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Monday, July 19, 2010

Facts Association Executives Need to Know About Antitrust Law

Although many business owners and managers pay little or no attention to antitrust laws, these laws pose a substantial threat to both businesses and their leaders.  Antitrust laws are complex and confusing, and violations of antitrust laws can arise from seemingly harmless conduct.  Worse yet, Federal Trade Commission (FTC) and Department of Justice (DOJ) enforcement resources are virtually unlimited, while very few individuals or businesses have the financial resources to defend themselves against a powerful government agency.  Indeed, in a recent case, the FTC attacked two Arizona dentists for agreeing between themselves not to do business with a particular insurance company.  The FTC sued and ended its assault only after both dentists were financially ruined, and their misdeeds published nationally.  Antitrust liability is NOT just for big business anymore.

Antitrust laws are set forth in the Sherman Act, Federal Trade Commission Act, the Clayton Act, the Robinson-Patman Act, and California’s Cartwright Act, among other statutes.  These laws prohibit combinations of competitors in restrain of trade, attempts to monopolize and other anti-competitive activities.  Since most association activities involve groups of competitors, the opportunity to unlawfully restrain trade is always present.

No Easy Fix: Unfortunately, there is no checklist of what is and is not safe conduct from an antitrust standpoint.  All antitrust analysis depends substantially on the surrounding facts and circumstances.  What is lawful for one group of individuals to discuss may be a violation for another group.  Further, activities of individual groups of association members and/or chapters may be attributed to a state or national association.  Also, inferences may be drawn from association, chapter or member activity.  Even though no specific conspiracy or agreement to restrain trade has actually occurred, it is possible for a violation to have occurred.

Areas of Risk:  It is not possible to provide a complete or specific list of activities that amount to an antitrust violation.  However, it is helpful to identify areas of risk, where close attention can be paid to the possible anti-competitive nature of the agreements or activity involve.  Some areas of risk include discussions of the following:
  •     Controlling or influencing current or future prices (for purchase or sale), controlling or influencing price increases or decreases, or stabilization or standardization of prices
  •     What constitutes a “fair” profit
  •     Procedures for establishing selling prices, cash discounts, credit terms
  •     Control of sales levels, inventory levels or timing of sales
  •     Allocation or division of markets or geographical divisions of markets among competitors 
  •     Agreements, recommendations or suggestions that members refuse to deal with certain other persons or firms (boycott)
  •     Whether or not the pricing practices of any competitor/industry member are unethical, or constitute an unfair trade practice
  •     Agreements limiting or restricting advertising
Again, certain discussions relating to activities identified above will not amount to antitrust violations.  However, discussions relating to them require thorough prior antitrust analysis and guidance in the discussion.

Minimizing the Risk: To rationally cope with this risk, business owners and managers are wise to educate themselves about antitrust laws, and the likely application of these laws within their respective business.  A good place to start is with the association’s “antitrust policy.”  The association’s policy should serve to protect the association and its leaders, and help educate leadership and members about these laws and how to avoid liability under them.  Having a basic understanding of antitrust risks will help avoid inadvertent violations, and aid members in challenging and interrupting risky behavior before harm occurs.

First Aid: What further steps can be taken to avoid antitrust liability?  First, educate yourself about the law.  Be aware that even the most informal meetings between competitors in which risky topics are discussed can lead to liability.  When in group meetings, have the agenda reviewed for antitrust risk, then stick to the agenda.  Additions to the agenda that touch upon risky areas should be scrutinized.  Discussions during meetings should be monitored; in some instances, legal counsel should be present at the meeting.  Meeting minutes should be reviewed by the group’s Executive and/or Counsel.  Audio or video recordings of business meetings should not be permitted; if they exist, a policy should be adopted to provide for their systematic erasure.  If discussion leads to possible antitrust violations, discussion should cease immediately.  Meeting attendees should loudly object to risky discussions, and leave the meeting if risky discussions do not cease.  If a possible violation has occurred, seek counsel, and strongly advise attendees against discussion of the possible violation.  Note that “executive session” discussions are NOT truly confidential.

Antitrust law is a difficult and complex subject, and a cause for realistic concern for nearly all business owners, managers and associations.  The preventive measures noted above can help an association avoid these risks, potentially preventing a disaster.

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SAMPLE ANTITRUST STATEMENT

(To be read aloud by Chair / Facilitator at the beginning of any ASSOCIATION meeting/gathering.)


It is the policy of the [name of association] and its members to  comply with laws and regulations applicable to their activities.

Among other things, ASSOCIATION members and leaders are subject to antitrust laws that prohibit fixing prices, allocating geographic markets, unfair or deceptive practices, setting profit levels; boycotts, and most other anticompetitive actions.  ASSOCIATION will neither permit nor condone anti-competitive behavior, whether willful or inadvertent, in connection with any ASSOCIATION activity.

Additionally, discussion among two or more providers that suggests intentional or unintentional fraudulent activity is illegal.  For example, [insert a suitable example, such as: discussion of methods to enhance reimbursement by providing services that are not medically necessary may amount to a crime (conspiracy to commit fraud)].

Conversations involving discussion of matters that may violate applicable laws and regulations should always be avoided, even in private settings, and cannot be tolerated in connection with any ASSOCIATION meeting or activity.  Persons engaging in possible violations of ASSOCIATION policy during meetings or activities will be required to cease such activities, and if necessary, are subject to ejection by the presiding officer of the meeting.

Questions concerning antitrust or other laws or regulations connected to ASSOCIATION activities should be referred immediately to the Chief Staff Executive.


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[SAMPLE ANTITRUST POLICY]


Name of Association

ANTITRUST LAW COMPLIANCE POLICY AND GUIDELINES

It is the policy of the  ________ (INSERT NAME OF ASSOCIATION) and its members to strictly comply with laws and regulations applicable to their activities, including federal and state antitrust laws.  It is further the policy of ASSOCIATION to assist its members and volunteers in complying with federal and state antitrust laws.  ASSOCIATION members and leaders are expected to conscientiously adhere to antitrust laws.  ASSOCIATION will neither knowingly permit nor condone anti-competitive behavior, whether willful or inadvertent, in connection with any ASSOCIATION activity.

ANTITRUST LAWS

The antitrust laws seek to preserve a free competitive economy.  As a general rule, competitors may not restrain competition among themselves through understandings or agreements as to the price, the production or the distribution of their products, or other agreements that unreasonably restrict competitive capabilities or opportunities of their competitors, their suppliers or their customers.  The antitrust laws also prohibit monopolization and attempts to monopolize, unfair methods of competition, unfair or deceptive acts or practices, most discrimination in prices between different purchasers in the sale of a commodity, exclusive dealing arrangements, most tying sales and requirements contracts, some joint ventures/mergers/consolidations, and similar activities.   A more complete discussion of the antitrust laws (Sherman Act, Federal Trade Commission Act, the Clayton Act, the Robinson-Patman Act, and California’s Cartwright Act) is available upon request from ASSOCIATION.

However, antitrust laws are often unclear in terms of applicability to any given conduct.  Whether or not an antitrust violation exists depends purely on the specific conduct and facts involved in each instance.  Notwithstanding the nebulous nature of the antitrust law, penalties for violating them, both civil and criminal, are severe.  Certain activities can result in felony criminal convictions with penalties of up to three (3) years in prison and $100K fines for individuals and $1,000K fines for corporations per offense.  Also, treble damages are available to private persons enforcing the antitrust laws.

Association members and leaders, in particular, have compelling reasons to understand and comply with antitrust laws because antitrust violation commonly consist of two elements: 1) concerted action with produces 2) an unreasonable restraint of competition.  Since ASSOCIATION’s activities involve meetings and activities of competitors (ASSOCIATION members), the concerted action element can generally be established without difficulty.  The only other element necessary to prove a basic antitrust violation is to show that the action amounts to an unreasonable restraint of competition.  So, agreements or activities of association members that are anti-competitive or have an anti-competitive effect, whether conducted as association business or not, could result in serious antitrust consequences.

MEMBER RESPONSIBILITIES

ASSOCIATION programs are carefully designed and monitored on an ongoing basis to ensure compliance with antitrust law.  Every ASSOCIATION member, whether organizational or individual, has a duty and responsibility under the law to avoid and prevent antitrust violations.  Every ASSOCIATION member needs to understand basic antitrust laws, to recognize areas of potential antitrust risk, and to overtly object to and refuse to participate in any activity that poses antitrust risk until that risk is properly assessed and cleared by legal counsel or other qualified advisor.

AREAS OF RISK

It is not possible to provide a complete or specific list of activities that amount to an antitrust violation.  However, it is helpful to identify areas of risk, where close attention can be paid to the possible anti-competitive nature of the agreements or activity involve.  Some areas of risk include discussions of the following:

  •     Controlling or influencing current or future prices (for purchase or sale), controlling or influencing price increases or decreases, or stabilization or standardization of prices
 Note:   Discussion of prices established by third parties not influenced or controlled by the discussing parties is generally not, standing alone, anti-competitive or illegal.
  •     What constitutes a “fair” profit level
  •     Procedures for establishing selling prices, cash discounts, credit terms
  •     Control of sales levels, inventory levels or timing of sales
  •     Allocation or division of markets or geographical divisions of markets among competitors
  •     Agreements, recommendations or suggestions that members refuse to deal with certain other persons or firms (boycott)
  •     Whether or not the pricing practices of any competitor/industry member are unethical, or constitute an unfair trade practice
  •     Agreements limiting or restricting advertising
Again, some discussions relating to activities identified above will not amount to antitrust violations.  However, discussions relating to them require thorough prior antitrust analysis and guidance in the discussion.

ASSOCIATION MEETINGS

To avoid even the appearance of impropriety, as well as to avoid inadvertent violation of antitrust laws, all association board and committee meetings will be conducted in accordance with the following rules:

1.    A written agenda will be prepared and distributed in advance of each meeting.  Agendized issues with potential antitrust implications will be reviewed and discussed by the chairman, executive director and legal counsel, if deemed appropriate.  Additions to the agenda having potential antitrust implications should be postponed, or discussions of such matters held with legal counsel or other qualified advisor present.
2.    Accurate, detailed meeting minutes of every meeting will be prepared and reviewed.  Audio, video or other recordings of meetings will not be permitted.  Minutes will be approved at the next meeting.
3.    In the event of concern regarding potential antitrust implications of a discussion, discussion must be discontinued pending resolution of the matter through the executive director or legal counsel, if necessary.
4.    In the event that any member has a concern about potential antitrust implications of discussion during a meeting, he or she shall interrupt discussion and state that concern immediately.  If discussion is not terminated and the concern resolved, the concerned member should state that he or she is leaving the meeting for that reason, and leave.
5.    Conversations involving discussion of matters in violation of this policy will not be tolerated at a association meeting, and violating parties may be ejected from the meeting by the chairman.

end of sample policy

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This document has been prepared for general reference only.  It is intended to inform association leaders and members of basic antitrust principles to assist them in acting responsibly in the conduct of association and members business activities.  It must not be considered as a substitute for competent legal advice.  It is recommended that interested persons confer with competent legal counsel concerning this and other significant legal issues.

Thursday, July 15, 2010

Certification Programs: A Legal Issues Checklist

Establishing or operating a certification program is rarely a simple matter.  Certification programs frequently provide compelling membership value, and enviable revenue streams.  On the other hand, numerous issues arise with a certification program.  What are the issues?   The following is a list of some of the most crucial legal issues to address with any nonprofit certification program:

Certification of Products, Persons or Processes – It is critical for a certifying entity to be clear about what is being certified.  Are individuals being certified?  If so, the risks may be higher.  Are products being certified as suitable for a specific purpose?  Or is a process being certified?  It is important to be very clear about what is being certified, and what that certification means to interested parties, including the certified person or entity, and consumers of the products or services involved.

Inherent Risks of Certification Programs - Credentialing programs always involve risk.  The more successful a credentialing program, the more it will generate risk.  Nonmembers will want the credential.  Regulators may be threatened by it.  Plaintiff's lawyers, looking for deep pockets and insured parties, will see credentialing parties as potential defendants.  The credentialing program may end up being the defacto standard for the industry or profession.  Reasonable reliance on the certification as being fully appropriate could result in liability based on the certification or standard being negligently established.  There is also risk of liability if the certifying entity grants a certification to individuals/entities that the certifier knew or should have known should not have been certified.  The implications of these risks are that the certification standards MUST be properly promulgated and applied.

Due Process – Criteria for certification should be competently established; criteria should provide a fair and reasonable threshold of competence; and denial or revocation of certification must allow for appeal, including the right to a hearing and opportunity to be heard.

Defamation – Care should be exercised to avoid harming persons/companies that did not qualify for the credential, or that have not taken or passed any examinations.  However, lists of certified persons/entities may be published.

Grandfathering Issues – Care should be exercised when considering grandfathering certification, as actions may make a strong appearance of anti-competitive behavior, whether intended or not.  Intentional or purposeful grandfathering of some competitors within a particular market in order to provide them with an important or substantial advantage not available to other competitors is almost always (depending on the specific facts) going to be illegal.

ADA compliance – Certifying organizations should consider the effect of certification of disabled persons.  Obviously, care should be taken not to discriminate against disabled persons. 

Antitrust – As noted above, certification programs almost always raise serious antitrust issues.  Care should be taken to prevent the certification from having an anti-competitive effect, such as making the certification unavailable to nonmembers when doing so results in a significant economic disadvantage to the nonmembers.

Fairness Issues – Certifications should, to the greatest extent possible, be free of  bias, discrimination, subjectivity, partiality or inconsistency in terms of the certification, and how certification requirements are applied.

Professional Advice – Entities establishing certification programs are strongly advised to seek professional guidance in establishing the certification program, including qualified legal counsel.

Monday, July 5, 2010

Nonprofit Association Sponsorship Income: IRS Scrutiny Likely to Increase

According to Marcus Owens, former director of the IRS’s Exempt Organizations Division (the Division that oversees nonprofit organizations), there is evidence the IRS may be considering and/or preparing to step up its review of nonprofit corporation sponsorship revenues.  Mr. Owens points to the IRS’s increased use of questionnaires, which provide the IRS with more information than is provided by ordinary Form 990 tax returns. 

The IRS itself has disclosed that it is focusing on generation of UBI (unrelated business income), use and management of endowment funds, and executive compensation.  This increased focus includes generation of detailed information concerning sponsorship revenues. 

In light of these circumstances, nonprofits should review their UBI and sponsorship programs and revenues, and take steps to ensure they are managing and reporting those revenues correctly.   Even if those revenues have been incorrectly reported in the past, making corrections now will put the nonprofit in a much better position with the IRS than if the IRS discovers the error on its own and the nonprofit has made no efforts to address the matter.  Upon the completion of the review, associations would do well to draft and implement appropriate changes in policies and procedures for the future if deficiencies are discovered.