Supreme Court: Self-interested boards must be actively supervised

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Yesterday, the Supreme Court affirmed the Fourth Circuit’s decision to uphold the FTC’s order against the North Carolina State Board of Dental Examiners In a tour-de-force opinion laying out the proper scope of the state action doctrine first articulated in Parker v. Brown, the Court held that “a state board on which a controlling number of decisionmakers are active market participants in the occupation the board regulates must satisfy Midcal’s active supervision requirement in order to invoke state-action antitrust immunity.”

At the heart of the FTC’s case were the actions of a state-authorized dental board, six of whose eight members are practicing dentists.  In 2010, the FTC filed an administrative complaint charging that the Board’s actions to classify teeth whitening as the practice of dentistry and then to exclude nondentists from the market for teeth whitening services in North Carolina were unfair methods of competition in violation Section 5 of the FTC Act. The Board first raised the claim that its actions were entitled to state action immunity in a motion to dismiss the administrative complaint. In a unanimous decision, the FTC rejected those claims, as did the Fourth Circuit. Now, so has the Supreme Court.

At the FTC administrative trial, several witnesses testified that the Board’s actions prevented them from offering teeth whitening services in competition with dentists—people like Jim Valentine, owner of WhiteSmile USA. WhiteSmile had plans to operate in Sam’s Clubs in North Carolina. But after the Board notified Mr. Valentine that it considered WhiteSmile's product and procedures to be the unlicensed (and therefore unlawful) practice of dentistry, investors backed out, derailing the company’s plans to operate in the state.

In a 6-3 opinion, the Court reaffirmed that “[f]ederal antitrust law is a central safeguard for the Nation’s free markets structures.” Nonetheless, in Parker v. Brown, the Court recognized immunity from federal antitrust laws when a state, acting in its sovereign capacity, decides to limit competition to achieve public objectives. In yesterday’s decision, the Supreme Court rejected the Board’s claim that it was invested by North Carolina with the power of the State, and was therefore entitled to state-action immunity:

“Limits on state-action immunity are most essential when the State seeks to delegate its regulatory power to active market participants, for established ethical standards may blend with private anticompetitive motives in a way difficult even for market participants to discern. Dual allegiances are not always apparent to an actor. In consequence, active market participants cannot be allowed to regulate their own markets free from antitrust accountability.”

In particular, active supervision by the State ensures that the interests of non-sovereign, financially-interested actors are aligned with state policy goals:

“Entities purporting to act under state authority might diverge from the State’s considered definition of the public good. The resulting asymmetry between a state policy and its implementation can invite private self-dealing. The second Midcal requirement—active supervision—seeks to avoid this harm by requiring the State to review and approve interstitial policies made by the entity claiming immunity.”

The Supreme Court’s decision in North Carolina State Board of Dental Examiners v. FTC is important for further refining the intersection between federal antitrust law and state regulation. But it also has implications for businesses like White Smile USA—and for any residents of North Carolina who might be shopping for teeth whitening services.

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