Sandwich Shop Franchisor Agrees to Make Restaurants Accessible

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

In a settlement under the Americans with Disabilities Act (ADA), the franchisor of Subway sandwich shops, Doctors Associates, Inc. (DAI), has agreed to make its franchised restaurants physically accessible to people with disabilities, the U.S. Department of Justice announced on July 31.

The agreement outlines procedures to make the shops physically accessible to people with disabilities and affects more than 20,000 Subway franchises.

The settlement focuses on the removal of barriers that impair the access of people with disabilities to the restaurants and their services. Where readily achievable, the settlement will ensure access to restroom facilities in the Subway shops.

“People with disabilities should be able to eat at their favorite establishments, and this agreement is designed to improve access to 20,000 Subway shops across the nation,” declared Wan J. Kim, Assistant Attorney General for the Civil Rights Division. “I commend DAI for working with us to fashion a practical and effective agreement. We hope that it will serve as a model for other dining establishments so that they will take the steps necessary to serve individuals with disabilities.”

Under the terms of the agreement, the franchisees will be responsible for removing barriers to access and DAI will ensure that their efforts comply. Specifically, they will:

(1) conduct initial architectural surveys to identify barriers;

(2) provide guidance on the ADA requirements and the steps each shop must take to address violations;

(3) revise its operations manual to reflect that the franchisees are required to conduct evaluations and remove barriers and that penalties may be imposed if they do not comply;

(4) provide interest-free loans to franchisees for the purpose of ensuring accessibility; and

(5) use its best efforts to locate accessible buildings in its site selection for future franchises.

Further information concerning the settlement agreement may be obtained by calling the Justice Department's toll-free ADA Information Line at 1-800-514-0301 or 1-800-514-0383 (TTY) or accessing the ADA Web site at http://www.ada.gov.

Use of Photo on Book Cover Could Violate Right of Publicity

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

An appropriation of likeness claim brought by a waitress under the Illinois Right of Publicity Act—based on the unauthorized use of her photographic image on a book cover—was not barred by the Act’s exceptions for artistic or creative expression or by the First Amendment, the federal district court in Peoria, Illinois has ruled.

The claim was brought by Kimmie Jo Christianson, a Peoria waitress, who agreed to have her photograph taken for a Fortune magazine article on single mothers supporting their families on low-wage jobs. Christianson gave her consent to have the photograph used only in the Fortune article, which appeared in the May 1986 issue.

In 2001, however, the photograph appeared on the cover of Nickel and Dimed: On (Not) Getting By in America, a best-selling book written by Barbara Ehrenreich. Five years later, Christianson brought suit against the book’s publisher and the author, seeking damages under the Right to Publicity Act (765 ILCS 1075).

Contrary to the defendants’ contention, the case did not fall within the statutory exception for creative works because the book did not attempt to portray, describe, or impersonate the waitress, the court reasoned. Likewise, the case did not fall within the statutory exemption for use of an individual’s identity for noncommercial purposes.

The right of publicity can conflict with the First Amendment when an individual’s identity is used by another in an artistic or creative expression. However, the First Amendment did not bar the waitress’s claim because the book and photo did not bear a reasonable relationship to one another, the court held.

The purpose of the image was not to reflect the subject matter of the book, but instead to reflect the ideas of the book in such a way that it would catch the eye or a prospective customer and lead to a possible sale, according to the court.

The subject matter of the book was the author’s personal journey from one part of the country to another, working at various low-paying jobs. The photograph and the book both concerned the plight of the working poor in America, but did not have any overlapping subject matter, in the court’s view.

At no point was the waitress, her photo, or the restaurant where she appeared ever part of the subject matter of the book.

The decision is Christianson v. Henry Holt and Company, LLC, No. 06-cv-1156, filed June 29, 2007. It appears at CCH Advertising Law Guide ¶62,619.

Burger Ads with Angus Jokes Not Enjoined

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

In a Lanham Act false advertising case arising from hamburger advertising characterized by the federal district court in Santa Ana, California, as “aggressive and sometimes amusing,” the court declined to preliminarily enjoin Jack in the Box television commercials. The complaining competitor (CKE) failed to establish a likelihood of success on the merits and a balance of hardships tipping sharply in its favor.

The focus of the case was the source of the beef used in the hamburger patties of the competing fast food chains. Jack in the Box advertised a “sirloin burger.” CKE offered an “Angus burger” under its Carl's Jr. and Hardee's brands.

In a Jack in the Box commercial for its sirloin burger, “Jack” pointed first to the sirloin area of a cow and then, when asked by an employee to point out the “Angus area,” looked at the rear of the cow. In another commercial, laughter erupted when an employee asked “ Jack” whether people would find “our sirloin” more attractive than “their Angus...es.”

Consumer Perception Survey

CKE offered a consumer survey as proof that a statistically significant number of participants were misled by the Jack in the Box commercials into believing that Angus was a cut of meat rather than a breed of cattle, that Angus beef was an inferior type of meat, and that Angus emanated from the rear-end or anus of beef cattle. The court gave the survey very little weight because its questions were leading. In addition, the court found that the survey was worded in such a way as to obscure whether any inference suggested by the commercial was negated because the consumer understood the joke.

Because CKE did not argue that the statements made in the challenged commercials were literally false, proof was needed that the advertising actually conveyed implied messages that deceived a significant portion of viewers. Contrary to CKE's contention, deception could not be presumed because the commercials were not found to have been intentionally created to persuade customers into misbelieving that any cut of “Angus beef” was inferior to “sirloin beef.” Without substantial extrinsic evidence that a significant portion of the commercial audience was deceived or evidence of intent to mislead consumers, the court held CKE to a higher standard in the balancing of hardships to determine whether the advertising should be preliminarily enjoined.

Materiality, Harm

CKE failed to establish a likelihood that the Jack in the Box television commercials for were materially deceptive or likely to harm CKE, in light of the results of CKE's consumer survey and the commercials' lack of an explicit comparison to CKE's product, the court determined. While CKE's survey indicated that 17 percent of consumers were less likely to buy hamburgers made with Angus beef, the survey also revealed that 14 percent of consumers were more likely to buy hamburgers made with Angus beef. This undermined any interpretation of the survey as establishing that the CKE was significantly harmed, the court said.

Harm could not be presumed on the theory that the commercials constituted comparative advertising because the commercials did not make a direct comparison to CKE's product. The commercials merely referred to “our competitor's product,” the court noted.

Unclean Hands

The court did find that Jack in the Box was unlikely to succeed in asserting a defense of unclean hands against CKE. Jack in the Box contended that CKE's commercials used a tongue-in-cheek style to attack competitors in a manner comparable to the Jack in the Box commercials at issue. This contention was rejected because the Jack in the Box commercials, which potentially implied that CKE's “Angus burgers” were made from an unsavory cut of meat, went further than any suggestions raised against competitors by CKE in its commercials, according to the court.

Full text of the July 2 opinion in CKE Restaurant v. Jack in the Box, Inc. will appear at CCH Advertising Law Guide ¶62,592.

Auto Dealer Can Proceed with Consumer Warranty Claim Against Italian Sports Car Maker

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

Automobili Lamborghini S.P.A. has been unable to get a federal district court in Hawaii to dimiss an action filed against it by a Hawaii auto dealership that purchased one of the auto maker’s Murcielago sports cars for more $285,000 back in July 2002. The complaining dealership filed suit in March 2006, alleging that Lamborghini breached the vehicle’s written warranty in violation of the federal Magnuson-Moss Act (MMA) and state law. The dealership contended that the Murcielago had been repaired several times for transmission and drive-train problems.

The court last month rejected the Italian auto maker’s argument that the complaining dealership couldn’t pursue an MMA claim because it wasn’t a consumer within the meaning of the statute.

As explained in the CCH Trade Regulation Reporter, the MMA was enacted in 1975 to provide a federal mechanism for government and private parties to deal with problems arising from consumer product warranties. The main concern of the law is warranties extending to "consumers." A consumer is defined as a buyer of any consumer product (but not a purchaser for resale) or any person receiving such a product during the duration of the warranty or service contract. Also included is any other person who is entitled by the terms of the warranty or service contract or under state law to enforce the obligations of the warranty against the warrantor.

Auto Dealership Could Be "Consumer"

The complaining auto dealership convinced the court that there was a question of fact as to whether it was a “consumer,” within the meaning of the MMA. The dealership could have been a buyer (other than for purposes of resale) of a consumer product.

The fact that the auto dealership paid Hawaii's one-half percent general excise tax rate for wholesalers instead of the four-percent rate for retail purchases was not determinative of whether the vehicle was purchased for resale, in the court’s view. The dealership's owner, a well known figure in the Hawaii car trade, contended that the Murcielago was never placed on the car lot for resale and never was marketed for sale. Instead, it was allegedly purchased with the intent of being driven by dealership owner and was driven only by him, his relatives, and service people. Moreover, the car was either kept at the dealership owner's home or was parked in a storage area in the basement of the dealership and not on display for sale.

As a result, the complaining auto dealer’s breach of express warranty claims based on drivetrain and/or transmission defects and instrument panel gauge defects were permitted to proceed.

The June 28, 2007, decision in Stoebner Motors, Inc. v. Automobili Lamborghini S.P.A., No. 06-00446 JMS/LEK, will appear at 2007-2 CCH Trade Cases ¶75,790.

House Oversight and Government Reform Committee Hearing Highlights P2P Risks

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

The risks of peer-to-peer (P2P) file-sharing technology and the need for legislation to protect consumers were the topics of a House Oversight and Government Reform Committee hearing convened on July 24.

Despite a voluntary code of conduct adopted in recent years by many P2P networks, there are indications that the risks remain high of inadvertently sharing highly confidential information through P2P technology. Describing a committee investigation that searched the popular P2P program Limewire, Chairman Henry Waxman (California) said “What we found was astonishing: personal bank records and tax forms, attorney-client communications, the corporate strategies of Fortune 500 companies, confidential corporate accounting documents, internal documents from political campaigns, government emergency response plans and even military operation orders.”

Federal Trade Commission Testimony

Mary Engle, associate director for advertising practices at the Federal Trade Commission (FTC), testified about the risks of P2P file sharing, including the inadvertent sharing of confidential information, exposure to adware or spyware, as well as possible copyright law violations and exposure to unwanted pornographic images. But Engle, like other witnesses, stressed the potential benefits of P2P technology. Benefits include transferring files more quickly, conserving bandwidth, and saving on maintenance and energy costs.

Citing a 2005 FTC report, Engle called for a balance between law enforcement and the promotion of new technologies. The report recommended that “policymakers balance the protection of intellectual property and the freedom to advance new technologies, thereby encouraging the creation of new artistic works as well as economic growth and enhanced business efficiency.”

Waxman sounded a similar note. “The purpose of this hearing is not to shut down P2P networks or bash P2P technology. P2P networks have the potential to deliver innovative and lawful applications that will enhance business and academic endeavors, reduce transaction costs and increase available bandwidth across the country. At the same time, however, we must achieve a balance that protects sensitive government, personal and corporate information and copyright laws.”

The text of the prepared FTC statement appears on the agency’s Web site — www.ftc.gov.

A list of hearing witnesses, along with links to their testimony, is available on the committee’s Web site — oversight.house.gov.

Drug Purchasers Stated Wisconsin Antitrust Law Claim Against Bayer

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

A divided Wisconsin Supreme Court has ruled that a putative class of Wisconsin residents who purchased the branded antibiotic drug Cipro stated Wisconsin Antitrust Act claims against the drug's maker, Bayer AG, for maintaining a monopoly over the drug and for conspiring with generic drug makers to inflate prices by delaying generic competition. The majority rejected Bayer's argument that the challenged interstate conduct was outside the scope of the Wisconsin Antitrust Act. The majority took an expansive view of the range of conduct that Wisconsin residents can attack under the state antitrust law.

One of the dissenters said that he was “unable to discern from the discussion in the majority opinion any meaningful limitation on antitrust suits against activities outside this state . . .”

The suit was originally filed in state court in November 2000. In the last seven years, the case took a number of procedural twists and turns, ultimately landing in the state’s highest court.

The claims withstood a motion to dismiss, the court ruled, even though the circumstances involved interstate commerce and the challenged conduct occurred outside of Wisconsin, because they alleged that the challenged conduct substantially affected the people of Wisconsin and had impacts in the state. Their allegation that Bayer conspired with manufacturers of generic drugs to maintain monopoly prices on a best-selling prescription drug purchased by thousands of Wisconsin residents over several years met the "substantially affects" test of Olstad v. Microsoft Corp. (2005-2 Trade Cases ¶74,918), which "opened the door to interstate antitrust enforcement [under the Wisconsin Antitrust Act] in some circumstances."

The plaintiffs were required to allege that the conduct complained of had impacts in Wisconsin, and not merely nationwide impacts. However, the impacts of the challenged conduct on Wisconsin did not have to be distinguishable from or disproportionate to its impacts on other states. Neither the statute nor case law required that plaintiffs allege that the challenged conduct caused disproportionate injury to Wisconsin consumers, the court held.

The July 13, 2007, Wisconsin Supreme Court decision in Meyers v. Bayer AG, 2007 WI 99, will appear at 2007-2 CCH Trade Cases ¶75,774.

Paper Maker's Subsidiary Acquitted of Price Fixing, Despite Evidence from Corporate Leniency Applicant

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

The Department of Justice Antitrust Division has been quite successful prosecuting price fixing cartels revealed by applicants seeking amnesty under the Antitrust Division’s Corporate Leniency Program. According to a speech delivered earlier this year by Gerald F. Masoudi, Deputy Assistant Attorney General for International Matters at the Antitrust Division, at a Cartel Conference in Budapest, Hungary (and available on the Justice Department website), the Corporate Leniency Program is the “greatest single driver” of the agency’s cartel enforcement success. Under the program, “the first corporate cartel member that comes promptly to the Antitrust Division, cooperates with our investigation and otherwise meets the requirements of our program will get a promise of full immunity.”

Usually, the outed co-conspirators, whether they are vitamin makers or manufacturers of rubber chemicals, plead guilty and pay enormous fines. Usually, but not always.

Indictment Against Stora Enso North America

Stora Enso North America, the U.S.-based subsidiary of Stora Enso Oyj of Helsinki, Finland, was indicted in December 2006. The Justice Department alleged that the U.S. subsidiary of the second largest magazine paper producer in the world violated Sec. 1 of the Sherman Act by entering into an agreement with one of its competitors to fix prices for brand name, coated publication papers sold to U.S. customers between August 2002 and June 2003. No Stora Enso employees were charged. The evidence against Stora Enso came from the competitor who had successfully obtained amnesty under the Corporate Leniency Program.

Acquittal

Stora Enso denied any wrongdoing and went to trial. Following a five-day trial, a federal jury in Hartford last Friday found Stora Enso not guilty. A judgment of acquittal was entered today.

As a result, the Antitrust Division failed to obtain a conviction or guilty plea following its three-year investigation into anticompetitive conduct in the industry.

Unique Case

David Marx, head of the Chicago Antitrust practice group of McDermott Will & Emery -- the firm which represented Stora Enso – believes that the case marks the first time that a defendant company has been acquitted of price fixing charges after the alleged co-conspirator has been granted amnesty under the Antitrust Division's Corporate Leniency Policy.


A copy of the indictment in U.S. v. Stora Enso North America Corp., Criminal No. 3:06cr323 CFD (USDC Conn.), appears on the Department of Justice website.

Privacy Law in Marketing Is Subject of New CCH Reporter

Information gathered through marketing efforts can be personal, valuable, and subject to a variety of U.S. and international laws and regulations governing its collection, protection, and use. A single security breach, careless handling of such information, or misuse in further marketing campaigns can result in serious legal liability.

That's why Wolters Kluwer Law & Business has launched a new publication (in print and online) to help untangle the complex web of legal regulation from around the world. CCH Privacy Law in Marketing brings together everything needed to deal with this emerging area of law.

The monthly-updated reporter combines treatise-style explanations by D. Reed Freeman, Jr. and J. Trevor Hughes with the full text of federal privacy laws and regulations, state privacy laws, and privacy laws and regulations from 33 foreign jurisdictions (provided in English translation).

Privacy topics include:

-- Telemarketing
-- E-mail marketing/”Spam”
-- Marketing to wireless devices
-- Cookies and web beacons
-- Information security
-- Identity theft
-- Phishing
-- Children’s privacy
-- Fax marketing
-- Online privacy policies
-- Customer proprietary network information
-- Use of Social Security numbers
-- International privacy law

Monthly reports will include new and amended laws and regulations, court decisions and other new developments, a list of pending legislation, and an informative newsletter.

To obtain further information about Privacy Law in Marketing, call the CCH customer service department (1-800-248-3248) or visit the CCH Online Store (http://onlinestore.cch.com) and search the keyword “privacy.”

New Brunswick Enacts Franchise Disclosure/Relationship Law

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


New Brunswick has become the fourth Canadian province to enact a generally applicable franchise law. The New Brunswick Franchises Act—a disclosure and relationship statute—became law upon receiving Royal Assent on June 26.

The statute requires franchisors to make presale disclosures to prospective franchisees, imposes a duty of good faith and fair dealing on parties to franchise agreements, and guarantees franchisees the right of association.

Disclosure Requirements

Modeled on the Uniform Franchises Act (CCH Business Franchise Guide ¶7021), which was adopted by the Uniform Conference of Canada in 2005, the New Brunswick law requires a franchisor to provide a prospective franchisee with a disclosure document at least 14 days prior to the signing of an agreement or the payment of consideration. A disclosure document must contain a financial statement, copies of all agreements, and statements for the purpose of assisting the prospective franchisee make an informed investment decision.

Right to Rescind, Sue for Damages

The statute provides a franchisee with a right to rescind the franchise agreement (1) within 60 days after receiving the disclosure document if the franchisor did not provide the document within the required time or the document was deficient and (2) within two years of entering the franchise agreement if the franchisor never provided the document.

A franchisee shall have a right of action for damages caused by a misrepresentation or nondisclosure in the disclosure document.

Implementing Regulations

The Lieutenant-Governor is authorized to issue regulations prescribing the content of the financial statement and other information included in the disclosure documents and setting forth rules for informal dispute resolution and mediation.

The law is expected to be proclaimed into force upon the promulgation of implementing regulation. Text of the legislation (Bill 32) appears here on the website of the Legislative Assembly of New Brunswick.

The other Canadian Provinces with franchise laws are Alberta, Ontario, and Prince Edward Island. Manitoba is investigating potential legislation.

Major Food and Beverage Firms Agree to Limit Advertising to Children

Eleven major food and beverage firms have pledged to limit their advertising to children in several different ways, under the Children’s Food and Beverage Advertising Initiative, a self-regulatory program sponsored by the Council of Better Business Bureaus.

The pledges were announced on July 18, during a forum on childhood obesity, hosted jointly by the Federal Trade Commission and the U.S. Department of Health and Human Services.

The 11 firms, accounting for an estimated two-thirds of children’s food and beverage television advertising expenditures in 2004, have agreed to (1) limit their advertising on programming directed to children under the age of 12, (2) focus children’s advertising on healthier foods and beverages, (3) direct their advertising of particular products to those over the age of 12, (4) restrict the use of third-party licensed characters to more healthy products and to websites that promote healthy lifestyles, (5) refrain from advertising in elementary schools, and (6) refrain from product placement in movies and content primarily directed to children under 12.

Pledges were made by Cadbury Adams, USA, LLC; Campbell Soup Co.; The Coca-Cola Co.; General Mills, Inc.; The Hershey Co.; Kellogg Co.; Kraft Foods, Inc.; Mars, Inc.; McDonald’s USA, LLC; PepsiCo, Inc.; and Unilever United States.

“In 2005, FTC Chairman Deborah Platt Majoras and HHS Secretary Mike Leavitt challenged the advertising industry to review and strengthen industry self-regulation of children’s food advertising in light of the growing concern about childhood obesity in our nation,” said Steven J. Cole, President and CEO of the Council of Better Business Bureaus. “These expansive commitments respond directly to that challenge.”

The pledges will improve the mix of foods advertised to children under 12 and will reduce the number of food advertisements by these firms, according to Elaine D. Kolish, director of the Children’s Food and Beverage Advertising Initiative.

The CBBB says it will monitor and publicly report on the firms’ compliance with their pledges.

Highlights of the pledges include:

Coca-Cola Co.: The soft drink giant committed to continue its practice in the U.S. of refraining from advertising its beverages on programming primarily direct to children under 12.

PepsiCo: By January 2008, the firm will restrict its advertising to products that meet its “Smart Sport” nutritional criteria, which are based on statements by the Food and Drug Administration, the National Academy of Sciences, and other public health authorities.

McDonald’s USA: Advertising primarily directed to children under 12 will be limited to meals that meet specified calorie, fat, saturated fat, and sugar limitations consistent with government standards.

Hershey Co.: The candy maker will refrain from advertising in media primarily directed to children under 12.

Mars, Inc.: The company announced a global policy of not advertising its traditional candy and snack products to children under 12.

Kraft: Ads for beverages, cereals, and snacks will be limited to those meeting the company’s “Sensible Solution” criteria.

Details of the announcement appear here on the Better Business Bureau website. Further information about advertising to children is available in the CCH Advertising Law Guide and Do's and Don'ts in Advertising.

Quotations from Chairman Majoras

Federal Trade Commission Chairman Deborah Platt Majoras recently gave an expansive interview to the San Francisco Chronicle, commenting on policy issues from anti-spam regulation and privacy initiatives to merger enforcement and childhood obesity.

Text of the interview appears here on the Chronicle’s web site.

Selected quotations from the Chairman follow:

The role of the FTC. “A lot of people don’t realize that the FTC was founded not only to do antitrust enforcement, but to actually be a market think tank for consumers. We do a lot of policy and market research.”

Anti-Spam efforts. “Spam, we believe, is on the rise again. It’s more malicious. It’s more dangerous now than it was before. I think we have done some good things with [the Canned Spam Act]. But it’s like playing “Whac-a-Mole”—you hit them in one place and they pop up in another . . . Most of the spam is crossing three or four international borders before it hits your mailbox. We are working really hard to form partnerships with lots of foreign countries so we can work with them to track down the biggest and worst spammers. I’m proud of work we’ve done on Canned Spam, but it isn’t a problem that we’re going to solve overnight. Quite frankly, I don’t think legislation can solve it.”

Merger enforcement. The perception that the Bush Administration is more friendly to mergers is “simply not borne out at the FTC. You look at the number of merger filings, it’s pretty even since about the first Bush administration. I can’t think there was a merger that people have pointed to and said, ‘Why didn’t you guys take a closer look?' or 'Why didn’t you challenge it?' To me, it’s not some political thing that shifts a whole heck of a lot. I think I’ve brought three cases in the past week.”

Factors used to review mergers. “The main thing you look at are the competitive effects. Will the firms be able to more easily collude or signal to each other on pricing? The other is whether the newly merged firm would be able to exercise some market power because no other competitor in the marketplace could substitute the same way. That’s the theory, for example, in the Whole Foods-Wild Oats case that we just brought (to block the two organic grocery chains from joining forces)—that the Wall Street Journal editorial board keeps ridiculing me for.”

Gasoline prices. “The difficulty here is that there is a lot of misperception about this market. Everywhere you go, you hear ‘Oh, the market has become so much more concentrated.’ Interestingly enough, it hasn’t in many parts of it, particularly at the exploration and actual oil end of it. Refining has tightened some. On the other hand, small refiners have bought up other refiners so they have been able to compete with large integrated refiners. The difficulty is that we have looked for anti-competitive behavior in this industry time and again, and we keep looking for it. Congress would like the problem to be solved by me suing a bunch of oil companies—or OPEC. Like that’s going to solve our energy problem. It’s just not.”

Childhood obesity. “We don’t know if it’s true [that the marketing of unhealthful foods to children causes childhood obesity]. We know that childhood obesity rates are at a level that cannot be sustained if we care about the health of our next generation. My best guess is that it’s multiple factors—that our kids have a more sedentary lifestyle, that food portions have gotten bigger, that food is less healthy. Everybody who can play a role and try to solve the problem ought to do it. We try to be a facilitator to push industry to change some of their practices.”

Advertising violent movies, games to children. “Talk about First Amendment issues. Every restriction on violent video games that has been tried in any state in the last number of years—and there have been about a dozen—have been struck down by federal courts. So this is an area in which self-regulation is critical. Is this embarrassing to companies that they aren’t actually following their own standards? Then good.”

Government, Consumers, Businesses Must Combat New Spam Threats: FTC Chair

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

Convening a two-day summit on spam on Wednesday, July 11, the head of the Federal Trade Commission (FTC) called on government, consumers, and businesses to work together to combat malicious spam.

“The risk that malicious spam will erode confidence in the Internet’s benefits to consumers and the global economy is too great to ignore and we must act quickly to address it,” FTC Chairman Deborah Platt Majoras remarked.

Spam has the potential to inundate consumers’ inboxes with unwanted e-mail, facilitate fraud and malicious code, and betray consumers’ trust in the Internet, Majoras noted.

Emerging Threats

“Botnets”—networks of hijacked personal computers used by spammers to conceal their identities—are common, and spammers are launching phishing attacks and delivering malicious code, or “malware,” to consumers’ computers. Emerging threats include “SPIM” (spam over Internet messaging), “SPIT” (spam over Internet telephony) and spam to mobile devices, said Majoras.

Active Enforcement

In view of the challenges, Majoras called for action on several fronts. First, law enforcement agencies need to be active. Majoras said the FTC has brought 89 spam-related actions since 1997. In the past two years, the agency has brought 11 enforcement actions against spyware companies.

In addition to the FTC’s activities, Majoras said, law enforcement agencies such as the Justice Department and the FBI are best suited to shut down criminal operations in most cases. “We cannot permit the electronic world to become a lawless frontier,” the chairman warned.

Authentication

Second, computer users need to be knowledgeable about with whom they are interacting electronically. To that end, Majoras urged the continued improvement of anti-spam technology and, in particular, domain-level authentication, which Majoras said holds the greatest promise for preventing spammers from operating anonymously.

According to Majoras, 70 percent of Fortune 100 companies and more than 25 percent of Fortune 500 companies use domain-level authentication technology that verifies who is sending electronic communications.

Self-Defense

Third, consumers must practice self-defense. The FTC has established an online consumer education tool – OnguardOnline.com – to encourage consumers to protect themselves. The site offers information about phishing, malware and spambots, and encourages consumers to use anti-virus and anti-spyware software. Fourth, Majoras said, collaboration among stakeholders – including technology experts and international stakeholders – is essential.

The remarks by Chairman Majoras (“Developing a Plan for Action in the Fight Against Malicious Spam”) opened the “FTC Spam Summit: The Next Generation of Threats and Solutions,” conducted July 11-12 in Washington, D.C.

Advance-Fee Credit Card Scammers Ordered to Stop, Pay Nearly $10 Million

This posting was written by Darius Sturmer, editor of CCH Trade Regulation Reporter.

In an FTC action, the federal district court in Chicago has entered several new orders against the Canadian operators of a cross-border advance-fee credit card telemarketing scam, permanently enjoining the corporate defendants and a principal from operating the scheme, directing them to pay nearly $10 million in consumer redress, and holding two other individuals in contempt of court for violating the terms of preliminary injunctions issued earlier in the case.

FTC Complaint

According to the FTC's September 2005 complaint, the defendants had, since at least 2004, used outbound telemarketing to contact consumers in the United States and offer them major credit cards for an advance fee of $249. The defendants typically claimed that the credit cards would have a $2,000 credit limit, zero percent interest, and no annual fees. They often targeted their offers at consumers with poor credit histories.

Consumers who provided their bank account information did not receive a major credit card, but instead were sent an application for either a "stored value card" or "cash card" that had no line of credit associated with it and could be used only if the consumer first loaded funds onto the card.

The complaint also alleged that the defendants violated the law by calling consumers on the FTC's National Do-Not-Call Registry.

In early May 2007, the FTC entered into a settlement of its charges with three of the individuals who allegedly ran the operation (CCH Trade Regulation Reports ¶16,007).

Final Orders

The final orders—which concern all 13 of the corporate defendants, as well as the individual defendant—barred the defendants from: (1) making, or assisting anyone else in making, any false or misleading statements concerning any fact material to a consumer's decision to buy any program, product, or service; and (2) violating, or helping anyone else to violate the Telemarketing Sales Rule.
The orders also held the defendants jointly and severally liable for $9.89 million (the total amount of consumer injury associated with the scam), froze their assets until they have satisfied the judgment, and barred them from selling their customer lists. Finally, the orders contained provisions designed to ensure future compliance with the FTC Act and the orders themselves.

Contempt Order

Civil contempt orders had been entered against one individual defendant and a non-party, for violations of the preliminary injunction issued by the court in January 2006, the FTC announced. In papers submitted to the court, the Commission demonstrated that just a few months after entry of the preliminary injunction, the individual defendant began a new telemarketing venture that falsely promised consumers they would receive at least $5,000 in government grants in exchange for an application fee of several hundred dollars.

The non-party, who along with his employees provided customer service for the venture, withdrew these fees from consumers' bank accounts, in total taking over $650,000 from consumers, approximately $550,000 of which he transferred to the individual defendant and the rest of which he kept in fees for himself. The court found that this conduct violated the preliminary injunction.

Among other things, the preliminary injunction froze the defendants' assets and prohibited them from engaging in deceptive conduct. It prohibited third parties who received notice of the order from assisting the defendants in violating it. Because the non-party customer service provider had been notified of this order, he was therefore bound by it. The court ordered the two individuals to return the $657,648 that they took from U.S. consumers victimized by their grants scam, and it imposed a fine of $5,000 per day for each day the amount remains unpaid.

The case is FTC v. Centurion Financial Benefits, LLC, U.S. District Court for the Northern District of Illinois, Civil Action No. 05C 5542. The consent decrees and civil contempt order were filed on July 5, 2007. Further details appear at the FTC web site and CCH Trade Regulation Reporter ¶16,026.

Dating Service Franchisor, New York Franchisees Settle Charges of Overcharging Customers

Nationwide dating service It’s Just Lunch International and three of its New York franchisees have settled an action brought by the New York Attorney General for charging customers more for social referral services than allowed by state law.

The franchisor and its franchisees will pay fines and costs to the state and reform their business practices to conform fees to within the statutory maximum of $1,000 and to offer contracts that fairly spell out consumers’ rights under New York law.

New York General Business Law §394-C provides that “social referral service contracts”: (1) may not require the payment of an amount greater than $1,000, (2) may not extend over a period of time greater than two years, (3) may not require the purchase of ancillary services as a condition of the contract, (4) must require a minimum number of referrals per month (if the contract charges more than $25), (5) must allow a customer to place a membership on hold for a period up to one year, and (6) must provide a three-business-day right to cancel a contract without a fee.

Many of the customers of It’s Just Lunch paid $1,500 for two six-month contracts that were signed at the same time. This practice was merely a device for circumventing state law limitation on fees of $1,000, according to the New York Attorney General.

The company’s contracts also violated state law by prohibiting consumers from filing lawsuits against the company and by failing to include many consumer-friendly provisions, such as a guarantee of a specific number of social referrals per month, the suit alleged.

The franchisees—located in New York City, Albany, and Williamsville—agreed to stop charging customers more than the $1,000 statutory limit, to bring their contracts into full compliance with the state law, to provide three free referrals to customers who paid more than $1,000 and signed contracts on or after January 1, 2006, and to pay a $6,000 fine and $1,000 in costs each.

Pursuant to the settlement, the franchisor paid a $45,000 fine and $2,000 in costs to the state and agreed to implement policies and procedures to ensure that future New York franchisees understand their obligations under the state law.

The settlement was announced in a July 6 press release issued by the New York Attorney General.

Whole Foods/Wild Oats Merger Creates “Enough Smoke to Suspect a Fire”: Antitrust Institute

Contrary to the views of many critics, the FTC has made a “highly compelling case for looking closely at whether a Whole Foods/Wild Oats combination will tend substantially to lessen competition,” according to an American Antitrust Institute “White Paper” issued July 7.

In the paper (“Whole Foods Proposed Acquisition of Wild Oats: The FTC Has Earned Its Day in Court”), Diana Moss writes that “there is enough smoke to suspect a fire.”

Rather than condemn the FTC, as many have already done, the public should await the results of the July 31 hearing on the FTC’s preliminary injunction before the U.S. District Court for the District of Columbia, Ms. Moss states.

The American Antitrust Institute (AAI) believes that there are at least three major issues that are worthy of investigation at the preliminary injunction hearing:

Product market definition: As has been pointed out by critics of the FTC’s complaint, the case turns on the definition of the relevant product market, described as “premium natural and organic supermarkets.” In 28 geographic regions across the country, Whole Food’s proposed acquisition of Wild Oats would eliminate the second largest competitor or potential competitor. However, if the relevant product market includes the natural and organic food products sold by full-line supermarkets, “the effect of the merger is de minimis.”

Pricing data. An analysis of the merging parties’ pricing data in relevant markets should be viewed as “complementary to the parties’ statements that the purpose of their merger is to avoid competition.” Much of the FTC case focuses on statements by Whole Foods CEO John Mackey, indicating a “clear desire to stifle competition.” However, “natural experiments,” using price data to determine if existing or potential competition discipline pricing by the merging parties, “should be viewed as a complement to anticompetitive motives . . .”

Elimination of potential competitor. The merger’s effect on eliminating a potential competitor deserves equal attention to the elimination of an existing rival in the relevant market. As CEO Mackey acknowledged, one of the motives behind the merger was to eliminate the single competitor that “has the scale and brand identity” that could serve as a “toe hold” for entry or expansion by a Whole Foods’ rival.

“Given the statements of Whole Foods’ Mr. Mackey, it is not surprising that the FTC would bring this case, although such statements are not necessarily determinative of the outcome,” observed Ms. Moss.

“And given the precedents such as Staples/Office Depot, in which close analysis of retail scanning data demonstrated that a narrow market definition makes good economic sense, the FTC deserves to have its day in court . . . "

Ms. Moss is Vice President and Senior Fellow of the American Antitrust Institute, an independent Washington-based non-profit education, research, and advocacy organization. According to the AAI, its mission is to increase the role of competition, assure that competition works in the interests of consumers, and challenge abuses of concentrated economic power in the American and world economy.

FTC's "Narrow View" of Markets May Threaten Franchisors

You would think that franchisors would be feeling pretty good about their antitrust exposure following Leegin Creative Leather Products, Inc. v. PSKS, Inc., the June 28 U.S. Supreme Court decision that overturned the application of the per se rule of illegality to vertical price fixing.

However, a recent Federal Trade Commission challenge to a non-franchise merger might nevertheless cause franchisors to worry about facing government antitrust scrutiny, according to a prominent franchise attorney.

Last month, the FTC brought a court and administrative action against Whole Foods Market’s proposed acquisition of Wild Oats Markets, Inc., alleging that the combination of supermarket chains would substantially lessen competition in the nationwide market for “premium natural and organic food supermarkets.”

Relevant Market

As previously discussed on Trade Regulation Talk, the relevant market definition alleged by the FTC has been the subject of much controversy, particularly since the vast majority of natural and organic food is sold through traditional supermarkets.

The FTC challenged the Whole Foods/Wild Oats combination by alleging a relevant market of “premium natural and organic food supermarkets,” which are differentiated from conventional supermarkets by (1) the breadth and quality of their perishables; (2) the wide array of natural and organic products and services and amenities they offer; and (3) the customer’s shopping experience “where environment can matter as much as price.”

"Extraordinarily Narrow Boundaries"

“Owing to the extraordinarily narrow boundaries of this alleged relevant market . . . the FTC’s decision to bring this action should be of concern to franchisors,” wrote Peter J. Klarfeld, in a July 6 Wiley Rein LLP Franchise Alert newsletter.

Franchisors have not had to worry much about antitrust challenges to many of their business practices because they do not have economic power in any “reasonably defined relevant market,” according to Klarfeld. The industry sectors in which franchisors deal (fast food, lodging, retail, real estate sales) are “just too vast for any brand to monopolize” and substitutes for the products and services are readily available.

Particular Quality, Image, Lifestyle

But what would happen if the relevant market did not consist of all competitors offering reasonably interchangeable products and services? What if the market included “only those competitors that offered products of the same perceived quality, a particular level of service and/or a particular advertising image,” he asked.

“What if associating a product or service with a certain ‘lifestyle’ narrowed the relevant market for antitrust purposes to other companies that attempted to invoke a similar ‘lifestyle’ in their advertising?”

Adoption of the FTC’s market definition in the Whole Foods/Wild Oats case could create relevant markets for restaurant chains that feature a particular kind of food or seek to attract a particular clientele (such as “kid-friendly” businesses).

Klarfeld suggests that the FTC may place limits on its relevant market theory as its action proceeds. “But as the FTC’s complaint now stands, its implications could create considerable mischief for franchisors.”

The court complaint is Federal Trade Commission v. Whole Foods Market, Inc. and Wild Oats Markets, Inc., U.S. District Court for the District of Columbia, Case 1:07-cv-01021, filed June 6, 2007.

FTC Issues Administrative Complaint to Block Whole Foods/Wild Oats Deal

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

The Federal Trade Commission has issued an administrative complaint challenging Whole Foods Market Inc.’s approximately $670 million acquisition of Wild Oats Markets Inc.

The June 27 issuance of the administrative complaint follows the June 6 filing of a similar complaint in the federal district court for the District of Columbia.

According to the complaint, the transaction would violate federal antitrust laws by eliminating the substantial competition between these two uniquely close competitors in the operation of premium natural organic supermarkets nationwide.

The FTC contends that the acquisition would give Whole Foods the ability to raise prices and reduce quality and services.

In the federal court proceeding, the judge issued a temporary restraining order on June 7, under which the parties may not consummate the deal until after a preliminary injunction hearing, which is scheduled for July 31 and August 1, 2007.

Controversial Challenge

The FTC challenge to this acquisition is one of the more controversial in recent years, attracting criticism from the general media in addition to the antitrust bar. Much of the commentary focuses on the relevant market definition.

The FTC is alleging that the acquisition would injure competition in the market for “premium natural and organic food supermarkets,” which are differentiated from conventional supermarkets by (1) the breadth and quality of their perishables; (2) the wide array of natural and organic products and services and amenities they offer; and (3) the customer’s shopping experience “where environment can matter as much as price.”

Criticism of Market Definition

Critics (and the two supermarket chains) have asserted that this market definition is far too narrow, since Whole Foods competes with a growing number of natural and organic food stores and farmers markets, in addition to more traditional supermarket chains, which are adding natural and organic food brands—and even departments.

The Wall Street Journal Law Blog cites a statistic that 74 percent of natural and organic foods “are now sold through conventional supermarkets and the like.” Daniel Gross, on Slate.com (“Bush’s War on Whole Foods”), contends that “[i]t’s hard to see how permitting Whole Foods to convert existing Wild Oats into Whole Foods outlets and perhaps close a few dozen redundant stores will deprive foodies of a unique retail experience.”

On his blog, Whole Oats CEO John Mackey writes that the company has “vigorous competition from a number of alternatives—Trader Joe’s, Wegman’s, Safeway, Giant, Balducci’s, farmers’ markets, and food co-ops.” He maintains that Whole Foods considers Trader Joe’s, rather than Wild Oats, to be the national company it has “the most difficulty competing against” and against which it prices most aggressively.

However, Wild Oats does appear to be the key competitor for Whole Foods in some markets. The FTC’s court complaint includes a statement from Mr. Mackey that buying Wild Oats would allow Whole Foods to avoid “nasty price wars” in some cities (such as Portland, Boulder, and Nashville) and to “eliminate forever the possibility of Kroger, Super Value, or Safeway using their brand equity to launch a competing national natural/organic food chain to rival us.”

Administrative Complaint

The issuance of the administrative complaint, fast on the heels of the court complaint, is not the normal procedure for the FTC. Filing duplicative complaints on parallel judicial and administrative paths may be an attempt to preserve legal options, while betraying a lack of confidence in the court challenge.

Further information on the administrative complaint, including a news release, appears on the FTC web site and at CCH Trade Regulation Reporter ¶16,025.

Government Employees Not Subject to RICO Suit for Extortion: Supreme Court

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

Government officials acting pursuant to their regulatory capacity could not be guilty of the RICO predicate act of extortion for attempting to obtain property for the sole benefit of the government, according to a June 25 decision of the U.S. Supreme Court

Employees of the federal Bureau of Land Management (BLM) could not have engaged in various forms of extortion in an attempt to force a landowner to re-grant an easement that the BLM had lost, the Court held.

Harassment and Intimidation

According to the complaining landowner, the government employees pursued a campaign of harassment and intimidation to force him to re-grant the lost easement, including (1) performing unauthorized surveys of the former easement; (2) illegally entering the landowner’s lodge; (3) bringing regulatory charges against the landowner for trespass, land use violation, and unauthorized road repairs; and (4) pursuing criminal charges for which the landowner was acquitted.

All these activities constituted extortion under the Hobbs Act and adversely affected the landowner's business by interfering with his guest ranch operations, according to the federal RICO claim.

Extortion

The government contended it had a valid claim of entitlement to the disputed property, which would be a complete defense against extortion. The Hobbs Act— which prohibits actual or attempted robbery or extortion affecting interstate or foreign commerce—does not apply when the U.S. government is the intended beneficiary of allegedly extortionate acts, the Supreme Court held.

The Act did not speak explicitly to efforts to obtain property for the government rather than a private party. Without some other indication from Congress, it is not reasonable to expose all federal employees to extortion charges whenever they stretch in trying to enforce government property claims, the Court held.

RICO Predicate Act

Because the employees' conduct did not fit the traditional definition of extortion, it also did not survive as a RICO predicate offense on the theory that it was chargeable under state law. There was no decision by any court from the entire 60 years of the Hobbs Act that found extortion in the efforts of government employees to get property for the exclusive benefit of the government, according to the Court.
The Supreme Court overturned a holding by the U.S. Court of Appeals in Denver (CCH RICO Business Disputes Guide ¶10,322) that the landowner could proceed with a RICO claim against BLM employees.

The opinion is Wilke v. Robbins, Docket No. 06-219, decided June 25, 2007. It will appear in CCH RICO Business Disputes Guide.