The American Bar Association Commission on Multidisciplinary Practice (the "Commission") is holding hearings as part of its mandate to evaluate the impact of professional service firms, such as accounting firms, owning law firms and providing legal services. The Commission has invited the Section of Antitrust Law (the "Section") to provide testimony regarding the potential antitrust law issues raised by the Commission’s activities.
The Section is concerned that the activities of the Commission could subject the Association to antitrust investigations by federal and/or state antitrust enforcement agencies, antitrust litigation with federal agencies, and/or private antitrust litigation by firms that believe they have been or may be disadvantaged by the Commission’s actions. We set forth below the antitrust standards that culd apply to the Commisson’s actions.
Section 1 of the Sherman Act prohibits agreements that unreasonably restrain interstate or foreign commerce. It has been applied to collective efforts by professionals to limit competition or erect barriers to prevent potential rivals from competing. Professional associations are not exempt from the antitrust laws. In fact, the antitrust laws have often been applied to professional associations’ efforts to restrain competition among their members or from outsiders, including the legal profession and the American Bar Association--most recently in United States v. American Bar Association, an antitrust action against the Association by the Department of Justice Antitrust Division that resulted in a consent decree governing law school accreditation.
There are two exemptions from the antitrust laws that might provide some protection for the Commission’s activities. The Noerr-Pennington Doctrine and the State Action Doctrine could protect the Commission and the Association from antitrust liability if the Commission’s activities are limited to petitioning appropriate state governmental bodies with authority to regulate lawyers’ conduct to promulgate desired rules or regulations and taking action under the authority of those state enforced rules or regulations.
We urge the Commission to conduct its activities in a manner that will minimize potential antitrust liability. Experienced antitrust counsel should be consulted as the Commission proceeds.
I. The Statutory Framework
As a preliminary matter, it may be helpful to set forth the primary legal framework for any antitrust analysis of this issue.
A. The Sherman Act
Section 1 of the Sherman Act states that "[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations, is declared to be illegal." In order to establish a Section 1 violation, three elements must be proved: (1) the existence of a contract, combination, or conspiracy among two or more separate entities that, (2) unreasonably restrains trade, and (3) affects interstate or foreign commerce. Thus, Section 1 liability cannot be predicated on the actions of a single entity or individual.
While it is clear that not every action of a trade association or other professional group provides the necessary plurality of actors, Section 1’s concerted action requirement is often "satisfied by the actions of a trade association or other group because an agreement among firms has the same economic effect regardless of whether it is explicitly among the firms themselves or a decision of a trade association or other group of which the firms are members." For purposes of Section 1, the actions of a trade association or other group of which individuals or firms are members are analyzed in the same way as an agreement among the constituent firms themselves.
Under Section 1, there are essentially two types of antitrust analysis. The first mode of analysis concerns those agreements whose nature and necessary effect are so plainly anticompetitive that no elaborate study of the relevant industry is needed to establish their illegality – they are deemed illegal per se and condemned as a matter of law without any consideration of proffered justifications. For example, naked horizontal price-fixing agreements or agreements among competitors to divide markets are subject to application of the per se rule.
Into the second category fall those agreements whose competitive effects can only be evaluated by analyzing the facts peculiar to the business, the history of the restraint, and the reasons why the particular restraint was imposed – these agreements must be evaluated according to a "rule of reason." Under the rule of reason,
[t]he true test of illegality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition. To determine that question, the court must ordinarily consider the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint was imposed; the nature of the restraint and its effect, actual or probable. The history of the restraint, the evil believed to exist, the reason for adopting the particular remedy, the purpose or end sought to be attained, are all relevant facts.
It is well established that the rule of reason focuses on a restraint’s competitive effects; the rule of reason explicitly will not evaluate whether a restraint is otherwise in the public interest or in any industry’s interest. Non-price vertical restraints are an example of a form of restraint analyzed under the rule of reason.
Section 2 of the Sherman Act provides that "[e]very person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony." Section 2 of the Sherman Act renders the actions of firms, both individually and collectively, illegal only when monopolization is achieved or threatened.
Courts have applied the Sherman Act to restrict the ability of competitors to agree not to deal with, or to deal only on specified terms with, other economic actors, particularly competitors. Such agreements are often described as "group boycotts" or "concerted refusals to deal" by the courts and are typically challenged under Section 1. Allegations of unlawful refusals to deal arise in myriad contexts, including refusals to enter into new business relationships or the termination of existing relationships and efforts at industry self-regulation through trade association membership criteria and promulgation of industry-wide standards for products and services.
Although the Supreme Court traditionally held horizontal refusals to deal to be per se violations of Section 1, more recently, the Supreme Court, as well as other courts, have recognized that certain horizontal refusals to deal should be analyzed under the rule of reason. For example, in Federal Trade Commission v. Indiana Federation of Dentists, discussed in greater detail below, the Supreme Court declined to apply the per se rule to a refusal by a group of dentists to forward x-rays to insurance companies. However, in Federal Trade Commission v. Superior Court Trial Lawyers Ass’n, also discussed below, the Supreme Court held that some group boycotts among horizontal competitors designed to affect price and not justified by plausible arguments that they are intended to enhance overall efficiency and make markets more competitive are still per se unlawful.
B. Federal Trade Commission Act
Section 5 of the Federal Trade Commission Act (FTCA) generally prohibits unfair methods of competition. All conduct violative of the Sherman Act may likewise come within the unfair trade practices prohibition of the FTCA and thus within the jurisdiction of the FTC.
II. The Learned Professions are not Exempt from the Prohibitions of the Sherman and Federal Trade Commission Acts
It was once believed that the so-called "learned professions" enjoyed an exemption from the antitrust laws because the practice of a learned profession was not considered "trade or commerce" within the meaning of the antitrust laws. The Supreme Court’s decision in Goldfarb v. Virginia State Bar, however, laid that belief squarely to rest. It is now widely recognized that the antitrust rules generally apply to the learned professions.
In Goldfarb, the Supreme Court squarely rejected the argument that Congress had never intended to include the so-called "learned professions" within the terms "trade or commerce," noting that the nature of a profession alone "does not provide sanctuary from the Sherman Act." The Court went on to hold that a minimum fee schedule for attorneys, published by the county bar association and enforced by the state bar association, was price fixing in violation of Section 1 of the Sherman Act.
The Court did, however, note that while the public service aspect of professional practice was not dispositive in determining whether the antitrust laws reach a restraint of trade imposed by a learned profession:
The fact that a restraint operates upon a profession as distinguished from a business is, of course, relevant in determining whether that particular restraint violates the Sherman Act. It would be unrealistic to view the practice of professions as interchangeable with other business activities, and automatically to apply to the professions antitrust concepts which originated in other areas. 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.
As noted by one group of commentators, while this passage from Goldfarb has certainly not been seized upon to provide the learned professions with an exemption from the antitrust laws, "it has been read as precluding rote application of the per se rule and mandating a detailed rule of reason inquiry in many situations." The extent to which the Supreme Court intended to provide for more lenient treatment for the learned professions in the antitrust context, however, is somewhat unclear.
As the Seventh Circuit noted in Wilk v. American Medical Association,
[f]or the present, we note that in Goldfarb, National Society of Professional Engineers v. United States and Arizona v. Maricopa County Medical Soc., the Court has taken pains to preserve the possibility that a particular practice which could be viewed as a violation of the Sherman Act in another context, should be viewed and treated differently in the circumstances peculiar to a learned profession. We know from Professional Engineers and Maricopa County that an agreement to fix prices will not escape per se treatment simply because it is entered into by professionals and accompanied by ethical protestations. But a canon of medical ethics purporting, surely not frivolously, to address the importance of scientific method gives rise to questions of sufficient delicacy and novelty at least to escape per se treatment.
Further, the Seventh Circuit noted that the Supreme Court has traditionally been reluctant to condemn rules "adopted by professional associations as unreasonable per se" or to "extend the per se rule to restraints imposed in the context of business relationships where a practice’s economic impact is not immediately apparent."
Other courts and commentators, however, see no special deferential standard for the learned professions. While it is conceivable that certain practices by members of a learned profession might survive scrutiny under the rule of reason even though they would be condemned as a violation of the Sherman Act in another context, as Professor Hovenkamp points out, the Supreme Court’s treatment of the issue suggests "that any notion that there is a substantial difference in the treatment of restraints among the learned professions has been abandoned." Indeed, as Professor Hovenkamp notes, as recently as 1990, the Supreme Court, in Superior Court Trial Lawyers Association, failed even to discuss the possibility of deferential treatment for restraints entered into by members of the learned professions.
Despite the cautionary approach adopted by the Supreme Court in Goldfarb, the general principle remains that the learned professions fall squarely within the ambit of the Sherman Act and its prohibitions and there is no broad exemption from the antitrust laws for the learned professions. Consequently, "[a]bsent some countervailing procompetitive virtue – such as, for example, the creation of efficiencies in the operation of a market or the provision of goods and services . . . an agreement limiting consumer choice by impeding the ordinary give and take of the market place cannot be sustained under the rule of reason." While restraints imposed by the learned professions theoretically may be entitled to somewhat more deferential treatment under the rule of reason, in actuality the Supreme Court’s jurisprudence provides little comfort that such treatment will be forthcoming.
III. The Antitrust Laws Apply to the Learned Professions’ Efforts to Restrain Competition Among Their Members or From Outsiders
The antitrust laws are often applied to efforts by professionals such as lawyers, doctors and engineers, to police competition among themselves or to prevent competition from "outsiders," often using professional ethics as the basis for the restrictions. Indeed, the legal profession has been challenged in its efforts to restrict competition among its members or from outsiders. For example, in United States v. American Bar Association, the United States Department of Justice filed a complaint against the American Bar Association that resulted in a consent decree that bars the American Bar Association from adopting or enforcing any rule prohibiting a law school from enrolling a member of the bar or graduate of a state-accredited law school in an L.L.M. program, offering transfer credits for any course successfully completed at a state-accredited law school, or organizing as a for-profit entity. The agreement also compelled the ABA to make several changes to its accreditation process.
In Federal Trade Commission v. Superior Court Trial Lawyers Ass’n, the Supreme Court addressed whether the concerted action of a group of lawyers, in refusing to accept assignments to represent indigent criminal defendants in the District of Columbia, violated Section 5 of the FTCA. The lawyers took this action in an effort to persuade the government of the District of Columbia to increase the District of Columbia Criminal Justice Act ("CJA") assignment reimbursement rates which, despite uniform support for a rate increase, remained at 1970 levels.
The Federal Trade Commission (FTC) filed a complaint against the SCTLA and four of its officers alleging that they had "entered into agreement among themselves and with other lawyers to restrain trade by refusing to compete for or accept new cases under the CJA program." The FTC characterized the strike as "a conspiracy to fix prices and to conduct a boycott" and concluded that they were, therefore, engaged in unfair methods of competition in violation of Section 5 of the FTCA. The FTC administrative law judge, after rejecting each of the respondent’s proffered defenses – that the boycott was adequately justified by the public interest in obtaining better legal representation for indigent defendants; that as a method for petitioning for legislative change it was exempt from the antitrust laws; and that the strike was a form of political action protected by the First Amendment – found that the FTC had proved all of the facts alleged, but that the complaint should, nevertheless, be dismissed because the District officials recognized that the net effect of the boycott was beneficial.
When the case reached the Supreme Court, the Court began its analysis by assuming that "the pre-boycott rates were unreasonably low, and that the increase has produced better legal representation for indigent defendants." The Court, however, nonetheless found that the boycott "constituted a classic restraint of trade within the meaning of Section 1 of the Sherman Act" and also violated the prohibition against unfair methods of competition in Section 5 of the FTCA. Without even discussing the possibility that the restraint might be entitled to more deferential treatment because it was imposed by members of a learned profession, the Court dismissed any argument that the social justifications proffered by the respondents made the restraint any less unlawful, noting simply that the Sherman Act "precludes inquiry into the question of whether competition is good or bad." The Court, after concluding that the lawyers’ boycott was not immunized under the First Amendment and that there was no special exception to the per se rules emanating from the First Amendment, went on to hold that the per se rule was applicable to the lawyers’ boycott.
Similarly, in Goldfarb, the Supreme Court also held that a minimum fee schedule published by a county bar association and enforced by the state bar association constituted price fixing. This same attitude is evident in other cases examining situations in which members of a so-called learned profession attempted to either restrict competition among themselves or from outsiders. For example in Federal Trade Commission v. Indiana Federation of Dentists, the Supreme Court analyzed an agreement among a group of dentists in Indiana pursuant to which the dentists refused to submit x-rays to dental insurers. The Supreme Court characterized the agreement as a group boycott, describing the dentists’ agreement as a concerted refusal to deal on particular terms with patients covered by group dental insurance, and noted that it had held such group boycotts per se unlawful in the past. In this case, however, the Court declined to "force the Federation’s policy into the boycott pigeonhole" and instead analyzed the Federation’s policy under the rule of reason. In defense of its policy the Federation proffered, among other arguments, a noncompetitive quality of care justification that amounted to a claim that x-rays alone were not adequate bases for diagnosis of dental problems or for the formulation of an acceptable course of treatment. The Court, however, held that non-competitive quality-of-service justifications were inadmissible to justify the denial of information to consumers. The Court found that the factual findings of the FTC were supported by substantial evidence and that those findings were sufficient as a matter of law to establish a violation of Section 1 of the Sherman Act and, hence, Section 5 of the FTCA.
Similarly, a canon of professional ethics prohibiting competitive bidding by engineers, an arrangement by which physician members of a state foundation for medical care set maximum fees, an ethical standard adopted by the American Medical Association in an attempt to contain and eliminate competition from chiropractors, and an ethical standard promulgated by the American Institute of Architects which prohibited architects from seeking a commission for which another architect has already been selected have all been declared illegal under the Sherman Act.
As a result, if the outcome of the Commission’s activities is a conclusion that the involvement of non-lawyers (such as accountants) in law firms or the practice of law is unethical, that could be construed as an effort to insulate the legal profession from competition. It could be viewed as a collective refusal by members of the bar to deal with non-lawyers in violation of the Sherman Act and Section 5 of the FTCA. The fact that the restriction is intended to restrict only "unethical" conduct would not be dispositive.
IV. The Noerr-Pennington and State Action Doctrines Provide Protection From Antitrust Liability for Genuine Efforts To Convince State Government to Take Legitimate Action That Affects Competition
If the American Bar Association determines that it is in the best interest of the profession to seek state enactment of an ethical rule that would prohibit law firms from affiliating with other professionals, the Noerr-Pennington and State Action Doctrines could allow the organized bar to achieve this result without antitrust liability, on a state-by-state basis, assuming that appropriate steps are taken in each state to secure approval of the prohibition by the state's legislature or highest Court.
A. Noerr-Pennington Doctrine
The legal genesis of the Noerr-Pennington doctrine is in the Supreme Court decisions in Eastern Railroad Presidents Conference v. Noerr Motor Freight Inc., 315 U.S. 127 (1961), and United Mine Workers of America v. Pennington, 381 U.S. 657 (1965), which held that the First Amendment protects competing entities from antitrust liability for their joint "petitioning" of government to secure governmental action even if the intent is to eliminate competition.
Noerr involved an antitrust claim brought by long distance trucking companies against, inter alia, an association of railroads. The plaintiffs alleged that the defendants violated Sections 1 and 2 of the Sherman Act by conspiring to restrain trade in, and monopolizing the long distance freight business. Plaintiffs claimed that defendants had engaged in a propaganda campaign "to foster the adoption and retention of laws and law enforcement practices destructive of the trucking business." The Supreme Court held that "where a restraint upon trade and monopolization is the result of a valid governmental action, as opposed to private action, no violation of the [Sherman] Act can be made out." The Court reasoned that when an antitrust plaintiff's injury is proximately caused by the government, the government's action constitutes a supervening cause that breaks the chain of causation between antitrust-defendant’s action and any anticompetitive effect.
In its simplest terms, the Noerr-Pennington doctrine shields from antitrust liability private parties who engage in concerted and genuine efforts to influence governmental action, even though the conduct is undertaken with an anticompetitive intent and purpose. The doctrine is significant because it seeks to accommodate two rights that are important in guaranteeing personal liberty: the right to petition government and the right to an economic system in which free and unfettered competition is the rule.
The key questions in deciding whether Noerr-Pennington principles apply are: (1) what is the harm that the plaintiff alleges it suffered; and (2) is that harm the proximate result of governmental action or private conduct? If the harm results from governmental action, no antitrust liability will lie. Moreover, if the plaintiff alleges two harms, one the proximate result of private conduct and the other the result of governmental action, no liability will attach to the private conduct if the harm associated with that conduct is merely incidental to the harm associated with the governmental action.
While the discussion of Superior Court Trial Lawyer’s Ass’n above indicates that defendants’ Noerr-Pennington argument failed, it is noteworthy that the Court rejected defendants’ theory because the boycott in question was an attempt to exact economic advantages from the government. As the Court noted in Allied Tube & Conduit Corp. v. Indian Head, Inc., if such conduct were protected, then "[h]orizontal conspiracies or boycotts designed to exact higher prices or other economic advantages from the government would be immunized on the ground that they are genuinely intended to influence the government to agree to the conspirators’ terms." Seeking to exact economic benefits from a government is distinguishable from attempting to obtain favorable regulation through a government.
B. State Action Doctrine
The State Action Doctrine provides antitrust exemption or immunity to private parties, such as lawyers and law firms, who forego the normal competitive rules of the marketplace pursuant to a state enforced regulatory mandate. The State Action Doctrine originated with the Supreme Court’s decision in Parker v. Brown, where the Court held that restraints on competition imposed by "state action or official action directed by a state" are immune from federal antitrust laws based on considerations of federalism and state sovereignty. Later Supreme Court decisions further refined the doctrine and explained its application to private parties.
For a private party to receive protection for its anticompetitive activity under the State Action Doctrine, the state must (1) clearly articulate an affirmative state policy to allow private parties to act anticompetitively; and (2) actively supervise the anticompetitive behavior.
The requirement that the challenged conduct be undertaken "pursuant to a ‘clearly articulated and affirmatively expressed state policy’ to replace competition with regulation" ensures that the state has authorized the elimination of competition. At a minimum, the state must authorize the challenged conduct.
Active supervision means that state officials "must have and exercise power to review particular anticompetitive acts of private parties and disapprove those that fail to accord with state policy." Put another way, the state must substitute an "adequate system of regulation" and exercise "significant control" over the anticompetitive behavior. Furthermore, the Supreme Court held in Federal Trade Commission v. Ticor Title Insurance Co. that state action immunity "is disfavored" and that the state must in fact exercise its authority to supervise.
There are several precedents in which courts have rejected antitrust challenges to anticompetitive actions by bar groups (including bar committees issuing ethical rules) where the actions have been expressly or implicitly approved by the state's highest court. The leading Supreme Court decision endorsing the State Action Doctrine in this context is Bates v. State Bar, in which the Supreme Court held immune from antitrust attack a disciplinary rule restricting lawyer advertising because the regulation was promulgated and enforced by the Arizona Supreme Court, which the state constitution authorized to regulate the practice of law. The Court observed that the Arizona Supreme Court was "the real party in interest; it adopted the rules, and it is the ultimate trier of fact and law in the enforcement process." The Arizona lawyer advertising rules "reflect[ed] a clear articulation of the State's policy with regard to professional behavior" and were "subject to pointed reexamination by the policy maker—the Arizona Supreme Court—in enforcement proceedings."
In Princeton Community Phone Book, Inc. v. Bate, the court held that a state bar’s ethics advisory panel's action was "not as clearly commanded as was the defendants' action in Bates." Nonetheless, the court found that the close relationship between the advisory committee and the state's supreme court conferred immunity:
The weaker the relationship between the state and the defendant, the more clearly the state must command the precise action taken by the defendant for the defendant to enjoy the state action exemption. Conversely, the closer the relationship between the state and the defendant, the less clearly the state need command the precise action for the defendant to enjoy the exemption.
Where the state adopts restrictive procedures, even as a result of the petitioning by private parties, parties acting pursuant to the state's rules are immune from antitrust attack. See Lawline v. American Bar Ass'n, 956 F.2d 1378 (7th Cir. 1992), cert. denied, 510 U.S. 992 (1993) (ethical opinions promulgated by defendant bar associations and challenged as anticompetitive were immune from antitrust attack because it was the state which issued the ethical rules, not the bar association); Sessions Tank Liners, Inc. v. Joor Mfg., Inc., 17 F.3d 295 (9th Cir.), cert. denied, 513 U.S. 813 (1994) (antitrust claim against corporation that had caused a prominent standard setting organization to amend its influential fire code to the disadvantage of plaintiffs, and the fire code that had been adopted by various local governments).
Most recently, in Massachusetts School of Law at Andover, Inc. v. American Bar Ass’n, the court rejected an antitrust attack on the ABA's accreditation standards for law schools. Plaintiffs asserted that the ABA had delegated the decision-making to a small group of professors who blatantly excluded new entrants out of anticompetitive motives. Massachusetts School of Law ("MSL") alleged that (1) unaccredited schools face a competitive disadvantage in recruiting students because their graduates are not allowed to take the bar examination in most states, and (2) enforcement of the ABA's accreditation standards increases the cost of faculty salaries and creates a boycott of unaccredited schools.
The district court granted summary judgment rejecting MSL's competitive disadvantage theory "to the extent that the decisions of the individual states to prohibit graduates of unaccredited schools from taking their bar examinations caused the injury." The district court based its ruling on the Parker principle, "reaffirmed" in Noerr, that "where a restraint upon trade or monopolization is the result of valid governmental action, as opposed to private action, no violation of the [Sherman] Act can be made out." The Third Circuit endorsed the district court's analysis and affirmed its grant of summary judgment for the defendants.
Just as states have antitrust immunity for ethical rules and bar admission requirements, etc., they have immunity if they wish to prevent attorneys, whether individually or combined in a firm, from associating with non-attorneys. And if the ABA urges states to implement such ethics rules, such advocacy cannot subject it to liability.
We urge the Commission to conduct its activities in a manner that minimizes its potential antitrust exposure. We also urge the Commission to work with experienced antitrust counsel as it proceeds to minimize that risk.
The views expressed herein have not been approved by the House of Delegates or the Board of Governors of the American Bar Association and, accordingly, should not be construed as representing policy of the American Bar Association.