October 31, 2014
This is the second of three posts with our conference materials from the recent Canadian Society of Association Executives’ (CSAE) Annual Conference in Niagara (for the first post see below). I presented with Mark Katz from Davies Ward Phillips & Vineberg LLP in Toronto. This post discusses competition law issues that can arise in the context of association codes of ethics, some recent key cases and best practices to minimize risk in relation to association codes.
The final post will be our PowerPoint on recent competition law developments for associations, including a number of important U.S. cases relevant in Canada.
OVERVIEW OF COMPETITION LAW
& ASSOCIATION CODES OF ETHICS
One of the functions that an association may perform is to help “regulate” the business activities of its members. “Self-regulation” of this type can protect consumers and reduce regulatory burdens for industry members. When properly applied, self-regulation can also enhance an industry’s reliability and reputation with customers, suppliers, government bodies and the public at large.
“Self-regulation” may be achieved through different vehicles, such as association by-laws, policies, procedures and so-called “codes of conduct” or “codes of ethics”.
Generally speaking, Canadian authorities adopt a deferential attitude when considering the internal workings of associations. Deference is particularly appropriate when dealing with internal decisions that seek to apply and enforce the standards of propriety and conduct appropriate for members of a particular association.
That said, it is clear that self-regulation by associations can create competition law issues if rules and regulations are adopted and enforced in such a way as to restrict competition. In particular, concerns can arise when associations seek to regulate their members with respect to entry and membership, business structures and scope of services, fee structures and compensation, business practices such as advertising, or standard setting.
Associations considering adopting a code of ethics, or undertaking the review of an existing code, must view the issue through a competition law “prism” and always ask themselves: (i) what is the code of ethics designed to achieve?; (ii) does it contain provisions that will limit competition between members?; and (iii) does it contain provisions that will limit entry/expansion by non-members?
Associations can minimize the risk in adopting codes of ethics by avoiding rules that, for example: (i) restrict members’ ability to solicit customers, including through truthful advertisements; (ii) could be regarded as involving an agreement to fix prices, allocate markets, restrict output or engage in bid rigging; (iii) prevent entry or expansion by new competitors; or (iv) prevent members from adopting innovative business practices.
RECENT CODE OF ETHICS CASES
Four recent cases brought by the U.S. Federal Trade Commission (“FTC”) illustrate some of the types of concerns that international competition law authorities, including in Canada, have with trade association codes of ethics.
Music Teachers National Ass’n (“MTNA”)
MTNA’s Code of Ethics contained a “Commitment to Colleagues” which said that members “shall respect the integrity of other teachers’ studios” and thus must not: (i) charge fees for music lessons that are lower than the average in that community; (ii) offer free lessons or scholarships, or otherwise solicit clients from a rival; (iii) or advertise free scholarships or tuition.
The Code also established a mechanism by which the MTNA could impose sanctions for violations. MTNA ultimately agreed in a settlement with the FTC to eliminate its restrictions on student solicitations, price competition and advertising.
California Ass’n of Legal Support Professionals (“CALSP”)
CALSP’s Code of Ethics prohibited members from: (i) offering discounted rates to another member’s clients; (ii) engaging in comparative advertising or disparaging other members; (ii) recruiting employees of competitors without notifying the competitor; (iii) the Code of Ethics also imposed sanctions for violations.
CALSP entered into a similar settlement with the FTC as did MTNA (discussed above).
National Ass’n of Residential Property Managers (“NARPM”)
NARPM’s Code of Ethics provided that members must not: (i) knowingly solicit another member’s clients; or (ii) criticize other property managers or their business practices.
In its settlement with the FTC, NARPM agreed to stop restraining members from soliciting property management work from competitors and from making statements about a competitor’s products, services, or business or commercial practices unless those statements are false or deceptive.
National Ass’n of Teachers of Singing (“NATS”)
The NATS Code of Ethics stated that members cannot “either by inducement, innuendo, or other acts, proselytize students of other teachers”.
The FTC settlement required NATS to stop restraining members from seeking teaching work from competitors, including by telling members that soliciting students is unethical
BEST PRACTICES – ASSOCIATION CODES OF ETHICS
General
Association codes of ethics and similar “self-regulating” initiatives should be structured so that they: (i) are clear and transparent; (ii) are voluntary or incorporate disciplinary procedures for breaches that are reasonable and not exclusionary; (iii) enjoy wide acceptance among the membership; (iv) have clear objectives; (v) offer meaningful incentives to participate; (vi) provide for a regular flow of information to members; (vii) incorporate effective dispute resolution procedures; and (viiii) do not restrict competition any more than is necessary to achieve the desired objectives and, indeed, should seek to promote competition whenever possible.
Codes of Ethics must not be used to: (vi) enforce pricing schedules or otherwise limit price competition; (ii) prevent members from soliciting business from each other; (iii) prevent members from soliciting employees from each other; (iv) create barriers to expansion/entry by new competitors; or (v) prevent members from adopting innovative business practices.
Membership
Membership criteria should relate to a legitimate and pro-competitive purpose or objective of the association and should constitute the minimum requirements necessary to achieve these legitimate ends. They should not be used to create artificial barriers to entry or as a way to limit competition from innovative and alternative business structures and practices.
A member or select group of members should not be given a veto over the admission of new members to the association.
No member of an association should be disciplined or expelled unless there is a breach of a clearly defined rule and unless for a legitimate purpose (e.g., to enforce safety standards). Members should not be disciplined with the objective of enforcing anti-competitive rules.
Advertising Restrictions
Associations are permitted to take measures to prevent false or misleading advertising by members. Any other advertising restrictions that cannot be justified on this basis will be suspect, and should be assessed by association counsel to determine if their effect is to substantially prevent or lessen competition.
In particular, there could be concerns about restrictions (including total bans) on: (i) canvassing or soliciting; (ii) comparative advertising; (iii) price advertising (including the offer of discounts or other inducements); and (iv) the size, style and medium of advertising.
Standards
Standards should be objective and reasonable and should not be applied arbitrarily or in a way that is designed to exclude certain market participants: (i) keep standards voluntary and do not take enforcement actions to require members to adhere to them; (ii) keep standards narrow so that they do not cover more than what is necessary to achieve the association’s objectives.
Industry members with direct financial or other economic interests should be excluded from standard setting or certification activities.
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