Legislature Mandates Governor Abbott Protect Texans from Potentially Anticompetitive Agency Rule-Making

Imagine that there was a state agency in Texas called the State Board of Domestic Animal Care. They are responsible for licensing and inspecting facilities in Texas (and the companies or individuals who own them) that house pets and cut their nails, brush their teeth, and wash and trim their coats. Of the six-member board, four are owners of such facilities. Let’s call these four “active market participants” because they are individuals who participate in the industry that their board regulates.

Imagine further that housing-and-grooming facilities’ owners are barely squeezing out a profit, in large part because of the superabundance of teenagers and college kids who are happy to wash their friends’ and families’ pets for cheap. In their frustration, those owners petition the State Board of Domestic Animal Care to require licenses to wash pets and, accordingly, ensure that non-licensed pet-washers are barred from doing so.

The Board obliges and erects a licensing regime. It also sends out cease-and-desist letters to anyone it suspects is engaging in illegal pet bathing. As a result, thousands of pet owners are driven to licensed facilities and must pay premiums to get their cats and dogs groomed there.

Can anything be done to rectify what seems to be an obvious case of cronyism? The answer is yes, something probably can be done thanks to antitrust laws. In general, antitrust laws prohibit cartels, price fixing, and other business practices that undermine the free market. And what happened in this hypothetical was almost certainly an undermining of the free market. Thus, our antitrust laws are generally regarded as essential to the preservation of economic freedom.

But the hypothetical has a twist. Antitrust suits can almost always be brought against private entities engaging in anticompetitive behavior. But in our hypothetical, the anticompetitive actor was a state agency, and states are generally immune from antitrust action. States often (lawfully, justly) regulate their economies in ways inconsistent with antitrust laws by imposing restrictions on occupations, conferring rights to dominate a market, or limiting competition to achieve certain public policy objectives. Such actions are central to state power in our federal republic; imposing too strict an antitrust regime against states would create too great a burden on their inherent power to regulate.

But there is one noteworthy exception to states’ sovereign immunity from antitrust action: When a controlling number of state agency board members are active market participants, the agency does not have immunity. Our hypothetical State Board of Domestic Animal Care falls under this category and illustrates the public policy underlying the exception: self-regulation often leads to self-dealing.

And yet there’s an exception to the exception: When a controlling number of board members are active market participants, an agency can retain its immunity if two conditions are satisfied. First, the state must articulate a clear policy supporting its anticompetitive conduct. And second, the state must provide active supervision of that conduct. These requirements were most recently set forth in the U.S. Supreme Court’s 2015 decision, N. Carolina State Bd. of Dental Examiners v. F.T.C., 574 U.S. 494.

In Texas, many agency boards are controlled by active market participants. So if they want to enjoy immunity from antitrust action, they must ensure that they’re articulating clear support for and providing active supervision of any anticompetitive conduct.

That’s where S.B. 1995—signed into law by Governor Abbott on June 10, 2019—comes in. Proponents of the bill argued that, without S.B. 1995, Texas agencies were at risk because they weren’t doing enough to ensure they retained their immunity. To fix that, S.B. 1995 amends Chapter 57 of the Texas Occupations Code to do, among other things, the following:

• Creates a Division in the Governor’s Office with the general charge to review state agency rules.
• With the advice and consent of the Texas Senate, the Governor appoints a Division Director. The Director must be a licensed Texas attorney and have antitrust law experience. He or she will serve a two-year term.
• Senior roles within the Division are restricted: Neither lobbyists nor officers/consultants with Texas trade associations are allowed to serve. Those lobbyists’, officers’, or consultants’ spouses are not allowed to serve either.
• The Division oversees state agencies whose boards are controlled by active market participants.
  • For example, the Texas Medical Board, Texas State Board of Dental Examiners, Texas State Board of Public Accountancy, and Texas Real Estate Commission are each controlled by active market participants. The Texas State Board of Plumbing Examiners probably is too, but it’s less clear looking at its members. Contrast those with the Commissioners of the Texas Alcoholic Beverage Commission—none of the three are active market participants.
  • Presumably it will fall upon the Division to designate which of the 100+ state agencies are controlled by active market participants and which ones are not. At present, there exists no standard judicially-, administratively-, or legislatively-created criteria distinguishing the two in Texas. Indeed, we expect that the absence of any widely-known, objective criteria separating boards controlled by active market participants from those that are not for the purpose of Division oversight will be fraught with conflict and litigation.

S.B. 1995 also sets forth basic mechanics of how the Division will operate:

• A state agency with a board controlled by active market participants must submit any proposed rule affecting market competition to the Division for review before the rule is adopted or implemented.
  • A rule “affects market competition” if it creates a barrier to market participants or results in higher prices or reduced competition.
• The agency must provide a statement of the rule’s purpose, copies of all records regarding the proposed rule, and any public comments about the rule.
• The Division will review each proposed rule to determine if its effect is consistent with and clearly articulates state policy.
• The Division has 90 days to complete its review. Whether it approves or rejects the proposed rule, the Division must explain its decision.
• The Division is not limited to taking a passive role. Instead, it can initiate review of a proposed rule if it has reason to believe that it may have an anticompetitive market effect.

The Governor has not yet appointed a Division Director. Thus, many questions—How large will the Division be? What are the practical steps an agency must take to submit its proposed rules and supporting documentation? How does the Division distinguish between agency boards controlled by active market participants and those that are not? Are there any rule-approval or rule-rejection trends?—are presently unanswerable. But Cobb & Counsel attorneys will stay abreast of all S.B. 1995-related developments and keep you informed.