Should Antitrust Laws Apply to State and Local Governments Engaged in Anticompetitive Market Conduct?

Occasionally we hear from small business owners who are upset about government affirmatively competing with them for customers. It is certainly a problem if you make a living offering yoga lessons and your town decides to start providing free lessons. The City has an unfair advantage in that it can take taxpayer dollars to subsidize its services. But, assuming that the City has been vested with broad authority to promote public health and welfare, there isn’t much one can do in such a case. Perhaps in that situation your best bet is to focus on offering a superior experience to your customers. Nonetheless, this can be frustrating for a small business owner.

But, what if government is competing with your business in a manner that is so anticompetitive that it could actually violate antitrust law? In a forthcoming law review article in Competition Magazine, Jarod M. Bona and I argue that federal antitrust law should apply to state and local government actors when they are engaged in market conduct on equal footing with private businesses. In other words, when government is engaged in the market—selling goods or services—it should be subject to the same laws that private actors would be. 

For over a century, the Sherman Antitrust Act has been understood to prohibit private actors from engaging in anticompetitive conduct. There are some per se violations: for example a price-fixing agreement between competitors, or an agreement to allocate a geographic market between competitors. But, most antitrust claims are more difficult to prove because you have to show that (1) the challenged business conduct could cause prices to go up or down; and (2) the defendant has so much market power that it could actually charge more than what could be charged in a healthy competitive market. That’s boiling it down a lot. But the bottom-line is that the Sherman Act was designed to prevent businesses from engaging in anticompetitive conduct to either attain, or maintain, a monopoly.

But it has always been an open question as to whether these rules should apply just the same to public actors when they are engaged in the market, selling goods or services. As we note in our article: “governmental entities can and do enter the marketplace as competitors and may have even stronger incentives than profit-maximizing firms to harm competition.” And in an age of tightening fiscal budgets—where many municipalities are facing difficult choices, or on the verge of bankruptcy—there is a real danger that public entities might see the potential for monopolistic enterprise as a way out.

For example, a local entity could “use the power to tax to raise sufficient revenue to offer a product or service below cost for sufficient time to exclude other competitors from a market.”  This may be a tempting option for local governments because monopolies are extremely profitable. And if antitrust law does not preclude local government from engaging in anticompetitive conduct, public actors can get away with driving-out competing private businesses and extracting monopoly rents from consumers in the end.

As Bona and I argue, it is time to make clear that municipal and state actors stand on equal footing with private business under federal law—at least when we’re talking about government-run business enterprises. Why should government actors—who are supposed to be protecting the rights and interests of the people over whom they represent—be given a blank check to act in anticompetitive ways against small businesses in the community, and in a manner that ultimately hurts consumers?

But there is a major hurdle in establishing that government actors can be held liable when acting as market participants. In 1943 the U.S. Supreme Court held in Parker v. Brown, that federal antitrust laws do not apply to certain state conduct. So in many instances state sanctioned government conduct is considered immune from antitrust law. But the Supreme Court has always held out the possibility of a “market participant” exception to the Parker immunity rule. In Federal Trade Commission v. Phoebe Putney Health Systems, NFIB Legal Center argued that the Court should expressly endorse the “market participant” exception theory. That case was ultimately decided on other grounds—though affirming the principle that publicly run commercial enterprise must be (a) authorized by a “clearly articulated and affirmatively expressed state policy; and (b) subject to “active[] supervision” by state officials. Nonetheless, Phoebe Putney was a step-forward for us in the fight to hold public actors subject to antitrust law when engaged in market conduct. Indeed, the Court made clear that when local or state actors engage in anticompetitive conduct, they do so “against the backdrop of federal antitrust law.”

Bona and I suggest that this gives good reason to think that the Court would ultimately endorse the market participant exception if it was to squarely address the issue. And given that there is a current split in authority among the federal courts of appeal on the market-participant issue, there is good reason to think that Court will eventually have to take the issue up. We certainly hope that happens sooner than later. As we argue, application of a market-participant exception could even give small business new avenues to attack anticompetitive local and state regulatory conduct. This is perhaps the most controversial of our assertions. We lay-out a case for why antitrust law should preempt local regulatory conduct—or actions in eminent domain—where it is apparent that the only purpose of the government’s conduct is to protect its own commercial enterprise from competition. (For example, a condemnation action aimed at displacing private business, so as to establish a government monopoly for parking, or other services.) Not only would applying antitrust law in such a case advance the pro-competitive goals of the Sherman Act, but it would be consistent with our liberal democratic conception of good governance, and the principles of federalism.

Though not directly confronted with the market-participant exception, the Supreme Court is currently considering petition for certiorari in a case raising a similar issue. North Carolina Board of Dental Examiners v. Federal Trade Commission, raises the question of whether a state regulatory board created by state law can be treated as a “private” actor under antitrust law where a majority of the board’s members are also market participants who are elected to their official positions by other market participants. Given that the SCOTUS Blog highlighted the case as its “Petition of the Day” on February 12th, it seems there are greater than usual chances that the Court will take the case. If the opportunity presents itself, we will weigh in once more to voice small business concerns.

For more on this issue, check out Jarod Bona’s commentary at The Antitrust Attorney Blog

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About Luke Wake

Luke A. Wake is a senior staff attorney at the NFIB Small Business Legal Center. Wake has particular expertise on environmental and land use issues, and has worked on numerous other constitutional issues and matters of importance to small business owners. He is an ardent defender of private property rights, which he believes are essential to the free enterprise system and the foundation of American liberty. As a strong advocate of individual rights and economic liberties, he has built his career defending small business interests. Since joining the NFIB Legal Center, Wake has focused on a whole host of issues, from employment law matters to regulatory compliance. In addition to serving as a resource for small business owners, Wake remains committed to the Legal Center’s pledge to ensure that the voice of small business is heard in the nation’s courts. He is also working to advance small business interests in law review articles, including publications in the Berkeley Journal of Law & Ecology, the Texas Journal of Law and Politics, and Competition Magazine. See R.S. Radford & Luke A. Wake, Deciphering and Extrapolating: Searching for Sense in Penn Central, 38 Ecology L.Q. 731, 746-747 (2011); Damien M. Schiff, Luke A. Wake, Leveling the Playing Field in David v. Goliath: Remedies to Agency Overreach, 17 Tex. L. Rev. & Pol. 97 (2012); Jarod M. Bona and Luke A. Wake, The Market-Participant Exception to State-Action Immunity From Antitrust Liability, J. of Antitrust and Unfair Competition of the State Bar of Ca., Vol. 23, No. 1, 156 (Spring 2014); James S. Burling and Luke A. Wake, Takings and Torts: The Role of Intention and Foreseeability in Assessing Takings Damages, in Condemnation 101: Making the Complex Simple in Eminent Domain 449-51 (ALI-ABA Committee on Continuing Professional Education eds. 2011). Before joining the Legal Center’s team, Wake completed a prestigious two-year fellowship as an attorney in the Pacific Legal Foundation’s (PLF) College of Public Interest Law. Wake is a graduate of Case Western Reserve University School of Law in Cleveland Ohio. He is a member of the California Bar, the District of Columbia Bar, and the U.S. Supreme Court Bar. He completed his undergraduate studies at Elon University in North Carolina in 2006 where he focused on political theory and corporate communications.
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One Response to Should Antitrust Laws Apply to State and Local Governments Engaged in Anticompetitive Market Conduct?

  1. Pingback: Applying the Antitrust Laws to Anticompetitive State and Local Government Conduct :: The Antitrust Attorney Blog

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