FTC Staff Comment Before the South Carolina Legislative Audit Council Concerning Sunset Review of Laws and Regulations Governing Various Professional Boards

UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTOt-\, DC. 20580
1\PR 2 3 1987
Mr. 	George 	L. 	Schroeder
Director
Legislative Audit 	Council
State of South 	Carolina
620 Bankers 	Trust 	Tower
Colunbia, 	South 	Carolina 	29201
Dear Mr. 	Schroeder:
We 	are 	pleased 	to 	respond 	to 	your 	invitation 	to 	assist 	in
the sunset 	review 	of 	the 	laws 	governing, 	and 	regulations
implemented 	by, 	the 	South 	Carolina 	state 	Boards 	of 	Podiatry
Examiners, 	Occupational 	Therapy 	Examiners, 	Speech 	and 	AUdiology
Examiners, 	and 	Psychology 	Examiners. 1 	Our 	comments 	address: 	(1)
restrictions 	on 	business 	practices 	of 	professionals, 	including
restrictions 	on 	corporate 	practice, 	employment 	of 	professionals
by 	corporations, 	and 	commercial 	affiliations, 	(2) 	restrictions 	on
truthful, 	nondeceptive 	advertising, 	and 	(3) 	restrictions 	on
advertising 	and 	fee 	splitting 	that 	are 	incorporated 	directly 	from
ethical 	rules 	promulgated by 	private 	professional 	associations
composed 	of 	co~petitors. 	In 	our view, 	these 	three 	types 	of
provisions 	are 	likely 	to 	injure 	South 	Carolina 	consumers, 	and 	we
therefore 	urge 	the 	Council 	to 	seek their 	repeal 	or mocification.
I. 	Inte~est and 	Experience 	of 	the 	Federal 	Trade 	Cor.~ission
, 	The 	Federal 	Trade 	Commission 	is 	empo~ered under 	15 U.S.C.
! 	§ 	'1, 	et 	seo. 	to 	prevent 	unfair 	methods 	of 	competitipn 	and 	unfair
or 	deceptive 	acts 	or 	practices 	in 	or 	affecting 	commerce.
Pursuant 	to 	its 	statutory mandate, 	the 	Commission 	encourages
competition 	among 	merr~ers of 	the 	licensed 	professions 	to 	the
maximum 	extent 	compatible with 	legitimate 	state 	and 	federal
goals. 	for 	several 	years, 	the 	Commission 	staff 	has 	been
investigating 	the 	competitive 	effects 	of 	restrictions 	on 	the
kinds 	of 	business 	arrangements 	that 	state-licensed professionals,
1 	These 	comments 	represent 	the 	vie~s of 	the 	Bureaus 	of
Competition, 	Consumer 	Protection, 	and 	Economics 	of 	the 	Federal
Trade 	Co~ission, and 	do 	not 	necessarily 	represent 	the 	views 	of
the 	Commission 	itself. 	The 	Co~ission has, 	however, 	voted 	to
authorize 	us 	to 	submit 	these 	comments 	to 	you.

George 	L. 	Schroeder 	Page 	2
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,
kinds 	of 	b"sinesF 	arrangements 	that 	state-licensed 	professionals,
including 	optometrists, 	dentists, 	lawyers, 	physicians, 	and
others, 	are 	permitted 	to 	use 	in 	their 	respective 	professions.
Our 9~al 	is 	to 	identify 	and 	seek the 	removal 	of 	restrictions 	that
impede 	competition, 	increase 	costs, 	and 	harm 	consumers 	without
providing 	countervailin~ benefits.
As 	a 	part 	of the 	Commission's 	efforts 	to 	foster 	competition
among 	licensed 	professionals, 	it 	has 	examined 	public 	and 	private
restrictions 	that 	limit 	the 	ability 	of 	professionals 	to 	engage 	in
truthful 	and 	nondeceptive 	acvertising. 2 	The 	Commission's 	staff
has 	gained 	considerable 	experience 	with 	the 	economics 	of
co~petition among 	health 	professionals, 	and 	with 	the 	effects 	of
state board 	regulation 	on 	competition.
II. 	Restrictions 	on 	the 	Practice 	of 	Podiatry
s.C. 	Code Ann. 	§ 	40-51-210 	prohibits 	any 	person 	from
incorporating 	for 	the 	purpose 	of 	providing 	podiatry 	services 	to
the 	public. 	This 	"corporate 'practice" 	restriction 	apparently
prevents 	podiatrists 	from 	practicing 	as 	corporations 	or
affiliating 	with 	lay 	co=porations. 	It 	is 	also 	unlawful 	for
podiatrists 	to open 	an 	office 	or 	practice 	podiatry 	"in 	connection
with 	a 	conunercial 	establishment," 	s.c. 	Code Ann. 	§ 	40-51-250,
which 	a?parently means 	that 	podiatrists 	cannot 	practice 	in
commercial 	settings 	s~ch as 	department 	or 	drug 	stores. 	Such
restric~ions are 	anticompetitive 	and 	harnful 	to 	cons~mers because
they 	prevent 	podiatrists 	from 	choosing 	the 	form 	of 	practice 	they
consider most 	efficient, 	they 	increase 	the 	costs 	of 	providing
2 	See 	Wyoming 	state 	Board 	of 	Registration 	in 	Podiatry, 	107
F.T.C. 	1~ 	(1986) (consent 	order) (settling 	charges 	tha~ the 	Board,
through 	regulations 	it 	promulgated 	and 	enforced, 	had 	restrained
competition 	among 	podiatrists 	by 	restricting 	the 	truthful
advertising 	of 	podiatric 	goods 	and 	services): 	Louisiana 	state
Board 	of 	Dentistry, 	106 	F.T.C. 	65 	(1985) (consent 	order) (settling
charges 	that 	the 	Board, 	through 	regulations 	it 	promulgated 	and
enforced, 	had 	restrained 	competition 	by 	restricting 	the
adve~tising of 	the 	cost 	and 	availability 	of 	dental 	services):
Montana 	Board 	of 	Optometrists, 	106 	F.T.C: 	80 	(1985) (consent
order) (settling 	charges 	that 	the 	Board, 	through 	regulations 	it
promulgated 	and 	enforced, 	had 	restrained 	competition 	by
restricting 	the 	truthful 	advertising 	of 	prices 	and 	claims 	of
professional 	superiority): 	American 	Medical 	Association, 	94
F.T.C. 	701 	(1979), 	aff'd, 	638 	F.2d 	443 	(2d 	Cir. 	1980), 	aff'd 	memo
by 	an 	e~ally diviCtd 	Court, 	455 U.S. 	676 	(1982) (holding 	that 	the
kY~ had 	illegally 	conspired 	to 	restrain 	competition a~~ng
physicians 	by 	suppressing 	through 	it~ ethical 	guidelines 	truthful
advertising 	and 	ether 	forms 	of 	solicitation 	of 	patients 	by member
physicians).

George L. 	Schroeder 	Page 	3
podiatry 	services, 	and 	they 	deter 	entry 	into 	the 	market 	by 	new
podiatrists. 	Thus, 	we 	urge 	the 	Council 	to 	recommend that 	these
statutory 	restrictions 	be 	repealed.
The 	combined 	effect 	of 	corporate 	and 	commercial 	practice
restrictions 	is 	to 	prevent 	podiatrists 	from 	choosing whatever
they 	consider 	to be 	the 	most 	efficient way 	to 	practice. 	These
restrictions 	would, 	for 	example, 	prevent 	podiatrists 	from 	forming
or 	affiliating 	with 	business 	arrangements 	such 	as 	ambulatory
clinics 	or 	health 	maintenance 	organizations 	("HMOs") 	that 	are 	not
controlled 	by 	podiatrists 	or 	are 	"commercial." 	Such 	arrangements
can 	facilitate 	entry 	by 	new practitioners 	and 	lead 	to 	high-volume
practices 	that 	may 	be 	more 	efficient 	than 	traditional 	practices.
Competition 	from 	new 	entrants, 	and 	the 	productivity 	gains 	from
increased 	volumes 	of 	patients 	seen, 	can 	benefit 	consumers 	through
lower prices 	or 	a 	greater variety 	of 	services.
Notwithstanding 	the 	anticompetitive 	nature 	of 	these 	types 	of
restrictions, 	they 	are 	frequently 	defended 	on 	the 	grounds 	that
they help 	maintain 	a 	high 	level 	of 	quality 	in 	the 	professional
services 	ma~ket. 	Proponents 	claim, 	for 	example, 	that 	business
relationships 	between 	professionals 	and 	non-professionals 	are
undesirable 	because 	they 	permit 	lay 	interference 	with 	the
professional 	jUdgment 	of 	licensees. 	They 	also 	allege 	that, 	while
lay 	firms 	might 	offer 	lower 	prices, 	such 	firms 	might 	also
encourage 	their 	professional 	employees 	to 	cut 	corners 	to 	maintain
p!"ofits.
Some 	studies 	of 	the 	delivery 	of 	optometric 	services 	appear
to 	contradict 	these 	contentions, 	however. 	They 	indicat 	that 	the
presence 	of 	innovative 	arrangements 	such 	as 	chain 	stores 	in
optometric markets 	is 	likely 	to 	strengthen both 	price 	and 	service
, 	co~petition.3 	Such 	a!"!"angements 	can 	increase 	co~sumer access 	to
! 	optometric 	ca!"e 	by 	permitting 	the 	establishment 	of 	high-volume
practices 	that 	charge 	significantly 	lower 	prices without
sacrificing 	the 	quality 	of 	care 	provided. 	The 	results 	of 	these
studies 	may 	be 	applicable 	to 	si~ilar restrictions 	in 	other 	areas,
such 	as 	podiatry.
The 	statute 	prohibiting 	pOdiatrists 	from 	practicing 	in
connection with 	commercial 	establishments 	could 	also have
anticompetitive 	effects 	even 	standing 	alone, 	apart 	from 	the
corporate 	practice 	restriction. 	This 	restriction 	effectively
3 	Bureau 	of 	Economics, 	Federal 	Trade 	Commission, 	Bureaus
of 	Consumer 	Protection 	and 	Economics, 	Federal 	Trade 	Commission, 	A
Comparative 	Analysis 	of 	Cosmetic 	Lens 	Titting 	By
Ophthalmologists, 	Optometrists 	and 	Opticians 	(1963): 	Staff Report
on 	Effects 	of 	Restrictions 	on 	Advertising 	and 	Commercial 	Practice
in the 	Professions: 	The 	Case 	of 	optometry 	(1980).

George 	L. 	Schroeder 	Page 	4
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prohibits 	podiatrists 	from 	providing 	services 	in 	locations
frequented 	by 	numerous 	consumers, 	for 	instance, 	on the 	premises
of 	a 	department 	store 	or 	shopping mall. 4 	Consumers 	desire 	and
can benefit 	from 	convenient 	access 	to 	goods 	and 	services,
including 	professional 	goods 	and 	services. 	Restrictions 	on
practicing 	in 	conmercial 	locations 	can 	reduce 	the 	accessibility
of podiatry 	services 	as 	well 	as 	consumers' 	opportunity 	to 	choose
among 	a 	variety 	of 	providers 	practicing 	at 	different 	locations.
Similarly, 	the 	restriction 	on 	corporate 	practice 	can, 	by
itself, 	have 	anticompetitive 	effects. 	Corporate 	business
arrangements 	can be 	procompetitive 	because 	they 	may 	be 	a 	means 	to
raise 	needed 	equity 	capital 	to 	start 	or 	expand 	a 	practice. 	For
example, 	podiatrists 	may 	want 	to 	finance 	their 	practice 	by
becoming 	co-workers 	with 	outside 	investors 	or 	put 	together 	chains
of clinics 	or 	other 	types 	of 	innovative 	arrangements 	to
accommodate 	high 	volume 	practices. 	Because 	current 	law 	precludes
a 	sale 	of 	stock, 	podiatrists 	may 	be 	forced 	to 	rely 	on more
expensive 	alternative 	financing. 	The 	cost 	of 	obtaining 	bank
financing 	or 	personal 	loans 	may 	be 	a 	significant 	impediment 	to
entry. 	If 	raising 	needed 	equity 	capital 	is 	made 	more 	difficult,
some 	podiatrists 	may 	be 	deterred 	from 	entering 	the 	market
altogether. 	Competition may 	be 	lessened 	because 	of 	the 	reduced
entry 	of 	new podiatrists, 	and 	potential 	productivity 	gains 	from
innovative 	practice 	arrangements 	may 	be 	i~~ibited.
We 	are 	also 	concerned 	that 	the 	restriction 	on 	corporate
pr~ctice may 	hinder 	the 	development 	of 	amb~latory clinics, 	HXOs,
preferred 	provider 	organizations 	("PPOs"), 	or 	other 	innovative
types 	of 	health 	care 	organizations. 	For 	example, 	if 	these 	types
of 	organizations 	hire 	or 	affiliate 	with 	podia~rists, they 	may 	be
, 	considered 	to 	be 	engaged 	in 	the 	delivery 	of 	podiatry 	services 	in
a 	manner prohibited 	by 	§40-51-210. 	If 	the 	South 	Car~lina
provision 	is 	interp~eted in 	this 	mdnner 	(cf. 	American 	Me=ical
Association, 	94 	F.T.C. 	701, 	1016-18 	(1979), 	aff'd, 	638 	f.2d 	443
(2d 	Cir. 	1980), 	atf'd 	memo 	by 	an 	equally 	divided 	Court, 	455 	U.S.
676 	(19S2», 	it 	could 	restrict 	the 	development 	of 	efficient
arrangements 	between 	podiatrists 	and 	clinics, 	HMOs, 	or 	PPOs.
Because 	these 	organizations 	can 	provide 	quality 	health 	care
services 	and 	health 	care 	financing 	at 	di?counted 	prices, 	a
restriction 	that 	impedes 	their 	development 	can harm 	consumers.
The 	anticorepetitive 	effects 	of 	restrictions 	on 	corporate
practice 	were 	carefully 	considered 	by 	the 	Commission 	in 	the
American 	~ecical Association 	case. 	The 	Commission 	found 	that 	AY~
4 	See, 	e.g., 	Oklahoma 	Optometric Association, 	106 	F.T.C.
556 	(1985) (consent 	order) (settling 	charges 	that 	the 	association's
pro~ibition on 	franchise 	or 	other 	commercial 	arrangements
unreasonably 	restrained 	competition 	and 	injured 	consumers).

George 	L. 	Schroeder 	Page 	5
rules 	preventing 	physicians 	from 	entering 	into various
contractual 	relationships, 	such 	as 	affiliating 	with 	HMOs,
unreasonably 	restrained 	competition 	and 	thereby 	violated 	the
antitrust 	laws. 5 	The 	Commission 	concluded 	that 	the 	AHA's
prohibitions 	kept 	physicians 	from 	adopting 	more 	economically
efficient 	business 	arrangements. 	These 	restrictions 	also
precluded 	competition 	by 	organizations 	not 	directly 	and
completely under 	the 	control 	of 	physicians. 	The 	Commission 	found
that 	there 	were 	no 	countervailing 	procompetitive 	justifications
for 	these 	provisions. 6
In 	sum, 	bans 	on 	corporate 	practice 	and 	on 	practice 	in
connection with 	commercial 	establishments 	may 	deprive 	consumers
of 	significant 	cost 	savings 	and 	convenience 	without 	providing 	any
countervailing 	benefits 	in 	the 	quality 	of 	care 	podiatrists
deliver. 	Thus, 	we 	urge 	the 	Council 	to 	recommend 	the 	repeal 	of
these 	provisions.
III. 	Restrictions 	on 	the 	Practice 	of 	occupational 	Therapy
The 	South 	Carolina 	Attorney 	General's 	Office 	has 	issued 	an
opinion 	letter 	concerning 	the 	practice 	of 	occupational 	therapy.7
That 	letter 	raises 	two 	issues 	of 	competition policy. 	First, 	it
appears 	to 	hold 	that 	the 	corporate 	practice 	of 	occupational
thera;y 	is 	unlawful. 8 	Second, 	it 	appears 	to 	hold 	that 	the
employment 	of 	an 	occupational 	therapist 	by 	a 	corporation 	is
5 	9~ 	F.T.C. 	at 	1011-18.
6 	See 	also 	Michigan 	optometric Association, 	106 	F.T.C. 	3~2
, 	(1985) (consent 	order) (settling 	charges 	that 	an 	optometric
! 	association's 	prohibition 	of 	corporate 	practice unreasonably
restrained 	co~petition and 	injured 	consumers).
7 	See 	letter 	from 	Robert 	D. 	Cook, 	Assistant 	Attorney
General 	to 	Barbara 	Waugh, 	Secretary, 	Occupational 	Therapy 	Board
(September 	8, 	1962) (hereinafter 	cited 	as 	"Waugh 	Letter').
8 	Waugh 	letter 	at 	2. 	~he attorney. general's 	opinion 	is
based 	on 	a 	common 	law 	rule 	prohibiting 	a 1::orporation 	from
engaging 	in 	a 	learned 	profession. 	It 	cites 	Wadsworth 	v. 	McRae
pruc 	Co., 	203 	S.C. 	5~3, 	5~8, 	28 	S.E.2d 	417 	(19~3) (holding 	that 	a
corporation may 	not 	engage 	in 	the 	practice 	of 	a 	learned
profession 	even 	through 	a 	licensed 	e~ployee). 	The 	opinion 	letter
also 	emphasizes 	the 	absence 	of 	any 	statutory 	authority 	for 	the
Board 	of 	Occupational 	Therapy 	to 	issue 	a 	license 	to 	practice
occupational 	therapy 	to 	a 	corporation. 	See 	S.C. 	Code. 	Ann. 	§ 	40-
36-10 	eta 	se:r.

George 	L. 	Schroeder 	Page 	6
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r
prohibited. 9 	South 	Carolina 	does 	not 	have 	any 	statutes 	or
regulations 	conteining 	such 	restrictions. 	Rather 	they 	are
apparently 	found 	in 	the 	common 	law 	of 	South 	Carolina.
The 	restrictions 	identified by 	the 	Attorney 	General's 	office
are 	likely 	to 	hinder, 	or 	prevent 	altogether, 	the 	development 	and
formation 	of 	innovative 	forms 	professional 	practice 	by
occupational 	therapists. 	Thus, 	we 	urge 	the 	Council 	to 	recommend
that 	the 	legislature 	act 	to 	alter 	the 	common 	law 	to 	permit
corporate 	practice 	by 	occupatio~al therapists 	and 	their
emploJ~ent by 	a 	corporation.
We 	have 	previously 	discussed 	our 	concerns 	about 	the
potential 	anticompetitive 	effects 	of 	a 	restriction 	on 	the
corporate 	practice 	of 	podiatry. 	These 	concerns 	are 	likely 	to 	be
applicable 	to 	prohibitions 	on 	incorporation 	by 	occupational
therapists 	as 	well. 	Therefore, 	we 	refer 	the 	Council 	to 	our
comments 	on 	that 	subject 	in 	Part 	II 	above.
The 	rest~iction on 	the 	employment 	of 	occupational 	therapists
by 	a 	corporation may 	also 	generate 	significant 	anticompetitive
effects 	and 	increase 	costs 	to 	consumers. 10 	For 	example,
occupational 	therapists 	may 	seek 	to 	associate 	with 	corporations
such 	as 	ambulato~ clinics 	or HMOs 	and 	agree 	to 	accept
corr.pe~sation in 	the 	form 	of 	a 	salary. 	Such 	an 	arrangement 	may
allow 	occupational 	therapy 	se~ices to 	be 	delivered 	to 	the 	pUblic
in 	connection with 	a 	variety 	of 	o~her health 	care 	services 	or
through 	a 	more 	competitive 	cost 	structure. 	Consequently, 	the
employment 	of 	occupational 	therapists 	under 	a 	salary 	arrangement
can 	increase 	consumer 	choice 	by 	increasing 	price 	and 	service
compe~ition among 	occupational 	therapists.
9 	Waugh 	letter 	at 	3-7. 	The 	opinion 	cites 	to 	an 	early 	South
Carolina 	case 	holding 	that 	a 	corporation was 	forbidden 	to 	employ
a 	licensed 	professional, 	because 	e~ployment by 	a 	corporation
could 	be 	used 	as 	an 	"expedient" 	to 	circwnvent 	the 	existing
restrictions 	on 	corporate 	practice. 	See 	Ezell 	v. 	Ritholz, 	lSS
S.C. 	30, 	198 	S.E. 	419 	(193S).
10 	See 	e.a., 	American Medical 	Association, 	94 	F.T.C. 	at
1016 	(finding 	that 	AY~ had 	illegally 	conspired 	to 	restrain 	its
members 	from 	working 	on 	a 	salaried 	basis 	or 	at 	less 	than 	ordinary
rates 	for 	hospitals, 	HMOs, 	and 	other 	institutions): 	American
Society 	of 	Anesthesiologists, 	93 	F.T.C. 	101, 	102 	(1979) (consent
order) (settling 	charges 	that 	the 	society, 	through 	its 	ethical
guidelines 	and 	membership 	re~~irements, illegally 	restrained
membe~s from 	being 	paid 	on 	other 	than 	a 	fee-for-service 	basis 	or
fro~ becoming 	salaried hospital 	employees).

George 	L. 	Schroeder 	Page 	7
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The 	availability 	of 	salaried 	employment 	also may 	be 	an
important 	option 	for 	those 	occupational 	therapists 	who 	cannot
obtain 	the 	capital 	necessary 	to 	open 	a 	practice 	or who 	seek to
avoid 	the 	difficulties 	of 	debt 	financing. 	Salaried 	e~ployment
can present 	fewer 	economic 	risks 	than 	independent 	practice. 	If
occupational 	therapists 	desire 	salaried 	employment 	but 	are
prevented 	by 	law 	from 	accepting 	it, 	they may 	be 	deterred 	from
entering 	the 	market, 	thus 	decreasing 	the 	availability 	of
occupational 	therapists.
We 	therefore 	urge 	the 	Council 	to 	recommend 	that 	the
legislature 	permit 	corporate 	practice 	by 	occupational 	therapists
and 	the 	employment 	of 	occupational 	therapists 	by 	corporations.
IV. 	Begul~tions of 	the 	Board 	of 	Speech 	and 	AUdiology 	Examiners
The 	Board 	of 	Speech 	and 	AUdiology 	Examiners 	has 	adopted
regulations 	that 	contain 	two 	provisions 	that 	could 	have
significant 	anticompetitive 	effects. 	The 	first 	of 	these
provisions, 	S.C. 	Admin. 	R. 	115-15 	D(5), 	requires 	speech
pathologists 	and 	audiologists 	to 	"announce 	their 	services 	in 	a
manner 	consistent with 	the 	highest 	professional 	standards 	in 	the
community." 	The 	second 	provision, 	S.c. 	Admin. 	R. 	115-15 	D('),
prohibits 	speech 	pathologists 	and 	aUdiologists 	from 	"using
professional 	or 	commercial 	affiliations 	in 	any way 	that 	would
mislead 	or 	limit 	services 	to 	persons 	served 	professionally."
These 	restrictions 	are 	anticompetitive 	because 	they 	may 	suppress
the 	disse~ination of 	potentially useful 	info~ation and may 	well
contribute 	to 	an 	increase 	in 	prices. 	We 	therefore 	urge 	the
Council 	to 	reccmmend 	their 	repeal.
The 	Commission 	has 	long 	been 	concerned 	about 	public 	and
private 	restrictions 	that 	limit 	the 	ability 	of 	professionals 	to
engage 	in 	truthful, 	nondecept:ve 	advertising. 1l 	The'supreme
Court 	has 	emphasized 	the 	vital 	role 	that 	advertising 	plays 	in
promoting 	the 	efficient 	allocation 	of 	society's 	scarce
resources. 12 	Studies 	indicate 	that 	prices 	for 	professional 	goods
11 	See, 	e.g., 	American Medical 	Association, 	9' 	F.T.C. 	at 	1023.
12 	See, 	e.g., 	Zauderer v. 	Office 	of 	Disciplinary Counsel,
105 	S. 	Ct. 	2265, 	2279-80 	(1985) ("the 	free 	flow 	of 	co~ercial
information 	is 	valuable 	enough 	to 	justify 	imposing 	on would-be
regula~ors the 	costs 	of 	distinguishing 	the 	truthful 	from 	the
false, 	the 	helpful 	from 	the 	misleading, 	and 	the 	harmless 	from 	the
harmful"): 	Bates 	v. 	State 	Bar 	of 	Arizona, 	433 	U.S. 	350, 	36'
(1977) ("commercial 	speech 	serves 	to 	inform 	the 	public 	of 	the
availability, 	nature, 	and 	prices 	of 	products 	and 	services, 	and
thus 	performs 	an 	indispensable 	role 	in 	the 	allocation 	of
resources 	in 	a 	free 	enterprise 	system").

and 	services 	are 	lower 	where 	advertising 	exists 	than where 	it 	is
prohibited,13 	and 	provide 	evidence 	that, 	while 	advertising 	is
likely 	to 	lead 	to 	lower 	prices, 	it 	does 	not 	lead 	to 	lower 	quality
services. 1' 	Therefore, 	to 	the 	extent 	that 	truthful, 	nondeceptive
advertising 	is 	restricted, 	higher 	prices 	and 	a 	decrease 	in
consumer welfare 	~ay result. 	For 	this 	reason, 	we 	believe 	that
only 	false 	and 	deceptive 	advertising 	should be 	prohibited.
George 	L. 	Schroeder 	Page 	8
r
The 	requirement 	that 	advertising 	be 	"consistent with 	the
highest 	professional 	standards 	in 	the 	community," 	is 	similar 	to
the 	dignity 	requirement 	that 	the 	Supreme 	Court 	addressed 	in
Zauderer v. 	Office 	of 	Disciplinary 	Counsel 	of 	the 	Supreme 	Court
of 	Ohio, 	105 	S. 	Ct. 	2265 	(1985). 	Both 	requirements 	in 	large 	part
regulate 	the 	manner, 	rather 	than 	the 	content, 	of 	advertising.
They 	are 	therefore 	overbroad 	and 	go 	beyond 	what 	is 	necessary 	to
protect 	consumers. 15 	The 	Supreme 	Court held 	in 	Zauderer, 	in 	a
First Amendment 	context, 	that 	a 	state's 	interest 	in 	promoting
dignity 	in 	an 	attorney's 	communication with 	the 	public 	is
insufficient 	to 	justify 	a 	restriction 	on 	truthful 	and
nondeceptive 	advertising. 16 	Like 	the 	disciplinary 	rule
invalidated 	in 	Zauderer, 	a 	provision 	such 	as 	S.C. 	Admin. 	R. 	115-
15 	D(5), 	which 	requ.ires 	advertisements 	to meet 	the 	"highest"
professional 	standards 	in 	a 	community, 	may 	be 	interpreted 	to
prOhibit, 	or may 	have 	a 	chilling 	effect 	on, 	truthful,
nondeceptive 	advertising.
Tr.e 	phrase 	"hig!"lest 	standard 	in 	the 	comJtunity" 	is, 	1 ike 	the
concept 	of 	"dignity," 	vague 	and 	sUbjective. 	It may 	be
interpreted 	so 	broadly 	as 	to 	prohibit 	a 	wide 	variety 	of 	truthful,
nondeceptive 	advertising, 	inclUding, 	for 	example, 	dramatizations,
graphic 	illustrations, 	comparative 	advertising, 	or 	testimonials.
, 	These 	advertising 	techniques 	are 	not 	inherently 	deceptive 	and 	are
! 	widely 	used 	in 	other 	contexts 	to 	communicate 	a 	message
effectively 	to 	consumers. 	Even 	if 	the 	provision 	is 	not 	actually
interpreted 	in 	this 	manner, 	moreover, 	it 	may 	still 	deter 	speech
pathologists 	and 	aUdiologists 	from 	engaging 	in 	some 	forms 	of
13 	See 	supra 	note 	3: 	see 	also 	Benham 	and 	Benham,
Fe~~latinc Throuch 	the 	Professions: 	A Perspective 	on 	Information
Control, 	18 	J.L. 	& Econ. 	~21 	(1975): 	Benham, 	The 	Effects 	of
:,.!A:..=d~v...::e:..=:r;...:t"",,i:..:s:::..,,~~·n~c::--..:o~n~t~h..,e::...-:P~r=-=i.::.c-=e--=o,-=f=--=E::...y",-,e::;..;g;;l.l:...::.a.::.s-=s-=e=s,15 J. L. 	& Econ. 	:3 37
(1972).
14 	See 	supra 	note 	3.
15 	See 	letter 	from 	Jeffrey 	1. 	Zuckerman, 	Director, 	Bureau
of 	Competition, 	to 	Thomas 	S. 	Johnson, 	Chairman, 	Commission 	on
A~vertising, American 	Bar Association 	(December 	8, 	1986).
16 	105 	S.Ct. 	at 	2280-81.

George 	L. 	Schroeder 	Page 	9
!
advertising 	for 	fear 	of violating 	the 	regulation. 	Finally, 	the
regulation 	is 	unnecessary, 	because, 	in 	competitive markets,
consumers 	are 	able 	to 	decide 	what 	they 	consider to 	be 	acceptable
forms 	of 	marketing 	and 	will 	withhold 	their 	business 	from
providers 	whose 	advertisements 	they 	regard 	as 	"undiqnified" 	or
offensive.
The 	second 	provision 	imposes 	a 	ban 	on 	"using" 	commercial
affiliations 	improperly. 	It 	is 	not 	clear 	to 	us 	how 	the 	Board
interprets 	or 	~ould apply 	this 	provision. 	To 	the 	extent 	that
this 	regulation 	prohibits 	materially misleading 	practices, 	it 	is
unnecessary, 	because 	such 	practices 	are 	prohibited 	elsewhere 	in
the 	regulations. l ? 	To 	the 	extent 	that 	this 	regulation 	is
intended 	to 	go 	beyond 	a 	simple 	prohibition 	on 	deceptive
practices, 	and 	to 	substantially 	restrict 	forms 	of 	commercial
practice 	by 	speech 	pa~hologists or 	aUdiologists, 	it may 	interfere
with the 	efficient 	delivery 	of 	professional 	services. 	We
therefore 	refer 	the 	Council 	to 	our 	commen~s above 	in 	Part 	II 	on
that 	subject.
Thus, 	because 	both 	of 	the 	restrictions 	discussed 	above
appear 	to 	unnecessarily 	limit 	competition 	and 	consumer 	choice, 	we
urge 	the 	Council 	to 	recommend 	their 	repeal.
v. 	Reoulations 	of 	the 	Board 	of 	Psychology 	Examiners
S.C. 	Code Ann. 	§ 	'0-55-60 	provides 	that 	the 	Board 	of
Psychology 	Examiners 	must 	adopt 	the 	American 	Psychological
Association's 	("APA's") 	Code 	of 	Ethics. 	Pursuant 	to 	this
statute, 	the 	Board 	has 	adopted 	the 	APh's 	Code 	of 	Ethics, 	bo~h by
refe~ence, S.C. 	Admin. 	R. 	100-', 	and 	by 	reprinting 	the 	text 	of
the APA's 	principles 	relating 	to 	advertising 	and 	fee 	splitting.
'. 	.	S.c. 	Ad~ln. R. 	100-6. 	We 	urge 	the 	Councll 	to 	recommend 	the
repeal 	of 	both 	S.c. 	Ann. 	§ 	40-55-60 	and 	the 	Board's 	implementing
regulations.
There 	are 	significant 	risks 	of 	anticompetitive 	effects 	~hen
a 	code 	of 	ethics 	of 	a 	private 	organization 	composed 	of
compe~i~ors is 	adopted 	by 	a 	state 	or 	state 	board. 	Provisions
contained 	in 	ethical 	codes 	developed 	by 	a 	private 	group 	of
professionals 	composed 	of 	competitors 	may 	restrict 	competition
among 	members 	of 	the 	group 	and 	be 	inconsistent with 	the 	best
interests 	of 	consumers. 	We 	discuss 	below the 	kinds 	of 	consumer
injury 	that 	can 	be 	caused by 	restrictions 	contained 	in 	such
ethical 	codes 	and 	that 	appear 	to 	arise 	from 	§ 	40-55-60 	and 	the
Board's 	implementing 	regulations.
17 	See 	S.C. 	A~in. 	R. 	115-15 	D(3).

George 	L. 	Schroeder 	Page 	10
Some 	private 	professional 	associations 	composed 	of
co~?etitors have 	adopted 	a 	wide 	range 	c~ antico~pet1t1ve
restrictions 	on 	advertising 	and 	other 	forms 	of 	competition 	by
their members. 	For 	instance, 	such 	associations 	have 	limited 	the
kind 	of 	fee 	advertising 	that 	is 	permissible, 	restricted
comparative 	advertising, 	prohibited 	testimonials 	as 	to 	the
quality 	of 	services 	provided, 	restricted 	advertising 	that 	appeals
to 	consumers' 	emotions, 	prohibited 	direct 	solicitation 	of
consumers, 	and 	banned 	certain 	fee-splitting 	arrangements. 	See.
~, 	National 	Society 	of 	Professional 	Engineers 	v. 	Ur.ited
States, 	'35 	U.S. 	679, 	695 	(1978); 	American 	Medical 	Association,
9~ 	r.T.C. 	at 	1018; 	Oklahoma 	Optomet~ic Association, 	106 	F.T.C.
556 	(1985) (consent 	order). 	Such 	ethical 	rules 	are 	often 	broader
than 	necessary 	to 	prevent 	false 	or 	deceptive 	advertising, 	and
thus 	needlessly 	restrain 	competition. 	As 	discussed 	above,
advertising 	standards 	should 	be 	implemented 	only where 	specific
forms 	of 	promotion 	are 	inherently 	likely 	to 	deceive 	or 	where
there 	is 	evidence 	that 	particular 	forms 	of 	adve~tising have 	in
fact 	been 	deceptive. 	See 	American 	Medical 	Association, 	94 	F.T.C.
at 	1009-10; 	see 	also 	In 	re 	R.P..J., 	455 	U.S. 	191, 	202 	(1982).
Restrictions 	on 	fee 	advertising, 	for 	example, 	can 	directly
sti~le price 	competition 	and 	thereby 	harm 	consumers. 	Fee
advertising 	for 	professional 	services, 	whether 	through 	the
publication 	of 	specific 	fees, 	a 	range 	of 	fees, 	or 	other means,
can 	disse~inate useful 	info~lation to 	consumers 	and 	may help 	~o
keep 	fees 	competitive. 	See 	Bates 	v. 	State 	Ba~ of 	Arizona, 	'33
U.S. 	350, 	377 	(1977) 	(the 	lack 	of 	price 	information 	in 	attorney
adve~tising "serves 	to 	increase 	the 	[consumer's) 	diffiCUlty 	of
discovering 	the 	lowest 	cost 	seller 	of 	acceptable 	ability. 	As 	a
result 	••• 	atto~neys are 	isolated 	from 	competition 	and 	the
, 	incentive 	to 	price 	competitively 	is 	reduced"). 	As 	a 	general
! 	proposition, 	when 	consumers 	are 	able 	to 	obtain ~ore ~nformation
on 	the 	prices 	at 	which goods 	o~ services 	are 	offered, 	prices 	are
lower. 	A restriction 	on 	the 	~anner of 	advertising 	professional
fees 	~ay prevent 	advertisements 	designed 	to 	increase 	consumers'
a~areness of 	existing 	fee 	levels 	or 	any 	discounts 	from 	usual
fees.
Restrictions 	on 	comp~rative advertising 	ar.also 	likely 	to
harm 	cor.sumers. 	~~en sellers 	cannot 	compare 	the 	attributes 	of
their 	services 	to 	those 	of 	their 	competitors, 	their 	incentive 	to
improve 	or 	to 	offer 	different 	services, 	products, 	~r prices 	can
be 	reduced. 	These 	restrictions 	are 	likely 	to 	be 	especially
harmful 	to 	competition 	and 	consume~s because 	comparison 	of 	the
fees 	or 	services 	offered 	by 	competing 	professionals may 	be
helpful 	to 	consumers 	in 	deciding 	whether 	care 	is 	affordable 	and
what 	spe=ific 	profession~l servi=es 	are 	offered. 	Comparative
adve~tisements are 	not 	inherently 	deceptive, 	and 	pe~itting them
may 	increase 	the 	effectiveness 	of 	adve~ising and 	result 	in 	lo~er

George 	L. 	Schroeder 	Page 	11
!
prices 	and 	the 	dissemination 	of 	useful 	information 	to consumers.
Like 	comparative 	claims, 	testimonials 	can 	be 	a 	means 	to
disseminate 	useful 	and 	truthful 	information 	that 	consumers 	may
use 	in 	selecting 	a 	provider. 	Testimonials 	pertaining 	to 	quality
or 	efficiency 	can 	inform 	consumers 	about 	such 	attributes 	as 	a
professional's 	training 	or methods 	of 	practice. 	Such
testimonials 	can 	be 	a 	highly 	effective means 	of 	attracting 	and
informing 	clients 	and 	fostering 	competition. 	Although
testimonials, 	like 	all 	advertising, 	have 	the 	potential 	to 	be
deceptive, 	there 	is 	no 	inherent 	deception 	in 	the 	use 	of
testimonials 	as 	to 	the 	quality 	of 	a 	professional's 	services.
Testimonials 	as 	to 	short waiting 	time 	before 	appointments 	or
eh~ressing general 	consumer 	satisfaction, 	for 	example, 	are 	not
inherently 	deceptive 	and 	can 	provide 	useful 	information.
Prohibiting 	all 	such 	advertising 	is 	overbroad. 18
A prohibition 	on making 	statements 	that 	are 	intended 	or
likely 	to 	appeal 	to 	a 	client's 	fears, 	anxieties, 	or 	emotions may
also 	be 	overbroad. 	Of 	course, 	there 	may 	be 	individuals who 	are
especially vulnerable 	to 	such 	appeals, 	and 	the 	Board may well
want 	to 	consider 	this 	factor 	when 	determining whether 	a
particular 	advertising 	claim 	is 	false 	or deceptive. 	However,
advertisements 	such 	as 	those 	containing 	presentations 	of
simulated 	real-life 	problems 	(~, 	depicting 	the 	consequences 	of
drug 	abuse 	or 	marital 	conflict) 	that 	strike 	an 	emotional 	chord 	in
a 	viewer 	or 	listener 	can 	be 	a 	very 	effective 	way 	to 	alert 	some
consurne~s to 	the 	need 	for 	p~ofessional treatment, 	while 	not
exp10iting vulnerable 	consumers. 	We 	do 	not 	believe 	that 	the 	risk
that 	some 	consumers 	may 	be 	vulnerable 	justifies 	a 	blanket
prohibition 	on 	advertising that 	is 	not 	inherently 	deceptive. 19
,
18 	See 	In 	re 	R.M.J., 	455 	U.S. 	at 	203 	(1982) (holding 	that
states 	may 	not 	place 	an 	absolute 	prohibition 	on 	information 	that
is 	potentially misleading 	if 	the 	information 	can 	be 	presented 	in
a 	manner 	that 	is 	not 	deceptive).
19 	The 	Coltlnission, 	in the 	context cf 	a 	form.al 	advisory
opinion, 	emphasized 	that 	a 	provision 	of 	a 	proposed 	ethical 	code
prohibiting 	"unfair" 	or 	"oppressive" 	communications 	that 	cause
consumers 	anxiety would 	not 	violate 	the 	antitrust ~a~s only
insofar 	as 	it 	was 	enforced 	reasonably 	and 	objectively 	to 	avoid
discouraging 	the 	dissemination 	of 	available 	information 	to
consumers. 	American Academy 	of 	Ophthalmology, 	101 	F.T.C. 	1018,
1024 	(1983). 	See 	generally the 	Commission's 	Policy Statement 	on
Deception, 	reprinted 	in 	Cliff~ale Associates, 	Inc., 	103 	F.T.C.
110, 	179 	(198~) (Commission's 	test 	for 	deception 	takes 	into
account, 	among 	other 	things, 	the 	likely 	impact 	on 	the 	audience 	to
whom the 	advertisement 	is 	addressed).

George 	L. 	Schroeder 	P~ge 12
Restrictions 	on 	direct 	solicitation 	of 	clients 	c~n also 	be
a~ticompetitive. 	See 	Americ~n Medical 	Associ~tion, 94 	F.T.C. 	at
1005. 	Such 	restrictions 	prohibit 	~hat can 	be 	a 	valuable
technique 	for 	inforcing 	consumers 	about 	the 	availability 	of 	a
professional's 	services. 	Solicitation, 	in 	and 	of 	itself, 	is 	not
inherently 	deceptive. 	The 	Supreme 	Court 	has 	ruled 	in 	the 	First
Amendment 	context 	that 	a 	state 	may 	regulate 	in-person
solicitation 	by 	attorneys 	of 	clients, 	~here the 	individual 	being
solicited 	~ould be 	forced 	to 	bargain 	from 	adverse 	circumstances
(e.a., 	after 	SUffering 	a 	personal 	injury). 	See 	Ohralik v. 	Oh:o
Stete 	Bar 	hssoci~tion, 436 	U.S. 	462, 	'68 	(1978): 	see 	elso 	In 	re
Primus, 	436 	U.S. 	412 	(1978). 	Under 	such 	circumstances, 	the
Supreme 	Court 	found, 	there 	is 	a 	potential 	for 	abuse 	inherent 	in
the 	face-to-face 	selling 	of 	legal 	services. 	In view 	of 	this
potential 	for 	abuse, 	regulations 	prohibiting 	uninvited, 	in-person
solicitation 	of 	perso~s ~ho are 	particularly vulnerable 	to 	undue
influence 	may 	be 	appropriate. 20
Finally, 	restrictions 	on 	fee-splitting 	arrangements 	may,
depending 	on 	how 	they 	are 	interpreted, 	interfere 	~ith the
operation 	of 	alternative 	health 	care 	delivery 	systems 	that 	may
have 	incentive 	arrangements 	with 	health 	care 	professionals 	in
~hich fees 	are 	divided 	bet~een the 	medical 	plan 	and 	the
professional. 	Such 	restrictions 	can 	impede 	legitimate 	cost
containment 	measures 	implemented 	by 	such 	organizations 	as 	HMOs.
Restrictions 	on 	fee-splitting 	may 	also 	prevent 	professionals
from 	paying 	an 	independent 	referral 	service 	that matches 	clients
with 	an 	appropriate 	practitioner. 	As 	a 	result, 	it may 	be more
difficult 	for 	consumers 	to 	identify 	practitioners 	with whom 	they
~ould like 	to 	deal. 	It 	is 	not 	clear 	that 	any 	regulation 	of
I 	referral 	fees 	is 	necessary. 	If, 	however, 	such 	regulatio~ is
, 	considered 	to 	be 	necessary 	in 	order 	to 	prevent 	dece~tion, ~he
less 	restrictive 	alternative 	of 	requiring 	disclosure 	to 	the
consumer 	of 	the 	referral 	fee 	arrangement 	might 	be 	imposed.
For 	the 	reasons 	expressed 	above, 	we 	urge 	the 	Council 	to
recommend 	the 	repeal 	of 	the 	statutory 	requirement 	that 	the 	Board
adopt 	the 	APA's 	Code 	of 	Ethics 	and 	recommend 	that 	the 	Board
delete 	the 	APAls 	Code 	of 	Ethics 	from 	its_regulati~ns.
VI. 	Conclusion
For 	the 	foregoing 	reasons, 	we 	urge 	that 	the 	South 	Carolina
Legislative 	Audit 	Council 	consider whether 	the 	statutes 	and
regulations 	discussed 	above 	are 	reasonably 	necessary 	to protect
consumers, 	and 	we 	urge 	the 	Coun=il 	to 	seek the 	repeal 	or
modification 	of 	the 	provi5ion~ that 	are 	not 	necessary to 	these
20 	See American Medical 	Association, 	94 	F.T.C. 	at 	1030.
I
!I
I,
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George 	L. 	Schroeder 	Page 	13
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ends. 	We 	appreciate 	having 	had 	this 	opportunity 	to 	present 	our
views. 	We 	would 	be 	happy 	to 	furnish 	you 	copies 	of 	any 	of 	the
reports 	that 	we 	have 	~entioned, and 	to 	answer 	any 	questions 	you
~ay have 	regarding 	these 	comments 	or 	to 	provide 	any 	other
assistance 	you 	~ay find 	helpful.
Sincerely,
1!b;: 	ckerman
Director
Bureau 	of 	Competition