Federal court ruling and its impact on nonprofits and associations
A recent decision from the United States Court of Appeals — District of Columbia Circuit highlights some of the legal challenges for trade and professional associations that sponsor certification and accreditation programs, as well as enforceable codes of ethics for their members, certificants and accreditants, and even association membership requirements generally (collectively, certification programs).
In Camarda v. Certified Financial Planner Board of Standards, Inc., No. 15-7080 (filed on Oct. 4, 2016), the plaintiffs — two certified financial planners — filed breach of contract and implied duty of good faith claims against the Certified Financial Planner Board of Standards, Inc. (the board), a nonprofit, tax-exempt organization that certifies financial planners. Although the court granted summary judgment to the board, the case is an example of the risks faced by associations that sponsor certification programs.
In many cases, the costs, burdens and distractions of mounting a defense to litigation can overwhelm an association. However, there are steps that an association can take to minimize these legal risks.
LEGAL RISK TO ASSOCIATIONS
It is well-established that association certification programs confer an array of valuable benefits for industry, government and the general public. Similarly, membership criteria and codes of ethics often serve a
legitimate purpose by helping the association function effectively and focusing its efforts on benefiting an industry or profession with common interests. While certification programs and membership standards provide many benefits, they occasionally are subject to legal challenge under the antitrust laws, common law theories of negligence (for certification programs), due process, and defamation, among others.
In Camarda, for example, the plaintiffs, who had been certified by the board, filed suit when the board decided to issue a public letter of admonition for the plaintiffs’ alleged failure to comply with certain board policies. The plaintiffs’ breach of contract and implied duty of good faith and fair dealing claims were based on the allegation that the board failed to follow its internal disciplinary process rules. The plaintiff also filed an unfair competition claim.
These types of claims are common against associations, particularly with respect to certification programs and membership requirements or restrictions. Many associations, for example, limit membership, or condition certification, on satisfying certain standards. Those that are denied membership or certification may claim they were denied the ability to effectively compete in the market or that their due process rights were violated.
In most cases these claims fail, usually with the court siding with the association at the summary judgment stage. That was the case in Camarda, where the court rejected each of the plaintiffs’ claims. According to the court, the board followed its internal disciplinary process and did not engage in any arbitrary or capricious action in deciding to discipline the plaintiffs. Moreover, the board noted there was no evidence that even a “perfect” process would have led to a different outcome.
STEPS TO MINIMIZE LEGAL RISK
Although the board in Camarda prevailed, there is no doubt that disgruntled plaintiffs will continue to file complaints against associations that sponsor certification programs, as well as in connection with association membership requirements and restrictions. Fortunately, there are a number of steps that an association can take to manage such programs to minimize litigation risks.
• Developing Standards. Any certification standards adopted by an association should be clear and unambiguous, reasonable, fair, and objectively grounded. These standards should be no more stringent or rigid than necessary to ensure the minimum competency or quality levels of those certified.
Specific commercial or economic considerations should play no role in an association’s development of the standards. This applies to certification and accreditation standards, as well as to association membership criteria and member codes of ethics.
• Availability of Certification. Certification programs should be open to association members and non-members on the same terms and conditions. The association should widely publicize the availability of the certification program and permit application by all who choose to apply. The fees for certification should be reasonable, but higher fees may be charged to non-members for certification to account for any association membership dues or assessments that contribute to funding the program.
• Update Standards. Periodically review and update all certification, accreditation and membership standards to ensure they are current and reflect new legal, technological and other developments. Provide appropriate opportunities for industry 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.
• Due Process. Due process should be built into the program. This requires associations to provide notice of a potential adverse decision to a current or prospective certificant, accreditant or member, an opportunity for the affected individual/entity to respond and defend himself/herself/itself, and an opportunity to appeal any adverse decision.
While nothing prevents a certification program from publicizing the names of, and information about, those who are certified, accredited, or members of the association, care should be taken to avoid any explicit or implicit disparagement of those who are not certified, accredited or association members (the underlying issue in Camarda). As a general best practice, an association should maintain strict confidentiality of all adverse allegations, complaints, actions and proceedings that arise in connection with the certification, accreditation, code of ethics, or membership program.
While it is acceptable, for instance, for a certifying association to verify that an individual or entity is not currently certified, no further details should be provided.
• Insurance. Maintain sufficient insurance to cover the liability risks of the program. Some association directors and officers liability insurance (D&O) policies provide coverage for certain claims arising from certification, accreditation and enforceable code of ethics programs as part of the basic policy, although there sometimes are coverage sublimits. Other D&O policies will not cover such programs without an endorsement to the policy. Importantly, D&O policies do not cover bodily injury or property damage claims arising from these programs, nor do they cover breach of contract claims (one of the claims alleged in Camarda. Specialized stand-alone insurance policies are available and sometimes necessary to insure against these risks. Adequate insurance should be a prerequisite to the operation of any association certification or accreditation program or enforceable member code of ethics.
Jeffrey S. Tenenbaum is an attorney who chairs the Nonprofit Organizations Practice Group at Venable LLP in Washington, D.C. His email is email@example.com. Andrew E. Bigart is an attorney with Venable LLP in Washington, D.C. His email is firstname.lastname@example.org