(By John C. Guadnola)

Although trade associations serve a number of very valuable functions, it is critically important for associations and their members to remain constantly vigilant of federal and state antitrust laws. The consequences of an antitrust investigation conducted by the Federal Trade Commission, the Department of Justice, or a State Attorney General's antitrust office, and the consequences of private antitrust actions, can be devastating to an association itself as well as to the association's individual members. Therefore, trade associations should always be cognizant of the intersection between their activities and antitrust principles.

Many activities of trade associations which would unquestionably be of benefit to association members, even some activities which could be of benefit to the economy and society in general, pose a grave risk of being found to violate antitrust law. For example, in the 1970's, a professional association of structural engineers prohibited its members from engaging in competitive bidding, asserting that public safety would be jeopardized if the cost of engineering became a determining factor in who did the work. The United States Supreme Court condemned the ban as violating the antitrust laws, rejecting the argument that protecting the public from shoddy engineering justified an exception to the Sherman Act.

The need to avoid violations of the antitrust laws is obvious from the consequences that will befall any individual or business found to have committed such a violation. It is common knowledge that the Sherman Act makes it illegal for private companies to engage in any contract, combination or conspiracy in restraint of trade or to monopolize or attempt to monopolize any line of commerce. If an entity, even a trade association, is found to have violated federal antitrust law, it will be subject to a fine of up to $10,000,000.

What is not as well known is that violation of this law is a felony, and that individuals who violate antitrust law can and will be prosecuted along with their corporate employers. When confronted with what it considers particularly egregious conduct, such as price fixing, the Justice Department always seeks and frequently obtains prison sentences for the individual offenders. The maximum prison term is 3 years, which will be in addition to a fine that could be as high as $350,000.

When the Department of Justice or the Federal Trade Commission pursues an investigation, the normal approach is to attempt to push liability for the conduct as high up the corporate structure as possible. This usually means that they focus their initial investigative efforts on lower-level employees, and offer leniency to those employees in exchange for information that implicates their superiors. That pattern is repeated until the federal agencies have identified and isolated the persons they believe to be the ringleaders of the violation. At that point leniency becomes extremely difficult to secure.

The criminal exposure is only one facet of the risk posed by antitrust violations. Private antitrust lawsuits can be brought by anyone damaged by the antitrust violation. If a trial results in a finding of an antitrust violation and damages, federal law mandates that a judgment be entered against the defendant for three times whatever damages were established. Federal law also mandates that the successful plaintiff will recover its attorney fees from the defendant. When a private action follows a criminal action, the entities that violated the antitrust laws are in particularly grave danger. If the federal government secures a conviction or a guilty plea, that can be used in evidence against the defendant in a private antitrust lawsuit. In that case the defendant has nothing to argue about but the amount of damages suffered by the plaintiff.

Even when one successfully defends against criminal or civil antitrust charges, the defensive effort can take a severe toll. The attorney fees involved in dealing with discovery are usually large, but that is often the smallest part of the cost. The disruption to normal business, the stress on those suspected of wrongdoing, and the emotional trauma of business owners who face the prospect of losing everything they've spent their business lives working for, frequently far outweigh the actual dollar costs of the litigation.

And the dollar costs will be significant. Discovery will typically be exhaustive, with the company being required to produce every document in its possession that could conceivably have a bearing on the charges. In today's world "document" includes electronic documents, even e-mails and the like. The cost and disruption of undertaking production of these materials can be staggering. Discovery also typically includes extensive interrogatories, which are written questions that must be answered in writing, under oath. They can be very detailed, and the process of gathering the information necessary to answer them and then drafting answers that are responsive but not incriminating can be very difficult. The final discovery stage will be depositions, typically of every person believed to have any knowledge of the activity involved in the case. Even if the trade association is not itself a target of the investigation, discovery could easily extend to the association. That could and in most cases will mean that the trade association is forced to produce documents, including e-mail and other electronic material, and that the trade association's employees will be deposed. Through discovery into trade association activities, the investigation could extend to other members beyond those originally implicated in the investigation.

In future editions of this newsletter we will discuss some of the areas in which trade associations and their members can run afoul of the antitrust laws, and how to avoid those pitfalls.

This article was published in the August & September 2007 issue of THE WASHINGTON EXECUTIVE, a publication of the Washington Society of Association Executives.