Earlier this morning, in a 6-3 decision, the Supreme Court ruled that state professional boards comprised of active market participants are not immune from antitrust laws even though the boards are formally designated as a state agency, unless the state also provides active supervision of the boards' actions. 

The case arose out of an FTC action against the North Carolina State Board of Dental Examiners ("Board") for issuing cease-and-desist letters to non-dentists offering teeth whitening services.  The Board claimed that the non-dentists were engaged in the unlicensed practice of dentistry.  The FTC, however, claimed that the Board was seeking to protect its members (licensed dentists who performed teeth whitening services) from competition from non-dentists charging lower prices.

The issue on appeal to the Supreme Court was whether the Board enjoyed state action immunity under Parker v. Brown, 317 U.S. 341 (1943), given that the Board was created by and designated as a "agency of the State" under North Carolina law.

The Court explained that "while the Sherman Act confers immunity on the State's own anticompetitive policies out of respect for federalism, it does not always confer immunity where, as here, the State delegates control over a market to a nonsovereign actor."  Although the Board was designated as a state agency under North Carolin law, "[s]tate agencies are not simply by their governmental character sovereign actors for purposes of state action immunity...  Immunity for state agencies, therefore, requires more than a mere facade of state involvement..."  

In this case, the Court was concerned that the Board was controlled by active market participants with a financial interest in the regulation at issue.  (Indeed, the Court noted that 8 out of the 10 Board members earned substantial fees from teeth whitening services.)

The Court explained:

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...  In consequence, active market participants cannot be allowed to regulate their own markets free from antitrust accountability.

Thus, the Court held that state agencies that are controlled by active market participants must meet the two-pronged test set forth in California Retail Liquor Dealers Ass'n v. Midcal Aluminum Inc., 445 U.S. 97 (1980), to be afforded state action immunity.  That test had been created by the Supreme Court to determine whether a private trade association (wine merchants who were delegated price fixing authority under California law) was entitled to state action immunity.  The Midcal test requires that the State (1) articulate a clear policy to allow anticompetitive conduct and (2) provide "active supervision" of the anticompetitive conduct.

Today, the Court held that this "active supervision test is an essential prerequisite of Parkerimmunity for any nonsovereign entity -- public or private -- controlled by active market participants."  The Court stated:

State agencies controlled by active market participants, who possess singularly strong private interests, pose the very risk of self-dealing Midcal's supervision requirement was created to address...  This conclusion does not question the good faith of state officers but rather is an assessment of the structural risk of market participants' confusing their own interests with the State's policy goals.

In other words, the Court recognized that "specialized boards dominated by active market participants" are "more similar to private trade associations vested by States with regulatory authority," than to the more typical state agencies previously afforded state action immunity.  "When a State empowers a group of active market participants to decide who can participate in its market, and on what terms, the need for supervision is manifest."

Since the Board did not contend that its conduct was actively supervised by the State of North Carolina, the Board was therefore not entitled to Parker immunity.

The dissenting opinion (authored by Justice Alito and joined by Justices Scalia and Thomas) argued that the majority's ruling was an "unprecedented step" that would "create practical problems and have far reaching effects on the States' regulation of professions."  The dissent pointed out that state medical and dental boards are typically staffed by practitioners, and that there is nothing new about the suspicion that such boards were acting out of the interests of their members and not the public.  "As a result of today's decision, States may find it necessary to change the composition of medical, dental and other boards, but it is not clear what sort of changes are needed to satisfy the test that the Court now adopts." 

Among the questions raised by the dissent were:

• What does it mean that a state agency is controlled by active market participants?  

• What is a controlling number?  

• Can something less than a majority suffice? 

• Who is an active market participant?  

• What is the scope of the market being analyzed?  

• Must the market be relevant to the particular regulation being challenged?  

• How much participation makes a person active?

The answers to these questions may eventually be worked out by lower courts or the FTC.  It will be interesting to see whether and how States change the makeup of professional boards or adopt new procedures to ensure that the actions of such boards are "actively supervised" by a non-market participant. 

In the meantime, I expect there will be an increase in the number of cases challenging alleged protectionist activity by state professional boards.

The Supreme Court's decision is available here:

North Carolina State Board of Dental Examiners v. Federal Trade Commission