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 antitrust laws n. acts adopted by Congress to outlaw or restrict business practices considered to be monopolistic or which restrain interstate commerce. The Sherman Antitrust Act of 1890 declared illegal "every contract, combination.... and common law theories of negligence, defamation defamation
In law, issuance of false statements about a person that injure his reputation or that deter others from associating with him. Libel and slander are the legal subcategories of defamation. Libel is defamation in print, pictures, or any other visual symbols. , discrimination, or interference with economic relations. In this article, Rob Portman explains the basics of managing these risks.
- Jerald A. Jacobs, ASAE ASAE American Society of Association Executives
ASAE American Society of Agricultural Engineers (Society for Engineering in Agricultural, Food, and Biological Systems)
ASAE Alkali-Sulfite-Anthraquinone-Ethanol 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 an·ti·com·pet·i·tive
That discourages competition among businesses: anticompetitive foreign trade restrictions. . Notably, a good purpose - for instance, to promote healthful health·ful
1. Conducive to good health; salutary.
healthful·ness n. and safe products or high-quality professional services (job) professional services - A department of a supplier providing consultancy and programming manpower for the supplier's products. - 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 A recovery of three times the amount of actual financial losses suffered which is provided by statute for certain kinds of cases.
The statute authorizing treble damages directs the judge to multiply by three the amount of monetary damages awarded by the jury in those cases , injunctive relief injunctive relief n. a court-ordered act or prohibition against an act or condition which has been requested, and sometimes granted, in a petition to the court for an injunction. , and attorney's fees attorney's fee n. the payment for legal services. It can take several forms: 1) hourly charge, 2) flat fee for the performance of a particular service (like $250 to write a will), 3) contingent fee (such as one-third of the gross recovery, and nothing if there is no .
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 Nonprofit Organization
An association that is given tax-free status. Donations to a non-profit organization are often tax deductible as well.
Examples of non-profit organizations are charities, hospitals and schools. 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 Self-regulatory organization (SRO)
Organizations that enforce fair, ethical, and efficient practices in the securities and commodity futures industries, including all national securities and commodities exchanges and the NASD. as long as the standards are not arbitrary, or discriminatory. Courts will scrutinize scru·ti·nize
tr.v. scru·ti·nized, scru·ti·niz·ing, scru·ti·niz·es
To examine or observe with great care; inspect critically.
scru 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 HIV (Human Immunodeficiency Virus), either of two closely related retroviruses that invade T-helper lymphocytes and are responsible for AIDS. There are two types of HIV: HIV-1 and HIV-2. HIV-1 is responsible for the vast majority of AIDS in the United States. as part of the association's recommended standards.
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 COMPETENCY, evidence. The legal fitness or ability of a witness to be heard on the trial of a cause. This term is also applied to written or other evidence which may be legally given on such trial, as, depositions, letters, account-books, and the like.
2. 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.