Professionals who serve on state regulatory boards – such as doctors serving on licensing agencies – and any entities relying on or challenging the actions of those boards need to understand new antitrust guidance. Earlier this year, the Supreme Court in North Carolina Board of Dental Examiners v. FTC decided that the actions of such state agencies do not automatically qualify for the “state action” exemption to the antitrust laws. Actions since the Court’s decision have clarified when these state agencies might be required to defend their actions under the antitrust laws. Professionals currently on or considering service on such boards should ask if the board’s structure and rules open it up to such challenges by the FTC or others.

The state action exemption is easy to summarize but difficult to apply: bona fide state regulation of the economy, even if anticompetitive, is exempt from the federal antitrust laws. Mere state blessing of private cartels is not. The Court has developed a two-prong test to organize the analysis:

1. The state’s anticompetitive policy must be “clearly articulated” by the state legislature, and

2. The action must be “actively supervised” by another state entity.

The Court has waived the need for active supervision for state subdivisions like municipalities, but insists on it for private actors. But what if the agency is populated by private actors?

In NC Board, the Court majority decided that the Board, though explicitly designated a state agency by the North Carolina legislature, required “active supervision” because a “controlling number” of the Board members were “active market participants.” In that case, six of the eight members were practicing dentists.

The dissent disagreed on several grounds and criticized the majority opinion for providing little guidance on the terms quoted above. The dissent predicted (correctly, as it turned out) that the states would tweak policies by guessing at answers to the many questions left open by the majority while the standards were “worked out by the lower courts and the” FTC. Two of the recently filed lawsuits are discussed immediately below.

In April 2015, Teladoc sued the Texas Medical Board in Texas over the latter’s rules requiring face-to-face patient interaction because those rules interfered with Teladoc’s business approach. The Texas Board is populated by a majority of market participants; however, the members of the Texas Board are appointed by the governor, not elected by other doctors, and its actions are subject to legislative and judicial supervision.

Similarly, in June, LegalZoom sued the North Carolina State Bar for not allowing it to sell its prepaid legal services plan. In October, the parties effectively settled this federal suit through a consent agreement settling a previously-filed state action. Under the agreement, the company will be allowed to request registration in the state so long as it complies with various state consumer protection laws. The company and the Bar agreed to work together to convince the North Carolina legislature to pass legislation changing the definition of “practice of law” such that, as the company stated, it could offer its prepaid plans without any material changes to its business practices.

Some states have proactively changed their regulatory procedures to ensure that the actions of their state agencies populated by private actors will satisfy the state action exemption. In July, Oklahoma’s governor announced that licensure and other non-rulemaking actions of boards with a majority of members who are “market participants” (a term still left undefined) must go through new “active supervision” by a “politically accountable actor.” Specifically, all such actions by boards such as the Board of Medical Licensure and Supervision and the Board of Dentistry shall be submitted to the attorney general for a review and written analysis. The boards must defer to that analysis, even if the attorney general suggests rescinding the action.

In June, the Connecticut legislature passed a change to the operations of the boards that work under the state’s Department of Public Health. Now, any complaint about the actions of any of the sixteen boards under the DPH shall be forwarded to the Commissioner of Public Health. That individual (currently a medical doctor) has fifteen days to decide if she will notify the board that its decision shall be considered a “proposed decision” and subject to later review, modification, or rejection by the Commissioner or her designee.

Finally, in October, the FTC issued guidance from its staff on how it will answer the two main questions left open by NC Board: When must such state agencies be actively supervised to qualify for the exemption and what constitutes “active supervision?”

The FTC broke down the first question into the two sub-questions left open by the Court: Who are “active market participants” and when is there “a controlling number” of them? Answering the first question, the FTC staff defined an active market participant as someone who (i) is licensed by the board or (ii) provides any service that is subject to the regulatory authority of the board. Explicitly included in this definition are those board members who have temporarily suspended their active participation in the occupation. Even those not directly affected by the particular action meet the definition. The selection method of these board members does not affect the analysis – whether elected by fellow professionals or appointed by the Governor, a board member can be an active market participant, according to this guidance.

Turning to the second sub-question, “a controlling number of decisionmakers” does not just mean a numerical majority, according the FTC staff guidance. Each board’s structure and rules and the veto power of the active market participants will be evaluated. For instance, the actions of a board with four non-market participants and three market participants that require five votes for approval will need “active supervision” to invoke the state action exemption.

To qualify as “active supervision,” the Court has said that the substance of the decision must be reviewed and the supervisor must have the power to veto or modify the decision. The FTC staff guidance would require the supervisor to gather information necessary for a substantive review, such as through document and data collection and public hearings, and then issue a written decision explaining his rationale for approving, modifying or disapproving the action. In that way, both the reasoning and the political acceptance of the decision will be clear.

Actions by agencies that are not actively supervised do not necessarily violate the antitrust laws; still, the time and expense of defending the actions in any antitrust challenge can be burdensome.