As JADA readers will recall, on May 24, 1999, the U.S. Supreme Court decided the case involving the California Dental Association’s advertising policies.1 The decision was a significant one in that the Supreme Court found that to show that CDA had violated antitrust laws, the Federal Trade Commission would have to prove CDA’s advertising policies had anticompetitive effects.
The U.S. Supreme Court vacated the judgment of the Ninth Circuit Court of Appeals, which had in its opinion affirmed the FTC’s ruling that CDA had violated the antitrust laws. In making its ruling, the FTC had used a form of analysis known as the "quick-look" rule of reason. The "quick-look" rule of reason allowed the Commission to make only a cursory review of CDA’s conduct in determining that there was an antitrust violation.
Under the rule of reason analysis, the party alleging an antitrust violation must first show the conduct has an anticompetitive effect in a relevant product and geographic market. If this is demonstrated, the defendant must show whether the conduct promotes a procompetitive goal. The rule of reason is violated only if a practice’s anticompetitive effect outweighs procompetitive benefits shown by the defendant.
The "quick-look" rule of reason is an abbreviated analysis used only to condemn practices that are "naked" restraints on price or output for which there are no procompetitive justifications.
In its ruling, the Supreme Court made it very clear that under the circumstances of a professional association utilizing its code of ethics in conjunction with professional advertising, a court could not merely presume a violation of the antitrust laws. On the contrary, the Supreme Court explicitly held that the FTC had to prove anticompetitive effects involving CDA’s advertising policies. That means that the FTC had to prove, in essence, that CDA’s policies decreased the output of dental services in the state of California.
After reaching its decision, the Supreme Court remanded the case to the Ninth Circuit Court of Appeals to allow the Ninth Circuit to determine if the FTC had in fact demonstrated that CDA’s advertising policies decreased the output of dental services in California. After the remand, the Ninth Circuit entered a briefing schedule and both the CDA and the FTC filed additional briefs. When all the briefs were filed, the Ninth Circuit set an oral argument date of April 19, 2000.
The overarching issue, of course, in this case was whether CDA’s advertising polices violated antitrust laws. CDA’s policies required that advertisements do the following:
- – state actual fees charged rather than state only that fees are low, reasonable or affordable;
- – include in across-the-board discount ads the discounted and regular fee, who is eligible and for what period;
- – include the factual foundation for quality ads.
The remainder of this article is a summary of my oral argument to the Ninth Circuit.
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THE ORAL ARGUMENT FOR THE CDA
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I began by advising the Court of the three questions that it had asked the parties to address in the Briefs to the Court, namely:
- Under the Supreme Court’s decision, what is the appropriate rule of reason analysis applicable to the California Dental Association’s advertising policies?
- Under this analysis and on the existing record, did the FTC sufficiently prove that CDA’s policies had an anticompetitive effect?
- What, if anything, should be remanded to the FTC for supplemental fact-finding?
I argued as follows:
The FTC was required to prove actual anticompetitive effects through empirical evidence.
I called to the Ninth Circuit’s attention that the Supreme Court found that the "striking disparities between the information available" to the dentist and the consumer "magnifies the dangers to competition associated with misleading advertising in the professional context,"2 and that the Supreme Court thus concluded that it is "at least equally plausible ... that restricting difficult to verify claims ... would have a procompetitive effect by preventing misleading or false claims that distort the market."2(p1616) I also noted that the Supreme Court observed that because CDA’s policies are as plausibly procompetitive as anticompetitive, or are competitively neutral, the FTC was required to prove anticompetitive effect rather than rely on theory, inference or assumption.
The Supreme Court was highly critical of the FTC’s failure to offer any empirical evidence of anticompetitive effect while requiring CDA to proffer "hard evidence" of pro-competitive impact by shifting the burden.2(p1615)
Recognizing its failure to provide any empirical evidence, the FTC maintains in the Ninth Circuit that it can satisfy its burden by relying on "empirical studies of other markets" in other cases or economic journals. Accordingly, the FTC looks to empirical studies that relate to other professional service markets in other parts of the country at other periods of time and that also relate to total bans on advertising and, therefore, are not relevant to CDA’s advertising policies. The Supreme Court clearly contemplated that the FTC must use empirical evidence of the impact of CDA’s policies on dentistry in California. The complete absence of any empirical evidence requires dismissal of the FTC’s complaint.
The FTC has failed to provide a sound theory of competitive injury.
Significantly, the Supreme Court also enunciated the rule that before shifting to a defendant the burden to show empirical evidence of procompetitive effects, the theoretical basis for the anticompetitive effects must be "properly identified" and actual anticompetitive effects must be shown.2(p1615) The FTC has failed to provide a sound theory. The foundation assumption of the FTC is that CDA’s policies constitute a total ban on several categories of advertising regardless of whether the claims were false or misleading. The record shows, and the Supreme Court determined, that CDA does not totally ban advertising and that, in fact, its policies "are very far from a total ban."2(p1614)
The FTC’s competitive effects theory is based on case law and economic studies relating to far more restrictive regulations than are involved in this case and in markets other than California dentistry. There are no agreements to "keep consumers ignorant" or not to "advertise prices" or to "suppress efforts to provide quality advertising" that the FTC says is anticompetitive. The CDA’s disclosure policies are designed to have the effect of "increasing" information to consumers.
The FTC’s theory does not fit this case. CDA’s policies are not analogous to a ban on advertising. The evidence shows that dental advertising is flourishing in California.
The FTC failed to show an actual effect on price, quality or output.
The FTC concedes that it did not quantify any "increase in price or reduction in output" caused by CDA’s advertising policies, and the administrative law judge who originally tried the case found specifically that FTC counsel produced no evidence of increased prices or reduced output. The challenged practices had been in place for 13 years prior to trial. The FTC’s total failure to show any market impact is dispositive. The FTC, in attempting to avoid this result, argues that it need only show that anticompetitive effects are "likely" combined with CDA’s market power. In the face of the Supreme Court’s opinion in this case, this argument is clearly erroneous.
The FTC did not establish that CDA’s policies are likely to harm competition.
The FTC urges that the Ninth Circuit’s prior decision on the substantiality of the evidence was not set aside by the Supreme Court. However, this is incorrect. The Ninth Circuit’s decision was based on the "quick-look" analysis.2(p1612) What may be sufficient evidence under the "quick-look" rule may clearly not be sufficient under the fuller rule of reason.
CDA’s price advertising policies.
The FTC points to across-the-board discount advertising and argues that these ads (that is, across-the-board ads) likely have been reduced. The record evidence shows that there are many reasons why dentists do not use across-the-board discount ads. More significantly, as the Supreme Court determined, "even assuming a prohibition against across-the-board discounts ads, it does not obviously follow that such a ban would have a net anticompetitive effect."2(p1614) The Supreme Court went on to observe that whether across-the-board ads complying with CDA’s advertising policies would be less effective than if they simply contained the discount is something requiring empirical evidence and not assumptions.2(p1614–5)
Next the FTC criticizes CDA’s policies requiring factual pricing information in lieu of unverifiable claims of "low or affordable fees" and urges that these unverifiable claims "signal" a dentist’s sensitivity to cost concerns. No economic literature was relied on for this. However, FTC Chairman Robert Pitofsky has stated that vague claims of "low" prices are difficult for consumers to evaluate,3 and other writers have written that unverifiable claims are rife with the potential for exploitation by sellers skilled at manipulating "signals" or "clues" relied on by consumers to judge a service’s quality or value.3(p17–8)
CDA’s quality advertising policies.
The Supreme Court clearly held that for the FTC to prevail regarding quality ad claims, it must establish that CDA’s policies tend "to limit the total delivery of dental services."2(p1615) Rather than meet this issue head-on, the FTC asserts that CDA imposes a "blanket suppression of quality claims." This argument is supportable neither by the record nor by the Supreme Court’s finding that although the universe of advertising might be reduced, the FTC has to show that the output or supply of dental services was reduced, which it did not do. On the contrary, with the amount of dental ads in California, the supply of dental services has increased.
The FTC failed in its attempt to show market power.
The administrative law judge squarely found that CDA did not have market power. The complete absence from this record of increased prices or reduced output or quality is persuasive evidence that CDA does not have market power.
There are no significant barriers to entry or expansion.
Because CDA membership is voluntary, it cannot prevent market entry in order to raise price or reduce quality or output. Indeed, the competition in California is so fierce that the administrative law judge found there was an oversupply of dentists in California.
Remand is unwarranted.
Immediately after the remand, the FTC requested that this case be returned to the FTC. It now is obvious why the FTC requested this relief. It has not proved with empirical evidence that CDA’s policies were anticompetitive.
If the FTC’s assumptions were correct, there were a variety of means that it could have shown by way of empirical evidence that CDA policies were anticompetitive. It tried this case after conducting only a cursory review of CDA’s conduct, and the Supreme Court found that this was not enough evidence to support proof of anticompetitive effects.
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CONCLUSION
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The FTC should not be given "two bites of the apple." All litigation at the appropriate time should come to an end. The Ninth Circuit should end this litigation by directing the FTC to dismiss its complaint.
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THE ORAL ARGUMENT FOR...
CONCLUSION
