FTC Should Investigate Intel’s Strategic Conduct Against Competitor: American Antitrust Institute

This posting was written by John W. Arden.

In light of the European Commission’s Statement of Objection alleging an abuse of dominance by Intel, the Federal Trade Commission should review the company’s strategic conduct against competitor Advanced Micro Devices “which has gone so long unchecked,” according to an August 29 letter sent by the American Antitrust Institute to FTC Chairman Deborah Platt Majoras.

Intel is clearly a monopolist in the microprocessor manufacturing industry, which for practical purposes is a global duopoly, wrote Albert A. Foer, President of the American Antitrust Institute (AAI).

“There seems to be no compelling evidence that this industry is a natural monopoly, so it becomes especially important to be vigilant against strategies by the dominant firm that might eliminate or cripple its only rival’s ability to gain substantial market share as a result of its hard-won and pro-competitive innovations and efficiency,” the letter observed.

“Reason to Worry”

Citing the EC’s complaint (as well as allegations in a private lawsuit brought by Advanced Micro Devices, a settlement in Japan, and an ongoing investigation in Korea), Foer states that there “seems to be substantial reason to worry about Intel’s rebate policies, in particular, which appear to be fashioned for the purpose of keeping Original Equipment Manufacturers from switching orders to a chip that, on the merits, they may prefer to purchase from AMD.”

The AAI called for the U.S. government to “reclaim its traditional role as the leading antitrust enforcer,” especially in a case that involves two U.S. corporations and is causing concern to the rest of the industrialized world.

Text of the letter appears at the American Antitrust Institute’s website.


Institute, Consumer Groups Supported FTC With “Whole Oats” Friend-of-Court Brief

This posting was written by John W. Arden.

In the flurry of news leading up to the U.S. Court of Appeal’s August 23 refusal to block Whole Foods Market’s acquisition of Wild Oats Markets, Inc., the AAI’s amicus brief for a stay pending the FTC’s appeal might have gone largely unreported.

The amicus brief, filed on August 23, argued that the federal district court erred in (1) failing to evaluate whether traditional supermarkets constrain premium natural and organic foods supermarkets, (2) elevating theory over fact by ignoring contemporaneous business documents demonstrating the anticompetitive purpose of the merger, and (3) considering the impact of the merger solely on “marginal consumers.”

In addition, the brief asserted that the benefits of a stay far outweighed “any theoretical harm from delaying this merger.”

Evidence of Anticompetitive Intent

Perhaps most interesting was the discussion of whether the court ignored business documents in which John Mackey, Whole Foods’ founder and CEO, expressed a desire to acquire Whole Foods in order to avoid “nasty price wars” in several cities and to “eliminate forever the possibility of Kroger, Super Value, or Safeway using their brand equity to launch a competition national natural/organic food chain to rival us.”

According the amicus brief, “[t]here were no procompetitive reasons articulated by Whole Foods for the acquisition and inexplicably, the court below never addresses this admission of anticompetitive intent.”

Citing Antitrust Law: An Analysis of Antitrust Principles and Their Application by Areeda and Hovenkamp, the brief points out that evidence of intent in a merger case may help determine whether the market “has been too broadly defined” or that “the acquired firm, though having a relatively small share, is a particularly disruptive force . . . “

“Economic testimony is relevant but it cannot trump marketplace realities,” the brief concluded.

The amicus brief was written by David Balto and filed on behalf of the American Antitrust Institute, the Consumer Federation of America, and the Organization for Competitive Markets. Text of the brief appears on the AAI website.

Conspiracy Claims Against New York Real Estate Brokers Allowed to Proceed

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

Large New York City real estate brokerage firms, acting through their trade association, could have conspired to exclude a complaining firm, which sold listings databases and other information technology (IT) products to real estate brokers, from participation as an approved or preferred vendor in the association's listing service, the federal district court in New York City has ruled. In addition, the trade association could have conspired with one of the complaining firm's competitors to block potential competitors.

Accordingly, the brokerage firms and trade association were denied summary judgment on the IT firm's conspiracy claims under both Section 1 of the Sherman Act and the New York Donnelly Act.

Common Ownership

Several of the brokerage defendants were owned by the same parent company as the complaining firm's competitor, giving them a direct financial stake in eliminating the complaining firm as a competitor. This common ownership provided circumstantial evidence of a motive to reduce the competition faced by the competitor that would have tended to exclude the possibility of independent conduct, the court observed. Thus, the complaining firm could make out a conspiracy claim under rule of reason analysis.

Substantial questions of fact were raised regarding (1) the defendants’ concerted action through the trade association and its agreement to promote the competitor service; (2) the alleged relevant market for real estate listings IT services; and (3) the procompetitive justifications for denying the IT firm an interface with the competitor database service.

Monopoly Claims

The IT firm's monopoly claims were rejected by the court. Monopolization claims against two of the firm's competitors failed because they rested on a discounted theory of shared monopoly. The firm showed no evidence that the competitors sought to form a single entity, that competition between them had diminished, or that they allocated customers.

Monopolization claims against the real estate brokerage firms also failed for lack of standing. The complaining firm was neither a consumer nor a competitor in the relevant market. As a vendor of IT services whose customers were competitors in the relevant market, the complaining firm was too remote a party to have antitrust standing, the court ruled.

The August 6 decision is Klickads, Inc. v. Real Estate Board of New York Inc., U. S, District Court, Southern District of New York, 2007-2 Trade Cases ¶75,832.

Court Refuses to Block Whole Foods/Wild Oats Combination Pending Appeal

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

The U.S. Court of Appeals in Washington, D.C. has refused to block the combination of Whole Foods Market, Inc. and Wild Oats Markets, Inc. The FTC appealed an August 16 decision of the federal district court in Washington, D.C., denying the agency's request for a preliminary injunction. On August 23, the appellate court denied the FTC's request for an injunction pending appeal and dissolved an administrative injunction issued on August 20. Thus, the parties were free to proceed with their proposed combination.

According to the appeals court, the agency failed to show that the district court, in denying the preliminary injunction, abused its discretion by making clearly erroneous factual or legal findings.

"Although the FTC has raised some questions about the district court's decision, it has failed to make a 'strong showing that it is likely to prevail on the merits of its appeal,'" the appeals court said in a one-page per curiam opinion.

"We are pleased to have cleared what we expect to be our last legal hurdle," said John Mackey, Chairman and CEO of Whole Foods, on August 23. "We look forward to closing this merger and believe the synergies gained from this combination will create long-term value for our customers, vendors, and shareholders, as well as exciting opportunities for our new and existing team members."

Acceptance of Tendered Shares

On Monday evening, August 27, Whole Foods announced that it has accepted all of the shares tendered and not withdrawn for all of the outstanding shares of Wild Oats Markets common stock at $18.50 per share, net to the seller in cash without interest.

The tender offer and withdrawal rights expired at 5:00 p.m., Eastern Time, on August 27, 2007. A total of 25,175,997 shares of common stock of Wild Oats Markets were tendered and not withdrawn prior to the expiration of the offer, excluding an additional 3,795,973 shares subject to guaranteed delivery.

As a result of these purchases in the tender offer, Whole Foods Market will own approximately 84.1 percent of the outstanding shares of Wild Oats Markets common stock, effective Tuesday, August 28, 2007.

Approximately 12.7 percent of the outstanding shares of Wild Oats Markets common stock, represented by the shares subject to guaranteed delivery, will be purchased by Whole Foods Market as those shares are delivered during the next three business days.

Satellite TV Ads Not Supported by Consumer, Installer Surveys

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

A flawed consumer survey did not support an advertisement claiming that consumers preferred DIRECTV satellite television to cable, the federal district court in Chicago has ruled. And a survey of installers was not sufficiently reliable to support another ad's clear implication that installers preferred DIRECTV over digital cable, the court held. Thus, DIRECTV was ordered to stop running both ads.

Consumer Survey

Participants in the consumer survey were not told that the DIRECTV signal was digital, but the cable signal was analog. Evidence was uncontradicted that digital signals were better than analog signals. Predictably, consumers responded that the digital signal was better.

“It is not easy to think of a test that could be more unfairly designed than the consumer survey run by [advertising information provider] TNS in this case,” the court said.

For DIRECTV to have run ads saying that consumers preferred DIRECTV over cable—without telling the public that their comparison was between digital and analog signals rather than between digital satellite and digital cable—was obviously a misleading representation, the court concluded. The likelihood that cable TV provider Comcast would prevail on its Lanham Act false advertising claims was found to be “overwhelming.”

Installer’s Survey

In addition, Comcast was held to be very likely to prevail on its claim attacking the advertisement based on the installer’s survey.

DIRECTV advertised that installers preferred DIRECTV picture quality four to one over cable, based on a survey that asked for a comparison between DIRECTV and cable without specifying digital cable. The installers would have been just as likely to respond based upon their experience with analog cable as any experience they might have had with digital cable, the court found.

The basic infirmity of the survey was the failure to ask a fair question, the court observed. The question should have been, “based on your experience as an installer, do you have a preference as between the picture afforded by satellite digital or cable digital.”

The problem might have been avoided or mitigated if the survey firm, Alliance Consulting Group, had screened the installers to make sure they were getting installers who had experience with both satellite digital (that is, DIRECTV) and cable digital. But Alliance did not do that, according to the court.

While some of the installers could have interpreted the question to mean DIRECTV digital versus cable digital, and answered on that basis, that hypothesis was thrown into doubt. There was absolutely no basis for anyone to think that there was a difference between an analog and a digital picture other than the fact that one is digital, the court noted. There was no evidence that satellite as such was better than cable. The fact that the installers favored DIRECTV four to one strongly suggested that they were responding on the basis of their experience with DIRECTV's digital signal versus analog cable.

Injunction Against Claims

DIRECTV was preliminarily enjoined, in any territory in which Comcast provides cable television service, from disseminating any advertising claims that rely upon, quote from, or are based to any extent on the two surveys.

While DIRECTV had ceased airing the advertisement based on TNS consumer survey, equitable relief was found appropriate because DIRECTV had not clearly disavowed any intention to resume the allegedly unfair conduct in the foreseeable future.

The August 15 hearing transcript and preliminary injunction order in DIRECTV v. Comcast of Illinois III, Inc., will be reported in CCH Trade Regulation Reports and CCH Advertising Law Guide.

DIRECTV Commercial Likely to Be Proven “False by Necessary Implication”

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

In a Lanham Act false advertising case, Time Warner Cable (TWC) is likely to succeed in proving “false by necessary implication” a television commercial in which celebrity William Shatner praised the “amazing picture quality of the DIRECTV HD” and asserted that “settling for cable would be illogical,” the U.S. Court of Appeals in New York has held.

The court joined other federal appellate circuits in holding that an advertisement can be literally false even though it does not explicitly make a false assertion, if the words or images, considered in context, necessarily and unambiguously imply a false message.

Settling for Cable “Illogical”

To interpret the controversial statement, “With what Starfleet just ponied up for this big screen TV, settling for cable would be illogical,” the court found it appropriate to look not only at that particular text, but also at the surrounding context of the commercial.

In light of Shatner’s opening comment extolling the “amazing picture quality of DIRECTV HD” and the announcer’s closing remark highlighting the unbeatable “HD picture” provided by DIRECTV, the line in the middle—“settling for cable would be illogical”—could be found to refer to cable’s HD picture quality, according to the court.

Since it would only be “illogical” to “settle” for cable’s HD picture if it was materially inferior to DIRECTV’s HD picture, TWC was likely to establish that the statement was literally false.

“The Best Picture”

TWC also was held likely to succeed in proving literally false DIRECTV's television commercial in which celebrity Jessica Simpson stated that a viewer could not get “the best picture—a “1080i” resolution high definition picture—without DIRECTV. This claim was flatly untrue, the court determined. The uncontroverted factual record established that viewers could, in fact, get the same “best picture” by ordering HD programming from their cable service provider.

Puffery

The “puffery” defense to false advertising was another area in which the court refined its position. Because DIRECTV’s obviously hyperbolic Internet advertisements constituted mere puffery, TWC is unlikely to succeed on claims that the advertisements violated the Lanham Act. The Internet ads depicted DIRECTV's HD television service as clear and sharp, depicted “other TV” (defined by the website as “basic cable”) as unwatchably blurry, pixelated, and distorted.

The court decided that non-actionable puffery encompasses visual depictions that, while factually inaccurate, are so grossly exaggerated that no reasonable consumer would rely on them in navigating the marketplace. The Internet advertisements' depictions of cable were not just inaccurate; they were not even remotely realistic, the court observed. It was difficult to imagine that any consumer, whatever the level of sophistication, would actually be fooled into thinking that cable’s picture quality was so poor that the image was nearly entirely obscured. Because the Internet ads were puffery, a lower court’s preliminary injunction against them (CCH Advertising Law Guide ¶62,459) was vacated.

Presumption of Irreparable Harm

The third area in which the court moved beyond its precedents was by ruling that irreparable harm may be presumed for purposes of entering a preliminary injunction barring false advertising. TWC was entitled to a presumption of irreparable harm from DIRECTV’s commercials, the court said, in upholding the injunction against the commercials in markets served by TWC.

The likelihood of irreparable harm may be presumed (1) when a false advertising plaintiff demonstrates a likelihood of success in showing that a defendant’ comparative advertisement is literally false and (2) that, given the nature of the market, it would be obvious to the viewing audience that the advertisement is targeted at the plaintiff, even though the plaintiff is not identified by name.

DIRECTV's Shatner commercial explicitly disparaged the picture quality of “cable.” TWC was “cable” in the areas where it was the franchisee, the court noted. Even though Shatner did not identify TWC by name, consumers in the markets covered by the preliminary injunction would undoubtedly understand his derogatory statement, “settling for cable would be illogical,” as referring to TWC.

DIRECTV's Simpson commercial did not explicitly refer to “cable.” However, given the nearly binary structure of the television services market, it would be obvious to consumers that DIRECTV’ claims of superiority were aimed at diminishing the value of cable—which, as discussed above, was synonymous with TWC in the areas covered by the preliminary injunction.

The August 9 decision in Time Warner Cable, Inc. v. DIRECTV, Inc. will be reported in CCH Trade Regulation Reports and CCH Advertising Law Guide.

Court Releases Decision Denying Injunctive Relief Against Whole Foods/Wild Oats Combination

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

The federal district court in Washington, D.C. released on August 21 a redacted version of the 93-page opinion denying the Federal Trade Commission’s motion for a preliminary injunction blocking the combination of Whole Foods Market, Inc. and Wild Oats Markets, Inc. The text of the decision will appear at CCH Trade Regulation Reporter ¶75,831.

At the outset, the court complimented the lawyers on the case for their professionalism, despite the pressures of the fast track schedule. The court sought to reach a decision and provide sufficient time for the losing party to appeal the decision before the consummation of the proposed merger, which is scheduled for August 31, 2007.

Relevant Product Market

The bulk of the opinion is devoted to picking apart the FTC’s proposed relevant product market. Because the court rejected the agency’s proposed relevant product market, the FTC could not meet its burden for obtaining preliminary injunctive relief.

“The FTC has not met its burden to prove that `premium natural and organic supermarkets’ is the relevant product market in this case for antitrust purposes,” the court stated. The FTC identified four premium natural and organic supermarkets--Whole Foods (the largest), Wild Oats (the second largest), Earth Fare (with 13 stores in four states) and New Seasons (with 8 stores in Oregon). According to the court, “the relevant product market within which to evaluate the proposed transaction must be at least as broad as the retail sale of food and grocery items in supermarkets.”

The court took issue with the FTC’s decision to focus on core consumers or committed customers of Whole Foods and how they might react to post-acquisition price increases. “The economic analysis and other evidence show that the proper focus is on ‘marginal’ customers,” in the court’s view.

The agency also erred “in looking to differentiation or uniqueness as the basis on which to define the product market,” according to the court. The court noted that all supermarkets differentiate themselves in order to attract customers and that they nevertheless compete vigorously with each other.

With respect to relevant geographic market, the court considered the FTC’s definition to be reasonable. However, because the agency did not properly define the relevant product market, the court didn’t examine the relevant geographic market issue closely.

Competitive Effects

The court also considered the competitive effects of the proposed merger. It discussed how major supermarket chains, such as Kroger, Publix, and Safeway, “have repositioned themselves to compete vigorously with Whole Foods and Wild Oats for the consumers’ premium natural and organic food business.”

Defenses

Potential efficiencies and flailing company defenses raised by Whole Foods and Wild Oats were considered briefly. The court concluded that the defendants failed to meet their burden on the issue of efficiencies under Section 4 of the Horizontal Merger Guidelines and failed to establish that Wild Oats was a weakened or flailing firm and that its elimination by Whole Foods would lead to a more efficient competitor.

Tunica Casinos' Shunning of Web Name Owner May Have Been Illegal

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


Eight casino operators in Tunica County, Mississippi, could have acted
unreasonably in restraint of trade, or even engaged in a per se illegal boycott, by jointly refusing to do business with the owner of several Internet domain names related to Tunica, the U.S. Court of Appeals in New Orleans has ruled. The domain name owner brought the suit under both federal and Mississippi antitrust law after its proposals to the casinos--that they each pay it a monthly fee to have visitors to “tunica.com” redirected to a county tourism Web site advertising the casinos--were repeatedly and uniformly rebuffed. Because the evidence on record of the casinos' conduct was sufficient to create an issue of fact about whether they engaged in concerted action, summary judgment in favor of the casinos (2005-2 CCH Trade Cases ¶75,076) was reversed and remanded.


The casinos' initial decision to reject the domain name owner's proposal was not unreasonable, given the joint nature of that proposal. However, a showing that the casinos had thereafter entered into a “gentlemen's agreement” to not deal with the domain name owner--including, for one casino, a pledge to terminate an ongoing relationship with the domain name owner—signified direct evidence of unlawful conspiracy, the appellate court decided. If evidence of the casinos' actions after the initial meeting in which they decided to reject the joint proposal were credited, it would further indicate the existence of a question of fact regarding concerted action, according to the court. The domain name owner offered evidence that the casinos met a year later and again decided to refuse to advertise on “tunica.com” in the hope that the value of the domain name would decrease and they could buy it at a later date. If the domain name owner could establish concerted actions by the casinos through this sort of direct evidence, the appellate court held, it was not required to provide circumstantial evidence, such as the details surrounding its later proposals to the casinos, from which a concerted refusal to deal could be inferred. The lower court's conclusion that this evidence did not amount to a legitimate dispute of fact was clearly erroneous, the court added.

The conduct also could constitute a per se illegal horizontal boycott, the court ruled. The casinos' boycott was clearly a horizontal agreement because they were direct competitors of one another. The trial court's conclusion that the boycott could not be per se illegal because none of the conspirators was a direct competitor of the domain name owner was wrong, the appellate court said. Rejected was an argument by the casino operators that certain language from precedential decisions suggested that per se unlawful boycotts were those intended to harm or disadvantage a competitor of the conspirators and that a victim had to be a competitor of at least one member of the alleged conspiracy before the per se rule would apply. Nothing in those cases established a bright-line rule limiting the application of the per se rule to cases in which the victim is a competitor of at least one conspirator, and no such rule was justified under the precedents. Even the U.S. Supreme Court had found a horizontal conspiracy to be per se unlawful where the conspirators were all suppliers--not competitors--of the victim, the appellate court remarked.

The text of the August 13, 2007, decision in Tunica Web Advertising v. Tunica Casino Operators Assn., will appear at 2007-2 CCH Trade Cases ¶75,821.

FTC Denied Injunction Blocking Supermarket Merger; Commission to Appeal Ruling

This posting was written by John W. Arden.

The Federal Trade Commission on August 16 was denied a preliminary injunction barring Whole Foods Market, Inc. from acquiring Wild Oaks Markets during the pendency of an FTC administrative proceeding.

The federal district court in Washington, D.C. issued an order, citing a 93-page opinion that is being held under seal for containing confidential business information.

In the order, Judge Paul L. Friedman instructed counsel for all parties to meet with him within two business days with agreed-upon proposed redactions. Subsequently, a redacted version of the opinion will be made public.

The FTC appealed the ruling on August 17, but has not requested a stay that would prevent the acquisition during the pendency of the appeal.

The supermarket chains agreed not to close the deal prior to noon (Eastern Time) on Monday, August 20. Absent a stay pending the appeal, the chains may close the transaction at any point thereafter.

FTC Court Challenge

On June 6, the FTC had filed a court complaint, challenging the proposed combination of the nation’s largest “premium natural and organic supermarket chains.” The agency charged that the acquisition would reduce direct competition in the market and lead to the exercise of unilateral market power, resulting in higher prices and reduced quality, service, and choice for consumers.

The federal district court issued a temporary restraining order on June 7, prohibiting the parties from consummating the deal until after a preliminary injunction hearing. Meanwhile, on June 27, the FTC issued an administrative complaint against the transaction.

The challenges were criticized in many quarters for their definition of a market of “premium natural and organic food supermarkets.” The Commission alleged that this market was differentiated from conventional supermarkets by the breadth and quality of their perishable goods; the wide variety of natural and organic products, services, and amenities; and the customer’s shopping experiences.

Critics maintained that this market definition was far too narrow because the two supermarket chains compete with other natural and organic food stores and farmers markets, in addition to traditional supermarket chains, which are adding natural and organic food brands and departments. One survey found that 74 percent of natural and organic foods are now sold through conventional supermarkets.
On the other hand, the American Antitrust Institute pointed out that the acquisition would eliminate Whole Foods’ largest competitor for natural and organic food in 28 geographic regions across the country.


Reactions of Parties

In an August 16 statement, the FTC expressed regret at the court decision, calling it a loss for both consumers and competition.

“We respect the Court’s decision, which we currently are reviewing,” said Jeffrey Schmidt, FTC Competition Director. “We brought this challenge because the evidence before us showed that the merger would most likely result in higher prices and reduced choices for consumers who shop at premium natural and organic supermarkets.”

On the other side, Whole Foods and Wild Oats felt vindicated.

“The District Court’s ruling affirms our belief that a merger between Whole Foods and Wild Oats is a winning scenario for all stakeholders,” said John Mackey, Chairman and CEO of Whole Foods Market. “We believe the synergies gained from this combination will create long-term value for customers, vendors, and shareholders as well as exciting opportunities for team members.”

Gregory Mays, Chairman and CEO of Wild Oats Markets, agreed. “We are very pleased with the court’s ruling and always had confidence that, once presented with the facts, the judge would rule in favor of this merger.”

State Supreme Courts Invalidate Waivers of Consumer Class Actions

This posting was written by Mark Engstrom, editor of CCH State Unfair Trade Practices Law, and John W. Arden.

Contractual provisions in wireless telephone service agreements could not operate to waive consumers’ rights to bring class actions against a wireless service provider, according to recent decisions issued by the Washington and Oklahoma Supreme Courts.

In both cases, a waiver of consumers’ rights to bring class actions against the provider was ruled unconscionable.

Substantive Unconscionability

In Scott v. Cingular Wireless, a class action waiver in an arbitration clause was held unconscionable because it effectively denied large numbers of consumers the protection of Washington’s Consumer Protection Act. The waiver also exculpated the wireless service provider from liability for an entire class of wrongful conduct.

The class action alleged that the service provider overcharged customers up to $45 a month by unlawfully adding roaming and hidden charges.

To the extent that the class action waiver barred Consumer Protection Act claims, it was a substantively unconscionable violation of Washington’s policy to protect the public and foster fair and honest competition, according to the Supreme Court.

Although the waiver did not expressly exculpate the service provider from anything (it merely channeled dispute resolution into individual arbitration or individual small claims court proceedings), it effectively exculpated the provider from legal liability for any wrong in which the cost of pursuit outweighed the potential amount of recovery.

Quoting Judge Richard Posner of the Seventh Circuit Court of Appeals, the Washington high court explained that the “realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30.”

Even the service provider’s promise to pay all filing, administrative, and other arbitration fees did not make it worthwhile to pursue small claims individually, in the court’s view. Because the class action waiver stated that the entire arbitration clause would be null and void if it were found to be unenforceable, there was no basis to compel arbitration. Accordingly, the case was reversed and remanded for further proceedings.

The July 12 decision appears at CCH State Unfair Trade Practices Law ¶31,441.

Retroactive Waiver

In Bilbrey v. Cingular Wireless, LLC, a customer was allowed to proceed with his class action claim under the Oklahoma Consumer Protection Act because the class action waiver in his wireless service contract was unconscionable for governing claims that arose from prior agreements, including agreements that involved the customer and the service provider’s predecessors in interest.

The customer alleged that the service provider violated the Consumer Protection Act by calculating the duration of incoming calls from the time a wireless channel was seized (just before the phone began to ring), rather than when the phone was answered. This practice was allegedly contrary to representations made to customers and resulted in overcharges.

Although the original service agreement (between the customer and a predecessor in interest) did not contain an arbitration clause, the service provider had induced the customer to sign a new contract, in exchange for a free phone, three months after the customer had filed suit.

Because the new agreement was signed after the customer’s Consumer Protection Act claim was filed, it had the effect of retroactively barring his active class claims, according to the Oklahoma Supreme Court.

Given the one-sided character of the clause, and the fact that it was unreasonably favorable to the service provider, the court concluded that the retroactive result was unconscionable. The lower court’s refusal to compel arbitration was upheld.

The June 26 decision appears at CCH State Unfair Trade Practices Law ¶31,431.

Whole Foods to Investigate Release of Information in FTC Court Filings

While awaiting a ruling in the Federal Trade Commission’s action to block its acquisition of Wild Oats Market, Whole Foods Market, Inc. has announced that it is investigating the FTC’s “apparent improper release” of confidential and proprietary information belonging to itself, Wild Oats and third parties.

According to a statement issued by Whole Foods on August 14, the release of information violated a confidentiality order and two further orders to keep the information under seal.

“All information shared with the FTC was done so with the reasonable understanding that it would be handled appropriately,” the natural and organic supermarket chain said.

The allegedly improper release of information occurred when the FTC filed electronic documents containing information about the chain’s competitive strategies, it was reported yesterday. These electronic documents had portions shaded out, rather than blackened out. The shaded words could become legible when they were copied and pasted on other documents.

When court officials discovered this situation, they created a new version of the documents that had relevant potions blackened out and substituted the new version for the original one.

In the meantime, media outlets were able to view the unabridged documents and publish stories on the information.

Based on a reading of the documents, the Associated Press reported that:

 After a successful acquisition, Whole Foods planned to close 30 or more Wild Oats stores, which was expected to result in nearly doubling the revenue for some Whole Foods stores.

 The chain figured that a successful merger would send as many as 80 to 90 percent of Wild Oats shoppers to Whole Foods stores, which the FTC maintained would result in higher prices.

 Whole Foods prohibited its suppliers from selling directly to Wal-Mart.

 The chain looks to the density of college graduates in locating new Whole Foods stores.

A spokesperson for Whole Foods said that the company had no idea how many stores would close if the merger went through.

The litigation started on June 6, when the FTC filed a complaint in the federal district court in Washington, D.C. challenging Whole Foods Market Inc.’s approximately $670 million acquisition of Wild Oats Markets Inc.

The court issued a temporary restraining order on June 7, prohibiting the parties from consummating the deal until after a preliminary injunction hearing. That hearing was conducted July 31 through August 1, 2007

FTC’s Evanston Healthcare Ruling Draws Wide-Ranging Reactions

The Federal Trade Commission’s August 6 decision—holding the combination of Chicago-area hospitals anticompetitive but not requiring divestiture of the acquired hospital—has drawn a wide variety of responses.

The decision upheld an administrative law judge’s ruling that Evanston Northwestern Healthcare’s 2000 acquisition of Highland Park Hospital violated Section 7 of the Clayton Act (CCH Trade Regulation Reporter, FTC Complaints and Orders Transfer Binder 2001-2005 ¶15,814). The Commission held that the acquisition substantially lessened competition and resulted in higher prices for insurers and healthcare consumers for general acute care inpatient services sold to managed care organizations (MCOs).

However, the Commission reversed the ALJ’s requirement that ENH divest Highland Park Hospital, finding that the extended period of time between the transaction and the conclusion of the litigation “would make a divestiture much more difficult, with greater risk of unforeseen costs and failures.”

Rather than requiring divestiture, the Commission ordered that ENH establish separate and independent contract negotiating teams—one for Evanston and Glenbrook Hospitals and another for Highland Park Hospital—that will allow MCOs to negotiate separately with the hospitals. This arrangement is intended to re-inject competition between the hospitals for the business of MCOs.

The Commission decision (In the Matter of Evanston Northwestern Healthcare Corp.) appears at CCH 2007-2 Trade Cases ¶75,814.

“Thrilled” with Outcome

According to an August 6 news release, ENH was “thrilled” that Highland Park Hospital will remain within the ENH system.

The FTC recognized the “significant improvements” in patient care services at Highland Park Hospital, post merger, as its principal rationale to overturn divestiture, said Mark R. Neaman, President and Chief Executive Officer of Evanston Northwestern Healthcare.

“Our investments in excess of $150 million, at Highland Park Hospital, have dramatically improved the breadth, depth and quality of healthcare services in the region,” Neaman said. “Our success in expanding comprehensive, quality care at competitive prices has increased patient access and treatment, not made 'victims' of select HMOs.”

Unusual Strategy

In an article from a law firm newsletter, Denise Gunter of the Nelson Mullins law firm said that this case is noteworthy for being the FTC's first opinion in a hospital merger case in several years, for the unorthodox remedy, and for the unusual strategy of bringing a post-transaction agency action.

“Prior to the Evanston case, the FTC's usual method for dealing with potentially anticompetitive hospital mergers was to file a motion for preliminary injunction in the federal district courts where the merging hospitals are located to stop the merger before it happens. This strategy was not always successful, and in the 1990s, the FTC and Department of Justice suffered a string of defeats in hospital merger cases . . . . In 2002, the FTC reinvented its hospital merger enforcement strategy by launching several investigations into already-completed hospital mergers. The FTC's reasoning was that by looking back at "done deals" the FTC would be able to establish that certain hospital mergers actually lead to higher prices, rather than simply relying on a prediction of what could happen if the merger occurred. Instead of filing these cases in the local federal district courts where the hospitals are located, the FTC decided it would file these cases in the FTC's own administrative court in Washington, D.C.”

According to Ms. Gunter, the case offers a number of lessons:

1. The FTC’s hospital merger enforcement program is alive.

2. Never underestimate the power of managed care company witnesses.

3. Health care providers must watch their language, as in documents indicating that ENH senior officials made the acquisition to increase their bargaining leverage in order to raise prices.

4. If you are going to acquire or merge, do it right by integrating operations swiftly and thoroughly.

Remedy “Without Teeth”

An article questioning the effectiveness of the remedy (“Federal order to increase hospital competition in Evanston lacks teeth”) was published August 9 on “Medill Reports,” an online publication of Northwestern University’s Medill School of Journalism.

Laura Onstot writes that “observers are questioning whether it will be possible, as a practical matter, for [ENH] to successfully comply with a key FTC order: to negotiate prices with health insurers separately from its parent company.”

According to Leemore S. Dafny, assistant professor of Management & Strategy at Northwestern University’s Kellogg School of Management, the requirement of separate negotiations with MCOs will not create real competition between the hospitals since they will still be working for a common owner.

“As a remedy, I find it unlikely that it will address the anti-competitive conduct that the FTC was originally concerned about,” she said.

Buyers of Zyprexa Could Bring RICO Suit Against Drug Company for Overpricing

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

As purchasers of the antipsychotic drug Zyprexa, consumers and third-party payers had standing to bring a civil RICO lawsuit for economic damages against Eli Lily and Co. because they demonstrated a sufficient causal connection between the drug company’s alleged fraud and their own claimed economic injuries, the federal district court in Brooklyn, New York has held.

Eli Lily’s motion for summary judgment on the ground that the purchasers could not show injury, causation, and reliance was denied.

According to a class action suit brought by pension funds, labor unions, insurance companies and individuals, Eli Lily pursued a scheme to mislead the American public, during an eleven-year period, about the safety and efficacy of Zyprexa. In furtherance of this scheme, the drug company allegedly promoted the drug for non-indicated uses and marketed it to patients who would have been better served by less-expensive medications.

Injury and Causation

The purchasers’ purported injury was direct—they overpaid for Zyprexa because of the drug company’s alleged misrepresentations, the court ruled.

The drug company allegedly misled purchasers by asserting that Zyprexa was safer and more efficacious than other available drugs, which led doctors to continue to prescribe and consumers to pay for greater amounts of Zyprexa than they would have paid absent the fraud.

This conduct kept Zyprexa sales at a higher level than they otherwise would have been. In turn, elevated demand for the drug allowed Eli Lily to keep prices higher than they otherwise would have been, and purchasers paid more for Zyprexa than they otherwise would have.

Reliance

Contrary to the drug company’s contention, the purchasers could use aggregate proof—rather than individualized proof—to establish reliance, according to the court.

Statistical proof of reliance is appropriate when the RICO claim alleges a sophisticated, broad-based scheme that is designed to distort the entire body of public knowledge, rather than to individually mislead millions of people, the court stated.

In this case, Eli Lily was charged with intentionally engaging "in a broad-based plan to misrepresent to the medical and scientific communities the nature of Zyprexa's benefits and risks," the court found. That plan "was successful in distorting the general body of knowledge about Zyprexa."

Allowing the suit to proceed furnishes "backstop protection against under-regulated potentially dangerous activity by a market where caveat emptor largely rules," the court concluded.

The decision is In re: Zyprexa Products Liability Litigation, 04-MD-1596, filed July 3, 2007. It appears at CCH RICO Business Disputes Guide ¶11,317.

FTC Announces Town Hall Meeting on Privacy Issues in Online Behavioral Advertising

The Federal Trade Commission will conduct a two-day “Town Hall” meeting on privacy and consumer protection issues raised by online “behavioral advertising” on November 1-2, 2007 in Washington, D.C. The meeting will follow up on a dialogue regarding behavioral advertising that emerged at a November 2006 “Tech-Ade” forum, which examined the key technological and business developments that are expected to shape consumer experiences in the coming decade.

"Behavioral Advertising"

Online “behavioral advertising” involves the collection of information about a consumer’s online activities—including the searches the consumer has conducted, the web pages the consumer has visited, and the content the consumer has viewed, according to the Commission.

This information is then used to direct advertising that reflects the consumer’s interests, thus increasing the effectiveness of the advertising. Some of these issues were examined by the FTC in a 2000 public workshop addressing the practice of “online profiling.” Technological advances and the evolution of business models have prompted concerns among consumer advocates, privacy experts, and others about the implications of online data collection and use.

Topics for Examination

The Town Hall meeting will raise the following questions:

--How does behavioral advertising work and what types of companies use this advertising?

--What types of data are collected? Is it personally identifiable or anonymous?

--How is the data to be used? Is it shared or sold? Can it be used for other purposes?

--How has behavioral advertising changed since 2000?

--What security protections are being provided for consumer data?

--Are online data-collection practices being disclosed to consumers?

--What standards govern practices related to online behavioral advertising?

--What changes are anticipated in the online behavioral advertising market over the next five years?

Interested parties are invited to submit requests to participate in panels and to recommend topics for discussion. Requests should be submitted electronically by September 14, 2007 to: behavioraladvertising_reuests@ftc.gov. Parties should include a statement on their experiences on the issues and their complete contact information. Panelists will be notified of their participation by October 5, 2007.

Written comments may be submitted via e-mail to: behavioraladvertising_requests@ftc.gov. or by mail to Secretary, Federal Trade Commission, Room H-135 (Annex N), 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. Comments must be received by October 19, 2007.

The Town Hall meeting was announced on August 6. A news release with more information appears at the FTC web site.

Chicago-Area Hospital Acquisition Was Anticompetitive, FTC Rules

Evanston Northwestern Healthcare Corp.’s acquisition of Highland Park Hospital in 2000 was anticompetitive and violated Section 7 of the Clayton Act, according to a Federal Trade Commission decision announced on August 6. However, the violation did not require Evanston Northwestern Healthcare to divest Highland Park, as was previous ordered by an administrative law judge (CCH Trade Regulation Reporter, FTC Complaints and Orders Transfer Binder 2001-2005, ¶15,814).

The Commission opinion, authored by Chairman Deborah Platt Majoras, upheld the October 2005 administrative law judge's ruling, with some modifications, and ordered an alternate remedy to restore competition in the market.

The Commission requires Evanston Northwestern Healthcare (ENH) to establish separate and independent contract negotiating teams—one for Evanston and Glenbrook Hospitals and another for Highland Park Hospital—that will allow managed care organizations (MCOs) to negotiate separately for the competing hospitals, “thus re-injecting competition between them for the business of MCOs.”

The administrative law judge had held that the acquisition “substantially lessened competition” and resulted in higher prices for insurers and healthcare consumers for general acute care inpatient services sold to manage care organizations. The ALJ ruled that ENH should be required to divest Highland Park Hospital altogether within 180 days. ENH appealed the ALJ decision.

Exercise of Market Power

By a 5-0 vote, the Commission affirmed the administrative law judge’s rulings that the acquisition violated Section 7 of the Clayton Act, that the evidence “demonstrates that the transaction enabled the merged firm to exercise market power, and that the resulting anticompetitive effects were not offset by merger-specific efficiencies.”

The record “shows that senior officials at Evanston and Highland Park anticipated that the merger would give them greater leverage to raise prices, that the merged firm did in fact raise its prices immediately and substantially after completion of the transaction, and that the same senior officials attributed the price increases in part to increased bargaining leverage produced by the merger.”

In addition, the “econometric analyses performed by both complaint counsel’s and respondent’s economists also strongly supported the conclusion that the merger gave the combined entity the ability to raise prices through the exercise of market power.”

Divestiture as Remedy

Although the Commission upheld the ALJ decision and largely adopted the findings of fact and conclusions of law, it did not agree with the determination that divestiture was the appropriate remedy. The long period of time between the closing of the transaction and the conclusion of the litigation “would make a divestiture much more difficult, with greater risk of unforeseen costs and failures,” the Commission wrote.

Instead, the Commission imposed an injunctive order, requiring ENH and Highland Park to negotiate independently with MCOs and therefore compete for their business.

ENH was ordered to submit a report within 30 days, detailing the implementation of the injunctive relief imposed by the Commission.

Concurring Opinions

Commissioners J. Thomas Rosch and Jon Liebowitz issued separate concurring opinions.

Commissioner Rosch based his finding of a Section 7 violation on “the unique competitive dynamics of hospital markets, stemming from the bargaining between hospitals and managed care organizations (MCOs) over inclusion in MCO networks.” The elimination of competition between Evanston and Highland Park enabled ENH to “engage in system (all-or-nothing) supra-competitive pricing.”

In his short concurrence, Commissioner Liebowitz said he joined the Commission in its conclusion that the merger violates the Clayton Act, as identified in Count One of the Complaint, and the remedy. He further joined Commissioner Rosch’s finding that the merger violated the Clayton Act as alleged in Count Two of the Complaint.

A press release regarding the Commission’s opinion and Order (In the Matter of Evanston Northwestern Healthcare Corporation, Docket 9315) and the 91-page Opinion of the Commission appears on the FTC website.

The Commission decision appears at CCH 2007-2 Trade Cases ¶75,814.

Wireless Text Message Promotion Did Not Violate Federal Telephone Law

This posting was written by William Zale, editor of CCH Privacy Law in Marketing.

Publisher Simon & Schuster and mobile marketing firm ipsh!net (defendants) did not violate the Telephone Consumer Protection Act by sending a promotional message for the “Stephen King VIP Mobile Club” to the seven-year-old son of a cellular telephone customer, the federal district court in Oakland has ruled.

The customer had expressly consented to receive branded promotions of a ringtone provider (Nextones), and the message contained the phrase “PwdbyNexton,” the court noted. In addition, the promotional text messages to a targeted list of cellular telephone numbers were not subject to the Act’s prohibitions against the use of an “automatic telephone dialing system,” the court held.

The message, received by the customer’s son at half past midnight, read as follows:

“The next call you take may be your last... Join the Stephen King VIP Mobile Club at www.cellthebook.com. RplySTOP2OptOut. PwdByNexton.”

Consent to Branded Promotion

The customer had agreed to receive promotions from “Nextones affiliates and brands” when she obtained a ringtone from the Nextones website.

According to its privacy policy, Nextones maintained a strict “no-spam” policy and, absent prior consent, did not share personal profile information, including mobile phone numbers, with any “third party.”

The defendants conceded that Nextones’ website did not define “brands” and that it suggested that “affiliates” were those interested in selling mobile ringtones and graphics. The defendants pointed to no case law defining affiliates or brands as those terms related to the Telephone Consumer Protection Act (TCPA). They claimed that the customer’s causes of action under the TCPA failed as a matter of law because the text message at issue was identified as carrying the Nextones brand and because defendant ipsh!net was a Nextones affiliate.

The customer disagreed and argued that, although she consented to receive promotional messages from Nextones affiliates and brands, she did not consent to receive the text message at issue. She contended that the defendants were “third parties” under Nextones’ privacy policy. She further argued that phrase “PwdbyNexton” did not identify the Stephen King text message as a Nextones “brand.”

That argument, however, was contradicted by the facts, according to the court. “PwdbyNexton” branded the text message as coming from Nextones. Thus, while there might be a dispute of fact concerning whether the defendants were Nextones affiliates, there was no dispute of fact that the promotional text message at issue was identified with a Nextones brand. The customer had expressly consented to receive promotions of Nextones brands, in the court’s view.

Automatic Telephone Dialing System

The text message was not subject to the TCPA’s prohibitions against the use of an “automatic telephone dialing system” because the equipment used did not store, produce, or call randomly or sequentially generated telephone numbers, the court determined.

The TCPA defined an automatic telephone dialing system as “equipment which has the capacity—(A) to store or produce telephone numbers to be called, using a random or sequential number generator; and (B) to dial such numbers.”

The court rejected the customer’s contention that the equipment used to send the promotional message to the targeted list was an automatic telephone dialing system because it had the capacity to store numbers to be called and to dial numbers without human intervention, automatically making calls to thousands of numbers in a short period of time.

The decision, Satterfield v. Simon & Schuster, ND Cal., No. C 06–2893 CW, June 26, 2007, is reported at CCH Privacy Law in Marketing ¶60,091.

Marketing to Wireless Devices

Further information regarding marketing to wireless devices—including an explanation by D. Reed Freeman—can be found in the recently-launched CCH Privacy Law in Marketing, a monthly-updated reporter that combines treatise-style explanations with the full text of federal privacy laws and regulations, state privacy laws, and privacy laws and regulations from 35 foreign jurisdictions (provided in English translation).

To obtain further information about CCH 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.”

Senate Panel Explores Need to Fix High Court’s Vertical Price Fixing Decision

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

Witnesses at a July 31 Congressional hearing called for legislation to overturn a recent Supreme Court decision that reversed a 96-year-old precedent applying the per se rule to vertical price fixing.

On June 28, the Court, in Leegin Creative Leather Products, Inc. v. PSKS, Inc. (2007 CCH Trade Cases ¶75,753), held that agreements to set minimum resale prices must be judged under the rule of reason. In doing so, the Court reversed and remanded an appeals court decision, upholding an award of nearly $4 million in favor of a terminated apparel retailer.

The Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights convened the hearing to explore whether the court’s 5-4 decision in Leegin—which overturned Dr. Miles Medical Co. v. John D. Park & Sons Co. (220 U.S. 373)— threatens discount retailers and consumers and whether a legislative fix is needed.

Sen. Herb Kohl (D-Wis.), chairman of the subcommittee, called the decision “an abrupt change to a settled antitrust rule.”

Possible Harm to Consumers

Quoting a dissenting opinion in the case, Kohl outlined the possible harm to consumers of vertical price fixing. “Justice [Stephen G.] Breyer estimated that if only 10% of manufacturers engaged in vertical price fixing, the volume of commerce affected today would be $300 billion dollars, translating into retail bills that would average $750 to $1,000 dollars higher for the average family of four every year.”

FTC Commissioner Pamela Jones Harbour called for legislation to overturn the decision.

“The Leegin opinion relies on at least two implicit assumptions: First, that manufacturers know what is best for consumers—even better than retailers, or consumers themselves— and second, that retail competition is not important to the American economy or to consumers,” said the Commissioner.

“But these assumptions do not match the reality of the American marketplace,” Ms. Jones Harbour testified. “[I]t is extremely likely that retail prices for thousands of products will go up in the wake of Leegin, with no countervailing benefits—which clearly is not good for consumers.”.

Impairment of Retail Competition

Robert Pitofsky, former FTC Chairman, joined in the call to Congress to step in. “I believe the majority decision was wrong and that otherwise healthy competition at the retailer level will be impaired,” he said. “Virtually all agree that minimum resale price maintenance, if allowed, will result in higher prices to consumers. Arguments that the higher prices are worth it because consumers will receive desirable services are entirely speculative and lacking any empirical support.”

Effect of Restraint on Competition

Testifying on behalf of the National Association of Manufacturers, lawyer Stephen Bolerjack countered that the court reached the correct decision in Leegin.

“Leegin applies the rule of reason, the accepted standard for antitrust cases, to minimum resale price maintenance agreements,” Bolerjack testified. “Leegin requires courts to make decisions based on substance – the effect of the restraint on competition in a market – rather than on formalistic analysis of whether conduct shows an agreement between a manufacturer and a reseller.”

British Airways, Korean Air Agree to Price-Fixing Fines

This posting was written by Sarah Borchersen-Keto, CCH Washington Correspondent.

The U.S. Department of Justice (DOJ) announced that British Airways PLC and Korean Air Lines Co. Ltd. each have agreed to pay separate $300 million criminal fines for their part in fixing the prices of passenger and cargo flights. As a result of plea agreements, both airlines are cooperating with DOJ's ongoing investigation into the air transport industry.

Attorney General Alberto R. Gonzales said the action was brought about through successful coordination with the UK's Office of Fair Trading.

“When British Airways, Korean Air, and their co-conspirators got together and agreed to raise prices for passenger and air cargo fares, American consumers and businesses ended up picking up the tab for their illegal conduct,” said Acting Associate Attorney General William W. Mercer.

Fixing Fuel Surcharges

According to the DOJ, between August 2004 and February 2006, British Airways engaged in a conspiracy to suppress and eliminate competition by fixing the fuel surcharge charged to passengers on long-haul international flights, including flights between the U.S. and the UK. The conspiracy raised the price on virtually every ticket purchased between 2004 and 2006 on long-haul international flights, the DOJ said.

Passengers who flew on British Airways between the UK and U.S. paid a fuel surcharge of about $10 per round-trip ticket in 2004. By 2006, the surcharge had risen to nearly $110 per ticket. As for air cargo, the airline’s fuel surcharge on shipments to the U.S. changed more than 20 times, and increased from four cents per kilogram to as high as 72 cents per kilogram. British Airways' air cargo conspiracy lasted from March 2002 to February 2006.

Passenger Fares, Cargo Charges

Meanwhile, the DOJ charged that Korean Air reached an agreement with its rivals to fix certain passenger fares for flights from the U.S. to Korea during the period from January 2000 to July 2006. The DOJ also charged Korean Air with agreeing with air cargo competitors on rates charged to customers in the U.S. and elsewhere for international air cargo shipments from at least January 2000 to February 2006.

Cooperation of Virgin Atlantic, Lufthansa

Virgin Atlantic and Lufthansa AG have agreed to cooperate in the ongoing investigations. Virgin Atlantic entered the DOJ's Corporate Leniency Program after reporting its participation with British Airways in the passenger fuel surcharge conspiracy. Lufthansa was conditionally accepted into the program after it disclosed its role in the international cargo conspiracy, along with British Airways and Korean Air. Virgin Atlantic and Lufthansa are obligated to pay restitution to the U.S. victims of their conspiracies.

British Airways’ chief executive Willie Walsh said he wanted to reassure the carrier’s passengers that they were not overcharged.

“Fuel surcharges are a legitimate way of recovering costs,” said Walsh. “However this does not in any way excuse the anticompetitive conduct by a very limited number of individuals within British Airways. Anticompetitive behavior is entirely unacceptable and we condemn it unreservedly.”

A press release on the matter appears on the Department of Justice Antitrust Division web site.

Nonrenewal for Franchisee’s Refusal to Serve Pork Could Constitute Racial Discrimination

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

Dunkin Donuts, Inc. could have committed racial discrimination in violation of federal civil rights law by notifying a Palestinian-Arab franchisee that he was ineligible for relocation or renewal of his franchise agreements because of his refusal to carry breakfast sandwiches made with pork products, the U.S. Court of Appeals in Chicago has ruled.

A federal district court’s grant of summary judgment in favor of the franchisor (CCH Business Franchise Guide ¶12,938) was reversed, and the dispute was remanded for further proceedings.

In 1984, the donut shop franchisor began offering breakfast sandwiches containing bacon, ham, and sausage at its franchises. The franchisee refused to sell the sandwiches because, he claimed, his Arab race forbade him from handling pork. The franchisor did not object to the franchisee's refusal until May, 2002, when it informed the franchisee that he was no longer eligible for a proposed relocation of one of his stores, or for renewal of his three franchise agreements.

Racial Discrimination Law

A plaintiff could prove racial discrimination under the civil rights law either through direct evidence or through an indirect burden-shifting method, according to the court. The franchisee presented little direct evidence that the franchisor intentionally discriminated against him. The franchisee provided only a statement by his store manager that she overheard a franchisor representative make an anti-Arab statement.

However, the statement was so lacking in detail—including any indication as to what the statement was—that its potential relevance was purely speculative, according to the court. It did not provide direct evidence that the decision regarding the renewal and relocation of the franchises was based on the franchisee’s race.

Burden-Shifting Method

Under the burden-shifting method, the franchisee was required to produce evidence from which a jury could find that: (1) the franchisee belonged to a protected class; (2) he performed, or could perform, his obligations; (3) he suffered an adverse action; and (4) similarly-situated unprotected individuals were treated more favorably, the court noted.

If the franchisee met that burden, the franchisor would be required to provide a legitimate, non-discriminatory reason for its actions. The burden would then shift back to the franchisee to demonstrate that the franchisor’s reasons were merely pretextual.

It was undisputed that the franchisee belonged to a protective class and that he suffered an adverse action, the court observed. Instead, the franchisor unsuccessfully contested the second and fourth prongs of the franchisee’s prima facie case. The franchisor argued that (1) the franchisee failed to establish that he could perform his obligations under the parties’ agreement because he was unwilling to serve the full line of products and (2) the franchisee failed to establish that there were no similarly-situated unprotected franchisees treated more favorably.

In response, the franchisee admitted that that his failure to carry the full line of breakfast products was inconsistent with a provision in the parties’ agreement. However, he contended that the franchisor applied that provision in a discriminatory manner. Thus, the second and fourth prongs were merged in the inquiry, leading to the issue of whether or not there were similarly-situated individuals not in the protected class who were treated differently, the court reasoned.

The franchisee identified three non-Arab franchisees in the Chicago area who refused to carry the full line of breakfast sandwiches and who were granted franchise renewals by the franchisor. Furthermore, the provision in the parties’ agreement was absolute in its terms regarding the carrying of the franchisor’s full-line of products and it did not indicate that exceptions would be made for certain reasons and not for others.

Thus, the franchisor’s argument that the three other franchisees were not similarly situated (because their reasons for failing to carry the full-line were different than those of the complaining franchisee) was unavailing, and the franchisee demonstrated a prima facie case, the court decided.

Pretext

Dunkin Donuts pointed to the provision itself as its non-discriminatory reason for notifying the franchisee he was no longer eligible for relocation or renewal of his franchises. There was enough evidence, however, to demonstrate that the reason was pretextual, the court ruled. Significant evidence showed that the carrying of breakfast sandwiches was not an issue of importance to the franchisor.

Dunkin Donuts allowed other franchisees in the area to refuse to carry any breakfast sandwiches at all, when merely relocating the shops, or in one case merely rearranging store displays, would have allowed them to carry the full-line. The practice of not carrying the full-line was apparently so common that the franchisor provided signs for such franchises declaring “Meat Products Not Available,” the court observed. Moreover, despite his failure to carry pork products for nearly 20 years, the franchisee always received favorable store reviews and the failure to carry such products was not an issue.

The fact that the failure to carry the sandwiches was unimportant to the franchisor was strengthened by evidence that breakfast sandwiches accounted for only approximately four percent of sales at shops in the franchisor’s system. There was no evidence that there had been a change the franchisor’s corporate or regional policy on the matter. Thus, the evidence was sufficient to allow a jury to find pretext.

The decision is Elkhatib v. Dunkin Donuts, Inc., No. 04-4190, July 10, 2007. Text of the opinion will appear in the August report of the CCH Business Franchise Guide.

A feature story on the franchise dispute ("Pork at issue in doughnut franchise row") appeared in the August 1 edition of the Chicago Tribune.