Supreme Court Rules that Industry Dominated Regulatory Panels Can Be Sued for Antitrust Violations

In North Carolina, the State Board of Dental Examiners is pretty much run by and for dentists.

When non-dentists started offering cheaper tooth whitening services, the board shut them down.

The Supreme Court has allowed state governments to engage in anti-competitive actions for over 70 years, and the question here was whether a something like the North Carolina State Board of Dental Examiners, where the inmates were running the asylum, deserved deserved immunity from antitrust enforcement.

The Supreme Court, and the answer was no:

State licensing boards composed of market participants do not enjoy automatic immunity from antitrust laws, the Supreme Court ruled on Wednesday. The decision in North Carolina Board of Dental Examiners v. Federal Trade Commission affirms the Fourth Circuit and deals a setback to an increasingly common form of regulation.

State action antitrust immunity

Since 1943, certain forms of state action have been immune from the antitrust laws. Accordingly, state legislatures may pass laws with anticompetitive effects. Several important Supreme Court cases since then have addressed the doctrine of state action immunity and helped to define its contours, particularly as it applies to actions outside state legislatures.

Antitrust immunity generally covers non-state actors only if the state both (1) clearly articulates the anticompetitive policy, and (2) actively supervises the policy. This case deals with the second requirement. If a professional licensing board is a state agency, must another state actor supervise the agency in order for the agency to be immune from the antitrust laws?

The dental board

In North Carolina, the legislature delegated regulation of dentists to a dental board. By state law, practicing dentists must fill a majority of the seats on the dental board.

This type of “self-regulation” is common among state licensing boards. But it has the natural tendency to become anticompetitive. Members of a guild frequently want to keep insiders in, keep outsiders out, and prop up the profession. A broad range of modern professions fall under professional licensing boards, including not just doctors, lawyers, and dentists, but also interior designers, real estate agents, floral designers, and hair braiders.

In this case, the dental board tried to exclude non-dentists from the market for teeth-whitening services after dentists complained about the low prices non-dentists charged for teeth whitening. It sent threatening letters to non-dentists who offered teeth-whitening services and even encouraged mall operators to kick out kiosks used for teeth whitening.

The dental board’s actions were not supervised by any state officials from North Carolina other than the members of the dental board itself. On these facts, the FTC took action against the dental board. The FTC and the Fourth Circuit both rejected the dental board’s attempt to invoke the defense of state action immunity.

No immunity for the dental board controlled by dentists

In a six-to-three opinion written by Justice Anthony Kennedy, today the Supreme Court affirmed the Fourth Circuit, holding that the dental board is not immune from the antitrust laws.

The Court’s opinion explains that even though the dental board is an agency of the state, its actions must still be supervised by the state in order to enjoy antitrust immunity. The “formal designation given by the States” does not itself create immunity. Here, the board is controlled by market participants in the same occupation that the board regulates. “When a State empowers a group of active market participants to decide who can participate in its market, and on what terms, the need for supervision is manifest.”

Where this might be most significant is in boards for doctors and state bars.

I am reminded of the case of Closings, Inc. in Massachusetts, which attempted to offer low cost closings for house sales in the commonwealth.

The state bar banned them, even though they employed lawyers to do the work, nominally because they were a corporation, rather than a partnership, and the state courts agreed.

What is was really about was that they were offering services for less than half what the law firms were charging, and as a result, they had achieved a 40% market share, and the lawyers did not want to lose what was easy money for what was a routine operation that should never have required a law degree.

These days, with a plethora of services that offer assistance for routine legal services online, I hope that we see a number of complaints filed against state bars.