Associations frequently endorse, sponsor or lend their names to products and services provided by third parties. In addition, associations often "rent" their membership lists to vendors and others for use in promoting beneficial and/or discounted products or services to the association's members. While such endorsement and list licensing arrangements can be extremely valuable to associations and their members, they also carry with them potential legal and tax exposure for associations. The following article is designed to assist associations in structuring such arrangements to minimize this exposure.
Endorsements – whereby an association endorses (on an exclusive basis) a vendor's product or service – are a rapidly growing and profitable area of association activity. Endorsements are a means to: (i) generate non-dues revenue from both members and non-members; (ii) promote the association's name and identity, and, by extension, the industry or profession in general; and (iii) provide a service (e.g., "tailored" products and services, discounted rates/fees, etc.) to members.
This subject is addressed in separate article, Association Endorsements: The Current State of the Tax Law.
Because the association's name is identified with the third-party products and services endorsed by the association, people who purchase, utilize or participate in them may believe they have been guaranteed by, or are products or services of, the association – and may look to the association for relief is something goes wrong. This identification has the potential to create liability risk for the association.
There is potential tort liability to an association from its endorsement of third-party products or services for loss or injury caused by or resulting from a vendor's products or services. Of course, the vendor itself is subject to possible negligence liability for any damages caused by its product or service. However, in certain circumstances, an association endorsing that product or service also may be held liable for the vendor's negligent acts. Such circumstances generally would involve a member who relies on the association's endorsement and is damaged by the negligence of the vendor. This type of endorsement liability is subject to various conditions and remains atypical.
The association will only be liable if the injured party can prove all of the elements of negligence liability: duty, reliance, breach of duty (negligence), injury, and causation. If any one of these five elements cannot be established, then liability will not result. The case law in this area leads to the conclusion that absent some significant involvement or control, assumption of responsibility, or clear negligence by the association, the association is not likely to be held liable for its good faith endorsement of vendor products or services.
Even though the potential for association tort liability from endorsements is relatively remote, the potential legal defense costs alone dictate that prudent associations seek ways to minimize any potential liability:
1. Due Diligence: In both selecting vendors and executing endorsements, it is essential for associations to exercise due diligence and reasonable care. This includes adequate inquiry into the company's competence and financial soundness, the product or service's quality and efficacy, and the company's claims about the product or service.
2. Disclaimers: A disclaimer should be used to clearly and accurately explain the association's limited role with respect to particular products or services. Disclaimers should be explicitly and unambiguously worded, conspicuous, and clarify that the association is not in any way guaranteeing the vendor's products.
3. Insurance: Associations should maintain professional liability insurance in amounts adequate to cover potential liability (including legal defense costs) stemming from its endorsement of products or services.
4. Minimize Control of Vendor: Associations should refrain as much as possible from involvement in, or control of, the endorsed products or services. Any involvement or control should be limited to "quality control."
5. Contractual Limitations: An association always should enter into a written contract with any vendor whose product or service it is endorsing. The terms of the agreement should be drafted to limit the potential liability of the association. In addition, while the contract terms are important, it is equally critical that such terms be followed in practice by both the vendor and the association.
Under federal and state antitrust laws, an association may be held liable for action that constitutes an unreasonable restraint of trade. Since associations are, by their very nature, "combinations" of business competitors, associations are especially prone to antitrust scrutiny. To avoid liability under the antitrust laws, associations must not engage in any activity which may result in an unreasonable restraint of trade.
In endorsement context, an association generally will be subject to antitrust liability only if: 1) the product or service endorsement is construed as a boycott of, or concerted refusal to deal with, a competing vendor or vendors, or 2) the association unreasonably denies non-members access to an endorsed product or service. With regard to the latter, in determining the reasonableness of non-member exclusion, courts will generally consider the reasonableness of the eligibility requirements, the "market power" of the association (i.e., the percentage of the industry or profession that association members constitute), and the intent and effect of the exclusion (i.e., whether the exclusion significantly impairs the excluded party's ability to compete in the market).
To minimize potential antitrust liability from endorsements, associations should:
1. Ensure that endorsement decisions are based on objective, reasonable criteria (e.g., a study of competing products or services by an objective, expert committee), that such criteria are applied objectively, that all potential vendors are considered, and that the basis for endorsement decisions is well documented.
2. Ensure proper access to endorsed products or services for non-members. As a general rule, non-members should be permitted access to endorsed products or services (particularly when the products or services are competitively valuable), although they may be charged a higher fee than members. However, where non-members are charged more than members for a particular product or service, the price differential should be reasonable. If non-members are excluded from access to a particular product or service (e.g., if and when the product or service is not competitively valuable), association membership criteria and dues should be objective and reasonable, and membership should be open to all who meet such criteria.
False/Misleading Advertising Liability
The Federal Trade Commission Act generally prohibits false or misleading advertising. FTC regulations specify certain guidelines that must be followed when associations endorse products or services. The rules require that an association's endorsement "be reached by a process sufficient to ensure that [it] fairly reflects the collective judgment of the organization." Furthermore, if the association is viewed by others as being expert in the field (as most are), it must either utilize an expert(s) in evaluating the competing products or services, or utilize objective standards previously adopted by the association and suitable for judging the merits of the competing products or services.
To avoid liability under the FTC Act, the decision to endorse a product or service must be supportable by the association – most preferably through a study/analysis of competing products or services, the application of previously-adopted objective standards to those products or services, and a conclusion as to why the decision to endorse a particular product or service makes the most business sense (to both the association and its members). Furthermore, depending upon the circumstances, there may be a continuing obligation to verify that the endorsed product or service is still living up to the claims made about it.
For more information, contact the author at jtenenbaum@TenenbaumLegal.com