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The Professional Testing Blog

Has Your Board Been Immunized?

Occupational regulation has experienced a remarkable level of expansion over the past several decades and the public protection role of occupational regulation has generally been accepted as the logically justifiable rationale for its creation.

Indeed a large body of economic literature has shown that free markets for professional services may not produce efficient outcomes resulting from market failures of information asymmetries, natural monopolies and externalities that harm the public.

While common ground can be found in a market failure rationale for regulatory intervention, much of the regulatory power at the State level rests with occupational licensing boards, whose members consist of active participants in the profession being regulated. Licensing boards regularly meet to establish and maintain requirements for entry into hundreds of occupations. Scholarly research on the effects of this structure in occupational regulation have concluded that among its unwanted consequences is the creation of industry captured cartels, limiting competition and increasing costs to consumers, without a proportional welfare benefit in terms of quality or safety.

In the private sector many activities and actions conducted by licensing boards would be considered violations of Sherman Antitrust Act which bans cartels and other forms of anticompetitive activity.  But licensing boards have historically been viewed as sanctioned extensions of the State and therefore protected under the sovereign immunity clause of the 11th amendment.

Reinforcing this interpretation was the 1943 U.S. Supreme Court ruling in Parker v. Brown that anticompetitive acts directed by the legislature of a State are exempt from the prohibitions of the Sherman Act.  This ruling held that antitrust laws were not intended to prevent any State’s ability to restrict competition in pursuit of the State’s goals in protecting the public interest. This gave rise to what is known as the State doctrine of immunity.

The strong State sovereignty rationale in decisions since then have avoided the fact that statutory interpretation of the Sherman Act did not intend to automatically exempt private action simply taken pursuant to state policy or delegated authority as commonly the case with occupational licensing boards.

Bringing this to light in a significant way was a recent United States Supreme Court ruling in In North Carolina State Board of Dental Examiners v. Federal Trade Commission, that policy making by state occupational licensing boards composed of active market participants are not immune from federal antitrust laws.

The case involved the North Carolina Board of Dental Examiners who attempted to prevent non-dentists from offering teeth whitening services. The FTC in this case charged that the Board engaged in extra-judicial activities aimed at preventing non-dentists from providing teeth whitening services.  The FTC sated in its complaint that:

Dentists in North Carolina, acting through the instrument of the North Carolina Board of Dental Examiners (“Dental Board”), are colluding to exclude non-dentists from competing with dentists in the provision of teeth whitening services. The actions of the Dental Board prevent and deter non-dentists from providing or expanding teeth whitening services, increase prices and reduce consumer choice without any legitimate justification or defense, including the “state action” defense. The actions of the Dental Board unreasonably restrain competition and violate Section 5 of the Federal Trade Commission Act.

The complaint concludes that the conspiracy, acts, and practices of the Board constitute anticompetitive and unfair methods of competition in or affecting commerce in violation of section 5 of the FTC Act. In its complaint the FTC argued that the Board was not protected by State-action immunity because its actions were not reviewed or actively supervised by a disinterested State official to ensure that they were in accord with state policy.

In its 6-3 decision, the Supreme Court agreed that the Board’s actions did represent an illegal suppression of competition and that the Board while authorized by the state to regulate the profession, is not a State agency and therefore a non-sovereign actor. In his majority opinion Justice Kennedy wrote:

“Where a State delegates control over a market to a non-sovereign actor, the Sherman Act confers immunity only if the State accepts political accountability for the anticompetitive conduct it permits and controls. Limits on state-action immunity are most essential when a State seeks to delegate its regulatory power to active market participants….”

The Court left us with four basic requirements for active supervision that occupational licensing boards must show: (1) Active supervision by the State of  anticompetitive decisions must be  substantive, not merely the procedures followed to produce it,” (2) The supervisor must have the power to veto or modify the particular decisions (3) The mere potential for review is not an adequate substitute for a decision by the State; it must actually occur (4) The supervisor must be a disinterested State official.

Most States commonly regulate professions and occupations through boards constituted by active participants in the fields they regulate. The decision in North Carolina should prompt States to examine their level of active supervision and perhaps member composition in order to ensure protection against antitrust litigation.

The temptation to expand the reach of practice restrictions will likely increase as new technologies, artificial intelligence and new business models are opening up doors to greater occupational specialization and professional practice boundaries become less fixed. State boards should use caution when taking actions that will be perceived as protecting their market.

Categorized in: Industry News