December 17, 2013
Codes of ethics are a common and ubiquitous aspect of many trade and professional associations. A well prepared and thought out association code can achieve a number of legitimate aims, including ensuring that members adhere to the common goals and principles of the association, reducing legal liability and risk and enhancing the brand of members’ product or service offerings.
Regulatory bodies also sometimes promulgate codes that adversely impact competition, where they have legislative authority to do so and conclude there are superior competing policy rationales. In this regard, among the Canadian Competition Bureau’s first new recent advocacy initiatives relates to a pharmacist regulator’s proposed ban on drug inducements (see: here).
On the other hand, a poorly designed code, where a voluntary association has no legislative authority to regulate member competition, can raise civil and in some cases criminal competition law issues. In Canada, these include criminal cartel issues under the conspiracy provisions of the Competition Act – for example, as an agreement among competing members to fix prices, divide or allocate markets or customers or illegally restrict or limit output. Association codes that restrict or eliminate competition may also be subject to review under other provisions of the Act, including the civil agreement provisions where a code prevents or lessen competition substantially in a market.
An interesting pair of association code of ethics cases announced yesterday by the U.S. Federal Trade Commission (FTC) highlights some of the issues antitrust enforcers, including in Canada, tend to focus on when challenging association codes (see: Professional Associations Settle FTC Charges by Eliminating Rules That Restricted Competition Among Their Members).
In these two cases, the FTC took issue with association codes of ethics put into place by associations of music teachers and legal support professionals that allegedly restricted members’ ability to solicit competitors’ clients, charging fees lower than “community averages”, offering free services and certain types of price and comparative advertising by members.
Under the proposed settlement with the associations, the FTC is seeking that the associations discontinue the challenged restraints on solicitation, pricing and advertising and adopt competition law compliance programs.
Interestingly, though not an uncommon theme in similar cases in the past, in both cases the restraints were characterized as rules to prohibit certain types of “unethical” member behaviour. From a maintaining price and market position perspective, such restraints may make perfect sense to an association’s members.
However, in Canada, as in other major jurisdictions, courts have made it clear for more than a century that with respect to collective restraints on price, markets or output, private interests or gains by the parties are largely (if not completely) irrelevant. In this regard, the conspiracy provisions of the Competition Act in Canada make it per se illegal, subject to fines and imprisonment, for competitors to agree to fix prices, divide markets or restrict output.
The distinction between revenue-enhancing association restraints and pro-competitive consumer benefits was emphasized by the FTC in its settlement announcement:
“Competing for customers, cutting prices, and recruiting employees are hallmarks of vigorous competition. Agreements among competitors not to engage in these activities injure consumers by increasing prices and reducing quality and choice. Absent a pro-competitive justification, these types of restrictions on competition are precisely the kind of unreasonable restraints of trade that the Sherman Act was designed to combat.”
As such, it makes sense for associations and their members to critically assess whether their codes of ethics are intended to ensure that members adhere to legitimate standards (e.g., relating to such things as education, professional training, truth in advertising and marketing, legally permissible conduct, etc.) or are in substance aimed at restricting or limiting key aspects of members competition.
In this regard, if an association code restricts or limits members’ ability to price their products, independently compete (for example, with respect to particular markets, customers, products or business models), engage in legal advertising or impacts output, such rules should be critically reviewed for potential competition law issues.
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