Can a state immunize its agencies from federal antitrust law through judicial review?

|The Volokh Conspiracy |

On Friday, I wrote about an amicus brief, for me and 54 other antitrust and competition policy scholars, that I wrote in Teladoc v. Texas Medical Board, a Fifth Circuit case involving the antitrust state-action immunity doctrine.

For a summary of the argument, see that post, but here's an even shorter background: the Texas Medical Board wants to regulate telehealth providers; one such provider, Teladoc, sued the Board under federal antitrust law, arguing that the rule the Board promulgated was anticompetitive; and the Board claimed that it was immune from federal antitrust law as a state agency. Agencies composed of market participants need to be actively supervised by the state if they want to get immunity; so the question here is whether state-court administrative-law judicial review counts as "active supervision" within the meaning of the doctrine.

On Monday, I reproduced the first part of the brief, on "The Problem of Occupational Boards Dominated by Market Participants". Today, I'll reproduce Part II of the brief, on why "Texas Administrative-Law Judicial Review Is Not Active Supervision".

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The Board relies on a single feature of Texas law that, in its view, constitutes active supervision: state-court administrative-law judicial review. See Appellants' Br. at 36, 45 (calling such review "sufficient"). (Nonetheless, the Board spends many pages discussing other aspects of Texas law that it concedes are not active supervision; the (ir)relevance of that discussion is discussed in Part III, infra.)

But judicial review in Texas courts does not qualify as active supervision under Midcal. If judicial review is to be active supervision, it must at least address the merits of the specific anticompetitive decision; it must be de novo; and it must occur before the imposition of the market restraint without the need for costly litigation. See N.C. Dental, 135 S. Ct. at 1116; Elhauge, supra, at 716-17.

As this Part shows, Texas judicial review fails this test, for the following two reasons.

First, it occurs only if someone incurs the substantial cost of state-court litigation. This cost means that state judicial review might never occur-in which case there is no reason to think that disinterested officials have actually approved the Board's specific decision. Moreover, such review is not guaranteed to occur before antitrust harm is suffered. This makes state judicial review the "'mere potential for state supervision,'" which the N.C. Dental Court explicitly held inadequate. 135 S. Ct. at 1116 (quoting Ticor, 504 U.S. at 638).

But there is a second reason, which goes to the heart of administrative law: Judicial review, even the "substantive" kind, merely checks for adequate reasoning and consistency with the enabling statute sufficient to show that the rule is within the Board's authority, and defers to the Board's reasonable interpretations where there is ambiguity. But this is not the same as review of decisions "to ensure they accord with state policy," which the N.C. Dental Court wrote was necessary. Id. Judicial review must at least be de novo to count as adequate supervision.

A. State Judicial Review Cannot Confer Antitrust Immunity if It Requires Costly Litigation or if It Is Post-Injury

First, state-court judicial review cannot confer antitrust immunity if it occurs only after costly litigation. State courts will not review a rule that no one challenges. But affected firms cannot always be expected to challenge Board rules. An aggrieved firm may decide that the expense of litigation is just too great. Sometimes, an agency rule may be a disguised form of cartel enforcement-for instance, benefiting all incumbent firms by setting a mandatory price. In such a case, the affected firms have no interest in challenging the rule. The cost of the rule falls on consumers, who (if they even have standing) usually cannot be counted on to challenge the rule: Each individual's harm may be too small to justify the expense of litigation, and one cannot rely on the possibility of damages class actions. See Elhauge, supra, at 716 ("[T]he effort and time necessary to invoke state review can discourage and delay vindication of the right to a competitive market.").

That "the 'mere potential for state supervision is not an adequate substitute for decision by the State'" is one of the "few constants of active supervision." N.C. Dental, 135 S. Ct. at 1116 (quoting Ticor, 504 U.S. at 638). Even if judicial review can be active supervision, there can be no assurance that the Board's decision comports with state policy (as determined by disinterested officials) until after judicial review has been successfully completed.

Second, state-court judicial review cannot confer immunity if it occurs after injury is suffered. There is no guarantee of pre-implementation review: Like federal courts, Texas courts recognize the doctrine of ripeness, which "asks whether the facts have developed sufficiently so that an injury has occurred or is likely to occur, rather than being contingent or remote," and thus "serves to avoid premature adjudication." Patterson v. Planned Parenthood of Houston & Se. Tex., Inc., 971 S.W.2d 439, 442 (Tex. 1998). Aggrieved parties might thus not be able to challenge Board rules until after implementation.

The prospect of having to suffer harm before incurring the additional expense of a lawsuit can discourage firms from challenging the rule to begin with: They might simply conform their conduct to the (invalid) rule and never achieve the ripeness necessary for a challenge.

B. Judicial Review Is Deferential and Therefore Asks the Wrong Question

1. Judicial Review Must Not Only Be "Substantive" but Must Also Focus on Whether the Board's Decision Accords with State Policy

N.C. Dental teaches that purely procedural review cannot constitute active supervision and that "[t]he supervisor must review the substance of the anticompetitive decision . . . to ensure [it] accord[s] with state policy." N.C. Dental, 135 S. Ct. at 1116; see also Patrick, 486 U.S. at 102-05. At a minimum, judicial review must be substantive, and must focus on the merits of the anticompetitive aspects of the specific acts being challenged. See Cantor v. Detroit Edison Co., 428 U.S. 579, 595 (1976); 1A Areeda & Hovenkamp, supra, ¶ 226c2, at 204-05.

Thus, to support its argument that state judicial review is sufficient, the Board points out that "the Texas APA allows both procedural and substantive" challenges. Appellants' Br. at 46 (citing Tex. Med. Ass'n v. Tex. Workers Comp. Comm'n, 137 S.W.3d 342, 346 (Tex. App. 2004)). But the mere label "substantive" is not enough for judicial review to be active supervision. The review must also ask the proper question: whether the Board's decision "accord[s] with state policy" as determined by disinterested officials.

A simple example will show why. Texas has its own antitrust statute, Tex. Bus. & Com. Code Ann. §§ 15.01 et seq., which resembles federal antitrust statutes. Suppose Texas grants a Board the power to control access to a profession, as long as that power is used consistently with the state antitrust Rule of Reason.

Anyone aggrieved by the Board's acts can go into state court and sue the Board under Texas antitrust law. Would the possibility of such state-court review constitute active supervision and thus (provided there was also clear authorization) preclude a later federal-court suit under the Sherman Act?

Obviously not. State antitrust review is of course substantive, not procedural. But it cannot constitute active supervision under Midcal. First, this would imply "the wholesale preclusion of federal antitrust law," which is "an untenable reading of the Sherman Act." Elhauge, supra, at 716. Second, the "substance" of this judicial review focuses on the wrong issue: whether the defendant's acts are unreasonable in an antitrust sense, not (as Midcal requires) whether the Board's acts comply with state policy as determined by a disinterested official. These are two different questions.

Thus, to be active supervision under Midcal, judicial review must not only be "substantive" in a generic sense, but in particular answer whether the merits of the Board's specific policy have been actually approved by disinterested officials. In most cases, Texas administrative-law review-like Texas antitrust-law review in the hypo above-answers the wrong question. Administrative law cares whether a policy has means-ends rationality and is within the bounds of agency authority (which, in this case, is extremely broad). This is simply not the same question as whether the merits of the specific policy have been actually approved by disinterested officials.

In fact, in a sense, state judicial review asks the opposite of the correct question. Texas administrative law, like its federal counterpart, is characterized by deference to agencies when a statute is ambiguous. Deference regimes are founded on the belief that agencies are politically accountable and thus better able to fill statutory gaps. But when agencies are dominated by active market participants, N.C. Dental teaches that they are actually unaccountable because of the risk of self-dealing. Allowing self-interested agencies to fill gaps is the opposite of N.C. Dental's insistence that their specific decisions be actually approved by disinterested officials. Therefore, deferential review is antithetical to active supervision.

2. Because Texas Judicial Review Is Deferential, It Does Not Truly Go to the Merits

A glance at the cases cited by the Board shows how pervasive deference is.

The Board notes that the Texas APA allows "substantive" (as well as "procedural") challenges, and asserts that the purpose of such judicial review is to "ensure that agency rules are in accord with the policy objectives set by the Legislature." Appellants' Br. at 46 (emphasis omitted) (citing Gulf Coast Coalition of Cities v. PUC, 161 S.W.3d 706, 712 (Tex. App. 2005)).

As Gulf Coast Coalition explains, however, a reviewing court determines whether the agency acted consistently with its statutory authority; and when statutes are ambiguous, agencies are granted deference. 161 S.W.3d at 711-12. This is similar to review of federal agency action under the federal APA. See, e.g., Motor Vehicle Mfrs. Ass'n v. State Farm Mutual Auto. Ins. Co., 463 U.S. 29 (1983); Chevron, U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984).

The Board also cites Texas Orthopaedic Ass'n v. Texas State Board of Podiatric Medical Examiners, 254 S.W.3d 714 (Tex. App. 2008). Appellants' Br. at 47. There, the court wrote: "An agency's construction of a statute that it is charged with enforcing is entitled 'to serious consideration by reviewing courts, so long as that construction is reasonable and does not contradict the plain language of the statute.'" 254 S.W.3d at 719 (citation omitted).

This, too, sounds like Chevron review. Indeed, the Texas Supreme Court has agreed that its standard is "similar" to Chevron. See R.R. Comm'n of Tex. v. Tex. Citizens for a Safe Future & Clean Water, 336 S.W.3d 619, 625 (Tex. 2011).

Both state and federal administrative-law review are characterized by deference to agencies when there is ambiguity or discretion. As one commentator intimately familiar with Texas administrative law-now the Solicitor General of Texas-has noted, Texas law may be somewhat less deferential than Chevron, but the two systems are "analogous." "[T]he issue of agency deference pervades our state's legal system," he writes; "[the Texas Supreme Court's] statements on agency deference suggest a series of decision rules that relate to the federal Chevron inquiry." Scott A. Keller, Texas Versus Chevron: Texas Administrative Law on Agency Deference After Railroad Commission v. Texas Citizens, Tex. Bar J., Dec. 2011, at 984, 984, 986, 988.

The deferential posture of state judicial review shows that such review cannot suffice under Midcal. Recall the purpose of the active-supervision requirement: to ensure that disinterested officials actually approve of the agency's specific decision. But many statutes, including the ones here, are ambiguous. For example, one statute requires that physicians "practice medicine in an acceptable professional manner consistent with public health and welfare." Tex. Occ. Code Ann. § 164.051(a)(6). Does this statute require examinations at an "established medical site"? Does it authorize disciplinary action for prescribing drugs as a result of an "online or telephonic evaluation by questionnaire"?

This is a far cry from the interpretation of unambiguous statutes, where the intent of the Legislature is clear-what federal law calls a "Chevron Step 1″ issue-and administrative review is a straightforward matter of making sure agency action conforms to the statute. The Board cites a few such cases, where courts struck down agency action because of an "evident" "mismatch" with legislative objectives. Appellants' Br. at 47 (citing Tex. Orthopaedic, 254 S.W.3d at 722; Tex. Bd. of Chiropractic Exam'rs v. Tex. Med. Ass'n, 375 S.W.3d 464, 475-88 (Tex. App. 2012)).

In such cases-where the agency's decision is so unreasonable that it is clearly inconsistent with legislative judgment and the agency's authority-judicial review tells us that the agency's decision does not comport with state policy. And if a statute is so clear that it grants no discretion, and the agency's action is exactly within that grant-in effect, if the Legislature commanded some act-then the agency's decision is that of the State and immunity properly applies. But in most interesting cases, courts defer to exercises of agency discretion within broad and ambiguous grants, where the State's decision on the precise issue is unknown.

The statute here is phrased broadly, using ambiguous language that authorizes many possible actions, depending on Board members' values. Texas law lets agencies choose any of these possibly contradictory policies, provided they are reasonable. As in federal law, there is no absolute bar against agencies' reversing their previous interpretations, if the new policy is also reasonable and the change is adequately explained. See, e.g., First Am. Title Ins. Co. v. Combs, 258 S.W.3d 627, 645 & n.28 (Tex. 2008) (Hecht, J., dissenting) (citing Texas and federal cases supporting this rule).

Deferential review, which upholds agency action unless it is unreasonable, substantively irrational, or arbitrary and capricious, thus cannot be active supervision under Midcal. See also 1A Areeda & Hovenkamp, supra, ¶ 226c1, at 187. Though substantive, it answers the wrong question: Is the policy both adequately reasoned and somewhere within the large set of authorized policies? Having means-ends rationality and being not totally contrary to legislative policy are praiseworthy. But because many policies are both authorized and capable of being rationally justified, passing this test is not the same as being actually approved on the merits by disinterested officials.

Moreover, the premise of deference-that agencies are more accountable than the judiciary-is precisely inappropriate when agencies are dominated by self-interested actors. In such cases, N.C. Dental holds that there is no substitute for actual scrutiny of the merits of the specific anticompetitive decision. At a minimum, then, judicial review must be de novo. One can imagine judicial review without deference, but Texas law has squarely rejected such a vision.

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In the next post, I'll talk about the Texas Medical Board's argument that other features of Texas law, though not themselves constituting active supervision, sufficiently constrain agency self-dealing and provide democratic accountability that they should make the active-supervision inquiry apply more weakly than it otherwise would.

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