Antitrust, IP Are “Complementary” Forces to Encourage Innovation: Antitrust Chief


This posting was written by Darius Sturmer, editor of CCH Trade Regulation Reporter, and John W. Arden.

Speaking at an antitrust conference in New York City on May 16, Assistant Attorney General Thomas O. Barnett, head of the Department of Justice Antitrust Division, offered a summary of recent developments at the intersection of antitrust and intellectual property law. Barnett described antitrust and IP laws as complementary, in that "both seek to protect and encourage innovation and growth."

Dynamic Efficiency

The antitrust chief stressed that the driving force behind growth is dynamic efficiency, which refers to "gains that come from entirely new ways of producing products or services." He cited a study by Nobel Prize winning economist Robert Solow, finding that, between 1909 and 1949, gains from labor and capital intensity accounted for only one-eighth of the U.S. GNP growth. The remainder of the growth could be ascribed to "technical change."

“Why does this matter to the antitrust-IP interface?” Barnett asked. “Antitrust does not protect competition for its own sake; instead, it protects competition as a force that leads to increased efficiency, growth, and consumer welfare. It follows that if the research shows us that technical change (dynamic efficiency) accounts for a large share of efficiency, growth, and welfare gains, antitrust enforcers should seek to ensure that their actions promote — and not inadvertently reduce — the forces that lead to technical change in the long term. Intellectual property is such a beneficial force.”

Bundling and Tying

Barnett called attention to the April 2007 issuance of a joint FTC and Department of Justice report entitled, "Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition."

Among the highlights of the report, he said, are the agencies' guidance on bundling and tying. According to the report, he said, U.S. antitrust law is “continuing its movement away from formalism in the non-criminal context and toward a case-by-case, effects-based approach that focuses on efficiency.”

There is increasing support for application of the rule of reason—rather than the per se rule—to all tying and bundling claims, according to the antitrust chief.

Supreme Court Decisions

Observing that the U.S. Supreme Court has taken an unusually large number of cases in the past two years concerning one or both of the fields, Barnett emphasized the importance of the Court's pending decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc., Dkt. 06-480, on the direction of antitrust enforcement. The case concerns whether minimum resale price maintenance agreements should be judged under a rule of reason standard.

He added that the recent Supreme Court decision in Weyerhaeuser Co. v. Ross-Simmons Hardware Lumber Co. (2007-1 Trade Cases ¶75,601) was significant because it reflected the general current trend in Sec. 2 analysis toward objective criteria focused on actual effects for determining whether a company has committed a violation.

Antitrust Policy in Developing World

Finally, Barnett noted that the intersection of patent and antitrust law is a hot topic in the developing world, with several countries—most notably China—in the process of creating or reversing their antitrust regimes.

“Until recently, antitrust was largely a phenomenon of a few Western democracies,” Barnett observed. “No longer. There are now 100 members of the International Competition Network, including nations as geographically diverse as Argentina, South Africa, India, Japan, and Israel. This development has been a great benefit in our fight against international cartels, but it can present challenges to our efforts to promote convergence of antitrust law regarding mergers and non-merger civil conduct.”

A concept has arisen in some quarters that antitrust law should constrain the exercise of intellectual property rights. Barnett takes a different view.

“There is no fundamental conflict between antitrust and IP principles because both bodies of law protect and encourage competition, innovation, and economic growth, as I explained above,” he concluded. “Where conflicts are perceived, this is typically due to a misunderstanding of antitrust or IP law, and/or a myopic focus on short term, static effects without regard to longer term, dynamic effects.”

Assistant Attorney General Barnett spoke at the American Conference Institute's In-House Counsel Forum on Pharmaceutical Antitrust in New York City. Text of the speech ("Recent Developments in Antitrust and Intellectual Property Law") appears at the Department of Justice Antitrust Division website.

Justice Department Files Suit to Restore Newspaper Competition in West Virginia

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

The Department of Justice filed an antitrust lawsuit against newspaper publishers Daily Gazette Company and MediaNews Group, Inc., aiming to undo a series of May 2004 transactions that resulted in the acquisition by Daily Gazette of MediaNews’ Daily Mail, its only competitor in the Charleston, West Virginia, daily newspaper market.

According to the Justice Department’s May 22 complaint, Daily Gazette—owner and publisher of The Charleston Gazette—bought the Daily Mail from MediaNews with the purpose and intent of shutting down the Daily Mail.

Daily Gazette actually had begun using its new control over the Daily Mail to initiate such a termination, until it suspended those actions that December in the face of a Justice Department investigation into the transactions, according to the complaint.

The suit seeks an order requiring the parties to restore the competition between them that existed prior to May 2004.

Until 2004, the Justice Department claimed, the Daily Gazette and MediaNews operated within a joint operating agreement (JOA) and each owned a 50 percent interested in an entity called “Charleston Newspapers,” which performed many of the commercial functions of The Charleston Gazette and the Daily Mail. The Newspaper Preservation Act of 1970 expressly permits the joint operation of commercial functions in certain circumstances.

The May 2004 transactions were not required to be reported under the Hart-Scott-Rodino (HSR) Antitrust Improvements Act of 1976, which requires companies to notify and provide information to the Department and FTC before consummating certain acquisitions. As a result, the Justice Department did not learn about the transactions until after they had been consummated.

A press release on the lawsuit appears on the U.S. Department of Justice Antitrust Division web site.

False Ad Claims Not Dismissed Under Communications Decency Act Immunity

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

Lanham Act false advertising claims against restaurant franchisor Quiznos for posting contestants’ videos in the “Quiznos v. Subway TV Ad Challenge” on a website could not be dismissed for failure to state a claim on the theory that Quiznos was entitled to immunity as an interactive service provider under the Communications Decency Act (CDA), the federal district court in Bridgeport, Connecticut has ruled.

Quiznos and website operator iFilm co-sponsored the nationwide contest, in which Quiznos sought out contestants to submit video entries comparing a Subway sandwich to the Quiznos Prime Rib Cheesesteak sandwich.

The contest rules informed entrants to log onto “meatnomeat.com” to submit their video entries. The entries were posted up through December 8, 2006. Over Subway’s objections, they remained on the inFilm website following the end of the contest and selection of a winner.

Subway alleged that the advertising statements encouraged and promoted by Quiznos and iFilm were false and misleading in violation of the Lanham Act. The invocation of CDA immunity was an affirmative defense.

Taking the allegations of the complaint as true, it could not be held as a matter of law that Subway would be unable to prove a set of facts in support of a finding of no immunity under the CDA.

Whether Quiznos was an information content provider, rather than an interactive service provider, was a question awaiting further discovery, the court held.

The decision is Doctor’s Associates, Inc. v. QIP Holders, LLC and IFILM Corp., Case No. 3:06-cv-1710 (JCH), filed April 19, 2007. The opinion appears at CCH Advertising Law Guide ¶62,554.

FTC Denied Injunction Barring Combination of Gas Suppliers Pending Appeal

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

One week after dismissing an FTC challenge to the proposed combination of natural gas suppliers serving Allegheny County, Pennsylvania, on state action immunity grounds, the federal district court in Pittsburgh denied the FTC’s request for an injunction pending appeal to the Third Circuit, pursuant to Rule 62(c) of the Federal Rules of Civil Procedure.

On May 14, the federal district court had ruled that the combination of Equitable Resources Inc. and The People’s Natural Gas Co. was immune from antitrust laws, under the state action doctrine, based on the April 13 approval of the transaction by the Pennsylvania Public Utilities Commission (see the Trade Regulation Talk posting of May 17, 2007 and 2007-1 Trade Cases ¶75,702).

Following this setback, the FTC brought a motion for an injunction pending appeal or—in the alternative—an injunction pending resolution by the appeals court of an emergency motion for an injunction.

Deference to State Assembly, Utilities Commission

The district court again rejected the FTC’s motion, holding that “the practical effect of granting the pending Motion for an Injunction . . . would be to grant the FTC's initial request for preliminary injunction to stop the merger transaction which the Pennsylvania PUC [Public Utilities Commission] has determined is in the public interest. The FTC has not met its heavy burden of convincing this Court that it should not defer to the Pennsylvania General Assembly and its PUC, and let the approved merger-acquisition transaction take its course.”

According to the court, “the FTC continually and inaccurately labels the merger as ‘anti-competitive,’ which it is not.”

Probability of Success, Irreparable Harm Standards

Rejected was the FTC's argument that it needed only to show that its appeal demonstrated a “substantial case on the merits,” rather than “a probability of success” on the merits. The FTC could not demonstrate a substantial issue on the merits of the state action immunity doctrine and did not demonstrate with any specificity that, if the injunction were not granted, it would suffer or the utilities' customers would suffer irreparable harm.

The agency unsuccessfully argued that if the transaction were substantially completed before the appellate court resolved its appeal, it would be difficult to “unscramble the eggs” of the merger transaction.

The decision is Federal Trade Commission v. Equitable Resources, Inc., Dominion Resources, Inc., Consolidated Natural Gas Co., The People's Natural Gas Co., No. 07cv0490, May 21, 2007. Text of the decision will appear in CCH Trade Regulation Reports.

Best Buy Charged with Deceiving Customers Through Electronic Bait-and-Switch

Retail chain Best Buy has used in-store computer kiosks to deceive consumers about product prices and to overcharge them, according to a Connecticut Unfair Trade Practice Act suit announced on Mary 24 by Connecticut Attorney General Richard Blumenthal.

Since 2005, the retailer has pledged to match any online prices offered by either a competitor or its own web site.

At the same time, Best Buy has operated an internal web site accessible only at kiosks in its stores. The kiosks feature a site that is virtually identical to the company’s Internet site. Customers at the stores could access the internal site at kiosks by clicking on a tab labeled “BestBuy.com.”

According to the Connecticut Attorney General, salespersons at Best Buy stores falsely told consumers that the kiosks would connect them to the company’s Internet web site—BestBuy.com.

When the internal site displayed an in-store price higher than that featured on the company Internet site, the salespersons allegedly suggested that (1) consumers previously misread lower prices online or (2) the lower online price had expired, the lawsuit charged.

Two Sets of Prices

“Best Buy gave consumers the worst deal—a bait-and-switch scheme luring consumers into stores with promised online discounts, only to charge higher in-store prices,” Blumenthal said. “The company commonly kept two sets of prices—one on its Internet site and an often-higher set on its in-store, look-alike, available on kiosks.”

The lawsuit seeks to compel Best Buy to fix its allegedly deceptive kiosks, eliminate confusion, and fulfill its price match policy. In addition, it requests civil penalties and restitution for consumers.

In reaction to Connecticut’s investigation, Best Buy in March added banners in its stores, reading “This Kiosk Reflects Local Store Pricing.” These “minor changes” are inadequate and incomplete, Blumenthal said.

Text of the news release appears at the Connecticut Attorney General’s web site.

Best Buy's Response

In a new release posted on its web site, Best Buy "adamantly" denied the Connecticut Attorney General's characterization of its in-store kiosks.

"We offered the in-store kiosks to provide our customers with another avenue for obtaining information about products and allow them the benefit of knowing exactly what was available at the store that the customer was presently in," a May 24 release said.

"We used the same web site platform for these in-store kiosks as we did for our national web site--we did this to ensure that customers familiar with the national web site could easily navigate the in-store kiosk."

"Unfortunately, for all the benefits that the kiosks provided to most of our customers, there was a small percentage who did not receive the best price when they should have," the release continued. "Once this issue was brought to our attention, we provided immediate training for our employees to help ensure that all customers received the best price. We are in the process of making changes to eliminate future confusion."

The release concluded with a statemnet that "we intend to vigorously defend ourselves."

Congress Targets Gasoline Pricing in Antitrust/Consumer Protection Bills

With Memorial Day ushering in the summer vacation season, people are starting to plan long car trips and attempting to figure out how much more gasoline will cost them this year.

The answers will not be welcome, since the national average price of gasoline has risen nearly 40% since early February. The national average price of unleaded regular now stands at $3.21 per gallon.

Thus, it’s no wonder that terms like “price gouging”—and bills targeting runaway gas prices—are being tossed around in Congress.

In the past few weeks, Congress has taken up the following bills dealing with gasoline pricing:

Price gouging. Under the proposed "Federal Energy Price Protection Act of 2007," gouging in the sale of crude oil, gasoline, diesel fuel, home heating oil, or any biofuel would constitute an unfair or deceptive act or practice in violation of the FTC Act. The measure (H.R. 2335), introduced on May 15 by Rep. Heather Wilson (New Mexico), also provides for criminal enforcement by the Department of Justice.

FTC monitoring, investigations. Under legislation (S. 1381)proposed by Sen. Barbara Boxer (California) on May 14, the FTC would be required to monitor gasoline prices and conduct investigations if prices increase 20 percent or more for at least 7 days during any 3-month period . The FTC would be expected to report the results of investigations to Congress. If, as a result of the investigation, the FTC were to determine that the price increases in a particular state were the result of market manipulation, it would be required to take appropriate action in cooperation with the state attorney general. Three days before introducing S. 1381, Senator Boxer announced her hope that the Senate would give "prompt consideration" to another measure targeting high gas prices, the proposed "Petroleum Consumer Price Gouging Protection Act" (S. 1263)—a bipartisan measure that would ban gasoline price gouging.

“NOPEC” antitrust law. The proposed "No Oil Producing and Exporting Cartels Act of 2007" or "NOPEC" would amend the Sherman Act to permit federal antitrust challenges to oil producing cartels. The measure was introduced by Rep. John Conyers (Michigan) on May 10. "This legislation will establish that OPEC's activities are not protected by sovereign immunity and that the Federal courts should not decline to hear such a case based on the "act of state" doctrine," Conyers said in introducing the legislation (H.R. 2264). A Senate version of the bill (S. 879) was introduced on March 14 by Sen. Herb Kohl (Wisconsin) and approved by the Senate Judiciary Committee on April 25.

Website Not Immune from Liability for Posting Questionnaires, Member Profiles

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

The Communications Decency Act did not immunize a roommate matching website (Roommates.com) from claims that it violated the Fair Housing Act by posting questionnaires, requiring their completion by would-be members, and by posting member's profiles and distributing them by e-mail, the U.S. Court of Appeals in San Francisco has ruled.

Content Provider

An entity cannot qualify for CDA immunity when it is responsible, in whole or in part, for the creation or development of the information at issue, according to the court. The website was responsible for its questionnaires because it created or developed the forms and answer choices. As a result, it was a content provider of the questionnaires and did not qualify for CDA immunity for their publication, the court determined.

A more difficult question was whether the CDA exempted the website from liability for publishing and distributing its members' profiles, which it generated from their answers to the questionnaires. The website did more than merely publish information it solicited from its members, the court noted. It also channeled the information based on the members' answers. It allowed members to search only the profiles of members with compatible preferences.

For example, a female room-seeker living with a child could search only profiles of room-providers who had indicated they were willing to live with women and children. In addition, the website sent room-seekers e-mail notifications that excluded listings incompatible with their profiles. Thus, the website would not notify a female about room-providers who said that they would not live with women.

Alleged Violation of Fair Housing Act

While the website provided a useful service, its search mechanism and e-mail notifications meant that it was neither a passive pass-through of information provided by others nor merely a facilitator of expression by individuals. By categorizing, channeling and limiting the distribution of users’ profiles, the website provided an additional layer of information that it was responsible at least in part for creating or developing. Whether these actions ultimately violated the Fair Housing Act was to be decided on remand.

The Communications Decency Act did immunize the website from claims that it violated the Fair Housing Act by publishing its members' “additional comments,” the court held. Members provided the information in question by filling in a blank text box. Next to this box, the website advised users that “[w]e strongly recommend taking a moment to personalize your profile by writing a paragraph or two describing yourself and what you are looking for in a roommate.”


Preferences and Restrictions

The responses to this query produced the most provocative and revealing information in many users’ profiles. Some stated that they “Pref[er] white Male roommates,” while others declared that they were “NOT looking for black muslims” etc.

The website's involvement was insufficient to make it a content provider of these comments, in the court’s view. The website’s open-ended question suggested no particular information that was to be provided by members. The website did not prompt, encourage or solicit any of the inflammatory information provided by some of its members. Nor did the website use the information in the additional comments section to limit or channel access to listings. The website therefore was not responsible, in whole or in part, for the creation or development of its users’ answers to the open-ended additional comments form, and was immune from liability for publishing these responses, the court concluded.

The May 15 opinion in Fair Housing Council of San Fernando Valley v. Roommates.com, LLC, No. 04-56916, will be reported in the CCH Advertising Law Guide.

Claims of Parallel Conduct Insufficient to Allege Conspiracy: U.S. Supreme Court

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

An antitrust complaint filed on behalf of a putative class of local telephone and high-speed Internet services customers against local telephone companies based on parallel conduct or parallel inaction should be dismissed, the U.S. Supreme Court ruled on May 21.

In a seven-to-two decision, written by Justice David Souter, the Court reversed a decision of the U.S. Court of Appeals in New York City (2005-2 Trade Cases ¶74,951) allowing the claims to proceed.

Plausible Suggestion of Agreement

In order to state a claim under Sec. 1 of the Sherman Act against telecommunications firms based on parallel conduct, the complaining consumers were required to plead allegations “plausibly suggesting (not merely consistent with) agreement,” according to the Court.

Stating such a claim required a complaint “with enough factual matter (taken as true) to suggest that an agreement was made.” The standard called for enough facts to raise a reasonable expectation that discovery would reveal evidence of illegal agreement.

The complaining consumers rested their claim on parallel conduct and not on any independent allegation of an actual agreement among the defending telecommunications firms, incumbent local exchange carriers (ILECs), the Court explained.

The customers contended that the ILECs refrained from competing against one another in their respective geographic markets for local telephone and high-speed Internet services and engaged in a parallel course of conduct to prevent competition from competing local exchange carriers (CLECs) in contravention of the Telecommunications Act of 1996.

Resisting competition was routine market conduct, and even if the ILECs flouted the 1996 Act in all the ways that the plaintiffs alleged, there was no reason to infer that the companies had agreed among themselves to do what was only natural.

A natural explanation for the noncompetition alleged was that the former government-sanctioned monopolists were sitting tight, expecting their neighbors to do the same thing. If alleging parallel decisions to resist competition were enough to imply an antitrust conspiracy, pleading a Sec. 1 violation against almost any group of competing businesses would be a sure thing.

Retirement of “No Set of Facts” Language

The customers argued before the High Court that the use of the plausibility standard at the pleading stage conflicted with the concept enunciated in Conley v. Gibson (355 U.S. 41 (1957)) that “a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief..”

In vacating dismissal of the complaint, the appellate court noted that “to rule that allegations of parallel anticompetitive conduct fail to support a plausible conspiracy claim, a court would have to conclude that there is no set of facts that would permit a plaintiff to demonstrate that the particular parallelism asserted was the product of collusion rather than coincidence.”

The High Court pointed out that the “no set of facts” language has been questioned, criticized, and explained away long enough” and has “earned its retirement.”

According to the Court, the phrase is best forgotten as an incomplete, negative gloss on an accepted pleading standard: once a claim has been stated adequately, it may be supported by showing any set of facts consistent with the allegations in the complaint.

Dissent

A dissent, written by Justice John Paul Stevens and joined by Justice Ruth Bader Ginsburg, took the position that the majority's “plausibility” standard was “irreconcilable with Rule 8 of the Federal Rules of Civil Procedure; and with our governing precedents.” The dissent also questioned the majority's assessment of the plausibility of the alleged conspiracy and the purported policy concern driving the decision, that is protecting antitrust defendants from the expense of pretrial discovery.

The decision in Bell Atlantic Corp. v. Twombly, will be published in the CCH Trade Regulation Reports.

Seller of Web Design Businesses Banned from Franchising

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

A company that sold franchises for Web site design and promotion services to businesses and the company's owner have agreed to refrain from promoting or selling franchises or business opportunities in order to settle Federal Trade Commission charges that they violated the Commission's franchise disclosure rule.

Under the terms of a final judgment entered by the federal district court in Miami, the company and its owner were also required to pay $160,000, which will be used for consumer redress.

According to a complaint filed in August 2005, the defendants sold franchises to market Web site promotion software and services to small and medium-size businesses under the "Netspace" trademark. The defendants' Web site suggested that a prospective franchisee would earn substantial amounts of money, the FTC alleged.

High Profitability, Proprietary Software

In their sales campaign, the defendants represented that their Netspace franchises were highly profitable because the defendants had developed propriety software and provided design, consulting, and other services that would be easy for Netspace franchisees to sell to their future small-to-mid-size business clients.

A "final high-pressure sales push" culminated in the disclosure that the prospective franchisee had been "awarded" a Netspace franchise at a cost ranging from $30,000 to $100,000 for a master franchise, according to the FTC's complaint.

Alleged Misrepresentations, Violation of Franchise Rule

The agency claimed that a consumer who purchased the franchise was not likely to earn substantial income and that the defendants' representations about their software were false and misleading. In addition, the FTC alleged that the defendants violated the Commission's franchise disclosure rule by failing to provide prospective franchisees with complete and accurate disclosure documents.

The company's owner was subject to an injunction prohibiting deceptive conduct in violation of the FTC Act, and this fact was not disclosed to prospective franchisees. The defendants also violated the Commission's franchise rule through their earnings claims to prospective franchisees, according to the agency.

The case is FTC v. Netfran Development Corp., FTC File No. 042 3225. The May 15, 2007 final judgment and a news release appear at the FTC website.

FTC Denied Preliminary Injunction Blocking Combination of Gas Suppliers

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

The Federal Trade Commission was not entitled to a preliminary injunction blocking a proposed combination of natural gas suppliers serving Allegheny County, Pennsylvania because the acquisition was immune from antitrust law under the state action doctrine, the federal district court in Pittsburgh has ruled.

The Pennsylvania Public Utilities Commission's (PUC's) approval of the transaction qualified Equitable Resources, Inc.'s proposed acquisition of The Peoples Natural Gas Company for state action immunity. Thus, the federal court action was dismissed.

Merger to Monopoly

The FTC had alleged that the acquisition would result in a merger to monopoly. It issued an administrative complaint on March 14, challenging the combination under the antitrust laws. Because the transaction could not go forward without PUC approval, the FTC waited to file for a preliminary injunction halting the transaction pending the agency's administrative proceeding until after the PUC had made its decision.

On April 13, the PUC approved the transaction, concluding that it was in the public interest. Shortly thereafter, the FTC filed its federal district court complaint seeking preliminary injunctive relief. The defendants sought dismissal of the federal court complaint on state action immunity grounds.

State Action Immunity Doctrine

As was required for the application of state action immunity, the State of Pennsylvania (1) had a clearly articulated and affirmative policy to displace competition with pervasive regulation and (2) actively supervised that policy.

The first prong of the two-part test was satisfied by state general assembly's express grant of authority to the PUC to review such transactions to determine whether they were in the overall public interest of the citizens of the Commonwealth of Pennsylvania. That the specific state Public Utility Code provisions implementing the policies of the state legislature and the PUC regulatory scheme directed that the PUC evaluate potential anticompetitive consequences did not undercut the fact that the state legislature had replaced free market competition with regulation, the court noted.

The second prong of the state action immunity test also was satisfied, in the court's view. The PUC took an active role in supervising public utilities, including natural gas distribution companies. Moreover, it explicitly retained jurisdiction to continue to actively monitor and review the approved merger transaction.

The text of the May 14, 2007 decision in FTC v. Equitable Resources, Inc., et al., will appear in CCH Trade Regulation Reports.

Merger Enforcement in Energy Sector

The FTC is known for its aggressive merger enforcement activities in the energy sector, and the federal district court’s decision was a setback for the agency. Administrative hearings on the acquisition had been scheduled to begin in late September 2007.

Last month, the agency had more success in another energy industry combination. The federal district court in in Albuquerque, New Mexico, granted the FTC's request for a temporary restraining order (TRO) blocking Western Refining, Inc.’s proposed $1.4 billion acquisition of Giant Industries, Inc. The agency is contending that the proposed acquisition may substantially lessen competition for the bulk supply of gasoline and light petroleum products to northern New Mexico.

Utah Enacts Sales Representative Commission Payment Act

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

Utah has enacted the Sales Representative Commission Payment Act, effective April 30, 2007. The statute regulates the relationship between a “principal” and an independent “sales representative” who solicits orders for products or services and receives compensation, in whole or in part, by commission.

A “principal” is a person who engages in any of the following activities with regard to a product or service: (a) manufacturing, (b) producing, (c) importing, (d) selling, or (e) distributing.

A “sales representative” is a person who enters into a business relationship with a principal to solicit orders for a product or service and under which the person is compensated, in whole or in part, by commission.

Contract Requirements

The business relationship between a sales representative and principal must be in writing, signed by both parties, and the writing must set forth the method by which the sales representative’s commission is calculated and paid. The principal has to provide the sales representative with a copy of the signed writing.

The following contract provisions are void: (a) an express waiver of any right under the statute, (b) a provision making the sales representative subject to the laws of another state, or (c) a requirement that the sales representative pursue a claim under the statute in a court not located in the state.

Payment of Commission

The statute provides that the principal shall pay the sales representative all commissions due while the business relationship is in effect in accordance with the agreement between the parties. On termination, all commissions due through the time of termination are to be paid to the representative within 30 days after termination. All commissions that become due after the effective date of termination shall be paid to the sales representative within 14 days after they become due.

Revocable Offers of Commission

The statute addresses revocable commission offers. If the principal revokes the offer, the sales representative is entitled to the agreed upon commission if the representative establishes that the revocation was for a purpose of avoiding payment, the revocation occurs after the principal obtains an order through the representative's efforts, and the ordered product or service is provided to and paid for by the customer.

Liability

A sales representative may bring a civil action against a principal for failing to comply with any provision of an agreement relating to payment of the commission or failure to timely pay commissions. If found liable, the principal is liable for (a) three times an amount calculated by (i) determining the sum of unpaid commissions owed to the sales representative and (ii) subtracting any monies the sales representative owes to the principal; (b) reasonable attorneys’ fees; and (c) court costs.

Unless payment is made pursuant to a binding and final written settlement agreement and release, the acceptance by a sales representative of a partial commission paid by the principal does not constitute a release as to the balance of any commissions claimed due. A full release of all commission claims that is required by a principal as a condition to a partial commission payment is void.

More detailed commentary and the text of the statute will be published in the CCH Sales Representative Law Guide. The Guide also includes commentary and text of the laws of 36 other states and Puerto Rico, along with form agreements, annotated explanations, and full text of court decisions.

Drug Wholesalers, Retailers Could Not Pursue Antitrust Claims Against Wyeth-Ayerst Labs

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

Pharmaceutical wholesalers and retailers that purchased Premarin, an estrogen replacement medication, directly from its manufacturer—Wyeth-Ayerst Laboratories, Inc—could not proceed with claims that Wyeth illegally maintained its dominant market share in the oral estrogen replacement therapy (ERT) market in violation of Sec. 2 of the Sherman Act, the U.S. Court of Appeals in Cincinnati has ruled. Summary judgment in favor of Wyeth was affirmed.

Link Between Actions, Antitrust Injury

The wholesalers and retailers failed to provide sufficient evidence to create a genuine issue of material fact as to the causal connection between the drug maker's challenged actions and their antitrust injury—that is, increased prices for Premarin.

Wyeth developed the "Premarin Preemptive Plan" after Duramed Pharmaceuticals, Inc. won Food and Drug Administration (FDA) approval for Cenestin—the second branded ERT drug on the market. ERT drugs are prescribed to treat women who have undergone hysterectomies and whose bodies no longer produce estrogen.

The wholesalers and retailers alleged that, under its "Premarin Preemptive Plan," Wyeth attempted to limit the alternative ERT drug's distribution through the use of restrictive contractual arrangements with managed care organizations (MCOs) and pharmacy benefit managers (PBMs). Then, the defending drug maker allegedly adopted price increases as a result of its successful campaign to limit the alternative ERT drug's market share.

The wholesalers and retailers failed to provide a causal link between Wyeth's contractual agreements with PBMs and MCOs and increased prices for Premarin, the court held.

Evidence

Such a link was not demonstrated by the purchasers' four pieces of evidence:

 the defending drug maker's documents concerning its pricing practices;

 the purchasers' expert testimony;

 a Congressional Budget Office study that the purchasers claimed supported the view that increased competitor market share imposed price restraint in the pharmaceutical market; and

 purported "concessions" by the defending drug maker's expert witnesses.

The decision is JBDL Corp. v. Wyeth-Ayerst Labs, Nos. 05-3860/3988, filed May 10, 2007. Text of the decision will appear at CCH Trade Regulation Reports ¶75,694

Task Force Reviews Recommendations of Antitrust Modernization Commission

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

Members of the House Judiciary Committee’s Antitrust Task Force lauded the work of the Antitrust Modernization Commission (AMC), but took issue with a few of its conclusions at a May 8 hearing.

For three years, the commission reviewed the antitrust laws to determine whether they need to be updated. The commission in early April issued a final report containing more than 300 pages of analysis and recommendations (CCH Trade Regulation Reporter ¶50,222).

Repeal of Robinson-Patman Act

While welcoming the commission’s work, Judiciary Committee Chairman John Conyers (D-Michigan) took issue with some of its conclusions. He was especially skeptical of the recommendation to repeal the Robinson-Patman Act, which prohibits sellers from offering different prices to different purchasers when there is no pro-competitive justification.

“Admittedly, the Act has its flaws; it is structurally complex and hard to administer, and it is not often used as an enforcement tool,” Conyers remarked. “But these problems don’t mean we should repeal the law altogether. Instead of repealing the Act, I believe we should be finding ways to make it work.”

Deborah A. Garza, the chair of the AMC, cited one factor that influenced the recommendation—the difficulty U.S. officials have explaining the Act to foreign competition officials.

John Yarowsky, Vice-Chair of the AMC, parted company with the commission on the issue. He acknowledged that the Act has led to considerable confusion. But, like Conyers, he urged Congress to fix the Act by redesigning it.

Indirect Purchaser Rule

In addition to the objection to the Robinson-Patman Act recommendation, Conyers took exception to the commission’s recommendation to repeal Illinois Brick v. Illinois (1977-1 Trade Cases ¶61,460) and Hanover Shoe. Inc. v. United Shoe Manufacturing Corp. (1968 Trade Cases ¶72,490)

He noted that the U.S. Supreme Court in those two cases ruled that only direct purchasers, not indirect purchasers, may sue for damages from price fixing, and that antitrust defendants in these cases cannot use the defense that the direct purchaser passed on the overcharge to the indirect purchaser or consumer.

“If each direct purchaser must determine how much of the overcharge was passed on downstream, it may be very difficult to pursue these actions,” Conyers said. “The result could be an overall decrease in holding price fixers and monopolists accountable. This is an issue we should study carefully.”

Merger Enforcement

The representative also voiced concerns about “a wave of consolidation in key industries” that have not been challenged by the Justice Department’s Antitrust Division.

Despite his concerns, the Judiciary Committee chairman found some of the AMC’s recommendations to be particularly useful.

“For example,” Conyers said, “its recommendation that immunities from the antitrust laws should be disfavored—and only created when the heavy burden is met of clearly demonstrating that the exemption is necessary to satisfy a specific societal goal that trumps the benefits of a free market—is a good starting point for Congress as it moves forward with various proposals.”

Two Identity Theft Bills Approved by Senate Judiciary Committee

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

The Senate Judiciary Committee passed a pair of bills designed to protect against identity theft by requiring the government and private companies to notify consumers when data breaches occur. The committee approved the bills on May 3.

The Notification of Risk to Personal Data Act (S. 239) would require federal agencies and private businesses to notify individuals and the media if there is a security breach of personal data. The notice would need to include a description of the breach and a toll-free number to call for more information.

If more than 5,000 individuals must be notified, the agency or the company would need to coordinate with credit reporting agencies. Significant data breaches involving the federal government or involving national security or law enforcement would require notice to the Secret Service.

The bill would provide a safe harbor if a risk assessment concludes there is no significant risk of harm and the Secret Service agrees. Breaches that involve only credit card numbers would not require notice if the card issuer has an anti-fraud security program and provides notice of fraudulent transactions.

The proposed "Personal Data Privacy and Security Act" (S. 495) contains the same notification provisions as the first bill approved by the committee. Additionally, the measure would add unauthorized access to sensitive personally identifiable information to the criminal prohibition against computer fraud.

It would require data brokers to let individuals know what information they have about them and, when appropriate, allow individuals to correct demonstrated inaccuracies, with exemptions for products and services already subject to access and correction rules.

Companies that have databases with personal information on more than 10,000 Americans would be required to implement data privacy and security programs, and vet third-party contractors hired to process data. The bill would allow for monetary and criminal penalties for violations.

"This comprehensive bipartisan privacy bill is aimed at better protecting Americans' privacy from the growing threats of data breaches and identity theft," remarked Judiciary Committee Chairman Patrick Leahy (Vermont), the bill's sponsor. But Leahy acknowledged, "This is not a perfect bill."

Sen. Leahy said the measure is the result of significant consultation with the privacy, consumer protection and business communities. He cited support for the bill by Microsoft, Vontu, the Center for Democracy and Technology, the Consumers Union, the Cyber Security Industry Alliance, and the Consumer Federation of America.

The Judiciary Committee passed substantially similar legislation in late 2005, but it was never taken up by the full Senate. Leahy hopes this year's effort will be successful.

"When we can bring consumer interests and business interests together to the extent that we have, we hope we are close to a bill this committee can support, a bill that can pass and a bill that can make a difference," he said.

Latvia to Consider Franchise Disclosure Regulation


A regulation requiring franchisors to provide presale disclosures to prospective franchisees and to compensate franchisees for noncompetition provisions in a franchise agreement will be considered by the Latvian Parliament, according to Field Fisher Waterhouse LLP of London.

The Latvian Parliament reportedly plans to adopt a franchise regulation in September of this year. An early draft of the regulation indicates that franchisors will be required to supply the following presale disclosures:

 A general description of the franchise
 Evidence of the validity of the rights to be granted under the franchise
 Information about the franchise network
 The terms of the franchise agreement, including payment terms.

Latvia currently does not specifically regulate franchising.

Further information is available from Mark Abell or Graeme Payne of Field Fisher Waterhouse.

Proposal Allows State Registration of Franchise Disclosures Prepared Under New FTC Rule


A proposal to allow franchisors to register franchise disclosure documents prepared pursuant to the new FTC franchise disclosure rule in all states requiring registration was released for public comment by the North American Securities Administrators Association (NASAA) on May 9.

Currently, the 13 states with franchise registration laws require franchisors to prepare disclosure documents pursuant to the Uniform Franchise Offering Circular (UFOC) Guidelines, a format issued by NASAA.

However, the new FTC franchise disclosure rule, issued January 23, 2007, adopted disclosure requirements that closely track the UFOC Guidelines. The new FTC franchise rule “omits or streamlines UFOC Guideline disclosure requirements, such as broker disclosures, cover page risk factors, and detailed computer requirements” and incorporate new disclosure requirements not found in then UFOC Guides, according to NASAA.

Successor to UFOC Guidelines

In light of the similarities between the new FTC rule and the UFOC Guidelines and the “lengthy and comprehensive regulatory review” that preceded the adoption of the rule, NASAA intends to adopt the rule as a successor to the UFOC Guidelines, with minimal additional requirements, the most significant being a “state risk factor” cover page.

If adopted, the proposal would allow franchisors to continue to use the UFOC format until July 1, 2008 or until NASAA adopts a replacement for the UFOC Guidelines, NASAA announced. The FTC rule comes into effect on July 1, 2007, but allows the use of the 1979 rule through July 1, 2008.

Public Comments

The public comment period on the NASAA proposal will run for 14 days from the announcement. Written comments should be sent to Dale Cantone, Maryland franchise administrator and Chair of the NASAA Franchise and Business Opportunity Project Group, with copies forwarded to each member of the project group and NASAA Legal Department.

The announcement, text of the proposed instructions for filing using the FTC franchise rule, and a list of those who should be sent comments appear on the NASAA web site.

Extensive materials on the new FTC franchise disclosure rule, including full text and expert commentary, appear in the CCH Business Franchise Guide.

U.S. Will Not Challenge Combination of Pork Packers/Producers

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

The Department of Justice Antitrust Division closed its investigation of the proposed combination of two pork packers and processors, after concluding that the transaction was unlikely to harm competition, consumers, or farmers.

As a result, Smithfield Foods Inc—the largest hog producer and the largest pork packer and processor in the United States—may proceed with its acquisition of Premium Standard Farms Inc.—the second-largest hog producer and the sixth-largest pork packer and processor in the United States.

Continued Significant Competition

The Antitrust Division concluded that the merged firm would face significant competition in the sale of fresh and processed pork from its national competitors, such as Tyson, Swift, Excel/Cargill, Hormel, and Seaboard Foods.

In addition, farmers who sell hogs or hog-raising services to the merged firm would have competitive alternatives that would deter the merged firm from lowering prices paid to the farmers, according to the Antitrust Division's statement.

“Second Request”

It took more than eight months to receive clearance for the transaction from the Antitrust Division. The merger was announced in September 2006. In November 2006, the Antitrust Division issued a “second request” (or request for additional information about the transaction) under the premerger notification requirements of the Hart-Scott-Rodino (HSR) Antitrust Improvements Act of 1976.

The effect of the second request was to extend the waiting period imposed by the HSR Act until 30 days after Smithfield and Premium Standard Farms substantially complied with the government's request.

When Smithfield and Premium Standard Farms certified substantial compliance with the government's request in February 2007, they agreed to give the Antitrust Division 60 days from that point to review the transaction and an additional 30 days thereafter for review should the Antitrust Division deem it necessary. The Antitrust Division exercised its option to take the additional 30 days. The parties closed the deal on May 7, the day the additional 30-day period would have expired.

Text of the May 4 statement will appear in CCH Trade Regulation Reports.

Bill Would Limit FTC, FDA Challenges to Dietary Supplement Marketing

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

The Federal Trade Commissions (FTC) and the Food and Drug Administration (FDA) could have a tougher time challenging health claims for foods and dietary supplements if the proposed Health Freedom Protection Act were to become law.

Rep. Ron Paul (R-Texas), sponsor of the legislation, said there is a need to stop “federal bureaucrats from preventing Americans from learning about simple ways to improve their health.” The proposal (H.R. 2117) was introduced on May 2 and referred to the House Committee on Energy and Commerce.

"False and Misleading" Standard

The proposed Health Freedom Protection Act would place the burden of proof on the FTC to establish that an advertisement for a dietary supplement or a dietary ingredient is “false and misleading and that the advertisement actually causes consumers to be misled into believing to be true that which is demonstrably false.”

The FTC has required “supplement manufactures to satisfy an unobtainable standard of proof that their statement is true,” according to Rep. Paul. “The FTC's standards are blocking innovation in the marketplace.” The bill also requires that the FTC warn parties that their advertising is false and give them a chance to correct their mistakes.

Censoring of "Truthful Claims"

“The Health Freedom Protection Act stops the FDA from censoring truthful claims about the curative, mitigative, or preventative effects of dietary supplements, and adopts the . . . use of disclaimers as an alternative to censorship,” Paul said. “The Health Freedom Protection Act also stops the FDA from prohibiting the distribution of scientific articles and publications regarding the role of nutrients in protecting against disease,” he added.

Text of the bill and status information appear on the Library of Congress Thomas site.

Trade Regulation Tidbits

News, updates, and observations:

 Herbert Hovenkamp, antitrust law professor and author, has been elected as a fellow of the American Academy of Arts and Sciences, a prestigious international society composed of leading scientists, scholars, artists, business people, an public leaders. Hovenkamp is holder of the Ben and Dorothy Willie Chair at the University of Iowa and is co-author (with Philip E. Areeda) of the 20-volume landmark antitrust treatise, Antitrust Law: An Analysis of Antitrust Principles and their Application (Aspen Publishers). Hovenkamp is also co-author of two other treatises for Aspen Publishers—Fundamentals of Antitrust Law (with Philip E. Areeda) and IP and Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property Law (with Mark D. Janis and Mark A. Lemley). Among the 227 new fellows announced on April 30 are former Vice President Al Gore, former U.S. Supreme Court Justice Sandra Day O’Connor, New York Mayor Michael Bloomberg, and filmmaker Spike Lee.


 At a session entitled “Advertising Law: What Is It? What Do I Need to Know?” presented May 1 at the INTA annual meeting in Chicago, a panel of attorneys set out the steps to follow to avoid liability in advertising. These were helpful, if somewhat familiar: tell the truth; support your claims; determine the net impression of the ad; obtain network approval (if applicable); and get releases for music, text, photographs, other visuals. A particularly interesting point was made by Carla Michelotti, Executive Vice President and General Counsel of Leo Burnett. She said that the lawyer should be involved at both the beginning and the end of the production process. It is important to be involved at the earliest stage to ascertain the theme of the ad campaign and ensure it does not pose a legal risk. Otherwise, the advertiser may incur great production costs before the lawyer can put on the brakes. It is important to be involved at the end of the process, as well, because a slight change in the words or images can create a claim or cause a potential rights conflict.


 “Keyword” Internet searching is a hot topic among advertising and IP lawyers. Another session at the INTA meeting—“Muddy Waters: Evolving Law and Policy in Internet Advertising”—explored the issue of a company’s purchasing a competitor’s trademark as a keyword on a search engine in order to have a search for the trademark pull up the company’s ads. Lauren Fisher, Assistant General Counsel for Intellectual Property for AOL, indicated that there is no consensus about the concept of “use” of trademarks on the Internet, saying “the laws in the Second Circuit are completely different from the laws in the Ninth Circuit.” She said that, under the new Trademark Dilution Revision Act of 2006, the use of comparative trademarks is not dilution. Thus, facilitating such use cannot constitute dilution. Rose Hagan, Senior Trademark Counsel for Google, Inc., observed that her employer “sells ad space, not trademarks” and that the advertiser should be responsible for its ad text and keywords rather than the search engine. There was some discussion about AOL’s refusal to provide trademark owners with information about obvious infringers. The company would provide such information only pursuant to a court order or subpoena, according to Ms. Fisher.

Marilyn Monroe’s Right of Publicity Did Not Survive Her Death

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

Marilyn Monroe, at the time of her death, did not own a right of publicity that could be bequeathed, the federal district court in New York City has ruled.

The court rejected a suit, based on the right of publicity, challenging (1) the sale at an Indianapolis Target store of a T-shirt bearing the star’s photograph and (2) the maintenance of a website offering for sale licenses for the commercial use of Monroe’s picture and likeness.

The suit was brought by Marilyn Monroe, LLC, a company that holds and manages the intellectual property assets of the Monroe’s residuary beneficiaries. Marilyn Monroe, LLC sued companies representing the children of the photographer Sam Shaw—the purported owners of copyrights to photographs of Marilyn taken by Shaw.

Recognition of Postmortem Publicity Rights

Postmortem publicity rights were not recognized in New York, California, or Indiana at the time of the star’s death in 1962, the court observed. To this day, New York law does not recognize any common law right of publicity and limits its statutory publicity rights to living persons, the court said.

California passed a postmortem right of publicity statute in 1984 (CCH Advertising Law Guide ¶30,555). Before that, a common law right of publicity existed in California, but it was not freely transferable or descendible, according to the court.

Indiana first recognized a descendible, postmortem right of publicity in 1994, when it passed the Right of Publicity Act (CCH Advertising Law Guide ¶31,455). Prior to that time, rights of publicity were inalienable in Indiana and could only be vindicated through a personal tort action for invasion of privacy, according to the court.

Thus, any publicity rights that Monroe enjoyed during her lifetime were extinguished at her death by operation of law, the court concluded.

The decision is Shaw Family Archives Ltd. v. GMC Worldwide, Inc., 05 Civ. 3939 (CM), May 2, 2007.

Tennessee Precedent

In another postmortem publicity rights case, a Tennessee appellate court in 2006 held (CCH Advertising Law Guide ¶61,986) that the publicity rights of legendary country music star Hank Williams (who died in 1953) could be enforced by his heirs.

In a dispute over the use and exploitation of recordings of Williams’ Mother’s Best Flour radio programs in 1951 and 1952, the court noted that Tennessee’s common law embodied an expansive view of property, including intangible personal property, and that the Tennessee legislature later provided statutory protection for the right of publicity (CCH Advertising Law Guide ¶34,255).

Identity Theft Legislation Approved by Senate Committee

The proposed "Identity Theft Prevention Act” (S. 1178) was approved by the Senate Commerce Committee on April 25. The measure would require businesses, organizations, and federal agencies to "develop, implement, maintain, and enforce a written program for the security of sensitive personal information” that the entity collects, maintains, sells, transfers, or disposes of.

The entity would be required to comply with Federal Trade Commission rules, which would be promulgated by the Commission within one year of the enactment of the statute. The proposal would also mandate notification of consumers in the event of a security breach.

If that breach affects at least 1,000 individuals, the entity would have to inform the individuals, report the breach to the FTC, and notify all consumer reporting agencies. The FTC would be required to post a report of the security breach on its web site, without disclosing any sensitive personal information. If the breach affects fewer than 1,000 individuals and the breach does not create a reasonable risk of identity theft, the entity shall inform the individuals and report the breach to the FTC. The FTC would not publish such a report on its web site.

Violation of the identity theft statute would constitute an unfair or deceptive act or practice under the Federal Trade Commission Act, which could be enforced by the FTC and other enumerated agencies. State attorneys general would also be empowered to bring civil actions as parens patriae on behalf of their residents.

The bill would preempt state or local laws, regulations, or rules that require a covered entity to give notice of security breaches or that require the implementation, maintenance, or enforcement of information security programs.

Full text of the bill—and a report on its status—appears at the Thomas web site of the Library of Congress.

Antitrust Bill Targeting Oil Cartels Passes Senate Judiciary Committee

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

The Senate Judiciary Committee passed a bill on April 25 that would allow the federal government to take legal action against foreign states, including members of OPEC, for price fixing and artificially limiting the amount of available oil

The Judiciary Committee approved the proposed “No Oil Producing and Exporting Cartels Act of 2007” or “NOPEC” (S. 879) unanimously.

The bill, which would amend the Sherman Act, would clear the way for the federal courts to hear antitrust suits against OPEC, according to Senator Herb Kohl, the bill’s sponsor and chairman of the Judiciary Committee’s Antitrust, Competition Policy and Consumer Rights Subcommittee.

“Our bill will hold OPEC member nations to account under the U.S. antitrust law when they agree to limit supply or fix prices in violation of the most basic principles of free competition,” Kohl remarked.

Under the bill, the Justice Department would have the authority to bring actions against foreign states for collusive practices.

Information about Senate Bill 879, including the text and current status, appears at the Thomas web site of the Library of Congress.