$19 Million Award for Termination of Insurance Agents Overturned

In a decision with ramifications for franchises and dealerships, State Farm Insurance Company’s termination of five insurance agents who had made public statements critical of the company was held not to breach the exclusive agency agreements, violate the covenant of good faith and fair dealing, or tortiously interfere with the agents’ relationships with their clients.

Jury verdicts in favor of the five agents and awarding $19.7 million were reversed by the Missouri Court of Appeals on a holding that the agency agreements permitted the company to terminate the agencies at any time upon written notice.

The agents were independent contractors who sold insurance products for State Farm on an exclusive basis in Missouri, Maryland, Ohio, and Texas. They all executed State Farm Agency Agreements. After discovering in that the agents had made statements critical of State Farm, the company sent letters to agents, terminating their agreements effective in January or February 2000.

The agents sought internal termination reviews, pursuant to the agency agreements. After the review committees recommended that the terminations be upheld, the Missouri agent filed suit in Missouri state court, alleging wrongful termination. The court allowed the other four agents to join as additional plaintiffs. The complaint brought by the five agents alleged that (1) their agreements were terminated without good cause, (2) the terminations breached the covenant of good faith and fair dealing, (3) the company intentionally interfered with the agents’ business relationships with current and future clients, and (4) the agents were entitled to punitive damages.

Following a 14-day trial, the jury returned verdicts in favor of the agents on breach of contract and tortious interference claims, awarding $8.7 million in actual damages and $11 million in punitive damages. State Farm brought an appeal.

On January 23, 2007, the Missouri Court of Appeals, Western District, reversed the trial court, on the following rulings:

Termination at will. The terminations did not breach the agency agreements, which were terminable at will by either party, upon written notice. The contractual language was not ambiguous as to whether a party must have good cause terminate the agency. Thus, the trial court should not have considered parol evidence and interpreted the agreement to require good cause for termination. All of the jurisdictions involved in this case followed the at-will doctrine, under which an agreement with no fixed duration is deemed to be at-will and terminable by either party, absent a specific contract term to the contrary.

Termination review process. The inclusion of a termination review process in the agency agreement does not imply that good cause is required for termination, according to the appeals court. Such a process is not inconsistent with at-will termination and did not limit the company’s right to terminate without cause. On the contrary, the termination review provision suggests that State Farm wishes to prevent arbitrary terminations without limiting its legal entitlement to terminate at will by written notice.

Implied covenant of good faith/fair dealing. There can be no claim for breach of an implied covenant of good faith and fair dealing in the termination of an at-will independent contractor relationship. Such an implied covenant can not overcome a contractual right to terminate at will.

Tortious interference with business relationships. The terminated agents did not have any business relationship with the policyholders that did not arise from their acting as agents for State Farm. The relationships between the agents and the policyholders were simply not the type of business relationships protected by the tort of interference with business expectancy.

Punitive damages. Because the agents failed to prove an underlying cause of action that could support a punitive damage award, the trial court’s award of $11 million in punitive damages had to be reversed.

The decision is Kelly v. State Farm Mutual Automobile Insurance Co., Missouri Court of Appeals, Western Division, Case No. WD66408, January 23, 2007.

FTC Suit Proceeds Against Drug Maker for Agreeing Not to Market Generic

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

The federal district court in Washington, D.C. has refused to dismiss as moot an FTC enforcement action against generic drug maker Barr Pharmaceuticals, Inc. for entering into an agreement not to compete with drug maker Warner Chilcott.

The FTC alleges that Warner Chilcott entered into an agreement with Barr under which the latter agreed not to compete in the U.S. with a generic version of a Warner Chilcott contraceptive. Barr allegedly was paid $20 million for agreeing not to proceed with the planned launch of the generic equivalent.

In its complaint, the agency sought to enjoin Barr and Warner Chilcott from operating under that exclusive license and from engaging in similar and related conduct in the future. Warner Chilcott later settled the charges.

Barr unsuccessfully argued that the that a series of events following the filing of the complaint rendered the FTC’s case moot: (1) Warner Chilcott waived all exclusivity provisions in the agreement with Barr when it launched a chewable version of the contraceptive; (2) Barr launched a generic version of the contraceptive; and (3) Warner Chilcott entered into the settlement agreement with the FTC.

According to Barr, the sole basis for the FTC’s action was the exclusivity provisions of the agreement. Thus, Warner Chilcott’s waiver of the exclusivity provisions through the introduction of the chewable version of the drug and efforts to convert customers to the chewable version rendered the suit moot.

However, the complaint challenged conduct beyond the particular exclusivity provisions of the agreement and sought relief beyond an injunction against the maintenance of those provisions, the court found. Moreover, Barr failed to carry its “heavy burden” of demonstrating that the “conduct at issue”—broadly defined—could not be reasonably expected to recur.

While Warner Chilcott settled with the FTC, Barr remained free to enter into the very type of agreement that the FTC sought to prevent through a permanent injunction, according to the court. The court did not reach “the entirely separate question of whether, as this case progresses, the FTC will be able to demonstrate an entitlement to injunctive relief aimed at conduct ‘similar and related’ to the exclusivity provisions of the [drug makers’] agreement.

The decision is Federal Trade Commission v. Warner Chilcott Holdings Co. III Ltd., (2007-1 Trade Cases ¶75,565) U. S. District Court, District of Columbia, No. 05-2179, filed January 22, 2007.

AdSense Participant Failed to Assert Injury from Google's Advertising

This posting was written by Bill Zale, editor of CCH Advertising Law Guide.

A business website operator, who sued Google for the allegedly false advertising of its AdSense program, failed to assert injury from Google's placement of third-party ads on the operator’s website and subsequent termination of the operator’s AdSense account, the federal district court in San Francisco ruled.

The website operator alleged that Google had sent an advertisement to her that contained a false statement—namely, that she would be able to preview the ads that Google AdSense placed on her website.

Participants in the AdSense program allowed Google to place ads from third parties on their websites after completing an application and inserting some hypertext markup code into their site, according to the court. The ads were tailored to the host website's content. Participants were able to block ads from competitors, or other ads based on their content or origin. Participants also had the option of choosing default ads to appear on their site if they did not approve of the ads that Google AdSense placed there, or if no ads relevant to the website's content were found.

Google AdSense paid participants each time an Internet user clicked on the third-party ads posted to the participants' website. To eliminate the problem of participants attempting to profit from this arrangement by clicking on the ads on their own websites, Google AdSense's contracts explicitly forbade participants from doing so, the court said.

The website operator in this case signed up to allow the AdSense program to place third-party advertisments on the website she maintained to advertise her corporate consulting business. However, Google AdSense did not provide her with any way to see which ads would be posted to her site before they appeared there.

Wanting to investigate the third-party ads placed on her website, she clicked on them. She communicated with Google AdSense staff and asked them to remove some of the ads placed on her website. The ads were not removed. Google AdSense terminated her account, removed all ads, and failed to pay her the approximately five dollars in revenue that the ads on her site had generated, according to the court.

In the false advertising claim, the website operator alleged that the method that Google provided to preview the ads did not work. The website operator alleged that she, not her customers, was deceived, the court noted. The website operator’s goodwill and relationships with her customers allegedly were damaged because of the ads that Google AdSense placed on her site.

In sum, the court noted that the website operator alleged that Google's false advertising deceived her into signing up for its services, which later caused her to lose the goodwill of her customers not because of Google's false statements, but because of the ads placed on her website and Google's subsequently closing of her Google AdSense account.

This theory of damages was too attenuated to support a false advertising claim, the court held. The website operator did not allege that she lost her customers' goodwill as a result of Google's false statements. Instead, she alleged she lost goodwill by Google's placing ads of which she did not approve on her website and then removing them. This did not support the false advertising cause of action.

Judge William Alsup’s opinion in Bradley v. Google, Inc., No. C 06-05289 WHA, U.S. District Court, Northern District of California, will be reported in CCH Advertising Law Guide.

False Advertising Claims Based on Authorship Hoax Rejected

This posting was written by Bill Zale, editor of CCH Advertising Law Guide.

A recent court decision sheds light on an unsettled area of intellectual property and advertising law—whether misrepresenting authorship can violate the false advertising provision of the Lanham Act. The answer, in the court’s view, was “no.”

A film production company could not pursue Lanham Act false advertising claims against a publisher for its hoax in advertising and marketing a book as being based on the “real-life” experiences of a non-existent author, the federal district court in New York City ruled. The film production company, which had purchased an option on film rights to a book, can pursue a common law fraud claim against the publisher, the court held.

In large part, the film product company’s Lanham Act Sec. 43(a)(1)(B) false advertising allegations mirrored its false authorship claims under Sec. 43(a)(1)(A), which were foreclosed by the U.S. Supreme Court’s decision in Dastar Corp. v. Twentieth Century Fox Film Corp., 539 U.S. 23 (2003). The film company nonetheless argued that Dastar left open the possibility that some false authorship claims could be vindicated under the auspices of Sec. 43(a)(1)(B)'s prohibition on false advertising.

However, the holding in Dastar necessarily implied that the Sec 43(a)(1)(B) false advertising prohibition against misrepresenting the “nature, characteristics, [and] qualities” of goods, services, or commercial activities could not be read to refer to authorship, the court reasoned. If authorship were a characteristic or quality of a work, then the very claim Dastar rejected under Sec. 43(a)(1)(A) would have been available under Sec. 43(a)(1)(B), in the court’s view.

Judge Jed Rakoff’s decision in Antidote Interantional Films, Inc. v. Bloomsbury Publishing, PLC, No. C 06-05289 WHA, U.S. District Court, Southern District of New York, will be reported in the CCH Advertising Law Guide.

State Bills Would Expand Antitrust Standing for Indirect Purchasers, Attorneys General

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

New Hampshire and Washington have started their new legislative sessions by considering proposals to expand the right to bring actions under their antitrust laws.

New Hampshire Senate Bill No. 52, introduced on January 4, would amend the state combination and monopolies law so that "Any person injured in his business or property by reason of a violation of this chapter may recover ... regardless of whether that person dealt directly or indirectly with the defendant."

If approved, the legislation would overturn a decision of the New Hampshire Supreme Court (2002-1 Trade Cases ¶73,659) that indirect purchasers lack standing under the state antitrust law. State subdivisions or agencies also would be permitted to recover damages regardless of whether they dealt directly or indirectly with the defendant.

In addition, the New Hampshire bill would amend the law to authorize the state attorney general "to bring an action for violations of this chapter as parens patriae on behalf of natural persons residing in the state. Whether the injured persons dealt directly or indirectly with the defendant shall not bar this action or otherwise limit recovery." Treble damages would also be recoverable.

Meanwhile, legislation has been introduced in the State of Washington that would permit the state attorney general to bring an action as parens patriae on behalf of state residents alleging state antitrust law violations.

The Washington measure (House Bill No. 1177, Senate Bill No. 5228), would allow courts to compensate victims of anticompetitive activity whether or not they were direct or indirect purchasers from the defendant. Political subdivisions would be specifically authorized to sue where their injuries were direct or indirect. The proposal was introduced in the House on January 12 and introduced in the Senate on January 15.

Sales Below Cost Law

In other antitrust legislative news, Colorado is considering a bill to repeal provisions of the Colorado Unfair Practices Act that prohibit below-cost sales. House Bill No. 1070 was introduced on January 10. The bill's sponsor, Rep. Kevin Lundberg, said that the legislation was intended to "remove those provisions that currently prevent [grocery retailer] King Soopers from giving a ten-cent discount on gas, and Wal-Mart and Target offering the same $4 prescription drug prices they do in most other states."

FTC Revises Premerger Notification Thresholds under HSR Act

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

The FTC has revised the thresholds for premerger notification filings under the Hart-Scott-Rodino (HSR) Antitrust Improvements Act of 1976. The HSR Act requires all persons contemplating mergers or acquisitions, which meet or exceed the jurisdictional thresholds in the Act, to notify the FTC and the Department of Justice Antitrust Division and to wait the statutory 30-day period before consummating the transactions.

Section 7A of the Clayton Act requires the agency to revise the jurisdictional thresholds annually, based on the change in gross national product. The thresholds were revised for the first time in 2005. The most recent revisions will take effect on February 22, 2007. Details of the revised thresholds appeared in the January 22 issue of the Federal Register.

The revised thresholds require reporting of all acquisitions that result in an acquirer holding an aggregate total amount of the voting securities and assets of the acquired party in excess of $239.2 million, unless otherwise exempted. That threshold was revised upward from its current $226.8 million. No transaction resulting in an acquiring person holding $59.8 million or less (currently $56.7 million or less) of assets or voting securities of an acquired person will need to be reported under the rules.

Acquisitions valued between these thresholds are reportable based on the size of the acquiring or acquired person. The thresholds in this "size-of-person" test will also be increased. Generally, the "size-of-person" test will require that one side of the transaction have sales or assets in excess of $119.6 million ($113.4 million currently) and the other have sales or assets in excess of $12 million ($11.3 million currently).

The filing fees themselves remain the same. Once the threshold adjustments are effective, a $45,000 filing fee will apply to transactions valued between $59.8 million and $119.6 million. The $125,000 filing fee will apply to transactions valued between $119.6 million and $597.9 million. The $250,000 filing fee will apply to transactions valued at $597.9 million or more.

FTC Issues New Disclosure Rules for Franchise, Business Opportunity Sales


After nearly 12 years of rulemaking activity, the Federal Trade Commission has issued the first revision to the FTC franchise disclosure rule since it was promulgated in 1979. On January 22, the Commission amended the rule—including separating requirements for franchising and business opportunity ventures—in order to streamline the disclosure requirements, minimize compliance costs, and respond to changes in technologies and market conditions. The Commission approved the new rules by a 5-0 vote.

A primary goal in amending the franchise disclosure rule was to harmonize the federal requirements with state franchise disclosure laws, according to the FTC. The amendments brought the rule into much closer alignment with state franchise disclosure laws and the Uniform Franchise Offering Circular (UFOC), a uniform disclosure format that may be used in all states mandating presale disclosure and registration.

In some instances, the new franchise rule requires more extensive disclosures than the UFOC, particularly with regard to aspects of the franchise relationship (litigation against franchisees, the absence of exclusive territories, and franchise associations). In a few instances, the franchise rule requires less disclosure than the UFOC (“risk factors,” franchise broker information, required purchases of computer equipment).

Under the new scheme, disclosure rules for franchises and businesses opportunities appear separately (Part 436 covering franchises, with Part 437 preserving the text of the original rule governing business opportunity ventures). The amended rules are effective on July 1, 2007. However, franchisors and business opportunity sellers may continue to use the original franchise rule until July 1, 2008.

The rulemaking is the culmination of a long, arduous process, which started with a regulatory review of the franchise rule in 1995. The Commission solicited public comments and held two public workshops in 1995 and 1996. An Advanced Notice of Proposed rulemaking was published in 1997 (CCH Business Franchise Guide ¶11,122), which was followed by six public workshops. A Notice of Proposed Rulemaking was published in 1999 (CCH Business Franchise Guide ¶11,713), and a staff report on the proposed revisions was released in August 2004 (CCH Business Franchise Guide ¶12,880).

A news release and text of the rules, along with a Statement of Basis and Purpose, are available on the FTC web site. An official notice will appear in the Federal Register.

The disclosure rules will appear in the CCH Business Franchise Guide. Wolters Kluwer Law and Business will publish a book containing the text of the disclosure rules and Statement of Basis and Purpose, along with expert analysis and explanatory materials.

Subway Again Tops "Franchise 500" Rankings

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

Entrepreneur magazine has recently announced its 2007 “Franchise 500” Rankings and—for the 15th time in 28 years—sandwich shop franchisor Subway tops the list. The magazine, which has been assembling its rankings since 1980, claims to have “perfected [its] ranking procedure, giving [it] a formula that accurately identifies today's top franchise opportunities.”

Only franchisors that submitted their full Uniform Franchise Offering Circulars (UFOCs) or Canadian disclosure documents, and whose information was verified by the magazine, were considered. A franchisor must also have a minimum of 10 units with at least one in the U.S., must be seeking new franchisees in the U.S., and cannot be in bankruptcy at the time the rankings are compiled (with the exception of Canadian-based companies that are expanding only in Canada.)

All companies, regardless of size, are judged by the same criteria: objective, quantifiable measures of a franchise operation, according to the magazine. The most important factors include the franchisor’s financial strength and stability, growth rate, and the size of the franchise system. The magazine also considers the number of years a franchisor has been in business, the length of time it has been franchising, startup costs, litigation, percentage of terminations, and potential available financing from the franchisor. An independent CPA audits the financial data considered by the magazine. Subjective elements such as franchisee satisfaction or management style are not considered.

While highly-ranked franchisors invariably use their “Franchise 500” listings to promote the sale of franchises, it should be noted that the rankings may indicate more about the success of franchisors than about the success of their franchisees. Many of these factors (e.g., size of franchise system, growth rate) do not necessarily reflect how franchisees are faring.

Over the last two decades, Subway itself has been involved in many legal disputes with its franchisees. In the 1990s, the disputes often concerned encroachment of franchisees’ market areas. At the same time, the franchisor was criticized by franchisees for its aggressive enforcement of arbitration clauses in franchise agreements.

More recently, Subway franchisee organizations have brought lawsuits, alleging that the franchisor’s changes to its franchise agreement take control of franchisee advertising funds away from independent franchisee boards and give it to the franchisor, according to Entrepreneur.

Following is a list of the magazine’s top 10 franchises, a description of the franchised business, and estimated startup costs:


1. Subway......................Sandwiches and salads.......$74.9K – 222.8K

2. Dunkin’Donuts..............Donuts & baked goods...........$179K – 1.6M

3. Jackson Hewitt Tax Service....Tax preparation..........$48.6K – 91.8K

4. 7-Eleven...............................Convenience stores..................Varies

5. UPS Store/Mail Boxes Etc.........Postal services..............$153.95K-266.8K

6. Domino’s Pizza....................Pizza................................$141.4K-415.1K

7. Jiffy Lube........................Oil changes...........................$214K-273K


8. Sonic Drive-Ins................Drive-in restaurants................$861.3K


9. McDonald’s.....................Fast food...............................$506K-1.6M


10 Papa John’s.....................Pizza.....................................$250K


Entrepreneur’s complete Franchise 500 for 2007 can be viewed here.

Minnesota Dealer Terminated Without “Good Cause”

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

An equipment manufacturer did not have “good cause” under the Minnesota heavy equipment dealer law to terminate a dealer for failing to meet unreasonable sales requirements that were different from those imposed on similarly-situated dealers, the U.S. Court of Appeals in St. Louis has ruled. The appeals court affirmed a jury verdict in favor of dealer on the termination claim.

However, the Eighth Circuit reversed the district court’s rejection of claims that the manufacturer coerced the dealer into refusing to purchase equipment from another manufacturer and substantially changed the competitive circumstances of the parties’ agreement without “good cause,” in violation of the dealer law.

Damages, Fees, Costs

A jury returned verdicts in favor of the dealer on three of its claims and awarded the dealer more than $14 million in damages. The federal district court in Minneapolis entered judgment for the dealer, but reduced the award by almost $1.7 million on the ground that the calculations made by the dealer’s expert improperly included prejudgment interest. The district court’s award of attorney fees and costs to the dealer was remanded with instructions to calculate damages, attorney fees, and costs in light of the holdings made on appeal.

“Good Cause”

There was evidence that the sales requirements imposed by a 1993 amendment to the agreement were not reasonable. Thus, the jury could have found that the termination was without “good cause,” the appeals court held.

Under the 1993 amendment, the dealer was required to improve—or at least maintain—its market share for at least three classes of the manufacturer’s lift trucks. There was extensive testimony of the “unrealistic” nature of these market share requirements, the court noted.

In addition to setting market-share benchmarks, the 1993 amendment required the dealer to improve or maintain its "dollar volume of parts per truck of population" sales. Testimony that the parts purchase requirement created “unachievable goals” was further evidence from which a jury could have found the conditions of the 1993 amendment unreasonable and more stringent than those imposed on similarly-situated dealers.

The decision is Minnesota Supply Co. v. The Raymond Corp., Nos. 04-1416/1850/2168/2169, filed December 28, 2006. It appears at CCH Business Franchise Guide ¶13,504.

Franchise Relationship/Termination Law Proposed in Massachusetts

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

A proposal has been filed in the Massachusetts legislature that would prohibit a franchisor from terminating, canceling, or failing to renew a franchise without “good cause.” The legislation also defines what a “franchise” is and, like state relationship/termination laws of other states, prohibits franchisors from taking certain actions against their franchisees. The measure, currently designated Senate Draft No. 1981, was filed January 10, 2007, by state Senator Patricia Jehlen. It has yet to be formally introduced or referred to a committee.

“Franchise” Definition

Under the proposal, a “franchise” is defined as any oral or written agreement, either express or implied, “between two or more persons by which: (a) a franchisee is granted the right to engage in the business of offering, selling or distributing goods or services, under a marketing plan or system prescribed or suggested in substantial part by a franchisor; and (b) the operation of the franchisee’s business pursuant to such plan or system is substantially associated with the franchisor’s trademark, service mark, trade name, logotype, advertising or other commercial symbol designating the franchisor or its affiliate.”

“Good Cause” for Termination

The draft defines “good cause” for termination or nonrenewal as including, but not limited to, “the franchisee’s refusal or failure to comply substantially with any material and reasonable obligation of the franchise agreement,” with certain exceptions. Those exceptions include the franchisee’s “(1) refusal to take part in promotional campaigns of the franchisor’s products; (2) failure to meet sales quotas suggested by the franchisor; (3) refusal to sell any products at a price suggested by the franchisor or supplier; (4) refusal to keep the premises open and operating during those hours which are documented by the franchisee to be unprofitable to the franchisee or to preclude the franchisee from establishing his own hours of operation beyond the hour of 10:00 p.m. and prior to 6:00 a.m.; or (5) refusal to give the franchisor or supplier financial records of the operation of the franchise which are not related or unnecessary to the franchisee’s obligations under the franchise agreement.”

In addition, a franchisor would be prohibited from terminating or canceling a franchise that involved a lease of the franchised premises under certain circumstances. Any franchisor or franchisee would have the right to have the question of “good cause” submitted to arbitration and the right to appeal the arbitration decision to a court, according to the measure.

Notice of Termination

The measure would require franchisors to give 60 days’ advance written notice of any termination or nonrenewal, and at least 6 months’ advance written notice of its intent not to renew an agreement that involved a lease of the franchised premises. Specific exceptions to the notice requirement are provided for instances of voluntary abandonment by the franchisee of the franchise relationship and a conviction of the franchisee for certain crimes.

Franchise Relationship Provisions

Franchisors would be required by the proposal, except in cases of voluntary abandonment of the franchise by a franchisee, to fairly compensate terminated franchisees for the fair market value of the inventory, supplies, and equipment purchased from the franchisor or its approved sources, and for goodwill. A franchisor would not be required to compensate a franchisee for goodwill if the franchisor provided the franchisee with one year’s notice of nonrenewal and agreed not to enforce any noncompete provision in the parties’ agreement.

The measure would restrict certain conduct on the part of franchisors, including: (1) prohibiting the right of free association among franchisees; (2) imposing unreasonable standards of performance on a franchisee; (3) failing to deal in good faith with a franchisee; and (4) discriminating between franchisees.

Additionally, the draft would require franchisors to protect and save harmless their franchisees from financial loss arising out of any claim of defect in merchandise or methods prescribed by the franchisor, and to reimburse franchisees at the prevailing retail price for warranty work.

FTC, Antitrust Division to Conduct Public Hearings on Single-Firm Conduct

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

The Federal Trade Commission and the Department of Justice Antitrust Division will hold joint public hearings on the implications of single-firm conduct under the antitrust laws on January 30, 2007, in Berkeley, California, and on February 13, 2007, in Chicago.

The January session will be hosted by the Berkeley Center for Law and Technology and the Competition Policy Center at the University of California, Berkeley, while the February session will be hosted by the University of Chicago's Graduate School of Business.

The hearings will examine whether and when specific types of single-firm conduct may violate Section 2 of the Sherman Act by harming competition and consumer welfare and when such conduct is procompetitive and lawful. The panels will provide an opportunity for business executives to express their views on Section 2 issues, including areas where the companies perceive that single-firm conduct has harmed consumers and areas where legitimate procompetitive behavior may have been chilled.

For additional information about the hearings, visit the FTC or Antitrust Division web sites or contact via e-mail Patricia Schultheiss at the FTC (section2hearings2@ftc.gov) or Gail Kursh, Deputy Chief, Legal Policy Section, at the Antitrust Division (singlefirmconduct@usdoj.gov).

Supreme Court to Review Removal of State Deceptive Advertising Case

The U.S. Supreme Court on January 12 agreed to review the removal to federal court of an Arkansas Deceptive Trade Practices Act claim brought by tobacco consumers against Philip Morris Companies, Inc. in Arkansas state court.

A class of tobacco consumers alleged that Philip Morris engaged in unfair and deceptive practices in advertising and marketing its cigarettes as “light” and having “lowered tar and nicotine,” while actually designing those cigarettes to deliver more tar and nicotine than the advertising and marketing would suggest. The class further claimed that the cigarettes delivered much more tar and nicotine to the smoker than FTC test results indicated.

Philip Morris removed this action to federal court under 28 U.S.C. §1442(a) (1), which permits removal when a person is sued for actions taken under the direction of a federal officer. The tobacco giant claimed it was acting under the direct control of the FTC when it engaged in the allegedly unlawful conduct. The class contested the removal, and the federal district court certified the question for interlocutory appeal to the U.S. Court of Appeals, Eighth Circuit.

The appeals court upheld the removal, agreeing that Philip Morris was acting under the direction of the FTC, which controlled the delivery of tar and nicotine information to consumers and monitored cigarette ads (2005-2 Trade Cases ¶74,901; CCH State Unfair Trade Practices Act ¶31,061; CCH Advertising Law Guide ¶61,808).

The direction was very specific, and the government compelled compliance with its directions through a voluntary agreement with the tobacco industry, the Eighth Circuit held. Moreover, the consumers’ claims were sufficiently related to the FTC’s direct and comprehensive control to establish a “causal connection” that linked the federal officer’s direction and control to the acts challenged in the complaint.

The class filed a petition for review by the Supreme Court on April 7, 2006, asking whether a private actor, doing no more than complying with federal regulation was a “person acting under a federal officer” for the purpose of 28 U.S.C. §1442(a)(1), entitling the actor to remove to federal court a civil action brought in state court under state law.

The petition is Watson v. Philip Morris Companies, Inc., Docket No. 05-1284, cert granted January 12, 2007.

Franchise Anti-Encroachment Law Survives Constitutional Attack

The anti-encroachment provision of the Illinois Motor Vehicle Franchise Act—which requires good cause to add or relocate a franchise within 10 miles of an existing franchise—passes constitutional muster, according to a January 8 decision of the Illinois Supreme Court. The statute survived a challenge that it was unconstitutionally vague, violated the Commerce and Equal Protection Clauses, and constituted special legislation.

Like legislation in many other jurisdictions, the Illinois Motor Vehicle Franchise Act (815 Illinois Compiled Statutes 710/1-32) is designed to protect existing motor vehicle dealers and consumers from “the negative impact of aggressive franchising practices by automobile manufacturers,” the state high court found.

Specifically, the Act requires a franchisor wishing to establish an additional franchise to provide 60 days’ notice to existing franchisees of the same line make located within 10 miles of the proposed location. The dealers have 30 days in which to file a protest with the Motor Vehicle Franchise Board. The manufacturer then has the burden of proving “good cause” for the addition of the franchise. “Good cause” means commercial reasonableness under 11 enumerated factors (including whether establishment of the franchise is in the public interest).

In this case, General Motors provided notice that it intended to open two new franchises in the Chicago area. Existing franchises challenged both locations within 30 days. A hearing was conducted, after which the hearing officer recommended that the protests be upheld. The Board followed the recommendations and barred the establishment of the two locations.

On appeal, General Motors claimed that there was good cause for the addition of the franchises and that the Act was unconstitutional on various grounds. The circuit court confirmed the decision of the Board, and the appeals court affirmed that judgment. The Illinois Supreme Court held as follows:

Good cause. The Motor Vehicle Board’s decision that the new franchises were not warranted by economic and marketing conditions was not clearly erroneous or against the manifest weight of the evidence. There were already three GM dealers within less than 10 miles of the proposed locations, there was little projected growth around the dealership, and the existing dealers were underperforming.

Vagueness. A contention that the Act was unconstitutionally vague because “a manufacturer cannot determine in advance when a dealership can be added to the market” was without merit. The Franchise Act is more detailed than some similar statutes that have been upheld in that it provides 11 factors for assessment in determining the existence of “good cause.”

Commerce Clause. The court rejected GM’s assertion that the statute impermissibly favors purely local interests over interstate commerce. A state statute is valid under the Commerce Clause if it evenhandedly effectuates a legitimate local public interest, the effect on interstate commerce is only incidental, and the burden on commerce is not clearly excessive to the local benefits. The court held that the Act serves the legitimate public interest of promoting fair dealing and protecting small business and consumers and found that GM failed to show any effect other than a restriction on intrabrand competition.

Equal protection and special legislation. GM claimed that there is no basis for conferring market protection on motor vehicle franchises but for denying this protection to other types of franchises. While the Motor Vehicle Franchise Act treats existing motor vehicle franchisees differently from other kinds of franchisees, the classification is related to “the legitimate government purposes of redressing the disparity in bargaining power between automobile manufacturers and their existing dealers and of protecting the public from the negative impact of harmful franchise practices by automobile manufacturers.” Furthermore, requiring a neutral body to determine whether there is good cause to establish an additional franchise is rationally related to the purposes served by the statute, the court concluded.

The decision is General Motors Corp. v. The State of Illinois Motor Vehicle Review Board, Docket No. 101585, January 8, 2007.

Supreme Court Reverses MedImmune Decision on Non-Antitrust Grounds

In a case originally involving antitrust claims, the U.S. Supreme Court reversed the dismissal of a patent licensee’s declaratory action challenging the validity of a biotech patent. The high court remanded the action, which was dismissed on the ground that the licensee had to terminate or breach its license agreement before it could challenge the patent in a declaratory judgment action. MedImmune, Inc. v. Genentech, Inc., No. 05-608, January 9, 2007.

The patent licensee had brought a declaratory judgment action against the patent owner, claiming patent invalidity, breach of contract, and violation of the Sherman Act. The U.S. District Court for the Central District of California dismissed the claim for lack of jurisdiction on the ground that a patent licensee in good standing cannot bring a declaratory judgment action to challenge a patent it has licensed. The court also dismissed the licensee’s antitrust and unfair competition claims.

The district court refused to transfer the antitrust portion of the appeal to the Ninth Circuit. The Federal Circuit had to take jurisdiction of the appeal of all issues when the complaint included any issue exclusively assigned to the Federal Circuit, in the court's view. Dividing the appeal between two circuits would be contrary to the careful balance and efficient design for the Federal Circuit.

On October 18, 2005, the U.S. Court of Appeals for the Federal Circuit affirmed the district court judgment in all respects (2005 TRADE CASES ¶74,972). In addition to upholding the decision on the jurisdictional issue, the Federal Circuit ruled that an interference settlement between the patent owner and another biotechnology company was not per se illegal under the Sherman Act. The appeals court determined that application of a per se illegality standard would discourage—if not prevent—settlements, placing unnecessary burdens on the courts and the Patent and Trademark Office (PTO). Moreover, the court held that the per se illegality urged by the licensee for interference settlements was contrary to both precedent and policy, as recorded in the Department of Justice/FTC’s Antitrust Guidelines for the Licensing of Intellectual Property .

The licensee’s petition for review by the Supreme Court questioned whether a patent licensee is required to refuse to pay royalties and materially breach a license agreement before bringing suit to declare the patent invalid, unenforceable, or not infringed. The Supreme Court granted review of the decision on February 21. Oral arguments were held on October 4.

In an opinion by Justice Scalia, the Supreme Court held that the standards for determining whether a declaratory judgment action satisfies the "case-or-controversy requirement" were satisfied in this case, even though the licensee did not refuse to make royalty payments. Where a plaintiff's self-avoidance of imminent injury is coerced by the threatened enforcement action of a private party, lower courts have long accepted jurisdiction, according to the Court.

A dissenting opinion by Justice Thomas maintained that the Court has "consistently held that parties do not have standing to obtain rulings on matters that remain hypothetical or conjectural. We have also held that the declaratory judgment procedure cannot be used to obtain advanced rulings or matters that would be addressed in a future case or controversy."

Government Merchants Share in Antitrust Settlement with Visa, MasterCard

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

Governmental agencies and instrumentalities that accepted Visa and MasterCard branded debit and credit cards will share in a record $3 billion antitrust settlement with the credit card companies. An agreement for compensating the “government merchants” was filed with the federal district court in Brooklyn, New York, on December 29, 2006. The agreement resolves a dispute between lead counsel for the merchant class and the government.

Under the settlement, the claims administrator will release no more than $3.4 million to the U.S. Treasury, Visa will pay $2 million to the Treasury, and MasterCard will pay $1.5 million to the Treasury. In exchange, the government merchants will release their claims against Visa and MasterCard.

The Department of Justice asked the federal district court to permit the government merchants to participate in the settlement. Lead counsel for the merchant class had objected, arguing that the government merchants were treated substantively and procedurally as class members, and an expert for the class included the billions of dollars of the government merchants’ annual Visa and MasterCard transactions in his calculations, which increased the amount of the class damages. The government’s application was supported by Visa and MasterCard.

The underlying antitrust settlement resolved charges that Visa and MasterCard had unlawfully tied their credit card networks to use of their debit cards through an “Honor All Cards” policy, thereby forcing merchants to accept inflated debit card transaction fees and stifling competition in the debit card market. Approval of the settlement was upheld by the U.S. Court of Appeals in New York City in January 2005 (2005-1 TRADE CASES ¶74,661).

Privacy Group Cites "Issues to Watch" in 2007

Congressional oversight of privacy issues, identity theft, a national identity system, collection of personal information about children, and the effect of more effective surveillance cameras are among the privacy issues to watch in 2007, according to the Electronic Privacy Information Center (EPIC), a public interest research group in Washington, D.C.

With the Democrats taking over Congress, privacy issues are likely to get renewed attention in the legislative arena, according to EPIC. Meanwhile, courts will wrestle with issues such as whether bloggers have responsibility for the publication of private information.

Following are some of EPIC’s “issues to watch” in the New Year:

Privacy Oversight and the New Congress. The new Democratic Congress can be expected to hold hearings on privacy rights of Americans, funds spent on surveillance technology, and “flagrant abuse of law.”

REAL ID Not So Real?. EPIC expects to see an effort to repeal the 2005 “Real ID” law, which by 2008 will “turn the state driver’s license into a quasi-National ID card.” The statute was enacted as an anti-terrorism measure, but “Homeland Security has been slow to embrace the law,” according to EPIC. In light of an estimated cost of more than $11 billion, the “U.S. experiment with a national identity system” may be short-lived.

Renewed Interest in Medical Records Privacy. After failing to pass controversial Health IT legislation that “would have exposed Americans’ most sensitive medical records on an electronic network” in the last session, Congress is expected to craft new legislation on the subject.

EU-US Privacy Showdown. In 2006, disputes arose over the transfer of European financial and travel records to the U.S. government. A temporary agreement on the collection of passenger data was hammered out in the European Parliament. EPIC predicts that the U.S. will face more battles regarding the use of European data.

“No swipe” Credit Cards.. Credit cards that contain RFID microchips (a.k.a., “spychips”) can be read without an individual’s knowledge or consent. A member of the Senate Banking Committee has denounced RFID “no swipe” credit cards, stating that contracts for the cards should have warning boxes, disclosing “the known weaknesses of the technology,” such as the risk of identity theft. EPIC looks for Congressional action in this area.

Cell phone Tracking and “SPIM.” Cell phones pose two new privacy concerns: (1) new technology and procedures that would allow police to track the location of cell phone users without a warrant and (2) the placing of banner ads on cell phone displays and “SPIM,” advertisements placed in instant messaging.

Databanks of Children. Government databases track everything from children’s drug dosages to their grade in math. EPIC suggests that the law: (1) ensures that children know what information the schools have and (2) holds schools liable for misuse of the information they collect.

Sex blogging. When Congressional staff assistant Jessica Cutler wrote about her sexual exploits with Washington insiders on her “Washingtonienne” blog, she launched a new era in privacy law, according to EPIC. “Are bloggers responsible for the private facts of others they put online? Is it political speech? Is it a diary?” One federal court will get to answer these questions this year.

Smarter Cameras, More Surveillance. Two technology trends may converge this year, as “the ability to process digital images is gradually incorporated in cameras designed for surveillance.” Cameras in public spaces might be able to scan crowds and match images against databases of facial images, raising new privacy concerns, according to EPIC.

The “Issues to Watch in 2007” were published, together with the “2006 Privacy Year in Review,” in the January 4, 2007 issue of EPIC Alert electronic newsletter.

EPIC was established in 1994 “to focus public attention on emerging privacy issues such as the Clipper Chip, the Digital Telephony proposal, national ID cards, medical record privacy, and the collection and sale of personal information.”

State Antitrust Enforcement: 2006 in Review

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

State antitrust investigations into the insurance industry netted significant settlements in 2006. In March, Zurich American Insurance Company agreed to settle with 13 state attorneys general and insurance regulators charges that it rigged bids and secretly paid insurance brokers hundreds of millions of dollars in exchange for steering business to Zurich.

Two separate settlement agreements, announced in March, resolved charges brought by the states of California, Connecticut, Florida, Hawaii, Illinois, Maryland, Massachusetts, New York, Oregon, Pennsylvania, Texas, Virginia, and West Virginia. St. Paul Travelers Companies, Inc., entered into a settlement agreement with the states of New York, Connecticut, and Illinois in August to resolve charges of customer steering, bid rigging, and improper finite reinsurance transactions.

In December, Prudential Insurance Company of America, the country's second largest group life insurer in the nation, reached separate settlements with the State of New York and the California Department of Insurance. Prudential allegedly engaged in deceptive and anticompetitive practices in the sale of group insurance products to employers throughout the United States. The insurer agreed to provide restitution to policyholders and to pay civil penalties to New York. The settlement with the California Insurance Department required changes to business practices.

New actions were also revealed in 2006. Acordia Inc., the fifth largest insurance brokerage firm in the nation, announced on December 19, that it would vigorously defend itself against allegations brought by the attorneys general of New York, Connecticut, and Illinois that it steered consumers to selected insurers in return for millions of dollars in secret payments.

Outside the insurance sector, a $14 million settlement agreement led to the dismissal of a multi-state antitrust enforcement action against SmithKline Beecham Corporation in March. The settlement agreement resolved allegations brought by 49 states, the District of Columbia, and the Territory of the Virgin Islands that the drug company unlawfully monopolized the market for its branded antidepressant Paxil and generic bioequivalents. In July, the state attorneys general announced lawsuits charging leading manufacturers of computer memory chips and their subsidiaries with fixing the prices of memory chips known as dynamic random access memory chips.

In merger news, Exelon Corporation and Public Service Enterprise Group Incorporated announced in September that they would terminate their merger agreement following their failure to reach an agreement with the New Jersey Board of Public Utilities.

Weight Control Pill Marketers Agree to Forfeit $25 Million to Settle FTC False Claim Charges

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

The marketers of four major weight-loss pills settled charges that they made false claims about the benefits of the products, the Federal Trade Commission announced on January 4. The marketers agreed to forfeit at least $25 million in cash and assets to settle the charges. Some of the funds will be used for consumer redress. The marketers also agreed to limit their future advertising claims.

“The marketers are required to back the claims with science and if they can’t do that, they can’t make the claim,” FTC Chairman Deborah Platt Majoras remarked.

The FTC settled allegations of deceptive marketing with marketers of Xenadrine EFX, CortiSlim, TrimSpa and One-A-Day Weight Smart. The FTC charged the marketers with making false and unsubstantiated claims, including claims that the products would result in substantial weight loss. The marketers of Xenadrine EFX actually had a study on hand in which a control group taking a placebo lost more weight than subjects taking Xenadrine EFX, the FTC said. Additionally, the agency charged the marketers of CortiStress, a product related to CortiSlim, with making unproven claims that the product could lessen the risk of osteoporosis, diabetes, Alzheimer’s disease, cancer and cardiovascular disease.

The marketers of Xenadrine EFX will pay $8 million to $12.8 million to settle the FTC charges. The product has been heavily advertised on television and in popular magazines, according to the FTC. In addition to the unsubstantiated claims of substantial weight loss, Xenadrine EFX’s marketing campaign employed paid endorsers who claimed to lose weight by using the product alone, while at the same time undergoing rigorous diet and exercise programs. “You won’t find weight loss in a bottle of pills,” Majoras warned consumers.

The FTC settled with the marketers of CortiSlim and CortiStress, who agreed to surrender assets worth at least $12 million. CortiSlim ads, like other ad campaigns involved in the settlements, ran on television, on radio and in print. The marketers of TrimSpa will pay $1.5 million to settle the FTC charges. The Bayer Corp. will pay a $3.2 million penalty to settle charges that advertisements for One-A-Day WeightSmart multivitamins violated an earlier FTC order requiring all health claims for One-A-Day vitamins to be supported by scientific evidence.

Further details appear on the FTC web site.

Department of Justice Antitrust Enforcement: 2006 Achievements

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

The number of enforcement actions brought by the Department of Justice Antitrust Division was up in 2006 over 2005. Investigations continued into the international cartel that fixed prices for high-tech dynamic random access memory (DRAM), as well as anticompetitive conduct in other industries, including ready-mixed concrete, freight forwarding services, offered to the U.S. military, and telecommunications. The Antitrust Division also announced in 2006 its first charges in the hydrogen peroxide and sodium perborates industries, the magazine paper industry, and the unprocessed fur pelt industry.

Court Challenges

Aside from the numerous guilty pleas, the Antitrust Division had several successes in court. In May, the U.S. Court of Appeals in New Orleans upheld the antitrust conviction of an executive for a vitamin manufacturer; however, the case was recommended for resentencing. Also in May, the U.S. Court of Appeals in Philadelphia ruled that a district court lacked the power to enjoin the Antitrust Division from filing an indictment after the government withdrew its grant of conditional leniency to Stolt-Nielsen S.A. In September, the Antitrust Division announced that a federal grand jury in Philadelphia indicted Stolt-Nielsen, two of its subsidiaries, and two company executives for conspiring to restrain trade in the parcel tanker shipping industry.

In the civil enforcement area, the federal district court in Chicago refused to dismiss an action challenging the policies of the National Association of Realtors for unreasonably restraining competition in the brokerage service markets.

Mergers and Acquisitions

Merger enforcement by the Antitrust Division generated some of the biggest antitrust news of 2006. In the telecom sector, the Antitrust Division approved without conditions the proposed acquisition of BellSouth Corporation by AT&T in October. Leaders of the House Judiciary Committee had urged the Antitrust Division to delay issuing any final decision on that proposed transaction until the federal district court in Washington, D.C. issued its public interest determination with regard to proposed U.S. consent decrees resolving antitrust concerns over the mergers of SBC/AT&T and Verizon/MCI. Those settlements were announced in October 2005.

The Antitrust Division in March closed its investigation into the proposed acquisition of the McClatchy Company’s Contra Costa Times and the Mercury News by MediaNews Group Inc. In an earlier settlement, McClatchy Co. and Knight Ridder, Inc. agreed to divest the St. Paul Pioneer Press to resolve antitrust concerns over their proposed multi-billion dollar newspaper merger.

Dairy Farmers of America, Inc., a national milk marketing cooperative, resolved a three-year-old lawsuit challenging its acquisition of Southern Belle Dairy Co. LLC, with a divestiture agreement on the eve of trial in October.

The Antitrust Division brought a gun-jumping case in April against two high-tech companies that merged earlier in the year. To settle charges that they violated premerger waiting period requirements, the companies agreed to pay a total of $1.8 million in civil penalties.

The Justice Department and the FTC jointly released a “Commentary on the Horizontal Merger Guidelines” in March. Further efforts to streamline the merger process came with amendments to the 2001 “Merger Review Process Initiative” in December.

FTC Enforcement: 2006 Highlights

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

At the FTC, 2006 began with the swearing in of Commissioners William E. Kovacic and J. Thomas Roach on January 4 and 5, respectively. Shortly thereafter, the agency approved its first mega-merger of 2006. The FTC cleared Teva Pharmaceutical Industries Ltd.’s proposed $7.4 billion acquisition of IVAX Corporation, creating the world’s largest generic pharmaceutical supplier.

More Mergers

Before the year was through, the Commission would also conditionally approve generic drug company combinations involving Watson Pharmaceutical, Inc. and Andrix Corporation, and Plivva d.d.

Also in the health care arena, Boston Scientific Corp. completed its $27 billion acquisition of the Guidant Corp, after agreeing to the terms of an FTC consent order. Johnson & Johnson was permitted to proceed with its proposed $16.6 billion acquisition of Pfizer’s consumer health care business, under a consent order. The agency also challenged a non-reportable, consummated merger by Hologic, Inc., a provider of diagnostic and digital imaging systems.

In the “death care industry,” the FTC approved Service Corporation International’s proposed acquisition of Alderwoods Group Inc. in December. Also on the merger front, the FTC announced the implementation of an electronic filing system for premerger notification filings, as well as merger review process reforms.

Oil Industry Report

The Commission released a report in May, following an investigation into market manipulation and price gouging in the oil industry. In the report, the FTC said it found no instances of illegal market manipulation that led to higher prices after Hurricane Katrina. The findings were met with skepticism from some members of the Senate Commerce, Science, and Transportation Committee.

Around the same time, the FTC was dealt a blow when the U.S. Solicitor General urged the U.S. Supreme Court to deny review of a decision by the U.S. Court of Appeals in Atlanta, concluding that the agency failed to establish that settlements of patent infringement litigation between pharmaceutical companies restrained trade. The Court ultimately rejected the FTC’s petition.

In July, a unanimous Commission concluded that Rambus, Inc., a developer and licensor of computer memory technologies, illegally abused the process for setting industry standards for dynamic random access memory chips, vacating an administrative law judge’s initial decision dismissing the agency’s complaint.

Consumer Protection

Among the significant consumer protection developments in 2006 were: (1) a proposed rulemaking for a business opportunity rule; (2) a record civil penalty against a magazine subscription seller for violation of a consent order; (3) a record $1 million civil penalty against social networking web site Xanga.com for alleged violation of the Children’s Online Privacy Protection Act and rule; (4) a court determination that the marketers of the “Q-Ray ionized bracelet” violated the FTC Act through false and misleading advertising; and (5) a settlement with the companies that developed and marketed the Grand Theft Auto: San Andreas video game prohibiting deceptive marketing.

As 2006 came to a close, the enactment of the US SAFE WEB Act promised to improved the FTC’s ability to cooperate with its foreign counterparts to combat spam, spyware, and other cross-border consumer fraud