Government monopolies: the Supreme Court should overrule the Southern Motor Carriers case

August 07, 2014 | By TIMOTHY SANDEFUR

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

In the N.C. Dental Examiners case, the Supreme Court will decide whether to extend Parker antitrust immunity to state regulatory agencies that are run entirely by private parties who have a private interest in excluding their own competitors from the marketplace. We filed this brief, joined by our friends at the Cato Institute, arguing that Parker immunity should not apply. In this post, I explain why the Southern Motor Carriers case, which allows states to extend such imunity liberally, should be overruled.

The Supreme Court first invented Parker antitrust immunity because government is inherently monopolistic in some ways, and ought to be—when it prohibits certain types of dangerous activities, those prohibitions obviously limit competition in some sense. Moreover, the Court was wary about intruding into state sovereignty, especially since the Sherman Antitrust Act didn’t specifically say it was meant to interfere with state governments. “We find nothing in the language of the Sherman Act or in its history which suggests that its purpose was to restrain a state or its officers or agents from activities directed by its legislature,” the Parker decision said. “In a dual system of government in which, under the Constitution, the states are sovereign, save only as Congress may constitutionally subtract from their authority, an unexpressed purpose to nullify a state’s control over its officers and agents is not lightly to be attributed to Congress.”

But did this mean that states could immunize citizens from federal antitrust laws simply by declaring people exempt? The Court said no: “a state does not give immunity to those who violate the Sherman Act by authorizing them to violate it, or by declaring that their action is lawful.” So what was the limit? When could state law allow individuals to act in ways that would otherwise violate the federal antitrust laws? Parker itself didn’t say, but the Court noted that in that case, the state had “command[ed]” the activity in question. “The state itself exercises its legislative authority in making the regulation and in prescribing the conditions of its application.”

Later cases understood this to mean that private parties would be exempt from the Sherman Act only where state law specifically compelled the otherwise illegal conduct. Mere “state authorization, approval, encouragement, or participation,” the Court said, “confers no antitrust immunity.” In Goldfarb v. Virginia State Bar, it held that antitrust liability would apply to a private organization that adopted an illegal price-fixing arrangement in the form of dues, because “the threshold inquiry” in determining whether Parker immunity should apply “is whether the activity is required by the State acting as sovereign.” Since no statute or regulation imposed a restraint on trade, the state bar was not immune.

But in Southern Motor Carriers Rate Conference, Inc. v. United States, the Court dramatically liberalized its granting of Parker immunity. In that case, the Court declared that a state command displacing competition was not a requirement for immunity.  Instead, the state could shield people from the antitrust laws if the state law “expressly permits, [even if it does] not compel, anticompetitive conduct.” This meant that states could allow private parties to engage in price fixing and other illegal activities so long as the state “intends to adopt a permissive policy”—that is, so long as the state left its deputies (often private entities) free to decide for themselves whether to engage in otherwise illegal conduct.

That decision gave states vastly broader power to immunize private parties from the antitrust laws. It meant that states could do just what Parker declared off-limits: states could “give immunity to those who violate the Sherman Act by authorizing them to violate it, or by declaring that their action is lawful.”

Souther Motor Carriers muddied the waters considerably, allowing state officials to empower private parties to legally block competition, in violation of federal law, and to do so by providing those parties with only vague instructions, which shield the officials from political accountability. It encourages states to couch their economic policies in nebulous terms which give regulatory agencies the broadest possible power to determine “the public interest,” or merely suggesting to these agencies what they “may consider.” Under this rule, the state can tell the Widget Regulatory Board, made up of licensed widget makers, that they can decide for themselves whether to illegalize their own competition.

This rule fails to ensure that either the regulators (or would-be widget makers) know when the Board may or may not restrict competition contrary to federal antitrust policy. Vaguely phrased state “permissive policies” thus leave the Board free to set state policy, and to violate federal law, without real oversight by the legislature or accountability to voters. As Prof. John F. Hart writes, “The displacement-of-competition standard, in supporting immunity for a substantial class of restraints instituted by state agencies or local government that cannot plausibly be said to implement state policy, defeats the Court’s objective of confining immunity to those restraints that implement state policy.”

And when a state only vaguely gestures in the direction of anticompetitive conduct, its agencies—or private parties claiming to act in the state’s name—can exercise unguided discretion to choose when to allow and when to prohibit competition.  In such a case, “it is illusory to view the state legislature as the ‘politically accountable’ source of a state policy that in fact has been adopted by the agency itself.”

Finally, “permissive policies”—as opposed to specific, clear instructions—allow elected officials to take credit for the successes regulatory agencies achieve, or to distance themselves from their failures, whenever convenient. Politicians can allow the Board to determine its own jurisdiction, and then claim later that they themselves never intended to create a widget cartel. This reduces transparency and accountability, and creates an incentive for government to delegate its power to private entities—rarely a good idea.

The Southern Motor Carriers Court sought to deflect this problem by requiring “evidence [that] conclusively shows that a State intends to adopt a permissive policy,” thus apparently preserving a clear-articulation requirement. But this does little to diminish the broad power that the case gave to states to nullify federal antitrust law. Vague “permissive policies” are not made less vague by the fact that the law “conclusively shows” that the state intends to adopt a vague policy! Telling a private party “engage in whatever anticompetitive conduct you choose” would “conclusively” delegate broad power to that private party, but would not define the contours of the policy itself. It would only “conclusively show” that the state intends to cast its “gauzy cloak” over the anticompetitive conduct of private parties. And that is just what the law is not supposed to allow.

Worse, the “permissive policy” rule is irreconcilable with the strong presumption against antitrust immunity that the Court has time and again pledged itself to. The Court has emphasized that “state-action immunity is disfavored, much as are repeals by implication.” But Southern Motor Carriers encourages courts to “use [their] imagination liberally in determining whether particular anticompetitive conduct was a foreseeable or logical result of the regulatory delegation,” and to grant immunity when they conclude in the affirmative. Allowing private parties to assert immunity from the antitrust laws on the grounds that the state intends to permit violation of those laws is just the sort of immunity-by-implication that the Court has rejected.

Southern Motor Carriers also premised its liberal grant of antitrust immunity on the idea that limiting immunity to cases where state laws actually compel the anticompetitive conduct would “reduce[] the range of regulatory alternatives available to the State.” But many federal laws reduce the range of regulatory alternatives open to states. If the antitrust laws “reflect a basic national policy favoring free markets over regulated markets,” as the Court has claimed, then there’s no reason to let states deviate downward from this baseline too easily. And the Supreme Court noted in FTC v. Ticor Title Insurance that adhering to a consistent presumption against antitrust immunity actually helps states to craft economic policies: “By adhering in most cases to fundamental and accepted assumptions about the benefits of competition within the framework of the antitrust laws, we increase the States’ regulatory flexibility.”

In any event, states would still have plenty of flexibility under a rule that merely requires them to clearly declare their intent to restrict competition, rather than letting them issue antitrust exemptions by vague declarations that they will “permit” private parties to create cartels backed by state law. Limiting antitrust immunity to cases where state law actually requires anticompetitive conduct—as Parker originally required—would encourage transparency and accountability to voters: states would only be able to grant immunity to private parties when the state adopts an anticompetitive policy in the clearest terms. If states “choose to displace the free market,” antitrust law should at least ensure that it is “clear that the State is responsible for the price fixing it has sanctioned and undertaken to control.”

The lenient rule of Southern Motor Carriers warrants one critic’s conclusion in that “the ideology of federalism has displaced a national model of competition for one favoring state-based resolutions.” Whatever one’s opinion of antitrust law in general, there is no justification for allowing states broad latitude to disregard federal law and erect private cartels with only vague instructions and loose oversight. Parker immunity should be extended to private parties acting under color of state law only where state law requires the restraint of trade in question. Southern Motor Carriers should be overruled, and courts should grant Parker immunity to private parties only where the anti-competitive conduct at issue is actually compelled by state law.