The Antitrust Danger of Trade Associations with Power

White TeethThe trade association necessitates a delicate balancing act between anticompetitive conduct condemned by the antitrust laws and pro-competitive information-sharing and best practices that ultimately help consumers.

Trade associations should have antitrust policies and should consistently consult with an antitrust attorney. Antitrust law reserves its greatest scorn to the horizontal agreements—the deals between and among competitors. And a trade association is, by definition, an entity created to bring these competitors together.

Competition Policy International (CPI) published an Antitrust Chronicle this week about trade associations and industry information sharing and I was fortunate that they invited me to publish an article in this issue. My article is called “’But the Bridge Will Fall’ is Not a Valid Defense to an Antitrust Lawsuit.” I discuss one of my favorite Supreme Court cases of all time: National Society of Professional Engineers v. United States.

There are a couple of ways that trade associations—and, really, any group of industry competitors—harm competition and risk antitrust liability. The first and most obvious concern is that the competitors will conspire against their customers or suppliers (don’t forget that buying conspiracies may be illegal too).

For example, a group of competitors may reach agreements on price, output, geographic or product and service markets, contractual terms, etc. These are per se antitrust violations, condemned with little analysis other than whether there was, indeed, an agreement.

The other conspiratorial harm that trade associations or groups of industry competitors can inflict is on competitors from another industry or profession. In my view, this harm is underrated and under-considered. I discussed this concern in a law review article a couple years ago.

Here is what happens: A group of professionals will spend a lot of time with other professionals of the same type. Dentists, for example, probably have a lot of dentist friends. They see each other at trade association meetings, may have been classmates, know what each other is going through, and have a similar belief system—that dentistry does great things. Nothing wrong with that, in the abstract.

But there is another group, let’s call them teeth-whitening technicians. They don’t have the history that dentists do, and may be a relatively new group that isn’t organized quite as well. And their trade association—this is hypothetical, that is, I am making it up—exists, but nobody really knows about it. So they don’t have much power.

It turns out that dentists whiten teeth for their customers. They typically do a good job and charge a lot—dental school was expensive. And dentists have similar cost structures with each other relative to other professionals or businesses and there are great barriers to entry for dentistry, so the teeth-whitening price is both stable and high.

That’s great for the dentists because people watch television and movies, see the actors’ glowing white teeth, and want the same for themselves. Dentists are quick to tell their patients about the opportunity because it is an extra service, i.e. new profit center, with good margins. The patients win because they get white teeth and the dentists win because they make bigger profits.

Bigger profits, however, are a magnet for competition. That is how it is supposed to be. It is, in fact, how competition works. When the margins go up, supply enters, and the price goes down or quality goes up. So if you want to make money, find a business with limited competition.

Seeing the big profits for dentists, a new industry professional develops—we are calling them the teeth-whitening technicians. I am making this up to simplify the example.

These teeth-whitening technicians don’t have the years of training—and the requisite student loans—from studying dentistry. They don’t and can’t fix a cavity or do root canals or other dentistry activities. In fact, they don’t want to. That isn’t why they are there.

What they can do, however, is whiten teeth. They may do it with different technology or methods than the dentists, but, lo and behold, it works. It may not even work as well, but it works. And, do you know what is great? They charge half the price as the dentists. This means that consumers that want white teeth save a lot of money. It also means that a large group of people that either couldn’t afford the dentist teeth-whitening prices or didn’t want to pay them, can have white teeth.

A success of capitalism? Victory for competition? Yes.

But wait, the story changes

The dentists are suddenly competing with a different industry, a different group of professionals. The upstart competitors don’t have the same cost structures, the barriers to entry are lower, and they are using different techniques. And, not surprisingly, dentists have trouble charging the same high prices for teeth-whitening. Sure, they still have some customers that are willing to pay the high price. But many of their customers either demand a lower price or go to the new competition.

What is the dentist to do? Individually, probably nothing. But the dentists is part of a group; a professional group that has a trade association: A powerful trade association of dentists. The association is angry because of the loss of business.

The first response is usually to come up with some rationalization why the new competitor isn’t doing the right thing. At this stage, terms like “unfair,” “health and safety,” and “misleading consumers,” are usually thrown around, regardless of whether they should be.

The next stage is organization: the trade association may seek legislation or regulation that limits the ability of the evil newcomers to “disrupt” the market for teeth-whitening. Oftentimes, the group of industry professionals has an especially sharp arrow in their quiver—the State Licensing Board.

It makes sense, doesn’t it, that a State Licensing Board will be made up of members of an industry? They, after all, are most knowledgeable about who can practice in that industry. That may be true, but the danger is probably obvious to you by now.

The State Licensing Board for dentists, made up primarily of dentists, could interpret the scope of dentistry to include teeth-whitening or some other area where non-dentists professionals want to compete. By doing so, they could use the power of the state to exclude their competition. These teeth-whitening technicians have no business whitening teeth. That is the province of dentistry. Looks like a group boycott to me—a serious antitrust violation.

So the teeth-whitening technicians sell their businesses and have to get another job or start another business. The customers are back to seeing their dentists for teeth-whitening, at the higher prices. And stains start to show up on the teeth of the customers that couldn’t pay or didn’t want to pay the high prices from the dentists. But the dentists benefit; profit margins are back up and business is good.

If this story is interesting or, perhaps, concerning to you, you should follow the case pending before the US Supreme Court entitled North Carolina State Board of Dental Examiners v. Federal Trade Commission. Bona Law PC filed an amicus brief in the case, and I wrote about the oral argument here, and our amicus brief here.

Update: The US Supreme Court upheld the Fourth Circuit’s decision in the NC Dental case, holding that the Dental Board is not exempt from antitrust liability.

The facts in the above hypothetical are not precisely the facts in the case, but the gist of the story is similar. And this is a story that plays itself out again and again in industry after industry. Look at the battles between taxi companies and Uber and Lyft.