A New Law Affects Standards Writing

Way back in the Sept. 1990 issue of CSE, I discussed potential liability for organizations involved in codes and standards development. However, Congress passed a new law this year that will directly affect how the earlier court rulings are applied.

In my article of 14 years ago, I highlighted the case of Hydrolevel v. ASME [635 F.2d 118 (2nd Cir. 1980)] . Hydrolevel had sued the American Society of Mechanical Engineers for conspiring to restrain trade. The case stemmed from a letter written by an ASME committee member disapproving of the company’s product.

The U.S. Supreme Court declined to hear an appeal by ASME, letting stand the Court of Appeals decision that ASME was liable for antitrust acts of individuals that it placed in positions of apparent authority. Under Hydrolevel, charitable and educational organizations can have antitrust liability. They could even be liable if the wrongdoers are volunteers instead of employees. The case did not address liability of the individual wrongdoers.

In the Nov. 1990 issue of CSE, I continued the story with a discussion of Allied Tube v. Indian Head [108 S.Ct. 1931 (1988)] . In that case, a group of people banded together to subvert an organization’s procedures for adopting codes and standards. The issue was a proposed amendment to the National Electrical Code that would allow installers to use PVC conduit. The steel tubing industry thought the amendment would cost them a lot of business, so they recruited more than 200 employees to join NFPA. The new NFPA members from the steel tubing industry voted down the amendment at NFPA’s annual meeting. The PVC conduit manufacturers sued the steel tube manufacturers and won a $3.8 million verdict for restraint of trade. The case established the principle that the writing of codes and standards is subject to antitrust laws—even though it is similar to governmental activities.

The message for engineers who help write codes and standards was that standards must be “based on the merits of objective expert judgments” and adopted “through procedures that prevent the standard-setting process from being biased by members with economic interests in stifling product competition,” (Allied, 486 U.S. at 501) . Attempts to bias a code to advance commercial objectives can result in liability for substantial damage amounts.

The importance of fairness and objectivity in writing codes and standards goes beyond potential liability for organizations and individuals who abuse the system. It influences the willingness of legislatures and courts to let industries regulate themselves. It should be no surprise that Congress stepped in with the Standards Development Organization Advancement Act of 2004 (H.R. 1086). President Bush signed this act into law on June 22, 2004 (Public Law 108—237). This law amends the National Cooperative Research and Production Act of 1993 (15 USC 4301 et. seq.) by extending selected antitrust protections to standards development organizations while those organizations are engaged in standards development activity. The law limits the core holding of Hydrolevel that standards development organizations have the same antitrust liability as anyone else.

Here is how House Judiciary Committee Chairman James Sensenbrenner (R-Wis.) explained the purpose of the new law in the committee’s report:

This bill fosters the critical role of standards development while strongly reaffirming the central role of our Nation’s antitrust statutes and preserving and promoting free market competition. Standards development organizations play a pivotal role in promoting this competition. Seven years ago, the Congress passed legislation requiring the use of voluntary consensus standards in Federal procurement and regulatory activities. While this legislation has encouraged Government use of private development standards, it also has increased the vulnerability of private standard developers of the antitrust litigation. This bill addresses this problem, and it simply limits recovery against standard development organizations [to] the actual economic damages while codifying the rule of reason for antitrust scrutiny of their activities.

Congressman Randy Forbes (R-Va.), a member of the House Judiciary Committee, lent his support to the bill with this comment:

Standards developing organizations play critical but sometimes overlooked roles in promoting market-based competition. Without technical product standards, there would be no compatibility or substitutability among competing consumer products, and public health and safety would be severely compromised. Until recently, standards were often developed by the Federal Government. However, the rapid pace of technological innovation makes nongovernment standard-setting activity more efficient and more effective. It is important to stress that this legislation does not create an antitrust exemption for standards developers. The bill is a narrowly tailored commonsense approach to promoting activity that enhances product choice and consumer welfare.

As Congressman Forbes pointed out, the act is not a completely free ride for standards-developing organizations. Under section 3, the antitrust protection does not apply to activity that involves: (1) the exchange of cost, sales or pricing information not reasonably required for the purpose of developing a voluntary consensus standard; or (2) any anti-competitive activity for a for-profit entity that stands to financially benefit from participating in any standards development activity.

Although standards-developing organizations are the nominal authors, codes and standards are actually written by individual technical committee members. Section 8 of the new law makes it clear that antitrust protection applies only to the standards-developing organizations. It does not extend to parties (individual committee members or their employers) who participate in standards development activities. Therefore, individual engineers who attempt to use their positions on standards writing committees for personal financial or competitive gain still face potential antitrust liability. Whether an individual engineer would be an attractive target for an antitrust action is a question most of us would prefer not to ponder.

Avoiding personal liability when serving on code-writing committees begins with objective engineering judgment. In addition, better committee meeting minutes and explanatory material—in the code itself or in an appendix—to document the purpose of the code provisions might deflect potential challenges that a code has an anti-competitive bias. The process of preparing that type of documentation would help code writers think through the reasons for the provisions they draft and identify possible ramifications. The additional documentation would also make codes easier to use, promoting more uniform enforcement and compliance.

Transition Planning: Boomers Begin to Retire

By 2020, the number of people aged 55 to 64 years is projected to increase by 47%, while the population of 35 to 54 year-olds will decrease by 6%, according to the U.S. Census Bureau. “For A/E/C and environmental consulting firms, as the Baby Boomer generation ages and contemplates retirement, this shift in demographics will affect the supply and demand for shares of closely held companies, which may also affect companies’ fair market values,” says Michael O’Brien, an associate with Natick, Mass.-based ZweigWhite specializing in ownership transition and valuation. “Too many A/E/C firms still wait too long to begin their ownership transition process, and with the changing demographics, it will become more vital to plan early for a transition to yield full value and be successful.”

O’Brien goes on to explain that the narrowing of the population gap may tip the scales of the supply and demand equilibrium in favor of buyers as the demand for shares may decrease because of the decline of potential purchasers of shares and the increasing numbers of sellers entering retirement. If an owner does not have enough buyers, then the price for those shares could be negatively impacted. “This is why it’s important for firm leaders to begin ownership transition planning early to create demand for shares without sacrificing value,” he says.

O’Brien shares the following advice with firm leaders who want to manage their transition risk:

Identify the buyers. Management and ownership transition planning run on parallel paths. By identifying and grooming the next generation of leaders early on, firm owners are essentially cultivating demand for firm shares.

Mitigate the burden on the buyers. Allow more time to effect the transition. Selling down some of the ownership interest in stages prior to the date of retirement is an effective method of managing the ownership transition program.

Sell to a third party. While a sale to a third party may yield a higher value for the company, more companies are likely to consider a third party sale alternative. The increased supply of companies for sale will reduce the premium in pricing over an internal sale. The greater the supply of A/E/C and environmental consulting companies available for sale, the more of a buyers’ market it becomes.

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