State Bar on antitrust: Close but no cigar

The California Supreme Court just issued an extraordinary en banc “Administrative Order” imposing a new “State Bar Antitrust Policy.” We have particular interest in this subject matter because our Center for Public Interest Law has been monitoring and objecting to our profession’s increasingly blatant violations of federal antitrust law — ironically engaged in by those purporting to enforce the ethical standards of our profession. And I have spent much of my career as a state and federal antitrust prosecutor, teacher and scholar — including teaching at the University of San Diego and at the National Judicial College, and scholarship on point (for those of you with an insomnia problem, see “California White Collar Crime and Business Litigation,” with Thomas Papageorge, Tower Press 2016, Fifth Edition).

The new policy has many pluses and one apparently fatal minus. On the plus side, the court’s seven-page policy skillfully states the law and cites the important U.S. Supreme Court holdings on point. Second, its discussion acknowledges the need for a new policy and implicitly the many years of violative behavior by the State Bar of California. To state the problem succinctly: A state regulatory board controlled by “active market participants” in the trade or profession regulated by that board lacks necessary “sovereign” status. That absent status, underlined in the Supreme Court’s 6-3 holding in North Carolina State Board of Dental Examiners v. Federal Trade Commission (2015), is profound. It means that what the State Bar (as well as many other state boards with similar private cartel control) do not have the critical “state action” defense that allows them to restrain trade. And we agree that a regulator must restrain trade.

So what is the bottom line? The law now requires “active state supervision” by a public body that is controlled by active participants as to any decision that would violate federal antitrust law. And the new policy order accurately states the law in these respects, cites the correct decisions, and laudably excerpts from the FTC guidelines adopted following the North Carolina holding.

Perhaps understandably, the policy does not cover some of the realities of the longstanding practices of the State Bar. For example, it does not discuss the “per se” category of federal antitrust offenses — violations that are unlawfully “unreasonable” as a matter of law. And those violations include the supply control power to determine who may practice, now very much in controversy. Nor does it explain the severity of violations: They are felony criminal offenses and give rise to treble damages and attorney fees on the civil side.

Indeed, the State Bar’s current untenable pattern of leading thousands of youth down the primrose path of seven years of higher education and serious debt, only to pass 43 and 34 percent, respectively, in the last two bar exams, is illustrative of the rationale behind current federal law. And the State Bar, unlike every other regulatory board with licensing exams in our state, has not and does not examine its exam for its actual relevance to the competence necessary to practice. Other regulatory bodies are required to do so every five to seven years, but the California bar has not done so in the 37 years we have been monitoring it.

On the plus side, the California Supreme Court acknowledges its role to provide that “active” supervision. We agree that it is the correct body to so function. And the court is setting an example in its laudable examination of the cut score applied by the State Bar in the supply control decisions noted above. This policy then expands upon that new precedent by establishing a broader approach for examination of other decisions with restraint of trade implications, including, for example, its actions to stop “unauthorized practice of law.”

Also on the plus side, the new policy puts our Supreme Court ahead of every other state supreme court of which we are aware — in seeking to fashion a policy that assures compliance with the law. There is a certain ambivalence in praising a supreme court for following the law — here a holding of a supreme court that one would think all state counterparts would herniate to respect and follow. But the fact is, others have not done so.

There is one minus, and it is profound and jeopardizes bona fide compliance with the law. The California Supreme Court does not seem to fully appreciate the problem that underlies the North Carolina holding. Justice Anthony Kennedy describes in frank language the self-interested conflicts that properly disqualify “active market participants” from controlling their own regulation. And the California bar is a living example of those abuses, with cartel control reflected in arbitrary supply constriction in the name of “competence assurance,” while doing nothing to assure actual competence in any of the some 24 areas of law where consumers suffer irreparable harm from that incompetence. A client of an immigration attorney or criminal defense attorney or bankruptcy attorney enjoys zero Bar involvement in competence assurance over the life-long career of attorneys, each of whom practice in one or two specialized areas. Continuing legal education is required, but it does not even have to be in the area of practice. Nor does the Bar require malpractice coverage (and we had to fight to require notice to clients that it is absent). And the Client Security Fund does not cover negligence, even where there is a malpractice judgment that cannot be collected. As the former State Bar Discipline Monitor, I can assure you that the discipline system does not assure competence at any acceptable level.

This brings us to the serious deficiency in the new policy. The Supreme Court cannot delegate the critical decisions to the contaminated body. Of course, we understand the underlying regard of the court for the leaders of the State Bar. We agree that most are fine and upstanding persons. Most of them believe they serve the public interest. But as very summarily indicated above, that is not the record. Nor is it the record for any of those regulatory boards controlled by those in the regulated profession. We have been examining those entities since 1980. The North Carolina holding is well warranted across the entire spectrum, and we could gladly discuss the psychological factors that lead to the impermissible bias, as Justice Kennedy describes in the U.S. Supreme Court holding.

The policy delegates to the State Bar Office of General Counsel the task of evaluating State Bar acts and decisions for possible antitrust impact. Public complaints are allowed, but are also channeled through the bar. The policy includes language about Supreme Court prerogative and seeks to characterize a system that is essentially a passive delegation as “active supervision.” It is not, and the court needs to read the full FTC definition it cites as to the required elements — none of which can be delegated to the non-sovereign combine of “active participants” with a fatal flaw in performing this role.

This critique is not a matter of “well, some advocates think we should do it differently, or maybe it might be better if.” No. The structure as set forth in the en banc policy does not comply with applicable federal law. You cannot delegate critical filtering, evaluation and information that heavily influences a judgment to the State Bar or to those it controls. Certainly it can advise, assuming there are other sources of information for the court to consider.

One way to accomplish compliance is to have a public member majority on the Board of Trustees. Our profession finds that to be some sort of insult. [Although my experience has been that most of us disapprove of CPAs controlling the Accountancy Board or physicians controlling the Medical Board, et al.]

What is frustrating about the stated policy is that a compliant mechanism is relatively easy to accomplish even with attorney control of the State Bar. The court could appoint a commission or even a single person not connected to the State Bar or to any “active participant” person or body. Someone who is appointed by and under the control only of the court (the “active supervisor”). Ideally, it should be three to five persons with expertise in antitrust or at least economics, and perhaps in law and/or legal education or other related subjects. A small group of persons who serve as the eyes and ears of a necessarily passive court brings it into compliance with the law. Failing to do so continues a regrettable violation.

Creating that subordinate body, free from active participants and within the court’s own domain, gives the Supreme Court an “active” status in its supervision. Delegating essential elements to the very body disqualified from determining these policies does not.

Our Supreme Court is carving out a policy that could be the model for the nation. And we would be among those litigating or otherwise proposing its adoption elsewhere and everywhere. But it has to have the critical mass of features that meet the letter and spirit of applicable federal law. This en banc policy, although better than past practice, does not do that. Most frustrating of all, the changes necessary to bring it into compliance, are not prohibitively expensive, will only increase the competence of the California Supreme Court in making relevant decisions, and are commended by prudent legal judgment and common sense.