Government monopolies: the Court should enforce the "active supervision" requirement

August 11, 2014 | By TIMOTHY SANDEFUR

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

In the N.C. Dental Examiners case, the Supreme Court will decide whether Parker antitrust immunity should apply to state regulatory agencies that are run entirely by private parties who have a private stake in preventing economic competition against them. Our brief, joined by the Cato Institute, argues that Parker immunity should not apply. In this post, I explain why the Court should reject the states’ effort to escape the “active supervision” requirement that is usually one of the prerequisites for Parker immunity. When deciding whether private parties acting as government deputies are immune from the Sherman Act or other antitrust laws, the Supreme Court has typically required that those private parties be “actively supervised” by disinterested state officials. Ever since Parker, the Court has insisted that states cannot “give immunity to those who violate the Sherman Act by authorizing them to violate it, or by declaring that their action is lawful.” The “active supervision” requirement is intended to ensure that states don’t just hand out Parker immunity willy-nilly. The Supreme Court has said that this supervision cannot be a mere formality, but must be genuine—states must exercise “sufficient independent judgment and control” over the private parties who are engaging in the anticompetitive acts to ensure that those acts are really the “product of deliberate state intervention.” The Court has not applied the “active supervision” requirement in cases involving state agencies or city governments, however, because obviously the government can be presumed to “actively supervise” itself. The North Carolina Board of Dental Examiners argues that it is a state agency, so the “active supervision” requirement should not apply. But this argument is absurd. The Board of Dental Examiners is made up entirely of practicing members of the trade that it regulates—and is elected by members of that trade, not the general public—so the conflict of interest is obvious: the foxes who stand to gain the most from unjustly restricting economic competition are put in charge of the competitive henhouse. As the Fourth Circuit said when it rejected the Board’s argument, “state agencies in which a decisive coalition (usually a majority) is made up of participants in the regulated market, who are chosen by and accountable to their fellow market participants, are private actors,” and cannot be exempt from the “active supervision” requirement for Parker immunity. Without that supervision, private parties will simply use government power to prohibit economic competition against themselves: the very definition of monopolistic behavior. Worse, not only is the Board made up almost entirely of licensees who have a substantial private interest in excluding competition from teeth-whiteners, but the agency acted not on complaints from consumers, but from other dentists, who were concerned primarily about economic competition against them. Teeth-whitening is simply not a realistic danger to the public—most states don’t require a person to have a license to do it, and you can even do it yourself in your own home with over-the-counter kits. Some states have urged the Court to disregard the obvious conflict of interest here, because states often staff their regulatory agencies with practicing members of trades and professions that they are charged with regulating. They claim that “state legislators have [good] reason[] to choose to rely on the specialized knowledge of professionals to regulate their own market.”  But it’s at least equally common for existing businesses to seek regulation as a way of preventing competition against themselves. As Milton and Rose Friedman put it, “[t]he justification” for such laws

is always the same: to protect the consumer. However, the reason is demonstrated by observing who lobbies . . . for the imposition or strengthening of licensure.  The lobbyists are invariably representatives of the occupation in question rather than of the customers . . . .  [I]t is hard to regard altruistic concern for their customers as the primary motive behind their determined efforts to get legal power to decide who may be a plumber.

There are plenty of ways for states to get the information they need without stacking regulatory boards with the very people who stand to gain the most from abusing their power. Regulatory agencies could be staffed by independent state officials who invite comment and input from professionals while keeping final decision-making authority in accountable hands. Or agencies could be made up of retired members of the profession, or could include existing members without letting them make up the majority of the board. Ideally, states could use alternatives to statutory licensing laws, such as private certification, so that consumers, rather than bureaucrats, could choose what services to purchase and what businesses to patronize. These and other alternatives would easily allow the state to obtain specialized knowledge while also resisting the danger of private exploitation of public power. One need not deny that states may have an interest in obtaining “specialized knowledge” to see that the danger of self-interested action by regulatory agencies dominated by private actors is a real one—and that the active supervision requirement allows states to obtain needed knowledge while ensuring compliance with the antitrust statutes. As the Supreme Court explained in Patrick v. Burget, the active supervision requirement is designed to allow states flexibility in their regulatory policies within the boundaries of federal law: it “requires that state officials have and exercise power to review particular anticompetitive acts of private parties and disapprove those that fail to accord with state policy.  Absent such a program of supervision, there is no realistic assurance that a private party’s anticompetitive conduct promotes state policy, rather than merely the party’s individual interests.” Yet, amazingly, the states in the NC Dental case never answer the question of what to do about the obvious conflict of interest that “active supervision” was designed to prevent. In short, the state’s interest in obtaining information from industry insiders does not justify allowing states to immunize from federal antitrust laws the private parties who wield state power in ways that benefit themselves.