Risks from Antitrust – Legislative Scoop: Keeping our Members Current

Legislative Scoop: Keeping our Members Current

Risks from Antitrust

This is an excerpt from Legal Duties for Directors, An Association Board Member’s Guide to Avoiding Risks While Advancing the Mission, by NARPM^® Attorney Jerry Jacobs, Pillsbury Law firm, Washington, DC.

One of the most serious kind of legal challenge that any association can face is an antitrust challenge. As an Association Director, you should be alert for antitrust risks almost instinctively. The law books are rife with reports of antitrust judgments against associations, and in a few cases against association Directors, going back a century. Defending and resolving an antitrust case often takes years and costs a fortune, not to mention the adverse publicity and diversion from mission while the case is pending. The most acute risk is to trade associations, because the antitrust laws exist to regulate business conduct. But beginning fifty years ago cases have been brought against professional societies as well. Associations formed to advance causes, science, education, or philanthropy have the lowest antitrust risk. Here’s a summary of the policies and programs of associations that can lead to potential antitrust exposure.

Antitrust Generally

The federal antitrust laws are intended to promote open and fair competition in all commercial endeavors. Most fundamentally they mandate that businesses and professionals must make important business decisions – for example setting prices or deciding with whom to do business — independently and not in concert with competitors.

State antitrust laws have the same objectives. Associations are voluntary organizations of members, many of which compete with one another. Virtually any action that an association takes toward private regulation of an industry or profession may raise antitrust issues. Many of these actions are perfectly lawful, such as standard setting, certification of products or professionals, and dispute resolution. Great care must be taken, however, to ensure that an association’s self-regulation activities do not fall within the special unlawful categories established by the courts as “anticompetitive.”

The courts consider an action to be anticompetitive when, on balance, it raises prices or fees or limits the quantity or quality of available goods or services. Prices and fees, in fact, are a particularly sensitive area. Even action that may only indirectly affect prices and fees, such as association-promulgated arrangements on terms and condition of sale, warranties, limitations on the extent or type of advertising, and hours of operation, can also be expected to attract antitrust scrutiny.

Violations of the antitrust laws may be prosecuted by the federal government, either civilly or criminally, and by private persons or firms alleging antitrust injury. Courts may award injunctive relief against violators and may require violators to pay victims three times the financial injury actually suffered (called “treble damages”), plus their attorneys’ fees.

Discussions at Meetings

Meetings may be the most universally common activity of associations. It is through meetings, first and foremost, that associations fulfill their essential mission of assisting members in communicating to one another, networking with one another, and learning from one another. Association meetings are also necessary to carry out the governance functions of associations.

But association meetings also present unique opportunities for violations of the law to occur. Antitrust conspiracies can be, and often have been, developed through discussions at association meetings. Defamation can occur, infringement liability can be incurred, and other legal risks are present. It is obvious that associations are not always in control, and therefore cannot always “police,” the discussions at association meetings. But associations should be careful to ensure that, at least when they are in charge of what is discussed at association meetings, there is due regard paid to the legal ramifications of those discussions.

The law books are rife with reports of antitrust judgments against associations, and in a few cases against association Directors, going back a century.

In the antitrust context, courts have often stretched to find that attendees at meetings have “agreed” upon joint anticompetitive business conduct. It is certainly not necessary, when government or private challengers are attempting sto prove an antitrust conspiracy, to show that the alleged conspirators actually signed a document committing themselves to illegal conduct, or even to show that they agreed clearly in conversations to commit to the conduct. Discussions at meetings
in which the plans for a conspiracy were “signaled” among the meeting attendees, followed by parallel anticompetitive activity of the attendees consistent with the discussions, have been sufficient
to support an antitrust violation.

Thus, in inviting speakers, preparing agendas and minutes, and monitoring discussions at association meetings, the maximum control possible should be exercised to avoid suggestions of antitrust
impropriety.

Membership Decisions

Membership in an association is ordinarily available in one or more categories to entities or individuals meeting criteria set out in the Bylaws. Associations that deny applications for membership, or terminate existing members, run a risk of legal challenge unless the reasons for denial or termination are clear, reasonable, and straightforward ones — for example, nonpayment of dues, failure to meet objective definitions of eligibility, or unwillingness to comply with a reasonable code of ethics. In fact, many associations have been required to defend against legal challenges
resulting from adverse membership eligibility decisions.

In general, the more important membership in an association is for employment, engagement, sales, work assignment, or reimbursement in a business, profession, or field, the more closely a court will scrutinize membership criteria and procedures and the more readily it will overturn what it perceives to be unreasonable criteria or unfair procedures. Associations are not social clubs; membership decisions may well come under legal attack if they even seem to be made based on criteria other than whether the applicant meets the published criteria.

Antitrust laws have often been applied to invalidate denial or termination of association membership. Where a challenger can show that association membership has significant competitive value, and was withheld by the association on arbitrary or unreasonable grounds, the finding of an antitrust violation is likely.

Separately or together with the theory of antitrust liability, the denial or termination of association membership can also be overturned on the theory of “fairness” — failure of the association to afford fundamental “due process.” In most states, basic due process requirements apply to association membership decisions and mandate at least: (1) notice of the basis of the decision to the person whose membership is to be denied or terminated, and (2) opportunity to respond to the association’s notice.

Price or Fee Data

Many associations have as one of their central activities the collection and dissemination of information about prices, costs, credit risks, production or sales levels, or other statistics about
the businesses, professions, or fields represented by the associations. Surveys to collect this data can be undertaken with little legal risk unless the information exchanged becomes the basis for anticompetitive agreements among the recipients of the information. Association surveys must not be used to facilitate illegal agreements among members to fix prices or fees; establish uniform
production or service levels; allocate markets or customers; or boycott suppliers, competitors, clients, or customers. There is also the risk that dissemination of inaccurate data could involve
defamation.

Steps should be taken to minimize the ability of members to use association-published statistical information for illegal ends: (1) only gross sales, or average prices or fees, or other composites
should be reported; (2) no composite data should be reported in a category where only a few submissions were received; (3) individual submissions should be accorded confidentiality; (4)
only past information, not projected future prices or fees, should be reported; (5) participation in any statistical program should be voluntary; and (6) the association should not make exhortations
or recommendations for action by members based on the information.

Codes of Ethics

Many associations promulgate and enforce codes of ethics for their memberships. These codes set forth both desirable goals and behavioral requirements considered essential for the protection of the public and for the optimal development of the association’s field. Enforcement ordinarily occurs according to a detailed set of procedures intended to ensure objectivity and fairness. Both the establishment of ethical requirements and their enforcement are legally sensitive areas.

Some code of ethics provisions are especially suspect; examples include provisions that: (1) set or suggest maximum or minimum prices or fees; (2) limit or discourage non-deceptive advertising; and (3) suggest boycotts of suppliers, competitors, or customers/patients/clients. But many ethical rules of associations are pro-competitive — they result in better products or services, increased availability or access, or lower prices or fees. All ethical rules must be evaluated to ensure that the motives and effects enhance competition and not reduce it. In any challenge the issue will usually be whether the code provisions were “reasonable.”

It is equally important that association codes of ethics be promulgated and enforced using adequate procedures. Associations can impose discipline, of course, only upon their members. In doing so, the law requires that associations be careful to use procedures to assure “due process.” Minimal due process includes: (1) written notice outlining the alleged violation, possible sanctions, and right to respond; (2) unbiased review of all charges and evidence from both the complaining party and the
responding party; and (3) the right to appeal an adverse decision to an unbiased separate decision-making body.

Standards , Testing , and Certification

Since colonial times, associations have issued statements on common terminology, simplification of parts or styles, and uniform design or performance specifications. Tens of thousands of association-promulgated standards are now in place. Associations that have developed standards have often taken the next steps and engaged in testing and certification of products or services against the established standards. These endeavors have manifest benefits: they raise the level of competition, provide common targets and goals, simplify ordering and communication, help assure interchangeability of parts, and provide assurance to the public that products and services with association certification meet standards of high quality. Programs of privately issued standards, testing, and product/service certification are always voluntary — there is no compulsion of law for compliance or participation; nevertheless, government agencies have often adopted association product or service quality programs through mandatory regulations.

The basic legality of association-sponsored standards, testing, and product/service certification programs has frequently been affirmed by courts. But legal challenges have also resulted in
adverse rulings, from which some general guidelines can be distilled: (1) the programs must not be used as vehicles for raising, lowering, or stabilizing prices or fees; (2) they must not result in excluding competitors; (3) they must not limit production or availability; (4) performance standards are preferable to design standards; (5) standards should reflect state-of-the-art technology; (6) the programs must be voluntary; (7) even nonmembers should have access to the programs; and (8) interpretation of standards, testing, or certification requirements should be non-biased.

Professional Certification

Associations of individual professional members, whether of traditional licensed professionals or others, very often operate or sponsor professional certification programs. The association will
promulgate a list of educational, experience, or testing criteria as the basis for its certification; and then the association will assess candidates’ qualifications against the criteria, often including a certification examination. Established association professional certification can often be a crucial, or even essential, credential for professional employment or engagement, reimbursement for
services, or advancement in the field.

Antitrust-based challenges have often been leveled against professional certification programs when those denied a credential have maintained that the criteria were unreasonable or assessments were unfair. Two elements are key to avoiding antitrust or other legal problems in this area. First, certification criteria should be valid and appropriate — reasonable — as the bases for measuring the professional competence of candidates.

Any element of economic or competitive motive in establishing the criteria runs risks. Second, and equally important, there must be complete fairness — due process — in evaluating applications,
administering exams, and scoring decisions. That means unbiased individuals must accord fair procedures to all candidates equally.

Antitrust Stories from Life

“To Advertise or Not To Advertise ” How do you as an Association Director make sure that antitrust risks are avoided? Self-regulation programs such as codes of ethics certainly bear close scrutiny. Here’s how one association had a bad result when it thought it was doing good.

The graphic arts market — for posters, prints, and reproductions — had been plagued by pirated versions of original art.  Some of the fakes were so good that even experts had trouble distinguishing them from the originals, which of course are far more valuable than the fakes. So a group of art dealers convinced their national association to do something about the problem.

A list was created of graphics arts suppliers who were known to have dealt in pirated art. The association published the list and asked members to agree, as a matter of compliance with the association’s code of ethics, to not deal with any of the companies on the list. The program was challenged by a “black-listed” art importer; the case ultimately went all the way to the US Supreme
Court, which decided that no private association has the right to regulate markets, even to try to exclude firms known to be engaged in illegal conduct.

“I Don’t Care What You All Do, I’m Going Ahead”

Meeting discussions that might seem innocuous can have devastating ramifications if they produce anticompetitive results. This story is about association Directors who thought they were honoring the law but found out, to their horror, that the opposite was the case.

A local association of automobile dealers included on its governing board the owners of all of the larger dealerships in the area. The Directors met at dinner once a month to discuss association
business, as well as business conditions in the field. At one such meeting a Director spoke up to complain about the practice, then common in the area, for dealers to add $100 to the price of each new car sold to account for “dealer preparation.” He noted that his costs were rising rapidly and squeezing the profit he could realize from new car sales. The Director announced that he was immediately going to start charging $200 for “dealer preparation” on each new car sale. He said he didn’t care what other Directors did. And he promptly left the meeting. In fact, in the coming
weeks nearly all of the Directors who had attended that dinner meeting raised their “dealer preparation” charge from the once-standard $100 to $200, which became the new standard in the area. The Department of Justice Antitrust Division obtained criminal indictments against all of
those Directors who either led the change or “followed the leader.” Most eventually served time in jail.

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Residential Resources: February 2018 Issue | Volume 29 | Number 2