You are enjoying yourself at your association's annual kick-off cocktail party when two of your former colleagues who now work for different competitors come over to say hello. Quickly the conversation turns to the smaller bonuses each of them received this year. All three of you discuss the problems that the industry is facing and one of your competitors complains about downward pricing pressure from customers. One competitor says to no one in particular, "if only we didn't have to cave in to our customers." The other competitor smiles and looks to you for a response. What do you do? If you are smart, you immediately excuse yourself from the discussion. Why? Because this is the type of communication that could get you into trouble under the antitrust laws. In this scenario, the participants in the conversation did not reach a specific agreement– in fact, no one even mentioned coordinating any type of conduct. Yet, if prices were to rise following the annual meeting, the conversation could be used as evidence that something fishy had occurred.
Does this mean you shouldn't talk to your competitors at trade or professional association meetings? Of course not. That would not be practical, nor would it be useful to the association. It is important to understand, however, the antitrust risks inherent in association activities so that you know how to minimize them.
Although trade and professional associations are recognized as valuable tools of American and global business, they are a particularly susceptible to accusations of antitrust abuse. Associations are, by definition, combinations of competitors. As one former chief of the Antitrust Division of the U.S. Department of Justice underscored, "[t]he members of a trade association, singly and as a group, are sitting on an antitrust powder keg!"
Why is Compliance with the Antitrust Laws Important?
Aside from the fact that your association should be committed to abiding by the laws of all jurisdictions in which it operates, the penalties for violations of the antitrust laws are severe –for the association, its members, and individuals. Under the U.S. antitrust laws, members of the association can be fined up to $100 million per violation, but courts have discretion to impose even higher fines. Courts or government antitrust agencies may impose permanent restrictions limiting association and member activity, including disbanding the association altogether. In addition, private lawsuits by customers or competitors who are able to show that they were harmed by the unlawful actions may recover damages in multiples of a government-imposed fine. Individuals also may face significant penalties for violating the antitrust laws. Because violations of the Sherman Antitrust Act are felonies, individuals can be imprisoned for up to ten years, fined up to $1 million, or both, per violation.
Dealing with a government antitrust investigation or a private antitrust lawsuit is expensive, time-consuming, and distracting. An investigation or lawsuit can seriously damage the reputation of your trade or professional association, its members, and individuals. It is important to emphasize that these penalties, damages, and distractions are avoidable by understanding in very basic terms what the antitrust laws require, and by consulting with legal counsel whenever you are in doubt.
Understanding the Antitrust Laws
The U.S. antitrust laws of principal concern to companies and individuals that participate in association activities are Section 1 of the Sherman Act and Section 5 of the Federal Trade Commission Act. These laws prohibit all contracts, combinations, and conspiracies that unreasonably restrain trade. In addition, all U.S. states have adopted laws that address antitrust and fair trade matters. State laws usually are interpreted and applied in a similar fashion to the federal laws. In general, strict compliance with the federal antitrust laws will result in compliance with the state laws.
The antitrust laws apply only to "concerted" action or "agreements." This means that, for the most part, as long as a company is making independent business decisions, it should not have exposure under the antitrust laws. The antitrust problems arise under Section 1 of the Sherman Act when companies coordinate or agree on certain conduct. It is not necessary for the agreement to be explicit; an agreement may be inferred from actions taken in parallel without an actual express verbal agreement, handshake or writing. It is important to remember that, like in the example above, comments made in an informal environment may be used as one type of proof of an agreement, even though the parties' subsequent actions were taken for sound business reasons.
Five Pitfalls for Associations
1. Price Fixing
In the example above, it would take more than this isolated encounter to prove price fixing. In order to have a price fixing violation, competitors must agree to control or stabilize prices or agree to the terms and conditions of sale. In most cases, price fixing agreements are not explicit, but are proven through circumstantial evidence such as remarks noted in meeting minutes, or comments written in e-mails or telephone logs. Price fixing is considered unlawful under the antitrust laws regardless of the reasons why it is undertaken or the effect on competition (per se unlawful).
To minimize the risk of price fixing, it is essential that competitors refrain from communicating about present or future prices, pricing policies, bids, discounts, credit or service charges, promotions, terms or conditions of sale, royalties, choice of customers, territorial markets or production quotas. As a general rule, if you are concerned that your communications with competitors may touch upon any of these issues, you should refrain from further discussion and consult counsel immediately.
2. Limiting Competition
One of the most significant antitrust concerns for an association is that by meeting together, competitors will find ways to reduce competition between them by raising prices, decreasing output, or inhibiting research and development. Had the competitors in the example above agreed not to solicit each others' customers or sell within each others' territories, they would have violated the antitrust laws through a market allocation scheme. There are various other methods of limiting competition, such as agreeing to exclude nonmember competitors from the association without a reasonable, objective reason and process for doing so (see discussion below), boycotting or refusing to deal with particular suppliers customers, or bid rigging. Like price fixing, each of these activities are per se unlawful, which means that on its face the conduct is illegal without further inquiry as to the business justification for the conduct or the actual impact on competition. In addition, an association cannot use its code of ethics to impose restrictions on members’ ability to compete, such as through prohibitions on advertising of prices, quality, or other factors.
The simplest way to avoid violating the antitrust laws through limiting competition is to simply not engage in any of these activities or discussions. If any such proposals surface during association meetings, the meeting chair should immediately end the discussion, remind the attendees of the antitrust issues, and contact legal counsel immediately. As a preliminary matter, agendas should be prepared for all trade or professional association meetings, preferably reviewed by antitrust counsel, and strictly adhered to. In addition, if you are unsure if a particular activity under discussion at a meeting or other association event raises antitrust concerns, you should refrain from further discussions and contact legal counsel. Finally, it is always a good idea to have antitrust counsel present at association meetings if there is a potential for discussion of issues that touch on any prohibited conduct.
3. Information Exchanges
- The data collected should be historical only. Present and future pricing data, for example, could be used for illegal price fixing.
- The data should be collected by association staff or other independent third-party collectors.
- The data submitted should be kept confidential and presented only in aggregated form with no individual members identified. No member should be given access to the data submitted by another member.
- Member participation in providing information must be voluntary.
- Each member should separately analyze the data and make independent business decisions based on the data.
4. Standards Setting
Developing industry standards is an acceptable way for professional societies and trade and professional associations to enhance safety, quality, and functional uniformity. Association standard setting may violate the antitrust laws, however, when its purpose is to restrict competition, restrict entry into the industry, deter innovation, or otherwise inhibit the ability of non-participants to compete. For example, in 1998, the Supreme Court found that a member of a fire safety association violated the antitrust laws by influencing the association to adopt a biased safety code to benefit its product and disfavor competing products.
Associations should take certain precautions when evaluating and adopting a standard to ensure that the association's position accurately reflects its member interests. In articulating an association position on any standard, the association should consider all relevant opinions, provide a sound technical basis for the standard, base the standard on legitimate objective justifications, and ensure that the standard is reasonably related to the goals it is intended to achieve. In addition, the standard should not be more extensive than necessary to accomplish these goals. Over time, the association may need to revise its position on the standard to reflect the evolving views of members and the current state of the technology. Finally, it is essential that members disclose any proprietary interest (for example, a patent) that they may have in a particular standard before the association adopts the standard. Failure to disclose an intellectual property and other interests in a specific standard may result in an antitrust violation. In 2002, the Federal Trade Commission filed an antitrust suit against a semiconductor memory device manufacturer for allegedly engaging in an anticompetitive scheme to participate in the work of the industry association standards setting process without disclosing that it was actively working to develop technology (and, in fact, possessed a patent and several pending patent applications) related to the relevant standard that the association ultimately adopted. The case is still in litigation.
5. Membership Restrictions
Trade and professional associations are free to adopt clear, reasonable, and objective standards for membership. Assuming that membership in the association is essential to compete in the industry, however, denial of membership to an eligible applicant may raise antitrust issues. Similarly, denial of access to association benefits or services to nonmembers may implicate the antirust laws if the benefits or services are essential or material to compete effectively. In that situation, the association may be required to provide access to those benefits necessary to effectively compete. The association is permitted to charge nonmembers a fee for services that are free to association members or charge a higher fee for nonmembers.
To avoid raising antitrust concerns related to membership restrictions, your association should clearly articulate the reasonable, objective criteria for membership. In addition, if trade or professional association membership is essential to compete, the association should allow nonmembers access to its benefits and services for a reasonable fee. Before opening all of its benefits up to nonmembers, however, your association should consider whether membership is, in fact, essential to compete in the industry or profession. If, for example, there are competing associations in the industry that offer comparable membership benefits, it is unlikely that membership in any one of them would be necessary to compete.
The Best Way to Avoid Antitrust Problems
Following the advice above will go a long way in reducing your association's antitrust risks, but there are still other antitrust pitfalls that your associations may face. To further minimize your trade or professional association's risks, your members must understand the antitrust laws and the types of activities that implicate them. To this end, your association should have an antitrust compliance program in place. The level of intensity of your compliance program may vary based on a number of factors such as the antitrust risks inherent in your industry; whether there is a history of antitrust problems in the industry or by members; the size of your trade or professional association (if your membership accounts for a significant percentage market participants, it likely has market power. Without market power, only per se offenses violate the antitrust laws); and the scope of the association's activities. Antitrust compliance programs may be very basic (reading of an antitrust statement at the beginning of each meeting to remind members of the antitrust laws) or comprehensive (requiring members to enroll in antitrust training and ensuring legal counsel to be present at all meetings). Antitrust counsel can help you assess your association's antitrust risks and fashion an appropriate compliance program.