The Supreme Court recently issued a 5-4 decision that could substantially alter the way that many antitrust cases dealing with agreements in restraint of trade are developed and decided. In California Dental Association v. Federal Trade Commission ("CDA"), No. 97-1625 (May 24, 1999), two issues were before the Court: (1) the FTC's jurisdiction over nonprofit associations and, even more importantly, (2) the judge-made "rule" or standard of analysis that applied to the particular restraints of trade challenged by the FTC in the case. The case involved competition among professionals in the health care context, but the impact of this decision may spread well beyond the health care sector.

As background, Section 1 of the Sherman Act literally prohibited all agreements in restraint of trade Soon after enactment of the statute, however, the Supreme Court clarified that the Sherman Act proscribed only those agreements that unreasonably restrain trade. This "rule of reason" became the normal standard by which the courts analyze the legality of conduct under the antitrust laws. Under the rule of reason, all competitive effects of a restraint - - the anticompetitive effects and, if any, the procompetitive effects - - are balanced to determine whether the net effect of the arrangement is unreasonably anticompetitive. Over time, the courts have found that certain types of agreements are always unreasonable and produce no counterbalancing procompetitive effects. The courts have deemed such practices "per se illegal." The per se rule operates as a presumption that such practices are unreasonably anticompetitive. The per se rule does not permit the courts even to consider evidence offered in justification of the conduct, because the likelihood that the justification would offset the anticompetitive effects is simply too remote. The list of per se violations is not a long one: it includes horizontal price-fixing agreements, vertical minimum price-fixing agreements, agreements among competitors to divide territories or customers, certain boycott agreements, and certain tying arrangements.

Whenever antitrust law has been first applied to a certain practice, such as the self-regulation of certain professions, the Supreme Court has been reluctant at the outset to employ the per se rule, even where conduct looked per se illegal, for fear of excluding evidence that, if properly understood in the discrete field, might justify the conduct. This concern against prematurely condemning practices peculiar to a profession as per se illegal relates back to the Court's striking down of the "learned professions" antitrust exemption. In 1975, in Goldfarb v. Virginia State Bar, the Court declared that antitrust law was applicable to conduct by professionals, but it declined to invoke the per se rule in that context. The Court explained that

The public service aspect, and other features of the professions, may require that a particular practice, which could properly be viewed as a violation of the Sherman Act in another context, be treated differently. 421 U.S. 773, 788-89 n. 17 (1975).

Under antitrust law, there was really only one way in which the practices of professionals could be subject to the law but still "be treated differently," and that way was in the choice of the analytical or evidentiary standard (per se v. rule of reason) applied.

In a series of subsequent antitrust decisions involving professionals, the Court paid continuing homage to the view that certain practices by professionals should be treated "differently." Eventually, however, in Arizona v. Maricopa County Medical Society, 457 U.S. 332 (1982), the Court did apply the per se rule, in this case to a maximum price-setting agreement among competing physicians, and rejected the physicians' Goldfarb-based argument that the per se rule should never be applied to health care professionals. In Maricopa, the majority found the per se standard appropriate because it saw the conduct at issue as obviously anticompetitive The dissenters, Justices Rehnquist and Powell and Chief Justice Burger, did not:

"[We] would give greater weight than the Court to the uniqueness of medical services, and certainly would not invalidate on a per se basis a plan that may in fact perform a uniquely useful service. 457 U.S. at 366 n.13."

In the wake of Maricopa, the Court has evaluated certain conduct, other than price fixing, among professionals by the rule of reason rather than the per se rule. See, e.g., FTC v. Indiana Federation of Dentists, 476 U.S. 447 (1986). As the Court has gained familiarity with those practices in context, it has found anticompetitive effects; nevertheless, the Court has not yet invoked per se illegality. Instead, in those situations, the Court has employed a truncated or "quick look" form of the rule of reason. Under the quick look, the Court does not exclude a proffer of evidence in defense of a practice that in another field would be per se illegal, but it initially screens the evidence to determine whether proffered procompetitive effects are "plausible." If a plausibly procompetitive feature is perceived, then the analysis expands toward the fuller rule of reason test; if no plausible justification is presented, then the practice can be condemned without further analysis.

The California Dental Association, a nonprofit professional self-regulatory organization, adopted and enforced a code of ethics that restricted the forms of advertising in which CDA members could engage. The restrictions were "agreements" that were enforced by the disciplinary authority of the CDA, membership in which is, for some, a professional necessity. Two forms of advertising were restricted: (1) advertising of discounts from fees (as opposed to advertising the actual fees) without adding certain disclosures, and (2) making claims related to quality of care without adding certain disclosures. The FTC ruled that these restrictions constituted per se illegal agreements among professionals not to compete on certain terms, including price. The Commission alternatively conducted a quick look rule-of-reason inquiry and found the restrictions unreasonable. Contesting that it satisfied the quick look rule of reason, the CDA unsuccessfully argued that, without the required disclosures, the prohibited advertising could be misleading and deceptive and that the restrictions served the offsetting procompetitive purpose of preventing misleading advertising. The Court of Appeals for the Ninth Circuit rejected the application of the per se standard but sustained the FTC's finding of unreasonableness under the quick look rule of reason.

The Supreme Court majority agreed with the Court of Appeals that the per se rule did not apply, but the Court rejected the quick look analysis here in favor of a full rule-of-reason assessment because the likelihood of anticompetitive effects was not "obvious." The Court did not discard the quick look form of analysis, but it ruled that both the Ninth Circuit and the FTC had failed to give sufficient weight to proffered justifications which the Court perceived as plausibly procompetitive in the context. The majority concluded that a more probing rule-of-reason balancing inquiry was required in order to determine the likely net effects of the restrictions.

In reaching its conclusion, the majority set a standard for the burden of proof in cases that are not consensus-per se illegal practices. To the Court, anticompetitive effects of the restrictions in this case were not obvious. Moreover, the Court found that the FTC had developed no evidence to prove any anticompetitive effects. In the Court's view, an implicit shift in the burden of proof occurred when the FTC short-circuited its inquiry into the anticompetitive effects and required the defendant instead to prove procompetitive effects. The Court ruled that such burden-shifting is certainly impermissible when anticompetitive effects of a restriction are not obvious. To put it another way, when procompetitive effects are plausible, anticompetitive effects cannot be obvious. The majority in CDA (in which Chief Justice Rehnquist joined) may not have fully embraced the Goldfarb view that the activities of professionals are "different" from those of others, but they may feel that the FTC has pushed forward too hastily with the quick look as an unqualified proxy for the per se rule in this context.

The Court observed that antitrust law is not constructed of a fixed number of analytical "boxes" into which all business practices must fit (that is, per se, quick look, rule of reason); rather, it consists of a flexible analytical continuum. In that sense, then, the Court does not seem to regard its order for a "less-quick" rule-of-reason analysis as a major development; but the four dissenters did regard the decision as significant, and the lower courts and enforcement agencies are likely to agree. The reason is that the government has become accustomed to the ease of bringing cases under the quick-look rubric. A near-presumption, based only on the government's perception of the likely anticompetitive effects, constitutes a government case. Only lip service is paid to proffered justifications, and the burden of proof is shifted to the defendant to establish, through hard evidence, that the practice will in fact produce procompetitive effects. In CDA, the Court attaches greater importance to subjective judicial perception of the comprehensive, competitive nature of activities than to the expediency of presumptions. The Court has declared that the "obviousness" of anticompetitive effects is in the eye of the judicial beholder, and where a proffered procompetitive justification is plausible in the eye of a court, then the anticompetitive effects of challenged conduct are simply not, by definition, "obvious." In such a case, the burden will remain on the plaintiff to present convincing evidence of the anticompetitive effects of a restraint.

The CDA holding is, therefore, likely to change the way that the government approaches its challenges to practices that are not unquestionably per se offenses. Where the government faces any doubt about whether a court will recognize a practice in context as per se illegal, it must now be prepared to bring forward the quantity and quality of evidence of anticompetitive effects required under the traditional or "full" rule of reason analysis.

Ken Starling is currently an antitrust partner at Piper & Marbury L.L.P., resident in the firm's Washington office. Mr. Starling served as a Deputy Assistant Attorney General in the Antitrust Division of the U.S. Department of Justice during the Reagan Administration, as Chief Antitrust Counsel to the Senate Judiciary Committee, and as Assistant Director for Litigation of the Federal Trade Commission's Bureau of Competition.