Antitrust Law Daily Wrap Up, ANTITRUST—4thCir: FTC Order Enjoining North Carolina Dental Board Actions Against Teeth-Whitening Providers Affirmed, (Jun 3, 2013)

By Peter Reap, J.D., LL.M.

A final order entered by the FTC finding that The North Carolina State Board of Dental Examiners violated the FTC Act by engaging in unfair competition in the market for teeth-whitening services in North Carolina, including a cease-and-desist order enjoining the Board from continuing to unilaterally issue extra-judicial orders to teeth-whitening providers in the state, was supported by sufficient evidence and was affirmed, the U.S. Court of Appeals in Richmond, Virginia, has decided (North Carolina State Board of Dental Examiners v. FTC, May 31, 2013, Shedd, D.).

The court rejected the following arguments pressed by the Board on appeal: (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.

Background. The eight-member Board is a state agency, comprised of six licensed dentists, one licensed dental hygienist, and one consumer member.

North Carolina’s Dental Practice Act provides that it is unlawful for an individual to practice dentistry in North Carolina without a license from the Board. The Board has the “power” to (1) refuse to issue a license to practice dentistry; (2) refuse to renew a license; (3) revoke or suspend a license; or (4) take other disciplinary measures “against a licensee as it deems fit and proper.” N.C. Gen. Stat. § 90-41.

After receiving complaints from dentists, the Board opened an investigation into teeth-whitening services performed by non-dentists. As a result of the investigation, the Board issued at least 47 cease-and-desist letters to 29 non-dentist teeth-whitening providers. The letters were issued on official letterhead and requested that the target cease and desist “all activity constituting the practice of dentistry.”

These letters effectively caused non-dentists to stop providing teeth-whitening services in North Carolina and also caused manufacturers and distributors of teeth-whitening products used by these non-dentist providers to exit or hold off entering North Carolina. The Board also sent letters to mall operators in an effort to stop malls from leasing kiosk space to non-dentist teeth-whitening providers; additionally, the Board contacted the North Carolina Board of Cosmetic Art Examiners to request that the Cosmetic Board inform its members and licensees to refrain from providing teeth-whitening services.

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. An Administrative Law Judge (ALJ) denied the motion, and the FTC affirmed.

In response, the Board filed a federal declaratory action, raising the same grounds and requesting that a federal court stop the administrative proceeding against it. The district court dismissed that action as an improper attempt to enjoin ongoing administrative procedure.

The ALJ then held a merits trial and issued an opinion finding that the Board violated the FTC Act. On appeal, the FTC—applying a de novo standard of review—affirmed and entered a final order against the Board that included a cease-and-desist order enjoining the Board from, inter alia, continuing to unilaterally issue extra-judicial orders to teeth-whitening providers in North Carolina.

Analysis

State action doctrine. Under the “state action” doctrine, the antitrust laws do “not apply to anticompetitive restraints imposed by the States ‘as an act of government.’” There are three situations in which a party may invoke the doctrine, the court noted. First, a state’s own actions are exempt from the antitrust laws. Second, private parties can claim the exemption if acting pursuant to a “clearly articulated and affirmatively expressed” state policy and their behavior is “actively supervised by the State itself” under California Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc., 445 U.S. 97 (1980). Third, as the Supreme Court recently reaffirmed, municipalities and substate governmental entities receive immunity from antitrust scrutiny when they act pursuant to state policy to displace competition with regulation or monopoly public service.

In its petition for review, the Board renewed its contention that, as a state agency, it is only required to show clear articulation. Alternatively, the Board contested the FTC’s conclusion that its conduct was not actively supervised. The Board was wrong on both counts, according to the court.

First, the FTC was correct that state agencies “in which a decisive coalition (usually a majority) is made up of participants in the regulated market,” who are chosen by and accountable to their fellow market participants, are private actors and must meet both Midcal prongs. When a state agency, like the Board here, is operated by market participants who are elected by other market participants, it is a “private” actor, the court ruled. Accordingly, the Board was required to satisfy both Midcal prongs to obtain the exemption.

Second, having concluded that the Board must satisfy both Midcal prongs, the court agreed with the FTC that the Board could not satisfy Midcal’s active-supervision prong.

In Midcal, the Court found that California did not actively supervise a wine-selling scheme because California law: (1) “simply authorizes price setting and enforces the prices established by private parties”; (2) “neither establishes prices nor reviews the reasonableness of the price schedules”; (3) does not “regulate the terms of fair trade contracts”; and (4) does not “monitor market conditions or engage in any ‘pointed reexamination’ of the program.” North Carolina has done far less “supervision” in this case than the Court found wanting in Midcal, the court determined. Here, the cease-and-desist letters were sent without state oversight and without the required judicial authorization. The Board has pointed to certain reporting provisions and “good government” provisions in North Carolina law, but those fall far short of the type of supervision in Midcal that was nonetheless considered deficient.

Concerted action. The court next examined whether the FTC properly found that the Board’s behavior violated the FTC Act. The FTC Act makes unlawful “[u]nfair 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.

The Board argued that, under the intracorporate immunity doctrine, it was incapable of conspiring with itself, and that, to the extent that doctrine did not apply, the FTC failed to prove a combination or conspiracy that imposed an unreasonable restraint of trade.

The FTC concluded that “Board members were capable of conspiring because they are actual or potential competitors.” Specifically, the FTC found that “Board members continued to operate separate dental practices while serving on the Board,” and that the “Board members had a personal financial interest in excluding non-dentist teeth whitening services” because many of them offered teeth-whitening services as part of their practices.

The FTC’s finding that the Board has the capacity to conspire under § 1 was affirmed, the court ruled. The Board members’ active-service requirement could create a conflict of interest since they serve on the Board while they remain “separate economic actors” with a separate financial interest in the practice of teeth whitening, the court reasoned. Any agreement between the Board members thus deprived the market of an independent center of decision making.

Having determined that the Board is capable of conspiring under § 1, the court next examined whether the FTC’s conclusion that the Board engaged in concerted action was supported by substantial evidence. The FTC found both direct and circumstantial evidence to support a finding of concerted action. First, the FTC concluded that “[o]n several occasions, the Board discussed teeth whitening services provided by non-dentists and then voted to take action to restrict these services.” Second, the FTC found a “wealth” of circumstantial evidence to the same effect—members “engaged in a consistent practice of discouraging non-dentist teeth whitening services” through their cease-and-desist letters and other efforts.

Substantial evidence supported the FTC’s conclusion, the court held. As the FTC found, several of these letters were sent after votes by the Board, and the lengthy consistent campaign of sending letters and cease-and-desist orders was suggestive of coordinated action. Thus, the FTC’s conclusion that the Board engaged in a combination or conspiracy under § 1 was affirmed.

Unreasonable restraint of trade. The FTC determined that the Board’s conduct violated § 1 under both a quick-look analysis and a full rule of reason analysis. Applying the quick look approach, the FTC first concluded that the conduct was “inherently suspect” because “[t]he challenged conduct is, at its core, concerted action excluding a lower-cost and popular group of competitors,” and “[n]o advanced degree in economics is needed to recognize” that the behavior “is likely to harm competition and consumers, absent a compelling justification.”

The FTC’s mode of analysis and its conclusion that the Board’s behavior was likely to cause significant anticompetitive harms was supported by substantial evidence and affirmed, the court decided. The Supreme Court made clear that practices like group boycotts are amenable to the quick look approach—cases in which 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. It was not difficult to understand that forcing low-cost teeth-whitening providers from the market had a tendency to increase a consumer’s price for that service, the court explained.

Here, the Board’s status as a group of professionals did not condone its anticompetitive practices. Accordingly, substantial evidence supported the FTC’s factual findings regarding the economic effects of the Board’s actions and those findings supported the conclusion that the Board’s behavior violated § 1.

At the end of the day, this case was about a state board run by private actors in the marketplace taking action outside of the procedures mandated by state law to expel a competitor from the market, the court noted. Despite these actions, if the Board was actively supervised by the State, it would be entitled to the exemption.

The case is No. 12-1172.

Attorneys: Noel Lee Allen (Allen, Pinnix & Nichols, P.A.) for North Carolina State Board of Dental Examiners. Imad Dean Abyad for FTC.

Companies: North Carolina State Board of Dental Examiners

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