First Amendment Protects Video Game Parody from California Unfair Competition Law Claim

This posting was written by Jody Coultas, Editor of CCH State Unfair Trade Practices Law.

A strip club operator did not state a California Unfair Competition Law (UCL) claim against the maker of Grand Theft Auto: San Andreas, a video game that featured a cartoon parody of the club, according to the Ninth U.S. Circuit Court of Appeals in San Francisco.

The video game mimicked a Los Angeles neighborhood, complete with variations on the business names and architecture located in that neighborhood, including the club's logo and trade dress.

Artistic Relevance, Misleading of Consumer

The video game company successfully argued that the First Amendment protected its use of the cartoon rendering of the L.A. club. An artist's use of a trademark violated the unfair competition law only where the use of the mark had no artistic relevance whatsoever, or where the use explicitly misled the consumer as to the source or content of the work, according to the court.

In this case, the video game company's artistic goal was to create a cartoon parody of East Los Angeles; thus, creating a strip club in the game with the same look and feel as the actual strip club had at least some artistic relevance.

Although the strip club argued that the video game explicitly misled consumers as to the source of the work, the court found that no reasonable consumer would confuse the strip club in the game with the actual strip club.

Threat of Confusion

In enacting the UCL, the legislature sought to avoid confusion in the marketplace about the origins and sponsorship of products. Here, the court concluded that the strip club in the game was merely incidental to Grand Theft Auto's overall story line and the actual setting in the game was fairly generic. Besides offering a form of low-brow entertainment, the video game and strip club had nothing in common and Grand Theft Auto: San Andreas posed no threat of customer confusion, concluded the court.

Trademark, Trade Dress Claims

The strip club operator’s trademark infringement and trade dress claims were rejected on findings that the video game maker’s use of the strip club’s trademark and trade dress bore some artistic relevance to the game and did not explicitly mislead consumers as to the source or content of the game. The buying public would not reasonably believe that the club operator produced the game, or the game maker operated the club, according the court.

The November 5 decision is E.S.S. Entertainment 2000, Inc. v. Rock Star Videos, Inc., CCH State Unfair Trade Practices ¶31,688, CCH Trademark Law Guide ¶61,327,and CCH Guide to Computer Law ¶49,625.

Failure to Meet Construction Deadlines Was Cause for Termination of Dealership

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

A motor vehicle manufacturer had "good cause" under the meaning of the Massachusetts motor vehicle dealership law to terminate a dealership for its failure to meet the interim facility construction deadlines in their letter of intent, the U.S. Court of Appeals in Boston has held. An earlier ruling by a federal district court (CCH Business Franchise Guide ¶13,867), was affirmed.

Under the parties' letter of intent, if the dealer met certain benchmarks, it would receive a temporary dealership agreement that would terminate if the dealer did not timely construct a new facility.

The dealer met the first of the benchmarks in the letter of intent and received a temporary dealership agreement. However, it failed to meet subsequent deadlines and never constructed the new facility. Based on this failure, the manufacturer subsequently terminated the dealership. The dealer brought suit, contesting the validity of the termination and seeking damages and injunctive relief.

Statutory Cause for Termination

The manufacturer demonstrated good cause for termination under two sections of the Massachusetts motor vehicle dealership law—Mass. Gen. Laws ch. 93B §5(h) and (j): (1) a section specifying that good cause existed for material breach of a facility requirement; and (2) a section listing six specific factors to be considered in a determination of good cause, including the amount of business transacted by the dealer and the public welfare, the court decided.

The dealer's argument that its failure to perform was excused by the manufacturer's failure to approve the dealer's preliminary construction plans in writing was without merit. The owner of the dealer admitted at a deposition that the plans did come back approved by the manufacturer and that the dealer's failure to perform was due to the owner's "lost focus" rather than the manufacturer's failure to approve the plans.

Bad Faith

The dealer’s claim that the manufacturer terminated the agreement in bad faith—in violation of the dealership law, Mass. Gen. Laws ch. 93B§5(m)—was without merit. The dealer failed to demonstrate any bad faith, the court held. The manufacturer merely enforced the terms of the parties’ letter of intent.

Although the dealer might have wished to change the terms of that agreement due to changed market conditions, the parties did not do so. The dealer law was not meant to insulate dealers “from the ordinary flux of pressure and striving that is part of a free economy,” according to the court.

Opportunity to Cure

A further claim that the manufacturer failed to offer the dealer an opportunity to cure its breaches of the letter of intent prior to termination—as required by the dealer law, Mass. Gen. Laws ch. 93B§5(h)—was rejected by the court. The undisputed facts showed that the manufacturer repeatedly offer the dealer reasonable opportunities to cure. Indeed, the evidence demonstrated that the dealer never complained of a lack of opportunity to cure at the time of the termination.

The November 7 decision is Wagner and Wagner Auto Sales, Inc. v. Land Rover North America, Inc., CCH Business Franchise Guide ¶14,014.

No Rehearing of Appellate Decision in Whole Foods Merger Case

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

Whole Foods Market, Inc. on November 21 was denied rehearing en banc of a federal appellate court’s decision that the FTC was improperly denied a preliminary injunction blocking the combination of Whole Foods and specialty grocer Wild Oats Markets Inc. That merger was consummated on August 28, 2007, after a federal district court’s denial of injunctive relief to the FTC.

The agency had claimed that the combination would create a monopoly in the market for premium, natural, and organic supermarkets in 18 different geographic areas. The appellate court refused to enjoin the deal pending appeal of that decision.

Product Market Analysis

The latest ruling of the U.S. Court of Appeals in Washington, D.C. amends and revises the court’s 2-1 decision of July 29. That decision held that the trial court analyzed the product market incorrectly when assessing the competitive impact of the transaction and therefore erred in concluding that the FTC was not likely to succeed on the merits of its claims (see Trade Regulation Talk, July 30, 2008).

In conjunction with the order, the court also reissued its July opinion, which it had amended to reflect that U.S. Circuit Judge David S. Tatel still concurred with Circuit Judge Janice R. Brown in her judgment to reverse the trial court’s ruling, but no longer concurred in her opinion in support of that judgment.

The November 21 amended opinion in FTC v. Whole Foods Market, Inc. will appear in CCH Trade Regulation Reports. The vacated August 2007 decision of the federal district court in the District of Columbia appears at 2007-2 CCH Trade Cases ¶75,831.

FTC Reaction

“We are quite pleased with the ruling on Friday by the appeals court reaffirming its decision to vacate the district court’s denial of the Commission’s application for an injunction against the acquisition of Wild Oats by Whole Foods,” said David Wales, acting Director of the FTC’s Bureau of Competition, in a November 24 announcement.

“Importantly, the decision rendered by the majority of the appellate panel reaffirms that the proper role of the district court in considering whether to grant the Commission’s request for a preliminary injunction is limited to whether the case raises sufficiently serious and substantial issues so as to make them fair ground for litigation during the full trial on the merits in the administrative proceeding,” he observed.

The Commission looks forward to showing why the merger is unlawful and “should be undone at the plenary trial in a few months,” according to Wales.

FTC Proposes Revisions to Endorsements, Testimonials Guides

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

The FTC has proposed revising its guides for endorsement and testimonial advertising practices to state that non-typical testimonials on a key aspect of the advertised product should be accompanied by clear and conspicuous disclosure of generally expected results when the advertiser does not possess adequate substantiation for the representation.

Testimonials reflecting consumer experience on a key attribute of a product will likely be interpreted as representing that the endorser’s experience is representative of what consumers will generally achieve, the agency concluded.

The Commission has also proposed changes to its guidance with respect to expert endorsements. The Guides Concerning the Use of Endorsements and Testimonials in Advertising appear at CCH Trade Regulation Reporter ¶39,038. The guides are advisory in nature. In an enforcement proceeding, the Commission would have the burden of proving that a particular use of an endorsement or testimonial was deceptive.

Application to New Types of Advertising

In light of comments received in an initial comment period, the agency is considering amending the guides to deal with new types of advertising, such as e-mail and Internet advertising. The Commission has proposed including several new examples that address the issues of advertiser and endorser liability and disclosure of material connections in various high-tech contexts.

According to the Commission's November 21 announcement, many of the proposed changes are clarifications or additional examples of the principles embodied in the existing guides, which were last updated in 1980, according to the FTC. Other proposed changes state principles that have been established in Commission enforcement actions. Several represent substantive changes from the current Guides, based upon increased knowledge of how consumers view endorsements.

Advertiser, Endorser Liability

Among these changes, the FTC has proposed a new provision explicitly recognizing two principles flowing from the Commission’s law enforcement activities: (1) advertisers are subject to liability for false or unsubstantiated statements made through endorsements, or for failing to disclose material connections between themselves and their endorsers; and (2) endorsers may also be subject to liability for their statements.

Written comments on the notice of proposed changes must be received by January 30, 2009. Comments should refer to “Endorsement Guides Review, Project No. P034520” and should be delivered to: Federal Trade Commission, Office of the Secretary, Room H-135(Annex S), 600 Pennsylvania Avenue, NW, Washington, DC 20580, or filed in electronic form at: https://secure.commentworks.com/ftc-endorsements.

A November 21 news release on the development appears here. The 86-page FTC Notice of Proposed Changes to the Guides is available here on the FTC website.

Solicitor General, Antitrust Group to Argue in Supreme Court “Price Squeeze” Case

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

The U.S. Solicitor General and the American Antitrust Institute (AAI) will be permitted to participate in oral argument as amicus curiae on Monday, December 8, when the U.S. Supreme Court considers a decision of the U.S. Court of Appeals in San Francisco (2007-2 Trade Cases ¶75,875) allowing a "price squeeze" claim to proceed against a telecommunications company.

The divided appellate court had ruled that complaining Internet service providers (ISPs) who sold digital subscriber line (DSL) Internet access to retail customers were not barred from claiming that the incumbent telecommunications company that served as their supplier at the wholesale level had violated Sec. 2 of the Sherman Act by virtue of an alleged price squeeze.

Wholesale Prices v. Retail Prices

The ISPs claimed that the incumbent company had engaged in an unlawful price squeeze by intentionally charging them wholesale prices that were too high in relation to prices at which it was providing retail services and necessary equipment to end-user customers. During one period, the company even charged wholesale prices that actually exceeded retail prices, thereby making it impossible for independent ISPs to compete in the retail market.

In a friend-of-the-court brief, the federal government supported the petitioning telecommunications company, arguing that “[a] price-squeeze allegation based solely on the margin between a vertically-integrated defendant’s wholesale and retail prices is insufficient to state a claim under Section 2 of the Sherman Act.”

Antitrust Duty to Deal

The federal government asserted that a statutory or regulatory duty to deal with rivals “does not automatically establish an antitrust duty to deal.” Since the incumbent telecommunications company had no antitrust duty to deal with the ISPs at the wholesale level, it had no duty under the antitrust laws to offer the ISPs any particular wholesale price terms, according to the government.

Allegations that the company’s retail prices were too low to allow the ISPs to compete did not state a claim for predatory pricing, the government maintained. An action for predatory pricing requires claims (1) that the retail prices are below “an appropriate measure of their costs,” and (2) that the company had a dangerous probability of recouping its investment in below-cost prices.

Finally, the government charged that the appellate court erred in recognizing a Section 2 claim based solely on the margin between the company’s wholesale and retail prices. Allowing such a claim “would protect competitors, not competition or consumers.” Low retail prices benefit consumers, as long as they are above predatory pricing levels, the brief stated.

Theory Remains Sound

In its amicus brief, the AAI—a non-profit education, research, and advocacy organization—urged the Supreme Court to reject the Justice Department's invitation to abolish price-squeeze claims as an independent basis for liability under Section 2of the Sherman Act. The long-established price-squeeze theory remains sound under modern antitrust policy, the brief contends.

The test for liability under the famous Alcoa case “does not protect ‘competitors’ at the expense of ‘competition,’ as the DOJ contends, but rather bars a monopolist that operates at two stages of production from foreclosing equally efficient single-stage rivals,” the AAI argues.

The anticompetitive effects of a price squeeze are well recognized, the brief notes. These effects include the preservation or entrenchment of a monopoly, the impairment of non-price competition and innovation, the facilitation of price discrimination, and the ability of a monopolist that is regulated at one level to dominate at a second, unregulated level.

AAI further argues that the district court’s finding of no antitrust duty to deal should not preclude a price-squeeze claim and that the company’s petition for review is moot in light of the ISPs' abandonment of their price-squeeze claim.

The petition is Pacific Bell Telephone Co. v. LinkLine Communications, Inc., Dkt. No. 07-512, cert. granted June 23, 2008. The motions for leave to participate in oral argument as amicus curiae and for divided argument were granted on November 17.

Text of the government’s brief appears here at the Department of Justice Antitrust Division website. Text of the American Antitrust Institute’s brief appears here on the AAI website.

Granting Argument to Public Interest Group

The Court's unusual granting of 15 minutes for the AAI argument was the subject of much discussion on the ABA Antitrust Section's listserve on November 20. Antitrust practitioners asked whether anyone could remember when a public interest organization received oral argument time in an antitrust case. In this case, the AAI asked for 10 minutes and received 15 minutes.

One listserv member cited a discussion of this issue on the ScotusBlog ("Practice Pointer: Oral Argument in Pacific Bell v. linkLine Communications," November 19, 2008).

The blog observed that "it's fairly unusual for the Court to actually grant a private amicus argument time—much less more time then the ten minutes that AAI had requested. So what gives?"

The answer is that the Linkline respondents had essentially abandoned their price-squeeze claim and had asked to be allowed to amend their complaint to further develop their retail-level predatory pricing claim.

If AAI were not granted an opportunity to participate in the argument, the judgment of the Ninth Circuit would be undefended.

Scotusblog comments that "the disposition of AAI's motion may serve as a useful practice pointer for other private amici seeking argument time . . . it demonstrates that the best chance for private amici to get argument time may lie in identifying a gap that, for whatever reason, would otherwise be left unaddressed at oral argument . . ."

Food Gift Certificates Exempted from California Expiration Ban

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

Because the California gift certificate statute provided that certificates “issued for a food product” may contain an expiration date, a frozen food home delivery service (Schwan's) could not have engaged in deceptive practices by selling certificates that expired one year after issuance, a California appellate court has ruled.

A purchaser alleged that the inclusion of the expiration date in the certificates violated the California Consumer Legal Remedies Act (CCH Advertising Law Guide ¶30,514) and Unfair Competition Law (CCH Advertising Law Guide ¶30,510). However, the gift certificate law's exemption of “food product” gift certificates from its prohibition against expiration dates (CCH Advertising Law Guide ¶30,515) encompassed frozen foods.

Telephone Sales of Gift Certificates

The purchaser was not allowed to amend the complaint to allege that, even if the certificates complied with the gift certificate statute, it would still be an unfair practice to sell them over the telephone without first disclosing the limitations placed on them, including a restriction disallowing cash refunds.

The purchaser provided no authority to support the contention that the failure to disclose a valid expiration date or redemption limitation over the telephone was an unfair business practice, according to the court. The gift certificate statute on its face did not prohibit sales over the telephone, and it did not require that issuers disclose expiration dates or redemption restrictions when making telephone sales.

The statute simply required issuers of gift certificates with valid expiration dates to print those expiration dates “in capital letters in at least 10-point font on the front of the gift certificate.” The purchaser did not dispute that Schwan’s had complied with this requirement, the court said.

The October 14 decision in Kennedy v. Schwan’s Home Service, Inc. will be reported at CCH Advertising Law Guide ¶63,155.

More About Gift Certificate and Advertising Laws

Subscribers to the Advertising Law Guide on CCH Internet Research NetWork have access to more detailed coverage 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.™

Brewers Proceed with Combination After Receiving Regulatory Clearance

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

Belgium-based InBev N.V./S.A—the second-largest brewer in the world—announced on November 18 that it completed its acquisition of the Anheuser-Busch Companies Inc.—the largest brewer in the United States—creating the “global leader in beer and one of the world’s top five consumer products companies.”

The company, which changed its name to Anheuser-Busch InBev, manages a portfolio of more than 200 brands, including Budweiser, Stella Artois, and Beck’s.

InBev said that it had received all regulatory clearances required to be obtained in order to proceed with completion of the deal. These included approvals from the U.S. Department of Justice, the U.K. Office of Fair Trading, and the China Ministry of Commerce.

DOJ Approval with Divestiture

In order to obtain U.S. antitrust approval of the $52 billion acquisition, InBev agreed to divest subsidiary Labatt USA, along with a license to brew, market, promote, and sell Labatt brand beer for consumption in the United States.

The Justice Department filed a complaint and proposed consent decree in the federal district court in Washington, D.C. on November 14. In its complaint, the government alleged that the transaction, as originally proposed, likely would have led to higher prices for beer in the Buffalo, Rochester, and Syracuse, New York, metropolitan areas. The divestitures, required by the proposed consent decree, would remedy the alleged harm.

According to the complaint, Anheuser-Busch’s Budweiser brands—including Budweiser and Bud Light—and InBev’s Labatt brands—including Labatt Blue and Labatt Blue Light—are the two biggest selling beer brand families in Buffalo, Rochester, and Syracuse. The original transaction would have eliminated competition between Labatt USA and Anheuser-Busch and resulted in higher prices to beer drinkers in those metropolitan areas.

In the large majority of U.S. markets, InBev accounts for less than two percent of beer sales and engages in very little competition with Anheuser-Busch, according to the Justice Department.

A press release, a complaint, and a proposed consent decree in U.S. v. InBev N.V./ S.A., Case: 1:08-cv-01965, appear at the Justice Dpartment Antitrust Division website. Further details will appear in CCH Trade Regulation Reporter.

U.K. Clearance

On November 18, the United Kingdom’s Office of Fair Trading (OFT) cleared the combination. The OFT was concerned about the acquisition because it “adds one significant premium lager brand, Budweiser, to InBev’s portfolio, already the U.K.’s leading premium lager supplier based on Stella Artois and Beck’s (and second largest in overall lager sales).” Estimated market shares of the combination ranged from 25 percent to over 50 percent in various market segments.

Upon closer examination, the OFT had no concerns regarding the “off-trade” market (retail sales), despite InBev’s 40 percent share of premium lager sales. Evidence suggested that it would not be profitable to raise retail prices of any of the InBev or Budweiser brands. Retail chains could switch to competing premium lagers that would “keep InBev’s pricing in check post-merger.”

Focusing on the “on-trade” market (bars and restaurants), the OFT found that InBev would account for more than 50 percent of premium lager sales, with Stella Artois being the leading premium draught lager, Budweiser being the being the leading premium bottled larger, and Beck's being the second most popular bottled lager.

However, the OFT found that “only a fraction of on-trade sales of premium lager are in bottles.” It concluded that bottled Budweiser could not act as a significant pricing constraint on draught Stella Artois, which competes with other premium and standard draught beers.

The agency also dismissed concerns that the merger could eliminate competition for “fridge shelf space” between Budweiser and Beck’s because the two were not close substitutes.

A press release on the clearance appears at the Office of Fair Trading website.

China’s Approval with Restrictions

China’s Ministry of Commerce on November 18 announced its approval of the combination, but placed restrictions on Anheuser-Busch InBev’s investments in China.

The company will not be allowed to increase the 27% stake in Tsingtao Brewery Co. held by Anheuser-Busch or InBev’s 28.56% stake in Zhujiang Brewery.

The company will be barred from purchasing a share of Beijing Yanjing Brewery Co. and China Resources Snow Breweries, which produces Snow Beer and required to report any change in the structure of the new company’s controlling shareholders.

Employees Can Proceed with RICO Claims for Denial of Worker's Comp Benefits

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

Six current and former employees of a freight carrier adequately alleged a pattern of racketeering activity against the carrier, a doctor, and an insurance services firm—entities that allegedly committed mail and wire fraud in a scheme to deny worker's compensation benefits to the employees, the U.S. Court of Appeals in Cincinnati has ruled.

Although two of the employees had their RICO claims dismissed by the district court for sufficiently alleging only one racketeering act each, RICO did not require each plaintiff to be a victim of multiple racketeering acts. Rather, it required that a pattern of racketeering activity be directed against the plaintiffs as a group. Accordingly, the district court erred by focusing on the number of predicate acts that were alleged by each plaintiff.

Pattern of Racketeering

The district court also erred in assuming that the existence of two predicate acts was sufficient to constitute a pattern, the appeals court held. Although a minimum of two predicate acts was indeed necessary to establish a pattern, relationship and continuity were also required.

A relationship existed if the alleged predicate acts had the same or similar purposes, results, participants, victims, or methods of commission, or were interrelated by distinguishing characteristics and thus were not isolated events. Continuity existed when a closed period of repeated racketeering acts extended over a substantial period of time ("closed-ended" continuity) or when the racketeering acts included a distinct threat of repetition that extended indefinitely into the future ("open-ended" continuity).

In this case, the predicate acts of mail and wire fraud had the same purpose, result, participants, and victims. They also had similar methods of commission. Therefore, the relationship element was established.

The continuity element also was established. Because the plaintiffs alleged a series of related predicate acts that occurred over a period of more than three years, they sufficiently alleged closed-ended continuity. They alleged open-ended continuity by asserting that part or all of each defendant's legitimate business was regularly conducted by fraudulently denying the employees their legitimate benefits via fraudulent mail and wire communications.

Because the plaintiffs sufficiently alleged a pattern of racketeering activity—and because each plaintiff sufficiently alleged an injury that resulted from that pattern—the employees could proceed with their RICO claims.

Reliance

The employees failed to allege reliance on defendants' allegedly fraudulent acts, the court held. The employees complained that the defendants had engaged in mail and wire fraud in furtherance of a scheme to deny them worker's compensation benefits. More specifically, they alleged that the carrier and the insurance services firm deliberately selected and paid unqualified doctors, including the doctor defendant, to render fraudulent medical opinions that supported the denial of worker's compensation benefits.

After a district court's dismissal of the employees' RICO claims was affirmed by the appellate court—on the ground that the employees failed to plead that they had relied on the defendants' alleged misrepresentations—the U.S. Supreme Court vacated the appellate court's judgment and remanded the case for reconsideration in light of Bridge v. Phoenix Bond & Indemnity Company (CCH RICO Business Disputes Guide ¶11,500).

In Bridge, the Supreme Court decided that first-party reliance was not an essential element of a civil RICO claim predicated on mail fraud. On remand, the district court's dismissal of the employees' claims was reversed because, among other things, the employees sufficiently alleged that the defendants had engaged in a fraudulent scheme that proximately caused their injuries: deprivation of worker's compensation benefits.

Preemption

The employees' claims were not preempted by Michigan's Worker's Disability Compensation Act (WDCA). The district court erroneously held that the RICO claims were subject to reverse preemption under the McCarran-Ferguson Act, a federal law that precluded the application of a federal statute that: (1) did not specifically relate to the business of insurance, and (2) invalidated, impaired, or superseded a state law that was enacted for the purpose of regulating the business of insurance. Because the district court concluded that the federal RICO statute did not relate to the business of insurance, that RICO would impair the WDCA, and that the WDCA was enacted to regulate the business of insurance, it dismissed the RICO claims.

The WDCA, however, was not enacted for the purpose of regulating the business of insurance. It was enacted to require employers to compensate workers for injuries suffered in the course of employment. Moreover, worker compensation benefits could not be characterized as insurance. Finally, RICO did not invalidate, impair, or supersede the WDCA.

Although the two statutes provided different remedies, the U.S. Supreme Court determined—in Humana v. Forsyth (RICO Business Disputes Guide ¶9631)—that a federal law proscribing the same conduct as a state law, but providing materially different remedies, did not impair the state law under the McCarran-Ferguson Act.

The October 23 decision is Brown v. Cassens Transport Co., CCH RICO Business Disputes Guide ¶11,575.

Further information regarding CCH RICO Business Disputes Guide is available here at the CCH Online Store.

Union Organizers Liable Under Driver Privacy Law for Using Motor Vehicle Data

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

A labor union was liable under the Driver's Privacy Protection Act of 1994 (DPPA) for accessing motor vehicle records of an industrial laundry company's employees in order to contact them with regard to an organizing campaign, the U.S. Court of Appeals in Philadelphia has held. Employees of the company, and certain of their relatives and friends, could be entitled to damages for the violations.

The labor union used license plates on cars found in the company's parking lots to access information contained in state motor vehicle records relating to those license plates. The union accessed the records of between 1,758 and 2,005 of the company's employees, or relatives or friends of employees, and contacted the subjects of the records regarding its campaign to organize the company's workers.

Permissible Uses

Labor organizing was not one of the 14 specific "permissible uses" of motor vehicle data excepted from liability under the DPPA, according to the court.

The union unsuccessfully argued that its labor-organizing purpose could not be severed from its purposes in using the data under the litigation exception and the exception for actions taken on behalf of the government. The union asserted that it accessed the vehicle records, in part, because it required the records to conduct an investigation of alleged illegal labor practices by the company. The investigation was being conducted, the union said, in connection with planned litigation against the company.

The litigation component of its activities could not obscure the union's primary purpose—organizing labor, the court said. The union could not "mask" this non-permissible use of the data behind the veil of other, permissible uses.

The DPPA prohibited obtaining or using personal information "for a purpose not permitted" under the statute. It contained no language excusing an impermissible use merely because it was executed in conjunction with a permissible purpose. The court declined to "engraft" a "labor exception" onto the DPPA.

Liquidated Damages

The plaintiffs could be entitled to cumulative liquidated damages awards of $2,500 for each of a labor union's alleged multiple DPPA violations. They would be limited to one damage award for both aspects of the union's violation of the DPPA: (1) obtaining the data and (2) using the data. Obtaining the data and using it were not, themselves, two separate violations, the court said. The plaintiffs would, however, be entitled to further liquidated damages awards for any subsequent violations found to have occurred by the trial court.

Punitive Damages

A district court's determination that the union would be "effectively deterred" from further violations of the DPPA without an award of punitive damages was vacated. The district court did not apply the proper standards for summary judgment, and improperly engaged in weighing of evidence on the summary judgment record, the appellate court said. The case was remanded for the district court to address explicitly whether summary judgment was appropriate on the issue of punitive damages.

Individuals Not Included in Records

Two of the plaintiffs lacked standing to pursue DPPA claims because neither of them were the registered owners of the vehicles about which the union obtained information. These plaintiffs were the wives of vehicle owners whose data had been obtained by the union. They suffered no invasion of an interest protected by the DPPA, the court said.

The DPPA provides that a person who knowingly obtains, discloses, or uses personal information from a motor vehicle record for a purpose not permitted under the statute shall be liable to the individual to whom the information pertains. The DPPA thus confers a cause of action to "the individual" whose personal information from the motor vehicle records is at issue.

The reach of the DPPA was limited to the single individual to whom a particular vehicle record pertained, and did not extend to other individuals who happened to share an address or telephone number with that individual, the court held.

The Third Circuit decision is Pichler v. Unite, CCH Privacy Law in Marketing ¶60,254.

CCH Privacy Law in Marketing provides comprehensive coverage of federal, state, and international privacy law governing the collection, maintenance, and use of personal data in marketing efforts. The publication features treatise-style explanations by authors D. Reed Freeman, Jr., and J. Trevor Hughes, in addition to the full text of laws from 46 states and 35 international markets. Monthly reports contain law updates, court decisions, enforcement actions, and an informative newsletter.

Further details regarding CCH Privacy Law in Marketing appear here at the CCH Online Store.

President to Designate Garza Acting Chief of Antitrust Division

This posting was written by John W. Arden.

President George W. Bush announced his intention to designate Deborah A. Garza to serve as Acting Assistant Attorney General in charge of the Department of Justice Antitrust Division. Ms. Garza will replace Thomas O. Barnett, who resigned his Antitrust Division post, effective November 19.

She has held several positions in the Department of Justice Antitrust Division, including Deputy Assistant Attorney General for Regulatory Matters, chief of staff and counselor, and special assistant to the Assistant Attorney General. In addition, she chaired the Antitrust Modernization Commission.

Ms. Garza practiced antitrust law at Frank, Harris, Shriver & Jacobson and Covington & Burling. She is a graduate of Northern Illinois University and the University of Chicago Law School.

The appointment was made public in a November 13 “Personnel Announcement.”

Gift Card Purchaser’s Deception Suit Not Barred by Gift Certificate Law

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

The New York gift certificates statute did not bar a gift card purchaser's suit asserting deceptive practices and common law violations by Shell Oil and other card sellers for imposing “dormancy fees” against card balances, a New York appellate court has ruled.

The cards were subject to dormancy fees of $1.75 per month if not used for more than 12 months. The purchaser’s card balances allegedly were reduced to zero by the dormancy fees.

The purchaser brought a class action complaint seeking to recover damages based on the allegedly deceptive marketing of the cards and the alleged failure to disclose the dormancy fees.

Disclosure Requirements

The New York gift certificates statute (CCH Advertising Law Guide ¶33,215) regulates gift cards, as well as other types of gift certificates. The statute requires, among other things, that gift card terms and conditions be “clearly and conspicuously stated thereon” including whether any fees are assessed against the card balance.

The purchaser did not expressly plead a cause of action under the gift certificate statute. Instead, the purchaser asserted claims based on the generally applicable New York deceptive acts and practices law, the implied covenant of good faith and fair dealing, and unjust enrichment.

Deceptive Acts and Practices

A cause of action under New York's generally applicable deceptive acts and practices statute (CCH Advertising Law Guide ¶33,210) may be maintained whether or not the practices at issue are subject to any other New York law, according to the court. In addition, nothing in the gift certificates statute required a conclusion that the legislature intended to abrogate any common law remedy arising from allegedly deceptive or improper practices concerning gift certificates or cards.

The gift certificate statute's exclusivity provision—which was cited by the card sellers—preempted only local legislation concerning gift certificates or cards that was inconsistent with or more restrictive than the state statute, the court determined. Nor were the remedies granted to the state attorney general under the gift certificate statute made exclusive.

Because the suit was not preempted by the gift certificate statute, a lower court’s dismissal of the complaint was reversed. The case was sent back to the lower court for further proceedings.

The October 21 decision in Llanos v. Shell Oil Co. will be reported at CCH Advertising Law Guide ¶63,154.

More About Gift Certificate and Gift Card Laws

Subscribers to the CCH Advertising Law Guide on CCH Internet Research NetWork have access to more detailed coverage 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.™

Economic Woes May Force New Administration to Tread Lightly on Merger Enforcement

This posting was written by John W. Arden.

Conventional wisdom—and the President Elect’s own policy statements—indicate that the new Administration will step up antitrust enforcement efforts (“Trade Regulation Talk,” November 6, 2008). However, a new take is that the economic downturn may cause the Administration to allow mergers and acquisitions that have positive economic effects, even if they normally would not pass muster under the federal antitrust laws.

In a November 10 New York Times article (“Why Obama May Assent to Deals”), prominent antitrust lawyer David Boies says that the next two years may see a new wave of mergers and acquisitions because the Obama Administration will be unlikely to kill deals that could save some jobs.

“Preserving jobs and economic stability will be perceived as more important than preserving competition,” Mr. Boies said. The cold, economic reality of the times may take the administration’s focus away from anticompetitive practices, “which is good for the winners (and their deal makers), but maybe not so good for the rest of us,” reporter Andrew Ross Sorkin wrote.

The question now is whether otherwise objectionable deals will be allowed to proceed based on companies’ claims that they are combining out of necessity, according to Sorkin.

An article published November 11 on the Wall Street Journal’s “Deal Journal” blog (‘Don’t Freak Out’ About Mergers Under Obama”) takes a similar angle. Heidi N. Moore writes that earlier fears that an Obama Administration might “holdup big combinations over antitrust concerns” might be unfounded.

In an interview, James “Hart” Holden, an antitrust partner with law firm Paul Hastings Janofsky & Walker, says that talk about how antitrust enforcement will be ramped up in the merger and acquisitions area is overblown.

“It’s overblown because if you drill down a little, there are two agencies that do merger reviews: the FTC and the DOJ,” said Holden, a former FTC enforcer. “When it comes to the FTC, they’re much less susceptible to political changes than the DOJ is. The FTC have five commissioners, and no more than three can be of the party in power. They are designed to be more immune to this sort of thing than the DOJ. And many areas where Obama wants to ramp up antitrust enforcement are in the FTC’s purview: energy, health care and so on. The FTC right now are fairly aggressive antitrust enforcers already.”

“The DOJ does not have the authority to block mergers,” he continued. “They have the authority to investigate mergers and file a lawsuit, but they do not get to decide; that power is with the federal courts. At the end of the day, nobody knows why the DOJ may or may not block a merger. And if someone tells you they do know, they’re crazy. The DOJ may have thought that the merger was problematic, but maybe they didn’t have the evidence to prove it in court.”

Nevertheless, Holden is not expecting the government to give out any easy passes. “Expect things to get harder on the margins,” he advised. “But don’t freak out about any sea changes at the DOJ or FTC. Change in the Obama administration won’t have a huge impact on deal flow. Most deals have minor or no antitrust concerns.”

Sale of "De-Identified" Data Would Not Violate California Medical Information Privacy Law

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

An individual could not pursue claims under the California Confidentiality of Medical Information Act (CMIA) against retail pharmacies that allegedly sold customer prescription information to data mining companies for marketing purposes because the individual failed to specify what individually identifiable information remained in the records after the pharmacies "de-identified" the information, the federal district court in San Diego has determined.

The CMIA prohibits health care providers, health care service plans, or contractors from disclosing medical information regarding patients without first obtaining authorization. It also prohibits health care providers from sharing or selling medical information for use in marketing.

The data mining companies (DMCs) installed software on the pharmacies' computer servers that captured and collated patient prescription information, which was then transferred to the DMCs' off-site servers and sold to pharmaceutical companies for use in structuring drug marketing programs directed at physicians.

The software installed on the pharmacies' computers de-identified the prescription information and assigned a number to each patient to allow correlation of that information without individually identifying patients.

"Medical Information"

"Medical information" is defined under the CMIA as "any individually identifiable information, in possession of or derived from a provider of health care ... regarding a patient's medical history, mental or physical condition, or treatment." Pharmacies were considered health care providers under the CMIA, the court noted.

"Individually identifiable information" is "medical information includ[ing] or contain[ing] any element of personal identifying information sufficient to allow identification of the individual, such as the patient's name, address, electronic mail address, telephone number, or social security number, or other information that, alone or in combination with other publicly available information, reveals the individual's identity."

De-identified information would not constitute "medical information" under the CMIA, according to the court. The individual's assertion that the DMCs' software inadequately anonymized the data was conclusory and did not rise above the level of speculation. He did not specify what information remained after the de-identification process.

The individual also failed to allege that any pharmacy or DMC reverse-engineered the de-identified information to create individually identifiable information.

Breach of Contract, Invasion of Privacy

Because the individual failed to allege a violation of state law, his claims that the pharmacies breached a contractual undertaking to comply with state privacy laws also failed.

In addition, the individual could not pursue claims for violation of privacy under the California Constitution because he failed to allege a legally protected privacy interest related to the transfer of de-identified medical information, the court ruled.

The decision is London v. New Albertson’s Inc., CCH Privacy Law in Marketing ¶60,255.

Mortgage Company Settles FTC Data Security Charges

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

A Texas-based mortgage lender has agreed to establish a comprehensive information security program and to refrain from making deceptive claims about privacy and security to settle FTC charges that it violated the FTC Safeguards and Privacy Rules, as well as Sec. 5 of the FTC Act. A proposed FTC consent order would settle the charges.

The FTC alleged that the lender violated Sec. 5 of the FTC Act and the Commission’s Privacy Rule (CCH Trade Regulation Reporter ¶38,060) by failing to live up to its own privacy policy.

In its privacy policy, the lender claimed:

“We take our responsibility to protect the privacy and confidentiality of customer information very seriously. We maintain physical, electronic, and procedural safeguards that comply with federal standards to store and secure information about you from unauthorized access, alteration and destruction. Our control policies, for example, authorize access to customer information only by individuals who need access to do their work.”

Safeguards Rule

The FTC further alleged that the lender violated the Commission’s Safeguards Rule (CCH Trade Regulation Reporter ¶38,061). The Safeguards Rule, enacted under the Gramm-Leach-Bliley Act, requires financial institutions to implement reasonable policies and procedures to ensure the security and confidentiality of sensitive customer information.

The lender allegedly made sensitive customer data vulnerable by allowing a third-party home seller to access the data without taking reasonable steps to protect it. A hacker compromised the data by breaking into the home seller’s computer, obtaining the lender’s user name and password, and using these credentials to access hundreds of consumer reports, according to the agency.

The action is In the Matter of Premier Capital Lending, Inc., FTC File No.0723004, November 6, 2008. Further details will appear in the CCH Trade Regulation Reporter.

A press release, complaint, and an agreement containing the consent order appears here on the FTC website.

Barnett Resigns as Justice Department Antitrust Chief

This posting was written by John W. Arden.

Assistant Attorney General Thomas O. Barnett has resigned as the chief of the Justice Department Antitrust Division, effective November 19, 2008.

Barnett was confirmed by the Senate as Assistant Attorney General of the Antitrust Division on Feb. 10, 2006. He became acting Assistant Attorney General on June 25, 2005, and previously served as Deputy Assistant Attorney General since April 18, 2004.

"Tom Barnett has been an effective enforcer of the antitrust laws and a strong advocate for consumers,” said Attorney General Michael B. Mukasey in a statement issued November 7.

“Under his leadership, the Antitrust Division has increased cartel enforcement to record levels with unprecedented fines and prison sentences, improved the efficiency and efficacy of its merger enforcement, and enhanced cooperation with our foreign counterparts."

Antitrust Division Accomplishments

The Division obtained $1.8 billion in criminal fines against 50 corporations and 91 individuals, during Barnett's term. The average prison sentence for incarcerated defendants charged by the Division reached an all-time high of 31 months in Fiscal Year 2007 with an overall average of 23 months during Barnett's 3 ½ years as head of the Division. Foreign executives in international cartel cases also faced longer jail sentences, averaging 12 months in Fiscal Year 2007.

A Department of Justice press release credited Barnett with filing 34 cases in federal district court to either block mergers and acquisitions or require divestitures to eliminate anticompetitive portions of transactions, while permitting consumers to benefit from allowing the remaining portions of the transactions to proceed.

During Barnett’s tenure, the Department (1) filed 14 amicus curiae briefs with the U.S. Supreme Court on competition related issues; (2) brought 16 civil non-merger cases, including some preventing both seller-side and buyer-side monopolization, enforcing compliance with antitrust decrees and procedures, and protecting competition in the market for real estate brokerage services; and (3) pursued 14 investigations resulting in companies abandoning their plans or otherwise changing their practices to eliminate competitive concerns.

Recent Controversy

Barnett was involved in some recent controversy relating to the Antitrust Division’s September 8, 2008 report on Sherman Act Section 2 enforcement. The report (“Competition and Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act”) discusses whether—and when—specific types of single-firm conduct may violate Section 2 by harming competition and consumer welfare.

The report was attacked in a statement issued September 8 by FTC Commissioners Pamela Jones Harbour, Jon Leibowitz, and J. Thomas Rosch for placing interests of firms with monopoly power or near monopoly power ahead of the interests of consumers and overstating “the level of legal, economic, and academic consensus regarding Section 2.”

Barnett responded by saying that the report reflected a “shared view” of antitrust enforcement among academics, economists, and others and maintaining that the views expressed in the report were “pro-consumer.”

The announcement of Barnett’s resignation appears here. There was no formal indication of his future plans.

President Obama and Antitrust

This posting was written by John W. Arden.

Amid the speeches and celebrations of Barack Obama’s electoral college landslide, business and legal observers were already trying to predict how the new administration’s antitrust policy will impact particular industry sectors.

Positions on Technology, Media

Yesterday morning, Bloomberg.com posted two articles, examining the president elect’s positions on technology and media and projecting how his antitrust stances will affect some of the major players in those businesses.

The first article (“AT&T, Comcast Face New Web, Antitrust Enforcement Under Obama”) states that AT&T and Comcast “will probably face in Internet rules backed by Google Inc. under Barack Obama’s administration, and will find it more difficult to persuade the government to approve acquisitions.”

“Telecommunications industry consolidation will likely slow under an Obama administration, [analyst Paul] Glenchur said. Obama pledges to ‘reinvigorate’ antitrust enforcement, according to his technology policy statement,” reporters Molly Peterson and Ian King wrote.

The second article (“Obama May Fight Media Concentration, Expand Access to Internet”) speculates about the Illinois Democrat’s policies on media concentration, network neutrality, and cable rules.

“President-elect Barack Obama will try to use his office to hinder media concentration and to increase local TV news coverage, objectives that have stirred resistance from industry groups,” wrote Todd Shields. Obama will make broader Internet access a goal and strongly support the principle of network neutrality, according to Shields.

In his technology proposal, “Obama promises to ‘reinvigorate’ antitrust enforcement,” the article continues. “In contrast to the Bush administration, an Obama presidency would view media mergers ‘very skeptically,’ Gigi Sohn, president of Public Knowledge, a Washington-based public interest group, said in an interview.”

“Paper Trail” on Antitrust

Unlike the current President, who expressed only a vague conception of antitrust law during his first campaign, Obama has a “paper trail” of positions on which to base forecasts of future policy.

In a statement to the American Antitrust Institute, released September 27, 2007, candidate Obama promised that his administration would step up review of merger activity, take aggressive action to curb the growth of international cartels, monitor key industries to ensure that consumers realize the benefits of competition, and strengthen competition advocacy domestically and in the international community.

Making Capitalism “Work for Consumers”

“Antitrust is the American way to make capitalism work for consumers,” according to the statement. “America has been a longtime leader in antitrust, and our antitrust rules and institutions have often served as models for other countries wanting to make capitalism work for consumers.”

Obama cited more than a century of “broad bipartisan support for vigorous antitrust enforcement, to protect competition and foster innovation and economic growth. Regrettably, the current administration has what may be the weakest record of antitrust enforcement of any administration in the last half century.”

As an illustration, Obama noted that between 1996 and 2000, the FTC and Department of Justice challenged an average of 70 mergers per year on antitrust grounds. Between 2001 and 2006, the agencies challenged an average of only 33 mergers per year. “And in seven years, the Bush Justice Department has not brought a single monopolization case.”

This “lax enforcement” has resulted in higher concentration and higher prices in industries such as health care and insurance, he indicated.

“My administration will also ensure that insurance and drug companies are not abusing their monopoly power through unjustified price increases—whether on premiums for the insured or on malpractice insurance rates for physicians.”

Senator Obama’s two-page statement appears on the AAI web site.

Justice Department’s Monopoly Report

The Obama campaign also got involved in the controversy surrounding the Department of Justice’s recent report on Sherman Act Section 2 enforcement.

On September 8, the Department of Justice Antitrust Division released a report (“Competition and Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act”), discussing whether—and when—specific types of single-firm conduct may violate Section 2 by harming competition and consumer welfare.

Among other things, the report observed that

(1) Vague or overly inclusive prohibitions against single-firm conduct are likely to undermine economic growth and to harm consumers.

(2) The “historic hostility” of the law to the practice of tying is unjustified and the qualified rule of per se illegality should be abandoned.

(3) Antitrust liability for mere unilateral, unconditional refusals to deal should not play a meaningful role in Section 2 enforcement because compelling access is likely to harm long-term competition and courts “are ill suited to be market regulators.

(4) Exclusive dealing arrangements foreclosing less than 30 percent of existing customers or effective distribution should not be illegal.

(5) Remedies for Section 2 violations should “re-establish the opportunity for competition without unnecessarily chilling competitive practices of undermining incentives to invest and innovate.

Only hours after the report was issued, the FTC issued a statement that it did not “join or endorse” the report. FTC Commissioners Pamela Jones Harbour, Jon Leibowitz, and J. Thomas Rosch released a joint statement that was highly critical of the DOJ’s findings.

The Commissioners expressed concern that the report was “chiefly concerned with firms that enjoy monopoly or near monopoly power, and prescribes a legal regime that places these firms' interests ahead of those of consumers.” They further criticized the report for "seriously overstating the level of legal, economic, and academic consensus regarding Section 2.”

The Obama campaign said that the Justice Department’s stance in the report reflected the need for a more aggressive approach to antitrust enforcement in the next administration, according to an article in the September 8 issue of the New York Times.

“Four more years of the Bush-McCain approach to antitrust will only lead to higher prices for American consumers and a less competitive environment for smaller businesses to thrive,” said Jason Furman, economic policy director for Senator Obama’s campaign.

Media Consolidation

Another notable statement by Obama was an article—co-written with Senator John Kerry--decrying media consolidation. The article (“Media consolidation silences diverse voices”) was published on November 7, 2007 by Politico.com.

According to the two Senators, the U.S. has witnessed “unprecedented consolidation in our traditional media outlets. Large mergers and corporate deals have reduced the number of voices and viewpoints in the media marketplace.”

However, the FCC, which is charged with governing the media, “may soon consider changes in the media ownership rules that only help big media get bigger, but do nothing to make media more responsive to minority viewpoints and local communities.”

The article called on Congress to stop allowing greater corporate consolidation and start promoting media diversity.

Threat of Antitrust Challenge Leads Yahoo! and Google to Abandon Ad Agreement

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

In light of a threatened antitrust challenge, search engine companies Yahoo! Inc. and Google Inc. abandoned an advertising agreement that would have given Yahoo! the option of using Google to provide ads on its websites and its publisher partners' sites.

The Department of Justice Antitrust Division issued a statement today, saying that the agreement “likely would have denied consumers the benefits of competition—lower prices, better service, and greater innovation.”

“The companies’ decision to abandon their agreement eliminates the competitive concerns identified during our investigation and eliminates the need to file an enforcement action,” said Thomas O. Barnett, Assistant Attorney General in charge of the Antitrust Division.

Advertising Agreement

The advertising agreement was announced in June. At that time, Google and Yahoo! said that that they would voluntarily agree to delay implementation pending Department of Justice review of the arrangement, even though regulatory approval was not required.

Google contended that the non-exclusive advertising agreement, which would have provided Yahoo! with access to Google’s AdSense advertising programs on their U.S. and Canadian websites, would in fact strengthen Yahoo!

Google also claimed that neither Google nor Yahoo! set ad prices and that prices would continue to be set by competitive auction. Google said that the deal was “similar to other standard business practices where competitors share components.”

Reduction of Competitive Rivalry

As a result of its investigation, the Justice Department concluded that “Google and Yahoo! would have become collaborators rather than competitors for a significant portion of their search advertising businesses, materially reducing important competitive rivalry between the two companies.” The government said that the companies suggested modifications to address antitrust concerns but that the proposed fixes were not sufficient to eliminate those concerns.

Relevant Markets for Impact on Competition

The Justice Department identified two relevant markets for considering the agreement’s impact on competition: (1) Internet search advertising and (2) Internet search syndication. Search engines provide listings consisting of so-called “natural” or “algorithmic” results of the search engine’s canvas of the Web, as well as paid or sponsored search advertisements. Google and Yahoo! also offer their search engine and search advertising services to third-party syndication partners, such as Internet Web sites for retail stores and newspapers, according to the Justice Department.

Google has shares of more than 70 percent in both relevant markets, the Justice Department concluded. Yahoo! is Google’s most significant competitor in both markets, with combined market shares of 90 percent and 95 percent in the search advertising and search syndication markets, respectively, according to the government.

Microsoft Criticism of Agreement

Microsoft Corporation, which had unsuccessfully attempted to acquire Yahoo earlier this year, was among the most vocal critics of the agreement. Microsoft Senior Vice President and General Counsel Brad Smith testified before Congress on the deal in July. “If search is the gateway to the Internet, and most believe that it is, this deal will put Google in a position to own that gateway and the information that flows through it,” he said.

There is speculation that Microsoft could make another run for Yahoo! in light of the collapse of the Google/Yahoo! agreement.

The November 5 Department of Justice press release appears here. A statement by Google is posted here.

Appointment of Distributor Without Notice to Existing One Violated Wisconsin Dealer Law

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

A manufacturer of truck blowers that appointed another distributor of its products in a complaining dealer's nonexclusive territory violated the Wisconsin Fair Dealership Law's (WFDL's) requirement that a dealership grantor "provide a dealer at least 90 days' prior written notice of...[a] substantial change in competitive circumstances," a federal district court in Madison, Wisconsin, has decided. Because the manufacturer did not make the change based on the dealer's "deficiency," it did not need to offer the dealer a right to cure.

Change in Competitive Circumstances

It was undisputed that the manufacturer did not follow the WFDL's mandatory notice and cure procedures before appointing the new distributor. The crucial question was whether the manufacturer's appointment of the second distributor amounted to a "substantial change in competitive circumstances," according to the court.

No Wisconsin court had addressed the scope of activity that could constitute a substantial change in competitive circumstances that did not affect the dealership agreement itself but, as in the instant circumstances, affected the dealer, the court noted.

Intrabrand Competition

In light of the statute's purpose and the reasoning of the Wisconsin Supreme Court in case law, a grantor substantially changed a dealer's circumstances under the meaning of the WFDL by allowing or engaging in any "intrabrand" competition likely to have a serious effect on a dealer's ability to continue to compete in that market, the court ruled.

The manufacturer's appointment of the second distributor had a serious effect on the complaining dealer's ability to continue competing as a truck blower distributor in Wisconsin, the court determined. The second distributor had a competitive advantage over the complaining dealer because it already marketed another manufacturer's brand of truck blowers. With the addition of the manufacturer's brand of truck blowers, the second distributor offered a broader selection than the complaining dealer could, the court noted.

Before the second distributor was appointed as a distributor in Wisconsin, the complaining dealer had no intrabrand competition in Wisconsin (except, perhaps, some incidental and undiscounted sales). Thus, the impact of the appointment on the dealer was substantial, the court reasoned.

"Deficiency"

The manufacturer did not appoint a second distributor because it believed that the complaining dealer had any "deficiency" under the meaning of the WFDL, but because it believed that the second distributor would be a "natural fit" that would sell better in the territory, according to the court. Technically, a "better" second distributor could be understood to be a "deficiency" of the complaining dealer's distribution under the meaning of the WFDL.

Such a reading, however, could turn nonexclusive dealership agreements such as the one between the parties into exclusive dealership agreements. Every time a new dealer was appointed, the dealer would have an opportunity to cure and hold onto its status as sole dealer. Instead, the statue's use of the term "deficiency" was better understood as a dealer's failure to live up to the grantor's expectations of it, the court held. Therefore, there was no deficiency to be claimed and no need for the manufacturer to provide the dealer an opportunity to cure.

The decision is Wisconsin Compressed Air Corp. v. Gardner Denver, Inc., CCH Business Franchise Guide ¶13,994.