Remarks before National Association of Attorneys General, 2003 Antitrust Seminar
I am very pleased to be with you today. The organizers of this session have done an excellent job putting together an interesting program, and I am honored to have been asked to present some opening remarks to set the stage for the panel discussion that follows.(1)
The session that I have been asked to lead off is titled "State Action Immunity After Indiana Movers." The reference, of course, is to the Federal Trade Commission's consent order in Indiana Household Movers and Warehousemen, Inc.,(2) where the Commission provided substantial new guidance on the requirements for establishing a state action defense against prosecution under federal antitrust laws.(3) In particular, the Commission discussed elements that would be helpful in establishing the "active supervision" requirement for certain entities who claim a state action exemption on grounds that they acted pursuant to a regulatory regime authorized by the state.(4) The Indiana Movers case arose from the work of the Commission's State Action Task Force, whose Report was issued just last week; we will be discussing that as well.(5)
Before discussing Indiana Movers and the Task Force Report, however, I would like to start by looking at the doctrine of state action in the broader context of antitrust policy. I believe that this broader context helps in understanding the enforcement and advocacy agenda that we are pursuing at the FTC, as well as the importance that we see in our federal-state partnership as a means of advancing competition policy to the benefit of consumers.
II. Competition as the Best Guarantor of Consumer Welfare.
The past 20 years has seen the emergence of a strong consensus in antitrust that enhancing consumer welfare is and should be itssingle unifying goal. This framework is based on sound economics, both empirical and theoretical, that teaches that effective competition is the best mechanism for achieving the optimum mix of products and services in terms of price, quality, and consumer choice.
In furtherance of this objective of enhancing consumer welfare, the FTC and state attorney generals' offices have worked together on a wide variety of important matters involving private conduct by business actors. Just in the past few years alone, these matters have included the investigation of alleged price fixing by certain hospitals and physicians, resulting in proposed consent orders;(6)investigations involving alleged monopolization of certain pharmaceutical products, which resulted in consumer redress in the hundreds of millions of dollars;(7) a number of natural gas and petroleum mergers;(8) and the investigation of spikes in heating oil prices in the northeast in the winter of 2000-2001, as well as apparent anomalies in gasoline pricing in various states.(9)
As important as these efforts have been, however, our enforcement efforts may be unavailing if business actors can circumvent market competition by simply pursuing a different strategy: rent-seeking behavior directed at government entities. Such rent-seeking behavior may come in the guise of consumer protection proposals, for example, which really are intended to protect incumbents rather than consumers. Other proposals may seek to exempt various groups from the antitrust laws altogether. Last year some 20 bills were introduced in Congress seeking various exemptions from the antitrust laws. Moreover, even well-intended regulation may have significant but unnecessary adverse effects on competition.
As antitrust lawyers, we know how damaging to consumer welfare such regulation can be. In most circumstances, effective competition is most likely to yield the optimal mix of goods and services to consumers at the lowest cost. Sectoral regulation may be appropriate in certain, limited applications, but it is the antithesis of competition, with its restrictions on price, entry, and conduct. As Chairman Muris has noted, a large and sad literature documents how sectoral regulation often has harmed consumers by imposing needless controls on entry, pricing, and new product development.(10)
For example, studies of licensing in dentistry have found price increases from 4 to 15 percent as a result of restricting supply.(11) A study of state restrictions on the use of dental auxiliaries (hygienists and assistants) estimated that in 1982 consumers paid approximately $700 million more for dental services as a result of those restrictions.(12) A survey of the literature showed that, for the dental procedures studied, the quality of service provided by auxiliaries is equal to that provided by dentists.(13) In eye care, studies find price increases from 5 to 33 percent from a variety of advertising and commercial practice restrictions.(14) These studies also find an ambiguous effect on overall quality.
Not only do these restrictions result in higher prices for consumers, but frequently they do so by foreclosing entry at particularly accessible points of entry into the economy for individuals and small firms. Thus, rent-seeking by incumbents often involves lawyers foreclosing entry by paralegals; dentists foreclosing entry by hygenists; funeral home directors foreclosing entry by ambulance drivers.
III. A Federal-State Partnership in Competition Advocacy
At the FTC, we have directed our efforts against unwarranted rent-seeking and unnecessary regulation in three principal ways. First, we have undertaken an active program of competition advocacy aimed at promoting competition as the basic principle of economic organization. At the state level, this has entailed assisting state officials, at their request, in the analysis of competition issues raised by proposed state legislation or other regulatory programs. These matters include legislation that was recently proposed in Alaska, Washington State, and Ohio to authorize competing physicians to bargain collectively with health plans over fees and other terms. In all three instances, the staff concluded that the proposal would significantly increase health care costs and harm consumers. The staff comments in these matters specifically addressed the state action doctrine, and I will return to them later in my remarks.(15) We have also assisted in the analysis of numerous other state legislative proposals or regulations.(16)
Second, we have also sought to apply competition policy expertise in the formulation of regulatory and other policies that affect competition. For example, in connection with the recent hearings on intellectual property jointly sponsored by the FTC and the Justice Department, we have sought to bring a competition perspective to the formulation of intellectual property rules and policy by the Federal Circuit, Congress, and the Patent and Trademark Office. The FTC's generic drug study last year likewise attempted to bring our competition policy expertise to bear on the federal statutory and regulatory regime that controls the introduction of generic drugs into the market.(17)
Finally, we have targeted rent-seeking behavior directed at government entities in our antitrust enforcement efforts. In addition to our state action cases, which I will discuss in more detail below, I would like to highlight the Commission's complaint against Unocal (formerly Union Oil). The complaint alleges that Unocal made false representations to the California Air Resources Board in connection with CARB's adoption of regulations relating to reformulated gasoline. The complaint alleges that Unocal falsely represented to CARB and other refiners that certain technology was non-proprietary and in the public domain. After CARB incorporated the technology into its regulations, the complaint alleges that Unocal sued those refiners for patent infringement, seeking royalties of 5 cents a gallon for virtually all gasoline sold in California during the summertime. The State of California has publicly supported the Commission's action.
In pursuing this competition agenda, there are several ways in which I believe that we can continue our close federal-state partnership. In the enforcement arena, we are building on a long tradition of successful collaboration. We recall, for example, that a large number of States joined in submitting an amicus brief supporting the Federal Trade Commission's position in the Ticor state action matter, which we litigated all the way to the Supreme Court.(18) We are thankful for your support, and look forward to working with you on similar enforcement matters in the future. In addition, as I noted earlier, we have an active program of working with States in the analysis of competition issues that arise in regulatory programs. It also may be fruitful to engage in efforts to coordinate, to the extent possible, the promotion of competition policies in different regulatory regimes.
IV. Comparative Advantages of State AGs in Promoting Competition in the Formulation of State Regulatory Policy.
In addition to these collaborative efforts, we believe that state attorneys general also are uniquely positioned to advance competition policy in a number of important ways. Let me start with the formulation of regulatory policy. First, by virtue of his or her position as the principal legal counsel to the state, the state AG is perfectly positioned to understand and to comment on the potential competitive ramifications of proposed regulatory measures and how they may interface with other statutory regimes, such as the antitrust laws, at both the state and federal levels.
Second, a state AG has greater knowledge, than would an outside observer, of the policy objectives and goals of state regulatory policy, and of any competing policy objectives. That understanding is critical to the tailoring of regulatory measures to achieve those objectives while also accommodating competition policy to the extent possible. Third, state AGs have the advantage of proximity to state boards and the consumers they serve. That proximity should facilitate greater understanding of the likely practical operation of regulatory measures and how they are likely to affect consumers. All of these factors are important to the formation of informed judgments about proposed regulatory measures.
The same factors - position as legal counsel, knowledge of regulatory objectives, and proximity to boards and consumers - also lend themselves to post-enactment supervision to ensure that regulatory regimes are implemented in a manner that is consistent both with the state's objectives and the supervisory requirements of the state action doctrine. Further, state AGs can here serve as protectors of the competition ethic unconstrained by strictures of the state action doctrine.
Finally, participation at both phases - a thorough exploration of the competitive ramifications of proposed regulatory measures and oversight of the implementation of regulatory regimes - is important to the notion of political accountability that underlies the state action doctrine itself. As the Supreme Court stated in Ticor, "States must accept political responsibility for actions they intend to undertake. . . . Federalism serves to assign political responsibility, not to obscure it." 504 U.S. at 636.
V. The FTC's State Action Report
As you all know, the antitrust state action doctrine was first articulated in the 1943 Supreme Court decision in Parker v. Brown,(19) which declared that the Sherman Act was not intended to apply to the activities of States. The Court based the doctrine on the relatively non-controversial notion that, in 1890, Congress intended to protect competition, not to limit the sovereign regulatory power of the States. Thus, pursuant to the doctrine, actions that could be attributed to "[t]he state itself" would be exempt from antitrust scrutiny.
Since Parker, the Supreme Court has elaborated on the state action doctrine several times to clarify the identification of actions that, although undertaken by entities other than the state as sovereign, nonetheless could be attributed to "the state itself." In Midcal, the Court established a two-prong test for conduct claimed to be authorized by the state: the conduct is exempt if it is (1) undertaken pursuant to a clearly articulated state law that displaces competition with a regulatory scheme, and (2) actively supervised by the state.(20) The Court, however, has not developed self-operating, readily applicable standards for applying either prong of the Midcal test.
We know that clear articulation does not mean that a state must compel or expressly authorize specific anticompetitive acts,(21) and, on the other hand, that a general grant of authority may not suffice as clear articulation,(22) but beyond that the law is less clear. In Town of Hallie, the Court referred to the notion of the "foreseeability" of anticompetitive effects as a tool for ascertaining the state's intentions.(23)That concept has proved troublesome, as lower courts have used it in ways that we believe are not supported by the Court's decision.
The Court has been somewhat more helpful in articulating standards for active supervision. In Midcal, Patrick(24) and Ticor, the Court emphasized that active supervision must be substantively meaningful. Further, state officials must "have and exercise power to review particular anticompetitive acts of private parties and disapprove those that fail to accord with state policy."(25) In evaluating whether alleged anticompetitive activity by a non-state entity meets the standards of the state action defense, the goal is to determine whether the conduct meets the state legislature's stated criteria and whether "the State has exercised sufficient independent judgment and control so that the details of the [practice] have been established as a product of deliberate state intervention, not simply by agreement among private parties."(26)
Nonetheless, the "clear articulation" and "active supervision" requirements have been the subject of varied and controversial interpretation, sometimes resulting in unwarranted expansion of the exemption and the shielding of essentially private anticompetitive conduct. At times, courts have failed to consider carefully whether the anticompetitive conduct in question was truly necessary to accomplish the state's objective. Other courts have granted a broad exemption to quasi-official entities, including entities composed of market participants, with only a tangential connection to the state. Many of the competition policy concerns still center on the question of what actions should be attributed to "the state itself."
I do not mean to suggest criticism of the entire state action doctrine. As explained by Chairman Muris, an exemption for state action may have significant benefits.(27) For example, exempting state regulatory schemes from antitrust challenge fosters the development of a diversity of such schemes. This process creates "natural experiments" from which regulators may learn and, when working optimally, can increase efficiency at all levels of government.(28) But unwarranted expansion of the doctrine can result in substantial cost. The Commission studied many of these issues during Chairman Muris' tenure as Director of the Bureau of Competition in the 1980s; theTicor case was one product of that effort. But concerns remain. The Antitrust Section of the American Bar Association recently noted that "[s]tate action immunity drives a large hole in the framework of the nation's competition laws."(29)
Shortly after assuming office in June, 2001, Chairman Muris formed a State Action Task Force to undertake a fresh look at the existing case law. The Task Force was charged with making recommendations on how to further guide the development of state action case law to ensure that the state action exemption remains true to its doctrinal foundation of protecting the deliberate policy choices of sovereign states and is otherwise applied in a manner that promotes competition and enhances consumer welfare. The Task Force report was issued in September of this year.
A. Principal Findings
The Report finds that the clear articulation standard has repeatedly been interpreted too broadly.(30) According to several appellate courts, once a state broadly authorizes certain acts or implements a general regulatory scheme for an industry, any anticompetitive effects flowing from the acts must have been foreseeable and are, therefore, a product of deliberate state policy. In other words, these courts equate a state's mere grant of general authority with a state's clear articulation of a policy to restrain competition. Thus, for some courts, the more general the state legislation, the more likely it is that the legislature intended to displace competition.
To give you one example, the Commission has encountered that kind of general regulation in the context of hospital mergers. It is not uncommon for states to have granted counties or other authorities general authorization to own and operate hospitals, and to establish or operate additional medical facilities as well. One might reasonably interpret such a statute as authorizing a hospital that was established pursuant to the statute to acquire other hospitals. One might also reasonably anticipate that some acquisitions would be anticompetitive. Since the possibility of some anticompetitive effects thus was "foreseeable," some courts would conclude that the state clearly articulated an intent to displace competition with a regulatory regime.
That result stands the "clear articulation" test on its head. Applied in that manner, the test ignores the substance of the state's policy choice, and both contravenes Supreme Court precedent and undermines the purpose of the clear articulation standard. In the simplified example I have used, an intent to displace competition is no more evident than it is in the usual state corporation law that allows firms to merge or acquire properties. The legislature equally could have intended that acquisitions of hospitals pursuant to the statute would be subject to the normal application of the antitrust laws. Indeed, absent a clear expression to the contrary, it should be presumed that the antitrust laws do apply, since implied antitrust exemptions are disfavored.(31) In sum, making a meaningful determination of whether the state has deliberately adopted a policy to displace competition requires a court to look beyond the state's mere authorization of general regulation.
On the "active supervision" side, the Commission's Ticor case helped to clarify the standard, but the Report finds that neither the Supreme Court nor the lower courts have provided adequate guidance on how to identify identities that should be subject to active supervision, and what states should do to provide meaningful supervision.(32) In evaluating whether an entity is subject to the active supervision requirement, courts examine a variety of factors that are not tailored to the underlying goals of the active supervision standard. Some examples: whether the entity exercises governmental powers (like eminent domain), lacks the ability to make a private profit, or has a public nature. These factors are not necessarily probative of whether members of the entity will pursue their own private interests rather than the state's. For example, non-profit corporations often try to restrain competition, either for their own benefit or for the benefit of their members. Other factors, such as the entity's structure, membership, decision-making apparatus, and public openness, are better indicators of the need for active supervision.
Courts also have not articulated a well-defined standard for active supervision.(33) The Supreme Court has stated that a state official must engage in a "pointed reexamination" of a pricing scheme (Midcal) and must exercise "independent judgment and control" (Ticor), but has provided little guidance on the standards federal courts should use to assess the state's efforts, and what states should do to satisfy those standards.
In addition, the Report finds that the state action doctrine largely ignores interstate spillover effects, which force citizens of one state to absorb the costs imposed by another state's anticompetitive regulations.(34) In economic terms, this is a "negative externality," and it can cause significant efficiency losses. Most courts have not incorporated these costs into their analysis.
Finally, the Report discusses some concerns with the application of the state action doctrine to the activities of municipalities that are increasingly engaged in business on a profit-making basis, and using their law-making power to exclude competitive challenges.(35)Clearly, that tilts the playing field, and can produce anticompetitive results. The Report notes that there is some support, at both the Supreme Court and lower court levels, for a "market participant" exception that would potentially address this problem, but courts have hesitated to embrace such an exception fully, and a few have rejected it outright.
B. Task Force Recommendations
The Report makes a number of recommendations on promoting specific developments in the state action doctrine. The recommendations are not fundamental changes to the doctrine, but, rather, are steps to keep the doctrine in line with its original purposes and goals. The recommendations include the following:(36)
- Re-affirm a clear articulation standard tailored to its original purposes and goals. An appropriate clear articulation standard would ask both (i) whether the state authorized the conduct at issue, and (ii) 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: (a) 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; (b) the absence of an adequate factual record precludes a finding of active supervision; and (c) 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: (a) any market participant, or (b) 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 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. The Commission can play an important role in helping to explain the value of competition policy to the federal courts.
VI. Implications of the Task Force Report for the Role of State AGs
The State Action Report has a number of implications for how state AGs can help ensure the availability of the state action defense for particular regulatory actions, if the state so desires. The requirements of clear articulation and, particularly, active supervision will come into sharper focus when the panel discusses the implications of the Commission's Indiana Movers case, which I will review in a few minutes.
I would suggest, however, that the Report has even deeper implications for the role of your offices. The root foundations of the state action doctrine, together with considerations of competition policy - including the Supreme Court's instruction that we should continue to observe the "fundamental and accepted assumptions about the benefits of competition within the framework of the antitrust laws" and, therefore, construe the state action exemption narrowly(37) - suggest that state attorneys general should be affirmatively involved in the application of competition policy expertise to the formulation and analysis of regulatory policy. I have already discussed why your offices are well situated to promote the competition ethic as part of regulatory policy. The State Action Report tells us why that is important to achieving the harmonization of state regulatory sovereignty and national competition policy that the state action doctrine seeks to achieve.
The state action doctrine does not permit a state simply to authorize anticompetitive conduct. Rather, in order to make the state action exemption available, a state must substitute a different form of economic organization - a positive regulatory program - for the competition it is displacing. In addition, the need for public accountability requires that the legislature clearly articulate its intentions and supervise the conduct of non-state actors. All of this requires the state to identify its objectives, make clear choices, and explain its decisions. How else can a state clearly articulate its intentions, and, in its supervisory role, determine whether its policies are being followed?
I would also submit that a state cannot make fully informed choices without considering and weighing the likely competitive and consumer impact of proposed regulatory measures. Only by doing so can a state determine whether a proposed regulation will likely enhance, rather than diminish, consumer welfare. This is an area where state attorneys general can put their competition expertise to great use. Opportunities abound, as regulatory proposals are endless. Economic research into the actual effects of regulatory strictures can help. Some of this research has been highlighted by the FTC in regulatory advocacy filings before state bodies - filings typically made at the behest of state officials. Such filings illustrate a positive way in which federal officials can cooperate with state authorities in highlighting the competition and consumer welfare implications of rules that are appropriately within the sphere of state responsibility.
Consumers can also benefit from post-enactment review of regulatory measures. For example, earlier this year, FTC staff assisted in the analysis of gasoline price controls enacted by the State of Hawaii in May, 2002. In this instance, the legislature included provisions delaying implementation of price controls so that Hawaii's Department of Business, Economic Development and Tourism could assess the likely impact of price controls and other alternative policies to reduce gasoline prices. Assisting in this review, FTC staff concluded that "the Hawaii Legislature acted with great foresight" when it included these provisions, because price controls likely were not the best way to promote consumer welfare.(38)
VII. Recent FTC Initiatives on State Action
A. Indiana Movers and Related Actions
The first major enforcement initiative that resulted from the work of the Task Force was the Indiana Movers case, (39) which gave the Commission an opportunity to provide guidance on the active supervision prong of Midcal. The complaint charged Indiana Household Movers and Warehousemen, Inc. (IHM&W), an association that represents approximately 70 household goods movers doing business in Indiana, with unlawful collective rate-setting. One of the association's primary functions is to prepare and file tariffs and supplements on behalf of its members with the Indiana Department of Revenue. These tariffs and supplements contain collective rates and charges for the intrastate and local transportation of household goods and related services. The complaint charged that the association's conduct is anticompetitive and violates Section 5 of the FTC Act , because it has the effect of raising, fixing, and stabilizing the price of the movement of household goods to the detriment of the state's consumers.
While Indiana law contemplates common carriers entering into "joint rates" under certain circumstances - i.e., IHM&W satisfied the "clear articulation" test - the association also had to demonstrate that the State actively supervised its conduct. Under Ticor, IHM&W had to show state officials had engaged in a "pointed re-examination" of its conduct, "exercise[d] authority" over those activities, and "effectively made [the challenged] conduct its own." IHM&W did not satisfy that prong of Midcal, and subsequently entered into a consent agreement to settle the charges.(40)
In announcing the consent agreement, the Commission provided substantial guidance on the kind of oversight that would, in the Commission's view, satisfy the active supervision requirement.(41) As explained by the Commission, if a state intends to displace national competition norms, the state action doctrine requires that the state replace those competition norms with specific regulatory standards. A state may not simply authorize private parties to disregard federal laws,(42) but must substitute an alternative state policy. In addition, when private actors are granted discretionary authority to implement a regulatory scheme, the state must ensure that those private actors comply with state policy rather than pursue their individual private interests - i.e., the state must actively supervise. This ensures that ultimate responsibility for the conduct can properly be laid on the state itself, not simply on the private actors. More fundamentally, the active supervision requirement furthers the principle of "accountability" that underlies federalism. If the state's policies prove to be unpopular with its citizens, those responsible will not be "insulated from the electoral ramifications of their decisions."(43)
With these basic principles in mind, in Indiana Movers the Commission sought to give guidance on the operational meaning of the term "active supervision." Going back to the requirement that the conduct be properly attributable to the state itself, the Commission concluded that the state must examine the private conduct in question in light of the regulatory regime it has set in place, to ensure that the conduct comports with the state's objectives and requirements.(44) This is the "pointed reexamination" required by the Supreme Court.(45) To provide this level of supervision, the Commission explained that a state must (1) obtain sufficient information to determine the actual character of the private conduct at issue, (2) measure that conduct against the legislature's stated policy criteria, and (3) come to a clear decision that the private conduct satisfies those criteria, so as to make the final decision that of the state itself.(46)
While the standards for active supervision are those articulated by the Supreme Court, and the Court has not prescribed specific procedural or substantive requirements, the Commission, in Indiana Movers, discussed three specific elements of a supervisory regime that it would find helpful in determining whether the active supervision prong of state action has been met: (1) the development of an adequate factual record, including notice and opportunity to be heard; (2) a written decision on the merits; and (3) a specific assessment - both qualitative and quantitative, if appropriate - of how the private action comports with the substantive standards established by the state legislature.(47)
A reviewing body obviously must have sufficient facts sensibly to determine whether the state's substantive regulatory requirements have been achieved, and a contemporaneous record is more reliable than facts reconstructed after the fact. The precise nature of the factual record depends on the substantive norm the state has established for the regulatory program involved. For example, if the regulatory program requires the consideration of consumer impact, the reviewing body would need reliable, timely, and complete economic data. In addition, the value of public notice and opportunity to comment is well established as a means of ensuring that relevant facts are brought to light. A written decision, although not essential, is normally the clearest indication that the reviewing body genuinely has assessed whether the private conduct satisfies the legislature's stated standards, and has directly taken responsibility for that determination. Finally, it must be clear that the reviewing body undertook a substantive analysis and exercised sufficient independent judgment and control so that the private action effectively became the product of the state's considered judgment.
The supervisory mechanism also should be tailored to the nature of the conduct authorized by the regulatory regime. For example, a supervisory framework that is suited to the review of discrete events such as rate-setting, as in Ticor or the more recent FTC rate-setting state action cases, may not be as well suited to the supervision of the ongoing conduct of an entity that wishes shelter under the state action doctrine. There may not be a one-size-fits-all solution.
The Commission subsequently entered into consent agreements with two other groups of household movers - the Minnesota Transport Services Association(48) and the Iowa Movers and Warehousemen's Association(49) - settling similar charges. In both cases, the state action defense was not available, for lack of active supervision. The Minnesota case also resulted in another procompetitive outcome. As a result of the Commission's discussions with state officials, the State of Minnesota repealed the state statute requiring the use of collective rates. Thus, to resume collective rate-making, the association would have to find some other source of authority that allows the practice, as well as demonstrate active supervision.
Three other movers' associations decided to contest charges that they engaged in unlawful collective rate-making. In July, the Commission issued administrative complaints against the Alabama Trucking Association(50), the Movers Conference of Mississippi,(51) and the Kentucky Household Goods Carriers Association.(52) The Alabama and Mississippi cases have been withdrawn from adjudication for the purpose of considering a proposed consent agreement.(53) The Kentucky case is before an administrative law judge, and Respondent's answer to the complaint raises a state action defense, claiming that the challenged conduct was undertaken pursuant to a clearly articulated and affirmatively expressed State policy of the Commonwealth of Kentucky and was actively supervised by the Commonwealth.(54)
B. South Carolina Dentists
The administrative complaint issued last month against the South Carolina State Board of Dentistry ("Board") also may raise state action issues.(55) The Complaint alleges that the Board, a creation of the South Carolina legislature established to supervise the practice of dentistry and dental hygiene, unlawfully restrained competition in the provision of preventive dental care. They did so by promulgating a regulation that unreasonably restricted the ability of dental hygienists to deliver preventive services, including cleanings, sealants, and fluoride treatments, on-site to children in South Carolina schools. The Complaint charges that the Board's action was undertaken by self-interested industry participants with economic interests at stake, that it was contrary to State policy, and was not reasonably related to any countervailing efficiencies or other benefits sufficient to justify its harmful effects on competition and consumers. A substantial majority of the Board members are dentists, and the preventive care in question involves services that both dentists and dental hygienists are trained to perform.
We do not yet know whether the Board will raise a state action defense, but in my opinion the defense is not available to the Board. Although the Board is vested with rule-making authority, the allegations of the Complaint make it clear that the South Carolina legislature did not intend the kind of competitive restraint imposed by the Board. On the contrary, in 2000 the legislature amended the South Carolina statutes to make it easier for dental hygienists to provide preventive services in a school setting. In particular, the legislature eliminated the previous requirement that the patient must have been examined by a licensed dentist with 45 days prior to the treatment by a dental hygienist. The Board's action, in July, 2001, reinstated that requirement and is clearly inconsistent with the policy established by the legislature. The Board therefore cannot meet the clear articulation requirement.
Commission staff also have sought to provide guidance on the active supervision requirement through the presentation of staff comments and testimony on proposed state legislation in Alaska, Washington, and Ohio that sought to create antitrust exemptions for physician collective bargaining.(56) These comments are instructive on the level and detail of supervision we think is needed, so I will discuss one of them in some detail; you might find it helpful to read the full text of all three, which are available on our website.
It is not my intent to single out any particular state, but the proposed Alaska legislation provides a good illustration of the issues. The bill sought to authorize competing physicians to engage in collective bargaining with health plans over fees and other terms under certain conditions - namely, when the health plan has "substantial market power"(57) - and provided that an authorized third party "may not represent more than 30 percent of the market of practicing physicians in the geographic service area or proposed geographic service area if the health benefit plan has less than a five percent market share." The bill authorized the Attorney General to limit the percentage of practicing physicians represented by an authorized third party, with two restrictions: the Attorney General could not impose a minimum threshold of "less than 30 percent of the market of practicing physicians," and may not impose any limit at all if "the market of practicing physicians . . . consists of 40 or fewer individuals." Commission staff had a number of concerns over the substantive provisions of the bill, and, as to state action, the staff concluded that the bill did not create a supervisory mechanism sufficient to establish an antitrust exemption.
The bill sought to provide state supervision of physician collective bargaining by authorizing the Attorney General to approve or disapprove: (1) the composition of a physician collective bargaining group, (2) a brief report on any proposed collective negotiations, and (3) a contract that was the subject of collective bargaining. The Attorney General's role was limited in significant respects, however, making it unlikely that the regulatory scheme would be found to provide the level of active supervision required to confer antitrust immunity.
First, the Attorney General's limited authority to review the composition of physician groups did not satisfy the Supreme Court's requirement that state officials "have and exercise power to review particular anticompetitive acts of private parties and disapprove those that fail to accord with state policy."(58) The Attorney General's limited review of bargaining groups at the formation stage would not amount to active supervision of "particular anticompetitive acts."(59) Indeed, in a market of "40 or fewer individuals," the Attorney General would have no authority whatsoever to review the composition of physician groups. This loophole may be particularly significant in some markets.(60)
Second, although the bill gave the Attorney General authority to disapprove a "brief report" on any proposed collective negotiations if the physician group was found to be "not appropriate to represent the interests involved in the proposed negotiations," it was unclear what authority this actually would confer, or how the Attorney General could make such an assessment on the basis of the limited information that the third party representative was required to submit. The report would describe the proposed subject matter of the negotiations and a statement of the expected efficiencies or benefits, but it would not supply a wide variety of information that would enable the Attorney General to assess the likely competitive effects of the negotiations. Further, there was no provision for the Attorney General to require submission of additional information, nor any mechanism by which to receive input from other physicians, affected health plans, or patients.
Third, the bill did not adequately provide for a "pointed examination" of collectively negotiated contracts. There were two principal defects that were likely to vitiate the active supervision required by the state action doctrine: (1) the Attorney General was presented with insufficient information, and (2) the Attorney General was given only 30 days to conduct the review, which could well be insufficient time.
Finally, the staff was concerned that the review process lacked sufficient transparency. While the bill provided that "[i]f the contract is disapproved, the attorney general shall furnish a written explanation of any deficiencies along with a statement of specific remedial measures that would correct any identified deficiencies," notably absent was a complementary provision requiring a written decision to approve a proposed contract. A written decision, expressly considering the potentially anticompetitive implications of a proposed contract and attempting to quantify the consumer impact and expected effect on consumer prices, would serve a number of salutary purposes. First, it would inform affected parties of the levels at which prices were being fixed, and so provide an opportunity for comment or challenge as to the appropriateness of those levels. Second, it would help inform the public of the likely impact of the proposed contract on their health care costs. From a consumer perspective, disapproval of a contract is the less troubling result. Disapproval indicates that market forces will continue to govern, whereas approval indicates that they will be temporarily suspended, with a potentially adverse impact on price and access. It is the latter situation that more clearly warrants an explanation and is more properly subject to consumer scrutiny.
In summary, state regulation, like its federal counterpart, often can have significant effects on markets. State attorneys general can play an important role in protecting consumer welfare by promoting a competition ethic as a part of state regulatory policy wherever possible. In addition, state attorneys general can play a major role in rational application of the state action doctrine so that it protects legitimate state interests while not compromising national competition policy. We look forward to working with you on these and matters in our valuable and important federal-state competition partnership.
1. The views expressed are mine and do not necessarily reflect the views of the Federal Trade Commission or any Commissioner.
2. Dkt. C- 4077 (April 25, 2003) (consent order) (hereafter referred to as Indiana Movers).
4. See California Retail Liquor Dealers v. Midcal Aluminum, 445 U.S. 97 (1980) (establishing "clear articulation" and "active supervision" requirements for non-state actors seeking shelter under the state action exemption).
6. The Maine Health Alliance, Dkt. No. C-4095 (Aug. 27, 2003) (consent order). The State of Maine settled a parallel state case. See State of Maine v. The Maine Health Alliance, Civ. Act. No. CV03-135 (Superior Ct. June 18, 2003) (consent order).
7. Bristol-Myers Squibb Co., Dkt. No. C-4076 (Apr. 14, 2003) (consent order); FTC Press Release, FTC Charges Bristol-Myers Squibb with Pattern of Abusing Government Processes to Stifle Generic Drug Competition (March 7, 2003), available at</opa/2003/03/bms.htm>; FTC v. Mylan Laboratories, Inc., 62 F. Supp. 2d 25 (D.D.C. 1999); FTC Press Release, FTC Reaches Record Financial Settlement To Settle Charges of Price-fixing in Generic Drug Market (November 29, 2000), available at </opa/2000/11/mylanfin.htm>; In re Lorazepam & Clorazepate Antitrust Litigation, 205 F.R.D. 368 (D.D.C. 2002) (final approval of settlements).
8. E.g., Southern Union Co., Dkt. C-4087 (July 16, 2003) (consent order; acquisition of Panhandle Easter Pipeline Co. from CMS Energy Corp.); Conoco, Inc., Dkt. C-4058 (Feb. 7, 2003) (consent order, merger with Phillips Petroleum Co.).
9. E.g., Western States Gasoline Pricing, FTC File No. 981-0187 (May 7, 2001).
10. Timothy J. Muris, Chairman, Federal Trade Commission, Looking Forward: The Federal Trade Commission and the Future Development of U.S. Competition Policy, Remarks before the Milton Handler Annual Antitrust Review, New York, NY, December 10, 2002, available at </speeches/muris/handler.htm> (hereafter, "Muris, Looking Forward"); see also Carolyn Cox and Susan Foster, The Costs and Benefits of Occupational Regulation, A Staff Report of the Bureau of Economics, Federal Trade Commission (October 1990).
11. See Cox and Foster, supra note 10, at 31; Morris Kleiner and Robert Kudrle, Does Regulation Affect Economic Outcomes?: The Case of Dentistry, The Journal of Law and Economics (Oct. 2000), at 547-82.
12. J. Nellie Liang and Jonathan D. Ogur, Restrictions on Dental Auxiliaries, Bureau of Economics Staff Report to the Federal Trade Commission (May 1987), at 2.
13. Id. at 3.
15. See part VII.C., infra.
18. FTC v. Ticor Insurance Co., 504 U.S. 621 (1992).
19. 317 U.S. 341 (1943).
20. California Retail Liquor Dealers v. Midcal Aluminum, 445 U.S. 97 (1980).
21. Southern Motor Carriers Rate Conference, Inc. v. United States, 471 U.S. 48, 60 (1985) (compulsion not required); Town of Hallie v. City of Eau Claire, 471 U.S. 34, 40-41 (1985) (express authorization not required).
22. See Community Communications Co. v. City of Boulder, 455 U.S. 40 (1982).
23. Town of Hallie, 471 U.S. at 43. The Court also held in Hallie that a political subdivision of a state, such as a municipality, need only satisfy the "clear articulation" requirement because "there is little or no danger that it is involved in a private" anticompetitive arrangement. Id. at 47 (italics in original).
24. Patrick v. Burget, 486 U.S. 94, 100-01 (1988).
25. Id. at 101 (emphasis added).
26. Ticor, 504 U.S. at 634-35.
27. See Muris, Looking Forward, supra note 10.
29. American Bar Association, Section of Antitrust Law, The State of Federal Antitrust Enforcement - 2001, A Report of the Task Force on the Federal Antitrust Agencies - 2001.
30. Task Force Report at 2, 25-36.
31. See Ticor, 504 U.S. at 636 ("we have held that state-action immunity is disfavored, much as are repeals by implication," citingLafayette v. Louisiana Power & Light Co., 435 U.S. 389, 398-99 (1978)).
32. Task Force Report at 2, 37-39.
33. Id. at 2, 36-37.
34. Id. at 2-3, 39-44.
35. Id. at 3, 44-49.
36. Id. at 3-4, 50-58.
37. Ticor, 504 U.S. at 636.
38. See Testimony of Jerry Ellig, Deputy Director, Office of Policy Planning, FTC, Competition and the Effects of Price Controls in Hawaii's Gasoline Market, Before the State Hawaii, Joint Hearing of House and Senate Committees (Jan. 28, 2003), available at</be/v030005.htm>.
39. Indiana Household Movers and Warehousemen, Inc., Dkt. C- 4077 (April 25, 2003) (consent order).
40. The Commission subsequently issued a comprehensive cease-and-desist order, and also required IHM&W to cancel all tariffs it has filed with the State that contain intrastate collective rates. The order also gives IHM&W an opportunity to modify its terms in the future, but only if it can demonstrate that the state action defense would exempt its conduct, allowing it to engage in collective rate-making. See id.
41. See Indiana Household Movers and Warehousemen, Inc., FTC File No. 021 0115, Analysis of Proposed Consent Order to Aid Public Comment (March 18, 2003), available at </os/2003/03/indianahouseholdmoversanalysis.pdf>.
42. Parker, 317 U.S. at 351.
43. See New York v. United States, 505 U.S. 144, 168-69 (1992).
44. Indiana Movers, Analysis to Aid Public Comment, at 5.
45. Midcal, 445 U.S. at 06.
46. Indiana Movers, Analysis to Aid Public Comment, at 5.
48. Minnesota Transport Services Ass'n, Dkt. C-4097 (Sept. 15, 2003) (consent order).
49. Iowa Movers and Warehousemen's Ass'n, Dkt. C-4096 (Sept. 10, 2003) (consent order).
50. Alabama Trucking Association, Inc., Dkt. No. 9307 (July 8, 2003) (Complaint).
51. Movers Conference of Mississippi, Inc., Dkt. No. 9308 (July 8, 2003) (Complaint).
52. Kentucky Household Goods Carriers Ass'n, Inc., Dkt. No. 9309 (July 8, 2003) (Complaint).
53. Alabama Trucking Association, Inc., Dkt. No. 9307, Order Withdrawing Matter From Adjudication for the Purpose of Considering a Proposed Consent Agreement (Aug. 29, 2003); Movers Conference of Mississippi, Inc., Dkt. No. 9308, Order Withdrawing Matter From Adjudication for the Purpose of Considering a Proposed Consent Agreement (Aug. 12, 2003).
54. Kentucky Household Goods Carriers Ass'n, Inc., Dkt. No. 9309, Respondent Kentucky Household Goods Carrier Association, Inc.'s Answer to Complaint (Aug. 18, 2003).
55. South Carolina State Board of Dentistry, Dkt. No. 9311 (Sept. 12, 2003) (Complaint).
56. Letter to the Alaska House of Representatives on Senate Bill 37 (Jan. 18, 2002), available at < /opa/2002/01/alaskaphysicians.htm>;see also Prepared Statement of the Staff of the Bureau of Competition and the Office of Policy Planning, The Threat of Consumer Harm Resulting from Physician Collective Bargaining Under Alaska Senate Bill 37, Presented by R. Ted Cruz, Director, Office of Policy Planning, Before The Committee on Labor and Commerce, Alaska House of Representatives (March 22, 2002), available at</be/hilites/cruz020322.htm>; Letter to the Washington House of Representatives on House Bill 2360 (Feb. 8, 2002), available at</be/v020009.pdf >; Letter to the Ohio House of Representatives on Ohio House Bill 325 (Oct. 16, 2002), available at</os/2002/10/ohb325.htm>.
57. One measure of "substantial market power" was "more than 15 percent of the market share."
58. Ticor, 504 U.S. at 634 (emphasis added).
59. As I will discuss later, the provisions for subsequent review of negotiated contracts were also inadequate. Moreover, even if a contract is subsequently disapproved by the Attorney General, there is some competitive risk inherent in allowing groups of competitors to engage in collective negotiations in the first place.
60. For example, a state like Alaska which, due to its population and its large geographic area, may have a large number of physician specialty markets consisting of 40 or fewer providers.