SmileDirectClub, Dental Boards, and State-Action Immunity: DOJ Antitrust Division Argues a Court Wasn’t Tough Enough on a State Dental Board


Author: Luis Blanquez

When someone new enters a market with a different or better idea or way of doing business, existing competitors must also innovate, lower their price, or otherwise improve their offerings to maintain their position in the market. That is why competition is good for consumers.

But sometimes competitors choose another path: they avoid competition by banding together to boycott the disruptive new entrant. And sometimes, they use state and local governments to accomplish that end—often under the guise of consumer health, safety, and welfare.

Competitors in some industries have been particularly successful in establishing a perpetual, government-backed gatekeeping role by collectively lobbying the state legislature to enact a licensing regime, imbuing power in a licensing board comprising competitors of the industry. That is what happened in North Carolina State Board of Dental Examiners v. FTC, a 2015 U.S. Supreme Court case about a professional licensing board comprising dentists who used their state government power to attempt to thwart competition from non-dentist teeth whiteners.

At Bona Law we are no stranger to enforcing the federal antitrust laws against anticompetitive conduct enabled by state and local governments. In fact, we filed an amicus curiae brief in the NC Dental case.

State and local governments create anticompetitive schemes that are inconsistent with federal antitrust laws all the time—regulation often displaces competition in some respect. When anticompetitive conduct is the result of government power, the federal antitrust laws sometimes exempt liability under the state-action immunity.

In NC Dental, the Supreme Court held that state regulatory boards dominated by active market participants qualify for the state-action exemption only if two stringent criteria are met: first, the defendants must show they acted pursuant to a clearly articulated state policy and second, their implementation of that policy is actively supervised by the state. NC Dental, 574 U.S. at 504. Defendants bear the burden for establishing both criteria. Id.

Yet five years after the North Carolina dental board lost at the Supreme Court, new disruptive competitors are still battling it out against dental boards across the country. One of those competitors is SmileDirectClub, who is currently litigating antitrust cases against dental boards in Georgia, Alabama and California. Rather than teeth-whitening, this time the product market is teeth alignment treatments. SmileDirectClub provides cost-effective orthodontic treatments through teledentistry.

One of SmileDirectClub’s services is SmileShops. These are physical locations in several states at which they take rapid photographs of a consumer’s mouth. Customers may also use an at-home mouth impression kit, which means that an in-person dental examination is not necessary. Afterwards they send the photographs to the SmileDirectClub lab.

SmileDirectClub connects the customer with a dentist or orthodontist, who is licensed to practice locally but is located off-site (and may be even located out-of-state), who evaluates the model and photographs and creates a treatment plan. If the dentist feels that aligners are appropriate for the patient, she prescribes the aligners and sends them directly to the patient. The patient doesn’t need to visit a traditional dental office for teeth alignment treatment. This results in significant cost savings and greater customer convenience and access.

But the members of the boards of dental examiners in Georgia, Alabama and California––the bullies that want things to remain the same––have, according to plaintiffs, used their government-created power in the marketplace to protect the economic interests of the traditional orthodontia market by using (i) coordinated statewide raids; (ii) false statements; (iii) and other misconduct to prevent SmileDirectClub from competing on the merits.

The Eleventh Circuit cases against the dental boards in Alabama and Georgia

In October 2018, SmileDirectClub together with one of its affiliated dentists in Alabama, Blaine Leeds, sued the Alabama Dental Examiners Board after receiving a cease-and-desist letter accusing him of unauthorized practice of dentistry. The district court declined to grant state-action immunity to the Alabama board members because they couldn’t show, among other things, the second element of the NC Dental test, active supervision. This case is currently on appeal.

In August 2020, SmileDirectClub won its first appellate victory against a state dental board when the Eleventh Circuit held that the Georgia’s board of dental examiners was not entitled to state-action immunity.

SmileDirectClub sued the Georgia board and its members alleging, among other things, that a rule amendment––to require dental assistants taking orthodontic scans to have immediate supervision from a licensed dentist––unlawfully restricted competition from teledentistry services. The district court dismissed SmileDirectClub’s claims against the board in its official capacity on sovereign-immunity grounds, but the claims against the board members in their individual capacities survived dismissal.

On appeal, the Eleventh Circuit held, among other things, that the members of the board failed to satisfy the active supervision requirement because the governor approved the proposed rule amendment without a substantive review:

“Though the Governor of Georgia had the “authority and duty to actively supervise” and was clearly empowered to “approve, remand, modify or reverse” proposed rules (or amendments), O.C.G.A. § 43-1C-3, he did not exercise that power here. There is no indication that the Governor engaged in a substantive review of the amended rule to ensure that it accords with state policy. His comments regarding the proposed amendment in the Certification of Active Supervision suggest that he examined only the procedural question of whether the amended rule was within the Board of Dentistry’s statutory power to propose the rule change. The Governor did not comment—even in passing—on the merits or substance of the rule change.”

In addition, the court held that the mere power and duty on the part of the governor was not enough for ipso facto immunity for the state board because the Supreme Court case made clear that mere potential supervision is not even sufficient to satisfy the “active supervision” requirement.

In both cases, DOJ and FTC each filed amicus curiae briefs that emphasize the limited nature of the application of the state-action doctrine.

Brief of the United States and the Federal Trade Commission as Amici Curiae Supporting Plaintiffs-Appellee D. Blaine Leeds and SmileDirectClub, LLC v. Jackson, et al. No. 19-11502, September 11, 2019.

Brief of the United States and the Federal Trade Commission as Amici Curiae Supporting Plaintiffs-Appellee SmileDirectClub, LLC v. Battle, et al. No. 19-12227, September 25, 2019.

If you want to know more about how the FTC and DOJ have approached the state-action immunity doctrine recently, we analyze some of the most recent briefs on state action immunity filed by the FTC and DOJ, as well as some reflections from former FTC Commissioner Maureen K. Ohlhausen on the Supreme Court’s 2015 North Carolina Dental Decision; and the FTC Staff Guidance on Active Supervision of State Regulatory Boards Controlled by Market Participants, in our article here.

The Eleventh Circuit has been particularly busy in the past few years reviewing the limited application of state-action immunity. Indeed, it has recognized the Supreme Court’s new and higher “clear articulation standard” for state action immunity cases, which includes narrower bounds on the meaning of foreseeability.

Under this new standard, the anticompetitive conduct must not only be the “foreseeable result” of state legislation, but the displacement of competition must also be the “inherent, logical, or ordinary result of the exercise of authority delegated by the state legislature.” In one of its most recent cases, it recognized that “we’re in a post-Phoebe Putney world” that sets a far higher bar for clear articulation.

But let’s go back to the case in California and to the Department of Justice Amicus Brief.

The Ninth Circuit case in California: Sulitzer v. Tippins, case No. 20-55735

In this case, the dental board defendants moved to dismiss similar claims for anticompetitive conduct based on a state-action immunity defense.

The district court rejected defendants’ argument that the state action doctrine applied because the defendants could not show that they were actively supervised. The court nevertheless held plaintiffs failed to state a Section 1 claim and ended up dismissing the complaint without prejudice.

SmileDirectClub amended the complaint once but the district court dismissed it again for failure to state a claim. This time the court held that SmileDirectClub may have pled enough facts to show the existence of an agreement––by way of a theory of the board’s ratification of the investigation––but surprisingly concluded it was nevertheless insufficient to state a Section 1 claim because the agreement was consistent with its regulatory purpose to undertake their delegated authority as members of the board, and thus was not intended to restrict or restrain competition.

SmileDirectClub has appealed the ruling before the Ninth Circuit where the case is currently pending.

DOJ’s amicus brief

DOJ filed an amicus brief in the Ninth Circuit appeal arguing that California’s dental board members are not immune from antitrust scrutiny. More specifically, DOJ explains in its brief that the lower court erred in tossing SmileDirectClub’s suit on the basis that the alleged agreement falls within the board’s regulatory authority.

The brief expressly disagrees with the district court’s conclusions that (1) there is no concerted action among the dental board members when they act within their regulatory authority, and (2) the conduct within the board’s regulatory authority cannot be anticompetitive.

In a nutshell the DOJ explains in the amicus brief that:

First, while regulatory authority for the challenged action is relevant to whether it qualifies as “state action” under Parker, that is a “disfavored” defense with stringent requirements, for which the burden is on defendants. By requiring Plaintiffs to plead—and later prove—the alleged conduct was beyond the dental board members’ regulatory authority, the ruling could create a de facto exemption for state regulatory boards controlled by active market participants that is fundamentally inconsistent—both substantively and procedurally—with NC Dental. DOJ urges the Ninth Circuit to clarify that such an exemption would be improper because it could create a situation where market participants regulate their own industry free from antitrust scrutiny.

Second, the Supreme Court has repeatedly held concerted action exists when market participants regulate their industries. These decisions have commonly involved market participants regulating their industries through professional associations. And the brief mentions cases such as FTC. v. Ind. Fed. of Dentists, 476 U.S. 447, 459 (1986); Ariz. v. Maricopa Cnty. Med. Soc’y, 457 U.S. 332, 347-51, 357 (1982); and Nat’l Soc’y of Prof’l Eng’rs v. United States, 435 U.S. 679, 692 (1978), among others.

Third, the Supreme Court has also made clear that the same principles apply when state regulatory boards controlled by market participants regulate their industries. And the brief cites the well-known NC Dental case: “[t]he similarities between agencies controlled by active market participants and private trade associations are not eliminated simply because the former are given a formal designation by the State, vested with a measure of government power, and required to follow some procedural rules.” 574 U.S. at 511. In both situations, the competitive issues are created by “a group of active market participants [] decid[ing] who can participate in its market, and on what terms,” and their agreements are subject to antitrust scrutiny under Section 1. Id.

Fourth, such concerted action comes in the form of adopted rules or policies, but it is not only limited to formal rules. It includes other types of agreements by members or board members. Then the brief goes on to provide several examples, like in the case of NC Dental, where the Fourth Circuit held that board members engaged in concerted action when agreeing to send cease and desist letters to non-dentist competitors; or the case of Robertson v. Sea Pines Real Estate Cos., Inc., 679 F.3d 278, 285-86 (4th Cir. 2012) (holding that concerted action existed even though “defendants passed the MLS by-laws in their capacity as MLS board members”).

Fifth, to the extent the district court held that the board members did not reach an agreement under Section 1 because they acted consistently with their regulatory authority, it misapplied Twombly. Twombly does not suggest that there cannot be concerted action when the challenged conduct falls within board members’ regulatory authority. Rather, Twombly holds that conclusory allegations of concerted action are inadequate, and that the plaintiff must allege sufficient facts to render the existence of concerted action plausible. 550 U.S. at 556-57.

Sixth, adequately alleging concerted action is necessary but not sufficient to plead a Section 1 violation. Plaintiffs must also allege that the concerted action harms competition and is therefore unreasonable.

Many alleged concerted actions by board members would likely be reasonable: they neither fall into the category of restraints that always or almost always have anticompetitive effects and thus are per se unlawful (such as price-fixing and market allocation), nor do they have an appreciable anticompetitive effect such that they would violate the rule of reason. But concerted action by board members may also be anticompetitive and unreasonable even though the action is within the board’s regulatory authority.

Last, the state action defense, like other antitrust exemptions, is “disfavored” and narrowly construed. Non-sovereign actors, such as a state regulatory board “controlled by active market participants,” can invoke the state-action exemption only if they demonstrate both (1) that the alleged anticompetitive conduct was taken pursuant to a “clearly articulated and affirmatively expressed . . . state policy” to displace competition, and (2) that the conduct was “actively supervised by the State itself.” NC Dental, 574 U.S. at 504. It is defendants’ burden to demonstrate that they meet its exacting requirements. NC Dental, 574 U.S. at 511.

The district court conclusion that defendants’ conduct was “consistent with the [] Board’s regulatory purpose” and within its authority is wrong. Among other reasons, this is because effectively expanding the state action exemption in this manner would allow regulatory boards to escape antitrust liability under a far less “exacting” standard than the United States Supreme Court requires. And procedurally, this theory would erroneously shift the relevant burden, asking plaintiffs to prove that the challenged conduct was beyond the board’s regulatory authority (which is not a proper limitation on Section 1 liability). In other words, State authorization by itself does not satisfy either the clear articulation or active supervision requirement.

The brief also shows how concerted action may be adequately alleged––either through facts constituting direct or indirect (circumstantial) evidence––and the current debate within the Ninth Circuit of the adequate pleading standard for antitrust conspiracy cases. In particular, it mentions the discrepancies between Kendall v. Visa U.S.A., Inc., 518 F.3d 1042, 1048 (9th Cir. 2008)––to infer the existence of an agreement, the complaint should contain sufficient factual allegations to “answer the basic questions: who, did what, to whom (or with whom), where, and when?” ––and In re Delta Dental Antitrust Litig., 2020 WL 5296996, at *7 n.3 (N.D. Ill. Sept. 4, 2020) and Frost v. LG Electronics, 801 F. App’x 496 (9th Cir. 2020). Both question Kendall’s consistency with Twombly. We have written about this debate in the past.

Final remarks

Once again, DOJ seeks to educate judges on the limits of state-action immunity.

First, in its last amicus brief DOJ makes clear that state board members are not immune from antitrust liability unless they follow a clearly articulated state policy. And remember, the clear-articulation requirement is satisfied only where the displacement of competition is the inherent, logical, or ordinary result of the exercise of authority delegated by the state legislature (Phoebe Putney). In that scenario, the State must have foreseen and implicitly endorsed the anticompetitive effects as consistent with its policy goals.

Second, to comply with the active supervision prong from NC Dental, the government (state) supervisor must review the substance of the anticompetitive decision, not merely the procedures followed to produce it; must have the power to veto or modify specific decisions to ensure they accord with state policy; and the ‘mere potential for state supervision is not an adequate substitute for a decision by the State.’ Last, the state supervisor may not itself be an active market participant. If you have additional questions, the FTC’s Staff Guidance on Active Supervision of State Regulatory Boards Controlled by Market Participants is a good place to start. Here is our analysis of this FTC guidance.

We are constantly on the look-out for cases that provide us with an opportunity to test the state action immunity exception in the courts and hopefully eventually obtain U.S. Supreme Court guidance on it, so if you have something, let us know. If you are an attorney, we can help you on appeal or during litigation.


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