FTC Staff Comment Before the South Carolina Legislative Audit Council Concerning Board of Architectural Examiners Regulation 11-17 Prohibiting Competitive Bidding

UNITED STAYES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
v,.;~()s ~
COMJ,1'SSION AUTHORIZED
March 	13, 	1989
George L. 	Schroeder
Director
Legislative Audit 	Council
State 	of 	South Carolina
620 	NCNB Tower
Columbia, 	South Carolina 	29201
Dear Mr. 	Schroeder:
The 	staff 	of 	the 	Federal 	Trade 	Commission II 	is 	pleased 	to
respond 	to 	the 	invitation of 	the 	Legislative Audit 	Council 	of 	the
State of 	South Carolina 	to 	comment on Regulation 	11-17 	of 	the
South Carolina 	Board of 	Architectural 	Examiners. 	21 	Regulation
11-17, 	as 	interpreted by 	the 	Board, 	~I prohibits 	architects 	from
participating 	in competitive 	bidding or 	"donat[ing] 	services" 	to
clients 	with 	the 	intent 	of 	influencing 	the 	client's 	award 	of 	a
project. 	We 	believe 	that 	the 	regulation 	is 	likely 	to 	harm
competition and 	suggest 	that 	the 	Council 	consider 	the
regulation's 	anticompetitive 	effects 	in determining whether 	it
should 	be 	retained.
I. 	Interest 	and 	Experience 	of 	the 	Federal 	Trade 	Commission
The 	Federal 	Trade 	Commission 	is 	charged 	by 	statute 	with
preventing unfair methods 	of 	competition 	and 	unfair 	or 	deceptive
acts 	or 	practices 	in 	or 	affecting commerce. 	15 	U.S.C. 	S 	45.
Under 	this 	statutory mandate, 	the 	Commission 	seeks 	to 	identify
restrictions 	that 	impede competition or 	increase 	costs 	without
offering 	countervailing benefits 	to 	consumers. 	The 	Commission
has 	sought 	to 	improve 	consumer 	access 	to 	professional 	services 	by
initiating 	antitrust 	enforcement 	proceedings 	~I and 	conducting
II 	These 	comments 	represent 	the 	views 	of 	the 	staff 	of 	the
Federal 	Trade 	Commission's 	Bureau 	of 	Competition 	and 	do 	not
necessarily 	represent 	the 	views 	of 	the 	Commission 	itself 	or 	any
indiviqual 	Commissioner.
2/ 	Regulations 	of 	Board of 	Architectural 	Examiners, 	S 	11-17.
~/ 	Board 	of 	Architectural 	Examiners, 	Administrative
Interpretation of 	Regulation 	11-17 	(September 	1988).
~/ 	~, 	~.~., Massachusetts 	Board 	of 	Registration 	in 	Optometry,
[FTC 	Complaints 	and Orders 	transfer 	binder] 	5 Trade Reg. 	Rep.
. 	(continued ... )

George 	L. 	Schroeder 	-2-
studies 	concerning various 	facets 	of 	the 	regulation of 	licensed
professions. 	51 	In 	addition, 	the 	Commission's 	staff 	has
submitted comments 	to 	state 	legislatures 	and 	administrative
agencies 	on various 	issues 	of 	professional 	licensing 	and
regulation. 	~I 	As 	one 	of 	the 	two 	federal 	agencies 	with principal
responsibility 	for 	enforcing 	the 	antitrust 	laws, 	the 	Commission
is 	particularly 	interested 	in 	restrictions 	that 	may adversely
affect 	the 	competitive 	process 	and 	raise 	prices 	to 	consumers.
II. 	Analysis 	of 	Regulation 	11-17
Regulation 	11-17 	of 	the 	South 	Carolina 	Board 	of
Architectural 	Examiners 	states 	in 	its 	entirety: 	nArchitects 	shall
not 	enter 	into 	a 	contract 	for 	professional 	services 	on 	any 	basis
other 	than 	direct 	negotiation 	thereby 	precluding 	participation 	in
any 	system 	requiring a 	comparison of 	compensation." 	As
interpreted 	in 	a 	September 	1988 	administrative 	interpretation 	of
the 	Board, 	Regulation 	11-17 	prohibits 	architects 	from
participating 	in 	competitive 	bidding or 	"donat[ing]"
architectural 	services 	to 	prospective 	clients. 	21 	These
prohibitions 	are 	discussed 	below.
~/(···continued)
(CCH) 	! 	22,555 	(June 	21, 	1988); 	Rhode 	Island 	Board 	of
Accountancy, 	107 	F.T.C. 	293 	(1986) (consent 	order); 	Louisiana
State 	Board 	of 	DentistkY, 	106 	F.T.C. 	65 	(1985) 	(consent 	order);
American 	Medical 	Ass'n, 	94 	F.T.C. 	701 	(1979), 	aff'd, 	638 	F.2d 	443
(2d 	Cir. 	1980), 	aff'd memo 	by 	an 	equally 	divided 	court, 	455 	U.S.
676 	(1982); 	American 	Dental 	Ass'n, 	94 	F.T.C. 	403 	(1979),
modified, 	100 	F.T.C. 	448 	(1982), 	101 	F.T.C. 	34 	(1983) 	(consent 	order).
51 	~, 	e.~., 	Cleveland Regional 	Office 	and 	Bureau 	of 	Economics,
Federal 	Trade 	Commission, 	Improving 	Consumer Access 	to 	Legal
Services: 	The 	Case 	for 	Removing 	Restrictions 	on 	Truthful
Advertising 	(1984); 	Bureaus 	of 	Consumer 	Protection 	and 	Economics,
Federal 	Trade 	Commission, 	A Comparative 	Analysis 	of 	Cosmetic 	Lens
Fitting 	by Ophthalmologists. 	Optometrists. 	and 	Opticians 	(1983);
Bureau 	of 	Economics, 	Federal 	Trade Commission, 	Effects 	of
Restrictions 	on Adyertising 	and 	Commercial 	Practice 	in 	the
Professions: 	The 	Case 	of 	OptometkY 	(1980).
il 	In 	the 	past 	two 	years, 	Commission 	staff 	have 	commented 	on
rules 	of 	professional 	conduct 	or 	regulations 	governing 	attorneys,
chiropractors, 	dentists, 	optometrists, 	pharmacists, 	physical
therapists, 	physicians, 	and 	real 	estate 	brokers.
21 	Architects 	are 	subject 	to 	disciplinary 	action 	for 	wdishonest
practice, 	unprofessional 	conduct 	or 	incompetent 	practice" 	if 	they
violate 	the 	Board's 	rules. 	Regulations 	of 	Board of 	Architectural
Examiners, 	S 	11-15, 	11-15(A)(3).

George L. 	Schroeder
(a) 	The 	Ban on Competitive 	Bidding
-3-
Regulation 	11-17 	and 	the 	Board's 	interpretation prohibit
architects 	from 	participating 	in competitive bidding. 	Under 	the
regulation, 	architects 	may 	not 	participate 	in 	a 	Wsystem 	requiring
a 	comparison of 	compensation," 	such 	as 	competitive bidding. 	The
Board's 	interpretation permits 	architects 	to 	disclose 	their
compensation only 	Win 	direct 	negotiations 	where 	architectural
services 	necessary 	to 	protect 	the 	public 	health, 	safety 	and
welfare 	have 	been 	defined." 	il
As 	you 	know, 	the 	Supreme Court 	has 	held 	that 	a 	ban on
competitive bidding 	imposed by 	the 	National 	Society of
Professional 	Engineers 	violated 	section 	1 of 	the 	Sherman Act. 	il
Similar 	bans 	in the 	medical 	!AI 	and 	accounting III 	professions
have 	also 	been 	held 	unlawful. 	121 	While 	a 	prohibition on
competitive bidding may 	not 	eliminate price 	competition, 	it
increases 	customers' 	search costs 	in 	procuring 	the 	services 	of
architects. 	Because 	Regulation 	11-17 	permits 	architects 	to
disclose 	their 	price 	only 	in 	individual 	negotiations, 	purchasers
of 	architectural 	services 	are 	forced 	to 	engage 	in 	a 	process 	of
preliminarily 	selecting 	an 	architect, 	negotiating 	a 	price, 	and
then 	either 	hiring 	the 	architect 	or 	selecting another 	architect
and 	beginning 	the 	process 	afresh. 	~I 	Because 	such 	a 	process
often will 	be 	less 	efficient 	than 	a 	single 	competitive 	bidding
il 	Administrative 	Interpretation of 	Regulation 	11-17, 	supra 	note
3.
il 	National 	Society of 	Professional 	Engineers 	v. 	United 	States,
435 	U.S. 	679 	(1978).
!AI 	American 	Medical 	Association, 	94 	F.T.C. 	at 	1014-15.
III 	United 	States 	v. 	Texas 	State 	Board 	of 	Public 	Accountancy,
464 	F. 	Supp. 	400 	(W.O. 	Tex. 	1978), 	aff'd 	as 	modified, 	592 	F.2d
919 	(5th Cir.), 	~' 	denied, 	444 	U.S. 	925 	(1979).
121 	You 	have 	requested 	the 	staff's 	views 	"on whether 	this
regulation 	promotes 	any 	restrictive 	or 	anticompetitive
practices." 	Accordingly, 	we 	do 	not 	comment 	on whether 	the 	Board
of 	Architectural 	Examiners 	is 	immune 	under 	the 	state 	action
doctrine 	to 	an 	antitrust 	action 	for 	its 	promulgation 	and
enforcement 	of 	Regulation 	11-17. 	These 	comments 	thus 	do 	not
address 	the 	lawfulness 	of 	the 	regulation 	but 	solely 	its 	effects
on 	consumer welfare.
~I 	This 	was 	the 	process 	required 	by 	the 	rule 	condemned 	in 	the
Professional 	Engineers 	case. 	~ 	435 	U.S. 	at 	692.

'.
George 	L. 	Schroeder 	-4-
contest, 	it 	necessarily 	increases 	search costs. 	As 	a 	result, 	the
dispersion of 	prices 	in 	the market 	will 	tend 	to 	be 	greater 	than
in 	the 	absence 	of 	a 	prohibition on competitive 	bidding. 	~/ 	In
addition, 	such 	a 	prohibition may 	increase 	the 	average 	price paid
by consumers 	for 	architectural 	services. 	~/
The 	Board's 	interpretation appears 	to 	link 	the 	competitive
bidding 	prohibition 	to 	considerations 	of 	the 	public 	health 	and
safety. 	Other 	private 	and 	public 	means 	that 	are 	less 	restrictive
of 	competition, 	however, 	may 	be 	available 	to 	protect 	these
interests. 	For example, 	construction 	projects 	are 	subject 	to
building 	codes, 	which 	are 	specifically designed 	to 	protect 	the
public 	health 	and 	safety. 	~/ 	In 	addition, 	potential 	exposure 	to
tort 	liability creates 	an 	incentive 	for 	all 	parties 	involved 	in 	a
building project 	-- 	from 	the 	client, 	to 	the 	architect, 	to 	the
builder 	-- 	to 	take 	actions 	necessary 	to 	protect 	public 	safety.
Consequently, 	restrictions 	on competitive 	bidding may 	not 	be
necessary 	to 	protect 	the 	public 	health 	and 	safety. 	As 	the
Supreme Court 	has 	observed, 	the 	notion 	that 	price competition
may 	threaten 	public 	safety 	is 	"nothing 	less 	than 	a 	frontal
assault 	on 	the 	basic 	policy of 	the 	Sherman Act." 	12/
(b) 	The 	Ban on 	"Donating" 	Services
The 	Board's 	interpretation 	also 	prohibits 	architects 	from
"offer[ing] 	to 	donate 	professional 	services 	with 	the 	intent 	of
~/ 	~ 	generally G. 	Stigler, 	The 	Organization 	of 	Indust~ 171-
87 	(1968). 	The 	term 	dispersion 	refers 	to 	the 	scattering 	of
prices 	above 	or below 	their 	average 	level.
~/ 	~ 	Butters, 	EQuilibrium 	Distributions 	of 	Sales 	and
Advertising 	Prices, 	44 	Rev. 	Econ. 	Stud. 	465 	(1977).
~/ 	Moreover, 	Regulation 	11-15(B)(3) 	of 	the 	Board 	requires
architects 	who 	discover 	any 	decision 	by 	a 	client 	that 	violates
applicable 	building codes 	or 	"materially affect[s] 	the 	safety 	to
the 	public 	of 	the 	finished 	project" 	to 	take 	specific 	corrective
actions, 	including 	notification of 	governmental 	authorities.
12/ 	National 	Society of 	Professional 	Engineers 	y. 	United 	States,
435 	U.S. 	at 	695. 	The 	Court 	added: 	"Exceptions 	to 	the 	Sherman
Act 	for 	potentially dangerous 	goods 	and 	services 	would be
tantamount 	to 	repeal 	of 	the 	statute. 	In our 	complex 	society, 	the
number of 	items 	that 	may cause 	serious 	harm 	is 	almost 	endless 	--
automobiles, 	drugs, 	foods, 	aircraft 	components, 	heavy equipment,
and 	countless 	others, 	cause 	serious 	harm 	to 	individuals 	if
defectively made. 	The 	judiciary cannot 	indirectly 	protect 	the
public 	against 	this 	harm 	by 	conferring monopoly 	privileges 	on 	the
manufacturers." 	~. 	at 	695-96. 	..

,
George L. 	Schroeder 	-5-
influencing the 	judgment of 	an existing or 	prospective client 	in
connection with a 	project 	in which 	the 	architect 	is
interested.~ la/ 	This 	prohibition 	is 	likely 	to 	have
anticompetitive effects 	by 	reducing 	the 	ability of 	new entrants
into 	the 	architectural 	services 	market 	to 	compete with 	incumbent
firms.
New entrants 	into competitive markets 	for 	professional
services 	often must engage 	in 	promotional 	activities 	to 	bring
themselves 	to 	the 	attention of 	prospective 	clients. 	A new
entrant 	into 	the 	architectural 	services 	market may be 	able 	to
compete with more 	established 	firms 	by 	submitting 	to 	a 	potential
client 	a 	preliminary design 	for 	a 	project on which 	the 	entrant 	is
bidding. 	This 	service 	reduces 	the 	client's 	uncertainty 	as 	to 	the
quality 	of 	the 	services 	offered 	by 	the 	new 	entrant 	and 	allows 	the
new 	entrant 	to 	compete more 	effectively with 	incumbents 	in 	the
market. 	A prohibition on 	the 	Wdonation" 	of 	services 	in 	order 	to
secure 	a 	project 	increases 	the 	client's 	cost 	of 	uncertainty
associated with 	the 	hiring of 	a 	new 	and 	untested entrant 	and
thereby 	reduces 	the 	ability of 	new 	entrants 	to 	compete. 	The
prohibition could 	also 	reduce 	competition 	in 	the 	quality 	of
design 	by 	hampering 	a 	prospective 	client's 	ability 	to 	compare 	the
design 	ideas 	of 	competing 	architects.
III. 	Conclusion
Regulation 	11-17, 	as 	interpreted by 	the 	Board 	of
Architectural 	Examiners, 	is 	likely 	to 	impede 	competition 	in 	the
market 	for 	architectural 	services 	in South Carolina.
Prohibitions 	on 	participation 	in competitive 	bidding 	similar 	to
the 	one 	contained 	in Regulation 	11-17 	have 	been 	held 	to 	violate
the 	federal 	antitrust 	laws 	because 	they 	injure 	consumers. 	The
Council 	should consider 	the 	costs 	imposed by 	the 	regulation 	on
South 	Carolina consumers 	in 	light 	of 	the 	questionable 	benefits
offered 	by 	the 	regulation.
la/ 	Administrative 	Interpretation, 	supra 	note 	7. 	The
interpretation permits 	architects 	to 	donate 	services 	solely 	for
altruistic 	reasons.