Opinion ID: 747684
Heading Depth: 1
Heading Rank: 4

Heading: Analysis of the Advertising Restrictions

Text: 34 The Commission concluded that the CDA's restrictions on price advertising--namely, the effective ban on volume discounts and statements describing prices as low or reasonable--were per se violations of Section 1 of the Sherman Act and Section 5 of the FTC Act. We disagree with its use of per se analysis but sustain its alternative conclusion that an abbreviated rule of reason analysis applies. 35 There is some support among older cases for the FTC's use of per se scrutiny. See United States v. Gasoline Retailers Ass'n, 285 F.2d 688, 691 (7th Cir.1961) (finding ban on price signs to be part of conspiracy to stabilize prices). In recent cases, however, per se analysis has only applied to price fixing, output limitations, horizontal market divisions, tying, and group boycotts. See American Ad Management, Inc. v. GTE Corp., 92 F.3d 781, 784 (9th Cir.1996). The Supreme Court, and this court, have been unwilling to expand the categories of conduct subject to the per se prohibitions. See NCAA v. Bd. of Regents of Univ. of Oklahoma, 468 U.S. 85, 100, 104 S.Ct. 2948, 2959-60, 82 L.Ed.2d 70 (1984); American Ad Management, 92 F.3d at 784-85. This is especially true where the economic impact of the restraint is not immediately obvious, see Indiana Federation of Dentists, 476 U.S. at 458-59, 106 S.Ct. at 2017-18, and where the restraint is a rule adopted by a professional organization. See National Soc'y of Professional Engineers v. United States, 435 U.S. 679, 692-96, 98 S.Ct. 1355, 1365-68, 55 L.Ed.2d 637 (1978). 36 We do not doubt that the FTC has gained considerable experience with advertising restrictions since AMA. See Mass. Board, 110 F.T.C. at 549. It may be correct that some types of price advertising restrictions amount to bans on price competition that warrant per se condemnation. See Arizona v. Maricopa County Medical Soc'y, 457 U.S. 332, 344, 102 S.Ct. 2466, 2473, 73 L.Ed.2d 48 (1982) (Once experience with a particular kind of restraint enables the court to predict with confidence that the rule of reason will condemn it, it has applied a conclusive presumption that the restraint is unreasonable.). But we cannot endorse the use of per se analysis in this case, which concerns a set of ethical guidelines promulgated by a professional organization for the apparent purpose of preventing false and misleading advertising. Unlike the situation in AMA and Mass. Board, the CDA's policies do not, on their face, ban truthful, nondeceptive ads. The allegation instead is that the rules have been enforced in a way that restricts truthful advertising. The value of restricting false advertising (which may itself violate the FTC Act) counsels some caution in attacking rules that purport to do so but merely sweep too broadly. As a result, we do not believe that this type of restriction warrants per se condemnation without further inquiry into its effects on competition. 37 We therefore analyze the restraints under the rule of reason, which requires balancing the anticompetitive effects and possible efficiency gains or business justifications of the challenged practice. See Professional Engineers, 435 U.S. at 691, 98 S.Ct. at 1365. In this case, the FTC applied an abbreviated, or quick look, rule of reason analysis designed for restraints that are not per se unlawful but are sufficiently anticompetitive on their face that they do not require a full-blown rule of reason inquiry. See NCAA, 468 U.S. at 109-10 & n. 39, 104 S.Ct. at 2964-65 & n. 39 (The essential point is that the rule of reason can sometimes be applied in the twinkling of an eye. (internal quotations omitted)). It allows the condemnation of a naked restraint on price or output without an elaborate industry analysis. Id. at 109, 104 S.Ct. at 2964. Although we have held that the quick look analysis should be the exception, rather than the rule, see American Ad Management, 92 F.3d at 789, we conclude that the FTC properly applied it here. 38 The restrictions CDA placed on price advertising amounted in practice to a fairly naked restraint on price competition itself. As the Commission and courts have found, price advertising is fundamental to price competition--one of the principal concerns of the antitrust laws. It plays an indispensable role in the allocation of resources in a free enterprise system. Bates v. State Bar of Arizona, 433 U.S. 350, 364, 97 S.Ct. 2691, 2699, 53 L.Ed.2d 810 (1977). Restrictions on the ability to advertise prices normally make it more difficult for consumers to find a lower price and for dentists to compete on the basis of price. See id.; Morales v. Trans World Airlines, 504 U.S. 374, 388, 112 S.Ct. 2031, 2039, 119 L.Ed.2d 157 (1992). This is particularly true of a restriction on advertising price discounts, a significant basis of price competition. See Mass. Board, 110 F.T.C. at 605. 39 The complexity in this case is that CDA asserts as justification for its restrictions the legitimate, indeed procompetitive, goal of preventing false and misleading price advertising. In particular, it claims, the rules simply require more disclosure, which enhances rather than limits price competition. We agree that as a general matter disclosure can augment competition and increase market efficiency by providing consumers more information. The problem is with the nature and amount of disclosure required. As the Supreme Court has recognized in other contexts, disclosure requirements can become so onerous that they actually stifle the information that consumers receive. Morales, 504 U.S. at 389-90, 112 S.Ct. at 2039-40. In practice, CDA's disclosure requirements appear to prohibit across-the-board discounts because it is simply infeasible to disclose all of the information that is required. Indeed, the record provides no evidence that the rule has in fact led to increased disclosure and transparency of dental pricing. Consequently, we do not think this possible justification, on these facts, requires more than a quick look under the rule of reason.
40 The Commission also applied the quick look rule of reason analysis to the nonprice restrictions, such as the effective ban on quality and superiority claims. These restrictions are in effect a form of output limitation, as they restrict the supply of information about individual dentists' services. See Areeda & Hovenkamp, Antitrust Law p 1505 at 693-94 (Supp.1997). Limiting advertisements about quality, safety and other nonprice aspects of service prevents dentists from fully describing the package of services they offer, and thus limits their ability to compete. The restrictions may also affect output more directly, as quality and comfort advertising may induce some customers to obtain nonemergency care when they might not otherwise do so. CDA contends that claims about quality are inherently unverifiable and therefore misleading. While this danger exists, it does not justify banning all quality claims without regard to whether they are, in fact, false or misleading. Under these circumstances, we think that the restriction is a sufficiently naked restraint on output to justify quick look analysis. We also note in this regard the Supreme Court's repeated holdings that the scope of inquiry under the rule of reason is intended to be flexible depending on the nature of the restraint and the circumstances in which it is used. See Indiana Federation of Dentists, 476 U.S. at 459, 106 S.Ct. at 2018; Professional Engineers, 435 U.S. at 688, 692, 98 S.Ct. at 1363-64, 1365-66.
41 CDA challenges whether substantial evidence supports the FTC's conclusion that CDA's policies violated the rule of reason. Finding a violation under the rule of reason requires a showing of (1) an agreement, conspiracy or combination between two or more entities, (2) intent to restrain competition, (3) actual injury to competition, and (4) an unreasonable restraint as determined by balancing the harm caused by the restraint and any procompetitive benefits from it. 5 American Ad Management, 92 F.3d at 788-89. In particular, CDA contends that the Commission has not produced evidence that there was an agreement with the intent to restrain trade, that CDA in fact restricted truthful, nondeceptive advertising, and that CDA had sufficient market power for its regulations to actually harm competition.
42 CDA first argues that there was no evidence of an agreement in restraint of trade. We disagree. Professional associations are routinely treated as continuing conspiracies of their members. Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492, 500, 108 S.Ct. 1931, 1937, 100 L.Ed.2d 497 (1988) (quoting 7 P. Areeda, Antitrust Law p 1477, at 343 (1986)). CDA members are independent, profit-seeking dentists in competition with each other. By joining the CDA, they effectively agree to abide by the CDA's Code of Ethics. CDA's advertising policies and accompanying enforcement activities thus constitute a combination or agreement within the meaning of Section 1 of the Sherman Act.
43 CDA further argues that it did not intend to restrain trade. Instead, it contends, the purpose of the Code of Ethics was merely to comply with state law. But whatever its motivation, the point of the advertising policy was clearly to limit the types of advertising in which dentists could engage, and thereby restrict a form of competition. Good motives will not validate an otherwise anticompetitive practice. NCAA, 468 U.S. at 101 n. 22, 104 S.Ct. at 2960 n. 22.
44 A more difficult question is whether substantial evidence supports the Commission's conclusion that CDA in fact restricted truthful, nondeceptive advertising. On its face, the Code only extends to false and misleading advertisements. The Commission found that through its pattern of enforcement, the CDA went beyond the literal language of its rules to prohibit ads that were in fact true and nondeceptive. 6 The CDA's advisory opinions and guidelines indicate that across-the-board discounts and descriptions of prices as reasonable or low do not comply with the Code. Although these guidelines are not directly binding on member dentists, the Commission staff presented evidence that the CDA has relied on them in making decisions about members' advertising on appeals from disciplinary decisions by component societies and on review of membership applications referred by components. In numerous cases, the CDA advised components that advertising did not comply because it included reasonable or affordable language. 45 Similar evidence supports its findings on the issue of discounts. Although Dr. Kinney, one member of the Judicial Council, testified that the guidelines might not bar all across-the-board discounts, other testimony is to the contrary. For example, one member suggested that advertising a senior citizen discount, standing alone, would violate the rules. The Commission's opinion cites numerous cases in which the CDA advised members of objections to special offers, senior citizen discounts, and new patient discounts, apparently without regard to their truth. It may be that there is some confusion even within the CDA about the extent to which truthful price advertising is restricted. But there are enough examples of CDA objections to truthful ads to find that substantial evidence supports the FTC's conclusion. 46 In terms of the nonprice advertising, advisory opinion eight expressly states that claims as to the quality of services are inherently likely to be false or misleading. The evidence before the ALJ demonstrates that the CDA, following this guideline, has often advised components that the Code of Ethics bars such claims, without any inquiry into whether or not, in a particular case, they were true. On numerous occasions, CDA also informed its components that guarantees were barred by state law. Taken together, there is sufficient evidence that the CDA restricted nonprice advertising without any particular consideration of whether it was true or false.
47 Showing that the restraints harmed competition under the rule of reason typically requires some analysis of market power. Although the Commission did not engage in a detailed analysis of market power, and its conclusions on this issue conflict with those of the ALJ, we conclude that they suffice under the quick look rule of reason in light of the nature of the restraints involved. The FTC correctly concluded that the relevant product market is dentistry and the relevant geographic market is local. The fact that approximately 75 percent of licensed dentists in California belong to the CDA is fairly strong evidence of market share. While this fact alone does not indicate what the market shares are in particular localities, it strongly suggests that at least in many, CDA's market share is quite high. 48 The Commission also found that there are significant barriers to entry in the form of licensing and education which tend to convert this market share into market power. In addition, CDA membership offers sufficient benefits that exclusion appears to present a significant hardship for some dentists. CDA membership is necessary for membership in the ADA, which itself provides prestige and valuable benefits. The record does not show that dentists are willing to forego CDA membership rather than give up their advertisements. In fact, some dentists stated they feared losing the economic benefits of membership, such as insurance, if they were expelled or denied membership because of advertising. Even if the benefits from membership can be obtained elsewhere, their availability in a single package from CDA certainly gives CDA an edge over other options. Taken together, these circumstances suggest that CDA possesses enough market power to harm competition through its standard setting in the area of advertising. 49 It is true that the FTC did not engage in the full economic analysis of market power often required under the full rule of reason. But as Professor Areeda argues, What constitutes sufficient proof [of market power] will vary enormously both with the type of restraint and with common knowledge.... If large scale professional organizations like the American Medical Association promulgate rules against advertising, a court will see a significant restraint that needs to be analyzed without careful market definition. 7 P. Areeda, Antitrust Law p 1503, at 377. Given the facially anticompetitive nature of both the price and nonprice advertising restrictions, the evidence of the CDA's large market share and influence justifies finding a violation under the quick look rule of reason.