Articles Posted in Antitrust Exemptions and Immunities

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Author: Ruth Glaeser

The Third Circuit Court of Appeals held that Merck is exempt from antitrust claims under the Noerr-Pennington doctrine in a lawsuit accusing it of deceiving the government about the effectiveness of its mumps vaccine to prevent competition.

Background from the Third Circuit’s Opinion

Merck was the sole licensed manufacturer of mumps vaccines in the United States for over fifty-five years, until 2022.  The vaccine was FDA-approved and included an FDA-approved label that outlined its shelf life, minimum-potency requirements, and effectiveness. Merck had an ongoing duty to ensure that the drug label was accurate.

In the late 1990s, the FDA expressed concern that Merck’s mumps vaccine did not provide immunity near the end of its purported 24-month shelf life. At the FDA’s suggestion, Merck overfilled the vaccine doses to try to make the doses potent through the end of the shelf-life period.

But this did not resolve the issue, and Merck did not share that information with the FDA.  Merck feared that disclosing this information would lead the FDA to require a change in the vaccine’s label. And a label change was particularly problematic for Merck because it competed with GlaxoSmithKline (“GSK”), which sold a similar vaccine in Europe. Merck thought that GSK’s vaccine would soon enter the U.S. market and a label change on Merck’s vaccine would make it easier for GSK to demonstrate that its vaccine was not inferior to Merck’s.

So, to preserve its market dominance, Merck misrepresented the vaccine’s potency and effectiveness at the end of its shelf life. To support this, Merck ran a clinical trial and claimed that it could reduce the potency of the vaccine without impairing the existing drug-label claims about immunity.  But the appellees in this case said the study did not reliably capture information about the drug’s immune response in the human body. Nonetheless, the FDA continued to approve Merck’s mumps vaccine label and Merck continued to make unsupported claims about the self-life and immunity of its mumps vaccine on the drug label.

GSK eventually demonstrated that its vaccine was competitive with Merck’s. And the FDA approved GSK’s application to sell its vaccine in 2022.

The Noerr-Pennington Doctrine

The Noerr-Pennington doctrine provides limited exemption from antitrust liability for actions intended to influence governmental decision-making in all three branches of government. This doctrine protects the First Amendment right to petition the government, including the courts.

It is, however, subject to a caveat—the “sham exception.” For Noerr-Pennington to apply, the challenged action must be a legitimate government petition rather than conduct intended to interfere with a competitor. Generally, the court will look to see if the anticompetitive conduct arises from the process of the government petitioning rather than the outcome. If the anticompetitive conduct arises from the process, rather than the outcome, of petitioning the government—like baseless litigation bankrupting a competitor due to legal fees—then the sham exception is more likely to apply.  But if the anticompetitive conduct is merely the outcome or result of legitimate government petitioning, then the Noerr-Pennington doctrine protects the conduct.

The Court’s Analysis

The Third Circuit engaged in this process v. outcome analysis. The crux of Appellees’ antitrust injury was that Merck’s actions delayed the launch of GSK’s competing vaccine in the United States for over a decade by maintaining deceptive statements on the vaccine label. They argued that it was the misleading statements on the label that prevented GSK from entering the market because GSK was unable to match Merck’s alleged effectiveness.

But the Court explained that the allegedly false or misleading claims on the drug label were the result of Merck’s successful petition to the FDA rather than part of the process. The Court said that Merck faced a dilemma when it was approached by the FDA:  Merck could either (1) reveal that its vaccine might be mislabeled, leading to potential relabeling by the FDA; or (2) persuade the FDA that overfilling the doses fixed the problem (despite not actually doing so) and the request that the label remain unchanged.  Merck did the latter, and the FDA did not order Merck to change the label or take further action against Merck after learning the truth.

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antitrust-exemptions-300x196

Author: Jarod Bona

Congress and the federal courts have—over time—created several exemptions or immunities to antitrust liability.

The US Supreme Court in National Society of Professional Engineers v. United States explained that “The Sherman Act reflects a legislative judgment that ultimately competition will produce not only lower prices, but also better goods and services.” 435 U.S. 679, 695 (1978). And “[t]he heart of our national economy long has been faith in the value of competition.” Id.

National Society of Professional Engineers holds, effectively, that those that think that they should not be subject to competition—for whatever reason—don’t get a free pass.

But there are several situations that do create limited exemptions to federal antitrust liability. Importantly, however, the US Supreme Court has repeatedly emphasized that courts should narrowly interpret these exemptions.

Here are the primary antitrust exemptions created by Congress and the federal courts:

State-Action Immunity. State-action immunity has come up a lot at Bona law. This exemption allows certain state and local government activity to avoid antitrust scrutiny. Lately, the US Supreme Court has narrowed the doctrine, including for state licensing boards that seek its protection when sued under the antitrust laws (North Carolina State Board of Dental Examiners v. Federal Trade Commission). Bona Law also advocates a market-participant exception to state-action immunity, but the courts are split on that issue. We expect that this exemption will continue to narrow over time.

Filed-Rate Doctrine. The filed-rate doctrine is a defense to an antitrust action that is premised on the regulatory rates filed with a federal administrative agency. In many regulated industries (like insurance, energy, shipping, etc.), businesses must, generally, file the rates that they offer to customers with federal agencies. The filed-rate doctrine eliminates antitrust liability for instances in which, to satisfy the antitrust elements, a judge or judge must question or second guess the level of these filed rates (i.e. that they included overcharges resulting from anticompetitive conduct). So a business filing rates with a regulator is not, by itself, sufficient to create an exemption from antitrust liability. There are nuances.

Business of Insurance. The McCarran-Ferguson Act exempts certain acts that are the business of insurance and regulated by one or more states from antitrust scrutiny. You can read more about the McCarran-Ferguson Act and its requirements here.

Baseball. That’s right—there is a baseball exemption to antitrust liability. This is a judge-made doctrine developed long ago. The other sports don’t have an antitrust exemption and the question of whether baseball should have one comes up periodically. If you want to learn more, you should read the five-part series on baseball and antitrust that Luke Hasskamp authored.

Agricultural Cooperatives. The Capper-Volstead Act provides a limited antitrust exemption to farm cooperatives. Under certain circumstances, this Congressional Act allows farmers to pool their output together and increase their bargaining power against buyers of agricultural products. You can read more about this in Aaron Gott’s article on the Capper-Volstead Act. And you can read about production restraints here.

The Noerr-Pennington doctrine. The Noerr-Pennington immunity—named after two US Supreme Court cases—is a limited antitrust exemption for certain actions by groups or individuals when the intent of that activity is to influence government actions. The Noerr-Pennington doctrine can apply to actions that seek to influence legislative, executive, or judicial conduct. There is, however, an important sham exception to Noerr-Pennington immunity that often comes up in litigation.

You can learn more about the Noerr-Pennington doctrine and antitrust liability here.

Statutory and Non-Statutory Labor Exemptions. The statutory labor exemption allows labor unions to organize and bargain collectively in limited circumstances, including requirements that the union act in its legitimate self-interest and that it not combine with non-labor groups. The non-statutory labor exemption arrives from court decisions that further exempt certain activities that make collective bargaining possible, like joint action by employers that is ancillary to the collective bargaining process.

You can read more about both the statutory and non-statutory labor antitrust exemptions here.

Implied Immunity. Implied immunity occurs in the rare instances in which there is no express antitrust exemption, but the anticompetitive conduct falls into an area of such intense federal regulatory scrutiny that antitrust enforcement must yield to the pervasive federal regulatory scheme.

The typical area where this comes up is with the federal securities laws, which is a good example of pervasive federal regulation. The US Supreme Court case to read for this antitrust exemption is Credit Suisse Securities (USA) LLC v. Billing, from 2007.

Keep in mind that courts do not easily find implied immunity of the antitrust laws—there must be a “clear repugnancy” or “clear incompatibility” between the antitrust laws and the federal regulatory regime. A broad interpretation of this immunity could create massive antitrust loopholes because even a regulator with a heavy hand on an industry may not consider anticompetitive conduct as part of its command and control. And regulation itself creates barriers to entry in a market that is more likely to lead to less competition.

Export Trade Exemptions. A little-known exemption involves export trade by associations of competitors. This antitrust exemption arises primarily from the Webb-Pomerene Act and the Export Trading Company Act. These FTC and DOJ guidelines provide more information about this antitrust exemption.

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Author: Luke Hasskamp

It’s one of the best times of the year—opening day in Major League Baseball!

Now, there has been a lot of professional baseball news lately, with the MLB lockout and acrimonious negotiations between the MLB players union and team owners, before they finally resolved the dispute and got back to baseball. But somewhat lost in the hubbub has been a dispute between MLB and several minor league baseball teams that has been in the works for years.

Specifically, four minor league teams have sued MLB under federal antitrust laws, alleging MLB unlawfully conspired to eliminate 40 minor league affiliates in violation of Section 1 of the Sherman Act.

Those teams (the Staten Island Yankees, the Tri-City Valley Cats, the Salem-Keizer Volcanoes, and the Norwich Sea Unicorns) were among the 40 teams that MLB stripped of their affiliations in major league clubs. This followed a plan announced in 2020 by MLB to reduce the number of affiliated minor league teams from 160 to 120. MLB’s move was, unsurprisingly, highly criticized by the teams, as well as their communities and political representatives.

In the lawsuit, the four minor league teams accused MLB’s actions as “nothing less than a naked, horizontal agreement to cement MLB’s dominance over all professional baseball and to reduce output and boycott” the 40 teams stripped of their MLB affiliation.

What is interesting about the lawsuit is that the four minor league teams expressly acknowledge that their claim is currently barred by existing Supreme Court precedent—baseball’s antitrust exemption that emerged 100 years ago, in the Supreme Court’s 1922 decision in Federal Baseball Club v. National League, 259 U.S. 200 (1922). (We have written a series of articles about baseball’s antitrust exemption which detailed the history of baseball and its legal disputes over the decades.)

In essence, in Federal Baseball Club, the Supreme Court held that federal antitrust laws do not apply to the game of baseball. That now notorious decision, written by Justice Oliver Wendell Holmes, Jr., consisted of just three paragraphs of reasoning. The Court’s ultimate reasoning: the Sherman Act did not apply because baseball did not have an impact on interstate commerce: “The business is giving exhibitions of baseball, which are purely state affairs.” The Court reasoned that, even if individuals did cross state lines for baseball games, “the transport is a mere incident, not the essential thing.” According to the Court, “personal effort not related to production is not a subject of commerce. That which in its consummation is not commerce does not become commerce among the states because the transportation that we have mentioned takes place.”

(Notably, this year marks the centennial anniversary of baseball’s antitrust exemption as Federal Baseball Club was decided 100 years ago, on May 29, 1922.)

Now, when we wrote our articles about 18 months before this one, we anticipated future disputes specifically between MLB and minor league teams. We noted, “[i] n 1998, Congress enacted the Curt Flood Act of 1998, which declared that the antitrust laws apply to Major League Baseball’s employment practices . . . . An interesting aspect of the law, however, was that only Major League Baseball players were given standing to sue—minor league [players and teams] remain subject to the reserve clause, which is an interesting wrinkle . . . .”

That “interesting wrinkle” became the full-blown lawsuit in December 2021 filed by these four minor league teams in the Southern District of New York. As we said, the minor league teams recognized the significant impediment that the Federal Baseball Club precedent created. They are asserting a federal antitrust claim against MLB, and the Supreme Court has exempted major league baseball from such claims. But the minor league teams insist that the Supreme Court is primed for a change of course. Indeed, they suggest that the Supreme Court’s recent antitrust ruling in NCAA v. Alston, 141 S. Ct. 2141 (2021), portends a likely reversal of the baseball exemption if the issue again reaches the Court.

Alston was a high-profile dispute between the NCAA and several college athletes challenging NCAA compensation restrictions under antitrust laws. The NCAA had tried to overcome the lawsuit by arguing it too was entitled to a similar protection from antitrust scrutiny that baseball enjoyed, at least for its amateurism rules, stemming from a nearly 40-year-old decision in NCAA v. Board of Regents, 468 U.S. 85 (1984). But, in Alston, the Supreme Court unanimously rejected that argument, concluding that whatever special protection from the antitrust laws that the Board of Regents decision had provided to the NCAA no longer applied.

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Author: Luis Blanquez

Just weeks before our ABA antitrust panel on State Action Immunity takes place in Washington DC, the Ninth Circuit Court of Appeals has allowed SmileDirectClub to proceed against the members of the California Dental Board for antitrust violations, rejecting the board’s immunity claim on active supervision grounds.

At Bona Law we are no stranger to enforcing the federal antitrust laws against anticompetitive conduct enabled by state and local governments. In fact, we filed an amicus curiae brief in the NC Dental case.

Background of the SmileDirectClub Antitrust Saga

This is part of the antitrust group of cases that SmileDirectClub has filed against dental boards in Alabama, Georgia and California.

Rather than teeth-whitening like in NC Dental, the product market in these three cases is teeth-alignment treatments. SmileDirectClub provides cost-effective orthodontic treatments through teledentistry. One of SmileDirectClub’s services is SmileShops. These are physical locations in several states at which they take rapid photographs of a consumer’s mouth. Customers may also use an at-home mouth impression kit, which means that an in-person dental examination is not necessary. Afterwards they send the photographs to the SmileDirectClub lab.

SmileDirectClub connects the customer with a dentist or orthodontist, who is licensed to practice locally but is located off-site (and may be even located out-of-state), who evaluates the model and photographs and creates a treatment plan. If the dentist feels that aligners are appropriate for the patient, she prescribes the aligners and sends them directly to the patient. The patient doesn’t need to visit a traditional dental office for teeth alignment treatment. This results in significant cost savings and greater customer convenience and access.

But the members of the boards of dental examiners in Georgia, Alabama and California have, according to plaintiffs, allegedly conspired to harass the SmileDirectClub parties with unfounded investigations and an intimidation campaign, with hopes of driving them out of the market, while using their government-created power in the marketplace to protect the economic interests of the traditional orthodontia market.

District courts in Alabama and Georgia have allowed all cases to proceed, after the 11th Circuit affirmed. The Alabama case settled in 2021, after that state’s dental board signed a consent decree with the Federal Trade Commission.

The District Court case in California: Sulitzer v. Tippins, case No. 20-55735

In California, by statute, the dental board regulates the practice of dentistry. See Cal. Bus.&Prof. Code §§ 1600–1621. It enforces dental regulations, administers licensing exams, and issues dental licenses and permits. Id. § 1611. The Board is made up of fifteen members: “eight practicing dentists, one registered dental hygienist, one registered dental assistant, and five public members.” Id. § 1601.1(a). Since many of its members compete in the market for teeth-straightening services, they allegedly view SmileDirect as a “competitive threat.”

Plaintiffs alleged that certain members of the Board, motivated by their private desires to stifle competition, mounted an aggressive, anticompetitive campaign of harassment and intimidation designed to drive the SmileDirectClub out of the market. The Complaint contended that these actions violated the Sherman Antitrust Act; the Dormant Commerce Clause; the Equal Protection Clause; the Due Process Clause; and California’s Unfair Competition Law. The dental board defendants moved to dismiss SmileDirectClub’s claims for anticompetitive conduct based on a state-action immunity defense.

The district court rejected defendants’ argument that the state action doctrine applied because the defendants––members and employees of the Dental Board of California—largely made up of traditional dentists and orthodontists who have a financial motive to view the newcomers as competition—could not show that they were actively supervised. The court nevertheless held plaintiffs failed to state a Section 1 claim and ended up dismissing the complaint without prejudice.

SmileDirectClub amended the complaint once, but the district court dismissed again the federal claims and declined to exercise supplemental jurisdiction over the state law claim. This time the court held that SmileDirectClub may have pled enough facts to show the existence of an agreement––by way of a theory of the board’s ratification of the investigation––but surprisingly concluded it was nevertheless insufficient to state a Section 1 claim because the agreement was consistent with its regulatory purpose to undertake their delegated authority as members of the board, and thus was not intended to restrict or restrain competition. Make sure you don’t forget this last sentence. The Ninth Circuit hammers this argument down now in its Opinion.

SmileDirectClub appealed the ruling before the Ninth Circuit

The Case on Appeal: SmileDirectClub and Jeffrey Sulitzer DMD v. Joseph Tippins et al., 9th U.S. Circuit Court of Appeals No. 20-55735

I would strongly suggest you read this opinion. It is absolutely worth your time.

First, the Ninth Circuit concludes that plaintiffs sufficiently alleged anticompetitive concerted action to meet the pleading standards of Federal Rule of Civil Procedure 12(b)(6), although it makes no judgment on the merits of the claims and whether those claims will withstand scrutiny in the next phase of the litigation

It further explains that by requiring plaintiffs to plead facts inconsistent with the Board’s regulatory purpose, the district court applied a standard more appropriate at the summary judgment stage, where § 1 plaintiffs must offer “evidence that tends to exclude the possibility” of lawful independent conduct. This is something many district courts do across the country and which we have been writing about at Bona Law systematically.

Second, the court plainly rejects the broad proposition—offered up by the board members and the district court—that regulatory board members and employees cannot form an anticompetitive conspiracy when acting within their regulatory authority.

In its opinion, the court highlights how the Supreme Court has stressed, “[t]he similarities between agencies controlled by active market participants and private trade associations are not eliminated simply because the former are given a formal designation by the State, vested with a measure of government power, and required to follow some procedural rules.” N.C. State, 574 U.S. at 511.

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Author: Luis Blanquez

It is time again for the ABA Antitrust Spring Meeting. In my case, this year is particularly special for two reasons. First, because the meeting is live. While the Zoom meetings have been extremely helpful, I think we (almost) all agree—online conferences just aren’t the same as in person ones. Second, because I will be a speaker in the panel dedicated to state action immunity issues: Is There Anything Left to Smile About?

Below is a brief preview of the State Action Immunity issues I will be discussing.

  1. The State Action Immunity Doctrine: From Parker to Phoebe Putney, City of LaGrange, SmileDirect and Quadvest

The state action immunity doctrine allows certain state and local government activity to avoid antitrust scrutiny. Federal antitrust laws are designed to prevent anticompetitive conduct in the market. Yet, the Supreme Court long ago held that these antitrust laws do not apply against the States themselves, even when they take actions that harm competition. Parker v. Brown, 317 U.S. 341 (1943). Like other judicially imposed exemptions from the antitrust laws, the Supreme Court has held that the Parker doctrine must be narrowly construed.

While the states themselves may adopt and implement policies that depart from the federal antitrust laws, subordinate political subdivisions, including state regulatory boards and municipalities, are not beyond the reach of the antitrust laws by virtue of their status because they are not themselves sovereign. The Supreme Court has recognized that a state legislature or state supreme court acting in its legislative capacity is “the sovereign itself,” whose conduct is exempt from liability under the Sherman Act without need for further inquiry.

But when the activity is not directly that of the state legislature or supreme court but is instead carried out by others pursuant to state authorization, the challenged restraint qualifies for state action exemption only if it is (1) undertaken pursuant to a “clearly articulated and affirmatively expressed” state policy to displace competition, and (2) actively supervised by the state. California Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc., 445 U.S. 97, 105 (1980).

So, when is then a state policy clearly articulated? That is the question the U.S. Supreme Court decided in FTC v. Phoebe Putney Health System, declaring a stricter standard than courts had been applying. Under this new standard, the defendant’s conduct must be not only foreseeable, but also the “inherent, logical, or ordinary result” of the state scheme.

In the panel we will discuss the different wrinkles under the two Midcal prongs, and how courts all over the country have started to apply the new heightened standard under Phoebe Putney when considering the clear articulation requirement.

  1. A Market Participant Exception is Necessary

At Bona Law we advocate for the establishment of a formal market participant exception, and we expect that the state action exemption will continue to narrow over time.

Indeed, when a state regulates, the market participants compete on the same playing field within the framework of that regulation. But if a commercial actor—public or private—is free of antitrust scrutiny, the federal policy of interstate competition suffers because participants do not play by the same rules. Therefore, state and local market participants must follow the same federal competition rules as their private counterparts.

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Author: Jarod Bona

You might wonder why industry trade associations can lobby the government without obvious antitrust sanction, even when—which is common—they seek regulations or actions that ultimately harm competition.

(By the way, if you are invited to a trade association meeting, you should read this.)

The answer is found in the Noerr-Pennington doctrine, which we will discuss here.

What is the Noerr-Pennington Doctrine?

The Noerr-Pennington immunity is a limited exemption from antitrust liability for certain actions by individuals or groups that are intending with that action to influence government decision-making, which can be legislative, executive, or judicial.

Importantly, for the Noerr-Pennington immunity to apply, the challenged action cannot be a sham that merely covers up an intent to interfere with a competitor’s ability to compete. The question of whether an action fits within the “sham” exception to Noerr-Pennington is often an area of intense dispute between the parties to litigation. You can learn more about the sham exception later in this article.

The purpose of the Noerr-Pennington doctrine is to protect the fundamental right to petition the government, including filing litigation in the courts. It also seeks to support the flow of information to the government. If you’ve read the First Amendment to our Bill of Rights, you might be familiar with this petitioning the government thing.

You may wonder why the doctrine has such an odd name—Noerr-Pennington. Why didn’t they name it the “government-petitioning” immunity or the “you-can-sue-who-you-want-without-incurring-antitrust-liability” doctrine?

Did two people named Noerr and Pennington invent the doctrine?

No—the Noerr-Pennington immunity developed from two cases in the crazy 1960s: Eastern Railroad Conference v. Noerr Motor Freight, 365 U.S. 127 (1961) and United Mine Workers of America v. Pennington, 381 U.S. 657 (1965—better known as the first year the Minnesota Twins made the World Series, unfortunately losing to the Dodgers and the great Sandy Koufax).

In Noerr Motor Freight (we’ll label the case with the party name that made the doctrine title), a group of railroad companies conducted a joint publicity campaign targeting legislation that would make it harder for trucking companies to compete with them. Even though defendants’ conduct was anticompetitive in intent, the Court held that joint action for legislation was of sufficient importance to society that it should be exempt from antitrust liability.

In Pennington, a union and a group of large mining companies escaped antitrust liability for their group effort (i.e. conspiracy) to try to induce the Labor Department to set minimum wages at a level that would make it difficult for small mining companies to compete.

From these two cases, the doctrine took off and was expanded to other contexts, including court filings. Of course, there are limits and parties facing antitrust scrutiny can’t just point to some potential eventual political impact to their actions to capture Noerr-Pennington immunity.

Interestingly, the US Supreme Court  in Allied Tube and Conduit Corp v. Indian Head, Inc., 486 U.S. 492 (1988), rejected Noerr-Pennington immunity for anticompetitive conduct before a private standard-setting body, even though local governments typically enact the standards set by that standard-setting group. If you are interested in where the lines are to meet the government petitioning part of the Noerr-Pennington doctrine, you should read Allied Tube.

What is the Sham Exception to the Noerr-Pennington Doctrine?

As you might expect with any exception, parties that want to get away with antitrust liability try to fit their conduct within it. That is one reason why the Supreme Court makes it clear that exceptions, exemptions, and immunities to the antitrust laws should be construed narrowly. (Unfortunately, many courts below the Supreme Court have not yet figured that out with respect to state-action immunity, as they are still applying it more broadly than I believe the Supreme Court has ordered through its recent decisions).

Anyway, to avoid abuse of the Noerr-Pennington doctrine, courts apply what is called a “sham exception.” This exception applies when the challenged conduct is intended to interfere with competition, rather than to legitimately influence official government conduct.

It isn’t always easy to understand when the “sham” exception applies, but one way to understand the difference is to compare the “process” of government petitioning from the “outcome” of government petitioning. When the anticompetitive conduct arises from the actual process—i.e. baseless litigation that bankrupts a competitor because of the legal fees—the sham exception applies. When the harm from the challenged conduct arises from the outcome of government petition—i.e. successfully convincing a government agency to pass a grossly anticompetitive regulation—the sham exception is less likely to apply.

One example of potentially “sham” petitioning activity outside of a litigation context is a situation in which a competitor will challenge its market adversary’s licensing application (of some sort) in an effort to delay it or otherwise interfere with its granting, outside of any issues with the merits.

Sometimes what you will see in the reality of a dispute is a combination of legitimate petitioning activity and other coercive anticompetitive conduct. In those instances, an antitrust defendant cannot use the activity protected by the Noerr-Pennington doctrine to shield the other unprotected anticompetitive conduct. Courts often have to distinguish between the two categories of conduct.

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Authors: Luke Hasskamp and Aaron Gott

This article briefly explores the applicability of federal antitrust laws to actions taken by municipalities or other state subdivisions and, specifically, whether they have acted pursuant to a clearly articulated state policy to displace competition in the marketplace.

Federal antitrust laws are designed to prevent anticompetitive conduct in the market. Yet, the Supreme Court long ago held that antitrust laws do not apply against States themselves, even when they take actions with anticompetitive effects. Parker v. Brown, 317 U.S. 341 (1943). The Supreme Court also recognized that this state action immunity applied not only to states but also to municipalities or other state political  subdivisions, and even private actors, provided they are acting pursuant to state authority.

Thus, any time a state or local government body is sued for antitrust violations, it will inevitably claim that it is exempt from liability under the state action immunity doctrine.

To obtain this immunity, the defendant will have to show, at the least, that it acted pursuant to a clearly articulated state policy to displace competition. In short, the state had to understand that the authority it was delegating to substate actors would have anticompetitive effects and that it clearly articulated such a policy in its legislative delegation.

But when is a state policy clearly articulated? That is the question the U.S. Supreme Court decided in FTC v. Phoebe Putney Health System, declaring a stricter standard than courts had been applying.

FTC v. Phoebe Putney Health System

Any antitrust lawyer who is drafting a brief on is probably going to cite Phoebe Putney. Those invoking state action immunity will probably downplay its significance and rely more heavily on earlier cases instead. Let’s talk about the case so you can understand how it dramatically raised the bar for defendants seeking immunity.

You don’t have to be an avid antitrust nerd to have noticed that the healthcare industry has undergone a lot of consolidation in recent years, with hospitals merging with or acquiring one another in already limited markets. The FTC challenges a fair number of these transactions because they reduce competition in markets that already have all sorts of competition problems. Phoebe Putney involved one of those challenges.

Phoebe Putney Health System was owned by a public hospital authority created by a city and county in Georgia. The health system owned Memorial Hospital, which was one of two hospitals in the county. The other hospital, Palmyra Hospital, was just two miles away and was owned by national nonprofit healthcare network HCA. Phoebe Putney and HCA reached an agreement for Phoebe Putney to purchase Palmyra, and the hospital authority approved.

The Federal Trade Commission scrutinized this plan and filed suit because the transaction would create a monopoly that substantially lessened competition in the local market for acute-care hospital services.

In defense, Phoebe Putney claimed that it was entitled to state action immunity because, it argued, it had acted pursuant to a clearly articulated state policy to displace competition. Specifically, Georgia state law allowed its political subdivisions to provide health care services through hospital authorities. The law authorized those hospital authorities “all powers necessary or convenient to carry out and effectuate” the law’s purpose, and more specifically granted them authority to acquire hospitals. Phoebe Putney claimed that it was foreseeable to the Georgia legislature that a hospital authority would use this power anticompetitively.

The district court agreed and dismissed the case. And since the case is FTC v. Phoebe Putney and not Phoebe Putney v. FTC, you can surmise that the Eleventh Circuit agreed with the district court. Many courts had been applying this foreseeability standard based on language from earlier Supreme Court cases like City of Columbia v. Omni Outdoor Advertising, and this case was no different. The Eleventh Circuit reasoned here, for example, that the Georgia legislature must have anticipated that granting hospital authorities the power to acquire hospitals would produce anticompetitive effects because “foreseeably, acquisitions could consolidate ownership of competing hospitals, eliminating competition between them.”

But the FTC had a good point: nothing about the rather basic corporate power to acquire a business suggests that a state clearly articulated a state policy allowing public hospital authorities to monopolize entire markets. Indeed, the statute did not even discuss competition. The Supreme Court granted certiorari, and ultimately agreed with the FTC in a rare 9-0 opinion: the Eleventh Circuit, like so many other courts, had been applying clear articulation “too loosely.” As a result, they had sanctioned all sorts of anticompetitive conduct by state and local government entities that the state legislature had not really intended. Federal antitrust policy should not be set aside so easily.

Instead, the defendant’s conduct must be not only foreseeable, but also the “inherent, logical, or ordinary result” of the state scheme. Courts had been seizing on the “foreseeability” language of the Court’s prior decisions while ignoring much of what else it had said:

  • State law authority to act is not sufficient; the substate governmental entity must show it was delegated the authority to act or regulate anticompetitively
  • There must be evidence the state affirmatively contemplated that the scheme would displace competition
  • Where a state’s position is one of mere neutrality to competition, the state cannot be said to have contemplated anticompetitive conduct
  • Simple permission to play in the market is not authority to act anticompetitively

The Court also addressed two additional arguments. First, Phoebe Putney pointed to Georgia’s certificate of need law as evidence that the Georgia legislature had contemplated the displacement of competition relating to hospitals. (Learn more about certificate of need laws here, here, and here). But the Court rejected this argument because “regulation of an industry, and even the authorization of discrete forms of anticompetitive conduct pursuant to a regulatory structure, does not establish that the State has affirmatively contemplated other forms of anticompetitive conduct that are only tangentially related.”

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Downtown Hartford

Author: Jarod Bona

In many instances, conduct involving the business of insurance is, indeed, exempt from antitrust liability.

So why does insurance sometimes get a free pass?

In 1945, Congress passed a law called The McCarran-Ferguson Act. Insurance, of course, has traditionally been regulated by the States. Territorial and jurisdictional disputes between the States and the Federal government are a grand tradition in this country. We call it Federalism. In 1945, it appears that the states won a battle over the feds.

As a result, in certain instances, business-of-insurance conduct can escape federal antitrust scrutiny.

The business of insurance isn’t the only type of exemption from the antitrust laws. There are a few. At The Antitrust Attorney Blog, we have discussed state-action immunity quite a bit (as suing state and local governments under the antitrust laws is a favorite topic of mine).

An exemption that is similar to the McCarran-Ferguson Act is the filed-rate doctrine, which we discuss here. There are, of course, several others, including–believe it or not–an antitrust exemption for baseball. The courts, however, disfavor these exemptions and interpret them narrowly.

But back to the insurance-business exemption and The McCarran-Ferguson Act. Do you notice that I keep calling it the “business of insurance” exemption and not the insurance-company exemption? That is because the courts don’t just exempt insurance companies from antitrust scrutiny. No, the exemption only applies to the business of insurance and in certain circumstances.

Below are the basic elements a defendant must satisfy to invoke the McCarran-Ferguson Act:

  1. The conduct in question must be regulated by the state or states.
  2. The conduct must qualify as the business of insurance—the business of insurers is not sufficient.
  3. The conduct must not consist of a group boycott or related form of coercion.

Each of these elements, in turn, has its own requirements, case law, and doctrinal development. The most interesting of the three elements is how to define the business of insurance.

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Author: Luis Blanquez

When someone new enters a market with a different or better idea or way of doing business, existing competitors must also innovate, lower their price, or otherwise improve their offerings to maintain their position in the market. That is why competition is good for consumers.

But sometimes competitors choose another path: they avoid competition by banding together to boycott the disruptive new entrant. And sometimes, they use state and local governments to accomplish that end—often under the guise of consumer health, safety, and welfare.

Competitors in some industries have been particularly successful in establishing a perpetual, government-backed gatekeeping role by collectively lobbying the state legislature to enact a licensing regime, imbuing power in a licensing board comprising competitors of the industry. That is what happened in North Carolina State Board of Dental Examiners v. FTC, a 2015 U.S. Supreme Court case about a professional licensing board comprising dentists who used their state government power to attempt to thwart competition from non-dentist teeth whiteners.

At Bona Law we are no stranger to enforcing the federal antitrust laws against anticompetitive conduct enabled by state and local governments. In fact, we filed an amicus curiae brief in the NC Dental case.

State and local governments create anticompetitive schemes that are inconsistent with federal antitrust laws all the time—regulation often displaces competition in some respect. When anticompetitive conduct is the result of government power, the federal antitrust laws sometimes exempt liability under the state-action immunity.

In NC Dental, the Supreme Court held that state regulatory boards dominated by active market participants qualify for the state-action exemption only if two stringent criteria are met: first, the defendants must show they acted pursuant to a clearly articulated state policy and second, their implementation of that policy is actively supervised by the state. NC Dental, 574 U.S. at 504. Defendants bear the burden for establishing both criteria. Id.

Yet five years after the North Carolina dental board lost at the Supreme Court, new disruptive competitors are still battling it out against dental boards across the country. One of those competitors is SmileDirectClub, who is currently litigating antitrust cases against dental boards in Georgia, Alabama and California. Rather than teeth-whitening, this time the product market is teeth alignment treatments. SmileDirectClub provides cost-effective orthodontic treatments through teledentistry.

One of SmileDirectClub’s services is SmileShops. These are physical locations in several states at which they take rapid photographs of a consumer’s mouth. Customers may also use an at-home mouth impression kit, which means that an in-person dental examination is not necessary. Afterwards they send the photographs to the SmileDirectClub lab.

SmileDirectClub connects the customer with a dentist or orthodontist, who is licensed to practice locally but is located off-site (and may be even located out-of-state), who evaluates the model and photographs and creates a treatment plan. If the dentist feels that aligners are appropriate for the patient, she prescribes the aligners and sends them directly to the patient. The patient doesn’t need to visit a traditional dental office for teeth alignment treatment. This results in significant cost savings and greater customer convenience and access.

But the members of the boards of dental examiners in Georgia, Alabama and California––the bullies that want things to remain the same––have, according to plaintiffs, used their government-created power in the marketplace to protect the economic interests of the traditional orthodontia market by using (i) coordinated statewide raids; (ii) false statements; (iii) and other misconduct to prevent SmileDirectClub from competing on the merits.

The Eleventh Circuit cases against the dental boards in Alabama and Georgia

In October 2018, SmileDirectClub together with one of its affiliated dentists in Alabama, Blaine Leeds, sued the Alabama Dental Examiners Board after receiving a cease-and-desist letter accusing him of unauthorized practice of dentistry. The district court declined to grant state-action immunity to the Alabama board members because they couldn’t show, among other things, the second element of the NC Dental test, active supervision. This case is currently on appeal.

In August 2020, SmileDirectClub won its first appellate victory against a state dental board when the Eleventh Circuit held that the Georgia’s board of dental examiners was not entitled to state-action immunity.

SmileDirectClub sued the Georgia board and its members alleging, among other things, that a rule amendment––to require dental assistants taking orthodontic scans to have immediate supervision from a licensed dentist––unlawfully restricted competition from teledentistry services. The district court dismissed SmileDirectClub’s claims against the board in its official capacity on sovereign-immunity grounds, but the claims against the board members in their individual capacities survived dismissal.

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Author: Aaron Gott and Nick McNamara

As the effects of the ongoing COVID-19 pandemic continue to ripple across all sectors of the economy, agriculture has been hit especially hard. The widespread closure of restaurants combined with the general hit on most Americans’ wallets has precipitated a massive demand shock, which in turn has sent the prices of agricultural products such as corn, soybeans, milk, and fresh produce tumbling. While this may be good news for consumers (at least in the short run), it does not bode so well for farmers, who in recent months have had to resort to dumping milk and culling herds of livestock—practices which are both wasteful and potentially environmentally harmful.

Can farmers work together to mitigate these issues by agreeing, prior to production, to set production caps so that prices may be stabilized, and waste avoided? The answer depends on whether such controls on output are covered by the Capper-Volstead Act’s antitrust exemption for farm cooperatives.

Under normal circumstances, a concerted agreement among horizontal competitors to restrict output is a per se violation of Section 1 of the Sherman Act. But the Capper-Volstead Act, enacted in 1922 amid populist fervor in the agricultural sector, provides a limited antitrust exemption to “[p]ersons engaged in the production of agricultural products as farmers, planters, ranchmen, dairymen, nut or fruit growers.”

You can read a more detailed primer on the Capper-Volstead Act here. But, in brief, the act allows agricultural producers to collectively process, prepare, handle, and market their products. Now, it is important to note again that the exemption applies only to agricultural producers, not processors. This past year, there has been a flurry of antitrust litigation against pork and beef processors who are alleged to have agreed to restrict output, among other things. As discussed in the primer, the Supreme Court has held that a cooperative cannot include processors because they do not fit into the category of “farmers, planters, ranchmen, dairymen, nut or fruit growers.” Thus, only those entities at the most basic level of the food supply chain get to enjoy the exemption.

For producers, the farm cooperative exemption has been interpreted by courts to include a blanket exemption from antitrust liability for price fixing, a practice which also normally incurs per se liability under Section 1 of the Sherman Act. No court has ever directly ruled on the question of whether the exemption applies also to output controls, but there are indications they might find output restrictions outside the narrow confines of the act.

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