State Action Immunity and Active Supervision: The Ninth Circuit Rejects the Board’s Claim for Immunity and SmileDirectClub Wins Again


Author: Luis Blanquez

Just weeks before our ABA antitrust panel on State Action Immunity takes place in Washington DC, the Ninth Circuit Court of Appeals has allowed SmileDirectClub to proceed against the members of the California Dental Board for antitrust violations, rejecting the board’s immunity claim on active supervision grounds.

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.

Background of the SmileDirectClub Antitrust Saga

This is part of the antitrust group of cases that SmileDirectClub has filed against dental boards in Alabama, Georgia and California.

Rather than teeth-whitening like in NC Dental, the product market in these three cases 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 have, according to plaintiffs, allegedly conspired to harass the SmileDirectClub parties with unfounded investigations and an intimidation campaign, with hopes of driving them out of the market, while using their government-created power in the marketplace to protect the economic interests of the traditional orthodontia market.

District courts in Alabama and Georgia have allowed all cases to proceed, after the 11th Circuit affirmed. The Alabama case settled in 2021, after that state’s dental board signed a consent decree with the Federal Trade Commission.

The District Court case in California: Sulitzer v. Tippins, case No. 20-55735

In California, by statute, the dental board regulates the practice of dentistry. See Cal. Bus.&Prof. Code §§ 1600–1621. It enforces dental regulations, administers licensing exams, and issues dental licenses and permits. Id. § 1611. The Board is made up of fifteen members: “eight practicing dentists, one registered dental hygienist, one registered dental assistant, and five public members.” Id. § 1601.1(a). Since many of its members compete in the market for teeth-straightening services, they allegedly view SmileDirect as a “competitive threat.”

Plaintiffs alleged that certain members of the Board, motivated by their private desires to stifle competition, mounted an aggressive, anticompetitive campaign of harassment and intimidation designed to drive the SmileDirectClub out of the market. The Complaint contended that these actions violated the Sherman Antitrust Act; the Dormant Commerce Clause; the Equal Protection Clause; the Due Process Clause; and California’s Unfair Competition Law. The dental board defendants moved to dismiss SmileDirectClub’s 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––members and employees of the Dental Board of California—largely made up of traditional dentists and orthodontists who have a financial motive to view the newcomers as competition—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 again the federal claims and declined to exercise supplemental jurisdiction over the state law 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. Make sure you don’t forget this last sentence. The Ninth Circuit hammers this argument down now in its Opinion.

SmileDirectClub appealed the ruling before the Ninth Circuit

The Case on Appeal: SmileDirectClub and Jeffrey Sulitzer DMD v. Joseph Tippins et al., 9th U.S. Circuit Court of Appeals No. 20-55735

I would strongly suggest you read this opinion. It is absolutely worth your time.

First, the Ninth Circuit concludes that plaintiffs sufficiently alleged anticompetitive concerted action to meet the pleading standards of Federal Rule of Civil Procedure 12(b)(6), although it makes no judgment on the merits of the claims and whether those claims will withstand scrutiny in the next phase of the litigation

It further explains that by requiring plaintiffs to plead facts inconsistent with the Board’s regulatory purpose, the district court applied a standard more appropriate at the summary judgment stage, where § 1 plaintiffs must offer “evidence that tends to exclude the possibility” of lawful independent conduct. This is something many district courts do across the country and which we have been writing about at Bona Law systematically.

Second, the court plainly rejects the broad proposition—offered up by the board members and the district court—that regulatory board members and employees cannot form an anticompetitive conspiracy when acting within their regulatory authority.

In its opinion, the court highlights how the Supreme Court has stressed, “[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.” N.C. State, 574 U.S. at 511.

The Ninth Circuit then explains how members of the board tried to argue that the actions of a state regulatory board could not be unreasonable if the board was “functioning in” its “ordinary regulatory capacity;” and how the district court took this rationale one step further and held that an agreement “consistent with the Dental Board’s regulatory purpose” cannot be unreasonable.

The court of appeals further states that the district court rejecting Parker immunity—then turning around and blessing the same conduct because it falls within the Board’s authority—effectively grants the Board Actors a free pass under the Sherman Act. It also states that the Board Actors’ concerted action can be unreasonable under the Sherman Act—even if they seek to achieve their anticompetitive aims through the exercise of valid regulatory authority.

Indeed. The court hammers this argument hard by stating that although each of those actions may independently fall within the Board’s authority, they could still be illegal if their anticompetitive effects outweighed their legitimate regulatory justifications.

The Ninth Circuit doesn’t agree with the district court’s concern that permitting the case to go forward at this stage will expose state regulatory board members to a lawsuit every single time such an investigation commences or that every investigation suggests the existence of a conspiracy. At the same time, it highlights the fact that members of regulatory bodies who conspire against competition are not automatically immune from antitrust liability.

Final Conclusions

This is an important development on what constitutes active supervision for state licensing boards in the context of state action immunity.

We know that state board members are not immune from antitrust liability unless they follow a clearly articulated state policy. And 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.

We also knew that to comply with the active supervision prong: (i) the government (state) supervisor must review the substance of the anticompetitive decision, not merely the procedures followed to produce it; (ii) must have the power to veto or modify specific decisions to ensure they accord with state policy; (iii) the mere potential for state supervision is not an adequate substitute for a decision by the State, and (iv) the state supervisor may not itself be an active market participant. Now we can add one more factor: (v) the concerted action by members of a state licensing board can indeed be unreasonable under the Sherman Act, even if they seek to achieve their anticompetitive aims through the exercise of valid regulatory authority. Even if each of those actions may independently fall within a licensing board’s authority, they may still be illegal if their anticompetitive effects outweigh their legitimate regulatory justifications, something courts do not need to analyze at a pleading stage, but rather after discovery has started, either during summary judgment or trial.

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