|December 14, 2011|
Previously published on December 13, 2011
The Federal Trade Commission (FTC or Commission) has a long history of challenging state licensing boards’ actions that restrict competition. This history includes advocating against restrictive legislation at the state level and litigation — some of which has reached the Supreme Court — on restrictive rules, such as limiting when and under what circumstances non-medical practitioners can conduct eye exams, provide oral exams and basic teeth cleaning services, and interpret x-rays. On December 2, 2011, the FTC added to this history when it unanimously concluded that the North Carolina State Board of Dental Examiners (the Board) illegally thwarted competition by working to bar non-dentist providers of teeth whitening goods and services (such as mall kiosks, spas, retail stores, and salons) from selling their products to consumers. In reaching this conclusion, the Commission rejected the Board’s state action defense and substantively determined that certain actions of the Board actually represented illegal conspiratorial conduct by dentists who were Board members, who, for the FTC’s purposes, represented separate economic actors. This is unlikely to be the last word on these issues in this case.
The North Carolina Board of Dental Examiners
The Board is an agency of the State of North Carolina and is statutorily charged with regulating the practice of dentistry in the state. By law, six of the eight members of the Board must be practicing dentists (the other two members are a licensed hygienist and a consumer representative). In the event the unlicensed practice of dentistry is suspected, the Board may bring an action to enjoin the practice in court or refer the matter to the District Attorney.
Importantly, the Board does not, itself, have the authority to discipline unlicensed individuals or to order non-dentists to stop violating North Carolina’s Dental Practice Act.
Over the past five years, the Board sent dozens of “cease and desist” letters to non-dentist teeth whitening providers and distributors ordering them to cease and desist from “all activity constituting the practice of dentistry.” The Board discouraged prospective non-dentist providers from opening teeth whitening businesses, and it sent letters to owners and operators of shopping malls to discourage their leasing space to non-dentist teeth whitening businesses. The Board’s goal in sending these letters, the Commission found, was to stop non-dentists from providing teeth whitening services and products.
The FTC’s Complaint Against the Board
On June 17, 2010, the Commission issued a single-count Complaint against the Board alleging that the Board violated Section 5 of the FTC Act by classifying teeth whitening as the practice of dentistry and enforcing this determination through cease and desist orders, which were neither authorized nor supervised by the State, and that were designed to, and did, drive non-dentist teeth whiteners out of business in North Carolina. The FTC’s Complaint alleged that the Board, reacting to a growing competitive threat, sought to exclude, and did exclude, non-dentists from the market for teeth whitening products and services in North Carolina.
The Commission Rejects Board’s “State Action” Defense
Notably, in an early procedural matter after the filing of the Complaint, the Commission rejected the Board’s argument that it was immune from suit under the state action doctrine. The Commission explained that, because the Board is controlled by practicing dentists, the Board’s challenged conduct must be “actively supervised” by the State for it to claim state action exemption from the antitrust laws. The Commission found that because the undisputed facts showed that there was no such supervision, the antitrust laws applied to the Board’s conduct. Later in the case, after an Administrative Law Judge (ALJ) held that the Board’s action to exclude these providers from offering their services to the market harmed competition, the Board sought to re-litigate the applicability of the state action defense on appeal. However, the Commission noted in its Opinion and Final Order that the Board failed to identify any change in controlling law that would require the Commission to reconsider its earlier decision.
The FTC’s Analysis in Its Final Opinion and Order
The Commission affirmed the ALJ’s determination that non-dentists legally provide certain teeth whitening products and services and that the Board’s action to exclude these providers from offering their services to the market harmed competition and violated Section 5 of the FTC Act. Further, the Commission found that the Board’s actions resulted in higher prices and fewer choices for consumers of these products and services.
The Commission applied the standards of Section 1 of the Sherman Act to assess whether the challenged actions of the Board violated Section 5 of the FTC Act. First, the Commission inquired into whether the Board’s conduct constituted concerted action and, second, it inquired into whether the conduct amounted to an unreasonable restraint of trade. The Commission applied the three alternative modes of analysis under the rule of reason as outlined in Indiana Federation of Dentists.1
As for concerted action, the Commission held that Board members were capable of entering into an agreement and conspiring under Section 1 because they are actual or potential competitors. The dentist members of the Board were “separate economic actors pursuing separate economic interests whose joint decisions could deprive the marketplace of actual or potential competition.” The Commission then found evidence that the dentist members of the Board did, in fact, have a common plan to exclude non-dentist teeth whitening providers from the market.
The Commission proceeded to scrutinize the challenged conduct of the Board under both the “quick look or inherently suspect” analytical framework and then the full rule of reason to determine whether the Board unreasonably restrained trade. It concluded under both analyses that all of the evidence indicated that the Board’s concerted action was anticompetitive. The conduct had an “obvious tendency” to suppress competition, increase prices, and harm consumers of teeth whitening products and services. In fact, the Commission went so far as to state that the challenged conduct bears a close resemblance to conduct condemned by the Supreme Court as “per se” illegal. Finally, the Commission held that the Board failed to advance a legitimate pro-competitive justification for its conduct and rejected various social welfare and public safety concern defenses, among others, asserted by the Board.
The FTC’s final order contains various remedies to restore competition in the teeth whitening products and services industry. The Board may not do the following, among other actions:
Direct a non-dentist provider to stop providing teeth-whitening products or services;
Prohibit, restrict, impede or discourage the provision of teeth-whitening goods or services by a non-dentist provider;
Communicate to a non-dentist provider (or prospective provider) that it would violate the Dental Practice Act by providing such products or services;
Communicate to a commercial property lessor that the provision of teeth whitening services by a non-dentist is a violation of the Dental Practice Act; or
Communicate to any manufacturer, distributor, or seller of teeth whitening products used by non-dentists that providing such products is a violation of the Dental Practice Act.
In this case, the FTC found a Sherman 1 violation by concluding that validly appointed members of the State Board of Dentistry were actually private conspirators when they utilized the Board’s processes to send cease and desist letters to non-dentist teeth whitening businesses. Industry professionals, including those who are brought together to serve on a licensing Board or function as an agency by operation of state law, must be cognizant of their activities as they relate to the basic federal antitrust laws. The state action doctrine is clearly not a bullet-proof exemption. And, as seen in this case, the FTC will not hesitate to protect competition in the marketplace if the conduct of such professionals — even those who are technically part of a state agency — leads to higher prices and reduced choices for consumers.
1 F.T.C. v. Indiana Federation of Dentists, 476 U.S. 447 (1986)