The Supreme Court created the state action doctrine in the name of federalism in 1943 to grant states protection from federal antitrust enforcement if they opted for regulation instead of free competition.
But by 2001, then-FTC Chairman Tim Muris worried that some courts had taken an overly broad approach to the doctrine and convened a task force to study the issue.
More than a decade later, that effort has yielded a pair of Supreme Court cases siding with the FTC and narrowing the immunity for state and state-sanctioned conduct, including Wednesday's ruling backing the watchdog's decision to take on North Carolina's dental board.
"The commission for a number of years has been quite express about its views that state action immunity had been broadened by courts in different district courts and courts of appeals," said McDermott Will & Emery partner Jeffrey Brennan. "This was another significant win for the FTC in the state action field."
Here's a look at how the FTC went about paring down the doctrine:
Convened a Task Force
In June 2001, Muris launched his task force to review the precedents on the doctrine and look for chances for the agency to direct future case law in a more competition-friendly direction.
By late 2002, the task force — originally headed by then-director of the FTC's Office of Policy Planning and now-Sen. Ted Cruz, R-Texas, and also including current FTC Commissioner Maureen Ohlhausen and then-General Counsel William Kovacic — had looked at a number of key doctrinal developments that might be worth pursuing.
Among them were the clarification of what states must do to meet the Supreme Court's requirement that they must clearly articulate a plan to displace competition with regulation, and what counts as active supervision for any private or substate public entities trying to benefit from immunity.
Targeted Mover Associations
While the task force was still wrapping up its report, the FTC began bringing a series of cases against associations of movers who it said were squelching competition by filing their rates with state agencies.
The first case came as part of a settlement with Indiana Household Movers and Warehousemen Inc. in March 2003, a deal that barred the company from filing collective intrastate rate tariffs with the state's Department of Revenue on behalf of 70 consumer moving companies.
At the time, the FTC warned that the case showed that private companies trying to benefit from state action immunity would have to have their conduct actively supervised by the state in order to shield price-fixing from antitrust scrutiny.
In July 2003, complaints followed against three more state movers associations. Most of the groups had settled with the FTC by the end of the year, but a case against a Kentucky group went through an administrative trial. In 2005, the commission unanimously concluded that the state action doctrine didn't provide antitrust protection for collective rate-setting activities. The Sixth Circuit ultimately declined to review the case.
Issued a Report
In September 2003, the task force concluded that courts had indeed expanded the immunity well beyond the boundaries laid out by the Supreme Court. The task force cautioned that some courts were now ruling that immunity applied even when there was "little or no evidence" that the state ever meant to impede competition and when those effects had a significant reach into other states.
The report recommended reaffirming a narrower clear articulation standard, strengthening the active supervision criteria and clarifying the requirements for determining whether quasi-governmental entities made up of market participants require active supervision.
The task force further urged the FTC to push courts to recognize the risk that any anti-competitive policies might spill over to other states and to launch a comprehensive campaign to file amicus briefs at the appellate level on state action issues.
Sued a Dental Board ... No, Not That One
Just weeks before the task force published its report on the state action doctrine, the FTC issued an administrative complaint accusing the South Carolina State Board of Dentistry of restricting competition by blocking dental hygienists from offering preventative care like cleanings and fluoride treatments to children in local school.
The following year, the FTC refused the board's bid to dismiss the case under the state action doctrine, concluding that the board's decision to issue "emergency regulation" ran contrary to state law and thus didn't qualify for the immunity.
The Fourth Circuit concluded it lacked jurisdiction to hear an appeal of that decision, and in early 2007, the Supreme Court likewise refused to take up the case. Later that year, the board reached a settlement with the FTC requiring it to publicly support a state policy eliminating the requirement that dentists examine children before they could receive care from dental hygienists in schools.
Challenged a Merger
In March 2007, the FTC sued to block Equitable Resources Inc. from buying Dominion Resources Inc.'s Pennsylvania unit, saying the deal amounted to a "merger to monopoly" for sales of natural gas to businesses in the Pittsburgh region.
But a month later, the Pennsylvania Public Utility Commission approved the deal and the companies persuaded a district court to reject the FTC's bid for a preliminary injunction under the state action doctrine.
The district court reasoned that the utility commission's approval triggered state action immunity for the deal, saying that state law gave the agency authority to review energy mergers for anti-competitive effects and that the commission likewise could supervise the implementation of the deal.
The Third Circuit, however, stayed the merger pending appeal, and the parties eventually abandoned the transaction in 2008. The circuit court agreed to dismiss the appeal and vacate the lower court's opinion over the objections of the utility commission the same year.
Won the Supreme Court's First Major State Action Case in Two Decades
After losing efforts to challenge a merger to monopoly between Phoebe Putney Health System Inc. of Albany, Georgia, and the only other hospital in the region at the district court and appellate level in 2011, the FTC convinced the justices in 2012 to take on their first state action case since 1992.
In 2013, the court unanimously overturned the Eleventh Circuit's decision that the state's hospital authority law qualified under the Supreme Court's clear articulation requirement and chastened the panel for applying the test "too loosely."
Though the Supreme Court refused to require state lawmakers to state expressly their intention to replace competition with regulation, it clarified that to gain immunity, states must "affirmatively contemplate" the possibility that they are allowing anti-competitive conduct.
The court found that the grant of fairly typical corporate powers to the hospital authorities like the one operating Phoebe Putney's rival fell far short of that level of foreseeability.
Won Again in North Carolina State Board of Dental Examiners
In a 6-3 ruling, the justices concluded Wednesday that state professional boards controlled by active market participants must be supervised by state governments to avoid federal antitrust scrutiny, affirming the Fourth Circuit's ruling that the North Carolina State Board of Dental Examiners' efforts to block nondentists from offering teeth-whitening services didn't qualify for antitrust immunity.
The decision, written by Justice Anthony Kennedy, emphasized that the "mere facade" of state supervision was not enough to qualify regulatory boards whose members police their rivals, and laid out a few criteria for what kind of oversight would be needed to trigger the kind of antitrust immunity normally reserved for the states themselves.
Though Justice Kennedy cautioned that the amount of supervision required was "flexible and context-dependent," he said a few things would be common to all active supervision.
Among other things, he said, the state must review the content of any anti-competitive decisions, the supervision must be handled by someone permitted to overturn or change agency decisions, and the supervisor cannot be an active market participant.
--Editing by Katherine Rautenberg and Brian Baresch.