Ruling that Insurance Agency Was Connecticut "Franchise" Reversed

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

A ruling that substantial evidence supported a jury's findings that an independent insurance agent's relationship with an insurance company was a "franchise" under the Connecticut Franchise Act and that the company violated the Act by terminating the agent without "good cause" was reversed by the U.S. Court of Appeals in New York City. A damage award of $2.3 million was overturned.

Ownership of Claims

The sole ground for reversal was that the claims, asserted by the individual agent and his incorporated business, actually belonged to the agent's bankruptcy estate and could not be brought by the agent or his representatives. Because the ownership of the claims was a threshold issue, the court did not need to address any of the other numerous issues raised in the appeal, the appeals court determined.

Significant Decision

The lower court decision was considered significant by the franchise bar for holding that an insurance agency relationship could constitute a “franchise.” In October 2005, the federal district court in Hartford, Connecticut ruled that the Connecticut legislature did not intend to preclude insurance agents from invoking the protections of the Connecticut Franchise Act (CCH Business Franchise Guide ¶13,200). Decisions from other jurisdictions that denied “franchise” status to insurance agencies were distinguished for involving different factual settings and legislative schemes.

Elements of “Franchise”

Unlike most state franchise laws, the Connecticut Franchise Act (Conn.Gen. Stat. §42-133e, CCH Business Franchise Guide ¶4070) does not require that a “franchise” pay a franchise fee.

According to the district court, there was substantial evidence that the complaining insurance agent was “granted the right to engage in the business of offering, selling, or distributing [goods or] services under a marketing plan or system prescribed in substantial part” by the insurance company and that the agent was empowered to “offer” the company’s policies to customers.

Considerable testimony from the agent and insurance company employees indicated that the agent operated pursuant to a marketing plan prescribed in substantial part by the company. The company did not challenge the finding that the agency’s business was substantially associated with the company’s trademark.

With the district court’s ruling reversed on other grounds, the question of whether insurance agencies may qualify as “franchises” under the Connecticut Franchise Act remains unclear, according to commentators.

The August 14 decision in Chartschlaa v. Nationwide Mutual Insurance Co. will appear in CCH Business Franchise Guide.

Scope of FTC's Unfair Competition Authority Under Sec. 5 to Be Reviewed

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

Earlier this year, the Federal Trade Commission announced a proposed consent order and complaint against Negotiated Data Solutions LLC (N-Data). In that matter, the agency alleged that the technology company engaged in unfair methods of competition and unfair acts or practices in violation of Sec. 5 of the FTC Act by enforcing certain patents against participants in a standard-setting organization employing Ethernet, a computer networking standard used in nearly every computer sold in the United States.

Violation of Sec. 5, Not Sherman Act

The FTC has faced some criticism for challenging the conduct as a stand-alone violation of Sec. 5 without alleging that it rose to the level of a Sherman Act violation. N-Data's conduct was not alleged to amount to an improper acquisition or maintenance of monopoly power.

In the past, the FTC has brought enforcement actions challenging conduct that could not be reached under the Sherman Act. For instance, the agency has challenged invitations to collude that fell short of an agreement required to state a Sherman Act, Sec. 1 violation. However, the FTC had been reluctant to broaden the scope of its authority under the FTC Act.

Public Workshop

Now, the FTC has announced a public workshop to examine the proper scope of the prohibition of unfair methods of competition under Sec. 5. According to the Commission, the workshop will consider the provision's scope in light of legal precedent, economic learning, and changing business practices in a global and high-tech economy.

The workshop will examine three topics: (1) the history of Sec. 5, including Congress's enactment, the FTC's enforcement, and the courts' response; (2) the range of possible interpretations of Sec.5; and (3) examples of business conduct that may be unfair methods of competition addressable by Sec. 5. The agency said that it was particularly interested in input from the business community on the last topic.

The workshop will be held October 17, 2008, in the Conference Center of the FTC office building at 601 New Jersey Avenue, N.W., Washington, D.C.

Request for Comments

The agency is also seeking comments on the topic. Comments must be received on or before October 24, 2008. Comments should refer to “Section 5 Workshop, P083900” and should be delivered to: Federal Trade Commission/Office of the Secretary, Room H-135 (Annex C), 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. Comments may also be filed in electronic form at: https:// secure.commentworks.com/ftc-Section5workshop.

FTC Issues Telemarketing Rule Amendments for Prerecorded and Abandoned Calls

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

Telemarketing calls that deliver prerecorded messages to consumers who have not previously agreed to accept them will be expressly banned, under a set of amendments to the Telemarketing Sales Rule (TSR) announced by the FTC on August 19.

Amendments further require that sellers and telemarketers provide, at the outset of all prerecorded messages, an automated keypress or voice-activated opt-out mechanism and modify the TSR's method of calculating the maximum permissible level of "call abandonment."

Prerecorded Call Requirements

The prerecorded call amendment requires that any prerecorded telemarketing call must: (1) allow the telephone to ring for at least 15 seconds or four rings before an unanswered call is disconnected; (2) begin the prerecorded message within two seconds of a completed greeting by the consumer who answers; (3) disclose at the outset of the call that the recipient may ask to be placed on the company's do-not-call list at any time during the message; (4) make an automated interactive voice and/or keypress-activated opt-out mechanism available during the message that adds the phone number to the company's do-not-call list and then immediately ends the call; and (5) in cases where the call is answered by an answering machine or voicemail, provide a toll-free number that allows the person called to be connected to an automated interactive voice and/or keypress-activated opt-out mechanism anytime after the message is received.

Rulemaking Proceeding

The amendments are the result of a rulemaking proceeding initiated in 2004 in which the FTC, responding to a petition from the telemarketing industry, proposed a change in the TSR to allow calls that deliver prerecorded messages to consumers with whom a seller had an established business relationship.

After receiving nearly 14,000 comments overwhelmingly opposed to such a change, the Commission altered its position. It proposed in October 2006 a broad prohibition on the use of prerecorded messages whenever the consumer called had not previously given express written permission to the seller to place such calls to his or her number. The final amendments adopt the October 2006 proposal, with several refinements suggested by comments it elicited.

Exemptions and Limitations

The amendments will not affect consumers' ability to continue to receive calls that deliver purely "informational" prerecorded messages (e.g., messages notifying recipients that their flight has been cancelled, that they have a service appointment, etc.). Such purely "informational "calls are not covered by the TSR because they do not attempt to sell the called party any goods or services, the Commission noted.

Exempt from the prohibition of prerecording messages are health care-related calls that are subject to the Health Insurance Portability and Accountability Act (HIPAA). Charitable solicitation calls placed by for-profit telemarketers (telefunders) that deliver prerecorded messages on behalf of non-profits to members of, or previous donors to, the non-profit will be exempt from the written agreement requirement, although the amendments will require that such calls include a prompt keypress or voice-activated opt-out mechanism.

The amendments will permit sellers to continue—for one year after the rule's publication—to place calls delivering prerecorded messages to consumers with whom they have an established business relationship. Overall, though, the changes "will protect consumers' privacy," said FTC Chairman William E. Kovacic, by "directly enabl[ing] consumers to choose whether they want to receive prerecorded telemarketing calls."

Call Abandonment

The TSR requires that at least 97 percent of a telemarketer's calls that are answered in person (as opposed to by an answering machine) be connected to a salesperson within two seconds after a consumer answers. The amendment will retain that required rate, but will allow it to be calculated over a 30-day period, rather than on a daily basis as is now the case. The change will permit the use of smaller calling lists, without an appreciable increase in call abandonments. It aims to enable all sellers to target their calling campaigns to consumers most likely to be interested in their offer and to benefit small businesses that have smaller customer lists in particular.

Effective Dates

The amendment modifying the method for measuring the allowable rate of call abandonment will become effective on October 1, 2008. The provision requiring that all prerecorded telemarketing calls provide an automated interactive opt-out mechanism will become effective on December 1, 2008. The provision requiring permission from consumers to receive such calls will become effective September 1, 2009.

A notice announcing the TSR amendments will be published in the Federal Register shortly. Text of the notice appears here on the FTC website, which also features a news release on the amendments. Full text of the amended TSR will appear in CCH Trade Regulation Reporter.

NFL’s Exclusive Trademark License Was Not an Illegal Conspiracy

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

The National Football League and its 32 member teams did not engage in an illegal antitrust conspiracy in violation of Section 1 of the Sherman Act by granting, through their jointly-owned licensing affiliate, an exclusive trademark license to a complaining apparel manufacturer’s competitor, the U.S. Court of Appeals in Chicago has decided. The league and its teams did not create an unlawful monopoly by awarding the license to the competitor.

Thus, grants of summary judgment in the defendants’ favor on the antitrust claims (2007-2 Trade Cases ¶75,813 and 2007-2 Trade Cases ¶75,973) were proper and were each affirmed.

Intraenterprise Conspiracy Doctrine

The league and the teams were acting as a single entity when collectively licensing their intellectual property. They therefore were incapable of conspiring amongst themselves to violate Section 1 with respect to that aspect of league operations, under the intraenterprise conspiracy doctrine espoused in Copperweld Corp. v. Independence Tube Corp. (1984-2 Trade Cases ¶66.065).

An assertion by the complaining manufacturer that the teams could not be considered a single entity—because they each actually controlled their own intellectual property and their actions deprived the market of independent sources of economic power—was rejected by the appellate court. The teams could function only as one source of economic power when collectively producing NFL football, owing to the very nature of the competitive venture, the court explained.

Single Source of Economic Power

Likewise, it followed that only one source of economic power controlled the promotion of NFL football, the court observed. The league and the teams introduced uncontroverted evidence that the teams shared a vital economic interest in collectively promoting NFL football.

The record “amply established” that since 1963, the teams have acted as one source of economic power, under the auspices of NFL Properties, to license their intellectual property collectively and to promote NFL football. Nothing in the Section 1 prohibited the teams from cooperating so the league could compete against other entertainment providers, the court noted.

Monopolization

Moreover, the failure of the apparel manufacturer’s Section 1 claim necessarily doomed its monopolization claim, the court stated. As a single entity for the purposes of licensing, the teams were free under Section 2 of the Sherman Act to license their intellectual property on an exclusive basis.

The August 18 decision in American Needle, Inc. v. National Football League appears at 2008-2 Trade Cases ¶76,259.

Trade Regulation Tidbits

This posting was written by John W. Arden.

News, updates, and observations:

 While Senators Obama and McCain continue to square off on issues such as the Iraq War and the economy, they have engaged in precious little discussion about antitrust issues. Those neglected issues will be addressed at an antitrust debate between McCain and Obama supporters, scheduled for 12:15 p.m. Wednesday, September 24, at George Washington University Law School in Washington, D.C. Sponsored by the Antitrust and Consumer Law Section of the District of Columbia Bar, the program—“Antitrust Issues and the Presidential Campaign”—will feature William Kolasky discussing the views of Senator Obama and James Rill describing the positions of Senator McCain. Both Kolasky, senior partner at WilmerHale, and Rill, senior partner at Howrey LLP, have served in the Department of Justice Antitrust Division. Don Resnikoff, senior assistant attorney general with the District of Columbia, will serve as moderator. Further information about this event is available here on the website of the District of Columbia Bar.

 The American Antitrust Institute has endorsed efforts by consumer, public power, and commodity trade groups, among others, “to push through legislation to remove antitrust exemptions for U.S. railroads,” according to an August 20 announcement. Nearly 20 such organizations have announced their support of the proposed “Railroad Antitrust Enforcement Act,” which would eliminate “special antitrust exemptions that allow the nation’s freight railroads to avoid competition and therefore keep their rates artificially and unfairly high.” These “unjustifiably high rail rates” constitute a hidden tax on everyday items like food, electricity, paper, and manufactured goods, the groups maintained. “Imagine consolidations in the airline, telecom or pharmaceutical industries without the Department of Justice or the Federal Trade Commission ensuring consumers are protected through compliance with the nation’s antitrust laws. That’s exactly what happens in the railroad industry.” The proposed legislation is S. 722 and H.R. 1650. Further details on the AAI position appears here.

 Is antitrust law becoming irrelevant to franchise lawyers? That is the question raised by noted franchise attorney Rupert M Barkoff in a recent “Franchising” column (New York Law Journal, July 28, 2008). Although knowledge of antitrust law was essential when Barkoff began practicing franchise law in the mid-1970s, things have changed. “As franchising became a more popular method of distributing goods and services, at the same time antitrust law moved heavily toward permitting franchisors more flexibility in structuring and administrating their franchise programs.” The antitrust view of vertical non-price restrictions changed dramatically in 1977, when Continental T.V., Inc. v. GTE Sylvania Inc. (433 U.S. 36, 1977-1 Trade Cases ¶61,488) made a franchisor’s customer and territorial restrictions subject to the rule of reason. Previously, those restrictions were considered per se illegal. Vertical price fixing by franchisors was historically considered per se illegal, until the Supreme Court eliminated the application of per se rule to maximum resale price fixing arrangements in 1997 (State Oil Co. v. Khan, 522 U.S. 3, 1997-2 Trade Cases ¶71,961, CCH Business Franchise Guide ¶11,274) and to minimum resale price fixing arrangements in 2007 (Leegin Creative Leather Products Inc. v. PSKS Inc., 2007-1 Trade Cases ¶75,753, CCH Business Franchise Guide ¶13,639). The Supreme Court held that, in some instances, maximum and even minimum price restrictions might enhance competition in the marketplace. The law of tying arrangements has also loosened its grip on franchisors since the early 1970s. In a series of decisions, courts have chiseled away at the per se treatment of tying arrangements, particularly in the franchise context. “This 30-year retrospective suggests that the antitrust laws cannot be ignored by the franchise legal community, but the in terrorem effect they once had on franchising has been mollified extensively,” Barkoff concluded. Full text of the article appears here.

Retailer Can Pursue Lanham Act Suit Over "Tax Free" Cigarette Ads

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

A retailer could pursue Lanham Act claims that tribal smoke shops in New York were falsely advertising cigarettes as "tax free," despite defense contentions that the claims were time-barred, that the advertising contained no quantity term, and that New York tax law did not require payment of excise tax for purchases of less than 400 cigarettes, the federal district court in Brooklyn has ruled.

The complaint stated that the advertising at issue induced non-tribe members to purchase "large quantities of cigarettes," which might include purchases involving more than 400 cigarettes (two cartons). The fact that the advertising did not include a quantity term did not support the conclusion that it was necessarily true, the court reasoned.

Statute of Limitations

Even assuming that the retailer was aware in 2000 that tribal smoke shops in New York were falsely advertising cigarettes as "tax free," the retailer's Lanham Act claim filed in March 2006 could not be rejected as time-barred at the stage of a motion to dismiss, the court held.

The Lanham Act provided no statute of limitations for false advertising claims. The most analogous state limitation was New York's six-year period for fraud claims, the court held.

Contrary to the tribal stores' contention, the retailer's claims for damages and injunctive relief did not have to be analyzed as separate causes of action for limitations purposes. The motion to dismiss could not be granted until it was determined whether the retailer became aware of its alleged injury more than six years before filing suit.

The August 8 decision is Gristede's Foods, Inc. v. Unkechauge Nation, CCH Advertising Law Guide ¶63,093.

Criminal Convictions, Relocation of Dealership Constituted Good Cause for Termination

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

A motorcycle dealer’s criminal convictions and unauthorized relocation of his dealership constituted “good cause” for a manufacturer to terminate the parties’ relationship under the Oregon motor vehicle dealer law, the federal district court in Eugene, Oregon has ruled.

Theft, Possession of Stolen Vehicle

The dealer was convicted of two counts of theft, one count of attempted theft, and one count of possession of a stolen vehicle, arising from his purchase of a stolen motorcycle on eBay. These convictions led to the revocation of the dealer’s municipal business license because the crimes were related to his business dealings.

Even though the amount of business transacted at the dealership remained high following the convictions—and the dealer was not responsible for the day-to-day operations at the relocated dealership—the court refused to force the manufacturer to continue dealing with an individual “whose reputation for dishonesty has been demonstrated through convictions for theft.”

The dealer stretched the record in an attempt to demonstrate that the manufacturer had engaged in the abusive practices that the motor vehicle dealer law was designed to prevent, the court noted. However, there was no reasonable evidence to suggest that the franchisor sought to terminate the parties’ agreement for any reason other than that permitted by the dealer law—the franchisee’s failure to comply in good faith with the reasonable requirements of the franchise.

Contract Termination Provision

The dealership agreement specifically permitted termination for any act by the dealer that violated any law, adversely affected the dealership’s operation, or injured the goodwill and reputation of the dealer, the manufacturer, or the manufacturer’s products.

The August 8 decision in Everything Cycles, Inc. v. Yamaha Motor Corp. will appear at CCH Business Franchise Guide ¶13,952.

Weight Loss Guru Banned from Producing Infomercials, Ordered to Disgorge Profits

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

Infomercial producer and weight loss book author Kevin Trudeau—held in contempt for intentionally violating a 2004 injunction by making an infomercial that misrepresented his book’s content—was ordered by the federal district court in Chicago to disgorge infomercial royalties conservatively estimated at more than $5.1 million and was banned for three years from participating in the production or publication of any infomercials for products in which he had any interest. The ban specifically included books and informational publications.

Confirming its previous contempt finding (CCH Advertising Law Guide ¶62,754), the court held that the infomercial falsely and intentionally led thousands (probably hundreds of thousands) to believe that the weight loss book would describe an “easy” and “simple” protocol that, once “finished,” would allow a consumer to “eat anything” he or she wanted.

Appropriateness of Ban

The three-year ban was appropriate remedy because Mr. Trudeau had made abundantly clear that nothing short of a complete ban, for a reasonable period of time, would achieve compliance with the previous directives to limit the content of his infomercials to non-misleading claims about his books, according to the court.

While commercial speech generally benefits from limited protection under the First Amendment, untruthful or misleading commercial speech “finds no refuge under the Constitution,” the court held, citing the Supreme Court decision in Central Hudson Gas Co. v. Public Service Commission, 447 U.S. 557 (1980).

To the extent that the First Amendment arguably protected any non-misleading portions of Trudeau’s infomercials, it did not trump the public’s interest in obtaining compliance with federal court judgments, according to the court.

The August 7 decision is Federal Trade Commission v. Trudeau, which appears at 2008-2 Trade Cases ¶76,255 and CCH Advertising Law Guide ¶63,048.

PAC, Nonprofit Violated Oregon RICO Law Through Forgery, Falsification of Reports

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

A political action committee (PAC) and a nonprofit corporation were liable for violating Oregon's Racketeer Influenced and Corrupt Organization Act (ORICO) because their racketeering activities—forging signatures on statements of sponsorship for two ballot initiatives and making false statements on financial reports—had injured two labor organizations by causing them to spend money to oppose the initiatives, the Oregon Supreme Court has ruled.

The labor organizations—representing Oregon teachers and other public school employees—alleged that the PAC and nonprofit corporation participated in racketeering activities by violating several criminal statutes in attempting to place initiatives on the ballot for the 2000 general election.

According to the labor organization, two of those initiatives “would have severely restricted, or prohibited, the ability of school districts and other employers to implement ‘check offs’ for payroll deductions for union dues when some part of those dues were used for political purposes.”

At trial, a jury found for the labor organizations on two counts, and the court entered judgment in the amount of $2.5 million.

Causation

On appeal, the PAC and nonprofit argued that the trial court's damage award was improper because the labor organizations were not injured "by reason of" the defendant's racketeering activities. According to the defendants, an ORICO provision that allowed recovery for injuries incurred "by reason of" a defendant's violations should have been interpreted to require a showing of proximate cause.

Although the U.S. Supreme Court required private plaintiffs to show that their injuries were proximately caused by a violation of the federal RICO statute, the facts under review in this case did not require the court to articulate a precise standard of causation for ORICO.

Whether the statute required proximate causation, as the defendants contended, or some lesser standard, as the plaintiffs contended, ORICO "unquestionably" permitted recovery for injuries that were the "intended consequence" of the RICO violation, according to the Supreme Court.

“Simple and Direct” Connection

In this case, the causal connection between the defendants' conduct and the plaintiffs' injuries (the money spent to oppose the initiative) was "simple and direct," the Court explained. More specifically, "plaintiffs were the very targets of defendants' illegal conduct, and the injuries that plaintiffs suffered were the very injuries that defendants intended to cause."

Moreover, the plaintiffs adequately alleged—and provided sufficient evidence to prove—that the defendants' conduct was a substantial factor in causing the plaintiffs' injuries, despite the existence of "several intervening causal factors."

Because the plaintiffs properly alleged that they had been injured "by reason of" the defendants' racketeering activities, and because the evidence was sufficient to permit a reasonable jury to conclude that the plaintiffs had been injured "by reason of" the defendants' ORICO violations, the causation element of the plaintiffs' RICO claim was satisfied.

Unsworn Falsification

Falsifying information on a financial reporting document (the "CT-12" form that charitable organizations must file with Oregon's attorney general) constituted a predicate act under ORICO, the court held. A jury found that the nonprofit corporation had falsified its CT-12 form in an effort to conceal its financial support of the political action committee. The jury also found that the false statements violated a state law prohibiting "unsworn falsification" in connection with an application for government "benefits."

Although the nonprofit organization contended that its CT-12 submissions did not constitute an application for a government "benefit," information in the report was used to procure the "benefit" of being permitted to solicit tax-exempt donations. Consequently, the jury's determination that the nonprofit organization had committed the crime of unsworn falsification, a predicate offense under ORICO, was permissible.

The decision—American Federation of Teachers—Oregon, AFT, AFL-CIO v. Oregon Taxpayers United PAC—appears at CCH RICO Business Disputes Guide ¶11,520.

Trade Regulation Tidbits

This posting was written by John W. Arden.

News, updates, and observations:

 Last year’s landmark Supreme Court decision on resale price fixing is having an effect on the marketplace, according to a front page article in today’s Wall Street Journal (“Price Fixing Makes Comeback After Supreme Court Ruling”). “Manufacturers are embracing broad new legal powers that amount to a type of price fixing—enabling them to set minimum prices on their products and force retailers to refrain from discounting,” writes Joseph Pereira. These “new legal powers” stem from the decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc. (2007 CCH Trade Cases ¶75,753), holding that agreements to set minimum resale prices must be judged under the rule of reason. The ruling overturned a 96-year-old precedent—Dr. Miles Medical Co. v. John D. Park & Sons Co.(220 U.S. 37)—applying the per se rule to vertical price fixing. New minimum pricing policies are creating challenges for retailers such as BabyAge.com, which reports that nearly 100 of its 465 suppliers now dictate minimum prices. The company is suing a half-dozen manufacturers and retailers, alleging price collusion. Home improvement retailer WorldHomeCenter.com is bringing suit against lighting manufacturer L.D. Kichler in New York State court, alleging that Kichler’s resale pricing policy has caused the retailer to lose substantial profits. Critics of the new pricing rules say that resale price fixing will limit consumer choice, cost consumers $300 billion per year, and “feed inflation.” The article appears here on Wall Street Journal online.

 Twenty-seven Internet, telephone, and cable companies have responded to a request for information about their collection and use of consumer data by leading members of the House Committee of Energy and Commerce who are looking into online behavioral advertising. Although a number of these companies answered that they do not tailor advertising or facilitate the tailoring of advertising based on a consumer’s Internet surfing, others indicated that they have used Internet tracking technology without notifying consumers or seeking their consent. Broadband providers Cable One and Knology stated that they both have tested a third-party behavioral advertising system, which uses deep packet inspection technology, but did not provide access to any personally identifiable information. Yahoo! responded that it “participates in a number of businesses related to Internet advertising and each business facilitates the customization of advertising to some degree.” Yahoo! added that it is working on finalizing an expanded consumer opt-out mechanism, due by the end of August. Microsoft admitted to displaying relevant advertising based on consumers’ use of an Internet search service or browsing web site owned by Microsoft or its advertising partners, but made clear that it does not engage in “deep packet inspection" or “any other tailoring of advertising based on users’ online behavior obtained through a network operator or an Internet service provider.” The 27 letters appear here on the webstie of the House Energy and Commerce Committee. Further information on the Committee’s initial inquiry appears in an August 11, 2008 posting on “Trade Regulation Talk.” A news release on the inquiry appears here.

 State breach notification laws are causing chief information officers, security officers, and privacy officers to work more closely than ever before, according to Harriet P. Pearson, vice president of corporate affairs and chief privacy officer of IBM. These laws require companies to provide notice to consumers whose electronic personal information may have been compromised as a result of a breach. “Part of the challenge is that there are 25 states [with breach notification laws],” she told Computerworld.com. “If you look at each of them, you will see that each one is slightly different, and that does cause challenges. It creates the requirement that if you are doing business across states, you have to go through and try to rationalize them across states.” These laws require different types of notices, have different triggering events, and use different definitions of personal information, she said. The most interesting development is that “nobody wants to become really good at knowing how to notify when there’s a breach.” Rather, corporate officers want to address the breaches themselves. An interview with Ms. Pearson appears here at Computerworld.com. Text of all state breach notification laws appear in CCH Privacy Law in Marketing.

Restaurant “Location” Ads Held Deceptive

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

The operator of a single “Chicago Pizza” restaurant violated the Illinois Deceptive Trade Practices Act by advertising separate telephone numbers for multiple “locations,” two of which corresponded to locations of a competitor's “Chicago Pizza” restaurants, an Illinois appellate court has ruled.

Likelihood of Confusion

The single-location operator's trade practices created a likelihood of confusion or misunderstanding, the court held. Adding to the confusion, many of the ads and coupons that touted multiple “locations” did not include the operator's own address. The operator unsuccessfully contended that it did not “pass off” its services as those of the competitor because the words “Chicago’s Pizza” were generic and descriptive of the parties’ location and goods.

While the operator blamed customers for their own “mistakes,” the operator's ads caused their confusion, according to the court. The competitor proved not only a likelihood of confusion or misunderstanding as a result of the advertisements and coupons, as required by the Act, but also actual confusion by customers. For example, an established customer of the competitor testified that the single-location operator's employee told him he was ordering from the “Wilson location,” when the competitor, not the operator, had a restaurant on Wilson Avenue.

In another example noted by the court, a regular customer of the competitor called one of the advertised numbers because he wanted the telephone number for the competitor's Lincoln Avenue location. The customer testified that when he ordered a pizza, he believed he was doing business with an affiliate of the competitor. When he called to complain about the poor quality of the food, an employee of the single location operator offered him a discount at the Lincoln Avenue “location,” even though the competitor, not the single-location operator, had a restaurant on Lincoln Avenue.

Injunction, Award of Attorney’s Fees

The competitor was entitled to injunctive relief under the Deceptive Trade Practices Act to stop the practices that perpetuated the potential for confusion. In addition, because the single-location operator willfully engaged in deceptive trade practices, the competitor was entitled to an award of reasonable attorney's fees.

The competitor's failure to prove actual damages precluded any award of damages or injunctive relief under the Illinois Consumer Fraud Act, even though it contained a provision that a violation of the Deceptive Trade Practices Act also violates the Consumer Fraud Act.

The August 7 decision in Chicago’s Pizza, Inc. v. Chicago’s Pizza Franchise Ltd. USA, will be reported at CCH Advertising Law Guide ¶63,088.

FTC Releases Proposed Market Manipulation Prohibitions for Petroleum Industry

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

The Federal Trade Commission (FTC) has proposed a rule prohibiting market manipulation in the petroleum industry. The agency said that the proposed rule is “intend[ed] to prohibit manipulative and deceptive conduct without discouraging pro-competitive or otherwise desirable market practices.”

The Commission is authorized to establish the rule under the Energy Independence and Security Act of 2007 (EISA). Sec. 811 of the Act states that the Commission “may prescribe” a rule “as necessary or appropriate in the public interest or for the protection of United States citizens.” The Commission tentatively determined that a narrowly tailored rule would in the public interest.

Prohibited Practices

Under the EISA, it is unlawful for any person, in connection with the wholesale purchase or sale of certain petroleum commodities to use any “manipulative or deceptive device or contrivance, in contravention of such rules and regulations as the Federal Trade Commission may prescribe as necessary or appropriate in the public interest or for the protection of United States citizens.” Thus, the FTC has the role of identifying the prohibited conduct.

The Commission states that the proposed rule focuses on fraudulent or deceptive conduct that threatens the integrity of wholesale petroleum markets. The rule is succinct. It begins by outlining its scope and defining key terms, such as Crude oil, Gasoline, and Petroleum distillates. Sec. 317.3 states the prohibited practices.

Under Sec. 317.3 of the proposed rule, it would be unlawful for any person, directly or indirectly, in connection with the purchase or sale of crude oil, gasoline, or petroleum distillates at wholesale:

(a) To use or employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any person.

Advance Notice of Proposed Rulemaking

The rulemaking process began with the publication of an Advance Notice of Proposed Rulemaking (ANPR) announced in May. The ANPR set a deadline of June 6 for comments. The deadline was extended until June 23. In response to the ANPR, the Commission received 155 comments, most of which were submitted by consumers, with the rest coming from industry members, trade and bar associations, academics, and other federal and state government agencies.

According to the FTC, although many consumers urged government action to address gasoline prices, few expressly supported an FTC market manipulation rule. Twenty-nine industry members, associations, and other organizations responded to the ANPR, and most of these commenters expressed concern about the prospect of an FTC rule, the Commission noted. Some commenters argued that a rule was unnecessary and would be duplicative of existing laws. Only a few organizational commenters affirmatively favored an FTC market manipulation rule, it was noted.


SEC Rule 10b-5 as Model

The Commission decided to model its proposed rule on Securities and Exchange Commission (SEC) Rule 10b-5, promulgated by the SEC pursuant to that agency’s market manipulation authority. While there was no legislative history on Sec. 811 of the EISA, the FTC explained that “the language of the statute, taken together with other indicators of Congressional expectations, suggests that any proposed FTC market manipulation rule should be modeled” on the SEC rule. Sec. 811 was identical to language found in Sec.10(b) of the Securities Exchange Act of 1934, which prohibited the use of any “manipulative or deceptive device or contrivance” in contravention of such rules as the SEC may prescribe.”

Request for Public Comments

The FTC is seeking comments on the proposal, including comments on the use of SEC 10b-5 Rule as a model for the conduct prohibitions, until September 18, 2008. The agency said that the Notice of Proposed Rulemaking will likely be officially published in the Federal Register on August 19, 2008. The notice was posted to the FTC’s Web site on August 13.

FTC Lifts Stay in Administrative Challenge to Whole Foods/Wild Oats Merger

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

The Federal Trade Commission has lifted a stay of the administrative challenge to the combination of Whole Foods Market, Inc. and Wild Oats Markets, Inc. The agency also ordered the parties to appear at an August 18 scheduling conference to be presided over by Commissioner J. Thomas Rosch.

Approximately six weeks after the FTC issued a complaint in the matter on June 28, 2007, the agency imposed the stay on the administrative proceedings due to the “pendency of the federal court proceedings and as a matter of discretion.”

Denial of Preliminary Injunction

On August 16, 2007, the federal district court in Washington, D.C. denied the Commission’s request for a preliminary injunction blocking the combination of the companies alleged to be the largest operators of premium, natural, and organic supermarkets (2007-2 Trade Cases ¶75,831).

The agency claimed that the merger would create monopolies in 18 markets where Whole Foods and While Oats were the only premium, natural, and organic supermarkets (“PNOS”). The district court, however, rejected the PNOS market as the relevant product market, suggesting that the two companies competed within the much broader market of all grocery stores and supermarkets.

Reversal, Remand

On July 29, 2008, the U.S. Court of Appeals in Washington, D.C. reversed the district court’s decision, concluding that the lower court “underestimated the FTC’s likelihood of success on the merits” (2008-2 Trade Cases ¶76,233). It remanded the matter, instructing the district court to balance the public and private equities to determine whether enjoining the merger would be in the public interest.

Following the appellate court decision, the Commission decided to lift the stay and restart proceedings based on its policy of conducting administrative proceedings as expeditiously as possible.

The August 8 order rescinding the stay will appear in the CCH Trade Regulation Reporter. It appears here on the FTC website.

Trade Regulation Tidbits

This posting was written by John W. Arden and Thomas Long.

News, updates, and observations:

 Jeffrey Schmidt, Director of the FTC Bureau of Competition, is leaving the agency to become a partner in the New York office of the Linklaters law firm. Schmidt joined the Commission as Deputy Director of the Bureau of Competition in February 2005. In his two-and-a-half years as director, Schmidt supervised the Bureau’s merger and non-merger enforcement divisions, helped to develop antitrust policy, secured changes in the Bureau’s infrastructure and merger review processes, and managed Bureau resources during a time when the FTC’s federal court case docket was greatly expanded, according to the Commission. David P. Wales, a Deputy Director of the Bureau of Competition since April 2006, has been named Acting Director. Previous to his service with the Commission, Wales was a partner in the antitrust practice groups of Cadwalader, Wickersham & Taft LLP and Sherman & Sterling LLP. From 2001 to 2003, he served as Counsel to the Assistant Attorney General in the Department of Justice Antitrust Division. Further information is available here on the FTC website.

 In an August 1 letter, leading members of the House of Representatives Committee on Energy and Commerce informed 33 cable, telephone, and Internet companies that the committee was looking into online behavioral advertising, the “the growing trend of companies tailoring Internet advertising based upon consumers’ Internet search, surfing, and other use.” Questions have been raised about how current statutory privacy protections apply to these practices and whether further legislation is needed, the letter stated. The companies were asked to provide information by August 8 about their data collection practices, the number of consumers affected, consumer notification efforts, and any “opt in” or “opt out” procedures offered to consumers. This information was requested to help the committee better understand “how companies may be engaged in efforts to target Internet advertising, the impact of such efforts on consumers, and broader public policy implications . . . ” A news release and a copy of the letter appear at the website of the House Committee on Energy and Commerce.

 “What’s New in Comparative Advertising, Claim Support, and Self-Regulation” is the title of the National Advertising Division’s Annual Conference , scheduled for September 22-23 in New York City. Presented by the National Advertising Review Council and the Council of Better Business Bureaus, the conference will feature the following topics: (1) social networking, blogging, branded integration, and interactive media; (2) challenges in claim substantiation; (3) supporting implied messages in advertising; (4) consumer surveys; (5) puffery and the risks of pushing the boundaries; (6) environmental advertising claims; (7) FTC enforcement priorities; (8) the National Advertising Division year in review; (9) a mock NAD challenge; (10) National Advertising Review Board appeals; and (11) NAD compliance and FTC enforcement. The keynote address will be delivered by Ty Montague of JWT New York. Other speakers will include Lesley A. Fair, senior attorney of the FTC Division of Consumer and Business Education, and U.S. District Court Judge Robert W. Sweet. For further information or to register for this conference, visit the website of the National Advertising Review Council.

Union Could Be Subject to Antitrust Attack for Efforts to Assist Contractors

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

The U.S. Court of Appeals in Boston has directed a lower court to take a closer look at allegations of a conspiracy between an iron workers union and union contractors to shut non-union contractors out of the structural steel industry in the greater Boston area.

The appellate court reversed the lower court’s decision (2007-1 CCH Trade Cases ¶75,764), granting summary judgment in favor of the union on the ground that the union was exempt under the federal labor laws from antitrust liability.

Five non-union New England-based steel erectors alleged that Local Union No. 7 of the International Association of Bridge, Structural, Ornamental & Reinforcing Iron Workers, which has a collective bargaining agreement (CBA) with the Building Trades Employers' Association of Boston and Eastern Massachusetts (BTEA), conspired with the BTEA and union contractors to restrain trade.

Subsidies to Union Contractors

The antitrust claims focused on the union’s job-targeting program. The union created the program to mitigate the disadvantage imposed on union contractors by union wages. Under the program, the union targets certain construction projects and offers subsidies to assist union contractors in underbidding nonunion contractors on erection jobs. The program is funded in part by deductions from the wages of union members. The union and the BTEA agreed to codify the method of fund contributions in their CBA. The complaining contractors alleged that, as a result of the union’s conduct, they were excluded from the market.

Statutory Labor Exemption

The statutory labor exemption did not shield the union from antitrust liability for establishing and administering the job targeting program, the appellate court ruled. The union raised the statutory exemption from antitrust liability as an affirmative defense against the Sherman Act claims, and thus had the burden of proving the defense applied. The statutory exemption did not apply, however, because the statutory exemption did not extend to agreements between labor and non-labor actors.

In administering the program, the union was acting in combination with a non-labor group, according to the appellate court. The program could not have operated except in tandem with union contractors. Furthermore, there was evidence from which a rational fact-finder could reasonably infer that the union and union contractors worked together to identify and win targeted projects away from non-union employers.

Nonstatutory Labor Exemption

The union might still be shielded from antitrust liability under the nonstatutory labor exemption, which applies where the alleged anticompetitive conduct is anchored in the collective-bargaining process. However, additional fact-finding had to be conducted with regard to the extent of the collaboration between the union, union contractors, and the construction companies that hired them. Because the district court did not to make a finding as to the applicability of the nonstatutory exemption, the appellate court remanded the matter to the district court.

Application of the nonstatutory exemption was usually limited to situations where the alleged restraint operated primarily in the labor market and had only tangential effects on the business market. The complaining nonunion contractors had alleged “concerted union-employer action that extended beyond merely the wage deduction provided for in the CBA and the job-by-job subsidy agreements, to collaboration in the identification and acquisition of target projects.”

Text of the August 1 decision in American Steel Erectors, Inc. v. Local Union No. 7 of the International Association of Bridge, Structural, Ornamental & Reinforcing Iron Workers, No. 07-1832, will appear at 2008-2 Trade Cases ¶76,241.

“Natural Fit” Diaper Ad Campaign Not Enjoined

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

In a suit brought by Procter & Gamble alleging that Kimberly-Clark falsely advertised its Huggies “Natural Fit” diapers in violation of the Lanham Act, the federal district court in Green Bay, Wisconsin, declined to issue a preliminary injunction to halt the campaign while the case is pending.

The advertised line of diapers is contoured toward the center between the baby’s legs. KC advertises that the diapers have a more “natural” fit than traditional diapers, the court noted.

“Brick Baby” Campaign

The parties have referred to the advertising as the “Brick Baby” campaign. The moniker derives from the fact that in KC’s television advertisement the announcer humorously suggests that KC’s diapers are designed for “babies of the human variety” while the image on screen suggests that other diapers are designed to fit inanimate bricks. KC commissioned a study by a company called MSW, which concluded that the ad was very persuasive.

P&G did not appreciate KC’s attempt at humor, in particular the suggestion that other leading brands of diapers—especially Pampers and Luvs, which were not named specifically but were the clear target of the ads—fit less naturally in comparison to Huggies. P&G asserts that KC’s statement that Huggies “fit more naturally” due to their contoured shape is false. Huggies’ contoured shape, P&G asserts, is irrelevant to how the diapers fit.

P&G asserts that KC’s consumer and employee testing does not back-up KC’s claim that the diapers fit more naturally. P&G further argues that its own testing proves that Pampers and Huggies have essentially the same “natural” fitting qualities.

Puffery

The “natural fit” advertising, in the court’s view, is “puffery” that cannot be proven true or false. The “more natural fit” claim is inherently vague and cannot be proven true or false because it is based solely on subjective consumer preference, according to the court.

P&G contended that diaper fit claims are verifiable through consumer testing. However, the fact that consumer testing is the principal method for informing companies about natural fit does not mean it is a legitimate method for proving truth or falsity in the Lanham Act context, the court said. When subjective preference is the arbiter of an advertising claim, resort to consumer studies is of limited value and only underscores the inherent difficulty in disproving the claim, in the court’s opinion.

Proof of Falsity

Even if the advertising were not puffery, P&G is unlikely to succeed in proving that the “natural fit” claims are false or misleading, the court added. Because KC’s advertising did not mention any consumer tests, P&G could not prove the advertising false by attacking KC’s test methodology. In addition, even granting P&G’s premise that consumer testing is a reliable means of proving or disproving a claim about natural fit, the court concluded that the evidence did not tend to show that P&G would be able to succeed in disproving the truth of KC’s claim.

Irreparable Harm

Finally, P&G failed to show “irreparable” harm from the advertising, the court found, and this alone sufficed to justify the denial of preliminary injunctive relief. P&G’s brand manager’s testimony indicated that the damages his employer had sustained were calculable now and will be calculable in the future. This is not a case where P&G’s products are being irreparably disparaged, according to the court. It is, instead, a case about money. Any harm P&G has suffered would be remediable by a monetary award without injunctive relief, the court said.

The August 5, 2008, decision in Procter & Gamble Co. v. Kimberly-Clark Corp., Case No. 07-C-883, will be reported in CCH Trade Regulation Reports and CCH Advertising Law Guide.

Alaska Enacts Personal Information Protection Act

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

A new Alaska law providing state residents with protection from identity theft and breaches of data security was signed by Governor Sarah Palin on June 13.

The Alaska Personal Information Protection Act (House Bill No. 65, Chapter 92) contains provisions relating to security freezes, data breaches, protection of Social Security Numbers, and disposal of records. The law will take effect on July 1, 2009, although state agencies may adopt regulations to comply with the statute’s requirements for the use of Social Security Numbers by state agencies.

Breach Notification

The new law requires businesses and government agencies that own or license the personal information of any resident of Alaska to notify the resident if the entity or agency discovers or is notified of a breach of security or its information system. The notice must be made without unreasonable delay.

If more than 1,000 residents are affected, the entity or agency must also notify all consumer credit reporting agencies of the timing, distribution, and content of the notices sent to residents.

Violations are subject to a civil penalty of up to $500 per resident who was not notified of the breach, up to a maximum of $50,000. Violations by nongovernmental information collectors are also unfair or deceptive practices under the Alaska Unfair Trade Practices and Consumer Protection Act, although private plaintiffs may recover actual economic damages of up to only $500.

Use of Social Security Numbers

The law also limits use of Social Security Numbers by private persons and government agencies. Persons doing business in the state may not request or collect Social Security Numbers, sell or rent them, or disclose them to third parties unless otherwise authorized by law.

Disposal of Records

To further limit the risk of identity theft, businesses and government agencies disposing of records that contain personal information must take all reasonable measures necessary to protect against unauthorized access to or use of the records. Such measures include burning, pulverizing, or shredding paper documents and destroying or erasing electronic media so that the personal information cannot be read or reconstructed.

Violators will be subject to a civil penalty of up to $3,000. Individuals damaged by a failure to properly dispose of records will be able to bring a civil action for actual economic damages, attorneys’ fees, and court costs.

Text of the Personal Information Protection Act will be reported at CCH Privacy Law in Marketing ¶30,200. It appears here on the Alaska State Legislature’s website.

Trade Regulation Tidbits

This posting was written by Jeffrey May and John W. Arden.

News, updates, and observations:

 Author and antitrust law professor Herbert Hovenkamp has received the John Sherman Award from the Department of Justice Antitrust Division for his lifetime contributions to the teaching and enforcement of antitrust law and the development of antitrust policy. The award was presented during a ceremony July 29 in the Great Hall of the Robert F. Kennedy Department of Justice Building in Washington, D.C. Hovenkamp is the Ben V. and Dorothy Willie Professor of Law and History at the University of Iowa and co-author (with Philip E. Areeda) of the 20-volume landmark antitrust treatise Antitrust Law: An Analysis of Antitrust Principles and Their Application (Aspen Publishers). Hovenkamp is also co-author of two other treatises for Aspen Publishers—Fundamentals of Antitrust Law (with Areeda) and IP and Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property Law (with Mark D. Janis and Mark A. Lemley). "Professor Hovenkamp sets the standard for antitrust scholarship today," said Thomas O. Barnett, Assistant Attorney General in charge of the Antitrust Division. "As one of the authors of the leading antitrust treatise, his insights and cogent analysis have helped to improve antitrust law and policy to better protect consumer welfare and to spur economic growth." The John Sherman Award, presented annually since 1994, is named for the author of the Sherman Act of 1890, the nation's first and foremost antitrust law. Previous recipients have included Robert H. Bork, Richard A. Posner, Philip Areeda, and Senator Howard Metzenbaum. A news release on the award appears here on the Department of Justice website.

 Legislation has been introduced in the House of Representatives that would direct the Federal Trade Commission to investigate whether the price of gasoline is being artificially manipulated by speculation in the oil markets and, specifically, at the Intercontinental Exchange in Atlanta. Within 90 days of the enactment of the proposed "Energy Fraud and Fairness Reform Act," the FTC would be required to report to Congress on the progress of its investigation and to make recommendations regarding any legislation necessary to address speculation in the oil markets. The proposal (H.R. 6647) was introduced on July 28 by Rep. C.A. Dutch Ruppersberger (D-MD). A news release from the Representative's office appears here. Text and further information on the bill appears here.

 The FTC will allow McCormick & Co. to proceed with its proposed $605 million acquisition of the Lawry's and Adolph's brands of seasoned salt products from Unilever N.V., under the terms of a proposed consent order that would require McCormick to sell its Season-All seasoned salt business to Morton International, Inc. The proposed consent order would resolve FTC concerns that the transaction would substantially eliminate competition in the highly-concentrated market for branded seasoned salt product. McCormick's Season-All and Lawry's products comprise most of the market, the agency alleged in its complaint. Further information on the Commission's complaint and consent order appears here at the FTC website.

Antitrust Division Active in Challenging Procurement Fraud

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

The National Procurement Fraud Task Force of the Department of Justice was created less than two years ago to target procurement fraud associated with the increase in contracting activity for national security and other government programs. The Department of Justice Antitrust Division has played an active role in many of its investigations. As a result, the government has uncovered anticompetitive conduct with respect to contracts for marine products purchased by the U.S. Navy and the U.S. Coast Guard, freight forwarding services to transport equipment for the U.S. military, and services to support the troops in Iraq.

Conspiracy to Defraud EPA

Most recently, the Antitrust Division has announced criminal charges related to efforts to defraud the Environmental Protection Agency (EPA). On July 31, a Canadian company that treats and disposes of contaminated soils-- Bennett Environmental Inc.—was charged with participating in a conspiracy to defraud the EPA at a New Jersey Superfund site. The company pleaded guilty to conspiring to defraud the EPA at the Federal Creosote site in Manville, New Jersey, by inflating the prices it charged to a prime contractor of the EPA and paying kickbacks to employees of that prime contractor during, 2002, 2003, and 2004. Along with the $1 million criminal fine, the Justice Department will recommend to the court that the company and its co-conspirators pay a total of $1.66 million in restitution.

As part of the same investigation, a New Jersey wastewater treatment supply company, its owner, and a former contracts administrator were charged a week earlier with conspiring to rig bids in connection with sub-contracts for wastewater treatment supplies and services at the Federal Creosote site. JMJ Environmental Inc., its owner John Drimak Jr., and Norman Stoerr, a former employee of a prime contractor that provided environmental remediation services at Federal Creosote and another Superfund site--Diamond Alkali in Newark--pleaded guilty on July 23 to rigging bids at Federal Creosote from approximately October 2002 to February 2006. Drimak also pleaded guilty to one count of conspiracy to defraud the EPA at the Federal Creosote site and to defraud a general contractor at the Diamond Alkali site. The Justice Department alleged that, as part of the conspiracy, Drimak participated in a false invoicing and kickback scheme from January 2002 until April 2007.

The ongoing investigation is being conducted by the Antitrust Division's New York Field Office, the EPA Office of Inspector General and the Internal Revenue Service Criminal Investigation.

Details of U.S. v. Norman Stoerr, Criminal No. 08-521, U.S. v. JMJ Environmental Inc., and John Drimak Jr., Criminal No. 08-522, and U.S. v. Bennett Environmental Inc., all filed in the federal district court for the District of New Jersey, will appear in the CCH Trade Regulation Reporter.