Decided May 31, 2013
The Fourth Circuit Court of Appeals denied the North Carolina State Board of Dental Examiners’ (the Board) petition for review of the Federal Trade Commission (FTC) order finding that the Board violated the FTC Act, 15 U.S.C. § 45, by engaging in unfair competition in the market for teeth-whitening services in North Carolina.
Dentists started providing whitening services throughout North Carolina in 1990. By 2003, non-dentists also started offering the same services, often at a significantly lower price than dentists. After receiving complaints from dentists, the Board opened an investigation into teeth-whitening services performed by non-dentists. As a result of the investigations, the Board issued at least 47 cease-and-desist letters to 29 non-dentist teeth-whitening providers. The Board ultimately expelled all non-dentist providers from the North Carolina teeth-whitening market. On June 17, 2010, the FTC issued an administrative complaint against the Board, charging it with violating 15 U.S.C. § 45, the FTC Act, by excluding non-dentist teeth whiteners from the market. The Board moved to dismiss the complaint, arguing that the FTC lacked jurisdiction over it and, alternatively, that it was exempt from the federal antitrust laws under the “state action” doctrine. Ultimately the Board petitioned the Court of Appeals for review of the FTC’s final order, raising 3 arguments: (1) that it is exempt from the antitrust laws under the state action doctrine; (2) that it did not engage in concerted action under § 1 of the Sherman Act; and (3) that its activities did not unreasonably restrain trade under § 1.
First, the court addressed whether the Board is exempt from the antitrust laws under the state action doctrine. The state action doctrine is where the antitrust laws do “not apply to anticompetitive restraints imposed by the States ‘as an act of government.’” The court then discussed the three ways by which a party may invoke the state action doctrine: (1) a state’s own actions “ipso facto are exempt” from the antitrust laws; (2) private parties acting pursuant to a “clearly articulated and affirmatively expressed as state policy” and their behavior is “actively supervised by the State itself;” and (3) municipalities and substate governmental entities acting pursuant to state policy to displace competition with regulation or monopoly public service. Unlike private parties, municipalities are not required to show active supervision. Further, even in these three circumstances, state-action immunity is disfavored and only recognized when it is clear that the challenged anticompetitive conduct is undertaken pursuant to a regulatory scheme that “is the State’s own.” In this case, the FTC found that the Board was a private party and could not show it was actively supervised by North Carolina. The FTC rejected that the Board was a substate governmental entity not subject to the active supervision requirement. While state agencies such as the Board may in some instances qualify as a substate governmental entity, the FTC found the “Court has been explicit in applying the antitrust laws to public/private hybrid entities, such as regulatory bodies consisting of market participants” like the Board. The operative factor is a tribunal’s degree of confidence that the entity’s decision-making process is sufficiently independent from the interests of those being regulated. Because a decisive majority of the Board was elected by dentists, the Board qualifies as a private party and is required to meet the active-supervision requirement. The Court of Appeals agreed the Board is a “private” actor required to prove active supervision, and also that the Board did not meet the supervision requirement. Because the cease-and-desist letters were sent without state oversight and without the required judicial authorization, it operated without sufficient supervision.
Next, the court addressed whether the FTC properly found that the Board’s behavior violated the FTC Act. The FTC’s factual findings are conclusive if supported by substantial evidence. The FTC Act makes unlawful “unfair methods of competition.” In this case, the FTC determined that the Board’s conduct violated the FTC Act because it was a violation of § 1 of the Sherman Act. Section 1 of the Sherman Antitrust Act prohibits “every contract, combination, or conspiracy, in restraint of trade.” To establish a § 1 violation, a plaintiff must prove (1) a contract, combination, or conspiracy that (2) imposed an unreasonable restraint of trade. Concerted action is satisfied when an agreement exists between “separate economic actors” such that any agreement “deprives the marketplace of independent centers of decision making.” The Board members’ serve on the Board while they remain “separate economic actors” with a separate financial interest in the practice of teeth whitening. Thus, any agreement between the Board members deprives the market of an independent center of decision making. However, to be concerted action, the parties must also have a conscious commitment to a common scheme designed to achieve an unlawful objective. In this case, the sending letters and cease-and-desist orders is suggestive of coordinated action. The Court of Appeals agreed with the FTC that the Board engaged in a combination or conspiracy under § 1.
Finally, the court addressed whether the Board’s actions amounted to an unreasonable restraint of trade under § 1. There are three forms of analysis for determining if conduct violates § 1: (1) per se; (2) quick-look; and (3) rule of reason. The FTC determined the Board’s conduct violated § 1 under both a quick-look analysis and a rule of reason, and the Court of Appeals agreed. Group boycotts are amenable to the quick look approach where “an observer with even a rudimentary understanding of economics could conclude that the arrangements in question would have an anticompetitive effect on customers and markets.” In this case, the court found it was not difficult to understand that forcing low-cost teeth-whitening providers from the market has a tendency to increase a consumer’s price for that service. As a result, the Board’s petition for review was denied.
– Sarah Bishop