Articles Posted in State-Action Immunity

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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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.

White TeethThe trade association necessitates a delicate balancing act between anticompetitive conduct condemned by the antitrust laws and pro-competitive information-sharing and best practices that ultimately help consumers.

Trade associations should have antitrust policies and should consistently consult with an antitrust attorney. Antitrust law reserves its greatest scorn to the horizontal agreements—the deals between and among competitors. And a trade association is, by definition, an entity created to bring these competitors together.

Competition Policy International (CPI) published an Antitrust Chronicle this week about trade associations and industry information sharing and I was fortunate that they invited me to publish an article in this issue. My article is called “’But the Bridge Will Fall’ is Not a Valid Defense to an Antitrust Lawsuit.” I discuss one of my favorite Supreme Court cases of all time: National Society of Professional Engineers v. United States.

There are a couple of ways that trade associations—and, really, any group of industry competitors—harm competition and risk antitrust liability. The first and most obvious concern is that the competitors will conspire against their customers or suppliers (don’t forget that buying conspiracies may be illegal too).

For example, a group of competitors may reach agreements on price, output, geographic or product and service markets, contractual terms, etc. These are per se antitrust violations, condemned with little analysis other than whether there was, indeed, an agreement.

The other conspiratorial harm that trade associations or groups of industry competitors can inflict is on competitors from another industry or profession. In my view, this harm is underrated and under-considered. I discussed this concern in a law review article a couple years ago.

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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.

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By Jarod Bona and Aaron Gott

We filed an amicus curiae brief with the U.S. Supreme Court on behalf of We All Help Patients, Inc. in North Carolina State Board of Dental Examiners v. FTC, a federal antitrust case challenging anticompetitive conduct by professional-licensing boards.

Let us tell you a little bit about this interesting case.

The Antitrust Case

The North Carolina Board of Dental Examiners is composed of six licensed dentists, one licensed dental hygienist, and one “public member.” Dentists make a lot of money by offering teeth-whitening services. So when non-dentists started providing teeth-whitening services at a far lower cost, dentists started complaining to the Board about the lower-priced competitors.

Naturally, a Board made up of self-interested private parties had an incentive to do something about it. They began sending cease-and-desist letters to non-dentist teeth whiteners and even went so far as to ask shopping malls to not lease kiosks to teeth whiteners. It wasn’t clear, of course, that North Carolina law limited teeth-whitening services to dentists.

The Board’s actions were, in fact, a conspiracy to restrain trade. The members were competitors that acted in agreement to exclude other competitors. The conspiracy question was not at issue with the US Supreme Court.

The Federal Trade Commission, which has long advocated for “free and unfettered competition as the rule of trade” to protect consumers and economic liberty, issued an administrative complaint against the State Board and ultimately held that the Board engaged in anticompetitive conduct and the state-action immunity doctrine did not apply. The case made its way up through the Fourth Circuit—which agreed with the FTC—and finally to the U.S. Supreme Court.

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TaxisProbably not. But any government agency that files an amicus brief supporting an Institute for Justice case challenging anticompetitive state action deserves some libertarian props.

If I had to name a favorite government agency, I would pick the FTC. I don’t agree with many of their positions, of course, and have gone up against them before. But they work hard to rein in anticompetitive state and local conduct and that is meaningful. In those instances, they are champions of competition. These state and local boards shouldn’t violate the antitrust laws.

Andrew Gavil, the Director of the Office of Policy Planning at the FTC, testified before the House Committee on Small Business on “Competition and the Potential Costs and Benefits of Professional Licensure.” This is an issue that I have studied for many years and the FTC has been and remains a leader in protecting competition from needless entry barriers by state and local boards.

Let’s take a quick look at Andrew Gavil’s written statement, which officially presents the views of the Federal Trade Commission by a 5-0 vote.

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UmpireA few years ago, now-Chief Justice then-Nominee John Roberts invoked an umpire analogy during his confirmation hearings, explaining that “My job is to call balls and strikes and not to pitch or bat.” I love baseball, so I can appreciate any description that marries law and baseball.

Without getting into the substance of Chief Justice Robert’s point, let’s examine that analogy in a slightly different context:

Let’s say you are in the midst of a serious competitive ballgame. You reach the seventh inning, the score is tied 3 to 3 (good pitching, lots of great defensive plays, maybe a solo home run, and a couple manufactured runs for your team—something for everyone). The umpires have called a good game, but they haven’t been perfect.

You are the home team, so you go out to pitch in the top of the seventh inning. But instead of a batter coming up for the other team, the home plate umpire takes off his mask, grabs a bat and goes up to bat. Well, this is unexpected. Suddenly you are playing against the umpire?

Okay, you are a good pitcher, you can handle it. It is odd, but life is about making adjustments. You wait for a new umpire, but the spot behind the catcher remains vacant. What is going on? You call a time-out and ask.

After hearing the answer, you go back to the mound thinking “this is crazy.” The umpire is, indeed, now competing against you. But there isn’t a new umpire. The original umpire is still the umpire. He will still make the calls, while playing the game.

Pitch one: A fastball right down the middle, an obvious strike. No swing. “Ball One,” you hear from behind the batter’s helmet. That doesn’t seem fair. But, you’ve seen worse calls, so you ready pitch two.

Pitch two: A change-up over the plate. “Ball two.” Now, you are livid. Two strikes, but your hitter is calling the game, so you are behind in the count 2-0. This is the point where you start to ready your bean-ball pitch, but you smartly realize that if you throw at the hitter, the umpire, who is also the hitter, will probably throw you out of the game.

Pitch three: Another fast-ball down the middle. You know he won’t swing. “Ball three.” The umpire-hitter then takes first base. “That was only ball three,” you yell at the foolish ump, who can’t count. You were initially angry, but you see that he made a fool of himself for not being able to count, so your anger subsides a little. You chuckle, while getting ready to throw another pitch.

But then the umpire explains that not only does he still make the calls, but he can also change the rules during the game. So, at least for now, three balls not four balls is a walk. At this point, you let out a string of expletives, articulating that it isn’t really competition if the other side doesn’t have to follow the rules and can change them at will.

So, that was half-way amusing, but what’s the point?

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I recently reported on my client’s antitrust case against the Virginia Board of Medicine. I also mentioned that I argued at the motion-to-dismiss hearing on March 28. I am excited to announce that we received the Court’s decision today rejecting the Board’s Motion to Dismiss.

If you are interested in the case, you can download the complaint and motion to dismiss documents below.

1. Amended Complaint

PillsLast week was a big antitrust week for the new law firm of Bona Law PC. First, it was the ABA Antitrust Spring Meeting, where antitrust lawyers from all over the world descend upon Washington, DC to obsess over antitrust and competition for several days. Second, I was writing an antitrust brief in a significant antitrust case.

Finally, I argued at a motion-to-dismiss hearing in the case Dr. Yvoune Kara Petrie, DC v. Virginia Board of Medicine, et al. I represent Yvoune Petrie, a doctor of chiropractic, in an antitrust lawsuit (Sherman Act, Section 1) against the Virginia Board of Medicine and several of its board members. Update: We survived the motion to dismiss.

With my client’s permission, I thought I’d tell you a little more about it.

As you might recall, I have experience and expertise in antitrust lawsuits against state and local entities, and believe that some of the most pernicious harm to competition comes from government conduct.

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