Law360 Article
SmileDirect Decision Reveals Antitrust Risk For State Boards
September 11, 2020
By:
Law360
The new normal developed in response to the coronavirus pandemic has radically changed the way that professional services are provided to consumers.
For many professions, working remotely rather than in an office setting has become pervasive. Virtual physical exams have become commonplace in health care. Virtual education is the norm for students from preschool through graduate school.
In-person testing for professional licensure has largely been replaced by online testing programs. The court systems have moved to utilize Zoom-type depositions and hearings and, in some situations, actual Zoom trials.
How are professional service providers held accountable to meeting the requirements of professional practice amid these drastic changes? In our system of government, state boards often have the responsibility of developing regulations that establish what constitutes minimum requirements for professional practice.
Historically, a majority of the members of such state boards are active, practicing members of the profession that they are regulating. In a wide range of antitrust cases involving highly regulated professions such as — but certainly not limited to — lawyers, doctors and dentists, courts have found that members of state boards are subject to the antitrust laws. In the seminal 2014 decision in North Carolina State Board of Dental Examiners v. Federal Trade Commission, the U.S. Supreme Court held:
When a State empowers a group of active market participants to decide who can participate in its market and on what terms, the need for supervision is manifest. The Court holds today that a state board on which a controlling number of decision makers are active market participants in the occupation the board regulates must satisfy Midcal's [California Retail Liquor Dealer's Association v. Midcal Aluminum, Inc.] active supervision requirement in order to invoke state-action antitrust immunity.
Every state and city has advisory boards and commissions. For example, the city of New York lists more than 300 advisory boards and commissions. Since the time of the North Carolina Dental Examiners decision, the makeup of these boards has been evolving and inclusion considerations have expanded the areas of expertise and interests on state boards.
Many state boards include several consumer representatives to provide user input. State government experts also may be included. And some are dominated by active practitioners, though they may not be aware of the fact that they possibly face personal antitrust liability.
The U.S. Court of Appeals for the Eleventh Circuit's recent decision in SmileDirectClub LLC v. Tanja Battle demonstrates this exposure and the growing, imperative need for attorneys who represent state boards or state board members to review and monitor their clients' activities. This case gives us a fascinating preview or, in the words of dissenting U.S. Circuit Judge Gerald Tjoflat, an advisory opinion of how state board members may be subject to antitrust liability unless state governments carefully supervise their activities.
Summary
SmileDirectClub offers orthodontic treatments at a steep discount compared to typical orthodontists, because unlike the typical orthodontist, it does not provide in-person treatment. SmileDirectClub SmileShops are staffed by dental technicians, not a dentist or orthodontist.
Patient scans are sent to state-licensed dentists who review and identify any periodontal disease, cavities or other oral conditions that would require further investigation or prevent the patient from being a candidate for SmileDirectClub's treatment. If no such problems are present, the dentist writes a patient-specific plan and ultimately a prescription for SmileDirectClub's clear aligners, which are sent to the patient by mail.
The Georgia Board of Dentistry was organized pursuant to Georgia Title 43, Chapter 11 of the Code of Georgia. At the time of this litigation, the board had 11 members, nine of whom were practicing dentists licensed in Georgia. One board member was a dental hygienist and one was a nondental professional. The board had the power to regulate the acts and practices performed by dental hygienists, dental assistants or other persons at the direction of and under the supervision of a licensed dentist.
On Jan. 24, the board voted to amend Rule 150-9-.02, which related to expanded duties of dental assistants. The proposed amendment added conducting digital scans for fabrication of orthodontic appliances and models to the duties of dental assistants that required direct supervision of a dentist.
"Direct supervision" was defined to require a Georgia-licensed dentist to be in the dental office or treatment facility, personally diagnose the condition to be treated, personally authorize the procedures to be done by the dental assistant, remain in the facility while the procedures are being performed, and before dismissal of the patient, evaluate the performance of the dental assistant.
The board sent the proposed amendment to the Georgia governor, who by statute was required to approve, modify or veto the proposed rule amendment.[1] On April 30, 2018, the governor issued a certificate of active supervision to the board approving the proposed amendment "for the purposes of active certification review required by Sec 43-1C-3."
Consequently, SmileDirectClub sued the board and the board members in their individual capacity, alleging antitrust, equal protection and due process violations. The board members filed a Rule 12(b)(6) motion to dismiss the antitrust violations.
The district court denied the motion to dismiss finding that, based on the complaint, there was insufficient evidence to conclude that the Midcal active supervision test had been met. The members of the board appealed to the Eleventh Circuit arguing that, on its face, the certificate of active supervision met the test.
The three judge panel of the Eleventh Circuit issued a 2-1 decision to send the case back to the district court.
Takeaways
The majority opinion by U.S. Circuit Judge R. Lanier Anderson III is of great value to professional associations, state boards and legal practitioners. It begins by discussing the antitrust state-action immunity doctrine of Parker v. Brown, explaining that the Sherman Act applies to individuals but not to action by state governments.
However, the state action immunity doctrine does not allow states to "give immunity to those who violate the Sherman Act by authorizing them to violate it or by declaring that their action is lawful."[2]
Therefore, under the rationale of North Carolina State Board of Dental Examiners v. FTC, ibid, where a state board is composed of active market participants, the State Board members do not automatically get antitrust immunity. Actions of state boards must meet the Midcal active supervision test.
The Eleventh Circuit court found that, although the governor clearly had the authority to exercise active supervision, there is no evidence that he actually did so. Judge Anderson stated:
There is no indication that the Governor engaged in a substantive review of the amended rule to ensure that it accords with state policy. His comments regarding the proposed amendment in the Certificate of Active Supervision suggest that he only examined the procedural question of whether the amended rule was within the Board of Dentistry's statutory power to propose a rule change. The Governor did not comment—even in passing—on the merits or the contents of the rule change. Quite the contrary. The reasonable inferences from his Certification is that he ascertained that the amendment was within the authority delegated to the Board by the Georgia statute … This is exactly the sort of potential for active supervision—without active supervision—that the Supreme Court has repeatedly held is insufficient to satisfy the active supervision requirement.
This decision should serve as a reminder that, when a new seller enters the marketplace offering a new and cheaper alternative for services or products, the seller may be faced with a situation where a state board or government regulator, based on input from current sellers, decides to curtail the new seller's market access.
In such situations the actions of the members of the state board or advisors to the government regulator may violate the antitrust laws. Many industry and professional groups have tried to hide behind the skirts of government and conspire to keep innovative, lower-priced products and services from the market.
In defending their turf, they may be violating the antitrust laws. Per se antitrust violations such as price-fixing, bid-rigging, customer allocations and some concerted refusal to deal are felonies. Individuals convicted of such felonies are subject to a minimum jail sentence of one year.
If you have a client serving on a state board or if you advise a state board, you should take necessary steps to ensure that actions of the state board and its members are subject to the type of active supervision described in the SmileDirectClub decision.
This case also highlights the need for state boards to recognize that, where a state board composed of active practitioners is engaging in activities that have a possible anticompetitive affect, even if the state board is created by the legislature and its members are appointed by the governor, antitrust counsel must review the proposed course of conduct to insure that it meets antitrust requirements.
The antitrust review must be by someone who has the specific authority to approve, modify or veto the proposed rule. If this is not done, the individual state board members who established the rule face personal liability, even if their actions have been submitted for approval to another state agency that has supervisory authority.
The SmileDirectClub decision emphasizes that the test is not what the supervisor is authorized to do or even what the supervisor says was done. The test is whether the supervisor made an independent antitrust analysis of the underlying facts and concluded that the proposed action does not violate the antitrust laws.
All states have a person or group in the attorney general's office with specific antitrust responsibilities. It would be prudent to have such a person be given the responsibility of reviewing actions of state boards comprised of active market participants and the authority to approve, modify or veto such actions.
[1] O.C.G.A. Sec 43-1C-3.
[2] 317 U.S. 351.