FTC Upholds Charges Against Advertising Restrictions By California Dental Association
Orders Group to Rescind Restrictions, Reinstate Disciplined Dentists
The Federal Trade Commission has issued an order that will prohibit the California Dental Association (CDA) from imposing a host of restrictions on the advertising and solicitation practices of its members. The order follows the Commission’s determination that CDA illegally restrained the advertising of the price, quality and availability of dental services. In a key section of the opinion, the majority found that a broad restriction on advertising of low prices and discounts is as anticompetitive as outright price fixing, and deserves to be treated harshly under the antitrust laws.
The Commission’s opinion, authored by FTC Chairman Robert Pitofsky, explains that “[t]he order we impose leaves CDA free to regulate false and misleading forms of marketing and advertising by its members, but does not allow it to impose broad categorical bans on truthful and nondeceptive advertising of the price, quality, or availability of dental services.”
CDA is a professional association based in Sacramento and composed of 32 component societies with a total of 19,000 members. Members in active practice comprise about 75 percent of the dentists in California, and up to 90 percent or more of the dentists in certain areas of the state.
According to the FTC complaint detailing the charges in this case, CDA rules prohibit dentists from engaging in a variety of truthful, nondeceptive advertising, and the association has expelled members who violated the rules and denied membership to dentists who had advertised in a manner unacceptable to the association. The challenged rules:
- essentially prohibit certain categories of price ads, including across-the-board discount offers (such as senior citizen discounts and coupons for new patients), and bar statements such as “inexpensive fees” and “care at reasonable prices”
- prohibit claims about the quality or superiority of dental services; and
- discourage the solicitation of new patients by prohibiting dentists from reporting the results of free dental screenings of school children on forms bearing the dentists’ names and addresses.
The FTC announced its complaint in the case in 1993, and the charges were upheld by Administrative Law Judge Lewis F. Parker in a July 1995 decision. CDA appealed, and the Commission heard oral argument on Nov. 15, 1995. In its appeal, CDA argued as threshold issues that it is a nonprofit organization beyond the reach of FTC authority, and that the ALJ erred in finding that CDA conspired with its members to restrict advertising. The Commission rejected these arguments.
On the first point, the Commission opinion states that the nonprofit exemption from Commission jurisdiction “extends only to corporations that are ?in law and in fact charitable,’” and that because CDA’s services engender many pecuniary benefits for its for-profit members, the association is subject to FTC authority. On the second point, CDA argued that the association and its members are like a corporation and its wholly-owned subsidiary which are generally understood to be legally incapable of conspiring with one another because they are not separate economic actors. The Commission disagreed, stating that CDA member dentists “do not shed their economic identities as competitors . . . upon joining the association . . . [and] were we to conclude otherwise, a cartel would evade liability . . . simply by organizating itself as a trade association.” The Commission also rejected CDA’s contention that the restrictions were imposed independently by each component society, stating “there is ample evidence in the record that the restrictions at the heart of this case were promulgated and enforced directly by, or at the direction of, CDA itself.”
The Commission then turned to the advertising restraints themselves, and held that the price restrictions could be deemed illegal per se (that is without conducting a detailed analysis of their costs and benefits) as naked attempts to eliminate price competition. As to CDA’s arguments that the price restrictions are procompetitive because they are intended to protect consumers from unfair or deceptive advertising, the Commission said CDA had “entirely failed” to explain how the claims banned by the restrictions harmed consumers.
The Commission conducted a more detailed review of the competitive effects of the advertising restraints not related to price, and concluded there were substantial anticompetitive effects, that CDA has the power to enforce the restrictions and thereby to withhold information that consumers value, and that there are no countervailing consumer benefits that justify them.
These restraints, the Commission found, “hamper dentists in their ability to attract patients to their practice[,] . . . are likely to reduce output[,] . . . [and] thus deprive consumers of information they value and of healthy competition for their patronage.” The Commission then analyzed CDA’s market power, noting that CDA controlled the practice of at least 75 percent of California’s dentists, who “place a high value on the benefits of membership in CDA . . . [and] [w]hen faced with a choice between membership and advertising . . . overwhelmingly choose the former.” It also is difficult for new dentists to begin practicing in California, the Commission found, while adding that “the idea that fully licensed dentists from other states would move in significant numbers to California to take advantage of the opportunity to advertise in competition with members of CDA is implausible at best.”
The Commission then examined whether CDA’s regulations presented any efficiencies, and found none. Although false, misleading, unfair, or unsubstantiated advertising harms consumers, “the record will not support the claim that CDA's actions are limited to advancing that goal," the opinion states. The Commission noted, similarly, that "[w]hile efforts to exploit youthful consumers and other particularly vulnerable groups have been challenged and condemned as deceptive and unfair in a variety of contexts, that rationale is misplaced here, given that the only apparent commercial effect of furnishing the prohibited identifying information to children could be to provide their parents with the means of contacting the dentist."
Finally, the Commission rejected CDA’s argument that its restrictions are similar to state-imposed advertising regulations and, thus, are legal. CDA’s arguments come up short, in part, the Commission said, because the state law does not contemplate private enforcement and the state does not supervise CDA’s enforcement of advertising restrictions. Moreover, the Commission said, “[g]iven the absence of state enforcement, it was CDA, not California, that tampered with the workings of the market for dental services.”
The order the Commission has issued requires CDA:
- to refrain from interfering with the solicitation of patients, specifically barring restrictions against dentists putting their names on forms in connection with dental screenings at public schools;
- to update its Code of Ethics to comply with the above;
- for 10 years, to refrain from suggesting or inducing any non-governmental entity to engage in the above restrictions;
- to terminate for one year any affiliation with a component society that is violating the advertising restriction prohibitions;
- to publish the Commission’s order and complaint, as well as an announcement describing the order’s effect, in the CDA Journal;
- to notify members currently or previously subject to CDA disciplinary orders because of their advertising or solicitation practices and to reinstate or grant membership to those who were treated adversely under CDA’s unlawful policy; and
- to establish a compliance program.
The Commission order would not prohibit ethical guidelines against false or deceptive advertising, or against solicitation of patients vulnerable to undue influence. Nor would it prohibit CDA from encouraging members to comply with state law, or from disciplining members who face court or state action.
The order will become binding on CDA 60 days after it is served. The Commission vote to issue the opinion and order was 4-1, with Commissioner Mary L. Azcuenaga dissenting and issuing a statement. Commissioner Roscoe B. Starek, III, issued a statement in which he concurred with the finding of liability but dissented in part as to the reasoning.
In her statement, Commissioner Azcuenaga said she did not join her colleagues in finding liability. She said that the Commission’s opinion overrules the method of analysis set forth in Massachusetts Board of Registration in Optometry (Mass. Board), a 1988 Commission decision that she said was an attempt to further a Supreme Court trend toward “antitrust analysis that focused more on competitive effects and efficiencies than on labels.” She dissented on that ground and also noted that she preferred to “apply the per se rule more sparingly than the majority has in this case.” She added: “The per se rule, which dispenses with consideration of efficiencies, should be circumscribed accordingly,” she said.
Azcuenaga also said: “Even assuming that CDA’s advertising policies are broader or more burdensome than necessary to prevent deceptive advertising, the majority’s rule of reason analysis is troubling.” She suggested that, under the rule of reason, the case could have been “disposed of on ease of entry alone,” and expressed concern that the majority’s analysis “implicitly suggests the adoption of a new standard for evaluating barriers to entry.”
In his statement, Commissioner Starek wrote that he could not join in the majority’s decision not to follow the Mass. Board truncated rule-of-reason analysis, and instead to condemn per se all agreements among competitors to restrain truthful, nondeceptive price advertising. “As the majority acknowledges, had it followed a horizontal restraints analysis based on Mass. Board, the result in the present case would have been the same: CDA’s advertising restrictions would have been condemned as unreasonable restraints of trade without an elaborate ?full’ rule of reason inquiry.” Emphasizing the need to engage in some measure of rule-of-reason analysis before condemning all truthful price advertising restraints that may come before the Commission in future cases, Commissioner Starek added: “The rule of reason approach prevails because whenever antitrust analysis is too far removed from an inquiry into actual effects upon actual markets, the risks of overdeterrence rise dramatically.”
Copies of the opinion and order, the Commissioners’ full statements, and other documents associated with this case, are available from the FTC’s Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-2222; TTY for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710. FTC news releases and other materials also are available on the Internet at the FTC’s World Wide Web site at: http://www.ftc.gov
(FTC Docket No. D 9259)