Supreme Court focuses on associations.

A recent U.S. Supreme Court ruling addresses association codes of ethics and antitrust issues, taking the guesswork out of the Federal Trade Commission-association community relationship.

It's rare that the United States Supreme Court issues decisions that directly affect associations. During the 1970s and 1980s, there were only a half a dozen such decisions. In these cases, the court determined that the antitrust laws apply to professions and professional societies and that provisions in associations' codes of ethics regarding fees, bidding, and advertising may not pass legal muster. The court also held that an association's advertising revenue is taxable and that nonprofit organizations may be held liable for the antitrust violations of volunteers and staff who appear to be acting on behalf of their associations.

Recently, the Supreme Court issued another association-related decision. And the case (California Dental Association v. Federal Trade Commission) - involving association codes of ethics, antitrust issues, and the jurisdiction of the Federal Trade Commission - will likely have long-lasting ramifications for the nonprofit community.

Making the case

At issue was the code of ethics of the California Dental Association, Sacramento. In practice, the code required association members to make certain disclosures when advertising price discounts and prohibited unsubstantiated quality claims. An investigation of CDA's code of ethics by the FTC prompted an administrative enforcement proceeding. At its conclusion, the FTC held that the advertising rules in the association's code of ethics violated the Federal Trade Commission Act. According to the FTC, the rules could not pass legal muster under the per se analysis - an analysis reserved for the most egregious antitrust violations in which the defendant is not permitted to even explain possible pro-competitive effects of its challenged conduct. In addition, the rules were found to be anticompetitive under an abbreviated or quick-look analysis - a test halfway between the per se analysis and the more rigorous rule-of-reason analysis, which requires a careful weighing of all possible anticompetitive and pro-competitive effects of the challenged conduct.

CDA appealed the commission's decision to the U.S. Court of Appeals for the Ninth Circuit. The appeals court upheld the agency's quick-look analysis and its related decision, but rejected the FTC's finding that the association's advertising rules were a per se violation of the act. From there, CDA petitioned the Supreme Court to hear the case. The court was asked to determine whether the FTC Act applied to CDA and whether, assuming the FTC had jurisdiction, the agency could make a determination on antitrust without undertaking a full-scale analysis.

The reasoning behind the ruling

Jurisdiction. CDA's stance that nonprofit organizations are not subject to the FTC Act was a difficult position to argue and one that the Supreme Court rejected by a 9-0 margin. The court explained that the statute expressly states that it applies not only to businesses carried on for their own profit, but also to businesses carried on for the profit of their members. The court found that CDA was engaged in conferring "far more than de minimis or merely presumed economic benefits" on its members. This judgment was based on CDA's for-profit subsidiaries, which offer advantageous insurance and financing arrangements to CDA's members and the association's direct involvement in lobbying, litigation, marketing, and public relations activities for its members' benefit.

However, the Supreme Court did suggest that some nonprofit organizations would not be subject to the FTC Act - an argument ASAE made in the amicus brief it submitted in support of CDA. According to ASAE, the FTC had claimed jurisdiction over purely charitable organizations on several occasions. And a number of FTC administrative decisions, including the CDA decision, had categorized association educational programs, scientific presentations, and peer-review systems as activities carried on to provide pecuniary benefits to members. Therefore, ASAE suggested, the court must be aware of the wide range of associations and not issue a broad rule that would inadvertently sweep virtually all types of nonprofit organizations within the jurisdiction of the Federal Trade Commission Act, as the FFC had attempted to do.

The Supreme Court's opinion clearly took ASAE's arguments into account and cautioned that "the FTC Act does not cover all membership organizations of profit-making corporations." Further, the court emphasized that "an organization devoted solely to professional education may lie outside the FTC Act's jurisdictional reach, even though the quality of professional services ultimately affects the profits of those who deliver them." Still, the court carefully noted that it was not deciding whether "enhancing professional education efforts" would subject membership organizations to or protect them from the commission's authority. However, the court did not rely on any of CDA's educational or scientific programs or publications as a basis for upholding the FTC's jurisdiction. (In the initial FTC proceeding, the association's scientific sessions and its technical and scientific publications were counted as activities carried on to increase its members' profits.)

Another question the court expressly reserved for another day: Is a nonprofit organization that engages in significant commerce, competes in relevant markets with for-profit players, or enjoys annual income surpluses subject to the FTC Act - not because it carries on business for its members' profits but because it may be carrying on business for its own profit?

Antitrust analysis. The Supreme Court, in a 5-4 decision, rejected the FTC's position that a quick-look analysis was sufficient to decide the suit. It remanded the case to the Ninth Circuit to either determine whether the commission's decision was based on substantial record evidence, or to remand to the agency for a more extensive rule-of-reason analysis. The majority explained that the quick-look analysis only is appropriate when the anticompetitive effects of the action in question are so obvious that "an observer with even a rudimentary understanding of economics" would conclude that customers and markets would be harmed. And it was suggested that CDA's advertising rules prohibiting unverifiable price and quality advertising "might plausibly be thought to have a net pro-competitive effect" because they reduce false and misleading advertising, which would have an anticompetitive effect.

Additionally, the majority emphasized that CDA does not prohibit or discourage dentists from advertising the prices of particular services or the actual discount from those prices offered to first-time or other customers. Under these circumstances, it cannot be determined, absent evidence, whether prohibiting dentists from advertising an across-the-board discount - without disclosing the prices that are discounted - has a pro-competitive or anticompetitive effect. Similarly, it is not possible to determine, absent evidence, whether prohibiting quality and patient comfort claims has a pro-competitive or anticompetitive effect or no effect at all.

The four dissenting justices took the stance that, under a traditional antitrust analysis, CDA's advertising rules were anticompetitive. Therefore, the Ninth Circuit's decision should be affirmed. The dissenters pointed out that some of the advertisements that CDA rejected included statements that the dentist "guaranteed all work for one year," that the dentist offered "gentle care in a caring environment," or that the dentist offered "reasonable fees quoted in advance." The dissenters agreed with the FTC and the Ninth Circuit that the value to consumers of the information provided by such statements outweighed the potential for misleading consumers.

It remains unclear whether advertising restrictions similar to those in CDA's code of ethics will ultimately be prohibited. It does appear, however, that the FTC and the courts can be expected to more thoroughly analyze the actual and likely competitive effects of restrictions plausibly aimed at protecting the public from false and misleading claims. As the decision points out, claims by professionals (like dentists) are particularly difficult for the average consumer to evaluate. Consequently, an association's regulation of professionals' advertising will require thorough analysis from antitrust agencies.

Assessing the impact

Although some questions are still awaiting answers, the CDA decision resolves two age-old questions - the extent of the FTC's authority over nonprofit organizations and the type of antitrust analysis needed when evaluating challenges to association self-regulation programs such as codes of ethics.

Because the Supreme Court apparently presumed the FTC's authority over trade associations for decades, there was little hope that the court would exempt all professional societies from FTC investigations and adjudications. But there was a risk that the court might consider all associations to be subject to the FTC's authority, even when their impact upon the financial, or business interests of members was indirect or tangential. As such, it is very favorable to the association community that the court rejected instating any kind of test to determine how much enhancement of for-profit members' interests must be conducted to subject a nonprofit organization to FTC jurisdiction.

Though CDA did not prevail the case on jurisdiction, it did win a significant victory on antitrust analysis. The Supreme Court's determination that the more rigorous - and more time-consuming and expensive - rule-of-reason analysis be used in this case may be a deterrent to those considering bringing antitrust cases against associations in the future. As for associations that are already the focus of an antitrust investigation, this ruling likely means an opportunity to better justify and defend their actions.

While this decision focuses on the regulation by an association of member advertising, it also provides a favorable view of the Supreme Court's thinking on the value of association self-regulation in general. Nonprofit organizations, often faced with improving professionalism and safety within their industries, yet fearing antitrust trouble, have frequently avoided enforcing codes of ethics, safety standards, and accreditation programs. Their quandary: Associations that do not vigorously enforce their established codes and standards may face legal liability.

This judgment will not - and, indeed, should not - do away with associations' vigilance in the self-regulatory arena (especially with regard to placing restrictions on member advertising). Along with long-awaited answers, the nonprofit community should come away from this verdict encouraged by the Supreme Court's acknowledgement of the beneficial aspects of self-regulatory efforts.

Jerald A. Jacobs and Nory Miller are partners at Jenner & Block, Washington, D.C. Jacobs is ASAE's general counsel.