Testimony of James M. Shannon

President and CEO

NFPA

Before the

House Committee on the Judiciary

Anti-Trust Task Force

US House of Representatives

Washington, DC

April 9, 2003

Mr. Chairman, ranking Member Conyers and Members of the Committee, I am honored to appear before this Committee again. I am James M. Shannon and I am President and Chief Executive Officer of NFPA (the National Fire Protection Association). NFPA is an international organization that develops voluntary consensus codes and standards that are adopted by state and local jurisdictions throughout the United States and are widely used by the federal government and other governments around the world. Before joining NFPA I served as Attorney General of the Commonwealth of Massachusetts from 1987 to 1991 and I was Chairman of the Antitrust Committee of the National Association of Attorneys General. In that capacity, I appeared before this committee to testify on antitrust matters. Before that I had the great honor of representing the Fifth Congressional District of Massachusetts as a member of this body from 1979 to 1985 and served on the Ways and Means Committee.

As a public official I sought to understand, improve, and enforce the antitrust laws to further the goals of enhanced competition. The bill that I am here to support today, the Standards Development Organization Advancement Act of 2003, will help standards developers continue their important work on behalf of all of our citizens while reaffirming the central role of our competition statutes in a free-market economy.

Let me take a minute to describe NFPA to give you a sense of the organizations that are covered by this proposal and why it is in the public interest to adopt this legislation.

NFPA was founded over one hundred years ago and has as its mission the protection of lives and property from fire and related hazards. This mission is accomplished principally through the development of nearly 300 codes and standards in a consensus process under rules sanctioned by the American National Standards Institute. These codes include the National Electrical Code, which is used in just about every jurisdiction in America, the National Fire Codes and the Life Safety Code which, under law, must be used in healthcare facilities that receive Medicare and Medicaid reimbursement.

Our rules require that standards be developed using procedures that ensure due process, openness, fairness and the participation of all materially affected interests. Our technical committees that draft and update our codes are balanced to ensure that no single group of interested persons can dominate the process. Decisions are reached by consensus after consideration of all the technical arguments. In our system, any party who disagrees with a decision may file an appeal and receive a hearing before a standard or code is issued. The wide acceptance of NFPA codes and standards and codes and standards of similar nonprofit organizations is testament to the benefits provided by these activities.

What is unique about the United States standardization process is that these activities, so vital to our citizens, are conducted by private organizations, not governmental agencies, but with broad participation, acceptance and support by public authorities. In fact, it has been federal policy since at least the Reagan Administration both through OMB Circular A-119 and more recently (in 1996) with the adoption of the National Technology Transfer and Advancement Act (NTTAA) to require the use of voluntary consensus standards to the extent possible in all procurement and regulatory activities.

The legislation before you today is necessary because standards development, by its nature, places competitors or potential competitors in a position where they may carry their competition into a standards development process. If one of these actors believes that its position in the market has been unfairly hindered by a particular standards decision, it may sue its competitor who has advocated that decision, alleging violations of the antitrust laws and in many cases will sue the standards development organization as well. This happens even though the standards development organization is a nonprofit organization with no profit or other motive to violate the antitrust laws. Because of the complexity of the antitrust laws and the continuing uncertainty of their potential application to standards development organizations, the prospect is that standards developers will continue to be named as pattern defendants in antitrust cases alleging anticompetitive conduct of business competitors carried out in the standards development context.

NFPA, for example, has been named in several antitrust suits that have arisen in this way. It has never been found liable for any antitrust violation. These suits, however, are very costly and disruptive to defend even when the court dismisses the standards development organization defendant, and, merely the threat of substantial treble damages severely restrains the operations of a nonprofit organization that develops codes and standards.

While I believe that a compelling case can be made for full antitrust immunity for nonprofit standards development organizations, the relief we are seeking today is far more moderate and similar to an approach adopted by this committee when it wrote the 1984 National Cooperative Research Act (NCRA) and amended that act in 1993. In those instances, this committee adopted an approach whereby procompetitive joint venture activity could be predisclosed to the antitrust agencies. In return for such disclosure, the parties receive not immunity but “detrebled” damages (actual damages), provided that their subsequent conduct stays within the bounds of their disclosure to the Department of Justice.

The NCRA has been a great success allowing cooperation to bring about technical innovation without sacrificing the procompetitive protection of antitrust law. With regard to the R&D activities covered by that Act, a balanced approach of not granting immunity but establishing a voluntary and transparent predisclosure process in return for reduced liability was in the best interests of both innovation and safeguarding competition. The same approach for standards development will provide similar benefits for the public.

The proposed legislation would simply amend the existing statute to allow SDO’s to use the very same predisclosure system as now used for R&D joint ventures and production joint ventures. Thus, the bill would leave the statutory scheme in place and simply include properly disclosed standards development activity as being eligible for the protections established by the NCRA. As in 1984 and again in 1993, the proposed bill would ensure that the definition of “standards setting” would never include any of the per se offenses, like price fixing, boycott or dividing territories. In order to qualify for this treatment the SDO would have to follow the open, voluntary and non-exclusionary principles embodied in the OMB circular. The protections provided in the Act would apply only to activities that had been disclosed in advance to the Department of Justice, and not to other activities of the standards development organizations.

These changes in law would not mean that standards development organizations could never be joined as a defendant in an antitrust suit involving standards development activities. These changes would mean that potential antitrust plaintiffs would be on notice that, to the extent that a standards developing organization stayed within the bounds of its pre-disclosure to the antitrust reviewing agency, it would be subject only to actual, not treble damage. In addition, under the proposed legislation, joinder of an SDO in an antitrust suit along with the actual business competitors could no longer be done lightly. As with the National Cooperative Research Act, this legislation provides for court awarded costs and attorneys fees where an Act-compliant SDO is sued unreasonably or in bad faith.

Mr. Chairman and Members of the Committee, in summary, the Standards Development Organization Advancement Act of 2003, is an act that alleviates what has become a significant problem for the nonprofit organizations that develop the codes and standards that provide protection for the health and safety of American workers and our whole citizenry. The procedures embodied in the Act have proven to be very successful with regard to cooperation in research and development as allowed in the National Cooperative Research Act. Just as with that Act this legislation will remove a growing obstacle to activity that is clearly in the public interest while leaving intact the important protection provided by strong antitrust laws.

Thank you.