Trade Associations face unique challenges that many other not-for-profit entities do not experience. The role of a trade association as a gathering point for an industry to solve problems and share ideas can lead to allegations of monopolistic behavior. Simply put, a trade association, though not designed to earn money itself, can be accused of acting like a conglomerate company; the regulations and decisions it seeks to impose can essentially limit aspects of a free market.
By definition, a trade association is simply any organization of businesses that operates within the same profession or industry. These associations generally have similar characteristics, such as:
- Not-for-profit
- Publically active or committed to public relations for the industry
- Formed to progress the industry’s efforts, efficiencies and standards
- Run by officers elected from the member body
Though non-profit businesses can band together to form such associations, all the businesses must fall within the same industry to be considered a trade association. Local chambers of commerce do not constitute a true trade association and do not run the same risks of violating anti-trust laws.
What are the U.S. Anti-Trust Laws?
Antitrust laws were established to eliminate illegal behavior—such as price-fixing—that inhibit free and fair competition in the marketplace.
The Sherman Anti-Trust Act prohibits certain business activities that reduce marketplace competition. The Clayton Anti-Trust Act expands upon the Sherman Act by including additional prohibited activities, such as price discrimination between different purchasers, exclusive dealing agreements and more.
Officers at Risk
Directors’ and officers’ (D&O) insurance is important because it can protect the decision-makers of a trade association from legal backlash from anti-trust laws. Individuals who cannot defend against claims of these violations can face fines of $1 million; companies directly involved could pay as much as $100 million in fines.
Even the most careful trade association officers cannot guarantee the actions of all its members. It is important that trade association officials do not tolerate any discussion that violates anti-trust law and clearly state that the association rejects such action entirely.
One important step any officer of a trade association can make is setting up extremely strict guidelines for meeting etiquette and discussion. The association should create a policy explicitly addressing these guidelines and require every member involved with the association to read it.
If you think you may need D&O coverage, please contact our the risk consultants on our Business Insurance team.
Price-Fixing
The most targeted area for anti-trust laws is price-fixing. Many actions of trade associations or its individual members can be construed as a form of price-fixing. As a general rule, members should never discuss profit margins or income at any time.
Specifically, dangerous topics are:
- Prices
- Credit Terms
- Profit Rates
- Pricing Strategies
It does not matter if discussion of these topics leads to decreased prices for consumers; any adjustment of price due to discussion between competitors is a violation of the Sherman Anti-Trust Act and can be grounds for a lawsuit from the government or private citizens.
Adjustments of Standards and Trade Policy
The next area of concern should be standardizations and memberships. One of the major goals of a trade association is to overcome problems and share ideas.
Unfortunately, official action by an association to implement some standards can constitute a violation of anti-trust law. Many members of such an association may want to push for a different type of production or waste management, but official action can quickly be condemned as fixing the market for one kind of service.
In order to properly avoid an anti-trust suit, an association must make standard-setting decisions free of influence from any party who stands to profit from the new requirements. However, past cases have shown that supposedly unbiased members or third-parties have been able to lie to trade associations during the standard-setting process. When the standards were ratified, significant lawsuits were brought against the trade association (as well as the instigators).
If not properly defended against, these lawsuits can lead to massive fines, product loss and defamation of character. Accurate recordkeeping and strong policies can help clear your association of guilt, but the time and money lost while fighting the case will still be significant.
Suppliers
Another major area of risk is supply control and shared supplier information. Violations occur whenever a trade association involves itself with the relationship between suppliers and its members. Associations can in no way suggest or recommend specific product suppliers to their members, nor should they reveal standard pricing or rates provide by those suppliers.
Favored supplier violations usually end up revealing themselves through price-fixing, as trade members begin purchasing and selling at identical rates. In general, this issue should be easy to avoid in official association statements. However, it may be impossible to control among average association members.
Customer Control
The final major pitfall for a trade association is territory agreements or customer division. Member companies of a trade association may not make agreements about customer allocation, marketing or servicing in specific areas. To predetermine which customers a company will accept or try to attract is a direct violation of anti-trust law. It may not be financially viable for one company to try and out-market an incumbent business. Still, they must not assist it in keeping its customers.
Protecting a Good Name
Trade associations exist under close scrutiny from government, non-association businesses and private citizens. Actions taken by officers of an association may not imply any violations of anti-trust law. However, that does not mean member businesses, if convicted of such a violation, will not try and implicate the association.
Quality D&O insurance policies work to protect the reputations of a trade association, its board members and the good name of the skilled industry itself. An experience agent can help create a plan that safeguards the hardworking officers of your trade association. Contact S.S. Nesbitt & Co., Inc. to learn more about coverage needs in the delicate world of business liability.
This content was abstracted from Zywave’s “Trade Association Risks” article.