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UNITED STATES v. NATIONAL SOCY. OF PROFESSIONAL EN

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA


December 19, 1974

United States of America, Plaintiff,
v.
National Society of Professional Engineers, Defendant.

Smith, D.J.

The opinion of the court was delivered by: SMITH

SMITH, D.J.:

This is an antitrust suit brought by the United States against the National Society of Professional Engineers (NSPE) under § 1 of the Sherman Act, 15 U.S.C. § 1, which declares illegal every "contract, combination . . . or conspiracy, in restraint of trade or commerce among the several States. . . ." The alleged offense centers on Section 11(c) of defendant's Code of Ethics which prohibits members of NSPE from submitting competitive bids for their engineering services. *fn1" Plaintiff seeks to enjoin the combination and conspiracy which maintains the prohibition against competitive bidding as well as to have canceled all provisions to the Code of Ethics and other relevant rules or statements of policy which support the bidding ban.

 NSPE is a professional society incorporated under the laws of South Carolina with more than 69,000 members located throughout the United States. Membership in NSPE accounts for slightly less than 10 percent of all graduate engineers in the nation holding a collegiate degree in engineering from an institution of higher learning. Upon a demonstration of proficiency, each of the states permits engineers to hold a certificate of registration or license to practice. Approximately 325,000 are so registered of whom 55,000 or 17 percent, are members of NSPE. About half of the registered professional engineers in this country are engaged in offering services to the public as consulting engineers. Although NSPE is a national organization, it is affiliated with professional engineering societies in each of the 50 states, territories and the District of Columbia. When a member joins NSPE, he joins the applicable state society and local chapter at the same time.

 Defendant's Board of Directors adopted the present format of the NSPE Code of Ethics in 1964. Section 11(c) of the Code provides that an engineer "shall not solicit or submit engineering proposals on the basis of competitive bidding." The section defines competitive bidding as any measure of compensation "whereby the prospective client may compare engineering services on a price basis prior to the time that one engineer . . . has been selected for negotiations." While Sec. 11(c) advises that disclosure of a recommended state society fee schedule does not constitute competitive bidding, it requires that the engineer "withdraw from consideration for the proposed work" if the prospective client insists on competitive bidding.

 In practice, adherence to Sec. 11(c) by the engineer and client means the prospective client will limit his initial search to the engineer whose background and reputation suggests he is the best qualified and most appropriate for the client's needs. Discussion of fees, however, will not be permitted until after the client has actually selected an engineer and discussed the scope of his particular problem. Should the engineer and client be unable to agree upon a satisfactory fee arrangement, the client will withdraw his selection and approach a new engineer. This procedure is known as the traditional method of retaining professional engineering services.

 In addition to the Code of Ethics, the defendant has sought to promote its ban on competitive bidding by a variety of other means. These include publication of professional policy statements, issuance of opinions on a case analysis basis by its Board of Ethical Review, distribution of pamphlets to members and clients, personal letters to individual clients suspected of soliciting on a competitive bid basis, and participation with other professional societies in preventing governmental agencies from obtaining price proposals for architect -engineering (A-E) projects by competitive bidding methods.

 While NSPE has no authority to terminate an engineer's membership in his state society for unethical conduct, it has played a significant role in coordinating and encouraging state society investigations into suspected misconduct. NSPE has recommended procedures to be followed by state societies upon the filing of charges of unethical conduct against a member, assisted in the conduct of these investigations, and directly warned members of apparent Sec. 11(c) violations.

 The policing actions of defendant with respect to Sec. 11(c) have met with apparent success. The record is devoid of any evidence suggesting significant defections by members from the bidding ban. Attempts by at least one federal agency to exchange the traditional method of procuring A-E services for competitive bidding met strong resistance resulting in part from actions of NSPE urging its members to refuse to offer their services.

 The nature of engineering services provided by NSPE members covers a wide spectrum embracing the study, design and construction of real property improvements located throughout the United States and abroad. Engineering services include prefeasibility studies, feasibility studies, planning, preliminary studies, the preparation of drawings, plans, designs, specifications, cost estimates, manuals, and reports, consultations, surveys, and inspections. This work is performed in connection with myriad projects ranging from highway construction, public utilities and communications facilities to commercial structures, transportation means and mining facilities. The list is virtually endless. The clients for whom NSPE members offer their services include governmental agencies at all levels, manufacturing companies, industrial companies and retailing companies operating throughout the United States.

 NSPE members practice as sole practitioners, partnerships and corporations ranging upwards in size to 1500 individuals. Individual members are often licensed to perform engineering services in several states at one time. Engineering firms with which NSPE members are affiliated frequently maintain offices in states and foreign countries other than their principal places of business. Such firms perform services on a multi-state, regional or national basis.

  Most design and construction projects require the services of both architects and engineers whose services are often provided by a single firm. The engineer's portion of the firm's fee normally accounts for about 5 to 6 percent of the cost of construction. For the year 1972, the 438 largest A-E design firms accounted for approximately $2.2 billion in fees. Profit margins for many firms range as high as 10 to 12 percent Forty, or approximately 9 percent, of the top 438 A-E design firms were publicly held corporations or affiliated with publicly held corporations, whose fees accounted for approximately 14 percent of the receipts from this group.

 In addition to A-E design firms, there is a second significant group of firms performing engineering services known as design/construct firms which differ from typical consulting engineering firms in their added capability of performing construction work as well as traditional A-E design work. In 1972, 30, or approximately 48 percent, of the top 62 design/construct firms in the nation were publicly held corporations or affiliated with such corporations and accounted for 65 percent of the $26 billion of new project contracts awarded this group.

 The Government attacks defendant's ethical prohibition against competitive bidding on grounds it constitutes price fixing in per se violation of § 1 of the Sherman Act. Claiming that Sec. 11(c) operates to deny clients access to competitive price information, plaintiff contends that bidding ban illegally tampers with the price structure of engineering services by eliminating all forms of price competition thereby stabilizing engineering fees. NSPE proffers a three pronged defense contending first, the practice of professional engineering is not trade or commerce within the scope of § 1; second, the ethical prohibition is a reasonable practice in the field of professional engineering; third, the practice of professional engineering is exempt from antitrust attack because it is a state regulated profession. The Court will consider these defenses seriatim.

 I

 Defendant claims that the practice of professional engineering falls outside the ambit of trade or commerce because it is a so-called "learned profession" governed by self-regulation. The notion that learned professions are not covered by the Sherman Act has its genesis in the construction placed upon the term "restraint of trade" under § 3 of the Sherman Act by the Supreme Court in Atlantic Cleaners & Dyers, Inc. v. United States, 286 U.S. 427, 436, 76 L. Ed. 1204, 52 S. Ct. 607 (1932). In giving expansion to the word "trade", the Court quoted with approval from now famous dictum set down by Mr. Justice Story in The Schooner Nymph, 1 Sumn. 516, 517-518; 18 Fed.Cas. 506, 507, No. 10,388 (1834):

 

"Whenever any occupation, employment, or business is carried on for the purpose of profit, or gain, or a livelihood, not in the liberal arts or in the learned professions, it is constantly called a trade."

 Notwithstanding this favorable reference to an early nineteenth century conception of trade, the Supreme Court has never held that a learned profession is exempt from the Sherman Act and has in fact affirmed its intention not to "intimate an opinion on the correctness of the application of the term [trade] to the professions." United States v. National Ass'n of Real Estate Boards, 339 U.S. 485, 491-2, 94 L. Ed. 1007, 70 S. Ct. 711 (1950). *fn2" The only circuit court to declare a learned profession exemption was the Fourth Circuit in Goldfarb v. Virginia State Bar, 497 F.2d 1 (1974). In that case, a divided court held that a legal profession's fee schedule was immune from a § 1 attack because of the applicability of the "learned profession exemption." Id. at 15. More recently, however, a federal district court, after giving careful consideration to the entire litany of learned profession cases, arrived at an opposite conclusion finding that the "fee schedule activities of the defendant, Oregon State Bar, are not immune to Sherman Act attack . . by the 'learned profession' exemption." United States v. Oregon State Bar, 385 F. Supp. 507 (D.C. Ore. 1974).

 The concept of a learned profession exception to the antitrust laws is of dubious validity in view of the repeated reluctance of federal courts to recognize it as a legitimate exception to the Sherman Act. The issue of whether a profession is a learned one is not seen by the Court as the appropriate approach for resolving the higher question of whether the Sherman Act is applicable to that profession. To engage in such an inquiry would chart the Court on a semantic adventure of questionable value. It would be a dangerous form of elitism, indeed, to dole out exemptions to our antitrust laws merely on the basis of the educational level needed to practice a given profession, or for that matter, the impact which the profession has on society's health and welfare. Clearly, the more appropriate and fairer course is to examine the nature and conduct involved in the profession on a case by case basis together with the context in which it is practiced.

 Congressional intent behind the Sherman Act focused on a desire to prevent restraints to "free competition in business and commercial transactions which tended to . . . raise prices or otherwise control the market to the detriment of purchasers or consumers of goods and services . . . ." Apex Hosiery Co. v. Leader, 310 U.S. 469, 493, 84 L. Ed. 1311, 60 S. Ct. 982 (1940). The types of business and commercial transactions which Congress intended the Sherman Act to protect have generally been accorded broad recognition by the courts. United States v. National Ass'n of Real Estate Boards, supra (business of real estate broker is trade within the meaning of § 3 of the Sherman Act); United States v. South-Eastern Underwriters Ass'n, 322 U.S. 533, 88 L. Ed. 1440, 64 S. Ct. 1162 (1944) (business of insurance not exempt from operation of the Sherman Act); American Medical Ass'n v. United States, 317 U.S. 519, 87 L. Ed. 434, 63 S. Ct. 326 (1943) (group health organization engaged in obtaining medical services for its members is conducting trade under § 3 of the Sherman Act). Each of these cases has turned on the character of the restraint and the activity restrained as opposed to a litmus test based on professionality. Cf. Apex Hosiery, supra, at 485. In view of this approach taken by the courts, it can be said at the very least that where the activity of a profession so directly impacts upon interstate trade and commerce as to substantially contribute to the latter's character and direction, it must be concluded that the profession's activity has become subsumed within the general scope of § 1 of the Sherman Act regardless of whether the profession may be characterized as a learned one. As the Supreme Court noted in South-Eastern Underwriters, supra, with reference to the language of §§ 1 and 2 of the Sherman Act:

 

"Language more comprehensive is difficult to conceive. On its face it shows a carefully studied attempt to bring within the Act every person engaged in business whose activities might restrain or monopolize commercial intercourse among the states." 322 U.S. at 553.

 The record amply demonstrates that professional engineering is not a metaphysical pursuit but rather a conduit through which abstract scientific principles are reduced to a level of practical application in response to a given problem. In this sense, professional engineering offers a service. And with respect to design engineers who prepare plans and specifications for real property improvements and articles of manufacture, professional engineering also offers a product. Unlike the lawyer's brief or the scholar's text which convey thought, an engineer's blueprints constitute a necessary physical tool which when combined with standardized techniques of manufacturing and construction, yield a final, functional reduction to practice. In this regard, professional engineering enjoys a maximum interface with end products of construction and manufacture.

 The business nature of professional engineering firms is clearly established in the record. It is an industry often organized on a local, regional, national and even international scale controlling, guiding and shaping the pace and direction of the vast array of interstate transactions needed to carry out much of the nation's construction and manufacture. Fully 50 to 80 percent of the cost of constructing and equipping construction projects is controlled by an engineer's work. A substantial amount of equipment and material is transported in interstate commerce at the specific direction of NSPE members. It would not be hyperbole to observe that professional engineering services are at the very backbone of the major portion of the nation's commerce. This is not a case of indirect and insubstantial impact by a so-called learned profession upon interstate commerce. The record is impressive in demonstrating that the imprint of professional engineering upon interstate commerce is clear and unmistakable. It is a driving force of seminal character which continues to forge the very foundation from which our commercial trade emanates. The Court is satisfied in light of the well documented record that the activities of NSPE and its members fall well within the scope of § 1 of the Sherman Act.

 II

 It is undisputed that price fixing is a per se unreasonable restraint of trade under the Sherman Act and that in such cases it is not for the court to decide whether a particular price fixing activity serves an honorable or worthy end. United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 84 L. Ed. 1129, 60 S. Ct. 811 (1940); United States v. National Ass'n of Real Estate Boards, supra at 489; United States v. South-Eastern Underwriters Ass'n, supra at 561. Hence, if the Sec. 11(c) ban on competitive bidding acts to fix the prices of engineering services, the Court's inquiry is ended and it need not consider the reasonableness of the ethical proscription.

 In order for conduct to be characterized as price-fixing, it is not necessary to show that the alleged combination or conspiracy has actually pegged prices at a particular level. Kiefer-Stewart Co. v. Seagram & Sons, 340 U.S. 211, 95 L. Ed. 219, 71 S. Ct. 259 (1951). It need only be established that the suspect conduct acts to restrain free price movement. It is the act of tampering with the price structure which is at the core of the offense. As the Court in Socony-Vacuum noted:

 

"Any combination which tampers with price structures is engaged in an unlawful activity. Even though the members of the price-fixing group were in no position to control the market, to the extent that they . . . stabilized prices they would be directly interfering with the free play of market forces." 310 U.S. at 221.

 Accordingly, where the application and practice of a code of professional ethics leaves members of a professional association genuinely free in their pricing decisions, no § 1 offense arises.

 Section 11(c) prohibits defendant's members from engaging in any form of price competition when offering their services; selection is restricted to considerations of reputation and ability. No fee information may be given a prospective client which takes the form of cost estimates or other proposals in terms of dollars, man days of work required, or percentage of construction cost which can be compared to that of another engineer. Section 11(c), however, does permit members to disclose recommended state society fee schedules to prospective clients in the course of the selection process. Moreover, Sec. 9(b) of defendant's Code of Ethics requires its members not to accept work at a fee "below the accepted standards of the profession in the area." *fn3" As a result of these sections, the only price information available for input into the client's selection equation is a uniformly regular fee schedule. Should the client persist in requiring competitive bids, Sec. 11(c) requires the engineer to withdraw the offer of his service altogether.

 Although the actual implementation and enforcement of Sec. 11(c) is not critical to a determination of whether a combination or conspiracy exists to restrain trade, Socony-Vacuum, supra at 225, n. 59, the record does support a finding that NSPE and its members actively pursue a course of policing adherence to the competitive bid ban through direct and indirect communication with members and prospective clients. As note supra, NSPE has engaged in educational campaigns and personal admonitions to members and clients who were suspected of engaging in competitive bidding practices.

 Upon careful review of the pertinent authorities, the Court is convinced that the ethical prohibition against competitive bidding is on its face a tampering with the price structure of engineering fees in violation of § 1 of the Sherman Act. It is not important to know what effect the Sec. 11(c) prohibition has on the price of professional engineering services. Kiefer-Stewart Co. v. Seagram & Sons, supra at 213. What is of critical significance is that the agreement among defendant's members to refrain from competitive bidding is an agreement to restrict the free play of market forces from determining price; to sacrific freedom in pricing decisions to market stability. The combination becomes a per se illegal one under § 1 of the Act when it tends to "cripple the freedom of traders and thereby restrains their ability to sell in accordance with their own judgment." Kiefer-Stewart, Ibid. By proscribing competitive bidding, Sec. 11(c) has as its purpose and effect the excision of price considerations from the competitive arena of engineering services. The ban narrows competition to factors based on reputation, ability, and a fixed range of uniform prices. The prospective client is thus forced to make his selection without all relevant market information. The Sec. 11(c) ban on competitive bidding is in every respect a classic example of price-fixing in violation of § 1 of the Sherman Act.

 III

 Action to regulate trade undertaken by state officials pursuant to state legislative command is not governed by the Sherman Act. Parker v. Brown, 317 U.S. 341, 63 S. Ct. 307, 87 L. Ed. 315 (l943). In Parker, a producer and packer of raisins challenged a California law which authorized the establishment, through state officials, of marketing programs for state produced agricultural products. The purpose of the legislation was to stabilize prices by restricting competition in order to "conserve the agricultural wealth of the State" and "prevent economic waste in the marketing of agricultural products." Id. at 346. The Court in Parker held:

 

"We find nothing in the language of the Sherman Act or in its history which suggests that its purpose was to restrain a state or its officers or agents from activities directed by its legislature." Id. at 350-51.

 Defendant has cited statutes in 16 states which prohibit fee bidding by engineers. It is defendant's position that because Sec. 11(c) coincides with state law, the Parker doctrine of state action immunity shields defendant from Sherman Act liability. The Court finds this extension of Parker unacceptable for several reasons.

 The state program in Parker comprised a carefully legislated administrative plan for trade regulation which insured continuous state supervision through the offices of a state created commission. It was not a case where agricultural growers had been allowed to restrain trade in contravention of the antitrust laws by mere legislative fiat. The Court emphasized this point by noting:

 

[A] state does not give immunity to those who violate the Sherman Act by authorizing them to violate it, or by declaring that their action is lawful. . . ." Id. at 351.

 Likewise, the First Circuit observed in George R. Whitten, Jr., Inc. v. Paddock Pool Builders, Inc., 424 F.2d 25, cert. denied, 400 U.S. 850, 27 L. Ed. 2d 88, 91 S. Ct. 54 (1970):

 

"The Court's emphasis on the extent of the state's involvement precludes the facile conclusion that action by any public official automatically confers exemption. . . . Our reading of Parker convinces us that valid government action confers antitrust immunity only when government determines that competition is not the summum bonum in a particular field and deliberately attempts to provide an alternate form of public regulation." Id. at 30.

 The instant Complaint charges defendant with illegal restraint of trade on a nationwide basis. It does not attack the action of any state official or agency. Unlike the situation in Parker, the challenged activity of NSPE and its members was a private conspiracy in restraint of trade and not conducted pursuant to the command of any state legislature. There is no evidence of any state enforcement machinery, present in Parker, which suggests that when the 16 states decided to prohibit competitive bidding they also intended to establish an alternate form of public regulatory control. Defendant's activities are plainly interstate in nature, unencumbered by the regulations of individual states. The extrapolation of Parker urged by defendant is both unfounded in logic as well as in law. The doctrine of state immunity enunciated by the Court in Parker simply has no applicability to a code of ethics which has been formulated outside the command and supervision of a state agency.

 For the reasons stated supra, the Court finds that promulgation and enforcement of Sec. 11(c) by NSPE, its members and state societies, constitutes a combination and conspiracy in unreasonable restraint of interstate trade and commerce in violation of § 1 of the Sherman Act.

 Findings of Fact and Conclusions of Law are annexed hereto.


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