Standards set by trade and professional associations are increasingly common. Standard-setting confers an array of valuable benefits not only to associations and association members, but also to industry, government and the general public. However, standard-setting is not without legal risk – potentially significant risks.
Fortunately, proper care in establishing and administering standards programs can go a long way toward minimizing those risks. As association standard-setting continues to play an increasingly important role in our society, it is more critical than ever to ensure that associations are not deterred from conducting such activities as a result of legal risks that can be effectively managed. This article outlines suggestions for minimizing the principal liability risks facing associations that set standards.
In general, courts are extremely reluctant to interfere with standard-setting programs operated by trade and professional associations. Courts generally are hesitant to second-guess the reasonableness of association standards, recognizing that professionals in associations have far greater experience than judges in formulating and applying standards of industry or professional excellence. Associations have prevailed in the vast majority of legal disputes involving standards.
However, despite associations' impressive track record of success in such litigation, the significant risks of litigation cannot be ignored. Even if an association ultimately prevails in court, the costs, burdens and distractions of mounting a defense can be overwhelming. Although clearly in the public interest and beneficial to members and others, standard-setting raises risks of legal liability under the antitrust laws, the copyright laws, and under common law theories of negligence and warranty, among others. Fortunately, there are steps associations can take in structuring and administering a standard-setting program to minimize the risk of being sued in the first instance, and, if a lawsuit does materialize, to ensure that the association will prevail. Moreover, there are steps associations can take to protect their valuable interests in these programs. Finally, appropriate errors and omissions insurance can help protect associations against the financial costs of such litigation.
Guidelines for Minimizing Liability Risks
Court decisions involving association standard-setting suggest that taking the following steps in connection with the setting of standards will significantly limit the association's liability risks and protect its interests:
1. Standards should be clear and unambiguous, reasonable, fair, and objectively grounded - care should be taken to ensure that valid, objective bases support each certification standard, to the extent possible. If used in connection with a certification program, standards should be based on data or on a respected body of industry or governmental opinion linking each particular standard to the qualities that the certification purports to measure. Where possible, standards should be directed at and focus on the ends, not the means. Where the means are specified, they must be legitimately, demonstrably and directly related to the objectives. Alternative means to achieve a given objective should be permitted where possible; establish equivalent standards wherever possible. Standards should never be arbitrary or capricious, or vague or ambiguous, and procedures should be developed that document the reasonableness of, and the objective basis for, proposed standards.
2. Standards should be no more stringent or rigid than necessary to ensure that the specified competency or quality levels have been attained.
3. Specific commercial or economic considerations should play no role in the setting of the standards. In addition, standards should never be created or used for the purpose of raising, lowering or stabilizing prices or fees, excluding competitors from the market, or limiting the supply or products or services.
4. Prior to finalizing standards, provide interested parties with notice of the proposed standards and an opportunity to comment. Fairly and objectively consider such comments in finalizing the standards.
5. Periodically review and update all standards to ensure that they are current and reflect new legal, technological and other developments. Provide appropriate opportunities for public notice and comment whenever standards are modified, and carefully consider such comments in the revision process. In addition, document any and all complaints or concerns about the standards and revise the standards accordingly if appropriate.
6. Ensure that participation in and use of the standards is completely voluntary.
7. Do not limit participation in the standard-setting process to only members of the sponsoring association.
8. There must be no bias, partiality or inconsistency in establishing or operating the standard-setting program. The standard-setting process must be objectively and uniformly administered, without subjectivity, favoritism or discrimination. The rules governing the process must be scrupulously, consistently and objectively followed by those administering the program.
9. Require full disclosure by those involved in the standard-setting process of any factor that might be considered bias or a conflict of interest. Require recusal or removal if a bias or conflict is particularly severe or pervasive. Full disclosure and appropriate checks and balances generally are effective mechanisms for safely managing most potential conflicts of interest.
10. To minimize the risk of copyright infringement, maximize copyright rights, and facilitate enforcement of such rights, use a copyright notice on all standards and related materials and register such standards and materials with the U.S. Copyright Office. Be sure that the association owns or has the right to use the entire contents of such materials (e.g., obtaining written copyright assignments from all non-association-employees that participate in the standard-setting process).
11. Use written disclaimers where appropriate to clarify the association's limited role with respect to the use of, and responsibility for, the standards.
12. Where appropriate and feasible, consider utilizing and participating in the standard-setting procedures of the American National Standards Institute ("ANSI").
13. Maintain sufficient insurance to cover the liability risks of the standard-setting program. Some association professional liability insurance ("APLI") policies provide coverage for certain claims arising from standard-setting activities as part of the basic policy, although some with coverage sub-limits. Other APLI policies will not cover such activities without an endorsement to the policy. Be sure to fully disclose the association's standard-setting activities in the insurance application. Note that most APLI policies do not cover bodily injury or property damage claims arising from these activities; stand-alone standard-setting insurance policies are available and may be necessary to insure against these particular risks. Adequate insurance should be a prerequisite to the operation of any association standard-setting program.
For more information, contact the author at jtenenbaum@TenenbaumLegal.com.