The quiet life of incumbents is often shattered by new paradigms – Uber’s controversial challenge to the taxi businesses of many countries is a colorful example of the synergy of technology and entrepreneurship doing battle with a rentier establishment. In the case at hand, the FTC saw something similar in a market for the vain: teeth-whitening services being offered by non-dentists at a price lower than the same services offered by dentists. The latter, using the State Board (the majority of which is made up of dentists), issued warnings to these pesky new entrants stating that the unlicensed practice of dentistry (including whitening of teeth) was a crime. Faced with such a potentially steep entry barrier, the new entrants abandoned the market. Is the conduct of the State Board an unfair method of competition under Section 5 of the Federal Trade Commission Act?
The answer to this question is more of constitutional law than antitrust. The anticompetitive effects are clear; the justification for this restriction on the basis of risks to health if teeth whitening was performed by non-dentists was not even pleaded on the facts; contrariwise, as the majority reports, complains to the State Board were based on the lower prices of the new entrants. Indeed it wasn’t even clear if it was true that the unlicensed practice of teeth whitening services was indeed a crime because the legislation did not include this service. And yet, in the world’s freest market, where under Federal Law the antitrust rules are compared to the Magna Carta, State laws may restrict competition, and there’s nothing (much) the Federal government can do about it. However, and this is the vital point which this judgment (North Carolina State Board of Dental Examiners v FTC) sheds light upon, such restrictions must be the result of state action for there to be antitrust immunity.
In briefest outline, this immunity (so-called Parker immunity after the seminal judgment) applies if the actor that restricts competition is either (1) the State acting in its sovereign capacity or (2) a private party, and then in this case only if (a) the restraint of competition is clearly articulated State policy and (b) that this policy is actively supervised by the State.
The State Board claimed that they benefited from immunity under the first limb of this doctrine because the Board had been created by the State. The bone of contention was how far this Board, created by the State (here under the Dental Practice Act) but populated by practicing dentists, merited immunity under that first limb. In the view of the majority, they did not: ‘A non-sovereign actor controlled by active market participants’ has to satisfy the second limb of the test and in this case it failed to do so because there was no active State supervision when the Board took the view that teeth whitening fell within its competences and that it was thus appropriate to send letters ordering non-dentists to stop offering teeth whitening services.
It follows that companies like Pro-Teeth Whitening might now re-open in Charlotte, North Carolina where it operated before the Board’s actions.
(1) The widening scope of Federal Competition Policy
The three dissenting Justices considered that more deference to State policies was warranted. Beneath the technical debates on whether the majority approach is consistent with precedent one gets a sense that the dissenting Justices are worried about departing from the original division of powers, so that the main bone of contention is about the constitutional balance being fixed rather than fluid. Thus the dissenters open by noting that State Dental Boards were always organized thus even before the Sherman Act. To Europeans this is a bit odd, because we know that we can use the TFEU precisely to challenge age-old practices. In Consorzio Industrie Fiammiferi the competition rules were used to challenge a 1923 Royal decree, for instance. To Europeans, competition law (and internal market law) applied to state conduct is a powerful crowbar to force states to rethink age-old restrictive practices. Of course some think this leads to neo-liberal oblivion, to others it shows we’ve got the most free market constitution in the world.
(2) Rules and Standards
The dissent felt, rightly, that the approach of the majority was also problematic because it would yield implementation problems. The rule-based approach supported by the dissent is easy to apply (Is the Board created by the State? If yes immunity) is a lot easier to apply to any case that may arise than the test of the majority (is the Board ‘controlled by active market participants, who possess singularly strong private interests’ such that there is a ‘structural risk of market participants’ confusing their own interests with the State’s policy goals’? If yes then immunity must satisfy the second limb of the Parker immunity doctrine). Is this a sufficiently strong argument to lead one to support the dissent’s view that the standard is unwieldy? I am optimistic that Federal courts will be able to find a way of testing how far the composition of the agency is sufficiently remote from the commercial interests the agency regulates. Moreover, even if we agree with the dissenting justices that ‘regulatory capture can occur in many ways’ is it not preferable to have a test that tries to challenge more of those occurrences, rather than fewer of them?
In oral argument, many of the Justices were troubled by the tension: surely the best way of regulating a profession is to ask professionals what to do (an example that was used is neurosurgery: surely nobody wants bureaucrats deciding on the best practices for neurosurgery). But this is to misread the debate. The FTC was not claiming that a regulatory board composed of self-interested experts is illegal. It is merely saying that if a State creates such a regulator, it has to actively supervise it and so the State has a duty to be the competition advocate and to ask the regulator to justify restrictive policies.
(3) Procedural Public Interest
North Carolina may still try and ban non-dentists by more direct involvement with the Board. As the majority said, if State can make a claim that an anticompetitive policy is the State’s own choice, then this suffices for antitrust immunity. No substantive test is needed to measure how far the harm caused by an anticompetitive market compares to the benefits of state regulation. The public interest, to recall Harm Schepel’s important paper (’Delegation of Regulatory Powers to Private Parties under EC-Competition Law: Towards a Procedural Public Interest Test’. (2002) 39(1) Common Market Law Review 31) is defined procedurally rather than substantively. Why so?
Perhaps doing this kind of comparison between consumer interests and producer interests is invidious (but isn’t cost-benefit analysis now so widespread?).
Perhaps States value what little residual sovereignty they still have over economic policy (spare a thought for Greece).
Or perhaps it all boils down to this: as the majority noted, if North Carolina wants to ban cheap teeth whitening services it may do so in a way that falls under Parker immunity. It will be for voters to then decide if this was the right policy choice. If so, here is a nice exam question: ‘Democracy can, and should, determine how free markets are. Discuss.’
(This posting also appeared at chillingcompetition.com. I thank the editors of that fine blog for the invitation to comment on this judgment.)