What Harvard Law Students Should Know About the Recent Supreme Court NC Dental Case: Arguably the Most Important New Precedent for Public Interest, Administrative, Antitrust, and State Government Law Since 1943

Is that title the product of ubiquitous attorney hyperbole? Or accurate? I believe the decision maybe the seminal example of the “King Wears No Clothes” lesson. Indeed, it has spawned no recognition within the popular press, and is apparently not comprehended by any editorial board from the Wall Street Journal to USA Today.

The U.S. Supreme Court case of North Carolina Dental Board v. FTC last month is, for antitrust and state regulatory law, the equivalent of Brown v. Board of Education for education and civil rights. To explain, in 1943 the same Court decided the seminal case of Parker v. Brown. It held that federal antitrust law applies, as a matter of supremacy, to matters affecting interstate commerce (pretty much everything). But an exemption was made for what is termed “state action.” That is, a state regulatory agency could arrange what would otherwise be an antitrust offense. Such a protective status require two conditions: it must be a restraint that was affirmatively articulated by the sovereign state — and it must be subject to “ adequate state supervision.” That second prong is critical. The state may not delegate sovereign power to restrain trade without that independent review. Another subsequent case (Midcal) by the Court made clear that this “supervision” may not be a general or pro forma review. It must be specific and real, and examine the anticompetitive implications of each public decision before implementation.

Since this 1943 decision, much has happened to the political reality of our “democracy.”

We have seen the rise of special interest influence as never before, especially for legislatures and other elective positions. Political process reformers, including Public Citizen and Common Cause, have been calling attention to this corruptive threat to democracy for decades. We have seen our political process become dominated by “horizontal associations” of trades and professions and businesses: insurance companies, real estate brokers, doctors, you name it – associations of persons normally prohibited from conspiring to restrain trade are allowed, via the Noerr-Pennington doctrine under the First Amendment, to form groups. But for that constitutionally-based exemption, they would be walking per se antitrust felonies. They now dominate our political landscape both federally and at the state level. But here is the rub: What has happened in the executive branches of our 50 states has been far worse. There, over these last 72 years, legislators and other officials have ignored the second prong of the Parker test for “state action” status and immunity.

A large percentage of what these state agencies do restrains trade. From the decision to set up barriers to entry (controlling supply) to rules dictating how one practices, to the excision of practitioners from the trade, you have per se unlawful group boycotts and price fixing offenses as a matter of everyday practice. If they do not have that “state action” exemption, they are (a) committing federal felonies and (b) subject to civil suit for treble damages.

So what has happened? Virtually every trade and profession and area of commerce has been captured directly and ostentatiously by the industries regulated. Most boards and commissions throughout the nation are composed in controlling fashion by current practitioners in the area of commerce allegedly regulated on our behalf as the People. There is little or no actual review by any state official with a broader perspective.

This problem has nothing to do with liberal vs. conservative. The issue of whether the state should regulate an area of commerce is always up for debate. But if there is a market flaw that warrants intervention in a regulatory mechanism, it is not properly delegated to the very private profit-stake tribal interests involved. That conflict of interest is exacerbated in a branch where actions are not substantially covered by the media, and are subject to virtually limitless ex parte (concealed) contacts with the lobbyists already disproportionately influencing the legislative branch. What some principled conservatives have figured out – most of these agencies are not the gestation of consumer groups — they are created, supported and controlled by the entities regulated. In studying California’s agencies for 35 years, I can assure you that their most ardent progenitors and defenders are the industries regulated.

We do not contend that those board members engaged in these functions are mustache twirling cads tying a maiden to the tracks. Most think they are serving the public interest, and are unpaid. But they are part of an occupational grouping, which is the modern tribal body prevalent and powerful in the 21st century. They have a perspective borne of their grouping. Take state bars, for example, all controlled by practicing attorneys. That is we. How many disciplinary systems go after excessive attorney billing? How many look at large law firms? How many police egregious dishonesty and deceit in court filings? How many ever require a showing of real competence in an area of actual practice (personal injury, criminal defense, bankruptcy, admiralty, etc) respectively relied upon by consumers? Ever tested at all? For a lifetime? And then how many require malpractice coverage, or even cover unpaid malpractice judgments through funds collected from fees or otherwise from a profession that controls its own regulation? They do not think of it. It is not part of the tribal culture to do so.

But the party is over. This decision has put a bright light on the embarrassment of state agency governance. Nor is that governance trivial in its coverage. Most regulation is not federal but state, everyone from doctors and nurses to lawyers and any kinds of contractors and insurers, real estate agents, architects, engineers, accountants, auto dealers, geologists and so on, reaching over one hundred trades and professions. Federal regulation is relatively trivial in comparison. The Court said “independent state supervision” back then, and now it says: “And we meant it, you flagrant violators.” You cannot have any state regulatory body controlled by “active market participants” in the trade or profession (or area of commerce) regulated, including state bars. Explicit, clear, repeated. That delegation removes any sovereign protection, you are all naked. So antitrust counsel, go to town. Board members are all liable. The state treasury is liable.

The 6-3 decision has a strange dissent. Justice Alito argued that it will create a “morass.” And that has some truth to it, but only because the Court has been flouted to such a degree. But you do not get “adverse possession” rights to create a cartel government because you have been at it for a long time. The dissent also makes the usual weak argument that these lines are really tough, and what about someone who has a relative or someone who is excessively sympathetic? It even cites one of my works to make the cute point that the respondent FTC was itself accused of being in the hands of industry (citing our Nader Report on the FTC in 1968). In other words, everyone can be corrupt. Ok, fair enough. But then it draws the non sequitur conclusion that because there is somewhat of a slippery slope (such slopes are hardly rare in any area of law or commerce), we should draw no line at all. It would seem reasonable that a fair “bright line” to draw is to say no to broad delegation of state power to a group currently participating in the very economic trade at issue. How is that a slippery slope?

Scalia, in oral argument, notes that he only wants “neurosurgeons” to decide who is competent to perform brain surgery. Partly true: We certainly want competent expertise to determine competence. But again, we have the non sequitur that this legitimate need means they should be the state’s governors. It is both possible and realistic to combine needed expertise without delegating state power to restrain trade to the very group benefitting from those restraints. Why did the dissenters not learn this in 9th grade civics class? They rely a great deal on arguments about respecting state sovereignty but, apart from blatant hypocrisy in cases such as the Concepcion case, how do you not draw a line when the catch-22 issue is whether it is an exercise of a legitimate state creature? The issue of “improper delegation” of constitutional authority is not just a liberal concept. It is germane to conservative theory as well. And delegation to a private group with a conflict of interest hardly corresponds to the most basic notions of democratic self-government.

The few responses thus far are from agencies already making up untenable theories, for example, “it only applies if the trade selects those making the decisions” (wrong, the Court did not so limit its decision at all). Or “it does not apply to us because our board decisions are reviewed by general legislative inquiry, or the presence of deputy AGs, or some general review of its operations.” But that will not work either, not unless it is specific review of every potentially anticompetitive decision by an entity with full power to approve or disapprove or alter and which does so in a bona fide fashion, considering those effects on behalf of the state, not a self-interested cartel.

The Court has finally struck a blow for democracy. And it will be actualized because of one phrase: treble damage liability. Thank you, Justice Kennedy. Now we all have to clothe many naked and quite ugly kings.

Robert C. Fellmeth, Stanford University (AB) 1967, Harvard University (JD) 1970, is a former state and federal antitrust prosecutor (1973-1982), coauthor of California White Collar Crime (w/ Papageorge, Tower Publishing, 4th edition 2013), et al., and former State Bar Discipline Monitor for California, Director of the Center for Public Interest Law, Price Professor of Public Interest Law, University of San Diego School of Law.