Professional and Trade Association Codes of Ethics Can Lead To Antitrust Trouble

Davis Wright Tremaine LLP

Professional and trade associations contribute to the public welfare in many ways, including disseminating information, promoting research, developing standards and spurring industry initiatives. But such associations generally are composed primarily of actual or potential competitors, and sometimes seemingly benign conduct—including even actions intended to promote the ethical conduct of an association’s members—can have untoward consequences for third parties, association members and the association itself, including potential antitrust liability. The recent announcement by the Federal Trade Commission (FTC) of consent decrees entered into by two professional associations—the first representing music teachers, and the other representing legal support services providers—highlights this risk and the need for professional and trade associations to guard against their codes of ethics, and also their policies, standards, rules and procedures, being co-opted for potentially anticompetitive purposes.

Trade and professional associations always have had to guard against the possibility that some members might carry out concerted anticompetitive schemes through use of association meetings and processes. For example, in In re: Plasma-Derivative Protein Therapies Antitrust Litigation, Civ. No. 09-C-7666, MDL No. 2109 (N.D. Ill., Feb. 9, 2011), hospital groups claimed that medical product makers CSL Ltd. and Baxter International, and their co-defendant Plasma Protein Therapeutics Association (PPTA), took part in a conspiracy, including secret meetings among industry rivals carried out through and in coordination with PPTA, to artificially raise the price of plasma-derivative protein therapies and to shrink the supply of plasma products even as demand for them grew. In denying motions to dismiss, the district court rejected the defendants’ assertion that their alleged misdeeds could be innocently explained as the result of independent pricing and production decisions, finding that the complaint sufficiently and plausibly alleged that the market for plasma products was “ripe for collusion.” Thereafter, CSL announced that it and PPTA had settled, with news reports stating that CSL agreed to pay $64 million to exit the antitrust litigation.

Allegedly anticompetitive schemes sometimes have played out through more benign, and even seemingly laudatory, conduct, including the codes of ethics adopted and enforced by associations. Although these codes generally are intended to promote lawful and ethical conduct by an association’s members and inspire the confidence of the public, they occasionally have been commandeered to serve more nefarious purposes. Two recent enforcement actions by the Federal Trade Commission reveal how associations’ codes of ethics, and conduct undertaken pursuant to such norms, can lead to potential antitrust liability.

The MTNA and CALSPro Consent Decrees
In these cases, the FTC asserted that the professional associations had adopted code of ethics provisions that limited competition among their members in violation of Section 5 of the FTC Act. By no means is this the first time that federal and state antitrust enforcement has been targeted at professional associations’ codes of ethics, with previous actions having been brought against associations of doctors, engineers, social workers, lawyers and realtors, among others. See, e.g., Inst. of Store Planners, 135 F.T.C. 793 (2003) (challenging restraints on price competition); Nat’l Acad. of Arbitrators, 135 F.T.C. 1 (2003) (restraints on solicitation and advertising); Am. Inst. For Conservation of Historic & Artistic Works, 134 F.T.C. 606 (2002) (restraints on price competition); Nat’l Soc’y of Prof’l Eng’rs, 116 F.T.C. 787 (1993) (restraints on advertising); Nat’l Ass’n of Social Workers, 116 F.T.C. 140 (1993) (restraints on solicitation and advertising); Am. Psychological Ass’n, 115 F.T.C. 993 (1992) (same); Nat’l Soc’y of Prof’l Eng’rs v. United States, 435 U.S. 679 (1978) (ethics restriction on competitive bidding); Goldfarb v. Va. State Bar, 421 U.S. 773 (1975). In the FTC’s view, “[c]ompeting for customers, cutting prices, and recruiting employees are hallmarks of vigorous competition,” and restrictions on such competition—even if articulated in professional associations’ ethics codes—can be unlawful absent a demonstrated procompetitive justification.

The FTC found no such justification for the challenged ethics provisions of the Music Teachers National Association, Inc. (MTNA) and the California Association of Legal Support Professionals (CALSPro). The Commission’s complaint against MTNA, a non-profit association that represents more than 20,000 music teachers nationwide, alleged that the association and its members restrained competition in violation of the FTC Act through a code of ethics provision that required members, among other things, to “respect the integrity of other teachers’ studios”, and thereby to “not actively recruit students [i.e., customers] from another studio.” In the Matter of Music Teachers National Association, Inc., FTC File No. 131-0118. The Commission also alleged that some of MTNA’s more than 500 affiliated state and local music teacher associations had identical or even more aggressive codes of ethics that restrained members from charging fees that are lower than the average in the community, offering free lessons or scholarships, or advertising free scholarships or tuition. MTNA, which was reported in the press to have few resources and to have claimed that it never enforced the challenged ethics provision, was said to have immediately agreed to not enforce it when approached by the FTC, in the hope of avoiding a costly investigation. Nonetheless, the FTC proceeded, including broad requests for documents that put a significant burden on the Association.

In its separate complaint against CALSPro, a non-profit that represents more than 350 companies and individuals that provide legal support services in California, the FTC challenged provisions of the Association’s code of ethics that, among other things, restricted members from competing on price when soliciting other members’ customers, disparaging each other through advertising or otherwise, and attempting to hire each other’s employees. In the Matter of California Association of Legal Support Professionals, FTC File No. 131-0205.

MTNA entered into a consent decree that requires that it (1) cease enforcing the challenged provisions and remove them from its code of ethics, (2) disassociate itself from affiliated organizations that retain the offending ethics provisions, and (3) adopt long-term compliance measures under which MTNA is required to (a) distribute statements regarding its settlement of the FTC’s claims at future national MTNA events, through mailings to all of its 20,000 members and 500 affiliates, in association publications, by posting on its website, and in statements to be given to all new and renewing members and affiliates, (b) require all MTNA affiliates to sign a compliance statement, (c) develop a sweeping antitrust compliance program that includes annual in-person training of MTNA’s leadership and employees and its state affiliates’ presidents, (d) submit periodic reports to the FTC, (e) appoint an antitrust compliance officer to supervise MTNA’s antitrust compliance program, and (f) comply with these requirements for a period of up to 20 years. CALSPro entered into a similar consent decree. The consent agreements, which were approved by the FTC by a vote of 4-0 and made available for public comment, are awaiting final Commission approval.

Associations’ Ethics Codes Should Be Narrowly Tailored and Focus Only On Objectives That Cannot Reasonably Be Viewed As Anticompetitive
The FTC’s focus on these two non-profits’ codes of ethics, and on provisions that required members to respect the “integrity” of other members’ businesses and to not disparage one another, should stand as a warning that associations need to be circumspect about adopting, let alone enforcing, ethical provisions that could be viewed as restricting, or intended to restrict, competition among members. Whether such provisions relate to members’ statements about one another, or pricing practices that might be perceived as casting members in an unfavorable light, an association should consider whether antitrust enforcement agencies or potential plaintiffs could portray ethical restrictions as pretextual constraints actually aimed at reducing competition among members.

This does not mean that associations need to consider wholesale abandonment of their codes of ethics. But defining “ethical conduct” —i.e., actions that conform to accepted standards—is a nuanced task. On the one hand, associations have a legitimate interest in promoting their missions, and in discouraging illegal, deceptive and immoral practices that could adversely affect the public’s confidence in the association and its members. On the other hand, when associations’ codes of ethics purport to restrict, directly or indirectly, members’ right or ability to compete vigorously, either through advertising, pricing, discounts or fair criticism of competitors’ products and services, they become suspect of being intended to deny the public the benefits of competition, including increased productive efficiency and lower prices.

Thus, professional and trade associations should narrowly tailor their codes of ethics to focus only on objectives that cannot reasonably be viewed as anticompetitive, such as exhorting members to (1) act only in a lawful manner, (2) not make untruthful or misleading statements, (3) not engage in wrongdoing, and (4) protect the public’s welfare through the maintenance of high standards. In the MTNA Order, for example, the FTC stated that the Association could adopt and enforce ethics provisions aimed at curbing representations that it “reasonably believes would be false or deceptive within the meaning of Section 5 of the Federal Trade Commission Act,” and that it could impose restrictions on members who serve as judges in music competitions sponsored or held by MTNA or any of its affiliates (e.g., by prohibiting judges from soliciting contestants as students during competitions).

In contrast, while it is no doubt part of the mission of a professional or trade association to promote the best image of, and public confidence in, the association and its members, it must be careful not to impose restrictions, dressed up as ethical strictures, that will inhibit members from competing for customers, advertising aggressively and discounting prices. This can be particularly challenging given the fact that an association’s board and committee leadership—the persons who will be making many of the decisions regarding the code of ethics—often may feel pressured to serve the business interests of their employers. Nonetheless, associations must be particularly vigilant, given the FTC’s penchant for questioning the intent and effect of such provisions, and the consequences—in terms of the costs of defense and compliance with remedial requirements—of getting in the agency’s cross-hairs.

Good Diligence Practices
Thus, antitrust risk should be considered in regard to any code of ethics provision that could be viewed as affecting the pricing, supply, distribution or advertising of an association’s members’ products or services. Similar care should be taken when considering matters regarding membership in the association, participation of members in association affairs, and the standards to which members and others are subject. Professional and trade associations should:

  • Periodically have counsel review their codes of ethics, and other policies, procedures and standards, for antitrust compliance;
  • Emphasize the association’s policy of complying with the antitrust laws, and communicate that policy to association members, leadership and employees;
  • Provide appropriate antitrust compliance training to certain key association leadership and employees;
  • With the assistance of counsel, monitor the conduct of board meetings, and certain committee and other association meetings, activities and decision-making, that may have anticompetitive effects or appearance (e.g., those relating to codes of ethics, standard setting, conducting and distributing the results of surveys, exclusionary membership or certification practices or criteria, etc.); and
  • Encourage members to engage in similar antitrust compliance measures, especially with respect to company representatives who will be participating in association activities.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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