Phoebe Putney

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”.