Government monopolies: the Court should not allow immunity unless anticompetitive laws are subsantively justified

August 12, 2014 | By TIMOTHY SANDEFUR

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

In N.C. Dental Examiners v. FTC, the Supreme Court will decide whether to extend Parker antitrust immunity to state regulatory agencies that are dominated by private parties who have a private stake in preventing economic competition against them. In our brief, joined by the Cato Institute, we argue that Parker immunity should not be extended, because state governments so frequently restrict competition in ways that harm consumers and entrepreneurs. In this post, I explain why the Court should not only confine Parker immunity to cases in which private parties are actively supervised by state officials, and where the restriction on competition is actually required by state law, but should also require that the restriction on competition substantially advance an important state interest.

The availability of antitrust immunity for private parties who act as state deputies is troubling not merely as a matter of economic policy but because state licensing entities frequently violate the constitutional rights of entrepreneurs by barring them from the market solely to protect existing firms from competition. We at PLF have seen many such cases—moving companies are subject to Certificate of Necessity laws that bar them from the market whenever existing firms decide they don’t want a new competitor, for example; pest control companies impose burdensome and unnecessary licensing requirements in order to protect themselves from having to compete. As Justice Stevens once warned, “[t]he risk that private regulation of market entry, prices, or output may be designed to confer monopoly profits on members of an industry at the expense of the consuming public” is especially acute “whenever government delegates licensing power to private parties whose economic interests may be served by limiting the number of competitors.”

Such abuses endanger the constitutional right to earn a living—a right Justice Douglas called “the most precious liberty that man possesses.”

Courts should be especially wary when states put federal constitutional rights at the mercy of private parties who have a private interest in blocking the exercise of those rights. The Supreme Court should therefore ensure that the “national policy in favor of competition” serves as a meaningful baseline from which states may deviate only when genuinely necessary. And Courts should employ a substantive limit, not merely a procedural hurdle, on the availability of Parker immunity. Drawing from existing constitutional law, therefore, we argue that Parker immunity should only be available where the restriction on competition substantially furthers an important government interest.

The compulsion and active supervision elements are important, but they are not enough to ensure that private parties do not use Parker immunity to shield themselves from federal law when they use state power to restrict the constitutional rights of entrepreneurs for private benefit. If “[t]he preservation of the free market and of a system of free enterprise without price fixing or cartels is essential to economic freedom,” then there’s no good reason to grant such immunity whenever the state takes some merely procedural step, such as simply declaring that it thinks restricting competition would be a good idea. Antitrust scholars have often urged the Court to require something more than a mere procedural step before a state may exempt private parties from the law: it shouldn’t be as simple as the issuing a formalistic declaration that it means to do so. Instead, there should be some substantive justification, independently assessed by the courts. Thus some scholars have propose that the Court apply a Rule of Reason requirement in such cases. Others have suggested that here should be some evidence of market failure that the restraint would redress, or at least some proof that the state restriction on competition is “reasonable.” Given the importance of the constitutional right at issue, however, a more serious test should apply: the substantial advancement standard.

A “rational basis” test would be excessively deferential, and would permit a state to grant immunity essentially whenever it chooses to, contrary to national policy. Rational basis scrutiny is too murky and permissive, and the Supreme Court has rightly expressed reluctance to lower the standard of legal scrutiny to that level. Here, “national policy, reflected in the antitrust laws, of insisting upon the primacy of competition as the touchstone of economic regulation,” justifies imposing a stronger standard on states. The Court should apply an intermediate form of means-ends scrutiny which would require a state to articulate an important goal to be accomplished by exempting private parties from federal antitrust laws, and require that the exemption serve that end in reality.

If state immunity from the antitrust laws is granted “out of respect for…the State, not out of respect for the economics of price restraint,” then the flexibility accorded states under the antitrust laws should mirror the flexibility states enjoy when they deviate from other federal legal or constitutional baselines. This idea echoes what has often been called “cooperative federalism,” which refers to federal laws that “offer States the choice of regulating that activity according to federal standards or having state law pre-empted by federal regulation.” In the antitrust realm, the Court should apply the inverse rule: federal antitrust liability will presumptively apply, unless the restricting competition is necessary to accomplish a real, and important state goal.

True, the text of the antitrust statutes don’t incorporate a cooperative federalism scheme—but the text doesn’t include any immunity for state action, either. That immunity was created by the courts, and the courts determine its contours. Because unlike the ordinary cooperative federalism model, Parker immunity allows states to act contrary to the federal antitrust baseline, some sort of judicial oversight is warranted to ensure that states do not inflict the sort of anticompetitive harms that the antitrust laws were meant to proscribe. So a substantive limit that allows states to deviate from a national pro-competitive standard would fit well with existing antitrust law.

One possible objection to this approach is that it would involve the Court in reviewing state economic policies, and thus would “reduce[] the range of regulatory alternatives available to the State.” But this objection fails for three reasons.

First, antitrust law has already deeply enmeshed the courts in national economic policy.  Major elements of antitrust law are the products of court rulings, not legislative or even administrative choices. A substantive limit on Parker immunity would therefore not seriously threaten concerns about courts (in Justice Ginsburg’s words) “[striking] down economic regulation enacted by the peoples’ representatives.” Indeed, courts already apply—and must apply—some form of means-ends scrutiny in cases involving antitrust immunity.  The only alternative would be to declare that all state regulations preempt the antitrust laws, which is not an acceptable conclusion.

Second, the federal antitrust laws already proclaim national economic policy—that policy being one opposed to cartel behavior by private parties excluding their rivals from the marketplace. Adding a substantial advancement test would simply enforce policies articulated in existing statutes—and would not create a subjective, judicially-created policy.

Finally, the extreme forms of judicial deference are usually applied only where the political process is believed to be a sufficient safeguard for the individual rights at issue. But the political process is certainly not enough to prevent private parties vested with state authority from engaging in anticompetitive and self-interested behavior. The general public is typically unaware of anticompetitive conduct—especially where state law establishes only a vague “permissive policy”—and although the public genuinely suffers from such conduct, the rewards for those who benefit from it are great enough to ensure that beneficiaries can prevent any serious reform efforts by offended taxpayers. As Aaron Edlin and Rebecca Haw write, “[i]ndividual consumers lack the incentive to participate in the process of licensing regulation; rarely would it be rational for a consumer to take the time and effort to try to change a licensing rule in the hopes of getting a cheaper haircut.”

In fact, in many cases, including this one, neither the general public nor the legislature has any direct control over those engaged in the anticompetitive conduct. The Board is directly elected to fixed terms by licensees who benefit from such conduct—not by the general public or by their elected officials, and certainly not by the entrepreneurs who need protection from the Board, and whose right to earn a living is sacrificed by barriers to entry.  Such entrepreneurs are “relegated to such a position of political powerlessness as to command extraordinary protection from the majoritarian political process.” Also, restraints of trade under the color of state law often have spillover effects in other states, where those who suffer from the conduct again have no power whatsoever to take political action against it.

Simply put, a substantive, and not merely procedural, test is needed to protect the constitutional rights of entrepreneurs, who have no realistic political protection against vested interests who exploit Parker immunity and state power to block newcomers from exercising their right to earn a living. A substantial advancement test would leave states with flexibility to authorize private parties to restrain trade if doing so is actually important, but would also ensure that entrepreneurs are not wholly at the mercy of the very firms who have the strongest interest in barring them from the marketplace.