Applying the Antitrust Laws to Anticompetitive State and Local Government Conduct

Update: The Supreme Court granted review in North Carolina Board of Dental Examiners v. FTC on March 3, 2014.

Lawyers, judges, economists, law professors, policy-makers, business leaders, trade-association officials, students, juries, and the readers of this blog combined spend incredible resources—time, money, or both—analyzing whether certain actions or agreements are anticompetitive or violate the antitrust laws.

While superficially surprising, upon deeper reflection it makes sense because less competition in a market dramatically affects the prices, quantity, and quality of what companies supply in that market. In the aggregate, the economic effect is quite large, thus justifying the resources we spend “trying to get it right.” Of course, in trying to get it right, we often muck it up even more by discouraging procompetitive agreements by over-applying the antitrust laws.

So perhaps we should focus our resources on the actions that are most likely to harm competition (and by extension, all of us)?

Well, one place we can start is by concentrating on conduct that is almost always anticompetitive—price-fixing and market allocation among competitors, as well as bid-rigging. We have the per se rule for that. Check.

There is another significant source of anticompetitive conduct, however, that is virtually ignored by the antitrust laws. Indeed, a doctrine has developed surrounding these actions that expressly protect them from antitrust scrutiny, no matter how harmful to competition and thus our economy.

As a defender and believer in the virtues of competition, I am personally outraged that most of this conduct has a free pass from antitrust and competition laws that regulate the rest of the economy, and that there aren’t protests in the street about it.

What has me so upset?

You guessed it: state and local government restraints!

Just about everyone concentrates on private restraints that, while possibly harmful to competition, are quite unstable. By that, I mean that it is very difficult for a company or companies to restrict competition for long.

If they form a cartel, the members have strong incentives to cheat (i.e. increase production, lower prices, or offer a better product). If a company engages in exclusionary or monopolistic conduct, it doesn’t take long before a new company or even a new market comes along and “disrupts” the monopoly. Competition is resilient like that.

But state and local restraints are the worst because they are ingrained in an economy through the power of law. Even the greatest innovators can’t overcome that—unless, of course, they curry the right favor with the government. But that isn’t competition; that is cronyism.

Former Chairman of the Federal Trade Commission, Timothy J. Muris, has a great description about government restraints and antitrust: “Attempting to protect competition by focusing solely on private restraints is like trying to stop the flow of water at a fork in a stream by blocking only one of the channels. Unless you block both channels, you are not likely to even slow, much less stop, the flow. Eventually, all the water will flow toward the unblocked channel.”

State Licensing Boards

State and local governments engage in all sorts of anticompetitive conduct from limiting the number of taxi-cab licenses in a city to professional advertising restrictions to actual price or output restrictions. A couple years ago, I published a law review article that explained how state licensing boards made up of participants of an industry—like a dental or medical board—were using their “state” power to eliminate their own competition by excluding other professions from competing with them.

Since that article, the Fourth Circuit in a significant decision has upheld an FTC action against the North Carolina Dental Board (made up primarily of dentists) for trying to lock out competition to dentists for teeth-whitening. The Supreme Court is considering whether to accept review. Update: The Supreme Court granted review on March 3, 2014. You can access the FTC’s Administrative Decision here.

This sort of activity is quite common among licensing boards, and I expect it to continue. In fact, I predict that over the next five to ten years you will see several battles between traditional doctors empowered by the state on official licensing boards and those that practice various forms of increasingly popular (and often quite effective, in my view) alternative medicine.

My prediction is based upon the pattern that markets with strong incumbents (with market power) will commonly react to insurgent and effective competition with cheap tricks that are often anticompetitive. Traditional doctors, of course, are the strong incumbents that, as a class, like the status quo.

But increasingly popular alternatives are arriving that threaten to disrupt this status quo. Clashes at the state medical board level are inevitable as traditional medicine struggles to keep hold of markets that it has dominated for years. Anyway, this could be a law review article by itself, so I will stop here. But watch for it over the next decade.

As an aside, a few months ago, I came across some podcasts (by Robb Wolf and others) that focused on the Paleo diet and alternative approaches to health and disease. I became intrigued and somewhat obsessively read, listened, and researched. I adopted what I learned and quickly and easily reached my pre-law-firm weight, and now feel significantly healthier. During my own exploration, it became apparent that there are a lot of great ideas out there based upon the best medical research that has a lot to offer over the traditional approach to medicine and health.

State-Action Immunity

The barrier to applying the antitrust laws to state and local government conduct is the state-action immunity doctrine. I will save a detailed discussion of this doctrine for future blog posts, but the short story is that federalism concerns have led the courts to exempt conduct by the state as a sovereign from antitrust scrutiny.

If you want to learn more about the details of this doctrine check out the Supreme Court’s 2013 decision in Federal Trade Commission v. Phoebe Putney Health System, Inc. (which actually pared back the exemption to a certain extent). I filed an amicus brief in this case, which you can read here.

Also, if you want more information on the scope of the immunity, I recently finished a draft of an article that I am co-authoring with Luke Wake of the National Federation of Independent Business (NFIB) entitled The Market-Participant Exception to State-Action Immunity from Antitrust Liability. Watch for it in the spring issue of Competition.

Update: Luke Wake posted a blog entry for the NFIB on state-action immunity and the market-participant exception.

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