Cartels shouldn’t be exempt from anti-monopoly laws just because they’re run by states

August 06, 2014 | By TIMOTHY SANDEFUR

(Part 1 of a series. Here are Part 2, Part 3, and Part 4)

There’s a lot not to like about antitrust law, but the basic idea that monopolies are bad, and that everyone should have the right to compete honestly in the free market, is a cornerstone of our society. Sadly, antitrust is so riddled with irrational rules and exemptions that the only entity that can actually create genuine monopolies—the government—is usually exempt from the anti-monopoly laws.

True monopolies can exist only where the government prohibits competition. In a free market, a large company that sought to raise its prices above market rates would soon be disciplined by the market, because new competitors would enter the business and charge less. Even so-called natural monopolies are generally subject to market discipline—and if a business does out-compete all its rivals by producing goods and services people need, or by lowering prices to a level nobody else can match, that’s a good thing! Sadly, antitrust law is frequently used to persecute successful companies whose only crime is providing goods people want at prices they’re willing to afford, and to prop up businesses that cannot compete in terms of price or quality.

Government, on the other hand, frequently creates and maintains monopolies. It prohibits low prices, bars new entrepreneurs from entering a business, and imposes requirements that privilege existing firms against competition solely for protectionist purposes. And when it does so, it’s typically exempt from the antitrust laws under a theory called Parker immunity. Thus the worst offender is the only one exempt from the prohibition on monopoly practices.

This makes no sense. As Chief Justice Warren Burger once put it, if the antitrust laws were “‘meant to deal comprehensively and effectively with the evils resulting from contracts, combinations and conspiracies in restraint of trade,’” then it is “wholly arbitrary” to treat government-imposed restraints of trade as “beyond the purview of federal law.”

Consider the case of North Carolina Board of Dental Examiners v. Federal Trade Commission, now pending before the Supreme Court. The state’s Dental Examiners Board is supposed to regulate the practice of dentistry in the state. But the Board is made up almost entirely of practicing dentists, who have a strong personal interest in preventing competition in the dental field—and they are elected by practicing dentists, not the general public. Unsurprisingly, when they received complaints from some dentists about people practicing “teeth whitening,” the Board declared that the teeth-whiteners were practicing dentistry without a license.

Teeth-whitening is not only safe and legal, but you can buy tooth-whitening supplies over the counter in your grocery store, and do it at home! Nevertheless, the state’s dentistry bureaucrats declared that you have to get a dentist license to do it. Why? Because they didn’t want the competition.

The Federal Trade Commission prosecuted the Board on the grounds that they were maintaining a cartel—prohibiting free competition in the dental industry, not for public safety reasons, but simply to prevent economic competition. But the Board argued that, as a state agency, they enjoy the Parker antitrust immunity and could not be prosecuted for their anticompetitive behavior.

Amazingly, the Fourth Circuit rejected that argument and ruled for the FTC. This marked one of the few times that a court has refused to immunize the government from its own antitrust laws. Now, the Supreme Court has taken the case, and we filed this brief, joined by our friends at the Cato Institute. We argue that Parker antitrust immunity should be granted to private parties acting under state law only in very rare cases—that is, only where (1) the state’s anticompetitive conduct is actually mandated by state law, and not just implicit in or authorized by, the state; (2) the private actors who are enforcing the anticompetitive conduct are actively supervised by state officials; and (3) the anticompetitive conduct in question substantially advances an important state interest.

States should not be allowed to create cartels by deputizing a group of practitioners and then leaving it to them to make their own rules for controlling the trade. To do so is simply to resurrect the same “guild” system that the first anti-monopoly laws were written to restrict.

In the coming days, I’ll explain why the NC Dental Examiners case is so important, and why the Court should rein in the availability of antitrust immunity for state government agencies.

Update: Part 2:Why Southern Motor Carriers should be overruled – Part 3: Why courts should enforce the “active supervision” requirement.