Pillsbury Winthrop Shaw Pittman
September 13, 2024
The following is a review of notable cases and regulatory developments for nonprofit organizations at the federal and state levels during the last two years.
ANTITRUST
Federal Court in Arizona Limits FTC Jurisdiction on Nonprofits
FTC v. Grand Canyon Education, Inc., No. 2:23-cv-02711-DWL (D. Ariz. Aug. 15, 2024)
A federal court in Arizona dismissed claims in a Federal Trade Commission (FTC) lawsuit against Grand Canyon University. The case has potential ramifications for other kinds of nonprofits, especially those without voting members. The court held that the FTC Act did not authorize the FTC to bring claims against GCU, formed as a nonprofit corporation with federal income tax exemption under Internal Revenue Code Section 501(c)(3), because GCU was not “organized to carry on business for its own profit or that of its members,” which is an element of the definition of a “corporation” under Section 4 of the FTC Act necessary for the FTC to assert jurisdiction. The FTC asserted in its complaint that GCU was “organized … to advance [Grand Canyon Education, Inc.’s] for-profit business and advance Defendant Mueller’s interests as officer, chairman, director, stockholder and promoter of investment in GCE.” (Mueller was both GCU’s president and GCE’s CEO.) But neither GCE nor Mueller were members of GCU.
The FTC argued that “GCU is a for-profit entity because it was organized to, and does, benefit its for-profit founder, GCE, and President, Defendant Mueller” and because a “genuine nonprofit does not siphon its earnings to its founder, or the members of its board, or their families, or anyone else fairly to be described as an insider.” The FTC also argued that “Arizona and IRS statutes [that] reference nonprofit or tax-exempt status … do not supplant the FTC’s authority.”
The court rejected the FTC’s view and held that “the FTC’s theory cannot be squared with the plain language of the statute.” The court reasoned that “if Congress had intended for [FTC Act] Section 4 to encompass nonprofit entities organized to carry on business for the profit of non-member ‘insiders,’ ‘related businesses,’ and ‘officers,’ it could have said so.” The court distinguished cases that have held that the “FTC [has] authority to pursue claims against a particular type of nonprofit entity—a nonprofit corporation with profit-seeking members that was expressly organized to benefit those members” (emphasis in original). It was fatal to the FTC’s asserted enforcement authority that the entities and persons allegedly wrongfully benefiting from GCU’s activities were not members of the nonprofit.
While this is just one case from one federal court, if not overturned on appeal it has potential ramifications for FTC jurisdiction over any nonprofit that cannot reasonably be found to be operating for the “business … of its members.” That might include, for example, not only charities and educational organizations, which often do not have members, but also other kinds of nonprofit such as credentialing organizations which also often do not have members of any kind.
Second Circuit Expanded Antitrust Liability for Association Members in Soccer Promotion Case
Relevent Sports, LLC v. U.S. Soccer Fed’n, Inc., 61 F.4th 299 (2d Cir. 2023)
The plaintiff, a U.S.-based soccer promoter, Relevent Sports, LLC, brought an action against the Fédération Internationale de Football Association (FIFA) and the U.S. Soccer Federation, Inc., alleging that the defendants violated the Sherman Antitrust Act and Clayton Antitrust Act by conspiring to prohibit official soccer games in the United States through a 2018 geographic market division policy that unlawfully prohibited soccer leagues and teams from playing official season games outside of their home territory. The plaintiff claimed that the 2018 policy represented an agreement among competitors to restrict competition. After concluding that the plaintiff failed to allege that the 2018 Policy itself stemmed from or constituted direct evidence of such a prior agreement among the Defendants, the district court dismissed the complaint for failure to state a claim.
The Second Circuit vacated and remanded, holding that a plaintiff challenging an association rule governing the conduct of the members’ separate businesses need not allege an antecedent “agreement to agree” but that an allegation that separate businesses joined an association and agreed to abide by the association’s rules and policies was sufficient to allege concerted action under the Sherman Act. The ruling increases the risk that an association’s members could be held liable for the actions of the association itself without any direct involvement in those actions. The U.S. Supreme Court denied Defendant’s Writ of Certiorari on April 22, 2024.
District Court Dismissed Antitrust Claims against Association Citing Insufficient Evidence of Members’ Participation in Conspiracy
Alvarado v. W. Range Ass’n, 2024 WL 915659 (D. Nev. 2024)
Cirilo Ucharima Alvarado, a Peruvian sheepherder, filed a class action lawsuit against Western Range Association (WRA), an association of sheep ranches, and eight WRA member ranches. The Plaintiff alleged violations of Section 1 of the Sherman Antitrust Act, claiming the Defendants engaged in wage-fixing and market allocation for sheepherders. The case proceeded in the U.S. District Court for the District of Nevada. The Plaintiff worked for Little Ranch in Nevada from July to December 2020 on an H-2A visa. The Plaintiff sought to represent all sheepherders who worked for WRA or its members through the H-2A program since June 1, 2018. The court previously denied WRA’s motion to dismiss the original complaint, finding plausible allegations of an unlawful wage-fixing agreement between WRA and its members.
The Plaintiff’s amended complaint alleged that WRA and the ranch Defendants conspired to fix wages at the minimum allowable rate set by the Department of Labor for H-2A sheepherders. The Plaintiff also claimed the Defendants agreed to allocate the market for foreign H-2A sheepherders and not poach employees from one another. The ranch Defendants moved to dismiss, arguing the Plaintiff failed to sufficiently allege each Defendant’s specific assent to and participation in anticompetitive agreements. The court agreed, finding that merely identifying the ranches as WRA members was insufficient to establish liability. The court emphasized that membership in an association alone does not render members automatically liable for the association’s antitrust violations.
The court distinguished this case from Relevent Sports, LLC v. United States Soccer Fed’n, Inc., where an association’s binding policy and members’ agreement to adhere to all policies sufficed to allege an agreement. Here, the Plaintiff did not allege a comparable membership agreement binding ranches to WRA’s policies. The court found the Plaintiff’s allegations too conclusory, lacking specific details about who from each ranch entered into purported agreements with WRA. While acknowledging that detailed “defendant by defendant” allegations are not required, the court ruled that more specific factual allegations were necessary to plausibly suggest each ranch Defendant’s participation in the alleged conspiracy. The court granted the motions to dismiss but allowed the Plaintiff leave to amend, noting the possibility of additional specific allegations emerging from ongoing discovery.
Sixth Circuit Ruling Reinforced Legality of Standards-Setting Association Certification Policies
Hobart-Mayfield, Inc. v. Nat’l Operating Comm. on Standards for Ath. Equip., 48 F.4th 656 (6th Cir. 2022)
Petitioner Hobart-Mayfield, Inc. (“Mayfield”), a manufacturing company that makes a football helmet accessory, sued the National Operating Committee on Standards for Athletic Equipment (NOCSAE), Riddell, Inc., Kranos Corp. (d/b/a/ Schutt Sports), and Xenith, LLC (collectively “Helmet Manufacturers”).
Mayfield manufactures the “S.A.F.E. Clip,” which is an add-on product designed to be a shock absorber for football helmets. Mayfield contends that NOCSAE’s grant of a unilateral right to Helmet Manufacturers to void a NOCSAE safety standard certification when an add-on product is attached to a helmet is a violation of the Sherman Antitrust Act and the Michigan Antitrust Reform Act as well as tortious interference with business relations. The crux of its complaint was that the Helmet Manufacturers could decertify certain helmets if add-on products were attached to them, which restrained Mayfield’s ability to sell its S.A.F.E. Clip.
The district court granted the Helmet Manufacturers’ motion to dismiss, and the U.S. Court of Appeals for the Sixth Circuit affirmed, holding that the accessory maker failed to allege that the Helmet Manufacturers entered into agreement to restrain trade in violation of the Sherman Antitrust Act, 15 U.S.C. § 1 because Mayfield failed to allege that there was an agreement between NOCSAE and the Helmet Manufacturers. Furthermore, there was no conspiracy in violation of the Sherman Antitrust Act as there was no per se or rule of reason violation, and the petitioner failed to show tortious interference.
DOJ, FTC Withdraw from Guidelines Establishing Antitrust Safety Zones for Information-Sharing Programs
In 2023, the U.S. Department of Justice (DOJ) and FTC withdrew from three joint antitrust policy statements that had provided antitrust safety zones for information-sharing programs involving competitors, which often are offered by associations. Under the antitrust safety zones, an information-sharing program was presumptively lawful if the information was collected, aggregated and disseminated by a third party (such as an association); the exchanged information was more than three months old; at least five providers supplied the exchanged information; and no single provider accounted for more than 25% of the exchanged information.
The antitrust safety zones set forth in the policy statements, although on its face applicable to the health care field, had been applied by the antitrust agencies to areas outside of health care and had been relied upon by parties, including many trade associations, professional societies and other nonprofits, when establishing their information-sharing programs.
When withdrawing from the statements, DOJ said that the guidance was “overly permissive on certain subjects, such as information sharing.” Press Release, DOJ (Feb 3, 2023). The FTC echoed DOJ, stating that “the Statements may be overly permissive on certain subjects, such as information sharing. In particular, companies have sometimes used the safety zone for information exchanges in contexts and industries that were never contemplated by the agencies, including to share competitively sensitive wage and benefit information with other employers.” Press Release, FTC (Jul. 14, 2023).
Neither DOJ nor FTC has issued new guidance. Each agency instead stated that it would be using “a case-by-case” enforcement approach going forward. As such, it is likely that it will take some time before we know whether information-sharing programs that operate within the antitrust safety zone that had been relied upon for years could be subject to legal challenge.
Massachusetts District Court Ruled That the American Red Cross Is a “Federal Instrumentality” and Immune from Antitrust Suits
Verax Biomedical Inc. v. American National Red Cross, 2024 WL 208127 (D. Mass. 2024)
Verax Biomedical, Inc. sued the American Red Cross (ARC), a federally chartered nonprofit corporation, for violating the Sherman Act. Verax claimed that ARC, the largest supplier of blood platelets in the United States, leveraged its power in the market to monopolize “mitigation services.” The District Court for the District of Massachusetts granted ARC’s motion to dismiss Verax’s antitrust claims.
Verax manufactures PGDprime, a Rapid Secondary Test designed to detect bacterial growth in blood platelets to mitigate the risk of platelets becoming infected. Prior to July 2020, ARC sold blood platelets to hospitals, which then separately employed mitigation services. In July 2020, ARC announced a plan to pretreat all platelets it sold using Cerus Corporation’s INTERCEPT Blood System, a test that is incompatible with Rapid Secondary Tests such as PGDprime.
The Sherman Act imposes liability on any “person” including “corporations and associations existing under or authorized by the laws of … the United States.” However, the United States is not a “person” subject to the Sherman Act. ARC argued that, as a federal instrumentality, it is not a person separate from the United States. The court held that the ARC is “a federally chartered instrumentality of the United States” with rights that include immunity from antitrust suits. ARC’s charter requires it to fulfill a variety of public functions and, on the whole, ARC’s “goals, obligations, and powers” support treating ARC as a public rather than a private entity. …