October 2015

FTC Continues Focus on Antitrust Violations in Association Codes of Ethics

6 min

On September 24, 2015, the Federal Trade Commission (FTC) announced a proposed consent order against the National Association of Animal Breeders (NAAB). NAAB's members collect, process, market, and sell dairy and beef cattle semen for artificial insemination (AI). In the complaint accompanying the order, the FTC alleges that NAAB's code of ethics limits competition among NAAB members by prohibiting comparative advertising and limiting price-based advertising. The FTC's proposed consent order eliminates those provisions and requires that NAAB adopt certain safeguards to avoid further potential anticompetitive conduct.

Although trade and professional association codes of ethics—and similar well-intentioned restrictions on association members, or on certificants or accreditants (if a certification or accreditation program is involved)—are generally viewed as promoting competition, the FTC and the U.S. Department of Justice (the primary federal antitrust enforcement agencies) continue to scrutinize association restrictions that directly or indirectly prevent members from competing against each other—regardless of the size of the association. In January 2015, for example, the FTC announced consent orders against the Professional Lighting and Sign Management Companies of America and the Professional Skaters Association, finding that the associations' bylaws restricted solicitation of a competing member's customers, and, in the case of the Professional Lighting and Sign Management Companies of America, the association's bylaws restricted price competition.

With respect to NAAB, the Commission's complaint alleged that the NAAB code of ethics restricted competition in those markets by regulating the advertising used by NAAB members. Specifically, the NAAB code of ethics prevents its members from:

  1. Naming members or other competitors when making statements comparing the products and services of a member with the products and services of any other member or competitor; and
  2. Publicizing or disclosing price information relating to the purchase or sale of animals.

The FTC attached to the complaint several comparative advertisements published by NAAB members to demonstrate how the code of ethics had resulted in members publishing advertisements that avoided naming competitors.

The Commission also alleged that NAAB established a dispute resolution system to enforce its code of ethics. Accordingly, the FTC found that advertising limitations in NAAB's code of ethics restricted trade by prohibiting the disclosure of truthful and nondeceptive information by restricting comparative advertising among AI organizations.

The FTC's proposed 20-year consent order prevents NAAB from regulating its members' advertising or otherwise restricting or guiding members' publication of information. In addition to standard injunction relief and notification requirements, the order also contains provisions requiring that NAAB: (1) appoint antitrust counsel for the duration of the order; (2) enable members to confidentially report violations and discipline NAAB personnel who violate the order; (3) train its board members, staff and others regarding compliance with antitrust laws; and (4) conduct a presentation on the order and antitrust compliance at the NAAB annual convention. The proposed consent order is subject to public review, with comments due by October 26, 2015.

Suggested Best Practices to Minimize Potential Legal Risk

As has been covered in previous Venable articles (available here and here), trade and professional associations' codes of ethics and other membership restrictions have been a recent focus of FTC antitrust enforcement. However, there are a number of best practices that an association can follow to limit potential risk when implementing a code of ethics or similar program or structure imposing competitive restrictions on the association's membership, certificants, or accreditants (through the bylaws or otherwise). At the top of the list is adopting an antitrust compliance policy and working with antitrust 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:

  • An 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;
  • Requirements for employee training and distribution of the policy to the association's officers, directors, employees, and, in certain cases, committee members and other volunteers, consultants, and other representatives;
  • Requirements that association meetings have an agenda circulated in advance, and that minutes of all meetings properly reflect the actions taken at the meeting; and
  • A requirement that any committee, board, or staff recommendations or decisions that potentially impact competition 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, the association should keep the following best practices in mind:

  • Codes of ethics or other membership restrictions 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 or membership provision. The association should document the development and reasonableness of the proposed code or membership restrictions. Code of ethics, membership criteria, and similar provisions should be no more stringent or rigid than necessary to ensure that minimum acceptable levels of conduct are met;
  • The code of ethics and other restrictions on the association's membership should be reviewed and updated periodically to ensure that they are current. In addition, associations should document any and all complaints or concerns about these documents and resolve them as appropriate;
  • A code of ethics and other restrictions on the association's membership should be clear and unambiguous, reasonable, fair, and objective. Equally importantly, the process for enforcing them 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; and
  • 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 other competitive restrictions on the association's membership, or certificants or accreditants, or is looking to implement such restrictions, should take steps to ensure that the restrictions serve a legitimate and pro-competitive function, are not structured any more restrictive than necessary to further this function, and do 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.