North Carolina's dental board, teeth whitening and the Supreme Court

There is a rule of thumb in business that you should never let your competitors write your regulations. North Carolina forgot it, and the Supreme Court had to remind everyone in 2015.

The facts sound like a sketch. A group of dentists, sitting as a state board, decided that teeth whitening at a mall kiosk was a threat to the profession. They did not respond by whitening teeth better or cheaper. They responded by sending letters. The case that followed, North Carolina State Board of Dental Examiners v. Federal Trade Commission, is one of the most useful decisions in modern law for anyone who wants to understand how government power is turned into private advantage, and how a court can limit it without touching the legislature's authority to license.

I will take it in the order a judge would: the facts, the question, the legal background, the holding, the reasoning, the dissent, and what followed.

The facts

North Carolina, like every state, licenses the practice of dentistry. The licensing is administered by the State Board of Dental Examiners, which the legislature created under the Dental Practice Act. The Board has eight members. Six of them must be licensed dentists, elected by other licensed dentists in the state. That structure is the whole story, so keep it in mind: the people who regulate dentistry in North Carolina are mostly practising dentists, chosen by practising dentists.

Teeth whitening is a cosmetic procedure. A bleaching agent is applied to the teeth, and the teeth become lighter. Dentists offered it, at a price. Beginning in the 2000s, non-dentists began offering the same service, often at a lower price, in storefronts and mall kiosks. The customers liked it, and the dentists lost business.

A number of dentists complained to the Board about the non-dentist providers. The Board did not, in the main, go to court or ask the legislature to define whitening as the practice of dentistry. Instead, beginning in 2006, it sent a series of cease-and-desist letters on its own letterhead to the non-dentist whitening businesses, telling them that what they were doing was the unlicensed practice of dentistry and that they had to stop. It also wrote to some of the owners of the malls where the kiosks sat, warning them that their tenants were operating unlawfully. The effect was predictable. Businesses closed or stopped offering whitening, and mall owners stopped leasing space to them. By the time the dust settled, non-dentist whitening had been driven from much of the state.

Notice what the Board did not have. The legislature had never said that whitening teeth is the practice of dentistry. The letters took the position that it was, and the Board enforced that position through intimidation rather than through the courts.

The question

The Federal Trade Commission brought an administrative complaint against the Board, alleging that the effort to exclude non-dentist whiteners was an unfair method of competition that violated the Federal Trade Commission Act. The Board's defence was not that the conduct was good for consumers. It was that the Board, as an arm of the state of North Carolina, was immune from federal antitrust law.

The Supreme Court framed the question this way: when a state board is controlled by active market participants, in other words by people who compete in the very market the board regulates, does the board's conduct enjoy immunity from the antitrust laws without any further supervision by the state?

The background: state-action immunity

The immunity the Board relied on comes from Parker v. Brown, decided in 1943. In that case California had a program to regulate the marketing of raisins in order to stabilize the price, in effect a state-run cartel. A raisin grower claimed it violated the Sherman Act. The Supreme Court held that the Sherman Act did not reach the actions of a state acting as a sovereign. Congress, in passing the Sherman Act, had been concerned with private restraints on trade, not with a state's decisions about its own economy. The ruling is rooted in federalism: Washington does not lightly intrude on the way a state governs.

But the Court has been careful about the limits. Private parties do not become immune just because a state's policy happens to favour them. In California Retail Liquor Dealers Association v. Midcal Aluminum, in 1980, the Court set a two-part test for when private conduct benefits from the Parker doctrine: the restraint must be clearly articulated and affirmatively expressed as state policy, and the policy must be actively supervised by the state itself. Without that second condition, a state could hand its authority to a private cartel and claim immunity.

The Board's argument was that it was not a private party at all. It was a state agency, and agencies of the state, the Board said, should be immune without the Midcal supervision requirement. The Fourth Circuit disagreed and the FTC's order stood. The Supreme Court took the case.

The holding

On February 25, 2015, the Court ruled six to three against the Board. Justice Anthony Kennedy wrote the opinion. The holding is that a state board on which a controlling number of the decision-makers are active market participants in the occupation the board regulates may invoke state-action antitrust immunity only if it satisfies Midcal's active-supervision requirement. The Board had not. No state official had reviewed its decision to send the cease-and-desist letters, and nobody had ever checked whether the exclusion of non-dentist whiteners served any state policy.

I will state the logic in numbered premises, because it is a clean piece of reasoning.

1. State-action immunity exists to protect the sovereign choices of the state, not the private interests of those who happen to hold state titles.
2. A state agency that is a true arm of the state, answerable to the public through electoral and political means, can reasonably claim that its choices are the state's choices.
3. A board controlled by active market participants is different. Its members have a private economic interest in the market they regulate. The risk that they will use their authority to serve their own interest rather than the state's is real, and the risk is the same as in the case of a private cartel that gets state approval.
4. The protection against that risk is supervision by someone who does not share the self-interest: a state official, who has the power to veto or modify the decision and who actually exercises it.
5. Therefore, such a board must show active supervision to claim immunity. The Board in this case could not.

The Court was also clear about what it was not doing. It did not hold that boards of practitioners are unconstitutional or that states cannot license the professions. It did not hold that the Board's conduct violated the antitrust laws in every respect; it affirmed the finding of unfair competition because the immunity defence failed. And it did not tell the states how to supervise. It said that supervision must be real, that it must be performed by a state actor who is not a participant in the market and has the power to reject the decision, and that the details could vary.

The dissent

Justice Samuel Alito wrote the dissent, joined by Justices Antonin Scalia and Clarence Thomas. The dissent deserves a fair hearing, because it does not defend what the Board did. Its argument is structural.

Alito's position was that the Board is a state agency, created by statute, with its members appointed or elected under state law, and charged with enforcing the state's dental licensing law. When a state agency acts, the dissent said, it is acting as the state, and Parker immunity should apply. Under the majority's rule, a state board becomes subject to federal antitrust scrutiny based on the composition of its membership, a test the dissent called unworkable. How many members must be active market participants for the board to be "controlled" by them? What counts as a market participant? What kind of supervision is enough? The dissent argued that the majority had put the states in the position of having to guess, and that the decision interfered with the ability of states to organize their own governments.

There is a respectable federalist concern in that. States are entitled to design their agencies, and Washington's antitrust bureaucracy should not be a general inspector of state administration. Where I come out against the dissent is on the facts of this case. The Board did not act under any state statute that defined whitening as dentistry, and no state official reviewed what it did. When the state has not decided, and nobody accountable to the voters reviewed the decision, there is no sovereign choice to protect. What the dissent calls an agency decision was in practice a trade-association decision under an official name.

What the case does not say

It is worth being careful about the limits, because commentators sometimes overstate it.

• The case does not say that licensing is illegal or that licensing boards cannot include practitioners. Practitioners know the trade, and a board without them would be ignorant.
• It does not say that a board's decision to discipline a dentist for malpractice is an antitrust violation. Enforcement against a licensed professional who harms a patient is the heartland of what boards do.
• It does not require a state to give up its regulation of the professions. It requires that when the market participants are in control, a state official must be able to say no.

What followed

The Federal Trade Commission's staff issued guidance in October 2015 on what the Court's decision means for state regulatory boards, explaining the factors that count as active supervision: the supervisor must review the substance of the decision and not merely the procedure, must have the power to veto or modify it, and must not be an active market participant. After that, states and their attorneys general reviewed how their boards were set up. Some states passed laws requiring that regulatory actions be reviewed by a state official or a separate body before they take effect, and some added public members to boards or limited the power of boards to take certain actions without such review. The details differ by state and change when a legislature meets, so the place to check is your own state's statutes and your attorney general's office.

The deeper lesson is about structure. Dental Examiners did not announce a new right. It pointed out that when government hands its coercive power to the private interests that benefit from it, someone has to be able to check that power. The Founders understood this problem. James Madison wrote in Federalist No. 10 that no man is allowed to be a judge in his own cause, because his interest would certainly bias his judgment. A board in which dentists decide who may compete with dentists is a judge in its own cause.

The conservative case from the decision

I would draw four conclusions, and I would draw them as conservatives and not as libertarians, because the point is not that regulation is always bad. The point is about accountability.

1. Power must answer to the public. A state agency whose decisions nobody elected and nobody reviews is a small, private government. A free republic should not have those.
2. Entry barriers are the incumbents' best weapon. I made that argument in big companies love the regulations their small rivals cannot afford, and this case is the field test: the incumbents used the state's name to protect themselves from a cheaper rival.
3. The remedy is structural, not rhetorical. A rule that the Board must be supervised by an accountable official does more than a thousand speeches against red tape. It changes who holds the veto. For the wider pattern of state reform, see arizona's universal license recognition and the case for copying it.
4. Federalism is not an excuse. States are free to experiment, and they should be. But federalism protects choices made by the state's accountable institutions. It does not protect a trade guild that happens to have a letterhead.

The burden of rules like these falls hardest on the small operator who cannot afford a lawyer, a theme I took up in the regulation bill a ten-person company pays that a giant can shrug off. The kiosk owner in North Carolina did not have a legal department. He had a letter from a body that looked like the government, and he complied.

You can read the broader record of these cases on the courts page, and you can see how the rules pile up on the red tape page. The point of reading them is not outrage. It is to learn to ask the one question this case teaches: when the government tells a competitor to stop, who benefits, and who checked?

The case in brief

1. North Carolina's dental board, six of eight of whose members were practising dentists chosen by dentists, sent cease-and-desist letters to non-dentist teeth-whitening businesses and to mall owners, with no statute defining whitening as dentistry.
2. State-action immunity under Parker v. Brown (1943) protects a state's sovereign choices, and Midcal (1980) requires a clearly articulated state policy and active state supervision when private actors are involved.
3. In North Carolina State Board of Dental Examiners v. FTC (2015), the Court held six to three that a board controlled by active market participants must show active supervision to claim immunity, and that this Board had not.
4. The dissent of Justices Alito, Scalia and Thomas raised a real federalism concern about an unworkable test, but it did not answer the fact that no accountable state official reviewed the Board's decision.
5. The remedy is structural: licensing boards need review by someone who does not share their economic interest.

What you can do: find out who sits on the licensing board for a trade in your state, how those members are chosen, and whether any state official reviews its decisions, and raise it with your state representative.