© 2015 Venable LLP Mary Williams, Licensing & Enforcement Section Unit Chief Counsel, Office of the Arizona Attorney General Andrew Bigart, Venable, LLP North Carolina State Board of Dental Examiners vs. Federal Trade Commission National Association of Motor Vehicle Boards and Commissions 2015 Fall Workshop September 10, 2015

Topics for Discussion Many state boards have been operating on the assumption that they are immune from the antitrust laws because their decisions were made pursuant to a clearly articulated state policy displacing competition. In North Carolina State Board of Dental Examiners v. Federal Trade Commission, 135 S. Ct (2015), the Supreme Court established a new "context-dependent" test for determining when a state exercises sufficient supervision over a state agency or board to confer antitrust immunity. The decision in North Carolina Dental makes it possible for the actions of state boards to come under antitrust scrutiny for the first time. Moving forward, we expect states to review board operations in light of North Carolina Dental to confirm that the state is exercising the requisite level of control, i.e., active state supervision. 2

Agenda Overview of Antitrust Basics Discussion of North Carolina Dental Board Decision Implications for National Association of Motor Vehicle Boards and Commissions Questions 3

Overview of Antitrust Basics 4

The Department of Justice (“DOJ”) and Federal Trade Commission (“FTC”) are the primary federal antitrust enforcement agencies. –Section 1 of the Sherman Act prohibits all contracts, combinations, and conspiracies that unreasonably restrain trade. –Section 2 of the Sherman Act prohibits monopolization and attempted monopolization. –Section 5 of the Federal Trade Commission Act (“FTC Act”) prohibits unfair methods of competition. State Laws –States typically interpret and apply their respective laws in a similar fashion to the federal laws. In general, compliance with the federal antitrust laws will result in compliance with state laws. –Enforced by state attorney generals. 5

Overview of Antitrust Basics Why is Antitrust Compliance Important? –Entities Permanent limits on business activity. Private lawsuits by customers or competitors may result in treble damages and attorney’s fees. For hard-core violations, fines of up to $100 million per violation or a court-imposed “alternate fine” of up to twice the gain or twice the loss to the victim. –Individuals: Violations can be prosecuted as felonies, resulting in imprisonment for up to ten years and fines up to $1 million or both, for each violation. 6

Overview of Antitrust Basics Hard core, per se antitrust offenses: –Agreements to fix prices; –Agreements to rig bids; –Agreements to allocate markets or limit production; and –Some agreements to boycott suppliers, customers, or competitors. Other conduct is analyzed under the “rule of reason,” which balances the anticompetitive effects against the procompetitive benefits. –Generally requires proof that the conduct has led to anticompetitive effects in the relevant market. –Covers any conduct that is not a per se violation. 7

Overview of Antitrust Basics What is an agreement? –An “agreement” does not need to be written. More often than not, agreements are inferred from facts and circumstances that suggest an understanding. –Agreements may be direct or indirect, explicit or tacit. An “agreement” may be based on a common course of conduct following interactions between the parties, including social interactions or other opportunities to communicate. 8

Antitrust Issues Price Fixing –Unlawful for competitors to agree on prices, fees or rates, discounts, costs, salaries, terms and conditions of sale, warranties, or profit margins. Allocating Markets –Unlawful for competitors to allocate markets or divide territories or customers. Group Boycotts / Refusals to Deal –Unlawful for competitors to agree not to deal with competitors, suppliers, or customers. 9

Examples of Recent Antitrust Investigations & Lawsuits In the Matter of Professional Lighting and Sign Management Company of America, Inc. (PLASMA) (2015) –FTC prohibited PLASMA from including in its code of ethics provisions that limit potential competition between members. –The FTC alleged that PLASMA’s bylaws restrain competition by: Prohibiting members from providing commercial lighting or sign services in the designated territory of another member unless that member declines to perform the work; Imposing a price schedule on work performed in the designated territory of another member; and Barring former members from soliciting or competing for clients of current members for one year after leaving the group. –This case addresses some of the “competitive” issues that are similar to those faced by state boards. 10

Discussion of North Carolina Dental Board Decision 11

Origins of the State Action Doctrine State Action Doctrine –Originated with Supreme Court’s 1943 opinion in Parker v. Brown, which explained that state conduct was beyond the reach of the antitrust laws given principles of federalism and state sovereignty. Case involved a California program regulating the market of raisins. Court explained that state legislative and court actions are exempt from the antitrust laws. For subordinate government entities that include private actors, however, an additional analysis is required to confirm immunity. –Under the state action doctrine, licensing bodies may qualify for antitrust immunity if: (1) the challenged restraint has been clearly articulated and affirmatively expressed as state policy; and (2) the policy is actively supervised by the state itself. Prior to North Carolina Dental, the Supreme Court had not elaborated on the factual underpinnings of “active supervision.” 12

The FTC’s View of the State Action Doctrine In 2003, the FTC issued a staff report summarizing the FTC’s interpretation of the state of the law: –The state must use its power to review the substantive merits of particular acts. –State supervision is not sufficient if it does not reach the conduct that resulted in the alleged harm, even if the state actively supervised other aspects of the conduct. –State officials must engage in a “pointed re- examination” of the private conduct.” 13

The FTC’s Administrative Complaint In June 2010, the FTC filed an administrative complaint alleging that the North Carolina State Board of Dental Examiners (Board) and its members violated the antitrust laws by unilaterally ordering non-dentists to stop providing whitening services. –The Board, which was established by state statute as the "agency of the State for the regulation of the practice of dentistry," is comprised of eight members, six of whom must be licensed dentists engaged in the active practice of dentistry. –The North Carolina Dental Practice Act did not specify that teeth whitening is the practice of dentistry; that was the Board’s interpretation of the Act. –The FTC alleged the Board had tried to harm competition in the teeth- whitening business by sending cease-and-desist letters on official letterhead to nondentist teeth-whitening service providers and product manufacturers. –The Board also sent similar letters to shopping malls advising them to expel tenants that provided teeth-whitening services. 14

The FTC’s Administrative Complaint According to the FTC complaint, as a result of the Board’s actions, the availability of teeth-whitening service in North Carolina was diminished. The FTC sought to stop the Board’s illegal conduct so that North Carolina consumers could benefit from competition between dentists and non-dentists for teeth- whitening services. The Board argued that it was a "state actor" engaged in state action and therefore immune from antitrust prosecution. The FTC rejected this defense and issued an order (2011) requiring the Board to stop sending communications that stated that nondentists may not offer teeth whitening services and products in North Carolina. 15

The Board Appeals the FTC Order The Board appealed to the Fourth Circuit Court of Appeals, which upheld the FTC's administrative order in a 2013 decision. On appeal from the Fourth Circuit, the U.S. Supreme Court rejected the Board's state-action immunity defense because "the Board did not receive active supervision by the State when it interpreted the Act as addressing teeth whitening and when it enforced that policy issuing cease-and-desist letters to nondentist teeth whiteners." The Court likened the Board to a private trade association vested with state regulatory power. 16

Supreme Court Decision Reviewing prior cases, the Supreme Court identified certain "constant requirements" of active supervision that must be present to qualify for state-action immunity: –The state supervisor must review the substance of the anticompetitive decision, not merely the procedures followed to produce it; –The state supervisor must have the power to veto or modify particular decisions to ensure that they are in accordance with state policy; –The "mere potential for state supervision is not an adequate substitute for a decision by the State"; and –The state supervisor may not itself be an active market participant. 17

Supreme Court Decision Thus, active supervision requires the state to ensure that a board's actions are in accordance with the state policy displacing competition, which is different from ensuring that a board has authority to take a specific action. –The state supervision needs to be focused on the specific activities related to the displacement of competition, and not just general matters such as human resources, contracting, finance, etc. The Court focused on the fact that the Act did not explicitly include teeth whitening as a service that constitutes the practice of dentistry and the lack of state supervision of the Board's actions in sending its cease- and-desist letters Thus, "[a] nonsovereign actor controlled by active market participants- such as the Board-enjoys Parker immunity only if its satisfies two requirements: first that the challenged restraint... be one clearly articulated and affirmatively expressed as state policy, and second that the policy... be actively supervised by the State." 18

Supreme Court Dissents Justices Scalia, Alito, and Thomas posted strong dissents. Acknowledged that active state supervision is required to immunize a private entity from antitrust immunity, but noted "North Carolina did not authorize a private entity to enter into an anticompetitive arrangement; rather, North Carolina created a state agency and gave that agency the power to regulate a particular subject affecting public health and safety.“ The dissenting justices thought it irrelevant that a majority of Board members were practicing dentists, in part because it makes sense to put regulation in the hands of knowledgeable practitioners. 19

Implications for National Association of Motor Vehicle Boards and Commissions 20

What does North Carolina Dental Board Mean? It is important to note what the decision does not mean. –It does not mean that the mere inclusion of active market participants on a state licensing board is a violation of the antitrust laws or strips the board of antitrust immunity. –The decision acknowledges that licensing boards composed of active market participants can be immune from antitrust scrutiny if they are actively supervised. The question then is what constitutes sufficient active state supervision? In sum, the Supreme Court explained: –“[T]he inquiry regarding active supervision is flexible and context- dependent. Active supervision need not entail day-to-day involvement in an agency's [or board's] operations or micromanagement of its every decision. Rather, the question is whether the State's review mechanisms provide 'realistic assurance' that a nonsovereign actor's anticompetitive conduct 'promotes state policy, rather than merely the party's individual interests.'" 21

What does North Carolina Dental Board Mean? Moving forward, we expect states to review state board operations in light of North Carolina Dental to confirm that the state is exercising the requisite level of control, i.e., active state supervision. The responsibility for this task will likely fall to state attorneys general, whose offices are frequently tasked with advising and defending state boards. State attorneys general will have to decide how to set up sufficient procedures to ensure that actions by state boards are supervised by appropriate personnel in order to claim state- action immunity from the antitrust laws. 22

What does North Carolina Dental Board Mean? Note that the University of San Diego, School of Law, Consumers Union, and the Citizens Advocacy Center have sent letters to the state attorneys general urging action. –Takes an aggressive interpretation of the case. –Requests information from states on their supervision practices. California –Attorney General working to prepare a formal opinion on state supervision of licensing boards, which included a request for public comment. Oklahoma –Governor issued an Executive Order identifies the Attorney General as the state agency responsible for reviewing state boards. 23

What does North Carolina Dental Board Mean? Factors that would potentially impact the analysis include: –Composition of the board, including the degree to which members are engaged in the private practice; –Whether the board is engaged in regulating conduct that clearly falls under its statutory mandate or whether the conduct is on the periphery of the regulated area (e.g., teeth-whitening services versus traditional issues involving dentistry); –Whether the board exercises its statutory powers or relies on other non- statutory mechanisms (e.g., the cease-and-desist letters in North Carolina Dental, which were not specified as appropriate enforcement mechanisms for the Board) to carry out its mission; –Whether the board must submit its regulations and enforcement mechanisms to a state agency or the state legislature for review and approval; and –The extent to which state employees or attorneys review the board's operations, including enforcement actions. 24

What does North Carolina Dental Board Mean? The bottom line is that state boards, with support from their attorneys general offices, should review their operations in light of North Carolina Dental to confirm that the state is exercising the requisite level of control. Until such an assessment is complete, state boards should assume that their operations are subject to potential antitrust exposure. Other questions to consider: –Does the decision impede a Board’s responsibility to protect the public from unqualified, incompetent regulated persons? –Does the Court’s holding equally apply to regulatory boards whose members may be elected rather than appointed by governor/legislature? –Does the existence of an avenue for judicial review or challenge satisfy the supervision requirement? 25

Questions? 26

© 2015 Venable LLP Mary Williams, Licensing & Enforcement Section Unit Chief Counsel, Office of the Arizona Attorney General Andrew Bigart, Venable, LLP North Carolina State Board of Dental Examiners vs. Federal Trade Commission National Association of Motor Vehicle Boards and Commissions 2015 Fall Workshop September 10, 2015