Any new antitrust decision by the U.S. Supreme Court is bound to prompt a flurry of tea leaf reading by the antitrust bar. A 5 to 4 vote ruling — with Justice Stephen Breyer, the Court's antitrust scholar, writing the dissent — is practically nirvana for those who like to parse the Court's pronouncements on matters of restraint of trade. Thus, the Court's May 1999 decision in California Dental Association v. Federal Trade Commission, 119 S. Ct. 1604 (1999), which, by a narrow majority, remanded the case to the Ninth Circuit for a "less quick" analysis of the competitive effects of certain restraints on advertising for dental services, provides particularly fertile ground for commentary.
We therefore could not resist the invitation to join the debate. Naturally, as Commission employees, we make no claim to objectivity. (In the spirit of full disclosure, we note that one of us participated in briefing the case to the Supreme Court). Furthermore, the case is still in litigation. The Commission and CDA will complete their briefing to the Ninth Circuit in early January.
With those disclaimers, we offer the following assessment. Notwithstanding some commentators' suggestion that the case signals a substantial change in the way the courts and the enforcement agencies will analyze most agreements among competitors, in fact the majority's decision appears to have less to do with "big picture" antitrust issues, and far more with its "professional" context. The Court accepted the Commission's fundamental legal argument that the antitrust rule of reason need not entail a detailed market analysis, even when something more than a "quick look" rule of reason is needed. The majority was unwilling to accept, however, that the particular conduct challenged in this case — professional association bans on certain kinds of advertising claims — could be equated with "classic horizontal agreements to limit output or price competition" that would need only "the most condensed rule of reason analysis." Calif. Dental Assoc., 119 S.Ct. 1614, 1617. In language reminiscent of some dissenting opinions in First Amendment cases striking down state-imposed bans on professional advertising, the majority emphasized the "significant challenges to informed decisionmaking by the customer for professional services" and the risk of deception from advertising for professional services. Id. at 1614. The case is a useful lesson for antitrust enforcers that when challenging restraints in the professions, and particularly restraints on advertising by professionals, it is still important to anticipate that judges may be skeptical that competition works in these markets to benefit consumers.
Background. The case involves the California Dental Association's (CDA) ban on essentially three kinds of advertising: (1) offers for across-the-board discounts, such as senior citizen or student discounts; (2) any "inexact" references to price, that is, any language about price — such as "reasonable fees," "low prices," "affordable care," or "prices that will make you smile" — other than simply stating a specific price for a particular service; and (3) a wide variety of non-price claims, such as statements that the dentist provides gentle care, punctual service, and satisfaction guarantees.1
The Commission, in an opinion authored by Chairman Robert Pitofsky, ruled that the restraints on price advertising were per se unlawful, reasoning that the bans on truthful, nondeceptive advertising about low fees and across the board discounts amounted to a naked attempt to limit price competition. The Commission also condemned all of the advertising restraints, both price and non-price, under an analysis the Commission termed a "quick look," but which in fact encompassed the chief elements of the rule of reason. On appeal, the Ninth Circuit disagreed with the application of per se treatment to the restraints on price advertising but upheld the Commission's condemnation of the ad bans under the rule of reason.
The Supreme Court's Ruling. The Court unanimously held that the Commission had jurisdiction over CDA, but by a one vote margin remanded the case back to the Ninth Circuit for further analysis of the likely effect of the advertising rules. Id. at 1618. The court of appeals, Justice Souter wrote for the majority, had erred in holding that quick-look analysis was appropriate. Such an abbreviated analysis, he stated, only applies when the anticompetitive effects from a restraint are "obvious." And while the four justices who dissented appeared to conclude that anticompetitive harm was indeed obvious in this case, the majority deemed the circumstances here too complex to reach that conclusion. The threshold issue in the majority's view was "whether professional price and quality advertising is sufficiently verifiable" to bring it within the treatment that antitrust would accord to ad bans in ordinary commercial settings. Id. at 1613.
Justice Souter emphasized that the restrictions are "at least on their face, designed to avoid false or deceptive advertising in a market characterized by striking disparities between the information available to the professional and the patient." The majority asserted that the heightened risk of misleading advertising in markets for professional services made it improper to apply a quick look analysis to CDA's restraints. Id. at 1614.
What does it all mean? Our old friend and former colleague Ken Starling suggested in the previous issue of this publication that the majority's decision might portend substantial changes in rule of reason analysis, in that the government must now undertake the burden of proving a "full" rule of reason case for all restraints except those that are unquestionably per se offenses. Elsewhere in the article he observes, however, that the CDA decision reaffirms the principle of the quick look rule of reason as reflected by NCAA v. Board of Regents, 468 U.S. 85 (1984), and FTC v. Indiana Federation of Dentists, 435 U.S. 679 (1986). These cases make clear that some non-per se offenses can be condemned under the rule of reason without proof of market power. Moreover, as he also notes, the majority emphasized that even conduct not appropriate for quick look analysis does not necessarily call for "plenary market examination." Id. at 1617. The majority (and the dissent) plainly endorsed the notion that there is a broad spectrum of rule of reason analysis, and that the quality and quantity of proof will vary depending on the circumstances.
In so doing, the majority, while not affirming the court of appeals, adopted the Commission's basic legal argument about the nature of rule of reason analysis. CDA had urged the Court to hold that outside of a very narrow category of quick look cases, rule of reason analysis requires a detailed examination of market definition and power (what former FTC General Counsel Steve Calkins has termed "the full Monty"). Along with the one dissenting FTC commissioner in the case, Mary Azcuenaga, CDA complained, for example, that the Commission's analysis was inadequate because it failed to define local geographic markets for dental services in California. The FTC's brief, however, echoing Chairman Pitofsky's opinion, emphasized the flexibility of the rule of reason. Thus, in making its finding on market power, the Commission found it unnecessary to define the contours of local geographic markets for dental services, because no matter how those local markets are defined, CDA's share in such markets would be substantial given its large statewide membership. The majority (and dissent) endorsed the FTC position as to the nature of the rule of reason inquiry, and expressed no concern with the Commission's market power analysis.
Ken Starling's suggestion that the case will force a significant change in the way the government proves its cases in the future appears to stem in part from his premise that the enforcement agencies have become accustomed to bringing rule of reason cases that are based on "near-presumptions" of anticompetitive harm and pay only "lip service" to proffered justifications. In fact, however, the recent era of antitrust enforcement at the agencies has been one of increased attention to efficiencies, both in the merger and non-merger context. In CDA — as the Commission noted in its opinion — efficiency justifications simply were not asserted except in the most general sense. Indeed, Chairman Pitofsky repeatedly sought at the oral argument before the Commission to elicit from CDA's counsel a procompetitive explanation for the restraints, but to no avail. And it is certainly not correct that the CDA majority "found that the FTC had developed no evidence to prove anticompetitive effects." It held that a quick look — along the lines performed by the Ninth Circuit — was insufficient, but made virtually no reference to what the Commission had found.2 In contrast, Justice Breyer's opinion for the dissenting justices contains numerous references to the Commission's factual findings.
A far less sweeping lesson that may be drawn from the CDA case for antitrust enforcers is the reminder that when dealing with cases involving the professions it may be useful to do more to make the case for the benefits of competition. Just as some judges are skeptical of the value of competition among hospitals, some are uncomfortable with advertising by professionals.3 As a result, they may be extremely receptive to arguments that consumers — who confront information asymmetries when purchasing computers, automobile repair services, etc. —are far less discerning when choosing a dentist and require special protections. A "back to basics" approach that details the consumer benefits from advertising, and the harms that flow even from limited restraints that impede the ability of competing sellers to communicate with consumers, seems likely to be an important part of the next antitrust challenge to professional association restraints on advertising.
1. These restraints do not appear in CDA's code of ethics, which merely bans false or deceptive advertising. Instead, they arise from CDA's interpretation and enforcement of its ban on deceptive advertising. Much of the trial was devoted to establishing the scope of the restraints, and demonstrating that these were indeed flat bans, imposed without regard to whether any individual ad was in fact false or deceptive. This was done largely through documentary evidence reflecting nearly 400 cases of enforcement by CDA and its local component dental societies.
2. Indeed, the Court specifically stated that "we do not reach the question of substantiality of the evidence supporting the Commission's conclusions." 119 S. Ct. at 1612.
3. Indeed, three of the five justices in the CDA majority have expressed the view that the decision in Bates v. State Bar of Arizona was unwise and should be reversed. See Shapero v. Kentucky Bar Ass'n, 486 U.S. 466, 480-91 (O'Connor, J., joined by Rehnquist C.J., and Scalia, J., dissenting).
The authors are, respectively, a staff attorney and Deputy Director of the FTC's Bureau of Competition. The views expressed are those of the authors only and do not necessarily represent those of the Federal Trade Commission or any Commissioner.