Risks of self-regulation.

The legal risks involved with self-regulation can be managed - here's how.

Associations are increasingly taking responsibility for "self-regulation" of members through product standards and testing, ethics codes, guidelines, certification or accreditation programs, or even membership selection. Although clearly in the public interest and beneficial to members, self-regulation programs raise risks of legal liability under the antitrust laws and common law theories of negligence, defamation, discrimination, or interference with economic relations. In this article, Rob Portman explains the basics of managing these risks.

- Jerald A. Jacobs, ASAE General Counsel

The three concerns of an association with a self-regulation program are antitrust, due process, and liability to third parties.

Antitrust risks. When a court evaluates association self-regulation programs, it usually applies the rule of reason, looking at all the facts and circumstances to determine whether a self-regulatory activity is, on balance, anticompetitive. Notably, a good purpose - for instance, to promote healthful and safe products or high-quality professional services - does not save an otherwise substantially anticompetitive activity.

An antitrust violation is serious business, exposing the association and its members to costly investigations and lawsuits by the Justice Department, the Federal Trade Commission, state prosecutors, or private litigants. Liability can be sought with criminal and/or civil penalties, including treble damages, injunctive relief, and attorney's fees.

Self-regulation programs and activities that are anticompetitive, discriminatory, unrelated to objective standards, or implemented without fair procedures are most likely to attract antitrust challenges. Associations are particularly vulnerable to such antitrust attacks because they are, by definition, combinations of competitors.

The Supreme Court has determined that associations are also responsible for the anticompetitive conduct of their volunteer agents acting under the "apparent authority" of the associations. This holds even if such conduct is in direct violation of an association's rules.

Due process violations. Nonprofit organizations engaged in standard setting, credentialing, membership determinations, or ethics enforcement must provide fair procedures in both setting and implementing criteria, particularly when the credential or membership is an economic or professional necessity. Common law due process has two elements: substantive fairness and procedural fairness. Substantive fairness requires the use of objective criteria reasonably related to a legitimate organizational purpose. Procedural fairness refers to the procedures of decision making.

Courts are likely to defer to substantive standards established by an association or other self-regulatory organization as long as the standards are not arbitrary, or discriminatory. Courts will scrutinize the fairness of the procedures more closely because these are matters with which courts are more familiar.

Liability to third parties. A self-regulating organization may be held liable when a patient, client, or customer suffers harm at the hands of a certified professional or by a product that is in compliance with industry standards. Recently, for example, a voluntary association of blood banks was held liable to a patient who contracted AIDS from transfused blood. The blood bank in this case had failed to adopt a particular test for HIV as part of the association's recommended standards.

Managing risks

Here are tips for ensuring use of reasonable criteria with self-regulation programs.

* Check all requirements, conditions, prerequisites, standards, or qualifications for membership, certification, accreditation, or ethical compliance to make sure that they are reasonable and objective.

* Establish-criteria that are no more stringent than necessary, for ensuring that minimum competency or quality levels have been attained.

* Make certification or compliance with ethical guidelines voluntary when possible; courts have held that voluntary standards do not restrain trade.

* Be certain that criteria for credentialing do not have the purpose or effect of unreasonably restricting or boycotting competitors.

* Establish criteria only after giving reasonable notice and opportunity to comment to all those who may be affected by requirements.

Your association must adopt a due process policy for applicants denied membership or certification or whose membership or certification is revoked. Make sure the policy includes the following:

* adequate notice of an adverse decision and a meaningful opportunity to respond;

* the respondent's right to a statement of the claims and to a hearing before a panel of peers, none of whom has a direct economic or personal interest in the outcome of the proceeding;

* the respondent's right to be represented by another person, including an attorney, and to submit evidence and arguments in defense;

* the respondent's right to examine the evidence and to cross-examine witnesses;

* the respondent's right to a written decision explaining the reasons behind it; and

* the respondent's right to appeal an adverse decision to a higher-level decision-making body within the organization.

Robert M. Portman and Jerald A. Jacobs are partners at Jenner & Block, in Washington, D.C. Jacobs edits this column.