Minimizing Antitrust Concerns Relating to Supplier Memberships.

Many associations maintain expanded membership categories that include ancillary members such as suppliers to the primary association membership. Some associations are more restrictive and either do not admit suppliers into membership at all or do so only with certain limitations. As with all association membership policies, the decision as to whether to admit suppliers as members and, if so, whether to admit all suppliers on equal terms, can raise antitrust concerns that associations must consider. In this column Alvin Dunn elaborates on these issues.

Jerald A. Jacobs, ASAE General Counsel

Associations are under no legal obligation to admit suppliers or other ancillary categories of members. Well-established case law makes clear that an association is free to limit its membership to companies that do business or practice a profession in a specific, defined industry or field. In addition, associations may choose to limit membership to those that are at a particular level within a field (such as distributors).

An association may, however, want to admit to its membership companies that operate at different levels. Suppliers to an association's regular members may be especially interested in joining an association. Admitting such companies can generate additional revenue and also encourage suppliers to offer discounts, benefits, and preferred treatment to members.

Keep in mind, however, that expanding an association's membership to suppliers or other ancillary categories of members--particularly if they are admitted on a selective basis--can raise antitrust issues.

Open policy reduces risk

From an antitrust perspective, the safest course for an association is to open its membership on an equal basis to all ancillary members that operate at a defined level or that perform a defined function. As long as membership is open to all companies that operate within a defined category, all companies that compete with each other in that category would have the opportunity to join and obtain the benefits of association membership.

Permitting suppliers of certain products to join as ancillary members does not force an association to open its membership to all types of suppliers or other companies that do business with association members. For example, while an association of widget manufacturers may permit steel suppliers to join as ancillary members, the association is not obligated to permit suppliers of cardboard boxes and packing materials to join. By denying association membership to all suppliers of cardboard boxes and packing materials, the association does not harm competition in that market.

More difficult antitrust issues can arise if an association chooses to admit as ancillary members only preferred suppliers or to admit only a single supplier and exclude all others. An excluded supplier might assert that by denying it membership the association's members are engaging in a group boycott that injures competition and violates the antitrust laws.

Rule of reason affords protection

In most cases, a supplier excluded from association membership would not have a strong antitrust claim. It is settled law that an association's exclusion of a potential member--particularly an ancillary member such as a supplier--be judged under the rule of reason. That is, a practice will be struck down under the rule of reason only if on balance its anticompetitive effects substantially outweigh its procompetitive benefits. Analysis under the rule of reason would likely begin by examining whether the association possesses market power--most simply defined as substantial market share--in the market in which the excluded supplier competes.

Even though an association may possess market power in the primary market or field in which its members operate--for example, the market for the manufacture and sale of widgets--it may not possess power in the market for the goods produced by the supplier that it may decide to exclude from membership. In other words, if an association does not possess power in the market for steel or other products needed to make widgets, it is not likely that excluding certain suppliers from membership would have substantial anticompetitive effects in that market. Steel suppliers, even if excluded from membership in the widget makers' association, would remain free to market their steel to the many other customers supporting the industry.

Economic self-interest prevails

If an association possesses market power with regard to a particular product and wishes to permit only certain suppliers to join the association, the antitrust risks are somewhat greater. Suppliers might make a strong argument that membership in the particular association is essential for them to compete and that denial of membership harms competition.

It seems unlikely, however, that an association would establish membership limitations that in fact harm competition among its suppliers. Clearly, it is in the economic self-interest of the association's members to ensure that vigorous competition exists among its suppliers, an environment that can lead to lower prices for key products.

One way an association might limit the antitrust risks is to make clear that no association member is required to purchase from suppliers that are members of the association and that, rather, association members are free to purchase from any supplier.

Even if an association's membership limitations acted to curb competition, under the rule of reason any anticompetitive effects would be weighed against the procompetitive justifications for the membership limitations. Presumably substantial benefits would flow to association members from the few select suppliers or other companies that are admitted as ancillary members. An association should be able to argue that the benefits result in lower prices and/or improved quality of the goods or services produced by association members.

Certainly an asso6ciation wants to avoid facing an antitrust lawsuit, and adopting any type of membership limitation creates some antitrust risk. Nevertheless, associations generally can admit suppliers as ancillary members on an equal basis without increasing their antitrust risk. An association seeking to admit only select suppliers needs to exercise greater care, but in many cases it should be able to do so without running afoul of antitrust laws. Obviously, the advice of experienced antitrust counsel is warranted in this area.

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