California Dental Association v. Federal Trade Commission (05/24/1999)

By: Gina George, Medill News Service

Questions presented

1) Does the Federal Trade Commission have jurisdiction over the California Dental Association, a nonprofit professional association?2) Is there substantial evidence that the CDA's advertising policies, as applied, unreasonably restrain trade in violation of Section 1 of the Sherman Antitrust Act and Section 5 of the FTC Act?

Brief

A disgruntled dentist complained to the Federal Trade Commission when the California Dental Association prohibited him from including his name on materials distributed at a dental screening on school grounds.

When the FTC looked into the association's advertising policy, the agency found what it believed was a bigger problem.

The dental association's code of ethics also forbids its members from using prices or discounts in their advertisements unless all applicable rules and fees are disclosed. Members are also instructed not to claim they have superior service or the latest techniques.

The association can deny membership to a dentist who doesn't comply with the code. Members who violate the code can face a range of penalties, including expulsion from the association.

The FTC filed a complaint in 1993 that said the California Dental Association violated the Sherman Antitrust Act and the FTC Act because it applied its advertising guidelines in a way that restricted truthful, nondeceptive advertising.

The government agency applied a ""quick look"" analysis to determine that the dental association's advertising policy was anti-competitive, claiming the method was sufficient because of the obviousness of the restraint.

An administrative law judge ruled in favor of the FTC in 1995, stating that the agency had jurisdiction over the dental association's activities and that even though the nonprofit association lacked market power, it had unreasonably restrained competition in violation of the Sherman Act and the FTC Act.

The FTC ordered the association to stop enforcing its advertising policies in 1996.

The association appealed to the FTC, where a panel of commissioners voted 4-1 against the dental association, but for different reasons than the administrative law judge used. The majority said that the association had sufficient market power to justify a finding of anti-competitive effect.

The association appealed to the 9th Circuit Court of Appeals, which also divided in its decision in 1997 to affirm the FTC order.

Appeals Judge Cynthia Holcomb Hall, writing for the majority, said that the FTC had jurisdiction because ""the CDA is engaged in substantial business activities that provide tangible, pecuniary benefits to its members."" Hall cited a related ruling in Community Blood Bank v. FTC, in which the 8th Circuit Court of Appeals held the FTC has jurisdiction over an entity that engages in business for profit, where gain from business or investment exceeds expenditures.

The court supported the FTCs quick look analysis of the dental associations market power, stating, ""The fact that approximately 75 percent of licensed dentists in California belong to the CDA is fairly strong evidence of market share.""

The court also found that the agency had substantial evidence that ""the CDA went beyond the literal language of its rules to prohibit ads that were in fact true and nondeceptive.""

In his dissent, District Judge Manuel L. Real, sitting by designation, wrote that the FTC lacked proof that the dental association restricted trade. ""The majority finds a restraint on competition without the supporting help from any of the economic principles to be applied to a full market power analysis.""

Real also argued that the FTC did not have jurisdiction. ""The CDA is a nonprofit professional association that does not operate commercially.""

The California Dental Association appealed to the U.S. Supreme Court, continuing to hold that the government agency does not have jurisdiction, and that it needs to prove that the dental association's rules have an anti-competitive effect. The Court granted certiorari on Sept. 29, 1998.

Amicus briefs were filed on behalf of the CDA by the National Society of Professional Engineers, the American College for the Advancement of Medicine, The American Society of Association Executives and the AmericanDental Association.

On May 24, 1999, the Court held that ""the Commissions jurisdiction under the FTC Act extends to an association that, like the CDA, provides substantial economic benefit to its for-profit members, but that where, as here, any anticompetitive effects of given restraints are far from intuitively obvious, the rule of reason demands a more thorough enquiry into the consequences of those restraints than the Court of Appeals performed.""

The opinion, written by Justice David Souter was unanimous on the issue of the FTC's jurisdiction over membership organizations whose purpose is to confer economic benefits on their profit-seeking members, and divided 5-4 on the question of whether the dental association's advertising policy actually had an anticompetitive effect. The dissent, written by Justice Stephen Breyer and joined by Justices John Paul Stevens, Anthony Kennedy and Ruth Bader Ginsburg would have affirmed the Commission's findings.

The Court vacated the appeals court judgment and remanded the case.