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Western Sugar v. ADM: Member Liability for Association Action

Date: Aug 23, 2012

Trade associations allow members to create a collective voice, advocating or promoting policies that benefit their industry. Associations and members must be careful because, under certain circumstances, individual members may be held liable for statements made with this collective, association voice.

Membership alone in a trade association is not enough to establish liability for the association's actions. Courts have generally held members of trade associations vicariously liable for the actions of their associations only when the members treat the association as their alter ego, exercise control over the association, and even where the individual members ratify the association's malfeasance. A July 31, 2012, Order from the Central District of California illustrates how individual members can be dragged into litigation along with their association.

In Western Sugar Cooperative, et al. v. Archer-Daniels-Midland Co., et al. No. CV 11-3473 CBM (MANx), Plaintiff sugar producers and two of their associations sued the Corn Refiners Association ("CRA"), as well as individual association members. Plaintiffs asserted that a CRA ad campaign claiming that high fructose corn syrup ("HFCS") is "natural," should be referred to as "corn sugar," and is nutritionally and metabolically equivalent to other sugars was false and misleading in violation of the Lanham Act. Plaintiffs alleged, among other theories, that individual members were liable for the actions of the trade association based on vicarious/agency liability for CRA's actions; or joint tortfeasor liability. Plaintiffs also alleged that the CRA members were individually liable for their own, similar, advertising statements. The member-defendants moved to dismiss on each theory.

Agency Allegations: The Court noted, that in order to establish that the trade association was the agent of a member, plaintiffs must "allege that both the principal and the agent have manifested an assent that the principal has the right to control the agent." The Court found that the Complaint set out a viable claim of agency based on allegations that individual member companies had members serving on the CRA's Board of Directors, and those member spent numerous hours working on the CRA's advertising campaign; that "decisions to launch and fund the multimillion dollar advertising campaign was subject to the Member Companies' approval," and that "the Member Companies provided the overwhelming majority of [the Association's] membership dues." Plaintiffs also identified specific funding for the false advertising campaign. The Court found these allegations of fact sufficient to support plaintiffs' claims that the individual members exercised "collective right," "power to control," and "domination over the CRA" sufficient to require a trial.

Conspiracy/Joint-tortfeasor Allegations: Joint-tortfeasor liability requires that a defendant "knowingly participate in the creation, development and propagation of the false advertising campaign." In support of their claims, plaintiffs alleged that the individual members "conspired" to "exercise their collective right and actual power to control the CRA…" and "orchestrated [the Association's] acts largely through their control and domination of the CRA and authorized the CRA to receive from them the necessary funding for such an advertising campaign." The Court found that these allegations were sufficient to require a trial.

Finally, the Court found that allegations of advertising by individual members were sufficient.

Western Sugar is a troubling case because the activities that the court found sufficient to hold members accountable for association action are common to association governance. Associations' boards are comprised of member companies, and association boards have an obligation or fiduciary duty of active oversight of association programs. While it is still at the pleading stages and a more refined and balanced view of liability standards could emerge as the litigation progresses, it is a cautionary tale to trade associations and their members to be careful how they conduct the association's business.