Brother May I?: The Challenge of Competitor Control Over ...Brother, may I?: the challenge of competitor control over market entry Maureen K. Ohlhausen* and Gregory P. Luib† ABSTRACT

Brother may I the challenge ofcompetitor control over market entry

Maureen K Ohlhausen and Gregory P Luibdagger

A B S T R A C T

Those concerned with restrictions on innovative technologies and business modelsoften decry the stultifying effects of a lsquoMother May Irsquo approach whereby the innov-ator needs government permission to enter a market These are worthy concerns thatregulators ought to take seriously This article focuses on a related issue which the au-thors call the lsquoBrother May Irsquo problem or the challenge of competitor control overmarket entry This problem arises when would-be entrants are effectively required toobtain permission from incumbent competitors to enter or expand within a particularmarket Whether it is due to a law or regulation the decision of a financially-interestedstate board or conduct by a monopolist looking to maintain its market power new en-trants to a market generally should not have to get their competitorsrsquo permission tocompete That such permission is effectively required in an increasing number of situ-ations is inconsistent with the free-market principles that ought to guide our economicpolicies Three recent appellate victories by the Federal Trade Commissionmdashin NorthCarolina Dental Phoebe Putney and McWanemdashall in some way involved the need toseek the permission of competitors to enter a market and this article addresses eachcase in turnK E Y W O R D S Federal Trade Commission antitrust state action immunity certificate-of-need laws exclusive dealingJ E L C L A S S I F I C A T I O N S K21 K42 L41 L42 L44

I I N T R O D U C T I O NThose concerned with restrictions on innovative technologies and business modelsoften decry the stultifying effects of a lsquoMother May Irsquo approach where the innov-ator needs government permission to enter a market These are worthy concernsand in recognition of them one of the authors has repeatedly advocated for what

Commissioner US Federal Trade Commission Washington DC Email mohlhausenftcgov This art-icle is based on a speech presented by Commissioner Ohlhausen at the 29 May 2015 Global AntitrustEconomics Conference at George Mason University School of Law The views expressed in this article aresolely those of the authors and do not necessarily reflect the views of the Federal Trade Commission orany other Commissioner

dagger Attorney Advisor to Commissioner Maureen K Ohlhausen US Federal Trade Commission WashingtonDC

Published by Oxford University Press 2015This work is written by US Government employees and is in the public domain in the US

Journal of Antitrust Enforcement 2015 0 1ndash23doi 101093jaenfojnv028Article

at Federal Trade C

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nloaded from

she calls regulatory humility advising regulators to wait to see if consumer harmoccurs before enacting new legal obligations1

This article focuses on a related issue which we call the lsquoBrother May Irsquo prob-lem or the challenge of competitor control over market entry This problem ariseswhen would-be entrants are effectively required to obtain permission from incum-bent competitors to enter or expand within a particular market Whether it is dueto a law or regulation the decision of a financially-interested state board or con-duct by a monopolist looking to maintain its market power new entrants to a mar-ket generally should not have to get their competitorsrsquo permission to competeThat such permission is effectively required in an increasing number of situations isinconsistent with the free-market principles that ought to guide our economicpolicies

Public choice theory of course has long recognized the problem of an industrycapturing its regulators2 The lsquoBrother May Irsquo scenario may be even more troublingas in some cases it is effectively lsquoregulatory replacementrsquo rather than regulatory cap-ture with competitors acting directly as a regulator

A few explanatory notes may help to provide context for this article The authorsbelieve strongly in the concepts of a free-market economy and economic liberty forindividuals We also view sound antitrust enforcementmdashthat is enforcement effortsaimed at protecting consumer welfare while minimizing burdens on otherwise effi-cient conductmdashas a necessary part of a well-functioning free market Competition isthe first line of defence for consumers Thus targeted antitrust enforcement is goodfor the market because it makes other regulation less necessary3

In addition the authors have been strong supporters of the Federal TradeCommissionrsquos (FTC) engagement in competition advocacy4 Such advocacy is ne-cessary in many instances to combat proposed regulatory barriers to entry supportedby incumbent interests Thus our long history with competition advocacy alsoshapes our views on these important policy issues

Finally to be clear this article does not advocate for requiring firms to assist theircompetitors The courts in Trinko5 and other cases have appropriately limited thegeneral duty of firms to help their competitors compete Similarly one of the authorshas argued against reliance on the essential facilities doctrinemdashparticularly in the

1 See eg Maureen K Ohlhausen lsquoRegulatory Humility in Practicersquo Remarks before the American EnterpriseInstitute (1 April 2015) lthttpswwwftcgovsystemfilesdocumentspublic_statements635811150401aeihumilitypracticepdfgt accessed 27 July 2015 Maureen K Ohlhausen lsquoThe Procrustean Problemwith Prescriptive Regulationrsquo (2014) 23 Comm Law Conspectus 1 lthttpswwwftcgovsystemfilesdocumentspublic_statements606381141222commlawpdfgt accessed 27 July 2015

2 See eg George J Stigler lsquoThe Theory of Economic Regulationrsquo (1971) 2 Bell J Econ amp Manag Sci 3 (lsquoAcentral thesis of this paper is that as a rule regulation is acquired by the industry and is designed and oper-ated primarily for its benefitrsquo)

3 See eg Timothy J Muris lsquoLooking Forward The Federal Trade Commission and the Future Developmentof US Competition Policyrsquo (2003) Colum Bus L Rev 359 364 (lsquoEffective antitrust enforcement may pre-clude direct command-and-control regulation of sectors of the economy avoiding the significant ineffi-ciencies such regulation entailsrsquo)

4 Commissioner Ohlhausen served as Director of the FTCrsquos Office of Policy Planning (OPP) from 2004 to2008 while Greg Luib served as Assistant Director of OPP from 2006 to 2009

5 See Verizon Commcrsquons Inc v Law Offices of Curtis V Trinko LLP 540 US 398 (2004)

2 Journal of Antitrust Enforcement

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intellectual property areamdashby foreign antitrust agencies6 Rather this article arguesthat firms should not have to obtain their competitorsrsquo permission to compete andthat the FTCrsquos enforcement and advocacy efforts should seek to eliminate such anti-competitive market distortions Interestingly three recent victories by the FTC inthe courtsmdashNorth Carolina Dental7 Phoebe Putney8 and McWane9mdashall in some wayinvolved the need to seek the permission of competitors to enter a market and thisarticle addresses each case in turn

This article proceeds as follows Section II addresses the Supreme Courtrsquos recentdecision in North Carolina Dental and its potential impact on state licensing boardsincluding in particular those comprised of active participants in the markets regulatedby such boards as well as the licensing of professionals more generally Section IIIdiscusses the Courtrsquos 2013 decision in Phoebe Putney and argues for the eliminationof state certificate-of-need (CON) laws which among other things prevented theCommission from obtaining a complete remedy in the Phoebe Putney merger matterSection IV explores the recent Eleventh Circuit decision in the FTCrsquos monopoliza-tion case against McWane Inc and its implications for exclusive dealing by monopol-ists Section V concludes this article

I I N O R T H C A R O L I N A D E N T A L A N D S T A T E L I C E N S I N G B O A R D SOne of the clearest examples of the lsquoBrother May Irsquo challenge arises in the statelicensing of professionals Here ourmdashand the Commissionrsquosmdashconcern has been theartificial and unjustified barriers to entry erected by some State licensing boardsincluding in particular those comprised of active participants in the very marketsthey regulate This issue came to a head in the Commissionrsquos successful ShermanAct section 1 case against the North Carolina Board of Dental Examiners (theBoard)

The North Carolina Dental caseIn North Carolina Dental the FTC filed an administrative complaint alleging thatthe Boardmdashthrough its dentist-membersmdashwas lsquocolluding to exclude non-dentistsfrom competing with dentists in the provision of teeth whitening servicesrsquo10 Afterdeciding that whitening teeth constitutes the practice of dentistry the Board issuedletters to non-dentist providers stating they were illegally practicing dentistry

6 See eg Maureen K Ohlhausen Commissioner US Federal Trade Commission Testimony on lsquoTheForeign Investment Climate in Chinarsquo before the US-China Economic and Security Review Commission(28 January 2015) 5ndash6 (expressing concern that decisions by US antitrust enforcers are being interpretedin China as endorsing the essential facilities doctrine a result that would devalue intellectual propertyrights around the world) lthttpswwwftcgovsystemfilesdocumentspublic_statements621411150128chinatestimonypdfgt accessed 27 July 2015

7 NC State Bd of Dental Examrsquors v FTC 135 S Ct 1101 (2015) (North Carolina Dental)8 FTC v Phoebe Putney Health Sys Inc 133 S Ct 1003 (2013) (Phoebe Putney)9 McWane Inc v FTC No 14-11363 2015 WL 1652200 (11th Cir 15 April 2015)

10 In re NC Bd of Dental Examrsquors Dkt No 9343 Complaint at 1 (17 June 2010) lthttpswwwftcgovsitesdefaultfilesdocumentscases201006100617dentalexamcmptpdfgt accessed 27 July 2015 The Boardconsists of six licensed dentists one licensed hygienist and one lsquoconsumer memberrsquo who is neither a den-tist nor a hygienist ibid para 2

Brother may I 3

at Federal Trade C

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without a license and ordering them to cease and desist11 The Board also issued let-ters to several third parties with interests in shopping malls stating that teeth whiten-ing services offered at mall kiosks are illegal12

The Commission alleged that the Boardrsquos activities constituted an unlawful re-straint of trade under the standards governing section 1 of the Sherman Act and thusan unfair method of competition under the FTC Act13 The result of this concertedeffort as alleged in the complaint was to deprive consumers of the benefits of pricecompetition and increased choice provided by non-dentist teeth whiteners14

Prior to the administrative trial in this matter the Board filed a motion to dismissarguing that its conduct was protected by the state action doctrine In a unanimousopinion written by then-Commissioner William Kovacic the Commission held thatlsquoa state regulatory body that is controlled by participants in the very industry it pur-ports to regulate must satisfy both prongs of Midcal to be exempted from antitrustscrutiny under the state action doctrinersquo15 That is to benefit from state action im-munity the Board must show not only that the state of North Carolina has lsquoclearlyarticulated and affirmatively expressedrsquo a state policy in favour of regulation andagainst competition with respect to teeth whitening services but that the Boardrsquosactivitiesmdashlike those of private partiesmdashare lsquoldquoactively supervisedrdquo by the State it-selfrsquo16 The Commission further found that the Board failed to demonstrate that lsquoitsdecision to classify teeth whitening as the practice of dentistry and to enforce this de-cision with cease and desist orders was subject to any state supervision let alone suf-ficient supervision to convert the Boardrsquos conduct into conduct of the state of NorthCarolinarsquo17

Following that ruling as well as a trial on the merits the administrative law judgefound the Board had violated the FTC Act18 a decision subsequently affirmed bythe full Commission19 In May 2013 the Fourth Circuit Court of Appeals denied theBoardrsquos petition for review of the Commissionrsquos order affirming both the state actionruling and the finding of liability20 The case ended up at the Supreme Court whichruled in the Commissionrsquos favour in February 2015 holding that lsquoa state board on

11 ibid para 2012 ibid para 2213 The FTC enforces s 1 of the Sherman Act through the FTC Act See eg Cal Dental Assrsquon v FTC 526 US

756 762 n 3 (1999) (lsquoThe FTC Actrsquos prohibition of unfair competition overlaps the scope of sect 1 ofthe Sherman Act rsquo) (citation omitted)

14 NC Dental Complaint (n 10) para 2515 In re NC Bd of Dental Examrsquors Docket No 9343 Opinion of the Commission at 13 (8 February 2011)

lthttpswwwftcgovsitesdefaultfilesdocumentscases201102110208commopinionpdfgt ac-cessed 27 July 2015 That motion to dismiss was addressed by the Commission in the first instance basedon 2009 changes to the rules governing its administrative litigation See ibid 3

16 Cal Retail Liquor Dealers Assrsquon Midcal Aluminum Inc 445 US 97 105 (1980)17 In re NC Bd of Dental Examrsquors Docket No 9343 Opinion of the Commission at 17 (8 February 2011)18 See In re NC Bd of Dental Examrsquors Docket No 9343 Initial Decision of the Administrative Law Judge (14

July 2011) lthttpswwwftcgovsitesdefaultfilesdocumentscases201107110719ncb-decisionpdfgt accessed 27 July 2015

19 See In re NC Bd of Dental Examrsquors Docket No 9343 Opinion of the Commission (7 December 2011)lthttpswwwftcgovsitesdefaultfilesdocumentscases201112111207ncdentalopinionpdfgt ac-cessed 27 July 2015

20 See NC State Bd of Dental Examrsquors v FTC 717 F3d 359 (4th Cir 2013)

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which a controlling number of decisionmakers are active market participants in theoccupation the board regulates must satisfy Midcalrsquos active supervision requirementin order to invoke state-action antitrust immunityrsquo21

A few aspects of the Courtrsquos opinion stand out First the Court reiterated the cru-cial role that antitrust plays in our economy noting that lsquo[f]ederal antitrust law is acentral safeguard for the Nationrsquos free market structuresrsquo22 And citing its recent de-cision in Phoebe Putney (another Commission victory in the state action area) theCourt explained that lsquogiven the fundamental national values of free enterprise andeconomic competition that are embodied in the federal antitrust laws lsquostate actionimmunity is disfavored much as are repeals by implicationrsquo23

The Court also focused on the important issue of political accountability As athreshold matter the Court rejected the idea that State agencies such as the Boardare sovereign actors that automatically qualify for State action immunity as the Stateitself The Court in Parker v Brown24 in establishing the state action doctrine recog-nized the importance of our federal system of government including the sovereigntyof the states Thus anticompetitive conduct is immunized only when it legitimatelyrepresents the State acting in its sovereign capacity However immunity for stateagencies the Court explained lsquorequires more than a mere facade of state involve-ment for it is necessary in light of Parkerrsquos rationale to ensure the States accept polit-ical accountability for anticompetitive conduct they permit and controlrsquo25 In otherwords lsquoParker immunity requires that the anticompetitive conduct of nonsovereignactors especially those authorized by the State to regulate their own profession re-sult from procedures that suffice to make it the Statersquos ownrsquo26

The Court next contrasted state agencies with municipalities which it has heldare not obligated to meet the active supervision prong to benefit from state actionimmunity In particular the Court noted that lsquomunicipalities are electorally account-able and lack the kind of private incentives characteristic of active participants in themarketrsquo27 Furthermore municipalities tend to address issues lsquoacross different eco-nomic spheres substantially reducing the risk that [they] would pursue private inter-ests while regulating any single fieldrsquo28 State agencies controlled by marketparticipants the Court noted are lsquomore similar to private trade associations vestedby States with regulatory authorityrsquo than to municipalities29

In ruling for the FTC the Court also rejected concerns raised by the Board andseveral of its amici that allowing the Commissionrsquos order to stand will discourageotherwise qualified citizens from serving on state regulatory agencies As the Courtexplained lsquoAdherence to the idea that those who pursue a calling must embrace eth-ical standards that derive from a duty separate from the dictates of the State reaches

21 NC State Bd 135 S Ct (n 7) 1114 Justice Kennedy wrote the opinion for the Court and was joined byChief Justice Roberts and Justices Ginsburg Breyer Sotomayor and Kagan

22 ibid 110923 ibid 1110 (citing Phoebe Putney Health Sys (n 8) 1010)24 317 US 341 (1943)25 NC State Bd 135 S Ct (n 7) 111126 ibid27 ibid 1112 (citing Town of Hallie v City of Eau Claire 471 US 34 45 n9 (1985))28 ibid 111329 ibid 1114

Brother may I 5

at Federal Trade C

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back at least to the Hippocratic Oathrsquo30 The Court further noted that to the extentagency officials are concerned about antitrust damage claims states may defend andindemnify those officials in the event of litigation31 Moreover states can ensureParker immunity is available to agencies by adopting clear policies to displace compe-tition and if those agencies are controlled by market participants by providing ac-tive supervision Those two requirements and their underlying rationale the Courtfound should apply to the Board just as they were held to apply to the medical peerreview board in Patrick v Burget32 where the Court directed to the legislative branchany challenges to the wisdom of applying the antitrust laws to the sphere of medicalcare33 That is any objections to the application of antitrust to the medical profes-sions should be taken up with Congress not than the courts

Finally the Court briefly addressed the issue of active supervision and how theBoard or any other agency controlled by market participants can meet this prongof the Midcal test Because the Board did not argue before the Court that NorthCarolina exercised active supervision over its conduct regarding non-dentist teethwhiteners the Court was not reviewing any particular supervisory system TheCourt however made clear that the supervision inquiry is lsquoflexible and context-dependentrsquo34 The statersquos lsquosupervision need not entail day-to-day involvement in anagencyrsquos operations or micromanagement of its every decisionrsquo35 Rather the crit-ical inquiry is lsquowhether the Statersquos review mechanisms provide ldquorealistic assurancerdquothat a nonsovereign actorrsquos anticompetitive conduct ldquopromotes state policy ratherthan merely the partyrsquos individual interestsrdquorsquo36 The Court went on to identify lsquoafew constant requirements of active supervisionrsquo including (1) lsquoreview [of] thesubstance of the anticompetitive decision not merely the procedures followed toproduce itrsquo (2) supervisory lsquopower to veto or modify particular decisions to ensurethey accord with state policyrsquo (3) the lsquomere potential for state supervisionrsquo is insuf-ficient and (4) lsquothe state supervisor may not itself be an active marketparticipantrsquo37

Unlike the Commissionrsquos victory in Phoebe Putney the decision in North CarolinaDental was not unanimous Justice Alito with Justices Scalia and Thomas joiningdissented Among other things the dissent argued that Parker immunizes state agen-cies the Board is a state agency lsquoand that is the end of the matterrsquo38 The fact thatthe Board lsquowas serving the interests of dentists and not the publicrsquo did not sway thedissenting Justices who argued lsquothat is not what Parker immunity is aboutrsquo39 Thedissentersrsquo reading of Parker was clearly different from that of the majority Theynoted that the regulation of the practice of medicine and dentistry has fallenlsquosquarely within the Statesrsquo sovereign police powerrsquo since before the Sherman Act

30 ibid 111531 ibid32 486 US 94 (1988)33 See NC State Bd 135 S Ct (n 7) 1115ndash1634 ibid 111635 ibid36 ibid (quoting Patrick 486 US at 100-1)37 ibid 1116ndash1738 ibid 1117ndash18 (Alito J dissenting)39 ibid 1118

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was passed in 189040 Thus the State statutes that created and conferred regulatoryauthority on the Board lsquorepresent precisely the kind of state regulation that theParker exemption was meant to immunizersquo41

The dissent also took issue with the practical problems that the majority opinionmay create for state regulatory regimes maintaining that it is unclear what changesto state boards will be necessary in light of the Courtrsquos decision The dissent furtheridentified several questions left unanswered by the decision including (i) lsquoWhat is aldquocontrolling numberrdquo [of decision makers]rsquo (ii) lsquoWho is an ldquoactive market partici-pantrdquorsquo and (iii) lsquoWhat is the scope of the market in which a member may not par-ticipate while serving on the boardrsquo42 Finally the dissent noted that regulatorycapture of a state agency can occur in many ways and asked why the inquiry shouldbe limited to the question of whether an agency includes active marketparticipants43

Implications for State boardsThe North Carolina Dental decision was a crucial victory for competition and con-sumers Under our federal system individual States can do a lot to meddle with thefree market that is their choice to make However States need to be politically ac-countable for whatever market distortions they impose on consumers44 Of coursewith a nod to George Stiglerrsquos insights from the 1970s the North Carolina DentalBoardrsquos conduct can be easily explained as rent-seeking behaviour by incumbents tofend off a new source of competition45 Where there is a benefit concentrated in thehands of a relatively small number of incumbent providers in this case dentists andthe competitive harm is dispersed across all consumers of health care services publicchoice theory predicts such incumbent exploitation of State licensing laws and regula-tions46 The adverse competitive results of such behaviour are manifest47 Now some

40 ibid 111941 ibid42 ibid 112343 ibid44 See eg FTC v Ticor Title Ins Co 504 US 621 636 (1992) (lsquoFederalism serves to assign political responsi-

bility not to obscure it Neither federalism nor political responsibility is well served by a rule that essentialnational policies are displaced by state regulations intended to achieve more limited endsrsquo)

45 See eg Stigler (n 2) 5 (lsquoWe propose the general hypothesis every industry or occupation that has enoughpolitical power to utilize the state will seek to control entryrsquo)

46 See eg Steven Menashi and Douglas H Ginsburg lsquoRational Basis with Economic Bitersquo (2014) 8 NYU JLamp Liberty 1055 1087ndash88 (lsquoBy now ldquo[a]ll reasonably sophisticated persons know that a well-knit specialinterest group is likely to prevail over an amorphous ldquopublicrdquo whose members are dispersed and as indi-viduals are not in sharp conflict with the organized interestrdquo The occupational licensing laws recentlyinvalidated under rational basis review are just this type of special-interest legislationrsquo) (quoting WalterGellhorn lsquoThe Abuse of Occupational Licensingrsquo (1976) 44 U Chi L Rev 6 16) Timothy Sandefur lsquoAPublic Convenience and Necessity and Other Conspiracies Against Trade A Case Study from theMissouri Moving Industryrsquo (2014) 24 Geo Mason U CR LJ 159 176 (lsquoPublic choice theory predicts thatwhere the government can redistribute wealth or opportunities between private groups those groups willinvest their resources in obtaining favorable legislation that will benefit them or handicap their rivalsEntry restrictions like occupational licenses or [certificate-of-need] laws are made-to-order examplesrsquo)

47 See eg Daniel J Gilman and Julie Fairman lsquoAntitrust and the Future of Nursing Federal CompetitionPolicy and the Scope of Practicersquo (2014) 24 Health Matrix 143 165 (2014) (lsquo[L]icensure may be used byincumbent professionals to insulate themselves from competition By restricting the entry of competitors

Brother may I 7

at Federal Trade C

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have described this type of situation as an example of regulatory capture48 But it ismore than regulatory capture it is the regulated replacing and acting as the regulators

There is no question that the Courtrsquos decision has implications for state agenciesthroughout the country Many licensing boards are controlled by active participantsin the markets they regulate A recent study for example found that active marketparticipants have a majority on 90 per cent of boards in Florida and on 93 per centof boards in Tennessee49 It is also understandable why States would prefermdashandconsumers might benefit frommdashhaving active market participants serve on stateregulatory boards They can offer valuable and potentially unique medical and otherexpertise in making important regulatory decisions In an amicus brief filed with theCourt in North Carolina Dental several States raised concerns that subjecting regula-tory board members to the antitrust laws would deter qualified professionals fromserving on State boards50 The States also raised concerns that a decision in favour ofthe FTC could lsquosubject every decision made by regulatory boards staffed by activeprofessionalsmdashincluding routine licensing decisionsmdashto direct oversight and ap-proval by full-time state employeesrsquo51

Although the authors appreciate these concerns we believe state boards have sev-eral viable options for avoiding both antitrust liability for and excessive oversight oftheir conduct These options should not be terribly onerous to implement andshould help states retain individuals with sufficient relevant expertise on their regula-tory boards First simply being more cognizant of and hopefully minimizing thecompetitive effects of a boardrsquos regulatory decisions would go a long way towardseliminating any antitrust exposure This may be a bit of an oversimplification but if aboard is not engaging in conduct that is a violation of the antitrust laws it need noteven address the issue of active supervision Second although citizens may benefitfrom the expertise of actual practitioners state boards need not be controlled by ac-tive market participants52 Those individuals could comprise less than a majority ofthe boardmdashor perhaps abstain from matters in which they have a financial interestThis option would also avoid the need to demonstrate active supervision of theboard Third even if a State prefers a particular board to be controlled by marketparticipants there are many options for actively supervising the actions of that boardIn fact as the FTC argued before the Court most States have established schemesto supervise some or all of the conduct of self-interested dental boards53 Under

licensure can restrict supply which can increase the income of incumbents (at consumer expense) or de-crease the pressure on incumbents to improve non-price aspects of their services such as quality or con-veniencersquo) (footnote omitted)

48 See eg Herbert Hovenkamp lsquoRediscovering Capture Antitrust Federalism and the North CarolinaDental Casersquo (April 2015) CPI Antitrust Chronicle 15ndash6

49 See Aaron Edlin and Rebecca Haw lsquoCartels by Another Name Should Licensed Occupations FaceAntitrust Scrutinyrsquo (2014) 162 U Pa L Rev 1093 1103 1157ndash64

50 See Brief of Amici Curiae State of West Virginia and 21 Other States in Support of Petitioner at 11 NCState Bd of Dental Examrsquors v FTC No 13-534 (US 30 May 2014)

51 ibid 1552 See eg Brief of Amici Curiae Pacific Legal Foundation and Cato Institute in Support of Respondent at 23 NC

State Bd of Dental Examrsquors v FTC No 13-534 (US 6 August 2014) (lsquoAgencies could be made up of retired mem-bers of the profession or could include existing members without their making up the majority of the boardrsquo)

53 See Brief for the Respondent at 54ndash55 NC State Bd of Dental Examrsquors v FTC No 13-534 (US 30 July2014) Brief of Amicus Curiae Neil Averitt in Support of Respondent at 4ndash7 NC State Bd of Dental

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those schemes which could be and are applied to other types of boards ultimateregulatory decisions are made by legislative committees umbrella state agenciessuch as rules review commissions or other disinterested state officials And ofcourse not every action of a regulatory board will need to be actively supervisedonly those that potentially raise antitrust issues would require such attention As alast resort States can opt to indemnify individual board members in the event thatantitrust damages are imposed on them54

Looking at North Carolina Dental and Phoebe Putney which is discussed in thenext section the state action area is one of the best examples of the Commissionusing its unique institutional features to guide the courts and others in the develop-ment of competition law towards better outcomes for competition and consumers55

Looking ahead the Commission should continue to focus both its enforcement andcompetition advocacy efforts on anticompetitive licensing activities within the StatesNonetheless the Commission ought to give the States some breathing room to re-spond to the changed legal landscape that they now face It will take the States sometime to evaluate and modify if necessary their licensing boards In the meantime asChairwoman Ramirez announced at the ABA Spring Meeting in April 2015 theCommission has begun an effort to provide guidance to States seeking to satisfy theactive supervision prong of the state action doctrine The authors have had discus-sions with representatives from state attorneys general offices and we hope to con-tinue that dialogue in the future

Implications for occupational licensing more generallyMore generally the authors are hopeful that the States while assessing the sufficiencyof their supervision over licensing decisions will also re-evaluate some of the excessiveoccupational licensing requirements they have adopted over the years That is as theStates reconsider the composition and oversight of their regulatory boards the authorsrecommend that they also take a very hard look at their occupational licensing regimesto see if they are on balance helping or harming their citizens

Among the professions subject to state licensure requirements today are floristsinterior designers tour guides barbers hair braiders and even lsquoshampoo special-istsrsquo56 In fact roughly 30 per cent of US workers are now required to obtain a

Examrsquors v FTC No 13-534 (US 5 August 2014) (identifying several forms of supervision currently em-ployed by the states)

54 See eg NC State Bd 135 S Ct (n 7) 1115 (2015) Edlin and Haw (n 49) 1152ndash5355 For a discussion of the FTCrsquos efforts in the state action area see Maureen K Ohlhausen lsquoReflections on the

Supreme Courtrsquos North Carolina Dental Decision and the FTCrsquos Campaign to Rein in State ActionImmunityrsquo Remarks before the Heritage Foundation (31March 2015) 7ndash13 lthttpswwwftcgovpublic-statements201503reflections-supreme-courts-north-carolina-dental-decision-ftcs-campaigngt accessed 27July 2015

56 See Stephanie Simon lsquoA License to Shampoo Jobs Needing State Approval Risersquo Wall St J (7 February2011) lthttpwwwwsjcomarticlesSB10001424052748703445904576118030935929752gt accessedon 27 July 2015 Melissa S Kearney and others lsquoNearly 30 Percent of Workers in the US Need aLicense to Perform Their Job It Is Time to Examine Occupational Licensing Practicesrsquo BrookingsInstitution Up-Front Blog (27 January 2015 1100 AM) lthttp wwwbrookingsedublogsup-frontposts20150126-time-to-examine-occupational-licensing-practices-kearney-hershbein-boddygt accessed27 July 2015 For a comprehensive review of state licensing requirements see Institute for Justice

Brother may I 9

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license to pursue their occupation57 Multiple studies have found that prices in-creasemdashby as much as 33 per centmdashas a result of occupational licensing58 Thatmight be tolerable if those price increases reflected improved quality however lsquoeco-nomic studies have demonstrated far more cases where occupational licensing hasreduced employment and increased prices and wages of licensed workers than whereit has improved the quality and safety of servicesrsquo59 Overall the drag on the econ-omy of excessive occupational licensing is counted in hundreds of billions of dollarsannually60 Moreover the increased costs of excessive occupational licensing fallsmost heavily on those least able to afford them61

A particular concern is that the lsquoBrother May Irsquo aspect of occupational licensingcan create unnecessary barriers to entry for entrepreneurs seeking to take their firststep on the economic ladder This is especially true for occupations that draw indi-viduals who are just beginning a professional career Licensing requirements whichoften include educational components can prevent lower-income workers who maynot be able to pay for additional education from entering certain fieldsmdasheven at thelowest rungs of the economic ladder62 A recently published study by the GoldwaterInstitute assessed the relationship between occupational licensing and entrepreneur-ship rates including in particular rates for lower-income people across the States63

lsquoLicense to Work A National Study of Burdens from Occupational Licensingrsquo (May 2012) (hereinafterIJ lsquoLicense to Workrsquo) lthttpswwwijorglicensetoworkgt accessed 27 July 2015

57 See Morris M Kleiner and Alan B Krueger lsquoAnalyzing the Extent and Influence of OccupationalLicensing on the Labor Marketrsquo (2013) 31 J of Labor Economics 175ndash76 (findings based on 2008 surveyconducted as part of Princeton Data Improvement Initiative)

58 See eg Morris M Kleiner lsquoReforming Occupational Licensing Policiesrsquo (2015) The Hamilton Project 17ndash22(hereinafter Kleiner lsquoReforming Occupational Licensingrsquo) lthttpwwwhamiltonprojectorgfilesdown-loads_and_linksreforming_occupational_licensing_morris_kleiner_finalpdfgt accessed 27 July 2015 (col-lecting studies) See also Executive Office of the President lsquoOccupational Licensing A Framework forPolicymakersrsquo (2015) 14 lthttpswwwwhitehousegovsitesdefaultfilesdocslicensing_report_final_nonembargopdfgt accessed 31 July 2015 (lsquo[T]he evidence on licensingrsquos effects on prices is unequivocalmany studies find that more restrictive licensing laws lead to higher prices for consumersrsquo)

59 Kleiner lsquoReforming Occupational Licensingrsquo (n 58) 6 See also ibid 12ndash13 (collecting studies) ExecutiveOffice of the President (n 58) 58 (lsquoMost empirical evidence does not find that stricter licensing require-ments improve quality public safety or healthrsquo) Edlin and Haw (n 49) 1111ndash12 (lsquoThe work of Kleinerand his contemporaries reveals a consensus in the academy a licensing restriction can only be justifiedwhere it leads to better quality professional servicesmdashand for many restrictions proof of that enhancedquality is lackingrsquo)

60 See Kleiner lsquoReforming Occupational Licensingrsquo (n 58) 661 See eg ibid 16 (lsquoThe net effects [of licensing] can be regressive as lower-income consumersmdashwho now

have to pay higher prices and may have less access to services ranging from haircuts to dental examsmdashpay more to the regulated practitioners some of whom are well compensatedrsquo) Steven HorwitzlsquoBreaking Down the Barriers Three Ways State and Local Governments Can Improve the Lives of thePoorlsquo (2015) Mercatus Research Paper 8 lthttpmercatusorgsitesdefaultfilesHorwitz-Breaking-Down-Barrierspdfgt accessed 27 July 2015 (lsquoBecause many licensed occupations offer products or ser-vices that are bought by the poor licensing laws hit the poor twicemdashonce in the form of limiting jobopportunities and then again in the form of higher pricesrsquo)

62 See eg IJ lsquoLicense to Workrsquo (n 56) 4 (lsquoThe 102 occupational licenses studied require of aspiring workerson average $209 in fees one exam and about nine months of education and trainingrsquo)

63 See Stephen Slivinski lsquoBootstraps Tangled in Red Tape How State Occupational Licensing HindersLow-Income Entrepreneurshiprsquo (23 February 2015) Goldwater Institute Policy Report No 272 lthttpwwwgoldwaterinstituteorgenworktopicsfree-enterpriseentrepreneurshipbootstraps-tangled-in-red-tapegt accessed 27 July 2015

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Among other things the study found that lsquothe states that license more than 50 percent of the low-income occupations had an average entrepreneurship rate 11 percent lower than the average for all states and the states [that] licensed less than athird had an average entrepreneurship rate about 11 percent higherrsquo64 Even after ad-justing for various factors such as the age and unemployment rate of the populationthe study found that lsquothe presence of widespread occupational licensing in a state hasa statistically significant negative effect on the rate of entrepreneurship in a statersquo65

The Commission has wisely devoted significant resources over the past 40 yearsopposing state laws and regulationsmdashincluding many in the occupational licensingareamdashthat in its view unnecessarily restrict competition As the Commission ex-plained in testimony in 2014 before the House of Representatives Committee onSmall Business

We have seen many examples of licensure restrictions that likely impede com-petition and hamper entry into professional and services markets yet offer fewif any significant consumer benefits In these situations regulations may leadto higher prices lower quality services and products and less convenience forconsumers In the long term they can cause lasting damage to competitionand the competitive process by rendering markets less responsive to consumerdemand and by dampening incentives for innovation in products services andbusiness models66

Since the 1970s the Commission has issued hundreds of comments and amicusbriefs to State and self-regulatory entities addressing professional licensure and otherrestrictions across a wide range of industries67 Our expectation is that theCommission will continue to pursue this important competition advocacy

I I I P H O E B E P U T N E Y A N D C E R T I F I C A T E - O F - N E E D L A W SAnother example of needing to obtain permission from onersquos competitors to enterthe market is found in CON laws that remain on the books in over two-thirds of theStates68 Under these laws would-be suppliers of a host of health care services fromacute care hospitals to nursing homes to rehabilitation centres must seek approvalfrom a state entity to enter the market The real issue in a typical CON determin-ation is not however one of ensuring patient safety or the proper qualifications ofthe applicantmdashthere are other laws and regulations that typically address those issues

64 ibid 1465 ibid 15 The Goldwater Institute study relied in significant part on data on state occupational licensing

gathered by the Institute for Justice in connection with its lsquoLicense to Workrsquo study See ibid 12ndash15 (dis-cussing use of data from IJ lsquoLicense to Workrsquo (n 56)

66 Prepared Statement of the Federal Trade Commission lsquoCompetition and the Potential Costs andBenefits of Professional Licensurersquo before the US House of Representatives Committee on SmallBusiness (16 July 2014) 1 lthttpswwwftcgovsystemfilesdocumentspublic_statements568171140716professionallicensurehousepdfgt accessed 27 July 2015

67 ibid 9ndash1368 See National Conference of State Legislatures lsquoCertificate of Need State Health Laws and Programsrsquo

lthttpwwwncslorgresearchhealthcon-certificate-of-need-state-lawsaspxgt accessed 27 July 2015(indicating that 36 States retain some type of CON programme as of 2014)

Brother may I 11

at Federal Trade C

nloaded from

more directlymdashbut rather the lsquoneedrsquo for a new entrant into the market at issue asdetermined by the state regulatory entity69 As discussed below CON laws have out-lived their intended use and now effectively serve primarily if not solely to assist in-cumbents in fending off competition from new entrants The Commission and thepublic were reminded of the anticompetitive effects of those laws most recently inthe Phoebe Putney matter

The FTCrsquos case against Phoebe PutneyIn Phoebe Putney the FTC challenged a merger involving a local hospital authority inAlbany Georgia The parties arranged to have the local hospital authority acquirePalmyra Park Hospital (Palmyra) from HCA Inc and then transfer all managementcontrol of the hospital to Phoebe Putney Health System Inc (Phoebe Putney)under a long-term lease The Commission filed its complaint in April 2011However based on the form of the transaction and the role of the hospital authoritytherein the federal district court granted the defendantsrsquo motion to dismiss holdingthat the state action doctrine immunized the transaction from federal antitrust scru-tiny70 On appeal the Eleventh Circuit Court of Appeals acknowledged that thetransaction represented a virtual merger-to-monopoly yet affirmed the districtcourtrsquos dismissal on state action grounds71 Following its ruling the Eleventh Circuitdissolved the injunction pending appeal that had prevented the parties from mergingallowing them to consummate the transaction

The Commission next turned to the Supreme Court which ultimately sided withthe agency on the state action issue in its unanimous 2013 decision72 To be immunefrom the antitrust laws under the state action doctrine private and other non-sovereign entities must demonstrate that the state lsquoclearly articulated and affirma-tively expressedrsquo a policy displacing competition and thus allowing the otherwiseanticompetitive conduct at issue73 The Court held that a general grant of corporatepowers to a sub-state entity such as a hospital authority is insufficient by itself to sat-isfy the clear articulation prong of Midcal74 The challenged transaction thus wasnot immune from antitrust scrutiny and the case was remanded for furtherproceedings

69 See eg Sandefur (n 46) 160 (lsquoUnlike occupational licensing laws CON requirements do not purport todetermine whether a person is educated trained or skilled before going into business Instead they areexpressly aimed at preventing competition against established companies regardless of quality or skillrsquo)Roy Cordato lsquoCertificate-of-Need Laws Itrsquos Time for Repealrsquo (2005) 1 John Locke Found NathanielMacon Research Paper 27 (lsquoEconomist Friedrich Hayek in his Nobel Laureate lecture ldquoThe Pretense ofKnowledgerdquo argued that central planners like those charged with determining who should and shouldnot get to provide medical services can only ldquopretendrdquo to have the information necessary to make thekinds of decisions they claim to be making At best any determination of ldquoneedrdquo by such planners will bearbitrary and will not reflect actual market conditions At worst these planners can become witting or un-witting tools of entrenched interests who wish to keep competition out of the marketrsquo)

70 See FTC v Phoebe Putney Health Sys Inc 793 F Supp 2d 1356 1381 (MD Ga 2011)71 See FTC v Phoebe Putney Health Sys Inc 663 F 3d 1369 1375 (11th Cir 2011) (noting that lsquoon the facts

alleged the joint operation of [Phoebe] and Palmyra would substantially lessen competition or tend tocreate if not create a monopolyrsquo)

72 See Phoebe Putney Health Sys (n 8)73 See ibid 1010 (citing Cal Retail Liquor Dealers Assrsquon v Midcal Aluminum Inc 445 US 97 105 (1980))74 See ibid 1012

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So far so good for patients in Albany The FTC complaint counsel resumed theadministrative litigation that had been stayed pending the federal court proceedingsIt did not take very long however before the agency recognized a potentially insur-mountable hurdle to a successful resolution of this case the Georgia CON lawsThat is even if the Commission could have established liabilitymdashand that seemedfairly likely given the factsmdashthe state CON laws would have prevented a divestitureof any hospital assets

Now the case took an admittedly circuitous route during its final 18 months Atfirst the Commission issued a proposed consent that imposed on Phoebe Putneycertain behavioural restrictions related to CON applications in the relevant geo-graphic market but no divestiture requirement75 The Commission later becameaware of certain information in connection with the public comments on the pro-posed consent order however that made it second-guess its initial assessment of theCON lawsrsquo preclusion of structural relief During this time a newly formed healthcare entity North Albany Medical Center LLC (North Albany) filed a request fordetermination with the Georgia Department of Community Health (DCH) askingwhether its potential acquisition of divested hospital assets would be permitted underthe CON laws North Albany obtained a favourable initial determination by DCHstaff in June 2014 Thereafter the Commission withdrew its proposed consent andsent the case back to administrative litigation76

Unfortunately for consumers of hospital services in the Albany area a state hear-ing officer subsequently ruled that the CON laws would apply to any divestiture thatmight take place in this matter77 The fact that the Albany region is deemed lsquoover-beddedrsquo made it unlikely that any divestiture buyer could obtain the necessary CONapproval to operate an independent hospital After the DCH Commissioner madepublic comments supporting that finding North Albany opted not to pursue an ap-peal and effectively dropped its bid to acquire any divested assets78 Thus lastMarch the Commission reluctantly finalized its consent agreement with PhoebePutney without a divestiture79

Implications of Phoebe PutneyWhat then are the takeaways from the Phoebe Putney matter First although it is oflittle solace to consumers in Albany the Supreme Court decision narrowing the stateaction doctrine is a significant victory for competition principles and consumer wel-fare going forward That decision along with North Carolina Dental represents theculmination of a decades-long effort by the Commission to narrow state action im-munity from the antitrust lawsmdashan effort in which one of the authors was proud to

75 See In re Phoebe Putney Health Sys Inc Dkt No 9348 Analysis of Proposed Agreement ContainingConsent Order to Aid Public Comment at 4ndash6 (22 August 2013) lthttpswwwftcgovsitesdefaultfilesdocumentscases201308130822phoebeputneyanalpdfgt accessed 28 July 2015

76 See In re Phoebe Putney Health Sys Inc Dkt No 9348 Statement of the Federal Trade Commission at 2(31 March 2015) lthttpswwwftcgovsystemfilesdocumentspublic_statements634181150331phoebeputneycommstmtpdfgt accessed 28 July 2015

77 See ibid 378 See ibid79 See ibid

Brother may I 13

at Federal Trade C

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participate in several roles80 Second Phoebe demonstrates the importance ofobtaining preliminary relief when challenging hospital mergers in CON states Bymaintaining the status quo injunctive relief prevents the possibility of competitiveharmmdashsometimes as in Phoebe irremediable harmmdashfrom occurring during theCommissionrsquos administrative proceedings and any appeals Similarly the outcome inPhoebe should give the Commission pause in challenging consummated hospital ac-quisitions in states with CON laws Finally this case is a stark reminder of the anti-competitive nature of laws that effectively give competitors veto power over newmarket entry

The Commissionmdashboth on its own and jointly with the Department of JusticeAntitrust Division (DOJ)mdashhas long advocated that states consider the costs thatCON laws may impose on health care consumers81 More specifically theCommission has argued that CON laws lsquoimpede the efficient performance of healthcare marketsrsquo lsquocreate barriers to entry and expansion to the detriment of health carecompetition and consumersrsquo and lsquoweaken marketsrsquo ability to contain health carecostsrsquo82 As a result the Commission and its staff have expressed support for the re-peal or narrowing of such laws83

The antitrust agencies have put forth strong arguments against CON laws Firstthe original reason for the adoption of state CON laws during the 1970s is simply nolonger valid Many of those laws trace their origin to a since-repealed federal man-date the National Health Planning and Resources Development Act of 1974 whichoffered incentives for States to implement CON programmes At the time the

80 Commissioner Ohlhausen was a member of the State Action Task Force which issued a report in 2003recommending several means for the Commission to narrow the state action doctrine (see Federal TradeCommission Office of Policy Planning lsquoReport of the State Action Task Forcersquo (September 2003)lthttpwwwftcgovos200309stateactionreportpdfgt accessed 28 July 2015) testified before theAntitrust Modernization Commission on the doctrine (see Prepared Statement of Maureen KOhlhausen Director Office of Policy Planning Federal Trade Commission before the AntitrustModernization Commission on the State Action Doctrine (29 September 2005) lthttpswwwftcgovpublic-statements200509ftc-staff-testimony-antitrust-modernization-commission-concerning-stategtaccessed 28 July 2015) and participated in several competition advocacy efforts at narrowing the scopeof the doctrine

81 See eg Letter from FTC Staff to the Honourable Marilyn W Avila lsquoNorth Carolina House ofRepresentativesrsquo (10 July 2015) (hereinafter lsquoNorth Carolina CON Advocacyrsquo) lthttpswwwftcgovpolicypolicy-actionsadvocacy-filings201507ftc-staff-comment-concurring-comment-commissionergtaccessed 28 July 2015 Joint Statement of the Antitrust Division of the US Department of Justice and theFederal Trade Commission before the Illinois Task Force on Health Planning Reform (15 September2008) (hereinafter lsquoDOJ-FTC Illinois Testimonyrsquo) lthttpswwwftcgovpolicypolicy-actionsadvocacy-filings200809ftc-and-department-justice-written-testimony-illinoisgt accessed 28 July 2015 Letter fromJanet M Grady Regional Director Federal Trade Commission to the Honorable Mary George HawaiiState Senate (13 March 1987) lthttpswwwftcgovpolicypolicy-actionsadvocacy-filings198703ftc-staff-comment-governor-mary-george-concerninggt accessed 28 July 2015

82 DOJ-FTC Illinois Testimony ibid 1ndash283 See eg North Carolina CON Advocacy (n 81) 1 DOJ-FTC Illinois Testimony (n 81) 2 Federal Trade

Commission and US Department of Justice lsquoImproving Health Care A Dose of Competitionrsquo (July2004) ch 8 at 6 lthttpswwwftcgovreportsimproving-health-care-dose-competition-report-federal-trade-commission-department-justicegt accessed 28 July 2015 (lsquo[T]he Agencies urge states with CONprograms to reconsider whether they are best serving their citizensrsquo health care needs by allowing theseprograms to continuersquo)

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federal government and private insurance reimbursed health care charges primarilyon a lsquocost-plusrsquo basis which provided incentives for over-investment CON lawswere designed to address this skewed incentive However reimbursement methodol-ogies that may in theory have justified CON laws have changed significantly essen-tially eliminating the original justification for those laws84

Second CON laws appear to have generally failed in their intended purpose ofcontaining health care costs The agenciesrsquo advocacies have been grounded in largepart on empirical studies of the impact of CON laws conducted by FTC econo-mists85 Those studies have found that rather than keeping health care costs downCON laws and regulations lead to higher prices and expenditures86 For exampleone study showed that if states substantially relaxed their CON programmes tosubject fewer hospitals to review annual hospital expenditures would decrease by14 per cent or approximately $13 billion87 Studies conducted by several inde-pendent commissions appointed by state legislatures to evaluate the impact ofCON laws have reached similar conclusions88 These results of course are rathereasily predicted by economic theory Like any barrier to entry CON laws preventor limit the entry of firms that could otherwise provide higher-quality andorlower-priced services than those offered by incumbents In other words output re-strictions lead to higher not lower costs they also result in higher profits for in-cumbent firms

Another fairly predictable result of CON regimes is the rent-seeking behaviourpursued by incumbents who are able to exploit the regulatory system to their advan-tage Using the lsquoBrother May Irsquo aspects of the CON process incumbent hospitalsand other health care providers can impose substantial delays on or thwartaltogether potential entrants into their markets thus protecting their own supra-competitive revenues89 Returning to public choice theory it readily predicts such

84 See DOJ-FTC Illinois Testimony (n 81) 4ndash585 The CON area is just one example of empirical work conducted by FTC economists lending support to

and thus increasing the effectiveness of the Commissionrsquos competition advocacy efforts86 See eg DOJ-FTC Illinois Testimony (n 81) 5 n16 (collecting studies)87 See Daniel Sherman Bureau of Economics Federal Trade Commission lsquoThe Effect of State Certificate-

of-Need Laws on Hospital Costs An Economic Policy Analysisrsquo (January 1988) vi lthttpswwwftcgovreportseffect-state-certificate-need-laws-hospital-costs-economic-policy-analysisgt accessed 28 July2015 ibid iv (lsquoThe study thus finds no evidence that CON programs have led to the resource savingsthey were designed to promote but rather indicates that reliance on CON review may raise hospitalcostsrsquo)

88 See eg The Lewin Group lsquoAn Evaluation of Illinoisrsquo Certificate of Need Program Prepared for State ofIllinois Commission on Government Forecasting and Accountabilityrsquo (February 2007) 16 (lsquoA review ofthe evidence indicates that CONs rarely reduce health care costs and on occasion increase cost in somestatesrsquo) William S Custer and others lsquoReport of Data Analyses to the Georgia Commission on theEfficacy of the CON Programrsquo (November 2006) 8 (lsquoCON regulation is associated with higher private in-patient costs The effect is robust with respect to model specification measures of CON rigor anddiagnosesrsquo)

89 See eg North Carolina CON Advocacy (n 81) 3 DOJ-FTC Illinois Testimony (n 81) 7 Federal TradeCommission and US Department of Justice (n 83) Exec Summ at 22 Incumbent providers have alsoentered into anticompetitive agreements that were outside of but nonetheless facilitated by the CONlaws See eg DOJ-FTC Illinois Testimony (n 81) 7ndash8 (discussing DOJ investigations of market allocationby hospitals and home health agencies)

Brother may I 15

at Federal Trade C

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incumbent exploitation of CON laws90 as well as incumbent efforts to keep suchlaws on the books91

We next address what appears to be the primary argument that states make insupport of retaining CON laws the ability to cross-subsidize care provided touninsured or underinsured patients92 The argument is that without CON lawsnew entrants will engage in cream-skimming by taking the most profitable pa-tients thus depriving incumbent providers of revenue that is used to provide careto otherwise under-served or unserved patientsmdashparticularly at communityor safety-net hospitals The public-policy goal of ensuring access to adequatehealth care services for patients who cannot afford them is certainly a laudableone Using the blunt and anticompetitive tool of CON laws however is not theanswer Such a use of CON laws flies in the face of any notion of free-marketcompetition93

Clearly there are a host of difficult issues relating to the payment and provisionof health care in this country that go far beyond CON laws and that may not haveeasy answers The commission established to study the efficacy of the Georgia CONprogramme in the mid-2000s for example was unable to reach consensus with re-gard to the best policy to address the difficult issue of cross-subsidization of indigentcare94 As that commission recognized lsquoWhen viewed in a vacuum analysis hasshown a relatively weak effect of CON but the CON program is being used as aregulatory device in an environment involving much stronger forcesrsquo95 Nonethelessusing CON laws as an indirect tax for funding indigent care imposes costsmdashin termsof price quality and innovationmdashacross all consumers of health care services96

There are less competitively-restrictive and more politically-transparent means for

90 See eg Sandefur (n 46) 176 (lsquoPublic choice theory would predict that under a CON regime existing firmswill engage in rent-seeking behavior such as spending resources on policing rivals instead of improvingservice and lowering costs or seeking to make [c]ertificates more difficult or expensive to obtainrsquo)

91 See eg ibid 173 (lsquoPublic choice theory would also predict that as economic and technological circum-stances change CON laws would nevertheless remain on the booksmdashvigorously defended by incumbentfirmsmdashlong after the economic rationales on which they were based were rendered obsolete even ontheir own termsrsquo)

92 See eg Commission on the Efficacy of the Certificate of Need Programme lsquoAn Analysis and Evaluationof Certificate of Need Regulations in Georgia Final Report to the Georgia General Assembly andGovernor Perduersquo (December 2006) xiindashxiii (hereinafter lsquoGeorgia Commission Reportrsquo) (lsquoHospital lead-ers are concerned that if they lose their ability to cross-subsidize from [the highest-margin] services theywill no longer be able to cover the fixed losses associated with inpatient Medicaid services and care of theuninsured For this reason hospitals whether nonprofit or proprietary urban or rural have wanted to seeCON rules maintained or tightened in order to maintain regulatory control over the provision of theseservices in non-hospital-based settingsrsquo)

93 See eg Sandefur (n 46) 170 (lsquoWhatever the merits of the ldquocream-skimmingrdquo and incentives rationalesthey apply only to public utilities or perhaps to markets that feature some kind of monopoly characteris-tics They do not apply to private markets with healthy competition In these markets ldquocream-skimmingrdquois simply the ordinary competitive process on which the economy depends for innovation and growthand encouraging investment where market demand is lacking is rightly seen as foolhardyrsquo)

94 See Georgia Commission Report (n 92) xiii95 ibid96 See eg Cordato (n 69) 18 (lsquoIf CON laws are being used to hide this tax from the electorate then not

only are they inconsistent with sound economics they are also inconsistent with an open and democraticpolitical processrsquo)

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pursuing the goal of indigent care In fact there is some evidence that CON laws donot actually advance the goal of increasing the level of indigent care97 Finally as theantitrust agencies have noted in their advocacies in this area CON laws were notadopted as a means of cross-subsidizing health care in the first instance98 That is anex post rationale identified by CON proponents that is inconsistent with free-marketprinciples More not less competition is needed in the health care space to improvequality control prices and spur innovation99

With the Noerr-Pennington100 doctrine rightly protecting incumbentsrsquo petitioningactivity related to CON applications however there is little if any room for law en-forcement action in this area It is crucial that the Commission engage with state le-gislatures on the issue of CON laws Prior to Commission staffrsquos July 2015 letter to astate representative in North Carolina101 however the Commission had not ad-dressed this issue in its competition advocacy since 2008 The Commission ought tocontinue seeking out opportunities to weigh in on the adverse impact of CON lawson consumer welfare102 The Commission has been on a bit of a winning streak inchallenging anticompetitive hospital mergers103 It would be unfortunate if any moreof those victories for health care consumers were jeopardized by CON laws that pre-clude any meaningful remedy in those cases

97 See eg Thomas Stratmann and Jacob W Russ lsquoDo Certificate-of-Need Laws Increase IndigentCarersquo (2014) Mercatus Ctr Working Paper No 14-20 at 3 lthttpmercatusorgpublicationdo-certificate-need-laws-increase-indigent-caregt accessed 28 July 2015 (lsquoWe do not find evidence asso-ciating CON programs with an increase of indigent care The effect of CON programs on indigentcare shows no clear pattern using either direct or indirect measures of indigent care However con-sistent with the existing literature our results suggest that CON programs restrict entry and limit theprovision of regulated medical servicesrsquo) DOJ-FTC Illinois Testimony (n 81) 9ndash10 (collectingstudies) The Lewin Group (n 88) ii 26ndash28 (lsquoThrough our research and analysis we could find noevidence that safety-net hospitals are financially stronger in CON states than other statesrsquo) (findingmargins for safety-net hospitals in CON states lsquoconsiderably lowerrsquo than margins for safety-net hos-pitals in non-CON states)

98 See DOJ-FTC Illinois Testimony (n 81) 499 See Federal Trade Commission and US Department of Justice (n 83) Executive Summary at 4

(lsquoVigorous competition both price and non-price can have important benefits in health care as wellPrice competition generally results in lower prices and thus broader access to health care products andservices Non-price competition can promote higher quality and encourage innovationrsquo)

100 See ERR Presidents Conference v Noerr Motor Freight Inc 365 US 127 (1961) United Mine Workers of Amv Pennington 381 US 657 (1965)

101 See North Carolina CON Advocacy (n 81)102 Of course competition advocacy does not always persuade state legislators to make more competition-

friendly policy decisions In fact the DOJ Antitrust Division testified before the special committee evalu-ating the Georgia CON law making many of the points that this article makes See Mark J Botti USDepartment of Justice Antitrust Division lsquoCompetition in Healthcare and Certificates of Needrsquo before aJoint Session of the Health amp Human Services Committee of the State Senate and the CON SpecialCommittee of the State House of Representatives of the General Assembly of the State of Georgia (23February 2007) lthttpwwwjusticegovatrpubliccomments223754htmgt accessed 28 July 2015Nonetheless that committee recommended that the Georgia legislature maintain the CON law in thatstate

103 See eg St Alphonsus Med Ctr-Nampa Inc v St Lukersquos Health Sys Ltd 778 F 3d 775 (9th Cir 2015)ProMedica Health Sys Inc v FTC 749 F 3d 559 (6th Cir 2014) FTC v OSF Healthcare Sys 852 F Supp 2d1069 (ND Ill 2012)

Brother may I 17

at Federal Trade C

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I V M C W A N E A N D E X C L U S I O N A R Y C O N D U C T B Y M O N O P O L I S T SThe remainder of this article addresses a third lsquoBrother May Irsquo situation in which awould-be entrant must effectively rely on its competitorrsquos permission before enteringor expanding its business This one involves not state regulation but rather privateconduct by a monopolist that is exclusionary and thus maintains its monopoly and isnot justified by a cognizable efficiency The end result is that a firm looking to enterthe market or expand its sales is at the whims of its monopolist-competitor to suc-ceed in such entry or expansion

The FTCrsquos case against McWaneThe Commission recently encountered this in its Sherman Act section 2 actionagainst McWane Inc104 In that case the Commission issued a seven-count adminis-trative complaint against McWane in January 2012105 Ultimately the Commissiondismissed six of the seven counts finding liability solely on the section 2 exclusivedealing count106 In particular the Commission found that McWane had used an ex-clusive dealing policy to prevent its sole rival Star Pipe Products Ltd (Star) frommeaningfully competing and thus maintained the monopoly that McWane enjoyedin the market for domestically-manufactured ductile iron pipe fittings107 (Althoughperhaps not the sexiest of markets the Commission has pursued of late pipe fittingsare used by municipal and regional water authorities in crucial waterworks projects)

The thrust of the case was that McWane with over 90 per cent market share hadimposed a policymdashthe Full Support Programmdashon distributors that required them topurchase all of their domestic fittings from McWane otherwise they would losetheir rebates and be cut off altogether108 There were two exceptions to the FullSupport Program under which customers were permitted to purchase competing do-mestic fittings (i) where McWane products were not readily available and (ii)where the customer bought domestic fittings and accessories along with anothermanufacturerrsquos ductile iron pipe109 The Commission found that to the extent thatStar was able to gain sales it did so primarily under these limited exceptions andthose sales were insufficient to have a competitive impact110

In finding liability on the exclusive dealing count the Commission determinedthat McWane had monopoly power in the domestic fittings market111 that the Full

104 See In re McWane Inc Dkt No 9351 Opinion of the Commission (6 February 2014) (hereinafterlsquoMcWane Commission Opinionrsquo) lthttpswwwftcgovsystemfilesdocumentscases140206mcwaneopinion_0pdfgt accessed 28 July 2015

105 See In re McWane Inc Dkt No 9351Administrative Complaint (4 January 2012) lthttpswwwftcgovsitesdefaultfilesdocumentscases201201120104ccwanestaradmincmptpdfgt accessed 28 July2015 (alleging conspiracy information exchange invitation to collude restraint of trade based on distri-bution agreement conspiracy to monopolize monopolization and attempted monopolization)Commissioner Ohlhausen was not at the Commission when it filed its administrative complaint inMcWane

106 See McWane Commission Opinion (n 104) 2 and n1107 See ibid 20 See also ibid 26 (lsquoImpairing its rivalsrsquo ability to threaten McWanersquos monopoly was the Full

Support Programrsquos core objectiversquo)108 See ibid 9 16109 See ibid 9110 See ibid 28ndash29111 See ibid 16ndash18

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nloaded from

Support Program constituted an exclusive dealing arrangement that substantiallyforeclosed its rivalsrsquo access to the most efficient sales channel112 and that this re-sulted in harm to competition and consumers in the domestic fittings market113 Asthe Commission opinion concluded

[T]he evidence that McWanersquos exclusive dealing policy significantly impairedthe access of McWanersquos only rival Star to the main channel of distributionthereby increasing its costs and keeping it below the critical level necessary topose a real competitive threat is plainly sufficient to meet the standard ofharm to competition set forth in the prevailing case law114

At the same time the Commission rejected the two efficiency justifications prof-fered by McWane First McWane argued that it engaged in exclusive dealing to gen-erate sufficient sales to operate its last domestic foundry The Commission did notview this to be lsquoa cognizable procompetitive justification for antitrust purposesrsquo115

More specifically McWanersquos increased sales volume did not result from actions suchas a price reduction that typically promote consumer welfare by increasing overallmarket output or lowering prices rather the increased sales would have come fromanticompetitive reductions in Starrsquos output

The second justification offered by McWane was that the Full Support Programprevented customers from cherry-picking the highest-selling items from Star andforced them to purchase McWanersquos full line of domestic fittings That is if distribu-tors were able to source from multiple suppliers they would buy the common fit-tings from the limited supplier (at lower prices) and turn to the full-line supplier forless common products only which supposedly could lead to the collapse of the full-line seller The Commission was not convinced that this is a cognizable efficiencyunder the antitrust laws To begin with McWane never explained why it could notcompete to sell the more common products by lowering its prices for them and rais-ing its prices for the less common products thereby reducing an implicit cross-sub-sidy In any event the Commission noted that lsquo[e]ven if selective entry by the full-line supplierrsquos rivals led to the collapse of the full-line seller that itself would not con-stitute a harm to the market (as opposed to a single firm)rsquo116

112 See ibid 20ndash25113 See ibid 25ndash29114 See ibid 26115 See ibid 30116 ibid 32 Commissioner Wright dissented from the Commissionrsquos opinion in McWane See In re McWane

Inc Dkt No 9351 Dissenting Statement of Commissioner Joshua D Wright (6 February 2014)lthttpswwwftcgovsystemfilesdocumentspublic_statements202211140206mcwanestatementpdfgt accessed 28 July 2015 The scope of the disagreement between the majority and the dissent waslargely limited to the narrow but obviously crucial issue of whether harm to competition fromMcWanersquos exclusive dealing had been demonstrated See eg ibid 7 n14 (assuming monopoly power)ibid 27ndash28 and n38 (agreeing that Full Support Programme amounted to exclusive dealing) ibid 33n40 (agreeing that lsquodistributors are a key distribution channelrsquo) ibid 4 (noting the lsquoample record evi-dence demonstrating that the Full Support Program harmed McWanersquos rival Starrsquo) Leon B GreenfieldlsquoAfterword Lorain Journal and the Antitrust Legacy of Robert Borkrsquo (2014) 79 Antitrust LJ 1047 1062(lsquoThe division among the FTC commissioners in the recent McWane matter illustrates the narrowedscope of todayrsquos debates surrounding unilateral exclusion enforcementrsquo)

Brother may I 19

at Federal Trade C

nloaded from

The Eleventh Circuitrsquos McWane decisionIn April 2015 the Court of Appeals for the Eleventh Circuit upheld theCommissionrsquos decision affirming its determinations regarding market definitionMcWanersquos monopoly power and harm to competition117 The court endorsed theapproach taken by the DC Circuit and several other courts in determining whether amonopolistrsquos conduct has harmed competition noting among other things that sub-stantial foreclosure is just one of several factors in the analysis and that harm to oneor more competitors is insufficient for purposes of section 2118 The EleventhCircuit also endorsed the DC Circuitrsquos causation standard for assessing exclusivedealing claims119

The Eleventh Circuit identified the pricing evidence in the record as the lsquomostpowerful evidence of anticompetitive harmrsquo120 More specifically the court observedthat by keeping Star from becoming a more efficient competitor McWanersquos exclusiv-ity policy preserved its ability to charge supracompetitive prices in fact McWanewas able to raise prices and increase its gross profits notwithstanding Starrsquos (limited)entry121 Finally much like the Commission the Eleventh Circuit was not persuadedby McWanersquos efficiency arguments122

Concluding thoughts on exclusive dealingA few points regarding exclusive dealing more generally are in order here First thereis no question that vertical business arrangements including exclusive dealing aremuch more likely to be procompetitive than anticompetitive Exclusive dealing canenhance competition in a number of well-documented ways including by eliminatinginter-brand free-riding reducing the costs associated with demand and supply uncer-tainty and intensifying competition for distribution123 Exclusive distribution ar-rangements can be particularly procompetitive where a manufacturer provides dealersupport discounts or other consideration for the exclusivity or where there is com-petition to be the exclusive distributor of a particular product

In short the economic literature clearly supports the proposition that exclusivedealing is likely to be procompetitive124 Exclusive dealing thus should not be a

117 See McWane Inc v FTC No 14-11363 2015 WL 1652200 at 9-12 19-21 (11th Cir 15 April 2015)118 ibid 16 (citing United States v Microsoft Corp 253 F 3d 34 58 (DC Cir 2001) (en banc))119 See ibid 18 (lsquoWe agree with the Commission and our sister circuits that in these circumstances the gov-

ernment must show that the defendant engaged in anticompetitive conduct that reasonably appears tosignificantly contribute to maintaining monopoly powerrsquo)

120 ibid 19121 ibid122 ibid 21ndash22123 See eg Benjamin Klein and Kevin M Murphy lsquoExclusive Dealing Intensifies Competition for

Distributionrsquo (2008) 75 Antitrust LJ 433 (explaining how exclusivity restrictions intensify competitionby manufacturers for retail distribution) Jonathan M Jacobson lsquoExclusive Dealing ldquoForeclosurerdquo andConsumer Harmrsquo (2002) 70 Antitrust LJ 311 357ndash60 (identifying various pro-competitive justificationsfor exclusive dealing arrangements)

124 See eg Alden F Abbott and Joshua D Wright lsquoAntitrust Analysis of Tying Arrangements and ExclusiveDealingrsquo in Keith N Hylton (ed) Antitrust Law and Economics (2nd edn Edward Elgar Publishing Ltd2010) 183 200ndash01 (lsquo[T]he potential efficiencies associated with both tying and exclusivedealing lead most commentators to believe that they are generally procompetitive and should beanalyzed under some form of rule of reason analysisrsquo) James C Cooper and others lsquoVertical Antitrust

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significant focus of the Commissionrsquos competition enforcement programmeNonetheless there are some situationsmdashparticularly in monopolized marketsmdashinwhich exclusive dealing can be anticompetitive and serve to maintain a firmrsquos monop-oly power125 That may very well be the case where a monopolist opts to impose ex-clusivity on its dealers rather than luring them with lower prices or increasedsupport any sales by the monopolistsrsquo rivals are limited to whatever the monopolistallows them to achieve such that the rivals are unable to achieve efficient scale andprices actually increase during the period of the exclusivity126 In such a situationassuming the Commission is able to identify substantial harm to competition that isnot outweighed by cognizable efficiencies it ought to pursue such conduct under theantitrust laws

Second as mentioned in the Introduction this article should not be read as an en-dorsement of either the essential facilities doctrine or a general duty to assist onersquoscompetitors (beyond that which may exist in the case law) More specifically oppos-ition to a requirement to obtain permission from onersquos competitor to enter and com-pete in a market should not be confused with support for forced sharing of even amonopolistrsquos intellectual property operational facility distribution system or anyother assets The Supreme Court in Trinko was justifiably concerned about lsquothe un-certain virtue of forced sharingrsquo and refusal-to-deal theories under section 2 of theSherman Act more generally127 Pursuing an exclusive dealing case against a firmwith monopoly power whose conduct has been exclusionary and harmful to competi-tion should not raise the same concerns about incentives to innovate and compete aswould a section 2 case against a monopolist for refusing to allow a competitor accessto its facilities or to sell to a competitor a product that the monopolist is not other-wise selling on the open market128

Finally to return to the cross-subsidization point whether one refers to it ascream-skimming or cherry-picking this rationale is unconvincing as a justification foreither certificate-of-need laws or exclusive dealing by a monopolist While cream-skimming may be a legitimate concern in very limited circumstances such as a

Policy as a Problem of Inferencersquo (2005) 23 Intrsquol J Industrial Organ 639 658 (lsquoMost studies find evi-dence that vertical restraintsvertical integration are procompetitive[]rsquo)

125 See Eastman Kodak Co v Image Tech Servs Inc 504 US 451 488 (1992) (Scalia J dissenting) (lsquoWhere adefendant maintains substantial market power his activities are examined through a special lensBehavior that might otherwise not be of concern to the antitrust lawsmdashor that might even be viewed asprocompetitivemdashcan take on exclusionary connotations when practiced by a monopolistrsquo)

126 See eg Dennis W Carlton and Ken Heyer lsquoAppropriate Antitrust Policy Towards Single-Firm ConductExtraction vs Extensionrsquo (2008) 22 Antitrust 50 53 (lsquoWhere scale economies matter conduct that de-prives rivals of scale may weaken competitive constraints and thereby (but not necessarily) harm compe-tition In addition input monopolization may raise rivalsrsquo costs and thereby relax competitive constraintswith a resulting harm to competitionrsquo) Dennis W Carlton lsquoA General Analysis of ExclusionaryConduct and Refusal to DealmdashWhy Aspen and Kodak are Misguidedrsquo (2001) 68 Antitrust LJ 659 663665 n15 (explaining how exclusive dealing can impair the competitive effectiveness of a rival and thusharm competition)

127 See Verizon Commcrsquons Inc v Law Offices of Curtis V Trinko LLP 540 US 398 408 (2004)128 In Trinko the Court distinguished the case before it from both Aspen Skiing and Otter Tail based in sig-

nificant part on the fact that the defendants in those two cases had refused to sell a product to a com-petitor that it already sold at retail See ibid 409ndash10 (distinguishing Aspen Skiing Co v Aspen HighlandsSkiing Corp 472 US 585 (1985) and Otter Tail Power Co v United States 410 US 366 (1973))

Brother may I 21

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rate-regulated market with high fixed costs129 the authors have not seen any evi-dence that would justify either a CON regime or exclusive dealing by a monopolistas a procompetitive response to cream-skimming by competitors At a more generallevel it is antithetical to free-market principles to allow firms to cordon off significantportions of the market from would-be competitors that may provide lower-pricedhigher-quality and more innovative products and services Rather as policy makerswe should be doing everything we can to oppose such government- or competitor-imposed market restrictions and to facilitate entry by new and innovativecompetitors

This issue arises with increasing frequency in the transportation area where in-novators like Uber Lyft Sidecar and others are disrupting an age-old way of doingbusiness and in the process providing consumers with expanded options greaterconvenience and often lower prices In short they are injecting much-needed com-petition into the market For that reason FTC staff has filed several advocacy com-ments to local authorities recommending that any restrictions on competition fromthese new transportation providers be no broader than necessary to address legitim-ate subjects of regulation such as safety and consumer protection and narrowlycrafted to minimize any potential anticompetitive impact130 Implicit in these advoca-cies is a rejection of the cream-skimming argument made by some taxi competi-tors131 and regulators132 in justifying opposition to Uber and others seeking to entertransportation markets throughout the country These new firms ought to be treatedthe same as incumbents in terms of applying existing regulations however theyshould not be locked out of the market because they are skimming cream or pickingcherries What they are really doing is competing

V C O N C L U S I O NFirms looking to enter a market should not have to ask their competitors lsquoBrothermay I please competersquo Whether the result of financially-interested state boards

129 See eg Sandefur (n 46)130 See eg Federal Trade Commission Staff Letter to Alderman Brendan Reilly Chicago City Council

regarding Proposed Ordinance O2014-1367 (15 April 2014) lthttpswwwftcgovpolicypolicy-actionsadvocacy-filings201404ftc-staff-comment-honorable-brendan-reilly-concerninggt ac-cessed 28 July 2015 Federal Trade Commission Staff Letter to Jacques P Lerner General CounselDistrict of Columbia Taxicab Commission regarding Second Proposed Rulemakings regardingChapters 12 14 and 16 of Title 31 (7 June 2013) lthttpswwwftcgovpolicypolicy-actionsadvocacy-filings201306ftc-staff-comments-district-columbia-taxicabgt accessed 28 July 2015Federal Trade Commission Staff Letter to Colorado Public Utilities Commission regarding DocketNo 13R-0009TR (6 March 2013) lthttpswwwftcgovpolicypolicy-actionsadvocacy-filings201303ftc-staff-comment-colorado-public-utilitiesgt accessed 28 July 2015

131 See eg Andrew Zaleski lsquoWelcome to the Uber Warsrsquo (2 September 2014) Politico Magazine lthttpwwwpoliticocommagazinestory201409welcome-to-the-uber-wars-110498htmlVWcQHrHD83Egt accessed 28 July 2015 (lsquoldquoSkimming the creamrdquo is the way [a taxi company execu-tive] describes what Uber does to taxi competitorsrsquo)

132 See eg Whorsquos Driving You lsquoCommunity-wide Taxi Service Endangered by ldquoRidesharingrdquorsquo (30 June2014) lthttpwwwwhosdrivingyouorgwp-contentuploads201506community-wide-access-fact-sheetpdfgt accessed 28 July 2015 (lsquoldquoUber Lyft and Sidecar simply do not serve all areas of a communityat all hours of the day By stealing more lucrative fares they will ultimately leave transportation desertsin underprivileged neighborhoods where people rely on taxicabs for daily errandsrdquomdashRobert WerthPresident of the Taxicab Limousine amp Paratransit Associationrsquo)

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making licensing decisions that favour incumbent professionals government regula-tions that competitors can easily manipulate to fend off new competition or anti-competitive actions by monopolists looking to maintain their dominant marketpositions such situations are anathema to free-market competition The goal of thisarticle is to shed some light on the problems that these situations present and dem-onstrate how targeted antitrust enforcement and advocacy supported by sound eco-nomic analysis can help limit the resulting adverse impact on consumer welfare

Three recent significant appellate victories for the FTC demonstrate both thevarious ways in which incumbents can fend off entry by new firms looking to injectcompetition into the marketplace and the various tools that the Commission canand should use to address such market distortions The Phoebe Putney decision is asignificant step in reining in antitrust immunity under the state action doctrine tothe ultimate benefit of consumers and should cause states to reconsider their certifi-cate-of-need laws The McWane decision represents a meaningful albeit relativelynarrow check on exclusionary conduct by a monopolist

However of the three cases discussed in this article it is the North CarolinaDental decision that is likely to have the most immediate and positive impact oncompetition and consumer welfare Given the extensive reach of state licensing re-gimes and boards composed of active participants in the markets they regulate thisdecision may have far-reaching implications for wide swaths of our economyCompetition and competitive markets supplemented by sound antitrust enforce-ment where necessarymdashnot excessive licensingmdashwill promote entrepreneurshipand provide the best platform for our citizens including the least advantaged in oureconomy to prosper We hope the States will take this opportunity to re-evaluatetheir licensing regimes to ensure that they are truly serving their citizensrsquo bestinterests

Brother may I 23

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