Certification AND THE LAW.

Understanding-and limiting-the legal and tax implications of running a certification program.

Dozens of decisions confront you as you struggle to get a certification program off the ground. What types of examinations do you develop? How do you administer them? What's the best way to market your program?

Among the most important issues to consider are the legal implications inherent in certification programs. These range from the seemingly mundane (how should you name your program?) to the conceptually challenging (what should be the relationship between the organization and the public at large?). What follows is a brief overview of some of the most important legal concerns you need to be familiar with, and how best to limit your liability.

The most common risks

When association executives are contemplating a new certification program, they often ask me about the risks that accompany such an effort. While there are few reported cases of associations being found liable as a result of standard setting, it is true that running a certification program inevitably attracts complaints, especially from those who fail to meet the program's standards.

Thankfully, full-scale judicial attacks are relatively rare, but as the cases involving the National Spa and Pool Institute show, such claims can be devastating. NSPI lost a jury trial in 1998 which, inter alia, alleged that NSPI had failed to exercise a duty of using "reasonable care" when it promulgated its swimming pool standards. NSPI's legal defense costs greatly exceeded its insurance coverage. To avoid being shut down by the jury's verdict and in order to post a bond for the appeal of the case, NSPI filed for Chapter 11 reorganization. (For further information about the litigation, contact NSPI's general counsel, Dave Karmol at [e-mail].)

Clearly, it pays to understand what forms claims can take. When a claim is advanced, it will probably be articulated as an antitrust violation, a reliance contract, or procedural due process claim. Following is an explanation of the most common types of claims.

Antitrust. Certification programs beg antitrust scrutiny, given that the object of standard setting is to bring competitors together to set criteria for, among other things, restricting entry into a field. Antitrust law prohibits anyone from unreasonably creating a barrier to practice in a profession. Therefore, the certification organization must make sure that all of its eligibility requirements are reasonable--that is, relevant to determining the professional's skill level and not so high as to block the majority of professionals from being eligible to apply for certification. The organization must also see to it that when a professional's certification is revoked, it is done in a fair manner that meets the criteria discussed above.

Third-party reliance. If a customer, patient, or employer is injured by a certified product or professional, it is possible that the certifying organization will be held liable for negligence or negligent misrepresentation. The argument follows that the person relied on the certification as a guarantee of competence; because the certified product or professional did not perform competently, the certification should not have been granted. Thus, it is argued, the standard-setting organization should be liable to the injured person for its mistaken or negligent grant of certification.

In order to find liability, the injured party generally must prove that

1. the organization should have known better than to grant certification;

2. the organization should have known that its mistake could result in the injury; and

3. the injured party was justified in relying on the certification as a guarantee of competence.

There are relatively few cases involving third-party suits against standard-setting organizations. Among those that have arisen, several have held that the organization is not liable in the case of products when it did not manufacture the product that caused the injury and did not exercise control over the manufacturer. Nevertheless, it is clear that liability may be found when certification is negligently granted or maintained. The deciding factor is the degree of control that can be shown that the standard-setting program exercised--or should have exercised--over the product or professional.

Common law due process. In addition to potential third-party liability, standard-setting activity may give rise to liability for failure to treat applicants with the legally required level of "fairness." Programs must be based on standards that are reasonable and applied fairly, and must offer some basis for appealing adverse decisions. They must gauge an applicant's performance alone and not be influenced by factors such as personal acquaintance, race, gender, or disability (to the extent that performance levels are not impaired). The fairness analysis is applied especially when certification is a virtual prerequisite to the practice of a given profession or to participating in an industry.

Contract-law implications. The rejection or revocation of certification may also give rise to liability under contract law. Claimants may be awarded damages when certification is revoked unless there has been careful drafting of the application and grant of certification. The terms of the grant of certification need to make it clear that certification is owned by the program, not the individual or product certified.

The benefits of incorporation

The very first legal question you need to address as you set up your program is what its structure should be. Certification programs can either be carried out within a trade association or professional membership society, or they can be part of a separate organization. When standard setting is part of a collaborative process involving several different organizations, however, it is best for all involved to establish a separate corporation. Otherwise, the activity could be characterized as one of the following:

* a program owned by only one of the groups;

* a joint activity such as a joint venture or partnership (neither of which are shielded by corporate liability limitations); or

* an unincorporated association in which all participants--corporate and individual--share fully in liability.

Often, the concern about the liability of standard setting drives individual organizations to form a corporation as well, rather than engaging in certification as an in-house activity or some sort of joint venture that puts the parent association at risk.

Proceeding with corporate formation

Once you have decided to start a separate corporation within which to operate your certification program, there are a number of basic decisions to make. You must

* decide where to incorporate. You'll want to consider what flexibility you want for holding meetings and elections, whether you want to have members and, most importantly, where your operations are likely to be located in the future.

* prepare articles of incorporation, which will serve as your primary governing document. contained in the articles are your purposes, several provisions required by the Internal Revenue Service relating to dissolution and prohibition on private inurement, as well as a brief summary of governance mandates.

* articulate the corporation's mission and governance construct (that is, how the board of directors is chosen) within the formal articles of incorporation and bylaws; and

* carefully consider your program's name. It's vitally important that the mission you envision is reflected--or at least not contradicted--by what you choose to call it. For instance, if there is some chance that your certification program may be offered internationally, it would be unwise to adapt your name to "American Board of[ldots]"

These initial formulations have enormous consequences for standardsetting programs. The way you fashion them can determine everything from what tax-exempt classification the new corporation is eligible for to who controls its revenues and policies.

Another key question your organization must consider is who the standard setting is intended to benefit: the profession or the public at large?

Many standard-setting programs are established, unabashedly, to promote the interests of the members of the profession or industry for which the programs set standards. Such a certification program's goals can be very similar to those of a trade association. The program may seek to promote public awareness of its profession, to provide a forum for distinguishing members of its profession from those in a competing profession, and to use certification as a means of recognizing those who meet the level of competence set out. The program may also market its credential as a hiring criterion for members of its profession, thereby giving its certificants an advantage over others.

The mission, as articulated, clearly has an impact on governance. To promote that profession-oriented mission as just described, the organization's board might likely be chosen mainly from members of the profession and from the board of the related professional membership association. Board members may include leaders in the profession, leaders of the professional associations, or simply members of the profession who bring a specialized knowledge to the board. The

board may be appointed by specified professional associations, elected from the membership of the professional associations, or elected from those certified, or it may be self-perpetuating. Care needs to be taken, however, in allocating board positions to outside organizations, lest control be vested in that outside organization. Too much control can lead to later liability for the outside association-not to mention the unavoidable disputes involving policy setting.

To the extent that the mission of the standard-setting entity is broad, the selection of the board of directors should reflect a broad commitment. Members of the board should be drawn, for the most part, from outside the credentialed profession.

Tax implications

The Internal Revenue Service takes the view that, in general, standard setting may be carried out only by 501(c)(6) organizations. This is, of course, particularly true when the standard-setting agency's mission is to benefit the profession and those members of the profession who become certified by the corporation. Certainly the most conservative course of action is to seek recognition for the certification corporation under 501(c)(6).

However, it is not impossible for a certification corporation to be recognized by the IRS as a 501(c)(3) charitable organization. To qualify as a 501(c)(3), the certification program must be able to demonstrate either that it serves to lessen a governmental burden (such as professional licensure), or that it meets the charitable goal of protecting larger public concerns rather than professional interests. For instance, the mission of a 501(c)(3) certification corporation could be expressed as promoting public health and safety through the effective practice of the given profession. (Of course, any benefit to the profession would need to be incidental to the public benefit conveyed by the certification program.) Many certification programs are established either with the direct financial assistance of government agencies-such as the Department of Labor or the Department of Housing and Urban Development-or even by legislative enactment. Such programs can point to the interest shown by federal, state, or local government agencies as a clear demonstration that the government believes its own burdens are lessened by private certification efforts.

As far as board selection is concerned, corporations seeking to be recognized as charitable organizations should maintain at least one 'public member" who is expected to represent the concerns of the larger public affected by certification. Appointment of board members by a professional society or election by members of the profession should be discouraged for 501(c)(3) organizations.

Maintaining corporate separateness

Although separate incorporation is an effective and often necessary means of protecting your professional association, it must be done properly and the separation must be maintained diligently. This means the relationship between the certification organization and professional association must be clearly defined. Often this involves drafting a contract for the transfer of trademarks or other assets of the certification program that the professional association may have previously developed.

What if the certification organization does not have a true separate legal presence from the professional association? A person, then, injured by the certification corporation may be allowed to use the doctrine of piercing the corporate veil to obtain access to the society's assets in satisfaction of any claim against the certification board.

For a quick-read list of these and other risk-reducing steps, see the sidebar, "Ten Ways to Reduce Your Risk." Then remember this: A magazine article is no substitute for sound legal advice. Before you get far into your certification-or if you're concerned that the one you have leaves you vulnerable-contact a lawyer who has experience representing certification and accreditation programs. The result should be a program that serves your profession and the public well without putting your association at undue risk.

Susan E. Dorn is a partner in Dorn & Klamp, PC, Washington, D.C.

Ten Ways to Reduce Your Risk

A few steps you can take now may be critical in a later analysis of whether your program--or your related association--is found liable for setting standards. These steps include

1. Incorporating. This is the first and easiest step in limiting liability and preserving organizational separateness.

2. Indemnifying board members and other volunteers in your formal corporate documents. Require applicants to sign an enforceable waiver of claims when applying for certification.

3. Taking advantage of all immunities. This may require purchasing insurance. For example, most Washington, D.C.-based nonprofit corporations are required to maintain insurance coverage of at least $500,000 per total claim in order to invoke their volunteer immunity defense.

4. Separating staff and board membership of the certification program from that. of the association.

5. Observing corporate formalities. The certification program's board of directors must hold separate board meetings and maintain its own set of books and records, including meeting minutes.

6. Avoiding intermingling of property. The association should not own intellectual property used by certification organization.

7. Conferring a revocable license for use of the corporation's certification mark when granting certification. Register your intellectual property with the U.S. Patent and Trademark Office. Web site: www.uspto.gov. (You should consider using a trademark attorney who is experienced in registering certification marks.)

8. Providing time limits for certification rather than giving lifetime certification. Rejection of eligibility for certification creates less liability than revocation of certification.

9. Establishing an appeal process from the outset.

10. Publicizing the limits of your program's reach. Take care in promoting the credential to manufacturers or employers.