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COMMENT
The Antitrust State Action Doctrine and State Licensing Boards
Ingram Weber
INTRODUCTION
Imagine that a state board of dentistry claims that consumers could be harmed when a popular procedure such as teeth whitening is performed incorrectly. The board issues a rule prohibiting anyone other than a state-licensed dentist from offering teeth-whitening services in the state. This rule ensures that only those with the most training and experience treating teeth in the state—dentists—may perform the service.
But whatever increased safety is generated by this rule comes at two costs. First, dental hygienists, nondentist doctors, and other groups can no longer earn money from teeth whitening. Second, because the rule shrinks the number of suppliers, consumers may have to pay more for the service.
When such a rule is promulgated by a state legislature and enforced by bureaucrats, consumers and nondentist competitors often accept the state’s judgment that the benefits to public safety justify the anticompetitive effects. But because the hypothetical board of dentistry is composed of practicing dentists, there is a greater fear that the professed threat to public safety is an excuse to allow dentists to enrich themselves by monopolizing the market for teeth whitening.
To continue this hypothetical, based on In the Matter of the North Carolina State Board of Dental Examiners,1 imagine further that the Federal Trade Commission (FTC) and aggrieved competitors seek to defeat the board’s rule by alleging that it represents a conspiracy in restraint of trade in violation of the
† BA 2005, Wesleyan University; MSc 2006, London School of Economics; JD Candidate 2012, University of Chicago Law School.
1 FTC, Opinion of the Commission, Docket Number 9343, 2011 WL 549449.
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Sherman Antitrust Act.
2 In response, the board claims that its actions are immune from antitrust liability under what is known as the state action doctrine. This doctrine, announced in Parker v Brown,3 immunizes anticompetitive acts authorized by the states from federal antitrust liability.4
The Supreme Court has yet to determine how the state action doctrine applies to state licensing boards, but it has settled the doctrine’s application to other bodies. State legislatures and state supreme courts receive automatic state action immunity for the anticompetitive actions they authorize.5 Municipalities receive state action immunity only if the anticompetitive conduct they authorize is pursuant to a clearly articulated state policy to displace competition.6 Private parties receive state action immunity only if their anticompetitive actions are pursuant to a clearly articulated state policy and are actively supervised by the state.7
The combination of public function and private composition in state licensing boards frustrates any easy application of the state action doctrine to their commands. Licensing boards are established by states in the form of state bars and boards of medicine, dentistry, accounting, and other professions. States authorize these agencies to regulate their respective professions by determining qualifications for licensure, implementing rules related to scope of practice, and issuing other regulations. Licensing boards are typically composed entirely or primarily of licensed professionals who continue to practice while serving on the board.8 As units of government, boards are analogous to both state legislatures and municipalities. This suggests that their actions should either receive automatic state action immunity or be subject only to the clear articulation requirement. On the other hand, their private composition suggests that they should be treated like private parties and be subject to active supervision in addition to the clear articulation requirement.
Resolving the application of the state action doctrine to state licensing boards is especially important given the ubiquity of
2 26 Stat 209, codified at 15 USC § 1 et seq.
3 317 US 341 (1943).
4 See id at 352.
5 See id; Hoover v Ronwin, 466 US 558, 568 (1984) (plurality).
6 See City of Lafayette v Louisiana Power & Light Co, 435 US 389, 413 (1978) (plurality).
7 See Southern Motor Carriers Rate Conference v United States, 471 US 48, 56–57 (1985).
8 See, for example, New York Office of the Professions, State Board for the Professions: Statutory Composition and Current Membership (New York State Education Department Nov 4, 2011), online at http://www.op.nysed.gov/boards/bdcomp.htm (visited Dec 27, 2011).
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licensing regimes. According to a study based on the 2000 census, the number of licensed occupations in states ranges from 47 to 178, with 17 states licensing over 100 occupations.
9 In California, more than 30 percent of the employed workforce is covered by licensing.10
Considering the enormous influence that state licensing boards collectively wield over the national economy,11 it is not surprising that lower federal courts and the FTC have applied the state action doctrine in ways that they believe will discourage board members from issuing self-interested regulations. Although the circuit courts and the FTC are split several ways on this issue, all approaches subject licensing boards to the clear articulation requirement, and all but one subject them to active supervision as well, at least in some circumstances. Commentators have also advocated for stronger constraints on licensing board regulations, urging courts to subject boards to active supervision.12
This Comment argues that these approaches undermine the benefits of licensing boards, obstruct state regulation, and in some cases exacerbate the threat of self-interested behavior. The approach offered here (1) exempts licensing boards from active supervision, (2) allows them to automatically pass the clear articulation test when they act pursuant to a statutory authorization to make rules within a state, and (3) subjects them to a strict version of the clear articulation test when they implement rules specified by a legislature or state supreme court.
The first two lenient components of this approach are based on three considerations. First, the state action doctrine originates in a
9 Morris M. Kleiner, Licensing Occupations: Ensuring Quality or Restricting Competition? 99–101 (W.E. Upjohn 2006).
10 Id at 102–03.
11 See J.F. Barron, Business and Professional Licensing—California, A Representative Example, 18 Stan L Rev 640, 643–44 (1966).
12 See Jarod M. Bona, The Antitrust Implications of Licensed Occupations Choosing Their Own Exclusive Jurisdiction, 5 U St Thomas J L & Pub Pol 28, 45 (2011) (urging courts to recognize that state licensing boards have “the structural incentive to expand their own monopoly” and that boards seeking to expand their jurisdiction should be subject to both the clear articulation and active supervision requirements); William S. Brewbaker III, Learning to Love the State Action Doctrine, 31 J Health Polit Pol & L 609, 611 (2006) (“[S]tate legislation conferring unsupervised regulatory authority on incumbent market providers should be viewed as facially preempted by federal antitrust law and hence invalid.”), citing Joint FTC/Department of Justice Hearing on Health Care and Competition Law and Policy *38 (2003) (testimony of Clark Havighurst, Professor of Law, Duke University School of Law), online at http:// www.ftc.gov/ogc/healthcarehearings/030611ftctrans.pdf (visited Dec 27, 2011); Jared Ben Bobrow, Note, Antitrust Immunity for State Agencies: A Proposed Standard, 85 Colum L Rev 1484, 1498 (1985) (“[W]here there is a palpable danger that the agency will pursue private rather than public interests, antitrust immunity should be granted only if the agency [ ] establishes that its challenged conduct is actively supervised by the state.”).
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concern for federalism, not efficiency. The doctrine allows a state to displace the federal procompetitive norm in order to achieve a policy objective that the state believes is more important. Second, regulation through professional licensing boards offers states at least two features that commonly cited alternatives lack. Compared to regulation through public employees, licensing board regulation is cheaper for states. Compared to an optional licensing regime (also known as certification), in which unlicensed providers are allowed to operate, mandatory licensing (the type discussed in this Comment) denies consumers the ability to select services the state believes are inferior. Although paternalistic and at times inefficient, licensing represents a state policy choice. The state action doctrine was designed to protect this judgment. Finally, even if the benefits of licensing boards do not exceed their cost to the public in terms of service price, availability, and innovation, licensing remains the dominant means by which states regulate medical, dental, legal, and many other markets for professional services. Real dangers to consumers can arise in these markets. Obstructing the ability of licensing boards to regulate services when no alternative regulatory regime is in place invites harm.
The third component of this approach, subjecting board implementations of state rules to a strict clear articulation test that requires evidence of authorization for the specific type of action taken, seeks to restrain board action when the state legislature or supreme court has indicated some specifics of the regulation that it is seeking. This component acknowledges the potential harm to competition when private parties are vested with public authority. This Comment’s approach aims to facilitate state regulation through licensing boards while minimizing opportunities for board members to issue self-interested anticompetitive rules.
Part I reviews the Supreme Court’s state action decisions. Part II examines how the circuit courts and the FTC apply the doctrine to state licensing boards. Part III explains the theoretical advantages and disadvantages of licensing boards, reviews an analysis of empirical studies on the impact of licensing on service quality and price, and explains why it is understandable for consumers to favor licensing over other forms of regulation, despite the possibility that the aggregate economic costs of licensing may exceed its benefits.
Part IV argues that courts should apply the clear articulation test strictly when a board implements rules specified by the legislature or state supreme court, but that a board should automatically pass the test when it makes a rule pursuant to a
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statutory authorization to regulate generally within a state. For example, if a statute defines the specific actions that constitute the practice of an occupation, a strict application of the clear articulation test should permit a board to take only those types of actions explicitly authorized by the statute. If, however, a statute authorizes a board to adopt all regulations it deems necessary to regulate its profession, any rules made pursuant to that authority should automatically satisfy the clear articulation test.
This Part seeks to use state licensing boards to advance the larger, normative debate over the clear articulation test. Commentators have long criticized the Supreme Court’s clear articulation requirement and offered proposals for reform. For example, the FTC advocates for a stricter application of the test that would require more evidence of legislative intent before granting state action immunity.13 In contrast, one scholar has argued that a lenient application of the test promotes the federalism principle underlying the state action doctrine by facilitating state regulation.14
This Comment acknowledges that the clear articulation test should be applied so as to facilitate state regulation, but it argues that both strict and lenient applications of the test can accomplish this goal. Lenient applications can facilitate regulation by relieving a legislature of the burden of specifying each area in which it wants licensed professionals to issue regulations. Strict applications can facilitate regulation by assuring a legislature that courts will not expand narrow delegations of authority to licensing boards beyond what the legislature intended. In applying the clear articulation test, courts should first determine which obstacle to delegation is greater with respect to the delegated entity. Professional members of state licensing boards have a strong incentive to expand their jurisdiction. Courts can therefore facilitate state regulation through licensing boards by adopting a strict application of the clear articulation test that requires statutory authorization of the specific type of anticompetitive act in question. An entity with less incentive to issue anticompetitive rules, such as a bureaucratic agency, may receive a more lenient application, though these bodies are not considered here.
13 Federal Trade Commission Office of Policy Planning, Report of the State Action Task Force 34–36 (2003), online at http://www.ftc.gov/os/2003/09/stateactionreport.pdf (visited Dec 27, 2011).
14 Hillary Greene, Articulating Trade-Offs: The Political Economy of State Action Immunity, 2006 Utah L Rev 827, 830–32.
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If, however, a legislature has made clear its intent to permit a licensing board more flexibility in issuing rules by granting it general rule-making authority, courts should allow an anticompetitive rule issued pursuant to that authority to automatically satisfy the test, provided that no other statute limits the board’s authority with respect to the challenged conduct. This facilitates state regulation by allowing legislatures to enlist the expertise and experience of practicing professionals in formulating regulation so long as the legislatures make that intention clear.
Part V contends that licensing boards should never be subject to active supervision. Imposing this requirement unnecessarily interferes with board regulation and in some cases may discourage regulation of emerging threats. The argument in this Part is directed against an approach to antitrust immunity that has persisted in the state action literature and recently emerged in an FTC opinion subjecting a state licensing board to active supervision.15 Several prominent scholars have contended that protection from antitrust laws should depend, at least in some circumstances, on whether the individuals who generated the challenged restraint stand to benefit financially from the restraint. Professors Phillip Areeda and Herbert Hovenkamp have recommended that courts classify as private “any organization in which a decisive coalition (usually a majority) is made up of participants in the regulated market.”16 Professor John Wiley has argued that courts should apply substantive antitrust analysis to state regulation that does not respond directly to market inefficiency if the regulation is the “product of capture in the sense that it originated from the decisive political efforts of producers who stand to profit from its competitive restraint.”17
Similarly, Professor Einer Elhauge has asserted that “restraints on competition must be subject to antitrust review whenever the persons controlling the terms of the restraints stand to profit financially from the restraints they impose.”18
15 North Carolina State Board of Dental Examiners, 2011 WL 549449 at *10.
16 Phillip E. Areeda and Herbert Hovenkamp, IA Antitrust Law: An Analysis of Antitrust Principles and Their Application ¶ 227b at 209 (Aspen 3d ed 2006).
17 John Shepard Wiley Jr, A Capture Theory of Antitrust Federalism, 99 Harv L Rev 713, 743 (1986). See also William H. Page, Capture, Clear Articulation, and Legitimacy: A Reply to Professor Wiley, 61 S Cal L Rev 1343, 1345–47, 1350–51 (1988); Matthew L. Spitzer, Antitrust Federalism and Rational Choice Political Economy: A Critique of Capture Theory, 61 S Cal L Rev 1293, 1315–18 (1988); John Shepard Wiley Jr, A Capture Theory of Antitrust Federalism: Reply to Professors Page and Spitzer, 61 S Cal L Rev 1327, 1337–40 (1988).
18 Einer Richard Elhauge, The Scope of Antitrust Process, 104 Harv L Rev 667, 671 (1991).
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In North Carolina State Board of Dental Examiners, the FTC drew on this literature to argue that a board of dentistry should be subject to active supervision because the board’s members, a majority of whom were practicing dentists, stood to benefit financially from the anticompetitive regulations that they issued.19 This Part demonstrates that using financial interest as a central criterion for determining state action immunity contradicts Supreme Court doctrine. To the extent that it supports subjecting state licensing boards to active supervision, it also represents a flawed policy.
The Comment concludes with an application of the proposed approach to the facts of North Carolina State Board of Dental Examiners. For simplicity, the term “state licensing board” refers here to licensing boards composed entirely or primarily of in-state practicing members of the regulated profession. At times, the Comment will refer to these boards as “privately composed licensing boards” to emphasize the distinction from agencies composed of bureaucrats.
I. THE STATE ACTION DOCTRINE IN THE SUPREME COURT
A. Origins
The Sherman Antitrust Act is a federal prohibition against monopolies and every “contract, combination . . . or conspiracy, in restraint of trade.”20 When private parties engage in prohibited anticompetitive behavior, they expose themselves to liability under the Act. Not all anticompetitive conduct, however, is barred by the Sherman Act. In Parker, the Supreme Court held that anticompetitive acts authorized by state legislatures are immune from the Sherman Act’s prohibitions.21 There, plaintiff, a raisin grower, sought to enjoin California officials from enforcing a state raisin marketing program that aimed to fix prices under the auspices of the state’s Agricultural Prorate Act.22 Although the program was anticompetitive, the Court held that the program was immune from Sherman Act challenges because the program “derived its authority . . . from the legislative command of the state.”23
19 North Carolina State Board of Dental Examiners, 2011 WL 549449 at *10.
20 15 USC §§ 1–2.
21 Parker, 317 US at 351–52.
22 Id at 344, 346–48.
23 Id at 350.
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The Court based its holding on an implied exemption from the Sherman Act.24 Because the Act contains no language suggesting that its purpose was to restrain a state from activities directed by its legislature and the Act’s legislative history, the Court declined to extend the Act to the anticompetitive conduct of states.25 The Court reasoned that although Congress has the power to prevent states from displacing the federal procompetitive norm, respect for federalism required that Congress express such a prohibition explicitly.26 The effect of the Court’s decision was to permit a state to sacrifice competition in a market in order to achieve an alternative goal.
B. State Legislatures and State Supreme Courts
Subsequent decisions by the Supreme Court clarified how the doctrine applies to various entities. Only acts of the state as sovereign receive state action immunity.27 State legislatures are considered sovereign.28 State supreme courts are also considered sovereign when they act in a “legislative capacity,” such as by promulgating rules governing the legal profession.29 State legislatures and state supreme courts thus receive automatic state action immunity for any anticompetitive behavior that they authorize. For example, in Parker, the Supreme Court immunized the state of California from federal antitrust liability because the price-fixing scheme was an act of the state legislature.30 In Hoover v Ronwin,31 the Court also immunized the decision of the Arizona Supreme Court to deny an applicant admission to the state bar.32
C. Municipalities
Municipalities receive state action immunity only if their anticompetitive conduct is pursuant to a “clearly articulated and affirmatively expressed” state policy that authorizes them to displace competition.33 The clear articulation requirement, first announced in
24 Id at 350–51 (“[N]othing in the language of the Sherman Act or in its history [ ] suggests that its purpose was to restrain a state.”).
25 Parker, 317 US at 350–51.
26 Id at 351.
27 See Hoover v Ronwin, 466 US 558, 574 (1984) (plurality).
28 See Parker, 317 US at 352.
29 See Hoover, 466 US at 568.
30 Parker, 317 US at 352.
31 466 US 558 (1984).
32 Id at 573 (plurality).
33 See City of Lafayette v Louisiana Power & Light Co, 435 US 389, 410–13 (1978) (plurality).
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City of Lafayette v Louisiana Power & Light Company,
34 ensures that nonsovereign bodies claiming to act for the state as sovereign do in fact act for it.35
In Lafayette, petitioner cities, which owned and operated electrical utilities, moved to dismiss a counterclaim by a competitor private utility, Louisiana Power & Light (LP&L), alleging various antitrust offenses against the cities.36 LP&L alleged that the cities displaced LP&L in certain locales by requiring LP&L customers to purchase electricity from the cities as a condition of continued water and gas service.37 A plurality of the Court refused to grant the cities the same automatic state action immunity accorded to state legislatures because it held that cities are not sovereign.38 Instead, the Court applied what is now known as the clear articulation test.39 Finding that no state statute or other authority permitted the cities to act as they did and that the policy of the state was at best “neutral” toward such activity, the Court denied state action immunity to the cities.40
D. The Standard for Satisfying the Clear Articulation Requirement
The Supreme Court has struggled to define the standard for determining that a state has clearly articulated a policy to displace competition. One early state action case, decided before Lafayette, suggested that the challenged conduct must be compelled by the state in order to receive state action immunity.41 Lafayette muddied the waters by holding that a municipality could receive immunity as long as the challenged activity was “clearly within the legislative intent.”42
Town of Hallie v City of Eau Claire43 and Southern Motor Carriers Rate Conference v United States,44 decided on the same day, helped clarify the standard. The Court rejected the suggestion that the challenged conduct must be compelled by the state in order for
34 435 US 389 (1978).
35 See id at 412–13 (plurality).
36 Id at 391–92 (majority).
37 Id at 392 n 6.
38 Lafayette, 435 US at 411–12 (plurality).
39 Id at 410–13.
40 Id at 414–15.
41 See Goldfarb v Virginia State Bar, 421 US 773, 790 (1975) (“The threshold inquiry . . . is whether the activity is required by the State acting as sovereign.”).
42 Lafayette, 435 US at 393–94 (quotation marks omitted).
43 471 US 34 (1985).
44 471 US 48 (1985).
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the policy to be clearly articulated
45 and instead adopted a foreseeability standard.46 In other words, an entity acts pursuant to a clearly articulated state policy for the purposes of receiving state action immunity as long as its anticompetitive conduct would foreseeably result from the legislature’s authorization to regulate.47
In Hallie, a city had acquired a monopoly over sewage treatment services in an area and refused to extend those services to adjacent townships unless the townships agreed to be annexed by the city and to use the city’s sewage collection services.48 The Court held that statutes authorizing the city to provide sewage services and to determine the areas to be served were sufficient to satisfy the clear articulation test for the city’s conduct because it was “foreseeable” that “anticompetitive effects logically would result from this broad authority to regulate.”49
The Court applied the foreseeability standard again in Southern Motor. There, rate bureaus composed of motor common carriers operating in four states submitted joint rate proposals to the public service commissions in each state for either approval or rejection.50 In three of the states, statutes explicitly permitted collective rate making by common carriers.51 These statutes easily satisfied the clear articulation requirement. The Court then considered whether a statute in the fourth state, which did not explicitly permit collective rate making, could still satisfy the requirement.52 In this state, a statute authorized the public service commission to regulate common carriers and to prescribe “just and reasonable” rates for those carriers to charge for the intrastate transportation of general commodities.53 The Court held that this statute articulated an anticompetitive policy with sufficient clarity to grant state action immunity to the Commission’s decision to permit collective rate making among motor common carriers because the state intended to displace price competition with a regulatory structure.54
Only one Supreme Court case has indicated the limit of the foreseeability standard. In Community Communications Co v City of
45 See Southern Motor, 471 US at 60–61.
46 See Hallie, 471 US at 42.
47 See id.
48 Id at 36–38.
49 Id at 42.
50 Southern Motor, 471 US at 50–51.
51 Id at 63.
52 Id.
53 Southern Motor, 471 US at 63, citing Miss Code § 77-7-221 et seq.
54 See Southern Motor, 471 US at 63–66.
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Boulder,
55 the city issued an emergency ordinance prohibiting the plaintiff—assignee of a permit to conduct a cable television business—from expanding into new areas of the city for three months while the city drafted a model cable television ordinance and invited competitors to enter the market.56 The city contended that a “home rule” amendment to the Colorado Constitution, granting the city broad powers of self-government, satisfied the clear articulation requirement for its ordinance. The Court rejected this argument, holding that a statute that expresses mere “neutrality” with respect to the challenged conduct cannot constitute clear articulation.57
E. Private Parties
Private parties are also eligible to receive state action immunity. If the doctrine did not protect private parties that undertake anticompetitive acts in accordance with state policy, plaintiffs could easily frustrate a state’s regulatory scheme by suing the complying entities.58 For example, if private parties were ineligible for state action immunity, the plaintiff in Parker could have defeated the state’s marketing initiative by suing the raisin growers complying with the state’s marketing program instead of the state itself.
Private parties must satisfy a two-prong test in order to receive state action immunity. Private parties who engage in anticompetitive activity receive state action immunity only if (1) they act pursuant to a clearly articulated state policy, and (2) the state actively supervises their anticompetitive conduct.59 This test was first set forth in California Retail Liquor Dealers Association v Midcal Aluminum.60 In this case, a California statute required all wine producers and wholesalers to file fair trade contracts or price schedules with the state and prohibited wholesalers from selling wine to a retailer for a price other than the one stated in the contract or schedule. When California’s Department of Alcoholic Beverage Control charged Midcal Aluminum, a wholesale wine distributor, with selling below a scheduled price, Midcal filed for an injunction against California’s wine pricing system, alleging a restraint of trade in violation of the Sherman Act.61 In announcing and applying the two-prong test, the
55 455 US 40 (1982).
56 Id at 44–46.
57 Id at 54–55.
58 See Southern Motor, 471 US at 56–57.
59 See id; California Retail Liquor Dealers Association v Midcal Aluminum, 445 US 97, 105 (1980).
60 445 US 97 (1980).
61 See id at 99–100.
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Court held that while the California statute satisfied the clear articulation requirement, it failed to actively supervise the trade contracts and price schedules filed by the producers and wholesalers. The state neither reviewed the reasonableness of the price schedules nor regulated the terms of the fair trade contracts.
62
The active supervision requirement ensures that a private party’s anticompetitive conduct promotes state policy and not merely the private party’s interests.63 To accomplish this purpose, the state must have and exercise the power to review the particular acts of private parties and disapprove of the acts that it does not believe are in accord with state policy.64
The Supreme Court has focused on three differences between private parties and municipalities to explain why the former, and not the latter, are subject to active supervision. First, the Court has emphasized that, unlike private parties, municipalities are subject to public scrutiny.65 Municipal officers “are checked to some degree through the electoral process,” and cities in some states are subject to mandatory disclosure requirements.66 According to the court, “[s]uch a position in the public eye may provide some greater protection against antitrust abuses than exists for private parties.”67 Second, the Court focused on the fact that municipalities, as arms of the state, have authority to act on behalf of the state. Private parties have no such authority.68 Finally, private parties, unlike municipalities, can be presumed to act for their own interests and not for those of the public.69
The Court’s most recent state action case provided some guidance on how actively the state must supervise the anticompetitive conduct of private parties in order for those parties to receive state action immunity. In FTC v Ticor Title Insurance Co,70 statutes in four states authorized private rating bureaus composed of title insurance companies to establish uniform rates for their members.71 The FTC conceded that these statutes satisfied the clear articulation requirement, but argued that the state did not actively
62 Id at 105–06.
63 See Patrick v Burget, 486 US 94, 100–01 (1988) (quotation marks omitted).
64 See id at 101.
65 See Hallie, 471 US at 45 n 9.
66 Id.
67 Id (explaining that public disclosure requirements and electoral constraints raise a presumption that municipalities act in the public interest).
68 Id at 45, 47.
69 Hallie, 471 US at 45, 47.
70 504 US 621 (1992).
71 Id at 629.
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supervise the companies’ anticompetitive activity (joint rate setting).
72 The bureaus recommended their rates to state agencies and the rates became effective automatically if the agencies did not reject them.73 The Court agreed with the FTC and denied state action immunity to the companies in two of the states, holding that the agencies insufficiently supervised the anticompetitive conduct.74 In some cases, states failed to check the recommended rates for mathematical accuracy.75 In one state, a rate came into effect despite the bureau’s failure to provide data demanded by the agency. Without more robust state review, the rate setting constituted private action and was therefore ineligible for state action immunity.76
F. State Agencies
State agencies are not exempt from the antitrust laws simply because of their status as such.77 The Supreme Court has not decided, however, when and how the clear articulation and active supervision requirements apply to state agencies. Although the Court has held the clear articulation requirement applicable in all of its state action cases involving agency action, it has yet to determine if all agency types must satisfy the test. Consequently, there remains a circuit split over whether at least some types of agencies are exempt from the clear articulation requirement.78
The Supreme Court has also not decided whether state agencies are exempt from active supervision. A footnote in Hallie suggested that they are, though the Court declined to decide the issue.79 Nevertheless, the Court’s case law before and after Hallie has never inquired into the supervision of bureaucratic state agencies.80
72 Id at 631.
73 Id at 629.
74 Ticor, 504 US at 639–40.
75 Id at 630.
76 Id at 638.
77 Lafayette, 435 US at 408 (“Plainly petitioners are in error in arguing that Parker held that all governmental entities, whether state agencies or subdivisions of a State, are, simply by reason of their status as such, exempt from the antitrust laws.”).
78 Compare Neo Gen Screening, Inc v New England Newborn Screening Program, 187 F3d 24, 28–29 (1st Cir 1999), with Automated Salvage Transport, Inc v Wheelabrator Environmental Systems, Inc, 155 F3d 59, 71 (2d Cir 1998); Hybud Equipment Corporation v City of Akron, 742 F2d 949, 957 (6th Cir 1984).
79 Hallie, 471 US at 46 n 10.
80 See, for example, New Motor Vehicle Board of California v Orrin W Fox Co, 439 US 96, 111 (1978); Southern Motor, 471 US at 50–52; Ticor, 504 US at 621.
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The Supreme Court’s application of the active supervision requirement to privately composed agencies, such as state licensing boards and state bars, is more muddled. One reading of the Court’s early state action cases suggests that licensing boards are subject to active supervision. In Goldfarb v Virginia State Bar,81 the Supreme Court denied state action immunity to minimum-fee schedules promulgated by local bars and enforced by the Virginia State Bar.82 In explaining that no state statutes or state supreme court rules authorized minimum-fee schedules, the Court wrote that “anticompetitive activities must be compelled by direction of the State acting as a sovereign.”83 By contrast, in Bates v State Bar of Arizona,84 the Supreme Court upheld restrictions on lawyer advertising because the Arizona Supreme Court itself had prescribed the restrictions and oversaw their enforcement by the state bar.85 In upholding the restrictions, the Supreme Court held that it deemed “it significant that the state policy is so clearly and affirmatively expressed and that the State’s supervision is so active.”86
The significance of these cases is difficult to discern, however, because they were decided before the Court announced the active supervision test in Midcal.87 Part V suggests an interpretation.
II. CIRCUIT COURT AND FTC APPROACHES TO THE STATE ACTION DOCTRINE AND STATE LICENSING BOARDS
A. The Clear Articulation Requirement
Circuit courts and the FTC always apply the clear articulation requirement to rules issued by state licensing boards. There is some disagreement, however, on how strictly courts should apply the Supreme Court’s foreseeability standard for determining legislative intent.88
Circuit courts apply the standard more leniently than the FTC. For example, in Earles v State Board of Certified Public Accountants
81 421 US 773 (1975).
82 Id at 788–92.
83 Id at 791 (emphasis added).
84 433 US 350 (1977).
85 Id at 359–63.
86 Id at 362 (emphasis added).
87 Midcal, 445 US at 105.
88 This disagreement extends to how the standard applies to bodies other than state licensing boards. For a discussion of circuit court and commentator approaches to the question, see C. Douglas Floyd, Plain Ambiguities in the Clear Articulation Requirement for State Action Antitrust Immunity: The Case of State Agencies, 41 BC L Rev 1059, 1061–65 (2000).
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of Louisiana,
89 the Louisiana legislature delegated to the Board of Public Accountants the power to “[a]dopt and enforce all rules and regulations, bylaws, and rules of professional conduct as the board may deem necessary and proper to regulate the practice of public accounting in the state of Louisiana.”90 The Fifth Circuit held that this delegation of general rule-making authority satisfied the clear articulation test for a Board rule that prohibited the practice of so-called “incompatible professions.”91
The FTC criticized this decision for its application of a lenient foreseeability standard, arguing that courts should not interpret the “presence of a general regulatory regime in an industry” as synonymous with a clear articulation of an intent to displace all competition in the industry.92
In re South Carolina State Board of Dentistry93 illustrates the FTC’s preferred approach. In this case, the South Carolina legislature, seeking to increase children’s access to preventive dental care, amended its state dental law to permit dental hygienists to provide such care to children in schools without those children having to be examined by a dentist within forty-five days prior to the hygienists’ treatment, as the law previously required. In its place, the legislature included a “general supervision” provision requiring that a dentist merely authorize the treatment before a hygienist examines a child.94 In response, the South Carolina Board of Dentistry issued an emergency regulation reinstating the forty-five-day rule.95
In applying the clear articulation test to the amended state statute, the FTC adopted a comparatively strict foreseeability standard that asked whether the challenged restraint would “ordinarily or routinely” result from the authorizing legislation.96 The FTC found that the forty-five-day requirement would not ordinarily result from the general supervision provision and denied the Board state action immunity.97 Admittedly, by having removed the requirement, the legislature’s intent not to have it reinstated was
89 139 F3d 1033 (5th Cir 1998).
90 Id at 1042, citing La Rev Stat Ann § 37:75(B)(2).
91 Earles, 139 F3d at 1042–44.
92 Federal Trade Commission Office of Policy Planning, Report of the State Action Task Force at *34–35 (cited in note 13).
93 138 FTC 229 (2004).
94 Id at 252–54.
95 Id at 231.
96 Id at 251–53 (quotation marks omitted).
97 In re South Carolina State Board of Dentistry, 138 FTC at 252–53.
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already clear. But this case is significant for illustrating the FTC’s approach to the foreseeability standard.
B. The Active Supervision Requirement
The principal division is over the application of the active supervision requirement. Before the Supreme Court’s 1985 ruling in Hallie, which exempted municipalities from active supervision, courts did not even consider subjecting licensing boards to active supervision. Instead, courts looked to whether the licensing board supervised the state’s anticompetitive policy, though courts struggled with how to define supervision.98 After Hallie, this approach was abandoned. In explaining why municipalities were exempt from supervision, the Hallie Court wrote that it could “presume, absent a showing to the contrary, that [a] municipality acts in the public interest. A private party, on the other hand, may be presumed to be acting primarily on his or its own behalf.”99
Circuit court and FTC decisions have interpreted this language to mean that because members of licensing boards have a financial interest in the regulations they promulgate and enforce, they should be treated, at least in some circumstances, like private parties. Accordingly, when state licensing boards invoke the state action defense, courts and the FTC now consider whether licensing boards are sufficiently similar to collections of private individuals to require active state supervision, though the courts and the FTC are split three ways over when the supervision requirement applies.
1. Majority approach.
The majority approach, adopted by the Ninth and First Circuits, subjects state licensing boards to supervision depending on the characteristics of the board in question. Courts look to whether there is a danger that the agency authorizing anticompetitive activity is pursuing interests other than those of the state. To decide this question, courts examine various characteristics of the agency to determine whether it is more like a private party or more like a state entity.
98 See, for example, Gambrel v Kentucky Board of Dentistry, 689 F2d 612, 618 (6th Cir 1982) (granting state action immunity to a board’s refusal to give denture work orders directly to patients); Benson v Arizona State Board of Dental Examiners, 673 F2d 272, 275 (9th Cir 1982) (granting state action immunity to a board’s refusal to allow dentists licensed in other states, but not licensed in Arizona, to practice dentistry outside a restricted permit scheme).
99 Hallie, 471 US at 45.
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In Hass v Oregon State Bar,100 for example, plaintiff sued the state bar for requiring that all state attorneys purchase malpractice insurance from the bar.101 The Ninth Circuit ruled that the state bar was exempt from supervision because it was an agency of the state organized to regulate the legal profession, produced records and held meetings open to the public, and was composed of members required to conform to the state’s code of ethics.102 The Ninth Circuit was careful to note that its holding was “based on the characteristics of the Oregon State Bar” and that it did “not hold that all state bars are protected under the state action exemption to the federal antitrust laws.”103 This case-by-case, characteristic-based approach to active supervision may be viewed as the majority approach.104
2. Minority approach.
The second approach, adopted only by the Fifth Circuit, automatically exempts boards from the active supervision requirement. In Earles, public accountants brought antitrust claims against the Board of Certified Public Accountants and others after the accountants, who also earned money by selling securities, were sanctioned under Board rules that prohibited the practice of “incompatible occupations.”105
In justifying its decision to exempt the Board from supervision, the Fifth Circuit illustrated the influence of Hallie’s concern for self-interested behavior. “Despite the fact that the Board is composed entirely of CPAs who compete in the profession they regulate, the public nature of the Board’s actions means that there is little danger of a cozy arrangement to restrict competition.”106
Admittedly, the difference between the majority and minority approaches is not distinctly cut. The majority approach moves through a checklist of specific features commonly associated with public bodies, while the minority approach grants boards a de facto
100 883 F2d 1453 (9th Cir 1989).
101 Id at 1455.
102 Id at 1460.
103 Id at 1461 n 4.
104 See FTC v Monahan, 832 F2d 688, 690 (1st Cir 1987) (“Whether any ‘anticompetitive’ Board activities are ‘essentially’ those of private parties depends upon how the Board functions in practice, and perhaps upon the role played by its members who are private pharmacists.”). See also Washington State Electrical Contractors Association, Inc v Forrest, 930 F2d 736, 737 (9th Cir 1991) (suggesting that the Washington Apprenticeship Council might be subject to active supervision because its private members have their own agenda which may not be in line with state policy).
105 Earles, 139 F3d at 1041.
106 Id.
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automatic exemption from active supervision because of the unspecified “public nature” of board action. It is difficult to further distinguish these approaches because no circuit court post-Hallie has ever subjected a licensing board or state bar to active supervision. Nevertheless, the Fifth Circuit’s approach is unique in granting licensing boards an automatic exemption from active supervision.
3. FTC approach.
The third approach represents almost a mirror image of Earles. The FTC holds that when the interests of the members of state licensing boards are insufficiently independent from the interests of the parties that the board regulates, the board’s actions are subject to active supervision.107 Because a majority of licensing board members are virtually always members of the regulated profession, in practice, the FTC will always require that the state actively supervise licensing boards before according state action immunity to the anticompetitive rules that boards promulgate.
In North Carolina State Board of Dental Examiners, for example, the Board sent letters to nondentists ordering them to stop providing teeth-whitening services because this constituted the unauthorized practice of dentistry.108 The FTC subjected the Board to the active supervision requirement, construing the Supreme Court’s state action jurisprudence to hold that whether an entity must be actively supervised depends on the “degree of confidence that the entity’s decision-making process is sufficiently independent from the interests of those being regulated.”109 Finding that no state body actively supervised the Board, the FTC denied state action immunity.110
Although in some respects this could be viewed as a variant of the majority circuit approach in that the application of the active supervision requirement depends on specific characteristics of the agency, it is much different. Where Hass looked to a variety of factors, the FTC looked to only one: the composition of the agency.
107 North Carolina State Board of Dental Examiners, 2011 WL 549449 at *7–9.
108 Id at *4–5.
109 Id at *9.
110 Id at *14–17.
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III. THE PROMISE AND PERIL OF PROFESSIONAL LICENSING BOARDS
The economic rationale for professional licensing boards is grounded in the threat to public safety that arises when there are no effective remedies for injuries that consumers cannot easily avoid.111 No legal remedy can restore a life taken by the hand of an unskilled surgeon. Professional licensing is designed to ensure that consumers make choices only among sellers who possess some minimum level of competence.112
Once a state decides to subject a profession to licensing, it is logical to entrust the power to license and regulate the profession to members of that profession.113 State legislators are no more capable of assessing the qualifications of professionals than are ordinary consumers.114 Current members of the profession have the expertise to determine qualifications and assess competence.115 In addition, practicing professionals are likely to spot emerging threats to public welfare in their respective fields faster than state legislators or bureaucrats.
COMMENT
The Antitrust State Action Doctrine and State Licensing Boards
Ingram Weber
INTRODUCTION
Imagine that a state board of dentistry claims that consumers could be harmed when a popular procedure such as teeth whitening is performed incorrectly. The board issues a rule prohibiting anyone other than a state-licensed dentist from offering teeth-whitening services in the state. This rule ensures that only those with the most training and experience treating teeth in the state—dentists—may perform the service.
But whatever increased safety is generated by this rule comes at two costs. First, dental hygienists, nondentist doctors, and other groups can no longer earn money from teeth whitening. Second, because the rule shrinks the number of suppliers, consumers may have to pay more for the service.
When such a rule is promulgated by a state legislature and enforced by bureaucrats, consumers and nondentist competitors often accept the state’s judgment that the benefits to public safety justify the anticompetitive effects. But because the hypothetical board of dentistry is composed of practicing dentists, there is a greater fear that the professed threat to public safety is an excuse to allow dentists to enrich themselves by monopolizing the market for teeth whitening.
To continue this hypothetical, based on In the Matter of the North Carolina State Board of Dental Examiners,1 imagine further that the Federal Trade Commission (FTC) and aggrieved competitors seek to defeat the board’s rule by alleging that it represents a conspiracy in restraint of trade in violation of the
† BA 2005, Wesleyan University; MSc 2006, London School of Economics; JD Candidate 2012, University of Chicago Law School.
1 FTC, Opinion of the Commission, Docket Number 9343, 2011 WL 549449.
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Sherman Antitrust Act.
2 In response, the board claims that its actions are immune from antitrust liability under what is known as the state action doctrine. This doctrine, announced in Parker v Brown,3 immunizes anticompetitive acts authorized by the states from federal antitrust liability.4
The Supreme Court has yet to determine how the state action doctrine applies to state licensing boards, but it has settled the doctrine’s application to other bodies. State legislatures and state supreme courts receive automatic state action immunity for the anticompetitive actions they authorize.5 Municipalities receive state action immunity only if the anticompetitive conduct they authorize is pursuant to a clearly articulated state policy to displace competition.6 Private parties receive state action immunity only if their anticompetitive actions are pursuant to a clearly articulated state policy and are actively supervised by the state.7
The combination of public function and private composition in state licensing boards frustrates any easy application of the state action doctrine to their commands. Licensing boards are established by states in the form of state bars and boards of medicine, dentistry, accounting, and other professions. States authorize these agencies to regulate their respective professions by determining qualifications for licensure, implementing rules related to scope of practice, and issuing other regulations. Licensing boards are typically composed entirely or primarily of licensed professionals who continue to practice while serving on the board.8 As units of government, boards are analogous to both state legislatures and municipalities. This suggests that their actions should either receive automatic state action immunity or be subject only to the clear articulation requirement. On the other hand, their private composition suggests that they should be treated like private parties and be subject to active supervision in addition to the clear articulation requirement.
Resolving the application of the state action doctrine to state licensing boards is especially important given the ubiquity of
2 26 Stat 209, codified at 15 USC § 1 et seq.
3 317 US 341 (1943).
4 See id at 352.
5 See id; Hoover v Ronwin, 466 US 558, 568 (1984) (plurality).
6 See City of Lafayette v Louisiana Power & Light Co, 435 US 389, 413 (1978) (plurality).
7 See Southern Motor Carriers Rate Conference v United States, 471 US 48, 56–57 (1985).
8 See, for example, New York Office of the Professions, State Board for the Professions: Statutory Composition and Current Membership (New York State Education Department Nov 4, 2011), online at http://www.op.nysed.gov/boards/bdcomp.htm (visited Dec 27, 2011).
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licensing regimes. According to a study based on the 2000 census, the number of licensed occupations in states ranges from 47 to 178, with 17 states licensing over 100 occupations.
9 In California, more than 30 percent of the employed workforce is covered by licensing.10
Considering the enormous influence that state licensing boards collectively wield over the national economy,11 it is not surprising that lower federal courts and the FTC have applied the state action doctrine in ways that they believe will discourage board members from issuing self-interested regulations. Although the circuit courts and the FTC are split several ways on this issue, all approaches subject licensing boards to the clear articulation requirement, and all but one subject them to active supervision as well, at least in some circumstances. Commentators have also advocated for stronger constraints on licensing board regulations, urging courts to subject boards to active supervision.12
This Comment argues that these approaches undermine the benefits of licensing boards, obstruct state regulation, and in some cases exacerbate the threat of self-interested behavior. The approach offered here (1) exempts licensing boards from active supervision, (2) allows them to automatically pass the clear articulation test when they act pursuant to a statutory authorization to make rules within a state, and (3) subjects them to a strict version of the clear articulation test when they implement rules specified by a legislature or state supreme court.
The first two lenient components of this approach are based on three considerations. First, the state action doctrine originates in a
9 Morris M. Kleiner, Licensing Occupations: Ensuring Quality or Restricting Competition? 99–101 (W.E. Upjohn 2006).
10 Id at 102–03.
11 See J.F. Barron, Business and Professional Licensing—California, A Representative Example, 18 Stan L Rev 640, 643–44 (1966).
12 See Jarod M. Bona, The Antitrust Implications of Licensed Occupations Choosing Their Own Exclusive Jurisdiction, 5 U St Thomas J L & Pub Pol 28, 45 (2011) (urging courts to recognize that state licensing boards have “the structural incentive to expand their own monopoly” and that boards seeking to expand their jurisdiction should be subject to both the clear articulation and active supervision requirements); William S. Brewbaker III, Learning to Love the State Action Doctrine, 31 J Health Polit Pol & L 609, 611 (2006) (“[S]tate legislation conferring unsupervised regulatory authority on incumbent market providers should be viewed as facially preempted by federal antitrust law and hence invalid.”), citing Joint FTC/Department of Justice Hearing on Health Care and Competition Law and Policy *38 (2003) (testimony of Clark Havighurst, Professor of Law, Duke University School of Law), online at http:// www.ftc.gov/ogc/healthcarehearings/030611ftctrans.pdf (visited Dec 27, 2011); Jared Ben Bobrow, Note, Antitrust Immunity for State Agencies: A Proposed Standard, 85 Colum L Rev 1484, 1498 (1985) (“[W]here there is a palpable danger that the agency will pursue private rather than public interests, antitrust immunity should be granted only if the agency [ ] establishes that its challenged conduct is actively supervised by the state.”).
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concern for federalism, not efficiency. The doctrine allows a state to displace the federal procompetitive norm in order to achieve a policy objective that the state believes is more important. Second, regulation through professional licensing boards offers states at least two features that commonly cited alternatives lack. Compared to regulation through public employees, licensing board regulation is cheaper for states. Compared to an optional licensing regime (also known as certification), in which unlicensed providers are allowed to operate, mandatory licensing (the type discussed in this Comment) denies consumers the ability to select services the state believes are inferior. Although paternalistic and at times inefficient, licensing represents a state policy choice. The state action doctrine was designed to protect this judgment. Finally, even if the benefits of licensing boards do not exceed their cost to the public in terms of service price, availability, and innovation, licensing remains the dominant means by which states regulate medical, dental, legal, and many other markets for professional services. Real dangers to consumers can arise in these markets. Obstructing the ability of licensing boards to regulate services when no alternative regulatory regime is in place invites harm.
The third component of this approach, subjecting board implementations of state rules to a strict clear articulation test that requires evidence of authorization for the specific type of action taken, seeks to restrain board action when the state legislature or supreme court has indicated some specifics of the regulation that it is seeking. This component acknowledges the potential harm to competition when private parties are vested with public authority. This Comment’s approach aims to facilitate state regulation through licensing boards while minimizing opportunities for board members to issue self-interested anticompetitive rules.
Part I reviews the Supreme Court’s state action decisions. Part II examines how the circuit courts and the FTC apply the doctrine to state licensing boards. Part III explains the theoretical advantages and disadvantages of licensing boards, reviews an analysis of empirical studies on the impact of licensing on service quality and price, and explains why it is understandable for consumers to favor licensing over other forms of regulation, despite the possibility that the aggregate economic costs of licensing may exceed its benefits.
Part IV argues that courts should apply the clear articulation test strictly when a board implements rules specified by the legislature or state supreme court, but that a board should automatically pass the test when it makes a rule pursuant to a
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statutory authorization to regulate generally within a state. For example, if a statute defines the specific actions that constitute the practice of an occupation, a strict application of the clear articulation test should permit a board to take only those types of actions explicitly authorized by the statute. If, however, a statute authorizes a board to adopt all regulations it deems necessary to regulate its profession, any rules made pursuant to that authority should automatically satisfy the clear articulation test.
This Part seeks to use state licensing boards to advance the larger, normative debate over the clear articulation test. Commentators have long criticized the Supreme Court’s clear articulation requirement and offered proposals for reform. For example, the FTC advocates for a stricter application of the test that would require more evidence of legislative intent before granting state action immunity.13 In contrast, one scholar has argued that a lenient application of the test promotes the federalism principle underlying the state action doctrine by facilitating state regulation.14
This Comment acknowledges that the clear articulation test should be applied so as to facilitate state regulation, but it argues that both strict and lenient applications of the test can accomplish this goal. Lenient applications can facilitate regulation by relieving a legislature of the burden of specifying each area in which it wants licensed professionals to issue regulations. Strict applications can facilitate regulation by assuring a legislature that courts will not expand narrow delegations of authority to licensing boards beyond what the legislature intended. In applying the clear articulation test, courts should first determine which obstacle to delegation is greater with respect to the delegated entity. Professional members of state licensing boards have a strong incentive to expand their jurisdiction. Courts can therefore facilitate state regulation through licensing boards by adopting a strict application of the clear articulation test that requires statutory authorization of the specific type of anticompetitive act in question. An entity with less incentive to issue anticompetitive rules, such as a bureaucratic agency, may receive a more lenient application, though these bodies are not considered here.
13 Federal Trade Commission Office of Policy Planning, Report of the State Action Task Force 34–36 (2003), online at http://www.ftc.gov/os/2003/09/stateactionreport.pdf (visited Dec 27, 2011).
14 Hillary Greene, Articulating Trade-Offs: The Political Economy of State Action Immunity, 2006 Utah L Rev 827, 830–32.
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If, however, a legislature has made clear its intent to permit a licensing board more flexibility in issuing rules by granting it general rule-making authority, courts should allow an anticompetitive rule issued pursuant to that authority to automatically satisfy the test, provided that no other statute limits the board’s authority with respect to the challenged conduct. This facilitates state regulation by allowing legislatures to enlist the expertise and experience of practicing professionals in formulating regulation so long as the legislatures make that intention clear.
Part V contends that licensing boards should never be subject to active supervision. Imposing this requirement unnecessarily interferes with board regulation and in some cases may discourage regulation of emerging threats. The argument in this Part is directed against an approach to antitrust immunity that has persisted in the state action literature and recently emerged in an FTC opinion subjecting a state licensing board to active supervision.15 Several prominent scholars have contended that protection from antitrust laws should depend, at least in some circumstances, on whether the individuals who generated the challenged restraint stand to benefit financially from the restraint. Professors Phillip Areeda and Herbert Hovenkamp have recommended that courts classify as private “any organization in which a decisive coalition (usually a majority) is made up of participants in the regulated market.”16 Professor John Wiley has argued that courts should apply substantive antitrust analysis to state regulation that does not respond directly to market inefficiency if the regulation is the “product of capture in the sense that it originated from the decisive political efforts of producers who stand to profit from its competitive restraint.”17
Similarly, Professor Einer Elhauge has asserted that “restraints on competition must be subject to antitrust review whenever the persons controlling the terms of the restraints stand to profit financially from the restraints they impose.”18
15 North Carolina State Board of Dental Examiners, 2011 WL 549449 at *10.
16 Phillip E. Areeda and Herbert Hovenkamp, IA Antitrust Law: An Analysis of Antitrust Principles and Their Application ¶ 227b at 209 (Aspen 3d ed 2006).
17 John Shepard Wiley Jr, A Capture Theory of Antitrust Federalism, 99 Harv L Rev 713, 743 (1986). See also William H. Page, Capture, Clear Articulation, and Legitimacy: A Reply to Professor Wiley, 61 S Cal L Rev 1343, 1345–47, 1350–51 (1988); Matthew L. Spitzer, Antitrust Federalism and Rational Choice Political Economy: A Critique of Capture Theory, 61 S Cal L Rev 1293, 1315–18 (1988); John Shepard Wiley Jr, A Capture Theory of Antitrust Federalism: Reply to Professors Page and Spitzer, 61 S Cal L Rev 1327, 1337–40 (1988).
18 Einer Richard Elhauge, The Scope of Antitrust Process, 104 Harv L Rev 667, 671 (1991).
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In North Carolina State Board of Dental Examiners, the FTC drew on this literature to argue that a board of dentistry should be subject to active supervision because the board’s members, a majority of whom were practicing dentists, stood to benefit financially from the anticompetitive regulations that they issued.19 This Part demonstrates that using financial interest as a central criterion for determining state action immunity contradicts Supreme Court doctrine. To the extent that it supports subjecting state licensing boards to active supervision, it also represents a flawed policy.
The Comment concludes with an application of the proposed approach to the facts of North Carolina State Board of Dental Examiners. For simplicity, the term “state licensing board” refers here to licensing boards composed entirely or primarily of in-state practicing members of the regulated profession. At times, the Comment will refer to these boards as “privately composed licensing boards” to emphasize the distinction from agencies composed of bureaucrats.
I. THE STATE ACTION DOCTRINE IN THE SUPREME COURT
A. Origins
The Sherman Antitrust Act is a federal prohibition against monopolies and every “contract, combination . . . or conspiracy, in restraint of trade.”20 When private parties engage in prohibited anticompetitive behavior, they expose themselves to liability under the Act. Not all anticompetitive conduct, however, is barred by the Sherman Act. In Parker, the Supreme Court held that anticompetitive acts authorized by state legislatures are immune from the Sherman Act’s prohibitions.21 There, plaintiff, a raisin grower, sought to enjoin California officials from enforcing a state raisin marketing program that aimed to fix prices under the auspices of the state’s Agricultural Prorate Act.22 Although the program was anticompetitive, the Court held that the program was immune from Sherman Act challenges because the program “derived its authority . . . from the legislative command of the state.”23
19 North Carolina State Board of Dental Examiners, 2011 WL 549449 at *10.
20 15 USC §§ 1–2.
21 Parker, 317 US at 351–52.
22 Id at 344, 346–48.
23 Id at 350.
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The Court based its holding on an implied exemption from the Sherman Act.24 Because the Act contains no language suggesting that its purpose was to restrain a state from activities directed by its legislature and the Act’s legislative history, the Court declined to extend the Act to the anticompetitive conduct of states.25 The Court reasoned that although Congress has the power to prevent states from displacing the federal procompetitive norm, respect for federalism required that Congress express such a prohibition explicitly.26 The effect of the Court’s decision was to permit a state to sacrifice competition in a market in order to achieve an alternative goal.
B. State Legislatures and State Supreme Courts
Subsequent decisions by the Supreme Court clarified how the doctrine applies to various entities. Only acts of the state as sovereign receive state action immunity.27 State legislatures are considered sovereign.28 State supreme courts are also considered sovereign when they act in a “legislative capacity,” such as by promulgating rules governing the legal profession.29 State legislatures and state supreme courts thus receive automatic state action immunity for any anticompetitive behavior that they authorize. For example, in Parker, the Supreme Court immunized the state of California from federal antitrust liability because the price-fixing scheme was an act of the state legislature.30 In Hoover v Ronwin,31 the Court also immunized the decision of the Arizona Supreme Court to deny an applicant admission to the state bar.32
C. Municipalities
Municipalities receive state action immunity only if their anticompetitive conduct is pursuant to a “clearly articulated and affirmatively expressed” state policy that authorizes them to displace competition.33 The clear articulation requirement, first announced in
24 Id at 350–51 (“[N]othing in the language of the Sherman Act or in its history [ ] suggests that its purpose was to restrain a state.”).
25 Parker, 317 US at 350–51.
26 Id at 351.
27 See Hoover v Ronwin, 466 US 558, 574 (1984) (plurality).
28 See Parker, 317 US at 352.
29 See Hoover, 466 US at 568.
30 Parker, 317 US at 352.
31 466 US 558 (1984).
32 Id at 573 (plurality).
33 See City of Lafayette v Louisiana Power & Light Co, 435 US 389, 410–13 (1978) (plurality).
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City of Lafayette v Louisiana Power & Light Company,
34 ensures that nonsovereign bodies claiming to act for the state as sovereign do in fact act for it.35
In Lafayette, petitioner cities, which owned and operated electrical utilities, moved to dismiss a counterclaim by a competitor private utility, Louisiana Power & Light (LP&L), alleging various antitrust offenses against the cities.36 LP&L alleged that the cities displaced LP&L in certain locales by requiring LP&L customers to purchase electricity from the cities as a condition of continued water and gas service.37 A plurality of the Court refused to grant the cities the same automatic state action immunity accorded to state legislatures because it held that cities are not sovereign.38 Instead, the Court applied what is now known as the clear articulation test.39 Finding that no state statute or other authority permitted the cities to act as they did and that the policy of the state was at best “neutral” toward such activity, the Court denied state action immunity to the cities.40
D. The Standard for Satisfying the Clear Articulation Requirement
The Supreme Court has struggled to define the standard for determining that a state has clearly articulated a policy to displace competition. One early state action case, decided before Lafayette, suggested that the challenged conduct must be compelled by the state in order to receive state action immunity.41 Lafayette muddied the waters by holding that a municipality could receive immunity as long as the challenged activity was “clearly within the legislative intent.”42
Town of Hallie v City of Eau Claire43 and Southern Motor Carriers Rate Conference v United States,44 decided on the same day, helped clarify the standard. The Court rejected the suggestion that the challenged conduct must be compelled by the state in order for
34 435 US 389 (1978).
35 See id at 412–13 (plurality).
36 Id at 391–92 (majority).
37 Id at 392 n 6.
38 Lafayette, 435 US at 411–12 (plurality).
39 Id at 410–13.
40 Id at 414–15.
41 See Goldfarb v Virginia State Bar, 421 US 773, 790 (1975) (“The threshold inquiry . . . is whether the activity is required by the State acting as sovereign.”).
42 Lafayette, 435 US at 393–94 (quotation marks omitted).
43 471 US 34 (1985).
44 471 US 48 (1985).
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the policy to be clearly articulated
45 and instead adopted a foreseeability standard.46 In other words, an entity acts pursuant to a clearly articulated state policy for the purposes of receiving state action immunity as long as its anticompetitive conduct would foreseeably result from the legislature’s authorization to regulate.47
In Hallie, a city had acquired a monopoly over sewage treatment services in an area and refused to extend those services to adjacent townships unless the townships agreed to be annexed by the city and to use the city’s sewage collection services.48 The Court held that statutes authorizing the city to provide sewage services and to determine the areas to be served were sufficient to satisfy the clear articulation test for the city’s conduct because it was “foreseeable” that “anticompetitive effects logically would result from this broad authority to regulate.”49
The Court applied the foreseeability standard again in Southern Motor. There, rate bureaus composed of motor common carriers operating in four states submitted joint rate proposals to the public service commissions in each state for either approval or rejection.50 In three of the states, statutes explicitly permitted collective rate making by common carriers.51 These statutes easily satisfied the clear articulation requirement. The Court then considered whether a statute in the fourth state, which did not explicitly permit collective rate making, could still satisfy the requirement.52 In this state, a statute authorized the public service commission to regulate common carriers and to prescribe “just and reasonable” rates for those carriers to charge for the intrastate transportation of general commodities.53 The Court held that this statute articulated an anticompetitive policy with sufficient clarity to grant state action immunity to the Commission’s decision to permit collective rate making among motor common carriers because the state intended to displace price competition with a regulatory structure.54
Only one Supreme Court case has indicated the limit of the foreseeability standard. In Community Communications Co v City of
45 See Southern Motor, 471 US at 60–61.
46 See Hallie, 471 US at 42.
47 See id.
48 Id at 36–38.
49 Id at 42.
50 Southern Motor, 471 US at 50–51.
51 Id at 63.
52 Id.
53 Southern Motor, 471 US at 63, citing Miss Code § 77-7-221 et seq.
54 See Southern Motor, 471 US at 63–66.
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Boulder,
55 the city issued an emergency ordinance prohibiting the plaintiff—assignee of a permit to conduct a cable television business—from expanding into new areas of the city for three months while the city drafted a model cable television ordinance and invited competitors to enter the market.56 The city contended that a “home rule” amendment to the Colorado Constitution, granting the city broad powers of self-government, satisfied the clear articulation requirement for its ordinance. The Court rejected this argument, holding that a statute that expresses mere “neutrality” with respect to the challenged conduct cannot constitute clear articulation.57
E. Private Parties
Private parties are also eligible to receive state action immunity. If the doctrine did not protect private parties that undertake anticompetitive acts in accordance with state policy, plaintiffs could easily frustrate a state’s regulatory scheme by suing the complying entities.58 For example, if private parties were ineligible for state action immunity, the plaintiff in Parker could have defeated the state’s marketing initiative by suing the raisin growers complying with the state’s marketing program instead of the state itself.
Private parties must satisfy a two-prong test in order to receive state action immunity. Private parties who engage in anticompetitive activity receive state action immunity only if (1) they act pursuant to a clearly articulated state policy, and (2) the state actively supervises their anticompetitive conduct.59 This test was first set forth in California Retail Liquor Dealers Association v Midcal Aluminum.60 In this case, a California statute required all wine producers and wholesalers to file fair trade contracts or price schedules with the state and prohibited wholesalers from selling wine to a retailer for a price other than the one stated in the contract or schedule. When California’s Department of Alcoholic Beverage Control charged Midcal Aluminum, a wholesale wine distributor, with selling below a scheduled price, Midcal filed for an injunction against California’s wine pricing system, alleging a restraint of trade in violation of the Sherman Act.61 In announcing and applying the two-prong test, the
55 455 US 40 (1982).
56 Id at 44–46.
57 Id at 54–55.
58 See Southern Motor, 471 US at 56–57.
59 See id; California Retail Liquor Dealers Association v Midcal Aluminum, 445 US 97, 105 (1980).
60 445 US 97 (1980).
61 See id at 99–100.
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Court held that while the California statute satisfied the clear articulation requirement, it failed to actively supervise the trade contracts and price schedules filed by the producers and wholesalers. The state neither reviewed the reasonableness of the price schedules nor regulated the terms of the fair trade contracts.
62
The active supervision requirement ensures that a private party’s anticompetitive conduct promotes state policy and not merely the private party’s interests.63 To accomplish this purpose, the state must have and exercise the power to review the particular acts of private parties and disapprove of the acts that it does not believe are in accord with state policy.64
The Supreme Court has focused on three differences between private parties and municipalities to explain why the former, and not the latter, are subject to active supervision. First, the Court has emphasized that, unlike private parties, municipalities are subject to public scrutiny.65 Municipal officers “are checked to some degree through the electoral process,” and cities in some states are subject to mandatory disclosure requirements.66 According to the court, “[s]uch a position in the public eye may provide some greater protection against antitrust abuses than exists for private parties.”67 Second, the Court focused on the fact that municipalities, as arms of the state, have authority to act on behalf of the state. Private parties have no such authority.68 Finally, private parties, unlike municipalities, can be presumed to act for their own interests and not for those of the public.69
The Court’s most recent state action case provided some guidance on how actively the state must supervise the anticompetitive conduct of private parties in order for those parties to receive state action immunity. In FTC v Ticor Title Insurance Co,70 statutes in four states authorized private rating bureaus composed of title insurance companies to establish uniform rates for their members.71 The FTC conceded that these statutes satisfied the clear articulation requirement, but argued that the state did not actively
62 Id at 105–06.
63 See Patrick v Burget, 486 US 94, 100–01 (1988) (quotation marks omitted).
64 See id at 101.
65 See Hallie, 471 US at 45 n 9.
66 Id.
67 Id (explaining that public disclosure requirements and electoral constraints raise a presumption that municipalities act in the public interest).
68 Id at 45, 47.
69 Hallie, 471 US at 45, 47.
70 504 US 621 (1992).
71 Id at 629.
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supervise the companies’ anticompetitive activity (joint rate setting).
72 The bureaus recommended their rates to state agencies and the rates became effective automatically if the agencies did not reject them.73 The Court agreed with the FTC and denied state action immunity to the companies in two of the states, holding that the agencies insufficiently supervised the anticompetitive conduct.74 In some cases, states failed to check the recommended rates for mathematical accuracy.75 In one state, a rate came into effect despite the bureau’s failure to provide data demanded by the agency. Without more robust state review, the rate setting constituted private action and was therefore ineligible for state action immunity.76
F. State Agencies
State agencies are not exempt from the antitrust laws simply because of their status as such.77 The Supreme Court has not decided, however, when and how the clear articulation and active supervision requirements apply to state agencies. Although the Court has held the clear articulation requirement applicable in all of its state action cases involving agency action, it has yet to determine if all agency types must satisfy the test. Consequently, there remains a circuit split over whether at least some types of agencies are exempt from the clear articulation requirement.78
The Supreme Court has also not decided whether state agencies are exempt from active supervision. A footnote in Hallie suggested that they are, though the Court declined to decide the issue.79 Nevertheless, the Court’s case law before and after Hallie has never inquired into the supervision of bureaucratic state agencies.80
72 Id at 631.
73 Id at 629.
74 Ticor, 504 US at 639–40.
75 Id at 630.
76 Id at 638.
77 Lafayette, 435 US at 408 (“Plainly petitioners are in error in arguing that Parker held that all governmental entities, whether state agencies or subdivisions of a State, are, simply by reason of their status as such, exempt from the antitrust laws.”).
78 Compare Neo Gen Screening, Inc v New England Newborn Screening Program, 187 F3d 24, 28–29 (1st Cir 1999), with Automated Salvage Transport, Inc v Wheelabrator Environmental Systems, Inc, 155 F3d 59, 71 (2d Cir 1998); Hybud Equipment Corporation v City of Akron, 742 F2d 949, 957 (6th Cir 1984).
79 Hallie, 471 US at 46 n 10.
80 See, for example, New Motor Vehicle Board of California v Orrin W Fox Co, 439 US 96, 111 (1978); Southern Motor, 471 US at 50–52; Ticor, 504 US at 621.
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The Supreme Court’s application of the active supervision requirement to privately composed agencies, such as state licensing boards and state bars, is more muddled. One reading of the Court’s early state action cases suggests that licensing boards are subject to active supervision. In Goldfarb v Virginia State Bar,81 the Supreme Court denied state action immunity to minimum-fee schedules promulgated by local bars and enforced by the Virginia State Bar.82 In explaining that no state statutes or state supreme court rules authorized minimum-fee schedules, the Court wrote that “anticompetitive activities must be compelled by direction of the State acting as a sovereign.”83 By contrast, in Bates v State Bar of Arizona,84 the Supreme Court upheld restrictions on lawyer advertising because the Arizona Supreme Court itself had prescribed the restrictions and oversaw their enforcement by the state bar.85 In upholding the restrictions, the Supreme Court held that it deemed “it significant that the state policy is so clearly and affirmatively expressed and that the State’s supervision is so active.”86
The significance of these cases is difficult to discern, however, because they were decided before the Court announced the active supervision test in Midcal.87 Part V suggests an interpretation.
II. CIRCUIT COURT AND FTC APPROACHES TO THE STATE ACTION DOCTRINE AND STATE LICENSING BOARDS
A. The Clear Articulation Requirement
Circuit courts and the FTC always apply the clear articulation requirement to rules issued by state licensing boards. There is some disagreement, however, on how strictly courts should apply the Supreme Court’s foreseeability standard for determining legislative intent.88
Circuit courts apply the standard more leniently than the FTC. For example, in Earles v State Board of Certified Public Accountants
81 421 US 773 (1975).
82 Id at 788–92.
83 Id at 791 (emphasis added).
84 433 US 350 (1977).
85 Id at 359–63.
86 Id at 362 (emphasis added).
87 Midcal, 445 US at 105.
88 This disagreement extends to how the standard applies to bodies other than state licensing boards. For a discussion of circuit court and commentator approaches to the question, see C. Douglas Floyd, Plain Ambiguities in the Clear Articulation Requirement for State Action Antitrust Immunity: The Case of State Agencies, 41 BC L Rev 1059, 1061–65 (2000).
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of Louisiana,
89 the Louisiana legislature delegated to the Board of Public Accountants the power to “[a]dopt and enforce all rules and regulations, bylaws, and rules of professional conduct as the board may deem necessary and proper to regulate the practice of public accounting in the state of Louisiana.”90 The Fifth Circuit held that this delegation of general rule-making authority satisfied the clear articulation test for a Board rule that prohibited the practice of so-called “incompatible professions.”91
The FTC criticized this decision for its application of a lenient foreseeability standard, arguing that courts should not interpret the “presence of a general regulatory regime in an industry” as synonymous with a clear articulation of an intent to displace all competition in the industry.92
In re South Carolina State Board of Dentistry93 illustrates the FTC’s preferred approach. In this case, the South Carolina legislature, seeking to increase children’s access to preventive dental care, amended its state dental law to permit dental hygienists to provide such care to children in schools without those children having to be examined by a dentist within forty-five days prior to the hygienists’ treatment, as the law previously required. In its place, the legislature included a “general supervision” provision requiring that a dentist merely authorize the treatment before a hygienist examines a child.94 In response, the South Carolina Board of Dentistry issued an emergency regulation reinstating the forty-five-day rule.95
In applying the clear articulation test to the amended state statute, the FTC adopted a comparatively strict foreseeability standard that asked whether the challenged restraint would “ordinarily or routinely” result from the authorizing legislation.96 The FTC found that the forty-five-day requirement would not ordinarily result from the general supervision provision and denied the Board state action immunity.97 Admittedly, by having removed the requirement, the legislature’s intent not to have it reinstated was
89 139 F3d 1033 (5th Cir 1998).
90 Id at 1042, citing La Rev Stat Ann § 37:75(B)(2).
91 Earles, 139 F3d at 1042–44.
92 Federal Trade Commission Office of Policy Planning, Report of the State Action Task Force at *34–35 (cited in note 13).
93 138 FTC 229 (2004).
94 Id at 252–54.
95 Id at 231.
96 Id at 251–53 (quotation marks omitted).
97 In re South Carolina State Board of Dentistry, 138 FTC at 252–53.
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already clear. But this case is significant for illustrating the FTC’s approach to the foreseeability standard.
B. The Active Supervision Requirement
The principal division is over the application of the active supervision requirement. Before the Supreme Court’s 1985 ruling in Hallie, which exempted municipalities from active supervision, courts did not even consider subjecting licensing boards to active supervision. Instead, courts looked to whether the licensing board supervised the state’s anticompetitive policy, though courts struggled with how to define supervision.98 After Hallie, this approach was abandoned. In explaining why municipalities were exempt from supervision, the Hallie Court wrote that it could “presume, absent a showing to the contrary, that [a] municipality acts in the public interest. A private party, on the other hand, may be presumed to be acting primarily on his or its own behalf.”99
Circuit court and FTC decisions have interpreted this language to mean that because members of licensing boards have a financial interest in the regulations they promulgate and enforce, they should be treated, at least in some circumstances, like private parties. Accordingly, when state licensing boards invoke the state action defense, courts and the FTC now consider whether licensing boards are sufficiently similar to collections of private individuals to require active state supervision, though the courts and the FTC are split three ways over when the supervision requirement applies.
1. Majority approach.
The majority approach, adopted by the Ninth and First Circuits, subjects state licensing boards to supervision depending on the characteristics of the board in question. Courts look to whether there is a danger that the agency authorizing anticompetitive activity is pursuing interests other than those of the state. To decide this question, courts examine various characteristics of the agency to determine whether it is more like a private party or more like a state entity.
98 See, for example, Gambrel v Kentucky Board of Dentistry, 689 F2d 612, 618 (6th Cir 1982) (granting state action immunity to a board’s refusal to give denture work orders directly to patients); Benson v Arizona State Board of Dental Examiners, 673 F2d 272, 275 (9th Cir 1982) (granting state action immunity to a board’s refusal to allow dentists licensed in other states, but not licensed in Arizona, to practice dentistry outside a restricted permit scheme).
99 Hallie, 471 US at 45.
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In Hass v Oregon State Bar,100 for example, plaintiff sued the state bar for requiring that all state attorneys purchase malpractice insurance from the bar.101 The Ninth Circuit ruled that the state bar was exempt from supervision because it was an agency of the state organized to regulate the legal profession, produced records and held meetings open to the public, and was composed of members required to conform to the state’s code of ethics.102 The Ninth Circuit was careful to note that its holding was “based on the characteristics of the Oregon State Bar” and that it did “not hold that all state bars are protected under the state action exemption to the federal antitrust laws.”103 This case-by-case, characteristic-based approach to active supervision may be viewed as the majority approach.104
2. Minority approach.
The second approach, adopted only by the Fifth Circuit, automatically exempts boards from the active supervision requirement. In Earles, public accountants brought antitrust claims against the Board of Certified Public Accountants and others after the accountants, who also earned money by selling securities, were sanctioned under Board rules that prohibited the practice of “incompatible occupations.”105
In justifying its decision to exempt the Board from supervision, the Fifth Circuit illustrated the influence of Hallie’s concern for self-interested behavior. “Despite the fact that the Board is composed entirely of CPAs who compete in the profession they regulate, the public nature of the Board’s actions means that there is little danger of a cozy arrangement to restrict competition.”106
Admittedly, the difference between the majority and minority approaches is not distinctly cut. The majority approach moves through a checklist of specific features commonly associated with public bodies, while the minority approach grants boards a de facto
100 883 F2d 1453 (9th Cir 1989).
101 Id at 1455.
102 Id at 1460.
103 Id at 1461 n 4.
104 See FTC v Monahan, 832 F2d 688, 690 (1st Cir 1987) (“Whether any ‘anticompetitive’ Board activities are ‘essentially’ those of private parties depends upon how the Board functions in practice, and perhaps upon the role played by its members who are private pharmacists.”). See also Washington State Electrical Contractors Association, Inc v Forrest, 930 F2d 736, 737 (9th Cir 1991) (suggesting that the Washington Apprenticeship Council might be subject to active supervision because its private members have their own agenda which may not be in line with state policy).
105 Earles, 139 F3d at 1041.
106 Id.
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automatic exemption from active supervision because of the unspecified “public nature” of board action. It is difficult to further distinguish these approaches because no circuit court post-Hallie has ever subjected a licensing board or state bar to active supervision. Nevertheless, the Fifth Circuit’s approach is unique in granting licensing boards an automatic exemption from active supervision.
3. FTC approach.
The third approach represents almost a mirror image of Earles. The FTC holds that when the interests of the members of state licensing boards are insufficiently independent from the interests of the parties that the board regulates, the board’s actions are subject to active supervision.107 Because a majority of licensing board members are virtually always members of the regulated profession, in practice, the FTC will always require that the state actively supervise licensing boards before according state action immunity to the anticompetitive rules that boards promulgate.
In North Carolina State Board of Dental Examiners, for example, the Board sent letters to nondentists ordering them to stop providing teeth-whitening services because this constituted the unauthorized practice of dentistry.108 The FTC subjected the Board to the active supervision requirement, construing the Supreme Court’s state action jurisprudence to hold that whether an entity must be actively supervised depends on the “degree of confidence that the entity’s decision-making process is sufficiently independent from the interests of those being regulated.”109 Finding that no state body actively supervised the Board, the FTC denied state action immunity.110
Although in some respects this could be viewed as a variant of the majority circuit approach in that the application of the active supervision requirement depends on specific characteristics of the agency, it is much different. Where Hass looked to a variety of factors, the FTC looked to only one: the composition of the agency.
107 North Carolina State Board of Dental Examiners, 2011 WL 549449 at *7–9.
108 Id at *4–5.
109 Id at *9.
110 Id at *14–17.
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III. THE PROMISE AND PERIL OF PROFESSIONAL LICENSING BOARDS
The economic rationale for professional licensing boards is grounded in the threat to public safety that arises when there are no effective remedies for injuries that consumers cannot easily avoid.111 No legal remedy can restore a life taken by the hand of an unskilled surgeon. Professional licensing is designed to ensure that consumers make choices only among sellers who possess some minimum level of competence.112
Once a state decides to subject a profession to licensing, it is logical to entrust the power to license and regulate the profession to members of that profession.113 State legislators are no more capable of assessing the qualifications of professionals than are ordinary consumers.114 Current members of the profession have the expertise to determine qualifications and assess competence.115 In addition, practicing professionals are likely to spot emerging threats to public welfare in their respective fields faster than state legislators or bureaucrats.