Antitrust Enforcers Turn Attention to Service Sector

For years, it has been standard practice in many states for title insurance companies to get together to determine the fees that they will charge to insure home buyers against the possibility that someone else owns their new homes.

But in January, the Federal Trade Commission shocked the industry by formally charging six major national companies, including three based in California, with illegal price fixing in 13 states.

The title insurance industry is only the latest part of the economy’s burgeoning service sector to feel the sting of action by either the FTC or the Justice Department, the government’s other antitrust enforcer. Service industries--everything from health care to retailing--now account for about three of every four jobs in the country and, as they have grown, the FTC and the Justice Department have shifted their attention to doctors, lawyers, engineers and trade associations that set industrywide standards and prices for a variety of services.

Major Departure

The new direction, which has evolved over the last decade and has been intensified by the Reagan Administration, represents a major departure for the government, which has traditionally focused its antitrust efforts on manufacturing industries. In the 1970s, the FTC and the Justice Department initiated antitrust actions against American Telephone & Telegraph, International Business Machines and the major oil companies.

“What I see us trying to do is to apply old ideas to new areas,” said Timothy J. Muris, director of the FTC’s bureau of competition. As the economy shifts from manufacturing to services, Muris said, “antitrust law has to change with it.”

But the new approach has raised a storm of controversy. Some antitrust activists charge that the FTC has all but abandoned antitrust prosecutions aimed at manufacturing companies, and the service-sector targets of the FTC’s new campaign believe that they are being unfairly singled out.

“The FTC and the Justice Department periodically examined our industry over the past 15 years and never before raised this issue,” said Erich E. Everbach, senior vice president and general counsel of Ticor Title Insurance in Los Angeles, one of the six companies named in the FTC complaint.

The title insurance industry, which has vowed to fight the complaint, maintains that its rating procedure is a legitimate part of the “business of insurance” and is a state-regulated activity exempt from antitrust law under the 1945 McCarran-Ferguson Act.

The complaint is pending before an FTC administrative law judge.

The industry takes heart from a March 27 Supreme Court decision. In a case involving a Justice Department challenge to the collective rate-making procedures of trucking companies in four Southern states, the court ruled the Justice Department action invalid because the procedures were supervised by state regulators.

That ruling is unlikely to cool the enthusiasm of James C. Miller III, the FTC chairman who has spearheaded the Reagan Administration’s campaign against anti-competitive forces in the service sector. It is no coincidence that Miller is also the first economist to head the commission, and he repeatedly emphasizes the “rational economic underpinnings of our law enforcement priorities.”

Under Miller and Muris, the FTC has moved against restrictions on advertising by professional groups, price fixing by real estate brokers and lawyers, and trade association boycotts of manufacturers doing business with discounters. It has launched dozens of investigations of state regulatory boards and looked at several unions, including the Screen Actors Guild for allegedly pressuring advertisers to use union actors in TV commercials.

Consent Agreement

In addition to the title insurance industry, Miller’s FTC:

- Announced a consent agreement last May with the National Assn. of School Music Dealers, which agreed not to interfere with the distribution practices of manufacturers of musical instruments. The commission had charged that the association had urged members to boycott manufacturers that shipped directly to discount mail-order dealers.

- Announced last May that a real estate multiple-listing service in Michigan City, Ind., had agreed to let member brokers charge or advertise fees lower than prevailing rates.

- Issued a complaint last October charging that the Louisiana State Board of Dentistry unlawfully prohibited dentists from advertising discounts.

- Charged in December, 1983, that an association of trial lawyers in Washington had illegally conducted a group boycott of court-assigned cases to coerce the city government into increasing their fees. An FTC administrative law judge dismissed the complaint, but the FTC staff has appealed the case to the full commission.

- Charged in 1983 that a physician-owned medical malpractice insurance company discriminated against doctors who supervised self-employed nurse-midwives. After the commission said the denial of malpractice insurance to such doctors constituted a boycott in violation of antitrust laws, the insurance company signed a consent order agreeing to halt the practice.

In step with the FTC, the Justice Department’s antitrust division has actively pursued anti-competitive practices in the service sector. As long ago as 1972, said John Poole, chief of the department’s special litigation section, the department began challenging the business practices of lawyers, civil engineers, geologists and nursing homes.

More recently, the Justice Department charged that the ethical rules of the Louisiana Board of Accountants, designed to prevent the dissemination of false and misleading information, improperly ban certain types of personal solicitation. The Justice Department, unlike the FTC, has the power to take the subjects of its investigations to court, and the case is awaiting trial in federal court in New Orleans.

Plenty of Room

For all this activity, Muris, the FTC’s antitrust chief, says there is still plenty of room to promote competition in the service sector.

“The basic problem is when you get new forms of competition and the traditional practitioners try to stop them,” he said. “There are still an enormous number of professional associations and state boards that restrain advertising.”

William F. Baxter, the head of the antitrust division during President Reagan’s first term and now a professor at the Stanford University Law School, believes that the FTC and the Justice Department are on the right track. “It’s a much closer orientation of antitrust law to what we know about the economics of industrial organization,” he said.

But that view is not universally shared by regulators who served under President Jimmy Carter. Robert Pitofsky, dean of the Georgetown University Law Center and an FTC member from 1978 to 1981, says the FTC’s new approach derives from its confidence that the competitive forces of a free market, unfettered by government regulation, will make no room for price fixing and other anti-competitive practices.

“They tend to look more closely at the kinds of restrictions that derive from government intervention,” he said. “I think they are being consistent with their philosophy. I just don’t agree with it.”

Another former commissioner during the Carter Administration characterized the FTC’s new attitude as a “general hatred of all regulation. . . . They look for any kind of regulation to go after. It comes from a different philosophy.”

Critics accuse the agency of muddling its priorities by devoting considerable attention to price regulation by local governmental agencies while allowing major transactions such as the joint small-car venture between General Motors and Toyota to proceed.

Reaction Varied

The reaction from local governments has varied. After the FTC issued formal complaints last year charging that taxi regulations in Minneapolis and New Orleans restricted the number of cabs and boosted fares, Minneapolis passed ordinances that increased the number of taxicabs in the city, and the FTC staff has now recommended that the complaint be dropped. In the New Orleans case, however, the Louisiana legislature effectively immunized the city from FTC antitrust action by passing a statute empowering the city to license taxicabs.

“In terms of the impact on consumers, this was an excellent target,” said Muris, citing a Transportation Department study that said consumers lose $800 million a year from restrictions on taxi operations. “We think we’ve have a good impact.”

But Rep. James J. Florio (D-N.J.), who heads the House subcommittee that oversees the FTC, says attacking local taxi regulations instead of major corporate mergers demonstrates “a perverse sense of what impacts on competition.”

“If a local town government has a system of allocating taxi licenses, that inherently is bad,” Florio said. “But if two oil companies come together in a collusive way, that is not regarded as offensive to the FTC.”

In recent years, Congress has curbed some FTC authority to investigate the insurance industry. It only narrowly turned away efforts by the medical profession in 1982 and the taxicab industry last year to exempt their areas from FTC jurisdiction.

The recent Supreme Court ruling, however, may prove to be a thornier problem for the FTC as it continues its campaign against anti-competitive practices in the service sector.

In the past decade, the high court has supported a number of legal challenges against professionals and some other components of the service sector. In 1975, for example, the court decided that lawyers are not exempt from antitrust rules, and in 1982, it held that the FTC had authority over the activities of nonprofit professional groups.

Setback for Department

But on March 27, the high court dealt a setback to the Justice Department in a case involving collective rate-setting procedures by trucking companies under the regulation of state agencies. The 7-2 Supreme Court ruling essentially upheld the legal authority of competing trucking companies to meet and recommend price schedules for approval by state public service commissions. As a result of the decision, the FTC may be forced to draw in its horns on other cases where state regulation is involved.

At the top of the list may be the case involving title insurance companies.

At Ticor Title Insurance, Everbach said: “We are ecstatic. We think the FTC must now re-examine its case. It would be beyond my comprehension if it decided to proceed further now.”