U.S., NC Regulators In Mexican Standoff
As I reported last month, the Federal Trade Commission issued an administrative complaint against the North Carolina State Board of Dental Examiners, “alleging that it is harming competition by blocking non-dentists from providing teeth-whitening services in the state.” Unfortunately for the FTC, a state regulatory agency isn’t a small business that can’t afford to defend itself. The Board fought back last week with a strongly worded answer “to refute not only a baseless complaint but also misleading characterizations made in the press release that the FTC issued before the Complaint was officially served.” Ooh, here we go!
At the outset, Board attorney Noel Allen objected to the caption of the Commission’s complaint: “The FTC so thoroughly misses the status of the Board and its members that it misnamed the Board in its Complaint, ironically omitting the word ‘State’ from the statutory name of the agency.” It’s perhaps a trivial point, but Allen’s larger argument is that the Board and its members — all the licensed dentists in North Carolina — cannot constitute an antitrust “conspiracy” since they are, in fact, agents of the state government.
In this case, the State of North Carolina requires a license to practice dentistry, and a dentist includes anyone who “[r]emoves stains … from the human teeth.” The FTC claims “teeth whitening” does not constitute stain removal. This is the crux of the dispute. Allen and the Board contest, “No one other than, apparently, the Commission, sees a difference between stain removal and teeth whitening services.” They offer a laundry list of supporting counter-examples, including at least 20 other state laws, FDA and other professional studies, and even advertising claims made by “unlicensed teeth whitening businesses whose marketing materials use the terms ‘teeth whitening’ and ‘stain removal’ interchangeably.”
The Commission accuses the Board of restraining competition and depriving consumers of access to lower-priced teeth-whitening services. This is true. The Board accuses the Commission of exceeding its authority by telling a state agency not to enforce state law as written. This is also true.
It Takes One to Know One
What’s also true is that the Commission’s case boils down to a comical argument that a state agency is violating FTC rules by … behaving exactly like the FTC. Either the FTC lacks self-awareness, or perhaps it claims a patent on thuggish regulatory behavior. Either way, it’s hard to view the Commission as a genuine champion of consumers here given the agency’s own record.
For example, the FTC objects to the Board’s practice of sending unlicensed teeth-whitening providers — such as mall kiosk operators — “cease and desist” letters:
The Dental Board has engaged in extra-judicial activities aimed at preventing non-dentists from providing teeth whitening services in North Carolina. These activities are not authorized by statute and circumvent any review or oversight by the State.
Not true, says the Board:
Regarding the supposed “extrajudicial activities,” no kiosk, spa or other provider of teeth whitening services by a non-dentist could actually be forced to stop operations unless the Board obtained either a court order or the cooperation of a district attorney in a criminal conviction and a court judgment. Any party receiving a cease and desist letter could simply ignore the letter and assert as a defense to the Dental Board’s request for an injunction their contention that their activities do not constitute the practice of dentistry or seek a declaratory ruling or judgment on the issue of whether their activities constitute the practice of dentistry. See N.C. Gen. Stat. § 150B-4.
The Board goes on to explain that although it “is an independent state agency, it is not without direct state supervision”: The Board is subject to North Carolina’s Administrative Procedures Act; it must file annual reports with various state officials, including the governor; its activities are subject to state open meeting and ethics laws; and the involvement of state courts is necessary for the board to take any enforcement action.
The FTC is no different than the Board in most respects, except when it comes to enforcement action. The FTC has independent legislative and judicial powers, as evidenced by its complaint against the Board, which will be heard by an FTC-appointed judge, prosecuted by FTC-appointed lawyers, and ultimately reviewed by the FTC commissioners.
And the FTC frequently uses the same type of “cease and desist” letters it condemns the Board for using. I documented one such case in a Mises Daily article two years ago, involving New Mexico-based Native Essence Herb Company and FTC lawyer Erika Wodinsky:
Ms. Wodinsky’s demand letter said that her office had conducted a “non-public investigation” of Native Essence and determined that the company’s website contained “false and/or unsubstantiated claims” that “induced” customers to buy certain herbal products. This itself was a false statement. Ms. Wodinsky and her staff never interviewed any of Native Essence’s customers. Indeed, many of the website statements deemed illegal by Ms. Wodinsky offered firsthand customer testimony praising Native Essence’s products and customer service.
[ … ]
Having made a unilateral determination that the Native Essence website should be censored, Ms. Wodinsky offered [Native Essence's owners] a simple choice: sign an enclosed “negotiated settlement,” where she had already decided the terms, or face an FTC-controlled administrative litigation process. Of course, if they opted for litigation, Ms. Wodinsky would ask a federal judge to place Native Essence under a government receiver and freeze all of the [owners'] personal assets to ensure they couldn’t afford to defend themselves.
Native Essence sold herbal supplements, a legal product not subject to any licensing regime. The FTC objected to Native Essence’s website, which contained links to studies — including some performed with government funds — that detailed the historical use of herbs for medicinal purposes. The FTC said all such information must be censored unless it’s pre-approved by the FTC or the FDA. What’s critical here is that the FTC did not investigate or establish any actual consumer injury. Indeed, there was never a single complaint against Native Essence. In contrast, the North Carolina Board reported that it “received several complaints from consumers who reported they were injured by non-dentists providing teeth whitening services.” It acted upon those complaints by conducting specific investigations of the accused businesses.
That’s not how the FTC does business. The Native Essence case was part of an FTC initiative dubbed “Operation False Cures,” where staff investigators simply trolled the Internet for websites that sold herbal supplements and sent “cease and desist” letters if there was even one statement the Commission objected to. There was no attempt to solicit or investigate specific allegations of consumer harm (as demonstrated by the false prosecution of William Isely).
The problem here is the schizophrenic division of the FTC into “competition” and “consumer protection” components. The consumer protection side of the FTC, which brings cases like Native Essence, essentially mimics the beliefs of state regulators like the North Carolina Board. They want to restrict competition because it produces “unlicensed” competitors that consumers are too stupid to avoid. On the flip side, the competition side of the FTC — which sued the Board — represents business interests that are excluded from the market, either by government regulation or their own inability to compete.
The two functions contradict one another: More “competition” means less “consumer protection,” and vice versa. It’s a wonder the competition side of the FTC hasn’t sued the consumer protection side.
The FTC and Libertarian Centralism
As much as the North Carolina Board’s rules are anti-free market and anti-libertarian, the FTC’s campaign against these rules is equally defective. The Board asserts the FTC’s action, if successful, “would unconstitutionally impair the ability of the State of North Carolina to protect its citizens under the Tenth and Eleventh Amendments to the Constitution.” The Board further invokes the Supreme Court-created “state action doctrine,” which normally exempts the act of states, and their agents, from federal antitrust scrutiny.
Libertarian centralists might counter that North Carolina Board’s actions violate the federal Constitution’s Ninth and Fourteenth Amendments. For example, the Institute for Justice recently challenged a Louisiana law that requires a licensing examination for florists. IJ represented unlicensed florists who claimed the law violated the Fourteenth Amendment’s Due Process and Privileges or Immunities clauses. The law deprived the unlicensed florists “of their constitutional right to be free from arbitrary and unreasonable interference in the pursuit of the occupation of their choice,” according to IJ’s complaint. (Earlier this week, Louisiana revised the law to replace the previous examination with a shorter exam that IJ said “presents no serious obstacle to would-be florists.”)
The Louisiana and North Carolina cases differ substantively in that the FTC does not assert any constitutional right of teeth-whitening providers to earn a living; the Commission is concerned primarily with the negative effects of “reducing consumer choice for the provision of teeth whitening services.” The FTC’s case is not constitutional but statutory. Section 5 of the Federal Trade Commission Act — a purported exercise of Congress’s authority to regulate interstate commerce — prohibits “unfair methods of competition.”
Of course, it’s not even clear how interstate commerce comes into play here. The Board notes that while its activities “may have an incidental effect on [interstate] commerce,” the actual regulation of who may practice dentistry — which includes “purely local” teeth-whitening services — is a police power reserved to the State of North Carolina. The FTC’s complaint, conversely, claims jurisdiction because “dentists and non-dentist providers of teeth whitening services in North Carolina purchase and receive products and equipment that are shipped across state lines by manufacturers and suppliers located out of state, and transfer money across state lines in payment for these products and equipment.” However, the Board counters that it does not ban or regulate the sale of teeth-whitening products, including over-the-counter kits; it only regulates those who provide services within the state.
If the FTC’s position is right, then there’s no state regulatory agency that would not fall under the Commission’s jurisdiction. Every licensing scheme affects commerce in some way. But granting the FTC a universal veto over state licensing policies does not advance economic liberty or individual rights in the long run. For one thing, it may not work. The North Carolina Board is fighting back because it has the resources — backed by taxpayers and its own membership — to litigate. The Board has no fear that excessive costs will drive it out of business. This means there’s a high likelihood the Board will run the FTC’s administrative gamut and take this case to an appeals court, where the FTC often fares poorly when it presents novel claims to expand its jurisdiction.
It’s also unclear whether the FTC would back off if the North Carolina General Assembly simply added the exact phrase “teeth whitening” to its statutory definition of dentistry. The Board noted that the regulatory trend in several states favors restrictions on who can whiten teeth for money:
For example, several teeth Whitening kiosks voluntarily shut down in Oklahoma after that state’s dental board filed an injunction against them, and the West Virginia board obtained a temporary injunction against the operator of a mall teeth whitening kiosk. And, as mentioned elsewhere in this response, the Alabama Supreme Court has ruled that teeth whitening constitutes the practice of dentistry. Also, legislation is pending in three states (Hawaii, Minnesota, and New Hampshire) that would include teeth whitening services in the definition of the practice of dentistry, and rules and policy statements on teeth whitening were recently proposed in two other states (Pennsylvania and Montana).
Obviously, the dental profession has ramped up its lobbying against potential teeth-whitening competitors. The Board itself described efforts, led by the American Dental Association, to get the FDA to restrict the public availability of tooth-whitening chemicals. This would put the FTC in a very awkward position given the agency’s view that FDA approval is synonymous with absolute scientific truth; many of the FTC’s consumer protection cases are based on failure to adhere to FDA standards.
The more the FTC wades into state-level regulation, the more business interests will lobby the Commission to act or not act. That makes the FTC bigger and more important without doing much for the actual businesses or their consumers. And unlike the courts that hear IJ-type cases, the FTC is a self-interested professional body that represents career antitrust lawyers. Just as the dentists use the North Carolina Board to propagate the dental profession’s political control over the market, so to the FTC does for the antitrust profession.
This is really a cautionary tale for libertarian centralists. It’s easy to file lawsuits and invoke the Fourteenth Amendment as a magic wand that can undo the damage of state regulation. But what happens when an unscrupulous federal agency gets in on the act and simply uses the opportunity to grab more power? It’s not that one can’t distinguish what IJ and similar groups do from what the FTC does — I just explained the differences. The problem is when you’re trying to sell a consistent libertarian philosophy to the masses. The FTC’s activities send mixed signals. What it’s doing appears libertarian on the surface. Yet it’s just the opposite in practice.
The centralists’ problem is that they either have to concede the righteousness of the FTC’s power grab or somehow argue that while it’s okay for federal courts to rewrite state laws, it’s not okay for federal agencies to do the same. Things get even more complicated when you try to sort out competing federal priorities, such as the “right to earn a living” and “consumer rights.” Federalizing state law doesn’t necessarily yield greater consistency or reliability.
For years I’ve complained about businesses not standing up to the FTC. Now we find the Commission facing its mirror image in a state regulatory agency. History suggests the feds will win out eventually, but that outcome is far from certain. The state deserves to prevail, not because its regulatory scheme is just, but because any expansion of federal power — especially FTC power — is far worse. Transferring more political power from the states and their legislatures to the unelected, extra-constitutional FTC does nothing to advance the libertarian cause.