Contractor Could Proceed with RICO Claim Alleging Extortionate Credit Line

This posting was written by Mark Engstrom, Editor of CCH RICO Business Disputes Guide.

A construction contractor sufficiently alleged a RICO conspiracy by three individuals who allegedly engaged in a scheme to force the contractor to accept an extortionate line of credit, the federal district court in Cleveland has ruled.

According to the contractor, one of the defendants refused to pay him $168,000 for gutter and siding work he had performed for the defendant’s company, a second defendant offered to assist him with a loan of $150,000 (in the form of cash from an illegal gambling operation), and a third defendant offered him “protection and collection services” in exchange for money.

Breach of Contract v. Extortion

Although the defendants tried to characterize the contractor’s RICO claim as a simple breach of contract claim, the contractor alleged that he: (1) was offered a $150,000 loan from one of the defendants; (2) reasonably believed that the defendants had previously used extortion to collect or attempt to collect similar debts; and (3) reasonably believed that the defendants had a reputation for using extortion to collect those debts (or to punish debtors that failed to repay them). These allegations sufficiently identified a claim for an extortionate extension of credit, in the court’s view.

More specifically, the allegations indicated that one defendant had refused to pay for gutter and siding work so another defendant could offer an extortionate line of credit.

They also indicated that the actions of the third defendant—attempting to gain a monetary benefit by implicitly and explicitly threatening violence and harm if the contractor did not pay for protection services—established a state law extortion claim that was punishable by imprisonment for more than a year.

Injury

According to the court, the contractor sufficiently alleged that his injuries—$168,000 in unpaid charges for gutter and siding work—were proximately caused by the defendants’ scheme to force him to accept an extortionate line of credit.

The decision is Matteo Gutter Systems v. Millenia Housing Management Ltd., CCH RICO Business Disputes Guide, ¶11,762.

$4.8 Million Gift Card Controversy Sent Back to State Court

This posting was written by William Zale, Editor of CCH Advertising Law Guide.

Because the amount in controversy in a lawsuit on behalf of New Jersey purchasers of Landry's Restaurants gift cards was at most $4.8 million, the federal district court in Trenton sent the case back to New Jersey state court, where it had been filed.

Landry's had removed the case to the federal court, asserting that the amount in controversy met the $5 million threshold for federal jurisdiction under the Class Action Fairness Act (CAFA).

Dormancy Fees for Nonuse

The purchaser of a $25 card alleged that Landry’s gift cards purchased by New Jersey residents between April 2006 and March 2009 imposed a “dormancy fee” after 12 months of nonuse. The purchaser sought to represent other New Jersey residents who purchased the cards.

The gift cards allegedly violated the New Jersey Gift Certificate Law (Sec. 56:8-110 of the Consumer Fraud Act), which prohibited imposition of dormancy fees on gift certificates and cards within 24 months after the date of sale.

The purchaser also alleged that the gift cards violated the New Jersey Truth-in-Consumer Contract, Warranty and Notice Act, a law prohibiting a consumer contract or notice stating that any of its provisions are void or unenforceable without specifying the provisions that are void or unenforceable in New Jersey.

Based on the documents produced in discovery, the maximum number of unlawful gift cards sold was 9,269. Given undisputed maximum damages of $520 per potential class member, the amount in controversy was at most $4,819,880. Therefore, it appeared to a legal certainty that CAFA’s requisite jurisdictional amount in controversy of $5 million was not met.

The opinion in Delaney v. Landry’s Restaurants, Inc. will be reported at CCH Advertising Law Guide ¶63,655.

Revised Google Book Settlement Attempts to Address U.S. Competition Concerns

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

After consulting with the U.S. Department of Justice, lawyers representing the parties in a copyright dispute brought by authors and publishers against online search engine Google have filed a revised settlement agreement with the federal district court in New York City.

The settlement would resolve claims that Google violated copyright laws by scanning books, creating an electronic database, and displaying excerpts without the permission of copyright holders. Google has denied the claims.

On November 13, 2009, the revised settlement proposal was filed with the court for preliminary approval. The revised proposal comes after the Justice Department expressed concerns that an earlier settlement agreement could harm competition. Specifically, the Justice Department questioned the proposed settlement’s pricing terms and its creation of "de facto exclusive rights for the digital distribution of orphan works."

The latest settlement proposal, which narrows the scope of the books involved, "clarifies how Google's algorithm will work to price books competitively," according to the parties. It will simulate the prices in a competitive market. Moreover, the new proposal removes the so-called "most-favored nation" clause, which pertains to licensing of unclaimed works.

The Justice Department had contended that the most-favored nation clause in the earlier settlement could discourage potential competitors from attempting to compete with Google in digital-book distribution.

Whether these concessions will satisfy the Justice Department's competition concerns is unclear. It has been reported that the Justice Department will provide its views on the revised settlement early next year.

Another change to the proposed settlement limited its scope to books published in the U.S., Great Britain, Canada, and Australia. This change was prompted by objections by foreign governments, rather than the Department of Justice.

Text of the revised settlement agreement in The Authors Guild, Inc. v. Google, Inc., appears here. In the next week, the federal district court is expected to set a date for a “fairness hearing.”

Gift Card and Certificate Fees, Expiration Dates Would Be Limited by Proposed Rules

This posting was written by William Zale, Editor of CCH Advertising Law Guide.

The Federal Reserve Board has announced proposed rules that would restrict the application of fees and expiration dates to store gift cards, gift certificates, and general-use prepaid cards.

The proposal would implement the gift card provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009, Public Law 111-24, signed by President Obama May 22, 2009. Title IV of the Act—relating to gift certificates, gift cards, and prepaid cards (CCH Advertising Law Guide ¶11,900)—becomes effective August 22, 2010.

(Further information on the Credit Card Accountability Responsibility and Disclosure Act of 2009 appears in a May 27, 2009 posting on Trade Regulation Talk.)

Covered products include retail gift cards, which can be used to buy goods or services at a single merchant or affiliated group of merchants, and network-branded gift cards, which are redeemable at any merchant that accepts the card brand.

Consistent with the statute, the proposed rule would not apply to other types of prepaid cards, including reloadable prepaid cards that are not marketed or labeled as a gift card or gift certificate, and prepaid cards received through a loyalty, award, or promotional program, according to the Board.

Dormancy, Inactivity, or Service Fees

The proposed rules would limit imposition a dormancy, inactivity, or service fee. Dormancy, inactivity, and service fees may be assessed only for a certificate or card if: (1) there has been at least one year of inactivity on the certificate or card; (2) no more than one such fee is charged per month; and (3) the consumer is given clear and conspicuous disclosures about the fees.

Fees subject to the proposed restrictions would include monthly maintenance or service fees, balance inquiry fees, and transaction-based fees, such as reload fees and point-of-sale fees.

Expiration Dates

The proposed rules would prohibit the sale or issuance of a gift certificate, store gift card, or general-use prepaid card that has an expiration date of less than five years after the date of issuance or the date funds are last loaded.

The expiration date restrictions would apply to a consumer’s funds, and not to the certificate or card itself. The proposal includes provisions intended to help ensure consumers have at least five years to use a certificate or card from the date of purchase. The proposed rule would prohibit the imposition of any fees for replacement of an expired card or certificate if the underlying funds remain valid

State Laws, Preemption

The Board would determine—upon its own motion or upon the request of a state, financial institution, or other interested party—whether the Act and rules preempt state law relating to electronic fund transfers, to dormancy, inactivity, or service fees, or to expiration dates of gift certificates, store gift cards, or general-use prepaid cards.

A state law that is inconsistent may be preempted even if the Board has not issued a determination. However, a financial institution would not be shielded by immunity for violations of state law if the institution chooses not to make state disclosures and the Board later determines that the state law is not preempted.

Comments

Comments on the proposal must be submitted within 30 days after publication in the Federal Register, which is expected shortly.

Subscribers to the CCH Advertising Law Guide on the Internet have access to more detailed coverage gift certificate and gift card laws in more than 35 states. A Smart Chart™ gives users quick access to the types of certificates and cards that are subject to—and exempt from—the laws. Coverage of fee restrictions, expiration date restrictions, and disclosure requirements is provided, along with links to the law texts.

Two Intended FTC Nominees Announced by White House

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Update: Nominations for the two FTC Commissioners were sent to the Senate on November 17. Julie Brill was nominated to serve a seven-year term from September 26, 2009. She would succeed Commissioner Pamela Jones Harbour. Edith Ramirez was nominated for a seven-year term from September 26, 2008, to fill the vacancy created by the departure of Commissioner Deborah Platt Majoras in March 2008 The announcement appears here on the White House website.

The Obama Administration announced on November 16 two candidates to serve as Federal Trade Commissioners.

The President named Julie Brill, Senior Deputy Attorney General and Chief of Consumer Protection for North Carolina, and Edith Ramirez, a partner in the Los Angeles office of Quinn Emanuel Urquhart Oliver & Hedges, LLP. Both are Democrats.

The White House announcement did not specify which potential nominee would fill the vacancy created by the departure of Deborah Platt Majoras in March 2008 and which candidate would replace Commissioner Pamela Jones Harbour, an Independent whose term expired on September 26.

Before joining the North Carolina Department of Justice in February 2009, Brill was an Assistant Attorney General for Consumer Protection and Antitrust for the State of Vermont for over 20 years. Prior to her career in law enforcement, Brill was an associate at Paul, Weiss, Rifkind, Wharton & Garrison in New York and clerked for Vermont Federal District Court Judge Franklin S. Billings Jr. She is an adjunct faculty member at Columbia Law School.

Ramirez is a graduate of Harvard Law School, where she worked on the Harvard Law Review with President Obama. She served as a law clerk to the Honorable Alfred T. Goodwin, U.S. Court of Appeals for the Ninth Circuit. In her current practice, Ramirez specializes in intellectual property and complex litigation matters.

A White House announcement on nominees for the FTC has been expected for weeks. A September 8 posting on Trade Regulation Talk discussed speculation concerning these nominations.

FTC Chairman Jon Leibowitz had commented at Fordham University’s International Antitrust Law Conference on September 24 that it was highly likely that the nominees would be named soon. Chairman Leibowitz went on to say that the Commission was working well despite the absence of a fifth member.

In addition to Leibowitz and Harbour, the two other current members of the Commission are Republicans William E. Kovacic and J. Thomas Rosch. Kovacic’s term expires in September 2011, and Rosch’s term expires one year later.

At the same time as the FTC candidates were named, the White House announced nominees for ambassadors to Nepal and Trinidad and Tobaggo. A nominee for the federal co-chair of the Appalachian Regional Commission was also announced.

“These individuals bring a depth of experience to their respective roles, and I am confident they will serve my administration and the American people well," Presidet Obama said. "I look forward to working with them in the months and years ahead.”

Text of the announcement appears here on the White House website.

Class Certification Denied in Prepaid Calling Card Consumer Fraud Case

This posting was written by William Zale, Editor of CCH Advertising Law Guide.

In a suit alleging that prepaid calling card service providers violated the consumer fraud acts of 11 states by marketing cards providing less than the advertised number of calling minutes, the federal district court in Brooklyn denied class certification.

A class action was not superior to other available methods for fairly and efficiently adjudicating the controversy, the court determined.

The prepaid calling card industry's deceptive practices had been the subject of extensive, repetitive private litigation as well as repeated enforcement actions by the Federal Trade Commission and several state attorneys general. Deceptive and abusive practices in the industry had been widely documented, according to the court.

In tests conducted by the FTC in connection with recent enforcement actions, the cards were found to provide half or less than half of the advertised minutes.

Class Litigation v. Regulatory Solution

In general, it would be inappropriate to deny those wronged civilly a fallback, court-supervised remedy when the administrative law segment of our justice system has neglected to provide an available superior form of protection, the court said. There are, however, instances where the litigation remedy is relatively so inferior as to warrant denying it altogether in hope that administrative justice would prevail.

The superior and sensible way to deal with this controversy, involving a multibillion-dollar national and international communications industry that served millions of people in every state, many of them poor and uneducated, was for the FTC or another federal agency with authority in the area to issue appropriate regulations, in the court’s view.

Lack of Federal Diversity Jurisdiction

The case was dismissed because the named plaintiff's individual claim arising from the purchase of a $2 calling card did not satisfy the $75,000 amount-in-controversy requirement for federal diversity jurisdiction, and there was no basis for federal question jurisdiction over the plaintiff's state law claims.

The November 10, 2009 opinion in Ramirez v. Dollar Phone Corp. will be reported at CCH Advertising Law Guide ¶63,639.

Focus on Franchising

This posting was written by John W. Arden.

News and notes on franchising and distribution topics:

□ The U.S. Supreme Court has scheduled oral argument on January 19, 2010, on Mac’s Shell Service Inc. v. Shell Oil Products Co., a case involving constructive nonrenewal claims brought by Shell gasoline station operators under the Petroleum Marketing Practices Act (PMPA). The U.S. Court of Appeals in Boston (CCH Business Franchise ¶13,890), held that the PMPA did not support a claims for constructive nonrenewal where a franchisee had signed and continued to operate under the complained of renewal agreement. On June 15, 2009, the Supreme Court granted the petitions of the franchisees and Shell (see June 16, 2009 posting at Trade Regulation Talk). The franchisees asked the Court to consider “the scope of the protections afforded by the PMPA to franchisees who face termination or nonrenewal of their franchise agreements unless they accept onerous contract terms.’’ They alleged that there was a split among the circuits “over whether a franchisor can lawfully present its franchisees with the Hobson’s choice of accepting unlawful contract terms or risking their livelihoods on a chance that a court will grant a preliminary injunction.” The petitions are Mac's Shell Service, Inc. v. Shell Oil Products Co., Dkt. 08-240, and Shell Oil Products Co. v. Mac's Shell Service, Inc., Dkt. 08-372.

□ The ABA Forum on Franchising is presenting a teleconference and live audio webcast of “Mediating Franchise Disputes,” a CLE program presented from 1 p.m. to 2:30 p.m. EST on Tuesday, December 3, 2009. This program— “one of the best programs presented at the 32nd Annual Forum on Franchising”—will cover the benefits and strategies used in mediations, as well as how to effectively draft mediation clauses. Moderated by Earsa Jackson of Strassburger & Price, the program will feature Michael K. Lewis of JAMS, Peter R. Silverman of Shumaker, Loop & Kendrick, and Peter J. Klarfeld of Grey Plant Mooty. Further information appears here on the ABA website.

□ The plenary session on Annual Franchise and Distribution Law Developments is always a highlight of the annual meeting of the ABA Forum on Franchising. This year’s plenary session—presented on October 16 by Joel R. Buckberg and Jon P. Christiansen—was no different. Each year since 2002, the presentation has been accompanied by a soft-cover bound volume containing more details of the developments and trends of the year. The introduction to this year’s book included a particularly interesting list of themes and trends on the reporting period of August 1, 2008 through July 31, 2009:

■ The extraordinary impact of automobile industry contraction, manufacturer bankruptcy, brand terminations, and dealer network shrinkage produced a sizable number of challenges to auto industry practices and efforts to restructure.

■ Franchisee challenges to franchise selling practices using deceptive practice statutes gained traction with appellate courts and demonstrated desperation in selling tactics, even for experienced franchisors.

■ Arbitration provisions continued to face uncertain enforcement, but challenges to arbitration awards were unsuccessful for the most part.

■ The U. S. Court of Appeals for the Ninth Circuit and its District Courts, the Federal Trade Commission and the California Department of Corporations again ignored each other’s policies on negotiation of franchise agreements and fostered their contradictory policy approaches to franchise empowerment.

■ There was no meaningful harmonization of the revised FTC Franchise Rule and state franchise laws, regulations, exemptions, and exclusions.

■ Damages for early termination of franchise relationships became less certain of collection, particularly where the franchisee’s history of unprofitable operation made its viability for the remainder of the franchise term speculative.

■ Bankruptcy court decisions highlighted the unfortunate risks that reward entrepreneurship with asset liquidation when a franchise, a franchisee and the franchisee’s financing are mismatched.

■ In-term non-competition covenants came under attack in the Ninth Circuit, applying California law, and in Georgia, where the state’s constitution supplied the firepower, in both cases to curtail the scope of these restrictions substantially.

■ Courts once again wrestled with legal principles underlying voluntary choice of law, fundamental public policy identification for conflict of laws purposes, and the applicability of state franchise statutes, producing some inconsistency and reduced predictability in case outcomes.

Further information about the ABA Forum on Franchising and its publications appears here.

Principal and Sales Rep Could Be Liable for Attorney’s Fees on Separate Claims

This posting was written by John R.F. Baer of Sonnenschein Nath & Rosenthal, author of CCH Sales Representative Law Guide.

When a sales representative presented two claims against its principal, one for pre-termination commissions and one for post-termination commissions, the claims were to be treated separately for determining whether to award attorney’s fees and costs under the New Jersey Sales Representatives’ Rights Law, a New Jersey appellate court has ruled.

In addition, the court reversed the trial court’s award of over $218,000 in attorney’s fees to the principal under the New Jersey rule governing inadvisable rejection of an offer of judgment

Successful Claim

The sales representative successfully contended that he was entitled to an award of fees under the statute on his claim for pre-termination commissions. However, this did not preclude his liability for fees in pursuing his unsuccessful claim for post-termination commissions.

There was no dispute that the principal was obligated and failed to pay $12,774 in pre-termination commissions. The true dispute was over the claim for post-termination commissions, which had questionable legal underpinnings and was hotly contested, according to the court.

Possibly Frivolous Claim

The statute provided for an award of attorney’s fees to a principal when “an action" brought by a sales representative against a principal is frivolous. The court interpreted the word "action" as referring to a single claim, not the entire collection of claims.

On remand, the trial court was directed to determine (1) what attorney’s fees and costs were due to the sales representative for the principal’s unlawful withholding of the stipulated pre-termination commissions, (2) whether the sales representative frivolously pursued the claim for post-termination commissions, and(3) if so, what amount of fees were incurred in defending that claim.

A dissenting opinion expressed the view that a principal should be permitted to recover attorney’s fees and costs under the Sales Representatives’ Rights Law only when the entire action under the statute lacks merit.

Offer of Judgment, Rejection

The trial court’s $218,000 fee allowance to the principal under the rule governing inadvisable rejection of an offer of judgment could not stand because it conflicted with the fee-shifting provision of the Sales Representatives’ Rights Law, the court held.

After rejecting the principal’s offer of judgment, the sales representative prevailed on the pre-termination commissions claims but did not prevail on the hotly contested claim for post-termination commissions.

The sales representative would have been liable under the rule for the principal’s attorney’s fees if the version of the rule in effect when the principal’s offer was made and rejected had been applied. Because the offer of judgment rule was procedural in nature, a later version of the rule—incorporating the limitation on fee allowances in conflict with fee-shifting statutes such as the Sales Representatives’ Rights Law—applied retrospectively to bar the fee allowance.

The principal’s mistake was in submitting an offer of judgment that did not distinguish between the sales representative’s separate claims for pre-termination and post-termination commissions, the court observed.

Had the principal complied with its statutory obligation to timely pay the sales representative’s earned pre-termination commissions, any further pursuit of damages for post-termination commissions would not have had the protection of the Sales Representatives’ Rights Law and could have rendered the representative vulnerable for an inadvisable rejection of the offer of judgment.

The opinion in Kas Oriental Rugs, Inc. v. Ellman will be reported at CCH Sales Representative Law Guide ¶10,316.

NFL Cannot Remove Judge from Oversight Authority for Antitrust Consent Decree

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

A federal district court judge can continue to oversee a 1993 settlement agreement that resolved an antitrust class action brought on behalf of professional football players against the National Football League, the U.S. Court of Appeals in St. Louis decided yesterday.

1993 Settlement

In April 1993, Hon. David S. Doty, U.S. District Judge for the District of Minnesota, issued an order (1993-2 Trade Cases ¶70,299), approving the settlement resolving a dispute arising out of various NFL player rules that had been the source of numerous disputes between players and the NFL.

Pursuant to the terms of the settlement, the court retained jurisdiction over its enforcement through appointment of a special master, who heard disputes on an expedited basis, subject to review by the court. In the years that followed, the court resolved numerous disputes over the terms of the settlement agreement and parallel Collective Bargaining Agreement that govern player employment in the NFL.

Present Dispute

In response to a decision by the district court against one of the member teams, the NFL filed a motion to terminate the district court’s oversight of the consent decree. In addition, the league requested that Judge Doty remove himself from the case because of a perception that he was biased. The district court denied the motions, and the U.S. Court of Appeals in St. Louis has now affirmed.

Modification of Settlement Agreement

It was not an abuse of discretion for the federal district court to deny the NFL’s motion under Rule 60(b) of the Federal Rules of Civil Procedure to end the court's oversight of the settlement agreement, according to the appellate court. The league did not establish any changed circumstances warranting modification of the consent decree.

The NFL unsuccessfully argued that the district court’s oversight of the settlement agreement was no longer permissible because it amounted to unlawful meddling in the collective bargaining process, which was prohibited by the U.S. Supreme Court’s 1996 decision in Brown v. Pro Football, Inc., 518 U.S. 231, 1996-1 Trade Cases ¶71,445. Brown did not constitute a change in the law requiring modification of the settlement agreement, the court explained.

Also rejected was the NFL's argument that the recertification of the players union, the resumption of collective bargaining, and the diminishing number of original class members who continued to play football constituted circumstances that warranted modification of the settlement agreement.

Recusal

Judge Doty was not required to recuse himself from overseeing enforcement of the settlement agreement, the appellate court also held. The NFL argued that the judge should have recused himself because of his comments in the press and ex parte meetings with NFL Players Association representatives.

The judge's comments referring to rulings that he made many years earlier and relating to matters long since resolved would not be interpreted by the average person as reflecting bias, it was held. Moreover, the judge’s statement that he had laughed at an NFL request that the court end its oversight of the settlement agreement did not demonstrate that the judge failed to take the request seriously. The district court responded to the request with an eight-page order that addressed the legal issues that the NFL raised.

To the extent that Judge Doty’s statements were jocular and informal, the average observer would see that as reflective of his down-to-earth approach to resolving the oft-contentious disputes brought to him by the parties, the appellate court explained.

The appellate court did note, however, that “although we do not believe that the articles created a reasonable perception of bias . . . the district judge would have been well advised not to opine publicly about his role in enforcing an ongoing consent decree.”

Ex Parte Meetings

Finally, to the extent that the league relied on the ex parte meetings to support recusal, its motion was untimely. Although the NFL had been aware of the court's practice of exchanging pleasantries in chambers with representatives of the players association for a number of years, it voiced a complaint only after receiving an adverse decision with which it strongly disagreed, according to the appellate court.

The November 10 decision in Reggie White, et al. v. National Football League, will appear at 2009-2 Trade Cases ¶76,790.

After U.S. Clearance, EC Questions Oracle’s Acquisition of Sun

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Oracle Corporation announced on November 9 that the European Commission (EC) has issued a statement of objections (SO) concerning the company’s proposed acquisition of Sun Microsystems Inc.

The SO follows a decision by the U.S. Department of Justice not to challenge the transaction. The Justice Department terminated the waiting period under the Hart-Scott-Rodino Act in August.

“Oracle plans to vigorously oppose the [European] Commission’s Statement of Objections as the evidence against the Commission’s position is overwhelming,” according to a company statement. “Given the lack of any credible theory or evidence of competitive harm, we are confident we will ultimately obtain unconditional clearance of the transaction.”

At the time of Oracle’s disclosure, the EC had not made the SO public. However, the EC announced in September that it had opened an in-depth investigation into Oracle’s acquisition of Sun.

Competition Concerns in Databases Market

According to the EC, its initial market investigation indicated that the combination of the U.S. technology companies would raise serious competition concerns in the market for databases—a key element of company IT systems.

EC Competition Commissioner Neelie Kroes said the transaction would combine “the world’s leading proprietary database company” and “the world’s leading open source database company.”

In its November 9 statement, Oracle said that “the database market is intensely competitive with at least eight strong players, including IBM, Microsoft, Sybase and three distinct open source vendors.”

According to Oracle, “there is no basis in European law for objecting to a merger of two among eight firms selling differentiated products. Mergers like this occur regularly and have not been prohibited by United States or European regulators in decades.”

Justice Department Reaction

In response to the EC’s action, Deputy Assistant Attorney General Molly Boast of the Department of Justice Antitrust Division issued a statement on November 9, reiterating the Antitrust Division’s earlier determination that “the merger is unlikely to be anticompetitive.”

Boast pointed to the number of open-source and proprietary database competitors to justify the U.S. position. “We remain hopeful that the parties and the EC will reach a speedy resolution that benefits consumers in the Commission’s jurisdiction,” Boast said.

The Department of Justice statement appears here on the DOJ website.

Australian Commission May Audit Franchisors, Seek Redress for Franchisees, Provide Warnings

This posting was written by John W. Arden.

Amendments to the Australian Franchising Code of Conduct, announced on November 5, will enable the Australian Competition and Consumer Commission to conduct random audits of compliance with the Code, seek redress on behalf of all franchisees subject to a particular franchise agreement, and issue public warnings “about rogue or unscrupulous” franchisors.

The changes came in response to a December 2008 report by the Joint Committee on Corporations and Financial Services and the Senate Standing Committee on Economics and took into account comments on a government discussion paper on franchising and state franchising reports.

The Franchising Code will be amended to state that it does not limit any common law requirement of good faith in relation to a franchise agreement to which the Code applies and to clarify parties’ obligations with respect to end-of-term arrangements and mediation.

Good Faith, Pecuniary Penalties

The government did not implement the parliamentary report’s recommendations to provide statutory requirement of good faith or pecuniary penalties for breach of the Franchising Code of Conduct.

“The Government accepts the intent of the good-faith recommendation of the report of the Joint Committee on Corporations and Financial Services (the Ripoll report) and will introduce measures into the Franchising Code to prevent behaviors that are inappropriate in franchising agreements,” the media release from the Small Business Minister Craig Emerson.

Study of Unconscionable Conduct

An expert panel will be established to investigate and report on the need to add further provisions to the Franchising Code to prevent behaviors inappropriate in a franchise agreement. The panel will consider whether to incorporate into the Australian Trade Practices Act a list of examples of unconscionable conduct or a statement of principles regarding unconscionable conduct.

The panel will consult with representatives from franchising and retail tenancy, small business organizations, the Australian Competition and Consumer Commission, and other interested parties. It will issue a report by the end of January 2010.

A November 5 media release on the announcement appears here on the website of the Australian Government’s Ministers for Innovation, Industry, Science and Research.

Using Motor Vehicle Data to Solicit Legal Clients Would Violate Federal Privacy Law

This posting was written by Thomas A. Long, Editor of CCH Privacy Law in Marketing.

A purported class of individuals could pursue claims against attorneys for violating the Driver's Privacy Protection Act (DPPA) by unlawfully obtaining personal information pursuant to the Freedom of Information Act (FOIA) from the South Carolina Department of Motor Vehicles (SCDMV) for the impermissible purpose of soliciting clients, the federal district court in Greenville, South Carolina has ruled.

The attorneys allegedly sent several FOIA requests to the SCDMV seeking information regarding individuals who purchased automobiles during specific periods of time, including the name, address, and telephone number of the buyer; the dealership where the automobile was purchased; the type of vehicle purchased; and the date of the purchase.

The attorneys then mailed a letter to the individuals, whose information was obtained, offering a free consultation and inviting the individuals to hire the attorneys to represent them in a lawsuit against certain dealerships. The letter included the label “ADVERTISING MATERIAL.”

Litigation, State-Action Exceptions

This conduct would not fall under the DPPA's “litigation exception,” according to the court. The DPPA provides that a state DMV may disclose personal information for use in connection with an investigation in anticipation of litigation. The exception permitted the attorneys to request information in an attempt to obtain evidence, but not to find and solicit clients.

The attorneys also did not qualify for the DPPA's state-action exception by functioning as “private attorneys general.” The attorneys did not allege that they provided any information to any government agency.

Knowledge, Damages Requirements

The individuals did not have to allege that the attorneys knowingly violated the DPPA, only that they knowingly obtained their personal information, the court said. The individuals were not required to plead actual damages in order to receive statutory liquidated damages under the DPPA.

The DPPA did not violate the Commerce Clause, the court determined. The personal information regulated by the DPPA was in interstate commerce and was therefore a proper subject of congressional regulation.

The decision is Maracich v. Spears, CCH Privacy Law in Marketing ¶60,380.

Facebook Privacy Settlement Gets Initial OK; Intervention Denied

This posting was written by Thomas A. Long, Editor of CCH Privacy Law in Marketing.

A proposed settlement between social networking website operator Facebook and a class consisting of Facebook members, resolving privacy claims over Facebook’s “Beacon” advertising program, has been preliminarily approved by the federal district court in San Jose.

The complaining Facebook members had asserted that their privacy rights were violated by the Beacon program, which allegedly caused information about books, movies, and other products purchased by Facebook members on participating sites—such as Blockbuster and eBay—to be posted publicly on Facebook’s “news feed” without permission.

The settlement would resolve all claims against Facebook and several participating retailers. The agreement would also require Facebook to shut down the Beacon program and to contribute $9.5 million to a “settlement fund” devoted to the formation of a non-profit foundation for the purpose of promoting online privacy, safety, and security (CCH Privacy Law in Marketing ¶60,377).

Class Certification, Settlement Terms

The parties were advised that, when seeking final approval, they should be prepared to establish that the requirements for unconditional certification of the class have been met, specifically with regard to the issue of whether there was sufficient “typicality” between class members who may have claims under the Video Privacy Protection Act (VPPA), 18 U.S.C. §2710, and those who did not.

Final approval would also require a sufficient showing that the terms of the settlement were reasonable, specifically in light of the potential VPPA claims and the apparent availability of statutory penalties under the statute.

Notice of the proposed settlement was to be given to the class through (1) an internal Facebook message in the “Updates” portion of the Inbox section of users’ personal accounts, targeting users whose personal information was likely to have been transmitted to Facebook via Beacons and (2) a court-approved summary form of publication notice, to be published in one daily issue of the national edition of USA Today.

Motion to Intervene

A motion by representatives of class action plaintiffs pursuing Video Privacy Protection Act claims against Blockbuster in a federal district court in Texas were not entitled to intervene in the California action for the purpose of opposing the settlement, the court ruled.

The Texas action also arose out of the Beacon program, but the plaintiffs alleged claims only under the VPPA and named Blockbuster as the sole defendant. The Texas action predated the California action by approximately four months.

The motion to intervene was untimely, the court said. The intervenors were aware of the existence of the California action no later than September 2008 and were aware of the pending settlement by early May 2009. The intervenors’ delay in bringing its motion caused prejudice to the parties, including the time and money expended in continuing to negotiate and finalize the settlement agreement.

The intervenors failed to demonstrate a “significantly protectable” interest that would not be adequately protected absent intervention, according to the court.

Moreover, the intervenors were able to make their objections known to the court through the process of moving to intervene. The substance of those objections was taken into account in determining whether conditional approval of the settlement was warranted.

The preliminary approval and notice order and the order denying leave to intervene were issued October 23. The orders in Lane v. Facebook, Inc. appear at CCH Privacy Law in Marketing ¶60,393 and ¶60,394.

New York State Charges Intel with Monopolization

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Intel Corporation unlawfully maintained its monopoly in the market for x86 central processing unit (CPUs) in violation of New York’s Donnelly Act and Sec. 2 of the Sherman Act, the State of New York alleges in an 83-page complaint filed today in a federal district court in Delaware.

The state is seeking injunctive relief and damages on behalf of its governmental agencies as well as New York consumers who purchased products containing x86 CPUs.

According to the complaint, Intel “engaged in a systematic worldwide campaign of illegal, exclusionary conduct to maintain its monopoly power and prices in the market for x86 microprocessors, the ‘brains’ of Personal Computers (PCs).” Intel allegedly bribed and bullied computer makers in an effort to deprive Advanced Micro Devices, Inc. of distribution channels for its competing microprocessors.

“Rather than compete fairly, Intel used bribery and coercion to maintain a stranglehold on the market,” said New York Attorney General Andrew M. Cuomo, in a statement announcing the complaint.

“Intel’s actions not only unfairly restricted potential competitors, but also hurt average consumers who were robbed of better products and lower prices," Cuomo charged."These illegal tactics must stop and competition must be restored to this vital marketplace.”

European Commission Fine

New York’s complaint follows a May 2009 European Commission (EC) decision fining the computer chip maker €1.06 billion (approximately $1.44 billion U.S.) for violating EC antitrust rules prohibiting the abuse of a dominant position. The EC found that Intel engaged in illegal anticompetitive practices to exclude competitors from the market of computer chips called x86 CPUs.

In addition to imposing the fine, the EC ordered Intel to cease the challenged practices. In September, the EC made public a redacted version of its May decision. Intel has announced that it was appealing the EC decision to the Court of First Instance of the European Community.

Federal Trade Commission Investigation

The Federal Trade Commission has also been conducting an investigation of Intel’s allegedly anticompetitive practices. Intel announced in June 2008 that the FTC had issued a subpoena related to its “business practices with respect to competition in the microprocessor market.”

At that time, the company explained that it had been working closely with the FTC since 2006 on an informal inquiry into competition in the microprocessor market and that it had provided the Commission staff with a considerable amount of information and thousands of documents.

Pulse Oximeter Maker Liable for Sole Source Discounts, Not Budling

This posting was written by Darius Sturmer, Editor of CCH Trade Regulation Reporter.

A federal district court in California did not err in discarding a jury's finding that a manufacturer of pulse oximeters violated federal antitrust law through its offering of bundled discounts to customers, but confirming the jury's liability finding on two other bases, the U.S. Court of Appeals in San Francisco has decided in an unpublished opinion.

The manufacturer could have acted illegally through sole source agreements and market share discounts it offered to customers, the appellate court said. In addition, the trial court's calculation of damages suffered by a complaining competitor was proper. Therefore, each of the trial court's rulings was upheld.

Antitrust Liability

The manufacturer did not violate Sec. 2 of the Sherman Act through the bundled discounts it offered to customers. The defending manufacturer's discounts were not alleged to have resulted in prices that were below an appropriate measure of its costs. Because no anticompetitive tying or pricing was asserted, the discounts could not, as a matter of law, have violated the statute, the court stated.

Rejected by the appellate court was an argument that the bundling practices were actually illegal market-share agreements, rather than general bundled discounts. Even if it could have been concluded that certain bundling contracts were exclusive dealing arrangements, in that the discounts were conditioned upon a near-complete exclusivity requirement, the evidence concerning the pervasiveness and effects of the varied bundling arrangements was insufficient to support a finding that the arrangements foreclosed competition in a substantial share of the relevant market. Therefore, the trial court did not err in vacating a jury verdict of liability regarding the bundling agreements.

The trial court correctly determined that a reasonable jury, based on the evidence presented at trial, could have concluded that the defending manufacturer violated the federal antitrust laws through sole source agreements and market share discounts it offered to customers. Sufficient evidence had been introduced to support the jury's finding.

On appeal, both parties offered the same evidence that had been presented to the jury and reviewed by the district court. The defending manufacturer failed to proffer any reason at appeal that compelled reversal of the jury's verdict.

Damages

The district court did not err in its calculation of damages resulting from the manufacturer's antitrust violations. The court properly determined, based on the evidence presented at trial, that all harm incurred by a complaining competitor on account of the defending manufacturer's anticompetitive business dealings with customers occurred before July 2001, as adherence to that cutoff date did not “absolutely lack evidentiary support.”

The competitor itself had stated that “the period between 1998 and 2001” was “when all harm was done” to it. Therefore, the court did not abuse its discretion in denying the competitor a new trial on damages, the appellate court said.

In addition, an apparent awarding of some post-July 2001 damages was not error, the appellate court noted. That award was based on a conclusion that the competitor should receive damages associated with oximetry monitor sales lost pre-July 2001, which consequently included the flow of lost sensor sales stemming from the lifespan of those devices.

Because of this installed base of monitors, the district court correctly determined that a hard stop on damages would cut them off prematurely. Moreover, because the competitor offered unreasonable models for calculating damages, it was proper for the court to adopt the defendant manufacturer's model—the only reasonable alternative—as its basis for calculating damages, the court concluded.

Concurring Opinion

A concurring opinion contended that the majority arrived at the correct result with respect to the bundling agreements, but for the wrong reason. According to the concurrence, the majority's conclusion—that the evidence on record was insufficient to support the jury's liability verdict that the manufacturer's bundling contracts constituted exclusive dealing arrangements—applied only with respect to the theory that bundling itself was a form of exclusive dealing. However, such a theory no longer held water after Cascade Health Solutions v. PeaceHealth (2007-2 Trade Cases ¶75,846), the concurring opinion argued.

The court should have based its decision instead on the ground that the complaining competitor had waived the argument that the bundling agreements at issue should be treated as market-share discounts.

The October 28 memorandum decision is Masimo Corp.v. Tyco Health Care Group, L.P., 2009-2 Trade Cases ¶76,780.

FTC, Canada Competition Bureau Approve Schering-Plough’s Acquisition of Merck

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Schering-Plough Corporation can proceed with its proposed $41.1 billion acquisition of Merck & Co. Inc. under the terms of a proposed FTC consent order, according to the agency's October 29 announcement.

The consent order would settle FTC charges that the transaction, as originally proposed, could have reduced competition in a range of animal health markets in which the companies compete and in the market for human drugs known as NK 1 receptor antagonists, which are used to treat nausea and vomiting resulting from chemotherapy and surgery.

The companies are two of the leading animal health suppliers in the United States. According to the FTC, the proposed acquisition raised significant concerns in markets where Merck—through Merial Limited, an animal health joint venture with Sanofi-Aventis S.A—and Schering-Plough directly compete. Merck would be required to sell its interest in Merial, under the proposed consent order.

In the market for NK 1 receptor antagonists, Merck’s Emend was the first and only approved treatment for human use. Schering-Plough, however, was in the process of licensing its own NK 1 receptor antagonist, rolapitant, to a third party when the company’s acquisition of Merck was announced.

The transaction, therefore, likely would have reduced the combined firm’s incentives to launch rolapitant, delaying or eliminating a future entrant into the market for NK 1 receptor antagonist drugs for nausea and vomiting. Under the terms of the FTC’s consent order, Schering-Plough would be required to sell assets related to rolapitant.

Canada Competition Bureau Approval

Canada's Competition Bureau also announced on October 29 that it has reached an agreement with Merck and Schering-Plough to resolve competition concerns with respect to their proposed merger. The Competition Bureau said that it worked closely with the FTC in its investigation. The relief imposed by the Competition Bureau is the same as that which would be required under the proposed FTC consent order.

The complaint and proposed consent order, In the Matter of Schering-Plough Corporation, a corporation, and Merck & Co. Inc., FTC Docket No. C-4268, will appear at CCH Trade Regulation Reporter ¶16,383.

New Consumer Protection Agency, FTC Powers Approved by House Committee

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

The House Energy and Commerce Committee yesterday approved legislation creating a new Consumer Financial Protection Commission, streamlining FTC rulemaking procedures, and broadening the FTC's authority to seek relief in court.

The committee reported favorably the proposed “Consumer Financial Protection Agency Act of 2009” (H.R. 3126), as amended, by a vote of 33 to 19.

This was the second House panel to approve the bill. The House Financial Services Committee reported favorably on the measure on October 22.

The legislation calls for a new Consumer Financial Protection Agency with broad rulemaking authority to prohibit unfair, deceptive, and abusive acts and practices with respect to financial products and services, among other responsibilities. The new agency would take over some of the consumer protection functions of the federal banking agencies and the FTC.

Effect on FTC Jurisdiction

The proposed legislation states that it preserves the FTC's authority under the FTC Act. However, the Electronic Funds Transfer Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Truth in Lending Act, and certain provisions of the Gramm-Leach-Bliley Act would come within the jurisdiction of the new Consumer Financial Protection Agency.

The Energy and Commerce Committee amended the legislation to strengthen the FTC's authority where it has shared jurisdiction with the new agency. Where there is shared jurisdiction, the version of the legislation approved by the House Financial Services Committee required the FTC to provide 30 days' notice to the Consumer Financial Protection Agency of its intention to file an enforcement action and the new agency would have the right to intervene.

The House Energy and Commerce Committee-approved version would eliminate the “waiting period” imposed on the FTC. Under the Energy and Commerce Committee-approved version, the FTC would merely be required to provide notice upon initiating an enforcement action.

The Energy and Commerce Committee-approved version would also impose a reciprocal notification requirement, such that the new agency would be required to notify the FTC of its enforcement actions, and the FTC would have a right to intervene.

A provision that would have substituted the director of the new agency for the FTC as a party to any pending actions after the creation of the new agency was stricken from the Energy and Commerce Committee version of the measure.

The Energy and Commerce Committee approved an amendment that would establish the new agency as a five-member independent commission, similar to the FTC, instead of having the agency headed by a single director. There would also be no automatic transfer of staff from the FTC to the new agency as originally proposed.

FTC Rulemaking Procedures

H.R. 3126 would streamline FTC rulemaking authority. It would grant the agency the authority to promulgate rules using Administrative Procedure Act (APA) “notice and comment” rulemaking procedures. The new APA procedures would replace the FTC’s current Magnuson-Moss rulemaking procedures, which are far more time-consuming.

Civil Penalty Authority

Energy and Commerce Committee Chairman Henry Waxman (California) introduced “an amendment to further strengthen the FTC’s litigation authority.” The amendment, which was approved in a 19 to 17 vote, would add language to the Consumer Financial Protection Agency Act authorizing the FTC to seek civil penalties in federal court actions for violations of Sec. 5 of the FTC Act.

Currently, the FTC can file an action in federal court to obtain injunctive relief and it can seek civil penalties for violations of its existing consent decrees. However, the agency must first present actions seeking civil penalties for violations of Sec. 5 of the FTC Act to the Department of Justice, which decides whether to file the suit.

Ranking Republican Member Joe Barton (Texas) unsuccessfully opposed the amendment, saying that it was wise to keep the Department of Justice in the process as a check on the FTC.

FTC Reaction

FTC Chairman Jon Leibowitz issued a statement, lauding the Committee’s passage of the bill.

“Americans are still experiencing a period of extreme financial distress, and the modest new authority given to our agency will help ensure that we have the tools necessary to fight fraud and go after those who perpetrate it,” the statement said. “We commend the House Energy and Commerce Committee, and especially Chairman Waxman, for their visionary work on behalf of consumers.”

“Steam” Dryer Claims Could Be Lanham Act False Advertising

This posting was written by William Zale, Editor of CCH Advertising Law Guide.

Allegations that Whirlpool’s advertisements for “steam” clothes dryers were literally false could not be rejected at the summary judgment stage of a Lanham Act false advertising case brought by competitor LG Electronics, the federal district court in Chicago has ruled.

LG alleged that the advertised dryers did not actually employ steam to remove odors and wrinkles from fabrics. Whirlpool's “steam” dryers worked by introducing a spray of cool water into a hot, spinning dryer drum where heat and moving air speeded evaporation of moisture from the dampened clothes.

Whirlpool unsuccessfully contended that the advertised dryers satisfied the meaning of “steam” employed by Consumer Reports, other magazines, and other competitors. Whirlpool identified no binding precedent holding that the behavior of competitors was relevant to whether its own advertising claims were literally false. Evidence from Consumer Reports articles and the like was inadmissible on summary judgment to prove the truth of the matters asserted, according to the court.

Whirlpool did not respond to LG's contention that the advertising was literally false because it necessarily implied the unambiguous message that Whirlpool's dryers created and used steam whereas conventional dryers did not.

Disputed Definition of “Steam”

Whirlpool's expert testimony that its dryers met the definition of steam as “vapor arising from a heated surface” was not conclusive, given the existence of competing definitions.

Considering the context of the advertising claims—touting the use of steam as a new way to care for clothes—a finder of fact could conclude that Whirlpool necessarily implied the unambiguous message that Whirlpool’s dryers refreshed clothing by a process not previously available in Whirlpool’s non-steam dryers, the court found. Finally, Whirlpool failed to support its contention that the use of the word “steam” in an LG-owned patent for conventional dryers constituted an admission that “vapor arising from a heated surface” in Whirlpool's dryers constituted steam.

Implied Falsity—Consumer Survey

A consumer survey was admissible to support allegations that Whirlpool’s advertisements conveyed an implied message to consumers, the court held. The LG survey consultant had designed and supervised over 500 consumer surveys in the areas of trademark, trade dress, advertising perception, and advertising claim substantiation.

Whirlpool contended that the survey was unreliable because LG's expert ignored the results of open-ended questions, improperly based his opinion solely on the result of a closed-ended question at the end of the survey, and used a “control” commercial too different from the “test” commercial. Whirlpool’s criticism was held to address the weight of the study, rather than its admissibility. Evaluating technical deficiencies and awarding weight to this evidence was the province of the trier of fact.

Expert Testimony—Consumer Perception

A thermodynamics expert's testimony for LG on consumer perception as to the definition of steam was stricken because he had no expertise in consumer perception, according to the court. However, his testimony that Whirlpool “steam” dryers did not create thermodynamic steam was not stricken because Whirlpool's objections went to the weight of the testimony, and Whirlpool would be free to cross-examine him regarding his application of the definition of steam to Whirlpool’s steam dryers.

The deicision is LG Electronics U.S.A. v. Whirlpool Corp., CCH Advertising Law Guide ¶63,596.

Buyers' Monopolization Claims over Patented Drug Resurrected

This posting was written by Darius Sturmer, Editor of CCH Trade Regulation Reporter.

Purchasers of a patented antidiuretic drug could maintain federal antitrust claims against the drug's manufacturer and exclusive licensed marketer for allegedly abusing the patent system to unlawfully maintain a monopoly over the drug, the U.S. Court of Appeals in New York City has decided.

Dismissal of the suit for lack of standing and failure to state a claim (2007-1 Trade Cases ¶75,726) was therefore vacated, and the matter was remanded.

As an initial matter, the appellate court rejected an argument by the defendants that the appeal properly belonged in the Federal Circuit. The Federal Circuit had exclusive jurisdiction over appeals when the district court's jurisdiction was based on patent law, the court noted. However, patent law had not created the cause of action in the case, and the purchasers' right to relief did not necessarily depend on resolution of a substantial question of federal patent law.

While their Walker Process-based legal theories (antitrust claims stemming from fraudulent procurement of a patent) did depend on patent law, an additional theory they maintained—that the marketer violated the antitrust laws when it filed a sham citizen petition asking the Food and Drug Administration (FDA) to require additional testing of a generic equivalent—did not.

Antitrust Standing

The purchasers had standing to recover overcharge damages resulting from the defendants' alleged conduct, the court said. Such an injury plainly was of the type the antitrust laws were intended to prevent.

Although the conduct at issue targeted the manufacturer's and marketer's competitors, the purchasers' claimed injury of higher prices was inextricably intertwined with the conduct's anticompetitive effects and thus flowed from that which made the acts unlawful.

The purchasers were proper plaintiffs, even though their injuries were derivative of the direct harm experienced by the defendants' competitors. While competing drug makers might have been the parties most motivated to enforce the laws, the purchasers too were significantly motivated due to their natural economic interest in paying the lowest price possible.

The overcharge damages they sought differed from the lost profits of which the competitors could complain and would have been left unremedied were they denied standing, the court added. This difference signified a lack of potential for duplicative damages, even assuming some overlap. Moreover, the claims did not rest on tenuous assumptions about the beneficial effects of generic competition.

Walker Process Claims

The appellate court declined to decide whether the purchasers had standing per se to raise their Walker Process claims. As they were challenging an already tarnished patent, the purchasers were entitled to antitrust standing without altering the limits on who can start a challenge to a patent's validity. Therefore, they had standing to raise Walker Process claims for patents that were already unenforceable due to inequitable conduct, and the lower court erred by concluding to the contrary, in the appellate court's view.

The direct purchasers adequately pled an antitrust claim under each of their legal theories, the court held. Given that the alleged fraudulent omissions made to the Patent and Trademark Office occurred over a number of years, the defendants' intent to deceive was sufficient to plausibly support a finding of Walker Process fraud. The fact of non-disclosure sufficed to properly allege materiality, the court added.

The purchasers' allegations also adequately made out a sham litigation claim, a claim based on improper FDA Orange Book listing, and the claim based on a citizen petition theory, the court concluded.

The October 16 decision is In re: DDAVP Direct Purchaser Antitrust Litigation, 2009-2 Trade Cases ¶76,770.

Marketing for “Phased Out” Cell Phone Could Violate California Unfair Competition Law

This posting was written by Jody Coultas, Editor of CCH State Unfair Trade Practices Law.

Wireless telephone subscribers stated California Unfair Competition Law (UCL) and Consumer Legal Remedies Act (CLRA) claims against AT&T, based on the company’s marketing and sale of a premium cell phone that it was allegedly in the process of phasing out, according to a California appellate court.

The subscribers purchased premium cell phones, which AT&T marketed as technologically advanced and capable of working around the world. However, the subscribers alleged that AT&T had no intention to continue to support and service the cell phones and was making changes to its wireless system that would substantially degrade service to subscribers using the phones.

To phase out the cell phones, AT&T sent the subscribers replacement phones that did not work around the world and cost significantly less than the original phone.

Misleading Representations

The subscribers stated a UCL cause of action against AT&T, according to the court. The UCL claim was based on the fraud prong of the UCL, and focused on AT&T’s representations that, although true, were likely to mislead the public. A business practice is deemed deceptive in violation of the UCL if a reasonable consumer was likely to be deceived. In light of the conduct alleged, the court could not conclude as a matter of law that reasonable consumers would not have been deceived.

Although AT&T argued that the subscribers had to plead the specific advertisements or representations they relied upon in making their purchasing decisions, the court found that a determination could not be made as a matter of law that the claim was not viable.

The subscribers alleged that, prior to their purchase of the cell phones, they conducted research and encountered advertisements and press releases explaining the advanced features of phone and improvements being made to the network the phone utilized. The subscribers did not need to present the specific advertisements to the court in order to have standing to bring the claims.

False Advertising Claim

Because they failed to show an injury in fact, the subscribers did not have standing to bring a California False Advertising Law (FAL) claim against AT&T, according to the court.

The subscribers alleged that AT&T violated the FAL by offering a free upgrade phone to owners of the phone at issue, but the phone offered did not have the same capabilities as the original phone.

In order to have standing, the subscribers needed to establish an injury in fact and loss of money or property as a result of a violation of the FAL. Even if it could be said that the return of an allegedly useless phone constituted an injury in fact, the subscribers did not suffer an injury because they declined to return their phones.

The decision is Morgan v. AT&T Wireless Services, Inc., CCH State Unfair Trade Practices Law ¶31,919.

Antitrust Division Asked to Investigate Bestseller Book Pricing

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

The American Booksellers Association—a trade organization representing locally owned, independent booksellers—has asked the Department of Justice Antitrust Division to investigate alleged predatory pricing by Amazon.com, Wal-Mart, and Target.

In its October 22 letter, the trade group requested a meeting with Christine Varney, Assistant Attorney General Antitrust Division, and Molly Boast, Deputy Assistant Attorney General for Civil Matters, to discuss the retailers' pricing of recent best sellers and its impact on small bookstores.

Price War in Internet Sales

The trade association points to recent reports that Amazon.com, WalMart.com, and Target.com have engaged in a price war in the pre-sale of new hardcover bestsellers, which typically retail for between $25 and $35. The companies are currently selling these and other titles for between $8.98 and $9—losing money on each unit, according to the trade association.

Predatory Pricing

The group contends that Amazon.com, Wal-Mart, and Target are using these predatory pricing practices to attempt to win control of the market for hardcover bestsellers. These companies are purportedly using “mega bestsellers . . . as a loss leader to attract customers to buy other, more profitable merchandise.” As a result, “the entire book industry is in danger of becoming collateral damage in this war.”

The association also called on the Antitrust Division to scrutinize the loss-leader pricing of digital content. The letter points to Amazon.com's purported below-cost pricing of digital editions of new hardcover books.

Private Suits

Over the years, the American Booksellers Association has filed Robinson-Patman Act suits against publishers and book stores for alleged price discrimination, with varying success. In the 1990s, the trade group obtained settlements from major publishers in price discrimination actions. Around the same time, the Federal Trade Commission (FTC) dropped investigations into price discrimination by the country’s largest book retailers (Trade Regulation Reporter ¶24,109).

Government Enforcement

Generally, the FTC, and not the Department of Justice, has been the federal antitrust agency that has taken the lead in enforcing the Robinson-Patman Act. However, the number of cases has dropped significantly in recent decades. The FTC has not issued a Robinson-Patman Act complaint since its action against spice company McCormick & Co. in 2000 (Trade Regulation Reporter ¶24,711).

Classes of Disabled Franchise Patrons Certified in ADA Action Against Burger King

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

Ten separate classes of Californian mobility-impaired patrons of ten Burger King restaurant franchises were entitled to be certified against the franchisor, Burger King, for violations of the Americans with Disabilities Act (ADA) and two California statutes, according to a federal district court in San Francisco.

The plaintiffs had sought to proceed as one large class of mobility-impaired patrons of 92 California Burger King franchises. However, the physical differences among the 92 franchises would predominate over the common issues because there was no common blueprint among them, the court determined.

Whether or not any store was ever out of ADA compliance would have to be determined store-by-store, feature-by-feature, before turning to the easier question of whether Burger King—as the franchisor/lessor—would have a duty to force the franchises to remediate. Thus, ten separate classes were certified for disabled patrons of each of the ten individual franchises where a named plaintiff encountered alleged access barriers.

Commonality

Burger King did not dispute that the plaintiffs established commonality for each separate class of patrons of the ten restaurants because every patron of a particular restaurant faced identically alleged access barriers. Because all mobility-impaired patrons of a particular restaurant who used wheelchairs faced identical facilities and identical access barriers, their common interest in assuring that all the features at the particular restaurant were in statutory compliance would predominate over any individual differences among them, the court held.

Typicality

The typicality requirement for certification was not disputed by Burger King and was satisfied because the named plaintiffs all used wheelchairs or scooters, the court ruled. By relying on a combination of census data showing that there were more than 150,000 people in California who used wheelchairs and scooters, declarations from numerous potential class members, and evidence of Burger King’s popularity, the plaintiffs satisfied the numerosity requirement.

Adequacy of Class Counsel

Burger King challenged the adequacy of the proposed class counsel on the grounds that five separate law firms sought joint appointment as lead counsel. It was best to have only one law firm as class counsel, the court commented, citing its own 35-years of practice and presiding experience. Thus, the plaintiffs were ordered to submit a memorandum and declaration explaining why anyone other than a single, court-selected attorney and his firm should be appointed as class counsel.

Franchisees as Defendants

Burger King's motion to add the franchisees/lessees of the ten restaurants as defendants was granted by the court. The plaintiffs did not dispute that the franchisees/lessees were jointly and severally liable with Burger King for any violations, or that the claims against them did not arise out of the same transactions and occurrences. Thus, because the joinder of the franchisees/lessees to the action would be useful in efficiently affecting any necessary injunctive relief at the stores under their control, Burger King's motion to add them to the action was granted.

The decision is Castaneda v. Burger King Corp., CCH Business Franchise Guide ¶14,238

Trade Regulation Tidbits

This posting was written by Jeffrey May and John W. Arden.

News, updates, and observations:

 President Barack Obama on October 17 commented on Congressional efforts to repeal the antitrust exemption for the health insurance industry. (See October 15, 2009 posting on Trade Regulation Talk.) In his weekly address, the President discussed the industry’s efforts to derail health care reform to protect its profits and bonuses. “[T]hey’re earning these profits and bonuses while enjoying a privileged exception from our antitrust laws, a matter that Congress is rightfully reviewing.” The White House did not go so far as to announce the President's support for legislative efforts to repeal the antitrust exemption. Appearing on ABC’s "This Week with George Stephanopoulos" on Sunday, October 18, David Axelrod, Senior Advisor to the President, was noncommittal on the legislation. “We’ll see what Congress does,” he said.

 A Minnesota-based packaged-ice company and three of its former executives have admitted to allocating customers, have agreed to plead guilty, and have agreed to pay a $9 million criminal fine, the Department of Justice has announced. The company and the individual defendants have agreed to cooperate with the Justice Department's ongoing antitrust investigation into the industry. The separate charges were filed in the federal district court in Cincinnati under seal in September. The seals were lifted on October 13. A news release on the plea agreement appears here on the U.S. Department of Justice Antitrust Division website.

 On October 16, the Maine House Joint Standing Committee on the Judiciary voted to recommend repeal of a recently-enacted state privacy statute, in light of constitutional issues raised by a federal court challenge to the law. The controversial law—“An Act to Prevent Predatory Marketing Practices Against Minors” (Public Law 230)—prohibits the collection of health-related or other personal information for marketing purposes from a minor without parental consent and bars “predatory marketing” to minors.

On August 28, challengers filed an action for injunctive relief in the federal district court in Maine, claiming that the statute violates the First Amendment rights of adults, as well as minors and online operators; violates the Commerce Clause; and is preempted by the federal Children’s Online Privacy Protection Act. On September 2, Maine Attorney General Janet Mills announced that she would not enforce the law, due to her concerns about its constitutionality. (See September 3, 2009 posting on Trade Regulation Talk.) On September 8, U.S. District Court Judge John Woodcock instructed the plaintiffs and Maine officials to work out acceptable language for an order settling the lawsuit. The parties agreed to an order acknowledging the constitutional defects of the law, documenting the state’s promise to refrain from enforcing the law, citing the legislature’s promise to revise the law in the next session, and putting Maine plaintiff attorneys on note that suits brought under the law would have to overcome constitutional questions raised in the action. (See September 14 posting on Trade Regulation Talk.)

After its hearing last week, committee members and staff indicated that a new legislative proposal—curing defects in the current law—would be introduced when the legislature convenes its next session in January 2010. None of the judicial or legislative action thus far repeals the law or bars private actions enforcing the law.

Letters to Competitor’s Customers Not “Advertising” Within Lanham Act

This posting was written by William Zale, Editor of CCH Advertising Law Guide.

A Guardian Life Insurance agency did not engage in “commercial advertising or promotion” within the meaning of the Lanham Act's false advertising prohibition by sending letters to MetLife customers using an agency name and logo formerly used by MetLife, the federal district court in Chicago has ruled.

The Guardian agency was set up by the former managing director of a MetLife agency, who had been replaced. The new agency had hired 21 former MetLife agents, some of whom had retained MetLife client files.

One of the new agency’s letters to Metlife customers announced a move to a larger location, and a second letter enclosed forms to “help make this transition . . . seamless to you.”

Direct Communications

The allegedly deceitful announcements were direct communications, not advertising, in the court’s view. “Advertising is a form of promotion to anonymous recipients, as distinguished from face-to-face communication,” the Seventh Circuit explained in First Health Group Corp. v. BCE Emergis Corp. (CCH Advertising Law Guide ¶60,408).

The agency's letters were not sent to anonymous recipients, the court noted. They were directed to individuals on client lists. The second letter enclosed a highly individualized transfer of assets form containing not just the customer's name but his or her social security number and MetLife account number.

Although the announcements might give rise to claims under state law, they were not actionable under the Lanham Act, either as advertising or trademarks (in light of the MetLife's abandonment of the agency name and logo), the court concluded.

The September 16 opinion in Metropolitan Life Insurance Co. v. O’M & Associates LLC, will be reported at CCH Advertising Law Guide ¶63,616.

McDonald’s Faces Class Action After Refusing to Redeem $5 Gift Card for Cash

This posting was written by William Zale, Editor of CCH Advertising Law Guide.

The holder of a $5 McDonald’s gift card has standing to sue fast food giant McDonald’s under California law based on McDonald’s alleged failure to redeem the card for cash, the federal district court in San Diego has ruled.

The California gift certificate statute (CCH Advertising Law Guide ¶30,515) provides that any gift certificate with a cash value of less than $10 is redeemable in cash. The statute defines “gift certificate” to include gift cards.

In a class action complaint, the gift card holder asserted claims under the California Unfair Competition Law (UCL) and the common law of unjust enrichment based on violation of the gift certificate statute.

Standing

McDonald’s argued that the gift card holder lacked standing to assert a UCL claim because he could still redeem his gift card for McDonald’s products and therefore did not lose money or property as a result of the unlawful conduct.

The holder responded that he did not want McDonald’s products and that McDonald’s unlawful conduct had caused him to keep the gift card that could only be used for products he did not wish to consume.

The court held that the holder had standing to pursue the UCL claim based on his allegation that he was denied money to which he had a right under the gift card statute. Likewise, the holder had standing to sue on the ground that McDonald’s was unjustly enriched by its practice of refusing cash redemptions on unused card balances of less than $10.

False Advertising

The holder also brought a UCL claim based on the California False Advertising Law, but the court rejected this theory.

The holder alleged that a statement on the back of the card—“[t]he value on this card may not be redeemed for cash . . . unless required by law”—was deceptive and misleading. The holder maintained that the statement led average consumers to believe that they could not redeem gift cards for cash and failed to disclose the right to redeem cards with balances of less than ten dollars for cash.

The holder’s false advertising theory failed, in the court’s view, because he did not allege that he relied on the language on the back of the gift card and, as a result of that reliance, lost money or property.

The September 21, 2009 opinion in Marilao v. McDonald’s Corp. will be reported at CCH Advertising Law Guide ¶63,615 and CCH State Unfair Trade Practices Law ¶31,917.

Despite Lower Turnout, ABA Forum on Franchising Is in Good Shape: Chair

This posting was written by John W. Arden.

In spite of sharply lower attendance at the ABA Forum on Franchising’s 32nd annual meeting, the “State of the Forum” is still “very, very good,” according to an October 16 address by Ronald Gardner, new chair of the group.

Attendance at last week’s annual meeting in Toronto was down by nearly 200 from last year’s near-record number—from 836 to 650. Nevertheless, the turnout was better than expected in view of overall economic conditions, said Gardner, managing partner of Dady and Garner in Minneapolis.

Other indicators are all positive, Gardner noted. Membership retention is at or above other ABA units. The Forum continues to be on solid financial footing. And the group has been able to lock in annual meeting facilities at favorable rates through 2013.

In Forum business, the group voted unanimously to amend its bylaws to expand the size of the governing committee from nine to 12 at-large members.

Three nominees were elected unanimously to serve terms on the governing committee. Serving new terms from 2010 through 2013 will be Leslie Curran of Plave Koch PLC in Reston, Virginia; Joseph Fittante of Larkin Hoffman in Minneapolis; and Michael Joblove of Genovese Joblove & Battista in Miami.

The Forum was revisiting the location of its 1989 meeting—the Westin Harbour Castle Hotel in Toronto.

Highlights of the meeting included a plenary session on “Engineering Healthy Franchise Relationships,” led by franchise relationship expert Greg Nathan, and the Annual Franchise and Distribution Developments session, presented by Joel R. Buckberg of Baker Donelson Bearman Caldwell & Berkowitz in Nashville and Jon P. Christiansen of Foley & Lardner LLP in Milwaukee. The annual reception and dinner was held at the Royal Ontario Museum.

Program co-chairs were Kerry Bundy of Faegre & Benson LLP in Minneapolis and Larry Weinberg of Cassels Brock & Blackwell LLP in Toronto.

The 2010 annual meeting is scheduled for October 13-15 at The Hotel Del Coronado in Coronado, California. The program chairs will be Deborah Coldwell of Haynes and Boone LLP in Dallas and Kathy Kotel of Carlson Restaurants Worldwide of Carrollton, Texas.

Baer Receives First Rudnick Award for Contributions to Franchise Law

This posting was written by John W. Arden.

The ABA Forum on Franchising on October 15 presented the inaugural Lewis G. Rudnick Award to John R. F. Baer in recognition of his contributions to the development of the Forum and franchise law as a discipline. Baer is a partner in the Chicago office of Sonnenschein Nath & Rosenthal, LLP.

The “lifetime achievement award” was created in remembrance of Lewis Rudnick, who died on January 24, 2009, at age 73. Recognized by the Forum as “one of the true giants of the franchise bar,” Rudnick was a founder of the Forum and its second chair (1981-1983). He helped establish the Franchise Law Journal, the Forum’s quarterly publication. As senior partner of Rudnick & Wolfe (currently DLA Piper), Rudnick trained several generations of some of America’s leading franchise lawyers.

“Most important, Lew was a kind man and consummate gentleman, who treated everyone with respect and demonstrated the personal qualities to which all lawyers should aspire,” said Edward Wood Dunham, immediate past chair of the Forum, in announcing the creation of the award.

The Rudnick Award is intended to honor members of the Forum who, over the course of distinguished careers as franchise lawyers, have made substantial contributions to the development of the Forum and to franchise law as a discipline, while comporting themselves in accordance with Lew Rudnick's high standards of professionalism, decency, and collegiality.

In presenting the first Rudnick Award, new Forum Chair Ron Gardner cited Baer’s thousands of hours of work for the Forum as a frequent speaker, author of more than a dozen Franchise Law Journal articles, editor of the Franchise Lawyer newsletter, associate editor of the Franchise Law Journal, member of the governing committee, and publications officer.

He is the chair of the Illinois Attorney General’s Franchise Advisory Board and editor of the CCH Sales Representative Law Guide, Gardner said. In addition, Baer is currently Vice Chair of the International Franchising Committee of the International Bar Association’s International Sales, Franchising and Product Law Section and formerly vice president of the Franchising Committee of Union Internationale des Avocats.

Baer has mentored many leading franchise lawyers during his long career in the field—and did all these things “with a smile,” Gardner said.

The presentation occurred during the opening session of the main program of the 32nd annual meeting of the Forum on Franchising, held in Toronto on October 14-16.

Additional Awards

Gardner referred to three additional annual awards, intended to recognize franchise lawyers at earlier stages in their careers, to encourage young and/or diverse practitioners to become and remain involved in the Forum, and to help them identify pathways to Forum leadership.

Those three awards are: (1) Chair's Award for Substantial Written Work or Presentation; (2) Chair's Future Leader Award; and (3) Chair's Explorers Award.

These awards will be presented for the first time at next year’s annual meeting, to be held October 13-15, 2009, at The Hotel Del Coronado, Coronado, California.

Members of Homeowner's Group Could Not Sue Group's Board for RICO Violations

This posting was written by Mark Engstrom, Editor of CCH RICO Business Disputes Guide.


In a case of first impression, members of a homeowner association lacked standing to sue the president of the association’s board, the members and managers of a limited liability company (LLC) that controlled the board, the LLC itself, and an associated construction company for violations of the fedearl RICO law, the federal district court in New Orleans has ruled. The defendants allegedly engaged in a racketeering scheme that diverted homeowner assessments for their own use.

A shareholder derivative suit analysis was used to determine whether the members of the homeowner’s association had standing to sue, even though the members paid regular dues and assessments rather than an initial share price, and thus were not classic shareholder-mode claimants. Under the derivative suit analysis, courts asked: (1) whether the racketeering activity was directed against the corporation; (2) whether the alleged injury to shareholders merely derived from, and thus was not distinct from, the injury to the corporation; and (3) whether state law provided that the sole cause of action accrued in the corporation.

In this case, the alleged misconduct was directed at the homeowner association’s funds, not at the homeowners themselves, the court explained. In addition, the homeowners’ injuries were derivative of the association’s injuries and were not distinct from them. Finally, Louisiana law did not provide standing for members of a homeowner's association to sue the association for breaches of fiduciary duty by the association’s officers.

The case, Joffrion v. Tufaro, USDC ED La., appears at CCH RICO Business Disputes Guide ¶11,743.

Repeal of Antitrust Exemption for Health Insurance Industry Considered on Capitol Hill

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Senate Judiciary Committee Chairman Patrick J. Leahy kicked off a congressional hearing on a proposal to repeal the antitrust exemption for the health insurance industry by saying that “the exemption, since it was enacted in 1945, has served the financial interests of the insurance industry,” but not the interests of consumers.

“There is no reason why health insurers should be accorded immunity to engage in what would be illegal if being done by any other company,” Leahy said. The senator from Vermont called for a level playing field where the health insurance industry plays by the same rules of competition as do other industries.

In September, Leahy introduced the proposed "Health Insurance Industry Antitrust Enforcement Act of 2009" (S. 1681) to repeal the McCarran-Ferguson Act exemption to the extent it shields health and medical malpractice insurance providers from antitrust liability for price fixing, bid rigging, and market allocations.

At the October 14 hearing, the committee heard from Christine A. Varney, Assistant Attorney General in charge of the Department of Justice Antitrust Division, and Senate Majority Leader Harry Reid of Nevada, among others.

Justice Department Testimony

“The Department of Justice generally supports the idea of repealing antitrust exemptions,” Assistant Attorney General Varney said in delivering the Justice Department’s views on the McCarran-Ferguson exemption. She noted however that the Justice Department took no position as to how and when Congress should address the issue.

Varney began the testimony explaining that “the McCarran-Ferguson Act was designed to . . . delegate[e] to the states the authority to continue to regulate and tax the business of insurance.” The antitrust exemption for the business of insurance was based on state regulation.

The testimony cited Antitrust Law, the Phillip E. Areeda and Herbert Hovenkamp antitrust treatise, for the proposition that the exemption, which applies in the presence of “even minimal state regulation,” has protected the industry from the “most egregiously anticompetitive claims, such as naked agreements fixing price or reducing coverage . . .”

“Repealing the McCarran-Ferguson Act would allow competition to have a greater role in reforming health and medical malpractice insurance markets than would otherwise be the case,” according to the Justice Department testimony. The possible justifications for the McCarran-Ferguson Act in 1945 may no longer be valid, it was suggested. The state action immunity defense could still shield insurers’ conduct that is state regulated. Moreover, an exemption for collective activity may not be necessary in light of the increasingly sophisticated antitrust analysis of potentially procompetitive collective activity, the testimony noted.

Senate Majority Leader’s Testimony

In his testimony, Senate Majority Leader Harry Reid urged passage of the legislation to repeal the antitrust exemption for the health insurance industry. He said that the industry should be subject to the same federal oversight as every other industry.”

Reid called assertions by insurance companies that they are subject to state antitrust laws “laughable.”

Senator Hatch’s Views

Senator Orrin Hatch (Utah), ranking member of the Judiciary Committee’s subcommittee on antitrust, competition policy, and consumer rights, suggested that, rather than “demonize” the health insurance industry, Congress should analyze the exemption’s impact on the health insurance industry. Hatch said that he remained “open to considering any measures that promote competition in the insurance sector,” including changes to the McCarran-Ferguson Act. However he said that he had “seen little evidence to justify a complete repeal of the antitrust exemption for the insurance industry.” Hatch suggested that a ban on collaboration in the health insurance industry could result in higher prices for consumers.

Pfizer’s Acquisition of Wyeth Clears Antitrust Hurdles

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Pfizer, Inc.’s proposed $68 billion acquisition of Wyeth was conditionally approved by the Federal Trade Commission (FTC) today. The agency signed off on the combination of the pharmaceutical giants, subject to divestitures aimed at preserving competition in multiple U.S. markets for animal pharmaceuticals and vaccines.

The FTC alleged that, if the acquisition were to proceed as proposed, it could have had anticompetitive effects in 21 U.S. markets for vaccines, antibiotics, and other treatments for animals. It was determined, however, that the transaction did not raise anticompetitive concerns in the markets for human pharmaceuticals.

In announcing the complaint and proposed consent order, the FTC took the somewhat unusual step of issuing a separate statement. Commission statements are more commonly issued when the agency seeks to explain a decision not to take an action or when there are dissenting views. In this matter, there were no dissents. Only two commissioners approved the proposed settlement, with Commissioners Pamela Jones Harbour and William E. Kovacic recused.

The statement was issued by the Commission to explain [the] decision, provide greater visibility into this important investigation, and, in the event that there are future such transactions, describe the framework . . . used in [the] analysis.”

The Commission’s statement noted that the transaction involved the combination of the largest prescription pharmaceutical company in both the United States and the world (Pfizer) and the twelfth-largest prescription pharmaceutical company in the United States (Wyeth). It explained the agency’s investigation into the competitive effects analysis of the acquisition with respect to markets for human pharmaceuticals, including Alzheimer’s disease treatments.

While it was determined that the merger was not likely to substantially reduce competition or potential competition in any relevant human health market in which Pfizer and Wyeth might compete, the Commission expressed its intention to monitor the markets and continue to evaluate future transactions “to ensure that any merger or acquisition does not undermine the pharmaceutical industry’s competitiveness.”

International Approvals

Canada’s Competition Bureau also approved the transaction today, subject to the divestiture of a significant number of animal health products. The U.S. and Canadian approvals are the last significant antitrust hurdles for the acquisition. Today’s settlements follow clearances from competition authorities in Europe in July, and more recently in China and Australia in September. Approval in each of these jurisdictions was also conditioned on the divestment of certain animal health assets. The FTC’s announcement noted that the U.S. agency’s cooperation with its foreign counterparts.

Details of the complaint and proposed consent order, In the Matter of Pfizer
Inc. and Wyeth, FTC Dkt. C-4267, appear on the FTC website and will appear at CCH Trade Regulation Reporter ¶16,376.

The statement of the Canada Competition Bureau appears on the Competition Bureau's website.

Apple, Google Boards of Directors Lose Members as FTC Investigates Overlaps

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Google announced yesterday that a member of its corporate board of directors, who was also a member of Apple’s corporate board, had stepped down.

Google did not give a reason for the resignation of Dr. Arthur Levinson. However, it follows an August 3 announcement by Apple that Google's chief executive officer, Eric E. Schmidt, was stepping down from Apple's board.

At that time, Apple said that Schmidt's departure was a mutual decision and necessary in light of growing competition between the firms.

“Unfortunately, as Google enters more of Apple's core businesses, with Android and now Chrome OS, Eric's effectiveness as an Apple Board member will be significantly diminished, since he will have to recuse himself from even larger portions of our meetings due to potential conflicts of interest,” said Steve Jobs, Apple's CEO.

FTC Reaction

In response to Google’s announcement about Levinson’s resignation, FTC Chairman Jon Leibowitz said:

“Google, Apple, and Mr. Levinson should be commended for recognizing that overlapping board members between competing companies raise serious antitrust issues and for their willingness to resolve our concerns without the need for litigation.”

Leibowitz added that the agency would “continue to monitor companies that share board members and take enforcement actions where appropriate.”

Government Challenges

The FTC disclosed in August that it was investigating Google/Apple interlocking directorates. Sec. 8 of the Clayton Act conditionally prohibits interlocking directorates in competing corporations. Yet, government challenges to the overlaps are rare.

Over the last few decades, there have only been a handful of government challenges. The most recent Department of Justice complaint alleging a Clayton Act, Sec. 8 violation was filed in 2007. In that case, the government challenged CommScope Inc.'s proposed $2.6 billion acquisition of Andrew Corporation to preserve competition for drop cable.

The government contended that the transaction would have given CommScope the ability to appoint directors to the board of Andes, a substantial competitor, in violation of Sec. 8 of the Clayton Act. The suit was resolved by a consent decree (2008-2 Trade Cases ¶76,247). (See December 10, 2007 entry, Trade Regulation Talk.)

Yesterday’s announcement by the FTC could signal a move toward greater scrutiny of interlocks, however, especially between high profile companies like Google and Apple.

The Google announcement appears here on the company website. Commissioner Leibowitz’s statement is available here.