Lessons for Associations from 2013 Antitrust Activity
Associations are walking antitrust risks, and plaintiffs and the government took their aim at a variety of association activity in 2013 — from dentists to music teachers, wire transfers to equines. The results are instructive for associations and their members as they work together in 2014, whether setting membership rules, dealing with nonmembers, organizing meetings or sharing information. Here are some of 2013’s antitrust highlights:
Trying to Maintain Professionalism Among Members Has Its Limits
Two professional associations settled with the Federal Trade Commission in response to allegations that their membership criteria unlawfully restricted competition.1 In one case, the Music Teachers National Association maintained a code of ethics that called on members not to recruit students from one another. Meanwhile, some of the association’s affiliated state and local groups purportedly required members to not charge below-average fees or offer free lessons.
The association claimed it had never enforced these provisions, and had no role in the local members’ rules, but it seems even the appearance of a collusive limitation on competition was enough to get the FTC’s attention. Like the music teachers, the California Association of Legal Support Professionals allegedly maintained a rule that it was unethical for members to undercut other members’ prices, disparage other members, or recruit other members’ employees without first notifying the company.
Both sets of rules may have been the result of good-faith efforts to maintain professional collegiality among the associations’ members. But the FTC nevertheless targeted the associations for their code provisions’ potential impact on competition. In response to the FTC’s investigation, both associations entered into consent orders that prohibited the restrictive code provisions and required the implementation of robust antitrust compliance programs.
With Great (Market) Power Comes Great Responsibility
The American Quarter Horse Association (AQHA), dedicated to the breeding of quarter horses, lost at trial in its defense against claims that the association improperly excluded cloned horses from its registry.2 One of the association’s primary functions is to record and track the pedigrees of quarter horses. In 2004, the association issued a rule excluding from its registry any horse produced from “cloning” utilizing genetic manipulation to produce to a live foal. This rule was developed by a group of members, each of which ostensibly was a competitor in the quarter horse market. The plaintiffs, who own cloned horses, argued that AQHA’s rule effectively shut them out of the market.
The plaintiffs alleged, and ultimately proved at trial in late 2013, that the association possessed substantial market power because, among other things, horse shows and races — a significant source of value for quarter horse owners and breeders — restrict participation to AQHA-registered horses. This successful challenge is a reminder to ensure that membership criteria are carefully tailored to promote competition and, if possible, allow those denied membership an opportunity to appeal any adverse decision.
State-Sanctioned May Not Mean Antitrust-Approved
Teeth whitening is a competitive business in many markets. So, when the North Carolina Board of Dental Examiners prohibited teeth whitening by anyone but licensed dentists, the FTC took notice.3 The FTC issued a complaint under Section 5 of the FTC Act, alleging that the dental board violated Section 1 of the Sherman Act. The FTC ultimately held that the board — which was dominated by dentists who compete in the teeth-whitening market — conspired to restrain competition in the market, shutting out non-dentists from competing for teeth-whitening business. The board argued that it was state-sanctioned and therefore immune from antitrust scrutiny.
On appeal, the Fourth Circuit upheld the FTC’s decision and reached two important conclusions distinguishing the board from being a state actor: The board was not sufficiently overseen by the state to receive so-called “state action” immunity from the antitrust laws. This follows previous decisions confirming that groups like medical boards and state bar associations are subject to antitrust scrutiny despite being officially sanctioned by a state.
The court also ruled that the board, acting as a single entity, could not avoid antitrust liability when all but one of its members were competing dentists with a financial stake in the practice of teeth whitening. The court’s conclusion was based in part on the board’s process to select members, by which members were elected by their peers and not appointed by government officials. It is possible the same conclusion might not be reached if the board was more independent from the competing marketplace.
Sharing Information Often Is OK, Particularly When it Benefits Consumers
The FTC issued an opinion4 in September confirming that exchanging information among members remains an important association activity. The Money Services Round Table asked the FTC for an opinion on the group’s plans to share information for the purposes of compliance with anti-fraud laws. The proposed participants in the exchange were large firms like Western Union, MoneyGram and Travelex, which manage electronic transfers of funds for individuals and institutions. Regulations require these companies to conduct extensive anti-fraud and anti-money-laundering monitoring activities and to terminate relationships with money transmitting agents that fail to comply.
The proposed participants sought to exchange information about those agents that each had terminated, purportedly so that participants could choose to avoid agents that others determined were non-compliant. The FTC concluded that this exchange would be permissible, despite the risk that it could enable participants to effectively boycott agents terminated by other participants.
The FTC placed considerable emphasis on the safeguards the group proposed, including using a third-party vendor to maintain and secure the database, making participation in the database exchange voluntary, and keeping each participant’s decision making independent. The FTC also appeared to give weight to the exchange’s ability to better protect consumers from non-compliant agents. The FTC’s decision referred to and largely reflected the guidance the agency previously has provided on information exchanges and antitrust compliance.
Optics Can Matter as Much as Substance
The U.S. Department of Justice investigated several private colleges, prompted by what seems to have been a mistaken interpretation of a session title at a conference. Several decades ago, schools were alleged to have agreed on strategies to avoid competing with each other on financial aid awards. Under a special exemption to the antitrust laws originally enacted in the Higher Education Act and most recently extended in the Improving America’s School Act of 1994, the few colleges that admit students without consideration of financial need may discuss, and agree among themselves on, certain financial aid policies without violating the antitrust laws.
The DOJ appears to have been concerned last year that schools outside of this exemption were once again colluding on financial aid offerings. As reported by Inside Higher Ed,5 the investigation was spurred by discussions at a meeting in early 2013 of the Council of Independent Colleges, during which attendees participated in a session entitled “Collaborative Efforts on Student Aid and Admissions Policies: A Report on Progress, Prospects, and Possibilities.”
The session touched on shifting aid funds to need-based aid. But, according to attendees, the discussion was focused on the potential for new legislation, which ordinarily is exempt from the antitrust laws. The DOJ ultimately closed the investigation, but not until targeted schools responded to the government’s inquiries with documents and information.
Like other antitrust activity in 2013, perhaps the best lesson from this short-lived investigation is one that associations are routinely advised: Consult antitrust counsel beforehand, even for something as seemingly simple as the name of a meeting.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.1 Settlement agreements available here. 3 Abraham & Veneklasen Joint Venture v. Am. Quarter Horse Ass’n, 2:12-CV-103-J, (N.D. Tex. May 24, 2013) and Findings of Fact and Conclusions of Law (ECF No. 143). 3 N.C. State Bd. Of Dental Exams. v. Fed. Trade Comm’n, 717 F.3d 359 (4th Cir. 2013). 4 FTC opinion available here. 5 Kevin Kiley, Inside Higher Ed, Justice Dept. Launches Investigation into merit aid talks, available here; Scott Jaschik, Inside Higher Ed, Inquiry Into Aid Talks Ends, available here.
All Content © 2003-2014, Portfolio Media, Inc.