A key function of many associations is to regulate the conduct of their members, or even an entire industry, but associations must understand that legal issues and potential liability come with disciplining members. The disciplinary process can be broken down into seven stages: (1) Authority and Process; (2) Complaint; (3) Investigation; (4) Notice of Charge; (5) Hearing; (6) Decision; and (7) Litigation.
Before discussing the stages, a threshold question for any association is whether it wants to be in the business of disciplining its members. Certain organizations would have no reason for being or would lose all credibility if they did not promulgate rules and regulations and enforce them. Other organizations, however, may not need a disciplinary process to fulfill their missions and/or the cost, in time and money, may not justify such a program. Every association should carefully consider this issue, and its members’ expectations, so when it receives a complaint against a member, it knows how to respond.
1. Authority and Process. Assuming that the association has decided it wants to regulate its members’ conduct through a disciplinary process, it must ask if the association has the authority. Courts have long held that associations have the inherent the power to discipline members, and certain state nonprofit corporation acts implicitly or explicitly authorize the discipline of members either through suspension or expulsion. 
Denial of membership in a trade association, however, has provided the basis for finding a group boycott in violation of Section 1 of the Sherman Act.  In many early cases,  the Supreme Court held that group boycotts were per se illegal. 
In Northwest Wholesale Stationers the Supreme Court reversed the lower court ruling that a purchasing cooperative’s expulsion of a member without any notice or hearing constituted a per se illegal group boycott. In refusing to find a per se violation, the Court identified several indicia of those cases in which the per se standard has been applied to group boycotts:
- the boycotts involved joint efforts to disadvantage the boycotted firms by denying or persuading others to deny them relationships that are necessary for them to compete;
- the boycotts cut off access to a supply, facility, or market necessary to enable the boycotted firm to compete;
- the boycotting firms possessed a dominant position in the relevant market; and
- the practices were not justified by plausible arguments that they were intended to enhance overall efficiency and make markets more competitive.
Following the Northwest Wholesale Stationers decision, except in situations where a boycott was in furtherance of another antitrust violation, most association membership/discipline antitrust cases have been reviewed under the rule of reason analysis.
Under this analysis, courts will first look to whether the anticompetitive effect of the discipline. It may be that the expulsion or suspension of the member will have no anticompetitive effect because the association lacks market power, membership is unnecessary for the member to compete effectively, or there are sufficient competitors in the market so that the loss of one competitor does not have material competitive effects.
If the exclusion would not result in an unreasonably anticompetitive effect, there is likely no antitrust violation. If it does, however, the basis for the discipline then should be examined to determine if the membership requirements and disciplinary action are reasonably necessary for the association to achieve procompetitive effects and whether those procompetitive effects outweigh the discipline’s anticompetitive effects.
For example, in United States v. Realty Multi-List, Inc., the court explained that, although the association’s membership requirements constituted a group boycott of competitors by the association’s members, the conduct should not be judged under per se standard because multiple listing services generated procompetitive effects and some membership rules were necessary for the association to function. The court first addressed whether the association had market power (for if it did not, a significant adverse effect on competition was unlikely). Once the court determined that the association possessed market power, it analyzed whether the requirements were justified by the legitimate business needs of the association and whether they were narrowly tailored to meet those needs. The court struck down membership requirements not meeting these standards but upheld those that did.
Thus, even if an association believes that it lacks market power, it should narrowly tailor its membership requirements and grounds for discipline to meet its legitimate business needs in order to withstand scrutiny.
The next question is what process the accused member should be given. Section 6.21 of the RMNCA and various other state nonprofit corporation acts not based on RMNCA provide that no member may be suspended or expelled except pursuant to a procedure that is fair and reasonable. Most of these statutes specify that a procedure is fair and reasonable if the articles or bylaws provide for (i) not less than 15 days prior written notice of the suspension and expulsion and the reasons therefore, and (ii) an opportunity for the member to be heard, orally or in writing, not less than 5 days before the effective date of the suspension or expulsion by a person or persons authorized to decide the matter. The law of the association’s state of incorporation will generally govern what, if any, process is required. In addition to statutory requirements, the association’s governing documents (articles, bylaws, board policies, etc.) may mandate certain procedures. Accordingly, it is important to review carefully any applicable statutes and governing documents at the early stages of any investigation or disciplinary action.
Prior to the Supreme Court’s ruling in Northwest Wholesale Stationers, conventional wisdom held that associations risked antitrust liability unless they offered due process rights before suspending or expelling a member. The Northwest Wholesale Stationers Court, however, made clear that “the absence of procedural safeguards can in no sense determine the antirust analysis . . . . If the challenged action would not amount to a violation of Section 1, no lack of procedural protections would convert it into a per se violation.” Nonetheless, some courts have held that the absence of due process in disciplining members may be considered in the rule of reason analysis as evidence of an anticompetitive motive or intent.
Accordingly, even if process is not required by statute, the association’s governing documents or antitrust law, we recommend that members at least be given notice of the charges against them with enough specificity and time to allow for an adequate defense and an opportunity to present that defense at a fair hearing held in good faith.
2. Complaint. Once an association receives a complaint against a member or otherwise discovers grounds that could be the basis for discipline against a member, it must make a number of decisions. For example, it must decide whether the complaint, if true, would constitute a violation of any association rule, code or bylaw. It must also decide whether the complaint is sufficiently specific or credible to warrant further action. Unless the association has detailed and objective “intake” requirements, these can be awkward and subjective determinations. For purposes of minimizing legal exposure and protecting the association’s credibility, consistency is obviously key in addressing these threshold issues.
3. Investigation. The level of investigation of any charge must take into account the severity of the charge and impact on the accused. The association should realize that the person(s) conducting the investigation will likely be witnesses in the hearing and in any ensuing litigation.
Whatever the level of detail, the investigation must be fair and objective. For example, the investigator should be free of any conflict of interest and should seek out and review both inculpatory and exculpatory information.
If the investigation is being conducted by inside or outside counsel, the ethical obligations of such counsel must be considered and a decision must be made as whether warnings similar to corporate Miranda or Upjohn warnings are appropriate. Although recently reversed, a ruling in the criminal prosecution of the former CFO of Broadcom Corporation held that the outside law firm conducting the internal investigation committed at least three violations of its duty of loyalty to the CFO by (i) failing to disclose to the CFO the potential conflict of interest created its dual representation (it represented Broadcom in the investigation but represented the CFO individually in other civil actions related to Broadcom) and obtain his written consent to that conflict; (ii) interrogating him for the benefit of another client (Broadcom); and (iii) disclosing his privileged communications to third parties without his consent. The court found the law firm’s ethical breaches to be “very troubling” and referred the firm to the State Bar of California for appropriate discipline.
4. Notice of Charge. The association will have great difficulty in relying on any violations not listed in the notice of charge, thus it should be specific and complete. The notice should list the time, date and place of the hearing and be given far enough in advance to allow the member to prepare a defense. To the extent applicable, the procedural and evidentiary rules of the hearing should be set forth in the notice. Often members will be given the opportunity to submit written materials or participate in the hearing by teleconference if they are unable to travel to the location of the hearing.
Care should be taken to avoid conclusions of guilt or any defamatory statements. Although statements made by members or officers of an association regarding the alleged misconduct of a member may be protected by a qualified privilege under certain circumstances, such a privilege has limitations. An accused member could turn the tables on the association if statements attacking the character or assuming the guilt of the accused are made that fall outside of the protections of the privilege.
Although the issue may arise earlier in the process, the association must be prepared to deal with public statements made by the accused that put the association, its staff or its volunteers in a negative light. Often the association will not be able or will not deem it appropriate to respond to these statements. The association should consider ways in which to deal with this public/member relations issue.
5. Hearing. The procedural and evidentiary rules for the hearing should be decided upon in advance, and should be consistent with applicable laws and the association’s governing documents. Thought should be given as to who will preside at the hearing. If the bylaws are silent, the experience and capability of the would-be hearing chair should be the deciding factor. Contrary to popular belief, it does not need to be the volunteer chairman or president of the association. Depending on the experience of the presider, consider preparing a script for him/her to follow. A script can be very comforting, even to an experienced presider, in the pressure situations that inevitably occur during hearings.
It should go without saying: Conduct the hearing in good faith and do not prejudge the outcome. The charges may not be valid and facts may be discovered that shed new light on the situation. Also, understand that deliberations and other communications of the Board or other body deciding the matter are not privileged. If litigation ensues, those deliberations and communications are likely discoverable. Thus, be professional in deliberations and in all correspondence.
We generally recommend that the association make a transcript of the hearing. This can add cost and is not necessary in all circumstances, but it can be extremely helpful in defending litigation.
6. Decision. The decision should thoughtfully and thoroughly review the disciplinary process and evidence presented at the hearing. It should recite findings of fact and specify the rules violated. The decision should also clearly set forth the discipline and provide the rationale therefore.
The written decision is the association’s BRIEF TO THE COURT. If the member files suit, the decision should convince a judge reviewing the matter that the member was given adequate process, a fair hearing and a just result.
7. Litigation. If despite the association’s best efforts the disciplined member files suit, there are a number of steps that should be taken immediately. The association should engage counsel and ensure that an answer or other responsive pleading is filed within the applicable time limit. Any insurers of the association should be notified. There is no harm in notifying insures, even if there is not coverage, but if the association waits too long to notify carriers it could forfeit coverage.
The association’s counsel should provide advice regarding retention of applicable documents and limiting discussions concerning the litigation. Retention obligations likely cover not only traditional paper files, but also information created or stored electronically. The association will have to make a determination, in consultation with legal counsel, regarding what to disclose to the association’s members. It may be politically necessary to provide at least some information about the case or the allegations to the association’s members.
While successful attacks on an association’s decision are difficult to mount, there are various claims routinely asserted by members that have been disciplined by associations. These may sound in tort, antitrust, contract, quasi-contract or privacy law. In addition to any factual defenses, there are also a number of legal defenses available to each of these types of claims. For example, the law is very clear in most states that decisions of voluntary associations are entitled to significant deference. The United States Constitution may provide still further defenses to a member’s lawsuit. Specifically, the First Amendment and the Commerce Clause may provide legal authority fatal to certain claims for relief.
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Although member discipline can never be entirely free of risk, an association can significantly reduce the possibility of legal liability and member discontent by breaking down the disciplinary process into manageable stages and carefully planning for each stage in light of the association’s unique interests and circumstances.
 See Revised Model Nonprofit Corp. Act (“RMNCA”) § 6.21 (1987) (generally adopted by AK, AZ, CO, CT, FL, GA, HI, ID, IL, IN, ME, MN, MS, MO, MT, NE, NC, OR, SC, TN, UT, VT, WV, and WY); Cal. Corp. Code § 5341 (West 2003); La. Rev. Stat. Ann. § 12:210 (1994); Mich. Comp. Laws § 450.2304 (2002); Nev. Rev. Stat. § 82.251 (2005); and N.Y. Not-for-Profit Corp. Law § 601 (McKinney 2007).
 See Associated Press v. United States, 326 U.S. 1 (1945).
 See, e.g., McCreery Angus Farms v. Am. Angus Ass’n, 379 F. Supp. 1008 (S.D. Ill. 1974) (expulsion from cattle association per se illegal).
 Certain agreements whose nature and necessary effect are so plainly anticompetitive that no elaborate study of the industry is needed to establish their illegality are summarily found to violate antitrust laws and are referred to as “per se illegal.” See Nat’l Soc’y of Prof’l Eng’rs v. United States, 435 U.S. 679 (1978).
 Nw. Wholesale Stationers v. Pac. Stationary & Printing Co., 472 U.S. 284 (1985).
 See, e.g., FTC v. Superior Court Trial Lawyers Ass’n, 493 U.S. 411 (1990) (where competitors had engaged in a boycott in furtherance of a price-fixing agreement, it was subject to the per se rule and thus there was no requirement to show market power).
 An analysis in which “the finder of fact must decide whether the questioned practice imposes an unreasonable restraint on competition, taking into account a variety of factors, including specific information about the relevant business, its condition before and after the restraint was imposed, and the restraint’s history, nature and effect.” State Oil Co. v. Khan, 522 U.S. 3 (1997).
 629 F.2d 1351 (5th Cir. 1980).
 Nw. Wholesale Stationers, 472 U.S. at 293.
 See Carleton v. Vt. Dairy Herd Improvement Ass’n, 782 F. Supp 926 (D. Vt. 1991); Pretz v. Holstein Friesian Ass’n, 698 F. Supp. 1531 (D. Kan. 1988).
 Cf. Normali v. Cleveland Ass’n of Life Underwriters, 315 N.E.2d 482 (Ohio Ct. App. 1974) (stating that an investigating committee has a duty only to investigate and has no obligation to place probative weight on exculpatory evidence).
 These warnings are generally provided to an employee being interviewed at the outset of an interview conducted by the company’s lawyers during an internal investigation. At a bare minimum, the warning admonishes the employee that (a) counsel represents the company and not the employee; (b) communications between the employee and counsel will be privileged; (c) however, this privilege belongs to the company and the company alone can decide to exercise it or waive it.
 See United States v. Ruehle, ___ F.3d ___ (9th Cir. 2009).
 See, e.g., McCreery Angus Farms v. Am. Angus Ass’n, 379 F. Supp. 1008 (S.D. Ill. 1974), aff’d, 506 F.2d 1404 (7th Cir. 1974) (noting that a member’s minimum due process rights include the right to notice of charges and an opportunity to defend oneself against the charges).
 See, e.g., Restatement (Second) of Torts § 596 cmt. e (1977) (noting that the common interest of members of associations is recognized as sufficient to support a privilege for communications regarding alleged misconduct of a member).
 See, e.g., Jackson v. Am. Yorkshire Club, 340 F. Supp. 628 (N.D. Iowa 1971) (finding suspension of member to be unlawful and void where association did not act pursuant to its bylaws in suspending member).
 See Fed. R. Civ. P. 16, 26, 34.
 See, e.g., Mahan v. Agee, 652 P.2d 765 (Okla. 1982).
 See Boy Scouts of Am. v. Dale, 530 U.S. 640 (2000); NCAA v. Miller, 10 F.3d 633 (9th Cir. 1993).