Unflattering resemblance

As discussed in a previous blog post, trade association members are subject to the same antitrust rules of the road as other companies or individuals who happen to be competitors. That means no price fixing, bid rigging, customer allocation or market division allowed, because these types of agreements are so plainly harmful that courts have condemned them as per se violations of the antitrust laws.

Outside of the per se illegal category, other types of competitor agreements or trade association rules may be subject to a more flexible rule of reason analysis, which balances the likely anticompetitive effects of an agreement or restraint against any procompetitive business justifications. But sometimes, restraints that are not clearly illegal still lean more one way than the other. As a result, courts have used a “quick look” that may avoid an elaborate market analysis if an observer with even a rudimentary understanding of economics could conclude that the restraint is very likely to lead to higher prices or reduced output and there is no sufficient efficiency defense. (The Commission often refers to this intermediate category of restraints as “inherently suspect.”)

In general, the more closely the restraint resembles a plainly harmful per se agreement, the more likely courts will use a “quick look” to determine that the competitors’ agreement presumptively harms consumers through higher prices, lower quality, or fewer choices. Recent FTC settlements involving trade association rules serve as a reminder that sometimes, a close family resemblance to bad kin can attract unwanted antitrust attention.

PLASMA. The Professional Lighting and Sign Management Companies of America is a national alliance of independent licensed electricians serving regional and national clients. Upon joining, each member is required to identify a designated territory it intends to serve. According to the FTC, three key provisions in the PLASMA bylaws prevented members from freely offering services to customers located in another member’s designated territory:

• Each PLASMA member has a “right of first refusal” for work in its designated territory. As a result, members cannot provide commercial lighting or sign services in the designated territory of another member unless the designated member first declines to perform the work. 
• Work performed in the designated territory of another member, for instance as a subcontractor, is governed by a price schedule for that territory.
• Former members of PLASMA cannot solicit or compete for clients of current members for one year after leaving the group. 

The FTC alleged that these bylaws have discouraged competition among licensed electricians who are members, particularly in the way the rules limit competition from out-of-territory members. In essence, the “right of first refusal” allows an out-of-territory member to service a customer only if the PLASMA member in the designated territory declines to perform the work. Moreover, PLASMA’s price schedule for subcontracting work threatens to eliminate the possibility of competitive bidding, which might result in lower prices for customers. Finally, barring former members from seeking work from customers—even prospective customers—of current PLASMA members for one year limits competition for the business of customers who (unknowingly) reside in the designated territory. The cumulative effect of these bylaws was to discourage competition from out-of-territory members, much like a per se illegal market division agreement. Without a business justification, these restraints unreasonably inhibited competition, according to the FTC.

Professional Skaters Association. In a second case, the Commission alleged that the Code of Ethics for the PSA restrained competition via a broad ban on soliciting the students of another member: “No member shall in any case solicit pupils of another member, directly or indirectly, or through third parties.” The PSA is a group of 6400 coaches who train skaters at all levels, including those who compete as part of Team USA. To ensure that members clearly understand the reach of the solicitation ban, PSA educational materials contained specific examples of prohibited conduct by coaches towards students of other coaches:

• Suggesting a skater change coaches
• Suggesting a skater would have better results by changing coaches
• Suggesting a skater who attends a seminar stay for a few days of additional training
• Sending recruiting material to a particular skater or parent
• Claiming one coach is a more qualified coach than another
• Claiming one ice skating program is better than another
• Offering free lessons, ice time, or equipment

According to the FTC, the PSA’s no-solicitation rule was very explicit and covered just about every type of interaction with potential students (there were even rules for using social media). Not only were the rules clear, the consequences were clear as well. The PSA actively enforced the ban through sanctions and other consequences for coaches who violated the Code, even when the student and his or her parents wanted to switch coaches for entirely personal reasons, such as carpooling arrangements or scheduling conflicts.

The FTC alleged that, rather than protecting skaters from overbearing coaches, the PSA’s non-solicitation provisions deprived them (or their paying parents) of the benefits of competition among the ice skating teachers and coaches by operating as an agreement among PSA members not to compete. The Commission has previously challenged no-solicitation provisions in trade association codes, charging that these rules are unreasonable limits on fundamental forms of competitive activity. The PSA agreed to stop its broad ban on solicitation, but will be allowed to limit solicitation in some limited situations where skater safety may justify it, such as while a skater is in a lesson or at an arena preparing to compete.

What are the takeaways from the most recent FTC enforcement actions involving trade association rules?

1. Professional and trade associations are subject to the antitrust laws, and association rules that restrain competition among members by prohibiting, restricting, or merely discouraging members from engaging in legitimate forms of competition are generally illegal unless they further some legitimate business purpose of the group.

2. Trade association rules or code provisions that bear a strong resemblance to agreements that are per se violations of the antitrust laws—price fixing, bid rigging, market division or customer allocation—will likely attract antitrust scrutiny, and—absent a strong countervailing procompetitive justification—be condemned. 

If you are a member of an association, or director or counsel to one, it may be time to review your association’s rules with an eye to weeding out any provision that restricts competition among your members without justification. If you are in doubt about whether proposed changes to your association’s rules or codes of ethics may violate the antitrust laws, you may apply for a staff advisory opinion. If you are aware of potentially anticompetitive provisions contained in association codes, you can contact the Bureau of Competition with your concerns.