On February 25, the U.S. Supreme Court issued its decision in North Carolina State Board of Dental Examiners v. Federal Trade Commission, 2015 U.S. LEXIS 1502 (2015). In the 6–3 opinion, the Court held that an action taken by the North Carolina State Board of Dental Examiners (the Board) — namely declaring teeth-whitening services to be the practice of dentistry and sending cease-and-desist letters to nondentist providers who engaged in the practice — was subject to antitrust scrutiny and not immunized under the state action doctrine. This Client Alert analyzes the Supreme Court’s holding and follows up on our prior Client Alerts regarding state action antitrust immunity, particularly as it has been applied in the health care context.

Background

Around 2003, nondentists began to compete with dentists in North Carolina by offering teeth-whitening services. These nondentists generally charged lower prices than dentists for the same service. Dentists complained about the increase in competition, id. at *11, and they also asserted that teeth whitening constituted the practice of dentistry and should therefore be regulated in order to address quality and safety concerns. Accordingly, the Board — which was composed almost exclusively of practicing dentists — investigated the practice of nondentist teeth whitening. Beginning in 2006, the Board began to issue cease-and-desist letters to nondentists, warning them against providing teeth-whitening services and reminding them that the unlicensed practice of dentistry violated criminal law. Id. at *12. The letters resulted in nondentists refraining from offering teeth-whitening services within the state. Id. at *13.

In 2010, the Federal Trade Commission (FTC) filed an administrative complaint, alleging that the Board had violated section five of the FTC Act because it had engaged in an unfair method of competition by excluding nondentists from the teeth-whitening market. The Board moved to dismiss the complaint. It argued that, as a state agency, its action was protected under the state action doctrine, which has been recognized for more than 70 years as immunizing certain state-sanctioned actions from antitrust scrutiny. See Parker v. Brown, 317 U.S. 341 (1943). An administrative law judge found in the FTC’s favor, holding that state action immunity did not protect the Board in this case, and the FTC sustained the ruling on appeal. The Board appealed to the U.S. Court of Appeals for the Fourth Circuit, which affirmed the FTC’s ruling. On March 3, 2014, the Supreme Court granted certiorari.

The Supreme Court Decision

To enjoy state action immunity, 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.” Id. at *16 (internal quotations omitted). Two years ago, the Supreme Court, in FTC v. Phoebe Putney Health System, Inc., addressed the first prong of this immunity. The Court held that state action antitrust immunity applies only when the state legislature has “clearly articulated and affirmatively expressed” a policy displacing competition and also that a state’s grant of general corporate powers is not enough to meet the “clear articulation” standard. Phoebe Putney, 568 U.S. at __ (2013). The Phoebe Court, however, did not address the contours or applicability of the state action immunity test’s second prong, which requires that the policy at issue be “actively supervised” by the state.

In Board of Dental Examiners, the Supreme Court picked up where it had previously left off. In the opinion authored by Justice Kennedy, the Court held that the Board’s actions were not immunized under the state action doctrine because the Board “did not receive active supervision by the State when it interpreted the Act as addressing teeth whitening and when it enforced that policy by issuing cease-and-desist letters to nondentist teeth whiteners.” Board of Dental Examiners, 2015 U.S. LEXIS 1502, at *17. The Board did not argue that the state had, in fact, actively supervised its conduct; rather, it argued that entities that had been designated as “agencies” by the state were exempt from this requirement. The Court disagreed, noting that such an argument inappropriately elevated form over substance and stating that “the need for supervision turns not on the formal designation given by States to regulators but on the risk that active market participants will pursue private interests in restraining trade.” Id. at *26.

In his dissent, Justice Alito — who was joined by Justices Scalia and Thomas — stated that, under the state action doctrine, only private entities are subject to the active supervision test and that agencies such as the Board are exempt. Justice Alito wrote that the Sherman Antitrust Act and the FTC Act “do not apply to state agencies; the North Carolina Board of Dental Examiners is a state agency; and that is the end of the matter.” Id. at *36 (Alito, J., dissenting). The majority, however, was unconcerned by the fact that state law had delegated control over the practice of dentistry to the Board and had designated it as an agency. The majority opinion noted that the relevant statute was silent as to teeth whitening and that “[w]ith no active supervision by the State, North Carolina officials may well have been unaware that the Board had decided teeth whitening constitutes ‘the practice of dentistry’ and sought to prohibit those who competed against dentists from participating in the teeth whitening market. Whether or not the Board exceeded its powers under North Carolina law, there is no evidence here of any decision by the State to initiate or concur with the Board’s actions against the nondentists.” Id. at *33 (citation omitted).

In short, the Court held, “The Sherman Act protects competition while also respecting federalism. It does not authorize the States to abandon markets to the unsupervised control of active market participants, whether trade associations or hybrid agencies. If a State wants to rely on active market participants as regulators, it must provide active supervision if state-action immunity under Parker is to be invoked.” Id. at *34.

Conclusion

The Supreme Court’s opinion expresses a clear concern with the role that active market participants play in shaping competition. The Court refused to recognize a state’s ability to give private individuals carte blanche pursuant to statutory authority — and instead required that states “actively supervise” their conduct. Across the country, state boards that are composed of private market participants (as well as other entities seeking protection under the state action doctrine) will need to reassess their own methods of supervision if they seek to ensure protection from antitrust scrutiny under the state action doctrine.