The U.S. Supreme Court ruled today that a North Carolina board's ban on cheap teeth-whitening by non-dentists may expose the board's members to a federal antitrust claim despite the board's status as a creature of the state. N. Carolina State Board of Dental Examiners v. FTC, No. 13-534 (U.S. Feb. 25, 2015).
The 6-3 Court stressed that the "state-action" defense to Sherman Act claims may not apply "when the State seeks to delegate its regulatory power to active market participants". Id. at 8.
The decision invites extra scrutiny — a drilling down if you like — on actions by politically unaccountable entities that use the power of the state to brush away competition.
Making teeth whiter
The case that the Court bit into started when dentists in the Tar Heel State complained about non-dentists who sold teeth-whitening services. The North Carolina State Board of Dental Examiners diagnosed the upstarts as a competitive threat and reacted by sending "cease and desist" letters to dozens of the chopper-glossers. "These actions had the intended result. Nondentists ceased offering whitening services in North Carolina." Id. at 3.
That provoked a snarl at the Federal Trade Commission. The FTC extracted an order from an administrative judge against the Board under section 5 of the Federal Trade Commission Act, 15 U.S.C. 45, which declares unfair methods of competition "unlawful". The Board's toothless defense lost all the way to the Fourth Circuit, which upheld the FTC's order prohibiting further efforts to suppress the provision of dazzling smiles by persons who don't have a dental license.
The Board's appeal to the Supreme Court
The case as it landed in the Supreme Court raised the question of whether the Board could invoke "the doctrine of state-action antitrust immunity as defined and applied in this Court's decisions beginning with Parker v. Brown, 317 U.S. 341 (1943)." Id. at 1. The core of the doctrine, the Court noted, allows states to "impose restrictions on occupations, confer exclusive or shared rights to dominate a market, or otherwise limit competition to achieve public objectives." Id. at 5. Thus, "the Court in Parker v. Brown interpreted the antitrust laws to confer immunity on anticompetitive conduct by the States when acting in their sovereign capacity." Id.
But what if a state smiles on a "nonsovereign actor controlled by market participants" by allowing it to wield the state's sovereign power? In that situation, the Court pointed out, the actor "enjoys Parker immunity only if it satisfies two requirements: 'first that "the challenged restraint . . . be one clearly articulated and affirmatively expressed as state policy," and second that "the policy . . . be actively supervised by the State."'" Id. at 6 (quoting FTC v. Phoebe Putney Health Sys., Inc., 133 S. Ct. 1003, 1010 (2013)).
No active supervision
The case turned on the "actively supervised by the State" prong of the Parker test. The majority — per Justice Anthony Kennedy — had little trouble concluding that North Carolina did not engage in active supervision of the cease-and-desist letter campaign. "[T]he Board relied upon cease-and-desist letters threatening criminal liability, rather than any of the powers at its disposal that would invoke oversight by a politically accountable official." Id. at 17. The Board's method thus eschewed a decision by a "politically accountable" person in state government on whether or not to allow the Board's treatment of teeth-whitening by non-dentists as the illegal practice of dentistry.
The three most conservative justices dissented. Justice Sam Alito led the frowners, contending that the majority had taken "the unprecedented step of holding that Parker does not apply to the North Carolina Board because the Board is not structured in a way that merits a good-government seal of approval". Id. at 1 (dissent). The fact that the Board "is made up of practicing dentists who have a financial incentive to use the licensing laws to further the financial interests of the State's dentists" did not matter, in Justice Alito's view. Id. So long as the state clothed the Board with the power to do what it did, Parker braced its actions with antitrust immunity, regardless of the anticompetitive motives or effects.
The decision in North Carolina Board picks on regulatory entities that "market participants" control. That class bridges a range of quasi-governmental units, including bar associations, medical boards, and hospital authorities. These regulators typically oversee specific trades and professions, and their actions can make the difference between crowning success and economic decay. Their actions — particularly enforcement actions that "politically accountable" persons in government do not participate in or approve — will now come under closer probing.