Advertisers' and Marketers' Regulatory Summit Scheduled for May 1-2

The American Conference Institute will hold its first-ever Advertisers' & Marketers' Regulatory Summit on May 1-2, 2007 in Washington, DC. In addition, an optional master class, "Claim Substantiation in Depth--What the Regulators Really Want," will be held April 30, 2007.

The program will cover current initiatives in direct marketing enforcement, regulation of marketing to wireless devices, avoiding liability under state consumer protection laws, best practices of self-regulated industries, the Federal Trade Commission's social networking site initiatives, state laws governing pricing and sweepstakes, charitable solicitation campaigns, advertising to children, and avoiding liability fo actions of business affiliates.

Attendees will hear from the Electronic Retailing Association; the Entertainment Software Rating Board; the FTC; attorneys general offices of Illinois, Massachusetts, and Minnesota; the National Advertising Division; the National Association of State Charity Officials; the New York City Department of Consumer Affairs; and private practitioners.

The event will be co-chaired by Lee Peeler and Ronald Urbach. For additional information contact the American Conference Institute by telephone at 888-224-2480 or visit AmericanConference.com/adsummit.

Failure to Mark Country of Origin Would Violate Lanham Act

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

Failure to mark the country of origin on basketballs imported into the U.S. would violate Sec. 43(a) of the Lanham Act, the federal district court in Seattle has ruled. Nevertheless, the question of who was liable—the Japanese manufacturer (Molten), a French distributor (Fan Avenue), or the operator of an online store—was yet to be determined.

In addition, Molten's advertising claim that it developed "dual cushioned technology" could constitute false advertising in violation of the Lanham Act because a competing U.S. manufacturer (Baden) established a question of fact as to whether Molten's technology infringed Baden's patented design, the court held.

Importation Without Marking

The omission of a geographically descriptive term had been held actionable under the Lanham Act, the court noted. Baden alleged and presented evidence that Molten basketballs were imported into the United States through the online store of an international amateur basketball association (FIBA) without any country-of-origin marking. Molten did not contradict this allegation.

However, the parties had not yet addressed whether Molten could be held liable when it was not Molten, but either Fan Avenue or FIBA, who actually distributed the basketballs to U.S. consumers.

Molten asserted that it did not own the basketballs when they were sold to U.S. consumers through the FIBA online store. In any further briefing on this claim, the parties were directed to discuss whether Molten itself was liable for any Lanham Act violation relating to geographic misdescriptiveness if it was not the distributor or the U.S. importer of the allegedly unmarked balls.

Technology Development Ad Claim

Molten contended that it did not falsely advertise its basketball cushioning technology because the technology was an outgrowth of its own designs and Baden's patent was invalid because of prior art. These arguments both raised inherently factual issues that could not be decided on motions for dismissal or summary judgment, according to the court.

Molten's trade dress argument that alleged similarities were "structural and therefore functional" was misplaced because Baden was asserting false advertising, not a trade dress violation, the court added.

The decision is Baden Sports, Inc.v. Kabushiki Kaisha Molten dba Molten Corp., and Molten U.S.A., Inc, WD Wash., March 2, 2007 (2007-1 Trade Cases ¶75,642 and CCH Advertising Law Guide ¶62,467).

Supreme Court Considers Antitrust Immunity in Securities Law Case

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

The U.S. Supreme Court on March 27 heard oral arguments on the issue of whether an alleged conspiracy in the securities industry should be subject to the federal antitrust laws or subject only to the federal securities laws.

At issue is a decision of the U. S. Court of Appeals in New York City (2005-2 Trade Cases ¶74,943), holding that an antitrust action against the nation’s leading underwriters for engaging in anticompetitive conduct with respect to initial public offerings (IPOs) should not have been dismissed on implied immunity grounds. The investors claim that the underwriters conspired in a number of ways to artificially inflate the price of securities in IPOs.

Laws Suited to Regulate Practices

The underwriters maintain that the securities laws, not the antitrust laws, should apply. They argue that the securities laws are best suited to regulate the practices at issue. Their lawyer, Stephen Shapiro, addressed the court. “The pivotal question in this case is whether this court’s decisions in [past cases] require implied antitrust immunity... And we submit that the answer is yes.”

The Securities Exchange Acts of 1933 and 1934 were enacted to regulate IPOs and alleged market manipulation, Shapiro said. The SEC has implemented detailed regulations applicable to syndicated underwriting, which is “inherently concerted action.” In fact, the SEC is drafting new rules covering the conduct involved in this case.

Shapiro suggested that the SEC should be given deference to enforce its rules and that application of the antitrust laws would complicate the SEC’s regulatory scheme.

Collaborative Conduct "Innocuous"

The federal government joined the case on behalf of Shapiro’s clients. U.S. Solicitor General Paul D. Clement observed that the kind of collaborative conduct that would normally raise red flags in the antitrust context “is innocuous, because it’s a hallmark of the underwriting process.”

While the SEC makes certain conduct (like tie-ins and laddering) unlawful, “very closely related conduct is not only permissible, but is considered beneficial to the capital formation process,” the Solicitor General explained.

Immunity Disfavored

The lawyer for the investors, Christopher Lovell, said the Court previously has determined that implied antitrust immunity is not favored and should be applied only to the minimum extent necessary. Lovell argued that the securities laws are inadequate to address the widespread conduct being alleged.

“[T]he securities laws are transactional. They can't get at a big wrong like this,” Lovell told the court. The antitrust laws, on the other hand, have the reach necessary to deal with these larger issues, he said.

The case is Credit Suisse Securities (USA) LLC v. Billings, No. 05-1157, cert granted December 7, 2006.

Monopoly Claims Against Google Dismissed; Amendment of Complaint Denied

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

A Web site operator—which provided links to information and resources on subjects related to young children—failed to allege that Internet search engine company Google engaged in monopolization or attempted monopolization, the federal district court in San Jose, California, has ruled. Because the complaining Web site operator failed to sufficiently allege the elements of a Sherman Act, Sec. 2 claim, despite several opportunities, further amendment of the complaint would have been futile. Accordingly, the second amended complaint was dismissed without leave to amend.

Relevant Market

The Web site operator's failure to define the relevant market required dismissal of the monopoly claims. Neither the "search market" nor the "search ad market" were relevant product markets, according to the court. A "market" was any grouping of sales whose sellers, if unified by a monopolist or a hypothetical cartel, would have market power in dealing with any group of buyers.

The Web site operator failed to allege that the search market was a "grouping of sales." To the extent that the search ad market was severable from the search market, the Web site operator could not bring a claim for monopolization or attempted monopolization of the search ad market.

The search ad market was too narrow to constitute a relevant market, in the court's view. The Web site operator argued that the search ad market was distinct from other forms of advertising on the Internet and that it should be considered as such for purposes of antitrust analysis. However, there was no logical basis for distinguishing the search ad market from the larger market for Internet advertising.

Intent to Monopolize

Even if the complaining Web site operator had identified a proper relevant market and had alleged that Google arbitrarily and unfairly removed the operator from its search results for reasons unrelated to business efficiency, it failed to demonstrate an intent to monopolize. The complained-of conduct, such as de minimus misrepresentations, did not amount to actionable exclusionary or anticompetitive conduct, either individually or collectively.

The Web site operator’s pleading also was inadequate with respect to the elements of the claim: monopoly power, willful acquisition or maintenance of monopoly power, and causal antitrust injury.


False Advertising Claim

The complaining Web site operator was not permitted to amend its complaint to add a Lanham Act false advertising claim. The Web site operator lacked standing to proceed with false advertising claims under Sec. 43(a) of the Lanham Act against Google for misrepresenting the objectivity of Google's search engine results. The complaining Web site operator did not allege an injury to itself from the misrepresentation as such; rather, it alleged that is had been injured by Google's alleged manipulation of its purportedly objective search results. Moreover, misrepresentations in the ranking of search results would not amount to commercial advertising or promotion, the court held.

The decision is Kinderstart.com, LLC v. Google, Case Number C 06-2057 JF (RS), March 16, 2007 (2007-1 Trade Cases ¶75,643).

High Court Hears Arguments on Per Se Illegality of Resale Price Maintenance

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

In an oral argument on March 26, the U.S. Supreme Court was urged to overturn a longstanding precedent and rule that agreements between manufacturers and retailers setting minimum resale prices for the manufacturer’s products should not be considered per se illegal.

The dispute before the court involves Leegin Creative Leather Products Inc, a manufacturer of women’s handbags and other accessories, and PSKS Inc., the owner of a shop that sold Leegin’s goods.

Leegin established a policy of refusing to sell to retailers that would not charge Leegin’s suggested retail prices. After learning that the shop owned by PSKS was offering Leegin’s products at a discount, Leegin tried to persuade PSKS to charge Leegin’s minimum price. PSKS sued, claiming resale price maintenance.

Relying on a 1911 Supreme Court case – Dr. Miles Medical Co. v. John D. Park & Son (230 U.S. 373)– the U.S. Court of Appeals in New Orleans held that resale price maintenance is per se unlawful and upheld an award of nearly $4 million (2006-1 CCH Trade Cases ¶75,166).

Leegin’s lawyer told the Supreme Court that Dr. Miles should be overturned. “The per se rule for resale price maintenance is widely recognized to be outdated, misguided and anticompetitive,” Theodore B. Olson told the court.

Per Se Illegality v. Rule of Reason

Olson argued that the per se rule should be replaced with the rule of reason, which would allow courts to consider the effects of a challenged practice on a case-by-case basis. A majority of economists, Olson said, as well as the Antitrust Division and the Federal Trade Commission, support Leegin’s position.

Again citing economists, Olson argued that minimum resale price maintenance agreements can lead to increased competition among manufacturers of different brands and encourage dealers to differentiate the products they sell through means other than price, such as superior service.

Justice Antonin Scalia was receptive to that argument, noting that some customers would prefer more service at a higher price. “I don’t think that all the customers want is ‘cheap,’” Scalia remarked. Olson concurred, saying the purpose of the antitrust laws is competition, not low prices.

Arguing for Leegin on behalf of the federal government, Deputy Solicitor General Thomas G. Hungar echoed some of Olson’s arguments. “It’s true that retail price maintenance can, but does not always result, in price increases, but, as Justice Scalia pointed out, price is not the only thing that consumers care about,” Hungar said.

“Bad Antitrust Policy”

Representing PSKS, Robert W. Coykendall told the court, “Discouraging price cuts and depriving consumers of low prices is bad antitrust policy.” Coykendall argued that Dr. Miles protects small businesses by allowing them to charge less than the manufacturer’s suggested price and thereby compete with large discount stores.

Retailers should be entitled to pass efficiencies on to consumers in the form of lower prices, he said. “There is no doubt that retail price maintenance raises prices to consumers,” Coykendall said.

Coykendall, joined by New York Solicitor General Barbara D. Underwood, argued that Congress has indicated its support for the Dr. Miles rule and that Congress, not the court, should change the longstanding rule. “This Court should continue to honor its precedents and respect the will of Congress by adhering to the Dr. Miles rule,” Coykendall said.

The case is Leegin Creative Leather Products Inc. v. PSKS Inc., No. 04-480, cert. granted December 7, 2006.

State Unfair Trade Practices Claims Target Colleges, Schools

It’s probably too early to call it a trend, but schools have been the subject of a number of state unfair trade practice lawsuits brought by their students. Predictably, rulings in these cases have gone a number of different ways.

Standing to Sue

In Daghlian v. DeVry University, Inc. (CCH State Unfair Trade Practices Law ¶31,352), the federal district court in Los Angeles held that a student could pursue putative class action claims that DeVry technical school violated California false advertising and unfair competition laws by failing to inform students that academic credits earned at the school probably would not transfer to other educational institutions.

Contrary to DeVry’s claim, the student had standing under California Proposition 64 because he asserted an actual injury in fact as a result of the alleged false advertising and unfair competition, the court determined. DeVry maintained that the student did not have standing because he did not allege that he actually attempted to transfer to another school, which refused to accept his DeVry credits.

The student asserted that he suffered injury when he spent $40,000 in tuition, expecting that his degree would be a foundation for further education, but did not receive what he had bargained for. He alleged that, prior to enrolling, a DeVry recruiter had told him that the school offered academic credits that would be accepted by a wide variety of other academic institutions.

The fact that the student may have received some value from his tuition payments did not mean he suffered no injury, according to the court.

Charter School as “Person”

In Wells v. One2One Learning Foundation (CCH State Unfair Trade Practices Law ¶31,281), the California Supreme Court ruled that state charter schools and their operators were “persons” who could be sued under the California Unfair Competition Law (UCL) for failure to provide students with promised equipment, supplies, and services.

The UCL defines “persons” subject to suit as “natural persons, corporations, firms, partnerships, joint stock companies, associations and other organizations of persons.” Because they were “associations” or “organizations,” the charter schools fell within the plain meaning of the statute.

Pleading Fraud with Particularity

In Jamieson v. Vatterott Educational Center, Inc. (CCH State Unfair Trade Practices Law ¶31,354), the federal district court in Witchita, Kansas, held that a Kansas Consumer Protection Act claim that an occupational training college misrepresented the quality and reputation of its curriculum was not pled with sufficient particularity.

Fraud complainants must identify, among other things, the “who, what, where, and when” of alleged misrepresentations. In this case, the complaint alleged that school representatives had made false statements about (1) the completeness of the school’s courses of study, (2) the qualifications and competence of the faculty, (3) the quality and availability of materials and equipment that would be provided by the school, (4) the school’s accreditation, (5) the school’s job placement rates, and (6) the skills plaintiffs would have upon completing a course of study.

Although the plaintiffs identified the general subject matter of the alleged misrepresentations, they failed to suffinciently identify any specific content, according to the court.

Deceptive or Unconscionable Claims

A student that had completed coursework in a polysomnography program at an Ohio community college was not allowed to proceed with claims against the college for alleged violations of the Ohio Deceptive Trade Practices Act and the Ohio Consumer Sales Practices Act.

The student claimed that marketing literature distributed by the college falsely represented that completion of the program would confer a sleep technician certificate accredited by the Ohio Board of Regents rather than a non-accredited “Competency Award.”

However, the Ohio Court of Appeals held that the literature was neither deceptive nor unconscionable, since the student did receive a “certificate” of competency and nothing in the literature suggested that completion of the program would result in registration with the state.

The case is Spafford v. Cuyahoga Community College (CCH State Unfair Trade Practices Law ¶30,979).

Disparagement of Cable Service’s HD Picture Was Likely False Advertising

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

Time Warner Cable (TWC) proved a likelihood of success on the merits of its Lanham Act Sec. 43 (a) false advertising claims that satellite television provider DIRECTV made literally false statements in television commercials and Internet advertisements disparaging the quality of cable high-definition (HD) television, the federal district court in New York City has ruled. The court granted a preliminary injunction barring DIRECTV from disseminating the commercials and Internet ads in any market served by TWC.

“The Best Picture”

In one of the television commercials, singer and actress Jessica Simpson stated that a viewer could not "get the best picture" without DIRECTV. This statement was likely to be proven literally false, the court determined, in light of the undisputed factual record establishing that DIRECTV and TWC provided HD pictures of equal quality.

Another commercial featured actor William Shatner, in the role of Star Trek Captain James T. Kirk, praising the "amazing picture quality of the DIRECTV HD" and asserting that "settling for cable would be illogical." A narrator then concluded: "[f]or an HD picture that can't be beat, get DIRECTV.”

Viewing the commercial as a whole, TWC met its burden of showing that the commercial focused on DIRECTV's HD programming and made the literally false statement that DIRECTV's HD programming was superior to that of TWC, according to the court.

Satellite HD “Beats Cable”

DIRECTV's Internet advertisements allegedly depicted DIRECTV's HD television service as clear and sharp; depicted "other TV" (defined by the Web site as "basic cable ") as unwatchably blurry, pixelated, and distorted; and claimed "DIRECTV's picture beats cable."

Contrary to DIRECTV's argument that its Internet ads constituted nonactionable puffery, TWC demonstrated a likelihood of success in proving that, in the relatively new world of HDTV equipment, new buyers might not have sufficient knowledge of the way in which HDTV sets operated to recognize as false DIRECTV's depiction of distorted cable TV images.

Part of the problem with the contested Internet advertisements was that nothing in the text or images suggested that the grossly distorted picture quality depicted in the advertisements was not characteristic of cable service, the court said.

The decision is Time Warner Cable, Inc v. DIRECTV, Inc., No. 06 Civ. 14245 (LTS)(MHD), filed February 5, 2007 (2007-1 TRADE CASES ¶75,636).

Senate Bill Targets Mergers, Acquisitions in Oil Industry

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

Bi-partisan legislation to require closer scrutiny of mergers and acquisition in the oil industry was introduced on March 14 in the U.S. Senate.

The proposed “Oil Industry Merger Antitrust Enforcement Act” would require merging oil companies to prove that their combination would not substantially lessen competition or tend to create a monopoly.

In addition, the measure (S.B. 878) would direct the FTC and the U.S. Department of Justice to revise antitrust guidelines for the oil industry in order to block mergers and acquisitions that would reduce competition in the fuel marketplace.

Modifications to Merger Guidelines

The legislation, sponsored by Senator Herb Kohl (D-Wisconsin) and Arlen Specter (R-Pennsylvania), would call on the FTC and Department of Justice to jointly review and revise all enforcement guidelines and policies to address the oil industry.

The revisions would be intended to (1) target mergers and acquisitions among the companies involved in the production, refining, distribution, or marketing of oil, gasoline, natural gas, heating oil, or other petroleum-related products and (2) ensure that application of the guidelines and policies will prevent any merger or acquisition in the oil industry that might substantially lessen competition or tend to create a monopoly.

Guidelines would have to be revised to reflect the high inelasticity of demand for oil and petroleum-related products, the ease of gaining market power, supply and refining capacity limits, difficulties of market entry, and unique regulatory requirements.

“Merger Wave”

The legislation is needed to respond to a “merger wave [that] has led to substantially less competition in the oil industry,” according to Senator Kohl, who chairs the Senate Judiciary Committee’s Antitrust, Competition Policy and Consumer Rights subcommittee.

“Led by gigantic mergers such as Exxon/Mobil, BP/Arco, Conoco/Phillips, and Chevron/Texaco, by 2004 the five largest U.S. oil refining companies controlled over 56% of the domestic refining capacity, a greater market share than controlled by the top ten companies a decade earlier,” Senator Kohl remarked.

“NOPEC” Bill

Another bi-partisan measure introduced on March 14 would permit U.S. legal action against the Organization of Petroleum Exporting Countries (OPEC).

The proposed “No Oil Producing and Exporting Cartels Act of 2007” or “NOPEC” would permit the Department of Justice to bring actions against foreign states for collusive practices in setting the price or production of petroleum products, according to Senator Kohl, sponsor of Senate Bill 879.

Nations that participate in oil cartels would not be exempt from basic antitrust laws under the sovereign immunity and act of state doctrines. Similar measures have been introduced, but have stalled, in previous legislative sessions.

$19 Million False Ad Damages Awarded in Satanism Voicemails Case

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

Household products manufacturer Procter and Gamble announced that it won a $19.25 million jury verdict on March 16 against four Amway distributors for spreading false rumors linking P&G to Satanism, in a false advertising suit in the federal district court in Salt Lake City. The rumors were spread in messages sent by the distributors via the Amway voicemail system.

"This is about protecting our reputation," said Jim Johnson, P&G's Chief Legal Officer. "We will take appropriate legal measures when competitors unfairly undermine the reputation of our brands or our company."

Prior to trial, the court had held on February 6 (CCH Advertising Law Guide ¶62,421) that P&G’s evidence was sufficient to demonstrate that the voicemail messages could have been sufficiently disseminated to constitute commercial advertising or promotion within the meaning of the Lanham Act Sec. 43(a) prohibition against false advertising.

In an earlier opinion in the case (CCH Advertising Law Guide ¶60,155 ), the U.S. Court of Appeals in Denver had determined that the messages, which accused P & G of using its profits to support the "church of satan," were commercial speech.

Even though the rumors were commercial speech, the trial court on March 2 denied P&G’s motion to exclude the distributor’s evidence that they spread the rumor for a religious or other noncommercial purpose. The evidence was admissible on the issue of whether the distributors statements were made “for the purpose of influencing consumers to buy the defendant’s goods or services,’’ according to the court.

The difference between this element of proof and the commercial speech element was “narrow, but significant,” the court said, although the evidence would appear to have had little effect on the jury’s verdict.

The March 2 ruling in Procter & Gamble v. Haugen, (D Utah) No. 1:95-CV-94 TS, will be reported in CCH Trade Regulation Reports and CCH Advertising Law Guide.

Teleconference, New Book Provide Guidance on New FTC Franchise Rule

Franchisors faced with having to comply with the new FTC franchise disclosure rule can receive help from an upcoming American Bar Association teleconference, as well as a new CCH law-and-explanation book.

The ABA Forum on Franchise is sponsoring a 90-minute teleconference and live audio webcast—“The New FTC Franchise Rule: A Primer for Practitioners”—on Thursday, April 12, from 1 p.m. to 2:30 p.m. Eastern time. The program will provide a comprehensive overview of the new rule, including a review of the most important changes. Panelists will be Susan Grueneberg of Dreier Stein & Kahan LLP (moderator), Kathryn M. Kotel of McDonald’s Corp., FTC Franchise Program Coordinator Steve Toporoff, and Maryland franchise regulator Dale Cantone.

Further information and registration are available at the ABA website. The program will be available on audio CD through the ABA Web Store.

Another helpful resource is the CCH law-and-explanation book—FTC Disclosure Rules for Franchising and Business Opportunities. The volume combines, in one handy reference, the text of the new franchise and business opportunity rules, the FTC’s lengthy Statement of Basis and Purpose, and Highlights and Analysis by prominent franchise attorneys David J. Kaufmann and David W. Oppenheim. The analysis features (1) a chart summarizing the disclosure variations between the revised franchise rule and the Uniform Franchise Offering Circular Guidelines and (2) a model franchise disclosure document prepared according to the new franchise rule.

For further information regarding the 336-page book, call the CCH customer service department (1-800-248-3248) or visit the CCH Online Store (http://onlinestore.cch.com) and search the keywords “FTC disclosure rule.”

FTC Challenges Combination of Natural Gas Distributors in Southeastern Pennsylvania

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

The FTC has issued an administrative complaint challenging a proposed combination of the only two competitors in the pipeline delivery of naturalgas to nonresidential customers in the greater Pittsburgh area and other parts of Allegheny County, Pennsylvania.

Equitable Resources, Inc.’s proposed acquisition of The Peoples Natural Gas Company would result in a merger to monopoly, according to the agency. The FTC has not yet moved for a preliminary injunction in federal district court to block the proposed transaction, because the deal can not proceed without Pennsylvania Public Utilities Commission (PUC) approval. A decision by the PUC is not expected until later this month or in early April.

The Peoples Natural Gas Company is a subsidiary of Dominion Resources,Inc. The transaction, valued at $970 million, includes Equitable’s purchase of Hope Gas, Inc., another subsidiary of Dominion. The complaint does not challenge the acquisition of Hope Gas, Inc.

Monopoly in Distribution of Natural Gas

“By removing Dominion Peoples as a competitor through this transaction, Equitable obtains a monopoly in the distribution of natural gas to many nonresidential customers in the Pittsburgh area,” said FTC Bureau of Competition Director Jeffrey Schmidt. “The transaction will thus result in higher prices for these nonresidential customers, including hospitals, schools, churches and apartment buildings, and likely increase the prices these customers charge consumers for their important services.”

According to the FTC complaint, the proposed acquisition may substantially lessen competition in the following ways, among others: (1) by eliminating competition between Equitable and Dominion in the local distribution of natural gas in the relevant markets;(2) by increasing the likelihood of, or facilitating, collusion or coordinated interaction between the combined entity and other providers of local distribution of natural gas in the relevant markets; and (3) by increasing the likelihood that the combined entity will unilaterally exercise market power in the local distribution of natural gas.

Authorization to Seek Injunction

While the FTC has not filed a motion for a preliminary injunction, its staff has been authorized to seek such an injunction, should it become necessary to preserve its ability to obtain effective relief while the administrative trial process proceeds. The Commission voted 4-1 to issue the administrative complaint and to authorize the staff to seek a preliminary injunction, with Commissioner Pamela Jones Harbour voting no.

The administrative complaint approved by the Commission on March 14,2007, for In the Matter of Equitable Resources, Inc., Dominion Resources,Inc., Consolidated Natural Gas Company, and The Peoples Natural Gas Company, FTC Dkt. 9322, is available here at the FTC web site.

Business Could Be Liable for CAN-SPAM Violations of Promotional Affiliates

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

A subscription pornographic website operator could be vicariously liable for its promotional affiliates' alleged violations of the CAN-SPAM Act by sending unconsented-to sexually explicit commercial e-mails without warning labels, the federal district court in Tucson has ruled.

The court’s opinion raises questions as to whether—outside the pornography industry—a business can be held vicariously liable if its promotional affiliates violate the Act through commercial e-mail marketing

The court observed that the text of the statute plainly contemplated a situation where an entity or person would pay or otherwise induce another to send a violative e-mail such that a joint violation of the statute would occur. The statute stated specifically that more than one person might be considered to have “initiated” a particular message. The statutory text also made it clear that “procuring” would involve somehow inducing, either by money or otherwise, the initiation of the message, in the court’s view.

The statute was inapplicable to an accidental or mistaken violation, immediately attended to and corrected. But the website operator in the case at hand could not insulate itself from any liability for the actions of affiliates on its ultimate behalf and for its financial benefit purely by putting on blinders or inattention to monitoring and supervising the use of its sexually explicit materials, according to the court.

The website operator had a duty to oversee the use of those sexually explicit materials when distributed for promotion. Despite disclaimers, upon receipt of knowledge that affiliates were using their promotional literature in a violative manner, the website operator would incur a duty to act reasonably to stop that activity.

The pivotal issues were control over the affiliates and knowledge of their violations. Because a reasonable trier of fact could differ over whether or not the relationship between the website operator and its affiliates resulted in vicarious liability of the operator for statutory violations, the case could not be decided on summary judgment motions.

The decision, brought by the U.S. Department of Justice on behalf of the Federal Trade Commission, is U.S. v. Cyberheat, Inc. (D Ariz.), No. CV-05-457-TUC-DCB, March 2, 2007. The opinion will be reported in CCH Trade Regulation Reports and CCH Advertising Law Guide.

High Court to Hear Arguments on RICO Extortion Claim Against Government Officials

This posting was written by Sonali Oberg, editor of CCH RICO Business Disputes Guide.

The U.S. Supreme Court will decide whether government officials acting pursuant to their regulatory capacity can be guilty under RICO of the predicate act of extortion under color of official right for attempting to obtain property for the sole benefit of the government.

At issue is a holding by the U.S. Court of Appeals in Denver (RICO Business Disputes Guide ¶10,322) that a landowner could proceed with a RICO claim against employees of the Bureau of Land Management (BLM) because the employees had engaged in various forms of extortion in an attempt to force the landowner to re-grant an easement the BLM had lost.

The landowner sufficiently pleaded several instances of business and property damages that allegedly resulted from the employees' activities. The employees took actions that adversely affected the landowner's business by interfering with guest ranch operations and causing economic injury and property damages.

Such allegations would be sufficient to show standing because, at the pleading stage, general factual allegations of injury resulting from the employees' conduct would suffice, according to the appellate court.

The petition is Wilkie v. Robbins, U.S. S.Ct., Dkt. 06-219, cert. granted December 1, 2006. Oral arguments scheduled for Monday, March 19, 2007.

Kmart Agrees to Disclose Gift Card Fees and Provide Refunds

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

In the Federal Trade Commission’s first enforcement action involving gift cards, Kmart Corporation has agreed to settle charges that it engaged in deceptive practices in advertising and selling its Kmart gift card, the FTC announced March 12, 2007. As part of the settlement, Kmart agreed to implement a refund program and publicize it on its website.

“Consumers have a right to know when gift cards come with strings attached,” FTC Chairman Deborah Platt Majoras said. “If fees or restrictions apply, gift card issuers must fully and clearly disclose them.”

According to the FTC’s complaint, Kmart promoted the card as equivalent to cash but failed to disclose that fees are assessed after two years of non-use, and misrepresented that the card would never expire. Kmart has agreed to disclose the fees prominently in future advertising and on the front of the gift card.

The FTC’s complaint alleges that since 2003, Kmart did not disclose adequately that after 24 months of non-use, a $2.10 “dormancy fee” would be deducted from the card’s balance for each month of inactivity, resulting in a $50.40 reduction from the card’s value if the card was not used for 24 months. In many instances, the Commission alleges, consumers did not learn of the fee until they attempted to use their cards.

According to the complaint, the Kmart gift card was sold bearing inadequate disclosures that appeared in fine print on the back side and that were phrased in legalese. In some instances the disclosures on the card were wholly concealed before sale, and there were no pre-sale disclosures in online sales.

As of May 1, 2006, Kmart stopped charging a dormancy fee on all Kmart gift cards, according to the FTC.

Under the proposed settlement, which is subject to public comment, Kmart Corporation, Kmart Services Corporation, and Kmart Promotions LLC, will not advertise or sell Kmart gift cards without disclosing, clearly and prominently, any expiration date or fees in all advertising and on the front of the gift card.

The proposed settlement further requires Kmart to disclose, clearly and prominently, all material terms and conditions of any expiration date or fee at the point of sale and before purchase. It bars Kmart from misrepresenting any material term or condition of the gift cards, and prohibits Kmart from collecting dormancy fees on any gift card sold before the proposed order is issued.

The proposed settlement requires Kmart to reimburse the dormancy fees for consumers who provide an affected gift card’s number, a mailing address, and a telephone number. Kmart will publicize the refund program on its website, including a toll-free number, e-mail address, and a postal address for eligible consumers to contact Kmart to seek a refund.

The FTC has established a Consumer Hotline at (202) 326-3569 for consumers who have questions about the refund program.

The Commission vote to accept the proposed consent agreement was 5-0. Commissioners Pamela Jones Harbour and Jon Leibowitz said they concur in the decision to bring an action against Kmart, but dissent in part from the proposed consent agreement because they believe the remedy should include disgorgement of ill-gotten profits

More than 25 states have laws that regulate gift certificates, gift cards, and stored value cards. The laws, which limit expiration or fees and require disclosures, are reported in CCH Advertising Law Guide.

Failure to Define Relevant Market Dooms Racetrack's Claims

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

Antitrust claims against an operator of a thoroughbred racetrack in Hallandale, Florida, were properly dismissed, according to the U.S. Court of Appeals in Atlanta, because an operator of a thoroughbred racetrack in Tampa failed to establish a valid relevant market.

Without a properly-defined relevant market, the complaining competitor was unable to prove an anticompetitive effect resulting from challenged exclusive dissemination agreements with pari-mutuel venues.

An expert for the Tampa-based track contended that the relevant market was out-of-state thoroughbred racing signals during the months that both tracks were operating. However, the testimony was conclusory and based on insufficient economic analysis, the appeals court ruled.

The decision is Gulfstream Park Racing Assn., Inc. v. Tampa Bay Downs, Inc., No. 03-16272, March 5, 2007.

Antitrust Enforcers Face Criticism at Senate Hearing

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

Lawmakers raised serious concerns about the recent track record of the federal antitrust enforcement agencies at a Senate antitrust oversight hearing on March 7. The top regulators of those agencies defended their performance.

"Alarming Decline" in Enforcement

Sen. Herb Kohl (D-Wis.) cited an “alarming decline” in antitrust enforcement under the Bush administration, particularly in the area of mergers. Kohl, who serves as chairman of the Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights, said the antitrust officials have challenged 75 percent fewer mergers under the Bush administration. At the same time, merger reviews have declined by 60 percent.

Nevertheless, the chief of the Justice Department’s Antitrust Division told lawmakers that the division remains “very active” in merger enforcement. Assistant Attorney General Thomas O. Barnett said the division filed 10 merger-enforcement actions in district courts in fiscal 2006. In an additional 6 transactions, the parties restructured the deals as a result of division investigations.

Barnett said the division’s activity in 2006 represents the highest level of merger-enforcement activity since the end of 2001, when the division was reviewing twice as many mergers as a result of what Barnett described as a “merger wave” during that time.

Sen. Russ Feingold (D-Wis.) was among the lawmakers joining Kohl in expressing concerns about allegedly lax review of mergers by the Antitrust Division. In response, Barnett said the division has not changed its approach to merger enforcement. “We are consistently applying the same principles that we have applied for 15 or 20 years,” Barnett said.

Deborah Platt Majoras, chairman of the Federal Trade Commission (FTC), testified that her agency has focused its enforcement efforts on areas of the economy that have the greatest impact on consumers, such as health care, energy, and real estate. In fiscal 2006, Majoras said the FTC had identified 16 transactions that raised concerns for competition. The FTC gained relief in nine cases, while seven transactions were withdrawn or restructured.

The antitrust agencies did receive some support from lawmakers during the hearing, particularly from Sen. Orrin G. Hatch (R-Utah), the top Republican on the subcommittee. “As with any endeavor, I am sure that there is some room for improvement with respect to current enforcement efforts, but I have been generally pleased with the enforcement efforts of both the Antitrust Division and the Federal Trade Commission,” Hatch said.

Consolidations in Several Sectors

Senators asked the heads of the antitrust agencies about consolidation in several sectors of the economy of particular concern to them and their constituents, including the agricultural, railroad, media, dairy, and airlines industries.

Kohl sought and gained assurances that Barnett would take a second look at the proposed takeover of Midwest Airlines by AirTran. Last month, the Antitrust Division closed its mandatory investigation of the merger after fewer than 30 days, Kohl said. Barnett agreed to review any additional comments and evidence generated by Kohl and others. Midwest Airlines serves Kohl’s home state of Wisconsin.

“Made from Sugar” Sweetener Ad Campaign Could Be Impliedly False

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

McNeil Nutritionals' advertising of its Splenda artificial sweetener as “made from sugar, tastes like sugar” could falsely imply that the product “contained” sugar or was “natural,” in violation of Sec. 43(a) of the Lanham Act, the federal district court in Philadelphia has ruled.

McNeil's motion for summary judgment was rejected because there were unresolved issues of fact about the percentage of consumers who were confused by the advertising, in light of consumer survey evidence introduced by Merisant, a manufacturer of competing artificial sweeteners.

Literal Truth

McNeil maintained that the phrase “made from sugar” was literally true and unambiguously excluded the interpretation that Splenda was sugar or that it was made with sugar. McNeil unsuccessfully contended that Merisant was improperly using survey evidence to define the word “from” in the phrase.

As employed by McNeil, the phrase “made from sugar” meant that Splenda was made through a patented, multi-step process that started with sugar and chemically converted it into a no-calorie, non-carbohydrate sweetener, the court found.

If Merisant were to produce enough evidence that McNeil attempted to mislead consumers about Splenda's sugar origins, then the claim that reasonable consumers were misled could not be rejected as a matter of law.

Consumer Survey Evidence

Although Merisant's survey evidence addressed consumer perceptions about the advertising claim “made from sugar, tastes like sugar” only as it appeared on packaging of Splenda, Merisant could pursue its allegations of implied falsity against McNeil's entire Splenda ad campaign—including television and print advertising.

If the jury were to find that “made from sugar” was impliedly false on a product package, the court said that it would be hard pressed to find the logic in permitting McNeil to use the same claim in other forms of media.

Laches

The defense of laches, based on Merisant's four-year delay in bringing suit, did not bar its false advertising claims because too many facts remained in dispute at the summary judgment stage of the case, the court held. McNeil had the burden of establishing the elements of laches—inexcusable delay and prejudice—because the delay did not exceed the most closely analogous state statute of limitations, the six-year “catch all” limitation under the Pennsylvania Unfair Trade Practices and Consumer Protection Law.

If McNeil’s advertising for Splenda was truly misleading, and if Merisant offered evidence that McNeil intended to mislead consumers, then principles of equity would prevent McNeil from successfully asserting a laches defense, according to the court..

Disgorgement of Profits

Deciding whether a disgorgement of profits would be an appropriate remedy was premature because of hotly-contested disputes of fact about whether McNeil intended to deceive the public and whether Merisant's sales were diverted by the McNeil's alleged misconduct, the court determined. Merisant asserted that it would incur lost profits of $24 million as a result of McNeil’s allegedly false advertising and that McNeil would realize approximately $20.1 million in profits on sales allegedly diverted from Merisant. Merisant also sought to recover $176.1 million in profits that McNeil allegedly earned from all sources through 2006 as a result of its advertising.

Unclean Hands

McNeil could not prevail on a defense of unclean hands because it failed to show with clear and convincing evidence that Merisant had engaged in egregious conduct, that the alleged misconduct of the parties shared a close nexus, and that either McNeil or the public interest was injured by Merisant’s alleged misconduct.

The decision, Merisant Co. v. McNeil Nutritionals, (ED Pa.) No. 04-5504, March 2, 2007, will be reported in CCH Trde Regulation Reporter and in CCH Advertising Law Guide.

New House Antitrust Task Force Considers Satellite Radio Merger

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

The House Judiciary Committee established an antitrust task force on February 28, and the task force's first order of business was to consider the recently proposed XM-Sirius Radio merger. The task force is slated to operate through August.

The task force heard testimony on the competitive impact of the XM-Sirius Radio merger. Mel Karmazin, CEO of Sirius, said the merger was necessary to preserve and enhance choices for consumers. He defended the proposed deal, claiming it would lead to lower prices and greater competition in the audio entertainment marketplace.


“Fundamental Issues in Antitrust”

Other hearing witnesses criticized the proposed merger, warning it would create a monopoly in the satellite radio industry. The merger of the only two satellite radio providers "raises the most fundamental issues in antitrust and poses a substantial threat to consumers and competition," according to Mark N. Cooper, director of research at the Consumer Federation of America. Cooper urged federal regulators to reject the proposed deal, noting that regulators had required the companies to agree not to merge as a condition of receiving their operating licenses.

David K Rehr, head of the National Association of Broadcasters, also opposed the merger. "One can easily see what XM and Sirius are really asking for here," said Rehr. "They want the ability to set subscription prices for national satellite radio service without constraint from a competing service. They want to eliminate the need to compete with another national service provider to acquire programming and talent that wish to reach the national audio market. They want the ability to demand exclusive access to attractive programming, such as sporting events. And, they want to reduce the need to spend money on innovative service and equipment for consumers."

Gigi B. Sohn, president of Public Knowledge—a public interest advocacy group—suggested that the merger be approved, subject to conditions, including a three-year freeze on the price the new company would charge for its satellite radio services.

Task Force Membership

The Judiciary Committee chairman, John Conyers Jr. (Michigan) chairs the antitrust task force. Other Democratic members are: Representatives Howard Berman (California), Rick Boucher (Virginia), Zoe Lofgren (California), Sheila Jackson-Lee (Texas), Maxine Waters (California), Steve Cohen (Tennessee), Anthony Weiner (New York), Artur Davis (Alabama), and Debbie Wasserman-Schultz (Florida).

Republican members are: Ranking Member Steve Chabot (Ohio), Deputy Ranking Member Ric Keller (Florida), Ex-officio Ranking Member Lamar Smith (Texas), and Representatives James Sensenbrenner (Wisconsin), Bob Goodlatte (Virginia), Chris Cannon (Utah), Darrell Issa (California), J. Randy Forbes (Virginia), and Steve King (Iowa).

Trouble Brewing at Coffee Beanery?

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

Several disgruntled franchisees of coffee shop franchisor the Coffee Beanery are teetering on bankruptcy and unhappy with the Flushing, Michigan-based company’s franchising practices, writes Mary Crane for Forbes.com. Five of the struggling franchisees were willing to go on the record with the reporter, and all of them had similar complaints.

The five franchisees bought into the franchisor’s new concept of a “café store,” a larger and more expensive unit than the franchisor’s traditional small coffee bar or kiosk-style concept. The café-store model required the franchisees to sell sandwiches and pastries, in addition to coffee products, Ms. Crane observes.

The disgruntled franchisees of the new concept all have similar complaints. The Coffee Beanery, they assert, never disclosed that the café stores business model was flawed—the stores were historically unprofitable and that the equipment they would be required to purchase was both defective and overpriced. In addition, each of the franchisees reported spending 30% to 40% more than they had expected to build their store.

Franchisee Fights Back

In January 2004, Richard Welshans and Deborah Williams, spent $1.6 million in opening their Coffee Beanery café store in Annapolis Maryland. Alleging that their franchise never turned a profit the couple filed a complaint with the Maryland Attorney General’s office.

The lynchpin of their complaint was that the franchisor failed to distinguish between its traditional stores and its café stores. Thus, it was difficult to draw conclusions about the profitability of the café stores from the franchisor’s 253-page offering circular. Harry Rifkin, an attorney representing the couple, claims that of the 60 to 90 café stores opened during the last 10 years, only one has ever been profitable.

Maryland Consent Order

The Maryland Attorney General, pursuant to the couple’s complaint, issued a consent order on September 12, 2006, finding the franchisor in violation of the Maryland Franchise Registration and Disclosure Law. The franchisor had made material misrepresentations of fact or omissions of material fact in its sales to Maryland franchisees and failed to provide prospective franchisees with the type of prospectus the law required, the Attorney General determined. As a result, the Coffee Beanery was permanently barred from offering and selling franchisees in Maryland in violation of the law.

The consent order offered the complaining couple a choice. They could release any claims they had against the franchisor in return for the rescission of their franchise agreement and the return of their initial investment. Or they could refuse the rescission and elect to pursue their claims against the franchisor. The couple refused rescission, Ms. Crane reports, choosing to fight to recoup all of their losses. They are now awaiting the results of an arbitration action they filed against the franchisor.

Mary Crane’s article for Forbes.com may be accessed here.

EC Warns Microsoft of Further Penalties for Noncompliance with 2004 Decision

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

Microsoft Corporation has four weeks to reply to a Statement of Objections issued by the European Commission (EC), outlining the EC's preliminary view that the computer software company’s pricing for certain technology does not comply with obligations imposed by a March 2004 EC decision. After four weeks, the EC may impose a daily penalty for failure to comply with the decision, according to a March 1 announcement.

Abuse of Dominant Position

The March 24, 2004 decision found that Microsoft abused its dominant position by leveraging its near monopoly in the market for PC operating systems onto the market for work group server operating systems. The decision found that Microsoft's refusal to supply interoperability information risked eliminating competition in the work group server operating system market.

In order to prevent the perpetuation of this abuse of Microsoft's dominant position, the 2004 Decision requires Microsoft to make available interoperability information on reasonable and non-discriminatory terms.

An assessment of the reasonableness of Microsoft's prices for interoperability information depends on whether there is innovation in the protocols and, if there is, what is charged for comparable technologies in the market.

Unreasonable Royalty Rates

According to the EC's Statement of Objections, Microsoft's current royalty rates are unreasonable. The Statement of Objections found that there is no significant innovation in the interoperability information. The EC is still considering the issue of whether the interoperability information is complete and accurate.

“Microsoft has agreed that the main basis for pricing should be whether its protocols are innovative,” said EC Competition Commissioner Neelie Kroes. “The Commission's current view is that there is no significant innovation in these protocols. I am therefore again obliged to take formal measures to ensure that Microsoft complies with its obligations.”

Senate to Hold Antitrust Hearings on March 7

For the first time in five years, the U.S. Senate will hold antitrust oversight hearings. The Senate Judiciary Committee’s Subcommittee on Antitrust, Competition Policy, and Consumer Rights has scheduled a hearing on “Oversight of the Enforcement of the Antitrust Laws” for Wednesday, March 7 at 2 p.m. in Room 226 of the Dirksen Senate Office Building.

Scheduled witnesses are Thomas O. Barnett, Assistant Attorney General in Charge of the Antitrust Division, and Federal Trade Commission Chair Deborah Platt Majoras.

McCarran-Ferguson Act

Earlier that day, the full Senate Committee on the Judiciary will conduct a hearing entitled “The McCarran-Ferguson and Antitrust Immunity: Good for Consumers?” The hearing is scheduled for 9:30 a.m. in Room 226 of the Dirksen Senate Office Building,

Witnesses will include (Panel I) Senator Trent Lott (R-Miss.) and Senator Mary L. Landrieu (D-La.) and (Panel II) Michael Homan of New Orleans; J. Robert Hunter, Insurance Director for the Consumer Federation of America; Marc Racicot, President of the American Insurance Association; and Susan E. Voss, Iowa Insurance Commissioner.

Further information is available from the U.S. Senate Committee on the Judiciary.

Antitrust Modernization Commission to Conduct Public Meeting on Recommendations


The Antitrust Modernization Commission will hold a public meeting on March 14 from 9:30 a.m. to approximately 5 p.m. on possible recommendations to Congress and the President regarding antitrust law. The Commission may conduct additional business as necessary. The meeting will be held at Morgan Lewis, Main Conference Room, 1111 Pennsylvania Avenue, N.W., Washington, D.C.

For additional information, contact Andrew J. Heimert, Executive Director and General Counsel, Antitrust Modernization Commission, telephone: 202-233-0701; email: info@amc.gov. Advanced registration is required. If you wish to attend the meeting, please provide your name by e-mail to meetings@amc.gov or call 202-233-0701. Please register by noon on March 13.

New Commission Member

President George W. Bush announced on February 22 his intention to appoint Deputy Assistant Attorney General Dennis W. Carlton to be a member of the Commission.. Last August, Carlton was selected to direct the Department of Justice Antitrust Division’s Economic Analysis Group.