PA Funeral Dir. Assn. v. FTC

Opinions of the United
1994 Decisions States Court of Appeals
for the Third Circuit
10-17-1994
PA Funeral Dir. Assn. v. FTC
Precedential or Non-Precedential:
Docket 94-3015
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IN THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 94-3015
PENNSYLVANIA FUNERAL DIRECTORS ASSOCIATION, INC.,
Petitioner
v.
FEDERAL TRADE COMMISSION,
Respondent
Petition for Review of the Federal Trade Commission's
Amended Funeral Industry Practices Regulation Rule
Argued August 2, 1994
BEFORE: STAPLETON and GREENBERG, Circuit Judges,
and ATKINS,* Senior District Judge
(Filed October 17, 1994)
T. Scott Gilligan (Argued)
Kepley, MacConnell & Eyrich
525 Vine Street Suite 2200
Cincinnati, OH 45202
Attorney for Petitioner
and Intervenor
Jay C. Schaeffer
Acting General Counsel
Ernest J. Isenstadt
Assistant General Counsel
Joanne L. Levine (Argued)
Federal Trade Commission
6th & Pennsylvania Ave., N.W.
Washington D.C. 20580
________________________________________
* Honorable C. Clyde Atkins, Senior United States District Judge
for the Southern District of Florida, sitting by designation.
Of Counsel:
Matthew Daynard
Bureau of Consumer Protection
Federal Trade Commission
6th & Pennsylvania Ave., N.W.
Washington D.C. 20580
Attorneys for Respondent
Cathy Ventrell-Monsees
Steven S. Zaleznick
W. Kent Brunette
Deborah M. Zuckerman
American Association of Retired
Persons
601 E Street, N.W.
Washington D.C. 20049
Of Counsel:
Allen Larson
Eugene Curry
Larson & Curry
Route 28-1185 Falmouth Rd.
P.O. Box 2730
Hyannis, MA 02601
Attorneys for Amicus
Curiae
OPINION OF THE COURT
ATKINS, Senior District Judge:
The Pennsylvania Funeral Directors Association, Inc.
and the National Funeral Directors Association of the United
States, Inc. as intervenor (collectively "PFDA"), have petitioned
this court, pursuant to Section 18(e) of the Federal Trade
Commission Act ("FTC Act"), 15 U.S.C. § 57a(e), for review of the
Federal Trade Commission's ("FTC") amended Funeral Industry
Practices Rule. The PFDA specifically asks this court to
invalidate an amendment to the original Funeral Industry
Practices Rule ("Funeral Rule") which prohibits all funeral
service providers from charging consumers a "casket handling fee"
in instances where the consumer has purchased a casket from a
party other than the funeral service provider -- i.e., from a
third party casket vendor. The PFDA contends that the FTC's
decision to implement a ban on casket handling fees was arbitrary
and capricious and that the factual findings underlying that
decision were unsupported by substantial evidence in the
rulemaking record taken as a whole. For the reasons set forth
below, we will affirm the amended Funeral Rule, and in particular
the ban on casket handling fees.
PROCEDURAL HISTORY
On September 24, 1982, the FTC promulgated the Funeral
Rule, which prohibited certain unfair and deceptive practices in
the funeral service industry. Trade Regulation Rule; Funeral
Industry Practices, 16 C.F.R. Part 453 (1982). The FTC's
decision to issue the Funeral Rule was appealed to the Fourth
Circuit, and was affirmed in Harry & Bryant Co. v. FTC, 726 F.2d
993 (4th Cir. 1984), cert. denied, 469 U.S. 820 (1984). The
Funeral Rule became effective on April 30, 1984.
One section of the Funeral Rule required the FTC to
initiate rulemaking proceedings within four years of the
effective date of the Funeral Rule to determine whether the
Funeral Rule should be amended or repealed. Pursuant to this
provision, the FTC issued an Advanced Notice of Proposed
Rulemaking on May 31, 1988, which included the proposed language
for the amendment under challenge in this case.
In January, 1994, after comprehensive rulemaking
proceedings, the FTC adopted the amendment to the Funeral Rule
which is at issue here; that amendment bans casket handling
fees. On January 14, 1994, the PFDA petitioned this court for
review of the amendment. The National Funeral Directors
Association of the United States, Inc., of which Pennsylvania
Funeral Directors Association, Inc. is a member, sought and was
granted permission to intervene.
FACTS
The Funeral Rule
The Funeral Rule was enacted on September 24, 1982,
after extensive rulemaking proceedings and became fully effective
on April 30, 1984. The Funeral Rule was premised on evidence
that consumers are uniquely disadvantaged when they purchase
funeral services after the death of a loved one, due to grief,
time constraints, and inexperience. Additionally, the evidence
showed that funeral service providers often sold only preselected
packages of goods and services such that consumers were forced to
purchase goods and services they did not want.
Therefore, the Funeral Rule set forth several
requirements and prohibitions to remedy the unfair practices.
Specifically, the Funeral Rule required funeral service providers
to disclose prices over the telephone and to supply each customer
with an itemized price list with every service and good that the
provider sold. Additionally, the Funeral Rule required funeral
service providers to "unbundle" their price packages, forbidding
them from requiring the purchase of a casket for direct
cremations and from conditioning the purchase of funeral goods or
services on the purchase of any other goods or services;1 the
purpose was to prevent funeral service providers from forcing
customers to purchase goods or services they did not want.2
However, recognizing that each funeral requires the service of a
funeral director and staff, the Funeral Rule permitted funeral
service providers to charge a non-declinable fee for their
professional services.
Several groups challenged the promulgation of the
Funeral Rule in 1982 on evidentiary, policy, procedural,
statutory, and constitutional bases. However, the Fourth Circuit
rejected the challenge and affirmed the Funeral Rule. Harry &
Bryant, 726 F.2d 993.
The Amendment Procedures
The Funeral Rule specified that, four years after it
took effect, the FTC would initiate a rulemaking amendment
proceeding to determine whether the Funeral Rule was operating
1Funeral service providers could still offer packages as an
option to consumers, but they had to offer each good and service
separately, as well.
2
Other provisions exist in the Funeral Rule, but they are not
relevant to our decision regarding the challenged amendment.
effectively, whether any amendments to the Funeral Rule were
needed, and whether the entire rule should be repealed. The FTC
started the rulemaking proceedings in December, 1987, when it
solicited comments on the Funeral Rule from consumers and funeral
service providers. More than 350 comments were submitted. The
majority of the comments came from people and entities which
favored retaining and/or strengthening the Funeral Rule. Most
funeral service providers, however, favored repealing or
weakening the Funeral Rule.
In May, 1988, the formal rulemaking proceedings began
when the FTC issued a Notice of Proposed Rulemaking. This notice
informed recipients that the issue of banning casket handling
fees would be considered by the FTC. More comments were
submitted (189), public hearings were held in three cities, and
evidence, including surveys, was presented to a presiding
officer. After the testimony of 83 witnesses was presented,
interested groups submitted rebuttal statements and proposed
findings, as well as comments on later reports filed by the FTC
staff.
The Casket Handling Fee Amendment
Prior to the enactment of the Funeral Rule, funeral
service providers (i.e., funeral homes) were virtually the only
parties selling funeral goods. However, after the implementation
of the Funeral Rule, the way was paved for third parties to
provide various funeral goods -- namely caskets. Because funeral
service providers could no longer require a consumer to purchase
a casket in order to receive any other funeral services, third
parties stepped into the markets, but only in some areas.3 The
third parties began selling caskets, primarily on a pre-need
basis and usually at a substantially lower price than did the
funeral homes.4
In reaction to the increased competition in the area of
casket sales, funeral service providers began charging customers
a "casket handling fee." This fee averages $300.00 to $500.00,
but can be as high as $1,000.00. Funeral service providers
charge this fee to customers who have purchased a casket from a
third party, but who want to have the remainder of the funeral
services conducted at the funeral home. The casket handling fee
is non-declinable, but funeral service providers do not charge
this fee for "ship-ins," among other select customers.5
Additionally, funeral service providers admit that there is
absolutely no additional labor or service or handling involved
when a customer provides a casket from a third party to justify
3
Since many states require a person to be a licensed funeral
service provider in order to be able to sell a casket, it is in a
limited amount of states and areas that third parties were able
to enter the market.
4
Funeral service providers generally seek to recoup their
overhead costs and profits through the sale of caskets. Thus,
the mark-up on caskets at funeral homes is substantial and is
often higher than a third party seller marks up his or her casket
price.
5
"Ship-ins" occur, for example, when the family resides in a
place other than where the deceased died. In those cases, a
funeral home in the city where the person died will prepare the
body and provide a casket. That funeral home then "ships" the
casket to the funeral home that will conduct the funeral.
such a fee. Rather, the casket handling fee is imposed solely to
recover income from the "lost sale" of the casket.
The casket handling fees often negate any savings the
consumer might have realized by buying a third party, less
expensive casket. In fact, sometimes the imposition of the
casket handling fee results in a higher overall "price" for a
third party casket as opposed to the caskets sold by funeral
homes. As a result, some consumers cancel their third party
casket purchases since they would end up paying more overall than
if they simply bought the casket from the funeral home.
Increased cancellations have evidently caused third party casket
sellers to be forced out of the market. Therefore, the FTC
promulgated the following as amended Section 453.4(b)(1)(ii) of
the Funeral Rule which makes it an unfair practice for a funeral
service provider to:
Charge any fee as a condition to furnishing
any funeral goods or funeral services to a
person arranging a funeral, other than a fee
for: (1) Services of funeral director and
staff, permitted by § 453.2(b)(4)(iii)(C);
(2) other funeral services and funeral goods
selected by the purchaser; and (3) other
funeral goods or services required to be
purchased [by law]. . .
16 C.F.R.§ 453.
The FTC did not intend the amended Funeral Rule to
prohibit funeral service providers from recouping overhead costs
or making profits. Rather, the amendment was intended to make
clear that only one non-declinable fee could be charged (the one
for the professional services of the funeral director), and that
funeral service providers could not seek to recoup overhead and
make profits by only charging a casket handling fee to those
people who chose to purchase their casket from a competitor.
STANDARD OF REVIEW
The FTC asserts that the amendment at issue here is
entitled to a presumption of validity because it merely closes a
loophole in the original Funeral Rule, and clarifies the ban on
"bundling." However, any substantive amendment to an FTC trade
regulation rule is subject to the same judicial review as a rule.
Section 18(d)(2)(B) of the FTC Act, 15 U.S.C. § 57a(d)(2)(B).
While the amendment may be related to "unbundling," which was
addressed by the original Funeral Rule, the amendment is not
merely a clarification. Rather, the amendment at issue here
prohibits a practice that was not being used by funeral service
providers at the time the Funeral Rule was enacted. Further,
nothing in the FTC Act indicates that amendments are entitled to
a presumption of validity.
On the other hand, to the extent that some bases for
the original Funeral Rule apply here, this court can look to the
Fourth Circuit's findings in Harry & Bryant Co., 726 F.2d 993 for
guidance. Therefore, the court will consider the amendment as it
would any FTC regulation rule, taking into consideration that the
Fourth Circuit has already sustained the FTC's findings that
bundling and tying provisions harm consumers, that consumers
cannot avoid such injury, and that the benefits of regulating
bundling practices outweigh the costs.
Congress established a hybrid standard for judicial
review of FTC regulation rules. Essentially, a court may set
aside the FTC conclusion if it is not supported by substantial
evidence in the rulemaking record taken as a whole, 15 U.S.C. §
57a(e)(3), American Home Products Corp. v. FTC, 695 F.2d 681, 686
(3d Cir. 1982), or if it is arbitrary, capricious, an abuse of
discretion, or otherwise not in accordance with law. American
Financial Services v. FTC, 767 F.2d 957, 985 (D.C. Cir. 1985),
cert. denied, 475 U.S. 1011 (1986); American Optometric
Association v. FTC, 626 F.2d 896, 904-906 (D.C. Cir. 1980). The
substantial evidence standard is applied only to the FTC's
factual determinations, while the arbitrary and capricious
standard is applied to all other determinations and conclusions.
American Financial Services, 767 F.2d at 985.
A factual finding is supported by substantial evidence
if the record contains "such relevant evidence as a reasonable
mind might accept as adequate to support a conclusion." American
Textile Mfrs. Inst., Inc. v. Donovan, 452 U.S. 490, 522 (1981);
American Home Products Corp., 695 F.2d at 686; American
Financial Services, 767 F.2d 957. A court is not permitted to
reweigh the evidence when determining whether the record contains
substantial evidence to support the FTC's conclusion. Steadman
v. SEC, 450 U.S. 91, 98-99, 100 n.20 (1981), reh'g. denied, 451
U.S. 933 (1981); Limerick Ecology Action, Inc. v. Nuclear
Regulatory Commission, 869 F.2d 719, 753 (3d Cir. 1989);
American Home Products Corp., 695 F.2d at 686.
The arbitrary and capricious standard is very
deferential. Environmental Defense Council v. Costle, 657 F.2d
275, 283 (D.C. Cir. 1981); see Monsour Medical Center v.
Heckler, 806 F.2d 1185, 1190-91 (3d Cir. 1986), cert. denied, 482
U.S. 905 (1987). When considering agency conclusions under the
arbitrary and capricious standard, the court must determine
whether the decision was based on consideration of relevant
factors and whether there has been a clear error of judgment.
Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 416
(1971); see Davis Enterprises v. EPA, 877 F.2d 1181, 1186 (3d
Cir. 1989), cert. denied, 493 U.S. 1070 (1990). Additionally,
the court may not substitute its judgment for that of the agency.
Arkansas v. Oklahoma, 112 S. Ct. 1046, 1061 (1992); Moats v.
United Mineworkers of America Health & Retirement Funds, 981 F.2d
685 (3d Cir. 1992).
ANALYSIS
The PFDA argues that the FTC has imposed on itself a
five-part test, each part of which must be satisfied in order to
promulgate a regulation rule.6 In turn, the PFDA wants this
6
The five-part test includes: (1) a statement as to the
prevalence of the practice the FTC seeks to regulate; (2) a
finding or conclusion that the practice causes substantial
consumer injury; (3) a finding or conclusion that the rule or
regulation would reduce such consumer injury; (4) a finding or
conclusion that the benefits to be derived from the rule or
regulation outweigh the costs imposed by the rule or regulation;
and, (5) a finding or conclusion that consumers cannot
reasonably avoid the injury that the practice causes. Ophthalmic
Practice Rules, 54 Fed. Reg. 10285, 10287, 16 C.F.R. § 456 (1989)
(citing American Financial Services Ass'n., 767 F.2d at 971;
Rule on Sale of Used Motor Vehicles, Statement of Basis and
court to apply that five-part test in assessing whether the ban
on casket handling fees should be affirmed. Nothing in the FTC
Act requires a reviewing court to rigidly adhere to this test
which the FTC merely suggests to itself as a means of ensuring
that its regulation rules are justified. Yet, since the FTC has
essentially made findings and conclusions in the context of those
five inquiries, the court will use the five-part test as a guide
to determine whether the findings are supported by substantial
evidence and/or are arbitrary and capricious.
The FTC's Finding as to the Prevalence of Casket Handling Fees
What the PFDA appears to complain of most is that the
FTC did not make an adequate finding as to the prevalence of
casket handling fees. The PFDA contends that the FTC finding
that "substantial 'casket handling fees' are imposed on consumers
by a significant portion of providers wherever third-party casket
sellers exist," Funeral Industry Practices; Final Amended Trade
Regulation Rule, 59 Fed. Reg. 1592, 1604, 16 C.F.R. § 453 (1994),
was based on flawed or insubstantial evidence and is not an
adequate statement as to the prevalence of casket handling fees.
However, contrary to what the PFDA asserts -- that
methodologically sound quantitative data must show that the
practice sought to be regulated occurs with some frequency -- a
"finding as to prevalence" requires neither that substantial,
Purpose, 49 Fed. Reg. 45692, 45703, 16 C.F.R. § 455 (1984);
Credit Practices Rule, Statement of Basis and Purpose, 49 Fed.
Reg. 7740, 7742, 16 C.F.R. § 444 (1984); Letter from FTC to
Senators Wendell H. Ford and John C. Danforth (Dec. 17, 1980)).
rigorous, quantitative studies be done, nor that the practice
occurs in a certain percentage of transactions throughout the
country. In fact, the FTC's Rulemaking and Investigatory
Procedures merely require that the FTC make a "statement as to
the prevalence of the acts or practices treated by the rule."
Organization Changes in the Commission's Rulemaking and
Investigatory Procedures, 46 Fed. Reg. 26284, 26289, 16 C.F.R. §§
0-5 (1981) (emphasis added).
"Prevalence" has never been strictly defined by the FTC
or the courts. The FTC has stated, though, that a statement as
to prevalence (as well as answers to the other four inquiries)
will "vary depending on the circumstances of each rulemaking and
the characteristics of the industry involved." Ophthalmic
Practice Rules, 54 Fed. Reg. at 10287, 16 C.F.R. § 456 (citing 49
Fed. Reg. 7740, 7742 n.4). Indeed, "[n]either the statutory
language nor the legislative history of the [FTC] Act suggests
that in 1975 Congress intended to require the [FTC] to find as a
pre-condition to rulemaking that acts or practices to be
regulated are prevalent." Trade Regulation Rule, Mail or
Telephone Order Merchandise, 58 Fed. Reg. 49096, 49100 n.61, 16
C.F.R. § 435 (citing 15 U.S.C. section 57a(d)(1)(A); Joint H.R.
and S. Conf. Rep. No. 1408, 93rd Cong., 2d Sess., reprinted in
1974 U.S. Code Cong. & Admin. News 7764). Further, even where
there is a limited record as to the prevalence of a practice on a
nationwide basis or where the data reviewed only relates to a few
states, the practice can be found to be prevalent enough to
warrant a regulation. Trade Regulation Rule; Credit Practices,
49 Fed. Reg. at 7752, 16 C.F.R. § 444, affirmed by American
Financial Services Ass'n., 767 F.2d 957 (limited record evidence
existed with respect to the prevalence of the practice; evidence
showed that practice occurred in just a few states and only in a
small percentage of transactions, but despite the inability to
precisely quantify the evidence, the FTC found that the practice
was probably more widespread than the data indicated and at any
rate was prevalent enough to warrant promulgating a regulation
rule); see also Amendment to Trade Regulation Rule Concerning
Care Labeling of Textile Wearing Apparel and Certain Piece Goods,
48 Fed. Reg. 22733, 22743, 16 C.F.R. § 423 (1983) (record did not
permit a determination of how widespread the practice was, just
that it did occur and FTC adopted amendment). Additionally,
studies upon which a finding as to prevalence is based need not
be projected to the entire nation where the practice is limited,
prohibited, or regulated in many areas anyway by state law.
Trade Regulation Rule; Credit Practices, 49 Fed. Reg. at 7752,
16 C.F.R. § 444, affirmed by American Financial Services Ass'n.,
767 F.2d 957 (because practice sought to be regulated was
forbidden by state law in many areas, practice did not need to
occur throughout nation in order to be subject to regulation).
Overall, then, there appears to be no mandate that a practice be
prevalent (i.e., occur in a certain number of transactions) in
order for the FTC to adopt a rule regulating the practice. See
Mail Order or Telephone Merchandise Rule, 58 Fed. Reg. 49096,
49100 n.61, 16 C.F.R. § 435 (1993); Trade Regulation Rule;
Credit Practices, 49 Fed. Reg. at 7753, 7757, 16 C.F.R. § 444.
Taking all of this into account, the FTC's finding as
to the prevalence of casket handling fees is supported by
substantial evidence in the rulemaking record taken as a whole.
First, the FTC noted that third party casket sellers only number
approximately 150-200 in the whole United States.7 Additionally,
those sellers are concentrated primarily in three states --
Pennsylvania, Ohio and Michigan -- because many states prohibit
anyone but a licensed funeral service provider from selling
caskets. Since casket sales by third parties is prohibited in
most areas by state law, most funeral service providers have no
need to impose casket handling fees. Therefore, the practice of
charging casket handling fees could not be widespread nationwide.
See Trade Regulation Rule; Credit Practices, 49 Fed. Reg. at
7752, 16 C.F.R. § 444.
Second, the FTC relied on several things in making its
finding as to prevalence:8 a study done by the Pre-Arrangement
Association ("PAA"); corroborative testimony and statements by
other witnesses; and other surveys of casket handling fees in
local markets. The FTC admits that the PAA study was not the
most statistically rigorous or comprehensive survey. However,
conducting or relying on statistically rigorous and comprehensive
7
The small number of documented third party casket sellers is
probably due, in part, to the fact that third party casket
sellers were literally non-existent prior to the 1982
implementation of the original Funeral Rule.
8
The PFDA argues that the FTC relied exclusively on the Pre-
Arrangement Association study, which the PFDA argues was not
statistically rigorous and was conducted in a biassed manner.
studies is not necessary in making a finding as to prevalence.
See Mail Order or Telephone Merchandise Rule, 58 Fed. Reg. at
49108, 49109, 16 C.F.R. § 435; Trade Regulation Rule; Credit
Practices, 49 Fed. Reg. at 7742, 16 C.F.R. § 444. Nevertheless,
the court does recognize that some basis or evidence must exist
to suggest that the practice the FTC rule seeks to regulate does
indeed occur, and, with respect to the incidence of casket
handling fees, substantial evidence supports a finding that the
practice exists.9
The PAA evaluated 31 responses from third party casket
sellers to a survey about whether casket handling fees are
imposed. All 31 respondents said that casket handling fees were
9
The PFDA, in addition to attacking the results of the PAA
study, complains that the survey itself was conducted in a
biassed manner. So, not only were the results on their face
woefully inadequate -- according to the PFDA -- to support a
finding as to prevalence, but the results may even have been
skewed. The PFDA asserts that because a cover letter that
accompanied the PAA survey stated that the results would be used
"to present to the FTC testimony on the impact that casket
handling fees have had on the third party sale of funeral
merchandise," Letter from Dayne Sieling, Executive Director of
the PAA to Members of all State Cemetery Associations dated
October 12, 1988, the survey itself was injected with bias.
While not claiming to be experts on statistical analysis,
the court finds that the cover letter did not infect the PAA
study so as to render it unusable or unreliable. For example,
the cover letter did not state that the PAA would use the survey
to get the FTC to ban casket handling fees, and, without
responses indicating that such fees are imposed, the ban would
never occur. Rather, the cover letter just stated that the issue
of casket handling fees would be addressed at upcoming FTC
hearings. Moreover, the FTC reviewed the PAA survey before it
was distributed in order to ensure that it was valid. Therefore,
the court rejects the PFDA's argument that the cover letters sent
with the PAA survey so infected the survey with bias that it was
arbitrary and capricious for the FTC to rely on it.
imposed in their market areas. Eighty-six percent of respondents
said that at least 60% of the funeral homes in their market areas
assessed such fees; 66% indicated that the fees were imposed by
at least 80% of the funeral homes; 48% of respondents stated
that at least 90% of the funeral homes in their areas assessed
casket handling fees; and 24% of respondents indicated that 100%
of the funeral homes in their market area used such a fee.
Testimony of Duke Radovich.
Additionally, most of the witnesses who testified at
the rulemaking hearings indicated that where third party casket
sellers exist, a significant number of funeral service providers
imposed casket handling fees. The other informal surveys the FTC
relied on were surveys conducted by a journalist, by a third
party casket seller, who surveyed funeral homes, and a third done
by asking funeral customers questions. Once again, all of these
"studies" indicated that where third party casket sellers exist,
substantial casket handling fees are imposed by funeral service
providers. In fact, the results showed that many customers of
the third party casket sellers ended up canceling their third
party contracts to avoid paying more overall than if they had
purchased their casket at the funeral home. This corroborative
testimony and anecdotal evidence buttresses the FTC's finding as
to the prevalence of casket handling fees.
Finally, the study that the PFDA would like the FTC and
this court to rely on (exclusively) -- funeral transaction
records collected by the Federated Funeral Directors of America
("FFDA") -- is not entirely applicable because that study
indicated that a very small percentage of funeral service
transactions involve a casket handling fee (0.05%). This result
occurred for probably two reasons. First, the survey sampled
funeral transactions throughout the country. As stated above,
third party casket sellers are concentrated in only a few areas
and a survey of the entire nation would obscure the prevalence of
the fees in the areas where third party casket sellers exist.
Second, the FFDA transaction sheets that were evaluated did not
specifically ask about casket handling fees. Rather, the
transaction sheets merely asked for an itemized price list of
what was charged to a customer. Because it is apparent that many
funeral service providers convince customers to cancel their
third party contracts and buy the casket from the funeral
director, a fee would not appear on a final bill. Moreover,
because casket handling fees are not really a good or a service,
they might not show up as a separate item on a final bill.
Therefore, the FTC did not act arbitrarily in declining to rely
solely on the FFDA study.
Overall, the PAA study, the informal surveys, the
testimony, and the anecdotal evidence all indicate that where
third party caskets are sold, a significant number of funeral
homes impose casket handling fees. The PFDA does not contest
this conclusion, but merely argues that the FTC did not rely on
statistically sound studies and that the practice does not occur
often enough throughout the country to justify a ban on the
practice. Therefore, the FTC's finding as to the prevalence of
casket handling fees was supported by substantial evidence in the
rulemaking record taken as a whole.
Whether Casket Handling Fees Cause Substantial Consumer Injury
The FTC concluded that since the casket handling fees
are non-declinable and are tied to the purchase of a casket, they
frustrate the underlying principle of the original Funeral Rule's
anti-bundling provisions. Funeral Industry Practices; Final
Amended Trade Regulation Rule, 59 Fed. Reg. 1592, 1604, 16 C.F.R.
§ 453. Therefore, the consumer is injured in that the right to
decline to purchase any item, including a casket, from a funeral
service provider "is illusory if funeral providers can condition
consumers' choice on the payment of an additional, non-declinable
fee." Id. at 1604. Further, consumer choice is restricted
because the casket handling fee operates as a penalty for
exercising that choice.
At the outset, the court notes that the original
Funeral Rule's regulations were enacted, in large part, to
eliminate bundling. The FTC concluded with respect to the
original Funeral Rule, and the Fourth Circuit agreed, that
bundling, or forcing a customer to pay for any item aside from
the one non-declinable professional service fee, injured
consumers. With respect to the amendment at issue here, the FTC
concluded that casket handling fees constitute bundling insofar
as they are unfair conditions on a customer's right to decline an
unwanted item.10 That conclusion was neither arbitrary nor
10
For example, funeral service providers essentially say,
"either buy your casket here, or we'll charge you for it anyway."
capricious since bundling speaks of forcing consumers to pay for
items or services that they do not want. Therefore, as discussed
above, the court will consider that the Fourth Circuit has
already determined that bundling causes consumers substantial
injury as part of the analysis of whether the FTC's conclusion
that casket handling fees cause substantial consumer injury is
supported by substantial evidence.
The PFDA argues that because a casket handling fee is
only imposed to make sure that those customers buying caskets
from third parties pay their fair share of the funeral home's
overhead costs, no consumer injury occurs. That argument is
interesting because the PFDA further argues that if no casket
handling fee is imposed, the customers who do buy their caskets
from the funeral home will be penalized by having to subsidize
the ones who purchase caskets elsewhere. But blaming or
penalizing the consumer who had the wherewithal to purchase a
less expensive casket ahead of time from a third party is unfair
since who pays what to whom is merely a function of how the
funeral director chooses to recoup his or her overhead costs. In
other words, the funeral director does not need to use the mark-
up on a casket to recoup those costs, especially knowing that
some casket sales may be lost to third parties; that is what the
non-declinable service fee is for. Every consumer using a
funeral home "uses" the overhead of the funeral director. Yet,
because funeral service directors are unwilling to redistribute
costs and recoup overhead through the one fee they are permitted
to charge everyone, some consumers are penalized for exercising
choice in purchasing caskets. Those consumers are forced to pay
for something they do not want -- the mark-up on the funeral
home's casket which the consumer did not even buy.
Another indication that the casket handling fee is a
penalty is that no extra labor, liability, time, or other cost is
involved in "handling" a third party casket. See Testimony of
Wendell Hahn. If customers who purchase a third party casket are
not "costing" the funeral homes anything extra, there really is
no justification for charging them a several-hundred dollar fee
other than to penalize them for not buying a casket from the
funeral home.
Additionally, funeral homes do not charge such handling
fees for ship-ins. Even though the families of these deceased
have caused the funeral home to lose a sale on a casket, and even
though the families of these deceased are not "paying their fair
share of the funeral home's overhead costs," they are not charged
casket handling fees. This shows that only those consumers who
make a conscious choice to purchase a casket from a third party
pay this fee.
Such a fee can only be described as a penalty for
exercising choice in purchasing a good and as a method of forcing
consumers to purchase a casket from a funeral home, or at least
pay the funeral home the mark-up on a casket so that the consumer
may as well have bought it from the funeral home. This
constitutes substantial consumer injury, especially in light of
the FTC's finding, sustained by the Fourth Circuit, that bundling
injures consumers. Therefore, the FTC's conclusion that casket
handling fees cause substantial consumer injury is supported by
substantial evidence and was not arbitrary or capricious.
The FTC's Conclusion that a Ban on Casket Handling Fees Will
Reduce Such Consumer Injury
The FTC implicitly found that a ban on casket handling
fees would reduce consumer injury. The PFDA argues that the ban
will not reduce consumer injury because funeral service providers
can circumvent the ban by creating packages, all of which include
caskets, and offering discounts on those packages. Since only
those people buying a casket from the funeral home would get such
a discount, the person who buys a third party casket would be
paying an indirect fee. Thus, according to the PFDA, the
consumer injury still exists.
On the other hand, the FTC distinguishes direct casket
handling fees from offering discounts to people who buy caskets
from the funeral home. The former is an anti-competitive penalty
(the fee) and the latter is a method used to deal with
competition from third party casket sellers which is pro-
competitive. The fee essentially requires consumers to buy their
caskets from funeral homes, or pay for it anyway. The other
methods (e.g., discounts) represent a way to encourage consumers
to buy their caskets from funeral homes.
As the FTC points out, the purpose of the ban is not to
prevent funeral service providers from recouping overhead costs
or making a profit. Rather, the purpose is to encourage
consumers to exercise choice in the marketplace, especially with
the entrance of third party competitors, and to prevent funeral
homes from effectively prohibiting that choice. The injury the
casket handling fees cause is not measured in terms of dollar
amounts the consumer pays, but in terms of prohibiting the
customer from choosing where he or she buys a casket. Therefore,
the fact that people who buy caskets from third parties may end
up realizing a smaller savings as a result of not obtaining a
discount at the funeral home does not mean that they are still
being injured.
While the "circumvention" methods of avoiding the ban
on casket handling fees does appear to weaken the FTC's position,
it does not destroy it. First, it is evident that the FTC
considered this issue and determined that it was not a
significant enough factor to abandon the amendment. Second,
although it does seem that customers who buy their caskets from
third parties still may end up paying some sort of indirect fee
as a result of exercising that choice, a likelihood exists that
funeral homes will simply restructure their prices such that the
overhead and profits are recouped somewhere other than in the
mark-up on a casket. Moreover, the discounting method is not
anti-competitive like the direct casket handling fee. For all of
these reasons, the FTC's conclusion that the ban on casket
handling fees will reduce consumer injury is supported by
substantial evidence and is not arbitrary or capricious.
The FTC's Conclusion that the Benefits to be Derived from the Ban
Outweigh the Costs
There are several benefits to be realized by the ban on
casket handling fees. Consumers will have increased choice in
the purchase of caskets. Consumers will not be penalized for
exercising that choice. Additionally, competition in the market
for caskets can be expected to increase with the ban in effect,
given the fact that many third party casket sellers went out of
business as a result of casket handling fees. Increasing
competition in the casket market is likely to drive the cost of
caskets down. All consumers will benefit from this result.
The FTC recognized some costs which will probably be
incurred by this ban. Since funeral service providers who now
charge a casket handling fee will have to restructure their
prices, the most significant cost is that many funeral service
providers will probably raise the amount of their non-declinable
professional service fees in order to ensure that they recoup
overhead costs. Therefore, every consumer may end up paying a
little bit more for that fee in the short run. However, the FTC
concluded that the long-term effect of the ban will be increased
competition in the casket market such that prices will eventually
go down and all consumers will pay less. Additionally, the FTC
found the cost to the funeral industry of having to restructure
their pricing methods in order to recoup overhead costs and make
profits was insignificant, especially in light of the fact that
the funeral service industry presented no evidence regarding the
costs it might incur in restructuring its pricing scheme.
The PFDA's main contention with the FTC's cost-benefit
analysis is that it is not tied to any quantitative data.
However, quantitative data is not necessary in such an
evaluation. See Mail Order Rule, 58 Fed. Reg. at 49108, 49109,
16 C.F.R. § 435; American Financial Services, 767 F.2d at 986.
Additionally, much of a cost-benefit analysis requires
predictions and speculation, in any context. An absence of
quantitative data here is not fatal to the FTC's analysis.
Finally, the PFDA asserts that the FTC's conclusion
that the ban on casket handling fees will result in more
competitive prices was flawed. The PFDA argues that since the
original Funeral Rule has not resulted in increased competition,
neither will this amendment. However, evidence showed that while
casket fees had risen in the years since the Funeral Rule went
into effect, the retail price had increased less than the
wholesale price charged to funeral homes by distributors. It
appears, then, that funeral service providers are responding as
expected to the Funeral Rule by not raising retail prices on
caskets to reflect the rise of wholesale prices; since prices
have not risen as much as they could have to retain the same
profit margin, prices have, in effect, been lowered.
Additionally, the advent of the casket handling fee as
a method of dealing with competition has precluded much true
competition from third parties which would ordinarily result in
prices charged being driven down. Therefore, overall, the FTC's
cost-benefit analysis, which lead the FTC to conclude that the
benefits of the ban on casket handling fees outweigh the costs,
was supported by substantial evidence and was neither arbitrary
nor capricious.
The FTC's Conclusion that Consumers Cannot Reasonably Avoid the
Injury Caused by Casket Handling Fees
The final prong of the five-part test involves whether
consumers can reasonably avoid the injury caused by casket
handling fees, thereby making the ban unnecessary. The consumer
injury is the restriction of choice when it comes to buying a
casket and the fact that a penalty is imposed when a consumer
exercises that choice in favor of a third party casket seller,
but against a funeral home. The PFDA argues that since there are
no consumer complaints in the record, consumers are obviously
avoiding the injury, or do not consider themselves "injured" by
the fee.11
However, this argument is premised on the assumption
that consumers who wish to avoid the fee can shop around to find
a funeral provider who does not charge such a fee. That is a
faulty assumption. The reason the FTC promulgated the original
Funeral Rule was because of the particular vulnerability of
funeral service consumers. Funeral consumers are forced to make
many of the choices involved in arranging a funeral in a bereaved
state and often do not have time to "shop around" at the time of
death of a loved one. Consequently, those consumers are in no
position to seek out a funeral service provider who will not
charge them a casket handling fee, if one even exists in their
immediate geographic area.
11
The PFDA also argues that market forces will keep the
amount of casket handling fees down such that consumers can avoid
injury. This argument is irrelevant given that the FTC does not
define the consumer injury by the amount of the casket handling
fee, but rather as the fact that such a fee is imposed.
Further, the studies discussed above show that where
third party casket sellers exist, a significant number of funeral
service providers charge casket handling fees. This indicates
that most consumers who wish to and do purchase third party
caskets will pay a fee for exercising that choice. If the
consumer cannot or will not pay the fee, he or she is forced to
buy the casket from the funeral home. That is no choice.
Therefore, the injury, as defined by the FTC -- restriction on
choice and being penalized for exercising that choice -- cannot
be avoided by consumers. The FTC's conclusion as to the
unavoidability of the injury is supported by substantial evidence
and is not arbitrary or capricious.
CONCLUSION
After careful review of the entire record, it appears
that none of the conclusions the FTC reached was arbitrary or
capricious or unsupported by substantial evidence in the
rulemaking record taken as a whole. Therefore, for all of the
reasons stated above, the petition for review will be denied.