California District Court Partially Dismisses Constitutional Claims In Dental Antitrust Suit
On March 19, 2020, District Judge George Wu of the United States District Court for the Central District of California dismissed an Equal Protection Clause claim, and expressed skepticism about remaining claims from a dental company’s suit alleging anticompetitive practices on the part of the Dental Board of California (the “Board”) and related due process and Dormant Commerce Clause claims. Sulitzer v. Tippins, 2:19-cv-08902 (C.D.Cal. March 19, 2020).
Plaintiffs are Jeffrey Sulitzer, a licensed dentist in California, Sulitzer PC, and SmileDirectClub LLC. Sulitzer specializes in the treatment of malocclusions or misaligned teeth and uses his expertise to oversee SmileDirect as its Chief Clinical Officer. SmileDirect is a national chain of over 350 storefronts, known as “SmileShops,” and a mobile “SmileBus,” which together provide patients with guidance on clear aligner therapy and connect patients with licensed dentists in their respective areas. SmileShop and SmileBus staff are not themselves licensed medical professionals and do not perform clinical services, instead relaying patient information and photos to Sulitzer or another treating dentist for medical advice. Plaintiffs claim the direct-to-consumer model offered by SmileDirect allows affiliated dentists to reach a greater percentage of customers.
Defendants are an investigator in the Enforcement Unit of the Board, the Executive Director of the Board, fifteen other named members of the Board, and ten Doe defendants. The Board regulates and enforces the standards for practice of dentistry and dental hygiene in California.
Plaintiffs allege that their “tele-dentistry” model threatens dentists’ traditional in-office model and will undercut typical prices by 60-70% through a direct-to-consumer model. Because of the threat to the industry, Plaintiffs claim that the Board deployed its investigator to “conduct a series of coordinated raids,” “intentionally harass Sulitzer P.C. employees and consumers,” and “serve a series of unwarranted information requests…designed to intimidate, harass, and unduly burden.” Based on these allegations, Plaintiffs delineate five causes of action: (1) a violation of Section 1 of the Sherman Act for anticompetitive conduct in the California tooth alignment therapy treatment market; (2) a Dormant Commerce Clause claim for the impact on SmileDirectClub locations outside of California; (3) an Equal Protection Clause claim; (4) a substantive due process claim; and (5) a California unfair competition law claim. Defendants moved to dismiss the complaint in December 2019.
Defendants focused much of their efforts on combating the claims of anticompetitive conduct by claiming state-action immunity for the Board. Under the state-action immunity standard, most recently articulated by the Supreme Court in North Carolina St. Bd. Of Dent. Examiners v. Federal Trade Comm’n, 574 U.S. 594 (2015), state government agencies are immune to federal antitrust claims for their regulatory action if the agencies are not controlled by “active market participants,” or if the alleged anticompetitive conduct is “clearly articulated and firmly expressed as state policy” and “actively supervised by the State.” In this instance, Defendants argued that the Board is not controlled by active market participants because most board members are appointed by the Governor rather than elected by the industry (as was the case in North Carolina), only 8 of the 15 members are licensed dentists, and two of those dentists are only, as plaintiffs admit, “potential participants” in the market. Similarly, the conduct alleged by Plaintiffs, including inspecting SmileDirect storefronts, conducting investigations, and submitting information requests, are activities of state policy supervised by the State. Thus, Defendants argued, the Board is immune. Further, Defendants suggested that Plaintiffs’ antitrust allegations lack sufficiently detailed claims and fail to show any motivation or agreement on the part of the Board to restrain trade beyond a vague recitation of the elements of a typical Shearman Act claim.
In a hearing in early March—following briefing on the motion to dismiss—the Court tipped its hand on its view of the Equal Protection and Dormant Commerce Clause claims, tentatively dismissing both and requiring further briefing from Plaintiffs to identify facts supporting the claims. In its March 19 hearing, the Court dismissed the Equal Protection Clause claim from the bench, but let the Dormant Commerce Clause claim stand and requested further briefing from Defendants to rebut Plaintiffs’ new allegations on the topic. The Court scheduled another telephonic hearing in April to hear arguments on the Dormant Commerce Clause and remaining antitrust claims on which it has not yet ruled. The Court also suggested that Plaintiffs consider whether their claims are better located in state court where there may be more appropriate remedies against a state body.
The next hearing on the motion to dismiss is scheduled for April 23, 2020, at which time the Court will take up the remaining constitutional and antitrust claims. This case will be worth monitoring going forward as an example of a district court interpreting the North Carolina ruling and helping further clarify the bounds of allowable conduct by state agencies that regulate markets in which their members also participate.