In its February 25 North Carolina Dental decision, the U.S. Supreme Court, per Justice Anthony Kennedy, held that a state regulatory board that is controlled by market participants in the industry being regulated cannot invoke “state action” antitrust immunity unless it is “actively supervised” by the state. In so ruling, the Court struck a significant blow against protectionist rent-seeking and for economic liberty. (As I stated in a recent Heritage Foundation legal memorandum, “[a] Supreme Court decision accepting this [active supervision] principle might help to curb special-interest favoritism conferred through state law. At the very least, it could complicate the efforts of special interests to protect themselves from competition through regulation.”)
A North Carolina law subjects the licensing of dentistry to a North Carolina State Board of Dental Examiners (Board), six of whose eight members must be licensed dentists. After dentists complained to the Board that non-dentists were charging lower prices than dentists for teeth whitening, the Board sent cease-and-desist letter to non-dentist teeth whitening providers, warning that the unlicensed practice dentistry is a crime. This led non-dentists to cease teeth whitening services in North Carolina. The Federal Trade Commission (FTC) held that the Board’s actions violated Section 5 of the FTC Act, which prohibits unfair methods of competition, the Fourth Circuit agreed, and the Court affirmed the Fourth Circuit’s decision.
In its decision, the Court rejected the claim that state action immunity, which confers immunity on the anticompetitive conduct of states acting in their sovereign capacity, applied to the Board’s actions. The Court stressed that where a state delegates control over a market to a non-sovereign actor, immunity applies only if the state accepts political accountability by actively supervising that actor’s decisions. The Court applied its Midcal test, which requires (1) clear state articulation and (2) active state supervision of decisions by non-sovereign actors for immunity to attach. The Court held that entities designated as state agencies are not exempt from active supervision when they are controlled by market participants, because allowing an exemption in such circumstances would pose the risk of self-dealing that the second prong of Midcal was created to address.
Here, the Board did not contend that the state exercised any (let alone active) supervision over its anticompetitive conduct. The Court closed by summarizing “a few constant requirements of active supervision,” namely, (1) the supervisor must review the substance of the anticompetitive decision, (2) the supervisor must have the power to veto or modify particular decisions for consistency with state policy, (3) “the mere potential for state supervision is not an adequate substitute for a decision by the State,” and (4) “the state supervisor may not itself be an active market participant.” The Court cautioned, however, that “the adequacy of supervision otherwise will depend on all the circumstances of a case.”
Justice Samuel Alito, joined by Justices Antonin Scalia and Clarence Thomas, dissented, arguing that the Court ignored precedent that state agencies created by the state legislature (“[t]he Board is not a private or ‘nonsovereign’ entity”) are shielded by the state action doctrine. “By straying from this simple path” and assessing instead whether individual agencies are subject to regulatory capture, the Court spawned confusion, according to the dissenters. Midcal was inapposite, because it involved a private trade association. The dissenters feared that the majority’s decision may require states “to change the composition of medical, dental, and other boards, but it is not clear what sort of changes are needed to satisfy the test that the Court now adopts.” The dissenters concluded “that determining when regulatory capture has occurred is no simple task. That answer provides a reason for relieving courts from the obligation to make such determinations at all. It does not explain why it is appropriate for the Court to adopt the rather crude test for capture that constitutes the holding of today’s decision.”
The Court’s holding in North Carolina Dental helpfully limits the scope of the Court’s infamous Parker v. Brown decision (which shielded from federal antitrust attack a California raisin producers’ cartel overseen by a state body), without excessively interfering in sovereign state prerogatives. State legislatures may still choose to create self-interested professional regulatory bodies – their sovereignty is not compromised. Now, however, they will have to (1) make it clearer up front that they intend to allow those bodies to displace competition, and (2) subject those bodies to disinterested third party review. These changes should make it far easier for competition advocates (including competition agencies) to spot and publicize welfare-inimical regulatory schemes, and weaken the incentive and ability of rent-seekers to undermine competition through state regulatory processes. All told, the burden these new judicially-imposed constraints will impose on the states appears relatively modest, and should be far outweighed by the substantial welfare benefits they are likely to generate.