Occupational Licensing in Digital Markets

Introduction

Innovative technologies and business models are propelling the digital economy to its current heights, as well as serving consumer needs in response to unforeseen challenges caused by the COVID-19 pandemic. These technologies and business models are frequently disruptive and often bump up against restrictions that require the innovator to obtain some kind of government permission, such as a government license, to enter a market, which is a ‘Mother, May I?’ approach to competition.[1]

Relatedly, some new offerings in the digital economy are subject to the ‘Brother, May I?’ problem, which is the challenge of competitor control over market entry.[2] This problem arises when innovative technologies or business models are required to obtain permission from incumbent competitors to enter or expand within a certain market. This might be due to a financially-interested state board or conduct by a monopolist looking to maintain its market power.[3] A recurring version of the ‘Brother, May I?’ problem stems from occupational licensure.

Although occupational licensure can offer important benefits—such as protecting consumers from health and safety risks that are difficult for them to assess on their own—not all licensing is warranted. Indeed, licensing restrictions may impede competition and hamper entry into professional and services markets while offering few consumer benefits. These regulations may result in higher prices, lower quality, and reduced consumer access to services and goods, including healthcare. This is especially true with innovative entrants in the digital economy who are often denied the ability to compete in a traditionally regulated market. In the long run these unnecessary restrictions can cause lasting damage to competition, rendering markets less responsive to consumer demand and dampening incentives for innovation.

Incumbent competitors have strong incentives to raise barriers to competition that the state will enforce for them. When licensing establishes entry conditions for an occupation, only individuals who satisfy those conditions are legally authorized to provide the services associated with that occupation, which tends to reduce the number of market participants and benefit those who meet the qualifications by allowing them to charge higher prices.[4] Although antitrust law is normally a check on collective action by competitors to reduce competition, activities to seek government action, even anticompetitive action, are immune from liability under First Amendment protections.[5] And public choice scholars have explained the incentives legislators and regulators might have to adopt economically harmful limits such as unnecessary occupational licenses.[6]

To provide context for this chapter on the interplay between occupational licensing and digital markets, it is important to understand the underlying concepts that guide the antitrust analysis for control of market entry under the color of state law. Several Federal Trade Commission victories in court—North Carolina Dental[7] and Phoebe Putney[8]—established clearer boundaries between true state action, which is immune from antitrust law, and private action, which is not, a key distinction in combatting anticompetitive occupational licensure that requires competitor permission to enter a market. Anticompetitive occupational licensure has been extended to the digital economy when online companies have been forced out of markets where traditional brick and mortar competitors blocked entry—Teladoc,[9] Tennessee Wine and Spirits,[10] Hines,[11] and Vizaline.[12] With innovation flooding the digital economy, traditional brick and mortar competitors have sometimes used occupational licensure to prevent entry into the market. Although this chapter is focused primarily on antitrust challenges to occupational licensure, the array of cases affecting licensing of digital commerce discussed involves challenges on a variety of Constitutional grounds, including the Commerce Clause and the First and Fourteenth Amendments. Each case implicates the same underlying issue, however: state regulation to protect entrenched bricks and mortar entities from digital commerce.

This chapter proceeds as follows. Section I begins with the background and recent history of the state action doctrine and its relation to occupational licensure, addressing the recent cases listed above. Section II discusses recent and current litigation involving competitors using the ‘Brother, May I?’ approach to prevent new technology in the digital economy from entering the market. Section III argues that the FTC’s targeted efforts in North Carolina Dental and Teladoc should extend to current issues in the digital economy by narrowing the use of occupational licensure for health services to regulations that actually protect health and safety. Section IV discusses the Commerce Clause implications caused by occupational licensure on new technology in the digital economy. Section V concludes this chapter.

I. The State Action Doctrine and State Licensing Boards

The state action doctrine—first announced in the 1943 U.S. Supreme Court opinion, Parker v. Brown,[13]—gives certain state decisions protection from the reach of the Sherman Act. The Court reasoned that “in light of states’ sovereign status and principles of federalism, Congress would not have intruded on state prerogatives through the Sherman Act without expressly saying so.”[14] The Parker Court set a threshold inquiry for invoking state action immunity, which is whether the anticompetitive action was by the sovereign or by a private party.

State action immunity has been modified doctrinally through the years. Four decades after creation of the state action doctrine, the Supreme Court limited its scope by creating a two-part test in California Retail Liquor Dealers Assn v. Midcal Aluminum, Inc.[15] First, the defendant claiming the immunity must demonstrate that the conduct in question was in conformity with a “clearly articulated” state policy. Second, the defendant must demonstrate that the state engaged in “active supervision” of the conduct.

The Midcal test limited the use of the state action doctrine by creating political accountability for state legislators that choose to displace competition through regulation. However, even with these limitations, the problem of private competitors claiming the protection of state authority to shield their private efforts to exclude competitors remains, and the FTC therefore undertook an organized effort to bring further clarity to the state action doctrine through scholarly research and targeted case selection.[16] The Phoebe Putney and North Carolina Dental decisions represent not only a narrowed interpretation of antitrust immunity under the state action doctrine but highlight the issues with state regulation and occupational licensure.

A.  Phoebe Putney and Certificate of Need Laws

In April 2011 the FTC filed a complaint challenging a merger involving a local hospital authority in Albany, Georgia.[17] The parties arranged to have the local hospital authority acquire Palmyra Park Hospital from HCA Inc. and then transfer all management control of the hospital to Phoebe Putney Health System, Inc. Although the transaction represented a virtual merger-to-monopoly, both the district court and Eleventh Circuit Court of Appeals granted and affirmed the defendants’ motion to dismiss on state action grounds.[18]

The FTC then turned to the Supreme Court, which in a unanimous 2013 decision sided with the agency.[19] For their actions to be immune from antitrust laws under the state action doctrine, private entities must demonstrate the state “clearly articulated and affirmatively expressed” a policy displacing competition and thus allowing the otherwise anticompetitive conduct at issue.[20] The Court held that a general grant of corporate powers to a private entity is insufficient by itself to satisfy the clear articulation prong of Midcal.[21] Therefore, the challenged transaction was not immune from antitrust scrutiny, and the case was remanded for further proceedings.

The FTC complaint counsel resumed the administrative litigation that had been stayed. It did not take very long, however, before the agency recognized a potentially insurmountable hurdle to a successful resolution of this case: the Georgia certificate of need (“CON”) laws.

CON laws establish requirements for state approval before a new health care provider can enter a market or an existing provider can make certain capital improvements, a classic “Brother May I?” situation.[22] Normally, states are not directly involved in the entry or improvement decisions of private firms except for requiring firms to comply with zoning laws and other general commercial regulations. However, CON laws were created so that the state could step in and prevent competing hospitals from purchasing equipment that would sit idle to keep up with other competing hospitals, which was claimed to prevent waste and lower health care costs. Although a small number of studies identify some very modest benefits from CON laws, the majority of studies fail to establish any definitive link between CON laws and lower unit costs.[23] Even with the lack of conclusive data showing an increase in consumer welfare through CON laws and the presence of other laws that ensure patient safety about two-thirds of states continue to use the antiquated regulation.[24]

Georgia is one of those states, and even if the Commission could have established antitrust liability, which was likely for a merger to monopoly, the state CON laws would have prevented a divestiture of any hospital assets.[25] Because the Albany region was deemed ‘over-bedded’ it was unlikely that a divestiture buyer could obtain CON approval, which forced the FTC to finalize a consent agreement with Phoebe Putney without divestiture.[26]

There are several takeaways from the Phoebe Putney matter. Importantly, the Supreme Court decision narrowing the state action doctrine is a significant victory for competition principles. It is also a reminder of the anticompetitive nature of laws that effectively give competitors veto power over new market entry.

B.  North Carolina Dental, State Licensing Boards Run by Market Participants

In 2010, the FTC filed an administrative complaint in North Carolina Dental, alleging that the State Board—through its dentist-members—was “colluding to exclude non-dentists from competing with dentists in the provision of teeth whitening services.”[27] The Board, after deciding that whitening teeth constitutes the practice of dentistry, issued letters to non-dentist providers and their landlords, stating they were illegally practicing dentistry without a license and ordering them to cease and desist.

Prior to the administrative trial over the alleged violation of § 1 of the Sherman Act, the Board filed a motion to dismiss—arguing immunity under the state action doctrine.[28] The FTC, in a unanimous opinion, held that “a state regulatory body that is controlled by participants in the very industry it purports to regulate must satisfy both prongs of Midcal to be exempted from antitrust scrutiny under the state action doctrine.”[29] The Commission further found that the decision to classify teeth whitening as the practice of dentistry and to enforce cease and desist orders based on that decision failed to demonstrate ‘active supervision’ by the state under the Midcal test.[30]

On appeal, the Fourth Circuit Court of Appeals denied the Board’s petition for review of the FTC’s order and affirmed the decision.[31] In 2015, the Supreme Court ruled in the Commission’s favor, holding that “a state board on which a controlling number of decisionmakers are active market participants in the occupation the board regulates must satisfy Midcal’s active supervision requirement in order to invoke state-action antitrust immunity.”[32] A few aspects of the Court’s opinion stand out.

First, the Court explained while citing Phoebe Putney that, “given the fundamental national values of free enterprise and economic competition that are embodied in the federal antitrust laws, ‘state action immunity is disfavored, much as are repeals by implication.”’[33] Next, the Court focused on political accountability. After rejecting the idea that state agencies are sovereign actors, the Court contrasted state agencies to municipalities.[34] Most significantly, the Court noted that “municipalities are electorally accountable and lack the kind of private incentives characteristic of active participants in the market.”[35] Finally, the Court briefly addressed the issue of active supervision as it relates to a state agency controlled by market participants. Although the Court made clear that day-to-day involvement in agency operations is not required, it identified a few constant requirements of active supervision:

(1) Review [of] the substance of the anticompetitive decision, not merely the procedures followed to produce it; (2) supervisory ‘power to veto or modify particular decisions to ensure they accord with state policy;’ (3) the ‘mere potential for state supervision’ is insufficient; and (4) ‘the state supervisor may not itself be an active market participant.’[36]

Unlike Phoebe Putney, this decision was not unanimous, and the dissent took issue with immunity not applying to state-created agencies. The dissenting Justices further identified several questions left unanswered by the majority:

(1) What is a “controlling number” of decision makers?; (2) Who is an “active market participant?”; and (3) What is the scope of the market in which a member may not participate while serving on the board?[37]

North Carolina Dental was an essential victory for competition and consumers as it forced states to be held politically accountable for how they choose to meddle in the competitive system.[38] Where there is a benefit concentrated in the hands of a small number of incumbent providers and the competitive harm is dispersed across all consumers of health care services, public choice theory predicts such incumbent exploitation of state licensing laws and regulations.[39] The adverse competitive results of this are manifest and is the regulated replacing and acting as the regulators.[40]

Both Phoebe Putney and North Carolina Dental exemplify the anticompetitive nature of the ‘Brother, May I?’ approach to regulation. Moreover, they illustrate how state licensure requirements can be a tool to fence out competition, a problem that becomes even more acute for the multi-state digital economy.

II. Occupational Licensure in the Digital Economy

The digital economy is, simply put, the economic activity and connection of businesses online including sales, data collection, communication, and devices. As internet use increases and technology improves, the ability for traditionally in person sectors of the economy to transition to the online marketplace follows suit. In the age of COVID-19 it is apparent that the digital economy is an essential and permanent fixture in the economy at large.

As early as 2004, the FTC engaged in studies regarding the use of occupational licensure in the digital economy as seen in its 2004 E-Commerce contact lenses report.[41] The FTC, after decades of enforcement in the eye care industry—including the enforcement of the Eyeglass Rule, which requires an eyecare provider to give a patient, at no extra cost, a copy their eyeglass prescription after completion of an eye exam[42]—found that the benefits associated with requiring third party online sellers of replacement contact lenses to obtain a license increased the cost of replacement lenses.[43] These increased costs would actually harm public health by inducing consumers to replace the lenses less frequently than doctors recommend or to substitute other forms of contact lenses that pose greater health risks. In sum, the added barrier to online sellers of contact lenses reduced competition and consumer choice in the entire market.[44]

Issues such as those presented in the FTC Contact Lenses Report appear in numerous other industries and board decisions to increase licensure requirements when incumbents feel pressure from new competitors in the digital economy. This section will address examples of recent matters involving occupational licensure in the digital economy for online practice by doctors and veterinarians, online sales of liquor and wine, and online map making. Each example shows how occupational licensing regimes are prone to misuse in innovative markets controlled by strong incumbents.

A.  Teladoc, Inc. v. Texas Medical Board: Occupational Licensure of Online Medical Practice

When innovative new entrants threaten to disrupt a market with strong incumbents, these incumbents may erect rules and regulations through occupational licensure to preserve the status quo. The case of Teladoc, Inc v. Texas Medical Board[45]is a timely example of rules that not only thwart entry but also threaten consumers’ health. The Texas Medical Board (“TMB”), filled primarily with active physicians, enacted a rule that would greatly reduce a patient’s ability to obtain medical care from online Teladoc physicians.

Teladoc employed “board certified physicians who are provided specialized training in treatment and diagnosis via telephone.”[46] After a patient requested a consultation with Teladoc, the physician would typically review the patient’s information and medical records prior to calling the patient for more information. On the phone call, the Teladoc physician would use the background information combined with any additional information offered by the patient or solicited by the physician to offer medical advice.[47] The medical advice could range from referring the patient to an in person doctor’s appointment, suggesting emergency room visits, or prescribing certain medications—Teladoc did not prescribe “DEA-controlled substances (including narcotics).”[48]

However, the TMB, in 2015, changed its rules to require a “face-to-face visit or in-person evaluation” before a physician could issue any prescription.[49] Teladoc challenged the revision claiming it violated federal antitrust laws and would increase prices while reducing choice, access, innovation, and overall supply.[50] The prominent issue in the litigation was state action immunity and more specifically whether the TMB met the active supervision requirement as set forth in North Carolina Dental.[51] Although TMB argued that it was subject to supervision through judicial review by the courts of Texas, the State Office of Administrative Hearings, and the Texas Legislature, the court found these types of review were “limited and fail[ed] to confer on the reviewing court a method for looking to whether the decision of the TMB is ‘in accord with state policy.’”[52] In sum the TMB was the type of board the North Carolina Dental Court predicted could create anticompetitive rules if not held politically accountable by active supervision.

The FTC recognized the anticompetitive effects that could flow from such regulations “especially. . . in medically underserved areas or with medically underserved populations” much like the conditions that exist in Texas.[53] Moreover, TMB’s rule would have imposed costs upon patients in Texas because the occupational licensing regime excluded board-certified entrants, and reduced patient access to those new entrants, which in turn raised prices and reduced output. Following the outcome in this case, Texas chose to remove the restriction on online medical practice, thereby allowing greater access to medical treatment in rural areas.

This case demonstrates how antitrust laws can intervene to protect consumers from these abuses. In the current COVID-19 crisis the benefits of online medicine are clear. Yet, the ‘Brother, May I?’ approach by the TMB highlights the potentially catastrophic effects that occupational licensure can have on innovation and consumer welfare.

B.  Hines v. Quillivan: Occupational Licensure of Online Veterinary Practice

A few years after Texas lessened restrictions on medical practice online, a veterinarian filed an equal protection claim for his online veterinary practice. The Texas State Board of Veterinary Examiners shut down and fined Dr. Ronald Hines’ online practice because it violated the Texas statute establishing veterinarian-client-relationship.[54] Dr. Hines’ case has a similar feel to Teladoc, but differs slightly because the Board of Veterinary Examiners enforced a new statute passed by the state legislature rather than creating its own rule. Yet, even with a statute, this case shows the effects that a board of market participants can have to influence a legislature to pass a law that would prevent innovative entrants from coming to market. Moreover, this case presents constitutional law issues that complicate the ability of online platforms to compete with in-state incumbents.

This section will give a brief background of the Hines I[55] case brought by Mr. Hines prior to the decision in Teladoc. Next, this section will outline the arguments made in Hines II[56], currently before the Fifth Circuit. Finally, this section will compare the effects of the licensure requirements on consumers in online medical practice and online veterinary practice.

1.     Hines I: ‘Brother May, I?’ and the Constitution

From 2002 to 2012, Dr. Hines gave veterinary advice both generally via his website and directly to patients who solicited his expertise.[57] Hines provided advice to various groups of people such as pet owners who had no access to conventional veterinary care—either because of geography and/or inability to pay—and other pet owners who might have received conflicting diagnoses.[58] However, Hines never attempted to serve as any patient’s primary veterinarian by providing medication, performing procedures, or physically examining the animal.[59] In fact, on his website, Hines advised any visitors that his advice was inherently limited and he “[did] not provide any advice or accept payment if in his professional judgment doing so would [have been] inappropriate.”[60]

In 2012, the Texas State Board of Veterinary Examiners (“TBVE”) informed Hines that he was in violation of Tex. Occ. Code § 801.351,[61] which prohibited veterinarians from providing veterinary advice without first establishing a veterinarian-client-patient relationship. In 2005, the state legislature amended the statutory provision to require a veterinarian-client-patient relationship before practicing and expressly excluded forming a relationship “solely by telephone or electronic means.”[62] In passing the amendment, the legislature recognized the TBVE’s claim that the veterinarian-client-patient relationship was a cornerstone of a veterinarian’s care of animals and veterinarians could circumvent that relationship via new technology.[63]

Dr. Hines’ violation of the statute was based on his failure to physically examine the animals about which he provided advice.[64] The TBVE ordered a one-year suspension of his veterinary license, required him to retake portions of the veterinary licensing exam, and imposed a $500 fine.[65] Hines filed a complaint for injunctive relief claiming violations of his rights under the First Amendment, Fourteenth Amendment substantive due process, and Fourteenth Amendment equal protection.[66]

The district court dismissed the equal protection and due process claims concluding that “because the law did not discriminate on the basis of any suspect classification, the count was evaluated pursuant to rational basis review—and held that the physical examination requirement passed that deferential standard.”[67] However, the district court denied the defendants’ motion to dismiss the First Amendment claims. On appeal the Fifth Circuit affirmed the district court’s Fourteenth amendment holding but reversed and remanded the First Amendment claim in favor of the defendant.[68] The Fifth Circuit explained that this restriction on the veterinary practice is within the scope of state regulation, and any effects on Dr. Hines’ First Amendment rights were incidental to the constraint and therefore did not violate the constitution.[69]

In 2017, Texas Governor Greg Abbot signed SB 1107, which allowed medical doctors to practice telemedicine in Texas without an in-person examination. And shortly after in June 2018, the U.S. Supreme Court explained there is no professional-speech exception to the First Amendment in NIFLA v. Becerra.[70] The Court explained that “professional speech” is difficult to define as all it embodies is a profession that requires a license from the state.[71] But if that is the case it “gives the States unfettered power to reduce a group’s First Amendment rights by simply imposing a licensing requirement.”[72] In conclusion the Court found that there was not a “persuasive reason for treating professional speech as a unique category that is exempt from ordinary First Amendment principles.”[73] With this new ruling by the Supreme Court changing controlling constitutional law, Dr. Hines was able to bring his First Amendment suit again under the res judicata exception.

2.     Hines II: Operating a Tele-practice

On June 11, 2019, the United States District Court for the Southern District of Texas decided Hines’ second case in the court.[74] Dr. Hines argued that the NIFLA holding and Tex. Occ. Code § 111.005,[75] the new telemedicine rule, breathed life into his First Amendment and Fourteenth Amendment due process claims respectively.[76] Again, defendants sought a motion to dismiss all of Hines’ claims.

The district court disagreed with Hines’ claim that NIFLA abrogated the Fifth Circuit’s decision in Hines I.[77] The court held that NIFLA did not reference Hines I nor did it make a statement that directly contradicts the Fifth Circuits opinion.[78] In sum, the court concluded that Hines’ argument was that the Fifth Circuit reached an erroneous conclusion and under the rule of orderliness, the district court cannot reconsider that decision.[79]

Next, the court addressed the Equal Protection Clause claim, noting that Hines I does not foreclose the current claim.[80] Hines I turned on the difference between veterinarians who saw animals in person and those who had not. Hines II focuses on the different treatment between doctors who can perform telemedicine on human patients and veterinarians who cannot perform telemedicine on animals.[81] Dr. Hines argued that the new law for doctors required the court to determine whether the Board has a rational basis to maintain the in-person requirement for veterinarians when Texas law removed the same requirement for doctors treating humans.[82] The district court found that the Board presented two reasons that form a rational basis. First, because animals cannot speak as humans can speak, a physical examination is important because without one the veterinarian would have to rely on the animal’s owner to convey information about symptoms.[83] Second, because owners lack knowledge about animal physiology, the information conveyed would likely lack accuracy.[84]

For these reasons the district court granted defendants motion to dismiss all claims. Hines has appealed the decision and oral arguments have been made to the Fifth Circuit. As of now the Fifth Circuit has not released its decision. The similarities between Hines I-II and Teladoc are clear. The incumbent veterinarians who sit on the TBVE have prevented the market entry of an innovative supplement to traditional veterinary practice. However, the difference is that a Texas Statute has given them the ability to restrict the market. Although Hines is not argued as a state action doctrine case, the effects of occupational licensure remain the same.

C.  Vizaline, L.L.C. v. Tracy: Occupational Licensure in Non-Medical Fields

The Fifth Circuit recently applied the NIFLA Court’s professional speech analysis to an innovative map making online competitor in Mississippi. In Vizaline,[85] the Mississippi Board of Licensure for Professional Engineers and Surveyors (“Mississippi Board”) claims Vizaline is partaking in the unlicensed practice of surveying. Like both Teladoc and Hines, the State Board is looking to squelch an innovative online entrant to the market through occupational licensure.

Vizaline is an important test for the state action doctrine and occupational licensure. First, the case revolves around a state licensing board’s determination that a novel process for map making constitutes the practice of surveying and therefore is under the board’s jurisdiction. Next, it expands the NIFLA professional speech analysis to the Fifth Circuit. Finally, this again exemplifies the issue that occurs when incumbents can stifle the entry of competing business models through the use of occupational licensure.

1.     The Background of Vizaline

Vizaline, a Mississippi technology startup, “converts existing metes-and-bounds descriptions of real property into ‘simple map[s]’ . . . through a computer program that overlays lines onto satellite images.”[86] The company sells these maps exclusively to community banks for small, less expensive properties that serve as loan collateral. These banks would normally have to use a costly in-person survey for these properties. Vizaline has never held itself out to be a surveyor. In fact, Vizaline stated it does not “establish or purport to establish metes and bounds descriptions of property . . . [n]or does it locate, relocate, establish, reestablish, lay out, or retrace any property boundary or easement.”[87] Moreover, Vizaline does not market its product as a replacement for a legal survey and alerts its customers that it is not a legal survey. If Vizaline encounters discrepancies in its drawings, it recommends its customers hire a licensed surveyor to correct the issue. Currently, the company has six employees and operates in five states.[88]

In Mississippi, the practice of surveying is regulated by the Mississippi Board in accordance with Miss. Code § 73-13-95 which states, “Any person who shall practice, or offer to practice, surveying in this state without being licensed. . . shall be guilty of a misdemeanor.”[89] In particular, the Mississippi Board alleged that Vizaline violated Mississippi Code § 73-13-95(c), which prohibits “‘receiv[ing] any fee’ for performing ‘any service, work, act or thing which is any part of the practice of surveying’ without a surveying license.”[90] The Mississippi Board, prior to bringing a lawsuit against Vizaline, asked the company to revise its website to not market to the general public and clarify it is not to be used as a survey—Vizaline complied.[91] Two years after its requests, the Mississippi Board sought an injunction against Vizaline’s business and disgorgement of all compensation. In response to the requested injunction Vizaline filed a lawsuit claiming the Mississippi rule violated the First Amendment.

2.     The Fifth Circuit Ends Professional Speech Protection for States

The district court took a similar view to that in Hines and promptly dismissed Vizaline’s First Amendment claim.[92] The district court found that the state, using its broad power to establish licensing standards and oversee professions, regulated “professional conduct which incidentally involves speech.”[93] In sum, the district court held that occupational licensing restrictions were categorically exempt from First Amendment scrutiny.

On appeal, the Fifth Circuit disagreed, citing NIFLA for the proposition that “occupational-licensing provisions are entitled to no special exception from otherwise-applicable First Amendment protections.”[94] The Fifth Circuit went on to explain that it and other circuit courts had invoked the “professional speech” doctrine, which addressed any speech by individuals that is based on their expert knowledge and judgment or which occurred within a professional relationship.[95] These courts had held that a statute that creates occupational licensure standards was not unconstitutional for violating First Amendment rights because it was an incidental effect of a legitimate regulation.[96]

The Fifth Circuit recognized that NIFLA replaced the Fifth Circuit’s previous analysis of occupational licensure requirements with a conduct-versus-speech dichotomy.[97] What this means is that First Amendment challenges do not turn on whether the regulation is occupational licensure, but whether the regulation is directed at conduct, rather than speech, and does not run afoul First Amendment protections.[98] The court reversed and remanded the lower court’s decision because there was no First Amendment scrutiny for the Mississippi Board’s licensing requirements.[99] The Fifth Circuit did not address whether the restrictions violated the First Amendment or what role Mississippi should have in regulating Vizaline’s practice but emphatically put an end to the “professional speech” exception.[100]

These cases illustrate that a growing concern of over-regulation by states has led to constitutional challenges of several occupational licensure requirements affecting digital commerce. Whether these challenges will have a lasting effect on occupation licensing overall is yet to be seen. But, with each challenge the same underlying principle issues remain—state regulation to protect entrenched bricks and mortar entities from digital commerce ends with less innovation, reduced access for consumers, higher prices, and the reduction of competition in the regulated industry.

D.  Tenn. Wine & Spirits Retailers Ass’n v. Thomas: Occupational Licensure’s Effect on Interstate Commerce

Licensure requirements might also unreasonably burden out of state companies and create conflicts with interstate commerce. Moreover, in the digital economy, a company might sell its products to a number of different states through an online platform, which means a state regulation that favors in-state firms would directly affect online sales. This issue brings to light yet another constitutional question relating to state regulation through occupational licensure.

The Twenty-first Amendment gives each state leeway in choosing alcohol-related public health and safety measures and most states have done so through state regulatory boards. In Tennessee, alcohol is regulated through the Tennessee Alcoholic Beverage Commission (“TABC”). In 2012, the Supreme Court of the United States granted certiorari to decide if a TABC regulation on alcohol retail violated the Commerce Clause. Much like the First Amendment arguments made in the above cases, state regulation that violates the Commerce Clause causes reductions in competition. The Supreme Court, in Tenn. Wine & Spirits Retailers Ass’n v. Thomas,[101] held that a TABC two-year residency requirement violated the Commerce Clause because its predominant effect was to protect in-state vendors from out-of-state competition.

1.     Tennessee Wine and Spirits Background

Tennessee requires alcohol distribution to flow through a three-tier system.[102] Producers may only sell to licensed wholesalers who may only sell to licensed retailers who are the only group allowed to sell to consumers.[103] This means that no entity may sell alcohol without a license.[104] The tiered system also contained residency requirement to obtain a license. For any retailer to obtain a license to sell alcohol for home consumption, the retailer must demonstrate that it has been a “bona fide resident” of the state for two years.[105] Moreover, a corporation could not get a retail license unless all of its “officers, directors and owners of capital stock satisfy the durational requirements applicable to individuals.”[106]

In 2016, two national chain liquor stores, Total Wine and Affluere, applied for a license to retail alcohol in Tennessee.[107] The TABC recommended approval of the application until the Tennessee Wine and Spirits Retailers Association (“Spirits Association”)—an in-state liquor trade association—threatened to sue the TABC if it granted the license.[108] The TABC decided to file a declaratory judgment regarding the constitutionality of the residency requirements.[109] The district court held that the requirements were unconstitutional.[110]

The Spirits Association appealed to the Sixth Circuit, which affirmed the district court decision. The court split on the 2-year residency requirement. The majority affirmed the lower court’s decision using a dormant Commerce Clause argument—the requirement facially discriminated against interstate commerce and the interests the requirement was meant to further could adequately be served by nondiscriminatory alternatives.[111] The dissent, however, claimed that the Twenty-first Amendment granted states limitless authority to regulate in state alcohol distribution unless it served no purpose besides “economic protectionism.”[112] The Spirit Association filed a petition for certiorari regarding the two-year residency requirement, which was granted by the Supreme Court.[113]

2.     The Supreme Court Strikes Down the Two-Year Residency Requirement

The Supreme Court in a 7-2 opinion held that the two-year restriction was unconstitutional. The majority framed the opinion as a dormant Commerce Clause issue. Under the dormant Commerce Clause, a state law that discriminates against out-of-state goods or economic actors is unconstitutional unless it is “narrowly tailored to advance[e] a legitimate local purpose.”[114] The Court found that the two-year residency requirement plainly favored in-state residents and that the Spirit Association did not make a Commerce Clause argument but instead chose to argue under the Twenty-first Amendment.[115]

The majority held that if the Twenty-first Amendment were read to take precedence over the Commerce Clause it would lead to an absurd result.[116] For example, if the Twenty-first Amendment trumped any previous section of the constitution, a state could enact laws prohibiting the sale of alcohol to a particular race or religion despite the Equal Protection Clause, or prohibit the sale of alcohol to people who express an unpopular point of view despite the First Amendment.[117] Instead, the Twenty-first Amendment should be viewed as “one part of a unified constitutional scheme.”[118] Moreover, the Court cited Midcal as an example of the Twenty-first Amendment’s limits, noting that when state alcohol laws conflict with federal regulation of the export of alcohol, that is deemed unconstitutional.[119]

Because the residency law directly conflicted with the dormant Commerce Clause, the Court looked to the purpose of the law and whether it had a legitimate interest in furthering the health and safety of citizens consuming alcohol and found that it did not.[120] When a purpose is “mere speculation” or an “unsupported assertion,” it is not immune from violating the Commerce Clause.[121] The Spirit Association presented no evidence that tied the residency requirement to the protection of public health and safety subjecting the law to Commerce Clause scrutiny.[122] Because the predominant effect of the residency requirement was to protect the Spirit Association’s members from out-of-state competition and it lacked a nexus to protecting public health and safety, the Court struck down the requirement.[123]

Although the Court only made passing reference to antitrust issues this case, it still exemplifies the issues that out-of-state online firms face when trying to enter a market that is regulated by state occupational licensure. Both national liquor retailers at issue in Tennessee Wine & Spirits had an online presence that was stifled by the unconstitutional barrier to market entry. And while states have the right to regulate to protect public health and safety, occupational licensing requirements that lack a nexus to that purpose tend to harm consumers and competition.

III. Narrowing Occupational Licensure to Protect Public Health and Safety

Occupational licensure, in its most appropriate form, allows a state to protect the health and safety of its citizens through requirements created by a politically accountable state board. However, a state board run by market participants without state supervision loses political accountability, which often leads to overreaching requirements that in the end harm consumers. As illustrated in the above cases, when state regulations stray from protecting public health and safety it can lead to a flurry of constitutional questions.

In the increasingly digital economy, occupational licensure prevents innovative firms from entering markets under the guise of protecting consumers. Teladoc, Hines, and Vizaline illustrate this principal. Like Phoebe Putney and North Carolina Dental, these three cases show the expansion of occupational licensure arising from an overly broad delegation of authority to protect public health and safety, which allows incumbents to choose whether new competitors and new technologies can enter a market, unmoored from legitimate health and safety concerns. While new technologies may offer new market options to consumers, they may also have adverse effects on health and safety, and, in these instances, occupational licensure may be justified.

However, evaluating new digital offerings in industries already regulated by occupational licensure requires states to re-evaluate the costs and benefits of the requirements. If this re-evaluation does not take place, outmoded restrictions become a barrier to lower cost or more convenient services for consumers and discourage entry for entrepreneurs. Studies have shown that widespread use of occupational licensure in a state has a “significant negative effect on the rate of entrepreneurship.”[124] The FTC has even created a task force—the FTC Economic Liberty Task Force[125]—to examine these types of licensing issues.

Where might occupational licensure be an appropriate policy response? One example is licensing to help prevent consumer fraud and mitigate the effects of certain types of market failure—”for example, those associated with persistent information asymmetries between professionals and consumers.”[126] Another appropriate function of occupational licensure is in health care, where consumers assume direct risks if treated by unqualified individuals,[127] Though this must be balanced against access issues. However, these potential concerns that may be appropriate for occupational licensure are everchanging and require a framework for analysis to maximize the benefits of occupational licensure while limiting the costs.

When analyzing licensure requirements, the FTC encourages policymakers to ask the following questions: Are there significant and non-speculative public policy purposes, such as consumer health and safety, that warrant licensing?[128] Do the licensing requirements have a significant adverse effect on competition and consumers?[129] If so, do the requirements address and alleviate the harm to the public policy purpose?[130] Are the requirements narrowly tailored to serve the state’s policy concerns without unduly restricting competition and if not are there less restrictive alternatives that would still serve the policy goal with less harm to competition?[131]

These questions are especially important when regulated industries are subject to new and disruptive forms of competition. For example, Teladoc illustrates a slow response to a new form of competition in health care. Had the TMB asked the above questions when deciding to enact its requirement to see patients in person, it could have come to the same conclusion that the legislature and governor did two years after litigation began. Instead, residents of Texas were forced to comply with a rule created by health care incumbents that did not protect public health and safety, but did increase costs and reduce access to health care. Similarly, in Hines it is not apparent that online veterinary advice is a genuine public policy concern nor does the restriction narrowly serve to alleviate the state’s stated policy concerns. Furthermore, in Vizaline, the state board is attempting to suppress a new technology from gaining a foothold in the market.

It is important for states to respond to the needs of their residents. These responses may very well include occupational licensure. However, it is a state’s duty to ensure regulation does not harm consumers, reduce competition, or abridge the constitution. States can ensure occupational licensure requirements benefit rather than harm citizens by asking the above questions, especially when new technologies disrupt a market. Occupational licensure that blocks innovation without public health and safety justifications harms both consumers and innovators.

IV. Occupational Licensure’s Growing Effect on Interstate Commerce in the Digital Economy

As seen in the cases discussed above, occupational licensure has a growing effect on interstate commerce. As the digital economy becomes more important in the lives of Americans, state-by-state occupational licensure requirements become even more burdensome on online companies. Although the state action doctrine allows a state to regulate competition within its borders to further a legitimate purpose, it does not give states immunity from the Commerce Clause.

Tennessee Wine and Spirits illustrates a state’s inappropriate use of state regulation to burden out-of-state firms to help in-state firms, a situation with clear implications for the growth of the digital economy. For example, although Vizaline’s occupational licensure issue focused on the First Amendment, it is easy to see how a similar residency requirement could have been put in place to prevent Vizaline from entering the market.

Because the digital economy allows customers to access new products and services at the click of a button, current licensing requirements might be expanded to create barriers for online firms that in turn help in state brick and mortar establishments. Teladoc is an example of this very principal. One way for states to avoid violating the Commerce Clause is to narrowly tailor licensure requirements to a legitimate public interest as discussed above. However, states continue to enact broad license requirements that might or might not apply to online services, and they have subjected a wide variety of professions to occupational licensure requirements including florists, interior designers, tour guides, barbers, hair braiders, and even shampoo specialists.[132] Although some of these professions cannot be performed online, the expanding array of licensure gives a sense of the breadth of a state’s resort to occupational licensure, despite highly attenuated links to public health and safety concerns.

Conclusion

New online technologies or business models should not have to ask their brick and mortar competitors for permission to compete. In a constantly changing digital economy, states must be able to protect the health and safety of their citizens but must do so in a narrowly tailored way that allows for innovation and competition that provide benefits such as improved access, reduced costs, and better quality. Occupational licensure will face increasing scrutiny as the digital economy grows, including antitrust and constitutional challenges. In sum, the purpose of occupational licensure has always been to protect the health and safety of an individual state’s citizens, not to protect incumbent firms from competition. These same principals apply with equal, if not greater, force to the digital economy.