Occupational Licensing Reaches the Supreme Court

In my last post, I wrote about how occupational licensing affects a growing number of industries by raising the barriers to entry.

While state boards usually consist of a mix of industry professionals and consumer members, there is danger in deferring too much to the knowledge of the active practitioners. Licensing is a practice that generally helps incumbent practitioners. Without a clear, separation between industry and regulation, the board members can develop regulations that mostly act to enrich incumbent professionals, rather than truly ensure quality professionals do not endanger public health or safety.

This separation was the root cause of a recent Supreme Court case that may change how some states structure their licensing boards. In North Carolina, the state dental board is composed of six licensed dentists, a licensed dental hygienist, and a consumer member. The dental professionals are, rather unusually, elected to the board by other licensed North Carolina dentists, as licensing board members are usually appointed by the state’s governor. The dental board had sent cease and desist letters to groups in mall kiosks and spas that were selling teeth whitening packages, a practice under the purview of licensed dentists and dental hygienists. However, the Federal Trade Commission (FTC) sued the North Carolina Dental board, claiming that, as currently constructed, the board did not qualify as a state actor but a private actor, and thus had violated antitrust law. The dental board rejected the FTC’s interpretation of their makeup and said that because the state had designated them as a state organization, they were one, and thus were exempt from the statute the FTC alleged they had violated.

The case was appealed through the judicial system to the Supreme Court. The FTC’s argument boiled down to this: because all of the industry members of the North Carolina dental board were active members of the profession they were regulating, and the state failed to provide adequate supervision in the way the board was composed. Because of that, the FTC concluded, the board was no longer exempt from antitrust regulations. In Justice Anthony Kennedy’s opinion, ruling in favor of the FTC, the anticompetitive actions that a group takes in regulating their own industry are not washed away just because a group is labeled as a state group. The key determination by the justices here was whether the active state supervision requirement was met, so the state board could invoke the exemption. In Justice Kennedy’s and the concurring judges’ opinion, the level of state supervision was inadequate, and the structural risk that “active market participants will pursue private interests in restraining trade” was present.  In the dissent, Justice Alito wrote that the level of state supervision necessary to qualify as a state actor and not a private one is ambiguous and such a decision is better left to the states, not to the courts.  

This case is an example of the how licensing organizations can use their power to increase the market power of incumbents while fencing others out. When the licensing organizations are so loosely connected to the state body they claim to work in the name of, their behavior is interpreted less as a way to ensure a standard of quality and more as a way encroach upon related disciplines that may not truly need to fall under the umbrella of licensed professionals. While this kind of decision ultimately remains a value judgment, it seems plain that this type of board composition will produce incentives for the board to act in ways that reduce economic opportunities for others while producing a greater wage premium for incumbent practitioners. In this way, the near-monopoly power granted to these kinds of state licensing boards restricts competition and erects barriers to entrepreneurship and innovation.

The ruling on this case may provide future ramifications for how states populate their licensing boards. Justice Kennedy’s decision showed significant concern for the potential of regulatory capture that comes with active professionals serving on state boards. More active state supervision through explicit appointments to licensing boards and less emphasis on populating the boards with active market participants may both be necessary to alleviate the type of concern articulated by the Supreme Court justices and reduce the negative outcomes that boards with significant market power produce. States can also consider alternatives to licensing, such as certification or mutual recognition agreements, to alleviate some of the pent-up supply of practitioners in certain industries and provide more opportunities for entrepreneurs.

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chris jackson

Chris Jackson

Chris Jackson is a research assistant in Research and Policy for the Ewing Marion Kauffman Foundation, assisting in the understanding of what policies and environments best promote entrepreneurship and education in the pursuit of economic growth.