Antitrust, State Regulation and Regulators, and Small Business

Legislatures have often enacted laws with conflicting or cross purposes.  What one particular statute or regulation encourages or requires may run contrary to another.  A small business may try to justify its practices or activities by relying on a particular law, regulation, or agency opinion, but a different separate law may require a result that runs against the small business’ interest.  Courts, regulators, and businesses then try to resolve the conflict.  This conundrum frequently arises between the federal antitrust laws and state regulation of licensed activities.  States license numerous jobs and positions ranging from architects to barbers.

When State regulators themselves are business owners, they may have a personal interest in taking actions as regulators that stymie competition such as restricting others from obtaining licenses, imposing high costs to enter or remain in the licensed activity, and otherwise limiting competition on the merits.  Small businesses and small business owners, appointed as regulators to a board or agency, can easily become caught in the cross-fire between the requirements of antitrust and their actions as state regulators.

To explain further, antitrust laws promote competition in the marketplace.  To that end, when private parties agree, formally or informally, to limit output, control prices, or restrict innovation, they face potential or actual antitrust liability – civil or criminal.  At the same time, state legislatures, boards, agencies and regulators pass laws, adopt rules or engage in practices that reduce competition or confer special privileges upon certain groups or persons.  In this State, for instance, certain vendors with disabilities have been given preference in operating food stands in some public places.  The result is that competition is sacrificed for the purpose of helping certain people with disabilities.  In a democracy, legislators often have competing goals and the law does not require them to place marketplace competition as the highest purpose or priority.

The principal rationale for state regulation over a given industry or particular businesses is to protect the public.  Unfortunately, a relatively few businesses or individuals prey upon the most vulnerable in our society.  Thus, a false, deceptive or misleading claim by a business licensed by the State that its product will cure cancer or add years to life may increase a business’ sales, but injures citizens, the public and other businesses that play by the rules.  Regulators often are empowered to file suit to stop such abusive practices.

Protection of the public also extends to competency of professionals and firms in the industry.  If the licensed professionals in a particular industry lack knowledge, know-how or expertise in their licensed fields, consumers suffer and a loss of confidence in the industry may follow.  Regulators thus are usually authorized to revoke, suspend or otherwise affect licenses.  Without a license, individuals or businesses cannot operate.

States enact laws that create boards and agencies.  Citizens, many of whom are licensees and in the business, are appointed to oversee or direct the agency and its activities.  They are the regulators for the industry.  Their authority is substantial.  Failure to comply with state regulators and regulations can result in sanctions from the State: fines, penalties, suspensions.  Or failure to have the required state license can result in the State shutting down a business and seizing its revenues and products.

At other times, the public protection rationale extends to state-made decisions that obviously limit competition, a purpose at odds with antitrust law.  Thus, for example, a particular Tennessee state agency limits competition by requiring certain health care businesses to obtain a CON (“Certificate of Need”) before starting or opening a business.  The would-be competitor must divulge competitively sensitive information, and existing competitors in the market often move to block the new competitor from entering the market.  The practice, sanctioned by state law, in effect, serves to exclude competitors, to maintain prices and margins, and to decrease competition.  The rationale for this law is that wide-open, unbridled competition in certain health care fields will result in a medical “arms race” that will needlessly increase prices.  Nonetheless, the legislature has made a choice, enacted into state law, which gives private persons and firms the ability to argue that new competitors should not be allowed to enter particular markets.  Without state law providing the existing competitors the ability to block new entrants, the existing competitors’ efforts would violate the antitrust laws.

In the last generation or so, the U.S. Supreme Court has reshaped and generally took some bite out of the federal antitrust laws.  While news of antitrust lawsuits often report that a federal agency (the U.S. Department of Justice Antitrust Division or the Federal Trade Commission) is investigating or settling a proposed merger between very large firms or challenging a practice by a large firm or firms that unduly raises prices or excludes competitors from the marketplace, the government continues to bring criminal price-fixing cases where competitors at the same market level have agreed upon prices or a range of prices, inevitably followed by class action lawsuits.  Private litigants can often bring their own suits, and if they prevail, secure injunctive relief, treble (triple) damages, and attorney’s fees.  In short, for every dollar of damages that they satisfactorily prove, they are awarded three dollars and also pay the other side’s attorney’s fees.

In the last few years however, the Court has made it more difficult for a state board or agency – controlled by active market participants or existing competitors who typically are small businesses, the regulators themselves – to prevail in these cases.  A primary defense for regulators is “state-action immunity.”  Though a State may choose to displace competition, the Supreme Court has made it clear that a State may not hand the reins of government to private individuals or others without supervision by state officials who act pursuant to a clearly articulated state policy.  A recent case, N.C. State Bd. of Dental Examiners v. Fed. Trade Comm., 135 S.Ct. 1101 (Feb. 15, 2015), made this point crystal clear.  These cases have encouraged challenges to state regulators’ anticompetitive actions.  As a result, challenges will be made to actions by state or local government boards or agencies controlled by market participants, who allegedly engage in unauthorized anticompetitive practices, raise prices, or limit competitors’ access to the market-place.

The antitrust laws are complex, and if a business loses, the impact can be devastating.  Often, a case or defense turns on not-so-obvious facts.  Perry A. Craft formerly served as an Assistant Attorney General and then as Deputy Attorney General headed the Antitrust Division for the Tennessee Attorney General’s office.  If you have concerns or questions about antitrust or related laws about competition, contact Nashville lawyer Perry A. Craft.