Good Counsel: Enforce Fair Trade in Your Ethics Code
Steer clear of antitrust issues when enforcing your ethics code.
Many associations have a code of conduct to promote ethical competition in their industry and protect consumers. But enforcing a code has the potential to create antitrust or other legal risks.
The Federal Trade Commission reiterated in a 2011 advisory opinion that “such self-regulatory activity serves legitimate purposes, and in most cases can be expected to benefit, rather than to injure, competition and consumer welfare.” The FTC pointed out that “companies may compete based on reputation, including reputation for ethical dealing,” and if companies or consumers “were to make unilateral decisions to limit or avoid business dealings with companies that do not comply with [ethical] principles, the resulting effects would not flow from anticompetitive conduct, but from competition itself—competition based on reputation . . . .”
However, the FTC also noted that some ethical restrictions or compliance mechanisms “can unreasonably restrain competition and harm consumers, thereby violating the antitrust laws.”
Enforcement of an ethics code can be found anticompetitive when the ethical rules amount to agreements among competitors that have the purpose or effect of restraining trade. For example, association ethics codes should steer clear of rules relating to prices; other terms and conditions of sale, such as warranties; competitive bidding; and solicitation of other members’ customers. Codes also should not include bans on price, discount, or other truthful and nondeceptive advertising.
Ethical restrictions on advertising have been the main area of contention before the FTC and in the courts. Certain restrictions have generally been upheld, including prohibitions on false or misleading advertising and rules requiring a reasonable basis for objectively verifiable claims.
Associations can minimize legal risks by providing members charged with code violations a reasonable level of due process, including
• notice of the alleged substantive rule violations
• notice of proposed sanctions
• access to all evidence intended to support the allegations
• a right to respond to the allegations, including a hearing
• an impartial hearing panel
• an appeal process.
Associations should follow their own rules and make reasonable efforts to ensure that the enforcement process is not tainted by malice toward the accused, bad faith, or an anticompetitive purpose.