Licensing Boards with a majority of members actively practicing in the regulated profession are vulnerable under the antitrust laws.

North Carolina State Board of Dental Examiners v. Federal Trade Commission, U.S. Supreme Court No. 13-534 (decided February 25, 2015).

Iowa health professional licensing boards, by law, are comprised of a majority of actively practicing licensed members of their professions appointed by the governor and approved by the Senate. For instance, the Iowa Board of Medicine (IBM) has 10 members, seven (7) of whom must be licensed physicians active in medical practice in this state. The Iowa General Assembly has determined that the expertise of licensed and practicing professionals is critical to informed board decision-making in setting parameters of practice, establishing qualifications for licensure, and determining appropriate grounds for licensee discipline.

Professional licensing boards in Iowa also are agencies of state government. They must exercise their authority and meet their responsibilities consistent with processes and procedures and powers and duties set forth in laws passed by the General Assembly. The legislature grants authority to licensing boards to assure that only appropriately educated, trained and qualified individuals practice in the profession. Periodically, licensing boards like the IBM issue cease and desist orders against persons for unlawfully practicing in the profession absent medical licensure.

A recent case decided by the U.S. Supreme Court examined enforcement actions of a state licensing board for the unlicensed practice of the profession under the microscope of the federal antitrust laws. In North Carolina State Board of Dental Examiners v. FTC, the Court examined the extent to which professional licensing boards enjoy “state action” immunity from federal antitrust liability. The case centered on alleged anticompetitive behaviors of the North Carolina Dental Board against non-licensed providers of teeth whitening services and products.

Dentists had been providing teeth whitening services in North Carolina since the 1990s. Starting in 2003, however, non-licensees began offering these services at prices substantially lower than those charged by dentists. The Dental Board received complaints from its licensees, most of which focused on the lower charges and not on harmful impacts to the public. The Board investigated and then, without adopting a rule, took aggressive action through cease and desist letters issued to non-dentist teeth whitening service providers and product manufactures; letters to shopping malls advising them that kiosk providers of teeth whitening services were in violation of the practice of dentistry; and warnings it convinced the cosmetology licensing board to send its licensees against teeth whitening practice. As a result of the Board’s actions, non-dentists ceased offering teeth whitening services in North Carolina.

The Dental Board is an agency of its state government with eight members, six of whom are actively practicing licensed dentists; one is a licensed dental hygienist; and one is a public member. Members of the dental profession elect the dentist members; dental hygienists elect the dental hygienist member; and the governor appoints the pubic member. Eight of the ten dentists who were members of the Board during the time of this dispute earned substantial fees from teeth whitening services.

In 2010, the Federal Trade Commission (FTC), a federal antitrust enforcement agency, filed an administrative complaint against the Dental Board. After motions and hearings, the FTC concluded that the Dental Board’s enforcement actions against teeth whitening competitors had unreasonably restrained trade in violation of the antitrust laws. The FTC rejected the Board’s public safety justification, saying that a wealth of evidence suggested that tooth whitening by non-dentists is a safe cosmetic procedure. The FTC also rejected the Board’s claims that as an agency of the state, it had state action immunity from federal antitrust liability.

The Board challenged the FTC’s decision in federal court. The 4th Circuit Court of Appeals, however, found in favor of the FTC. The Board then took its case to the U.S. Supreme Court.

A significant fact permeating the Supreme Court’s analysis of state action antitrust immunity for this licensing board was its composition. A majority of member decision makers from among the regulated dental profession created the potential for concerted action against competitors. It seemed to make no difference to the Court that the Dental Board members were elected by other dentists rather than appointed by the governor with approval authority from the legislature, as is the case in Iowa.

The Court explained two ways in which state action immunity from federal antitrust enforcement may attach. The first is immunity afforded to anticompetitive conduct by states acting in a sovereign capacity. In its 1943 case, Parker v. Brown, the Supreme Court explained that state action immunity from antitrust liability is accorded to states without need for further proof so long as the challenged activity is an exercise of the State’s “sovereign” power, such as legislation passed by a state general assembly or decisions entered by a state supreme court. “[T]he Sherman Act confers immunity on the State’s own anticompetitive polices out of respect for federalism.”

The Dental Board argued that as an agency of state government, it could claim Parker state action immunity without need for further proof. The Supreme Court disagreed. “State agencies are not simply by their governmental character sovereign actors for purposes of state-action immunity.” State action immunity for state agencies, the Court said, requires more to ensure that the State sovereign accepts political accountability for the agency’s challenged anticompetitive behavior.

The Court then turned to the second path for claiming state action immunity from federal antitrust liability. A non-sovereign entity, to claim state action protection, must meet a two-part test established by the Supreme Court in its 1980 case, California Retail Liquor Dealers Assn. v. Midcal Aluminum Assoc. The Midcal test requires a non-sovereign actor to prove that 1) the challenged restraint is a clearly articulated and affirmatively expressed state policy which 2) is actively supervised by the State. Successfully meeting this two-pronged test solidifies that the State, in its sovereign capacity, has accepted political accountability for the anticompetitive conduct, thereby justifying state action immunity from antitrust liability for the non-sovereign’s challenged activity.

The Court moved from speaking generally about agencies of state government to focus particularly on those non-sovereign government actors, like the Dental Board, comprised of a majority of active market participants from within the profession. “Limits on state-action immunity are most essential when the State seeks to delegate its regulatory power to active market participants, for established ethical standards may blend with private anticompetitive motives in a way difficult even for market participants to discern.” To claim state action immunity, then, the Dental Board was required to meet the two-pronged Midcal test, thereby showing that it did not act on its own but, rather, was clearly and affirmatively carrying out state policy and, in doing so, was actively supervised by the State.

The FTC did not make an issue of whether the Board’s cease and desist actions against non-licensee teeth whitening providers met the first Midcal test so the Court moved to the second, “active state supervision,” prong. The Dental Board, however, never argued that its cease and desist actions were actively supervised by the State; instead, it unsuccessfully relied on Parker immunity. As such, the Court had no facts to analyze on this point. Even so, it noted that the North Carolina legislature had not defined teeth whitening as a practice requiring a dental license nor had the Board used “any of the powers at its disposal that would invoke oversight by a politically accountable official.”

The Court’s final holding or ruling was narrowly focused: “The Court holds today that a state board on which a controlling number of decisionmakers are active market participants in the occupation the board regulates must satisfy Midcal’s active supervision requirements in order to invoke state-action antitrust immunity.” Whether the test is met depends upon the circumstances of each case. While day-to-day involvement of the State in the agency’s challenged action is not required, “active supervision” calls for State review of the substance of the board’s anticompetitive decision, along with the power to veto or modify that decision.

In addressing the uncomfortable facts in this case, the Court issued a ruling of significant implication for all professional licensing boards. Whether this decision will deter qualified professionals from serving on state licensing boards for fear of antitrust liability remains to be seen. More importantly, however, may be the extent to which licensing boards with majority membership and essential expertise from active participants in the regulated profession will be chilled by this decision in making tough enforcement judgment calls on non-licensee practice of the profession.

The Court gave some counsel. If a licensing board’s enforcement action is supported by specific state law directing what otherwise might be viewed as anticompetitive activity, the board likely meets the Midcal test. Yet, it is not realistic to expect a state legislature to define with specificity all acts that fall within the scope of a regulated profession; indeed, that is one of the functions delegated by the Iowa General Assembly to its licensing boards. Rulemaking, the Court seems to hint, also may provide effective support for licensing board immunity from antitrust challenge under the Midcal test. In Iowa, a licensing board’s proposed rule is subject to review by the Iowa Administrative Rules Review Committee, composed entirely of lawmakers from both the House and the Senate and with authority to delay a rule and refer it to the General Assembly for its review and action.

The behavioral checks imposed by the Supreme Court make sense under the bothersome facts of this case. A strident reading of Midcal by regulators and courts in future licensing board cases, however, risks shifting the pendulum of free market health care practice too far away from the critical role professional licensure plays in assuring quality, competent and safe medical care. In that regard, the consumer the antitrust laws seek to protect is not well served.