Senators Mike Lee (R-UT), Ted Cruz (R-TX) and Ben Sasse (R-NE) recently introduced a bill that would extend a limited state action immunity to state licensure boards only if states implement reforms that reduce occupational licensing restrictions. In a panel discussion on August 9, Acting FTC Chairman Maureen K. Ohlhausen stated the goals of the bill are consistent with the FTC’s aim to curb overbroad occupational licensing and are a signal of growing public awareness of the costs of these licensing regimes. She is aware, however, of some state-level concerns about the bill’s mechanics.
The FTC, many academics and others have focused public attention on the high costs of excessive occupational licensing. According to the FTC, between 25 and 30 percent of jobs in the United States — including interior designers, florists and hair braiders — require a license. These licensing requirements, some argue, protect the interests of incumbents while reducing competition and hampering workers’ ability to enter a new field or move about the country. Further, licensing requirements in some fields often do not serve a clear public benefit: Consumers are well-equipped to judge an interior designer’s skills for themselves, and the cost of a “less than attractive” throw pillow, for example, is low.
The bill, titled the Restoring Board Immunity Act, seeks to curb occupational licensing by offering states that engage in reform an enticing prize: immunity for state occupational licensing boards to private antitrust suits challenging licensing requirements. While Chairman Ohlhausen and others laud the bill’s objectives, its critics consider the bill an archetypal federal overreach and prefer that licensing requirements be evaluated under the traditional state action doctrine as the Supreme Court has articulated it in a pair of recent cases: North Carolina Board of Dental Examiners and Phoebe Putney.
This client alert analyzes the bill and follows up on Pepper’s prior client alerts1 regarding state action antitrust immunity.
Currently, to enjoy state action immunity to the antitrust laws, a "nonsovereign actor controlled by active market participants" must satisfy a two-pronged test: "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." N.C. State Bd. of Dental Exam'rs v. FTC, 135 S. Ct. 1101, 1110 (2015) (internal quotations omitted). In 2013, the Supreme Court addressed the first prong of this immunity in FTC v. Phoebe Putney Health System, Inc., 568 U.S. 216 (2013). The Court held that state action immunity applies only when the state legislature has "clearly articulated and affirmatively expressed" a policy displacing competition and a state's grant of general corporate powers is not enough to meet the "clear articulation" standard. Id. at 220.
In Board of Dental Examiners, the Supreme Court addressed the second prong of the state action immunity test. First, the Court held that the North Carolina Board of Dental Examiners — which was almost entirely composed of "market participants" (i.e., active dentists) — was subject to the “active supervision” requirement, rejecting the board’s position that, because North Carolina had dubbed it a “state agency,” it should be automatically exempt. Further, the Court held that the board’s actions were not immune because it was not subject to “active supervision” by the state when it issued cease-and-desist letters to nondentist teeth whiteners. Bd. of Dental Exam'rs, 135 S. Ct. at 1110. The Court observed that “the question is whether the State's review mechanisms provide 'realistic assurance' that a nonsovereign actor's anticompetitive conduct 'promotes state policy, rather than merely the party's individual interests.'" Id. at 116.
In Teladoc, Judge Robert Pitman of the U.S. District Court for the Western District of Texas picked up where Board of Dental Examiners left off, probing what “active supervision” requires. See Teladoc, Inc. v. Tex. Med. Bd., No. 1-15-CV-343, 2015 U.S. Dist. LEXIS 166754 (W.D. Tex. Dec. 14, 2015). In that case, Teladoc claimed that members of the Texas Medical Board (TMB) had stifled competition from telemedicine providers by adopting rules requiring that a physician conduct an in-person examination before treating a patient. The TMB moved to dismiss, arguing that it enjoyed state action immunity from the antitrust claim. Judge Pitman disagreed, holding that the supervision mechanisms cited by the TMB — potential judicial review and review by the Texas legislature — did not satisfy the active supervision requirement as articulated in Board of Dental Examiners. Id. at *29.
Cementing the perception that licensing board practices that previously would not have been challenged can entail serious antitrust exposure, the FTC brought an agency action in May against the Louisiana Real Estate Appraisers Board. The FTC’s complaint alleges that the board has unreasonably restrained price competition for real estate appraisal services by adopting a regulation that lenders’ agents must pay appraisers at a rate determined by one of three methods, rather than a rate decided via bona fide negotiation and operation of the free market. On June 30, the FTC also sent a letter to an assistant attorney general in North Carolina, expressing concern that a proposed bill that prescribes a single method for determining customary and appraisal fees would disrupt the free market and increase prices for consumers.
The Senate Bill
The Senate bill’s proponents recognize that these judicial developments have created uncertainty about whether the state action immunity will shield state licensure boards. The bill addresses this uneasiness by offering antitrust protection for licensure boards, but only if they adopt occupational regulation reforms that track one of two frameworks. Both frameworks aim to reduce overreliance on licensure as an approach to occupational regulation and overly aggressive enforcement of licensing requirements. Under both frameworks, all board actions must be authorized by a “non-frivolous” interpretation of the state’s occupational licensing laws, and the state must adopt a policy of using occupational licensing only when less restrictive approaches, such as certifications, are insufficient to protect consumers.
Under the first framework, a state must (1) establish an officer tasked with day-to-day supervision of licensing authorities, which must ensure that the boards do not engage in overbroad enforcement; (2) establish an administrative complaint process that will review board action upon receipt of a complaint; (3) create a mechanism for periodic review of occupational regulations; and (4) create an affirmative defense that may be raised in actions to enforce occupational regulations, which can shift the burden of proof to the state to establish that the regulation satisfies intermediate scrutiny.
Under the second framework, the state must (1) create a cause of action providing for judicial review of licensing laws under the intermediate scrutiny standard; (2) create an affirmative defense that places the burden of proof in license enforcement actions on the state to establish that the licensing law in question satisfies intermediate scrutiny; and (3) award attorneys’ fees and costs in successful challenges of licensing laws.
Board members in states that implement reforms under one of the two frameworks would be immune from private antitrust actions and claims to damages challenging occupational license requirements. Other kinds of anticompetitive conduct — e.g., price fixing — would not be immune. Also, anticompetitive conduct could still be challenged under section 5 of the FTC Act.
In her panel discussion, Chairman Ohlhausen stated that the bill’s objectives were in line with the FTC’s recent efforts and that introduction of the bill is a signal of growing public awareness that overly aggressive licensing rules are hurting consumers and workers. She did not commit to supporting the bill in its current form, however, stating that she was “sensitive to” state concerns. Other panelists — Sarah Oxenham Allen, the assistant attorney general of Virginia, in particular — argued that the bill places too great of a burden on states and disregards principles of sovereignty.
This is yet another state action development, and we will keep you posted on this bill.
1 Access our prior client alerts here: “Texas Medical Board Loses Bid for State Action Immunity” (Jan. 5, 2016); “The State Action Doctrine: Active Supervision Reigns Supreme” (Feb. 26, 2015); “State Action Doctrine at the Supreme Court: Take Two” (March 19, 2014); “Supreme Court Limits State Action Immunity in FTC v. Phoebe Putney Health System, Inc.” (Feb. 22, 2013).
Jan Levine is a partner in Pepper Hamilton’s Health Sciences Department, a team of 110 attorneys who collaborate across disciplines to solve complex legal challenges confronting clients throughout the health sciences spectrum. Melissa Hatch O’Donnell is an associate in the Health Sciences Department.
The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.