FTC: Professional Associations' Ethical Codes Restrict Competition

MTNA is a non-profit corporation that serves as a professional association of music teachers. (Complaint, In the Matter of Music Teachers National Association, Inc., File No. 131-0118). MTNA has over 20,000 members, most of whom are employed as music teachers, and over 500 affiliated state and local music teacher associations. The organization maintained a professional code of ethics, which included a “Commitment to Colleagues” provision prohibiting members from soliciting clients of other member music teachers. The organization had a dispute resolution and sanction process for reported code violations.

CALSPro is a non-profit corporation that serves as a professional association for over 350 company and individual members who provide legal support services. (Complaint, California Association of Legal Support Professionals , File No. 131-0205). As a condition of membership, CALSPro required members to abide by a code of ethics that prohibited, among other things, offering discounts when soliciting another member's client, disparaging another member, or recruiting another member's employees without first contacting that member. CALSPro established a Dispute Resolution Committee to uphold the Code of Ethics and a sanction mechanism for code violations.

FTC Complaints and Consent Order

The FTC charged MTNA with restraining competition among its member music teachers in violation of Section 5 of the FTC Act. MTNA signed a consent decree with the FTC, agreeing to: 1) remove the anticompetitive provisions from its Code of Ethics; 2) disassociate from any affiliated organizations that retained the anticompetitive ethical provisions; and 3) undertake a number of compliance steps, including appointing an Antitrust Compliance Officer and offering antitrust training to officers, members, and affiliate organizations. The FTC did allow MTNA to continue its practice of prohibiting judges serving in MTNA music competitions from soliciting business during the course of the competition, noting that such restrictions had valid justifications.

In the same vein, the FTC charged CALSPro with anticompetitive behavior by restricting its members' ability to compete on the basis of price, to advertise their services, or to solicit employees from competitors. CALSPro signed a consent decree, agreeing that the organization would amend its Code of Ethics and institute a variety of compliance and training programs, including a method for members to report future antitrust violations anonymously.

Analysis and Practical Implications

Trade and professional associations are, by design, organizations composed of competitors or potential competitors. As such, those who counsel these groups or individual association members must be particularly sensitive to antitrust compliance issues, ensuring that any policies or ethical provisions do not restrain competition among the organizations' members. The FTC has recognized that “self-regulatory activity serves legitimate purposes, and in most cases can be expected to benefit, rather than injure, competition and consumer welfare.” (Council of Better Business Bureaus, Inc., 2011 WL 9809691 (F.T.C. 2011) (advisory opinion)). At the same time, federal enforcers have not hesitated to challenge trade association conduct that threatens to harm competition.

For example, the government will view with suspicion trade association rules or ethical codes that limit marketing or advertising practices. In 2009, the FTC found that real estate association Realcomp's management of a realty listing database unlawfully foreclosed discount brokers by limiting discount brokers' ability to disseminate their listings. (Opinion of the Commission, In re Realcomp II, Ltd., FTC Dkt. No. 9320). Realcomp was required to amend its listing rules.

Similarly, the MTNA and CALSPro complaints highlighted the associations' restrictions on members' client solicitation and marketing methods. The FTC also noted that both organizations had established processes for sanctioning members for violations of the ethics codes, thus providing a means for enforcing the anticompetitive restraints.

While marketing restrictions present an area of heightened risk, not all such restrictions are anticompetitive and unlawful. For example, the FTC was clear that both organizations could continue to punish members for any false or deceptive advertising. And with MTNA, the FTC specifically allowed the association to maintain its ethical restrictions that barred judges at musical competitions from soliciting business at those competitions, noting MTNA's justification that such conduct could give judges an unfair advantage over other members and could undermine the integrity of competitions. But ethical codes that limit advertising or solicitation of competitors' customers ' or employees ' present special risks, and antitrust counselors to associations or individual association members should ensure that such restrictions are narrowly tailored to achieve an important procompetitive goal.

The CALSPro and MTNA enforcement actions serve as a reminder that prudent associations should review their policies and consider offering antitrust compliance training for employees, affiliates, and members. Likewise, associations should develop strategies to monitor activity at trade association meetings and to prevent such meetings from serving as a forum for members' anticompetitive behavior. Similarly, companies that participate in trade associations should have compliance policies and training in place to guide employees that will be participating in trade association activity. Antitrust counsel should be consulted early and often in connection with association activities such as promulgating or enforcing codes of conduct, standard-setting, or conducting member surveys or disseminating survey results regarding competitively sensitive topics.

If an organization develops a code of ethics or other type of code of conduct, some basic precautions will help the association and its members minimize their antitrust risks:

• The association and its members should understand and be able to articulate the procompetitive benefits the code of ethics is designed to achieve, e.g., more truthful, accurate, and/or transparent marketing practices. All provisions of the code should be measured against these procompetitive benefits.
• The provisions in the code should be fair, clear, and, where possible, based on objective criteria.
• The code should focus on improving the ways in which members advertise or market their services, not on restricting members' ability to engage in those competitive activities in the first place. For example, many codes of conduct instruct association members to conduct their advertising or marketing activities in an ethical, truthful and non-misleading manner or require certain disclosures in advertising. In contrast, a provision that limits members' right to advertise at all (or during certain times or in certain places) could trigger antitrust scrutiny, even if it ultimately offers procompetitive benefits that outweigh any potential anticompetitive effects.
• Complying with the code should not impose significant technical burdens or costs that would advantage some companies over others.

Finally, an association designing and implementing an ethics code should consider whether compliance with the code should be strictly voluntary, or if the code should contain some dispute resolution and/or enforcement mechanism that imposes sanctions for non-compliance. While members and external stakeholders may favor a code with enforcement “teeth,” association-led efforts to enforce code provisions or pass judgment on potential violations could raise the level of antitrust risk. If a code includes sanctions, they should be limited to denial of the benefits of association membership and should not burden companies' ability to compete effectively in the marketplace.

In addition, associations seeking to develop a mechanism to monitor members' compliance should consider identifying or creating an enforcement mechanism that is separate from the association, e.g. , provide that potential violations will be reported to appropriate regulatory authorities, or empower an independent third party individual or organization to review complaints and resolve disputes as needed.

Diane Bieri is a partner at Arnold & Porter LLP, working with the firm's FDA and Healthcare and Antitrust practice groups. Jonathan Gleklen is chair of the firm's U.S. antitrust practice group.

On Dec. 16, 2013, the FTC announced consent decrees settling charges that two professional associations, the Music Teachers National Association (MTNA) and the California Association of Legal Support Professionals (CALSPro), had violated Section 5 of the FTC Act by using their respective codes of ethics to restrain competition among association members. (Agreements Containing Consent Orders for In the Matter of Music Teachers National Assoc., File No. 131-0118 and In the Matter of California Association of Legal Support Professionals , File No. 131-0205). Specifically, the Commission charged both organizations with banning members from engaging in core competitive activities, such as soliciting or offering discounts to other members' clients, or recruiting other members' employees without first notifying the competing member.

Interested in-house counsel should take note that there is a long history of antitrust enforcement against professional associations that attempt to restrict their members' ability to compete effectively in the marketplace in the name of maintaining ethical standards. Courts have upheld (or at least refused to condemn short of full rule of reason analysis) association codes that arguably have some connection to procompetitive benefits, such as improving quality or protecting customers. Yet courts and agencies have not hesitated to condemn rules that limit price competition or the “poaching” of clients. The FTC's actions against MTNA and CALSPro, for instance, serve as a reminder that counsel who advise professional or trade associations or individual association members should carefully consider the antitrust risks posed by overly restrictive provisions of association ethical codes, and take some simple precautions that can help members achieve their goals while avoiding antitrust problems.

Background

MTNA is a non-profit corporation that serves as a professional association of music teachers. (Complaint, In the Matter of Music Teachers National Association, Inc., File No. 131-0118). MTNA has over 20,000 members, most of whom are employed as music teachers, and over 500 affiliated state and local music teacher associations. The organization maintained a professional code of ethics, which included a “Commitment to Colleagues” provision prohibiting members from soliciting clients of other member music teachers. The organization had a dispute resolution and sanction process for reported code violations.

CALSPro is a non-profit corporation that serves as a professional association for over 350 company and individual members who provide legal support services. (Complaint, California Association of Legal Support Professionals , File No. 131-0205). As a condition of membership, CALSPro required members to abide by a code of ethics that prohibited, among other things, offering discounts when soliciting another member's client, disparaging another member, or recruiting another member's employees without first contacting that member. CALSPro established a Dispute Resolution Committee to uphold the Code of Ethics and a sanction mechanism for code violations.

FTC Complaints and Consent Order

The FTC charged MTNA with restraining competition among its member music teachers in violation of Section 5 of the FTC Act. MTNA signed a consent decree with the FTC, agreeing to: 1) remove the anticompetitive provisions from its Code of Ethics; 2) disassociate from any affiliated organizations that retained the anticompetitive ethical provisions; and 3) undertake a number of compliance steps, including appointing an Antitrust Compliance Officer and offering antitrust training to officers, members, and affiliate organizations. The FTC did allow MTNA to continue its practice of prohibiting judges serving in MTNA music competitions from soliciting business during the course of the competition, noting that such restrictions had valid justifications.

In the same vein, the FTC charged CALSPro with anticompetitive behavior by restricting its members' ability to compete on the basis of price, to advertise their services, or to solicit employees from competitors. CALSPro signed a consent decree, agreeing that the organization would amend its Code of Ethics and institute a variety of compliance and training programs, including a method for members to report future antitrust violations anonymously.

Analysis and Practical Implications

Trade and professional associations are, by design, organizations composed of competitors or potential competitors. As such, those who counsel these groups or individual association members must be particularly sensitive to antitrust compliance issues, ensuring that any policies or ethical provisions do not restrain competition among the organizations' members. The FTC has recognized that “self-regulatory activity serves legitimate purposes, and in most cases can be expected to benefit, rather than injure, competition and consumer welfare.” (Council of Better Business Bureaus, Inc., 2011 WL 9809691 (F.T.C. 2011) (advisory opinion)). At the same time, federal enforcers have not hesitated to challenge trade association conduct that threatens to harm competition.

For example, the government will view with suspicion trade association rules or ethical codes that limit marketing or advertising practices. In 2009, the FTC found that real estate association Realcomp's management of a realty listing database unlawfully foreclosed discount brokers by limiting discount brokers' ability to disseminate their listings. (Opinion of the Commission, In re Realcomp II, Ltd., FTC Dkt. No. 9320). Realcomp was required to amend its listing rules.

Similarly, the MTNA and CALSPro complaints highlighted the associations' restrictions on members' client solicitation and marketing methods. The FTC also noted that both organizations had established processes for sanctioning members for violations of the ethics codes, thus providing a means for enforcing the anticompetitive restraints.

While marketing restrictions present an area of heightened risk, not all such restrictions are anticompetitive and unlawful. For example, the FTC was clear that both organizations could continue to punish members for any false or deceptive advertising. And with MTNA, the FTC specifically allowed the association to maintain its ethical restrictions that barred judges at musical competitions from soliciting business at those competitions, noting MTNA's justification that such conduct could give judges an unfair advantage over other members and could undermine the integrity of competitions. But ethical codes that limit advertising or solicitation of competitors' customers ' or employees ' present special risks, and antitrust counselors to associations or individual association members should ensure that such restrictions are narrowly tailored to achieve an important procompetitive goal.

The CALSPro and MTNA enforcement actions serve as a reminder that prudent associations should review their policies and consider offering antitrust compliance training for employees, affiliates, and members. Likewise, associations should develop strategies to monitor activity at trade association meetings and to prevent such meetings from serving as a forum for members' anticompetitive behavior. Similarly, companies that participate in trade associations should have compliance policies and training in place to guide employees that will be participating in trade association activity. Antitrust counsel should be consulted early and often in connection with association activities such as promulgating or enforcing codes of conduct, standard-setting, or conducting member surveys or disseminating survey results regarding competitively sensitive topics.

If an organization develops a code of ethics or other type of code of conduct, some basic precautions will help the association and its members minimize their antitrust risks:

• The association and its members should understand and be able to articulate the procompetitive benefits the code of ethics is designed to achieve, e.g., more truthful, accurate, and/or transparent marketing practices. All provisions of the code should be measured against these procompetitive benefits.
• The provisions in the code should be fair, clear, and, where possible, based on objective criteria.
• The code should focus on improving the ways in which members advertise or market their services, not on restricting members' ability to engage in those competitive activities in the first place. For example, many codes of conduct instruct association members to conduct their advertising or marketing activities in an ethical, truthful and non-misleading manner or require certain disclosures in advertising. In contrast, a provision that limits members' right to advertise at all (or during certain times or in certain places) could trigger antitrust scrutiny, even if it ultimately offers procompetitive benefits that outweigh any potential anticompetitive effects.
• Complying with the code should not impose significant technical burdens or costs that would advantage some companies over others.

Finally, an association designing and implementing an ethics code should consider whether compliance with the code should be strictly voluntary, or if the code should contain some dispute resolution and/or enforcement mechanism that imposes sanctions for non-compliance. While members and external stakeholders may favor a code with enforcement “teeth,” association-led efforts to enforce code provisions or pass judgment on potential violations could raise the level of antitrust risk. If a code includes sanctions, they should be limited to denial of the benefits of association membership and should not burden companies' ability to compete effectively in the marketplace.

In addition, associations seeking to develop a mechanism to monitor members' compliance should consider identifying or creating an enforcement mechanism that is separate from the association, e.g. , provide that potential violations will be reported to appropriate regulatory authorities, or empower an independent third party individual or organization to review complaints and resolve disputes as needed.

Diane Bieri is a partner at Arnold & Porter LLP, working with the firm's FDA and Healthcare and Antitrust practice groups. Jonathan Gleklen is chair of the firm's U.S. antitrust practice group.