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Antitrust and Research Trade Associations

Client Advisory

April 2006

This memorandum sets forth general guidelines to assist trade associations and their members in reducing the possibility of violating the U.S. antitrust laws while fulfilling the associations’ purposes of improving business conditions in their industries. These guidelines are necessarily general, however, because questions involving the antitrust laws can involve a wide range of circumstances, making it virtually impossible to issue guidelines that cover all the questions that may arise.

This memorandum also provides background information regarding the National Cooperative Research and Production Act of 1993, which provides certain protections to research, development and production joint ventures and sets forth guidelines for its applicability in order to eliminate confusion regarding application of antitrust laws to such ventures.

This memorandum is directed primarily towards the activities of an association as an organization seeking to perform its stated purpose, not towards anticompetitive activities by the association’s members that are clearly outside the scope of the association’s purposes. That is, we have assumed that the association’s members will not use association meetings to discuss prices, divide markets, or engage in other activities that would raise serious antitrust problems wholly apart from the association. In so doing, we assume that counsel for each of the members of the association has cautioned those members against such activities, whether they be at meetings of the association, at meetings of professional societies or other organizations, or otherwise.

The National Cooperative Research and Production Act of 1993

In November 1980, the Department of Justice (Antitrust Division) (the “DOJ”) published the “Antitrust Guide Concerning Research Joint Ventures” (the “Guide” or the “1980 Guide”). The Guide assessed the antitrust laws in relation to joint research projects conducted by market competitors. However, the Guide was not as helpful to industry as the DOJ had anticipated. Instead, businesses continued to shy away from entering R&D joint ventures for fear of unfavorable DOJ evaluations and private institution of treble damage actions.

Responding to these concerns, Congress passed the “National Cooperative Research Act of 1984” (“NCRA”). Congress intended that NCRA would dispel the uncertainties surrounding enforcement of the antitrust laws under the 1980 Guide and thus encourage R&D joint ventures among competitors.

In 1993 Congress amended and redesignated the NCRA as the “National Cooperative Research and Production Act of 1993” (the “Act” or “NCRPA”) to include certain forms of production joint ventures. 15 U.S.C.A. §§ 4301-4306. By extending NCRA, Congress aimed to promote innovation, facilitate trade, and strengthen the competitiveness of the United States in world markets.

Finally, NCRPA was further amended by the “Standards Development Organization Advancement Act of 2004,” which added, to the joint ventures covered by NCRPA, the standards development activities of standards development organizations (“SDO’s”).

To secure the law’s protections, the joint venture must file with the DOJ and the FTC a written notification[1]identifying the parties to the venture and stating the venture’s nature and objectives. SDO’s must file the name and place of business of the organization and state the nature and scope of the standards activity.

The DOJ or the FTC will then publish in the Federal Register the information about the joint venture’s or SDO’s participants and objectives.

NCRPA requires that principal production facilities of the JV be in the United States and that controlling parties be U. S. persons or, if foreign, from countries with antitrust laws accommodating U. S. persons appropriately.[2]

About 1,000 joint ventures and over 200 standards development organizations have filed under NCRPA since the law was passed and then amended.

Three provisions of the Act make SDO activity or joint R&D or production activity among competitors more attractive. First, the Act provides that conduct falling within the definition of “joint venture” or “standards development organization” will be judged under the so-called “rule of reason.” Briefly, judicial use of the rule of reason avoids finding conduct illegal per se and instead takes into account all relevant factors affecting competition in properly defined markets.[3]

Second, with respect to covered activity, the Act exempts such activity from treble-damage suits, if the participants have made certain disclosures to the DOJ and the FTC pursuant to a voluntary notification procedure. With respect to production joint ventures, the Act exempts such ventures from treble-damage suits if two requirements are met in addition to the disclosure requirement: (1) the venture’s production facilities must be located in the United States or its territories; and (2) the joint venturers and those parties who control the joint venturers must be either United States persons, or foreign persons from a country “whose law” accords parity of antitrust treatment to United States persons and domestic persons with respect to participation in production joint ventures.

Finally, should private suits against a protected venture ensue, the Act permits awarding the venture costs, including reasonable attorneys’ fees, to the extent that the plaintiff’s claim or conduct during the litigation was “frivolous, unreasonable, without foundation, or in bad faith.” [4]

Before the Act became effective, courts limited their reasonableness inquiry to the balancing of competitive benefits conferred by the contested activity against the anticompetitive effects caused in the relevant product market. The Act now mandates that courts also consider competitive effects of the venture on the relevant research, development, product, process, and service markets. As previously stated, this expansive and fluctuating standard permits courts to be sensitive to often rapid advances in technology, as well as changing global and domestic economic climates.

The FTC’s Joint Venture Project

The FTC, in conjunction with the DOJ, conducted public hearings on June 5 and December 15, 1997 entitled the “Joint Venture Project” (the “JVP”). The issue addressed at these hearings was whether antitrust guidance to the business community can be improved through clarifying and updating antitrust policies regarding joint ventures and other forms of competitor collaborations. The JVP hearings also focused on the effectiveness of the NCRPA since its enactment.

As a result of the JVP hearings, the FTC and the DOJ issued the “Antitrust Guidelines for Collaborations Among Competitors” (the “Guidelines”). The Guidelines cite the increased variety and use of competitor collaborations as the impetus for a new framework. Issued in April of 2000, the Guidelines aim to assist businesses, including trade associations, in assessing the probability of an antitrust challenge to potential collaborations with competitors. Likewise, the Guidelines provide a framework for evaluating which agreements will be challenged under the rule of reason and which will be examined as per se illegal. Finally, the Guidelines create the concept of “Safety Zones” which map out certain collaborations which will be presumed lawful by the DOJ and the FTC.

According to the Guidelines, per se illegal agreements are those which are so likely to harm competition that they do not warrant the expense required to examine their effects. Agreements which fall under this category have included price fixing, output limits, and market allocations.

Conversely, all other agreements are looked at from a rule of reason analysis. The first step under this analysis considers the business purpose of the agreement and whether the collaboration has already caused anticompetitive concerns. If so, the examination continues on to a factual inquiry, including:

  • whether the agreement decreases the incentive to compete;
     
  • to what extent it decreases market shares;
     
  • evaluation into market circumstances surrounding the agreement that may increase the likelihood of an anticompetitive environment; and
     
  • the timing of the agreement.

Finally, if, at the conclusion of this inquiry, the DOJ and the FTC find a potential for anticompetitive concerns, then they will examine whether there are procompetitive benefits which offset the negative effects of the agreement.

As illustrated by this overview, the rule of reason analysis is considerably blurry. The Guidelines provide no bright line rule regarding the analysis.

The Guidelines’ Safety Zones

Realizing that competitor collaborations can often be procompetitive, the Guidelines outline Safety Zones for certain types of agreements. These Safety Zones allow collaboration participants to determine beforehand whether their potential agreements will fall under an antitrust challenge. The Guidelines stress that agreements which fall outside the designated Safety Zones are not presumed anticompetitive. Rather, they will be viewed according to the applicable standard of review.

These pronouncements should be understood in the context of increasing FTC and DOJ enforcement in the Association area, where special vigilance has been applied against Association activities which result in price-fixing or in unreasonable restraints on advertising. 

The DOJ’s increased criminal enforcement activities affect trade associations in three ways:

  • The association and the members can be prosecuted either as participants or as “aiders and abetters” in an anticompetitive conspiracy. The result in terms of jail sentences and fines, however, is the same whether prosecuted as participants or aiders/abetters.
     
  • A trade association may be called to testify or provide records. An association that fails to comply risks an indictment for obstruction of justice and perjury.
     
  • Sentencing guidelines provide for increased mandatory jail terms ranging from 6 to 30 months, depending on the amount of commerce involved. The Antitrust Amendments Act of 1990 increased the maximum fines for an antitrust violation from $100,000 to $350,000 for an individual and from $1 million to $10 million for a corporation.

These recent developments require corporations participating in trade associations to review, update and revitalize their antitrust compliance programs.

Applicability of the 1980 Guide to Joint R&D Activity

Whether or not the participants in an R&D joint venture wish to apply for protection under NCRPA, the 1980 Guide, despite its age, remains a useful analytical tool when considering the legality of intended activity.

The analytical section of the Guide covers three principal areas: (1) the effect on competition of elements of cooperative research, (2) collateral restraints put in place by the venturers, and (3) access to results of the venture by participants and nonparticipants. A common thread running throughout the Guide is the concept of “research competition” and the principle that the legality of an R&D joint venture often will depend on whether it or individual efforts will better result in innovation and invention.

The Guide also shows great concern for the pace of research and cautions repeatedly that the preferable alternative is the one that speeds research activity and removes the ability to control or deter research from the hands of a few dominant forces in the market. Finally, the Guide shows a healthy understanding for the realities of forming industry groups to engage in expensive and often risky research activities. The Guide recognizes, for example, that in appropriate cases preferential disclosure of results is permissible as an incentive to membership.

Since the Guide often discusses intended activity as being more or less susceptible to antitrust ramifications, a useful checklist of alternatives for the venturers’ counsel to consider follows. The chart below summarizes by topic the likelihood that certain aspects of joint R&D activity will leave the venture vulnerable to opposition from competitors or increased scrutiny from the antitrust authorities:

Antitrust Concerns

Topic

Not Likely

More Likely

Access to Association

Reasonable fees, royalties or expenses; reasonable premium to latecomers

Unreasonable charge that creates or abuses market power


Access to Association’s Results


Fees to nonmembers  reasonably reflecting expenses


Concerted denial is analogous to boycott; “blackball systems” to restrict relicensing are illegal


Ancillary Restraints


Limited


Broad


Availability of Individual Research


Cost and risk high; small companies; small R&D budgets; outside financing unavailable; R&D-poor industry


Cost and risk low; large companies; large R&D budgets


Collateral Restraints in General


“Rule-of-reason” (reasonably ancillary to main purpose, scope or duration reasonable, and not a pattern of anticompetitive agreements)


“Per se” (price fixing, market division, tying arrangements, group boycotts)


Collateral Restraints (Disclosure of Results)


Full disclosure, no limits on individual effort


Restraints on public disclosure, pooling of confidential information


Collateral Restraints (Nonpatent)


Closely related to venture’s purpose; e.g., duty to exchange previous results; confidentiality pending patent, division of research effort


Remote relation to venture’s purpose and anticompetitive; e.g., restrictions on individual development, production and marketing of inventions; sharing of cost or other confidential information; unreasonable membership rules


Collateral Restraints (Patents and Know-how)


Require sponsor to obtain patents; cross-licensing of new patents; exchange of know-how related to project


Price agreements; market division; agreements to limit products; unreasonable patent pooling


Competitive Relationship of Venturers If Assets (e.g., Patents) Are Acquired


Could merge under DOJ and FTC Guidelines; members of different industries (improves likelihood of licensing); potential competitors; failing company combining with only available venturer


Too large to merge under DOJ and FTC guidelines;  members of same industry; actual competitors


Conduct of Project


By independent third party; e.g., university (more incentive to speed research and publicize results)


By participants


Contributions by Participants


Pooling of background patents (especially if they are blocking research) and know-how


Dedication of subsequent patents or know-how (disincentive to future research)


Displacement of Individual Research


Joint research fosters new research or alternative research by freeing funds


Joint research displaces or discourages participant research


Effect of Government Involvement


Restraint imposed as “act of government” or express immunity


Mere knowledge or tacit approval is of little use


Effect on Market Competition


Minimal (pro-competitive if smaller competitors group to meet larger competitor)


Significant


Effect on R&D Competition


Other avenues for R&D activity exist and are used by market participants


All or majority of market participants rely predominantly and exclusively on same R&D venture, diminishing number of R&D sources


Importance and Immediacy of Project on Industry-wide Basis


“Crash” program needed


No immediate concern


Method of Exploitation of Research Results


Individual (particularly if venturers are not competitors)


Joint (particularly if venturers have significant market share)


Motive of Participants


To speed research


To slow research or reduce competitive threat


Number of Competitors in Industry


Many


Few (highly concentrated)


Overall Balance of Activity


Less restrictive and directly related to goals of venture


Too restrictive in light of reasonable alternative


Patentability of Results


Not protectable (“free rider” problem)


Protectable


Phase of Project


Earlier (“basic”) research


Later--production or marketing phase


Project Agreement


No restraints


Restraining provisions


Purely Contractual Research


Legitimate purposes for joint research


No business purpose for joint research


Scope of Project


Narrow in subject matter of research and short in duration; few or small participants


Broad in subject matter of research and long in duration; many or large participants such that major portion of industry is involved


Size of Research Project


Expensive


Inexpensive


Special Case of Compliance with Government Standards on Externalities (e.g., Pollution)


Joint projects are a natural response


Research pace slowed, intentional failure to meet standards, or projects are too broad


Structure of Industry


Many competitors; easy entry


Concentrated, with barriers to entry


Type of Research


“Pure” basic research (no ancillary restraints)


Developmental research (especially if restraints are present)


Use of Association’s Results by Members


Freedom to sublicense (subject to reasonable royalties); reasonable license from venture; reasonable period during which members exclusively may exploit results (pre-publication)


Significant restrictions

This checklist is only a general list of suggestions. In particular, a trade association could have many legitimate elements and nonetheless run afoul of the antitrust laws. To state the obvious, for example, if an otherwise legitimate R&D joint venture had a price-level clause in the eventual licensing agreement, then that agreement could be per se violative of the Sherman Act, notwithstanding the propriety of the balance of the cooperative relationship.

One must examine each element of the proposed joint undertaking with reference to the Act, the Guide, judicial decisions, and business review letters. Counsel should then balance the whole and determine whether some less restrictive alternative is reasonably protective of the participants’ interests and preferable to the one under consideration. As before, this will always be a complex undertaking, and the Guide certainly assists in the effort.

Minimizing Antitrust Concerns

The remaining portion of this memorandum specifically discusses how the Association may minimize antitrust exposure to the Association’s members.

Membership Requirements

Membership requirements should be consistent with the stated objectives of the Association, and the Association should apply them in a consistent, nondiscriminatory manner. Because membership in the Association may confer competitive benefits, membership should be open to all companies that might not be able to compete equally with the members if they were excluded. Remember, however, that over-inclusiveness is discouraged by the Act, and ventures may no longer rely on open-access policy to avoid antitrust liability.

Membership requirements must therefore be reasonably necessary to accomplish the legitimate goals of the Association. For example, the Association may not exclude or discriminate against potential members on the basis of criteria unrelated to the potential member’s ability to further the objectives of the Association. If excluded firms cannot practicably or effectively duplicate the Association’s research efforts, the Sherman Act may mandate access.

Access problems are most clearly presented in situations where denial of access will result in a competitive disadvantage to competitors of one or more of the participants. Access problems sometimes require analysis under both Section 1 and Section 2 of the Sherman Act. Section 1 of the Sherman Act forbids all forms of agreement in unreasonable restraint of trade. Section 2 of the Sherman Act forbids monopolization, attempts to monopolize, and conspiracy to monopolize. Analysis of an R&D joint venture under Section 2 begins with a definition of the relevant market and an evaluation of the degree of market power possessed by the participants as a group. Where that power is substantial, as when the ventures collectively possess a predominant share of a relevant market towards which research is directed or collectively control a facility essential to effective competition, exclusion of outsiders from participation may require a Section 2 analysis.

Collective denial of access to the venture may raise serious problems under Section 1 of the Sherman Act as being a boycott or concerted refusal to deal. A “blackball” system, under which a single venture participant has the authority to control access, is particularly likely to be found illegal.

To implement the Association’s nondiscriminatory membership policy, the Association should publicize its existence and requirements for membership in professional journals, at professional meetings, and through direct mailings to potential members. Dues charged to members must also not unreasonably exclude potential members. The dues structure should be based on assets or sales of potential members, because smaller companies may be excluded if the same dues are charged to all members.

Organization

The Association’s structure should be such as to reduce the possibility that the Association can be controlled by a small group of members that might therefore more easily use the Association to violate the antitrust laws. Dominance by a small group of powerful market members would be immediately suspect under the principles enunciated in the Guide. To disperse control, the Association should follow these principles:

  1. one vote per member, instead of weighted votes based on assets or sales;
     
  2. election of the Board of Directors by members;
     
  3. selection by the Board of an Executive Director who is not an employee of any member; and
     
  4. equal opportunity to be elected to the Board of Directors and to serve on nominating and other committees.

To the extent decisions made by the Association are made pursuant to votes, every effort should be made to prevent commercially-interested voters from having a “disproportionate voice” in the process. For example, procedures should be implemented to prevent meeting-packing by interested voters. Additionally, voters should be held to some realistic level of relevant expertise or knowledge concerning the issues on which they vote.

In a recent case, the U.S. Supreme Court held that a steel concern unreasonably restrained trade when it recruited new members to a standards organization on the eve of a particularly important vote. The voters were to decide whether a new product, made of plastic, could be certified and thus placed in competition with steel products previously approved. The steel concern encouraged its employees and their spouses as well as its sales representatives and agents to become members of the organization. The ensuing vote narrowly defeated the approval of plastics. Many of those voting lacked any familiarity with the technical issues on which they voted. The steel concern’s actions violated the antitrust laws by subverting the organization’s consensus procedures.

Availability of the Association’s Results to Nonmembers

The results of the Association’s activities must be made available on reasonable terms to nonmembers. Otherwise, the Association and its members may be seen as conspiring to monopolize by creating what amounts to an exclusive cross-licensing arrangement with respect to the information or technology developed by its funded research. One commentator has stated that the more valuable the competitive benefits, the more need there is to make the benefit available promptly and on reasonable terms to nonmembers who compete with members. The Guide states that analysis of access to results is particularly relevant when the venture has produced a facility or technology with such market impact that those outside the venture cannot effectively compete without that information. The antitrust authorities, however, will be less concerned when access to results is denied if the participants in the venture were not dominant prior to development of the new technology.

The antitrust laws do not mandate that access to the research be made available immediately or free of charge. The Association may insist that any outsiders pay reasonable royalties or otherwise bear their fair share of the burdens and expenses of the project in order to receive the Association’s research results. A reasonable fee might well be the cost of the project divided by the number of members plus the cost of reproducing copies of the results for the nonmembers. While this formula is useful in most cases, reasonable cost and prompt availability will depend on the circumstances in each case.

The Association must therefore review each project’s publication policy individually to ensure that outsiders pay their fair share and not more. As with the Association’s membership requirements, availability of Association-sponsored research results should be publicized in special journals, at professional meetings, and through other appropriate means. To be consistent with the Association’s tax-exempt status and to give wider dissemination of the results of its activities, the Association should also provide copies of reports to engineering, scientific and educational organizations, libraries and any other relevant institutions at no cost, or for only the cost of reproduction of the results.

Research Activities

The Guide clearly favors pure research over developmental research, which may involve ancillary restraints. Joint activity should be as limited as practicable under the circumstances. The Association must have a legitimate business purpose for its joint research, and the specific project should be one that probably would not be undertaken with the same degree of skill and efficiency by individual researchers. In this instance, the Association’s assumption of a project is to further innovation and invention, while not displacing individual efforts of members, and, in fact, should aim to encourage individual efforts.

The project should be narrow in scope and as short in duration as circumstances permit. Preferably an independent research laboratory will conduct the research, rather than having the Association’s members conduct the research themselves.

The benefit to society from joint R&D activities will not serve as a defense to a claimed antitrust violation if the Association’s activity has anticompetitive effects. Anticompetitive effects can result if the benefits are not made available to nonmembers, or members of the Association or others are prevented from conducting independent research, or otherwise if the members of the Association agree (expressly or implicitly) not to implement new technological developments that are the subject of the joint research before a given date.

The DOJ has also stated that joint “basic” research, which merely identifies problems but does not seek specific solutions, is generally less objectionable than applied research. The DOJ reasons that solutions to problems can confer a competitive advantage upon those with access to research results. If the Association sponsors applied research, the results from this research, including licenses, should be available to nonmembers promptly and on reasonable terms.

Restrictions on Research by Members and Independent Contractors

As discussed above, and emphasized repeatedly in the Guide, the Association’s activities should not reduce competition in the conduct of research. Neither the Association’s members nor the persons and organizations that conduct studies, investigations, or research for the Association should be prohibited from performing or contracting for the performance of research in areas not sponsored by the Association. The Association can, however, prohibit independent contractors from using the results of research conducted for the Association prior to the time the Association makes the results public.

Restrictions on Standards and Certification Activities

Establishing standards and certifying products or practices serves legitimate social ends, such as improving safety, health, economic efficiency, and product quality. Establishing standards or certification programs, however, raises difficult antitrust considerations, not addressed by the Guide.

In one case, the FTC noticed a settlement agreement with Dell Computer Corporation with respect to its alleged violations of the Federal Trade Commission Act. Consent Order, 62 Fed. Reg. 4,767 (1997). As part of the consent order, the FTC prohibited Dell from enforcing patent rights against computer manufacturers using an industry standard product. Dell had abused a standard-setting process in the computer industry by certifying that it had no patent rights or other intellectual property claims to a technology that Video Electronics Standards Association (“VESA”) had accepted as the industry standard. As a member of VESA, Dell was required to disclose that it held patent rights to the technology before the technology was adopted as an industry standard. Dell violated federal antitrust laws by attempting to invoke patent rights “in an effort to unilaterally impose costs on its rivals.” Consent Agreement, 60 Fed. Reg. 57,870 (1995).

Neither the FTC nor the DOJ has been active in pursuing claims against Associations,[5] but they do not hesitate to prosecute member companies which use or misuse Associations or their results for illegal purposes.[6]

Technical Justification

Exclusionary standards require an adequate technical basis to be procompetitive. Such a technical basis must exist at the time the product restriction is imposed. Post hoc rationalizations will be evaluated with great suspicion. Organizations should be aware that the use of balanced committees and other consensus procedures in setting standards will not guarantee that standards imposed will be viewed as having an adequate technical basis. There is no bright-line definition of what constitutes an adequate technical basis. The following principles used by the FTC in reviewing technical justifications offered by standards organizations, however, provide some guidance:

  • It is not absolutely required that standards developers use statistical surveys, laboratory testing results or other “hard data” before imposing safety restraints. Standards developers should be free to act on any type of information that experts in the field reasonably would accept as persuasive and credible.
     
  • The amount and quality of information justifying a product restriction must be balanced against the amount and quality of information opposing such a restriction. Thus, the mere fact that some experts disagree with the standards developers is not sufficient to automatically condemn a restrictive standard. Credible anecdotal information, without more, will not suffice to negate hard data showing that a product is reasonably safe and fit for its intended purpose. Mere speculation regarding product hazards or biases against new products are also insufficient justification.
     
  • By setting a standard, an organization in effect represents to the public that the standard is technically sound and commercially reasonable. Therefore, since a standards organization is responsible for the standard’s effect in the marketplace, it must be able to produce some evidence in support of its decisions, although formal records need not be kept.

In one case the Central District Court of California held that certain manufacturers did not violate the Sherman Act when their trade association elected not to form a task force on rebuilt circuit breakers. In re Circuit Breaker Litigation, 984 F. Supp. 1267 (C.D. Cal. 1997). Defendants in the litigation alleged that Underwriters Laboratories (“UL”) illegally restrained trade by refusing to create a certification program for rebuilt modeled case circuit breakers in concert with other plaintiffs in the lawsuit. See id. at 1278. According to the district court, “a standards-setting organization does not per se violate antitrust laws by refusing to certify a product.” Id. Under a rule of reason test, the court held that UL’s decision not to create the program endorsed by the defendants was neither discriminatory nor unreasonable. In addition, the court found that the defendants could not prove any injury resulting from UL’s purportedly anticompetitive decision.

Standards Coverage of Proprietary Products

Assuming that it can satisfy the other legal requirements, the Association should not be overly reluctant to extend standards coverage to patented, trademarked, or other products to which a small number of manufacturers have exclusive production or distribution rights. Extension of standards coverage in such cases does not necessarily create or enhance monopoly power. For example: A standards organization that writes the specs for indoor-plumbing pipe currently qualifies the use of metal and plastic pipe. A patent-holder for rubberized pipe needs the organization’s approval of the material in order to enter the market. The standards organization should not refuse certification of rubberized pipe merely because the patent-holder is the sole producer of this product. Rubberized pipe would be merely one more product competing with metal and plastic pipes, and its entry into the market would increase competition. Reluctance to include rubberized pipe within the approved standards would in this case be an unreasonable restraint of trade.

Procedural Safeguards

If the Association sponsors activities to establish standards (whether such standards relate to acceptable procedures or to products purchased by or sold by industry companies), the standards must be objective. The standards must also be voluntary in the sense that there be no agreement to compel compliance with the standards or to compel a reduction in the number of available products. In addition, quality standards should ordinarily be set forth as minimum acceptable standards, to be regularly updated to reflect advances in the state of the art so as not to reduce innovation or development of new techniques and products.

To attain objective standards that will achieve general acceptance and reflect the state of the art, the procedures by which standards are set and updated must be structured so as to obtain the input of persons to be affected by the standards, including consumers in some cases. Such procedures may include public hearings and review of private complaints.

Evaluation of the risks involved in establishing standards will vary with the particular facts. In one case, standardization of product quality was found to be a method by which sellers, in effect, fixed prices by prohibiting quality competition. In other circumstances, an organization’s members could be engaged in a group boycott if they only purchase, whether by agreement or not, products that are certified as meeting standards set by that organization.

The U.S. Supreme Court years ago held the American Society of Mechanical Engineers, Inc. (“ASME”), civilly liable for the actions of several of its volunteer individual members, who, as agents with apparent authority, intentionally misrepresented an existing ASME code and then used the erroneous information to the disadvantage of one of their competitors. Representations made by ASME’s agents damaged the agents’ competitors because the statements carried the weight of ASME’s reputation and acknowledged expertise in setting engineering standards. The Court imposed liability on ASME in order to deter abuses of ASME’s code and because ASME was, in the Court’s judgment, in the best position to prevent improper use of its code.

If the Association were to set standards that favor certain manufacturers who are members of a trade association, the Association and the manufacturers and their trade associations might be deemed to have conspired to injure the business of those who could not comply (or who were not members of the trade association) in an attempt to monopolize that line of commerce.

If the Association certifies products or processes as meeting certain standards, the certification process must be fair, open to nonmembers, free of any burdens not imposed on members, and at no greater cost than that charged to members, taking into account the members’ payment of dues to cover the certification costs. The Association must provide for certification of any products which qualify, and should provide for appeals of adverse decisions.

Business Review Letters

The DOJ and the FTC have established procedures to review, from an antitrust point of view, proposed activities of companies and organizations. After reviewing the documents submitted, each of these agencies will state whether (a) it intends to take enforcement action for specified reasons, (b) it does not intend to take such action, or (c) it can express no present view as to enforcement. A statement of intention is not legally binding on the agency issuing the statement and does not preclude civil actions by private parties, the DOJ, the FTC or other government agencies.

In general, we believe that a request for a business review letter would not be of significant assistance to the Association unless (1) a proposed activity presents particularly difficult antitrust questions, (2) the proposal is concrete and (3) the effects of the activity can be predicted with relative certainty.

Conclusion

This memorandum is intended to provide only general guidelines for the conduct of the Association’s activities. Because an intent to violate the antitrust laws is not necessary to establish antitrust liability, and since the antitrust laws are confusing and the circumstances in which antitrust questions can arise are numerous, we recommend that advice be requested on specific activities of the Association when they are proposed and as they move through each stage to completion.


Questions regarding this advisory may be directed to Robert A. McTamaney (mctamaney@clm.com), or Gary D. Sesser (sesser@clm.com) of our New York Office.


Endnotes

[1] See “NCRPA Update for June 2004” and “Filing a Notification Under the NCRA (06/1004)” at http://www. usdoj. gov/ atr/ public/ guidelines/ guidelin. htm.

[2] See Antitrust Guidelines for Collaborations Among Competitors (http:// www. ftc.gov/os/ 2000/04/ ftc doj guidelines.pdf) for a good discussion of collaborative JVs versus mergers. The term “standards development organization” means a domestic or international organization that plans, develops, establishes, or coordinates voluntary consensus standards using procedures that incorporate the attributes of openness, balance of interests, due process, an appeals process, and consensus in a manner consistent with the Office of Management and Budget Circular Number A-119, as revised February 10, 1998. The term “standards development organization” shall not, for purposes of this Act, include the parties participating in the standards development organization. The term “standards development activity” means any action taken by a standards development organization for the purpose of developing, promulgating, revising, amending, reissuing, interpreting, or otherwise maintaining a voluntary consensus standard, or using such standard in conformity assessment activities, including actions relating to the intellectual property policies of the standards development organization.

[3] See California Dental Association v. Federal Trade Commission 119 S. Ct. 1604 (1999); Viazis v. Am. Assoc. of Orthodontists, 182 F. Supp. 2d 552, 569 (E.D. Texas 2001)

[4] To date, no cases have been brought by federal or state agencies against a NCRPA-reported joint venture. See Addamax Corp. v. Open Software Foundation, 888 F. Supp. 274 (D. Mass. 1995).

[5] But see American Society of Sanitary Engineering, 106 F.T.C. 324 (1985).

[6] For example, see the FTC’s cases against Union Oil Company and Rambus alleging the illegal acquisition of monopoly power in part by misrepresentations to industry standard-setting bodies.



Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © 2017 Carter Ledyard & Milburn LLP.
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