An increasing problem in the competition
law world is the relationship between competition law and varying degrees of
state action in other realms. In Europe, this problem is artificially easy
because of the hierarchy of laws involved. In Deutsche
Telekom and the other
margin squeeze cases, the European Court of Justice relied on the principle
of primacy
to hold that competition law, which is written in the main body of the
Treaties, trumps sectoral regulation, which isn’t. When there is no Community
dimension, and outside the EU, the answer isn’t quite that straightforward.
To begin with the easy one: When EU
competition law applies, i.e. when someone is naughty in a way that “may affect
trade between Member States”, the only question is who’s to blame:
- If the offending behaviour is mandated by EU sectoral legislation, the secondary legislation in question is null and void, something that can be established through the prejudicial question procedure or through an action for annulment, as the case may be.
- If the offending behaviour is mandated by Member State sectoral legislation, the Member State is the culprit and it is up to the Commission to start an infringement procedure. In an appropriate case, the Member State legislation in question can also be slapped down by a national court, with or without a prejudicial question.
- If, on the other hand, the relevant sectoral law merely permits the offending behaviour without mandating it, the onus is on the company to make sure it obeys both competition law and sectoral law, meaning that it can be punished for failing with regard to the former. This is what happened in the margin squeeze cases.
At the Member State level, when there is no
Community dimension, saying that your naughtiness is expressly permitted by
sectoral legislation is fundamentally a sound argument. Of course, in a given
case the question remains whether this is a correct interpretation of the law, which
will depend on which statute was enacted first, whether there is express saving
language somewhere, the way the US Telecommunications Act expressly says that
it is without prejudice to competition law, and it will depend on the various
canons of interpretation.
In the British Albion Water competition law
case, for example, Ofwat, which under the UK system is both the sectoral
regulator and one of the possible competition authorities, argued that Welsh
Water’s pricing structure (the so-called “costs principle”) was expressly
permitted by section
66E WIA 1991, an argument that was obviously gratefully echoed by Welsh
Water itself. The Competition Appeal Tribunal went along with that approach to
some extent, but concluded that it was not enough to save Welsh Water from
competition law liability under a margin squeeze theory. (Albion
Water v. Water Services Regulation Authority, [2006] CAT 23, par. 920-980.
Cf. also Ofwat’s
decision, par. 324-331.)
The reason why all of this is interesting
now is that the problem has cropped up in the US again. There, the situation is
a mixture of the previous one. On the one hand, the relationship between
competition law and sectoral regulation has a clear hierarchical dimension,
because American competition law is enacted at the Federal level in the Sherman
and Clayton Acts (15
USC 1-38), on the other hand, the Federal authorities are much more
reluctant to have this law displace State law, the Supremacy Clause
notwithstanding. The result is something of a half-way system, as summed up in
the 1943 Supreme Court case of Parker v.
Brown.
In Parker, the Court held that the
competition laws don’t displace state law. The Court argued that the Federal
legislator would not do something so drastic without explicitly saying so, and
in this case it didn’t. (Nor did the sponsors of the Sherman Act.) If the
states want to create a monopoly or a cartel somewhere, they are allowed to. At
the same time, however, the Court didn’t take back its earlier holding that the
States can’t shield private actors from antitrust liability. (Cf. Northern
Securities Co. v. United States from 1904.) So all sectoral legislation
that does not create an outright statutory monopoly or cartel winds up
somewhere in the middle.
This can produce some pretty unsatisfying
results in either direction. Earlier this year, in FTC v.
Phoebe Putney Health System, the Court held unanimously (Justice Sotomayor
writing for the Court) that some hospital shenanigans in rural Georgia were not
shielded by Georgia’s health care legislation, because the naughtiness in
question was not “clearly envisaged” by the legislator. This is odd because, as
the Court summarises it,
the Law
authorizes each county and municipality, and certain combinations of counties
or municipalities, to create “a public body corporate and politic” called a
“hospital authority.” §§31–7–72(a), (d).Hospital authorities are governed by 5-
to 9-member boards that are appointed by the governing body of the county or
municipality in their area of operation. §31–7–72(a).
Under the Law, a
hospital authority “exercise[s] publicand essential governmental functions” and
is delegated “all the powers necessary or convenient to carry out and
effectuate” the Law’s purposes. §31–7–75. Giving morecontent to that general
delegation, the Law enumerates 27powers conferred upon hospital authorities,
including the power “[t]o acquire by purchase, lease, or otherwise and
tooperate projects,” §31–7–75(4), which are defined to include hospitals and
other public health facilities, §31–7–71(5); “[t]o construct, reconstruct,
improve, alter, andrepair projects,” §31–7–75(5); “[t]o lease . . . for
operationby others any project” provided certain conditions are satisfied,
§31–7–75(7); and “[t]o establish rates and chargesfor the services and use of
the facilities of the authority,”§31–7–75(10).
I find it difficult to see how that does
not include the right to authorise a private actor to monopolise hospital
services in a given county. In that regard, the standard applied by the 11th Circuit,
who asked whether the hospital authority’s actions were “foreseeable” in the
sense of “reasonably anticipated” by the legislator, makes more sense to me:
[I]t is not necessary,
the court reasoned, for an anticompetitive effect to “be ‘one that ordinarily
occurs, routinely occurs, or is inherently likely to occur as a result of the
empowering legislation.’” (…) [Applying that standard], the court reasoned that
the Georgia Legislature must have anticipated that the grant of power to
hospital authorities to acquire and lease projects would produce
anticompetitive effects because “[f]oreseeably, acquisitions could consolidate
ownership of competing hospitals, eliminating competition between them.”
If you are going to protect the States’
right to organise regulated sectors in whatever way they please, you have to
give a fair reading to their statutes. By applying the “presumption against
state immunity” (p. 7) as drastically as it did, without properly considering
what the Georgia legislature most likely intended, the Supreme Court made the
state immunity doctrine a sham.
Even more recently, the 4th Circuit
backed the FTC’s decision against the North Carolina State Board of Dental
Examiners, who had set out to prevent non-dentists from offering
teeth-whitening services. Here, the basic legal approach is eminently sensible;
being a private body consisting predominantly of dentists, the state board is
asked to show that their behaviour was “actively supervised by the State
itself”. (Cf. the 1980 Supreme Court ruling of California
Retail Liquor Dealers Association v. Midcal Aluminum.) Since it wasn’t, the
state board was nailed to the wall by the FTC and the court.
But again I’m not completely convinced by
how it goes on. The problem is what the 4th circuit and the FTC are doing with
regular competition law. After all, just because the state immunity doctrine of
Parker
does not apply, does not mean that the state board is automatically at fault.
You still have to tick all the usual competition law boxes. And the box that
trips them up, I think, is the one that we Europeans would call
“justification”, and which in the US goes to the question of whether the
“restraint of trade” in question is “unreasonable”, I requirement that is read
into the Sherman Act in order to keep it from invalidating every contract ever
(15 USC 1).
In the US, in order to decide that
question, the courts first consider whether a “per se rule” applies – or as it
is called now: a quick-look test – or whether the case should be treated under
the rule of reason. Quoting the 1984 Supreme Court case of NCAA v. Board
of Regents of the University of Oklahoma, the 4th Circuit explained:
The rule of
reason applies “if the reasonableness of a restraint cannot be determined
without a thorough analysis of its net effects on competition in the relevant
market.”
The court does some hand waiving to argue
that the distinction doesn’t matter much, before observing that
the Supreme
Court has cautioned that we should be hesitant to quickly condemn the actions
of professional organizations because “certain practices by members of a
learned profession might survive scrutiny . . . even though they would be
viewed as a violation of the Sherman Act in another context.” Nat’l Soc’y
of Prof’l Eng’rs v. United States, 435 U.S. 679, 686 (1978).
So here’s my question: Where is this
scrutiny? Immediately after this observation, the 4th Circuit
quotes some more language that says the same, and then it “conclude[s] that
substantial evidence supports the FTC’s factual findings regarding the economic
effects of the Board’s actions and that those findings support the conclusion
that the Board’s behavior violates § 1” (p. 31) and tells the state board to
get the North Carolina state legislature to pass some legislation if there are
legitimate public health concerns about non-dentists providing teeth whitening
services (p. 32).
This seems wrong to me. Surely it should be
lawful for a group of companies to form a cartel if the alternative is to allow
a market failure – in this case a threat to public health – to persist? If the
public health threat truly exists, the net economic answer would be that the
restraint of trade is the lesser of two evils, meaning that a rule of reason
approach would conclude that there is no violation of the competition laws. And
so it follows that the state board should be allowed to prove that this public
health threat is real. I appreciate that the court’s role is to “uphold [the
FTC’s] factual findings if supported by substantial evidence” (p. 26), but then
at the very least I’d like for the court to say what that substantial evidence
is. Instead, all I have is this, where, in its final
opinion, we find the FTC categorically rejecting such a justification
without even examining the facts. Instead, it quotes the Professional
Engineers case already quoted above by the 4th circuit, where the Supreme
Court said:
The Sherman Act
reflects a legislative judgment that ultimately competition will produce not
only lower prices, but also better goods and services. (…) The assumption that
competition is the best method of allocating resources in a free market
recognizes that all elements of a bargain—quality, service, safety, and
durability—and not just the immediate cost, are favorably affected by the free
opportunity to select among alternative offers. (…) The fact that engineers are
often involved in large-scale projects significantly affecting the public
safety does not alter our analysis. Exceptions to the Sherman Act for
potentially dangerous goods and services would be tantamount to a repeal of the
statute. In our complex economy, the number of items that may cause serious
harm is almost endless.
Yeah, that’s just wrong. If you want to
rule out self-regulation in favour of bureaucratic micro-management, that’s
fine, but then you don’t get to call your approach a “rule of reason”.
