Antitrust state-action immunity and market-participant-dominated boards

I have a new post up at the Reason Foundation blog about antitrust state-action immunity, in the context of the Fifth Circuit's Teladoc v. Texas Medical Board case (where the state recently voluntarily dismissed its appeal). Here's an excerpt:

The N.C. Dental decision was a blow in favor of competition. Whatever one thinks of antitrust law generally, government-sponsored anticompetitive activity should be at least as tightly controlled as private anticompetitive activity. (Admittedly, some might be uncomfortable, on federalism grounds, with federal interference with how a state chooses to regulate.) But it raised as many questions as it answered. What does it take for a market-participant-dominated agency to be "actively supervised"?

A case quickly arose to test the contours of active supervision. Teladoc, Inc. is a provider of "telehealth services"; it provides health-care services by phone or video, instead of by traditional in-person consultation. Typically, employers contract with Teladoc for a subscription fee; its employees create personal accounts and upload their medical records. These individuals can then contact Teladoc at any time and be connected with a doctor trained in phone or video treatment and diagnosis. (This doctor is of course licensed in Texas and has to abide by the same ethical rules as other Texas doctors.) The doctor talks with the patient and consults the patient's records; the doctor's medical advice can include prescribing medications or referring the patient to a physical doctor or an emergency room. Teladoc's services cost a fraction of traditional doctors' services and are especially useful for people who work in remote areas where doctors are in short supply.

In Texas, the practice of medicine is regulated by the Texas Medical Board, which is dominated by active market participants-doctors of one kind or other. In 2010, the Board amended its regulations to provide that doctors cannot prescribe medications to patients without a face-to-face visit. The result was, in effect, to force Teladoc to shut down its operations in Texas.

Teladoc sued in federal district court, alleging (among other things) that the Board had violated the Sherman Act by excluding Teladoc from the market. First, the parties agreed to ignore the question of immunity and just ask the court to decide, on the merits, whether the Board's actions violated the Sherman Act. In May 2015, the court determined that there was indeed a Sherman Act violation. It was clear that the Board's regulations had the effect of limiting supply and increasing price. Of course, in such cases, the Board is allowed to offer a pro-competitive justification for these restrictions: the concern that medical practice without face-to-face consultations would decrease the quality of medical care. But the district court concluded that the evidence for this proposition was scant and anecdotal, and was rebutted by contrary evidence produced by Teladoc, including a study showing positive health outcomes from the use of Teladoc by a large employer in California.

Thus, everything rested on the question of immunity. If the Board was immune, it could safely ignore the court's ruling that its actions violated the Sherman Act. In a second decision, issued in December 2015, the court reached this question, and analyzed whether the Board was immune. Given N.C. Dental, the main question was whether the Board was "actively supervised" by the state.

Usually, when the Supreme Court imagines active supervision, it's talking about supervision by some official in the executive branch of state government. If a disinterested executive official signs off on every Board decision and endorses its merits, then one can comfortably say that the Board's decision is that of the state, and then immunity properly applies. This is, roughly, the way that Georgia has reacted to the N.C. Dental decision; now the Governor must sign off on any contested decision by a market-participant-dominated board.

But such review doesn't exist in Texas, so the Board's most substantial argument focused instead on state-court judicial review. Whenever any agency adopts a new rule or interpretation of law, any affected party can sue in state court, arguing that the agency is violating the law. The Board argued that this state-court judicial review was sufficient to constitute active supervision. The district court disagreed, therefore holding that the Board wasn't immune. The Board then appealed to the Fifth Circuit (the regional federal appellate court that covers Texas).

At the Fifth Circuit, a group of 55 antitrust and competition scholars-mostly law or economics professors-filed an amicus brief agreeing with the district court's (and Teladoc's) analysis and disagreeing with the Board's arguments (more specifically, disagreeing with a better version of the Board's arguments, as reformulated on appeal by the Texas Solicitor General). These scholars included Rebecca Haw Allensworth of Vanderbilt, Aaron Edlin of UC Berkeley, and Einer Elhauge of Harvard, the authors of an antitrust professors' Supreme Court amicus brief in N.C. Dental (which I joined), as well as other noted scholars like antitrust treatise author Herbert Hovenkamp. I was the main author of that amicus brief.

. . .

It would have been nice to have had our arguments endorsed in a precedential opinion by the Fifth Circuit. But Teladoc instead gained a victory of a different sort. In October 2016, perhaps moved by the arguments in our amicus brief-as well as those in other amicus briefs (the Cato Institute also filed a brief, which discussed other issues such as the right to earn a living)-the Board withdrew its appeal. This leaves standing the district court opinion in favor of Teladoc and against the Board's antitrust immunity. That opinion has no precedential value, but it does allow Teladoc to continue its operations in Texas, and it may have some persuasive value if the same issue arises in other states. The trend is thus in favor of keeping a tight lid on market-participant-dominated agencies, and requiring that, if a state wants these boards to be immune from antitrust liability, it had better subject them to real, disinterested oversight.

You can read the whole thing here. My previous blog posts are here—this includes posts and articles on public-employee pension reform and the "California Rule", privatization and government liability, private governance, prison privatization, and antitrust.