Supreme Court Update: NC Board of Dental Examiners v. FTX (13-534), Direct Marketing Ass'n v. Brohl (13-1032), and Alabama Dep't of Revenue v. CSX Transportation (13-552)

March 18, 2015 Supreme Court Update

Greetings, Court fans!

We're bringing you up to speed with summaries of the Court's decisions in NC Board of Dental Examiners v. FTX (13-534), regarding the scope of state action immunity from federal antitrust law; Direct Marketing Ass'n v. Brohl (13-1032), on whether the Tax Injunction Act bars a federal court from enjoining a state law requiring on-line retailers to report customer sales to facilitate sales tax collection; and Alabama Dep't of Revenue v. CSX Transportation (13-552), analyzing whether Alabama's diesel taxes discriminate against rail carriers.

NC Board of Dental Examiners v. FTX (13-534) has the antitrust bar (if no one else) buzzing. In a 6-3 decision, the Court held that state agencies controlled by market participants are not entitled to immunity from suit under the federal antitrust laws unless they operate pursuant to a clearly articulated anticompetitive policy of the state and are actively supervised by the state. By statute, the North Carolina State Board of Dental Examiners is "the agency of the State for the regulation of the practice of dentistry." The Board creates and enforces a licensing system for dentists. State law requires the Board to be composed of six actively practicing dentists, one actively practicing hygienist and one consumer. The dentists and hygienist are elected by their respective peer professionals.

North Carolina law does not specify whether tooth whitening constitutes the practice of dentistry. But when non-dentists began to offer tooth whitening services in North Carolina, the Board began investigating the issue after receiving complaints from dentists that the non-dentist providers were offering the services at lower prices. The Board sent cease-and-desist letters to the non-dentist providers, forcing them out of the market, and prompting the FTC to file an administrative complaint against the Board. An administrative law judge ("ALJ") denied the Board's motion to dismiss based on state action immunity and sided with the FTC on the merits. The FTC sustained the ALJ's determination, and the Fourth Circuit affirmed . . . as did the Court.

Led by Justice Kennedy, the Court explained that the federal antitrust laws are essential to "the preservation of economic freedom." While the antitrust laws themselves contain no exception for anticompetitive actions taken by the states, the Court has always implied one as federal law might otherwise impose an unconstitutional burden on a state's power to regulate. But this immunity only applies when a state is acting in its sovereign capacity. While state legislation and actions of a state supreme court, acting legislatively rather than judicially, will always qualify as sovereign actions, state action immunity is not always available where "a State delegates control over a market to a non-sovereign actor." And "[s]tate agencies are not simply by their governmental character sovereign actors for purposes of state-action immunity." This is particularly so where a state delegates its regulatory power to active market participants. To ensure that the conduct of these non-sovereign actors truly amounts to the will of the sovereign, thus warranting immunity, the state must clearly articulate an anticompetitive policy and actively supervise the enforcement of that policy. Otherwise, even well-meaning people serving in these agencies may confuse self-interest with the state's interests as they fill in the interstices of the laws under which they operate.

Here, the parties assumed that the clear articulation requirement was met, so the Court did as well. (Certainly, North Carolina clearly articulated an intent to exclude non-dentists from practicing dentistry. It is less clear, however, whether North Carolina ever thought about tooth whitening and whether it was "dentistry.") However, even the Board did not contend that it was actively supervised by the state in executing that anticompetitive policy. Instead, it had simply argued that as a state agency, the supervision requirement did not apply. But the Court's majority eschewed this black and white line, explaining that the Board here resembled a private professional association more than a typical agency. Where a state agency is controlled by active market participants, the Court held, it must meet the supervision requirement. While the Court did not provide an instruction book for states on how to sufficiently supervise similar agencies in order to ensure immunity, it did provide some guideposts. "Day-to-day involvement" is unnecessary. However, the supervision must be sufficient to provide "realistic assurance" that the anticompetitive conduct promotes state policy. The supervisor must, at minimum (1) examine the substance of the anticompetitive decision, not just the procedure by which it was reached; (2) the supervisor must have the power to veto or modify the decision; and (3) mere potential for supervision is not enough. Good luck states…

Justice Alito, joined by Justices Scalia and Thomas, dissented. In their view, the line is black and white. The Board was a state agency and as such was a sovereign entity. End of story. The fact that "the Board is not structured in a way that merits the good-government seal of approval" is irrelevant. States are allowed to structure agencies however they like, and these types of professional regulatory agencies (typically run by active market participants who have expertise in the regulated field) are common. The active supervision test simply does not apply to sovereign actors like the Board. In the view of the dissenters, by departing from this bright line rule, the majority "diminishes our traditional respect for federalism and state sovereignty; and [establishes a rule that] will be difficult to apply."

Next up, in Direct Marketing Ass'n v. Brohl (13-1032), the Court gave a perhaps temporary reprieve to online retailers whose business models depend on skirting state sales taxes. While most states impose a sales tax on tangible personal property purchased in the state, the dormant commerce clause prevents states from requiring retailers who lack a physical presence in the state (read: Amazon) to collect these taxes on behalf of the state's department of revenue. Or so the Court held in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), a case that pre-dated the rise of e-commerce by almost a decade. In Colorado, as in other states, residents who purchase goods online are required to file a return and remit the uncollected sales taxes directly to the State Department of Revenue. Needless to say, hardly anyone does this, and that suits online retailers just fine. In an effort to improve collection, Colorado passed a law requiring the noncollecting retailers to notify their Colorado customers of the state's sales tax requirement and to report each transaction with a Colorado purchaser to the Department of Revenue. At the end of each year, retailers were required to send a statement to the Department listing the total amount each Colorado customer paid for Colorado purchases in the prior calendar. Direct Marketing Association, an online trade association sued in federal court, alleging that the law violated the dormant commerce. The District Court agreed and issued a permanent injunction against the notice and reporting requirements of the statute, but the Tenth Circuit reversed, holding that the Tax Injunction Act (TIA) deprived the District Court of jurisdiction.

The Supreme Court reversed in a unanimous decision authored by Justice Thomas. The TIA provides that a federal district court "shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient, remedy may be had in the courts of such State." 28 U.S.C. § 1341. But, as the Court saw it, the District Court didn't do any of those things when enjoining the state from requiring online retailers to provide information useful to the state in collecting taxes. The terms "assess," "levy," and "collect' each refer to discrete phases of the taxation process, whereas "information gathering" has long been treated as a phase of tax administration that occurs before assessment, levy, and collection. Moreover, just because the injunction might inhibit the state's assessment, levying, and collection activities, does not mean that it has "restrain[ed]" those phases of the taxation process, as that term is understood in the TIA. Though Justice Thomas acknowledged that the word "restrain" could have the broad connotation the Tenth Circuit ascribed to it, he concluded that the context of the TIA (and the parallel Anti-Injunction Act in the federal taxation context) made it more likely that it bore the narrower meaning that was used in equity, which captures only orders that stop the act of assessment, levy, or collection. While the Court rejected the Tenth Circuit's TIA ruling, it suggested that the injunction (and suit) might potentially be barred by the "comity doctrine," which "counsels lower federal courts to resist engagement in certain cases falling within their jurisdiction," including suits that interfere with the "fiscal operations of the state governments." However, because the comity doctrine (unlike the TIA) is not jurisdictional, and because Colorado apparently had not raised that doctrine below, the Court did not consider it, but rather instructed the Tenth Circuit on remand to consider whether the argument remains available.

Justice Ginsburg, joined by Breyer, penned a short concurrence emphasizing that the Court's decision was consistent with prior precedent and observing that the case did not involve the kind of evasion that the TIA was intended to prevent—namely, the practice of tax scofflaws attempting to avoid or delay collection by filing federal lawsuits.

The more interesting concurrence was Justice Kennedy's. Writing alone, Justice Kennedy suggested that maybe it's time to reconsider Quill, the pre-Amazon 1992 case holding that states cannot force retailers to collect sales tax if they don't have a physical presence in the state. As Justice Kennedy pointed out, this twist on the dormant commerce clause actually predates even Quill, which simply applied stare decisis to a 1967 decision, National Bellas Hess v. Department of Revenue of Illinois (1967). In Kennedy's view, Quill was wrong when it was decided (and he basically said as much in his 1992 concurrence) and at this point is completely outdated. Even more than in 1992, "[t]here is a powerful case to be made that a retailer doing extensive business within a State has a sufficiently ‘substantial nexus' to justify imposing some minor tax-collection duty, even if that business is done through mail or the Internet." (As Justice Kennedy pointed out, mail-order sales totaled about $180 billion in 1992, but by 2008 e-commerce sales alone totaled $3.16 trillion in the U.S.) Given marked changes in technology and consumer sophistication, Kennedy urged that the Court reconsider Quill as soon as possible. While no other Justice joined Kennedy's call (not even Justices Thomas and Scalia, who concurred with him in Quill), it seems that this question is bound to return to the Court and Jeff Bezos probably already has his lawyers gearing up for a fight.

To add to the excitement, sales and use taxes were also featured in Alabama Dep't of Rev. v. CSX Transportation, Inc. (13-533), where the Court held 7-2 that the Eleventh Circuit must take another crack at deciding whether Alabama's diesel taxes discriminate against rail carriers. In relevant part, the Railroad Revitalization and Regulation Reform Act of 1976 (the 4-R Act) prohibits a state from imposing a tax that "discriminates against a rail carrier." Alabama imposes sales and use taxes on railroads for the purchase or consumption of diesel fuel, but exempts the railroads' competitors (motor carriers and water carriers) from the tax. While motor carriers are required to pay an alternative fuel-excise tax on diesel, water carriers are completely exempt. CSX sought to enjoin the collection of the taxes, arguing that the State's "asymmetrical" tax treatment violated the 4-R Act. Back in 2011, the Supreme Court held that a tax discriminates under the 4-R Act when it treats "groups [that] are similarly situated" differently and that the comparator class can vary depending on the circumstances. CSX Transp. v. Ala. Dept. of Rev. (2011). On remand, the Eleventh Circuit held that motor and water carriers were a proper comparator class for CSX's discrimination claim. Furthermore, it rejected Alabama's argument that CSX was not discriminated against because motor carriers also had to pay a (different) tax on diesel.

In an opinion by Justice Scalia, the Court held that the Eleventh Circuit got it half right. It was correct to hold that CSX's motor and water competitors were an appropriate comparator class, rejecting Alabama's argument (adopted by the dissent) that the only appropriate comparison class is all general and commercial and industrial taxpayers. While other adjacent subsections of the 4-R Act do require that the treatment of railroad property be compared to the treatment of commercial and industrial property in the same assessment area, the subsection at issue in this case contained no such limitation, which allowed the comparison class to be determined in the normal course—that is by reference to the type of discrimination alleged. Here where CSX alleged that the tax discriminated against it in relation to its motor and water competitors, those competitors were an appropriate comparison class. Though CSX was required to show that the comparison class was "similarly situated" to it, that concept is not as narrow in the context of the 4-R Act as it is in the general equal-protection context. Therefore, the fact that the motor and water carriers are in different lines of business did not render them an inappropriate comparison class.

The Eleventh Circuit was wrong, however, to reject Alabama's argument that it did not discriminate against CSX relative to motor carriers because motor carriers are required to pay an alternative tax on diesel. As Justice Scalia observed, "[a] State's tax discriminates only where the State cannot sufficiently justify differences in treatment between similarly situated taxpayers." Here, it is possible for Alabama to justify its decision to exempt motor carriers from the sales and use tax based on its decision to subject those carriers to a fuel-excise tax. "It does not accord with ordinary English usage to say that a tax discriminates against a rail carrier if a rival who is exempt from that tax must pay another comparable tax from which the rail carrier is exempt. If that were true, both competitors would be disfavored—discriminated against—relative to each other." And while the water carriers are not subject to the alternative tax, the Eleventh Circuit failed to consider Alabama's argument that federal law required them to be exempt. Accordingly, the case was remanded for the Eleventh Circuit to determine whether the fuel-excise tax on motor carriers and the alleged federal exemption for water carriers justified Alabama's asymmetric sales-and-use tax on railroads' purchase and consumption of diesel.

Justice Thomas filed a dissenting opinion joined, as usual, by . . . Justice Ginsburg. Actually, we suspect the last time Justices Thomas and Ginsburg shared the light end of a 7-2 seesaw was the last time this case came before the Court, when they dissented on similar grounds. To this unlikely pair, the plain language of the 4-R Act requires that a railroad show that it has been discriminated against "by comparison to general commercial and industrial tax payers." Alabama's tax scheme does not discriminate against rail carriers, because it's not even targeted at rail carriers. It's a generally applicable sales tax that happens to have an exemption for diesel on which the motor fuel tax has already been paid. Because railroads can purchase diesel that has already been subject to the motor-fuel tax, they are not discriminated against by the tax scheme.

And with that, we're more or less up to speed. The Court's next conference is March 20th, so we'll be back at you with the latest in the spring!