Antitrust and membership restrictions
The U.S. District Court for the Eastern District of Texas issued a decision involving the American Quarter Horse Association in 2013 that has some lessons for associations generally when it comes to antitrust risks for enforcing membership restrictions.
That 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.
In American Quarter Horse Association, the plaintiffs, who breed cloned horses, alleged that "Rule 227(a) of the American Quarter Horse Association 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 controled 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...."
The plaintiffs in this case 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 court found, however, 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.
In light of this 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.
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