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FTC Wins Fourth Circuit's Approval on both State Action and Section 1 Challenges
Practical Law Legal Update 4-531-1165 (Approx. 4 pages)
FTC Wins Fourth Circuit's Approval on both State Action and Section 1 Challenges
by PLC Antitrust
| Published on 04 Jun 2013 • USA (National/Federal) |
The US Court of Appeals for the Fourth Circuit denied the North Carolina State Board of Dental Examiners' petition to review an FTC finding that the Board violated the FTC Act by limiting the market for teeth-whitening services in North Carolina.
On May 31, 2013, the US Court of Appeals for the Fourth Circuit announced that it denied the North Carolina State Board of Dental Examiners' (the Board) petition to review a Federal Trade Commission (FTC) finding that the Board violated the FTC Act when it prohibited non-dentists from providing teeth-whitening services in North Carolina. The FTC's administrative complaint, issued on June 17, 2010, arose out of the Board's investigation of non-dentists offering teeth-whitening services in North Carolina, which led to the Board issuing at least 47 cease-and-desist letters to those providers. According to the FTC, the demands to cease-and-desist had various anticompetitive effects, including causing:
- Non-dentists to stop offering their less expensive teeth-whitening services in North Carolina.
- Teeth-whitening manufacturers and distributors of products used by those non-dentist providers to exit or not enter the North Carolina market.
After a series of motions to dismiss filed with the Administrative Law Judge, district court and FTC, the Board petitioned the Fourth Circuit for review. The Board argued that:
- It is exempt from antitrust laws under the state action doctrine.
- It did not take concerted action in violation of Section 1 of the Sherman Act (Section 1).
- Its activities were not an unreasonable restraint of trade under Section 1.
The court addressed each of the Board's arguments in turn.
State Action Doctrine
The court held that the Board's actions were not protected by the state action doctrine. First, the court held that the Board was a private actor, in part because:
- Its members were participants in a regulated market, elected by other market participants and not by the state.
- It took actions to benefit its own membership.
The court cited FTC v. Phoebe Putney Health System, Inc., 133 S.Ct. 1003, 1010 (2013) to explain that the state action doctrine is only available to private actors when both:
- The state actively supervised the body in question.
- It is clear that the challenged anticompetitive conduct was a clearly articulated policy of the state.
The court reasoned that North Carolina did not adequately supervise the Board's actions, noting in particular that the cease-and-desist letters were sent without obtaining required judicial authorization and without state oversight. Because the Board failed to meet the "actively supervised" prong, the court did not address the "clearly articulated" prong.
In a concurring opinion, Circuit Judge Barbara Milano Keenan emphasized that the ruling is narrow for the purposes of defining private actors under the state action doctrine. Judge Keenan explained that had the Board been appointed or elected by the state, as opposed to their peers, they may have not been considered a private actor.
Concerted Action in Violation of Section 1
The FTC had alleged that the Board's actions violated Section 5 of the FTC Act because they violated Section 1 of the Sherman Act. The court agreed that the Board engaged in concerted action to further a combination or conspiracy in violation of Section 1. The court explained that to show a violation of Section 1, a plaintiff must show a contract, combination or conspiracy that resulted in an unreasonable restraint of trade.
The court disagreed with the Board that it was incapable of conspiring with itself. Rather, the court cited to cases like American Needle, Inc. v. National Football League, 130 S.Ct. 2201 (2010) in holding that agreements within one entity may count as concerted action, particularly when the entity's members:
- Are actual or potential competitors.
- Have financial interests that conflict with the Boards' interests.
By voting to keep non-dentists out of the teeth-whitening market and sending cease-and-desist letters, the Board engaged in concerted action.
Unreasonable Restraint of Trade Under Section 1
Finally, the court held that the Board's actions were an unreasonable restraint of trade under Section 1. The court applied a quick look analysis and found that there was substantial evidence supporting the finding that the Board's behavior was likely to cause significant anticompetitive harm, namely that driving teeth-whitening competitors from the market would increase the price for that service.
The court noted that although the US Supreme Court has cautioned against too quickly condemning professional organizations' practices, the organizations' anticompetitive acts are nonetheless subject to antitrust laws.
Practical Implications
This is the second recent FTC victory regarding the state action doctrine. The first was Phoebe Putney (see Legal Update, Supreme Court Overturns 11th Circuit Decision in FTC v. Phoebe Putney). Also, professional boards elected by peers should be aware that, at least in the Fourth Circuit, they will be considered private actors for purposes of the state action doctrine and must satisfy the two-prong test for state action immunity to apply.