FTC Staff Report Recommends Clarifications Of the Antitrust State Action Doctrine

Report of State Action Task Force Calls for More Rigorous Application of the Clear Articulation and Active Supervision Requirements

For Release

In a staff report released today, the Federal Trade Commission’s State Action Task Force concludes that the scope of the antitrust state action doctrine has expanded dramatically since first articulated by the Supreme Court in 1943. The doctrine has become unmoored from its original objectives, the report concludes, and is frequently invoked to protect private commercial efforts with no relation to state policy. Accordingly, the “Report of the State Action Task Force” recommends a number of specific clarifications of the doctrine, including more rigorous
application of the “clear articulation” and “active supervision” requirements.

“The state action doctrine can have significant benefits, but over-broad interpretations
impose significant costs on consumers,” said FTC Chairman Timothy Muris. “The Task Force
has identified instances in which parties with a direct financial interest in the regulated field have
attempted to characterize their own protectionist efforts as the will of the state. The Supreme
Court never intended to shield such conduct from antitrust enforcement.”

The report identifies recurrent areas of concerns in recent state action case law, and
challenges the conventional wisdom that the anticompetitive impact of an over-broad
interpretation of the doctrine can be limited to a single state.

“The Task Force Report confirms once again why exemptions from the antitrust laws
must be construed narrowly,” noted Todd Zywicki, Director of the FTC’s Office of Policy
Planning. “Extending the protection of the state action doctrine to parties operating under a
vague grant of authority, with little or no state supervision, not only harms consumers in the state
in question, but frequently results in harm to consumers outside the state imposing the restraint.”

“Government-imposed restraints on competition have the potential to injure consumers
significantly,” Zywicki added. “It is crucial that any such restraints reflect a clearly chosen and
closely monitored choice by public authorities, not just price fixing by other means.”

The State Action Doctrine

The state action doctrine was first articulated by the Supreme Court in Parker v. Brown.
The doctrine emerged in response to efforts to apply antitrust rules to the activities of state
governments, and is rooted in the notion that Congress passed the Sherman Act to protect
competition, not to limit the sovereign regulatory power of the states. The state action doctrine
maintains this distinction by shielding certain regulatory conduct from federal antitrust
enforcement, provided that the conduct is: 1) in furtherance of a clearly articulated state policy,
and 2) actively supervised by the state.

The FTC’s State Action Task Force

In response to concerns about the expanding scope of the state action doctrine, Chairman
Muris established a task force of FTC staff in the summer of 2001 to examine the issue. The
State Action Task Force was charged with reviewing state action issues raised by Commission
investigations and cases, as well as exploring advocacy and amicus opportunities, to identify both overly expansive interpretations of the doctrine and a broad range of potential limitations. This review led to a number of successful FTC enforcement actions and competition advocacy efforts, as well as preparation of a comprehensive Task Force Report. The findings in the report include: an analysis of the current state of the law, identification of areas of concern, the Task Force’s recommended clarifications, and a brief summary of recent FTC matters raising significant state action issues.

Concerns Identified by the Task Force

The report identifies a number of concerns with the state action doctrine, as currently
articulated by some courts. Chief among these is a persistent weakening of the two principal
limitations on the doctrine: the “clear articulation” and “active supervision” requirements.

Regarding “clear articulation,” this trend is best exemplified by the willingness of some
courts to infer a state policy of displacing competition from a legislative grant of general
corporate powers. Although it is clear that the exercise of such powers merits no special antitrust
treatment in the private sector, some courts have reached the opposite conclusion when the
powers are granted through legislation.

With respect to “active supervision,” the concern is a lack of clear standards to guide
application of the requirement. Without guidance on how to implement the various formulations
of the requirement articulated by the lower courts, the “active supervision” requirement has had a
minimal impact.

These concerns are not limited to the flawed application of these key limitations,
according to the Task Force. The report also notes that some courts have interpreted that
doctrine in a manner that ignores significant interstate spillovers, which may force the citizens of
one state to absorb the costs imposed by another state’s regulations. In addition, some courts
have interpreted the doctrine broadly enough to shield virtually any municipal activity, despite the
fact that municipalities are increasingly engaging in business on a for-profit basis, while
simultaneously using their law-making power to block competitive challenges.

Recommended Clarifications

To address these concerns about the application of the state action doctrine, the Task
Force recommends the following clarifications:

  • Re-affirm a clear articulation standard tailored to its original purposes and
    goals. An appropriate clear articulation standard would ask both whether the state
    authorized the conduct at issue and whether the state deliberately adopted a policy
    to displace competition in the manner at issue.
  • Clarify and strengthen the standards for active supervision. An appropriate
    active supervision standard would encompass the following parameters: 1) a
    finding of active supervision must be based on a determination that the state
    official’s decision was rendered after consideration of the relevant factors; 2) the
    absence of an adequate factual record precludes a finding of active supervision;
    and 3) the use of specific procedural measures – such as notice to the public,
    opportunity for comment, and a written decision – is significant, though not
    necessarily conclusive, evidence of active supervision.
  • Clarify and rationalize the criteria for identifying the quasi-governmental entities
    that should be subject to active supervision. The category of entities subject to
    the active supervision requirement would include either: 1) any market participant,
    or 2) any situation with an appreciable risk that the challenged conduct results
    from private actors’ pursuing private interests, rather than from state policy.
  • Encourage judicial recognition of the problems associated with overwhelming
    interstate spillovers, and consider such spillovers as a factor in case and
    amicus/advocacy selection. Although courts are understandably reluctant to
    interfere with purely intrastate regulatory regimes, they should consider the
    problem of interstate spillovers when the benefits of the anticompetitive regulation
    accrue overwhelmingly to in-state parties, and the costs fall overwhelmingly on
    out-of-state parties.
  • Undertake a comprehensive effort to address emerging state action issues through
    the filing of amicus briefs in appellate litigation. As demonstrated by past
    Commission involvement, the FTC can play an important role in helping to explain
    the value of competition policy to the federal courts.

Recent FTC Matters Raising State Action Issues

In the two years since its formation, the Task Force, working closely with FTC
enforcement staff, has addressed important state action issues. The most recent efforts have
included both litigation and competition advocacy.

Regarding litigation, the Commission recently entered into a consent order with Indiana
Movers and Warehousemen, Inc. The analysis to aid public comment that accompanied that
consent order provided the Commission with an opportunity to offer clear and authoritative
guidance on the meaning of the “active supervision” requirement.

With respect to competition advocacy, both the Commission and FTC staff recently have
filed comments with a range of state officials opposing antitrust exemptions for physician
collective bargaining, restrictive licensing requirements for participants in real estate closings, and mandatory minimum mark-ups on gasoline. State regulations that appear to have a disparate impact on e-commerce have also been a particular focus of the Commission’s recent state action advocacy efforts. These efforts include both an amicus brief opposing restrictions on Internet casket sales and participation in a state administrative proceeding to oppose restrictions on Internet contact lens sales.

The Commission vote to approve the State Action Report and place a copy on the public
record was 5-0.

Copies of the report are available from the FTC’s Web site at http://www.ftc.gov
and also from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue,
N.W., Washington, D.C. 20580. The FTC’s Bureau of Competition seeks to prevent
business practices that restrain competition. The Bureau carries out its mission by
investigating alleged law violations and, when appropriate, recommending that the
Commission take formal enforcement action. To notify the Bureau concerning particular
business practices, call or write the Office of Policy and Evaluation, Room 394, Bureau of
Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, DC
20580, Electronic Mail: antitrust@ftc.gov; Telephone (202) 326-3300. For more
information on the laws that the FTC enforces, the Commission has published “Promoting
Competition, Protecting Consumers: A Plain English Guide to Antitrust Laws,” which can
be accessed at http://www.ftc.gov/bc/compguide/index.htm.

(FTC File No. P011200)

Contact Information

Media Contact:
Mitchell J. Katz,
Office of Public Affairs
202-326-2161
Mkatz@ftc.gov
Staff Contact:
John Delacourt,
Office of Policy Planning
202-326-3754