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More States Should Take Advantage of an Antitrust Doctrine to Make Our Economy Fairer and More Democratic

For years, journalists have reported numerous instances of worker exploitation, hazardous working conditions, and poverty wages in the nail salon and fast food industries. In a blockbuster 2015 New York Times investigation, for example, journalists found that New York nail salonists were “paid below minimum wage; sometimes they are not even paid…[and] endure all manner of humiliation, including having their tips docked as punishment for minor transgressions, constant video monitoring by owners, even physical abuse.” For Californian fast food workers, other investigations have revealed they endure routine wage theft, verbal abuse, and unsafe working conditions, including frequent assaults and robberies.

To combat these appalling conditions, in their recent sessions, the New York and California legislatures considered enacting new laws that would transform each industry. Among other obligations, both proposals create state regulatory councils, sometimes referred to as “wage boards” or “labor boards,” overseeing the respective industries that are staffed with lawmakers, industry workers, and experts endowed with the power to enhance wages, benefits, and working conditions. Such bold legislative actions are sensible given the abhorrent environment in each industry. They also underscore the idea that a well-functioning democracy requires that the people should be able to structure markets – through their political institutions – to meet their economic needs and agree upon a minimum set of fair working conditions for all workers in any industry.

New York’s bill is effectively stalled in the legislative labor committee. A version of California’s bill was signed in September. When both proposals become formally enacted and enforced, workers will undoubtedly benefit, and such policies should unquestionably be replicated across other industries.

Such praiseworthy reforms carry significant legal risk, however. Parties opposed to such measures have historically used the antitrust laws, the laws designed to protect the public against corporate power and ensure businesses use fair strategies to compete, to challenge these reforms – and could do so again. The antitrust laws, like the landmark Sherman Act of 1890, are sweeping in their application. Congress included provisions restraining all monopolistic practices by dominant corporate actors and restrictions on a host of unfair conduct. The restrictions imposed by the Sherman Act incentivized all firms in the economy to use fair methods of competition that enhance the public’s welfare to succeed in the marketplace. Most applicable here is the first section of the Sherman Act, which prohibits “every contract, combination, or conspiracy … in restraint of trade.” At first glance, such broad wording appears to set limits on the kinds of regulations enacted by state governments since they could ostensibly authorize conduct that a judge could be convinced to classify as a “restraint of trade” and, therefore, be prohibited by the Sherman Act.

However, to prevent the Sherman Act from becoming a law that empowers the federal judiciary to inhibit any conduct it solely deems as a “restraint of trade” – including regulations mandated from states legislatures – during the New Deal in the 1940s, the Supreme Court created a legal doctrine that facilitated Congress’s legislative intent with the Sherman Act by exempting certain conduct classified as “state action” from the antitrust laws. The state action doctrine, also known as Parker Immunity after the 1943 Supreme Court decision where the idea was formally codified, is profoundly important because how it is applied implicates who should control local economies – the federal judiciary misusing the Sherman Act or state governments working in conjunction with federal statutory law.

When Parker Immunity is interpreted in line with Congress’s intent with the Sherman Act, the doctrine encourages states to liberally use their regulatory power alongside the Sherman Act to structure markets to protect small businesses, enhance standards and wages for workers, and restrain unfair business practices – all while preventing powerful corporations from controlling the national economy. In effect, both Parker Immunity and the Sherman Act operate as two sides of the same coin on regulating corporate conduct to strengthen worker power and the vitality of independent businesses and local communities. Parker Immunity ultimately encompasses what is politically possible when governments are empowered to solve problems afflicting the public and is what will allow states like New York and California to be able to enact their respective policies.

The Beneficial Applications of Parker Immunity

The origins of Parker Immunity are rooted in situations analogous to the modern nail salon and fast food industries. In the 1930s, California raisin farmers faced a destructive price spiral whereby frenzied competition among raisin sellers led to increasingly and unsustainably low prices. To ensure a stable, sustainable, and fairer marketplace, California enacted a law that allowed producers to obtain fairer prices for their products – allowing all firms to be able to compete sustainably.

Specifically, California’s law allowed the creation of producer plans that established uniform standards for the selling of their products. The plan at issue established standards for when farmers’ raisins could be sold, the prices they could be sold for, and imposed limitations on how many raisins could be sold. California’s law also created an administrative agency to review the created plan and monitor the farmers to ensure compliance with the law.

The regulations were eventually challenged under the Sherman Act as unlawful restraints. The Supreme Court, however, would subsequently hold that California’s regulatory program did not violate the antitrust laws because the program was a result of “the execution of a government policy” derived from “state action” or “official action directed by a state.”

The Supreme Court justified its decision primarily based on two circumstances. First, the Supreme Court recognized that Congress specifically sought for the antitrust laws to set limits on how corporations could succeed in the market by restricting methods of competition that were unfair and inhibiting the power of dominant corporations. In other words, powerful corporations, not small businesses and workers, were the target. During the legislative debates, Senator Sherman articulated that his namesake act would not “interfere with” but instead cooperate with state regulatory efforts to “prevent and control combinations within the limit of the State” and that the aim of the law was to promote the “industrial liberty” of the people by “checking, curbing, and controlling the most dangerous [corporate] combinations.” In this sense, striking down California’s law would subvert Congress’s intent because it was duly enacted state law explicitly designed to support producing farmers. Second, the Court also recognized that Congress did not intend for the Sherman Act to undermine state governments’ ability to regulate their economies. Instead, Congress explicitly wanted the Sherman Act to work alongside state regulations.

With this viewpoint, the Supreme Court positioned the Sherman Act to not just prevent markets from being controlled by dominant businesses, but also as a legal tool of democratic market governance to facilitate responsive government by empowering state lawmakers to enact regulations with the Sherman Act acting as the foundation. Therefore, the Supreme Court at the time cast the Sherman Act as a democratizing law meant to ensure that the people maintained control over businesses operating within their communities. The public retaining their ability to shape their local economies through their state government while having their federal legislature establish minimum national standards for permissible corporate conduct were intertwined and complementary goals.

Empowered by Parker Immunity, states have enacted many policies designed to make competition fairer and promote other policy goals, such as supporting small businesses and ensuring appropriate workplaces. For example, alcohol distributors in many states like Connecticut are regulated under “post and hold” laws, where they must publicly post their alcohol prices and maintain those prices for a set period. Such regulations also work in conjunction with other regulations to restrict and inhibit the adverse effects of discriminatory volume discounts and alcohol from being sold below cost, and thereby inhibit national retailers from crushing smaller and local outlets. In addition to protecting the public by preventing the excessive consumption of alcohol, these laws are designed to promote local alcohol distributors and ensure fair competition between retailers.

Occupational licensing is also a product of Parker Immunity. State licensing, while seen as “deputiz[ing] incumbent firms in restricting the marketplace against new entrants” by conservative think tanks, actually protects workers and the public by establishing minimum professional standards and facilitating the creation of stable and fair-paying jobs for workers.

Parker Immunity can even authorize states to completely remake markets to ensure socially beneficial competition. States can facilitate the creation of cooperatives, alternative types of business entities where workers or small producers can come together to serve their interests, such as negotiating better pricing or obtaining ownership in a firm. Cooperatives can help workers and producers obtain fairer wages and prices.

More Democracy Inhibits Political Capture by Dominant Firms

For all its virtues, the state action doctrine can be a tool for corporate abuse. Consider a recent example from the state of North Carolina. The North Carolina legislature is considering enacting a new law to turn the University of North Carolina Health Care System into a state agency and allow it to acquire companies and engage in other collusive conduct without fear of violating the antitrust laws. Instead of creating a fair market, this action seeks to use state power to immunize a dominant corporate actor from the laws designed to restrain their conduct. The state action doctrine, therefore, can potentially serve as a potent legal vehicle for powerful corporations with access to near-unlimited financial resources to lobby state governments to enact legislation that will shield them from the laws specifically designed to create open, competitive, and fair markets by restraining monopolistic conduct.

Despite this kind of nefarious immunization, which in this case compelled the Federal Trade Commission to write a letter in June condemning the North Carolina bill, throwing the entire doctrine out with the proverbial bath water is unnecessary and undermines both Congress’s intent with the antitrust laws and the Supreme Court’s original construction of the state action doctrine it articulated in its Parker decision. As the highlighted examples above show, a broad state action doctrine that promotes fairer markets, better wages, and working conditions for workers can co-exist with antitrust law’s provisions condemning conduct that unfairly entrenches dominant corporations.

While such political-capture scenarios reveal the potential risks associated with Parker Immunity, the solution is more democracy, not relying solely on judges to manage state and local economic life through wielding the Sherman Act. Potential misuse does not necessitate abandoning Congress’s intent with the Sherman Act and completely barring state political institutions from governing their economies. Rather than leave marketplace rules to be determined by generalist judges, scenarios like that of the proposed legislation in North Carolina, which epitomizes deficient or misused governance, can be resolved with morenot less, democratic involvement.

Unionization Cannot Fill the Void

While by no means giving rise to its existence, granting antitrust immunity to state laws allows space for increased democratic market governance. Parker Immunity, therefore, symbolizes the importance of political engagement and responsive government by providing the opportunity and ability of the democratic process to become (even more) tightly integrated and present with actively governing the economy rather than substitute such a mechanism with judicial supervision and control. Those that are opposed to the state action doctrine could appear to innately fear the democratic process and would prefer unaccountable judges to govern the economy.

Moreover, consider if opponents of Parker Immunity got their way and the doctrine was abolished. Beyond the obvious moral implications of allowing workers, like nail salonists, to receive poverty wages and forcing them to tolerate inhumane working conditions, such as air so toxic it causes women to become practically infertile, in the name of hostility toward regulation and keeping prices low for consumers (the North Star of conservative antitrust policy), other options afforded to nail salonists to obtain fair conditions are problematic and hardly failsafe.

Nail salonists could attempt to unionize, as many workers across the United States are currently trying to do. Yet U.S. labor law makes unionization incredibly difficult. For one, unions can only be created in a piecemeal firm-by-firm fashion – think just because one Starbucks location unionizes does not mean the others become unionized as well. Unionization is also a protracted process – in almost 50% of instances, it takes more than a year for a union to obtain its first collective bargaining agreement. Of course, despite these obstacles, unionization should still be pursued as a critical means to enhance worker power and restrain corporate power. With a surfeit of nail salons and fast food restaurants, however, seeking to protect all workers through unionization will be an arduous task and will not set minimum standards across the industry. Moreover, given the weak penalties, corporations like Starbucks and Amazon are more than eager to flagrantly violate federal labor law to thwart their workplaces from becoming unionized.

Another alternative available to the salonists to potentially raise their wages is through merging their operations. As history has all too frequently shown, mergers consolidate markets and concentrated corporate power almost always inevitably hurt workers through the loss of jobs, depriving them of additional work opportunities and lowering wages. Furthermore, because mergers do not lead to workers obtaining power over firm decisions, merging their operations will almost certainly not solve the workplace conditions afflicting them. Overuse of mergers could also lead companies to confront the antitrust laws from another angle, since Congress has imposed a heavy restriction on merging to consolidate power.

A Wage Board for Every State

Here again, there is another way; while certainly not a trivial task, the state legislature can establish regulatory agencies to supervise the industry and enact market-wide standards to prevent unfair corporate practices and increase pay and working conditions, all while maintaining a deconcentrated market and providing consumers multiple options to obtain their services. Therefore, state-created regulations are perhaps the most practical, expeditious, and democratic means to alleviate the ills in the industries while concurrently preventing the harmful effects that Congress intended the antitrust laws to thwart. In other words, without Parker Immunity preventing the antitrust laws from proscribing state regulations, workers suffer as the Sherman Act effectively becomes a legal cudgel that only authorizes the federal judiciary’s conception of appropriate market regulation and work standards.

It is almost a foregone conclusion that reactionary legal advocates will attempt to use the antitrust laws as a pretext to challenge New York and California’s policies aimed at addressing the deplorable working conditions endured by nail salon and fast food workers. Regardless of the prospect of litigation and the heightened barriers the Supreme Court has imposed on obtaining Parker Immunity since the 1970s, it exists. Like New York and California, more states should enact and be prepared to fight for their regulations to enhance and protect the lives of working people by taking advantage of the immunity granted by the Supreme Court more than 80 years ago.

Daniel A. Hanley is a Senior Legal Analyst at the Open Markets Institute.

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