Eleventh Circuit

SmileDirectClub

Uncertain future for active supervision doctrine of state-action immunity

In August 2020, the Eleventh Circuit in SmileDirectClub, LLC v Battle affirmed the denial of a motion to dismiss SmileDirectClub’s antitrust claim against the Georgia Board of Dentistry, holding that the Board is not entitled to state-action immunity from antitrust liability based on the state’s lack of ‘active supervision’ over the Board’s conduct.^[1] SmileDirectClub further restricted the ability of state regulatory bodies made up of active market participants in a profession, such as boards of dentistry, to claim their conduct is immune from antitrust law simply because it was rubber-stamped by the state without the state’s substantive review of the merits of the challenged decision. However, in December 2020, a majority of the judges voted to rehear the case en banc, vacating the panel’s August opinion.^[2]

SmileDirectClub overview

SmileDirect provides orthodontic treatments, such as teeth alignment, to patients around the United States.^[3] Technicians take digital scans of patients’ teeth and send those scans to SmileDirect’s lab to create a model.^[4] In Georgia, a state-licensed dentist or orthodontist reviews the model and identifies any condition that needs further investigation or prevents the patient from using SmileDirect’s treatment.^[5] For patients with no identified problems, the doctor creates a patient-specific plan and prescribes a clear aligner, which the patient receives through the mail. The service is sharply discounted because it does not involve in-person treatment by an orthodontist.^[6]

On 24 January 2018, the Georgia Board of Dentistry, primarily made up of licensed dentists plus a hygienist and a non-dental professional, voted to amend Rule 150-9-.02,^[7] adding ‘[d]igital scans for fabrication [of] orthodontic appliances and models’ to the list of Expanded Duties of Dental Assistants, which requires direct supervision by a dentist.^[8] That amended rule thus prohibited digital scans, such as those conducted by SmileDirect, unless a licensed dentist was physically present.^[9] Under Georgia law, the Board has broad power to promulgate rules regulating services by persons at the direction and supervision of licensed dentists, and the Governor of Georgia must approve, modify, or veto proposed amendments.^[10] On 30 April 2018, the Governor issued a certificate of active supervision to the Board, which approved the amendment ‘for the purposes of active supervision review’ required by Georgia law, stating ‘the amendment adopted by the Board is within its authority as granted by clearly articulated state policy.’ ^[11]

SmileDirect filed suit, alleging antitrust and constitutional claims against the Board and its members and sought declaratory judgment.^[12] The district court dismissed all claims except the antitrust and constitutional claims against the Board members in their individual capacities.^[13] The Board appealed only the district court’s denial of its motion to dismiss the antitrust claim.^[14] The court held that the denial of state-action antitrust immunity was immediately appealable in the Eleventh Circuit under the collateral-order doctrine, concluding that it had appellate jurisdiction.^[15] The appeal provided the Eleventh Circuit with the opportunity to use its prior interpretations of the ‘active supervision’ doctrine and state-action immunity to evaluate the adequacy of state supervision over the Georgia Board of Dentistry’s conduct. The court found that the Board lacked both ipso facto state-action immunity as well as state-action immunity under the ‘active supervision prong’ of the ‘Midcal test,’ ^[16] from the Supreme Court’s 1980 decision in California Retail Liquor Dealers Association v Midcal Aluminum Inc.^[17] The court also applied the Supreme Court’s framework in North Carolina Board of Dental Examiners v FTC, which articulated required attributes of the active super­vision doctrine but could not apply the doctrine in that particular case because the board did not claim it was subject to active supervision by the state.^[18] By holding that the Governor of Georgia’s supervision in SmileDirectClub did not meet the high mark for substantive review required under North Carolina Dental, the court further demarcated the level of state supervision required under the active supervision prong.

Reviewing the active supervision doctrine precedent

In Parker v Brown, the Supreme Court held that Sherman Act antitrust liability applies to individual rather than state action, creating what is known as state-action immunity or ‘Parker immunity’ for the state.^[19] For state-action immunity to apply, the Midcal test requires the challenged market restraint to be (1) ‘clearly articulated and affirmatively expressed as state policy’ and (2) ‘actively supervised by the state itself.’ ^[20] North Carolina Dental requires that a non-sovereign body comprised of active market participants in the occupation that the board regulates can receive the benefits of state-action immunity from antitrust liability only if the state meets the Midcal two-prong analysis.^[21] Although the Supreme Court could not review any actual state super­visory systems in North Carolina Dental, the court described three attributes that were ‘constant requirements’ of the active supervision prong:

• the supervisor must review the substance of the anticompetitive decision, not merely the procedures followed to produce it;
• the supervisor must have the power to veto or modify decisions to ensure they accord with state policy, and the mere potential for state supervision is not an adequate substitute; and
• the state supervisor may not itself be an active market participant.^[22]

Evaluating supervision by Governor over Georgia Board of Dentistry

In SmileDirectClub, although the Governor of Georgia had the ‘authority and duty to actively supervise’ and was able to ‘approve, remand, modify or reverse’ proposed rules of the Board of Dentistry, the court found that there was no indication that the Governor ‘engaged in a substantive review of the amended rule to ensure that it accords with state policy.’ ^[23] The court highlighted how the Governor’s comments in the certification of active supervision suggest he ‘examined only the procedural question of whether the amended rule was within the Board of Dentistry’s statutory power’ rather than commenting on the merits or substance of the rule.^[24] The court determined that such cursory procedural approval, while exhibiting ‘potential active supervision,’ does not rise to the level of ‘actual supervision.’ ^[25] Because SmileDirectClub held that the Georgia Board of Dentistry failed to satisfy the ‘active supervision’ prong, and both Midcal prongs are required for state-action immunity, the court did not consider the ‘clear articulation’ prong.^[26]

The court in SmileDirectClub also found that the Board lacked ipso facto state-action immunity from antitrust liability.^[27] In Hoover v Ronwin, the Supreme Court held that where challenged anticompetitive conduct is that of the sovereign itself, including the state legislature or supreme court, the court need not address the clear articulation and active supervision tests.^[28] The court in SmileDirectClub found that even assuming the Governor has the power and duty to adopt and make his own the action of the Board, the Board’s action in this case was not ‘in reality’ the action of the Governor.^[29] Although the Board argued that the ‘mere power and duty on the part of the Governor would suffice’ for ipso facto immunity, the court found that such ‘potential supervision’ cannot confer ipso facto immunity – which completely immunizes an actor from antitrust litigation – where ‘potential supervision’ is not even sufficient to confer immunity under the active supervision prong of Midcal.^[30] Indeed, the court refused to apply a lower standard for ipso facto immunity than for Midcal’s active supervision test.^[31]

Diverging views from the bench

First signs of SmileDirectClub’s ambiguous future

Although joining the majority opinion, Judge Jordan wrote a concurring opinion calling for a re-examination of Eleventh Circuit precedent on whether the denial of state-action antitrust immunity should be immediately appealable under the collateral order doctrine by private parties.^[32] Judge Jordan noted that state-action antitrust immunity is more of a defense to an antitrust cause of action than an entitlement to avoid suit completely.^[33] Although the concurring opinion underscored important questions for the future of state-action immunity in the Eleventh Circuit, the dissenting opinion by Judge Tjoflat raised the greatest concern surrounding the majority’s decision and its effect on antitrust litigation.

Before the Eleventh Circuit voted to rehear SmileDirectClub en banc, Judge Tjoflat’s dissenting opinion raised questions about the court’s jurisdiction to issue the majority’s opinion and noted that the district court reserved the state-action immunity question for the summary-judgment stage, after discovery and development of the factual record.^[34] Judge Tjoflat described any decision by the court on the Board’s entitlement to state-action immunity at this stage of the litigation as premature and, therefore, hypothetical because the court only has jurisdiction to review an otherwise non-appealable interlocutory order if it ‘conclusively determines a disputed question.’ ^[35]

According to the majority opinion, the district court held that the antitrust claim, as pleaded, ‘is sufficient to survive a Rule 12(b)(6) motion to dismiss on Parker immunity grounds.’ ^[36] However, immediately before and after that statement, the district court noted that ‘a definitive ruling on Parker immunity would be premature at this stage’ and ‘further factual development is required to determine whether the Board members are entitled to Parker immunity.’ ^[37] Indeed, the dissenting opinion highlighted the district court’s statement that ‘[o]nly discovery will determine whether the Board provided all relevant information to the Governor, whether the proposed amendment was subjected to any meaningful review by the Governor, or whether the certification of active supervision was merely “rubberstamped” as a matter of course.’ ^[38] Indeed, Judge Tjoflat perceived the majority’s decision as an impermissible ‘advisory opinion’ in which the district court and Eleventh Circuit could disagree on a motion for summary judgment at the close of discovery and subsequent appeal.^[39] Judge Tjoflat expressed alarm that, despite the decision’s lack of ‘tangible effect on the instant litigation,’ its legal standards would affect future litigants in the Circuit.^[40]

Awaiting resolution on SmileDirectClub and state-action immunity

Judge Tjoflat’s alarm surrounding the influence of SmileDirectClub on the future of state-action immunity has been moderated in light of the Circuit’s decision to rehear SmileDirectClub en banc.^[41] When the Eleventh Circuit revisits the case, a key question will be whether the district court made a conclusive determination on state-action immunity when denying the Board’s motion to dismiss the antitrust claim.

The same question is likely to be addressed in Leeds DDS v Board of Dental Examiners of Alabama, which is currently on appeal in the Eleventh Circuit.^[42] In that case, the Northern District of Alabama held that the Board of Dental Examiners of Alabama, in its own antitrust challenge by SmileDirectClub, was a non-sovereign actor controlled by active market participants and that the principals of North Carolina Dental applied to whether the Board qualified for state-action immunity.^[43] However, the district court found that a decision on whether the Board was entitled to state-action immunity would be premature on a motion to dismiss where the necessary factual record was ‘simply not present.’ ^[44] Similar to the decision in SmileDirectClub, the Eleventh Circuit in Leeds is likely to address whether it has jurisdiction to consider the state-action immunity issue.

The Eleventh Circuit’s resolution of the decisions in both SmileDirectClub and Leeds may provide litigants with additional clarity on whether existing state procedures and statutes, ostensibly designed to provide active supervision reviews under North Carolina Dental, are enough to withstand that decision’s demanding benchmark for substantive review.^[45] In SmileDirectClub, the court found that the Governor of Georgia’s process of issuing the certification of active supervision under Georgia law was still inadequate for active supervision review, and required a more substantive assessment of the challenged decision’s merits.^[46] Without a final determination on active supervision, Leeds denied the motion to dismiss the case on state-action immunity grounds, finding that a four-sentence memo-to-file stating that the Board’s challenged decision did not ‘significantly lessen competition’ or ‘affect competition at all’ cannot establish that the state reviewed the substance of the conduct.^[47] The court discussed how Alabama’s regulatory review system through the Legislative Services Agency (LSA) was enacted shortly after North Carolina Dental and requires further action by the LSA if it finds that the challenged decision would significantly lessen competition; yet, the memo-to-file – concluding that the rule did not affect competition – suggests that the challenged conduct did not receive that further substantive review.^[48]

Although it is still unclear what the Eleventh Circuit’s ultimate determinations will be, these two cases will undoubtedly provide the Circuit with the opportunity to further develop and delineate the limits of the active supervision doctrine of state-action immunity for future antitrust litigants.

Automotive alignment

Insufficient evidence of price-fixing and group boycott

In March 2020, the Eleventh Circuit affirmed the US District Court for the Middle District of Florida’s dismissal of Mississippi automobile body shops’ claims of horizontal price-fixing and group boycott against insurance companies in Automotive Alignment & Body Service, Inc, et al v State Farm Mutual Automobile Insurance Company, et al.^[49] The Circuit decided five similar appeals from the same multi-district litigation in 2019 in Quality Auto Painting Center of Roselle, Inc v State Farm Indemnity Co, in which body shops similarly alleged that insurance companies conspired to depress prices for repairs, with State Farm as the leader.^[50] In both cases, the body shops alleged that State Farm set the market rate for labor using an electronic survey of shops in the geographic area with faulty and manipulated data and steered insureds away from non-compliant body shops.^[51] As with Quality Auto, the Eleventh Circuit in Automotive Alignment held that the body shops’ allegations in their complaint were insufficient to state claims of horizontal price-fixing or group boycott under the Sherman Act because they did not plausibly suggest an ‘agreement or conspiracy’ among the insurance companies.^[52] The Eleventh Circuit’s precedents in these auto insurance cases illuminate how litigants must allege more than parallel conduct or common tactics by competitors for price-fixing and group boycott claims to survive a motion to dismiss, and that they must specifically plead facts that show the presence of an agreement between the players.

The court in Automotive Alignment highlighted how, for plaintiffs to state a claim of horizontal price-fixing or group boycott, the crucial question is ‘whether the challenged anticompetitive conduct stems from independent decision or from an agreement, tacit or express.’ ^[53] Conscious parallel conduct alone is insufficient to raise the inference of a conspiracy, and plaintiffs must also allege sufficient ‘plus factors’ to make parallel conduct more probative of conspiracy.^[54] Regarding the plaintiffs’ allegation that the other insurance companies tell the body shops they will not pay more than State Farm, the court found the allegations of ‘price leadership’ or ‘following the example set by a competitor, without agreeing to do so in advance’ insufficient to establish the existence of an agreement for price-fixing.^[55] The court similarly found that allegations that the other insurance companies matched State Farm’s newly altered ‘market rate’ within a period of weeks suggest price leadership rather than a price-fixing conspiracy.^[56] The court also examined the plaintiffs’ allegation that in Oklahoma, the United Services Automobile Association (USAA) told one of the body shops that labor rates would be going up because the new State Farm survey ‘had just been sent out.’ ^[57] The court found the allegation irrelevant to the Mississippi body shop plaintiffs but highlighted that, even if it were relevant, the complaint did not specify to whom the survey was sent out and failed to make ‘collusion more plausible than conscious parallelism.’ ^[58]

The plaintiffs also alleged that many of the insurance companies used the same threatening tactics to discourage body shops from discussing rates with each other and offered the same false reasons for neglecting to pay body shop posted rates.^[59] However, the court found that the competitors’ use of common tactics only suggests a conspiracy when ‘such usage would not plausibly arise from independent responses to common stimuli.’ ^[60] Similarly, the plaintiffs’ allegations of group boycott, including that the insurance companies used uniform steering tactics to drive insureds away from body shops that refuse to pay State Farm rates, failed to prove conspiracy where such tactics were ‘methods that would logically be employed by any insurer to dissuade insureds from using a disfavored shop.’ ^[61] The complaint pointed to examples of the same false or misleading statements used by the insurance companies to steer customers away from non-compliant shops, including telling insureds that the shop is not on a preferred list, has quality issues, charges more, or takes longer to complete repairs.^[62] However, the court found that these common tactics are within the ‘wide swath of rational and competitive business strategy unilaterally prompted by common perceptions of the market.’ ^[63]

Three of the Mississippi body shops claimed that their business from insured customers of other insurance companies dropped substantially after the body shops left State Farm and Shelter direct repair programs.^[64] However, the court found that the lost business could plausibly be explained by a number of independent market forces rather than steering.^[65] Indeed, the large variation in body shops’ lost business, ranging from 10 to 75 percent, undermined concerted steering as the plausible cause, and the court acknowledged that the percentages mean little on their own.^[66] Further, the Eleventh Circuit held that the district court did not abuse its discretion when it denied the plaintiffs’ motion to reconsider the dismissal of the antitrust claims based on newly discovered evidence that, ‘sometime after filing their second amended complaint’, the body shops obtained statements from insurance company employees that the companies get together to set body shop rates, including a statement from a State Farm representative that the company intentionally suppresses and fixes rates.^[67] The court found that, although the body shops claim that the new evidence was unavailable when they filed their second amended complaint, they offered no explanation for their failure to bring the new evidence before the district court during the time the complaint was pending.^[68]

District court decisions

Relationship with franchisees deemed incapable of concerted action

In Arrington v Burger King Worldwide, Inc, the US District Court for the Southern District of Florida granted the defendants’ motion to dismiss a complaint by employees of Burger King franchisees, holding that Burger King Corporation (BKC) and franchisees could not be liable under section 1 of the Sherman Act for concerted action.^[69] The employees alleged that franchisees, at the direction of and with the assistance of BKC, colluded to depress wages and employment opportunities for employees of Burger King franchisees through no-hire agreements in every Burger King franchise agreement since at least 2010 and before September 2018.^[70] The no-hire agreement incorporated into Burger King’s standard insurance agreement states:

Neither BKC nor Franchisee will attempt, directly or indirectly, to entice or induce, or attempt to entice or induce any employee of the other or another Franchisee of BKC to leave such employment or employ such employee within six (6) months after his or her termination of employment with such employer, except with the written consent of such employer.^[71]

The plaintiffs claimed that the no-hire agreements are an unreasonable restraint on trade and ‘per se unlawful’ under section 1 of the Sherman Act.^[72] Further, the plaintiffs alleged that defendants were alternatively liable under ‘a quick-look analysis’ because an observer with ‘even a rudimentary understanding of economics could conclude the arrangements in question would have an anticompetitive effect on employees and labor.’ ^[73]

The court noted that the plaintiffs must allege ‘concerted action’ to state a plausible claim under section 1, and the alleged arrangement must be an agreement between two or more entities ‘capable of engaging in concerted action.’ ^[74] Section 1 of the Sherman Act only reaches unreasonable restraints of trade between separate entities and does not reach wholly unilateral conduct.^[75] The issue before the court was whether the Burger King franchisor and franchisees are capable of engaging in concerted action as separate entities or whether they should be treated as a single entity under antitrust law.^[76] The court reviewed the Supreme Court’s precedents in Cooperweld Corp v Independent Tube Corp and American Needle, Inc v National Football League to determine when coordinated activity is viewed as that of a single enterprise for the purposes of Sherman Act liability. Copperweld held that coordinated activity between a parent and a wholly owned subsidiary is treated as a single enterprise because they have ‘complete unity of interest’ with common objectives.^[77] However, American Needle held that an entity formed by 32 teams in the National Football League engaged in concerted action when it made decisions about licensing and intellectual property for the teams because the teams remained ‘separately controlled, potential competitors with economic interests [] distinct from [the jointly owned corporation’s] financial well-being.’ ^[78]

The plaintiffs alleged that BKC franchisees are independently owned and operated and possess the sole right to hire and fire employees. Indeed, the plaintiffs claimed that BKC warns franchisees that because they do not control an exclusive territory, the franchisees may face competition from other franchisees or competitive brands that BKC controls.^[79] However, the court found that BKC’s relationship with its franchisees more closely resembles a single corporation organized into divisions or a parent-subsidiary because BKC requires franchisees to pay royalties, contribute toward joint advertising, use standardized equipment, and maintain uniform operations, appearance, menus, service, food preparation, training standards, and hours of operation.^[80] Acknowledging that the franchisees in the abstract are capable of competing with each other for employees or customers, the court found that this alone did not answer the question of whether the franchisor and franchisee should be treated as a single entity under the Sherman Act, which requires a totality-of-the-circumstances approach.^[81] The court highlighted how there would be no Burger King franchise or independent source of economic power without the uniformity guaranteed by BKC.^[82] Indeed, the court found the relationship between BKC and its franchisees ‘totally derivative,’ with their success and ability to compete with other burger restaurants ‘wholly dependent on systemwide uniformity’ and providing ‘a consistent product at a predictable price.’ ^[83] Therefore, the court concluded that the no-hire agreement between BKC and its franchisees was an ‘internal agreement’ to implement a single entity’s policies and does not constitute an unlawful restraint on trade under section 1 of the Sherman Act.^[84]

Arrington is now on appeal in the Eleventh Circuit and will affect future antitrust litigation against franchises under section 1, further illuminating the circumstances that lead the courts to treat them as single firms versus separate entities.^[85]

Plaintiff in tying arrangement case survives motion to dismiss

In Paycargo, LLC v CargoSprint, LLC, the Northern District of Georgia denied CargoSprint’s motion to dismiss Paycargo’s amended complaint in a product tying case under the Sherman Act, holding that Paycargo plausibly alleged the contours of the tying product market, CargoSprint’s market power in the tying product market, and that a not unsubstantial amount of interstate commerce in the tied market is affected by the tie.^[86] Paycargo, a provider of electronic payment management services to carriers and shippers in the freight and cargo shipping industry, alleged that CargoSprint unlawfully restrains trade and attempts to create a monopoly over web-based payments in the shipping and cargo industry by tying the use of its two products, SprintPay and SprintPass.^[87] CargoSprint’s SprintPay product, similar to Paycargo’s product, offers electronic payment services to the freight and cargo shipping industry. SprintPass is an electronic information-sharing platform that helps coordinate the transfer of cargo during dock deliveries.^[88]

A tying arrangement is an unlawful restraint of trade if a seller exploits monopolistic leverage in one market to take control over a different market, and a plaintiff must plead:

• a tying and tied product;
• evidence of actual coercion by the seller that in fact forced the buyer to purchase the tied product;
• that the seller had sufficient market power in the tying product to force the buyer to accept the tied product;
• anticompetitive effects in the tied market; and
• involvement of a not unsubstantial amount of interstate commerce in the tied market.^[89]

Although dismissals are disfavored in such fact-intensive antitrust litigations, the court highlighted how plaintiffs must plausibly allege the contours of the relevant market to survive the motion to dismiss.^[90]

The court held that Paycargo adequately pleaded the contours of the tying product market, even though it limited the product market for dock delivery services solely to SprintPass, because Paycargo alleged sufficient facts showing no reasonably interchangeable substitutes offering the same functionality, including that customers would not rely on a self-help method for dock deliveries.^[91] Indeed, the court found that even if coordinated dock delivery services did not constitute a separate product market, Paycargo adequately alleged the existence of a submarket for sophisticated delivery services in high-volume locations with long wait times.^[92] The court also held that Paycargo sufficiently alleged CargoSprint’s market power to be able to force buyers to purchase the tied product by alleging the existence of barriers to entry in the dock delivery scheduling market and CargoSprint’s cost advantage over competition.^[93] Paycargo alleged that CargoSprint’s high market share as the sole provider of automated delivery services through SprintPass enables it to charge double for the cargo payment services and retain customers notwithstanding their dislike of SprintPay.^[94] Further, although CargoSprint claimed that PayCargo did not allege barriers to entry, the court found that Paycargo offered facts showing the cost of developing a competing product, potential competitor TurretLab’s difficulty in entering the market without sales in the United States, and the cost to consumers of using SprintPass and SprintPay.^[95] Additionally, PayCargo plausibly alleged CargoSprint’s cost advantage over potential competitors where CargoSprint avoided high development costs.^[96] Finally, the court held that Paycargo plausibly alleged the involvement of a not unsubstantial amount of interstate commerce whereby CargoSprint imposed its tying arrangement on five major airports in the United States and processed an estimated 50,000 transactions each month in Los Angeles alone.^[97]

Paycargo will affect future litigation in the Circuit by providing plaintiffs with examples of sufficient facts needed to survive a motion to dismiss in fact-intensive product tying cases.

Notes