High Court Considers Proper Standard in Predatory Buying Case

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

In oral arguments November 28, the U.S. Supreme Court considered the question of what standard a plaintiff alleging predatory buying must meet to prevail under Section 2 of the Sherman Act.

The case involves Ross-Simmons Hardwood Lumber Co., a pioneer in the alder lumber industry that went out of business in 2001, and lumber products giant Weyerhaeuser Co. Ross-Simmons sued Weyerhaeuser, claiming Weyerhaeuser purchased more logs than it needed at an inflated price in an effort to eliminate competition. Ross-Simmons prevailed in a jury trial of its monopolization and attempted monopolization claims and was awarded nearly $79 million in damages.

On appeal, the Ninth Circuit (2005-1 TRADE CASES ¶74,817), upheld the jury verdict, ruling that the standard for a predatory pricing claim articulated by the Supreme Court in Brooke Group Ltd. v. Brown & Williams Tobacco Corp. (1993-1 TRADE CASES ¶70,277) did not apply to a case that alleged “predatory bidding” in violation of Section 2 of the Sherman Act.

The Brooke Group decision maintained that a plaintiff asserting predatory pricing must prove that the defendant suffered a short-term loss from the pricing and had a dangerous probability of recouping its loss through “supracompetitive” pricing after the elimination of competition. The appeals court upheld instructions that allowed a jury to find a Section 2 violation based on factors such as “fairness” and “necessity.”

The issue before the Supreme Court revolves around the jury instructions. The jury was told it could find that an anticompetitive act occurred if Weyerhaeuser purchased more logs “than it needed” or paid a higher price “than necessary” to prevent competitors from obtaining the logs they needed at a fair price.

Representing Weyerhaeuser, Andrew J. Pincus said that the question was “whether the standards adopted in Brooke Group to determine whether a seller’s prices violate the antitrust laws because they are too low also should apply in assessing the claim that the buyer’s purchase prices are illegally high.”

Weyerhaeuser maintains that the proper standard is the stricter one established by the court in Brooke Group. A predatory pricing case, Brooke Group would require Ross-Simmons to show that Weyerhaeuser paid so much for the raw materials that (1) the price at which it sold its products did not cover its costs and (2) the company had a “dangerous probability” of recouping its losses. Weyerhaeuser claims the stricter standard is a much clearer test.

Chief Justice John G. Roberts Jr. appeared hesitant to apply the Brooke Group standard to this case. The alleged anticompetitive activity in Brooke Group was low pricing, which benefits consumers. But that situation was not present in this case, he said. “So isn’t that a reason not to think that we should apply to Brooke Group test to this situation?” he asked.

Pincus responded that when competition drives up the prices of logs, the sellers of those logs benefit. Consumers too may benefit, he said, because of the expectation that a buyer bidding more can make more efficient use of the product and generate more output, ultimately resulting in lower prices for consumers. Weyerhaeuser, he said, had achieved such efficiencies. Pincus noted that the court in past cases has said that “price competition generally, a free and open price competition, will produce lower prices and better goods and services.”

Arguing for the federal government, in support of Weyerhaeuser, Kannon K. Shanmugam urged the court to adopt the Brooke Group test. Shanmugam said a claim of predatory bidding is the “flip side” of a claim of predatory pricing, so the Brooke Group standard for predatory pricing claims should apply to predatory bidding claims as well.

On behalf of Ross-Simmons, Michael E. Haglund countered that the Brooke Group test is not the proper standard in predatory buying cases. It is not justified “because raising input prices, unlike cutting output prices, is moving prices in the wrong direction for consumers,” Haglund told the court.

While acknowledging that the jury instructions may not have been perfect, Haglund said “the instructions on the whole” provided sufficient guidance to the jury. To improve the instructions, Haglund suggested the following language: “Paid a higher price than necessary to move the log market to higher levels than otherwise would have prevailed in order to injure competition.”

The case is Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co. Inc., No. 05-381, cert. granted June 26, 2006. A transcript of the oral argument appears at:

http://www.supremecourtus.gov/oral_arguments/
argument_transcripts/05-381.pdf

Rest Easy, McDonald’s Isn’t Trying to Stop You from Making a Sandwich

A story about how McDonald’s Corp. is seeking a patent on the “method and apparatus for making a sandwich” seems to have caught the fancy of newspapers, blogs, and legal listservs in the U.S. and England.

The item has prompted overly-broad statements like “McDonald’s wants to own the right to how a sandwich is made” (U.K Metro) and “The next time you’re stacking a pastrami hero, better make sure McDonald’s isn’t watching—they’re [sic] trying to claim rights on how to make a sandwich” (The New York Post).

The Wall Street Journal’s “Law Blog” wasn’t above poking fun at McDonald’s U.S. and British patent application and its claims relating to the “simultaneous toasting of a bread component” and the insertion of condiments into the sandwich with a “sandwich delivery tool.”

Even members of the ABA Forum on Franchising’s listserv took the occasion to bemoan the expansion of “business method patents,” the examination backlog at the Patent and Trademark Office, and the lack of proper training of patent examiners.

This is all good fun, but a close reading of the Abstract of the 55-page patent application indicates that McDonald’s patent claims are not that unusual. The claimed invention relates to (1) “the pre-assembly of sandwich components and simultaneous preparation of different parts of the same sandwich” and (2) a sandwich assembly tool “useful in the preparation of a made-to-order sandwich.” The tool has one or two cavities for garnish. Under the claimed method, the “bread component” is placed over the tool, and the tool and bread component together are inverted to deposit the sandwich garnish onto the bread component. The strangely-shaped tool is described in great detail.

Methods for making a variety of sandwiches—from subs and deli-style sandwiches to “cocktail sandwiches” and hamburgers—are expressed in painstakingly-specific terms.

Despite media reports, McDonald’s is not intending to prevent anyone from using previous methods for making sandwiches, the franchisor told Metro. Such a patent would not retroactively apply to previous methods in any event.

“They might have a novel device, but it could be quite easy for someone to make a sandwich in a similar way without infringing their claims,” a spokesman for the British Patent Office pointed out.

Supreme Court Hears Arguments in Antitrust Pleading Case

This posting was written by Jeffrey May, editor of CCH Trade Regulation Reports, and John W. Arden.

The U.S. Supreme Court heard oral argument November 27 on the pleading requirements in an antitrust case. The Court is reviewing Bell Atlantic Corp. v. Twombley, a decision of the U.S. Court of Appeals in New York City (2005-2 TRADE CASES ¶74,951) that the customers of a telecommunications company did not have to plead so-called “plus factors” to sufficiently allege that telecommunications providers conspired to refrain from competing against one another. In vacating the dismissal of the conspiracy claim, the appeals court held that a heightened pleading standard should not have been applied.

The customers had brought a putative class action, alleging that the Incumbent Local Exchange Carriers—Bell Atlantic Corp., Bellsouth Corp., QWEST Communications International, Inc., SBS Communications, Inc., and Verizon Communications, Inc.—conspired to exclude Competitive Local Exchange Carriers and to refrain from competing against one another in their respective geographic markets for local telephone and high-speed Internet services.

Arguing for the petitioning telecommunications companies, Michael Kellogg of Kellogg, Huber, Hansen, Todd & Evans in Washington, D.C. told the court that it was “faced with the question of what a plaintiff needs to plead in order to state a claim and show an entitlement to relief under the antitrust laws.” Kellogg argued that an agreement could not be inferred from allegations of parallel conduct and that it was insufficient to “merely to recite a legal conclusion, and claim an entitlement to relief therefore.”

As a matter of substantive antitrust law, there is a “range of permissible inferences that can be drawn from parallel conduct,” he said. “And if all you have is parallel conduct that’s consistent, on one hand, with conspiracy, or on the other hand, with ordinary business judgment, you cannot draw an inference of the sort that the plaintiffs depend upon in this case.”

Assistant Attorney General Thomas O. Barnett of the Department of Justice, Antitrust Division, argued on behalf of the government in support of the petitioners. The antitrust chief said that a “fundamental concern of the United States is that the decision of the Second Circuit can be read to hold that a Section 1 Sherman Act complaint will survive a motion to dismiss merely by alleging parallel action or inaction in attaching the bare assertion of an agreement. Such a result fails to appreciate that parallel action or inaction is ubiquitous in our economy and often reflects beneficial competitive forces.”

During argument for the complaining customers by J. Douglas Richards of Milberg Weiss Bershad Hynes & Lerach LLP in New York City, Chief Justice Roberts asked whether there was any allegation of an agreement apart from the parallel conduct. Richards maintained that the “leading plus factor” is “action that would have been against the self-interest of the conspirators in the absence of a conspiracy.” In this case, the complaint alleges “that the conduct of not entering into one another’s territories and competing among the [Incumbent Local Exchange Carriers] as a [Competitive Local Exchange Carriers]” was contrary to the defendants’ self-interest. Justice Breyer suggested that the complaining customers’ interpretation of the antitrust pleading requirements could require a “major restructuring of the economy.”

Richards further contended that the defending telecommunications companies were expected to compete, in light of the Telecommunications Act of 1996. Their decision not to compete created an inference of conspiracy, he maintained. Justice Scalia responded by saying that, based on his past experience in the field of telecommunications, the customers’ case was very weak if it were based on what Congress expected to happen when it passed the Act.

A transcript of the oral arguments appears at:

http://www.supremecourtus.gov/oral_arguments/
argument_transcripts/05-1126.pdf

“Medspa” Explosion a Headache for Some Franchisees

This posting was written by Peter Reap, editor of the CCH Business Franchise Guide.

In the past three years, the number of “medspas” (businesses offering medical treatments in a spa environment) has more than tripled to about 1,500, according to Rhonda L. Rundle, writing in the Wall Street Journal. However, the fast-growing industry has turned into a financial and legal pain for some unsuspecting medspa franchisees

Medspas offer services such as laser hair removal and botox injections in an upscale, comfortable environment very different from a doctor’s office. Licensing rules vary, but many states do not specifically regulate medical facilities that provide relatively routine treatments.

Two years after opening his medspa franchise in St. Louis, Jeff Nebot, a franchisee of Sona Medspa International, Inc., thought he had struck gold when his business’ annual revenue hit $3 million. Soon thereafter, however, Nebot realized that his revenue lagged behind his payouts for marketing staff and franchise fees. The gold was gone for good when Mr. Nebot sold the assets of his business for only $2 last April, the Journal reports.

Nebot lays the bulk of the blame on his franchisor. He complains that the marketing, advertising, and support services provided by the franchisor in exchange for roughly one-fourth of his revenue were inadequate, forcing him to develop his own marketing. He also says that he was misled as to the efficacy of Sona’s laser hair removal treatments.

Several of Sona’s franchisees, though not Mr. Nebot, are currently in arbitration with the franchisor. The franchisees claim that the franchisor represented a complicated business as a “turnkey operation” and failed to provide adequate support.

Some franchisees of another franchisor—Radiance MedSpa Franchise Group, PLLC—have alleged that their franchisor overestimated revenue and underestimated initial start-up costs in its financial projections. According to the Journal, the president of Radiance, Charles L. Engelmann, recently acknowledged that some franchisees are attempting to get their money back, but also claimed that the number of Radiance businesses was expanding and none of them have closed.

While there is no official tracking of medspa businesses, interviews with industry consultants, franchisees, and others indicates numerous failures, according to Ms. Rungle. Medspas “are coming up like mushrooms and then they are gone,” states Hannelore Leavy, executive director of the International Medical Spa Association. Leavy says that many of the struggling businesses are affiliated with a franchise system that has a flawed business model, which may require that too much of a franchisee’s revenue to go for marketing, among other problems.

The regulatory environment for medspas is changing as states react to complaints about burns and other serious mishaps. In the wake of a recent law change in Florida, some medspas are required to spend an extra $60,000 a year to hire a dermatologist or plastic surgeon to oversee their operations.

Stricter enforcement of existing laws has also begun. In February 2005, the California Corporations Commissioner denied registration of a franchise offering of HealthWest, Inc., a California-based medspa franchisor with approximately 20 franchisees around the country. According to the agency, HealthWest had offered and sold unregistered franchises within California and had “falsely represented” that prospective franchisees could legally own a medspa in the state without a medical background.
http://www.corp.ca.gov/enf/info/dr/05pdf/HealthWest.pdf

Ms. Rungle’s article, “Medspa Boom Has Become A Bust for Some,” appears on page B1 of the Tuesday, November 21, 2006, Wall Street Journal.

Children’s Food Advertising Guidelines Getting Sweet and Sour Reactions

Imagine starting a program promoting the advertising of healthy food and beverage choices among children. Then attract a former director of the FTC Bureau of Consumer Protection to head up the development of the program. After months of study, convince 10 of the largest food and beverage companies to join the self-regulatory program. Sounds all good, right? Not necessarily, say food and consumer advocacy groups.

The new Children’s Food and Beverage Advertising Initiative, announced by the Council of Better Business Bureaus (CBBB) and the National Advertising Review Council (NARC) on November 15, has received decidedly mixed reviews from government and health advocacy goups.

The Initiative is designed to shift the mix of advertising to children to encourage healthier dietary choices and healthy lifestyles, according to the CBBB and the NARC. Ten companies, which account for more than two-thirds of food advertising to children, have publicly committed to follow the initiative’s core principles. These companies—which include McDonald’s, Kraft Foods, General Mills, and Coca-Cola—agreed to:

(1) Devote at least 50% of their advertising directed to children to promoting healthier dietary choices and/or to messages that encourage good nutrition or healthy lifestyles;

(2) Limit products shown in interactive games to healthier dietary choices or incorporate healthy lifestyle messages into the games;

(3) Refrain from advertising food or beverage products in elementary schools;

(4) Refrain from engaging in product placement in editorial and entertainment content; and

(5) Reduce the use of third-party licensed characters in advertising that does not meet the Initiative’s product or messaging criteria.

The Initiative resulted from a review of the Guidelines of the Children’s Advertising Review Unit (CARU), undertaken by NARC and led by Joan Z. (Jodie) Bernstein, former Director of the FTC Bureau of Consumer Protection. The review process brought together more than 40 leading children’s advertisers. In addition to the Initiative, the review produced a revision of the CARU Guidelines to cover (1) advertising that is “unfair” in addition to advertising that is misleading, (2) advertising that obscures the line between editorial content and (3) advertising messages in interactive games. http://www.cbbb.org/initiative/

The Initiative was welcomed by FTC Chairman Deborah Platt Majoras. “I am highly encouraged by the Council of Better Business Bureaus’ initiative on children’s food and beverage advertising, and I commend the Council for taking these important steps,” Majoras said. The new program “shows real promise and I hope will encourage more competition in developing and marketing healthier products that are attractive to kids and their parents.” http://www.ftc.gov/opa/2006/11/majorasstatement.htm


Others have not been so positive. “Any junk food advertiser who feared that a rewrite of the Children’s Advertising Review Unit’s voluntary guidelines would force a significant change in the way companies do business can rest easy,” said Michael F. Jacobson, executive director for the Center for Science in the Public Interest. “While the Council of Better Business Bureaus labored like an elephant, it came forth with a mouse.”

“The industry’s definition of ‘healthy’ includes sugary breakfast cereals, for instance,” he said in a statement posted on the health advocacy group’s website. “If a ‘healthy lifestyle message’ means that Ronald McDonald is pedaling a bike while peddling junk food, that message still does more harm than good. It’s a joke.”

Mr. Jacobson expressed hope that Congress will take a fresh look at the industry’s advertising practices. “In the meantime, junk food marketers should expect more lawsuits—not praise—from health advocates.” http://www.cspinet.org/new/200611141.html

In a November 17 news release, the group lauded the efforts of British regulators, who have recently prohibited junk-food marketers from advertising on programming aimed at kids under 16.

Commercial Alert, a consumer group, agreed with those sentiments. “Self-regulation is just another word for letting the fox regulate the chicken coop, which of course leads to dead chickens,” said Executive Director Gary Ruskin. “Self-regulation has been a key ingredient in the childhood obesity epidemic. It is the problem, not the solution. The childhood obesity epidemic will continue until Congress passes tough new laws against marketing to children. Self-regulation is no substitute.” http://www.commercialalert.org/news/news-releases/2006/11/
food-companies-launch-yet-another-phony-effort-against-childhood-obesity

Senator Tom Harkin (D, Iowa) took a stance somewhere between the FTC and the advocacy groups. “If employed successfully, this could be a good first step,” he said. “But the program leaves companies significant leeway to continue marketing unhealthy foods to kids. And, ultimately, the new initiative is only as good as the enforcement.”

While supporting the effort, Harkin encourage more companies to “go beyond the 50 percent benchmark and use all of their creativity, resources, and marketing practices to help improve the health of our nation’s children,” Harkin said. “Ultimately, Congress will examine this issue closely. As the Institute of Medicine urged in its report last year, government has a responsibility to foster the development and promotion of healthful diets and lifestyles for our kids.” http://harkin.senate.gov/news.cfm?id=265855

Web Publisher Not Liable for Discriminatory Housing Ads Posted by Third Party

This posting was written by Cheryl Montan, editor of CCH Guide to Computer Law.

Publishing company Craigslist was not liable for Fair Housing Act violations resulting from allegedly discriminatory advertisements posted on its website, the federal district court in Chicago has ruled. The Communications Decency Act operated to immunize the publisher from liability for content posted on its website by third parties. (Chicago Lawyers’ Committee for Civil Rights Under the Law, Inc. v. Craigslist, Case No. 06 C 0657, November 14, 2006).

The Chicago Lawyers' Committee for Civil Rights Under Law, Inc. (CLC), a public interest consortium of Chicago law firms, sought to hold Craigslist liable for discriminatory housing advertisements appearing on its website. Craigslist requested dismissal of the suit, arguing that, as an interactive computer service provider, the Communications Decency Act shielded it from liability for the third-party ads. Craigslist operates a website (accessible at “chicago.craigslist.org,” as well as other web addresses), that allows third-party users to post and read notices for, among other things, housing sale or rental opportunities. In a typical month, more than 10 million items of user-supplied information are posted on the Craigslist website.

The Fair Housing Act prohibits discrimination in the sale or rental of housing, including publishing and printing advertisements that discriminate or indicate a preference based on race, color, religion, sex, handicap, familial status, or national origin. 42 U.S.C. § 3604(c). http://www4.law.cornell.edu/uscode/html/uscode42/
usc_sec_42_00003604----000-.html

Courts have held that Section 3604(c) applies to a variety of media, including newspapers and print publishers. CLC contended that Internet publishers like Craigslist should be held to the same standard of liability as print publishers under the Fair Housing Act.

Craigslist asserted that the Communications Decency Act operated to immunize it from liability for content, including housing ads, posted on its website by third parties. The CDA provides that "[n]o provider . . . of an interactive computer service shall be treated as a publisher for information provided by another information content provider." 47 U.S.C. § 230(c)(1).

The court agreed with Craigslist. While the CDA does not grant immunity per se to website operators, it does prohibit causes of action based on the website operator’s status as a publisher. The CLC’s Fair Housing Act cause of action depended on Craigslist’s actions as a publisher of content provided by third parties. Thus, the court dismissed the complaint as barred by the CDA.

Culligan's New Franchise Agreement Reflects "True Partnership"

This posting was written by Peter Reap, editor of CCH Business Franchise Guide.

The new franchise agreement between Culligan International and its water-treatment franchisees could become a model for other franchise systems, according to an article by Richard Gibson in the November 13 issue of The Wall Street Journal. The new agreement features shared commitments, responsibilities, and rewards, a departure from many franchise agreements designed to give the franchisor firm control over the business, Mr. Gibson reports.

Under the revised terms, franchisees who previously had little clout – something common in many franchise systems – now must be consulted on critical changes to the brand and hold some veto power. In addition, the new agreements grant the franchisees exclusive territories, caps on wholesale costs, the right to select a qualified successor, and longer franchise terms of 20 years, among other changes.

The new agreement was negotiated after the private equity firm Clayton, Dubilier & Rice purchased the franchisor in 2004. According to the franchisees, the firm said it was prepared to consider a significantly revised agreement. The goal was to align interests and remove troublesome issues that had strained franchisee relationships with the previous owners. However, the initial draft submitted by the firm contained few of the franchisee’s suggestions.

The franchisee association of approximately 650 members called an emergency meeting in May 2005, during which the franchisees made a fateful decision, Mr. Gibson observes. If they could not persuade their new franchisor to make significant concessions, they would leave the franchise system en masse and found a rival water treatment company of their own. “When they realized we weren’t bluffing, they snapped around pretty fast,” says one of the franchisees involved in the negotiations.

Within a few days, both sides returned to the bargaining table, and “things got ironed out.” The resulting new agreement “reflects more of a true partnership, with shared decision-making, mutually supportive financial goals and, perhaps most importantly, mutual respect,” according to Mr. Gibson. Among the significant points:

-- The franchisor collects a royalty payment on every dollar of franchisee revenue. Previously, the company made money only on equipment sales.

-- The duration of the agreement is 20 years, twice the length of previous agreements.

-- Franchisees have a right to renew their agreements on then-current terms.

-- Franchises are required to be consulted on major changes to the business. They previously had almost no say in such matters.

-- Prices on current equipment are reduced and future equipment prices are capped.

- Except in connection with certain promotions, the franchisor will not advertise suggested retail prices without dealer approval.

-- Franchisees are now paid for all warranty work and receive a royalty on sales by the franchisor to large retailers.

-- The franchisor may no longer examine franchisees’ customer lists.

-- Franchisees are now granted exclusive territories for residential business.

-- Franchisees can now select a successor to their businesses, with the franchisor having no right of first refusal.

-- Franchisees are entitled to purchase as much as 10% of the franchisor’s privately held stock.

Susan P. Kezios, president of the American Franchisee Association, praised the agreement as “definitely a step in the right direction, on a number of levels.” One of them is that the franchisor has no right of first refusal on transferred franchises, she commented. Extending the duration of the agreements to 20 years has the similar effect of encouraging new franchisees looking for long-term investments, she noted. The full text of Mr. Gibson’s article appears on page R11 of the Monday, November, 13, 2006, Wall Street Journal.

Illinois Beer Distribution Law Blamed in Microbrewer’s Market Withdrawal

The Illinois Beer Industry Fair Dealing Act is being blamed for a popular Michigan microbrewery’s withdrawal from the Illinois market, according to a story in the November10 issue of the Chicago Tribune.

Bell’s Brewery, Inc. of Kalamazoo, Michigan has decided to stop shipping product to Illinois, after a dispute arose between the microbrewery and Chicago Beverage Systems, which recently purchased the Illinois distribution rights for Bell brands from another distributor.

Apparently, microbrewery owner Larry Bell feared that his highly-regarded, but relatively modest, product line would not be fully serviced by the new distributor, one of the largest liquor distributors in the Midwest. A meeting with the distributor did not ease his fears that his brands would get short shrift in light of the distributor’s representation of Miller, Coors, and other national and foreign brands. Under the Illinois Beer Industry Fair Dealing Act (815 Illinois Compiled Statutes 720/1-10), Bell’s Brewery had to distribute its product in Illinois through Chicago Beverage Systems or not at all.

“My choice was to be sold to [Chicago Beverage Systems], to be sued, or pull out,” Bell was quoted as saying in the Tribune. “I saw the lesser evil as pulling out.”

These choices apparently were dictated by the law’s prohibition of termination, cancellation, or nonrenewal of wholesalers and distributors except with good cause and 90 days’ written notice. Brewers that terminate or refuse to renew a wholesaler or distributor without good cause must pay reasonable compensation. Like liquor distribution laws in other states (and distribution laws affecting other industries), the Illinois statute was intended to remedy the inequality in bargaining power between large manufacturers or suppliers and smaller distributors.

However, this dispute—between a brewer with annual revenues of $12 million and one of the largest beer distributorships in the Midwest—stands the legislative intent of such laws on its head. In fact, Chicago Beverage Systems is owned by Reyes Holdings, L.L.C., the largest privately-held company based in Chicago, with 2005 revenues of $7.27 billion.

This conceptual flaw is only one criticism of beer and liquor distribution laws, which have been enacted, in some form, in 45 states. When the Illinois legislature considered enacting a similar law for wine and spirits distribution in 1999, the Director of the Chicago Regional Office of the Federal Trade Commission warned that the legislation would (1) make permanent existing agreements between suppliers and distributors by prohibiting a supplier from canceling, failing to renew, or terminating any such agreement without good cause; (2) shield the business of liquor distribution from market forces; and (3) deter the entry of new distributors and new products. http://www.ftc.gov/be/v990005.htm

The FTC wrote a similar letter in 2005 to a California state senator regarding a proposed beer “Franchise Act.” According to the letter, the proposal was likely to increase the cost of beer distribution and reduce competition among wholesalers, resulting in higher retail prices and a possible reduction in the variety of beers available to consumers. http://www.ftc.gov/os/2005/08/050826beerfranchiseact.pdf

There is speculation on BeerAdvocate.com (a web site for beer aficionados) that Bell’s will sit out for a period of 12 to 18 months and then re-enter the market with another distributor. http://beeradvocate.com/forum/read/841604/?start=0

Network Consolidation Was Cause for Termination Under New York Beer Distribution Law

This posting was written by Peter Reap, editor of CCH Business Franchise Guide.

The U. S. importer of a Canadian brewer’s products could terminate its agreement with a New York wholesaler—pursuant to its national policy of consolidation of its wholesaler network—without violating the New York beer law, an arbitrator in New York City has decided. (Molson USA, LLC v. John G. Ryan, Inc., AAA Case No. 15 181 00640 05, November 6, 2006.)

As required by Section 55-c-7 of the New York Alcoholic Beverage Control Law, the importer would be required to pay the wholesaler the fair market value of the distribution rights that would be lost or diminished by reason of the termination, together with the fair and reasonable compensation for other damages suffered. The importer’s policy was "reasonable, nondiscriminatory and essential" as required by the statute and the distributor acted in "good faith" regarding the proposed termination, the arbitrator determined.

Under a mandatory arbitration clause in the parties’ agreement, the importer sought (1) a declaratory judgment that it had the right to terminate the agreement and appoint a wholesaler of its own choosing and (2) a determination of the amount of compensation due the wholesaler by virtue of the termination. In the event the parties were unable to reach an agreement about the amount of such compensation, the amount would be determined during the second phase of the arbitration proceeding, according to the arbitrator.

The beer distribution section of the New York Alcoholic Beverage law provided that a brewer (or its agent, such as the importer) could terminate a wholesaler only for "good cause." The good cause requirement established standards that had to be met by a brewer in order to justify termination as part of a national or regional policy of consolidation. In relevant part, the statute specified that good cause for termination pursuant to such a policy was limited to: "[t]he implementation by a brewer of a national or regional policy of consolidation which is reasonable, nondiscriminatory and essential. Such policy shall have been previously disclosed, in writing, in reasonable detail to the brewer's wholesalers, and shall result in a contemporaneous reduction in the number of a brewer's wholesalers not only for a brand in this state, but also for a brand in contiguous states or in a majority of the states in which the brewer sells the brand." http://public.leginfo.state.ny.us/menugetf.cgi?COMMONQUERY=LAWS

Amendments to the beer law that changed the statute’s definition of good cause for termination as part of policy of consolidation were made in 2001, during the pendency of the parties’ agreement. These amendments were applicable to the agreement, despite a claim that they would impair an existing contract in violation of the Contracts Clause, the arbitrator ruled. Following the rationale of Garal Wholesalers, Ltd. V. Miller Brewing Co. (751 N.Y.S.2d 679, 2002), the statute and the 2001 amendments were remedial in nature and should be applied retroactively to avoid undermining its remedial purpose, the arbitrator determined. The changes were not drastic and did not rise to the level of substantial impairment.

The importer’s proposed termination of the wholesaler was "nondiscriminatory" within the meaning of the statute, according to the arbitrator, because the national plan of consolidation had been in effect since 2001 and had been pursued steadily since that date. The distributor’s efforts to stage its consolidation efforts consistent with the limitations of state law and the need to operate its business did not constitute discrimination, the arbitrator reasoned.

Factors such as cost savings to the importer and its corporate parent, avoidance of financial losses, increases in efficiency, and focus on the brands that contributed to increased revenues satisfied the statutory requirements that a plan be reasonable and essential, the arbitrator ruled.

Finally, the distributor acted in "good faith" under the meaning of the statute with regard to its proposed termination of the wholesaler, according to the arbitrator. A brewer did not fail to act in good faith by implementing a policy of consolidation over time. State law and the need to run a business permitted a brewer to achieve its consolidation in stages, the arbitrator reasoned.

FTC Extends Comment Period on Proposed Amendments to Telemarketing Sales Rule

This post was written by Jeffrey May, editor of CCH Trade Regulation Reporter.

The FTC is still accepting public comments on two proposed amendments to the Commission's Telemarketing Sales Rule, 16 CFR Part 310. One proposal would prohibit telemarketers from using prerecorded messages in calls answered by a consumer without that person’s prior consent to receive such calls. The other proposal would modify the method for measuring the maximum allowable call abandonment rate in the rule’s call abandonment safe harbor. The comment period, which was originally set to expire on November 6, has been extended 40 days to December 18, 2006, in response to a request from the Direct Marketing Association.

The Telemarketing Sales Rule (CCH Trade Regulation Reports ¶38,058; CCH Advertising Law Guide ¶16,000; CCH Business Franchise Guide ¶6800) prohibits deceptive and abusive telemarketing acts or practices. In 2003, the Telemarketing Sales Rule was amended to include a provision limiting the number of calls to consumers that telemarketers may “abandon” without risking FTC enforcement action. “Abandoned calls” (those answered by consumers who find nobody on the line) often result from the use of predictive dialers. To preserve telemarketers' ability to use automatic dialing systems, but to avoid “dead air,” the FTC included a “safe harbor” in the amended rule that allows a telemarketer to play a prerecorded message when a consumer answers. The prerecorded message is permitted only in a maximum of three percent of calls answered by consumers in person (rather than an answering machine).

Under the first proposed amendment, telemarketers would no longer be permitted to place calls delivering a prerecorded message to consumers with whom the seller has an “established business relationship.” The amendment would explicitly prohibit sellers and telemarketers from delivering a prerecorded message when a person answers a telemarketing call, except in the very limited circumstances permitted in the call abandonment safe harbor, or when a consumer has consented, in writing, to receive such calls. Telemarketers now have until January 2, 2007, to revise their practices to discontinue calls that deliver a prerecorded message to consumers with whom the seller has an established business relationship and that conform to the previously proposed, and now rejected, safe harbor.

The agency’s second proposal is to amend the method of calculating the three percent maximum under the rule’s safe harbor provision from three percent per day per calling campaign to three percent per 30-day period per calling campaign. The Direct Marketing Association had petitioned the FTC for this change.

Comments on the proposed amendments should be mailed or delivered to: Federal Trade Commission/Office of the Secretary, Room H-159 (Annex K), 600 Pennsylvania Avenue, NW., Washington, D.C. 20580. They should refer to “TSR Prerecorded Call Prohibition and Call Abandonment Standard Modification, Project No. R411001.” The original notice of the proposed amendments appears at 71 Federal Register 58716, October 4, 2006; the extension appears at 71 Federal Register 65762, November 9, 2006.

FTC Staff Report Examines Noerr-Pennington Doctrine

This post was written by Jeffrey May, editor of CCH Trade Regulation Reports

The FTC staff has released a report by its Office of Policy and Bureau of Competition providing enforcement perspectives on the Noerr-Pennington doctrine. The doctrine shields from antitrust attack private conduct seeking government action. The November 2 report provides the staff's views on how best to apply the doctrine to conduct that imposes great risk to competition but that does not further the First Amendment and government decision-making principles that underlie the doctrine.

The 38-page report describes the development of the doctrine and explains how to delineate its proper parameters. Text of the staff report appears at http://www.ftc.gov/reports/PO13518enfperspectNoerr-Penningtondoctrine.pdf

The staff also recommended that the Commission further describe the proper application of the Noerr doctrine by clarifying (1) that conduct protected by Noerr does not extend to filings, outside the political arena, that seek no more than a ministerial government act; (2) that conduct protected by Noerr does not extend to misrepresentations, outside of the political arena, that meet the standards set forth in the Commission's Unocal decision (CCH Trade Regulation Reporter, FTC Complaints and Orders Transfer Binder 2001-2005,¶15,618); and (3) that conduct protected by Noerr does not extend to patterns of repetitive petitioning, outside of the political arena, that employ government processes, rather than the outcome of those processes, to harm competitors in an attempt to suppress competition.

How Do You Judge Success of FTC Merger Enforcement?

A seemingly innocuous paragraph buried on page 21 of the Federal Trade Commision’s Strategic Plan for Fiscal Years 2006-2011 has sparked a lively discussion on the ABA Antitrust Section’s listserv about how the FTC determines the success of its merger enforcement efforts.

Last Monday, David Balto, a former antitrust enforcer at both the FTC and Department of Justice Antitrust Division, started the discussion by pointing out that the FTC has measured the success of its Hart-Scott-Rodino “second request” process “by assessing the number of second requests that result in a positive outcome (a challenge, consent, or the deal is dropped) against the total number of second requests.”

In an earlier strategic plan, the FTC set a goal of 60-80% "positive outcomes." In 2005, according to Balto, the FTC had 52% “positive outcomes.” Nevertheless, the FTC’s strategic plan for 2006-2011 raised the bar to 90%:

For each year 2006-2011:

Continue effective administration of the HSR program so that at least 90% of HSR request for additional information result in a positive outcome, which includes Commission authorization of a complaint for preliminary injunction in federal court, issuance of a an administrative complaint, acceptance of a consent agreement, the parties’ voluntary abandonment or restructuring of a proposed transaction based on FTC antitrust concerns, and closing of an investigation without subsequent events indicating that the transaction injured competition.

www.ftc.gov/opp/gpra/spfy06fy11.pdf

Balto asked a series of questions, including:

“Why would the FTC increase the goal from 60-80% to 90%?”

“If 90% is the goal, won’t the agency tend to miss some worthwhile investigations? Would that suggest that the agency is underenforcing?”

Mark Whitener, also a former FTC enforcer, observed that the apparent change may not reflect “an actual change in policy in favor of more deal challenges,” since the term “positive outcome” now includes “closing of an investigation without subsequent events indicating that the transaction injured competition.”

According to Denis Paul, including cleared transactions that did not later result in injury to competition renders the statistic completely ineffective for its purpose—namely, to measure the efficiency of the FTC’s second request decision-making process. The issuance of a second request on a transaction later proven to been competitively benign is an inefficient use of resources, Paul asserted, whereas the issuance of a second request on a transaction that leads to enforcement is a more efficient use of resources.

Jon Putman chimed in that the “success rate” is a function of what deals are proposed. “If you raise the standard for challenge, people propose fewer borderline deals. So you actually understate the effect of the tightening standards if you restrict the sample to the deals that are proposed once standards are tightened.”

Cecile Kohrs Lindell disagreed that the policy necessarily “raises the standard for challenge.” It seems to indicate only that there will be fewer challenges. She wondered about the value of the percentage figures. When considering the acceptances of consent agreements, “there’s no way to assess whether the remedy is broader or narrower than it might have been on any continuum of enforcement.” Finally, she is not sure what a “negative outcome” would be: “Only closings where it could be proved there was an anticompetitive result within what period of time?”

A negative outcome, John Pisarkiewicz wrote, would be “no challenge, no consent agreement, and the merger goes through.” The FTC wishes to minimize negative outcomes because "spending resources to investigate a proposed acquisition which ultimately poses no harm to competition wastes resources.”

Luke Froeb, former Director of the FTC Bureau of Economics, remarked that there are two mistakes that can be made in challenging mergers: you can challenge pro-competitive mergers (Type I error) or fail to challenge anticompetitive mergers (Type II error). “In general there is a tradeoff between Type I and Type II errors (a reduction in one means more of the other). The only way you can simultaneously reduce both is to gather more information (which increases the cost of enforcement and compliance).” He interprets the FTC 90% goal as “an effort to reduce the costs of wasteful enforcement and compliance—the kind of investigation and compliance that does nothing to increase accuracy.”

In response, Jon Putman wrote that he agreed with that statement of the policy objective, but questioned whether the proposed statistics “tell you anything about whether the FTC is getting closer to that objective.”

Ken Davidson, another former FTC lawyer, weighed in that the “benchmarks on HSR filings/Second Requests/Consents are a poor substitute for an evaluation of merger effectiveness.” He related how he was involved in meetings in which the benchmarks were being developed. “Everyone was aware that by counting second requests and consents, we would distort bureaucratic incentives, but no one could think of anything that could be done annually that would reflect the efficacy of the merger program.”

Conference Board Announces 2007 Antitrust Meeting


“Antitrust Issues in Today’s Economy” is the title of the Conference Board’s annual Antitrust Conference, scheduled for March 1, 2007, in New York City.

Highlights of the meeting include “New Directions in Competition Policy: What Lies Ahead?” with Stephen Calkins, Herbert Hovenkamp, Assistant Attorney General Thomas O. Barnett, FTC Chair Deborah Platt Majoras, and Steven C. Salop; “Twenty Five Tears After IBM and AT&T” with Abbott B. Lipsky, Jr., Thomas E. Kauper, Howard A. Shelanski, and John H. Shenefield; and “The Intersection of Consumer Law and Competition Law: What Every Antitrust Lawyer Needs to Know,” with FTC Commissioner William E. Kovacic and Lee Peeler, President of the National Advertising Review Council of the Council of Better Business Bureaus.

Further details, including the full agenda, appear at http://www.conference-board.org/conferences

Snap-on Tools' $125 Million Class Settlement with Franchisees Approved

This post was written by Peter Reap, editor of CCH Business Franchise Guide.

A settlement agreement valued at more than $125 million between franchisor Snap-on Tools Co. and a class of its current and former franchisees was approved by a federal district court in Newark, New Jersey, on October 27. The class consisted of more than 2,900 former Snap-on franchisees and almost 3,200 current franchisees.

The action alleged that Snap-on specifically targeted unsophisticated persons to become franchisees and that the franchisor’s deceptive business practices caused the franchisees' businesses to fail. In addition, the franchisees complained that they were contractually required to make minimum weekly purchases of product from the franchisor but could re-sell those products only to a limited number of end-users.

The agreement provided both monetary and non-monetary benefits to the class members. Approximately $61.5 million in debt owed by former franchisees was forgiven by the franchisor as a result of the agreement. Further, former and current franchisees would receive cash payments estimated to total $25 million.

The franchisor also agreed to make a number of modifications to its franchise distribution model and business practices, designed to benefit both current and prospective franchisees, according to the court. These modifications included: (1) a reduction of the required investment in initial inventory; (2) offers of financing to qualified franchisees; (3) a technology credit; (4) improved initial training for new franchisees; and (5) improvement of recruitment training practices. The modifications of business practices were valued at approximately $60 million.

The class had satisfied the Rule 23 criteria for certification, the court ruled. The numerosity requirement was met because the class had over 5,000 members. The plaintiffs’ claims arose from a common nucleus of operative fact and raised the same legal and equitable issues, satisfying the commonality requirement. The typicality requirement was met because the interests of the class and the named representatives were aligned, the court held. Moreover, there was adequacy of representation because such interests were aligned and the there was a strong showing that class counsel was qualified to handle the complex litigation. Finally, common questions of law or fact predominated because each class member’s claim depended on the resolution of the same questions regarding the franchisor’s alleged deceptive business practices.

The settlement agreement was fair, adequate, reasonable, and in the best interests of the class, the court determined. The “innovative hybrid settlement not only compensates class plaintiffs for past injuries but also provides non-monetary relief in the form of changes to Snap-on’s internal business that will benefit current and prospective franchisees in the future,” according to Judge Dennis M. Cavanaugh.

A requested award of attorney fees in the amount of $13 million was reasonable, the court decided. The amount was the equivalent of 10.4% of the settlement, a figure well below the norm, the court commented. The qualified and experienced attorneys spent a great deal of time preparing their case, arbitrating it, and negotiating a settlement—all with the risk of very contentious litigation looming with no guarantee of a successful result. Significantly, the class counsel achieved a very favorable and creative settlement that properly benefited all members of the class.

The not-for-publication opinion is DeSantis v. Snap-on Tools Co., LLC, U.S. District Court, District of New Jersey, Civil Action No. 06-cv-2231 (DMC), October 27, 2006.

High Court Will Not Review Federal Court’s Authority to Block Antitrust Indictment

This post was written by Jeffrey May, editor of CCH Trade Regulation Reporter.

Applicants for amnesty under the Justice Department Antitrust Division’s Corporate Leniency Policy should be advised that the government may withdraw its grant of conditional leniency and file charges if it decides the applicants are not holding up their end of the bargain. The applicants are not necessarily entitled to a pre-indictment hearing on whether they are in material breach of the agreement.

The U.S. Supreme Court on October 30 decided not to weigh in on whether a federal district court had the power to block the Department of Justice from filing an antitrust indictment against a company that had been granted conditional amnesty under the Corporate Leniency Policy. Now that company, Stolt-Nielsen, S.A., will have to challenge the indictment in federal district court. Stolt-Nielsen issued a statement on October 30 that it planned to file its motion to dismiss the indictment on November 22.

In September, a federal grand jury in Philadelphia indicted London-based Stolt-Nielsen S.A., two of its subsidiaries (Stolt-Nielsen Transportation Group Ltd. of Liberia and Stolt-Nielsen Transportation Group Ltd. of Bermuda), and two company executives for conspiring to restrain trade in the parcel tanker shipping industry.

In announcing the indictment, the Justice Department said that the Antitrust Division revoked the conditional leniency after it learned that top executives “had continued to meet with competitors and participate in the conspiracy for months after the scheme's discovery by Stolt-Nielsen's then-general counsel, and that Stolt had both withheld [information] and provided false and misleading information about the true extent of the conspiracy." According to the government, "Stolt-Nielsen's conditional leniency was predicated on a number of representations made by the company, including a promise that the company 'took prompt and effective action to terminate its part in the anticompetitive activity being reported upon discovery of the activity.'"

The High Court declined to consider Stolt-Nielsen’s petition to review a decision of the U.S. Court of Appeals in Philadelphia (2006-1 Trade Cases ¶75,172) that the district court lacked the power to enjoin the filing of the indictment. The appellate court decided that the limited authority of federal courts to enjoin criminal prosecutions was inapplicable in this situation. Generally, the executive branch had the exclusive authority and absolute discretion to decide whether to prosecute a case.

The Third Circuit had reversed a decision of the federal district court in Philadelphia (2005-1 Trade Cases ¶74,669), holding that the government could not prosecute the provider of transportation services for bulk liquids because the company did not breach the amnesty agreement. The lower court explained that resolving the issue of whether the applicant was in material breach of the agreement and whether the Justice Department was bound by the agreement at the pre-indictment stage ensured that the applicant was afforded the requisite due process without imposing an undue burden on the government.