Will the Supreme Court hear this important antitrust case?

January 27

Today and in the coming days, I’ll be blogging about a recent Fourth Circuit case, North Carolina Board of Dental Examiners v. FTC. (The Fourth Circuit is the federal appellate circuit covering Maryland, Virginia, West Virginia, North Carolina, and South Carolina.) It came down from the Fourth Circuit last May 31, and the Board of Dental Examiners (the losing party in that case) is now asking the Supreme Court to review the case. (Technically, the Board is “filing a petition for a writ of certiorari”, or “filing a cert petition” for short. When the Supreme Court agrees to hear the case, it’s called “granting cert”.)

I hope the Supreme Court grants cert, because this case raises important questions of antitrust law — in particular, the extent of the “state action” immunity to antitrust law. (I’ve briefly written about this case here.)

When private people or corporations engage in anticompetitive conduct, they’re usually subject to antitrust law. But when a state legislature regulates its economy in an anticompetitive way, it’s exempt from antitrust law: in Parker v. Brown, an important case from 1943, the Supreme Court declared that Congress, when it passed the antitrust laws, didn’t intend to cover anticompetitive regulation by state legislatures. That’s antitrust “state action” immunity.

But between purely governmental action and purely private action, there’s a vast gray area. What if the anticompetitive conduct comes not from the state legislature itself but from some state agency or board, or from some other state-created entity like a municipality? And what if these boards are actually composed of private actors — like the North Carolina Board of Dental Examiners in this case, which regulates dentistry and is also composed of dentists (who, by the way, are also elected by dentists)? To what extent do these boards get to benefit from state action immunity?

That’s what this case is about. There’s currently a three-way circuit split on when apparently governmental state regulatory boards, which are usually exempt from antitrust law, are “private” enough that antitrust law applies. (I’ve written about the fuzziness of the public-private distinction here.) The Second, Fifth, and Tenth Circuits take one view; the First, Ninth, and Eleventh Circuits take another view; and now the Fourth Circuit is taking yet a third view (which the FTC, one of the federal antitrust enforcers, agrees with). It’s thus worthwhile for the Supreme Court to grant cert and resolve the disagreement, since it’s usually a good idea for federal law to be uniform across the country.

Because this doctrine is about defining who’s public and who’s private for purposes of antitrust, it’s also of particular interest to those who are interested in privatization. For instance, when does regulation through a private group increase the regulation’s vulnerability under federal antitrust law? This can be used as an argument against privatization (“better to regulate through a public-sector agency, because if the regulatory function is outsourced, some of the private regulators’ actions will be held invalid”) or as an argument in favor of privatization (“better to regulate through private parties, because that goes some way toward leveling the uneven playing field that otherwise would immunize government policy from antitrust penalties”).

And since my scholarly interests include both privatization and antitrust, this case is doubly interesting to me, so I wanted to share it with you.

*     *     *

First, let’s consider the following cases, which have actually come up and been considered by the Supreme Court:

  • Parker v. Brown (1943), which started it all. In 1933, California adopted the Agricultural Prorate Act, a typical New Deal-style statute that “authorize[d] the establishment, through action of state officials, of programs for the marketing of agricultural commodities produced in the state, so as to restrict competition among the growers and maintain prices in the distribution of their commodities to packers.” The proration marketing program for raisins was established in 1940. Here’s how the program worked: a committee divided raisins into “standard”, “substandard”, and “inferior” grades. The goal was to keep raisin prices up by restricting how many raisins were sold. Producers could only sell 30% of their crop through “ordinary commercial channels”. Of the remaining 70%, the better ones could be used to stabilize the price of raisins — the committee was to sell variable amounts to maintain the price — while the worse ones could only be used “for assured by-product and other diversion purposes”. The party named “Brown” was a raisin marketer who wanted to sell more raisins than the program allowed. The Supreme Court determined that there was no antitrust problem here. It’s true that, if raisin growers had privately agreed to limit supply and stabilize price in this way, there would be an antitrust violation, but the Sherman Act was never meant to cover policies of the state legislature.
  • California Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc. (1980). This case also came out of California. A California statute required wine producers and wholesalers (among others) to file “fair trade contracts or price schedules” with the state, and weren’t allowed to sell to retailers at any price other than the one set in their fair trade contract or price schedule. In other words, no on-the-spot discounts. The challenger here was a wholesaler who sold wine below its listed price, and who also sold wine without filing a fair trade contract or price schedule. The penalty for this could be a fine or a license revocation. Here, the Supreme Court determined that this was resale price maintenance that violated antitrust law. (Note: the law on resale price maintenance is different today.) Unlike in Parker, here there was no antitrust immunity. It’s true that there was a “clearly articulated” state policy to displace competition and fix prices. (I’ve written about the “clear articulation” requirement here.) But, the Court held, the policy must also be “actively supervised” by the state. Because the actual price fixing was done by the actions of private parties — the wholesalers and others who filed their contracts and schedules — and the state passively accepted these prices, here there was no active supervision and therefore antitrust law applied in its full vigor.
  • Town of Hallie v. City of Eau Claire (1985).  Various towns in Wisconsin adjacent to the city of Eau Claire alleged that Eau Claire was being anticompetitive: It had gotten federal money to build a sewage treatment plant, which was the only plant available to the local towns. The city of Eau Claire refused to permit the local towns to use the sewage treatment plant. Instead, it provided those services to individual landowners in areas of the towns under certain conditions: a majority in those areas had to vote to have their homes annexed by the city and to use the city’s sewage collection and transportation services. But those towns already had their own sewage collection and transportation services, so for those services they were competitors with the city of Eau Claire. If a private monopoly refused to sell to people unless those people also bought its other products, that might qualify as “tying” or “refusal to deal” for purposes of antitrust law. But the Supreme Court said that in this case, the city of Eau Claire was immune from antitrust law. Recall the two prongs from Midcal: (1) clear articulation and (2) active supervision. The city could show “clear articulation”, because various Wisconsin statutes clearly contemplated that cities could engage in anticompetitive conduct. And the “active supervision” prong wasn’t necessary here, because the challenged party was not a private party but a municipality — therefore, the Court held, there was little danger of this being in reality a private price-fixing arrangement. (In a footnote, the Court wrote that it was “likely” that state agencies were also exempt from the “active supervision” requirement — though it didn’t decide the issue then, and still hasn’t decided it to this day.)

*     *     *

Well, that’s where we stand today with the state action doctrine. The cases give us a nice three-part structure:

1. When the actor is the state legislature itself, it’s not regulated by antitrust law at all. (This rule also applies to the state Supreme Court acting in its regulatory capacity, for instance when it regulates lawyers.)

2. When the actor is a municipality (and “likely” also when the actor is a state agency), it’s immune from antitrust law if it can show that it was acting pursuant to a clearly articulated state policy.

3. When the actor is private, it has to show that same clear articulation, but in addition it also has to show that it’s being actively supervised by the state before it can benefit from antitrust immunity.

Though the status of state agencies hasn’t been decided by the Supreme Court, everyone seems to agree that if an agency is indisputably public, it falls within category 2 above. But the difficult part is what happens when an apparently public state agency can be characterized as “private” in some way. Does it fall within category 3 at some point? That’s what our current case, North Carolina Board of Dental Examiners v. FTC, is all about. I’ll discuss this case further tomorrow.

[UPDATE: Slightly edited immediately after posting to remove typos and change slight wording.]

Sasha Volokh lives in Atlanta with his wife and three kids, and is an associate professor at Emory Law School. He has written numerous articles and commentaries on law and economics, privatization, antitrust, prisons, constitutional law, regulation, torts, and legal history.
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