The rule of reason after California dental

Antitrust Law Journal

Volumn 68, Issue 2, 2000, Pages 527-538

  Muris, Timothy J ^a  

^a GEORGE MASON UNIVERSITY   (United States)

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EID: 0347487358     PISSN: 00036056     EISSN: None     Source Type: Journal    
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References (52)

1. 119 S. Ct. 1604 (1999).
2. See Timothy J. Muris, The Federal Trade Commission and the Rule of Reason: In Defense of Massachusetts Board, 66 ANTITRUST L.J. 773 (1998); Timothy J. Muris, The New Rule of Reason, 57 ANTITRUST L.J. 859 (1989).
3. See Timothy J. Muris, The Federal Trade Commission and the Rule of Reason: In Defense of Massachusetts Board, 66 ANTITRUST L.J. 773 (1998); Timothy J. Muris, The New Rule of Reason, 57 ANTITRUST L.J. 859 (1989).
4. Broadcast Music, Inc. v CBS, Inc., 441 U.S. 1 (1979). For the genesis of BMI, see Judge Taft's famous opinion in United States v. Addyston Pipe & Steel Co., 85 F. 271 (6th Cir. 1898), aff'd as modified 175 U.S. (217) (1899), and Robert Bork's classic articles on the rule of reason, Robert H. Bork, The Rule of Reason and the Per Se Concept, Price Fixing and Market Division [I], 74 YALE L.J. 775 (1965); Robert H. Bork, The Rule of Reason and the Per Se Concept, Price Fixing and Market Division [II], 75 YALE L.J. 373 (1966).
5. Broadcast Music, Inc. v CBS, Inc., 441 U.S. 1 (1979). For the genesis of BMI, see Judge Taft's famous opinion in United States v. Addyston Pipe & Steel Co., 85 F. 271 (6th Cir. 1898), aff'd as modified 175 U.S. (217) (1899), and Robert Bork's classic articles on the rule of reason, Robert H. Bork, The Rule of Reason and the Per Se Concept, Price Fixing and Market Division [I], 74 YALE L.J. 775 (1965); Robert H. Bork, The Rule of Reason and the Per Se Concept, Price Fixing and Market Division [II], 75 YALE L.J. 373 (1966).
6. NCAA v. Board of Regents of the Univ. of Okla., 468 U.S. 85 (1984).
7. FTC v. Indiana Fed'n of Dentists, 476 U.S. 447 (1986). 6 441 U.S. at 19-20 (quoting United States v. United States Gypsum Co., 438 U.S. 422, 441 n.16 (1978) (citations omitted)).
8. I discuss justifications in Muris, New Rule, supra note 2, at 861-63. Arizona v. Maricopa County Medical Society, 457 U.S. 332 (1982), is the only recent Supreme Court decision that does not fit easily within the post-BMI framework. Nevertheless, in the context in which the case was argued, the result appears consistent, given that the Court clearly indicated that competitors who act jointly could avoid the per se price-fixing rule when they form "partnerships or other joint arrangements in which [they] . . . pool their capital and share the risks of loss . . ." Id. at 356. Given the facts before the Court, the result can be understood as holding that a facially suspect practice, jointly seting price, was not shown to be ancillary to any efficiency-enhancing arrangement that could justify it.
9. FTC v. Superior Ct. Trial Lawyers' Ass'n, 493 U.S. 411 (1990).
10. Palmer v. BRG of Ga., Inc., 498 U.S. 46 (1990).
11. 121 F.T.C. 190, 284. I discuss Chairman Pitofsky's opinion at length in Muris, Mass. Bd., supra note 2, at 786-92.
12. California Dental Ass'n, 121 F.T.C. at 190 (1996).
13. Id. Although he wanted to retain strict per se categorization, he was also willing to apply an abbreviated analysis to find a rule of reason violation.
14. California Dental Ass'n v. FTC, 128 F.3d 720, 727 (9th Cir. 1997).
15. 119 S. Ct. at 1618.
16. This does not mean, as we shall see shortly, that a restraint can never be per se illegal, nor does it mean that categorization has no role in antitrust analysis. See infra Part II.
17. 119 S. Ct. at 1612.
18. Id. at 1617.
19. Id. at 1613.
20. Id.
21. Id. at 1607 (quoting George Akerlof, The Market for "Lemons": Quality Uncertainty and the Market Mechanism, 84 Q.J. ECON. 495 (1972)).
22. Id.
23. Id. at 1614.
24. Id. at 1612.
25. Id. at 1613.
26. Because the Commission and the Ninth Circuit in fact found such power existed, one might argue that CDA is consistent with the notion that market power is nonetheless required. Such an interpretation is strained. All three opinions below produced at least one jurist rejecting a finding of market power. Moreover, the record lacked extensive evidence of market power, given that the case was tried on an essentially per se theory. When the plaintiff can satisfy the Court on the "easily ascertained" nature of anticompetitive effects, CDA does not even suggest that an additional requirement, for example, market power, is needed. Justice Breyer's dissent stated that the Commission had met its burden of showing that the parties had "sufficient market power to make a difference." Id. at 1621. Given the record evidence, he would not require what the CDA and dissenters below demanded, namely, a detailed inquiry into defining markets and measuring the impact of the restraints in these markets.
27. Massachusetts Bd. of Registration in Optometry, 110 F.T.C. 549 (1988).
28. United States v. Topco Associates, Inc., 405 U.S. 596 (1972), was the Court's worst example. The case involved a cooperative association of numerous small-and medium-sized regional supermarket chains operating, across the membership, in many states. Topco-brand private label products were developed, to be sold only in designated territories, which were usually exclusive. Although member chains expanded into each other's territories, they could not sell Topco brands in a territory in which other members held the rights. The Supreme Court found the restraints illegal per se. It never challenged the finding below that the territorial restrictions were "ancillary and subordinate to the fulfillment of the legitimate, procompetitive purpose of the Topco cooperative, reasonable and in the public interest." 319 F. Supp. 1031, 1038 (N.D. Ill. 1970). Instead, the Court acknowledged the procompetitive purposes and effects of the Topco private-label program, yet emphasized the irrelevance of such factors. In Topco the Court stated for the first time that per se rules are not part of rule of reason analysis and have no relationship to the reasonableness of a practice.
29. Brief for the United States as Amicus Curiae in support of Reversal, at 10, NCAA v. Board of Regents, 468 U.S. 85 (1984) (No. 97-1624) (footnote omitted).
30. OLIVER WENDELL HOLMES, JR., THE COMMON LAW 1 (100 Anniv. ed. 1981).
31. Northern Pac. Ry. Co. v. United States, 356 U.S. 1, 5 (1958); see also FTC v. Indiana Fed'n of Dentists, 476 U.S. 447, 458-59 (1986); Arizona v. Maricopa County Med. Soc'y, 457 U.S. 332, 344 (1982); Broadcast Music, Inc. v. CBS, Inc., 441 U.S. 1, 19 n.33 (1979).
32. 119 S. Ct. at 1617 (emphasis added).
33. For a full discussion of the evidence, see Timothy J. Muris, California Dental Association v. Federal Trade Commission: The Revenge of Footnote 17, 8 SUP. CT. ECON. REV. 265 (2000) and sources cited therein.
34. James H. Love & Jack H. Stephens, Advertising, Pricing, and Quality in Self-Regulating Professions: A Survey, 3 INT'L J. ECON. BUS. 227 (1996).
35. Id.
36. See Love & Stephens, supra note 33; see also J. HOWARD BEALES & TIMOTHY J. MURIS, STATE and FEDERAL REGULATION OF NATIONAL ADVERTISING 8-9 (1993). The Court itself cited some of this evidence in its earlier First Amendment cases. See, e.g., Bates v. State Bar of Ariz., 433 U.S. 378 (1977). The one study that found restricting advertising lowered prices is flawed. See Muris, supra note 32.
37. JOHN F. CADY, RESTRICTED ADVERTISING AND COMPETITION: THE CASE OF RETAIL DRUGS (American Enterprise Institute 1976); John F. Cady, An Estimate of the Price Effects on Restrictions on Drug Price Advertising, 14 ECON. INQUIRY 495, 504 (1976).
38. JOHN F. CADY, RESTRICTED ADVERTISING AND COMPETITION: THE CASE OF RETAIL DRUGS (American Enterprise Institute 1976); John F. Cady, An Estimate of the Price Effects on Restrictions on Drug Price Advertising, 14 ECON. INQUIRY 495, 504 (1976).
39. WILLIAM W. JACOBS ET AL., IMPROVING CUSTOMER ACCESS TO LEGAL SERVICES: THE CASE FOR REMOVING RESTRICTIONS ON TRUTHFUL ADVERTISING (FTC Staff Report 1984). Love & Stephens, supra note 33, do not cite this study.
40. See Love & Stephens, supra note 33, at 237.
41. RONALD S. BOND ET AL., EFFECTS OF RESTRICTIONS ON ADVERTISING AND COMMERCIAL PRACTICE IN THE PROFESSIONS: THE CASE OF OPTOMETRY (FTC Bureau of Economics Report 1980).
42. John Kwoka used part of the FTC data to analyze one measure of quality frequently discussed - the time that the professional spends with the patient. Opponents of advertising argue that less time will be spent, necessarily causing a less thorough, and therefore lower quality, examination. Kwoka's analysis revealed not only that this quality dimension was not lower, but instead was greater in markets in which advertising prevailed. John E. Kwoka, Jr., Advertising and the Price and Quality of Optometric Services, 74 AM. ECON. REV. 211 (1984).
43. By itself, a quality difference would not justify restraints on advertising. Quality differences are common, including in markets in which quality is difficult to measure. High quality producers use devices, such as guarantees and advertising, to convince consumers of their superiority. Some consumers may prefer lower quality at a lower price, while others may prefer the higher quality at a higher price. Antitrust law normally allows consumers to make these decisions, preventing providers from restricting the information available. Accordingly, even a study that revealed that advertising did lower overall quality in a market may simply reflect consumer desires. From an economic perspective, we cannot judge the impact by looking at prices or quality in isolation. Even if restrictions on advertising increase quality, they may raise price so much that consumers would prefer lower quality and lower prices. The airline industry provides an example. Before deregulation, unable to compete on price, airlines competed on quality. Thus, airlines provided higher quality through better food, more room (particularly with most flights far less than full), and other amenities. Price, however, was dramatically higher than today. Although many aspects of quality have dropped, most consumers prefer the lower price/quality combination. Those who prefer higher quality, such as more room and better food, can always fly first class. See GEORGE W. DOUGLAS & JAMES C. MILLER III, ECONOMIC REGULATION OF DOMESTIC AIR TRANSPORTATION: THEORY AND POLICY (1974); Clifford Winston, U.S. Industry Adjustments to Economic Deregulation, 12 J. ECON. PERSP. 89 (1998). As Winston details, one area of airline quality has increased - service frequency. Id. at 101.
44. By itself, a quality difference would not justify restraints on advertising. Quality differences are common, including in markets in which quality is difficult to measure. High quality producers use devices, such as guarantees and advertising, to convince consumers of their superiority. Some consumers may prefer lower quality at a lower price, while others may prefer the higher quality at a higher price. Antitrust law normally allows consumers to make these decisions, preventing providers from restricting the information available. Accordingly, even a study that revealed that advertising did lower overall quality in a market may simply reflect consumer desires. From an economic perspective, we cannot judge the impact by looking at prices or quality in isolation. Even if restrictions on advertising increase quality, they may raise price so much that consumers would prefer lower quality and lower prices. The airline industry provides an example. Before deregulation, unable to compete on price, airlines competed on quality. Thus, airlines provided higher quality through better food, more room (particularly with most flights far less than full), and other amenities. Price, however, was dramatically higher than today. Although many aspects of quality have dropped, most consumers prefer the lower price/quality combination. Those who prefer higher quality, such as more room and better food, can always fly first class. See GEORGE W. DOUGLAS & JAMES C. MILLER III, ECONOMIC REGULATION OF DOMESTIC AIR TRANSPORTATION: THEORY AND POLICY (1974); Clifford Winston, U.S. Industry Adjustments to Economic Deregulation, 12 J. ECON. PERSP. 89 (1998). As Winston details, one area of airline quality has increased - service frequency. Id. at 101.
45. Detroit Auto Dealers Ass'n, 111 F.T.C. 417 (1989), aff'd in part and remanded, 955 F.2d 457 (6th Cir. 1992), modified on remand, 119 F.T.C. 891 (1995), remanded with direction for a hearing for further modification, 84 F.3d 787 (6th Cir. 1995).
46. Detroit Auto Dealers Ass'n, 111 F.T.C. 417 (1989), aff'd in part and remanded, 955 F.2d 457 (6th Cir. 1992), modified on remand, 119 F.T.C. 891 (1995), remanded with direction for a hearing for further modification, 84 F.3d 787 (6th Cir. 1995).
47. Detroit Auto Dealers Ass'n, 111 F.T.C. 417 (1989), aff'd in part and remanded, 955 F.2d 457 (6th Cir. 1992), modified on remand, 119 F.T.C. 891 (1995), remanded with direction for a hearing for further modification, 84 F.3d 787 (6th Cir. 1995).
48. Detroit Auto Dealers Ass'n, 111 F.T.C. 417 (1989), aff'd in part and remanded, 955 F.2d 457 (6th Cir. 1992), modified on remand, 119 F.T.C. 891 (1995), remanded with direction for a hearing for further modification, 84 F.3d 787 (6th Cir. 1995).
49. Massachusetts Bd. of Registration in Optometry, 110 F.T.C. 549, 604 (1988). Although Chairman Pitofsky attempted to overturn Massachusetts Board in his CDA opinion, the rejection of his per se analysis in both the Ninth Circuit and the Supreme Court will require the FTC to either return to Massachusetts Board or attempt to develop a different framework for applying truncated analysis. The NCAA brief, supra note 28, and the Massachusetts Board opinion itself explain why the framework is the best interpretation of the relevant Court opinions. I provide my own reasons for supporting Mass Board in Muris, New Rule, supra note 2, and Muris, Mass. Board, supra note 2.
50. The validity inquiry helps solve one of CDA's apparent mysteries: why was this restraint on advertising suspect enough that a detailed market power inquiry was unnecessary, yet CDA did not have the burden of persuassion regarding its purported justification? Under the Mass. Board framework, given the plausible efficiency justification that CDA's rules would avoid deception and lower quality, the FTC bore the burden on the validity issue. By failing to provide the empirical evidence that the text discusses, the FTC failed to meet its evidentiary burden.
51. Of course, the fact that CDA involved professional advertising is crucial to understanding the decision. Had some other group restrained advertising - car repair sellers, e.g. - the Court would have had little difficulty applying truncated analysis to condemn the restraint. Although CDA was the first antitrust case before the Court to consider professional advertising, concern over maintaining professionalism has existed in a closely related body of jurisprudence, the analysis of restraints on advertising under the First Amendment's Commercial Speech Doctrine. Some restraints on advertising, particularly those involving lawyers, are beyond the reach of antitrust laws. State action is exempt from antitrust, and most restraints on lawyer advertising are shielded from antitrust attack under this doctrine. Thus, challenges to such restraints have often proceeded under the First Amendment. Despite the First Amendment, the Court has permitted some restrictions on professional advertising, most recently in Florida Bar v. Went For It, 515 U.S. 618 (1995). There, in another one-vote decision, the Court upheld rules that prohibited lawyers from using direct mail to solicit personal injury or wrongful death clients within thirty days of an accident. The Court's composition was identical to that in CDA. Four of the Justices who voted to remand in CDA were in the Florida Bar majority; three of the CDA dissenters also dissented in Florida Bar. The fourth dissenter, Justice Souter, wrote the majority opinion in CDA, while the fifth member of the Florida Bar majority, Justice Breyer, wrote the CDA dissent. The Florida Bar majority was written by Justice O'Connor, who has long sought to allow professionals to restrict advertising. She discussed the need to protect the privacy and tranquility of personal injury victims, as well as the fact that the solicitations in question reflected poorly on the legal profession, causing users of legal services to view lawyers less favorably. One cannot understand the Court's CDA result without focusing on professionalism.
52. Naked price fixing, prosecuted criminally, remains the most common per se practice. In successful criminal price-fixing cases, in which the government proves an explicit agreement among competitors to fix prices, the defendants have no plausible efficiency justifications to assert.