2008 Was Active Enforcement Year for FTC

This posting was written by CCH Trade Regulation staff.

In the last year of an administration that de-emphasized federal enforcement of antitrust and consumer protection law, the Federal Trade Commission nevertheless had a very active year.

In fact, the agency was recently lauded for its “very active consumer protection enforcement” in a recent 2008 Transition Report by the ABA Antitrust Section. That report commended the FTC on its “ongoing effort to conduct an extensive internal review and retrospective self-evaluation prior to its 100th anniversary,” but noted “an actual or perceived divergence regarding enforcement standards” between the FTC and the Department of Justice Antitrust Division. The report recommended that the agencies “work together to reduce any material differences in their approaches to civil antitrust enforcement.”

Amendments to Rules of Practice

As 2008 came to a close, the FTC finalized amendments to its rules of practice to expedite administrative proceedings, setting tighter time limits leading up to the issuance of an administrative law judge's initial decision. Evidentiary hearings will generally be held five months from the date of the complaint in most merger cases and eight months from the date of the complaint in non-merger cases. The time to answer a complaint will be shortened from 20 to 14 days. The amendments—which also change discovery and motions practice and the Commission’s handling of motions to dismiss or withdraw a case after a federal court’s denial of a preliminary injunction—will apply prospectively only to new cases initiated after publication in the Federal Register, which is anticipated in early January.

Antitrust Actions

Federal appellate courts handed the agency some victories in 2008. The FTC's determination that the conduct of the North Texas Specialty Physicians, an organization of independent physicians and physician groups around Fort Worth, amounted to horizontal price fixing was upheld by the U.S. Court of Appeals in New Orleans (2008-1 Trade Cases ¶76,146).

The U.S. Court of Appeals in Washington, D.C. reversed a lower court's decision denying the FTC's request for a preliminary injunction blocking the combination of Whole Foods Markets, Inc. and Wild Oats Markets, Inc. (2008-2 Trade Cases ¶76,233).

The U.S. Court of Appeals in New Orleans upheld a Commission order requiring Chicago Bridge & Iron Co., N.V. and its United States subsidiary to divest certain assets acquired from Pitt-Des Moines, Inc. and used in the business of designing, engineering, and building field-erected cryogenic storage tanks (2008-1 Trade Cases ¶76,019). The Commission had ruled that the acquisition would likely result in a substantial lessening of competition.

The agency suffered some setbacks as well. The U.S. Court of Appeals in Washington, D.C. vacated the Commission's determination that Rambus Inc.'s actions before a standard setting organization amounted to exclusionary conduct in violation of antitrust laws (2008-1 Trade Cases ¶76,121). The agency has petitioned the U.S. Supreme Court to review the case.

The FTC has actively filed suits in federal courts challenging antitrust violations. In February, the Commission filed a case charging that pharmaceutical manufacturer Cephalon engaged in illegal conduct to prevent competition for its branded drug, Provigil, by paying four competing firms to refrain from selling generic versions of the drug (Trade Regulation Reporter ¶16,110). In December, the agency alleged that Ovation Pharmaceuticals, Inc. preserved its monopoly in drugs to treat a potentially deadly congenital heart defect in premature babies by acquiring its only competitor in the market (Trade Regulation Reporter ¶16,231).

The Commission also concluded a long-pending matter involving a hospital acquisition in suburban Chicago. The FTC issued an order providing rules for how Evanston Northwestern Healthcare Corporation (ENH) had to negotiate with health insurance companies or managed care organizations in light of the Commission's 2007 determination that an ENH hospital acquisition in 2000 violated antitrust laws (2008-1 Trade Cases ¶76,130).

Consumer Protection

In the consumer protection area, two appellate court decisions stood out. The U.S. Court of Appeals in San Francisco affirmed an order against the marketers of a liquid dietary supplement to pay almost $120 million for failure to comply with an earlier FTC consent decree's consumer redress provisions (2008-1 Trade Cases ¶76,116). Second, the U.S. Court of Appeals in Chicago held that marketers of the "Q-Ray Ionized Bracelet" violated the FTC Act by claiming that tests proved the therapeutic claims they made about the product (2008-1 Trade Cases ¶75,991).

Cartel Crackdown Highlighted DOJ Antitrust Enforcement in 2008

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

Cartel enforcement was once again the focus of the Department of Justice Antitrust Division in 2008. Cartel activity was the target of a significant number of the more than six dozen civil and criminal federal court actions resulting from Antitrust Division investigations. The number of actions was up significantly over recent years.

Record Fines

The year saw major fines, including the second highest criminal fine ever imposed by the Antitrust Division. In November, electronics manufacturers LG Display Company, Sharp Corporation, and Chunghwa Picture Tubes Ltd. agreed to plead guilty and pay a total of $585 million in criminal fines for their roles in conspiracies to fix prices in the sale of liquid crystal display (LCD) panels. LG’s $400 million fine was the second highest criminal fine ever imposed by the Antitrust Division.

Another large fine was imposed on Air France-KLM. The airline agreed to pay $350 million—the third highest fine—for its role in a multi-year conspiracy to fix prices for international air cargo rates. The fine against Air France-KLM was announced in June, along with fines against Cathay Pacific Airways of $60 million, fines against Martinair Holland of $42 million, and fines against SAS Cargo Group of $52 million.

Earlier in the year, Japan Airlines pleaded guilty and was sentenced to pay a $110 million fine. The investigation has also resulted in jail time for industry executives.

Enforcement Setbacks

Despite these victories, not all of the agency’s cartel enforcement efforts were successful. The Antitrust Division lost a price fixing action against two marine hose industry executives in November.

A federal jury acquitted two executives of Manuli Rubber Industries, who had been indicted in 2007 and charged with participating in a conspiracy to fix prices and allocate market shares for sales of marine hose used to transport oil.

Leniency Program

In November, the Antitrust Division released a series of questions and answers about its leniency program, as well as model letters related to the program, providing guidance on the program (Trade Regulation Reporter ¶50,235).

Some practitioners expressed concern regarding the Antitrust Division’s decision to reserve the right to limit the extent of the conditional leniency where “there is a significant lapse in time between the date the applicant discovered the anticompetitive activity being reported and the date the leniency application was made . . .”

Monopoly Report

In September, the Antitrust Division released a report explaining its view of the antitrust issues raised by single-firm conduct. The report, “Competition and Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act,” reflects the Justice Department's enforcement policy, according to the report (Trade Regulation Reporter ¶50,231).

Among the findings in the DOJ report were statements that exclusive dealing arrangements foreclosing less than 30 percent of existing customers or effective distribution should not be illegal; that the practice of tying can often promote efficiency and therefore the “historic hostility” towards the practice is unjustified; and that antitrust liability for mere unilateral, unconditional refusals to deal with rivals should not play a meaningful role in Section 2 enforcement.

The document was criticized by three of the FTC Commissioners: Pamela Jones Harbour, Jon Leibowitz, and J. Thomas Rosch. The three said that the report could radically weaken enforcement of Sec. 2 of the Sherman Act.

The Commissioners voiced two major problems with the report. The first was that it 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.” The second was that it “seriously overstates the level of legal, economic, and academic consensus regarding Section 2.” (See Trade Regulation Talk, September 8, 2008).

Employee Benefits Company Failed to State Per Se Boycott Claim

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

An employee benefits firm that marketed “an innovative strategy for controlling health care costs” failed to allege that a life insurance company and independent agents engaged in a per se illegal boycott, the U.S. Court of Appeals in Cincinnati has ruled. Dismissal of the antitrust claims (2007-2 Trade Cases ¶75,807) was affirmed.

Boycott Through Horizontal Agreement

Only a group boycott through horizontal agreement could constitute a per se illegal violation, the court explained. There neither was, nor could be, a horizontal relationship among the insurance company and its wholly-owned and controlled companies.

Moreover, there was no horizontal agreement among direct competitors to establish a “hub and spoke” conspiracy that qualified for per se treatment.

Although the complaining firm sufficiently identified the “hub” as the life insurance company and the “spoke” as the independent insurance agents, “the rim holding everything together is missing,” according to the court.

There were no agreements identified between competitors. The complaining firm focused instead on agreements between the life insurance company and other insurance agents, but these were irrelevant because the critical issue for establishing a per se violation with the hub-and-spoke system was how the spokes were connected to each other, the court found.

Relevant Market

The company could not assert a claim under rule-of-reason analysis, because it failed to allege a relevant market, the court held. The rule-of-reason test required a court to analyze the actual effect on competition in a relevant market to determine whether the conduct unreasonably restrains trade.

Without an explanation of the other insurance companies involved—and their products and services—the boundaries of the relevant product market could not be determined, and the case had to be dismissed for failure to state a claim.

The December 22 decision is Total Benefits Planning Agency Inc. v. Anthem Blue Cross and Blue Shield, 2008-2 Trade Cases ¶76,435.

Wrongfully Terminated Franchisee Denied Damages on Retrial

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

A bioremediation service franchisee, whose two franchises were terminated as a result of the franchisor’s breach of contract and breach of fiduciary duty, was denied damages for either lost profits or the value of its businesses.

In a retrial on the issue of damages, the federal district court in Fort Meyers, Florida held that the franchisee had abandoned its lost profits theory of damages, had failed to present competent evidence on lost profits, and had failed to demonstrate business value damages through destruction of its businesses.

Following the expiration of the parties' agreements, the franchisor filed suit against the franchisee for trademark infringement, breach of contract, and other claims, in part, because the franchisee continued to display the franchisor's trademarks. The franchisee filed several counterclaims, including breach of contract and breach of fiduciary duty.

Jury Award

A jury found in favor of the franchisee on all claims and counterclaims and awarded the franchisee $1,224,500 in damages. However, the court had ordered a retrial on the issue of damages only, finding that the award was the result of conjecture and improper measures.

In its brief for the retrial, the franchisee indicated that it did not disagree that with the principle that it could not recover both lost profits and the value of its business, since those remedies were mutually exclusive, the court observed. The franchisee represented in its brief that it desired to proceed solely on the value of the franchises. Thus, to allow the franchisee to recover any lost profits after the close of the damages retrial would be unfair to the franchisor, the court held.

Business Value

The franchisee was denied damages based on the value of its franchised businesses because Florida law, required a showing that the businesses were in fact destroyed. The franchisee failed to demonstrate the destruction of its two franchised. To the contrary, the businesses continued to provide bioremediation services, often to the same customers and using the same equipment as they had during the terms of the franchise agreements, the court observed.

Even assuming that the value of the businesses was an appropriate measure of damages in the retrial, the franchisee failed to offer competent evidence proving the value of its two franchises, the court ruled.

The franchisee presented an expert witness who testified that the value of the businesses on the date of termination was "approximately $58,000." The expert projected the businesses' future cash flows, but relied only on actual financial data from the five-month period prior to the termination to prepare his projection. Further, the expert recognized that if he had relied on any earlier period of income, it would have diminished the value of the businesses.

It appeared to the court that the expert relied on the five-month period because that was the only period that would result in a favorable valuation for the franchisee. A five-month period of income was not a reliable indicator, the court held. A reasonable investor would likely value a business' income over at least a 12-month, if not a 24-month, period.

Reliability of Financial Statements

The reliability of the financial statements forming the basis of the expert's opinion was also doubtful, according to the court. Testimony revealed that the franchisee had created two conflicting financial statements for 2002. Further, the expert admitted that he was not able to confirm the information on any of the financial statements. Most tellingly, the principal of the franchisee admitted in testimony that some of the financial statement provided to the expert was inaccurate. Inaccurate financial statements could not form the basis of reliable testimony on the valuation of a business.

The decision is Environmental Biotech, Inc. v. Sibbitt Enterprises, Inc., CCH Business Franchise Guide ¶14,032.

FTC Amends Rules for Administrative Trials

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

The Federal Trade Commission issued interim final rules on December 23, 2008, amending Parts 3 and 4 of its Rules of Practice. The amended rules are intended to expedite the Part 3 process for administrative trials. The agency said that it is responding to criticism that the agency's adjudicatory process is too protracted.

Tighter Time Limits

The amended rules set tighter time limits during the adjudicatory process leading up to the issuance of an administrative law judge’s initial decision. For example, evidentiary hearings will generally be five months from the date of the complaint in most merger cases and eight months from the date of the complaint in non-merger cases, and the time to answer a complaint will be shortened from 20 to 14 days.

In addition, the amendments would change discovery and motions practice, expedite evidentiary hearings, and change the Commission’s process for handling motions to dismiss or to withdraw a case from administrative adjudication after a federal court’s denial of a preliminary injunction in an action brought by the Commission.

Commission Deadlines

The Commission also announced for the first time tight deadlines for its resolution of appeals. The amendments set deadlines for when the Commission must rule on dispositive motions, applications for interlocutory appeals, and motions to dismiss after the denial of a preliminary injunction. The Commission added a requirement that it rule on motions to dismiss or for withdrawal from adjudication not later than 30 days after the filing of motion papers.

Notice of Proposed Rulemaking

The amendments follow an October 7, 2008, Notice of Proposed Rulemaking (NPRM), in which the Commission invited public comment on proposed amendments. “The proposed amendments announced in the October 7, 2008, NPRM were the culmination of a recent broad and systematic internal review to improve the Commission’s Part 3 practices and procedures in light of recent adjudicatory experiences,” according to the Commission.

The public comment period closed on November 6, 2008. The Commission received eight comments.

Commission Response to Public Comments

The Commission responded to comments criticizing the rule changes. It rejected arguments that the timing deadlines are unfair, noting that “the government’s monopoly case against Microsoft and its merger case against Oracle, have gone to trial on roughly similar schedules.” Moreover, the Commission noted that the provisions authorize the extension of deadlines for “good cause.”

Commenters’ concerns about the role of the Commission in deciding legal and policy issues early in the proceeding were not compelling. According to the Commission, the commenters failed to demonstrate that early Commission involvement improperly interferes with the independence of the administrative law judge.

Prospective Application

The amendments will apply prospectively only to new cases initiated after publication in the Federal Register, which is anticipated shortly. Current rules will govern all currently pending Commission adjudicatory proceedings.

Request for Comment

The agency will accept public comments on the rules comments within 30 days of the date they are published in the Federal Register. The Commission is especially interested in comments on amendments that were not proposed in the NPRM.

Comments should refer to "Parts 3 and 4 Rules of Practice Rulemaking --P072104" and should be mailed or delivered to: Federal Trade Commission, Office of the Secretary, Room H-135 (Annex R), 600 Pennsylvania Avenue, NW, Washington, DC 20580.

Comments may also be filed in electronic form here.

A news release and the text of the Federal Register Notice appear on the FTC website.

FTC Seeks Dismissal of Whole Foods' Court Challenge to Administrative Proceeding

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

The FTC has filed a motion to dismiss an action brought in the federal district court in Washington, D.C. by Whole Foods Markets, Inc., alleging that the Commission violated the specialty grocer’s due process rights.

Whole Foods filed the action on December 8, contending that the agency’s administrative proceedings involving Whole Foods’ now consummated acquisition of rival Wild Oats Markets, Inc. are improper and violate Whole Foods’ rights under the Administrative Procedure Act. (See Trade Regulation Talk, December 10, 2008.)

Whole Foods is seeking an order from the court requiring the Commission to terminate its ongoing administrative proceedings.

Exclusive Jurisdiction

According to the FTC’s December 12 filing, the district court lacks subject matter jurisdiction to hear the case. The agency contends that the U.S. Court of Appeals in Washington, D.C. has exclusive jurisdiction over the issues.

The FTC Act provides for exclusive review of administrative decisions in a federal appellate court, the agency explained. Thus, the FTC asked the court to dismiss Whole Foods’ complaint, or in the alternative, to transfer the matter to the U.S. Court of Appeals in Washington, D.C.

The case is Whole Foods Markets, Inc. v. FTC, Case No. 1:2008 cv 02121.

Terminated Franchisee Must Pay Franchisor Past Due, Future Royalties

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

A child care business franchisee that was terminated for nonpayment of royalties was required to pay the franchisor both past-due and lost future royalties, according to a Texas appellate court, applying Georgia law pursuant to a contractual choice of law. A jury award of nearly $1.4 million—for both past-due and future royalties—was affirmed.

Contrary to the franchisee’s claim, the award was not so flagrantly excessive as to create a clear implication of bias on the part of the jury. There was no compelling evidence to overcome the presumption that the trial court’s approval of the verdict should not be disturbed.

Past-Due and Future Royalties

The court rejected the franchisee’s references to Postal Instant Press, Inc. v. Sealy (Business Franchise Guide ¶10,893) and its progeny for the proposition that a franchisor could not recover past due and future royalties after the termination of a franchise agreement.

The Sealy court found that a franchisor could not recover future profits where it had terminated the agreement because the damage was proximately caused by the franchisor’s termination rather than by the franchisee’s breach of contract. It expressly refused to consider whether damages for future damages would be available if the franchisee terminated the agreement, the court noted.

Moreover, the Sealy court did not preclude the award of future royalties if the franchisor terminated the agreement, where the franchisee’s conduct proximately caused the damages and the award was not excessive, oppressive, or disproportionate.

Nonpayment, Withdrawal, Breakaway Operations

Unlike in the Sealy case, this franchisee failed to make royalty payments, independently withdrew from the from the franchise system, and began operating its child-care facilities under a different name. The jury found that the franchisee had failed to comply with a material obligation of its agreements. Although the franchisor in Sealy terminated the franchise agreement prior to filing suit, the jury in this case found that the franchisor had not failed to comply with the parties’ agreements.

Amount of Damages

The jury verdict was supported by the evidence presented at trial, the appellate court held. The franchisor’s accountant and damage expert testified to prospective losses of royalty payments from the date of the franchisee’s last payment. He calculated past-due royalties for two facilities at more than $564,123 and set future lost royalties, based on continuing the 25-year franchise agreements, at more than $1,641,000.

The expert’s revenue calculations were based on the business records of the two franchises, including enrollment records, cash receipts, account deposit records, check registers, income tax returns, weekly revenue reports, sign-in sheets, tuition and income spreadsheets, and monthly royalty summaries.

Mere difficulty of fixing the exact amount of lost profits is not a legal obstacle to an award, the court held. In this instance, the jury award of $1,384,000 was “within the range of evidence presented at trial.” Thus, the award was upheld.

The decision is Progressive Child Care Systems v. Kids ‘R’ Kids International, Inc., Texas Court of Appeals, Second District of Texas, Forth Worth, CCH Business Franchise Guide ¶14,018.

Gift Card Suit Not Barred by Receipt of Card from Employer

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

The fact that a gift card holder received the card as a gift from her employer did not bar the holder from pursuing claims for damages and injunctive relief on the ground that small-print disclosures of “dormancy fees” on gift cards violated the New York deceptive acts and practices law, a New York appellate court has ruled.

The holder also could pursue claims for breach of contract and unjust enrichment. Claims brought under the New York gift card statute were rejected for lack of authorization of a private right of action.

Disclosure of Dormancy Fee

In a class action complaint, the card holder alleged that the type size used by card issuer Simon Property Group was impermissibly small, that Simon failed to clearly and conspicuously disclose the terms of the dormancy fee, and that this conduct, combined with deceptive marketing, damaged the holder. Allegations of a card issuer's unilateral imposition of illegal and/or unwarranted fees upon its customers had been held to state a valid claim of consumer fraud. Dismissal of the holder's deceptive practices claim was reversed.

Consumer Transaction

The card holder relied on a New York civil practice rule, N.Y. CPLR Sec. 4544, which provided 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.

Even though the holder received the card from her employer, the ultimate intended use of the card was for the recipient to purchase consumer goods with it for personal, family, or household purposes, the court determined. As a result, contrary to Simon's contention, the contract at issue involved a “consumer transaction” subject to CPLR Sec. 4544. Simon's other contentions regarding applicability of Sec. 4544 had already been rejected in Lonner v. Simon Property Group, Inc., CCH Advertising Law Guide ¶63,156.

Gift Card Statute

There was no private right of action for violations of the New York gift certificate statute, the court held. The statute (General Business Law Sec. 396-i, CCH Advertising Law Guide ¶33,215) did not expressly provide a private right of action and authorized only the Attorney General to commence an action for a violation of its provisions. Other sections of the General Business Law, such as Sec. 349 governing unfair and deceptive practices, did expressly provide for a private right of action (Sec. 349(h), CCH Advertising Law Guide ¶33,210). This suggested that recognition of an implied private right of action would be inconsistent with the legislative scheme.

Injunctive Relief

The card holder could pursue a claim for injunctive relief to bar Simon from collecting dormancy fees that allegedly were inadequately disclosed. Simon contended that, pursuant to a consent order with the New York attorney general, the fee structure for all of Simon's New York cards issued on or after October 18, 2004, complied with the applicable statutory provisions. However, the consent order did not apply to cards sold prior to October 18, 2004, including the holder's card. Dismissal of the claim for injunctive relief was reversed.

The November 25 decision in Goldman v. Simon Property Group, is reported at CCH Advertising Law Guide ¶63,195.

Gift Certificate Smart Chart

A new Smart Chart™ gives subscribers to the Advertising Law Guide on the CCH Internet Research NetWork quick access to detailed information on the types of certificates and cards that are subject to—and exempt from—statutes in more than 35 states. 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™.

Trade Regulation Tidbits

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

News, updates, and observations:

 Antitrust Institute President Bert Foer met on December 15 with members of the Obama transition team to discuss antitrust policy and specifically the AAI’s transition report to the next president (“The Next Antitrust Agenda: The American Antitrust Institute’s Transition Report on Competition Policy to the 44th President of the United States”). The 413-page report, available here on the AAI web site, contains detailed recommendations, background information, and analysis on issues such as cartels, monopoly, merger policy, private enforcement of antitrust laws, and antitrust policy in particular industries.

A memo on the meeting indicated that Foer made the following points: (1) the Antitrust Division in the Bush Administration did a “creditable job” in fighting cartels, but has been lax on merger enforcement, has ignored abuse in vertical relationships, and became “a cheerleader” for monopoly; (2) the Antitrust Division’s report on Section 2 of the Sherman Act should be withdrawn; (3) the next Department of Justice antitrust chief should be receptive to a “post-Chicago” view of economics and not heavily influenced by having spent a career defending the nation’s largest corporations against antitrust enforcement; (4) the Antitrust Division deserves significant increases in its budget; (5) the Division and Solicitor General has been consistently siding with antitrust defendants and should have “a more balanced perspective”; (6) the Division should have a more aggressive approach to merger enforcement; and (7) legislative priorities should include reforming the handling of resale price maintenance in light of the Leegin decision.

 Consumers of beer were not entitled to a preliminary injunction blocking InBev N.V./S.A.'s acquisition of the Anheuser-Busch Companies Inc., the federal district court in St. Louis has ruled. It was overwhelmingly likely that they could not succeed on the merits of their claim that the transaction violated Sec. 7 of the Clayton Act. On the same day that the court denied the preliminary injunctive relief, InBev announced that it had completed its acquisition of Anheuser-Busch. The consumers, however, have continued to pursue the litigation. They contended that, if the acquisition were consummated, they were threatened with loss and damage in the forms of higher prices, fewer services, fewer competitive choices, deterioration of products and product diversity, suppression and destruction of smaller actual competitors, and other anticompetitive effects. The consumers admitted that InBev and Anheuser-Busch were not competing directly with each other in the U.S. beer market, but contended that Belgium-based InBev could have entered the market. The consumers, however, failed to show that any current beer producer or distributor viewed InBev as a potential entrant into the U.S. beer market. Thus, the characterization of InBev as a perceived potential or actual potential competitor in the U.S. beer market was purely speculative, and the evidence presented was insufficient to warrant granting a preliminary injunction. The decision is Ginsberg v. InBev SA/NV, 2008-2 Trade Cases ¶76,400.

 A group of congressmen from Texas introduced legislation (H.R. 7330) on December 10 to stop the marketing of college football’s “Bowl Championship Series National Championship Game” as a championship or national championship game. In addition, the proposed “College Football Playoff Act of 2008” would make it unlawful to market merchandise related to any post-season NCAA Division I Football Bowl Subdivision (FBS) football game that refers to the game as a championship or national championship game. The measure would prohibit such conduct, unless the game is the final game of a single-elimination post-season playoff system for which all NCAA Division I FBS conferences and unaffiliated Division I teams are eligible. A violation would constitute an unfair or deceptive act or practice under the FTC Act. U.S. Rep. Joe Barton (R-Texas), a sponsor, said “the BCS championship game is not a championship game under any sensible interpretation of the manner in which sports championships are determined.” This season’s BCS Championship game pits No. 1 Oklahoma (12-1) against No. 2 Florida (12-1) on January 8, 2009. The University of Texas (11-1) is ranked third, despite having beaten Oklahoma during the regular season.

Consumers Could Not Establish California Unfair Competition Claim Absent Injury, Causation

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

A group of consumers could not maintain a California Unfair Competition Law claim against a retailer for false advertising because they failed to allege an injury in fact and causation, a California appellate court ruled.

The retailer ran advertisements that prominently stated the price for a single unit of the products for sale, when those products could be purchased only in multi-unit sets. The consumers alleged this constituted false advertising in violation of the Unfair Competition Law (UCL).

While the initial case was pending, California voters passed Proposition 64, legislation that changed the standards for standing under the UCL. Proposition 64 required plaintiffs in UCL actions to present evidence of actual harm resulting from the unfair competition or deceptive acts.

California courts held that Proposition 64 applied to pending cases. Thus, the complaining consumer had to show that he suffered injury in fact and lost money or property as a result of the unfair competition. Since the original consumer plaintiff did not allege any injuries, the lower court allowed the addition of plaintiffs who alleged injuries and losses as a result of the advertising.

Injury Requirement

Although the additional consumer plaintiffs alleged injuries caused by the advertising, the appellate court found that they failed to present sufficient facts to support those allegations. Rather than identifying specific injuries and losses, the consumers merely stated that such injuries occurred.

In order to have standing under the UCL, the consumers needed to identify the products they purchased or how the purchases injured them. The consumers failed to present evidence that the purchased products were defective, overpriced, or unwanted, according to the court.

The consumers also failed to state a cause of action because they did not allege a quantifiable injury that could be remedied by restitution. The UCL authorized the court to grant successful consumer plaintiffs restitution rather than damages. In this instance, the alleged injuries resulted from the inconvenience and cost of gasoline used in traveling to the retailer’s store. These allegations did not constitute a request for restitution. The court explained that restitution awards act to return money wrongfully taken from an injured party in order to restore the status quo.

Causation

In order to state a UCL claim, the consumers had to present evidence that the alleged injuries were caused by the retailer’s false advertising. While the consumers described the advertisements and the alleged injuries, they failed to allege that the advertisements actually caused the injuries.

The consumers did not show that they entered into a transaction for the advertised products because of the advertisements. They failed to allege that they relied on the advertisements in any way.

At the time of the purchases, the consumers knew the actual prices of the products and still went ahead with the transactions. Thus, the alleged false advertising did not injure the consumers in any way, according to the appellate court. Absent injury, the consumers did not state a claim against the retailer under the UCL.

The decision is Erickson v. Fry’s Electronics, Inc., filed November 25, California Court of Appeal, Fourth Appellate District. The opinion will appear at CCH State Unfair Trade Practices Law ¶31,715.

“Light” Cigarette Suit Not Barred by Federal Law, FTC Actions: U.S. Supreme Court

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

Smokers can pursue a suit based on claims that tobacco company Philip Morris violated the Maine Unfair Trade Practices Act by advertising and promoting “light” cigarettes, the U.S. Supreme Court ruled on December 15.

The Court rejected contentions by Philip Morris and its parent company, Altria Group, that the state law claims were expressly preempted by the Federal Cigarette Labeling and Advertising Act and impliedly preempted by Federal Trade Commission actions.

Express Preemption

The Labeling Act provided that “[no] requirement or prohibition based on smoking and health shall be imposed under State law with respect to the advertising or promotion of any cigarettes the packages of which are labeled in conformity” with the Act.

Philip Morris contended that Congress could not have intended to permit the enforcement of state fraud laws because doing so would defeat the Labeling Act’s purpose of preventing nonuniform state warning requirements. However, fraud claims rely only on a single, uniform standard: falsity, the Court pointed out.

In Cipollone v. Liggett Group, Inc., 505 U.S. 504 (1992), the Court held that a common law fraud claim was not preempted by the Labeling Act. As in Cipollone, the smokers' alleged a breach of the duty not to deceive by claiming that the deceptive marketing statements “light” and “lowered tar and nicotine” induced them to purchase the product.

The presence of the federally-mandated warnings might bear on the materiality of the allegedly fraudulent statements, but that possibility did not change the case from one about the marketing statements to one about the warnings, according to the Court.

Implied Preemption

The smokers’ claims were not impliedly preempted by FTC actions. Neither the handful of FTC industry guidances and consent orders on which Philip Morris relied nor the Commission’s inaction with regard to “light” descriptors even arguably justified the preemption of state deceptive practices laws, the Court held.

The smokers still must prove that Philip Morris’ use of “light” and “lowered tar” descriptors in fact violated the state deceptive practices statute, but neither the Labeling Act’s preemption provision nor the FTC’s actions in this field prevented a jury from considering that claim, the Court concluded. The decision of the U.S. Court of Appeals in Boston (CCH Advertising Law Guide ¶62,656, 2007-2 Trade Cases ¶75,877, CCH State Unfair Trade Practices Law ¶31,454) was affirmed and remanded.

Justice Stevens wrote the majority opinion, joined by Justices Kennedy, Souter, Ginsberg, and Breyer. Justice Thomas dissented, joined by Chief Justice Roberts and Justices Scalia and Alito.

The December 15, 2008, decision in Altria Group, Inc. v. Good, will be reported at CCH Advertising Law Guide ¶63,232 and in CCH Trade Regulation Reports and CCH State Unfair Trade Practices Law.

Toy Maker Gets Early Christmas Gift—Dismissal of Rival’s False Ad Suit

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

The federal district court in Seattle has given toy maker Rose Art Industries, Inc. an early Christmas gift. The court granted the toy maker’s motion for summary judgment in an action brought by rival PlastWood SRL, alleging that Rose Art engaged in false advertising in violation of Sec. 43(a) of the Lanham Act in the marketing of its Magnetix line of construction toy sets.

The Magnetix construction sets competed with PlastWood’s SuperMag construction toy sets. These toy sets are comprised of small plastic building blocks that are held together by magnetic force. Rose Art’s Magnetix toys were labeled as entertainment for ages 3 to 100.

According to PlastWood, Rose Art’s advertising and product packaging stated that a wide variety of structures could be built by assembling Magnetix blocks in certain described manners. PlastWood contends that at least three of those structures—a sphere/Ferris wheel, an airplane, and a skyscraper—could not be built and collapsed under their own weight. In addition, PlastWood contended that other structures could be built only be built by experts and not by the toys’ intended audience: children.

Literal Falsity Claims

PlastWood limited its theory for liability to a claim of literal falsity. It did not pursue a false advertisement claim based on misleading advertisement.

The court first rejected PlastWood’s argument that Rose Art’s advertising was literally false because children could not build the toys. The statements were not literally false simply because a three year old could not build some of the structures, the court stated.

PlastWood failed to cite any authority for the proposition that advertising structures that were hard to build was tantamount to a false advertising claim, especially considering the box said the product was intended for ages 3 to 100.

The court went on to say that PlastWood failed to establish any genuine issue of material fact in support of its assertion that the three structures could not be built as represented. The court decided that no reasonable jury could come to such a conclusion.

Expert Witness

Rose Art’s expert, a self-proclaimed independent contractor and “builder of construction toys,” using only the parts included in the Magnetix toy sets and without using any glue or other adhesive, was able to construct the three structures, the court stated.

PlastWood contended that Rose Art’s expert modified the structures while building them and that they were not identical to those depicted on the Magnetix toy box. However, there was no material difference between the expert's structures and what was depicted on the packaging, in the court’s view. Criticisms made by PlastWood’s expert were not sufficiently material to withstand summary judgment.

Rose Art’s Magnetix line is no longer on the market. Following a safety recall of certain Magnetix toys, Rose Art launched a new MagNext product line earlier in 2008.

The text of the December 5, 2008, decision in PlastWood SRL, et al., v, Rose Art Industries, Inc., Case No. C07-0458JLR, will appear in CCH Trade Regulation Reporter at 2008-2 Trade Cases ¶76,410 and in CCH Advertising Law Guide.

Another view of the decision appears on the Seattle Trademark Lawyer blog, published by Michael Adkins of Graham & Dunn. The blog has posted the full text of the decision. It appears here.

Sony Agrees to $1 Million Penalty for Child Privacy Practices of Music Fan Websites

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

Sony BMG Music Entertainment (Sony Music) has agreed to pay $1 million as part of a settlement to resolve Federal Trade Commission charges that it violated the Children’s Online Privacy Protection Act (COPPA) and the Commission’s implementing Rule, the FTC announced on December 11, 2008.

Collection, Maintenance, Disclosure of Information

The Commission’s complaint alleges that, through its music fan websites, Sony Music improperly collected, maintained and disclosed personal information from thousands of children under the age of 13, without their parents’ consent. The civil penalty to be paid by Sony Music matches the largest penalty ever in a COPPA case.

Sony BMG Music Entertainment, a subsidiary of Sony Corporation of America, represents hundreds of popular musicians and entertainers, including numerous artists popular with children and teenagers. The company operates over 1,000 websites for its musical artists and labels. Sony Music requires users to submit a broad range of personal information, together with date of birth, in order to register for these sites.

On 196 of these sites, Sony Music knowingly collected personal information from at least 30,000 underage children without first obtaining their parents’ consent, in violation of COPPA, according to the FTC.

Many of these sites also enable children to create personal fan pages, review artists’ albums, upload photos or videos, post comments on message boards and in online forums, and engage in private messaging. In this way, children were able to interact with Sony Music fans of all ages, including adults.

Requirement of Parental Consent

“Sites with social networking features, like any websites, need to get parental consent before collecting kids’ personal information,” said FTC Chairman William E. Kovacic. “Sony Music is paying the penalty for falling down on its COPPA obligations.”

COPPA prohibits unfair or deceptive acts or practices in connection with the collection, use, or disclosure of personally identifiable information from and about children under 13 on the Internet. The law requires operators to notify parents and obtain their consent before collecting, using, or disclosing children’s personal information.

Notice of Information Collection and Use

The FTC’s complaint alleges that Sony Music violated COPPA by failing to provide sufficient notice on the Sony Music websites of what information the company collects online from children, how it uses such information, and its disclosure practices; failing to provide direct notice to parents of Sony Music’s information practices; failing to obtain verifiable parental consent; and, failing to provide a reasonable means for parents to review the personal information collected from their children and to refuse to permit its further use or maintenance.

FTC Act Section 5 Charges

The FTC’s complaint also charges Sony Music with violating Section 5 of the Federal Trade Commission Act by falsely stating in its privacy policy that users who indicate that they are under 13 on its website registration pages will be restricted from participating in Sony Music’s web page activities. In fact, Sony Music accepted registrations from children who entered a date of birth indicating that they were under 13.

Remedies

The Commission’s consent order calls for Sony Music to pay a $1 million civil penalty. In addition, the order specifically prohibits Sony Music from violating any provision of the Rule, and requires it to delete all personal information collected and maintained in violation of the Rule. The company is required to distribute the order and the FTC’s “How to Comply with the Children’s Online Privacy Protection Rule” to company personnel. The order also contains standard compliance, reporting, and record keeping provisions to help ensure the company abides by its terms.

To provide resources to parents and their children about children’s privacy in general and social networking sites in particular, the order requires Sony Music to link to certain FTC consumer education materials for the next five years. The company must include a link to the children’s privacy section of the Commission’s www.ftc.gov website on any site it operates that is subject to COPPA.

In addition, Sony Music must include links to the social networking section of the Commission’s www.onguardonline.gov website on any of its sites that offer users the opportunity to create publicly viewable profiles.

The Commission vote approving the complaint and consent order was 4-0. On December 10, 2008, the Department of Justice, on behalf of the FTC, filed the complaint in the U.S. District Court for the Southern District of New York and submitted the consent decree for the court’s approval.

A news release on the development appears here on the FTC website. Text of the complaint and consent decree appear here.

Further Information on COPPA

The text of the Children’s Online Privacy Protection Act is at CCH Trade Regulation Reports ¶27,590, CCH Advertising Law Guide ¶10,700, and CCH Privacy Law in Marketing ¶25,300.

The text of the FTC’s Children’s Online Privacy Protection Rule is at CCH Trade Regulation Reports ¶27,590, CCH Advertising Law Guide ¶16,010, and CCH Privacy Law in Marketing ¶26,300.

The Act and Rule are explained by advertising attorney Gonzalo E. Mon of Kelley Drye & Warren LLP at CCH Privacy Law in Marketing ¶9000 through ¶9080.

Further details about the Sony action will appear in CCH Trade Regulation Reports, CCH Advertising Law Guide, CCH Privacy Law in Marketing.

Whole Foods Attempts to Block FTC Administrative Proceedings on Merger

This posting was written by John W. Arden.

Whole Foods Market has filed a federal lawsuit attempting to prevent the FTC from conducting an administrative trial on February 16, 2009 regarding last year’s Whole Foods-Wild Oats merger.

A complaint, filed December 8 in the federal district court in Washington, D.C., claimed that the FTC’s administrative action would violate Whole Foods’ due process rights and the Administrative Procedure Act.

“How can the same FTC sit as judge and jury sometime in the future on the very same case in which it has already declared that the Whole Foods-Wild Oats merger is illegal and its key expert’s testimony is ‘garbage’?” asked John Mackey, co-founder and CEO of Whole Foods Market.

After failing to convince a federal court to block the merger, the FTC is “attempting to get a second bite at the apple by challenging this merger in administrative proceedings conducted by and within the Commission itself,” according to the complaint.

Violation of Due Process

The Commission allegedly deprived Whole Foods’ due process rights by:

 Prejudging the case in public legal briefs prior to commencing the administrative proceeding;

 Imposing an “unreasonably truncated and arbitrary” discovery schedule that prejudices the specialty grocer;

 Appointing as Presiding Official of the administrative proceeding one of its own Commissioners who had prejudged the case and then replacing him with an administrative law judge and “stripping him of his independence to modify the schedule without the Commission’s permission," and

 Failing to disqualify a Commissioner from adjudicating the ultimate merits of the merger.

Prejudgment and Bias

Count one of the complaint asserted a violation of due process based on the Commission’s prejudgment and biases.

According to Whole Foods, even before the commencement of the administrative trial or the introduction of any evidence, the FTC stated that it had (1) established that “premium natural and organic supermarkets constitute a distinct market for antitrust purposes,” (2) proved that the “premium natural and organic supermarkets market” was the appropriate relevant market in which to analyze the merger, (3) concluded that the relevant market was supported by extensive evidence presented to the district court, (4) determined that the merger would substantially lessen competition, (5) concluded that Whole Foods’ expert economic analysis was “garbage” lacking any empirical foundation, and (6) concluded that Whole Foods’ witnesses were unreliable and “subject to manipulation.”

In view of these statements, the administrative proceedings will be fundamentally flawed and cause Whole Foods to suffer irreparable harm to its constitutional rights to due process, the complaint asserted.

Unreasonable Scheduling Order

The second count alleged that the Commission’s “unreasonable” scheduling order—closing discovery by December 19, 2008 and requiring depositions to be completed by December 19, 2008—deprived Whole Foods of a fair opportunity to prepare its defenses to the Commission’s charges.

In count five, the scheduling order was alleged to violate the Administrative Procedure Act, which requires the FTC to refrain from engaging in “arbitrary and capricious” conduct.

Failure to Disqualify

Count three maintains that the Commission has violated the due process clause by depriving Whole Foods of a fair and impartial adjudicatory proceeding. Due process requires that the Commission disqualify itself from adjudicating the merits of the merger, it claimed.

Whole Foods asked the federal district court to find that the Commission violated due process, to order the Commission to terminate the administrative proceeding and proceed in federal district court, and to award Whole Foods costs incurred in bringing the action.

The complaint is Whole Foods Market, Inc. v. Federal Trade Commission, Case 1:08-cv-02121, filed December 8, 2008. A news release on the development appears here on the Whole Foods website.

The Whole Foods-Wild Oats merger was consummated on August 28, 2007, after the federal district court in Washington, D.C. denied the Commission’s motion for a preliminary injunction blocking the deal (2007-2 Trade Cases ¶75,831).

On July 29, 2008, the U.S. Court of Appeals in Washington, D.C. “reluctantly” reversed the federal district court a lower court’s decision (2008-2 Trade Cases ¶76,233). In an unusual move, a three-judge panel issued three separate opinions. The majority concluded that the district court in its August 2007 decision “underestimated the FTC’s likelihood of success on the merits.”

Chinese Firms Not Immune from Vitamin Price Fixing Claims

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

Chinese manufacturers of vitamin C were not entitled to dismissal of price fixing conspiracy claims against them on the basis of any of three doctrines of foreign sovereign immunity—act of state, foreign sovereign compulsion, or international comity, the federal district court in Brooklyn has ruled.

Although each of the doctrines is different, all were premised on an act by a foreign government, the court noted. The manufacturers failed to allege facts showing that the Chinese government required the defending corporations to fix prices in violation of the Sherman Act, the court determined.

The manufacturers' motion for dismissal on those grounds was therefore denied. A second amended complaint, adding a direct purchaser class representative and two additional defendants, was dismissed with leave to replead to add factual allegations against the proposed new defendants.

Role of Chinese Government

An amicus curiae brief submitted by the Chinese Ministry of Commerce allegedly detailing the Ministry’s role in orchestrating and maintaining the vitamin C cartel would not have sufficed to establish that the manufacturers’ activities were compelled by the Chinese government.

The brief described the creation and operation of an organization—characterized by the defendants as a trade association—that facilitated the actions of the alleged cartel, explaining that the organization was an entity under its direct and active supervision that had a central role in regulating China's vitamin C industry.

Although the Ministry noted that it did not itself decide what specific prices for vitamin C should be, it (along with the defending manufacturers) asserted that they could not have exported vitamin C that did not conform to an agreed-upon price.

Compulsion of Anti-Competitive Acts?

While the Ministry’s brief merited substantial deference, it could not be taken as conclusive evidence of compulsion, particularly given that the plain language of other documents relied upon by the manufacturers to demonstrate governmental compulsion of their anti-competitive acts directly contradicted the Ministry’s position by suggesting that the manufacturers’ acts were voluntary rather than compelled.

If the documents were to be credited, they suggested a complex interplay that made it difficult at the pleading stage to determine the degree of the manufacturers' independence in making pricing decisions.

It was not clear from the record at the dismissal stage of the case whether the defending manufacturers were performing government function, whether they were acting as private citizens pursuant to governmental directives, or whether they were acting as unrestrained private citizens, in the court's view.

Numerous cases cited by the defending manufacturers in support of their motion to dismiss on sovereign immunity grounds involved much clearer examples of government compulsion or were decided on a fuller record.

Chinese Law

By the Ministry’s own acknowledgment, Chinese law was not as transparent as that of the United States or other constitutional or parliamentary governments, the court observed. Rather than codifying its statutes, the Chinese government apparently frequently governed
by regulations promulgated by various ministries.

According to the Ministry, private citizens or companies could be authorized under Chinese regulations to act in certain circumstances as government agents. Even the formation of the “vitamin C subcommittee”—characterized by the complaining purchasers as a trade association—was shrouded in mystery, as it was apparently authorized in response to a request by unidentified applicants who were quite likely the defendants themselves.

Accordingly, the record was “simply too ambiguous to foreclose further inquiry into the voluntariness of defendants' actions.”

Amended Complaint

The court also held, however, that two California-based vitamin resellers were entitled to dismissal of a second amended complaint filed by the putative class of vitamin purchasers adding them as defendants to the suit. While the second amended complaint was quite detailed in its pleading of a conspiracy among the Chinese manufacturers, it did not explain how the California resellers could have been part of the manufacturer cartel. Instead, it merely described them as a subsidiary and an affiliate, respectively, of one of the defending
manufacturers during the class period.

Thus, the second amended complaint both failed to provide notice to the resellers as to what they were alleged to have done wrong and changed the nature of the originally-charged conspiracy. The purchasers were directed to remedy these shortcomings by alleging what actions the resellers took that harmed the plaintiffs.

The decision is In re Vitamin C Antitrust Litigation, 2008-2 Trade Cases ¶76,406.

U.S. Supreme Court Hears “Price-Squeeze” Case

This posting was written by CCH Washington Correspondent John Scorza.

The U.S. Supreme Court on December 8 took up the question of whether a plaintiff states a claim under Section 2 of the Sherman Act by alleging that the defendant—a vertically integrated retail competitor with an alleged monopoly at the wholesale level but no antitrust duty to provide the wholesale input to competitors—engaged in a “price squeeze” by leaving insufficient margin between wholesale and retail prices to allow competitors to compete.

The claim at issue was brought by linkLINE Communications Inc., an independent Internet service provider (ISP), against SBC California Inc.

In the suit, linkLine claimed that the wholesale prices SBC charged to linkLINE and other ISPs for access to its DSL lines were so high that the ISPs could not effectively compete in the retail market. SBC and its affiliates own phone lines and other facilities needed for DSL service, and they control a large share of the retail DSL market in California.

Use of Monopoly Power

linkLine contends that SBC is using its monopoly power to drive competitors out of the market. The company wants the Supreme Court to vacate a decision of the U.S. Court of Appeals in San Francisco (2007-2 Trade Cases ¶75,875) and to send the case back to district court so it can file an amended complaint alleging that the prices SBC charged were predatory.

Richard Brunell of the American Antitrust Institute (AAI) appeared in support of linkLINE.

“The problem with a price squeeze by a monopolist is that by charging wholesale prices to rivals that are the same or barely above its retail process, the monopolist may exclude equally efficient competitors to the ultimate detriment of consumers,” Brunell said in a statement from the AAI. He argued that the price-squeeze theory remains solid under antitrust law.

Aaron Panner, representing petitioner SBC, urged the Court to adopt a clear rule that, in the absence of a duty to deal, an allegation of a price squeeze cannot be a valid claim.

Duty to Deal

The federal government entered the case in support of SBC. Deanne E. Maynard, assistant to the solicitor general, told the court that SBC has no duty to deal with linkLINE or other ISPs and is free to charge whatever prices it pleases.

“In the absence of a duty to deal, a monopolist cannot be forced to share the benefits of its lawful monopoly with its rivals,” Maynard said.

The case is Pacific Bell Telephone Co. v.linkLINE Communications Inc. (Docket No. 07-512). A transcript of the oral argument appears here on the Supreme Court web site.

Massachusetts Extends Deadline for Compliance with Personal Information Security Rules

This posting is from CCH Financial Privacy Law Guide.

The Massachusetts Office of Consumer Affairs and Business Regulation (OCABR) has pushed back the deadline for compliance with standards for how businesses must protect and store consumers’ person information, it was announced on November 14.

Providing Flexibility to Businesses

The regulations (201 Code of Massachusetts Regulations Sec. 17.01 through 17.04) initially were set to take effect on January 1, 2009, but OCABR extended the deadline to provide flexibility to businesses that may be experiencing financial challenges brought on by national and international financial conditions.

“These sensible measures are already widely used by many Massachusetts companies, but we recognize that some businesses, currently facing economic uncertainties, will benefit from having additional time to comply,” said Undersecretary of Consumer Affairs and Business Regulation Daniel C. Crane.

“The action taken today serves to provide flexibility to businesses working to implement the necessary measures to safeguard their customers/ personal information in a timely manner.

According to the OCABR, the new compliance dates are consistent with the Federal Trade Commission’s recent delay of enforcement of the Red Flags Rules, which require financial institutions and creditors to develop and implement written identity theft prevention programs (72 Federal Register 63718—63775, November 9, 2008).

Information Security Program

The regulations, issued in September, require all businesses that own, license, store or maintain personal information about a resident of Massachusetts to develop, and monitor a comprehensive, written information security program applicable to any records containing that information.

The security program must include a computer security system under which businesses must encrypt documents sent over the Internet or saved on laptops or flash drives, encrypt wirelessly transmitted data, and utilize up-to-date firewall protection that creates an electronic gatekeeper between the data and the outside world and only permits authorized users to access or transmit data, according to preset rules. Also, businesses must take reasonable steps to verify that third-party service providers with access to personal information have the capacity to protect the information.

Laptops and Portable Devices

While the deadline for ensuring encryption of laptops will be extended to May 1, 2009, the deadline for ensuring encryption of other portable devices will be further extended to Jan. 1, 2010. The OCABR noted that many reported data breaches have related to laptops, which are more easily encrypted than other portable devices such as memory sticks, DVDs and PDAs.

The deadline for requiring written certification from third-party providers will be further extended to Jan. 1, 2010, in order to ensure proper consumer protection and facilitate implementation without overburdening small businesses during harsh economic times.

Further information concerning the rules and the deadline for compliance will appear in CCH Privacy Law in Marketing.

RPM Ruling Blamed for Eliminating Discounting, Prompting Higher Prices, Fewer Choices

This posting was written by CCH Washington Correspondent John Scorza and John W. Arden.

Consumers are paying more for many products as a result of an antitrust decision issued last year by the U.S. Supreme Court, according to a group of retailers, online merchants, consumer advocates, and antitrust experts.

The diverse group met today in Washington, D.C. to discuss the anti-consumer fallout from the ruling in Leegin Creative Leather Products Inc. v. PSKS Inc. (2007-1 Trade Cases ¶75,753), which made resale price maintenance (RPM) subject to the rule of reason rather than being considered per se illegal.

Essentially Legalizing Vertical Price Fixing

For nearly a century, manufacturers were prohibited from punishing businesses for selling their products at discounted prices. But the Leegin decision overturned a 96-year-old precedent—Dr. Miles Medical Co. v. John D. Park & Sons Co.(220 U.S. 37)—and potentially changed the face of U.S. discount retailing forever, according to the American Antitrust Institute. The Leegin decision essentially legalized vertical price fixing, the AAI said.

“The Supreme Court underplayed the magnitude of the anticompetitive risks of price fixing,” said Bert Foer, President of the AAI. “The court did not account for the fact that it leads to higher prices, reduced efficiency and lost innovation in retailing.”

Price Increases, Lack of Differentiation

The result has been increased prices and a lack of price differentiation among retailers, according to Jacob Weiss, president of BabyAge.com, an online vendor of baby equipment. The price of baby supplies and toys has increased by 20 to 40 percent since last year, Weiss said. And there is almost no difference between the prices of same products offered by competing retailers.

The assembled group—which included brick-and-mortar retailer Costco as well as online auction and shopping giant eBay—called on lawmakers and regulators to reverse the court’s decision and restore the ban on resale price fixing. The attorneys general of more than 30 states formally asked lawmakers to do the same in a May letter.

Possible Courses of Action

A panel of policy makers, including FTC Commissioner Pamela Jones Harbour, offered possible courses of action to address the problems of RPM. Commissioner Harbour announced that the FTC will hold a series of four-to-six workshops exploring how to best distinguish between uses of RPM that benefit consumers and those that do not. These workshops will be held between January and March of 2009.

Representatives from the House and Senate Judiciary committees stated their intention to hold hearings to address the issues this spring.

The American Antitrust Institute is an independent, non-profit education, research, and advocacy organization based in Washington, D.C. A press release and audio recording of the press conference is available at the AAI web site.

ABA Antitrust Section Offers Recommendations for Incoming Administration

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

The American Bar Association Section of Antitrust Law on November 25 submitted a transition report to President Elect Barack Obama, offering its views on the current state of federal antitrust and consumer protection enforcement, as well as recommendations regarding prospective policies and initiatives.

The Section’s overall assessment of the current state of enforcement is that both the FTC and the Department of Justice “generally have been effective in their efforts to pursue their missions in a manner consistent with mainstream bipartisan principles.”

The report cited the Justice Department’s “vigorous” criminal enforcement and the FTC’s “very active” consumer protection enforcement and lauded both agencies for their efforts at merger reform, continued participation and leadership in international cooperation efforts, and attempts to provide greater guidance to the public through hearings, workshops, and other statements or reports.

The Section did note that a debate existed about whether the agencies were striking the right balance between under-enforcement and over-enforcement and expressed concern as to an actual or perceived divergence between the agencies regarding enforcement standards.

The report offered the new administration recommendations in 12 topical areas that were identified by the Section’s Transition Report Task Force as being the most important overall to the success of the administration.

The recommendations included the following:

Investigatory processes. The report encouraged merger process reform, transparency, and engagement between agency staff and subject parties. It also suggested that the agencies should require timelines for certain investigations.

Resources and capabilities of agencies. The Antitrust Section stressed the importance of funding the agencies, staffing them with expert personnel and officials, and engaging outside counsel or consultants when needed to prepare or try cases.

International cooperation initiatives. Recommended initiatives ranged from “soft” cooperation and bilateral/multilateral agreements to providing translations of key guidelines to assist the work of developing competition jurisdictions.

Criminal enforcement. It was suggested that the new administration review the Antitrust Division’s policy of insisting on the public naming of “carve outs” at the time parties’ enter into corporate plea agreements.

Retrospective analyses. The Section recommended that the agencies undertake retrospective analyses of their efforts at merger enforcement, civil non-merger enforcement, competition advocacy, administrative litigation, and consumer protection.

Substantive merger reform. The agencies should consider ongoing revisions to the Merger Guidelines, improve application and understanding of unilateral effects theories, increase the consideration given to certain efficiencies when evaluating proposed mergers, clarify the role of market definition in coordinated effects cases, and improve the remedies process.

Civil non-merger enforcement. The Obama administration was urged not to depart from the FTC’s long-standing restraint in bringing FTC Act, Section 5 cases, and the agencies were encouraged to provide more clarity regarding truncated rule of reason analysis.

Monopolization. The report encouraged clarity, transparency, and adoption of common international standards for evaluating unilateral conduct under Section 2 of the Sherman Act.

Intellectual property/antitrust. The agencies should study several aspects of the IP/antitrust interface, including those relating to standard setting, patent reform, pharmaceutical patents, and international convergence.
Health care. Under the new administration, the agencies should consider competition law in the context of national health care policy, coordinating their competition advocacy efforts in the upcoming health care reform debate and providing more guidance on the legality of mergers and other joint activity in the industry.

Federal, state, private party cooperation. The report recommended that the federal agencies examine the effectiveness of current federal/state coordination, work with the state attorneys general to formulate and apply consistent merger guidelines and appropriate protocols, and allow cooperation by Leniency Program applicants and civil plaintiffs under the Antitrust Criminal Penalty Enhancement and Reform Act in certain circumstances.

Substantive reform. The agencies should support reform of repeal of the Robinson-Patman Act, continue their opposition to exemptions and immunities from the antitrust laws, offer guidance regarding minimum resale price maintenance analysis in the wake of the U.S. Supreme Court’s Leegin decision, and oppose legislative proposals to overturn that ruling.

The 77-page transition report and a letter from James A. Wilson, Section Chair, appear at the American Bar Association web site.

FTC Asks High Court to Review Standard-Setting Case

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

The Federal Trade Commission has petitioned the U.S. Supreme Court to review a federal appellate court decision that set aside a Commission finding that Rambus, Inc. had engaged in monopolistic conduct in violation of the FTC Act, as well as the Commission’s remedy order.

At issue is a decision of the U.S. Court of Appeals in Washington, D.C., holding that the FTC failed to demonstrate that Rambus Inc.’s actions before a standard setting organization (SSO) amounted to exclusionary conduct “under settled principles of antitrust law” (2008-1 Trade Cases ¶76,121).

Acquisition of Monopoly Power

According to the appellate court, the agency did not prove that the developer of computer chip memory technologies unlawfully acquired its monopoly power in the relevant markets for four technologies that had been incorporated into industry standards for dynamic random access memory (DRAM) chips.

The FTC sought review pursuant to Section 16(a) (3) of the FTC Act. This provision permits the FTC to represent itself before the Supreme Court if the Solicitor General declines to file a petition for certiorari. In its petition, the Commission noted that it has exercised this authority on only three prior occasions.

Questions for Review

The agency asked the Court to consider:

(1) whether deceptive conduct that significantly contributes to a defendant’s acquisition of monopoly power violates Section 2 of the Sherman Act and

(2) whether deceptive conduct that distorts the competitive process in a market, with the effect of avoiding the imposition of pricing constraints that would otherwise exist because of that process, is anticompetitive under Section 2 of the Sherman Act.

The Commission vote authorizing the Office of General Counsel to file the petition with the Supreme Court was 4-0.

A news release on the development appears here on the FTC website. The petition in FTC v. Rambus Inc. appears here. Further details will appear at CCH Trade Regulation Reporter ¶60,021.

Restriction on Transfer of Prescription Data for Marketing Use Did Not Violate Free Speech

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

A New Hampshire law that prohibited certain transfers of physicians' prescribing histories for use in marketing campaigns by pharmaceutical manufacturers did not unconstitutionally restrict commercial speech, the U.S. Court of Appeals in Boston has held.

The New Hampshire Prescription Information Law (N.H. Revised Statutes Annotated Sec. 318:47-f, 318:47-g, and 318-B:12(IV)) regulated conduct, not speech. Even if the law amounted to a regulation of protected speech, it passed constitutional muster, the court said.

A decision of the federal district court in Concord, New Hampshire (CCH Privacy Law in Marketing ¶60,103), invalidating the law on First Amendment grounds, was reversed.

New Hampshire Prescription Information Law

According to the appellate court, the purpose of the Prescription Information Law was to curb the spiraling costs of brand-name prescription drugs. In relevant part, the law states:

Records relative to prescription information containing patient-identifiable and prescriber-identifiable data shall not be licensed, transferred, used, or sold by any pharmacy benefits manager, insurance company, electronic transmission intermediary, retail, mail order, or Internet pharmacy or other similar entity, for any commercial purpose, except for the limited purposes of pharmacy reimbursement; formulary compliance; care management; utilization review by a health care provider, the patient's insurance provider or the agent of either; health care research; or as otherwise provided by law. Commercial purpose includes, but is not limited to, advertising, marketing, promotion, or any activity that could be used to influence sales or market share of a pharmaceutical product, influence or evaluate the prescribing behavior of an individual health care professional, or evaluate the effectiveness of a professional pharmaceutical detailing sales force.

N.H. Revised Statutes Annotated Sec. 318:47-f.


Data Mining Practices

Two data mining companies challenged the law. They alleged that the statutory ban on transfer and use of prescriber-identifiable information violated the Free Speech Clause of the First Amendment, was void for vagueness, and offended the Commerce Clause.

The data miners purchased prescription history data, aggregated the entries, grouped them by prescriber, and cross-referenced each physician's prescribing history with physician-specific information available through the American Medical Association. Their final products enumerated the prescriber's identity and specialty, the drug prescribed, and related information.

They sold these database products to brand-name drug manufacturers, to facilitate marketing efforts called “detailing.” Detailing involved tailored, one-on-one visits by pharmaceutical sales representatives with physicians and their staffs.

Prescription history information enabled detailers to focus on physicians who regularly prescribed competitors' drugs, physicians who prescribed large quantities of drugs for particular conditions, and "early adopters" of new pharmaceutical products.

Conduct v. Commercial Speech

The law’s restrictions on transfers of prescriber-identifiable information regulated conduct, not expression, the court said. Unlike typical commercial speech, the transfers did not cause new information to be filtered into the marketplace with the possibility of stimulating better informed consumer choices. The law only restricted the ability of data miners to aggregate, compile, and transfer information destined for narrowly-defined commercial ends.

For the data miners, information itself was a commodity. “The plaintiffs, who are in the business of harvesting, refining, and selling this commodity, ask us in essence to rule that because their product is information instead of, say, beef jerky, any regulation constitutes a restriction of speech,” the court said. “We think that such an interpretation stretches the fabric of the First Amendment beyond any rational measure.”

The data miners could legally gather and analyze the regulated information and could publish, transfer, and sell it, as long as the purchaser did not use the information for detailing, the court stated.

The law’s restriction was on the conduct of detailing, not on the information with which the conduct was carried out. The fact that the law made the most profitable use of that information illegal did not mean that the data miners’ free speech rights had been violated.

To the extent that the challenged portions of the law impinged at all on speech, that speech was of scant societal value, in the court’s view. The benefits flowing from the prohibited transactions paled in comparison to the negative externalities produced.

First Amendment Scrutiny

Even if the law’s restrictions on data transfers implicated the First Amendment, the law was constitutional, the court held. In combating a novel threat to the cost-effective delivery of health care, New Hampshire acted with as much forethought and precision as the circumstances permitted and the Constitution demanded.

Under the Central Hudson test for restrictions on commercial speech, the law would be permissible if the statute was enacted in the service of a substantial governmental interest, directly advanced that interest, and restricted speech no more than was necessary to further that interest.

New Hampshire cited three governmental interests: (1) maintaining patient and prescriber privacy, (2) protecting citizens' health from the adverse effects of skewed prescribing practices, and (3) containing costs. For simplicity's sake, the court restricted its analysis to the third of those interests.

Cost containment was a sufficiently substantial government interest, the court said. The state provided evidence that the transfer of prescriber-identifiable information for marketing purposes led to higher drug prices. Trial testimony indicated that the practice of detailing substantially increased physicians' rates of prescribing brand-name drugs, which tended to be more expensive than generic drugs.

The data miners did not deny that the collection and processing of prescribing histories made detailing more efficacious. Accordingly, the Prescription Information Law was reasonably calculated to advance the state’s substantial interest in reducing overall health care costs within New Hampshire.

Vagueness

The court rejected the data miners’ contention that the Prescription Information Law was void for vagueness. Read in light of the legislature's manifest intent, the law is sufficiently clear. The law’s specific purpose was to curtail the practice of targeted detailing by pharmaceutical companies. In keeping with this narrow purpose, the statute excluded from its coverage almost every commercial use other than detailing.

This narrow reading of the law served to allay any concerns of a “chilling effect” on permissible uses. As long as data transfers did not involve targeted marketing efforts, there was no violation.

Commerce Clause

Also rejected was the data miners’ assertion that the law unconstitutionally regulated interstate commerce. Although the law did not explicitly limit its reach to conduct taking place within New Hampshire, the New Hampshire Supreme Court would interpret the law to affect only intrastate transactions, according to the court. The law may result in a loss of profit to out-of-state data miners due to the closing of one aspect of the New Hampshire market for their wares, but that did not amount to regulating conduct outside the state.

The November 18 decision in IMS Health Inc. v. Ayotte will appear in CCH Privacy Law in Marketing.