The Collateral Order Doctrine and State Action Immunity: Salt River Power District, Antitrust Federalism, and the Burden of State-Supported Monopoly

Alden Abbott —  16 January 2018

On December 1, 2017, in granting certiorari in Salt River Project Agricultural Improvement and Power District v. SolarCity Corp., the U.S. Supreme Court agreed to consider “whether orders denying antitrust state-action immunity to public entities are immediately appealable under the collateral-order doctrine.”  At first blush, this case might appear to involve little more than a narrow technical question regarding the availability of interlocutory appeals.  But more fundamentally, this matter may afford the Supreme Court yet another opportunity to weigh in on the essential nature of the antitrust state action doctrine (albeit indirectly), in deciding whether the existence of state action immunity should be decided prior to the litigation of substantive antitrust suits.

Background

The Salt River Power District (SRP) is the only supplier of traditional electrical power in Phoenix, and is a subdivision of the State of Arizona.  SRP has lobbied successfully for special governmental status and has used its longstanding ties to government to advance the interests of its private shareholders.  (This sort of tale comes as no surprise to students of public choice.)  Counsel for respondent SolarCity discussed these ties in their brief opposing certiorari:

[SRP] was created in 1903 to take advantage of a federal law that provided interest-free loans for landowners to build reclamation projects to irrigate their lands.  During the Great Depression, SRP successfully lobbied the Arizona legislature for a law denominating it a political subdivision of Arizona so the landowners who ran SRP could avoid income taxes and sell tax-free bonds. . . .  Arizona denominates SRP a public entity, but as th[e] [U.S. Supreme] Court . . . explained [in a 1981 case involving [the right of local non-landowner residents to vote on SRP policy determinations], SRP and organizations like it are “essentially business enterprises, created by and chiefly benefitting a specific group of landowners.” . . . .  Among other things, SRP lacks “the crucial powers of sovereignty typical of a general purpose unit of government” and SRP’s electric business does not implicate any traditional sovereign power. . . . 

SRP’s retail electric business is unregulated. The business answers only to its own self-interested Board, not a public utility commission or any similar independent body. . . .   42 (ER55). SRP is thus free to serve private, not public interests. . . .  SRP takes profits from electricity sales and uses them to subsidize irrigation and canal water so that, for example, certain agricultural interests can farm cheaply by a city in the desert. . . . 

 In short, [as the Supreme Court explained in 1981,] SRP makes money from electric customers and pays out dividends in the form of irrigating “private lands for personal profit.”

 

SolarCity sells and leases rooftop solar-energy panels in Arizona.  It alleges that SRP used its special government subsidies to drive it out of the market for the supply of those panels to customers in the SRP district area.  Specifically, according to counsel for SolarCity:

As solar generation increased in popularity and efficiency, SRP started to view solar as a long-term competitive threat to its electricity sales and profits. . . .  Facing competition for the first time ever, SRP had a choice between competing in the market or using its monopoly power to exclude competition. . . .  SRP first attempted to compete on the merits by developing its own solar offerings. . . .  However, consumers continued to prefer SRP’s solar competitors. . . .  Then, rather than offer consumers a better product or value, SRP used its unregulated market power to impose terms that lock customers into remaining what SRP calls “requirements” customers—those who satisfy all their electric needs from, and deal exclusively with, SRP. . . .

SRP’s plan [which imposed a large penalty on any customer who obtained power from its own solar system] worked. . . .  The new requirements it mandated for its customers had a drastic anticompetitive effect. . . .  New rooftop solar applications—from customers of any firm, not just SolarCity—dropped by about 96 percent. . . .  SolarCity was forced to stop selling in SRP territory and to relocate employees.

SolarCity sued SRP for Sherman Antitrust Act violations in Arizona federal district court.  SRP moved to dismiss under the antitrust state action doctrine, which (as Professor Herbert Hovenkamp puts it) “exempts qualifying state and local government regulation from federal antitrust [law], even if the regulation at issue compels an otherwise clear violation of the law.”  The district court denied the motion to dismiss, and the Ninth Circuit affirmed.  The Ninth Circuit panel opinion (Judge Michelle Friedland, joined by Judges Alex Kozinski and Ronald Lee Gilman) assessed the applicability of the “collateral order doctrine,” which allows an appeal of a non-final district court decision if it is:  (1) conclusive; (2) addresses a question separate from the merits of the underlying case; and (3) raises “some particular value of a high order” that will evade effective review if not considered immediately.  The Ninth Circuit emphasized the Supreme Court’s teaching that the collateral order doctrine is a “narrow exception” that must be “strictly applied.”  It concluded that, “because the state-action doctrine is a defense to liability and not an immunity from suit, the collateral-order doctrine does not give us jurisdiction here [footnotes omitted].”

In its brief supporting its writ of certiorari, SRP stressed that an interlocutory appeal was justified here because“[a] denial of state-action immunity, like a denial of state sovereign immunity, offends state sovereignty, dignity, and autonomy. . . .  [T]he decision below threatens the dignity and autonomy of the states, as well as the division of regulatory power between the state and federal governments, by allowing a political subdivision of a state to be subjected to prolonged litigation for engaging in conduct that was clearly authorized by the state.”

In short, the Supreme Court has been asked to take fundamental federalism principles into account in weighing the applicability of the collateral order doctrine.

Discussion

Set aside for the moment the narrow question of the applicability of specific collateral order doctrine criteria in this case.   Assuming the validity of the facts summarized above, this matter highlights the always-present anticompetitive potential of enabling private parties to exercise monopoly power under the mantle of state authority.  Let us briefly examine, then, key state action principles that apply to essentially private conduct that seeks to shelter under a governmental cloak.

Commendably, in Midcal and 324 Liquor, the Supreme Court made it clear that the state action doctrine does not enable state governments to directly authorize purely private actors to violate the Sherman Act, free from state oversight.  But should an entity such as SRP that is in essence an unregulated for-profit private enterprise, acting in an anticompetitive fashion, be free to undermine the competitive process (benefiting from government subsidies to boot) merely because a century-old state law characterized it as a state political subdivision?

The “spirit” of recent Supreme Court jurisprudence suggests that the answer should be no, and that the Court may be willing to look beyond the formality of a legislative designation (in this case, “state political subdivision”) to questions of political accountability.  In 2015, In North Carolina Dental Board, the Court rejected the claim that state action immunity applied to the self-interested actions of a state dental regulatory board stacked with dentists (the board barred competition from non-dentists in tooth whitening).  In so doing, the Court held that entities designated as state agencies are not exempt from active supervision when they are controlled by market participants, because immunizing such entities from federal antitrust challenge would pose the risk of self-dealing that the Court had warned against in prior decisions, such as Midcal.

A legal formalist might respond that a mere state board is of a lesser dignity than a state political subdivision, such as SRP, which directly exercises state sovereign power, and, as such, is not subject to “active supervision” requirements.  Functionally, however, SRP acts in all respects like a private company, except that it benefits from certain special state subsidies that assist it in undermining competition.  Recognizing that reality, the Court might be willing to say that it will look beyond formal legislative designations to the actual role of a state entity in deciding whether it is, or is not, engaging in “sovereign action.”  (State instrumentalities engaging in classic sovereign functions, such as a state supreme court or state treasury department, would not raise this sort of problem.)

More specifically, the Court might wish to consider whether federal antitrust law should be applicable when a state instrumentality that does not have the attributes of a classic private business – such as a state owned-controlled- and operated electric company, for example – engages in business activity and uses its governmental ties to subvert competition.  Such a company might, for instance, predate against competing private companies by pricing below its own cost to drive out and keep out rivals, relying on taxpayer funding to support its activities.  Activity of this sort could be made subject to a “market participant exception” to the state action doctrine (at the very least requiring state active supervision), as recommended by the Federal Trade Commission’s 2004 State Action Task Force Report.  Such an exception, which has not yet been specifically addressed by the Supreme Court, would reduce the returns to anticompetitive business activity engaged in by privileged “state” agents, thereby promoting commercial freedom and vibrant markets.  And, as two learned commentators recently pointed out, it would not offend federalism principles that underlie the antitrust state action doctrine (footnote references deleted):

[T]he state does not act within its sovereign prerogative when engaged in economic conduct.  It cannot be that the government is truly exercising sovereign powers when acting in the same way as its private citizens.  Thus, restricting the prerogative of state and local governments to engage in economic conduct does not abrogate sovereign immunity.  Therefore, the federalism concerns underpinning the . . . [state action] immunity doctrine are not in play when the State acts as an ordinary market-participant on equal-footing with private citizens.

The policy and federalism justifications for denying state action immunity to an unsupervised state agency acting as a commercial operator would apply “in spades” to SRP, which, as has been seen, in all material respects looks like a purely private actor.

Let’s return now to the specific question before the Supreme Court.  While state action doctrinal issues (including, of course, a possible market operator exception) are not directly presented in the SRP v. SolarCity case, they may well flavor the approach the Court takes in determining the availability of interlocutory appeals of state action immunity denials.  The clear and ringing invocation of federalism principles in petitioners’ brief for certiorari suggests a possible doctrinal hook.  In particular, the Court might determine that respect for the dignity and role of states as coordinate sovereigns compels a finding that denials of antitrust state action immunity should be subject to immediate review.

A ruling that state action questions should be decided “up front” might, however, prove a pyrrhic victory for petitioners.  Counsel for respondents have ably pointed out the quintessentially private commercial nature of SRP’s activities, which could amply support a judicial finding of no state action immunity – whether based on the somewhat novel “market participant” exception or because of inadequate state supervision.

Conclusion

The Supreme Court’s decision in SPR v. SolarCity will determine the narrow issue of the availability of interlocutory appeals to an antitrust defendant that is denied a dismissal on antitrust state action grounds.  A holding that authorizes such appeals also would have the incidental salutary effect of furthering efficiency, by eliminating a significant source of costly uncertainty affecting the litigation of cases that fall under the shadow of the “state action” umbrella.

More broadly, the facts in SPR v. SolarCity highlight a potential future clarification of the antitrust state action doctrine – establishment of a clear “market participant” exception to state action immunity.  Such an exception commendably would promote effective market processes without offending federalism.  It would also tend to diminish returns to (and thereby weaken incentives to engage in) rent seeking by those firms that seek to obtain a business advantage through special government privilege, rather than through competition on the merits.

Alden Abbott

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I am a Senior Legal Fellow at the Heritage Foundation. I write on antitrust, domestic and international regulatory policy, and law and economics. I am an Adjunct Faculty Member at George Mason Law School.