Antitrust Risks for Associations Setting Standards for Suppliers.

Quality control of products or services provided by suppliers can be a critical factor in many industries or professions. Associations often play an active role in promoting the quality of suppliers' products or services by establishing standards or guidelines. While these are rarely subject to enforcement by the association, an association sometimes has indirect enforcement opportunities, such as by policing the products or services that it permits to be advertised in publications or displayed at trade shows. A supplier that does not qualify under an association's standards or guidelines might claim that it is the victim of an unlawful boycott by the association's members, thus raising antitrust issues. In this article, Alvin Dunn addresses the antitrust risks that may arise when associations set standards and guidelines for suppliers.

Antitrust laws prohibit agreements among competitors that unreasonably restrict competition. An association is typically composed of members who compete with each other, and concerted action by members through their association is often considered by courts to be a de facto agreement subject to antitrust scrutiny. Association action that could affect members' prices or fees, direct members to deal or not deal in certain markets or areas, or harm firms that compete with members raises the greatest antitrust risk. Nevertheless, concerted action via an association that could harm a supplier seeking to do business with the association's members also can raise antitrust issues.

Legal considerations

The law recognizes that standards or guidelines that an association might set for suppliers' products or services may provide great public benefits and may be essential to the business or professional success of association members. Selecting preferred suppliers can benefit members by assuring them of consistent, high-quality inputs. Standards or guidelines for suppliers are also increasingly important as more and more firms outsource broader segments of their operations. While the U.S. Supreme Court has repeatedly upheld antitrust challenges against association standards and guidelines, the court has also repeatedly noted the pro-competitive impact that these activities can have. Standards or guidelines set by an association have the potential to cause competitive harm, particularly if association members use them to discriminate unfairly against suppliers' products or services that do not meet the association's regimen, stifle innovation, tend to exclude low-cost or high-cost suppliers, and so on. In the we ll-known Hydrolevel case (American Society of Mechanical Engineers, Inc., v. Hydrolevel Corporation, 1982) involving a standard for boiler fuel cut-off valves, the lower-level staff of the engineering society that promulgated the standard was found by the U.S. Supreme Court to have been unduly influenced by interested firms to interpret its standard in such a way as to stifle use of an innovative design. The association--the governing board of which did not know or approve of the anticompetitive interpretation--ultimately paid antitrust damages and extensive legal fees exceeding $6 million.

Risk-reducing recommendations

There are a number of points to be considered by associations in minimizing the antitrust risk that may be associated with establishing standards or guidelines for products or services of suppliers to association members.

1. Performance standards are preferable to design, specification, or construction standards. Standards should be based on objective criteria and should not have the effect of stifling innovation. Standards should not be implemented solely at the insistence of select powerful member suppliers.

2. Calling an association's quality control document by some other denomination does not typically affect the nature or impact of the antitrust risk. Using the terms guidelines, recommendations, specifications, warnings, model, or the like will not alter the element of risk.

3. Standards developed by nonmembers or with nonmember participation are preferable to standards developed only by association members. Standards developed with nonmember input demonstrate consensus and argue against exclusionary motives. Likewise, nonmember experts should participate in testing and certification programs, if possible.

4. Suppliers and other parties affected by the standards should be permitted, to the greatest extent possible, to participate in the standard-setting process. A proposed standard should be circulated before it is implemented, with the standard-setting body giving full consideration to the comments of suppliers and other parties.

5. Standard setting by an association should not be used as a forum through which association members exchange sensitive information regarding competing products. If it is necessary to share trade secrets or other confidential information in order to formulate a standard that will permit companies to operate more efficiently or effectively, participants in standard-setting activities should be bound by a strict confidentiality agreement.

6. Standard setting should not be used as a vehicle for patent holders to enhance their patented products or services. Those who participate in, or seek to influence, standard setting should be asked to disclose all conflicts of interest.

Balanced process

A supplier of products or services to an industry or profession represented by the association would usually face significant obstacles in arguing that the supplier is a victim of an unlawful boycott resulting from standards or guidelines set by the association. Unless the supplier could demonstrate that the association members used the association's program to fix prices and fees or allocate markets or areas, this kind of claim would be judged under the rule of reason in antitrust law: The association's program would be struck down only if, on balance, its anticompetitive effects substantially outweigh its pro-competitive benefits. The association's motives unrelated to competition--such as enhancing the quality of supplies--would be balanced against any claimed anticompetitive effects. As long as the association's actions have a rational, reasonable basis, the association should survive any antitrust challenge.

That said, defending an antitrust case involves significant legal fees, staff resources, and negative public relations. Due care should be taken at every stage of an association's development and promulgation of standards or guidelines.

Alvin Dunn is an attorney and Jerry Jacobs is a partner at the law firm of Shaw Pittman, Washington, D.C. Jacobs edits this column and is general counsel to ASAE.