This Mississippi Bill Could Be the Beginning of the End of Occupational Licensing Cartels

Over the past 15 years, opponents of occupational licensing have repeatedly challenged both the laws themselves and the boards that write and enforce them.

Many of these legal challenges have been successful, overturning hair braiding licensing requirements or inspiring legislation to eliminate them in Louisiana, Iowa, and Nebraska, for example. Similar efforts have taken down licensing rules for florists, cosmetologists, eyebrow threaders, animal caretakers, landscape contractors, interior designers, and tour guides, among other professions, in various states. Part of Tennessee's licensing laws for makeup artists have been successfully overturned in court. Mandatory barber licenses have been challenged in a handful of states, as has Washington, D.C.'s requirement that interior designers and tour guides get a government permission slip before matching a resident's furniture with her carpets or explaining the history of the Jefferson Memorial.

Each of those victories tore down unnecessary and restrictive occupational licensing rules, but most cases only resulted in the defeat of a small part of a state licensing regime, or the creation of a narrow exemption. In the 1960s, about 5 percent of all jobs required permission from the government. Today that number is more like 30 percent. Additional rules are added every year.

The fight against needless occupational licensing laws can feel like an elaborate and expensive game of Whac-A-Mole, where there are always more moles than mallets.

Instead of continuing to play the game, then, what if there were a way to unplug the machine?

Licensing reformers hope the key to that paradigm shift might lie in a U.S. Supreme Court decision that turned 2 years old earlier this year. In that ruling, the high court held that some state licensing boards can be held accountable under federal antitrust laws designed to protect consumers from cartels and monopolies—which is exactly what some licensing boards have become, captured by the very industries they're meant to be regulating.

Armed with that ruling, officials at the Federal Trade Commission (FTC) and state lawmakers are reaching for the plug.

Lawmakers in Mississippi are the first to grab it. Legislation passed this week in Jackson gives Gov. Phil Bryant new veto powers over state licensing boards' regulations. From a legal perspective, that means Mississippi's regulatory boards would pass an important test created by the U.S. Supreme Court two years ago. Politically, it means the democratically-elected governor would provide at least some accountability and oversight to the boards' actions—potentially heading off anti-competitive rules before they can disrupt the economy, drive entrepreneurs out of business, or spur costly lawsuits.

Government Grants Itself Immunity From Antitrust

This story begins with the passage of the Sherman Antitrust Act in 1890, when Congress gave itself the authority to break up private-sector monopolies and cartels, or arrangements where businesses agree to set prices and collude to limit new entrants into a marketplace. Two decades later, the Federal Trade Commission was created to enforce those federal prohibitions on such anti-competitive behavior.

Unlike the common understanding of the law, though, the Sherman Act did not prohibit all monopolies. Governments have a monopoly on the use of force, for starters, but they also are allowed to create other monopolies—like electric or gas utility services, or Amtrak—to provide specific services without competition.

The question of which monopolies are allowed and which are not is really a question about the legal concept of immunity. The federal government gave itself immunity from Sherman Act antitrust rules when the bill was passed, and a 1943 Supreme Court case (Parker v. Brown) determined that the same antitrust immunity—now called "Parker immunity" in legal parlance—extended to the states, because they are sovereign entities under constitutional law. Subsequent court cases clarified that state-created monopolies, like utility companies, also had immunity as long as they were created for specific purposes and supervised by the government that created them.

The special sauce of immunity extends, in part, to local governments too. In 1985, the U.S. Supreme Court ruled, in Town of Hallie v. City of Eau Claire, that local governments aren't covered by antitrust laws even if they are not "actively supervised" by state governments—indeed, few local governments are—because local governments are directly answerable to voters and are acting, theoretically, at least, in the public interest.

In that same case, the Supreme Court deliberately punted on the question of whether licensing boards had immunity—the question, in other words, of whether boards are more like municipalities, which don't require supervision from the state, or more like state-created public utilities, which do. Justice Lewis Powell, who authored the unanimous opinion, foreshadowed the legal battle that would come before the court 30 years later.

"In cases in which the actor is a state agency, it is likely that active state supervision would also not be required, although we do not here decide that issue," he wrote in a footnote attached to the decision. "Where state or municipal regulation by a private party is involved, however, active state supervision must be shown, even where a clearly articulated state policy exists."

In those two lines, Powell was acknowledging that licensing boards and other state entities differ from utilities and other state monopolies. Licensing boards are created by the state, but generally operate with a degree of autonomy when it comes to setting requirements and enforcing the rules for certain professions.

If a licensing board made up of dentists, for example, were to create anti-competitive rules to prohibit non-dentists from offering teeth whitening services, would that board be acting with the sovereign, immune authority of the state government, or would it be operating like an illegal cartel, subject to antitrust laws?

For nearly 30 years, that remained an open question. But in 2012, the FTC brought legal action against the North Carolina Board of Dental Examiners for making exactly such a rule.

Whitening teeth requires only a few basic tools and practically no knowledge of dentistry. Requiring that teeth whitening be conducted only by licensed and trained dentists is a bit like saying that only medical school graduates are allowed to operate tanning salons. In the former case, anyone can buy the necessary supplies for less than $30 at any pharmacy and do the procedure in his or her own home. Or you can pay a little more to have someone do it for you, either at a dentist's office or in one of the small salons that have popped up in malls and storefronts. Dentists in North Carolina complained to the state board about the proliferation of those non-dentist teeth whitening kiosks. "Many complainants noted that the prices of those offerings undercut the prices of the services they offered; few complainants referred to any consumer harm," observed the FTC in its filing with the U.S. Supreme Court.

In response to those complaints, the board issued a new rule. Only licensed dentists would be allowed to offer teeth whitening services in the state. The board sent cease-and-desist letters to more than 40 small businesses mostly operating in mall kiosks and small storefronts, forcing them out of business.

Six of the eight members of the board were actively practicing dentists, and their decision to put competitors out of business was seen, by the FTC, as a blatant example of anti-competitive behavior.

In court, the FTC argued that boards filled by individuals working in the private sector, and not subject to supervision from a governor or other democratically elected part of government, could not claim to have immunity from antitrust laws. It took two years for the challenge to make its way to the Supreme Court. When it did, the justices voted 6–3 to uphold a lower court ruling declaring that the licensing board was indeed subject to antitrust rules.

"When a State empowers a group of active market participants to decide who can participate in its market, and on what terms, the need for supervision is manifest," wrote Justice Anthony Kennedy in the majority decision.

The Supreme Court's ruling sets up a two-level test that occupational boards must pass in order to retain immunity from antitrust action. Boards that are controlled by "active market participants" are not immune, unless they are "actively supervised" by another branch of the state government.

The North Carolina Board of Dental Examiners—a board filled by a majority of actively practicing dentists that literally drove its own competitors out of business—was a particularly egregious example of that behavior, but it was by no means alone. In state after state, the FTC has found licensing rules that range "from the dubious to the ridiculous," says Maureen Ohlhausen, the commission's acting chairman.

The FTC "has consistently recognized that occupational licensing can help protect consumer health and safety, or further other legitimate public policy goals," Ohlhausen, the attorney who spearheaded the project that resulted in the commission bringing a challenge against the North Carolina dental board, told Reason in an email. "However, the FTC has seen many examples of interested private actors using government regulation to unnecessarily impede competition by hampering entry into professional and other service markets, thereby limiting access to services, increasing prices, and decreasing quality and innovation for consumers."

Mississippi Passes a Law to Provide Oversight to Licensing Boards

"If you're good at cutting hair, then it shouldn't matter whether you graduated from high school or not," says Russell Latino.

The state of Mississippi disagrees. To get a barber's license there—and in many other places—you need a high school diploma or a GED certificate, and that rule doesn't exist because knowing algebra or understanding the cultural significance of To Kill A Mockingbird is particularly crucial to the practice of safely cutting human hair.

"All you're doing with a rule like that is excluding people who could otherwise take care of themselves and make a living," says Latino, the Mississippi state director for Americans for Prosperity, a national group that lobbies state governments to implement free market solutions. In Mississippi, his group has been pushing for reforms to licensing rules.

"If you're good at cutting hair, then it shouldn't matter whether you graduated from high school or not."

This week, Mississippi became the first state in the country to change the structure of its regulatory boards to comply with the 2015 Supreme Court ruling.

With one eye on the North Carolina dental board case and the other on the state's economy, Gov. Phil Bryant in January called for the passage of H.B. 1425, a bill that would give the governor, secretary of state, and state attorney general joint responsibility for "actively supervising state executive branch occupational licensing boards to ensure compliance with state policy." A majority of the three executive branch officials—or their appointees—would have to approve all new regulations passed by the state's licensing boards before those rules could take effect. The bill also requires the governor's office to review all existing regulations to ensure they comply with state law, though modifications of pre-existing licensure rules are not allowed.

Proponents say it oversight fulfills the "active supervision" requirement created by the Supreme Court's 2015 decision.

The bill cleared a final vote in the state House on March 28, after having been previously approved by the state Senate, and is headed to Bryant's desk. Knox Graham, Bryant's press secretary, confirmed to Reason that the governor plans to sign the bill.

Among licensing reformers, the passage this week of H.B 1425 was hailed as a major victory. Latino called it a "groundbreaking reform" and a "first-of-its-kind legislation that could become a national model for how occupational boards operate."

In place of one-size-fits-all licensing rules that can be corrupted and abused by incumbent professionals to block competition, Mississippi's legislation offers a variety of alternative measures that protect the public from fraudulent or untrained practitioners without imposing high costs on qualified individuals. Market competition, third-party or consumer-created ratings systems like those available through apps such as Yelp, and private certifications are offered as potential solutions. If none of those work for a certain profession, the state can move along to mandatory inspections, impose bonding and insurance requirements, and even authorize the state attorney general to target frauds.

Only after all that has been tried, and failed, should a new licensing law be created.

Giving veto power to the governor creates a clear line of accountability, says Jameson Taylor, director of the Mississippi Center for Public Policy, a free market think tank. It might not be a perfect mechanism, but it gives the public an opportunity to weigh in if something is out of line.

"Right now, it's a process that's entirely controlled by insiders," he says. "This would fix that."

Licensing Boards Controlled and Designed By Insiders

The process isn't merely controlled by insiders. Often, it is designed by them as well.

Consider New Jersey's decision last year to create a new state licensing process for anyone who installs, builds, or cleans a pool. That bill was the result of lobbying by the Northeast Spa and Pool Association, a trade group. Lawrence Caniglia, the president of the association, is not shy about explaining why the industry wants more licensing.

"Frankly, we're looking for a more professional industry—and you can raise the rates you're charging because you're…a (properly) licensed pool builder or service professional," Caniglia told Pool and Spa News, a trade publication. The association has successfully lobbied for the passage of similar laws in Connecticut, New York, and Pennsylvania in recent years.

Licensing laws proliferate in part because of what Lawrence Spiwak calls the "Holiday Inn Express" problem. Spiwak, president of the Phoenix Center, a Washington, D.C., based think tank focused on legal and economic issues, is referring to the hotel ads that ran in the early 2000s that usually featured someone appearing to be an expert at a highly skilled trade—a surgeon in one ad, a helicopter pilot in another—before revealing that he or she doesn't know anything about that skill at all. "But I did stay in a Holiday Inn Express last night" was always the punch line.

The ads were funny because they subverted expectations—you need more than a good night's sleep to become a doctor or a pilot, of course—and played off a basic human fear. How do we know our pilot knows what he's doing? We don't, but we choose to get on the plane anyway because we trust the system of training and the feedback signals provided by the market.

Special interest groups often use that same pitch, but not for laughs, to create licensing boards and defend their existence as being predicated on public safety. How do you know your teeth whitening is being done safely unless the government is regulating it? In some professions such oversight might be needed, but licensing has grown to absurd lengths in the name of protecting the public from unscrupulous practitioners. Louisiana, for example, once fended off a challenge to its licensing rules for florists by arguing that government permission slips were necessary to protect the public from the scourge of contaminated dirt.

In reality, licensing rules are less about protecting the public and more about protecting the license holders. Professional licensing boards are essentially "cartels by another name," according to Aaron Edlin and Rebecca Haw, two University of Pennsylvania law professors who published a paper in 2014—just as North Carolina Board of Dental Examiners was moving through the court system—laying out exactly how and why those boards should face antitrust scrutiny.

Researchers have consistently found that occupational licensing doesn't do much to ensure quality or efficacy. However, the growth of licensing laws is correlated with a decline in labor force participation and has been shown to be a drag on the economy. The rules reduce worker mobility, make it harder for entrepreneurs to enter the market, and may be partially responsible for the low rates of new businesses started since the end of the last recession.

"Economic studies have found little impact of occupational licensing on service quality in occupations that are not widely licensed; even in occupations that are widely licensed, studies have found few impacts of tougher requirements for licensing on health measures or quality outcomes," wrote Morris Kleiner, a professor of economics at the University of Minnesota and one of the most prominent researchers on occupational licensing, in a recent study released by the Brookings Institution. A 2011 study published by Kleiner, Alan B. Kruger, and Alex Mas calculated that occupational licensing resulted in 2.85 million fewer jobs and cost consumers more than $200 billion annually.

"I challenge anyone to explain why the state has a legitimate interest in protecting the public from rogue interior designers carpet-bombing living rooms with ugly throw pillows."

If these regulations are not protecting consumers, says Ohlhausen, the acting FTC chair, then we must consider whom they are protecting. Often, they're the result of regulatory capture, when a regulated industry ends up controlling the mechanisms of government meant to regulate, or regulatory replacement, when governments abdicate their oversight in favor of letting an industry write and enforce its own rules. In the case of the North Carolina Board of Dental Examiners, it was not the state itself acting to restrict the teeth-whitening business, but a board of self-interested, active market participants imposing licensing rules solely as a means of restricting competition.

"I challenge anyone to explain why the state has a legitimate interest in protecting the public from rogue interior designers carpet-bombing living rooms with ugly throw pillows," Ohlhausen said last month at the George Mason Law Review's annual symposium.

Advancing Economic Liberty at the FTC

Ohlhausen calls the requirement that someone obtain a government-issued permission slip in order to work the "mother, may I" approach to economic regulations. Even worse, she says, is the "brother, may I" form of regulation, which requires individuals and businesses to get permission from their own competitors.

As the new chairman of the FTC, Ohlhausen plans to seize the opportunity presented by the Supreme Court's ruling in North Carolina Board of Dental Examiners. Last month, she announced a new Economic Liberty Task Force within the commission, which will identify problematic licensing laws and encourage state officials to review onerous requirements. Though the task force is mostly meant as an advisory resource for state officials, it will have the ability to take legal action against licensing boards engaged in anti-competitive behavior.

"I believe that economic liberty is central to opening doors of opportunity and increasing competition, entrepreneurship, and innovation that benefits all consumers," Ohlhausen told Reason in March. She said the FTC will be partnering with governors, state attorneys general, state legislators, and members of Congress.

Libertarians typically view antitrust laws with skepticism because they give the government significant power over certain types of markets. Ayn Rand once wrote that federal anti-monopoly laws amounted to "the penalizing of ability for being ability, the penalizing of success for being success." But when one part of government is out of control, as many licensing boards are, perhaps it's only another part of government that can bring it to heel.

Ohlhausen sees herself as an advocate for liberty—she's fond of Margaret Thatcher's saying that "there can be no liberty without economic liberty"—but does not self-identify as a libertarian.

Now that the FTC has the power to bring lawsuits against states with unsupervised licensing boards controlled by active market participants, state officials have a newfound reason to bring those boards under greater scrutiny. They don't have to care about economic liberty. They just have to care about not getting sued.

"While the FTC is an enforcement agency, part of the agency's mission is to promote competitive markets and protect consumer welfare," she says. "I believe we can do a lot work to advance economic liberty."

Questions for Reformers

The North Carolina Board of Dental Examiners case changed how state-level licensing boards have to operate, but it also created a lot of new questions. What constitutes "a controlling number" of board members? That could be assumed to mean a majority of the board, but then why did the Supreme Court not use that term specifically? How involved in the market does a board member have to be to count as an "active participant," thus triggering mandatory state oversight? If board members withdraw from practice during a short term of service but typically return to practice when the term ends, does that mean they're not active market participants during their time on the board?

In his dissenting opinion on the case, Justice Samual Alito raised these, and other, questions that states and the FTC would have to contend with in the wake of the ruling. "The answers to these questions are not obvious, but the States must predict the answers in order to make informed choices about how to constitute their agencies," he wrote.

There are also concerns about how the proposed reforms in Mississippi—or anywhere else—could transfer power to the governor's office and away from the state legislature.

State Rep. Toby Barker (R-Hattiesburg) opposed the bill when it was debated on the House floor in early February. According to the Jackson Free Press, he said the proposal would cede legislative authority to the governor, effectively letting one person have control over licensing boards.

Those worries shouldn't be discounted out of hand. Vesting more authority in the executive branch might seem like an odd solution to the problem of government regulations run amuck. It's not hard to conceive of ways in which that power could be abused. Governors can be captured by the same special interests that control licensing boards, or they can be convinced to approve anti-competitive rules with the same faulty arguments about protecting public health and safety that often convince state lawmakers to create those licensing boards in the first place. If pool contractors can convince governors to sign bills creating special licenses for their profession, why wouldn't they be able to get governors to approve the board's edicts, right?

Groups that backed the Mississippi proposal, including the Institute for Justice and Americans for Prosperity, acknowledge the potential for abuse exists. Lawmakers in Mississippi amended the bill to include the secretary of state and attorney general, along with the governor, in a triumvirate of executive officials overseeing the licesing boards. "By spreading that oversight you mitigate risk of a rogue elected official," Latino told Reason.

Still, even the worst case scenario—where a governor, attorney general, and secretary of state are serving as rubberstamps for licensing boards' agendas—is no worse than what currently happens without that oversight. Since a governor (and in some states, attorneys general and secretaries of state) is popularly elected, there is an added level of democratic accountability applied to what licensing boards can do.

"The idea is if you are going to give established industry insiders state power to regulate their own competitors, there has to be some oversight from an independent source accountable to the people," says Latino.

Ideally, that arrangement "should prevent vested private actors from abusing government process and imposing new regulations that displace competition without a compelling and substantiated need," says Ohlhausen. If states want to be immune from antitrust litigation over licensing boards' anti-competitive rules, she says, then executive branch oversight must be "active," per the test created by the Supreme Court in 2015.

Will Other States Follow Mississippi's Lead?

No other state has yet considered reforms as far-reaching as Mississippi's. But several others are starting to roll back licensing provisions, or at least taking a hard look at when and where they can be reduced.

In 2013, Iowa Gov. Terry Branstad vetoed proposals that would have created four new licensing boards in his state. While serving as governor of Indiana, Vice President Mike Pence vetoed bills to require state licenses for diabetes educators, anesthesiologist assistants, and dieticians. Efforts are underway in Arizona, Missouri, Nebraska, and Wisconsin to review existing state licensing laws, with special scrutiny for laws that serve no public health or safety function.

Illinois approved a law last year to stop the state's Department of Financial and Professional Regulation from using past criminal convictions to block people from obtaining occupational licenses. In Wisconsin, Gov. Scott Walker and legislative Republicans have launched an effort to review state licenses and repeal ones that serve no public health or safety purpose. A similar effort is underway in Nebraska. Florida and other states have loosened licensing rules for military families, telling state boards to honor licenses from across state lines.

Those reforms are happening against the backdrop of an FTC that feels newly empowered to use federal antitrust laws to unlock anti-competitive markets. The commission is working with Gov. Pete Ricketts and lawmakers in Nebraska on a new legislative task force aimed at reducing burdensome licensing laws there.

Congress could get in on the act too. Sen. Mike Lee (R-Utah) is preparing to introduce legislation to encourage states to enact licensing reforms similar to those included in a bill he co-sponsored last year with Sen. Ben Sasse (R-Nebraska). That proposal, called the ALLOW Act, would have required officials in Washington, D.C., to use the least restrictive form of regulation—meaning things like certification or inspection requirements—before approving more onerous occupational rules like licensing. That bill also would have required officials to periodically review and justify existing licensing requirements for reauthorization every five years.

Ohlhausen says she believes in federalism and does not want to use the FTC's new task force to force states to behave in a certain way. "If politically accountable state actors have a clearly articulated policy and make the decision to displace competition in favor of state regulation, we must and should respect that decision," she says. In other words, if states want to create anti-competitive licensing laws that are bad for workers and consumers, they should be allowed to make those mistakes—as long as they're doing it in a legitimate way.

When those regulations don't reflect the will of the people, "but rather regulatory capture by a narrow group of interests," then the FTC will use its authority to act.

In the meantime, expect to see more states follow Mississippi's lead.

Robert Johnson, an attorney with the Institute for Justice who has been involved in several licensing cases, says he's been following the North Carolina Board of Dental Examiners ruling and its ramifications, and the Mississippi bill, though imperfect, offers the best chance to stop the ongoing game of occupational licensing Whac-A-Mole that he's been fighting for years. Unless states make changes to how their licensing boards operate, Johnson says, they now have an "enormous risk of liability," either from antitrust challenges brought by the FTC or from private individuals and groups.

But for Johnson, the issue is bigger than legal risk. "What we're talking about," he says, "is people's right to practice a chosen profession without having to get permission from the government."