Soft Drink Distributors Were Not Minnesota Franchisees

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

Five soft drink distributors were not “franchisees” under the meaning of the Minnesota Franchise Act (MFA) because they neither sold a manufacturer’s drinks in order to start a new business nor paid the manufacturer an indirect “franchise fee,” a federal district court in St. Paul, Minnesota, has decided. Thus, the manufacturer did not violate the MFA by terminating its agreements with the distributors without “good cause” and was granted summary judgment on the distributors’ claim.

The distributors brought suit against the manufacturer after it notified them that their agreements would terminate at the end of 2006. Three of the distributors had only oral agreements with the manufacturer, while the other two had written agreements that permitted termination without cause.

Business Opportunity Provision of the MFA

The distributors argued that they were franchisees under the meaning of the MFA’s business opportunity provision because they entered into their relationships with the manufacturer in order to start new businesses. Under the MFA’s business opportunity provision, payment of a franchise fee was not necessary to establish the existence of a franchise, the court noted. Rather, that portion of the statute defined, in relevant part, a “franchise” as the sale or lease of any products “for the purpose of enabling the purchaser to start a business…” Specifically, the distributors contended that they had been in the business of distributing beer prior to entering their relationships with the manufacturer and that the manufacturer sold them its soft drinks so that they could start the new business of distributing premium soft drinks.

Neither the parties nor the court was able to locate any caselaw interpreting the MFA’s business opportunity provision. However, a review of caselaw from other jurisdictions and consideration of the commonly understood meaning of “start a business” suggested that the phrase did not have the broad meaning claimed by the distributors, according to the court. Whatever the ambiguities inherent in the phrase “start a business,” the court believed that it could not be stretched to cover a situation in which an already-established beer distributorship took on the distribution of a line of soft drinks. Were the court to hold otherwise, the scope of the MFA would be so broad that, anytime a wholesaler or retailer added a new line of products, the wholesaler or retailer could be deemed a “franchisee” and the supplier could be deemed a “franchisor.” Thus, the distributors were not franchisees under the MFA’s business opportunity provision.

Indirect Franchise Fee

The distributors asserted that they were franchisees of the manufacturer under the MFA’s definition of a “franchise” requiring the franchisee to pay, directly or indirectly, a franchise fee. The distributors claimed that they pad indirect franchise fees in the form of co-op advertising and marketing fees, excessive minimum volume and sales requirements, and discount pricing programs.

Minnesota courts long held that ordinary business expenses such as purchased supplies, marketing materials, and participation in advertising and discount programs were not franchise fees unless they were unreasonable and lacked a valid business purpose, the court observed. Further, the record was devoid of evidence that any of the marketing and advertising expenses incurred by the distributors were unreasonable or lacked a valid business purpose.

At most, there was some showing that one of the distributors occasionally lost money when it participated in one of the manufacturer’s marketing programs, but to say that a distributor lost money because of such participation was not to say that the program was unreasonable or lacked a valid business purpose, the court reasoned. The evidence showed that when the distributor agreed to participate in a discount program at a loss, it did so in the hope of promoting brand awareness. Based on the record, no reasonable jury could find that the manufacturer’s discount and other marketing programs were unreasonable or lacked a valid business purpose, the court held. Similarly, there was no evidence that the manufacturer’s minimum purchase requirements and sales goals were unreasonable or lacked a valid business purpose. Thus, because the indirect fees that the distributors were allegedly forced to pay were ordinary, reasonable business expenses with a valid business purpose, they were not franchise fees under the meaning of the MFA, the court ruled.

The July 25, 2008, decision in Day Distributing Co. v. Nantucket Allserve, Inc., Case No. 07-CV-1132 (PJS/RLE), will appear in the CCH Business Franchise Guide.

FTC Gets Another Shot at Whole Foods/Wild Oats Merger

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

Eleven months after Whole Foods Market, Inc. and Wild Oats Markets, Inc. consummated their merger, a divided U.S. Court of Appeals in Washington, D.C. has “reluctantly” reversed a lower court’s decision denying the Federal Trade Commission’s request for a preliminary injunction blocking the combination. In an unusual move, the three-judge panel issued three separate opinions. The majority concluded that the district court in its August 2007 decision (2007-2 CCH Trade Cases 75,831) “underestimated the FTC’s likelihood of success on the merits.”

"Premium, Natural, & Organic Supermarkets"

The FTC filed a complaint to block the transaction in June 2007. It contended that Whole Foods and Wild Oats were the two largest operators of premium, natural, and organic supermarkets (“PNOS”). According to the agency, the merger would create monopolies in 18 markets where Whole Foods and Wild Oats were the only PNOS. The district court denied the injunctive relief, and the appellate court refused the agency’s request for an injunction pending appeal. Whole Foods and Wild Oats then consummated their merger in August 2007.

The district court rejected the PNOS market as the relevant product market for analyzing the competitive impact of the transaction, suggesting that Whole Foods and Wild Oats competed within the broader market of grocery stores and supermarkets. According to the appellate court, the lower court “analyzed the product market incorrectly.”

The FTC offered evidence that a PNOS submarket existed catering to a core group of customers. The district court, however, assumed that market definition had to depend on marginal consumers. The appellate court did not agree with the district court that the FTC would never be able to prove a PNOS submarket.

A concurring opinion agreed with the majority decision that the district court erred in focusing only on marginal customers, but also contended that the lower court overlooked or mistakenly rejected evidence supporting the FTC’s view that Whole Foods and Wild Oats occupied a separate PNOS market. The concurring opinion pointed to evidence that the Whole Foods and Wild Oats CEOs believed that their companies occupied a market separate from the conventional grocery store industry.

Balance of Equities

The appellate court remanded the matter to the district court to balance the public and private equities to determine whether enjoining the merger would be in the public interest. The FTC unsuccessfully urged the appellate court to consider the equities for the first time on appeal. However, the appellate court did note that “the equities in a [15 U.S.C.] § 53(b) preliminary injunction proceeding will usually favor the FTC.”

The concurring opinion stated that private equities should be afforded little weight and should only be considered if Whole Foods can show some public equity favoring the merger, such as increased employment or reduced prices.

Dissent

A dissent contended that the district court properly denied the requested relief because the relevant market for evaluating the merger was all supermarkets, and the merger would not substantially lessen competition in a market that included all supermarkets.

The dissent also took issue with the majority’s focus on core customers in defining the market. The dissent contended that the majority relied on a distinction between marginal consumers and core consumers, even though “the FTC never once referred to, much less relied on, the distinction between marginal and core consumers in 86 pages of briefing or at oral argument.”


FTC Reaction

FTC Bureau of Competition Director Jeffrey Schmidt said, in response to the decision: “We are pleased by today’s decision of the appeals court in the Whole Foods matter and are looking forward to future proceedings before the district court, leading to a full trial on the merits before the Commission.”


The text of the July 29, 2008, decision in FTC v. Whole Foods Market, Inc., and Wild Oats Markets, Inc., No. 07-5276, will appear in CCH Trade Cases.

Federal Trade Commission Urges Healthier Food Choices for Children as Obesity Rises

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

In response to rising levels of childhood obesity across the nation, the Federal Trade Commission (FTC) is calling on the food and media industries to promote healthier food choices for children and adolescents.

A new FTC report, Marketing Food to Children and Adolescents: A Review of Industry Expenditures, Activities, and Self-Regulation, released July 29, shows that 44 major food and beverage marketers spent $1.6 billion in 2006 promoting their products to children and adolescents. The report was commissioned in 2005 by Sen. Tom Harkin (Iowa) to help Congress examine the effectiveness of self-regulatory frameworks to change the pattern of advertising to children and curb childhood obesity.

“While many food and beverage companies have pledged to market healthier options to kids through self-regulatory programs, I want to see real results and changes in the types of products marketed towards children. If these programs do not produce significant changes--government will have to act,” Harkin said.

The report notes that food advertising to youth is marked by integrated advertising campaigns that combine traditional media, along with packaging, in-store advertising, and the Internet. The ad campaigns often involve cross-promotion with a new movie or popular television program.

FTC Recommendations

The FTC is recommending that all companies that market food or beverage products to children under 12 adopt “meaningful, nutrition-based standards” for their products, which extend to all advertising and promotional techniques. Companies also should improve the nutritional profiles of products marketed to children and adolescents, whether in or outside of schools. They should cease the in-school promotion of products that do not meet nutritional standards and improve the quality and consistency of the nutritional criteria adopted for “better for you” products.

Food and Beverage Industry Progress

While acknowledging that there is room for improvement, the food and beverage industries have made significant progress since 2005, the FTC concluded. To date, 13 of the largest food and beverage companies have pledged not to advertise to children under 12 or to limit their television, radio, print, and Internet advertising to foods that meet specified nutritional standards. Several major food and beverage companies have also adopted the Alliance for a Healthier Generation guidelines, which are designed to lower the caloric value and increase the nutritional value of foods and drinks sold in schools outside the school meal program.

Council of Better Business Bureaus Report

Separately, the Council of Better Business Bureaus (BBB) on July 29 released its first report on the progress made by participants in BBB’s self-regulation program, the Children’s Food & Beverage Advertising Initiative.

“The participants in the Initiative are to be commended for their leadership in taking proactive steps to address concerns about advertising directed to children under 12 and childhood obesity,” said Elaine Kolish, director of the Initiative.

The report is available on the Council of Better Business Bureaus Web site: www.bbb.org.

Denial of Freedom of Information Act Request for Antitrust Amnesty Agreements Vacated

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

The Department of Justice could be required to disclose redacted versions of amnesty agreements entered into by the Antitrust Division since 1993 pursuant to a Freedom of Information Act (FOIA) request, the U.S. Court of Appeals in Washington, D.C. has ruled. An order denying access to the amnesty agreements (2007-1 CCH Trade Cases ¶75,659) was vacated, and the matter was remanded to the district court "to establish the feasibility of the release of redacted versions of the amnesty agreements."

Parcel tanker shipping company Stolt-Nielsen made a series of FOIA requests seeking various records pertaining to a grand jury investigation. The company sought approximately 100 amnesty agreements. Stolt-Nielsen said that it would accept the agreements "with the names and identities of the relevant companies or individuals redacted." When the government produced some documents but refused to release the amnesty agreements, Stolt-Nielsen filed suit under FOIA.

The district court sided with the government on its refusal to turn over the amnesty agreements. The court held that the government properly withheld the documents based on exemptions to FOIA disclosure. In addition, the district court concluded that, because no portions of the amnesty agreements were reasonably segregable, the release of redacted versions was not permissible.

FOIA Exemptions

Under FOIA, federal government agencies are required to disclose information to a requestor, unless an exemption to the disclosure requirement applies. FOIA Exemptions 7(A) and 7(D) could be applicable to the amnesty agreements, the appellate court ruled. Under subsection (b)(7) of FOIA, the government is permitted to withhold records or information compiled for law enforcement purposes, if the production of such records or information could reasonably be expected to interfere with enforcement proceedings (Exemption 7(A)) or to disclose the identity of a confidential source (Exemption 7(D)).

Release of Reasonably Segragable Information

Even if the documents were exempt from disclosure, "reasonably segregable" portions of the documents should have been provided after the deletion of the exempt portions, according to the appellate court. The government did not sufficiently justify withholding the agreements in the face of the redaction of identifying information.

The appellate court suggested that names and dates could be redacted from the documents if necessary. The government had argued that the dates of various documents could allow persons with expert knowledge of antitrust proceedings to determine what industries were under investigation. Also rejected was the government’s argument that disclosure was not necessary because the redacted documents without names and dates would provide no meaningful information. "FOIA mandate[d] disclosure of information, not solely disclosure of helpful information," the court stated.

The July 25, 2008, decision in Stolt-Nielsen Transportation Group,
Ltd. v. United States, No. 07-5191, will appear CCH Trade Cases.

Deceptive Practices Suit Based on Credit Card Solicitation Not Preempted by Truth-in Lending Act

This posting was written by Andrew Soubel, Editor of CCH State Unfair Trade Practices Law.

The federal Truth-in-Lending Act (TILA) did not preempt claims or the relief granted by a lower court against a credit card company for engaging in a fraudulent and deceptive solicitation scheme in violation of the New York Deceptive Acts and Practices Law (DAPL), a divided New York Court of Appeals has ruled.

The New York attorney general alleged that the company’s applications and solicitations regarding potential credit limits, initially-available credit, secured card benefits, credit insurance coverage, re-aging benefits, and deceptive enrollment of consumers in a cardholder benefit program constituted a violation of DAPL.

Disclosures in Credit Card Application, Solicitation

The company argued that the TILA preempted the claims. The TILA expressly preempted state credit and charge card provisions governing application and solicitation disclosures. However, the attorney general’s claim did not relate to the disclosures in credit card applications or solicitations. Instead, the court found that it related to the inclusion in those materials of certain fraudulent and deceptive misinformation—none of which was addressed by the federal disclosure scheme.

The company also argued that the relief granted under the DAPL should be preempted by the TILA. A recent Supreme Court decision stated that if the relief granted imposed substantive requirements (i.e. disclosure requirements), then the judgment would be preempted by the federal law. However, because the relief granted below did not impose any disclosure requirements, it was not preempted, the court held.

Dissent

The dissent argued that the TILA should preempt the attorney general’s bid to impose disclosure requirements on the company. The judge stated that the majority reached the opposite conclusion by misreading the TILA’s special preemption rule for credit or charge card applications or solicitations. Also, the dissenter suggested that the relief sought did alter the format and content of the disclosure in the company’s credit or charged card solicitations in violation of the TILA.

The June 26 decision is In the Matter of the People of the State of New York v. Applied Card Systems, Inc., CCH State Unfair Trade Practices Law ¶31,610.

eBay's Advertising of Tiffany Jewelry Not Proven False

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

Famous jeweler Tiffany failed to establish that online marketplace eBay engaged in false advertising under the Lanham Act in connection with the sale of counterfeit jewelry on its site, the federal district court in New York City has ruled.

eBay allegedly engaged in false advertising by (1) referring to Tiffany merchandise in promotional features on the eBay home page and Jewelry & Watches page and (2) purchasing “Tiffany” as a keyword to indicate the availability of Tiffany merchandise on eBay via “sponsored links” on Internet search engines such as Yahoo! and Google.

Literal Falsity

Because authentic Tiffany merchandise was sold on eBay’s website, Tiffany failed to prove that eBay’s challenged advertising was literally false, the court said. Tiffany argued that while the advertising might be literally true, it was nevertheless likely to mislead or confuse consumers into believing that any given piece of silver jewelry labeled “Tiffany” was genuine when, in fact, a consumer was more likely to receive counterfeit silver jewelry than authentic silver jewelry.

Fair Use

Tiffany’s false advertising claims focused on the same practices as Tiffany’s direct trademark infringement claims and were unsuccessful for the same reasons, according to the court. eBay’s use of the term “Tiffany” in advertising was a protected, nominative fair use. To the extent that Tiffany argued that eBay’s advertising was impliedly false, that argument rested on Tiffany’s assertion that eBay knew that jewelry sold on its website was counterfeit.

While eBay certainly had generalized knowledge that Tiffany products sold on eBay were often counterfeit, Tiffany did not prove that eBay had specific knowledge as to the illicit nature of individual listings. To the extent that the advertising was false, the falsity was the responsibility of third party sellers, not eBay.

Misleading Customers

In short, Tiffany failed to establish that eBay’s ads were likely to mislead consumers because authentic items were offered for sale, and inauthentic items were only listed on eBay due to the illicit acts of third parties. It could not be said that eBay was misleading customers when eBay was diligently removing listings from the website that were purportedly counterfeit, according to the court.

The July 14 decision in Tiffany (NJ) Inc. v. eBay, Inc. will be published at CCH Advertising Law Guide ¶63,019.

Tooth Manufacturer’s Claims Against Monopolistic Rival Can Proceed

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

A monopolization claim by a manufacturer of prefabricated artificial teeth against the industry's dominant player, Dentsply International, Inc., was not barred as untimely and did not fail for lack of cognizable antitrust injury, the federal district court in Harrisburg, Pennsylvania, has ruled. Thus, Dentsply’s motion to dismiss was denied.

The antitrust injury asserted by the complaining competitor, Lactona Corporation, was in part predicated upon an event occurring more than a dozen years before Lactona filed suit—Dentsply's 1993 ban on its dealers’ carrying new products of its competitors. However, the suit was not time-barred because the face of the complaint did not clearly demonstrate the applicability of the limitations defense.

The complaint did sufficiently allege that Dentsply possessed market power and engaged in anticompetitive conduct that raised above mere speculation Lactona's right to recovery under Sec. 2 of the Sherman Act.

Related Litigation History

In 1999, the Department of Justice filed suit, challenging Dentsply’s practices under federal antitrust law. In 2005, the U.S. Court of Appeals in Philadelphia ruled that Dentsply's actions had indeed constituted unlawful monopolization (2005-1 Trade Cases ¶74,706). A final judgment prohibiting Dentsply from engaging in exclusionary conduct for seven and one-half years was entered in 2006 (2006-2 Trade Cases ¶75,383).

Private litigation arising out of the same conduct has produced more mixed results. A suit brought against Dentsply and many of its dealer-distributors on behalf of dental laboratories, who use Dentsply's (and its competitors') products to make sets of dentures for dentists, has progressed to trial after denial of the labs' motion for summary judgment (2007-2 Trade Cases ¶75,890).

The same court opinion, however, largely rejected a variety of antitrust charges filed against the manufacturer and many of its dealer-distributors. Earlier this year, a monopolization claim brought against Dentsply by another competing manufacturer survived a motion to dismiss based on statute of limitations and antitrust injury grounds (2008-1 Trade Cases ¶76,103).

Statute of Limitations

In the instant suit, Lactona's monopolization claim could not be dismissed on limitations grounds because the complaint was not predicated solely upon Dentsply's alleged threat in 1994 to sever business ties with a dealer pursuant to its ban on carrying competitive products, which allegedly caused that dealer to terminate its offerings of Lactona's products, the court stated.

The monopolization claim was also based upon two undated incidents in which the Dentsply purchased dealers' stock of Lactona teeth or replaced them with its own products, as well as upon the anticompetitive effects of the particular market-control strategy that Dentsply had implemented. Granting the motion for dismissal would have imposed an obligation on Lactona to allege the precise timing of every instance of anticompetitive conduct. The Federal Rules of Civil Procedure imposed no such burden, and the complaint's failure to recite the dates on which the alleged harm occurred did not warrant dismissal under the statute of limitations, according to the court.

Sufficiency of Allegations

The claim was sufficiently alleged to survive dismissal under the pleading standard articulated by the U.S. Supreme Court in Bell Atlantic Corp. v. Twombly (2007-1 Trade Cases ¶75,709), the court added. Lactona's assertion that Dentsply controlled 75 percent of the market, a share approximately 15 times larger than that of the second-largest producer, was adequate, if proven, to demonstrate its monopolistic dominance in the market during the relevant period.

The market was characterized as consisting of relatively few dealers, who acted as distribution conduits between manufacturers and a limited number of dental laboratories. As a result of laboratories' expectation that dealers would stock the competitor's products, owing in part to its market position, Dentsply was alleged to have wielded considerable influence over the terms and conditions on which dealers purchased and sold its products and those of its rivals.

In addition, Lactona sufficiently alleged that Dentsply engaged in anticompetitive conduct, for purposes of a Sherman Act, Sec. 2 claim. At the heart of the complaint were factual assertions that (1) Dentsply threatened dealers with termination if they ordered or continued to sell Lactona's teeth, (2) Dentsply exchanged dealers' inventories of the Lactona's teeth for its own products, (3) Dentsply implemented a dealership agreement provision prohibiting dealers from carrying any other manufacturers' new products, and (4) none of Dentsply's dealers added competing tooth lines to its inventory over a six-year period.

If true, these allegations raised a plausible inference that Dentsply maintained its monopolistic market share through methods other than the competitive merits of its products, the court concluded.

The June 17 decision is Univac Dental Co.v. Dentsply International, Inc., 2008-2 Trade Cases ¶76,224.

RICO Damage Award Upheld in Dominican Republic Banking Scandal

This posting was written by Mark Engstrom, Editor of CCH RICO Business Disputes Guide.

A $177 million treble-damage award against a businessman who had illegally diverted millions of dollars from a bank in the Dominican Republic was affirmed by the U.S. Court of Appeals in Atlanta.

After the 2003 collapse of one of the largest banks in the Dominican Republic, a receivership established by the Dominican government brought suit against a Florida businessman for wrongfully diverting millions of the bank’s funds to finance other business ventures and personal expenses. A jury found for the receivership on three civil RICO claims and one fraudulent transfer claim. After trebling of the racketeering damages, the judgment totaled approximately $177 million.

On appeal, the businessman contended that the RICO claims should have been dismissed for “unripeness” and because the federal statute could not be applied extraterritorially. The businessman argued that the plaintiff's damages had to be "clear and definite" before a RICO claim could accrue and that this heightened standard of certainty in pleading and proving RICO damages foreclosed the viability of the plaintiff's claims. However, the court found the arguments unpersuasive.

Ripeness of Claim

A RICO claim was not “unripe” simply because a plaintiff had not first pursued other potential remedies, the court held. Indeed, there was no per se rule that every other avenue of recovery—such as realization on collateral or claims for fraud or breach of contract—must be pursued before a RICO claim could ripen. Nor was there a per se rule to the contrary.

Whether a plaintiff must first pursue other remedies depended on whether the other contingencies were "sufficiently likely to mitigate the plaintiff's loss that damages in the RICO case could not be ascertained, or may not have occurred at all."

Extraterritorial Jurisdiction

The assertion of extraterritorial RICO jurisdiction was appropriate in this case, the court decided. Although federal courts disagreed about the extraterritorial reach of RICO, the more widely accepted view, and the one adopted by the instant court, was that RICO may apply extraterritorially if "conduct" material to the completion of the racketeering had occurred in the United States, or if significant "effects" of the racketeering had been felt here.

In this instance, the "effects test" was not satisfied because no person or business in the United States had been harmed by the businessman's alleged activities. However, the "conduct test" was satisfied because the conduct that occurred in the United States was not an insubstantial or preparatory part of the defendant's overall "looting" scheme. Indeed, the court found that the defendant's conduct had provided the means to consummate the scheme.

The June 19 decision is Liquidation Commission of Banco InterContinental, S.A. v. Renta, CCH RICO Business Disputes Guide ¶11,518.

Combination of Wine and Spirits Companies Receives FTC, EC Approval

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

Pernod Ricard received clearance from the Federal Trade Commission (FTC) and the European Commission (EC) for its proposed $9 billion acquisition of Swedish spirits company V&S Vin & Sprit on July 17. The transaction is, however, conditioned on the divestiture of a number of brands in various markets.

Pernod Ricard is based in France. Among the more popular brands of spirits produced and distributed by Pernod Ricard in the United States are Martell Cognac, Hiram Walker Cordials, Kahlua Coffee Liqueur, Chivas Regal, Ballantine’s, and The Glenlivet Scotches, Jameson Irish Whiskey, Beefeater Gin, Wild Turkey Bourbon, and Mumm Champagne. Pernod Ricard also distributes Stolichnaya vodkas, but it does not produce or own the line.

V&S is owned by the Kingdom of Sweden. The brands of V&S include the lines of Absolut Vodka, Level Vodka, Plymouth Gin, and Cruzan Rum.

FTC Concerns

The FTC expressed concern that the transaction may substantially lessen competition in five markets: "super-premium" vodka, Cognac, domestic cordials, coffee liqueur, and popular gin.
The agency contended that the acquisition would effectively combine the two most popular brands of "super-premium" vodka sold nationwide--Absolut and Stolichnaya.

Under the terms of a proposed consent order, Pernod Ricard would be required to end its distribution agreement with the owners of Stolichnaya—Spirits International BV—to satisfy competitive concerns in that market.

FTC Bureau of Competition Director Jeffrey Schmidt said that the transaction would also raise “concerns about the exchange of information in [the] four other distilled spirits markets.”

In purchasing V&S, Pernod Ricard will assume V&S's role in a distribution joint venture between V&S and Fortune Brands, Inc. According to the FTC, Fortune's subsidiary Beam Global Spirits & Wine, Inc. owns brands that compete with Pernod Ricard brands in the markets for Cognac, domestic cordials, coffee liqueur, and popular gin.

Preventing Use of Sensitive Information

The proposed consent order is designed to preserve competition between Pernod Ricard and Beam Global in these markets by imposing firewalls to prevent Pernod Ricard from acquiring and using competitively sensitive information about the Beam Global brands. Beam Global brands that compete with Pernod Ricard brands include: Courvoisier Cognac, DeKuyper cordial, Starbucks coffee liqueur, and Gilbey’s gin.

International Cooperation

In announcing the settlement, the FTC said that its staff cooperated with the staff of the EC in reviewing the proposed transaction. The cooperation was undertaken pursuant to their 1991 bilateral cooperation agreement and their 2002 Best Practices on Cooperation in Merger Investigations.

Divestitures in European Markets

The EC investigation identified competition concerns in a number of national markets, including the market for: aniseed flavored spirits in Finland, vodka in Greece, gin in Poland, and cognac, port, gin, and Canadian whisky in Sweden.

To satisfy the EC’s competition concerns, Pernod Ricard offered to divest the following brands: Dry Anis in Finland, Serkova vodka in Greece, Lubuski gin in Poland and Star Gin, Red Port, and Grönstedts cognac in Sweden. In addition, Pernod Ricard will discontinue the distribution of a third party's brand, Royal Canadian, to alleviate competitive concerns with respect to the market for Canadian whisky in Sweden. The July 17 EC statement also noted that Pernod Ricard would terminate distribution agreements for Stolichnaya and Moskovskaya vodkas.

Further information regarding this development—In the Matter of Pernod Ricard S.A.—appears here on the FTC website.

Insurer, Broker Might Have Conspired to Allocate Customers, Divide Markets

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

The Ohio Attorney General sufficiently pled claims of conspiracy to allocate customers, divide markets, and restrain competition against insurance companies and an insurance broker, an Ohio state trial court has ruled.

The attorney general outlined a scheme in which the insurers communicated through the broker in order to provide protection and receive protection for renewal policies that generated lucrative premiums.

Communications Between Parties

The complaint described communications from employees of the broker who were seeking inflated and fictitious quotes from defendant insurers to feign competition. Additionally, the broker allegedly perpetrated the conspiracy by seeking communication from defendant insurers declining to quote insurance.

The court ruled that the state's allegations met the standard of review specified by the U.S. Supreme Court's decision in Conley v. Gibson (1957), 355 U.S. 41, which held that a Rule 12(B)(6) motion would not be granted "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief."

Twombly Standard Rejected

Rejected was the defendants' contention that the court adhere to the standard of review applied by the U.S. Supreme Court's 2007 decision in Bell Atlantic Corp. v. Twombly (2007-1 Trade Cases ¶75,709). Twombly, which held that in order to survive a motion to dismiss the complaint had to allege "enough facts to state a claim to relief that is plausible on its face, "was not applicable. The scheme outlined by the attorney general was not merely one in which there was an allegation of parallel conduct, as the complaint alleged in Twombly. The circumstances established more than parallel conduct, according to the court.

The court also rejected contentions that the attorney general had standing under the Ohio Valentine Act to seek injunctive relief, equitable relief, and statutory forfeiture and that the statute of limitations barred the action. While the statute did not specifically provide for any tolling of the statute of limitations, the "discovery rule" was applied to situations, such as this one, where the defendants purportedly concealed their acts from being discovered.

The June 30 decision is State of Ohio v. American International Group, Inc., Ohio Court of Common Pleas, Cuyahoga County, 2008-2 Trade Cases ¶76,202.

Rhode Island Fair Dealership Act Amended

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

Two identical Rhode Island bills that amend the good cause, notice of termination, and opportunity to cure provisions of the Rhode Island Fair Dealership Act (RIFDA) have become law without the Governor’s signature.

Enacted in 2007, the RIFDA is a relationship/termination law that requires the grantor of a dealership to provide a dealer at least 90 days' prior written notice of the termination, cancellation, nonrenewal, or substantial change in competitive circumstances of a dealership and to provide the dealer with at least 60 days in which to rectify any claimed deficiency.

The law's notice requirement will not apply in certain situations, including when the termination is for the dealer's insolvency. A shortened ten-day notice period applies in cases of payment defaults.

"Good Cause"

The RIFDA, as originally enacted, defined "good cause" to mean:

"(a) failure by a dealer to comply substantially with essential and reasonable requirements imposed upon the dealer by the grantor, or sought to be imposed by the grantor, which requirements are not discriminatory as compared with requirements imposed on other similarly situated dealers either by their terms or in the manner of their enforcement; or (b) bad faith by the dealer in carrying out the terms of the dealership."

Interestingly, the original version of the Act did not explicitly require "good cause" for termination, or even specify exactly to what its definition of “good cause” was to be applied.

The new amendments redefine “good cause” and specifically link it to terminations. Under the revised RIFDA, “good cause for terminating, canceling or nonrenewal shall include, but not be limited to, failure by the dealer to comply with reasonable requirements imposed by the grantor or for any of the reasons listed” elsewhere in the Act.

Other Reasons

Those reasons, added by the new laws to the RIFDA’s notice provision, are:

“in the event the dealer: (1) voluntarily abandons the dealership relationship; (2) is convicted of a felony offense related to the business conducted pursuant to the dealership; (3) engages in any substantial act which tends to materially impair the goodwill of the grantor's trade name, trademark, service mark, logotype or other commercial symbol; (4) makes a material misrepresentation of fact to the grantor relating to the dealership; (5) attempts to transfer the dealership (or a portion thereof) without authorization of the grantor; or (6) is insolvent, files or suffers to be filed against it any voluntary or involuntary bankruptcy petition, or makes an assignment for the benefit of creditors or similar disposition of assets of the dealer business.”

However, the amended RIFDA still does not explicitly mandate “good cause” for franchise terminations, in the manner of the relationship/termination laws of some other states.

The amendments modify the notice of termination and opportunity to cure provisions by requiring a grantor to provide 60 (previously 90) days prior written notice of termination or nonrenewal, and 30 (previously 60) days to cure any claimed deficiency. In addition, they specify that a dealer shall have the right to cure three times in any 12-month period.

The amendments also specify additional circumstances in which no advance written notice of termination is required (reasons one through six in the preceding paragraph), and make other changes.

As enacted, the bills differ drastically from their introduced versions, which sought to completely delete the good cause, notice of termination, and opportunity to cure provisions of the Act. In addition, the introduced version sought to eliminate the Act’s provision specifying that the Act did not apply to provisions for binding arbitration under certain circumstances. In the version of the bills that were enacted, that provision remained substantially intact.

House Bill No. 8150 became law without the Governor’s signature on July 5, 2008, and Senate Bill No. 2592 became law without the Governor’s signature on July 8, 2008. Both bills became effective immediately.

The amended law will appear at CCH Business Franchise Guide ¶4390.

Resale Price Fixing Claims Can Proceed Against Baby Products Retailer, Manufacturers

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

The federal district court in Philadelphia has refused to dismiss antitrust claims brought against Babies ‘R’ Us—the large retailer of baby and juvenile products—and baby products manufacturers by smaller retailers and consumers.

The complaining retailers and consumers alleged that Babies ‘R’ Us orchestrated resale price fixing conspiracies in an effort to ward off competition from the smaller competitors that had undercut its prices. The undercutting purportedly stopped when the manufacturers began to require the retailers to sell their goods at or above a certain price.

The court denied defendants’ motion to dismiss on May 19 and denied a motion for reconsideration on July 2.

Relevant Markets

At the outset, the court accepted the plaintiffs’ relevant product markets. The challenged conduct allegedly restrained competition in the markets for “high-end baby and juvenile strollers,” “high-end high chairs,” “high-end breast pumps,” “high-end baby bedding,” “high-end car seats,” and “high-end infant carriers,” among others.

The complaining retailers and consumers asserted facts about interchangeability and cross-elasticity of demand that explained why the proffered markets were not larger than they were allege to be, in the court’s view.

Concerted Action

Two interrelated types of concerted action were sufficiently alleged: (1) concerted action between Babies ‘R’ Us and each manufacturer, and (2) concerted action between each manufacturer and that manufacturer’s retailer dealers.

The plaintiffs asserted concerted action by claiming parallel conduct coupled with “plus factors” or circumstances that tended to negate the possibility that the defending retailer and each manufacturer acted independently. The complaints alleged: (1) that the parallel conduct at issue was against each manufacturer’s independent economic self-interest; (2) that Babies ‘R’ Us wielded sufficient influence over each manufacturer to create a duress situation; and (3) that Babies ‘R’ Us threatened to retaliate against each manufacturer if each manufacturer did not implement a minimum resale price maintenance (RPM) agreement with its retailers, and the manufacturers in turn acquiesced.

Competitive Injury

The plaintiffs also sufficiently alleged that the conspiracy could have harmed competition, according to the court. The alleged RPM scheme caused prices for the baby products to increase beyond competitive levels. In addition, the RPM policies purportedly blocked certain sales that otherwise would have been made, and in some cases caused sales to be made less rapidly than they otherwise would have, resulting in reduced overall output. Further, there was at least one allegation that quality had decreased in the form of a decrease in customer service.

Monopoly Claims

The court also refused to dismiss Sherman Act, Sec. 2 claims of monopolization, attempted monopolization, and conspiracy to monopolize against Babies ‘R’ Us. The complaining retailers and consumers sufficiently alleged that Babies ‘R’ Us maintained its monopoly power by procuring the anticompetitive RPM agreements with the manufacturers. The challenged conduct could also show a specific intent to monopolize for purposes of their attempted monopolization claim.

Motion for Reconsideration

One of the defending manufacturers moved for reconsideration of the earlier decision as to the issue of concerted action. The court rejected the manufacturer's argument that the court erred in applying the law with respect to the plaintiffs’ plus-factor allegations.

The case is BabyAge.Com, Inc. v. Toys ‘R’ Us, Inc., Civil Action Nos. 05-6792, 06-242. The May 19 decision and the July 2 decision will appear in CCH Trade Reguation Reports.

Privacy Concerns with “Behavioral Advertising” Can Be Addressed by Self-Regulation: FTC

This posting was written by John W. Arden.

Although “behavioral advertising” raises consumer privacy concerns, the Federal Trade Commission is “cautiously optimistic” that those concerns can be effectively addressed by industry self-regulation, an FTC official said on July 9 in testimony before the Senate Committee on Commerce, Science, and Transportation.

“Behavorial advertising” is the practice of collecting information about an individual’s online activities in order to provide advertisements that are tailored to the individual’s interests, according to Lydia Parnes, Director of the FTC’s Bureau of Consumer Protection.

The practice involves the use of “cookies” to track consumers’ online activities and to associate those activities with a particular computer or device. The cookies collect information on websites and web pages visited by the consumer. However, this information is usually not personally identifiable.

Consumer Benefits, Discomfort

While behavioral advertising may benefit consumers by providing them with advertising relevant to their interests, it also may track sensitive information about children, health, or a consumer’s finances, according to Ms. Parnes.

Two recent surveys indicate that a majority of consumers feel discomfort about having their online activities tracked, collected, and used to provide advertising. These surveys indicated that 45 percent of consumers believe that the tracking should be banned, while 47 percent believe that tracking should be allowed with some form of consumer control.

Key Findings

The FTC held a two-day Town Hall meeting on behavioral advertising in November 2007. According to Ms. Parnes, several key points emerged from this meeting, including:

(1) Behavioral advertising may provide valuable benefits to consumers in the form of free content, personalization, and potential reduction in unwanted advertising;

(2) The invisibility of the practice—and the risk that collected data may be misused—raises privacy concerns; and

(3) Business and consumer groups expressed support for transparency and consumer control in the online marketplace.

Self-regulatory efforts by the Network Advertising Initiative (NAI) were criticized for the limited membership of the NAI, the limited scope of the efforts, and the lack of enforcement and cumbersome “opt-out” system.

FTC Self-Regulatory Principles

In response to these criticisms, the FTC issued its own set of self-regulatory principles and sought public comment on them. (See “Trade Regulation Talk,” December 21, 2007). These principles recommended: (1) transparency and consumer control of data collection, (2) reasonable security and limited retention of consumer data, (3) a requirement of consumer consent to the use of data in a materially different way than previously represented, and (4) a requirement of affirmative express consent for use of sensitive data such as that involving children, health, or finances.

The Commission received more than 60 public comments, which are now being evaluated. These included some specific proposals for possible implementation of self-regulation.

“The FTC is encouraged by the efforts that have already been made by the NAI and some other organizations and companies and believes that the self-regulatory process that has been initiated is a promising one,” said Ms. Parnes.

The Commission expressed optimism that the issues raised can be effectively addressed through “meaningful, enforceable self-regulation” and an intention to continue to monitor the marketplace in order to take appropriate action to protect consumers.

A news release and text of the prepared testimony appears at the FTC website.

FTC Proposes Rescinding Guidance on “Test Method” for Cigarette Tar, Nicotine Yields

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

The FTC is seeking comment on a proposal to rescind its 1966 guidance to tobacco companies, which indicated that factual statements of tar and nicotine yields based on the Cambridge Filter Method, also frequently referred to as the “FTC Test Method,” generally will not violate the FTC Act.

If the guidance were to be withdrawn, advertisers would no longer be able to use terms such as “FTC Method” or other phrases that state or imply FTC endorsement or approval of the Cambridge Filter Method or other machine-based test methods.

Misleading Results?

The Commission is considering rescinding the guidance in light of criticism that the machine-measured yields determined by the Cambridge Filter Method may be misleading to individual consumers who rely on the yields as indicators of the amount of tar, nicotine, and carbon monoxide they actually will get from smoking a particular cigarette.

The current yields tend to be relatively poor indicators of tar, nicotine, and carbon monoxide exposure and do not provide a good basis for comparison among cigarettes, according to the Commission.

Solicitation of Public Comments

Interested parties are invited to submit comments on or before August 12, 2008. Comments should refer to "Cigarette Test Method, [P944509]" and should be mailed or delivered, with two complete copies, to the following address: Federal Trade Commission, Office of the Secretary, Room H-135 (Annex L), 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. Comments can also be filed electronically via the Web-based form at https://secure.commentworks.com/ftc-CigaretteTestMethod.

A news release and a notice to be published in the Federal Register appear at the FTC web site.

Congressional Efforts to Bar Test

On July 8, Senator Frank R. Lautenberg (D-N. J.) issued a statement in response to the FTC announcement.

“Big Tobacco has relied on the FTC’s flawed testing method to mislead smokers into thinking these cigarettes deliver less tar and nicotine,” he said. “In reality, some so-called ‘light’ and ‘low-tar’ cigarettes can actually be more harmful for smokers. Tobacco companies should not be able to hide behind the federal government to deceptively market their deadly products.”

Lautenberg introduced legislation in March 2008 to prohibit the use of the FTC Test Method to market cigarettes as "light" or "low-tar." The proposed “Truth in Cigarette Labeling Act of 2008” (S. 2685), which was reported favorably by the Committee on Commerce, Science, and Transportation on May 15, is similar to a measure introduced by Lautenberg in 2006 that failed to become law.

Five More Air Carriers Agree to Plead Guilty for Fixing Cargo Rates

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

Five more airlines have agreed to plead guilty and pay criminal fines totaling $504 million for participating in a multi-year conspiracy to fix prices for international air cargo rates, the Department of Justice has announced.

Four other carriers have already pleaded guilty to participating in the conspiracy and have paid significant fines. Of the $504 million in newly announced fines, Air France-KLM has agreed to pay $350 million—the second-highest fine ever levied in a criminal antitrust prosecution.

Price fixing charges were filed in the federal district court in Washington, D.C. on June 26 against Société Air France, Cathay Pacific Airways Limited, Koninklijke Luchtvaart Maatschappij N.V., Martinair Holland N.V., and SAS Cargo Group A/S. Air France-KLM now operates under common ownership.

The carriers were charged with fixing cargo rates at meetings and discussions held in the United States, Europe, and Asia. The companies also monitored and enforced adherence to the agreed-upon cargo rates.

According to Associate Attorney General Kevin O'Connor, as a result of the conspiracy, fuel surcharges imposed by some of the conspirators rose by as much as 1,000 percent during the course of the conspiracy, far outpacing any fuel cost increases during the same time period.

The plea agreements are subject to court approval. In addition to Air France-KLM's agreement to pay a fine, Cathay agreed to pay a $60 million criminal fine, Martinair agreed to pay a $42 million criminal fine, and SAS agreed to pay a $52 million criminal fine.

According to the Department of Justice Antitrust Division, the total fines from the investigation in the air transportation industry are anticipated to reach $1.27 billion if the plea agreements are accepted. This would mark the highest total amount of fines ever imposed in a criminal antitrust investigation.

Last year, British Airways Plc and Korean Air Lines pleaded guilty and were each sentenced to pay a $300 million criminal fine. In January, Qantas Airways Limited pleaded guilty and was sentenced to pay a $61 million criminal fine for its role in the conspiracy. Japan Airlines in May pleaded guilty and was sentenced to pay a $110 million criminal fine for its role.

Further information regarding these most recent settlements appear at U.S. Antitrust Cases No. 4953 and 4956 (CCH Trade Regulation Reporter ¶45,108) and at the U.S. Department of Justice, Antitrust Division website.

Auto Lessees Lack Standing to Recover Damages from Allegedly Conspiring Manufacturers

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

Lessees of new cars lacked standing to seek damages from Canadian and U.S. auto makers for conspiring to restrict the flow of cheaper Canadian cars into the U.S. market between 2001 and 2003, when the U.S. dollar was much stronger than the Canadian dollar, the U.S. Court of Appeals in Boston has ruled.

Indirect Purchaser Rule

The lessees contended that, as a result of the conspiracy, they were forced to pay inflated payments under their automobile lease agreements in the United States. Because the lessees were indirect purchasers, they lacked standing to sue for damages under Sec. 4 of the Clayton Act, and their suit was correctly dismissed under the rule of Illinois Brick Co. v. Illinois (1977-1 Trade Cases ¶61,460). In March, the appellate court rejected the certification of a class seeking injunctive relief under federal antitrust laws (2008-1 Trade Cases ¶76,100).

The court rejected the lessees’ attempt to recast the claim as one of vertical conspiracy involving auto dealers, in an effort to avoid their indirect purchaser status. If the dealers were co-conspirators, then the lessees would arguably be direct victims of the conspiracy. However, the lessees did not did not join the dealers as defendants, nor did they plead sufficiently or argue consistently that dealers were part of the conspiracy.

Dealers as Participants in Conspiracy

While the lessees referred at times to dealers as members of the conspiracy, these references were primarily to Canadian dealers, not to the U.S. dealers who actually negotiated the leases. Moreover, those passing and general allusions were contradicted and outweighed by allegations in the complaints that dealers also paid higher prices due to the conspiracy, the court explained.

The June 30 decision is In re New Motor Vehicles Canadian Exp. Antitrust Litigation. The opinion will appear at 2008-1 Trade Cases ¶76,195.

Marathon Defeats Dealer’s Tying Arrangement, Price Fixing Claims

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

Tying and price fixing claims brought by Marathon and Speedway gasoline dealers against Marathon Petroleum Company and its wholly-owned subsidiary Speedway SuperAmerica LLC were properly dismissed, the U.S. Court of Appeals in Chicago has ruled. An Indiana Marathon dealer failed to state an antitrust claim.

The complaining dealer alleged that, as a condition of granting a dealership, Marathon required the dealer to agree to process credit card purchases through a processing service designated by Marathon. Although Marathon dealers were required to use the service for sales involving Marathon’s proprietary credit card, the dealer contended that it was compelled to use the designated processing system for all credit card transactions in order to avoid the cost of duplicate processing systems.

Market Power Over Tying Product

Even assuming that Marathon tied the processing of all credit card sales by its dealers to the Marathon franchise, the oil company could not have engaged in a per se illegal tying arrangement, according to the court. A per se tying claim required proof that the seller had “market power” in the market for the tying product, and Marathon did not have such market power.

The complaint stated that Marathon was “the fourth-largest United States-based integrated oil and gas company and the fifth-largest petroleum refiner in the United States” and sold “petroleum products to approximately 5,600 Marathon and Speedway branded direct-served retail outlets and approximately 3,700 jobber-served retail outlets.”

Despite the allegations, the oil company did not have significant unilateral power over the market price of gasoline. Marathon could not charge a supracompetitive price (folded into the price for gasoline that it charged its dealers) for credit card processing, according to the court.

Product Market for Marathon Franchises

While Marathon had a “monopoly” over its franchises, there was no separate product market for Marathon franchises, the court held. “Marathon” was not a market; it was a trademark, the court explained. And a trademark did not confer a monopoly. Moreover, no local gasoline markets were alleged in which the oil company had market power.

If Marathon raised the price of using its name or trademark to sell gasoline above the competitive level by raising the price of the credit card processing service that it offered, competing oil companies would nullify its price increase by keeping their own wholesale gasoline prices at the existing level.

In any event, Marathon required that the particular card processing services be used only for transactions using its brand of credit card. The complaining service station operator might have had an incentive to route all credit card transactions through the designated system to avoid having duplicate processing equipment. However, the additional cost of using multiple card processing systems was not a penalty imposed by Marathon. This was not tying.

Price Fixing

The dealer also failed to state a plausible price fixing claim against Marathon. The dealer contended that Marathon, in exchange for overcharging its dealers for credit card processing, was receiving kickbacks from banks and other financial institutions that offered credit cards. The theory made no sense, in the court's view.

If Marathon forced its dealers to pay an exorbitant fee for processing credit card sales, then this would only hurt firms that offered credit cards, the court observed. Most of the fee would be passed on to the consumer in the form of a higher gasoline price, which would reduce the demand for gasoline and hence the use of credit cards. Issuers of credit cards would not pay the oil company to reduce the demand for their product.

The decision, written by Judge Richard A. Posner, is Sheridan v. Marathon Petroleum Co., LLC, decided June 23, 2008. The opinion appears at 2008-2 Trade Cases ¶76,192.

Members of Former Rock Band Engaged in False Advertising, Violated Right of Publicity

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

Two members of the former rock band “The Doors” engaged in false advertising under California law by disseminating ads for a concert tour by a band falsely identified as “The Doors,” a California appellate court has ruled. The band members (keyboardist Ray Manzarek and guitarist Robby Krieger) also violated the California right of publicity statute, according to the court.

The trial court's finding of liability (CCH Advertising Law Guide ¶61,765) on the false advertising claim was not inconsistent with jury verdicts rejecting trademark infringement and unfair competition claims, which were not substantively equivalent to the false advertising claim, the appellate court determined.

The court upheld a permanent injunction barring the two band members from promoting their concerts using the name “The Doors”; using any name containing the name “The Doors”; or using the name, voice, or likeness of deceased band member Jim Morrison.

Right of Publicity

The band members violated the California right of publicity statute by using the name, voice, or likeness of Jim Morrison to promote the concert tour. A statutory exemption for musical works was inapplicable because the use of Morrison's name, voice, and likeness was part of the overall marketing plan to sell tickets for more than 65 concerts. In addition, no "original work" protectible by the First Amendment was created by the use of Morrison's likeness, the court held.

The not-for-publication decision is Densmore v. Manzarek, California Appellate Court, Second Appellate District, May 29, 2008, CCH Advertising Law Guide ¶63,015.