Maine-Based Distributorship Might Be Connecticut “Franchise”

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

A federal district court erred in concluding that the relationship between a manufacturer of countertop surfaces and a Maine-based authorized distributor was not a “franchise” under the meaning of the Connecticut Franchise Act, the U.S. Court of Appeals in Boston has ruled.

Place of Business in Connecticut

The lower court based its decision on the Act’s coverage of franchise agreements “the performance of which contemplates or requires the franchisee to establish or maintain a place of business” in Connecticut. The court found that the distributorship was not a "franchise" because (1) the agreement did not require the distributor—which held an exclusive franchise for much of New England—to maintain a place of business in Connecticut, and (2) it was “mere conjecture” that the manufacturer had any belief about whether the distributor would maintain a Connecticut place of business.

The appellate court ruled that a jury could have reasonably found that the manufacturer knew that the distributor purchased a firm that held its franchise for the rest of Connecticut, that the firm had an office and warehouse in the state, and that a Connecticut presence might be maintained to service Connecticut customers.

Accordingly, the appellate court vacated and remanded (1) the district court’s ruling that the Act did not apply to the relationship and (2) the district court’s grant of summary judgment to the manufacturer on the claim that it violated the Act by terminating the distributor without “good cause” (¶13,713, Business Franchise Guide 2007-2008 New Developments Transfer Binder).

Application to Out-of-State Distributor

The manufacturer argued that the statute was not meant to apply to out-of-state businesses like the complaining distributor. However, the legislative history it cited said only that an out-of-state franchisee was not protected merely because the franchisor was a Connecticut company, which was another matter entirely.

It hardly suggested that an out-of-state franchisee was unprotected when it maintained a Connecticut place of business, at least to the extent of its in-state franchise, the appellate court asserted.

The question remained as to whether the Act could apply, given that the parties’ franchise agreement provided that it was governed by Delaware law. Since that issue had not been briefed by either party, it would be left to the district court on remand.

The decision is New England Surfaces v. E.I. Du Pont De Nemours and Co., CCH Business Franchise Guide ¶13,989.

Small-Print Disclosure of Gift Card Fees Could Violate New York Law

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

Small-print disclosures of “dormancy fees” on Simon Gift Cards could violate New York law, a New York appellate court has ruled.

Simon Property Group’s alleged imposition of the improperly disclosed fees constituted a breach of contract, a violation of the implied covenant of good faith and fair dealing, and a violation of the New York deceptive practices statute, according to a consumer class action complaint.

The Simon Gift Card is a prepaid, stored-value card, programmed to hold a recorded balance from which the amount of transactions are deducted. Below a magnetic strip on the back of the card appeared the following:

“An administrative fee of $2.50 per month will be deducted from your balance beginning with the seventh month from the month of card purchase.”

Once activated, the card was placed in a cardboard sleeve along with five additional folding double-sided pages, which contained the card’s terms and conditions—including dormancy fees—in small print.

The court noted that virtually all gift cards are subject to a variety of fees. The court cited a report stating that consumers lose nearly $8 billion annually due to unredeemed value, expiration, or loss of gift cards—more than double the loss from debit and credit card fraud.

Federal Preemption

In earlier rulings in this case and a related case, Goldman v. Simon Property Management Group, Inc., the court overturned lower court decisions that the claims were federally preempted. The lower court had held that the National Bank Act and federal regulations of the Office of the Comptroller of the Currency preempted the application of New York law to Simon Gift Cards, which were issued by Bank of America, N.A., pursuant to a license from Visa U.S.A., Inc.

The appellate court rejected the lower court’s determination that the national bank was the real party in interest, in Goldman v. Simon Property Management Group, Inc., 31 A.D.3d 382, 383 (N.Y. App. Div., 2d Dept. 2006). Simon Property Group, not the bank, marketed and sold the card, and charged and collected the fees, according to the court.

Clear and Conspicuous Disclosure Requirements

The New York gift certificate statute (General Business Law Sec. 396-i), enacted in 1997, requires that the “terms and conditions of a gift certificate store credit shall be clearly and conspicuously stated thereon.” The law was amended effective October 18, 2004 to prohibit, among other things, the assessment of monthly fees prior to the 13th month of dormancy, although it is unclear whether this prohibition could be applied in this case, which was commenced February 18, 2004.

A New York civil practice rule, N.Y. CPLR Sec. 4544, provides that a consumer contract in which the print is not clear and legible or is less than 8 points in size (5 points for upper case) may not be received into evidence on behalf of the party who printed or prepared the contract.

The gift card at issue set forth imposition of the fee in font sizes materially less than required by CPLR 4544, the court found. In addition, the fee language was concealed, under case law precedents applicable to provisions buried in fine print agreements, according to the court.

The allegedly improper disclosure of the gift card dormancy fees would support a recovery of damages for breach of contract, the court held. In addition, the allegations were sufficient to maintain the claim for breach of the implied covenant of good faith and fair dealing. Even were Simon Property Group entitled to charge dormancy fees, it would still be barred, as a matter of good faith and fair dealing, from setting fees at grossly excessive amounts, the court added.

Finally, the alleged failure to conspicuously disclose the gift card dormancy fees could constitute deceptive and misleading practices under New York General Business Law Sec. 349, the court held. An action for damages under the deceptive practices statute could be based on the allegations of injury caused by the practices at issue, the court concluded.

The October 14, 2008 opinion in Lonner v. Simon Property Group, Inc. will be reported in the CCH Advertising Law Guide.

More About Gift Certificate and Gift Card Laws

Subscribers to the Advertising Law Guide on CCH Internet Research NetWork have access to more detailed coverage of gift certificate and gift card laws in New York and more than 35 other states.

A newly added Smart Chart™ gives users quick access to the types of certificates and cards that are subject to—and exempt from—the laws. Coverage of fee restrictions, expiration date restrictions, and disclosure requirements is provided, along with links to the law texts.

Information on 500 advertising-related state laws in ten categories with links to the texts is available in the Advertising Law Guide State Laws Quick Reference Smart Charts™.

Delta/Northwest Merger Gains Unconditional Antitrust Approval from Justice Department

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

The proposed merger of Delta Air Lines Inc. and Northwest Airlines Corporation will not be challenged by the Department of Justice Antitrust Division. The Justice Department concluded after a six-month investigation that the proposed transaction is not likely to substantially lessen competition.

In an October 29 statement, the Justice Department said that the combination of the nation’s third and fifth largest airlines is “likely to produce substantial and credible efficiencies that will benefit U.S. consumers.”

The Justice Department offered few specific reasons for its unconditional approval of the transaction. It did, however, point out that the carriers “currently compete with a number of other legacy and low cost airlines in the provision of scheduled air passenger service on the vast majority of nonstop and connecting routes where they compete with each other.”

The statement also noted that “the merger likely will result in efficiencies such as cost savings in airport operations, information technology, supply chain economics, and fleet optimization that will benefit consumers.”

“Premier Global Airline”

In April 2008, Delta and Northwest announced their plans to create America’s “premier global airline.” The combined company will operate under the Delta name and be headquartered in Atlanta. Stockholders of both companies overwhelmingly approved the pending merger back in September.
According to the Justice Department, Delta and its domestic regional affiliates offer service to more than 300 destinations in 58 countries, while Minneapolis-based Northwest serves 239 destinations in 21 countries in North America, Asia, and Europe.

Department of Justice Authority

Since deregulation of the airline industry in the late 1980s, the Justice Department has been responsible for reviewing the competitive aspects of airline mergers. The Department of Transportation still has the authority to consider the impact of the transaction on the public interest.

Congressional Response to Transaction

Congressional lawmakers had called on the Justice Department to take a close look at the merger. Both companies’ CEOs testified before Congress and cited the unprecedented rise in fuel costs and increased international competition as key factors behind their proposed merger.

In April, Delta CEO Richard H. Anderson told the House Judiciary Committee's antitrust task force that "oil is a game-changer.” Northwest CEO Douglas M. Steenland told lawmakers that a merged carrier would maintain all of Delta and Northwest's hubs and serve more domestic and international destinations than any other carrier, while also serving 140 small communities in the United States.

In June, Senator Herb Kohl (Wisconsin) sent a letter to Thomas Barnett, Assistant Attorney General in charge of the Antitrust Division, urging the Justice Department to “evaluate critically the airlines' claims to merger efficiencies” and to “consider the proposed Delta/Northwest merger in light of the many predictions of further consolidation in the airline industry.”

European Commission Approval

U.S. antitrust approval follows the approval of the European competition authority. The European Commission (EC) announced in August that it had cleared the Delta/Northwest transaction after concluding that it would not significantly impede effective competition in Europe. The EC found the companies' activities to be mainly complementary. The carriers offer competing direct flight services for only three transatlantic routes. At the time, Delta flew to 32 cities in the European Union (EU), and Northwest flew to 15 EU cities.

Whole Foods Opposes FTC Rule Changes, Merger Challenge Proceeds

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

A month after the FTC announced plans to streamline its adjudicative proceedings, Whole Foods Market, Inc. announced objections to the proposal. The agency issued a notice of proposed rulemaking seeking public comment on proposed rule revisions that would amend Parts 3 and 4 of the FTC Rules of Practice, which concern the process of administrative adjudication at the agency.

On October 27, Whole Foods submitted comments opposing the new and amended regulations. The specialty grocer also objected to the agency’s “limited 30-day comment period.” Whole Foods said that it was forming an “Ad Hoc Committee for FTC Fair Pay” and it encouraged other businesses and organizations to submit comments to the FTC seeking an extension of the comment period, as well as a rejection of the proposed regulations.

Several of the proposed rule revisions allow an administrative law judge or the Commission to impose tighter time periods during the adjudicatory process, according to the FTC. Under the proposal, evidentiary hearings generally would be set five months from the date of the complaint in a merger case and eight months from the date of the complaint in a non-merger case.

According to Whole Foods, the proposed regulations “would prevent many, if not most, companies from having enough time to defend themselves from FTC actions attempting to block mergers.”

In addition, Whole Foods contends that the proposed regulations “would undermine the independence of Administrative Law Judges . . . who are supposed to be the objective fact-finders before the FTC makes its final judgment."

Current Acquisition Challenge

An administrative proceeding to determine the legality of the consummated merger of Whole Foods Market, Inc. and Wild Oats Markets, Inc. is moving forward. The trial is set to begin in February 2009. In that proceeding, Whole Foods had objected to the appointment of Commissioner J. Thomas Rosch to serve as presiding official for a scheduling conference and had sought to disqualify the Commission or any individual Commissioner from acting as the presiding officer for all purposes.

Recently, the Commission has issued a protective order governing confidential material (CCH Trade Regulation Reporter ¶16,209) and has designated Acting Chief Administrative Law Judge D. Michael Chappell as the administrative law judge presiding over the adjudicative proceeding in the matter (CCH Trade Regulation Reporter ¶16,210).

Credit Card Holders Not Compelled to Arbitrate Antitrust Claims Against Amex

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

Holders of MasterCard and Visa branded credit cards were not required to arbitrate antitrust claims against the American Express Co., the U.S. Court of Appeals in New York City has ruled.

The cardholders alleged that American Express (Amex) participated in a conspiracy with credit card networks and issuing banks to fix foreign currency conversion fees and impose arbitration clauses in cardholder agreements.

The MasterCard and Visa cardholders had agreed to arbitrate claims pursuant to their cardholder agreements with issuing banks. Amex sought to invoke the arbitration clauses in those agreements by equitable estoppel. However, Amex could not avail itself of the arbitration clauses contained in the plaintiffs’ cardholder agreements.

Arbitration was a matter of contract, and the requisite contractual basis for arbitration did not exist, the court explained. The cardholder agreements did not provide a sufficient contractual basis for sending the case to arbitration.

The cardholders were not holders of Amex credit cards, did not seek relief as purchasers of Amex products, and had not entered into any contract with Amex, let alone any contract containing an arbitration clause. Rather, the cardholders entered into standard cardholder agreements with the issuing banks, which had broad arbitration clauses.

The plaintiffs were correct when they asserted that there was “no reason for someone signing up for a Chase Visa card, for example, to believe that he (or she) was entering into any kind of relationship” with Amex, the court noted.

The October 21 decision is Ross v. American Express Co., 2008-2 Trade Cases ¶76,341.

Dummar’s RICO Claims Against Administrators of Howard Hughes Estate Barred

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

A federal civil RICO claim brought by Melvin Dummar could not proceed against an administrator of the estate of billionaire Howard Hughes and a former senior officer of various enterprises that were founded by Hughes, the U.S. Court of Appeals in Denver has ruled. The claim was barred by RICO's four-year statute of limitations.

The case involved a scenario depicted in the Oscar-award-winning 1980 movie, “Melvin and Howard.”

The plaintiff, Melvin Dummar, allegedly found a bloodied and disheveled Hughes lying semi-conscious in a rural road in the Nevada desert. Dummar claimed that he had helped Hughes by waking him and driving him to a Las Vegas Hotel. Shortly after Hughes's death, a stranger allegedly delivered to Dummar an envelope containing a holographic will that purportedly gave Dummar a 1/16 share of the Hughes estate.

Although a Nevada jury rejected the will in 1978, Dummar filed suit in 2006, alleging that the defendants had conspired to conceal evidence that would have validated the will. Absent the defendants' alleged wrongdoing, Dummar would have inherited $156 million.

According to Dummar, a pilot had flown the reclusive Hughes from Las Vegas to a brothel in the Nevada desert on the same day that Dummar had rescued him, and the pilot had returned to Las Vegas without Hughes. When the pilot accepted an executive position with another company, he was ordered to surrender his flight logs and company records so that "all references to Hughes as a passenger could be removed." The pilot then signed a non-disclosure agreement, which, until recently, he had honored.

Misconduct Surrounding Jury Verdict

Dummar's complaint identified grievous misconduct surrounding the 1978 jury verdict. The defendants' alleged misconduct included: (1) a pattern of threats against potential witnesses for Dummar; (2) the forgiveness of the jury foreman's debts to Hughes's casinos; (3) the foreman's use of typewritten notes that were purportedly prepared at his home from handwritten trial notes; and (4) the subornation of perjury through bribes and threats to Hughes's close aides.

The appeals court reasoned that Dummar's injury—and its discovery—had occurred the moment that the jury returned its verdict finding that the will was invalid. Accordingly, the limitations period began to run in 1978, when the verdict was rendered --28 years before the lawsuit was filed.

Tolling of Limitations Period—Fraudulent Concealment

Dummar, argued, however, that fraudulent concealment had tolled the limitations period. His complaint listed three acts to support the application of equitable tolling: (1) the perjury and misleading testimony of Hughes's aides; (2) the destruction of flight log evidence; and (3) the "ongoing understanding" about the enforceability of non-disclosure agreements that were signed by employees of various Hughes entities. None of these acts, however, were sufficient to allege fraudulent concealment, in the court's view.

First, the perjury of Hughes's aides may have misled the jury, but it would not have misled Dummar. Moreover, witness tampering in a state-court proceeding was not a racketeering activity under the federal RICO statute. Second, the alteration of the flight logs may have concealed evidence that corroborated Dummar's testimony, but it should not have prevented Dummar from knowing any element of his RICO claim. Third, non-disclosure agreements were not, by themselves, fraudulent, and Dummar did not allege that the agreements required anyone to make misrepresentations of any sort.

Even if Dummar had characterized as fraudulent concealment his allegations that the defendants had ordered, bribed, and coerced Hughes's aides to commit perjury, he failed to allege that he had acquired evidence of this misconduct during the four-year limitations period that preceded his complaint, the court observed. If those allegations were based on information that was acquired less than four years before the suit was filed, his complaint needed to assert that.

State RICO Claim

Dummar also alleged violations of Nevada's civil RICO provisions. However, the asserted violations—extortion, perjury, and the submission of false evidence—all occurred before, during, or immediately after the 1978 trial, and Nevada's civil RICO provisions required one of the predicate acts to have occurred after the effective date of the statute: July 1, 1983. Consequently, the court held that Dummar's complaint failed to state a viable cause of action.

The decision is Dummar v. Lummis, CCH RICO Business Disputes Guide ¶11,551.

White Paper Analyzes Rulings on the Admissibility of Expert Financial Testimony

This posting was written by John W. Arden.

Since the U.S. Supreme Court handed down the “Daubert Trilogy” in the 1990s, the admissibility of expert witness testimony has become a major issue in federal and state court litigation.

In Daubert v. Merrell Dow Pharmaceuticals, 509 U.S. 579 (1993), the Supreme Court replaced the “general acceptance” standard for the admissibility of expert testimony of Frye v. United States with the two-part test of Rule 702 of the Federal Rules of Civil Procedure. This new test required that expert testimony (1) must be reliable—based on recognized knowledge, and (2) must be relevant—of assistance to the trier of fact.

During the six years following the Daubert decision, 1,065 federal court opinions were issued on the admissibility of expert testimony. And the number has continued to grow.

In order to help practitioners keep up with the issues and trends in this area, Wolters Kluwer Law & Business has published a white paper, entitled Challenges to the Admissibility of Expert Financial Testimony: 2005-2008, written by Bruce S. Schaeffer, Susan Ogulnick, and Sara Ann Schaeffer of Franchise Valuations, Ltd.

The authors review the 85 challenges to the admission of expert financial testimony between 2005 and 2008 and report the results of those challenges. In addition to a general analysis of the decisions, the study contains charts that categorize the type of expert involved in each case and summarize the outcomes of each decision.

The white paper is available for free download here.

About the Authors

Bruce S. Schaeffer is an attorney in private practice in New York City and the founder and president of Franchise Valuations Ltd, a firm that provides expert testimony, performs lender due diligence, and resolves succession and estate planning problems for the franchise community. Mr. Schaeffer is also co-author of CCH Franchise Regulation and Damages, a treatise explaining franchise law, the computation of damages in franchise litigation, the assessment of legal risks, the valuation of franchises, and the use of expert witnesses.

Susan Ogulnick is Vice President of Research and Operations for Franchise Valuations, Ltd. She has more than 20 years of experience in the information industry and is a recognized authority in acquiring information about hard-to-value entities. Sara Anne Schaeffer is an intern at Franchise Valuations Ltd.

Justice Department, States Move to Block Beef Packer Combination

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

The proposed combination of the third and fourth-largest U.S. beef packers has been challenged by the U.S. Department of Justice Antitrust Division and 13 state attorneys general. A complaint to block JBS S.A.'s proposed acquisition of National Beef Packing Company LLC was filed October 20 in the federal district court in Chicago.

The proposed transaction would combine two of the top four U.S. beef packers, resulting in lower prices paid to cattle suppliers and higher beef prices for consumers, according to the Antitrust Division.

Elimination of Significant Competitor

The complaint alleged that JBS's acquisition of National would substantially restructure the beef packing industry, eliminating a competitively significant packer and placing more than 80 percent of domestic fed cattle packing capacity in the hands of three firms: JBS, Tyson Foods Inc., and Cargill Inc. The Justice Department concluded that the acquisition would lessen competition among packers in the production and sale of USDA-graded boxed beef nationwide.

JBS's acquisition of National also would lessen competition among packers for the purchase of cattle ready for slaughter in the High Plains, centered in Colorado, western Iowa, Kansas, Nebraska, Oklahoma and Texas, and the Southwest, the Justice Department concluded.

The Attorneys General of Colorado, Iowa, Kansas, Minnesota, Missouri, Montana, North Dakota, Ohio, Oklahoma, Oregon, South Dakota, Texas, and Wyoming joined in the Justice Department's lawsuit.

Text of the complaint in U.S. v. JBS S.A. appears here on the Department of Justice Antitrust Division website. Further details will appear in CCH Trade Regulation Reporter.

Reactions from Congress

Senator Chuck Grassley (R-Iowa), a critic of the Antitrust Division's scrutiny of mergers in the agricultural sector, called the move to block the proposed acquisition "a positive first step." In an October 20 announcement, Grassley promised to "continue to prod federal antitrust enforcers to be vigilant about keeping the agricultural sector of our economy competitive."

Senator Tim Johnson (D-South Dakota) issued a press release stating that "agriculture communities are faced with pressure from large agri-business and [the] decision by the Department of Justice [to challenge the acquisition] is a reflection of what ranchers and farmers across the state and nation and members of Congress have communicated to the Department."

Drug Makers' Patent Settlement Pact Not Unreasonable Restraint

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

The U.S. Court of Appeals for the Federal Circuit has upheld a lower court's determination that a settlement agreement between a drug maker/patent holder and a generic drug manufacturer, which included reverse payments from the patent holder to the generic drug maker, was not an unreasonable restraint of trade in the market for ciprofloxacin.

Any anticompetitive effects caused by the settlement agreement between drug maker Bayer AG and the generic defendant Barr Laboratories, Inc. were within the exclusionary zone of the patent, the court explained.

Under the agreement, Barr agreed not to market its generic version of Cipro in the United States until after the relevant patent expired. In exchange, Bayer agreed to make a settlement payment and quarterly payments (referred to as "reverse payments" or "exclusion payments") to Barr, which totaled over $398 million.

Exclusion of Horizontal Competitor

According to complaining purchasers, the agreement allowed Bayer to exclude a horizontal competitor from the market not by enforcing its rights as a patentee, but instead by ceasing to enforce its rights and paying the competitor $398 million.

Complaining purchasers did not demonstrate that the agreement had an anticompetitive effect on the market beyond that permitted by the patent, according to the court. There was no legal basis for restricting the right of the patentee to choose its preferred means of enforcement.

Moreover, in the absence of evidence of fraud before the Patent and Trademark Office (PTO) or sham litigation, it was not necessary to consider the validity of the patent when analyzing a settlement agreement involving a reverse payment.

Rule of Reason vs. Per Se Analysis

The lower court properly applied rule of reason analysis in reviewing the agreement, according to the appellate court. The existence of reverse payments did not render the agreement a per se antitrust violation, in the court's view.

The appellate court explained that rule of reason analysis involved a three-step process: (1) the plaintiff had the initial burden of showing that the challenged action had an actual adverse effect on competition as a whole in the relevant market; (2) if the plaintiff succeeded, then the burden shifted to the defendant to establish the procompetitive redeeming virtues of the action; and (3) if the defendant carried this burden, then the plaintiff had to show that the same procompetitive effect could be achieved through an alternative means that was less restrictive of competition.

Since the complaining purchasers failed to meet their burden under the first step of the analysis, it was not necessary to consider the second or third steps of the analysis, in the court's view.

Greater Scrutiny Sought

The complaining purchasers contended that greater scrutiny was required in light of recent precedent. They argued that the district court’s treatment of the agreement was not in line with that of the other circuits, the FTC, or the Solicitor General.

They cited the Sixth Circuit’s 2003 decision,In re Cardizem CD Antitrust Litigation, (2003-2 CCH Trade Cases ¶74,059), which upheld a summary judgment ruling that a reverse payment agreement was per se illegal. They also argued that the Eleventh Circuit in Valley Drug Co. v. Geneva Pharms., Inc. (2003-2 CCH Trade Cases ¶74,222) provided a more extensive analytical framework within which to review the settlement agreements.

In addition, the Federal Trade Commission purportedly advocates a rule of reason inquiry focusing on the amount of the payment and several other factors. The Solicitor General, they alleged, had suggested that “the strength of the patent as it appeared at the time at which the parties settled” should be considered in the analysis.

State Law Claims

The court also rejected claims against the drug maker for unlawfully monopolizing the ciprofloxacin market in violation of state antitrust laws by obtaining a patent through fraud on the PTO and enforcing the patent through sham litigation. Those claims were preempted by federal patent law, the court ruled.
The October 15 decision—In re Ciprofloxacin Hydrochloride Antitrust Litigation—appears at 2008-2 Trade Cases ¶76,336.

Medical Device Manufacturer’s Ads Not Proven False

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

A home health care provider had standing to sue under the Lanham Act as a competitor of a manufacturer of infrared lamps, but the care provider’s claims that the manufacturer falsely advertised its lamps were rejected by the federal district court in Indianapolis.

The care provider asserted that two statements made by the manufacturer were false: (1) that its infrared lamp was a treatment for peripheral neuropathy and (2) that the Food and Drug Administration had approved or cleared the device as a treatment for peripheral neuropathy.

Care Provider’s Standing to Sue

The manufacturer contended that the care provider lacked standing because it was an end-consumer of the manufacturer’s devices and thus could not suffer the competitive injury required for asserting a Lanham Act claim.

The care provider asserted a commercial injury on the theory that both parties competed for the same patient dollars for the treatment of peripheral neuropathy. Every sale of the manufacturer’s self-use lamp model to an individual based on the allegedly false advertising was said by the care provider to be a sale lost for its more-comprehensive range of in-home services for the relief of peripheral neuropathy symptoms.

The care provider was a competitor and therefore had Lanham Act standing, the court held.

FDA Clearance

The care provider cited no evidence that the alleged misrepresentation as to FDA clearance of the lamps for the treatment of peripheral neuropathy was made in commercial advertisements, the court found. The only evidence relating to this representation was that it was made personally from the manufacturer’ sales representative to the care provider’s personnel, which was not grounds for a Lanham Act claim.

The fact that the lamps’ FDA marketing clearance was limited to pain and circulation did not mean that the lamps were not a safe and effective treatment for peripheral neuropathy, according to the court.

“Treatment” Ad Claims

There was no dispute that the manufacturer promoted its lamp generally as a treatment for peripheral neuropathy.

The manufacturer contended that the “treatment” claim meant that the lamp provided relief from the symptoms of pain and numbness associated with peripheral neuropathy. The care provider contended that “treatment,” without further qualification, meant only that the lamp was a cure or treatment for the disease or disorder of peripheral neuropathy itself, not that it provided only symptomatic relief. The care provider maintained that because there is no cure or treatment for peripheral neuropathy, the manufacturer’s advertisements were false.

The care provider’s interpretation was too narrow. In light of the common definition and medical definition of the word “treatment” as including the providing of relief from symptoms and the evidence on the nature of peripheral neurology, the court found no genuine dispute on the question of whether the manufacturer’s “treatment” advertisements were false or misleading. Summary judgment rejecting the false advertising claims was granted.

The opinion in Nightingale Home Healthcare, Inc. v. Anodyne Therapy, LLC will be reported at CCH Advertising Law Guide ¶63,145.

Forum on Franchising Attracts Near-Record Crowd to Thirty-First Annual Meeting

This posting was written by John W. Arden.

Despite the recent economic downturn, a near-record crowd attended the 31st annual meeting of the American Bar Association Forum on Franchising on October 15-17 in Austin, Texas.

The 836 registered attendees made up the second largest group in the history of the Forum on Franchising, ranking only behind last year's attendance of 850, according to the group.

In welcoming remarks, program co-chair Joseph J. Fittante, Jr. of Larkin Hoffman Daly & Lindgren noted the growth of the membership of the group from 181 in 1978 to 2,187 in 2008. He called this year's attendance a "minor miracle" in bad economic times.

During his annual address to members, Forum Chair Edward Wood Dunham of Wiggin and Dana said the "State of the Forum" was "pretty great." He called the attendance figure "an amazing number" and noted that the percentage of participation (more than 38% of membership) is "unprecedented in ABA terms."

Other highlights referenced by Dunham included the continued excellence of the Forum publications, the fact that the group's finances are in "great shape" due in large part to the efforts of Finace Chair Charles Modell, and the new availability of the Franchise Law Journal and Franchise Lawyer newsletter by e-mail.

In addition to paying tribute to meeting co-chairs Fittante and Peter J. Klarfeld of Wiley Rein LLP as well as ABA Forum Director Kelly A. Rodenberg, Dunham recognized the contributions of several Forum officers in their last year in office.

These officers included Deborah S.Coldwell of Hayes and Boone, editor-in-chief of the Franchise Law Journal; Lawrence M. Weinberg of Cassels Brock & Blackwell, Director of the International Franchise and Distribution Division; Karen Satterlee of Starbucks Coffee, Director of the Corporate Counsel Division; David Kaufmann of Kaufmann Feiner Yamin Gilden & Robbins, Governing Comittee member; and Richard L. Kolman of Mail Boxes Etc., technology officer and Government Committee member.

The assembled membership elected Ronald K. Garner of Dady & Garner as incoming Chair for 2009 through 2011; Harris J. Chernow for another term on the Governing Committee for 2009 through 2012; Deborah Coldwell as a new member of the Governing Committee for 2009 through 2012; and Karen Satterlee as new member of the Governing Committee for 2009 through 2012.

The meeting program featured a plenary session on "Making the Pen Mightier than the Sword," by Bryan A. Garner, coauthor with Justice Antonin Scalia of the recent book Making Your Case: The Art of Persuading Judges, and the annual update of judicial and legal developments by David A. Beyer and Natalma M. McKnew.

The Forum will hold its 32nd annual meeting on October 14-16, 2009 in Toronto. Further information about the ABA Forum on Franchising is available from the group's web site.

Chemical Companies May Be Liable under RICO for Cleanup Delay

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

Property owners could proceed with RICO claims against the corporate owners and operators of a chemical manufacturing plant that allegedly disposed of solid and liquid waste (DDTr pesticides) in a manner that contaminated local properties, the federal district court in Mobile, Alabama, has ruled. The companies allegedly conspired with various entities and their environmental contractors in an effort to “defraud governmental agencies and the public at large” by delaying or ignoring the cleanup of environmental hazards.

Among other things, representatives of the companies allegedly met in a hotel to “conspire to manipulate data” from their environmental risk assessments and to "form a covenant to defraud the public and governmental entities" regarding the presence and degree of environmental contamination. According to the property owners, the scheme was furthered through deceptive communications to government agencies. As a result, the companies allegedly saved millions of dollars, to the detriment of the public and interstate commerce, through machinations that were devised to convince the government and the community to delay or do nothing about the contamination. Although the companies argued that the property owners failed to allege their claims with sufficient particularity, the companies never explained how the allegations failed to satisfy the heightened pleading standard required by Rule 9(b) of the Federal Rules of Civil Procedure.

Predicate Acts

The property owners sufficiently identified two acts of mail fraud: (1) a letter that was sent to a non-party conspirator, with a request that the recipient forward its environmental risk assessments, and with an acknowledgment that the defendant would reciprocate; and (2) a letter that was sent to a company that prepared a draft endangerment assessment report for the defendant. The second letter suggested that the consultant who prepared the report should be fired--and another contractor hired--because the defendant disagreed with the report. These assertions of specific facts were sufficient to allege mail fraud as a predicate act, the court held.

Causation

The property owners sufficiently alleged that "confirmed DDTr contamination" from the chemical plant caused their property values to decline. Their theory that the defendants had effectively delayed cleanup of the contaminated sites--and that those delays allowed the contamination to continue to seep onto the owners' property, thereby injuring the owners by impairing their property values--were legally sufficient to satisfy RICO's direct causation requirement, the court ruled.

The September 10, 2008, decision in Abrams v. CIBA Specialty Chemicals Corp. (S.D. Ala.), Civil Action #08-0068-WS-B, will appear at CCH RICO Business Disputes Guide ¶11,564.

Gift Card Purchaser Brings Consumer Fraud, Truth-in-Notice Suit

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

A gift card purchaser has filed a class action complaint asserting that Foot Locker, Inc. violated New Jersey law by selling gift cards providing for the charge of a “dormancy fee” after 12 consecutive months of non-use. The purchaser claims that Foot Locker violated the gift certificate statute contained within the New Jersey Consumer Fraud Act and the state’s Truth-in-Consumer Contract, Warranty and Notice Act (TCCWNA).

The purchaser seeks actual damages, statutory damages, and injunctive relief on behalf of a putative class of consumers who purchased Foot Locker gift cards in New Jersey on or after April 4, 2008.

Foot Locker has removed the case from state court to the federal district court in Trenton (docket no. 3:08-cv-05003-AET-TJB). Invoking federal jurisdiction under the Class Action Fairness Act, Foot Locker alleges that the amount in controversy exceeds $5,000,000. In a declaration to the court, the company’s gift cards manager has stated, based on a review of business records, that since April 4, 2006, Foot Locker has sold more than 50,000 gift cards in New Jersey.

Gift Certificate Statute

The New Jersey gift certificate statute provides that no dormancy fee may be charged against a gift card within 24 months immediately following the date of sale or following the most recent activity or transaction in which the card was used.

The statute also imposes disclosure requirements. These include a notice of any expiration date or dormancy fee printed in at least 10-point font, on the gift card, sales receipt, or package, along with a telephone number which the consumer may call, for information concerning any expiration date or dormancy fee.

The purchaser alleges that Foot Locker violated the statutory dormancy fee limitation by selling a $25 gift card stating that a service fee of $1.50 would be deducted from the remaining card balance after 12 consecutive months of non-use. The purchaser further alleges that Footlocker’s disclosure of the dormancy fee was printed in a smaller than the required 10-point type size and that Footlocker failed to meet the consumer information telephone number disclosure requirement.

Truth-in-Notice Statute

TCCWNA prohibits a seller from entering into a written consumer contract or giving a written consumer notice containing a provision that violates a clearly established legal right of a consumer under state or federal law. The statute also provides that no consumer contract or notice may state that any of its provisions are void or unenforceable without specifying which provisions are void or unenforceable in New Jersey.

The purchaser claims that each of Foot Locker’s violations of the gift card statute are violations of TCCWNA. In addition, the purchaser maintains that a disclaimer stating “No variance . . . allowed except where legally required” violated the statute.

TCCWNA provides that a violator is liable to the aggrieved consumer for a civil penalty of not less than $100, actual damages, or both, at the election of the consumer, together with reasonable attorney’s fees and court costs.

Detailed information and links to the texts of gift certificate and gift card statutes in more than 35 states can be accessed by subscribers to the Internet version of the CCH Advertising Law Guide through the interactive Advertising Law Guide Gift Certificate Topics Smart Chart. Information on 500 state laws in ten categories with links to the texts is available in the Advertising Law Guide State Laws Quick Reference Smart Charts.

ISP's Antitrust Claims Against Business Software Company Properly Rejected

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

Antitrust claims brought by an independent service provider (ISP) against a business software company with which the ISP had entered into various consulting service agreements were properly dismissed, the U.S. Court of Appeals in San Francisco has ruled in a not-for-publication opinion.

Dismissal of the ISP's Sherman, Clayton, California Cartwright and Lanham Act claims (2005-2 Trade Cases ¶75,001) was affirmed.

The ISP's allegations were detailed in an earlier lower court ruling (2006-1 Trade Cases ¶75,292). Between 1996 and 2001, the ISP performed implementation and customization of the software company's products for customer sites. It allegedly recruited and trained engineers and technicians to work exclusively in customizing the defendant's software to meet the specific needs of manufacturing and distribution companies.

The ISP contended that the software company misused its market power and drove smaller competitors out of the market for the implementation and customization of the defendant's software products.

Power to Eliminate Competition in Market

Dismissal of the ISP's monopolization claims brought under Sec. 2 of the Sherman Act and under the California Cartwright Act was proper because the ISP failed to allege facts indicating that the software company had power to eliminate competition within a relevant market, the court ruled. Further, the ISP failed to plead facts that the software company had a "dangerous probability of success" in its attempt to control the relevant market or any intent to control prices.

Tying Arrangements

Tying claims under Clayton Act, Sec. 3 and the California Cartwright Act were also properly rejected. The ISP contended that the software company tied the sale of its software and/or software upgrades upon a buyer's purchase of its consulting or implementation services.

The ISP did not satisfy the elements of tying as per se illegal because it did not show that the software company had appreciable economic power to coerce acceptance of the tied product. The ISP also did not meet its initial burden to prove tying under a "rule of reason" analysis because there was no showing that the alleged tying restrained trade in the relevant market to impair competition.

Trade Disparagement

The appellate court upheld dismissal of the ISP's claims that the software company engaged in trade disparagement in violation of Sec. 43 of the Lanham Act. The ISP did not show that the software company made a false statement of fact about the ISP's services or its own services.

The October 7 not-for-publication opinion in nSight, Inc. v. PeopleSoft, Inc. appears at 2008-2 Trade Cases ¶76,320.

No Private Action under Telephone Consumer Protection Act for Prerecorded Political Calls

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

An individual could not pursue claims under the Telephone Consumer Protection Act (TCPA) against candidates and promoters of candidates for public office for making, or causing to be made, prerecorded political campaign calls soliciting votes that failed to contain the telephone number of the business or entity responsible for making the calls, a Maryland state appellate court has determined.

Because the calls were political in nature, they were not prohibited by Sec. 227(b) of the TCPA, which provided a private right of action to recipients of unsolicited, prerecorded commercial telephone calls., according to the court.

Technical and Procedural Standards

Section 227(d) of the TCPA prohibited phone calls that did not comply with certain technical and procedural standards for automatic telephone dialing systems. Those standards were detailed in underlying regulations that required all prerecorded telephone message to clearly state the identity of the entity responsible for initiating the call, as well as the entity's telephone number. There was no private right of action under Sec. 227(d), the court said.

Preemption

The individual's Maryland Telephone Consumer Protection Act claims were preempted by the TCPA, the court held. Section 227(e) of the TCPA provided that states may create their own more-restrictive standards than the federal statute, except with regard to the technical and procedural standards set by Sec. 227(d).

The September 15 decision, Worsham v. Ehrlich, appears at CCH Privacy Law in Marketing ¶60,250.

Focus on Franchising

This posting was written by John W. Arden.

News and notes on franchising and distribution topics:

 The tightening of the credit market is having an adverse effect on franchising, impacting current franchisees wanting to remodel their existing locations and prospective franchisees wanting to open new outlets, according to an article (“Credit Crunch Squeezes Franchisees”) in the September 29 edition of the Wall Street Journal. GE Capital is becoming more stringent in pricing and issuing loans for new franchisees and has “essentially put a hold on new loans.” Bank of America has tightened its lending to such an extent that McDonald’s Corp. told its franchisees to seek other lenders for immediate borrowing. “While clearly other resources exist for franchise funding operation, the recent pullbacks of two of the main lenders in the arena are disconcerting,” restaurant industry analyst Sharon Zackfia said.

 In a September 26 presentation, “2009 Franchise Economic Forecast” Darrell Johnson, President of FRANdata, reviewed the current state of franchising in 2008 and made general economic and franchise forecasts for next year. Johnson expressed the opinion that economic stabilization would not occur until at least 2010, that an unprecedented de-leveraging was under way, and that the crisis of credit is becoming a crisis of confidence. He predicted that some franchise sectors will stay hot, new brands will grow at a slower pace, an increasing number of foreign brands will enter the United States, and brand acquisitions will continue. Franchisees demonstrating better performance will have better access to capital, opportunities to buy underperforming units, and opportunities to expand into other brands. On the other hand, marginally-performing franchisees will exit in greater numbers, which will lead to increased litigation. On the upside, rising unemployment usually stimulates franchise development, and younger people are coming on to franchising. In order to gain access to capital, franchisors will need to show financial strength, management experience, operational performance, system performance, and section and industry performance. Johnson struck a positive note in concluding that franchising will grow in 2009. He pointed out that the sector has faced many challenges in the past 20 years, including the S&L crisis and junk bond collapse in the late 1980s, the collapse of long term capital management in 1998, the terrorist attacks of 9/11, and the WorldComm and Enron affairs of 2002. “This crisis is much deeper, but will pass.”

 How franchisors should deal with deficient franchise performance short of outright termination is the subject of a recent “Franchising” column by Rupert M. Barkoff, appearing in the September 30 edition of the New York Law Journal. In the column (“Kinder, Gentler Alternatives to Franchise Terminations”), Barkoff creates a matrix of sorts to help analyze how to treat defaulting franchisees. There are two variables of the matrix—the “character of the franchisee” and the “nature of the breach.” In such an inquiry, there are three types of franchisees—the “good citizen,” the “misguided franchisee,” and the “rogue franchisee.” The nature of the franchisee’s breach can also be divided into three categories—financial, operational, and matters of citizenship.

The first “box” in the matrix concerns the “rogue franchisee” and any type of default. This franchisee is no good for the system, and rehabilitation of this type of franchisee is rare. “In deciding whether to grant clemency in any situation involving a rogue franchisee, the franchisor must not only be willing to forgive, but consider whether the efforts that may be needed to reform the villain justifies the commitment of the appropriate level of resources, when compared to the benefits of applying these resources to other needs of the franchise system.”

The "misguided franchisee" is one who need strong leadership and must be pointed in the right direction. In the case of the “misguided franchisee” who has committed a financial default, “the key step is determining why the franchisee does not have the money to pay his debts.” If the problem is incurable because the franchise does not have cash flow, “it will not really matter what solution is tried, other than debt forgiveness, or injections of new capital.” If the cash flow problem is curable, the options are (1) a permanent reduction in royalty rate or minimum payment; (2) temporary royalty relief; (3) supplemental marketing dollars; and (4) penalties and fines.

How to treat the "misguided franchisee" who has committed operational defaults is a more difficult question, since the defaults are less objectively identifiable. “Absent open defiance, franchisors should be willing to work with franchisees to eliminate operational defaults . . . termination would be an extreme remedy.” Citizenship defaults—ranging from failure to file reports on time to failure to attend conventions and creating disharmony among franchisees—can be difficult to identify and to solve, according to Barkoff. In most of these cases, termination would not be appropriate. A little more attention and perhaps an incentive, like a possible additional franchise, might lead to better behavior.

The question of handling “the good franchisee” is not as problematic. His failures could arise from having the wrong location. The solution might be to close the underperforming unit and help the franchisee move in order to keep him in the system. According to Barkoff, “good franchisees are hard to come by, and the cost of recruiting a new one may well exceed the cost of helping the failed, but good-citizen franchisee solve his problems.”

Wells Fargo/Wachovia Combination Receives Premerger Clearance

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

Wells Fargo & Company’s acquisition of Wachovia Corporation will not be challenged by the federal antitrust agencies.

On October 9, the parties received early termination of the report-and-wait period under the Hart-Scott-Rodino Act. Wells Fargo announced the same day that it was proceeding with the combination, after Citigroup, Inc. ended negotiations with Wachovia.

Wells Fargo sought expedited approval of the transaction from the Federal Reserve Board. The Federal Reserve Board said in an October 9 statement that it would “immediately begin consideration of the filings.” In an October 12 press release, the Board announced its approval of the transaction.

Wells Fargo and Wachovia announced on October 3 that they had entered into a definitive merger agreement for the companies, including all of Wachovia’s banking operations in a whole company transaction. The parties said that the transaction required no financial assistance from the Federal Deposit Insurance Corporation (FDIC) or any other government agency.

Citigroup Offer

The Wells Fargo/Wachovia deal came while a Citigroup offer for the ailing Charlotte, North Carolina-based bank was pending.

In an October 3 news release, Citigroup called Wachovia's agreement with Wells Fargo a clear breach of their exclusivity agreement, which prohibited Wachovia from entering into a transaction with another party.

On September 29, Citigroup had announced that it reached an agreement–in-principle to acquire all of the banking subsidiaries of Wachovia. Citigroup said that it intended to acquire more than $700 billion of assets of Wachovia's banking subsidiaries, and related liabilities and that the FDIC would provide loss protection in connection with approximately $312 billion of mortgage-related and other Wachovia assets. The deal was “supported by all of the federal banking agencies and the Secretary of the Treasury, after consultation with the President,” according to Citigroup.

Citigroup has said that it will not ask that the Wells Fargo-Wachovia merger be enjoined. However, it plans to pursue claims of breach of contract and for tortious interference with contract against Wachovia and Wells Fargo and their officers, directors, advisors.

Data Brokers Settle Charges of Selling Private Phone Records

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

Web-based “data broker” businesses and their principals have settled charges by the Texas Attorney General that they violated the Texas Deceptive Trade Practices Act by fraudulently marketing consumers’ private telephone records, it was announced on September 25.

Under an agreed final judgment, the companies—USA Skiptrace, AMS Research Services, Inc., and Worldwide Investigations, Inc.—and their principals are permanently prohibited from obtaining and selling consumers’ private telephone records.

According to Texas Attorney General Greg Abbott, USA Skiptrace, for a fee of $125, would obtain a person’s phone record history, including the number of calls made and received, the duration of calls, dates and times, and other private information.

The purchaser of such information was required to fill out a form on USA Skiptrace’s website and to pay for the service with a credit card. The purchaser provided the cell phone number, name, and address of the person whose phone records were being sought. AMS Research Services Inc. then notified the purchaser via e-mail that the order would be fulfilled between one and six business days.

“The sale of the personal cell phone information is an outrageous invasion of personal privacy that will not be tolerated in Texas,” Abbott said. “Today’s judgment permanently bans these defendants from peddling customer phone records without prior consent.”

USA Skiptrace was enjoined from representing that it can obtain private phone records without first obtaining a lawfully-issued subpoena or receiving prior consent from the individual or company.

The defendants were also barred from employing “pretexting” practices to obtain personal phone information, such as posing as the person whose records are being requested or claiming to speak for that person as his or her representative. The corporate defendants were ordered to pay $150,000 in civil penalties, with their principals also responsible for a separate fine of $2,500.

A news release on the case appears here on the Texas Attorney General’s website. The agreed final judgment and permanent injunction in State of Texas v. Strange appears at CCH Privacy Law in Marketing ¶60,251.

iPhone Purchasers’ Monopoly Claims Withstand Apple’s Motion to Dismiss

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

Last week, the federal district court in San Jose, California, denied Apple, Inc.’s motion to dismiss antitrust claims brought by nine consumers from California, Washington, and New York who purchased the iPhone. The court ruled that the consumers sufficiently alleged Sherman Act, Sec. 2 claims against Apple and AT&T Mobility, LLC (ATTM)—the exclusive cellular phone service provider to iPhone customers. The plaintiffs seek to represent a nationwide class.

Each plaintiff purchased one or more iPhones and each executed a two-year contract with ATTM. Unbeknownst to the purchasers, Apple and ATTM had entered into a five-year agreement, under which ATTM would serve as the only authorized provider of wireless voice and data services for iPhones in the United States. As a result, customers allegedly would be forced to renew with ATTM, despite initially being required to agree to only a two-year contract.

The complaining consumers also alleged that Apple issued an “upgraded” version of the iPhone operating software to retaliate against purchasers who installed unapproved third-party applications or used the SIM cards of wireless providers other than ATTM.

Apple attempted to disclaim warranty liability for any damage to consumers’ iPhones as a result of installing the new software. The iPhones of some consumers who installed the software were purportedly damaged. Based on this conduct, the consumers alleged violations of the Magnuson-Moss Warranty Act (MMWA).

Relevant Market, Market Power

The court ruled that the iPhone purchasers sufficiently alleged two relevant markets: (1) an aftermarket in iPhone voice and data services and (2) an aftermarket in applications for the iPhone. A legally cognizable aftermarket in a single brand’s products can exist, even if that market is created by a contractual relationship, as long as the aftermarket was “wholly dependent” on the primary market, according to the court. The consumers alleged aftermarkets that would not have existed without the primary market for iPhones. Thus, they were “wholly derivative from and dependant on the primary market.”

The consumers alleged that they were locked into using the provider after the expiration of their initial two-year service contracts by the undisclosed agreement between ATTM and Apple. Apple unsuccessfully argued that there was no aftermarket for iPhone applications because (1) Apple did not sell or make any add-on applications and (2) the array of differing applications for the iPhone could not possibly make up a single relevant market.

The iPhone purchasers also sufficiently alleged market power and monopolization in these aftermarkets. A claim of market power could not arise solely from contractual rights that consumers knowingly and voluntarily gave to the defendant. However, there was a dispute as to whether the consumers knowingly placed Apple in a monopoly position. Such a dispute was better suited for resolution at a later stage of the litigation, in the court’s view.

Arbitration Agreements

An arbitration agreement did not require the iPhone consumers to arbitrate their antitrust, Magnuson-Moss Warranty Act, and consumer protection claims, the court ruled. The nine named plaintiffs were residents of California, Washington, and New York, and they successfully argued that the arbitration agreement was procedurally and substantively unconscionable and therefore unenforceable under California, Washington, and New York law.

The customers did not see the arbitration agreement until they purchased their new iPhone, connected to the Internet, and then were presented with the terms of service.

Moreover, the Federal Arbitration Act did not preempt application of state unconscionability law to the Arbitration Agreement. Application of general state unconscionability laws to the arbitration agreement neither conflicted with an express federal law, nor stood as an obstacle to the accomplishment of a federal objective to encourage arbitration, according to the court.

Magnuson-Moss Warranty Act Claim

The iPhone purchasers could proceed with claims under the MMWA against Apple for unlawful conditioning of the iPhone warranty on consumers’ use, in connection with the iPhone, of products and services “approved” by Apple. Apple allegedly refused to honor the warranties of customers who used iPhone applications and cellular service not approved by Apple.

The fact that Apple issued a press release in advance of releasing the “upgraded” version of the iPhone operating software that disclaimed warranty liability for damage resulting from installation of the new version was “of no moment to the permissibility of Plaintiffs’ claims” because such a later disclaimer ran afoul of the MMWA's single document rule. The MMWA requires warrantors to disclose warranty terms in a single document, the court explained.

The October 1, 2008, decision, In re Apple & AT&TM Antitrust Litigation, No. C 07-05152 JW, will appear in CCH Trade Regulation Reporter.

High Court Hears Argument in “Light” Cigarette Case

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

The U.S. Supreme Court heard argument on October 6 on the question of whether smokers can sue a tobacco company under a state law for deceptive advertising or whether the suit should be preempted by federal law. Smokers alleged that a tobacco company made fraudulent misrepresentations in violation of the Maine Unfair Trade Practices Act by advertising and promoting cigarette brands as “light” and having “Lowered Tar and Nicotine.”

Preemption of State Law

The question presented for review, according to the petition, was whether state law challenges to FTC-authorized statements regarding tar and nicotine yields in cigarette advertising are expressly or impliedly preempted by federal law.

At issue is a decision of the U.S. Court of Appeals in Boston (2007-2 Trade Cases ¶75,877), rejecting the tobacco company's contentions that the smokers' state law claims were impliedly preempted by the FTC's oversight of cigarette advertising and barred by the Maine statute's exemption for actions otherwise permitted under laws as administered by any regulatory board or officer acting under the statutory authority of the United States. The company argued that the Federal Cigarette Labeling and Advertising Act bars such suits brought under state laws.

Uniform Advertising Standard

Arguing on behalf of the tobacco company, former U.S. Solicitor General Theodore Olson said the federal law is in place to ensure a uniform advertising standard. Different requirements by the various states might cause “diverse, confusing advertising,” Olson told the court. Congress clearly wanted “one uniform source of regulation of advertising of cigarettes with respect to smoking and health.”

Justice David Souter questioned Olson’s claim, saying that it is well-accepted that the FTC’s regulation of deceptive advertising does not exclude state regulation. Justice Stephen Breyer also noted that Congress has not by tradition set aside state laws in the area of false advertising.

Appearing on behalf of the government, Assistant Solicitor General Douglas Halward-Driemier argued in favor of state authority—in addition to the authority of the FTC—to regulate deceptive claims.

David C. Frederick, attorney for the smokers who brought the suit, challenged Olson’s position that the FTC has sole regulatory authority to regulate advertising with respect to smoking and health. He noted that studies have found there to be no difference in the amount of tar and nicotine inhaled by smokers of light cigarettes and smokers of regular cigarettes.

Duty Not to Deceive

“Our contention here is that a generalized duty not to deceive is not a requirement based on smoking and health,” Frederick asserted. “It is based on a duty not to deceive.”

Chief Justice John Roberts and Justice Antonin Scalia were among the justices who questioned Frederick’s position.

Supreme Court Opens New Term by Handling Antitrust, Trade Regulation Matters

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter, and John W. Arden.

On the opening day of its 2008-2009 term, the U.S. Supreme Court denied review of two federal antitrust cases, vacated a restrictive covenant ruling under California law, and heard oral arguments on a case questioning whether smokers’ state unfair trade practices claims against the advertising of cigarette manufacturer Philip Morris were impliedly preempted by the FTC’s oversight of advertising.

Petitions for Review

The Supreme Court denied petitions for review in two antitrust cases.

Left standing by the Court is a decision by the U.S. Court of Appeals in New York City (2007-2 Trade Cases ¶75,983), rejecting a travel agency’s claim that an air carrier violated state and federal antitrust laws by terminating the parties’ ticket sales agreement. The appeals court ruled in an unpublished opinion that the agency failed to present sufficient evidence that the carrier’s conduct had been part of a conspiracy. The petition is Tokarz v. Lot Polish Airlines, Docket No. 07-1514, cert. filed June 2, 2008, review denied October 6, 2008.

The Court declined to review a decision of the U.S. Court of Appeals in Philadelphia (2008-1 Trade Cases ¶76,052), holding that a trade show contractor lacked standing to pursue claims that a contract between a convention center management company and a labor union violated federal antitrust law. A petition for review asked whether the standing analysis for labor antitrust cases differed from the analysis applied in non-labor law cases. The petition for review is Casper v. SMG, Docket No. 07-1603, cert. filed June 23, 2008, review denied October 6, 2008.

Noncompete Agreements

It further vacated a decision of the U.S. Court of Appeals in San Francisco (2008-1 Trade Cases ¶76,129), holding that an arbitrator manifestly disregarded California law by enforcing an in-term restrictive covenant in a trademark license agreement. The appellate court had reasoned that the arbitrator’s ruling foreclosed competition in a substantial share of the comedy club business. The decision was vacated and the matter was remanded in light of Hall Street Assoc. v. Mattel, Inc. (U.S. Sup. Ct. 2008), 128 S.Ct. 1396. The petition is Comedy Club, Inc. v. Improv West Associates, Docket No. 07-1334.

Preemption

Argument was heard on October 6 regarding whether smokers can pursue a suit alleging that a tobacco company made fraudulent misrepresentations in violation of the Maine Unfair Trade Practices Act by advertising and promoting cigarette brands as “light” and having “Lowered Tar and Nicotine.” The question presented for review, according to the petition, is whether state law challenges to FTC-authorized statements regarding tart and nicotine yields in cigarette advertising are expressly or impliedly preempted by federal law.

At issue was a decision of the U.S. Court of Appeals in Boston (2007-2 Trade Cases ¶75,877), rejecting the tobacco company’s contentions that the smokers’ state law claims were impliedly preempted by the FTC’s oversight of cigarette advertising and barred by the Maine statute’s exemption for actions otherwise permitted under laws as administered by any regulatory board or officer acting under the statutory authority of the United States.

The decision is Philip Morris USA Inc. and Altria Group, Inc. v. Good, Docket 07-562, cert filed October 26, 2007, cert. granted January 18, 2008.

Price Fixing Claims Against Aspartame Makers Barred as Untimely

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

Claims on behalf of a putative class of purchasers of the artificial sweetener Aspartame—alleging that producers had engaged in a worldwide, horizontal price fixing and market allocation conspiracy—were barred by the Sherman Act's four-year statute of limitations, the federal district court in Philadelphia has ruled.

Complaints were filed in 2006 on behalf of a class of all persons and entities that had purchased Aspartame since 1992. However, the named plaintiffs had not made any purchases of Aspartame from any of the defendants after 1999. Thus, a motion for summary judgment in favor of the producers was granted.

Tolling of Statutory Period

The purchasers were not entitled to sufficient tolling of the accrual of their cause of action, pursuant to the doctrine of fraudulent concealment, which would have brought their claims within the limitations period, the court held.
Although their last purchases of the sweetener occurred well more than four years before they filed suit and they should have been aware of the facts supporting their claims, they took no steps to investigate their potential claims during the limitations period, the court noted. Thus, the purchasers failed to exercise due diligence.

Failure to Investigate Claims

While the record contained no red flag that provided them with unequivocal proof of the existence of their claims, it did contain numerous warnings that collectively revealed significant barriers to entry and lack of competition in the market for the sweetener—including (1) prices in 1994 and 1995 that were described by one plaintiff as “out of sight,” (2) complaints related to the sale and marketing of Aspartame abroad in 1993, and (3) a Harvard Business School study of those complaints that was released in 1993 and again in revised form in 1995 and 2000.

In light of these warnings, the court said, it was unreasonable for the purchasers to have taken no steps or actions to investigate their claims. The purchasers likewise failed to establish that they could not have discovered the alleged antitrust violations through the exercise of reasonable diligence, the court concluded.

The decision is In re Aspartame Antitrust Litigation, 2008-2 Trade Cases ¶76,311.

DOJ, EC Antitrust Chiefs Provide Diverse Views on Unilateral Conduct by Dominant Firms

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

Antitrust enforcement chiefs from the U.S. Department of Justice and the European Commission expressed differing approaches to dealing with unilateral conduct by dominant firms at two antitrust conferences last week.

Antitrust Division’s Views

Just two weeks after the Department of Justice issued its report on the antitrust issues raised by single-firm conduct, Thomas O. Barnett, Assistant Attorney General in charge of the Department of Justice Antitrust Division, explained the U.S. policy trend toward a “mid-channel course for treating unilateral conduct.”

Barnett told attendees of the Georgetown University Law Center’s Global Antitrust Enforcement Symposium in Washington, D.C. on September 23 that Sherman Act, Section 2 policy must navigate between “the formalism of rigid prohibitions and the unstructured, open-ended vortex of a pure effects-based analysis.”

The speech, entitled “Navigating Scylla and Charybdis: Three Stages in the Journey to Effective Section 2 Enforcement,” appears in full text at CCH Trade Regulation Reporter ¶50,232.

Barnet said that the Antitrust Division’s goal is “to enforce Section 2 in a manner that increases overall efficiency and, thereby, consumer welfare.” Early approaches to antitrust enforcement against single-firm conduct often failed to maximize consumer welfare, according to Barnett, where government and private plaintiffs attacked firms “for engaging in behavior that, although perhaps aggressive, nonetheless was a beneficial part of the competitive process.”

Barnett also cautioned against relying on a highly fact-intensive, effects-based analysis to address unilateral conduct under the antitrust laws. He warned of the costs and burdens associated with such an approach. “We should seek liability standards that are based on clear and objective criteria, that effectively identify conduct likely to harm the competitive process, and that take into account institutional limitations and costs of administration,” Barnett said.

European Commission Approach

Neelie Kroes, European Commissioner for Competition Policy, offered the European Commission’s approach to unilateral exclusionary conduct of dominant firms during Fordham Law School’s 35th Annual Conference on International Antitrust Law and Policy.

On September 25, two days’ after Barnett’s speech at Georgetown, Kroes announced that the European Commission (EC) was planning to release a report offering guidance on enforcement of Article 82 of the EC Treaty to exclusionary conduct by dominant firms. It is unlikely that the EC report will closely resemble the recent U.S. Justice Department’s report on single-firm conduct. Kroes said that the Justice Department report gave “food for thought” and that, together with the responses from the FTC commissioners, the documents provided a vital opportunity for debate. She noted, however, that “there is a wide range of views on these issues.”

There is agreement among U.S. and EC antitrust enforcers that the protection of consumer welfare is the goal of competition policy. Kroes pointed out a greater concern in the United States “about over-enforcement, about false positives, than in Europe.” She added that “[i]n Europe, we are worried equally about over-enforcement and under-enforcement. Both false positives and false negatives harm consumers.”

The result has been more unilateral conduct cases in Europe. Cases based exclusively on Article 82 make up one quarter of the Commission’s antitrust cases, according to Kroes. Cases involving both Articles 81 & 82 make up between one-third and one-half of recent cases.

Significant Agreement

Barnett addressed Fordham attendees at a later session and suggested that there was significant agreement regarding unilateral conduct on both sides of the Atlantic. He noted the positive shift to a more effects-based analysis in Europe and the share goal of protection of consumer welfare. He did point out that, despite convergence in other areas of competition law (such as cartel and merger enforcement), single-firm conduct was an area where most of the progress was left to be made.