Avoiding antitrust problems: understanding antitrust laws can be your best protection.

You're at a board meeting. All the members are talking about general conditions in the industry when John suddenly begins discussing a payment problem he's having with a particular customer. Legal counsel, if present, would immediately bring a halt to John's discussion. Why? Discussion of individual companies could lead to collective discriminatory conduct - perhaps a boycott of some kind - resulting in restraint of trade.

While it's an honor to be selected for a leadership position, you may be unaware of the potential antitrust liability that accompanies such a position. It is your obligation to know how the antitrust laws apply to associations and to you, personally, as a volunteer leader.

Federal antitrust laws

Three federal statutes - the Sherman Act, the Clayton Act, and the Federal Trade Commission Act - make up the antitrust laws. The most important provisions of these statutes prohibit "contracts, combinations, or conspiracies ... in restraint of trade." Since an association is a combination of individuals or corporations, one element of a possible violation is always present, and only some action by the association that restrains trade needs to occur for there to be an antitrust violation.

Federal antitrust laws may be enforced against associations, their volunteer leaders, and employees, both by government officials and by private parties. In both cases, penalties are severe. An individual convicted of a criminal violation of the Sherman Act, for instance, may be fined up to $350,000 per violation and imprisoned for up to three years. There have been cases in which volunteer leaders of associations representing manufacturers and suppliers have been prosecuted for fixing prices, fined, and sent to jail.

A corporation or association convicted of such a criminal offense may be fined up to $10 million per violation. Civil violations of the antitrust laws can result in the issuance of a cease and desist order or, in rare cases, the dissolution of the association. Failure to obey such an order can result in substantial civil penalties.

In addition to government prosecution for a civil or criminal violation, the association, its leadership, and staff can face private actions for treble damages - three times the amount of the actual damages resulting from an antitrust violation - brought by competitors or consumers. A finding that the defendant violated the antitrust laws in a private action will result in payment by the defendant of treble damages to the injured party, plus all costs and attorneys' fees.

Troublesome activities

From a practical standpoint, the following association activities can create antitrust problems.

* Price-fixing. Association members are most likely to violate, and the government is most likely to enforce, the prohibition against price-fixing. Price-fixing occurs when two or more people agree to establish a price for a product or service, thus eliminating price as an element of competition by two or more individuals or companies.

A price-fixing violation may be inferred from similar price-setting activity by association members, even in the absence of an oral or written agreement. If price-fixing is established, the association and its leaders may not raise the defense that the prices set are reasonable or that the ends sought through the price-fixing behavior are worthy.

* Agreement to divide customers or territory. An agreement among members of an association to divide customers or territory is a violation. Even an informal agreement whereby one member agrees to stay out of another member's territory will constitute a violation of the antitrust laws.

* Membership restrictions. Assuming that an association provides an essential economic benefit, the denial of membership to an eligible applicant or the denial of access to most association services to nonmembers may constitute a restraint of trade. Such denials may limit the ability of the applicants or nonmembers to compete.

The association may charge nonmembers a fee for services that are free to association members or charge a higher fee than members pay. And there are a few exceptions to the rule about not being able to deny access. For example, nonmembers do not have to be allowed into association business meetings, because they have no right to participate in decisions regarding governance of the association. Nonmembers may also be excluded from board meetings on the same grounds.

With an association statistical reporting program that requires members to share data on their individual organizations for the purposes of compiling a report, nonmembers desiring access to the report can be required to comply with the same rules as members.

* Standardization and certification. An association that develops voluntary industry standards may face antitrust problems if such standards are not carefully developed and reasonably applied. Similarly, association certification activities must be administered in an absolutely nondiscriminatory manner.

* Code of ethics, An association must exercise care if it seeks to enforce its code of ethics for members. Courts have found provisions such as minimum fee schedules or anticompetitive bidding clauses to be illegal on the grounds that they are disguised methods of restricting competition.

How to avoid problems

One way for an association to minimize the danger of an antitrust investigation or litigation is to institute an antitrust compliance program. A wide variety of such programs exist, ranging from those in which associations require legal counsel to be present at all meetings to those that provide for a periodic review of minutes of meetings and other association documents.

One way to assess an association's current situation is for legal counsel to conduct an antitrust audit of the association's operations (see sidebar, "Recommended Operating Procedures"). The audit usually consists of a study of pertinent association files and discussions with key association staff members and, in some cases, volunteer leaders. Once the documentation search and interviews are completed, a written antitrust policy statement is usually prepared to assist the association staff and volunteer leaders in complying with the antitrust laws.

Additionally, it may be essential for legal counsel to monitor association activities on an ongoing basis. Such monitoring can include review of agendas, minutes of meetings, and association programs.

If the potential for antitrust problems is significant and continuing - often the case when there's direct competition among members - many associations have legal counsel attend all board and relevant committee meetings to ensure compliance with the antitrust laws. The type and intensity of an association's antitrust compliance program, and how it uses counsel, usually depends on the perceived antitrust risks confronting the association and its members.

Recommended Operating Procedures

The following association. operating procedures ensure compliance with the antitrust laws.

1. In the bylaws or in a written policy statement of the association, include a thorough description of the association's intention to comply fully with antitrust laws.

2. Give all members of the board of directors a copy of the association's antitrust policy statement, detailing what can and cannot be done at association meetings.

3. Require the association's legal counsel to periodically update members concerning antitrust problems and to formalize the association's antitrust compliance program.

4. Ask the association's legal counsel to approve in advance all new association programs or changes in existing programs that may have potential antitrust implications. Give special attention to statistical reporting and credit reporting programs.

5. Hold regularly scheduled association meetings. Prohibit meetings that have no legitimate purpose - no agenda or set items for discussion - to prevent conversation on topics that shouldn't be discussed.

6. For each meeting, prepare an agenda that is reviewed in advance by legal counsel.

7. Have legal counsel present at all meetings of the board of directors and at any other meetings during which sensitive issues will be discussed.

8. Have legal counsel approve the minutes of all meetings to ensure that the minutes reflect the association's policy of complying with the antitrust laws.

Arthur L. Herold is a partner in the Washington, D.C., law firm of Webster, Chamberlain & Bean.