Every Association looks for ways to develop best practices in an effort to professionalize the industry, ensure that members follow the rules and regulations that are set or implied in the provision of services to clients, and projects an image of an earnest and proficient group of companies working for the common good, both for the sector they are in and the customers they serve. Associations develop guidelines providing members – and the industry as a whole, with generally accepted principles of conduct promoting the highest levels of ethics within the group. In non-regulated industries, it follows the philosophy that self-regulatory measures are preferable to governmental intervention and regulation or helps government in determining the needed regulation if that is the case.

All Associations are founded in an effort to develop internal agreements, within the organization (between members) and external agreements (to manage external challenges: client perception, vendors, government, etc…). Developing Best Practices are normally industry-wide or Association agreements that look to standardize efficient and effective ways to accomplish the provision of the services the members offer and generally consists of techniques, methods, procedures or processes. The idea is that if an organization follows best practices, or have standard-setting agreements[1],  a given common outcome can be ensured which rises the members to a higher level of excellency.

Developing Best Practices

Developing Best Practices in an association is not easy. In my opinion, the first step is to ask: Are there any government regulations in place that directly guides the members of the association to perform in a certain way or requirements that are expected – or mandated, to be followed?[2]

If they are, such as a license or certification, then this is where associations start building their “Best Practices”. Some Associations might even deny membership – or types of memberships, to applicants or potential members. Industries have specific, business or general laws and regulations, domestic or international, that its members must obey. Although “following the law” cannot be a ‘Best Practice” – it should be expected with no need to stress the fact, but there are situations where industry members have found “alternate”, “informal”, “gray-area methods” to offer services that an association wants to prevent members to use and avoiding these practices can indeed become a “Best Practice”.

There are also government regulations in place that indirectly influences the way members of an association need to behave and the Association wants to make sure members are aware of them and a “Best Practice” can evolve from this fact. Some of these regulations or requirements can be from foreign governments & jurisdictions and although they might not be enforced in a different country it does create an unfair advantage if some members follow them and some not.  Issues such as this can harm the reputation of an industry, for example, and the Association might create a “Best Practice” out of this concern.

“Best Practices” can also be constructed by Associations that want the industry to auto-regulate itself before there is a possibility that governments step-in and regulate it. Normally, large companies in an industry, when they see there is an increase in small or medium-sized businesses eating away their market share, hire lobbyists to influence legislation in their favor and create barriers-of-entry or requirements that they know that they can’t be followed by the escalating competition.

These standard-setting agreements are important but they cannot be enforced most of the time by Associations (unless the Best Practices restrict some companies from becoming members) but can give grounds for signaling a member that is not following them and calling it to order. Its actions might even become grounds for expulsion.

Codes of Ethics

A code of ethics and professional conduct outlines the ethical principles that govern decisions and behavior at a company or organization[3]. Associations should develop these general outlines of how its members should behave, some of them starting with broad statements calling for “fairness”, “integrity”, “fair-dealing” or the management of Conflicts of interest or Anti-Bribery and Anti-Corruption matters. The Code of Ethics can be laid out separately from the “Best Practices” or incorporated in them.

Internal Agreements: A warning

Best Practices and Codes of Ethics are standard-setting agreements. But one of the most difficult to manage agreements within an association are cost or price related. In some industries and in some countries, there are large gray areas between what members of an industry can agree or not related to costs and prices. My advice to Associations when one member, or a group of members, bring the subject of prices or price wars, to stop the discussion immediately and consult local attorneys to make sure the members of an Association understand the local “antitrust laws”. If you are providing services internationally you also need to understand the anti-trust laws of other countries.

Many countries have laws that protect consumers and regulate how industries must operate their businesses to provide an equal playing field for similar businesses that operate in a specific industry and preventing larger companies from gaining too much power over their competition. We are going to use an article by Investopedia[4] and summarize it here to help you understand the basic principles of Antitrust laws or simply put, the laws that stop businesses, by themselves or together, from “playing dirty” in order to make a profit.

 

What Are Antitrust Laws?

 

Antitrust laws also referred to as competition laws, are statutes developed by. governments to protect consumers to ensure that fair competition exists in an open-market economy. These laws have evolved along with market changes, vigilantly guarding against monopolies, cartels[5] and disruptions to an open and fair business competition that safeguards the customers rights from questionable business activities. These activities can be Price Fixing, Bid Rigging, Market Allocation, Monopolies and Predatory Pricing.

 

Price Fixing

 

Price fixing occurs when the price of a product or service is set by a group of business intentionally to ensure profitability rather than letting market forces determine it “naturally”. Industries always find ways to avoid price wars and tend to price similar products or services equally to maintain margins. A leading business in a market can set its price and others might simply follow it.  The problem comes when members of an industry come to an agreement “showily”[6] and they are taken to court by prosecutors or sued by others. Just check the Price Fixing cases in Wikipedia[7] to see a large diversity of cases.

 

Bid Rigging

 

Bid Rigging occurs when two or more parties collude to choose who will win a contract. The “losing” parties purposely make lower bids (or don’t participate in the bid) in order to allow a “winner” agreeing compensation or a rotation of winners in the future.

 

Market Allocation

 

Market allocation[8] , regional monopoly or market sharing occurs when two or more parties agree to keep their business activities to specific geographic territories, types of customers[9] or any other scheme that involves agreements based on the provision or non-provision of products and services in or to a geographical location.

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Monopolies

 

Monopolies refer to the dominance of an industry or sector by one company or firm while cutting out the competition and it becomes illegal when acquiring market share is done through exclusionary or predatory practices. These illegal activities can be exclusive supply agreements (when a supplier is prevented from selling or servicing different or specific buyers) and refusal to deal (choosing who to conduct business with to prevent competition).

 

Predatory Pricing

 

Predatory Pricing or Dumping occurs when a leader in a market cuts prices very low to break the competition and has enough market share to recoup its losses in the future when its competition is gone. This has been done in every industry and in every market but it is very hard to prove and get enough information to create a winning court case.

Surcharges

It has become a common practice in many industries to charge clients a surcharge. A surcharge is an extra fee, a charge, or sometimes a tax that is added by the merchant on to the cost of a good or service, beyond the initially quoted price. It is normally a hike to defray the cost of increased commodity pricing, such as with a fuel surcharge, or the use of certain type of payment vehicle.

Surcharges may be set at specific dollar amounts, such as $3 per transaction, or based on a percentage of the total price.

The surcharge in the use of certain type of payment vehicle, such as credit or debit cards, or checks, versus payments with cash, has been a contentious issue in many countries and in many states in the United States. Companies like Visa & Mastercard have fought long and hard to prevent the “credit card surcharge” in many markets around the world. In the State of New York[10] law prohibits businesses from posting a cash price and adding a fee when customers choose credit (the “credit card surcharge”) but  the law permits businesses to post a price (credit card price) and charge less when customers choose cash (a “cash discount”).

The fuel surcharges were set-up to account for fluctuating fuel prices in almost every industry that involves transportation. Fuel price volatility has made it difficult for companies to negotiate long-term contracts, which are very important for certain industries in their business-to-business deals. A surcharge allows those contracts to accommodate short-term price fluctuations. In many instances, like airlines and ferries, the surcharge has been passed to the public. There is always a marketing component to surcharges as the public will probably understand more the need of a surcharge rather than a price increase.

In the case of one of the biggest fines imposed to airlines by the Australian Competition and Consumer Commission (ACCC) was due to price fixing on the fuel surcharge added to invoices of cargo services to Australia[11]. Close to 20 airlines were fined millions after a more than 10 year-long investigation proved that there was an industry-agreement to fix the prices of the surcharge.

The restaurant surcharges in California and the “myriad of legislative and court decisions” is a good case study to read and understand as it relates to the implications of adding and managing surcharges. The article in the California Restaurant Association’s website entitled “Understanding and guidance on surcharges[12] is a good example of an Association guiding and helping its members in managing this issue.

In the article, the authors[13] advise that businesses should implement surcharges with an eye toward prevention of any claims for consumer fraud, false advertising, unfair business practices or improper utilization of the surcharge. Accounting for the surcharge in the company books is a very important issue which needs the advice of competent accountants.

The Big Three US Antitrust Laws

The core of U.S. antitrust legislation was created by three pieces of legislation: the Sherman Anti-Trust Act of 1890, the Federal Trade Commission Act—which also created the FTC—and the Clayton Antitrust Act. The Sherman Anti-Trust Act intended to prevent unreasonable “contract, combination or conspiracy in restraint of trade” and “monopolization attempted monopolization or conspiracy or combination to monopolize.

The Federal Trade Commission Act bans “unfair methods of competition” and “unfair or deceptive acts or practices.” The FTC has a good website with relevant information of the antitrust laws of the US[14] and a section entitled “Dealings with Competitors” which gives relevant information on Price Fixing, Bid Rigging, Market Division or Customer Allocation, Group Boycotts, Other Agreements Among Competitors and a Spotlight on Trade Associations. In this last subject the FTC clearly states[15]: “Forming a trade association does not shield joint activities from antitrust scrutiny […] For instance, it is illegal to use a trade association to control or suggest prices of members. It is illegal to use information-sharing programs, or standardized contracts, operating hours, accounting, safety codes, or transportation methods, as a disguised means of fixing prices”. [Note: the underline is mine].

In the case of an industry that has agents or distributors of its goods and services, it is also important that the Association consults with attorneys on the common practices that members are allowed to engage in such as “black-listing” some agents, or other agreements that can be illegal such as price or commission fixing.

The Clayton Antitrust Act addresses specific practices that the Sherman Anti-Trust Act may not address. According to the FTC, these include preventing mergers and acquisitions that may “substantially lessen competition or tend to create a monopoly

Stop Cartels: A UK’s CMA campaign

The Competition and Markets Authority (CMA) in the UK is very active prosecuting businesses that attempt, individually or in conjunction with others, to use illegal practices to cheat customers. I suggest you visit CMA’s site that tells whistleblowers and the public to report these activities and learn how to spot them: https://stopcartels.campaign.gov.uk/

Most countries have a government body that supervises competition. As examples let’s name the Australian Competition and Consumer Commission (ACCC), in Spain is the Comisión Nacional de Mercados y la Competencia (CNMC), in Mexico, under the Ministry of Economy, is the Comisión Federal de Competencia Económica (COFECE) and in Colombia is the Autoridad Antimonopolio de Colombia (SIC) under de Superintendencia de Industria y Comercio.

Conclusions

Every Association must look for ways to develop standard-setting agreements in order to professionalize the industry, ensuring that members follow certain best practices and a code of ethics that projects an image of an earnest and proficient group of companies working for the common good. There are many benefits of fierce competitors looking at each other and working together. In time, most trade groups realize the power that they gain, collectively and individually, when an Association is strong, healthy and reinvents itself with every challenge, seizing opportunities that its members never imagined before.

 


[1] The Good, the Bad and the Ugly: Trade Associations and Antitrust – Remarks of Jon Leibowitz, Commissioner of the Federal Trade Commission: American Bar Association Antitrust Spring Meeting, Washington, DC, March 30, 2005 – http://bit.ly/2kepwpv

[2] The need for licensing, for example, might be a mandated government requirement; permits, certifications, etc…

[3] https://www.betterteam.com/code-of-ethics-and-professional-conduct

[4] https://www.investopedia.com/ask/answers/09/antitrust-law.asp

[5] A cartel is an organization created from a formal agreement between a group of producers of a good or service to manipulate prices. https://www.investopedia.com/terms/c/cartel.asp

[6] I am using “showily” just to use an antonym of “naturally”

[7] https://en.wikipedia.org/wiki/Price_fixing_cases

[8] These are the “stay out of my territory, I won’t enter yours” agreements.

[9] These are the “don’t approach my customers, I won’t touch yours” agreements.

[10] https://en.wikipedia.org/wiki/Surcharge_(payment_systems)

[11] https://www.accc.gov.au – Search for fuel surcharges to see the many fines that the ACCC imposed

[12] https://www.calrest.org/tips/understanding-and-guidance-surcharges

[13] Wilson Elser Moskowitz Edelman & Dicker LLP

[14] https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws

[15] https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/dealings-competitors/spotlight-trade