, sort of.

Entities filing amicus briefs do so for a reason and that reason isn’t typically just court friendliness. In fact, as we will discuss below, there are many good reasons for someone to file an amicus brief.

Along with antitrust and commercial litigation, I’ve been an appellate litigator my entire career. I started out by clerking for Judge James B. Loken on the United States Court of Appeals for the Eighth Circuit (in Minneapolis), then moved on to Gibson Dunn’s appellate group in Washington DC. So, as you might imagine, I’ve participated in many appellate matters. And without question some of my favorite briefs to write are amicus briefs. I’ve filed many of them over the years.

Indeed, at Bona Law, we have already filed four amicus briefs during our first year or so of business (US Supreme Court, Fourth Circuit, Eighth Circuit, and the Minnesota Supreme Court).

From the attorney’s perspective what I really like about amicus briefs is that they invite opportunities for creativity. The briefs for the parties before the court include necessary but less exciting information like procedural history, standard of review, etc. Then, of course, they must address certain necessary arguments. Even still, there is room for creativity and a good appellate lawyer will take a thoughtful approach to a case in a way that the trial lawyer that knows the case too well may not.

But what is great about writing an amicus brief is that you can pick a particular angle and focus on it, while the parties slog through other necessary details. The attorney writing the amicus brief figures out—with the client’s help—the best contribution they can make and just does it, as efficiently and effectively as possible.

Because the amicus brief should not repeat the arguments from the parties, the attorney writing the brief must develop a different approach or delve deeper into an argument that won’t get the attention it deserves from the parties. This is great fun as the attorney can introduce a new perspective to the case, limited not by the arguments below, but by the broader standard of what will help the court.

This means that the law review article that the attorney saw on the subject that hasn’t developed into case law is fair game. So is the empirical study from a group of economists that may reflect on practical implications of the decision confronting the court. Or the attorney might educate a state supreme court about what other states are doing on the issue. Often an association will explain to the court how the issue affects their members.

The point is that amicus briefs present opportunities to develop issues in ways that party briefs rarely do. Indeed, that is partly why they are valuable to courts.

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Colgate DoctrineAs an antitrust attorney with an antitrust blog, my phone rings with a varied assortment of antitrust-related questions. One of the most common topics involves resale-price maintenance. “Resale price maintenance” is also one of the most common search terms for this blog.

That is, people want to know when it is okay for suppliers or manufacturers to dictate or participate in price-setting by downstream retailers or distributors.

I think that resale-price maintenance creates so many inquiries for two reasons: First, it is something that a comparatively large number of companies need to consider, whether they are customers, suppliers, or retailers. Second, the law is confusing, muddled, and sometimes contradictory (especially between and among state and federal antitrust laws).

If you want background on resale-price maintenance, you can review my blog post on Leegin and federal antitrust law here, and you can read my post about resale-price maintenance under state antitrust laws here.

Here, we will discuss alternatives to resale-price maintenance agreements that may achieve similar objectives for manufacturers or suppliers.

The first and most common alternative utilizes what is called the Colgate doctrine.

The Colgate doctrine arises out of a 1919 Supreme Court decision that held that the Sherman Act does not prevent a manufacturer from announcing in advance the prices at which its goods may be resold and then refusing to deal with distributors and retailers that do not respect those prices.

Businesses—with the minor exception of the refusal-to-deal doctrine—have no general antitrust-law obligation to do business with any particular company and can thus unilaterally terminate distributors without antitrust consequences (in most instances; please consult an attorney).

Both federal and state antitrust law focuses on the agreement aspect of resale-price maintenance agreements. So if a company unilaterally announces minimum prices at which resellers must sell its products or face termination, the company is not, strictly speaking, entering an agreement.

Update: You can now read this article translated to French at Le Concurrentialiste.

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NC Dental DecisionIf you haven’t yet heard, the Supreme Court upheld the FTC’s antitrust action against North Carolina’s state dental board. And I think they did a good job with the opinion.

We wrote an amicus brief in this case and I have been studying these issues for years, so let me tell you some of my thoughts.

Justice Anthony Kennedy wrote the Court’s majority opinion and Justice Samuel Alito filed a dissent, which Justices Antonin Scalia and Clarence Thomas joined.

State Action Immunity Background

You can read a brief summary of the case here, but here is nutshell: The North Carolina dental board, consisting mostly of practicing dentists, took certain actions to keep non-dentists from offering teeth-whitening services in North Carolina. Noticing the blatant anticompetitive conduct, the FTC sued them under the federal antitrust laws.

The issue at the Supreme Court, however, wasn’t whether the conduct violated the antitrust laws or whether it was anticompetitive, which (in my view, the FTC’s view, and the Fourth Circuit’s view) it clearly was. The issue was whether the North Carolina State Board of Dental Examiners can use what is called the State-Action-Immunity doctrine as a shield from federal antitrust law.

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, municipalities need only show the first requirement (we will discuss this point further below).

The issue in NC Dental v. FTC (link to the Court’s opinion) was whether state licensing boards must demonstrate active supervision as well as the first prong—clear articulation. NC Dental didn’t show active supervision, so if they must do so under law, their state-action-immunity defense fails. And that is what happened.

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

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.” The opinion says a lot, but this core fact—competitors regulating competitors—is what ultimately matters.

After discussing the factual context of the case, the Supreme Court started its Section II—the legal background section—with the following line: “Federal antitrust law is a central safeguard for the Nation’s free market structure.” I expect that attorneys and judges will quote this line for years. You can compare it to the Court’s quote from National Society of Professional Engineers (which was originally from Standard Oil v. FTC): “The heart of our national economy long has been faith in the value of competition.”

Here is another good line from the same paragraph of NC Dental: “The antitrust laws declare a considered and decisive prohibition by the Federal Government of cartels, price fixing and other combinations or practices that undermine the free market.” So Justice Kennedy—the Court’s libertarian?—sets a positive free-market foundation.

There is, of course, a tension between the free-market policies of the federal antitrust laws and federalism. That, in fact, is what the state-action immunity doctrine is all about. Under federalism, “in some spheres [the States] impose restrictions on occupations, confer exclusive or shared rights to dominate a market, or otherwise limit competition to achieve public objectives.” So the Court’s task is to demarcate the line between the obligations of federal antitrust law and the states’ rights to depart from this free-market policy.

You can read more about this tension between federal antitrust law and federalism in an article I wrote with Luke Wake for Competition. In that article, we argue that the Court should apply a market-participant exception to state-action immunity. That is, if a state or local government engages in commercial competition rather than regulation, it should not be able to invoke the state-action immunity shield; it must play by the same rules as other competitors. As an aside, you might notice the Court’s language in NC Dental distinguishing between regulation and market-participants. I certainly noticed it.

In resolving the tension between federalism and federal antitrust law, the Court—as it did recently in Phoebe Putney—points out that state-action immunity, like other antitrust exemptions, is disfavored.

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The US Supreme Court issued its eagerly awaited decision today in North Carolina State Board of Dental Examiners v. Federal Trade Commission. As you might recall, this case involved an antitrust challenge by the FTC against a state dental board made up of practicing dentists that took actions to exclude non-dentists, i.e. their competitors, from the teeth-whitening business in North Carolina.

The issue before the Supreme Court was whether the North Carolina dental board could invoke the state-action-immunity doctrine to exempt itself from antitrust scrutiny. To obtain state-action immunity, defendants typically have to show (1) that the challenged restraint is clearly articulated and affirmatively expressed as state policy; and (2) that the policy is actively supervised by the state.

Previous Supreme Court decisions had established that the second requirement, active supervision, did not apply to municipalities. Until today, it was an open question whether state licensing boards, and state agencies in general, had to establish active state supervision over their activities as part of state-action immunity. According to the Supreme Court, they do.

This is an important decision that could lead to more antitrust challenges of state-agency conduct. State licensing boards better get their act together; it will be more difficult for them to abuse their power in anticompetitive ways.

We filed an amicus brief in this case urging the Supreme Court to make the decision it did.

You can read a more complete analysis here. Here is a summary article on the decision that Aaron Gott wrote for Bona Law PC.

In the meantime, you can access the Court’s opinion in North Carolina State Board of Dental Examiners v. Federal Trade Commission. You can read our amicus brief here. My blog posts on anticompetitive state conduct and state-action immunity are here.

You can read my blog posts on the NC Dental case here and here and here.

Takings and KoontzIf you read The Antitrust Attorney Blog regularly, you might have noticed that I think that the governments—federal, state, and local—tend to overreach into our business, our pursuits, and our lives. And I have strongly advocated that we apply the federal antitrust laws to counter the bloating influence of governments everywhere into our markets.

You may have also noticed my interest in property and real estate. Part of that is personal—I believe that real-estate investing is a great idea. There are many advantages to it. And my wife and I are real-estate investors. Besides antitrust, my firm offers real-estate litigation (in addition to appeals, business litigation, and challenges to government conduct).

Well, these interests have collided into a massive project that I just completed with Luke A. Wake of the National Federation of Independent (NFIB) Small Business Legal Center. We finished the initial version of a law review article entitled Legislative Exactions After Koontz v. St. Johns River Management District.

Update: We are excited to announce that we have accepted an offer to publish our article in the Georgetown International Environmental Law Review.

This isn’t the first time that Luke Wake and I have written something together. Last year, we published an antitrust article entitled The Market-Participant Exception to State-Action Immunity. Back when I was with DLA Piper, we also worked on an amicus brief together for the NFIB in the U.S. Supreme Court case of FTC v. Phoebe Putney Health System, Inc. Luke is a rising star in the legal world, so you should remember his name.

Koontz v. St. Johns River Management District

In 2013, the Supreme Court enhanced property rights in the United States when it decided Koontz. It was a sharply split decision that included an expertly written dissent by Justice Elena Kagan, who in my view is coming close to equaling Justice Antonin Scalia as the Supreme Court’s top writer.

As an aside, Justice Kagan (then Professor Kagan) was my Administrative Law professor at Harvard Law School and the wit that you see in her opinions was on full display in class. (She did, by the way, mention one day in class that Justice Scalia was her favorite Justice; I don’t think she meant that from an ideological perspective).

Koontz arose in the context of what is called the unconstitutional conditions doctrine, as applied to Takings law. If you don’t know what a Taking is, you can read this short article distinguishing eminent domain and inverse condemnation (takings).

First, some quick background. In 1987, the Supreme Court held in the case of Nollan v. California Coastal Commission that governments cannot attach conditions to permit requirements unless the condition bears a “nexus” to the impact of the proposed project. In 1994, the Supreme Court in Dolan v. City of Tigard further held that such conditions must also bear a rough proportionality to the harm from the proposed project.

The names of the plaintiffs in these cases conveniently rhyme, so people in the takings arena refer to this doctrine as the Nollan and Dolan requirements.

Here is what happened: Coy Koontz, an entrepreneur in the Orlando, Florida area, sought to develop some property that he held. Sounds reasonable enough. The property was zoned commercial and he sought a permit for its development.

Florida, however, had enacted comprehensive environmental restrictions that required a state agency to review any such applications to determine whether the proposed project will reduce wetlands. So, in this case, Mr. Koontz couldn’t develop his land unless the St. Johns River Management District blessed the project.

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Antitrust Group BoycottMaybe everyone really is conspiring against you? If they are competitors—that is, they have a horizontal relationship—they may be committing a per se antitrust violation.

A group boycott occurs when two or more persons or entities conspire to restrict the ability of someone from competing. This is sometimes called a concerted refusal to deal, which unlike a standard refusal to deal requires, not surprisingly, two or more people or entities.

A group boycott can create per se antitrust liability. But the per se rule is applied to group boycotts like it is applied to tying claims, which means only sometimes. By contrast, horizontal price-fixing, market allocation, and bid-rigging claims are almost always per se antitrust violations.

I receive a lot of calls about potential group boycott actions. This is probably the most frustrating type of antitrust conduct to experience as a victim.

Many antitrust violations, like price-fixing, tend to hurt a lot of people a little bit. A price-fixing scheme may increase prices ten percent, for example. Price-fixing victims feel the pain, but it is diffused. Typically either the government or plaintiff class-action attorneys have the biggest incentive to pursue these claims.

Group boycott activity, however, is usually directed toward one or very few victims. The harm is not diffused; it is concentrated. And it is often against a competitor that is just trying to establish itself in the market. The defendants may act like bullies to try to keep that upstart competitor from gaining traction in the market. Sometimes trade associations lead the anticompetitive charge.

Group boycott activity often occurs when someone new enters a market with a different or better idea or way of doing business. The current competitors—who like things just the way they are—band together to use their joint power to keep the enterprising competitor from succeeding, i.e. stealing their customers.

Sometimes group boycott claims are further complicated when the established competitors—the bullies—use their relationships with government power to further suppress competition. Indeed, sometimes the competitors are government power.

This is what occurred in the NC Dental v. FTC case (discussed here, and here; our amicus brief is here): A group of dentists on the North Carolina State Board of Dental Examiners engaged in joint conduct, using their government power, to thwart teeth-whitening competition from non-dentists. Update: The US Supreme Court upheld the Fourth Circuit’s decision supporting the FTC in its antitrust claim against the North Carolina State Board of Dental Examiners.

This, in my opinion, is the most disgusting of antitrust violations: a group of bullies engaging government power to knock out innovation and competition. And I am very happy to see the Federal Trade Commission take a pro-active role against such anticompetitive thuggery.

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