California Dental Assoc. v. FTC

• Citation: 224 F.3d 942
• Decision Date: 19 April 2000
• Docket Number: No. 96-70409,96-70409
• Parties: (9th Cir. 2000) CALIFORNIA DENTAL ASSOCIATION, Petitioner, v. FEDERAL TRADE COMMISSION, Respondent
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 942

224 F.3d 942 (9th Cir. 2000)

CALIFORNIA DENTAL ASSOCIATION, Petitioner, v. FEDERAL TRADE COMMISSION, Respondent.

No. 96-70409

U.S. Court of Appeals for the Ninth Circuit

Argued and Submitted April 19, 2000--Pasadena, California

Filed September 5, 2000

COUNSEL: Erik F. Dyhrkopp and Peter M. Sfikas, Bell, Boyd & Lloyd, Chicago, Illinois, for the petitioner.

Michael S. Fried, Attorney, and John F. Daly, Assistant General Counsel, Federal Trade Commission, Washington, D.C., for the respondent.

On Remand from the United States Supreme Court FTC No. 9259

Before: Herbert Y. C. Choy, and Cynthia Holcomb Hall, Circuit Judges, and Manuel L. Real, District Judge.^*

OPINION

HALL, Circuit Judge:

After affirming our prior judgment in part and reversing in part, the United States Supreme Court remanded this case for a determination of whether the California Dental Association's advertising restrictions are anti-competitive under rule-of-reason analysis. Having closely examined the record under the rule of reason, we conclude that the Federal Trade Commission failed to prove that the restrictions are anti-competitive. We therefore vacate and remand with instruction that the Commission dismiss its case against the Association.

I.

Petitioner, the California Dental Association ("CDA"), is a trade association for California dentists that is a part of the American Dental Association ("ADA"). CDA itself is composed of 32 local "component societies." Individual dentists in California must be a member of a component society to belong to CDA, and must have CDA membership to join the ADA. CDA membership is not a condition to obtaining a dentist's license from the State of California, but about 19,000 of the 26,000 licensed dentists in California belong to the association. CDA is organized as a nonprofit corporation under California law and qualifies for nonprofit status under I.R.C. S 501(c)(6).

CDA provides its members a variety of services, including lobbying, marketing and public relations on behalf of member dentists, seminars on practice management, assistance in compliance with OSHA and disability requirements, continuing education, placement services, an administrative procedure for handling patient complaints, and various publications. It also has several for-profit subsidiaries from which members can obtain liability insurance, financing for equipment and other purchases, discounts on long distance calling, auto leasing, and home mortgages.

Dentists must abide by the CDA Code of Ethics as a condition of membership. The Code provides that a dentist may be disciplined for unprofessional conduct as defined in the state's Dental Practice Act and for violating any state law relating to the practice of dentistry. The Code goes on to provide more specific ethical standards in various areas of practice. Most relevant to this case is section 10, which governs advertising. It states:

Although any dentist may advertise, no dentist shall advertise or solicit patients in any form of communication in a manner that is false or misleading in any material respect. In order to properly serve the public, dentists should represent themselves in a manner that contributes to the esteem of the public. Dentists should not misrepresent their training and competence in any way that would be false or misleading in any material respect.

To aid in interpreting this provision, CDA's Judicial Council, which is responsible for enforcing the Code, has released several advisory opinions. According to the Code, these opinions are not binding on member dentists but "may be considered as persuasive by the trial body and any disciplinary proceedings under the CDA Bylaws." The following are the advisory opinions most relevant here:

2. A statement or claim is false or misleading in any material respect when it:

a. contains a misrepresentation of fact;

b. is likely to mislead or deceive because in context it makes only a partial disclosure of relevant facts;

c. is intended or is likely to create false or unjustified expectations of favorable results and/or costs;

d. relates to fees for specific types of services without fully and specifically disclosing all variables and other relevant factors;

e. contains other representations or implications that in reasonable probability will cause an ordinarily prudent person to misunderstand or be deceived.

3. Any communication or advertisement which refers to the cost of dental services shall be exact, without omissions, and shall make each service clearly identifiable, without the use of such phrases as "as low as," "and up," "lowest prices," or words or phrases of similar import.

4. Any advertisement which refers to the cost of dental services and uses words of comparison or relativity -for example, "low fees" -must be based on verifiable data substantiating the comparison or statement of relativity. The burden shall be on the dentist who advertises in such terms to establish the accuracy of the comparison or statement of relativity.

. . .

8. Advertising claims as to the quality of services are not susceptible to measurement or verification; accordingly, such claims are likely to be false or misleading in any material respect.

These guidelines substantially mirror parts of the California Business and Professions Code. See Cal. Bus. & Prof. Code SS 651, 1680. CDA claims that its Code, along with the advisory opinions, is intended to ensure that dentists comply with these laws.

CDA has also issued a separate set of advertising guidelines intended to help members comply with the Code of Ethics and state law. According to the section on discount advertising, state law requires dentists offering discounts to list all of the following in the advertisement:

1. The dollar amount of the non-discounted fee for the service;

2. Either the dollar amount of the discount fee or the percentage of the discount for the specific service;

3. The length of time that the discount will be offered;

4. Verifiable fees pursuant to the Business and Professions Code; and

5. Specific groups who qualify for the discount or any other terms and conditions or restrictions for qualifying for the discount.

Both CDA and its component societies on their own enforce the advertising rules of the Code of Ethics. As a general matter, components undertake the initial investigation into a member's advertising and, if possible, resolve the matter at the local level. Typically, if the component's ethics committee concludes that a member's advertising is false or misleading in violation of CDA's Code of Ethics, it asks the member to discontinue or modify the advertisement. If the matter cannot be resolved or the component is unsure of how to apply the relevant standard under the Code, the case is referred to CDA's Judicial Council, which holds a hearing. If a violation is found, and no settlement is reached, CDA can impose penalties ranging from censure to expulsion.

CDA and its components also review the advertisements of applicants for membership. If the applicant does not agree to discontinue noncomplying advertising and the component considers denying the application for that reason, it can refer the case to CDA's Membership Application Review Subcommittee (known as "MARS"). After reviewing the advertising, MARS will recommend to the component that it grant or deny membership. In some cases, applicants with noncomplying advertising can be offered a form of conditional admission under which they must change their ads within a year.

In its complaint against CDA (the component societies were not made parties to this action), the Federal Trade Commission ("FTC") staff alleges that the CDA applied these advertising guidelines in a way that impermissibly restricted truthful, nondeceptive advertising in violation of section 5 of the FTC Act, 15 U.S.C. S 45. After a trial, Administrative Law Judge ("ALJ") Lewis Parker determined that CDA had barred members from making representations of "low" or "reasonable" or "affordable" prices. He also found that CDA effectively prohibited across-the-board discounts by requiring dentists to post the nondiscounted price for all of the services subject to the discount. As enforced, he determined, these policies barred forms of price advertisement without regard to whether they were false or misleading. Finally, the ALJ found that CDA limited various forms of "quality" advertising regardless of truth or falsity. In particular, CDA objected to quality claims of any kind because they might be read to imply superiority over other dentists and were unverifiable. The association also deemed guarantees and attempts to allay patients' fears, through such language as "gentle, quality care," and "special care for cowards," to be misleading, although the policy appears to have been relaxed on "gentleness" claims. The ALJ noted that CDA's components had engaged in similar behavior, although they were not charged in the complaint with violating the FTC Act.

The ALJ concluded that the FTC had jurisdiction over CDA's activities and CDA had conspired with its members and component societies to restrict advertising. Applying the FTC's decision in In re Massachusetts Board of Registration in Optometry, 110 F.T.C. 549 (1988) ("Mass. Board"), he held that the advertising restrictions were inherently suspect and had no plausible efficiency justification. Although he also found that CDA lacked market power, he held that a showing of market power was not necessary under Mass. Board. He concluded that CDA had unreasonably restrained competition in violation of section 5 of the FTC Act.

The majority of the Commission affirmed, on somewhat different reasoning. Chairman Pitofsky's opinion held that the restrictions on price advertising were unlawful per se. It further held that the nonprice advertising guidelines were unlawful under an abbreviated rule-of-reason analysis. In so doing, it disagreed with the ALJ...