Trade and professional associations benefit society by promoting
various industries, professions, and other interests. To realize
their goals, however, associations must sometimes limit membership
in the association or association-sponsored programs. A recent
court decision, Abraham v. American Quarter Horse
Association, No. 2:12-cv-00103-J (E.D. Tex.), highlights how
association restrictions can sometimes run afoul of the antitrust
laws, especially where the restrictions are intended to, or have
the effect of, foreclosing a competitor's ability to compete in
the market. In this regard, the case shines a light on the
tightrope that associations walk when trying to balance membership
and programmatic needs against the limits imposed by the antitrust
laws.
This article provides a brief overview of the case, followed by
suggested best practices for associations to minimize the antitrust
risk of membership and program restrictions.
Summary of American Quarter Horse Association
In American Quarter Horse Association, the plaintiffs,
who breed cloned horses, alleged that "Rule 227(a) of the
American Quarter Horse Association ["AQHA"] Regulations,
which prohibited the registration of any horses produced by the
cloning process and their offspring, violates Sections 1 and 2 of
the Sherman Act (15 U.S.C. §§ 1 and 2)...."
Specifically, as explained by the court, the plaintiffs argued that
elite Quarter Horse breeders controlled the Association's rules
committee, and that "[t]hese breeders" opposed cloning
and sought to exclude clones from the registry to "keep prices
for their own horses high by avoiding competition...."
Section 1 of the Sherman Act prohibits contracts, combinations, and
conspiracies that unreasonably restrain trade. Most association
conduct, including membership and program restrictions, is analyzed
under the rule of reason, which balances the procompetitive
benefits of the challenged conduct against the potential
anticompetitive harm. Section 2 of the Sherman Act prohibits
monopolization and attempted monopolization, claims that require
proof of both monopoly power (the power to control prices or
exclude competition) and the willful acquisition or maintenance of
that power through "predatory" or
"exclusionary" conduct.
In American Quarter Horse Association, the plaintiffs
argued that the registry restriction "precluded
competition" from cloned horses and "established
unnecessary and insurmountable barriers to entry into the
market." In terms of competitive harm, the plaintiffs alleged
that most shows and races required horses to be registered with
AQHA in order to compete. The AQHA defended the rule, in part, on
grounds that the registry restriction was designed to promote and
preserve the integrity of the breed and to further the
association's internal management – goals to which most,
if not all, trade associations can relate. The AQHA also cited a
number of cases that upheld similar breed registries or membership
requirements. Jack Russell Terrier Network of Northern
California, 407 F.3d at 1032, 1035, for example, held that a
breed registry and its local clubs had a common goal in pursuing
the best interests of the Jack Russell Terrier breed and protecting
the current and future value of that breed as determined by the
breed registry's standards.
Managing Your Association's Membership and Program Requirements and the Antitrust Laws
In light of the American Quarter Horse Association
decision, associations should review their current membership
standards and the requirements for participating in an
association-sponsored program (such as a certification or
accreditation program) for compliance with the antitrust laws. This
is particularly important for "dominant" associations or
those that control access to a facility deemed (fairly or not) to
be essential to competing in a market. Even smaller associations
should be mindful of the potential impact of a rule limiting
membership or program participation. No association – no
matter its size – wants to end up with the fate of its
membership or program standards in the hands of a jury. The
following are basic steps that every association should keep in
mind when promulgating or enforcing association membership or
program restrictions.
In denying the defendant's summary judgment motion, however,
the court found that "a factfinder could determine that the
AQHA has monopoly power over the economically viable Quarter Horse
market because its rules control not only market participation but
whether, in turn, a horse is valuable or relatively
worthless." The court also found that the question of the
rule's alleged procompetitive benefits could "best be
dealt with at trial." The jury, following trial, rendered a
verdict against AQHA, concluding that the rule was exclusionary and
not reasonably tailored to achieve AQHA's legitimate
procompetitive goals.
Consider the Antitrust Risks Before Imposing a Restriction.
An association's membership or program restrictions should be, to the greatest extent possible, narrowly drawn, nondiscriminatory, objective, fully articulated, and uniformly applied. Restrictions should be implemented only to the extent necessary to further a legitimate procompetitive purpose. In addition, to limit the risk of "disgruntled" members or others raising due process or other similar arguments, associations should provide prospective members/participants with (a) a clear statement of the association's requirements, (b) notice of a potential adverse decision, (c) an opportunity to respond, and (d) an opportunity to appeal any adverse final decision.
Maintain Oversight of Committee Activities.
A subtle, but important, takeaway from American Quarter
Horse Association is the need for an association's
officers, directors, and staff management to exercise oversight of
committee activities. According to the court,
"Plaintiffs...produced evidence that the AQHA actually made
its decisions to defend Rule 227(a) through the
competitor-controlled SBR Committee, and that even if the Board did
not relegate control to the Committee on cloning matters, it did
not review or question the Committee's unanimous
recommendations."
In practical terms, associations should exercise oversight by
implementing the following basic steps:
- Adopt a formal antitrust policy in which the association affirms its commitment to abide by the spirit and the letter of federal and state antitrust laws. The policy should be distributed to (and possibly signed by) the association's officers, directors, employees, and representatives. An association should refrain from enforcing "unwritten" policies that restrict membership or program participation.
- All restrictions should be reviewed for full compliance with the association's governing documents.
- Require association meetings to have an agenda circulated in advance, and that minutes of all meetings properly reflect the actions taken at the meeting. Stop any meeting (formal or informal) where improper subjects are being or will be discussed.
- Ensure that any proposed board, committee, or staff recommendations or decisions with potential antitrust implications are reviewed in advance by in-house or outside counsel.
Be Careful What You Say and Do.
From both the antitrust and corporate perspectives, an association should operate in a transparent manner subject to written policies and procedures. At the same time, however, anything said or written by a member or employee, including e-mails, text messages, and the like, may end up before a jury in the event of litigation. In American Quarter Horse Association, for example, the plaintiffs presented evidence that AQHA members had previously expressed concerns about competition from cloned horses. Needless to say, an association's statements, actions, and writings should be as clear and unambiguous as possible to avoid misinterpretation or misconstruction after the fact. This rule carries through to statements made and actions taken at or in connection with association-sponsored conferences, trade shows, cocktail parties, dinners, and social events, and on association-sponsored electronic communication services such as listservs and other similar forums.
The American Quarter Horse Association case is a reminder for associations of the potential antitrust risk of membership and program restrictions. To minimize this risk, associations should review their membership and program eligibility and participation rules carefully to ensure that they are appropriate for the market and narrowly drawn to further a legitimate procompetitive purpose of the association.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.