California Dental Ass'n v. F.T.C.

• Decision Date: 22 October 1997
• Docket Number: No. 96-70409,96-70409
• Citation: 128 F.3d 720
• Parties: 1997-2 Trade Cases P 71,954, 97 Cal. Daily Op. Serv. 8120, 97 Daily Journal D.A.R. 13,159 CALIFORNIA DENTAL ASSOCIATION, Petitioner, v. FEDERAL TRADE COMMISSION, Respondent.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 720

128 F.3d 720

1997-2 Trade Cases P 71,954, 97 Cal. Daily

Op. Serv. 8120,

97 Daily Journal D.A.R. 13,159

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

No. 96-70409.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted July 16, 1997.

Decided Oct. 22, 1997.

Peter M. Sfikas, Bell, Boyd & Lloyd, Chicago, IL, for petitioner.

Ernest J. Isenstadt, Assistant General Counsel, Federal Trade Commission, Washington, DC, for respondent.

Petition for Review of an Order of the Federal Trade Commission. FTC Docket No. 9259.

Before: CHOY and HALL, Circuit Judges, and REAL, District Judge. ^*

Opinion by Judge HALL; Dissent by Judge REAL.

CYNTHIA HOLCOMB HALL, Circuit Judge.

The California Dental Association ("CDA") petitions for review of an order of the Federal Trade Commission ("FTC") that it cease and desist from restricting certain types of advertising by its members. The issues are whether the FTC has jurisdiction over the CDA and whether substantial evidence supports its conclusion that the CDA's advertising policies, as applied, unreasonably restrain trade in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1, and Section 5 of the FTC Act, 15 U.S.C. § 45. We have jurisdiction pursuant to 15 U.S.C. § 45(c) and affirm.

I. BACKGROUND

A. The CDA

The CDA is a trade association for licensed dentists in the State of California. It is part of the American Dental Association ("ADA") and is itself composed of 32 local "component societies." Individual dentists must be a member of a local component to belong to the CDA, and must belong to the CDA to join the ADA. CDA membership is not a condition to obtaining a dentist's license from the state, but roughly 75 percent of the practicing licensed dentists in California belong to it. The CDA is organized as a nonprofit corporation under California law and federal tax law.

The CDA provides its members a variety of services, such as lobbying, marketing and public relations, seminars on practice management, assistance in compliance with OSHA and disability requirements, continuing education, placement services, and administrative procedures for handling patient complaints. It also has several for-profit subsidiaries from which members can obtain liability and other types of insurance, financing for equipment purchases, long-distance calling discounts, auto leasing, and home mortgages. CDA membership also allows access to a broad range of similar benefits from ADA membership.

B. The CDA's Advertising Policy

As a condition of membership, dentists agree to follow the CDA Code of Ethics, which provides that dentists may be disciplined for unprofessional conduct and violations of state law relating to the practice of dentistry. This case concerns the Code's ethical standards concerning advertising. The basic rule is set out in section 10 of the Code, which 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."

The CDA's Judicial Council, which is responsible for enforcing the Code, has released the following advisory opinions elaborating upon the ethical standard for advertising: ¹

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.

The advisory opinions substantially mirror parts of the California Business and Professions Code. See Cal. Bus. & Prof.Code §§ 651, 1680. The CDA claims that its Code, as explained by the advisory opinions, is intended to ensure that dentists comply with these laws.

The CDA has also issued an additional 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 nondiscounted 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; and

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

According to the testimony of current and former CDA officials, the state Board of Dental Examiners generally does not pursue violations of state laws on advertising by dentists, and CDA has attempted to fill in the gap with its own enforcement efforts.

Both the CDA and its component societies enforce the CDA's advertising rules. Typically, components undertake the initial investigation into a member's advertising and, if possible, resolve the matter at the local level without CDA's involvement. Thus, if a component ethics committee concludes that a member's advertising is false or misleading in violation of the Code, it asks the member to discontinue or modify the advertisement. If the member does not agree or the component is unsure of how to apply the relevant standard under the Code, the case is referred to the CDA Judicial Council, which holds a hearing. If it finds a violation, and no settlement can be reached, the CDA can impose a range of penalties including censure, suspension and expulsion.

The CDA and its components also review the advertisements of applicants for membership. If the applicant does not agree to discontinue noncomplying advertisements, and the component intends to deny the application for that reason, it can refer the case to the CDA's Membership Application Review Subcommittee. After its own review, the subcommittee recommends to the component that it grant or deny membership. Applicants who are new dentists have sometimes been offered conditional admission under which they must agree to bring their advertisements into compliance within a year. Since 1990, some dentists have been admitted on condition that the component "counsel" them about their advertising and that the dentist agree to comply with its advice.

C. Proceedings Before the ALJ

The Commission's complaint against the CDA alleged that the organization applied its advertising guidelines in a way that restricted truthful, nondeceptive advertising. ² It contended that this practice violated Section 1 of the Sherman Act, 15 U.S.C. § 1, and consequently Section 5 of the FTC Act, 15 U.S.C. § 45. After a trial, the ALJ found that CDA had barred members from representing that their prices were "low," "reasonable" or "affordable." He also found that the CDA effectively prohibited across-the-board discounts by requiring dentists to post the nondiscounted price for all of the services subject to the discount. In both cases, the policy did not take into account whether the ads were false or misleading. In addition, he found that CDA restricted much advertising based on quality because it might imply superiority over other dentists and is difficult to verify. The CDA also considered money-back guarantees to be misleading and therefore impermissible. ³

The ALJ concluded that the FTC had jurisdiction over the CDA's activities. 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 lacked a plausible efficiency justification. Although he found that the CDA lacked market power, he held that a showing of market power was unnecessary under the Mass. Board standard. Consequently, he determined that the CDA had unreasonably restrained competition in violation of Section 1 of the Sherman Act and Section 5 of the FTC Act.

D. Proceedings before the Commission

The majority of the Commission affirmed, on somewhat different reasoning. Chairman Pitofsky's opinion did not rely on Mass. Board but instead held that the restrictions on price advertising were unlawful per se. ⁴ It further held that the nonprice advertising guidelines were unlawful under an abbreviated rule of reason analysis. It disagreed with the ALJ and found that CDA possessed sufficient market power to justify a finding of anticompetitive effect. Commissioner Starek concurred in the result but would have applied the Mass. Board reasoning. Commissioner Azcuenaga dissented, arguing that there was insufficient evidence to...