The US Supreme Court Hears Arguments in North Carolina Board of Dental Examiners v. FTC

NC Dental PictureThe US Supreme Court does not review many antitrust cases. So when they do, it is kind of a big deal for antitrust attorneys around the world.

On Tuesday, the Supreme Court heard oral arguments in North Carolina Board of Dental Examiners v. FTC, which addressed the scope of state-action immunity from antitrust liability. More specifically, the Court is reviewing whether a state licensing board must satisfy both prongs of what is known as the Midcal test to avoid antitrust scrutiny.

The first element, which everyone agrees applies, requires the defendant entity to show that the State “clearly articulated and affirmatively expressed” the challenged anticompetitive act as state policy. The Supreme Court is deciding whether state licensing boards are subject to the second element as well: whether the policy is “actively supervised by the State itself.” Municipalities and other local governments have a free pass from this second element, but private people and entities must satisfy the active supervision requirement.

So what is the big deal? If an entity—state or private—can show that state-action immunity doesn’t apply, it can violate the antitrust laws at will. It can grab consumer surplus for itself; it can exclude competition; it can behave under different rules than everyone else. And monopoly is quite profitable.

In NC Board of Dental Examiners v. FTC, a state-sanctioned dental board—composed of six licensed dentists, one licensed dental hygienist, and one public member—engaged in actions to exclude non-dentist teeth-whitening services. As you might recall, Bona Law filed an amicus brief in this case. You can learn about the case and our amicus brief here. Among other points, we argued that the Supreme Court should analyze the case as the Court outlined in American Needle, by reference to whether the units of competition—the independent decision-makers—are private. They are. We also advocated that the Supreme Court apply an active state supervision requirement with some teeth.

(If you are generally interested in state-action immunity from antitrust, I also filed an amicus brief in the US Supreme Court’s other recent antitrust case, FTC v. Phoebe Putney Health System, which you can review here. We argued for an exception to state-action immunity for state and local entities that compete as market participants. You can read our law review article about that issue here. I also wrote a law review article several years ago about the very issue presented in NC Dental.)

Anyway, back to NC Dental. The Fourth Circuit held that the second Midcal element, active state supervision, applied to the dental board composed of private dentists. The Supreme Court took up that issue.

Here are my observations from the oral argument transcript.

  • The issue of whether a state could determine that a trade association was a state entity and have the association’s officers avail themselves of state-action immunity came up. The Board attorney tried to make a big deal over whether the officer’s took an oath to enforce state law (as well as other formalities), but the Justices were quite skeptical.
  • Justice Kagan—my administrative law professor at Harvard Law School—explained that the Court’s prior decision in City of Hallie asked the same question we have in NC Dental: Is the entity “more like just private parties or is [it] more like a prototypical State actor”? In City of Hallie, the Court held that the municipality was less like a private entity and more like a prototypical State actor, so it did not require it to prove the second Midcal element. Justice Kagan continued: “the requirement of active State supervision is a way of ensuring that the actor is engaging in the challenged conduct pursuant to State policy. … we need to have that test when there’s a real danger that the party is acting to further his own interest but not when there is not such a danger.” Sometimes the battle is asking the right question and I think Justice Kagan nailed it.
  • The attorney for the Board tries to argue that certain state formalities are sufficient—unless the state agency is essentially a sham—to shield the entity and individuals from antitrust scrutiny. The Supreme Court in American Needle rejected reliance on such formalities in a previous antitrust case.
  • Justice Breyer—a former antitrust law professor—has a great line about antitrust and this case: “The object of the antitrust laws is to prevent private individuals who compete with each other in business from getting together and making agreements. That kind of interest seems present here, present in Midcal, and present in all the other cases, but not present in Hallie.” [the Court didn’t require active state supervision in Hallie].
  • Justice Kagan, again, is on fire: “the two prongs of Midcal are supposed to operate in tandem with each other. They both have a role to play in ensuring that an actor is in accord with the State policy and is not acting solely to further his own interest.” She then elaborates: “So to strip the second half of the test off is to leave the first half of the test essentially … unprotected. There’s no way to make sure that the people are acting in accord with State policy rather than to serve their own interests.” I couldn’t agree more—it isn’t appropriate to separate the Midcal two elements from each other and their overall purpose. In our amicus brief, we stated that “Courts should not [] apply these factors in a vacuum, parsing the plain language of each. Instead, they are a means to the specific policy underlying the state-action immunity doctrine, not ends by themselves.”
  • Clarification: In the language that follows, I initially criticized the FTC for certain strategy decisions relating to the argument and briefing. But I was too quick to blame the FTC. Even though the FTC is the party, the case at this stage is run by the Solicitor General. So the decisions may not have been made by the FTC and, technically, could have been made over the objections of the FTC. We don’t know what happened in the strategy sessions (well, I don’t). I will leave the point (with minor changes), but please understand that any blame on the FTC itself may be misplaced: In my view, the FTC (as a party) makes too big of a deal over the fact that the dental board members were elected by other dentists rather than appointed by a state official. The reality is that the distinction is not as important in practice as it sounds. Whether appointed or elected, local professional associations play an important role in selecting the members. And, in the end, the members are private competitors. That is what matters. I am surprised, and frankly, disappointed that the FTC stressed this factor (whether their decision or not). A typical litigant will often take the narrowest position they can to win. But a litigant like the FTC that seeks a policy victory does not need to take such a narrow position based upon a distinction with little practical difference. The attorney representing the FTC, to his credit, agreed when pushed by Justice Kagan, that this is just an “add-on feature,” but someone clearly made a strategy judgment to stress this factor. The FTC has admirably been a strong proponent of applying the antitrust laws to state and local governments. So it is strange that they would set up their argument to narrow their potential policy victory. Anyway, I don’t think the Court views it as dispositive.
  • Some justices expressed concern with a hypothetical situation about whether a group of brain surgeons or bureaucrats will decide who can practice brain surgery. The issue, really, is what sort of active state supervision should be required over a group of brain surgeons.
  • Near the end of its argument, the FTC pointed out in response to the brain-surgery hypothetical (which reoccurred through the argument) that the real issue is not typically brain surgeons deciding who can practice brain surgery, but instead is a battle between competing professions: Dentists telling non-dentists in what endeavors they can legally compete with dentists. So (applying the Court’s hypothetical) what happens if there is an alternative to brain surgery, but the brain surgeons on a committee have the power to exclude that alternative practice?
  • Justice Alito expressed concern over a rule that would require federal courts to look at state agencies and state regulatory entities to determine “whether they are really serving the public interest or they are serving some private interest.” Our amicus brief advocated that the federal courts instead look at the “independent center of decision-making”—here the individual board members—and determine whether they have private competitive interests.
  • Justice Breyer points out that “this whole thing turns to me on what the supervision consists of and whether it’s good enough or not here.” I would not be surprised if the Supreme Court makes a substantive ruling on the actual contours of active state supervision.
  • One issue that comes up in the argument and the briefing is whether a ruling for the FTC and against the dental board means, essentially, automatic antitrust liability for boards all over the country. I think that this argument is overplayed. First, very few board actions are, in fact, antitrust violations. Second, an active state supervision requirement is merely that—it isn’t a death knell under the antitrust laws.

Those are my knee-jerk reactions to the oral argument. We wrote a brief in the case, so I’m biased.

I am not going to make any predictions, but I am excited to read the opinion (or opinions). For whatever it is worth, in reviewing the transcript, it appeared that Justices Kagan and Breyer, in particular, distinguished themselves with great mastery of the issues and subject matter.