The Federal Trade Commission (FTC) announced consent orders on December 23, 2014 requiring the Professional Lighting and Sign Management Companies of America (PLASMA) and the Professional Skaters Association (PSA) to eliminate from their bylaws provisions that limited competition among each association's members. These orders, along with two similar actions earlier this year, are important reminders that trade and professional association codes of ethics and membership restrictions can present significant antitrust risk if not structured properly.
Although association codes of ethics are generally viewed as procompetitive, the FTC and the U.S. Department of Justice (the primary federal antitrust enforcement agencies) will scrutinize any restriction that directly or indirectly prevents members from competing against each other – no matter the size of the association. For example, take the action against PLASMA, an association representing approximately 25 member firms that specialize in commercial lighting and electrical sign installation and maintenance. According to the FTC, the PLASMA bylaws:
- Prohibited members from providing services in the designated territory of another member, unless the other member first declines to perform the work;
- Included a price schedule for any work performed in the designated territory of another member; and
- Barred any member, for one year following termination of membership, from soliciting or competing for the customers (or prospective customers) of another member.
Although the FTC challenged the first provision, the proposed consent order does not prohibit PLASMA from requesting that its members identify any geographic region(s) within which the members can quickly respond for service, so long as there are no restrictions on the number of members that may identify a particular geographic region as a "quick response" region.
The bylaws also established a committee to resolve alleged violations of the bylaws, as well as a process through which PLASMA could sanction violations of the bylaws.
In the PSA matter, the FTC raised similar concerns regarding a "no-solicitation" provision and the association's enforcement mechanism.
Suggested Best Practices to Minimize Potential Legal Risk
The FTC consent orders with PLASMA and PSA highlight that the costs and burdens of defending a government antitrust investigation far outweigh the costs of implementing an antitrust compliance program. Fortunately, there are a number of best practices that an association can follow to limit potential risk when implementing a code of ethics or similar type of program. At the top of the list is adopting an antitrust compliance program and working with antirust counsel to review and clear any proposed codes of ethics or similar membership restrictions.
A formal antitrust policy should include, at a minimum, the following provisions:
- Overview of antitrust laws and explanation of prohibited types of conduct;
- Affirmation of the association's commitment to compliance with federal and state antitrust laws;
- Requirement for employee training and distribution of the policy to the association's officers, directors, employees, and representatives;
- Requirement that association meetings have an agenda circulated in advance, and that minutes of all meetings properly reflect the actions taken at the meeting; and
- Requirement that any committee, board, or staff recommendations or decisions that potentially impact the market be reviewed in advance by in-house or outside legal counsel.
With regard to membership codes of ethics and other similar restrictions on the association's membership (which may also take the form of membership criteria in the bylaws or otherwise), the association should keep the following best practices in mind:
- 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 of products or services.
- There should be a valid, objective reason for each code provision. The association should document the development and reasonableness of the proposed code provisions. Code provisions should be no more stringent or rigid than necessary to ensure that minimum acceptable levels of conduct are met.
- 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 resolve complaints or concerns as appropriate.
- A code of ethics should be clear and unambiguous, reasonable, fair, and objective. 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. Due process should be built into the program.
- Associations should maintain strict confidentiality with respect to all adverse allegations, complaints, actions, and proceedings that arise in connection with the process.
Finally, it is important for associations to recognize that codes of ethics and other membership restrictions can raise legal concerns in the areas of due process, defamation, and tortious interference. Common law due process, for example, requires associations to provide notice of potentially adverse decisions to members or prospective members, an opportunity for such persons to defend themselves, and an opportunity to appeal any adverse decision.
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Any association that has a code of ethics, or is looking to implement one, should take steps to ensure that the code serves a legitimate function and does not expose the association to potential antitrust or other legal risk. Spending time on these issues upfront can save costs and headaches in the long run.
This article is not intended to provide legal advice or opinion and should not be relied on as such. Legal advice can only be provided in response to a specific fact situation.