James Cooper on Antitrust Treatment of Expansive Interpretations of Ethical Rules

totmauthor —  20 September 2011

Attorneys earn excess rents by maintaining barriers to entering the legal profession.  Legislation and regulation expanding the scope of work that only an attorney legally can perform is an obvious way in which attorneys attempt to expand or protect the market for their services.  The FTC has a long history of trying to convince state legislators and courts that expanding the scope of the practice of law is likely to have unjustified anticompetitive consequences.   A more subtle way attorneys limit competition for legal services is by interpreting existing legislation and rules in a manner that expands the universe of practices that are considered “unethical” or “unauthorized practice of law.”  In this symposium, I will address the application of antitrust law to this conduct.

The Legal practice no stranger to antitrust scrutiny.  Indeed, in several seminal antitrust cases the Supreme Court has grappled with the tension between a national policy in favor of competition and states’ abilities as sovereigns to regulate the practice of law.  See e.g., Bates v. State Bar of Arizona; Goldfarb v. Virginia; Hoover v. Ronwin.  Taken together, what these cases make clear that entry barriers erected directly by the state supreme court acting in its legislative capacity are ipso facto exempt from antitrust scrutiny as acts of the state sovereign.  Agreements among private attorneys (e.g., via a private state bar association as opposed to a mandatory state bar) to set competitively sensitive variables (like price and advertising), on the other hand, clearly are not unless both the “clear articulation” and “active supervision” tests from Midcal are met.  One area that has yet to be addressed, but which I think merits closer attention, is the use of ethics opinions or threats of enforcement for violations of ethical codes to limit competition in the market for legal services.

Let me provide a hypothetical to motivate this discussion:

  • Imagine a firm that uses a website to match attorneys with potential clients.  The site works like this:  you post on the website that you’re looking for someone to draft partnership agreements under Virginia law for your new business; attorneys who have paid to participate in the platform see your request, and, if interested, post a reply describing their qualifications and in some cases price.  The website make money from attorney subscriptions.  Recently, however, the state bar ethics committee issued an ethical opinion that participation in this platform would violate the state bars’ ethics rules by constituting and illegal payment to a non-attorney (the web site) for a referral.  Now, as an attorney in State X, you have a dilemma.  The website has been quite useful in helping you build your practice, but if you continue to participate, you risk being sued – either by an arm of the state bar, or a private attorney acting to protect the integrity of the legal practice – for violation of ethical rules.  The possible penalties (in addition to legal and opportunity costs to address any ethical challenge) could include fines, suspension, or even disbarment.

In this case, the state has not issued a new rule or regulation that explicitly expands the legal monopoly.  Instead, a group of attorneys (who most likely do not work full time for the state bar) have merely opined on what the state ethics rules require.  This opinion, however, has the practical effect of discouraging use of the online legal platform by threating legal sanctions.   In this manner, it has a clear anticompetitive effect of reducing consumer choice and retarding competition among attorneys.  Established attorneys with large client bases and existing referral systems operated by local bar associations, moreover, are likely to be the primary beneficiaries of this new opinion.

The interesting antitrust questions that arise in this scenario are (1) whether the state action doctrine protects this conduct; and (2) does this conduct constitute a restraint of trade.

Is This State Action?

Turning to the state action issue, the ethics committee of a state bar is not the sovereign, so its actions are not ipso facto immune from antitrust scrutiny.  Thus, a necessary condition for state action exemption is that the ethics committee was acting pursuant to a clearly articulated and affirmatively expressed state policy. Less clear, however, is whether this is also a sufficient condition for state action protection.  I argue that it is not, and that in addition the ethics committee must show that the state approved its decision to adopt an interpretation of the ethics rules that was likely to have anticompetitive effects.

Support for this position can be found in the FTC decision, In re North Carolina State Board of Dental Examiners (NCDE), (Feb. 8, 2011).  NCDE concerned a state dental regulatory board composed of private dentists that had sent cease and desist letters to non-dentists who performed teeth whitening procedures.  The Board acted on its interpretation that these non-dentists were engaging in the unauthorized practice of dentistry.  The Dental Board, however, lacked the authority to enjoin anyone from teeth whitening; its statute only allowed it to file a complaint in state court alleging unauthorized practice of dentistry.  The Board claimed state action exemption, arguing that as a state subdivision it needed only to show that it satisfied the clear articulation prong of the Midcal test.  The FTC disagreed, and held that to enjoy state action protection the Board also must show that the state actively supervised its decision to issue the cease and desist letters. (Id. at 9-11).

The important factor in the FTC analysis was its conclusion that the Dental Board’s interests were insufficiently independent from the interest of those it was regulating.  Turning to first principles, the Commission explained:

[I]f a state permits private conduct to go unchecked by market forces, the only assurance the electorate can have that the private parties will act in the public interest is if the state is politically accountable for any resulting anticompetitive conduct . . . .  Decisions that are made by private parties who participate in the market that they regulate are not subject to these political constraints unless these decisions are reviewed by disinterested state actors to assure fealty to state policy.

Id. at 10-11.  The Commission went on to find that the state of North Carolina had not supervised the Dental Board’s decision to classify teeth whitening as the practice of dentistry, thereby restraining competition in the market for teeth whitening, “was subject to any supervision, let along sufficient supervision to convert the Board’s conduct into that of the state of North Carolina. “ Id. at 17.

The reasoning in NCDE is equally applicable to expansive interpretation of rules or statutes to limit competition in legal services.  For example, in the above hypothetical, the ethics committee’s opinion should not enjoy state action protection unless the committee can show that the state reviewed and approved its decision to limit competition.  True, this rule will impose costs, but as I (along with Bill Kovacic) have argued elsewhere (see 90 B.U.L. Rev. 1555, 1597 (2010)) this is the price a state must pay if it wants to circumvent the national policy in favor of competition.  In deference to federalism, Parker and its progeny allow states to adopt policies that contravene the antitrust laws.  But regulatory bodies comprising unelected market participants are not sovereign, so deference to their anticompetitive policies does not vindicate the federalism principles that animate the state action doctrine.   What’s more, these bodies are likely to pose a greater risk to competition than elected officials, who at least are politically accountable for the anticompetitive policies that they pursue.

Finally, I argue that ex post review by a state court of decisions by ethics committees that expand the definition of the practice of law or that suggest some new practice is unethical should be insufficient to constitute active state supervision.   The active supervision prong of Midcal requires the state to approve prices set by a private cartel before they go into effect, so logically it should also require the state to approve ex ante an ethics committee’s decision to interpret ethical rules in a manner that is likely to restrain competition in the market for legal services.

Restraint of Trade?

Even if the ethical committee’s actions are not protected by the state action doctrine, we must also address a second question:  does the ethics committee’s opinion constitute a restraint of trade under the antitrust laws?  In Schachar v. Am. Academy  of Ophthalmology, 870 F.2d 397 (7th Cir. 1989), an ophthalmologist challenged the AAO under the antirust laws for opining that radial keratotomy was an experimental procedure.  Judge Easterbrook held that this could not be a restraint because although the AAO’s opinions carried weight due to its reputation, it had no power to prevent anybody from performing radial keratotomy.   Could the same issue exist for my hypothetical?  Is an opinion by the ethics committee no different from that of a trade association or an expert body?  I argue no, because unlike that AAO in Schachar, the ethics committee is acting under the color of law, which provides a reasonable basis for attorneys licensed in State X to believe that they risk state sanction if they fail to heed the warning.

Again, NCDE is illuminating.  Following the Commission’s state action decision, and after a full trial, the ALJ found that the Board’s conduct related to non-dentist teeth whiteners constituted an unreasonable restraint of trade. (see http://ftc.gov/os/adjpro/d9343/110719ncb-decision.pdf).   He based this finding on two grounds: the nature of the Board’s conduct coupled with its power to exclude competitors, which flowed from the fact that it was a state agency; and evidence that the Board’s actions actually caused some non-dentist teeth whiteners to exit the marketplace.   It would be hard to distinguish a state bar’s ethics committee’s expansive interpretation of an ethical requirement from the facts in NCDE; both regulatory bodies have the power to exclude competition because their opinions, unlike those of a private association, carry the possibility of legal sanction for non-compliance.