Emily Myers, Antitrust and Powers and Duties Chief Counsel, National Association of Attorneys General
The state action immunity doctrine is an important protection for state regulatory boards and other non-state entities. The Supreme Court created the doctrine in Parker v. Brown, 317 U.S. 341 (1943), to protect a state from antitrust claims when it exercises its authority to create regulation with anticompetitive effects. The Court held that acts of the sovereign state, even if anticompetitive, outweigh the importance of a freely competitive marketplace. Where the state itself is not the actor, and it has delegated its authority to private parties (for example, state professional regulatory boards), the Supreme Court imposed two requirements to ensure that the anticompetitive acts are really the acts of the state. The potentially anticompetitive action may be protected if 1) the challenged restraint has been clearly articulated and affirmatively expressed by state policy (“clear articulation”) and 2) the policy is actively supervised by the state itself (“active supervision”).1
The Supreme Court’s most recent decisions on state action immunity, in FTC v. Phoebe Putney Health Sys.,2 and North Carolina Dental Board v. FTC,3 provided additional guidance to the states on the application of the federal antitrust laws to potentially anticompetitive actions taken by non-state entities. The decision in Phoebe Putney addressed the “clear articulation” part of the test. The court held that the state’s grant of general corporate powers to hospital authorities did not include permission to use those powers anticompetitively. Nor was displacement of competition an inherent or foreseeable result of the hospital authority’s general ability to acquire hospitals. The court’s decision in N.C. Dental addressed the “active supervision” part of the test, and clarified that when a regulatory board has a controlling number of market participants, the board’s actions must be actively supervised by a politically accountable, government actor.
It is important to ensure that state regulatory boards and other state entities are both following clearly articulated state policy and being actively supervised by a politically accountable government actor if they are seeking state action immunity. This article will discuss case law developments during the past year.
After its success in the N.C. Dental case, the FTC has continued to focus on anticompetitive behavior by state regulatory boards. In its most recent action in this area, the agency issued an administrative complaint charging the Louisiana Real Estate Appraisers Board with violating antitrust law by unreasonably restraining price competition—i.e., price fixing—in the market for real estate appraisal services. The Board is a state-chartered agency, a majority of whose members are market participants. The FTC alleged that the Board unreasonably restrained price competition for real estate appraisal services provided to appraisal management companies (AMCs). Because AMCs act as agents for lenders in arranging for real estate appraisals, they function as purchasers of appraisal services. The FTC alleged that the Board’s regulation (Rule 31101) prevents AMCs and appraisers from arriving at appraisal fees through operation of the free market and that enforcement of Rule 31101 effectively requires that appraiser fees match or exceed the median fees identified in Board-commissioned survey reports.
After the FTC issued its complaint, the Governor of Louisiana issued an executive order requiring the state Commissioner of Administration to review new rules implemented by the Board involving these fees. The Governor also required the Division of Administrative Law (DAL) to approve, modify, or reject certain Board enforcement activities. The Board then rescinded the prior Rule, closed all pending investigations, and vacated its only adjudication under the prior Rule. The Board re-promulgated the Rule and after publishing it and receiving comment, resubmitted the Rule, along with the rulemaking record, to the Commissioner of Administration, the Governor, and the legislature, none of which objected.
The Board argued that these actions constituted active supervision for purposes of state action immunity, but the FTC ruled that there was only the potential for active supervision, not active supervision. This is insufficient under the Supreme Court’s N.C. Dental decision. The FTC noted that there was no evidence that the Commissioner of Administration had undertaken a substantive analysis of the Rule, that the Commissioner’s general counsel expressly disclaimed any power to disapprove the Rule once it had been published for comment, that neither house of the Louisiana Legislature held hearings or voted on the re-promulgated Rule, and that, under state law, any Board rule could go into effect after legislative inaction.
The Board appealed the Commission’s denial of state action immunity to the Fifth Circuit, but the court of appeals dismissed the appeal as premature. The court held that because the FTC Act does not provide for judicial review of interlocutory Commission decisions, but allows review only of “an order of the Commission to cease and desist from using any method of competition or act or practice.” Interlocutory rulings can be reviewed along with the final cease-and-desist order.
The Board filed suit in federal district court in Louisiana, alleging violations of the Administrative Procedure Act based on the “arbitrary and capricious” FTC decision to continue to pursue the case and to deny the Board state action immunity. The Board also asked for a declaratory judgment that the Board was entitled to state action immunity. The district court held that the administrative decision is appealable, and that the FTC’s case should be stayed while the court decides the Board’s case. The court held that denial of immunity is an irreparable harm, because it may “forc[e] the state to engage in activities from which it might otherwise be protected, such as an unlawful enforcement order.” There is no substantial injury to the FTC or the public from the issuance of the stay, since the Board agreed not to enforce the order at issue until the case is resolved. The court also “recognize[d] that an unnecessary trial would hamper State officials’ efforts to conduct the normal daily responsibilities of their offices, to the detriment of the State.”4
A number of cases were filed in California and other states challenging the provisions of collective bargaining agreements reached by school districts with teachers’ unions. These agreements were challenged on many grounds, but the antitrust theory is that collective bargaining agreements stemming from the exclusive representation system of California (and other states) are anti-competitive because they prevent individual employees from negotiating compensation based their individual merits. In deciding these cases, court addressed the question of “clear articulation” of the state’s purpose. In Crockett v. NEA-Alaska,5 and Babb v. California Teachers Ass’n,6 the courts held that the use of collective bargaining agreements was clearly articulated and affirmatively expressed as state policy, even though the individual provisions of the agreement were not. The plaintiff also argued that there was no active supervision by the state, but the courts held that because the other party to the challenged collective bargaining agreements is a public school district, which is a local government entity, there was no active supervision requirement. Both courts also found that the antitrust claims failed because “the labor of a human being is not a commodity” within the meaning of the Sherman Act so “’restraints on the sale of the employee’s services to the employer’—those employment terms set forth in a collective bargaining agreement—‘are not themselves combinations or conspiracies in the restraint of trade or commerce under the Sherman Act’ even if they ‘curtail the competition among employees.’”7
A recent Colorado decision addressed both clear articulation and active supervision, although in a rather conclusory way. In Colo. Real Estate Comm’n v. Vizzi,8 a real estate broker (Vizzi) challenged a disciplinary action against him on antitrust grounds. Vizzi had provided “unbundled” services to three buyers, for example, only listing the property on the Multiple Listing Service or only providing a lockbox and yard sign. Colorado law requires that real estate brokers “assist one or more parties throughout a contemplated real estate transaction with communication, interposition, advisement, negotiation, contract terms, and the closing of such real estate transaction without being an agent or advocate for the interests of any party to such transaction.” The Colorado Real Estate Commission, composed of three real estate brokers and two members of the public, brought an action against Vizzi, and an ALJ imposed sanctions. The Commission upheld the sanctions and Vizzi challenged the sanctions on antitrust grounds.
The Colorado appellate court determined that the Commission’s interpretation of its statute and regulations was correct. It then turned to Vizzi’s antitrust claims. The court analyzed both the “clear articulation” and the “active supervision” prongs of the Midcal test. First, the court noted that the Colorado General Assembly had articulated as one of its reasons for enacting the governing statute that “the public should be advised of the general duties, obligations, and responsibilities of the real estate broker they engage.” The court found that this was an adequate articulation of state policy, and because the statute listed specific requirements for services that brokers must provide, they clearly did not contemplate a situation where fewer services could be provided.
Turning to the “active supervision” prong, the court described the N.C. Dental decision as involving actions (regulation of teeth-whitening) which were arguably beyond the authority of the dental board. Also, the court noted that there was an allegation of anticompetitive animus on the part of the dental board. The Colorado court held that there was no violation of the antitrust laws in this case because it was uncontested that Vizzi’s actions constituted the practice of a real estate broker and “the Commission’s statutory purview is the regulation of the practice of real estate brokers.” The court also stated, “[u]nlike in Dental Examiners, there is no support in the record for the notion that the Commission’s enforcement actions were motivated by anticompetitive animus.”
Louisiana’s state regulatory boards had another brush with litigation in which the court found that the regulatory board was not entitled to state action immunity. In Veritext Corp. v. Bonin,9 Veritext, a large national court reporting service, filed suit against the Louisiana Board of Examiners of Certified Court Reporters (Board), six of whose nine members are certified shorthand reporters. The suit alleged that the Board’s regulation prohibiting all contracts between court reporters and party litigants, including volume-based discounts and concessions to frequent customers, was anticompetitive, and the board did not satisfy the active supervision test.
The court agreed, stating,
Nothing in the record indicates that elected or appointed officials oversaw or reviewed the Board’s decisions or modified the Board’s enforcement priorities. And the Board’s argument on this point—that the legislature can amend the law in this area or veto proposed rules under Louisiana’s Administrative Procedure Act—is unconvincing. State legislatures always possess the power to change the law.Active supervision requires more than the bare possibility that controlling law might be changed—the “mere potential for state supervision” that Dental Examiners expressly identified as insufficient.
The Board asserted that it was not promoting private interests when it was enforcing state law, but the court disagreed, saying, “And it strains credulity to regard the Board’s conduct as strictly public-minded, in light of its decision to convene a meeting that included “How to increase rates?” as one of its agenda items.”
SmileDirect Club, a corporation with operations throughout the country, has challenged dental board actions in a number of states. Federal district courts in Alabama10 and Georgia11 both recently declined to dismiss SmileDirect’s claims on grounds of state action immunity.
SmileDirect operates a web-based teledentisry platform that connects patients seeking clear aligner therapy with licensed dentists. Patients seeking aligners visit a SmileDirect location where technicians take thousands of pictures of their teeth with a machine called an iTero, essentially a digital camera on a wand. The images are used to create a model of the patient’s teeth, which is then reviewed by a state-licensed dentist, along with the pictures and the patient’s dental history. If the dentist feels that aligners are appropriate for the patient, the dentist writes a prescription to a lab that fabricates the clear aligners. The patient then receives a series of custom-made removable plastic retainers that are placed on the patient’s teeth to move them in small increments until the teeth are aligned.
Alabama statutes include in the practice of dentistry, “Use [of] a roentgen, radiograph, or digital imaging machine for the purpose of making dental roentgenograms, radiographs, or digital images” but provide an exemption from disciplinary action for non-dentists who perform these acts under the supervision of a licensed dentist. The Alabama Board, which is made up of six dentists and one dental hygienist, sent a cease-and-desist letter to SmileDirect stating that the lack of a dentist at their facilities meant that their non-dentist employees were engaged in the unauthorized practice of dentistry.
In the Georgia case, the Board, which also has a majority of dentists, approved an amended rule which redefines the duties of dental assistants and requires that digital scans taken for the purpose of fabricating orthodontic appliances and models be made under the direct supervision of a licensed dentist.
In both cases, SmileDirect sued the Board and the Board members, in their official and individual capacities, alleging violations of the Sherman Act as well as the state and U.S. constitutions.
In both Alabama and Georgia, the court dismissed the claims against the Board itself on the grounds of sovereign immunity. Both courts cited the Eleventh Circuit’s four-part test for sovereign immunity: “(1) how state law defines the entity; (2) what degree of control the State maintains over the entity; (3) where the entity derives its funds; and (4) who is responsible for judgments against the entity.” In Alabama, SmileDirect argued that the state exercises no control over the Board’s actions in promulgating regulations and sending out cease-and-desist letters. The court held “[t]he decisive question is whether the state exercises any less control over the Board’s rulemaking and enforcement functions than it does over the Board’s payment of its employees” (conduct that had been entitled to sovereign immunity in an earlier Eleventh Circuit case). The court found that the degree of control by the state was the same in each case, so the Board was entitled to sovereign immunity.
The Georgia court held that the Board was subject to “some” control by the state, noting that the Governor appoints (and may remove) the Board members, who are confirmed by the state senate, and the Board’s rules are approved by the Governor. This, along with the other factors, was sufficient to give the Board sovereign immunity.
Turning to SmileDirect’s claims against the Board members, both courts allowed SmileDirect to assert federal claims against the Board members in their official capacities. The courts cited Ex Parte Young,12 holding that the Eleventh Amendment does not bar suits seeking prospective relief against state officials to prevent them from violating federal law. SmileDirect’s state law claims were barred, as were its claims against the Board members in their individual capacities, and any claims for damages against the members.
Having held that the Board members were not entitled to sovereign immunity, each court then addressed the question of state action immunity. The Alabama court declined to dismiss SmileDirect’s claims because there were factual questions, including 1) whether the iTero machine used by SmileDirect is a “digital imaging machine” as described by the statute; 2) whether a dentist needs to be physically present to supervise the use of the machine; and 3) whether the Board’s issuance of a regulation covering this conduct was “actively supervised” by the legislature.
The Georgia court also cited factual questions about the state’s “active supervision” of the Board. The court noted that the Board members provided a “Certification of Active Supervision” signed by the Governor which approves the rule change at issue, but “[o]nly discovery will determine whether the Board provided all relevant information to the Governor, whether the proposed amendment was subjected to any meaningful review by the Governor, or whether the Certification of Active Supervision was merely ‘rubberstamped’ as a matter of course.”
The Alabama case has been stayed pending appeals by both sides to the Eleventh Circuit. In the Georgia case, the Board members have appealed the decision and the court has stayed proceedings pending that appeal.
The continuing development of the state action doctrine suggests that attorneys who are counseling professional licensing boards or other non-state entities should continue to advise caution when boards are promulgating rules that may be challenged as anticompetitive. If the rule is indeed anticompetitive, the board members may not be protected by antitrust immunity unless their conduct is plainly following a clearly articulated state policy and unless the board is answerable to some governmental actor who is not a market participant. Recent cases make it clear that mere potential for active supervision is insufficient to provide immunity from antitrust claims.
- California Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc., 445 U.S. 97 (1980).
- 568 U.S. 216 (2012).
- 574 U.S. 494 (2015).
- Louisiana Real Estate Appraisers Bd. v. U.S. Federal Trade Commission, 2019 U.S. Dist. LEXIS 126165 (M.D. La. July 29, 2019).
- 367 F.Supp. 3d 996 (D. Alaska 2019).
- 378 F. Supp. 3d 857 (C.D. Cal. 2019).
- Apex Hosiery Co. v. Leader, 310 U.S. 469, 503 (1940).
- 2019 COA 33 (Colo. Ct. App. 2019).
- 901 F.3d 287 (5th Cir. 2018).
- Leeds v. Bd. of Dental Examiners, 2019 U.S. Dist. LEXIS 56402 (N.D. Ala. Apr. 2, 2019).
- Smiledirectclub, LLC v. Ga. Bd. of Dentistry, 2019 U.S. Dist. LEXIS 140217 (N.D.Ga. May 8, 2019).
- 209 U.S. 123 (1908).