U.S. Supreme Court Demand a More Detailed Analysis of Restraints Designed to Prevent Fraudulent and Deceptive Advertising

June 1, 1999 Advisory

On May 24, 1999, the United States Supreme Court, in California Dental Association v. FTC, 119 S.Ct. 1604 (1999), ruled that a professional associations prohibitions on certain types of truthful, nondeceptive advertising, with the asserted objective of preventing false or deceptive advertising, deserved a thorough evaluation of competitive and anticompetitive effects before the restrictions could be considered to have violated the antitrust laws.

In California Dental, the Federal Trade Commission (FTC) challenged the legality of advertising guidelines and opinions, promulgated pursuant to the Code of Ethics of the California Dental Association (CDA), which prohibit discount price and quality advertisements. The CDA is a voluntary nonprofit association of approximately 19,000 dentists comprising about three-quarters of the dentists practicing in California. Among the justifications asserted by the CDA for its practices was that the challenged advertising restrictions are procompetitive in that that they tend to prevent false or deceptive advertising. Recognizing that markets for professional services are marked by significant challenges to informed decision making, the Supreme Court vacated the opinion of the Court of Appeals for the Ninth Circuit. The Ninth Circuit had analyzed the restrictions under the quick look rule of reason analysis. Criticizing the Ninth Circuits review as too quick, the Court remanded the case, not for a full rule of reason inquiry, but instead for a less than quick look in order to assess the professional advertising restrictions.

Significantly, the case also affirmed that the FTC has jurisdiction over nonprofit professional associations such the CDA. The FTCs jurisdiction over professional associations is limited to those that carry on business for the profit of their members. The Court held that the CDA met this requirement. The Court observed that activities such as lobbying, litigation, marketing, and public relations, as well as arranging advantageous insurance and continued on page 2 preferential financing for its members, made the CDAs contribution to its members profits so proximate and apparent as to bring the association under the jurisdiction of the FTC.

California Dental continues the Supreme Courts evolution from rigid characterizations, toward more comprehensive market analysis, to determine whether business practices violate the antitrust laws, as recently reflected in the approaches taken in NYNEX Corporation v. Discon, 119 S.Ct. 493 (1998), and State Oil Co. v. Khan, 522 U.S. 3 (1997).