Failure to Disclose Insureds’ Right to Independent Defense Counsel Was Deceptive

This posting was written by Mark Engstrom, Editor of CCH State Unfair Trade Practices Law.

An insurer’s failure to inform two physicians and their limited liability partnership that they had a right to hire independent counsel—at the insurer’s expense—to defend a malpractice action that asserted both covered and uncovered claims was a deceptive business practice under New York's Deceptive Acts and Practices Law, a New York appellate court has ruled.

Rather than inform the plaintiffs of their right to choose independent counsel, the insurer advised them (and other insureds) that they could retain counsel to protect their insured interests "at their own expense." This conduct was likely to mislead a reasonable consumer acting reasonably under the circumstances, and thus was deceptive under the New York statute.

The insurer's conduct was "consumer oriented" because its failure to inform plaintiffs of their right to choose independent counsel had become a "routine practice" that affected many similarly-situated insureds, the court held.

The existence of both covered and uncovered claims created a conflict of interest between the insurer and the insureds. The defense attorney's duty to the insured required him to defeat liability on any ground; his duty to the insurer, however, required only those theories that would defeat the insurer's liability. In the proceedings below, the attorneys retained by the insurer to represent the physicians successfully moved to dismiss the malpractice action against them.

Moreover, the attorney that the insurer had retained for the partnership had joined in the motion, despite the fact that he had legally sufficient grounds to oppose it. The dismissal of claims against the physicians left the partnership exposed to an uncovered claim for vicarious liability, which ultimately resulted in a jury award of more than $3 million.

Under these circumstances, one could not conclude that the plaintiffs' interests had been adequately represented. In the court's view, liability in the malpractice action was engendered by a lack of independent representation and undivided loyalty, and was not uncompromised by conflicts of interest. It thus constituted sufficient harm under Deceptive Acts and Practices Law. Accordingly, the trial court's dismissal of the claim was reversed, and the matter was remanded to the lower court for a trial on damages.

The June 5 decision is Elacqua v.Physicians’ Reciprocal Insurers, New York Appellate Division, Third Department, CCH State Unfair Trade Practices Law ¶31,594.

Bill to Give FTC New Authority Over Petroleum Price Gouging Defeated in House

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

The House of Representatives rejected a bill on June 24 that would have given the Federal Trade Commission new authority to investigate and punish price gouging in the oil industry. On a motion to suspend the rules and pass the bill, the measure failed to gain the required two-thirds majority by a 276-146 vote.

The bill—the Federal Price Gouging Prevention Act (H.R. 6346)—would make it illegal for any person at the wholesale or retail levels to sell gasoline or other petroleum products at a price that is “unconscionably excessive” in areas that are under a presidentially-declared emergency. The legislation would instruct the FTC to focus its enforcement actions on large energy companies with sales in excess of $500 million.

Supporters of the bill believed it was necessary to give the FTC specific authority to combat the type of price gouging that allegedly occurred after Hurricane Katrina. Detractors countered that the bill would unnecessarily inject the government into the energy marketplace.

In addition to civil penalties of up to $3 million for each violation, the bill would have set criminal penalties of up to $150 million for corporations violating the act. The Justice Department would have been responsible for pursuing criminal charges.

Administration Objections

The Bush administration had threatened to veto the legislation. A June 24 Statement of Administrative Policy asserted that the legislation could result in price controls that would be harmful to consumers.

“By controlling prices, [the bill] would interfere with market mechanisms and distort price signals that encourage suppliers to provide more gasoline,” the statement said.

The administration also objected to the bill’s failure to adequately define the term “unconscionably excessive” prices, which could lead to unnecessary confusion and litigation. The administration contended that the FTC and the Justice Department already have adequate powers to combat price gouging.

“The Administration again urges Congress instead to take actions that address the root causes of high gas prices,” the statement concluded. “To address gasoline prices, we need legislation that will allow environmentally-responsible domestic oil production and encourage refinery expansion.”

Truck Dealer’s Horizontal, Vertical Price Fixing Claims to Proceed to Jury

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

A heavy truck dealership presented sufficient evidence at trial of a horizontal price fixing agreement between competing dealers and of a vertical price fixing agreement between a heavy truck manufacturer and those dealers to send the matter to a jury, the U.S. Court of Appeals in Philadelphia has ruled.

A trial court's judgment as a matter of law in favor of the defending manufacturer and dealers on the Sherman Act claim was vacated, and that issue was remanded for further proceedings.

Evidence of Conspiracy

The complaining dealership presented direct evidence of "gentlemen's agreements" between dealers banning competition on price. Viewed in the light most favorable to the complaining dealership, the evidence showed a horizontal agreement that was per se illegal, in the court's view.

In addition, the dealership introduced sufficient direct evidence that the manufacturer agreed with the defending dealers to support their anticompetitive agreements by refusing to offer sales assistance to dealers who sought to sell outside the geographic "area of responsibility" designated for them under their dealership agreements with the manufacturer. A jury could rationally conclude that the policy was the result of collaboration between the manufacturer and the dealers.

Price Discrimination

The lower court's rejection of a price discrimination claim was affirmed. The defending manufacturer was not shown to have engaged in price discrimination in violation of the Robinson-Patman Act by allegedly offering the complaining dealership less favorable discounts than were given to other competing dealers, the appellate court also held.

Evidence comparing the average amount of sales assistance offered to the complaining dealer with the average amount offered to other dealers located in the same general geographic area did not prove unlawful discrimination because it did not compare the amount of sales assistance offered to the respective dealers when they actually competed against each other for a sale to the same customer. Merely offering lower prices to a customer did not give rise to a price discrimination claim, the court said.

The Robinson-Patman Act did not apply in a case involving a single sale of a customized good via a competitive bidding process. Although dealers may compete with one another by bidding against each other for the same deal, and the amount of sales assistance manufacturer offered to each dealer may well determine which dealer a customer chooses to accept a bid from, the manufacturer did not sell a truck to the dealer until the customer actually selected a dealer's bid.

The amount of sales assistance it was willing to provide to a particular dealer was part of an offer by the manufacturer to sell, not of a sale itself. Only one sale, not two, actually resulted, the court explained.

The June 17 decision in Toledo Mack Sales & Service, Inc. v. Mack Trucks Inc. appears at 2008-2 Trade Cases ¶76,189.

Focus on Franchising

This posting was written by John W. Arden.

News and notes on franchising and distribution law:

 The ABA Forum on Franchising has announced the program for the 31st annual Forum on Franchising, October 15-17, 2008, in Austin, Texas. Entitled “Deep in the Heart of Franchising,” the main program will feature two plenary sessions and 24 workshops, covering topics ranging from advanced disclosure issues under the amended FTC franchise rule to franchising in Brazil, Russia, India, and China. Besides the two-day main program, the group is offering three intensive programs on Wednesday, October 14: the traditional “Fundamentals of Franchising” for those new to the field; “Developments under the Amended FTC Rule—Learning from Our Mistakes”; and “Evidentiary and Trial Issues in Franchise Cases.” The conference will be held at the Hilton Austin. Further information and online registration is available here.

 Four members of the ABA Forum on Franchising have been nominated to serve two-year terms on the group’s governing committee, starting in August 2009. Ronald K. Gardner of Dady & Garner, P.A. in Minneapolis has been nominated to succeed Edward Wood Dunham as Chair of the Forum Governing Committee. Nominated as members of the Government Committee are Harris J. Chernow of Chernow Katz, LLC in Horsham, PA; Deborah S. Coldwell of Haynes & Boone, LLP in Dallas; and Karen B. Satterlee of Starbucks Coffee Co. in Seattle. Forum members will vote on the nominations during the October 16, 2008, business meeting at the 31st annual Forum on Franchising in Austin, Texas.

 In his “Legal Update” column in the most recent Franchise Update magazine, Atlanta attorney Rupert M. Barkoff bemoans the United States’ “overly complex and extremely inefficient” franchise sales regulatory system, which involves both federal and state regulation, no federal preemption, and a lack of harmonization among state regulatory schemes. Although he has made similar complaints since 1981, the shortcomings of the U.S. system were brought home to him again when he recently performed work for Australian franchise companies entering the U.S. “Like the United States, Australia—a highly franchised country—relies upon disclosure as the primary way to prevent franchise sales fraud and to ensure that prospective franchisees can make informed purchasing decisions. However, the Australians have no registration procedures, and franchise sales are regulated only at the federal level. Thus, their system has avoided two of the pitfalls of ours. This makes the Australians highly critical of our system. As I have previously noted in various publications, they think we are ‘mad.’”

Barkoff does welcome the recent revision of the South Dakota Franchise Investment Law, which now requires mere “notice filing” of franchises and essentially eliminates the cumbersome review process. “For the record, I am not totally convinced that a complete elimination of franchise disclosure document review would be good. However, presently the system has erred on the side of too much review. Since there appears to be little interest in a federal-level review requirement preempting the state reviews, the remaining registration states might consider outsourcing the process to a single entity that would be charged with responsibility for performing this function.”

 A new government policy might prevent franchisors from having more than one venture in India at the same time, according to a June 23 alert from Field Fisher Waterhouse, a London law firm. The Foreign Investment Promotion Board (FIPB) of the Government of India has indicated that existing foreign investors can make investments in a new venture only if they are able to demonstrate that the new venture will not damage the prospects of their existing business partner in India. The restriction applies to new ventures in the same sector that may damage an existing joint venture or collaboration with an Indian party, according to law firm. This development may impact multiple-brand franchisors in the retail and hospitality fields as they attempt to take a second brand into India, according to the firm.

High Court to Consider “Price Squeeze” Claim Against Telecommunications Firm

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

Pacific Bell Telephone Company has successfully petitioned the U.S. Supreme Court to review a decision of the U.S. Court of Appeals in San Francisco (2007-2 Trade Cases ¶75,875), permitting monopolization claims based on a “price squeeze” theory to proceed against the telecommunications company.

The appellate court allowed the Sherman Act, Sec. 2 claims of Internet service providers (ISPs) who purchased services at wholesale from Pacific Bell and used them to provide retail digital subscriber line Internet access to customers.

The ISPs contended that Pacific Bell had engaged in an unlawful price squeeze by intentionally charging them wholesale prices that were too high in relation to prices at which it was providing retail services and necessary equipment to end-user customers. Pacific Bell had moved to dismiss the price squeeze claim in the amended complaint for failure to state a claim. After the appellate court affirmed denial of the motion to dismiss, Pacific Bell sought review by the U.S. Supreme Court.

Conflict Among Circuits

In its petition for review, Pacific Bell contended that review was proper because the Ninth Circuit's decision conflicted with the decision of the U.S. Court of Appeals in Washington, D.C. in Covad Communications Co. v. Bell Atlantic Corp. (2005-1 Trade Cases ¶74,712).

In that decision, the District of Columbia Circuit, “in indistinguishable circumstances,” ruled that a price squeeze claim could not proceed. Pacific Bell also argued that the Ninth Circuit decision improperly created an exception to the rule established by the Supreme Court in Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko, LLP (2004-1 Trade Cases ¶74,241) “that—in the absence of any antitrust duty to deal—a rival's allegations that a monopolist has provided insufficient assistance fail to state a claim under Section 2.”

Federal Enforcement Agencies' Positions

The Court's decision to take up the petition came after the U.S. Solicitor General filed a friend-of-the-court brief, urging the High Court to grant Pacific Bell's petition for review. The Solicitor General said in the May 22 brief that “Section 2 of the Sherman Act does not provide a cause of action for “price-squeeze” claims of the type at issue here.”

The FTC, on the other hand, issued a May 23 statement, saying that it disagreed with the Justice Department's analysis and that the case did not appear to be ready for review.

The petition is Pacific Bell Telephone Co. v. LinkLine Communications, Dkt. 07-512, cert. granted June 23, 2008.

Franchisee Not Required to Give Franchisor Futile Opportunity to Cure

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

Even though a lingerie store franchise agreement required a franchisee to give the franchisor written notice and at least 60 days to cure any breaches before the franchisor could be held liable for breach, the franchisee was excused from that condition because the franchisor’s breaches were not curable, the California Supreme Court has decided. It would have been an idle act to provide notice and an opportunity to cure, according to the court.

The California high court reversed an appellate court decision, which held that an arbitrator exceeded his powers when he applied an equitable defense to excuse the franchisee’s failure to provide notice and an opportunity to cure and found in favor of the franchisee.

After the failure of the franchisee’s store, the parties had asserted breach of contract claims against each other. The arbitrator found in favor of the franchisee, ruling that the franchisor had failed to meet its obligations to provide operating manuals, training, assistance, and advertising. Accordingly, the franchisee was awarded more than $478,000 in consequential damages.

The parties’ agreement contained a mandatory arbitration agreement, which explicitly prohibited an arbitrator from modifying or changing any material provision. The contract provision requiring notice and an opportunity to cure stated that it was “a material term of the Agreement and may not be modified or changed by any arbitrator in an arbitration proceeding or otherwise.”

While the agreement limited arbitral powers to change the agreement, it did not unambiguously prohibit the arbitrator from excusing performance of a contractual condition where the arbitrator concluded that performance would be an idle act, the court held.

The contract’s no-modification provision would have barred an actual change. Had the arbitrator decided that the parties’ agreement should be reformed by changing the required 60 days’ notice to 30 days’ notice, he would have exceeded his powers, the court explained. However, excusing performance of a contract term in a specific factual setting is not modifying or changing the term.

California law provided for equitable excusal of contractual conditions causing forfeiture in certain circumstances, including those circumstances making performance futile, the court observed. The franchisor took issue with the arbitrator’s factual finding that providing notice of the asserted breaches would have been an idle act. However, it was for the arbitrator to find the facts, not for the trial court or the appellate courts.

The June 9 decision in Gueyffier v. Ann Summers, Ltd. appears at CCH Business Franchise Guide ¶13,912.

NASAA Approves 2008 Franchise Registration and Disclosure Guidelines

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

The North American Securities Administrators Association (NASAA) on June 6, 2008, adopted its 2008 Franchise Registration and Disclosure Guidelines, as a replacement for NASAA's Uniform Franchise Offering Circular Guidelines and 2007 Interim Franchise Guidelines.

Compliance with FTC Franchise Rule

NASAA's 2008 Franchise Registration and Disclosure Guidelines require that, as of July 1, 2008, all franchisors prepare and distribute disclosure documents that, at a minimum, comply with the disclosure format of the FTC franchise rule, as amended in 2007. The 2008 Guidelines allow states that register franchise offerings to accept, as of July 1, 2008, franchise disclosure documents prepared under the FTC's amended Franchise Rule with certain additional requirements, including a "state risk factor" cover page.

The 2008 Guidelines contain the same basic disclosure requirements set out in the Interim Guidelines and add a provision for electronic disclosure. In addition, they feature new filing instructions and uniform registration forms that were not included as part of the Interim Guidelines. Instructions for preparation immediately follow each form.

Forms

Specifically, the forms included are: (1) Uniform Franchise Registration Application; (2) Franchisor's Costs and Sources of Funds; (3) Uniform Franchise Consent to Service of Process; (4) Franchise Seller Disclosure Form; (5) Franchise Disclosure Document; (6) Application Fee; (7) Guarantee of Performance; (8) Consent of Accountant; and (9) Advertising and Promotional Materials.

The 2008 Guidelines appear at CCH Business Franchise Guide ¶5705 and here at the NASAA web site.

Marketer of Discontinued Product Could Not Challenge “First and Only” Ad Claim

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

An herbal supplements marketer (Natural Answers), which had sold a smoking cessation lozenge from 2000 until 2002, lacked standing to pursue Lanham Act false advertising claims against a drug company (GlaxoSmithKline) that later promoted its product as “the first and only stop smoking lozenge,” the U.S. Court of Appeals in Atlanta has ruled.

In March 2002, after GlaxoSmithKline declined an offer to form a joint promotional venture, Natural Answers discontinued its lozenge. Seven months later, GlaxoSmithKline launched its product. Later efforts by Natural Answers to find another joint venture partner failed.

Lanham Act Standing

Five factors should be weighed to determine whether a plaintiff has prudential standing to bring a Lanham Act false advertising claim, under the court’s earlier decision in Phoenix of Broward, Inc. v. McDonald’s Corp. (CCH Advertising Law Guide ¶62,598): (1) nature of the alleged injury, (2) directness of the injury, (3) proximity to the allegedly injurious conduct, (4) speculativeness of damages, and (5) risk of duplicative damages or complexity in apportioning damages.

Injury Requirement

None of the five factors favored Natural Answers. Because it was no longer selling smoking cessation lozenges at the time of the alleged injury from GlaxoSmithKline's allegedly false advertising, the court found that Natural Answers did not suffer the type of commercial injury that Congress sought to prevent. A claim of direct injury could not be based on the theory that GlaxoSmithKline's conduct would weaken the value of Natural Answers' unregistered HERBAQUIT LOZENGES trademark if the product was reintroduced.

GlaxoSmithKline's allegedly injurious conduct obviously affected companies that actually sell smoking cessation products far more directly than it could affect Natural Answers, according to the court. The amount of damages was entirely speculative because Natural Answers had not lost any sales or market share. Finally, allowing Natural Answers to sue would present a risk of duplicative damages.

If Natural Answers had standing to bring this claim, then any company that ever had, will have, or possibly might have a smoking cessation product whose associated trademark could potentially be “weakened” would have standing, the court said.

The June 13, 2008 decision in Natural Answers, Inc. v. SmithKline Beecham Corp. will be reported in CCH Trade Regulation Reports and CCH Advertising Law Guide.

Former NCAA Coach’s Exclusion Not Subject to Antitrust Scrutiny

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

The National Collegiate Athletic Association (NCAA), the Southeastern Conference, and the University of Kentucky’s athletic department did not engage in an unlawful group boycott by allegedly acting to prevent a former assistant football coach at the University of Kentucky from coaching at any of the NCAA’s member schools, the U.S. Court of Appeals in Cincinnati has held. The antitrust claim was not commercial in nature and did not allege a cognizable antitrust injury.

A federal district court’s dismissal of the former coach’s antitrust claim (2005-1 Trade Cases ¶74,822), fraud claims, and breach of contract claims was affirmed.

Appearance Before Committee on Infractions

The alleged conspiracy purportedly culminated in an order issued by the NCAA, which required the former assistant coach and any NCAA member institution seeking to hire him to appear before an NCAA committee on infractions. The committee would consider whether the member institution should be subject to NCAA bylaw procedures limiting the coach’s athletically-related duties at the new institution for a designated period.

This order was issued in connection with sanctions that the NCAA imposed against the university, stemming from the school’s—more specifically, the former assistant coach’s—violation of NCAA rules governing recruiting, improper inducements, and academic fraud.

Commercial Activity

Because the NCAA’s rules were intended to further its noncommercial objectives by “primarily seek[ing] to ensure fair competition in intercollegiate athletics,” they were not commercial in nature, the appellate court decided. The former coach’s extensive depiction in the complaint of the NCAA as a commercial entity was immaterial, the court explained. The appropriate inquiry was whether the NCAA rules themselves—and the organization’s enforcement of those rules—were commercial in nature. Because the rules and corresponding sanctions were not commercial, the enforcement of those rules could not be commercial. Therefore, the NCAA’s actions were not subject to scrutiny under the Sherman Act.

Antitrust Injury

Even if the defendants’ alleged illegal activity had been commercial in nature, the former coach still failed to state a claim because he failed to plead an antitrust injury, the appellate court stated. The complaint contained no allegations of the effect of the NCAA’s enforcement of its non-commercial rules on the coaching market. It merely stated that the NCAA’s actions resulted in the unfair investigation and sanction of coaches denied due process. The former coach’s alleged injury stemmed from the denial of his due process rights and a conspiracy depriving him of an opportunity to defend himself against “rules violations that led to the ban.” He did not allege that the ban resulted from some anticompetitive purpose, the court noted.

An alleged “denial of due process,” causing the coach to unjustly punished, could not amount to an antitrust injury, in the court’s view. At best, proof of that conduct would have shown only injury to the coach himself, not to competition in any market.

The decision is Bassett v. NCAA (2008-1 Trade Cases ¶76,180), decided and filed June 9, 2008.

Iowa and Oklahoma Enact Data Breach Notification Laws

This posting was written by Thomas Long, Editor of CCH Privacy Law in Marketing.

New state laws requiring companies to notify consumers of data security breaches have been enacted in Iowa and Oklahoma.

Under the Iowa statute, businesses that own or license computerized data must give Iowa consumers notice of the breach of security by certain specified methods. The notification must be made in the most expeditious manner available and without unreasonable delay. The legislation also specifies acceptable methods of notification.

The measure requests Iowa's legislative council to establish an interim study committee to assess and review the extent to which public officials, entities, and affiliated organizations --which possess or have access to personal identifying information of an Iowa resident that could, if disclosed, render the resident vulnerable to identity theft --are disclosing or selling the information for compensation. The committee must issue a report of its recommendations to the General Assembly by Jan. 15, 2009.

The Iowa law (S.B. 2308) was signed May 13, 2008 and will be effective July 1. Text of the law appears at CCH Privacy Law in Marketing ¶31,500.

Oklahoma's Security Breach Notification Act provides that individuals and entities that maintain computerized data must notify affected residents if unencrypted or unredacted personal information has been accessed or acquired without authorization and if the entity reasonably believes that the access may result in identity theft or other fraud. Notice must be made without unreasonable delay; however, it may be delayed to identify the scope of the breach and restore system integrity or if a law-enforcement agency advises the entity that notice will impede a criminal or civil investigation.

Notice includes written notice mailed to the individual, telephone notice, or electronic notice. If the cost of providing notice would exceed $50,000 or the number of affected residents exceeds 100,000, substitute notice may be provided. Substitute notice consists of any two of the following: e-mail, conspicuous posting on the Internet website of the individual or entity, or notice to a major statewide media.

Failure to provide the required notice of a security breach may result in a civil penalty up to $150,000 per breach or series of breaches discovered by a single investigation. The Oklahoma Attorney General or a district attorney has the exclusive authority to bring an action.

The Oklahoma law (H.B. 2245) was approved April 28, 2008 and will take effect November 1. Text of the law appears at CCH Privacy Law in Marketing ¶33,602.

FTC Seeks En Banc Review of D.C. Circuit’s Rambus Decision

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

The Federal Trade Commission has asked the U.S. Court of Appeals in Washington, D.C. for an en banc rehearing of a three-judge panel’s decision overturning a Commission finding of monopolization against Rambus, Inc.

The panel ruled on April 22 that the FTC failed to demonstrate that Rambus’s actions before a standard setting organization (SSO) amounted to exclusionary conduct “under settled principles of antitrust law” (2008-1 Trade Cases ¶76,121).

Agency Decision

The agency had found that Rambus unlawfully acquired its monopoly power through exclusionary conduct before the SSO (2006-2 Trade Cases ¶75,364) and ordered compulsory patent licensing on a reasonable royalty basis (2007-1Trade Cases ¶75,585).

The Commission opinion was vacated and the case and desist order was set aside by the panel. According to the panel decision, the agency did not prove that the licensor of computer memory technologies unlawfully acquired its monopoly power in the relevant markets for four technologies that had been incorporated into industry standards for dynamic random access memory (DRAM) chips.

Conflict with Precedent

The FTC contended that en banc review was appropriate because the panel decision conflicts with the District of Columbia Circuit’s en banc decision in U.S. v. Microsoft Corp. (2001-1 Trade Cases ¶73,321) and U.S. Supreme Court precedent. The agency suggests that the causation standard for monopolization articulated by the panel in the Rambus case is inconsistent with the standard articulated by the panel in Microsoft. In addition, the panel decision improperly extends the Supreme Court’s 1998 holding in NYNEX Corp. v. Discon, Inc. (1998-2 Trade Cases ¶72,362) to protect a firm’s use of deception to achieve monopoly power, according to the Commission.

The agency contends that “[t]he case has broad implications for the ability of antitrust law to protect against ‘hold-up’ by patent owners who acquire market power by engaging in deception or other exclusionary conduct in the standard-setting process.”

The June 6 petition for rehearing en banc is Rambus, Inc. v. FTC, Nos. 07-1086 and 07-1124. Text of the petition is available here at the FTC website.

Reliance by Plaintiff Not Required Element of RICO Claim: U.S. Supreme Court

This posting was written by William Zale.

In a private RICO suit predicated on mail fraud, property tax lien auction bidders were not required to show that they relied on alleged misrepresentations by successful bidders, the unanimous U.S. Supreme Court has ruled.

The successful bidders allegedly obtained a disproportionate share of liens by filing false attestations of compliance with a county’s rule requiring that each buyer submit bids in its own name. The rule was designed to ensure that liens were apportioned fairly when bidding resulted in a tie. To further their scheme, the successful bidders allegedly used the mail on numerous occasions to send required notices to property owners.

Conduct of Enterprise Through Mail Fraud

By allegedly conducting their enterprise through a pattern of mail fraud, the successful bidders would have violated RICO Sec. 1962(c). As a result, the complaining bidders allegedly lost the opportunity to acquire valuable liens. Nothing on the face of the relevant statutory provisions imposed a requirement of first-party reliance, the Court observed.

No showing of reliance was required to establish that a person violated Sec. 1962(c) by conducting an enterprise’s affairs through a pattern of racketeering activity predicated on mail fraud, according to the Court. In addition, it was difficult to derive a first-party reliance requirement from Sec. 1964(c), RICO's private suit provision, which states simply that “[a]ny person injured in his business or property by reason of a violation of section 1962” may sue to recover treble damages and attorney’s fees.

Mail Fraud v. Common Law Fraud

The successful bidders contended that RICO should be read to incorporate the rule that only a recipient of a fraudulent misrepresentation may recover for common law fraud and that the recipient may do so only if he relied on the misrepresentation in acting or refraining from action.

However, Sec. 1962(c) did not use the term “fraud.” The key term—“racketeering activity”—was defined by Congress to include not fraud but mail fraud—a statutory offense unknown to the common law, the Court pointed out. An indictable act of mail fraud was not a fraudulent misrepresentation but rather the use of the mails with the purpose of executing or attempting to execute a scheme to defraud.

Causation of Injury

The successful bidders next argued that proof of first-party reliance in a claim predicated on mail fraud was needed to establish causation of injury under Sec. 1964(c). The Court rejected this contention as an attempt to let the first-party reliance element in through the back door by holding that the proximate cause analysis under RICO must precisely track the proximate cause analysis of a common law fraud claim.

The complaining bidders could establish proximate causation if their alleged injury was a foreseeable and natural consequence of the successful bidders' alleged scheme to obtain more liens for themselves. While a RICO plaintiff alleging injury by reason of a pattern of mail fraud might have to establish at least third-party reliance in order to prove causation, this did not make first-party reliance indispensable in proving proximate causation, the Court concluded.

The June 9 decision, delivered by Justice Thomas, is Bridge v. Phoenix Bond & Indemnity Co. The opinion will be reported in CCH RICO Business Disputes Guide.

FTC Opens Antitrust Investigation of Intel Pricing Practices: Report

This posting was written by John W. Arden.

In a reversal of its previous decision, the Federal Trade Commission has opened a formal investigation of Intel Corporation, according to a June 7 story in the New York Times.

The investigation was prompted by complaints by competitor Advanced Micro Devices (AMD) that Intel instituted pricing intended to maintain a near-monopoly in the microprocessor market, the story explained.

ADM alleges that Intel systematically offers computer manufacturers large discounts—sometimes below cost—in exchange for promises not to do business with competitors.

The complaining firm “has been scouring the world in search of regulators in Europe, Asia and the United States who would agree to prosecute Intent for what A.M.D. maintains are anticompetitive pricing practices,” said the article by Stephen Labaton. While meeting with “considerable success” in Europe, Japan, and Korea, the competitor was not able to gain support from federal and state antitrust enforcers.

However, William E. Kovacic, FTC Chair since March 31, authorized the investigation, with the support of the other Commissioners, the Times reported. Kovacic’s predecessor, Deborah Platt Majoras, had blocked a formal inquiry into the allegations for a number of months.

Intel has maintained that its prices were not below cost and that AMD was only attempting to make up for its failures in the marketplace.

Other Developments

Earlier this month, the South Korean Fair Trade Commission fined Intel the equivalent of $26 million for offering discounts to prevent Samsung Electronics Co. and Trigem Computer from buying products from AMD.

On January 10, 2008, the New York Attorney General announced an investigation into whether Intel violated state and federal antitrust laws by coercing customers to exclude AMD from the worldwide market for x86 computer processing units. (See the January 10, 2008 posting on Trade Regulation Talk.) Text of the announcement appears here.

In 2005, AMD made similar charges about Intel pricing policies in an antitrust suit filed in the federal district court in Wilmington, Delaware. The trial of that lawsuit was recently delayed to 2010.

AAI Reaction

The FTC’s opening of the investigation was hailed by the American Antitrust Institute (AAI).

“We congratulate the Commission on this decision to open an investigation, which finally brings the U.S. into this landmark monopolization case that is of such great interest all around the world,” said Albert Foer, President of AAI. The organization’s June 6 announcement appears here.

The non-profit education, research, and advocacy organization had been critical of the Commission’s failure to launch an investigation in the matter. On August 29, 2007, the AAI sent a letter to then-FTC Chairman Majoras, asking the U.S. government to review Intel’s strategic conduct against AMD, “which has gone so long unchecked.” (See the August 30, 2007 posting on Trade Regulation Talk.) Text of that letter appears here.

Challenges to Valuation and Damage Experts Increasing Dramatically

This posting was written by Bruce S. Schaeffer of Franchise Valuations, Ltd., co-author of CCH Franchise Regulation and Damages.

It is becoming clearer and clearer that the first thing litigants must do when retaining experts is to address their qualifications and ability to withstand “Daubert” challenges.

A recent study done by PriceWaterhouseCoopers on challenges to financial expert witnesses reported that 30% were completely excluded, 18% were partially excluded, and 49% were admitted. Although they represent only a minority of the experts used, financial expert witnesses have been subject to a dramatically increasing number of challenges in both federal and state courts.

The study found:

 Since Kumho Tire v. Carmichael, 526 U.S. 137 (1999), the number of challenges to all types of experts has been increasing.

 In each of the three years from 2003 to 2005, a higher percentage of financial expert witnesses were excluded than non-financial experts.

 During the same period, the success rate of challenges to defense experts was greater than challenges to plaintiff experts.

 Financial experts experienced the highest rates of exclusion in fraud, antitrust, employment discrimination, bankruptcy and intellectual property matters.

This trend is particularly pernicious because (1) proof of damages can not be dispensed with in making out a case and (2) "Daubert" motions to disqualify financial experts, when made just before trial, can leave a party completely without an expert or time to get another one if the period for discovery and designation of experts has passed.

For example, in the case In re Med Diversified, Inc. 346 B.R. 621 (Bankr. E.D. N.Y. Aug. 2, 2006), a U.S. Bankruptcy Court held that:

 An expert's benchmarking analysis was unreliable and tainted the expert's analyses under the discounted cash flow valuation method and the guideline company valuation method;

 The expert's discounted cash flow analysis was unreliable and thus inadmissible;

 The expert's methodology in generating enterprise valuation under the guideline company valuation method was unreliable;

 The expert's analysis under the direct market comparable transaction valuation method was flawed and thus unreliable;

 The expert's bias warranted disqualification of the expert and his report; and

 The expert’s patently unreliable report could not be redone to render it admissible.

Additional information on expert witness issues appears in CCH Franchise Regulation and Damages by Byron E. Fox and Bruce S. Schaeffer.

Campaign to Compel Employer Recognition of Union Could Violate RICO

This posting was written by William Zale.

An employer could pursue federal RICO claims on the theory that a union, a union local, and the operators of a negative publicity campaign engaged in a pattern of extortion to compel the employer to recognize the union as the exclusive bargaining representative for employees at a large pork processing plant, the federal district court in Richmond has ruled.

Predicate Acts, Pattern of Racketeering Activity

The employer stated predicate acts of extortion under state law by alleging that the defendants had interfered with the employer's business and third-party relationships to inflict financial losses and had threatened more of the same if the employer did not forgo its “property right” not to recognize the union as bargaining representative, the court determined. Until the union prevailed in a valid National Labor Relations Board certified election, the employer had the right not to recognize the union as bargaining representative.

The employer sufficiently asserted a pattern of racketeering activity by alleging that the defendants’ acts of extortion were related and continued for over 18 months, the court found. The conduct allegedly continued after the filing of the complaint when the defendants allegedly caused the employer to lose a marketing opportunity on the Oprah Winfrey show.

Conspiracy to Acquire Control

The employer stated a claim that the defendants conspired to violate RICO's Sec. 1962(b) prohibition against acquiring an interest in or control over an enterprise through a pattern of racketeering. The defendants unsuccessfully contended that, even if they succeeded in gaining the employer's “voluntary” recognition of the union, they would not gain an interest in or control of the employer. On the facts alleged, if the defendants were able to extort the employer's recognition of the union, the defendants would gain substantial control over the employer's business operations, according to the court.

Conduct of Union Enterprises

The employer stated a claim that the operators of the negative publicity campaign conducted the affairs of the union enterprises through a pattern of extortion in violation of RICO Sec. 1962(c). The employer also stated a Sec. 1962(d) claim of conspiracy to violate Sec. 1962(c).

The campaign included drafting allegedly false press releases and reports regarding workplace safety violations and denials of worker compensation claims, organizing protests at the sites of the employer's business partners and at shareholder meetings, and proposing municipal resolutions condemning the employer. The operators of the publicity campaign allegedly were not merely retained as professional advisors to the union. According to the complaint, they were significant, active, independent participants in the alleged misconduct, the court said.

Conspiracy to Use Ill-Gotten Income

In addition, the employer stated a claim that the defendants conspired to violate RICO's Sec. 1962(a) prohibition against using or investing in an enterprise income derived from a pattern of racketeering. The court said that an object of the alleged conspiracy was to use income to operate the union enterprises and to pay the salaries and fees of the defendant entities and individuals for the purpose of engaging in further negative publicity campaigns.

A Sec. 1962(d) claim of conspiracy to violate Sec. 1962(a) can be legally sufficient, in the court’s view, if an agreement to use or invest income derived from racketeering activity is alleged, even if there is no alleged actual use or investment of income.

The May 30, 2008 opinion in Smithfield Foods, Inc. v. United Food and Commercial Workers International Union, will be reported in CCH RICO Business Disputes Guide

High Court Will Not Review Baseball Players’ Right of Publicity Claims

This posting was written by John W. Arden.

A ruling that a fantasy game provider’s First Amendment rights to use major league baseball players’ names, biographical data, and performance statistics overruled the players’ rights of publicity was left standing by the U.S. Supreme Court. On June 2, the high court denied the players’ petition for review.

Left standing was an October 16, 2007 decision of the U.S. Court of Appeals in St Louis in C.B.C. Distribution and Marketing, Inc. v. Major League Baseball Advanced Media, L.P. (CCH Advertising Law Guide ¶62,693).

In that case, major league baseball players brought suit against the fantasy game provider for using their names and playing information after the expiration of a 2002 license agreement authorizing such use. The game provider had sold fantasy sports products through a website, e-mail, mail, and the telephone.

The players produced sufficient evidence to establish a cause of action for violation of their rights of publicity under Missouri law. However, the information used by the game provider was speech entitled to First Amendment protection, according to the appeals court.

The recitation and discussion of factual data concerning the performance of major league baseball players commanded a substantial public interest and therefore was a form of expression due substantial constitutional protection, the appeals court held.

In their petition for review, Major League Baseball Advanced Media and the Major League Baseball Players Association asked (1) whether the unauthorized use of Major League baseball players’ identities in violation of Missouri law was insulated from liability by the First Amendment and (2) whether the game provider’s breach of its contractual obligations not to use or challenge the players’ identity rights after expiration of a license was insulated from liability by the First Amendment.

The petition is Major League Baseball Advanced Media v. C.B.C. Distribution and Marketing, Inc., Docket No. 07-1099, filed February 22, 2008, denied June 2, 2008.

Further details on the appeals court decision appear in an October 21, 2007, Trade Regulation Talk posting.

National Association of Realtors Settles Restraint of Trade Charges

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

The National Association of Realtors has agreed to change policies and adhere to certain conduct remedies that allow Internet-based residential real estate brokers to compete with traditional brokers.

The trade association has agreed to settle a civil suit brought by the Department of Justice Antitrust Division, alleging that it obstructed real estate brokers who used innovative Internet-based tools to offer better services and lower costs to consumers.

The Justice Department had charged that the association’s policies prevented consumers from receiving the full benefits of competition, discouraged discounting, and threatened to lock in outmoded business models.

The September 2005 lawsuit challenged two policies adopted in 2003 and 2005. The first rule challenged by the Justice Department required multiple listing services (MLSs) to permit traditional brokers to withhold their listings from password-protected Internet sites—known as virtual office web sites or VOWS—by means of an “opt out.” The association did not permit brokers to withhold their listings from tradition broker members of an MLS. The association subsequently suspended its policy during the Justice Department’s investigation.

The second rule prevented a broker from educating customers about homes for sale through a VOW and then referring those customers (for a referral fee) to other brokers, who would help customers view homes in person and negotiate contracts for them. Some of the VOWs that focused on referrals also passed along savings to consumers as a result of increased efficiencies, according to the Justice Department.

Under the terms of the settlement, awaiting approval in the federal district court in Chicago, the association will repeal its anticompetitive policies and require affiliated MLSs to repeal their rules that were based on these policies. The association will enact a new policy guaranteeing that Internet-based brokerage companies will not be treated differently than traditional brokers.

Under the new policy, brokers participating in an affiliated MLS will not be permitted to withhold their listings from brokers who serve their customers through VOWs. In addition, brokers will be able to use VOWs to educate consumers, make referrals, and conduct brokerage services. Such brokers will not be excluded from MLS membership based on their business model.

The association also has agreed to adopt antitrust compliance training programs that will instruct local realty associations about the antitrust laws generally and about the requirements of the propose settlement specifically.

Statement by Realty Association

The National Association of Realtors issued a May 27 statement, saying that it had reached a favorable settlement. According to the association, the proposed final judgment “validates [the association’s] longstanding Internet Data Exchange (IDX) policy and strengthens the rule governing participation in multiple listing services.”

Further details regarding the proposed final judgment—as well as the complaint and other documents—in U.S. v. National Association of Realtors appears here at the Department of Justice Antitrust Division’s website.

Criminal Conviction under New Hampshire Consumer Protection Act Upheld

This posting was written by Mark Engstrom, Editor of CCH State Unfair Trade Practices Law.

A roofer who accepted a customer's $4,000 deposit—but failed to purchase roofing materials, produce proof of insurance, obtain a building permit, or otherwise indicate that he would begin work on the customer's home—could not escape a criminal conviction for violating the New Hampshire Consumer Protection Act (CPA), the Supreme Court of New Hampshire has ruled.

Although the roofer argued on appeal that the state had alleged nothing more than a breach of contract, the state had sufficiently alleged that the roofer engaged in an unfair or deceptive act or practice by: (1) knowingly entering into a contract with the customer and accepting money to perform a service; (2) knowingly failing to provide the service despite numerous requests to do so; and (3) knowingly failing to return the customer's money as agreed. These allegations were sufficient to state a criminal violation of the CPA, according to the court.

Moreover, evidence of the roofer's "rascality" was sufficient to prove his guilt beyond a reasonable doubt. Under the "rascality" test, the objectionable conduct must attain a level of "rascality" that would raise an eyebrow of someone inured to the "rough and tumble of the world of commerce."

The court affirmed the jury's conviction, but vacated and remanded the trial court's sentence of twelve months in jail, two years probation, and a $2,000 fine.

The roofer could not be sentenced to probation if the statutory maximum for fines and jail time was imposed, the court explained. In order to impose probation, a trial court was required to retain a portion of its sentencing power as an enforcement mechanism.

The May 16 decision is State of New Hampshire v. Sideris, N.H. S.Ct., CCH State Unfair Trade Practices Law ¶31,583.