RICO Claims Based on Franchisor Misrepresentations About Sourcing Reinstated

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

Previously dismissed civil RICO claims against a sandwich shop franchisor were reinstated after the federal district court in Green Bay, Wisconsin, concluded that its original decision was in error.

Originally, the court held that the franchisor's use of express disclaimers and non-reliance clauses in its franchise agreement had fatally undermined the franchisees' allegations of fraudulent misrepresentations and concealment, offenses that provided the basis for plaintiffs' RICO claims. Upon closer examination, however, the court decided that this determination was erroneous.

Overcharging by Approved Vendors

Franchisees argued that the franchisor had knowingly caused them to be overcharged for essential goods and services by demanding kickbacks from approved vendors, even though the franchisor had induced franchisees, through contrary representations, to purchase their franchises.

The court had relied on three Seventh Circuit decisions to support its earlier conclusion that the terms of the franchise agreement were dispositive as a matter of law. That reliance demonstrated "manifest error" because none of the Seventh Circuit decisions had held that the terms of a contract could preclude the possibility of a fraud claim regardless of the facts alleged.

Case law suggested that the degree of sophistication of the plaintiffs should be considered. In this instance, the franchisees' complaint suggested that they had a greater degree of sophistication than the average consumer. However, not even the franchisor contended that the contracts at issue involved equally sophisticated commercial enterprises. These considerations, coupled with the uncertainty in federal law regarding the significance of reliance in a civil RICO claim, made it clear that dismissal of the franchisees' claims was "at best premature."

Negotiations for Benefit of Franchisees

Among other things, the franchisor's Uniform Franchise Offering Circular represented that "we and our affiliates negotiate purchase agreements with suppliers for the benefit of Franchisees." Initially, the term "benefit" was deemed "too vague and indefinite" to support a fraud claim. Upon reconsideration, however, the court concluded that this determination should be left for trial, or at least for a more complete development of the record.

Newly Discovered Evidence

An assertion that reconsideration was warranted by "newly discovered evidence," however, was rejected. According to the court, the evidence characterized as "new" was neither new nor fatal to the court's analysis of the plaintiffs' fraud claims. Nevertheless, the court's original judgment was vacated—because its original decision was based on an erroneous finding of law—and the franchisees' RICO and fraud claims were reinstated.

The April 16 decision in Westerfield v. The Quizno's Franchise Co., LLC appears at CCH RICO Business Disputes Guide ¶11,475.

Ad Program Using State Vehicle Registration Information Did Not Violate Federal Law

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

A company that contracted with the Florida Department of Highway Safety and Motor Vehicles (DMV) to mail notices to Florida vehicle owners, reminding them to renew vehicle registrations, did not violate the federal Driver's Privacy Protection Act (DPPA) by using information in vehicle owners' registration files to sell targeted advertising that was placed in the envelopes along with the renewals, the federal district court in Jacksonville has decided.

The company's advertising program used a "household view" developed from the vehicle identification numbers, the dates of purchase, and the zip codes for all vehicle-owning households in the participating county to determine which ads to place in each particular envelope.

Carrying Out Government Functions

The DPPA generally prohibits any state DMV from disclosing personal information in motor vehicle records to any person or entity. The DPPA permitted, however, disclosure of such information for use by any government agency in carrying out its functions, or any entity acting on behalf of a federal, state, or local agency in carrying out its functions. This exception would include use of the information by the Florida DMV itself, the court said.

Florida law contemplated that a function of state agencies may be to enter into agreements with vendors who place advertising in government publications in exchange for bearing the costs of production or publication or for compensation. One of the DMV's acknowledged functions was mailing out registration notices, and Florida law specifically allowed the DMV to contract with private vendors to financially support this function with advertising included in the renewal mailings.

Nondisclosure of Information to Advertisers

Unlike the conduct by the Florida DMV that was found violative of the DPPA in the case of Collier v. Dickinson (CCH Privacy Law in Marketing ¶60,109), the advertising program in the current case did not involve disclosure of registrants' personal information to the advertisers, the court noted. That information remained in the control of the DMV and the contractor.

Revenue generated from the disclosure of personal information to the contractor was not used for general purposes; rather, it was used to defray the expense of the renewal process. In addition, the program was directly supervised by DMV officials, who approved each advertisement.

Contractor Acting for DMV

The contractor acted "on behalf of" the DMV, for purposes of the exception, in the court's view. The contractor had contracted with the state to completely redesign, repackage, and administer the mailing of the registration renewal reminders—actions that the contractor could not have taken except while acting "on behalf of" the DMV.

“Making Available” Personal Information

Allowing advertisers to use the DMV envelope to send their ads did not constitute "making available" personal information in violation of the DPPA, the court determined. The term "make available" meant that the information is made available for viewing.

Although the contractor manipulated the information in the DMV's files to allow its sponsors to select certain categories of registrants to receive particular ads, the advertisers were not provided with the registrants' names and addresses. The effect on registrants' privacy was no different than if every registrant received the same ad.

The April 9 decision is In re Imagitas, Inc. Driver's Privacy Protection Act Litigation, CCH Privacy Law in Marketing, ¶60,202.

Class of Direct Purchasers of Antidepressant Drug Certified in Monopoly Case

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

The federal district court in Philadelphia has certified a class comprised of approximately 100 direct purchasers of the branded antidepressant Wellbutrin SR to pursue monopoly claims against the drug's maker—GlaxoSmithKline—for delaying the entry of generic competition.

The class contended that GlaxoSmithKline engaged in monopolization through fraudulent assertions to the U.S. Patent and Trademark Office and the filing of frivolous patent infringement actions against generic-drug manufacturers seeking to market less expensive version of the drug. The class sought to recover the overcharges resulting from the challenged conduct.

Class Requirements

The court ruled that the class met the requirements of Federal Rules of Civil Procedure 23(a) and 23(b)(3). Rejected was the drug maker's argument that a conflict existed between the national wholesalers and other class members because the national wholesalers benefited from anticompetitive activity that prevented entry of generic drugs into the market.

Regardless of whether some class members profited from the alleged activity, the controlling question was whether the class members suffered an overcharge. If an overcharge occurred, all class members were entitled to recover, whether or not some plaintiffs experienced a net benefit while others experienced a net loss.

Rule 23(b)(3) required that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.

The direct purchaser plaintiffs maintained that the impact of the alleged conduct could be established by common proof and methodology based on publicly available data as well as information obtained through discovery. They presented a colorable method for establishing common impact, thereby satisfying the predominance inquiry as to class wide impact.

Moreover, the superiority requirement was met because denying certification would require each direct purchaser to file suit individually at the expense of judicial economy and litigation costs for each party and would create a risk of inconsistent results for the defendant and for all direct purchasers.

Assignment of Claims

Certification was not denied, even though the named plaintiffs were assignees of direct purchasers. Antitrust claims could be assigned, and the drug maker's challenge to the validity of an assignment did not require the rejection of one of the class representatives. The merits of the defense would not distract the particular named plaintiff to the detriment of the class itself, according to the court.

The May 2, 2008, decision in In re Wellbutrin SR Antitrust Litigation, Civ. Action No. 04-5525, will appear at 2008-1 CCH Trade Cases ¶76,140.

FTC Modifies Order to Permit Nine West to Set Resale Prices

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

An FTC consent order that prohibited Nine West Group, Inc., a major manufacturer and seller of women's shoes, from engaging in resale price maintenance (RPM) agreements with dealers has been modified by the Commission in light of the 2007 U.S. Supreme Court decision in Leegin Creative Products, Inc. v. PSKS, Inc. (2007-1 CCH Trade Cases ¶75,753).

The Commission granted in part an October 2007 petition from Nine West Footwear Corporation, successor to Nine West Group, Inc., to modify a 2000 FTC order (FTC Complaints and Orders Transfer Binder 1997-2001, ¶24,707). The order banned Nine West, for a 20-year period, from threatening or penalizing dealers that sell below the company’s designated retail prices.

Nine West had argued that the Leegin decision, which reversed a long-standing precedent that held all RPM agreements per se illegal, constituted a dramatic change in antitrust law and required that the order be reexamined. The American Antitrust Institute and a number of state attorneys general had asked the Commission to deny the petition.

State Settlements

In 2000, Nine West also entered into separate settlements with the attorneys general for 56 U.S. states, territories, commonwealths, and possessions. Nine West's settlement with the attorneys general required the company to pay $34 million. The money collected was to be used to fund women's health, educational, vocational, and safety programs. The FTC's action does not affect the state orders.

The modified order regarding In the Matter of Nine West Group Inc., FTC Dkt. C-3937, announced May 6, 2008, will appear in the CCH Trade Regulation Reporter.

The FTC news release and Nine West’s petition appear on the FTC website.

Bill Extending Antitrust Exemption for College Financial Aid Awards Passes House

This posting was written by John Scorza, CCH Washington Correspondent.

Colleges and universities would be allowed to collaborate with each other about administering need-based financial aid without fear of violating antitrust laws, under a bill approved on April 30 by the House.

The bill—the Need-Based Educational Aid Act (H.R. 1777)—would make permanent the current antitrust exemption the institutions now enjoy. The exemption is set to expire on September 30.

For more than 50 years, several private schools have used common practices to assess students’ financial needs and to give the same financial aid awards to students admitted to more than one member of the group of schools.

In the late 1980s, the Antitrust Division challenged the practice. Congress in 1992 passed a temporary antitrust exemption authorizing the schools to continue the practice. Congress has extended that safe harbor on several occasions.

Supporters of the measure say it is necessary to ensure that a greater number of students receive aid.

“The need-based financial aid system makes financial aid available to the broadest number of students solely on the basis of demonstrated need,” remarked Rep. John Conyers (D-Mich.), chairman of the House Judiciary Committee.

“The schools have been concerned that without this exemption, they would be required to compete – through financial aid awards – for the very top students, which could result in a system in which the very top students receive an excess of the available aid while the rest of the applicant pool receives less or none at all,” said Rep. Conyers.

Sponsored by Representative William Delahunt (D-Mass.), the bill was introduced in the House on March 29, reported by the Judiciary Committee on April 10, and passed the House by voice vote on April 30. The legislation was received in the Senate, read twice, and referred to the Judiciary Committee on May 1.

Ninth Circuit Reaffirms Direct Purchaser Rule, Denies Hospital’s Antitrust Standing

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

The U.S. Court of Appeals in San Francisco yesterday refused to create an exception to the direct purchaser rule of Illinois Brick Co. v. Illinois (U.S. Sup. Ct. 1977), 431 U.S. 720, 1977-1 Trade Cases ¶61,460, which generally bars recovery by indirect purchasers in federal antitrust cases.

The court ruled that the plaintiff-appellant—Bamberg County Memorial Hospital & Nursing Center—lacked standing under the doctrine, because it only indirectly purchased from defendant Johnson & Johnson.

Bamberg, which had had a contractual relationship with Johnson & Johnson (J&J), sued the medical supplies manufacturer for impermissibly leveraging its monopoly power in sutures to create a monopoly in the endomechanical products market.

Another hospital and a distributor of medical devices also sued J&J for antitrust violations. The three separate cases had been consolidated by the district court in Santa Ana, California.

Despite Bamberg’s contract with J&J, the hospital ultimately purchased J&J’s sutures (used to close wounds) and endomechanical products (used primarily for minimally invasive laparoscopic surgery) through a separate contract with a third-party distributor. The distributor was the immediate purchaser of sutures and endos from J&J.

Hospital’s Contractual Relationships

Bamberg was a member of a group purchasing organization (GPO), which negotiated agreements with J&J on the hospital’s behalf. Those agreements set the pricing options for the relevant products. Bamberg then executed its own contracts with J&J pursuant to the terms of the GPO agreements.

While the contracts allowed the hospital to order products either directly from J&J or from an authorized distributor, the hospital chose the latter option and selected a distributor that was not owned or otherwise controlled by the manufacturer. The contract with the distributor specified the terms of purchase for the J&J sutures and endos. Thus, the hospital's contract with J&J did not result in the procurement of any goods directly from the manufacturer, the court explained.

The hospital did not pay J&J directly for any goods, and J&J did not ship any goods directly to the hospital. Rather, Bamberg paid the distributor directly for its orders (at a price equal to the price negotiated under the GPO agreement with the manufacturer, plus the distributor’s markup), and the distributor delivered the products to the hospital.

Proposed Exception

That the distributor arguably had a smaller stake in contesting the price did not justify carving out an exception to the direct purchaser rule for a plaintiff who (1) contracted directly with the defendant; (2) challenged the lawfulness of that contract; and (3) was charged artificially high prices by the defendant in its contract.

The court noted that such an exception would still present problems of multiple liability and force courts to engage in complex factual inquiries to determine how damages should be apportioned between parties. Moreover, there were clearly other motivated plaintiffs, distributors and hospitals alike, who unquestionably met the direct purchaser requirement and could serve the role of private attorney general contemplated by Sec. 4 of the Clayton Act.

The April 30, 2008, decision in Delaware Valley Surgical Supply Company, Inc., et al v. Johnson & Johnson, will appear in CCH Trade Cases.

FTC Challenge to Patent-Settlement Tactics Transferred to Federal Court in Pennsylvania

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

A closely-watched Federal Trade Commisison (FTC) case against Cephalon, Inc.—the manufacturer of the prescription wakefulness drug Provigil—for impeding the entry of generic substitutes through patent settlement arrangements has been transferred from the federal district court in Washington, D.C. to the federal district court in the Eastern District of Pennsylvania. Cephalon had requested the transfer to the federal court in Pennsylvania, where putative class actions alleging antitrust claims against the company are pending.

The FTC filed the case in the federal district court in Washington, D.C. in February, challenging Cephalon’s patent settlement agreements with four drug manufacturers that each planned to sell a generic version of Provigil. Cephalon purportedly paid the firms to refrain from selling generic Provigil until 2012.

The agency contended that the conduct denied patients access to lower-cost, generic versions of Provigil and forced consumers and other purchasers to pay hundreds of millions of dollars a year more for Provigil.

Pay-for-Delay Settlement Tactics

The FTC contended that the conduct involved "pay-for-delay" settlement tactics that threatened the Hatch-Waxman statute, which was designed to encourage the speedy introduction of generics. The agency has targeted these types of agreements before; however, two recent federal appellate court decisions have rejected antitrust challenges to a patent holder’s compensation to a generic rival.

FTC Grounds for Opposing Transfer

The FTC opposed transfer on three grounds: (1) that Cephalon failed to make an adequate case for transfer; (2) that the United States was entitled to deference in choosing its forum for antitrust actions; and (3) that transfer to the Eastern District of Pennsylvania would unduly delay the government’s prosecution of the case to the detriment of consumers nationwide.

First, the court addressed the “threshold question”: whether the FTC could have brought this case in the Eastern District of Pennsylvania. Cephalon both resided and transacted business there. Moreover, the operative settlement agreements were all negotiated from that location. Thus the bulk of the events giving rise to this claim occurred within the Eastern District of Pennsylvania, the court decided.

Deference for FTC Choice of Forum

While the FTC’s choice of venue was entitled to heightened respect, there were no meaningful ties between the District of Columbia and the events or parties that gave rise to the action. Therefore, the FTC’s selection of the District of Columbia as its chosen forum was not entitled to substantial deference. The convenience of the parties and witnesses tipped slightly in favor of Cephalon, in the court’s view.

Risk of Inconsistent Judgments

The interest of justice also dictated that transfer was appropriate to avoid subjecting Cephalon to the risk of inconsistent judgments. Absent transfer to the Eastern District of Pennsylvania, Cephalon would have been forced simultaneously to litigate two cases in two different courts arising out of precisely the same conduct.

The court suggested that the FTC might have an interest in inconsistent judgments. Cephalon had argued that the Commission was “openly shopping for a circuit split on the issue of reverse-payment Hatch-Waxman settlements.” Whatever legitimate interest the FTC may have in achieving a circuit split and getting the issue before the U.S. Supreme Court, the court refused to subject one defendant to the burden of inconsistent judgments based on the same events.

The April 28, 2008, decision in FTC v. Cephalon, Inc., Civil Action No. 08-0244 (JDB), will appear in CCH Trade Cases.

FTC Final Order Requires ENH to Conduct Separate Negotiations with MCOs

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

The Federal Trade Commission has issued an order providing rules for how Evanston Northwestern Healthcare Corporation (ENH)—an operator of hospitals in Chicago North Shore suburbs—must negotiate with health insurance companies or managed care organizations. The order comes in light of the Commission’s 2007 determination that ENH’s acquisition of Highland Park Hospital in 2000 violated antitrust laws.

Last year, after determining that the acquisition was anticompetitive, the FTC decided not to require divestiture of Highland Park Hospital—the preferred remedy for an anticompetitive acquisition. Instead, the Commission determined that “in light of unique circumstances” a more appropriate remedy would be to require ENH to establish separate and independent negotiating teams—one for Evanston and Glenbrook Hospitals and another for Highland Park Hospital.

Attorneys for the FTC and ENH offered proposed remedial orders. On April 28, the Commission released its final order, saying that it was attempting to “replicate the competitive conditions that existed prior to ENH’s 2000 acquisition of Highland Park as much as possible, short of divestiture.”

Scope of the Order

In deciding the impact of the consummated merger on competition, the Commission had focused on the market for acute inpatient hospital services. ENH unsuccessfully argued that, based on the Commission’s analysis of competition, the scope of the order should be limited to managed care contracts for inpatient services and exclude contracts for outpatient services.

Noting its broad discretion in fashioning remedies for anticompetitive conduct, the Commission held that payors must be able to negotiate separately with the ENH teams for all hospital services, not just inpatient services. In justifying the scope of the order, the FTC also pointed to the fact that payors usually make contracting decisions based on the price of the entire set of hospital services and do not contract separately for inpatient and outpatient services. The Commission stated that “for payors, the option to negotiate separately with Highland Park solely for inpatient services would be of dubious value.”

When contacted by a payor to negotiate a managed care contract, ENH must set up separate and independent negotiating teams. A payor can decide to contract jointly for both Highland Park and Evanston after notification by ENH of the Commission’s order. Payors have the option to re-open and re-negotiate current contracts.

The Commission excluded government payors, such as Medicare and Medicaid, from the scope of the order. It noted, however, that other governmental entities, such as a municipality procuring health care coverage for its employees as a self-insured entity, would be able to negotiate separately for all hospital services.

Firewall to Prevent Information Sharing

The Commission’s order calls for firewalls to minimize the risk that competitively sensitive information will be shared by the Evanston and Highland Park negotiating teams. Under the order, the Evanston and Highland Park negotiating teams are not permitted to engage in negotiations with payors who opt to negotiate jointly for hospital services at all three ENH hospitals. Thus, ENH can negotiate jointly for services at all three hospitals with payors who opt-out of separate negotiations, but the two teams used to negotiate for Evanston and Highland Park separately may not be involved in the joint negotiations.

Rejected was an ENH proposal that the ENH negotiating team would be responsible for the negotiations with Evanston when payors elected to negotiate for Evanston separate from Highland Park, and for negotiating all services at all ENH hospitals when payors opted to negotiate for all three ENH hospitals together.

Dispute Resolution Mechanism

The order requires the negotiating teams to negotiate with payors in good faith. When the hospitals and those negotiating with them cannot reach agreement, the dispute will be sent to mediation in accordance with the Commercial Mediation Rules of the American Arbitration Association (AAA). If the dispute cannot be settled by mediation, then it will be settled by binding arbitration in accordance with the AAA’s Commercial Arbitration Rules. The Commission will retain jurisdiction over violations or possible violations of the order.

The Commission’s order also requires ENH to give prior notification to the Commission for any future acquisitions of hospitals in the Chicago area. The order terminates in 20 years.

The Commission opinion and order regarding In the Matter of Evanston Northwestern Healthcare Corporation, FTC Dkt. 9315, will be reported in CCH Trade Cases.

Fruit Juice Snacks Packaging Could Deceive “Reasonable Consumer”

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

Purchasers of Gerber “Fruit Juice Snacks” stated California statutory false advertising and unfair competition claims and could plausibly prove that a reasonable consumer would be deceived by the product's packaging, the U.S. Court of Appeals in San Francisco has ruled.

The federal district court in San Diego erred in concluding—without considering any evidence beyond the packaging—that the purchasers failed to state claims, according to the appellate court.

Use of “Fruit Juice,” Images of Fruit

The purchasers, who were parents of small children, brought a class action challenging the use of the words “Fruit Juice” juxtaposed alongside images of fruits such as oranges, peaches, strawberries, and cherries. The purchasers contended that this juxtaposition was deceptive because the product contained no fruit juice from any of the fruits pictured on the packaging and because the only juice contained in the product was white grape juice from concentrate.

The purchasers challenged a statement on the side panel of the packaging describing the product as made “with real fruit juice and other all natural ingredients,” even though the two most prominent ingredients were corn syrup and sugar. The purchasers also challenged another side panel statement, namely, that the product was “one of a variety of nutritious Gerber Graduates foods and juices.” The purchasers challenged Gerber’s decision to label the product a “snack” instead of a “candy,” “sweet,” or a “treat.” Finally, the purchasers alleged that the phrase “naturally flavored” did not comply with applicable type size requirements.

“Reasonable Consumer” Test

Claims under the California false advertising and unfair competition statutes were governed by a “reasonable consumer” test, the appellate court observed. Under that standard, the purchasers had to show that members of the public were likely to be deceived.

The lower court based its decision solely on its own review of an example of the packaging. While the primary evidence in a false advertising case is the advertising itself, California courts had recognized that whether a business practice was deceptive would usually be a question of fact not appropriate for decision without consideration and weighing of evidence from both sides, according to the appellate court.

The April 21, 2008 decision in Williams v. Gerber Products Co. will be reported at CCH Advertising Law Guide ¶62,925.

Airline Chiefs Cite Fuel Costs, International Competition as Major Reasons to Merge

This posting was written by Sarah Borchersen-Keto, CCH Washington Correspondent.

The chief executives of Delta Air Lines and Northwest Airlines, testifying before House and Senate Committees on April 24, cited the unprecedented rise in fuel costs and increased international competition as key factors behind their proposed merger. They also stressed that the proposed merger will not lead to any lessening of competition.

Delta CEO Richard H. Anderson told a Senate Judiciary subcommittee that the combined airline would be able to withstand an 80 percent greater increase in fuel prices than either airline standing alone, and still maintain profitability.

Fuel is “Game-Changer”

“This financial strength and flexibility, much greater than either airline standing alone, will provide additional resources to help weather this unprecedented fuel cost environment and a softening domestic market,” Anderson said. In a hearing earlier in the day before the House Judiciary Committee’s antitrust taskforce Anderson told lawmakers, “oil is a game-changer,” noting that oil prices have driven five carriers into bankruptcy since the start of the year.

Northwest CEO Douglas M. Steenland noted that with fuel prices at record highs, and amid an economic slowdown, “we remain financially challenged.” He noted that high fuel costs have significantly eroded the benefits of restructuring at both airlines.

Heightened International Competition

Delta and Northwest also pointed to heightened international competition, particularly as a result of open skies agreements, as another major reason to merge. Steenland stated that “large, well-funded foreign airlines” have been increasing their service to the U.S. because of open skies. Anderson said the continuation of the open skies policies requires the carriers to combine their networks in order to compete.

Turning to concerns over the competitive nature of a Delta-Northwest merger, Steenland told the hearing that a merged carrier would maintain all of Delta and Northwest’s hubs, serve more domestic and international destinations than any other carrier, while also serving 140 small communities in the U.S. Anderson, meanwhile, stressed the complementary nature of the carriers’ two networks, with Northwest focusing on the upper northwest, and Delta’s domestic focus centering on the east and mountain west.

“Momentous Matter”

At the House antitrust taskforce hearing chairman Rep. John Conyers (D-Mich.) described the proposed merger as a “momentous matter” which required adequate time to consider the many aspects of the deal. “We need to consider where this merger will take us,” Conyers said, adding that if approved it could lead to a “cascade of other mergers.”

While warning of a situation in which three mega-carriers compete with a handful of low-cost carriers, Conyers also acknowledged that if the merger is rejected “we could end up with more carriers in bankruptcy, negating more union contracts, including pension and health care benefits.”

Attorney Ads Not Subject to Heightened Scrutiny Under Colorado Law

This posting was written by Mark Engstrom, Editor of CCH State Unfair Trade Practices Law.

Attorney advertising was not subject to a heightened standard of scrutiny under the Colorado Consumer Protection Act (CPA), the federal district court in Denver has ruled.

Neither case law nor the Colorado rules of professional conduct supported a special standard for attorney advertising. In fact, the Colorado Supreme Court’s decision in Crowe v. Tull (CCH State Unfair Trade Practices Law ¶31,147) stated precisely the opposite: “[the] potential for consumer targeting demonstrates the need for the same protections against deceptive legal advertising as exists for other purveyors of goods and services.”

Moreover, rules governing attorney ethics had no bearing on the question of whether an advertisement was misleading for purposes of the CPA, the court stated. This was one of the major points of Crowe, which explained that “[w]hile safeguarding the public against consumer fraud may at times be an ancillary consequence of the disciplinary system, its rules and remedies are not tailored to that specific purpose.”

If the ethics rules warranted a heightened CPA standard for attorney advertising, the Crowe court would have said so when it considered the effect of the ethics rule at issue, the court observed.

In this instance, the plaintiffs (clients of the defendant attorney) had not—and could not have—alleged that the representations at issue were factually unsubstantiated. Claims that the attorney would “work hard to get clients every dollar (clients) deserve” were statements of intent or opinion, not statements of verifiable fact, the court concluded.

Accordingly, the plaintffs’ motion for reconsideration of the summary rejection of their CPA claim was denied.

The April 3 decision, Pappas v. Frank Azar & Associates, P.C., will appear in the CCH State Unfair Trade Practices Law.

False Ad Suit Against Poultry Producer Not Barred by USDA Label Approval

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

Advertising by Tyson Foods that its chicken was “Raised Without Antibiotics that impact antibiotic resistance in humans” could violate the Lanham Act’s false advertising prohibition, even though the U.S. Department of Agriculture approved Tyson’s use of the phrase on labels, the federal district court in Baltimore has ruled.

Competitors Sanderson Farms and Perdue Farms sued Tyson for nationally advertising its chicken as “Raised Without Antibiotics” by means of television commercials, radio spots, print ads, billboards, posters and other media. In addition, Tyson advertised several forms of the qualified claim that its chicken was “Raised Without Antibiotics that impact antibiotic resistance in humans.”

The competitors alleged that Tyson’s chicken feed contained “ionophores”—molecules that kill microorganisms—and that ionophores are antibiotics.

“Raised Without Antibiotics”

The Food Safety and Inspection Service of the USDA originally approved Tyson’s use of a “Raised Without Antibiotics” label. FSIS subsequently revoked that approval and specifically stated that ionophores are antibiotics. FSIS informed Tyson that it could no longer use a product label claiming that its chicken was “Raised Without Antibiotics.” Subsequently, the label was qualified to read “Raised Without Antibiotics that impact antibiotic resistance in humans.”

The competitors clearly stated a claim upon which relief could be granted by asserting that the unqualified advertising claim “Raised Without Antibiotics” was literally false, the court held. Without current USDA approval for its label, Tyson could not rely on the USDA’s former, briefly held position as a defense.

Qualified Ad Claim

The competitors also could pursue their suit on the ground that Tyson’s use of the qualifying phrase—“that impact antibiotic resistance in humans”—was ineffective at curing the literal falsity of the root claim—“Raised Without Antibiotics,” the court determined.

The competitors asserted that Tyson’s non-label advertisements containing the qualified claim were false or misleading to the consumer public despite the fact that the USDA had determined that the qualified claim was not “false or misleading” under the Poultry Products Inspection Act. While FSIS’s determination involved a highly technical and scientific review of the proposed label language, it did not involve a review of whether the language was misleading to the consumer when combined with images and promotional slogans, the court observed.

Consumer Survey

The competitors submitted a 600-participant survey to show that Tyson’s qualifying language had no demonstrable consumer impact. The survey buttressed the allegation that Tyson’s qualified claim meant something different to the consumer public, when viewed as part Tyson’s advertisements, than it meant to the experts and scientists at the USDA during the label approval process.

A non-label false advertising claim brought under the Lanham Act was not precluded even though the advertising phrase at issue was approved for use on labels by the USDA, the court concluded. The opposite conclusion would extend USDA expertise into an area—advertising—that the agency had no congressional authority to enter, while at the same time significantly curtailing the congressional protections explicitly accorded to “persons engaged in . . . commerce” under the Lanham Act, the court said.

The April 15, 2008 decision in Sanderson Farms, Inc. v. Tyson Foods, Inc. will be reported in CCH Trade Regulation Reports and CCH Advertising Law Guide.

FTC Determination that Rambus Abused Standard-Setting Process Vacated

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

The Federal Trade Commission failed to demonstrate that Rambus Inc.’s actions before a standard setting organization (SSO) amounted to exclusionary conduct “under settled principles of antitrust law,” the U.S. Court of Appeals in Washington, D.C. has decided. Thus, the agency did not prove that the licensor of computer memory technologies unlawfully acquired its monopoly power in the relevant markets for four technologies that had been incorporated into industry standards for dynamic random access memory (DRAM) chips.

The court set aside a Commission opinion finding Rambus engaged in monopolistic conduct in violation of the FTC Act (2006-2 Trade Cases ¶75,364), as well as the Commission’s remedy order (2007-1 Trade Cases ¶75,585).

The FTC determined that Rambus, while participating in the standard-setting process in the 1990s, deceptively failed to disclose to the SSO the patent interests it held in the four DRAM technologies. According to the agency, Rambus’s deceptive conduct before the SSO significantly contributed to its acquisition of monopoly power.

Anticompetitive Effect

“Deceptive conduct—like any other kind—must have an anticompetitive effect in order to form the basis of a monopolization claim,” the court explained. Even if Rambus’s conduct was deceptive, the Commission did not demonstrate that the company inflicted any harm on competition.

The court said that the Commission’s conclusion that Rambus’s conduct was exclusionary depended on a syllogism: “Rambus avoided one of two outcomes by not disclosing its patent interests; the avoidance of either of those outcomes was anticompetitive; therefore Rambus’s nondisclosure was anticompetitive.”

The Commission determined that if Rambus fully disclosed its intellectual property, then the SSO either would have excluded Rambus’s patented technologies from its DRAM
standards or would have demanded assurances of “reasonable and nondiscriminatory” license fees (RAND assurances), the court explained. The Commission did not, however, determine that one or the other of these two possible outcomes was more likely.

Assuming that avoidance of the first of these possible outcomes was anticompetitive, that Rambus’s more complete disclosure would have caused the SSO to adopt a different standard, then Rambus’s failure to disclose harmed competition. But there was insufficient evidence that the SSO would have standardized other technologies had it known the full scope of Rambus’s intellectual property.

The Commission’s syllogism could not survive because the loss of a RAND commitment from Rambus would not harm competition. The SSO’s loss of an opportunity to seek favorable licensing terms was not an antitrust harm, in the court’s view.

Remand

In ordering remand to the Commission for further proceedings, the court questioned whether there was sufficient evidence that Rambus engaged in deceptive conduct at all. It expressed “serious concerns about strength of the evidence relied on to support some of the Commission’s crucial findings regarding the scope of [the SSO’s] patent disclosure policies and Rambus’s alleged violation of those policies.” The court described the Commission’s findings as “murky” and pointed to instance where the Commission took an “aggressive interpretation of rather weak evidence.”

Rambus Statement

Rambus issued an April 22 statement that it was “very pleased with this decision.” The company said that “the decision, especially combined with the jury verdict in March reaching the same conclusion, should put the issue to rest and allow us to focus on running our business.”

In a March 26 press release, Rambus announced that a jury in the federal district court in San Jose, California, found in its favor in an antitrust case brought by memory manufacturers Hynix Semiconductor, Micron Technologies, and Nanya Technology
Corporation. The jury determined that Rambus acted properly while a member of the standard-setting organization, according to Rambus.

The April 22, 2008, decision in Rambus, Inc. v. Federal Trade Commission, No. 07-1086, will appear in CCH Trade Regulation Reports.

Japan Airlines Agrees to Plead Guilty to Fixing Cargo Shipping Prices

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

Japan Airlines International Co. Ltd. has joined the list of other global air carriers—including British Airways Plc., Korean Air Lines, and Quantas Airways Limited—that have admitted to participating in a conspiracy to fix rates for international cargo shipments.

According to a one-count information, filed in the federal district court in Washington, D.C., Japan Airlines International (JAL) engaged in a conspiracy to eliminate competition by fixing the rates for international shipments of cargo to and from the United States and elsewhere between April 2000 and February 2006.

During the time period covered by the felony charge, JAL was the largest carrier of cargo between the United States and Japan and earned almost $2 billion from its cargo flights to and from the United States, it was alleged.

“This pice-fixing conspiracy inflicted a heavy toll on American businesses and consumers,” said Thomas O. Barnett, Assistant Attorney General in charge of the Department of Justice Antitrust Division. “Japan Airlines is the fourth carrier to admit to its involvement in this cartel and to agree to cooperate with an ongoing investigation.”

Last August, British Airways and Korean Air Lines pleaded guilty to similar charges and were each fined $300million. Earlier this year, Quantas pleaded guilty and was sentenced to pay a $61 million criminal fine for its role in the price fixing conspiracy.

The U.S. antritrust case is Japan Airlines International Co. Ltd., U.S. No. 4932, CCH Trade Regulation Reports ¶45,108. Further details appear here on the Department of Justice website.

Antitrust Enforcers Announce International Competition Network’s Recommended Practices

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

The heads of the federal antitrust agencies were in Kyoto, Japan, earlier this week, promoting antitrust convergence at the seventh annual International Competition Network (ICN) Conference. The ICN conference, hosted by the Japan Fair Trade Commission, was held on April 14-16, 2008.

More than 500 delegates and competition experts participated, representing more than 70 antitrust agencies from around the world, along with competition experts from international organizations and the legal, business, consumer, and academic communities.

The ICN adopted new “Recommended Practices” to improve merger analysis and assessment of unilateral conduct, according to the agencies. In addition, the ICN’s cartel working group issued a report stressing the importance of effective cartel settlement systems.

Views of U.S. Enforcers

“As competition laws continue to take root throughout the world, the international competition community faces an increasing challenge to ensure that competition agencies can develop and maintain the institutional capacity to be effective champions for consumers,” said FTC Chairman William E. Kovacic.

“The Kyoto Conference took us another big step on the long journey to building effective, pro-consumer competition agencies,” Kovacic noted. “Through its Competition Policy Implementation Working Group and other projects, the ICN is playing a leading role in bringing agencies together to share their experience to strengthen our mutual goal of combating anticompetitive practices and improving the lives of our consumers.”

Thomas O. Barnett, Assistant Attorney General in charge of the Department of Justice Antitrust Division, identified the ICN as “a leading forum for identifying best practices among antitrust enforcement agencies and promoting international convergence in antitrust enforcement." He added that the “Recommended Practices adopted at this conference are an important milestone in the ICN's efforts to develop consensus in the substantive analysis of mergers and unilateral conduct."

Merger Analysis Recommended Practices

ICN members adopted three new Recommended Practices for Merger Analysis. The new Recommended Practices for merger analysis included the concepts that:

(1) merger review analysis should provide a comprehensive framework for assessing whether a merger is likely to harm competition significantly;

(2) market shares and measures of market concentration play an important role in merger analysis but generally are not conclusive indicators that a merger is likely to harm competition significantly; and

(3) assessment of firm entry and/or expansion by existing competitors should be an integral part of the analysis of the competitive effects of a merger.

Unilateral Conduct Recommended Practices

In addition, ICN members adopted a set of Recommended Practices for review of unilateral conduct. The Recommended Practices provide that a firm should not be found to possess substantial market power without a comprehensive consideration of factors affecting competitive conditions in the market. The Recommended Practices further provide that agencies should use a sound analytical framework, firmly grounded in economic principles, in determining whether a firm has substantial market power, and that assessment of entry and expansion conditions should be an integral part of the analysis.

Announcements by the Federal Trade Commission and the Department of Justice appear here and here, respectively. Further information about the ICN can be found at the organization’s website: http://www.internationalcompetitionnetwork.org/

Nondisclosure of Franchisor Supplier Contracts Was Not Fraudulent Inducement of Franchisees

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

A sandwich shop franchisor's failure to disclose facts about its contracts with franchise suppliers did not constitute fraud or fraud by omission in inducing a putative class of Illinois sandwich shop franchisees to enter into franchise agreements, the federal district court in Chicago has decided.

There was no tenable argument that the franchisor had a duty to disclose certain facts about its contracts with suppliers or that the franchisees reasonably relied upon alleged misrepresentations and omissions made by the franchisor. Thus, the franchisees’ claims for fraudulent inducement and for violation of the federal RICO statute were dismissed.

Duty to Disclose

The franchisees alleged that the franchisor committed fraud by, among other things, failing to disclose certain key facts to them about its contracts with franchise suppliers. However, absent a duty to disclose, the franchisor could not be held liable for a failure to make disclosures. No duty to disclose existed in the present circumstances because it was well established under Illinois law that parties to a contract, including franchise contracts, did not owe a fiduciary duty to one another, the court held.

Specifically, the franchisees claimed: (1) that the franchisor required its franchisees to pay prices it knew to be higher than those the franchisees could get from third-party vendors for goods of equal or better quality; and (2) that the prices the franchisees paid were deliberately inflated by kickbacks from approved vendors to the franchisor. This conduct directly contradicted representations made in the franchisor's Uniform Franchise Offering Circular (UFOC) that contracts with suppliers would be made for the benefit of franchisees, according to the franchisees.

Importantly, however, the UFOC did not say that the supplier contracts would be made for the sole benefit of franchisees, the court reasoned. Instead, the agreement explicitly warned the franchisees that the franchisor could “receive payments from suppliers on account of such suppliers' dealings with Franchisee and other franchisees and may use all amounts so received without restriction and for any purpose Franchisor and its affiliates deem appropriate.”

The UFOC similarly warned the franchisees that the franchisor had the right to receive payments from suppliers. In light of such explicit contractual provisions, the court reached the same conclusion reached in an almost identical case (Westerfield v. Quizno’s Franchise Co., Inc., CCH Business Franchise Guide ¶13,734)—that it would be unreasonable for the franchisees to have assumed that the franchisor would not negotiate contracts with suppliers that would benefit the franchisor. Thus, even if the franchisor owed the franchisees a duty to disclose, the provisions in the franchise agreement and the UFOC clearly satisfied that duty, according to the court.

Contractual Disclaimers

The franchisees’ claims that the franchisor fraudulently induced them to enter into their franchise agreements through misrepresentations and omissions were without merit because, faced with unambiguous disclaimers and non-reliance clauses in the UFOC and franchise agreement, the franchisees could not have reasonably relied on any oral statements concerning likely profits and expenses, the court ruled.

The franchisees’ suggestion that the franchise agreement was unconscionable—and therefore could not be used to defeat their claims—was rejected. In assessing whether a contractual provision should be disregarded as unconscionable, Illinois courts looked to the circumstances at the time of the contract's formation, including the relative bargaining positions of the parties and whether the provision's operation would result in unfair surprise.

However, none of the clauses contained within the UFOC or the franchise agreement could be seen as creating an unfair surprise, the court determined. Before signing the franchise agreement, each franchisee was provided with the UFOC, which clearly disclosed the vendor rebates. Nor were the franchisees vulnerable consumers or helpless workers. Rather, they were business people who bought a franchise.

The decision is March 31, 2008 decision in Siemer v. Quizno's Franchise Co., Inc. appears at CCH Business Franchise Guide ¶13,869.

Congress Pledges to Vigorously Scrutinize Delta/Northwest Merger Proposal

This posting was written by Sarah Borchersen-Keto, CCH Washington Correspondent.

Congressional leaders pledged to vigorously scrutinize the proposed merger of Delta Air Lines and Northwest Airlines after the two carriers announced they plan to merge into a combined carrier worth $17.7 billion.

While Congress does not have the authority to halt a merger, it can force the Department of Transportation (DOT) and the Department of Justice (DOJ) to consider issues and evidence before making a final decision on the deal.

DOJ spokeswoman Gina Talamona said the department “is interested in examining the proposed transaction. The Antitrust Division will look at the competitive effects of the transaction and how the merger would affect consumers.”

Plans for Hearings

In an April 15 statement, Senate Antitrust Judiciary Subcommittee Chairman Herb H. Kohl (D-Wis.) said he plans to hold hearings to carefully examine the impact of the proposal, and possible further airline consolidation, on competition and consumers. While acknowledging the financial pressures on airlines, Senator Kohl said it was “vital” that consolidation does not lead to fare increases and service reductions.

Rep. James L. Oberstar (D-Minn.), Chairman of the House Transportation and Infrastructure Committee, described the merger proposal as “probably the worst development” in aviation history in the aftermath of deregulation. The merger would create a “globe-straddling mega-carrier” that would likely result in a further “cascade of mergers.” Rep. Oberstar said his committee will hold hearings on the matter, and will compile a record of factual information that will be presented to the DOJ.

“We will marshal all the forces we can within the Congress—and the communities served by existing carriers—to insist that the department does a very thorough, meticulous, workman-like analysis of this merger proposal,” Oberstar said in an April 15 release.

Route Overlap, Hub Concentration, Service Issues

A joint statement from Oberstar and House Aviation Subcommittee Chairman Jerry F. Costello (D-Ill.) urged the DOJ to focus on route overlap, hub concentration, and service to smaller communities in order to determine any anti-competitive impacts. The DOJ should also consider the potential domino effect of a merger, Oberstar and Costello said.

Meanwhile, House Judiciary Committee Chairman John Conyers (D-Mich.) announced that the committee’s Taskforce on Competition Policy and Antitrust Laws will hold a hearing on “Competition in the Airline Industry” on April 24.

Impact Beyond Costs/Benefits to Airlines

Sen. John D. Rockefeller IV (D-W. Va.), Chairman of the Senate Commerce Subcommittee on Aviation Operations, Safety and Security, called the Delta-Northwest announcement a “watershed moment for the aviation industry,” and said it is “absolutely critical that federal agencies dig down into the details of this merger before signing off on the dotted line.” At the same time, Congress has to make sure that the deal “won’t be measured solely through the costs and benefits to Delta and Northwest,” he said on April 15.

Statement by Airlines

The two carriers said their new airline, to be called Delta, will provide a stable platform for future growth in the face of significant economic pressures from rising fuel costs and intense competition. Small communities will have enhanced access to more destinations, they claimed, while passengers would enjoy greater choice and competitive fares.

In a joint statement, the carriers said that, by combining forces, they would create a global U.S. flag carrier strongly positioned to compete with foreign airlines that are continuing to increase service to the U.S.

How to Value a Franchise Depends on Why You’re Valuing It

This posting was written by Bruce S. Schaeffer of Franchise Valuations, Ltd., co-author of CCH Franchise Regulation and Damages.

Valuation of a franchise is an issue in many franchise disputes. It is calculated in several different ways, but usually is defined as what a hypothetical buyer would pay for it.

In such situations, an expert's valuation of a franchise generally takes into account many things such as the balance sheet, the cash flow, license rights, and the covenants and other restrictions on transfer placed on franchises such as the right of first refusal.

Business Valuation Concepts

Generally, the major terms used in business valuations are “fair market value,” which is a legal term, and “fair value,” which is an accounting term and both generally mean the same thing.

"Fair market value" is a term of art which has been the subject of court decisions in the gift and estate tax area since the 1930s and has developed a formidable body of law to refine its meaning. The basic definition is found in the Internal Revenue Code and in Revenue Ruling 59-60 where the Internal Revenue Service defined "Fair Market Value" as

the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.

The hypothetical buyer and seller are assumed to be able, as well as willing, to trade.

Under this concept, there are three (and really only three) general methods that are acceptable for determining business value. These are—in legal terms—book value, capitalization of earnings, and comparable sales.

Context of Valuation: Divorce

However, in some cases all this theory may be superceded by the question: why are you valuing the franchise? For example, in divorce cases the judge may ignore the concept of “fair market value.”

The recent Tennessee case of Bertuca v. Bertuca is such a situation where the court specifically dismissed the concept of a sale. In that case the husband was the owner of several McDonald’s and the appellate court held the franchises should be valued simply as follows:

Cash Flow (per expert)................................$ 412,663
Capitalized at 12%....................................$ 3,438,858
Add: Current Assets...................................$ 1,016,829
Less: Current Liabilities..............................($ 525,891)
Less: Notes Payable 6/30/2005.....................($ 2,199,028)
Less: Rebuild Note...................................($ 950,000)
[An obligation to refurbish one of the units.]

VALUE....................................................$ 780,768

The husband had appealed the trial court’s ruling as to valuation but the appellate tribunal held:

Mr. Bertuca next complains that the trial court failed to consider the non-marketability of his interest in [the franchises]. Since our determination as to value is based upon the earnings value of the partnership, that value would not be impacted by the lack of marketability of Mr. Bertuca's interest unless it appeared from the record that his needs or situation were such that a sale of his interest would be necessary or desirable. The trial court very carefully drafted its ruling in the case allowing Mr. Bertuca to pay the amount awarded over time so that he would not [*21] have to sell his partnership interest in order to satisfy the award. Since the partnership indebtedness is serviced by the income derived from the business and will be paid in seven years, the value of the business significantly increases with time and we are satisfied it is in Mr. Bertuca's best interest to maintain his interest in the partnership. There is no indication in the record that Mr. Bertuca has any intention of selling his interest in [the franchises]. Thus the value of the business is not affected by the lack of marketability and discounting the value for non-marketability in such a situation would be improper. Anderson, 2006Tenn. App. LEXIS 592, 2006 WL 2535393, at*4.

And the court went on to add:

Mr. Bertuca makes a similar argument with regard to the trial court's failure to reduce the value due to the buy-sell agreement applicable to his ninety percent partnership interest. He correctly points out that a trial court should consider such an agreement when determining the value of a business. See, Harmon v. Harmon, No. W1998-00841-COA-R3-CV, 2000 Tenn. App. LEXIS 137, 2000 WL 286718, at *9-10 (Tenn.Ct.App. March 2, 2000). As with Mr. Bertuca's lack of marketability argument, such a provision only affects the value if he plans to sell his interest [*22] in the partnership and the record is devoid of any suggestion that he intends to do so. The buy-sell provision, therefore, does not affect the value of his interest in the partnership determined on a value of earnings basis.

So much for the concept of “fair market value” in divorce proceedings! It appears that if there is to be no sale, some courts will not use a hypothetical sale as a basis for valuation.

Bertuca v. Bertuca, 2007 Tenn. App. LEXIS 690, (filed November 14, 2007) will appear in the CCH Business Franchise Guide.This decision was provided by David Beyer, Esq. of DLA Piper, for which the author expresses special gratitude.

Additional information on franchise valuation issues appears in CCH Franchise Regulation and Damages by Byron E. Fox and Bruce S. Schaeffer.

Federal Trade Commission Testimony Supports Proposed 2008 Reauthorization Act

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

All four current FTC commissioners testified before the Senate Commerce Committee on April 8, discussing a proposal to reauthorize the agency for the next seven years. The Commission generally supports the proposed “Federal Trade Commission Reauthorization Act of 2008” (S. 2831), according to the prepared congressional testimony.

FTC Chairman William E. Kovacic began by telling the committee that the agency “welcome[d] and encourage[d] [Congressional] efforts to continue to see that the agency [was] put on a footing that permits it to deliver effective competition and consumer protection programs.”

He was encouraged by the legislation's efforts to increase agency funding and its long-range approach. The bill would provide Fiscal Year 2009 funding at $264 million and would increase the budget by 10 percent per year for the next seven years.

Authority to Seek Civil Penalties

The Commission testimony supported provisions in the proposed legislation that would enable the agency to seek civil penalties for knowing violations of Section 5 of the FTC Act. The Commission reiterated its support for new authority to seek civil penalties in areas where its existing remedies are insufficient to achieve the law enforcement goal of deterrence, such as spyware, data security, and telephone records pretexting.

In addition, the FTC supported the bill's grant of authority to litigate its own civil penalty cases. Currently, the agency is required to refer civil penalty cases to the Department of Justice.

Commissioner Jon Leibowitz reported that the FTC “unequivocally supports” Section 7 of the proposed 2008 FTC Reauthorization Act, which would give the FTC the ability to challenge practices that aid or abet violations of the FTC Act.

“Making it easier for the Commission to challenge those who provide assistance to others who are violating Section 5 of the FTC Act could help the agency attack the infrastructure that supports Internet fraud,” according to Commissioner Leibowitz’s testimony.

Repeal of Common Carrier Exemption

The Commission testified in favor of the bill's proposed repeal of the telecommunications common carrier exemption. This “outdated” exemption bars the FTC from reaching certain conduct by telecommunications companies, according to the agency. Its repeal would allow the FTC to protect consumers who are dealing with unfair or deceptive practices in consumer billing and advertising by phone companies and wireless service providers.

Extension of Jurisdiction over Nonprofits

Currently, the FTC’s jurisdiction over nonprofits is limited by the definition of “corporation” in the FTC Act. The Commission supports the bill's efforts to extend its jurisdiction to certain nonprofit entities, according to the testimony. Section 6 of the proposed 2008 FTC Reauthorization Act would reach nonprofit entities that have tax-exempt status under Section 501(c)(3) of the Internal Revenue Code.

The Commission said that it would benefit from broadening this provision to cover certain other nonprofits, such as Section 501(c)(6) trade associations.

Rulemaking Proceedings

The proposed FTC reauthorization bill would allow the FTC to conduct rulemaking on consumer protection issues under the streamlined rulemaking procedures of Section 553of the Administrative Procedures Act (APA), which are generally available to federal agencies. APA procedures would be much less time-consuming than procedures under the agency's current Magnuson-Moss authority.

In light of the issues in the subprime mortgage lending industry, “the FTC believes that it should have the authority to use APA procedures to promulgate rules whenever the banking agencies and National Credit Union Administration commence rulemaking under the FTC Act.”

Noting differing views among the commissioners on the subject of adopting APA rulemaking on a notice-and-comment basis, Commissioner J. Thomas Rosch expressed his personal view that “APA rulemaking authority for consumer protection matters would greatly increase the Commission's effectiveness in dealing with certain types of practices.” Rosch pointed to the subprime lending area as an example.

Recent Enforcement Efforts

In addition to addressing the proposal introduced by Senator Byron Dorgan (North Dakota), the prepared testimony recalled some FTC law enforcement actions since September, when the Commission last provided reauthorization testimony. Commissioner Pamela Jones Harbour covered the enforcement highlights in her oral statement.

The text of the prepared testimony appears here on the FTC website and will be reported at CCH Trade Regulation Reports ¶50,228. A videocast of the testimony appears here at the Senate website.