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State Action Doctrine at the Supreme Court: Take Two

Wednesday, March 19, 2014

The Supreme Court has a renewed interest in the state action doctrine. After declining to clarify what types of state action are exempt from federal antitrust scrutiny for years, the Supreme Court agreed to hear its second case on the subject.

In February 2013, the Supreme Court issued its decision in FTC v. Phoebe Putney Health System, Inc., 133 S. Ct. 1003 (2013), which reined in the state action antitrust immunity doctrine by reiterating that the immunity applies only when the state legislature has “clearly articulated and affirmatively expressed” a policy displacing competition, and holding that a state’s grant of general corporate powers is not enough to meet the “clear articulation” standard.1 The Phoebe Court did not address the second prong of the state action immunity test, which requires that a state policy displacing competition be “actively supervised” by the state, but only if the party asserting immunity is a private entity rather than a municipality or substate governmental entity.2

On March 3, 2014, the Court granted certiorari in North Carolina State Bd. of Dental Examiners v. FTC, a case probing whether the state action immunity insulates the North Carolina State Board of Dental Examiners (the Board) from antitrust scrutiny. In so doing, the Supreme Court promises to examine whether and when the “active supervision” requirement sidelined in the Phoebe case applies to professional regulatory boards. Thus, the case could have far-reaching implications for medical, legal, accounting, and other professional boards across the country.

Background

While the Federal Trade Commission (FTC) was busy undoing a merger in the Phoebe Putney action, it was also investigating alleged anticompetitive behavior by the Board. North Carolina designated the Board as an “agency of the state” that enforces the North Carolina Dental Practice Act. The Board is comprised of six practicing dentists voted on by other dentists, one dental hygienist chosen by dental hygienists in the state, and one consumer member appointed by the governor.

Around 2003, the Board noticed a proliferation of teeth-whitening services in North Carolina operated by non-dentists. These services were generally less expensive than the whitening services offered by dentists. The effectiveness of the whitening, however, was not the same as that offered by dentists, though these services were more effective than home-based alternatives. Nonetheless, many dentists noticed a decrease in demand for their whitening services and complained to the Board. The Board decreed that whitening services could only be provided by dentists and sent cease-and-desist letters to non-dentist providers (as well their landlords) for the unlawful practice of dentistry.3 This action caused several of the non-dentist providers to terminate their leases.

The Litigation to Date

The FTC has a long history of aggressively promoting competition in health care markets, including by seeking to influence state statutes and rules limiting certain providers’ scope of practice.4 In 2010, following this tradition, the FTC stepped in, seeking to block the Board’s action as anticompetitive under the prohibition against “unfair methods of competition” found in Section 5 of the FTC Act.5 The Board countered that it was permitted to do so under authority granted by North Carolina, and thus, was immunized from the antitrust laws. The FTC disagreed and sought to block the action, winning at each turn — from the administrative law judge, to the full review by the Commission at the FTC, all the way to the Fourth Circuit.

On March 3, 2014, the Supreme Court granted the petition for a writ of certiorari. Soon to follow will be a series of briefs from both the Board and the FTC. In addition, we anticipate that many interested parties will write amicus briefs in support of the Board. Indeed, already several states and several state bar associations, as well as national medical and dental associations, wrote amicus briefs urging the Supreme Court to review this matter to protect their actions from antitrust scrutiny.

Specifically, the question the Supreme Court is examining is “[w]hether, for purposes of the state-action exemption from federal antitrust law, an official state regulatory board created by state law may properly be treated as a ‘private’ actor [to which the “active supervision” prong applies] simply because, pursuant to state law, a majority of the board’s members are also market participants who are elected to their official positions by other market participants.”

The lower courts agreed with the FTC that the Board was a private actor, and thus subject to the “active supervision” requirement despite its designation as a state agency, because a majority of the Board’s members are market participants, selected by other market participants, all of whom stood to gain from its exclusionary behavior. Supervision from the state, which lacks the interest of a market participant, would give the behavior the credence needed to invoke antitrust immunity. “Decisions that are made by private parties who participate in the market that they regulate are not subject to these political constraints unless these decisions are reviewed by disinterested state actors to assure fealty to state policy ... Therefore, allowing the antitrust laws to apply to the unsupervised decisions of self-interested regulators acts as a check to prevent conduct that is not in the public interest.” North Carolina State Bd. of Dental Examiners v. FTC, 717 F.3d 359, 368 (4th Cir. 2013).

What Can We Expect the Court to Do?

In Phoebe, the Supreme Court stopped short and chose not to opine on the “actively supervised” prong, which is now the subject for review in North Carolina State Bd. of Dental Examiners. The Supreme Court, however, emphasized in Phoebe that “state action immunity is disfavored,” suggesting that states must satisfy a heavy burden to give an entity a pass from antitrust scrutiny. 133 S. Ct. at 1016 (citing FTC v. Ticor Title Ins. Co., 504 U.S. 621, 636 (1992)). It would not be surprising, therefore, for the Supreme Court to continue down this path and require some level of oversight from the state for the action to be deemed as taken by the state and, thus, worthy of antitrust immunity.

On the other hand, the fact that the Supreme Court has granted certiorari when the FTC won at each step below, may signal an intent to reverse. Such a decision could have major ramifications for the actions taken by a wide array of medical and other professional bodies regulated by states in a similar fashion. We will be following this case carefully; stay tuned.

Endnotes

1 Shortly thereafter, following the test outlined by the Supreme Court, New York passed a bill to permit a specific entity to enter into health care-related affiliations and to receive immunity from federal and state antitrust laws; see Pepper Hamilton LLP’s October 31, 2013 Client Alert, “In the Wake of Phoebe Putney, New York Passes Law Giving Antitrust Immunity to State Health Care System,” available at http://www.pepperlaw.com/publications_update.aspx?ArticleKey=2786. For more about the Supreme Court case, see also our February 22, 2013 Client Alert, “Supreme Court Limits State Action Immunity in FTC v. Phoebe Putney Health System, Inc.,” available at http://www.pepperlaw.com/publications_update.aspx?ArticleKey=2563.

2 The Phoebe Court accepted the Eleventh Circuit’s determination, unchallenged by the parties, that the hospital authority at issue was not a private party, but a political subdivision.

3 Notably, the Board does not maintain the authority to actually enforce the prohibition against the unlicensed practice of dentistry. The Board could refer the matter to a district attorney or seek an injunction in court, a power which other North Carolinians hold as well.

4 For a recent example, see FTC, The Doctor (or Nurse Practitioner) Will See You Now: Competition and the Regulation of Advanced Practice Nurses, March 7, 2014; available at http://www.ftc.gov/news-events/blogs/competition-matters/2014/03/doctor-or-nurse-practitioner-will-see-you-now (arguing that rules limiting the scope of practice of nurse practitioners should be carefully tailored).

5 15 U.S.C. § 45.

Jan P. Levine, Sarah Sandok Rabinovici and Melissa J. Hatch

Written by

Jan P. Levine
Phone: 215.981.4714
Fax: 215.981.4750
levinej@pepperlaw.com

Sarah Sandok Rabinovici
Phone: 212.808.2739
Fax: 212.286.9806
rabinovicis@pepperlaw.com

Melissa H. O’Donnell
Phone: 215.981.4060
Fax: 215.981.4750
odonnellm@pepperlaw.com


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.

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