A horse of a different color: a study of color bias, anti-trust, and restraint of trade violations in the equine industry.

• Author: Craig, Mary W.
• Position: Texas

1. INTRODUCTION II. THE TEXAS BUSINESS & COMMERCE CODE, ANTI-TRUST AND RESTRAINT OF TRADE LAWS IN THE UNITED STATES A. Fiduciary Duty 1. Texas' Treatment of the Business Judgment Rule B. Restraint of Trade 1. The Per Se Rule 2. The Quick Look 3. The Rule of Reason III. THE FLOYD LAWSUIT A. FLOYD'S AFTER EFFECTS IN THE AQHA B. FLOYD'S IMPLICATIONS FOR THE AMERICAN PAINT HORSE ASSOCIATION 1. The Business Judgment Rule 2. Restraint of Trade IV. CONCLUSION In 2000, Kay Floyd sued the American Quarter Horse Association (2) ("AQHA") as a result of a registration rule Floyd alleged discriminated against her economically. (3) She did not challenge the right of AQHA to create registration rules that maintained the integrity of the breed, but she challenged its right to prevent her from registering a horse born to two AQHA-registered parents that fit every registration criterion except one. (4) Floyd challenged AQHA's right to prevent her from registering a second pairing from the same parents because that foal was born through embryo transplant in the same year as a foal born through natural birth. (5)

   Floyd brought suit under the restraint of trade provisions of the Texas Business & Commerce Code. (6) Those provisions comply with federal statutes against anti-trust and restraint of trade, and comply with the United States Supreme Court rulings concerning those topics. (7) The Texas lower court that heard Floyd's complaint agreed with her allegations and gave AQHA one of its few adverse rulings relating to the way it ran its business. (8) The result was a settlement with Floyd, registration of both her horses, and a change in multiple AQHA registration rules. (9)

   This article examines Floyd, (10) its long-range effect on AQHA, (11) and the implications of the ruling on other voluntary or non-profit associations, both within and without the animal industry. (12) In particular, this article applies the principles of the Floyd ruling to the American Paint Horse Association. (13)

1. INTRODUCTION

   The equine industry is a major player in the economic life of the United States. A recent study found equine-related activities contribute more than $102 billion each year to the U.S. economy, provide 1.4 million full-time jobs, include 9.2 million horses, involve 4.6 million Americans, and account for $1.9 billion in tax revenues each year. (14)

   The United States animal industry comprises multiple animal registry associations that maintain bloodline records, provide official registration papers, and approve shows in which owners display their animals for points and resultant financial rewards. (15) The equine industry is largely self regulated by more than fifty equine associations active in North America, (16) including the AQHA (17) and the American Paint Horse Association ("APHA"). (18) This article examines those two equine associations in light of Floyd. (19)

   The AQHA registered 135,787 horses in 2007, (20) claimed 345,905 members in 2007, (21) and approved over 3,000 horse shows and special events world-wide. (22) The APHA claimed more than 90,000 members in 2007, (23) approved almost 1,300 shows and special events worldwide, (24) and boasted approximately 7,200 members in its youth association. (25) While the APHA cannot claim to be the largest equine registry association, (26) it is large enough to have an economic impact on the industry and its members. Unfortunately for some APHA members--those owners of solid bred Paints--the Association has a negative economic impact. (27)

   A Quarter Horse is considered a solid-color breed, (28) and AQHA traditionally refused to register horses it considered to have excessive white or those it considered to have no color pigment at all. (29) A Paint Horse is characterized by white spots or patches in various places on its body that distinguish a Paint from other horse breeds. (30) The patterns of dark and white are classified by coat patterns--tobiano, overo, tovero, and others. (31) However, breeding spotted horses does not always produce spotted offspring and may result in a solid coat pattern. (32) The APHA classifies those horses with insufficient white in their coats as Solid Paint Bred horses ("SPB"). (33) They have a separate registry within APHA, (34) separate classes at APHA shows, (35) and are generally considered less valuable by those dedicated to maintaining more white in the coat patterns. (36)

   Floyd had a rule-changing effect on AQHA, as explained later in this paper. (37) The APHA, in the face of the Floyd court's ruling and mounting pressure from its members, still refuses to make rule changes that will avoid economic discrimination against some of its members. That refusal might well be the basis of a restraint of trade suit against APHA. The question becomes what might happen legally were some of the members to sue APHA, as Floyd sued AQHA.

2. THE TEXAS BUSINESS & COMMERCE CODE, ANTI-TRUST AND RESTRAINT OF TRADE LAWS IN THE UNITED STATES

   To understand why the Floyd lawsuit changed the law in Texas, and changed the way AQHA does business, we must first examine the principles of anti-trust and restraint of trade and their application to Floyd's claims in her lawsuit. This section of the paper will discuss fiduciary duty, (38) restraint of trade, (39) and the three methods a court uses to determine whether a corporation's internal system has violated the law. (40)

   1. FIDUCIARY DUTY

   The concept of fiduciary duty has deep roots in American law. (41) In a typical fiduciary relationship, the fiduciary owes "[a] duty of utmost good faith, trust, confidence, and candor ... to the beneficiary." (42) Such duties are created out of certain special relationships, in which the fiduciary is obligated to place the beneficiary's interests first. (43) The directors of a corporation owe a fiduciary duty to the company, so they are held to a higher standard of care than one who is not a fiduciary. (44) The imposition and extent of corporate fiduciary duty is based on state law, (45) so the law varies among jurisdictions. In all jurisdictions, the directors of corporations, unlike other fiduciaries, enjoy the added protection of the business judgment rule ("the Rule"). (46)

   However, how the Rule is applied depends on the jurisdiction. (47) Because "[o]ver 40 percent of the corporations listed on the New York Stock Exchange and over 50 percent of Fortune 500 companies are incorporated in Delaware," this article will first examine the Rule generally by analyzing decisions of the Delaware courts, often called "the Mother Court of corporate law." (48) Many jurisdictions cite Delaware decisions in their opinions as persuasive authority for this reason. (49)

   In Delaware, as in most jurisdictions, the Rule applies ab initio (50) and creates a rebuttable presumption that corporate directors are protected in their actions as long as they relate "to any rational business purpose." (51) The presumption assumes that the directors acted independently, "on an informed basis and with a good faith belief that the decision[s] will serve the best interests of the corporation." (52) The plaintiff can overcome this presumption by pleading and proving facts that show the director(s) breached any one of the fiduciary duties of "good faith, loyalty, or due care." (53)

   The standard of loyalty states that the director must act in a manner that best serves the corporation. (54) The standard of due care for a corporate director is gross negligence. (55) The duty of good faith demands that the director not do wrong consciously (i.e., commit an intentional crime, knowingly take action outside of authority). (56) Once the plaintiff proves that the directors have violated one of the three duties, the burden shifts to the defendant directors to prove that the conduct was fair to the corporation. (57)

   The "fairness" of a particular action must be established "to the court's satisfaction," an exacting standard. (58) So, often shifting the burden is outcome determinative. Even if the plaintiff overcomes the presumption, and the directors fail to prove fairness, the plaintiff is still required to establish "proximate causation and entitlement to damages and/or the necessity for injunctive relief" to be entitled to relief in a tort claim based simply on a breach of the duty of care. (59) If, however, the claim is based on the directors' breach of a fiduciary duty, the plaintiff need not make such a showing. (60) Another key aspect of the Rule is that it protects only action or a conscious decision not to act; mere inaction without deliberation is not enough to trigger the protection. (61) Also, even if the directors' conduct meets the three duties, some courts will not apply the Rule if the conduct is an "abuse of discretion;" that is, if it is "so egregious as to amount to a nowin decision" for the corporation. (62) Lastly, the Rule would not apply if the directors' actions constituted fraud, illegal, or ultra vires (unauthorized) conduct. (63)

   However, the business judgment rule does not apply if the directors have engaged in self-dealing. (64) "A corporate director is interested if (1) he appears on both sides of a transaction; or (2) he has or expects to derive personal financial benefit not equally received by the stockholders." (65) The truly undecided issues would lie in the areas of due care and good faith.

   1. Texas Treatment of the Business Judgment Rule

      Texas applies the business judgment rule to nonprofit corporations by statute under the Texas Non-Profit Corporation Act. (66) Only one reported Texas case cites that statute, (67) but a recent unreported case sets out the elements needed to overcome the presumption of the Texas's business judgment rule. (68) To be entitled to relief, the Texas statute requires a plaintiff to prove that the director "has not acted: (1) in good faith; (2) with ordinary care; and (3) in a manner he reasonably believes to be in the best interest of the corporation." (69)

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