ABA Antitrust Immunity? Not so Fast

Topics: Government

Hallelujah!

A profession just lost a very big round at the Supreme Court.

I refer of course to the Court’s 6-3 ruling in North Carolina State Board of Dental Examiners v. FTC, finding that the dental examiners’ board attempting to prohibit nondentists from teeth whitening violated the Sherman Antitrust Act. If you think this was some arcane back-page curiosity, read on.

The facts are straightforward:

Starting in 2006, the Board issued at least 47 cease-and desist letters on its official letterhead to nondentist teeth whitening service providers and product manufacturers. Many of those letters directed the recipient to cease “all activity constituting the practice of dentistry”; warned that the unlicensed practice of dentistry is a crime; and strongly implied (or expressly stated) that teeth whitening constitutes “the practice of dentistry.” App. 13, 15. […] Later that year, the Board sent letters to mall operators, stating that kiosk teeth whiteners were violating the Dental Practice Act and advising that the malls consider expelling violators from their premises.

These actions had the intended result. Nondentists ceased offering teeth whitening services in North Carolina.

The Federal Trade Commission (FTC) filed an administrative action challenging the board’s action as an anticompetitive and unfair method of competition, an Administrative Law Judge found in favor of the FTC, and the US Court of Appeals for the Fourth Circuit affirmed. (The state board’s defense was its contention that its actions were not subject to antitrust oversight under the “state action” exemption.)

In refreshingly clear language, the Supreme Court (Justice Anthony Kennedy) invoked basic economic analysis and common sense to find the practice of dentists regulating dentists indeed subject to antitrust scrutiny and, here, flatly and impermissibly motivated by self-interest. Some excerpts (emphasis supplied):

Federal antitrust law is a central safeguard for the Nation’s free market structures.

State agencies are not simply by their governmental character sovereign actors for purposes of state action immunity. See Goldfarb v. Virginia State Bar, 421 U. S. 773, 791 (1975) (“The fact that the State Bar is a state agency for some limited purposes does not create an antitrust shield that allows it to foster anticompetitive practices for the benefit of its members”). Immunity for state agencies, therefore, requires more than a mere facade of state involvement, for it is necessary [to] ensure the States accept political accountability for anticompetitive conduct they permit and control.

Limits on state-action immunity are most essential when the State seeks to delegate its regulatory power to active market participants, for established ethical standards may blend with private anticompetitive motives in a way difficult even for market participants to discern. Dual allegiances are not always apparent to an actor. In consequence, active market participants cannot be allowed to regulate their own markets free from antitrust accountability.

Pregnant with implications for lawyers is the reference to Goldfarb v. Virginia State Bar. As Kennedy characterized Goldfarb,

There the Court denied immunity to a state agency (the Virginia State Bar) controlled by market participants (lawyers) because the agency had “joined in what is essentially a private anticompetitive activity” for “the benefit of its members.” 421 U. S., at 791, 792.

Need I say much more?

I mentioned that Justice Kennedy’s decision was well grounded in economic theory. The particular branch of the literature that deals with questions such as this is referred to as “public choice economics,” which is simply applying standard economic analysis to governmental actions.

A central tenet and finding of public choice economics is that when self-interested economic actors (such as the dentists in this case) are given power to influence or, worse, actually write the rules governing how others may compete with them, they put their private self-interest ahead of their role as stewards of the public interest. Among the many distinguished fathers of public choice economics are Kenneth Arrow (1972 Nobel) and James Buchanan (1986 Nobel), as well as Gordon Tullock, William Niskanen, and Mancur Olson. According to the Library of Economics, “public choice has revolutionized the study of democratic decision-making processes.”

We shall now see, shall we not?, whether the American Bar Association (ABA) decides to relax some of its proscriptions on what is and is not permissible in terms of the economic structures of law firms. In particular, I have to believe the ban on non-lawyer ownership is completely up for grabs now.  The gracious and pre-emptive move would be for the ABA to relax it before it’s struck down entirely.

But don’t hold your breath. To paraphrase Upton Sinclair, it is difficult to get a man to understand something when his livelihood depends upon his not understanding it.  I eagerly await the ABA’s day in court.

(Originally appeared on AdamSmithEsq.com. Reprinted with permission.)