Opinion ID: 8407613
Heading Depth: 2
Heading Rank: 3

Heading: The Board’s State-Action Immunity Defense

Text: The plaintiff alleged in its amended complaint that the Board violated the Sherman Act by willfully seeking and maintaining monopolies in various New York municipalities, and by abusing its monopoly power by providing low-quality service and by attempting to expand its overall market share by threatening retaliatory action against those persons who use the plaintiffs service where competition is allowed. The district court, citing our decision in Cine, held that the municipalities’ immunity under the Parker doctrine necessarily also protected the Board: ‘■‘Because the municipal defendants’ decisions appointing the Board as exclusive agent are immune from antitrust liability, the Board is similarly immune from antitrust liability as the party receiving those appointments.” EII, 145 F.Supp.2d at 279. The plaintiff argues on appeal that the district court misapplied the law of state-action immunity for private parties. 7 The Board argues that the district court’s holding was correct, and in the alternative that under the Noerr-Pennington doctrine, certain allegations by the plaintiff fail to allege an antitrust injury. 8 A The State-Action Defense for Private Actors There are circumstances under which private parties may avail themselves of the Parker state-action immunity doctrine. The Supreme Court has explained the purpose of extending state-action immunity to private parties thus: The Parker decision was premised on the assumption that Congress, in enacting the Sherman Act, did not intend to compromise the States’ ability to regulate their domestic commerce. If Parker immunity were limited to the actions of public officials, this assumed congressional purpose would be frustrated, for a State would be unable to implement programs that restrain competition among private parties. A plaintiff could frustrate any such program merely by filing suit against the regulated private parties, rather than the state officials who implement the plan. We decline to reduce Parker’s holding to a formalism that would stand for little more than the proposition that [the plaintiff] sued the wrong parties. S. Motor Carriers Rate Conf., Inc. v. United States, 471 U.S. 48, 56-57, 105 S.Ct. 1721, 85 L.Ed.2d 36 (1985) (footnote omitted) (“ Motor Carriers ”). In California Retail Liquor Dealers Assoc. v. Midcal Aluminum, Inc., 445 U.S. 97, 105, 100 S.Ct. 937, 63 L.Ed.2d 233 (1980), the Supreme Court established that private parties must satisfy a two-prong test to qualify for state-action immunity. First, the private party must show that the alleged anticompetitive acts were pursuant to a “clearly articulated and affirmatively expressed ... state policy” to displace competition. Id. (citation and internal quotation marks omitted). Second, it must show that its conduct was “actively supervised by the State itself.” Id. (citation and internal quotation marks omitted). More recently, the Supreme Court made clear that the first prong of the Midcal test is not as demanding as the Court’s statement of it in Midcal suggests. It does not, for example, require a private party to show “ ‘a specific, detailed legislative authorization’ for its challenged conduct.” Motor Carriers, 471 U.S. at 64, 105 S.Ct. 1721 (quoting Lafayette v. La. Power & Light Co., 435 U.S. 389, 415, 98 S.Ct. 1123, 55 L.Ed.2d 364 (1978)). Rather, “[a]s long as the State as sovereign clearly intends to displace competition in a particular field with a regulatory structure, the first prong of the Midcal test is satisfied.” Motor Carriers, 471 U.S. at 64, 105 S.Ct. 1721. For example, in Motor Carriers itself, the Court held that a private party accused of horizontal price fixing had satisfied the first prong of Midcal by showing that a state legislature had instructed a state agency to prescribe “just and reasonable” prices, and the agency, in turn, had “exercised its discretion by actively encouraging collective ratemaking.” Id. at 63-64,105 S.Ct. 1721. Under the second prong of the Midcal test—active state supervision—a private defendant must show not only that “state officials have ... [the] power” to supervise, but also that those officials “exercise [that] power to review particular anticompetitive acts of private parties and disapprove those that fail to accord with state policy.” Patrick v. Burget, 486 U.S. 94, 101, 108 S.Ct. 1658, 100 L.Ed.2d 83 (1988). This requirement of official involvement seeks to prevent states from transforming the Parker doctrine, designed to accommodate the states’ sovereign interest in regulating commerce, into an unbounded license for the states to issue Sherman Act exemptions to private parties. See Motor Carriers, 471 U.S. at 57, 105 S.Ct. 1721 (“Th[e] supervision requirement prevents the State from frustrating the national policy in favor of competition by casting a ‘gauzy cloak of state involvement’ over what is essentially private anticompetitive conduct.” (quoting Midcal, 445 U.S. at 106, 100 S.Ct. 937)); Parker, 317 U.S. at 351, 63 S.Ct. 307 (“[A] state does not give immunity to those who violate the Sherman Act by authorizing them to violate it, or by declaring that their action is lawful.”). This second part of the Midcal test thus serves as a counterweight to the first because it “ensure[s] that the state-action doctrine will shelter only the particular anticompetitive acts of private parties that, in the judgment of the State, actually further state regulatory policies.” Patrick, 486 U.S. at 100-01, 108 S.Ct. 1658. 9 The Supreme Court’s most recent decision applying the active supervision prong is FTC v. Ticor Title Ins. Co., 504 U.S. 621, 112 S.Ct. 2169, 119 L.Ed.2d 410 (1992). There, the Court held that arrangements whereby states authorized horizontal price fixing among insurance companies, but required the companies to file collective tariffs that state agencies had the option to reject, lacked sufficient state supervision to qualify for immunity. Id. at 639, 112 S.Ct. 2169. To fulfill the active supervision prong, the Court held, private parties must prove that state officials “have undertaken the necessary steps to determine the specifics” of the regulatory regime; a mere “negative option” among state agencies to reject prices proposed by private parties is insufficient. Id. at 638-39, 112 S.Ct. 2169. “The mere potential for state supervision is not an adequate substitute for a decision by the State.” Id. at 638, 112 S.Ct. 2169. The Supreme Court followed a similar approach in Patrick, a case that involved an accusation by a physician that a group of his peers had conspired to deprive him of hospital privileges in violation of the Sherman Act. 486 U.S. at 97-98, 108 S.Ct. 1658. Although the defendants presented evidence of state policies encouraging physician peer review, the Court rejected their immunity claims because they had failed to show that state actors actively reviewed “private decisions regarding hospital privileges to determine whether such decisions comport[ed] with state regulatory policy and to correct abuses.” Id. at 101, 108 S.Ct. 1658. Although the Supreme Court has applied the two-part Midcal test in each of its subsequent cases involving an assertion of state-action immunity by a private party, we have twice declined to engage in an independent immunity inquiry for a private party whose alleged anticompetitive conduct was to participate in “concerted” action with a government entity authorized by the state to take such action. Our first decision in this line was Cine, a case which, as discussed in Part H.A., above, involved efforts by a state-created entity, the UDC, to improve the Times Square area by purchasing theaters and then leasing them to developers. Although the Cine plaintiffs asserted that “collusive and monopolistic” pricing policies would result from the coordinated action between the UDC and the private-party defendants, the only anti-competitive conduct alleged by the plaintiffs to be illegal was the private parties’ seeking, and the UDC’s awarding, long-term leases on theaters. 790 F.2d at 1037-38; see also Cine 42nd St. Theater Corp. v. Nederlander Org., 609 F.Supp. 113, 119 (S.D.N.Y.1985), aff'd, 790 F.2d 1032 (2d Cir.1986) (setting forth the plaintiffs’ contentions). After concluding that the UDC’s actions were fully authorized by New York State and therefore immune, we held that such immunity extended automatically to the “private [parties] acting in concert with the UDC.” Cine, 790 F.2d at 1048. We explained that “[w]hen the UDC accomplishes its goal in a protected manner, and the participation of private third parties was reasonably contemplated by the legislature, allowing successful tangential attacks on the UDC’s activities through suits against the third parties would effectively block the efforts of the UDC.” Id. Our second such decision was Automated Salvage Transp., Inc. v. Wheelabrator Envtl. Sys., Inc., 155 F.3d 59 (2d Cir.1998), which involved alleged antitrust-law violations arising from contracts between a state-operated waste-disposal entity and private waste-disposal companies promising to honor each other’s exclusive service agreements with various towns. Id. at 63. After concluding that the state agency’s actions were authorized under a state statute and thus immune from federal antitrust-law liability, we held, relying on Cine, that the private companies were also immune because “[subjecting them to antitrust liability would effectively block [the state entity’s] efforts to carry out its mandate through contracts with private parties.” Id. at 74. As in Cine, the only anticompetitive actions allegedly taken by the private-party defendants were those of contracting with the state-created entity. Id. at 71. The Board argues on appeal that the Supreme Court’s decision in Ticor and ours in Cine and Wheelabrator stand for the proposition that the active state-supervision test of Midcal is applicable only in horizontal price-fixing cases. We disagree. With regard to Ticor, the Supreme Court did not limit Midcal to any particular form of private anticompetitive conduct, but instead simply cautioned that its holding that the private defendants were not immune “should be read in light of the gravity of the antitrust offense, the involvement of private actors throughout, and the clear absence of state supervision.” 504 U.S. at 639, 112 S.Ct. 2169. Four years before Ticor, moreover, the Supreme Court, without dissent, applied the active supervision prong in Patrick, a case that had nothing to do with price fixing. 486 U.S. at 100, 108 S.Ct. 1658. 10 We think that Cine and Wheelabrator, rather than departing from the logic of Midcal and subsequent Supreme Court precedent, are consistent with it. We decided in both cases that the governmental entities were authorized to engage in contracting with private parties, establishing that the first prong of Midcal was satisfied with regard to the private parties’ actions. We then went on to extend that immunity to the private parties, reasoning that to allow suits against private parties who contract with governmental entities, who are themselves authorized to contract with private parties, would effectively undermine the governmental entities’ ability to contract. Wheelabrator, 155 F.3d at 74; Cine, 790 F.2d at 1048. The private parties are the necessary counterparts to the government’s acts, and authorization of the government’s contracting therefore necessitates authorization of the private parties’ contracting. In extending immunity from governmental entities to private parties where the only alleged antitrust violation was entering into a contract with the government, these decisions do not go through a separate Midcal analysis. But, as the Supreme Court observed in Town of Hallie, “[w]here the actor is a municipality, there is little or no danger that it is involved in a private ... arrangement.” 471 U.S. at 47, 105 S.Ct. 1713. The private actions “in concert” with the governments’ in Cine and Wheelabrator were part of an “anti-competitive scheme [that was] the State’s own,” Ticor, 504 U.S. at 635, 112 S.Ct. 2169, thus satisfying the concern that the second Midcal prong — active supervision — was designed to address. Cine and Wheelabrator do not stand for the proposition that private parties who contract with governmental agencies are always immune from antitrust liability. As the Supreme Court has made clear, the relevant object of analysis under the state-action immunity doctrine is the activity challenged, not the identity of the party. Motor Carriers, 471 U.S. at 58-59, 105 S.Ct. 1721 (“The success of an antitrust action should depend upon the nature of the activity challenged, rather than on the identity of the defendant.”). In Name. Space, Inc. v. Network Solutions, Inc., 202 F.3d 573 (2d Cir.2000), which involved an assertion of federal-action immunity from antitrust-law claims by a private party that had contracted with a federal agency, we applied Motor Carriers to conclude that the private party was immune for conduct “compelled by the explicit terms” of its contract and the government’s explicit direction. Name.Space, 202 F.3d at 582. At the same time, however, we observed that the private party’s “mere status as a government contractor does not entitle it to antitrust immunity for all its conduct,” id. at 581, reinforcing the notion that the relevant unit of analysis is the activity challenged, not the status of the party. The suspension of the requirement for an independent immunity inquiry for the private parties in Cine and Wheelabrator, therefore, should be understood to apply only to their acts of contracting with an authorized government entity. B. The Board’s Actions We now consider each of the Board’s actions that the plaintiff alleges violate the Sherman Act. We note at the outset that, perhaps with United States v. Aluminum Co. of Am., 148 F.2d 416, 429 (2d Cir.1945) (Hand, J.), and its observation that a person does not violate the antitrust laws when it has monopoly “thrust upon it” in mind, the plaintiff does not assert that the Board violated the Sherman Act merely because the Village passed an ordinance according it exclusivity within the Village. Instead, the plaintiffs claim is that the Board actively sought and abused monopoly power. We conclude that the district court erred by holding that our decision in Cine relieved the Board of the need to satisfy Midcal’s two-prong test to qualify for state-action immunity. None of the Board’s alleged anticompetitive conduct involved acts of contracting with a governmental entity authorized to enter into contracts with private parties. Municipal ordinances, not contracts, created the monopolies within the municipalities at issue in this case. Moreover, when the Board conducts an inspection, or allegedly threatens those who hire the plaintiff, it is engaging in transactions or seeking to engage in transactions with other private parties, not the Village. “[T]he nature of the activity challenged,” Motor Carriers, 471 U.S. at 58, is private, and therefore poses the danger of reflecting the Board’s “own interests, rather than the governmental interests of the State,” Patrick, 486 U.S. at 101, 108 S.Ct. 1658. We therefore hold that Cine and Wheel-abrator have no application in this regard to the Board’s conduct, and state-action immunity is available for the Board’s alleged acts in restraint of trade in violation of Section One of the Sherman Act only if it can satisfy Midcal’s two-prong test. With respect to the Board’s alleged continuing monopolization of electrical inspection services in violation of Section Two of the Act and the plaintiffs assertion that the Board is left free by the Village to use its power of exclusivity to determine the price, terms, and quality of its services, thé Board must meet both parts of the Midcal test—including active supervision by the Village—-to warrant protection under the state-action - immunity doctrine. The Village “may not confer antitrust immunity”—including immunity from such charges of monopolization—-“on private persons by fiat.” Ticor, 504 U.S. at 633, 112 S.Ct. 2169 (citing Midcal, 445 U.S. at 105, 100 S.Ct. 937). Unless the Village maintains “ultimate control” over the monopoly it created, “there is a real danger that [the defendant] is acting to further [its] own interests, rather than the governmental interests of the State.” Town of Hallie, 471 U.S. at 47, 105 S.Ct. 1713. 1. The First Part of the Midcal Test. We concluded in Part II.B., above, that the Village’s conferral of exclusivity upon the Board was “an authorized implementation of state policy.” Omni Outdoor, 499 U.S. at 370, 111 S.Ct. 1344. We think that this holding also satisfies the first prong of the Midcal test for the Board to the extent that the Board’s alleged anticompetitive actions were “pursuant” to the grant of exclusivity. Town of Hallie, 471 U.S. at 40, 105 S.Ct. 1713. The plaintiffs amended complaint alleges anti-competitive actions by the Board in municipalities other than the Village, suggesting that the first prong of the Midcal test for purposes of these actions would depend on the authority of these other municipalities to confer monopoly powers upon the Board. On appeal, however, the plaintiff has not raised arguments addressing these municipalities’ authority as distinct from the Village’s, and so we assume that our analysis of the Village’s authority applies equally to these other municipalities for the limited purpose of assessing the Board’s satisfaction of the first prong of Midcal. The plaintiff also alleges that the Board attempted to monopolize inspections services by seeking government-issued exclusivity. Amend. Compl. ¶¶ 55, 84. Because these actions were not pursuant to state policy, but rather in pursuit of it, they do not appear to qualify for Parker immunity. They may, however, be protected under the Noerr-Pennington doctrine. See Omni Outdoor, 499 U.S. at 379-80, 111 S.Ct. 1344 (holding that the Supreme Court’s decisions in Eastern R.R. Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127, 81 S.Ct. 523, 5 L.Ed.2d 464 (1961), and Mine Workers v. Pennington, 381 U.S. 657, 85 S.Ct. 1585, 14 L.Ed.2d 626 (1965), establish that “[t]he federal antitrust laws ... do not regulate the conduct of private individuals in seeking anticompetitive action from the government”). We leave any analysis of this issue to the district court in the first instance on remand. The Board’s alleged poor service and retaliatory threats within the Village, if they occurred, unlike the Board’s alleged action in lobbying for exclusivity, were pursuant to the exclusivity granted to the Board in the sense that the Board’s insulation from competition would have lent these actions much of their capacity to harm. We thus conclude that these alleged actions pass the first part of the Midcal test. 11 Further inquiry into whether the Board is immune with respect to them must be conducted under the second part of the Midcal test: whether there was adequate active supervision of the Board. 2. The Second Part of the Mid-cal Test. With respect to the active state supervision part of the Midcal test as applied to the Board’s remaining alleged anticompetitive conduct, the Board argues in the alternative that adequate supervision was present. In support, the Board cites an affidavit in which the Village’s mayor asserts that the Village’s building department “maintained strict controls over the inspections” by “establishing policies as to the manner in which the electrical inspections were carried out ... [,] enforcing] the requirement that all inspectors ... possess the appropriate qualifications ... [and] providing] guidance to the inspectors as to how to proceed.” Mayor Frank Falco Aff. ¶ 11. The mayor also asserts in his affidavit that the Village could have replaced the Board at any time by resolution had it become dissatisfied with the Board’s services. Id. ¶ 16. As we have noted, the district court did not determine whether the Board was actively supervised, holding instead that this part of the Midcal test need not be met. We decline to decide this heavily factual issue in the first instance on the record before us. We note that in this context that the Village’s mere “negative option” to replace the Board at any time is alone likely inadequate supervision, Ticor, 504 U.S. at 638, 112 S.Ct. 2169 (noting that supervision must be “active”), and leave to the district court on remand the determination in the first instance of what degree or kind of supervision is adequate and suffices for the Board’s assertion of immunity to succeed.