August 10, 2004

Association Codes of Ethics: Identifying Legal Issues and Minimizing Risk

10 min

Legal Issues Regarding Association Codes of Ethics

Although courts are usually reluctant to interfere with internal association decisions, an association's establishment of any set of restrictions or qualifications on membership may raise legal concerns, primarily in the areas of antitrust, due process, defamation, negligence, and tax.

A. Antitrust

From an antitrust1 perspective, for instance, under the Sherman Act, an association will be at risk of antitrust liability if its enforcement of its code of ethics against a member or prospective member is held to be an unreasonable restraint of trade in the relevant market and that restraint causes antitrust injury. The courts and antitrust enforcement agencies have agreed that the mere existence of membership qualifications and standards will not necessarily be considered unreasonable. For example, geographic location, the functional level served, or the type of service performed by the member are routinely considered to be reasonable, pro-competitive restrictions -- essential definitions of the profession or industry that is represented by the association.

However, unreasonable, anti-competitive restrictions may be viewed as prohibited "group boycotts" or "concerted refusals to deal." Obvious examples would be refusal to admit members who offer discounted prices to their customers or who do business with "disfavored" suppliers or customers.

Under the two traditional modes of antitrust analysis (rule of reason and per se illegal), the key determination made by the courts in determining whether a challenged activity violates antitrust law is whether the restriction, on balance, promotes or suppresses competition. (It is far more preferable for an association to have a challenged activity viewed under the rule of reason, as it is much more difficult for a plaintiff to demonstrate the requisite anti-competitive injury using the rule of reason.)

Among the more problematic types of membership restrictions are those which seek to guard against immoral or unethical behavior.2 When such "ethical" restrictions are imposed, it is important not only that the restrictions themselves are reasonably tied to a pro-competitive purpose (e.g., discouraging fraud or deception in a profession), but also that there is ample procedural fairness offered to the affected member or applicant.3 Thus, antitrust commentators have strongly recommended that to ensure fairness and uniformity, restrictions and the process for enforcing the restrictions be set forth plainly and objectively in association documents.4 By doing so, associations are able to put members and applicants on notice as to the types of restrictions that apply, and associations are better able to defeat any future assertion that they acted arbitrarily. (Even when an association membership restriction may have strong pro-competitive justifications, if the restriction is applied arbitrarily or subjectively, the association may still be at antitrust risk.5 )

B. Due Process

In addition to antitrust issues, associations also may incur legal risk for violating common law "due process" claims based on a lack of either substantive or procedural fairness. Substantive fairness requires the use of objective standards reasonably related to a legitimate organizational purpose, while procedural fairness requires the uniform application of such standards.6

Procedural due process is a doctrine that essentially requires associations to provide notice of a potential adverse decision to a member or prospective member, to provide an opportunity for the affected individual to respond and defend himself or herself, and to provide the individual with an opportunity to appeal any adverse decision.7 Of course, it is incumbent on an association to both have the relevant procedures in place and actually follow all due process obligations it places on itself through such procedures.

C. Defamation

Defamation is the oral utterance or written publication of false or misleading facts, or false or misleading implied facts, that are derogatory or damaging to an individual's, entity's or product's reputation. Accusing someone of dishonesty or other moral deficiency, or of professional or business deficiency, raises particularly significant risks of defamation liability. In the self-regulation context, this risk is most likely to arise: (i) when an individual or entity is denied or expelled from membership, and then damaging statements are made (to one or more third parties) by a representative of the association about the individual or entity; or (ii) when sensitive, potentially damaging, information about a member or applicant becomes known to the association during the code of ethics enforcement process, and that information is subsequently disclosed to one or more third parties (intentionally or unintentionally).

D. Negligence

In general, courts will give great deference to internal association decisions, particularly those involving self-regulation.8 Still, reliance on the fact of membership, certification or accreditation of a professional, entity, product, or service can, in some cases, cause the association that granted the membership, certification or accreditation to be held liable when a patient, client or customer suffers harm (physical, financial or otherwise) at the hands of the member. The most common claim is that the association was negligent in granting membership, certification or accreditation and should therefore be liable for resulting injuries.

This liability risk to third parties generally means negligence liability (a form of tort liability). Court decisions holding associations liable for negligence in the self-regulatory context are relatively rare.9 This type of liability is subject to a number of conditions and remains infrequent, although there have been several high-profile cases in recent years holding associations liable for negligence arising from their self-regulatory programs. In short, an association generally will be found liable under the tort of negligence only if the injured party can prove all of the elements of negligence liability -- duty, breach of duty (negligence), reliance, and causation, along with proof of damages (injury).10

E. Tax

It is conceivable -- although very unlikely -- that an association that is exempt from federal income tax under Internal Revenue Code of 1986 Section 501(c)(6) could run afoul of Code restrictions that prohibit such organizations from providing substantial "particular services" to members. Such a restriction might apply in the event that the Internal Revenue Service ("IRS") reviewed a particular association's code of ethics enforcement program and determined that, in fact, the program's primary purpose is the mediation of intra-membership business disputes. An association would only be in danger of losing its tax-exempt status if the IRS were to determine that the activity constituted greater than 50 percent of the association's total activities. If the questioned activity accounted for less than 50 percent of the association's total activities, the IRS still might seek to tax fees received by the association in exchange for the provision of such services as unrelated business income.

Suggestions to Lessen Legal Risk

There are a number of important steps that an association may take that will lessen its legal risk when it offers and enforces a membership code of ethics:

A. Ethical codes should be clear and unambiguous, reasonable, fair, and objectively grounded -- care should be taken to ensure that valid, objective bases support each code provision. Code provisions should never be arbitrary or capricious, or vague or ambiguous, and procedures should be developed that document the development and reasonableness of, and the objective basis for, proposed code provisions.

B. Code provisions should be no more stringent or rigid than necessary to ensure that minimum acceptable levels of conduct are met.

C. Specific commercial or economic considerations should play no role in the setting or application of the code provisions. In addition, codes of ethics should never be created or used for the purpose of raising, lowering or stabilizing prices or fees, excluding competitors from the market, or limiting the supply or products or services.

D. Prior to finalizing code of ethics provisions, associations should provide interested parties with notice of the proposed provisions and an opportunity to comment, and then fairly and objectively consider such comments in finalizing the code of ethics.

E. The code of ethics should be reviewed and updated periodically to ensure that it is current. In addition, associations should document any and all complaints or concerns about the code of ethics and act on such complaints or concerns as appropriate.

F. There must be no bias, partiality or inconsistency in establishing or operating the program. The process must be objectively and uniformly administered, without subjectivity, favoritism or discrimination. The rules of the process must be scrupulously, consistently and objectively followed by those administering the program.

G. Due process should be built into the program. Before discipline is enforced, individuals who would receive such discipline should be provided with: (i) notice of an adverse decision and a meaningful opportunity to respond to the notice, (ii) a hearing before a panel of peers, none of whom has a direct economic or personal interest in the outcome of the proceeding, (iii) the right to be represented by another person, including an attorney, and to submit evidence and arguments in defense, (iv) the right to examine the evidence and to cross-examine witnesses (if applicable), (v) the right to a written decision explaining the reasons underlying it, and (vi) the right to appeal an adverse decision to a higher-level decision-making body within the association. Proceedings of this nature should remain strictly confidential.

H. Associations should require full disclosure by those involved in the ethics enforcement process of any factor that might be considered bias or a conflict of interest, and should require recusal or removal if a bias or conflict is particularly severe or pervasive. Generally, reduced volunteer involvement and increased association staff involvement may assist in objectivity and the absence of bias.

I. All decisions should be based completely and exclusively on the record of the review and not on extraneous, anecdotal, subjective, or other outside sources of information.

J. Associations should maintain strict confidentiality with respect to all adverse allegations, complaints, actions, and proceedings that arise in connection with the process.

K. Associations should avoid any implicit or explicit guarantee or warranty of members. To this end, avoid "puffery," do not overstate how a professional or company who is a member of the association performs, and do not use superlatives such as "never fails" or "safest" in describing those that are members, and do not allow members to express or imply that they are endorsed by the association by virtue of being accepted as a member.

For more information, contact Mr. Tenenbaum at or Mr. Constantine at





1 The primary federal antitrust statutes that are relevant to association membership restrictions are Section 1 of the Sherman Act and Section 5 of the Federal Trade Commission Act.
2 See, e.g., National Society of Professional Engineers v. United States, 435 U.S. 679 (1978).  An association for professional engineers sought to enforce an ethical restriction on members engaging in competitive bidding, which the U.S. Supreme Court held to be in violation of Section 1 of the Sherman Act.
3 Pretz v. Holstein Friesian ss'n of America, 698 F. Supp. 1531 (D. Kan. 1988).
4 MacArthur, Associations and the Antitrust Laws, p. 38 (U.S. Chamber of Commerce, 1996).
5 Silver v. New York Stock Exchange, 373 U.S. 341 (1963). An association's denial of membership must be pursuant to fair procedures.  See, also, Northwest Wholesale Stationers, Inc. v. United States, 435 U.S. 679 (1984), holding that while procedural safeguards are not always necessary to escape antitrust liability, they may still be relevant.
6 See, e.g., Medical Institute of Minnesota v. National Association of Trade and Technical Schools, 817 F.2d 1310 (8th Cir. 1987).
7 In general, due process is only owed to a person or an entity that would suffer some form of harm based on an association’s disciplinary action.  While for other legal reasons (e.g., avoiding claims of negligence), it is important to treat complaints about association members with seriousness and objectivity, the "complainants" in an association’s code of ethics program are generally not the subject of the association’s review, and do not stand to suffer direct harm by an association's decision in its code of ethics enforcement process.
8 See, e.g., Wilfred Academy v. Southern Association of Colleges and Schools, 957 F.2d 210 (5th Cir. 1992). This case involved an association’s decision to deny a college accredited status.  According to the court in this decision:  "In reviewing an accrediting association’s decision to withdraw a member’s accreditation, the courts have accorded the association’s determination great deference. ...Courts give accrediting associations such deference because of the professional judgment these associations must necessarily employ in making accreditation decisions."
9 See., e.g., Keams v. Tempe Technical Institute, 110 F.3d 44 (9th Cir. 1997).  The court held in this case that an association has no duty to end-users of services provided by institutions that were accredited by the association.
10 Virtually all of the relevant cases in this regard are related to association certification, accreditation and establishment of product safety standards. We are not aware of any court decisions in which an association was held liable for merely allowing an entity (whose negligence caused harm to some third party) to become or remain a member of the association, although the legal principle is the same.