Antitrust and the State Bar of California

We just celebrated the Fourth of July, and are reminded of our Founders’ vison of a democracy of, by and for the people. We discuss often the three-branch aspect of our checks and balances, but there is an even more important underlying check: the separation between public and private. It is violated with “socialism,” a system where the state owns and operates the means of production. But the converse violation is even worse: the control of the state by commercial interests, or “industrial socialism.” It is the ultimate betrayal of our Founders.

Most of us are concerned about our nation’s problem with excessive private influence over our government through campaign contributions, and ex parte lobbying. But less well known is the removal of that underlying check of public/private separation within our state regulatory agencies. These boards and commissions serve as the “state regulator” of everyone from accountants to lawyers to veterinarians. Their private capture has gone beyond the already problematic “special interest influence.” Rather, in these governmental entities, such conflicted interests have taken over as the actual controlling public officials themselves. This has happened in state after state, including ours.

The justification for nurses controlling nursing regulation, doctors regulating medical practice, lawyers controlling legal entry and standards, and most other examples usually cite the need for “expertise.” But that expertise is properly “on point” where needed — and is easily acquired without allowing those in the trade regulated to be the actual public decision-makers. We also acknowledge that such conflicted board members are well intentioned, receive little or no pay, and believe sincerely that they are performing a task in the public interest.

We do not easily recognize our own occupational/tribal biases. But they are very much there. Would a nonattorney-controlled state bar require attorney applicants, who have completed seven years of college, to take an exam that flunks 55 to 65 percent and has dubious and unexamined relevance to actual competence? Would it then not do a thing to assure competence in actual areas of practice relied upon by consumers? What would its interest be in dishonest billing or intellectual dishonesty vis-à-vis current standards? We attorneys tend not to see such flaws, nor will a regulator controlled by us likely be so oriented. Those in charge understandably focus on what they know and care about. This is not a problem confined to attorneys, but applies to any grouping within a common trade.

Into this private takeover malaise enters the most important U.S. Supreme Court decision in the antitrust/regulatory area of law: the 2015, 6-3, holding in North Carolina State Board of Dental Examiners v. FTC. It is not narrow, but announces its holding in explicitly broad terms. No public body controlled by “active market participants” in the profession regulated can be a sovereign body for federal antitrust purposes. Interestingly, the court goes into some detail on the kind of occupational bias that attends such conflicts, as noted above, and which properly disqualify reliance upon such bodies. They have the same status as would their trade association leaders meeting in a Beverly Hills hotel. To have what is termed “state action” immunity such a board must be “actively” supervised by a nonparticipant-controlled body. Importantly, some of what regulatory bodies do qualifies as “per se” antitrust offenses, without any defense even allowed that the restraints are “reasonable.” That per se category includes supply control (i.e., licensing and setting a “pass point” for entry).

We agree that many per se offending actions are proper for a state agency, e.g., assuring qualification to practice, et al. But unless there is “active” state supervision over such participant controlled bodies, they are not “public” and their decisions become federal felony offenses and yield private treble damage remedies. As someone familiar with antitrust prosecutions, these per se cases are difficult to defend and the liability consequences can be calamitous. What would be the treble damage total of the lost revenue for 10,000 barred attorney practitioners? 50,000 of them?

Two years ago, we were joined by Consumers Union and the Citizens’ Advocacy Center requesting documentation from the attorneys general of each of the 50 states concerning their compliance with this holding. So far, only about four or five states are so moving. California’s bill to bring our Department of Consumer Affairs’ boards into compliance was defeated by vigorous lobbying from many trade associations, led by the nurses — a group otherwise progressive — and illustrating the implacable allegiance of these horizontal associations to their own irrationally defined interests (even where it portends serious liability).

But the State Bar of California is even more of a sitting duck than are other boards. It is controlled by practicing attorneys in supermajority, and it bars a higher percentage of applicants from practice than do 48 other states — with untested connection to its purported rationale. And it has not been “actively supervised” over the past 30 years. In fact, we examined all documents indicating any outside supervision of the Committee of Bar Examiners controlled by the Bar Board of Trustees and found virtually none. The mere presence of a supreme court or other uncontaminated public body in a state’s organizational chart does not comply; it must be “active,” as the U.S. Supreme Court specifies and the Federal Trade Commission has now amplified in its published guidance following Board of Dental Examiners.

However, it now looks as if the California Supreme Court is looking constructively at the issue. It may be taking a lead role in California and nationally to comply with applicable federal law. Two weeks ago, it adopted revised rule (effective Jan. 1, 2018) to wrest control of the Committee of Bar Examiners from the Bar Board of Trustees. It will now directly appoint most of the committee’s members. It also ordered a comprehensive review of the bar exam pass point. And its new Rule 9.6(b) requires periodic revalidation of the bar exam to assure its relevance to its purpose (for the first time applying the requirement that already applies to other state agencies, see Business and Professions Code Section 139).

More steps are needed to avoid violation and the serious ramifications that would then follow. The Committee of Bar Examiners will still be controlled by “active market participants” in the legal profession. The state Supreme Court’s role in making appointments may well be beneficial, but it is not itself the required “active supervision.” The U.S. Supreme Court is clear that restraint of trade affecting decisions cannot be made by “active participant” controlled entities, regardless of who selects them.

But this is a resolvable dilemma. In the area of federal Sherman Act compliance, the state Supreme Court needs to use a “nonparticipant” and active intermediary to serve as its agent in the review process. Otherwise, it delegates to a contaminated entity and that is not the necessary “active” supervision required.

Further, the pass point is not the only area of antitrust liability for the bar. The bar takes actions that are anticompetitive outside of the bar exam. The state Supreme Court needs to take the next obvious step: Provide for actual “active supervision.” It has an Administrative Office of the Courts (the AOC), that could provide the required “active” element, allowing the court to be an effective decisionmaker, without dispositive factual reliance on “active participant” controlled sources. Optimally, that could be a “competition commission” including possible experts in education, sociology, economics, or others with relevant expertise.

Or the court might wish to have a single person, perhaps an antitrust economist, perform this task within the AOC. But having some non-”active participant” agent assist it in collecting evidence of anticompetitive impact and options is necessary for two reasons: (a) it allows an entity to receive and screen complaints of Sherman Act offenses for possible deeper review — facilitating coverage across the area of possible violation, and (b) it provides for the organization and transmittal of information to the court that makes its role truly “active” — given its inherently passive structure, as well as truly extraordinary workload.

With these final steps, our Supreme Court will chart an enviable path ahead of its counterparts in other states, one that many of us will use to stimulate wider compliance nationally. And it will demonstrate the proper respect due for our U.S. Supreme Court, and for our Founding Fathers. We properly celebrate their vision not only on the Fourth of July, but in our actions throughout each calendar year.