Friday, May 30, 2008

Dismissal of Antitrust Challenge to Booksellers' Online Marketing Agreement Upheld

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

A consumer lacked standing to proceed with antitrust claims challenging a marketing agreement between online bookseller and brick-and-mortar bookseller Borders Group, Inc., the U.S. Court of Appeals in San Francisco has decided. Dismissal of the antitrust claims with prejudice (2005-2 Trade Cases ¶75,004) was affirmed.

Market Allocation Agreement

Under the 2001 agreement, Borders agreed to abandon its efforts in the online market, which had proven to be unsuccessful. Amazon and Borders agreed to jointly relaunch as a co-branded Web site, hosted by Amazon. The complaining consumer contended that the agreement was a per se illegal market allocation agreement, and that, as a result of the agreement, he was forced to pay supracompetitive prices.

The consumer failed to show, however, that he personally purchased an item for a higher price than he would have paid had there been no marketing agreement. Academic articles submitted to the court by the consumer could not establish that the consumer paid higher prices.

Moreover, the consumer did not even allege that he himself experienced any reduced selection of titles, poorer service, or any other potentially conceivable form of injury. The online bookseller, on the other hand, offered declarations showing that prices for books declined after the defendants entered into the agreement. Thus, the consumer suffered no injury-in-fact, according to the court.


Because the consumer failed to establish Article III standing, there was no reason to consider the consumer's antitrust standing, which limits the availability of antitrust damages to those plaintiffs who suffered the type of harm resulting from the kind of conduct that the antitrust laws were intended to eliminate.

The May 27 decision is Gerlinger v., Inc. It will be reported at 2008-1 Trade Cases ¶76,161.

Thursday, May 29, 2008

$23 Million Judgment Upheld in Scrap Metal Price Fixing Case

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

The U.S. Court of Appeals in Cincinnati has upheld a $23 million judgment in favor of a class of scrap metal generators who alleged price fixing claims against a scrap metal broker. The appellate court rejected the broker's contentions that the plaintiffs' expert was unreliable, that the generators' damages were not supported by the evidence, that class certification was improper, and that the lower court improperly tolled the statute of limitations.

Expert Testimony

The trial court did not abuse its discretion by admitting the testimony of the plaintiffs' expert, offered to prove the amount of damages the class incurred as a result of anticompetitive conduct. The plaintiffs' expert performed his analysis according to a reliable method (the "during and after" method) and reliably applied that method to the facts of the case. The expert's calculations were tested on cross-examination and subjected to further scrutiny and criticism by the defendant's own expert.

The defendant did not argue that the plaintiffs' expert was unqualified or that his testimony was irrelevant. Nor did it challenge the reliability of the broadly-accepted "during and after" method to determine damages. Instead, the defendant challenged the reliability of the expert's testimony. However, the task for the district court in deciding whether an expert's opinion was reliable was not to determine whether it was correct, but rather to determine whether it rested upon a reliable foundation.

In the appellate court’s view, the challenge to the damages analysis of the plaintiffs' expert went to the weight, not the admissibility, of his testimony. The district court determined the testimony to be sufficiently reliable and appropriately passed the torch to the jury to make the ultimate determination. The defendant's contention that the trial court abused its discretion by failing to hold a Daubert hearing before ruling on the admissibility of the damages expert's testimony also was rejected.


The jury's award of $11.5 million in damages was supported by the testimony of the plaintiffs' expert, even though the expert estimated aggregate damages of $20.9 million. The defending broker's challenge to the verdict was directed at the accuracy of the amount of damages and not the fact of damages. The defending broker argued that the jury must have resorted to speculation and conjecture to arrive at the $11.5 million figure, and that this illustrated the insufficiency of the evidence on damages. However, the fact that the jury chose to assess damages in an amount substantially below that recommended by the plaintiffs' expert did not mean that the evidence offered in support of lost profits was inadequate.

The appellate court also ruled that the jury verdict did not represent an "impermissible fluid recovery." The defendant unsuccessfully argued that, because the jury returned a verdict in an amount less than the damages estimated by the plaintiffs' expert, it was impossible to figure out: (1) how the jury reached its verdict, (2) to which class members the verdict applied, and (3) in what amounts it applied to each class member. Rather than proposing a fluid recovery, the plaintiffs provided evidence of a classwide aggregate injury, in the court's view.

The expert opined that every class member who sold ferrous scrap incurred a 16.4 percent undercharge for every sale during the class period, resulting in aggregate damages of $20.9 million. That the jury awarded a lower amount than the expert suggested did not mean that it rejected the expert's uniform-impact theory; instead, the jury might have simply rejected the undercharge amount of 16.4 percent. Ultimately, the $11.5 million verdict was tripled to $34.5 million and the amount received from settling defendants was subtracted to arrive at a judgment of $23,036,000.

Class Certification

Certification of the class of industrial scrap-generating companies was affirmed, despite the defending broker's argument that the "predominance of common questions" requirement of Federal Rule of Civil Procedure 23(b)(3) was not met because damages could not be calculated on a class-wide basis. A precise mathematical calculation of damages was not required before deeming a class worthy of certification. The requirements of Rule 23(b)(3) are satisfied if the plaintiffs can establish that the defendants conspired to interfere with the free-market pricing structure.

Statute of Limitations

The trial court did not err in instructing the jury on tolling and the applicable statute of limitations. The court had suspended the limitations period based on the pendency of related criminal or civil proceedings by the government and instructed the jury that it could consider acts four years prior to March 2000. The court also gave a fraudulent concealment instruction allowing the jury to alter further the dates in consideration, if it found the requisite elements. The appellate court concluded that the jury could have reached its verdict based on a fraudulent concealment theory. Any error in the trial court's instructions would have been harmless.

The May 15 decision is In re Scrap Metal Antitrust Litigation, 2008-1 Trade Cases ¶76,157.

Wednesday, May 28, 2008

Media Ignored Obama’s Comments on Industry Consolidation: Antitrust Group

This posting was written by John W. Arden.

Media networks have essentially ignored comments made by Senator Barack Obama about media consolidation in the U.S. and the lack of antitrust enforcement in the industry, according to the American Antitrust Institute (AAI), a non-profit education, research, and advocacy organization based in Washington, D.C.

Senator Obama made “extended critical comments about the current state of U.S. antitrust policy” in response to a question while campaigning in Oregon on May 18. He stated an intention to increase enforcement of antitrust laws, particularly with regard to media consolidation.

“The AAI considers a presidential contender’s comments on antitrust policy or enforcement priorities to be newsworthy, especially given that these issues are not often directly addressed in [a] national political campaign,” said Albert Foer, president of the group. “Discussion of the media industry is especially important to individual citizens, who rely on this industry to stay informed.”

Despite the importance of this issue, a survey of 20 prominent newspapers found that not one either reported the comments or published a Reuters wire story on the issue, according to the AAI. The web sites of The New York Times and The Washington Post published another Reuters wire story about Obama’s remarks on antitrust policy, but neither mentioned media consolidation.

The comments were noted in an article about media industry consolidation on the web site of The Nation, a weekly magazine of politics and culture. The article (“Obama—Let’s Challenge the Murdochization of Our Media”) concludes with the following statement:

“Obama is tapping into the powerful and passionate view shared by millions of Americans that our current hyper-consolidated media landscape—with 90% of it controlled by some six corporations—is a disservice to a democracy which demands diverse voices and views."

The senator previously voiced his concern with antitrust issues in a statement to the AAI, released on September 27, 2007. The AAI had invited all presidential candidates to present their views on antitrust; however, only Obama and John Edwards responded.

In his statement, Senator Obama pledged “to reinvigorate antitrust enforcement” by stepping up review of merger activity, taking aggressive action to curb the growth of international cartels, monitoring key industries to ensure that consumers realize the benefits of competition, and strengthening competition advocacy domestically and in the international community.”

Text of that two-page statement appears here on the AAI website. Further details on the statement are featured in an October 1, 2007 posting on “Trade Regulation Talk.”

Tuesday, May 27, 2008

DOJ, FTC Differ on Ripeness of Supreme Court Antitrust Petition

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

The U.S. Solicitor General has urged the U.S. Supreme Court to grant a petition for review of a federal appellate court's decision allowing unlawful price squeeze claims to proceed. The FTC decided not to join the Justice Department's May 22 amicus brief. In a May 23 statement, the Commission said that it disagreed with the Justice Department's analysis and that the case did not appear to be ready for review.

Unlawful Price Squeeze

At issue is a decision of the U.S. Court of Appeals in San Francisco (2007-2 Trade Cases ¶75,875), permitting Internet service providers (ISPs) who sold digital subscriber line Internet access to retail customers to proceed with Sherman Act, Sec. 2 claims against an incumbent telecommunications company—Pacific Bell. The ISPs contended that Pacific Bell 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.

Pacific Bell had moved to dismiss the price-squeeze claim in the amended complaint for failure to state a claim. After the appellate court affirmed the denial of the motion to dismiss, Pacific Bell sought review by the U.S. Supreme Court. The petition is Pacific Bell Telephone Co. v. LinkLine Communications, Inc., Dkt. No. 07-512.

The Solicitor General told the Court that “Section 2 of the Sherman Act does not provide a cause of action for ‘price-squeeze’ claims of the type at issue here—namely, allegations that a vertically integrated company with an alleged monopoly at the wholesale level, but with no antitrust duty to provide that wholesale input to its retail competitors, engaged in a ‘price squeeze’ by leaving insufficient margin between wholesale and retail prices to allow its retail competitors to compete.” The decision “threatens to chill retail price-cutting by vertically integrated firms and encourage litigation designed to protect competitors at the expense of competition,” according to the Solicitor General. “Despite the interlocutory posture of the case, review is warranted.”

According to the Commission's statement: “The holding of the Ninth Circuit is unquestionably correct, and indeed merely echoes what other courts of appeals have held on the narrow issue presented to the court below: that claims of a predatory price squeeze in a partially regulated industry remain viable after [Verizon Comms. Inc. v. Law Offices of Curtis V. Trinko, LLP, 2004-1 Trade Cases ¶74,241, 540 U.S. 398 (2004)].”

The Commission went on to say that the procedural posture would deprive the Court of a fully developed record. “There is no apparent justification, based on only a partial record of the plaintiffs’ pleadings in this case, for turning back 60 years of case law that embraces price-squeeze claims under Section 2 of the Sherman Act.” Three of the four commissioners voted to issue the statement, with FTC Chairman William E. Kovacic recused.

Past Instances of Diverging Views

The FTC statement concluded by noting that “the FTC and the Solicitor General frequently cooperate in fashioning recommendations to the Supreme Court regarding the grant or denial of certiorari, and likely will continue to do so.” This was not the first time, however, that the federal antitrust agencies took different positions on Supreme Court petitions.

In 2006, the Solicitor General advised the High Court to reject the FTC's petition for review of a decision of the U.S. Court of Appeals in Atlanta (2005-1 Trade Cases ¶74,716) vacating the agency's cease and desist order against pharmaceutical companies for entering into anticompetitive patent settlements.

Then in 2007, the Solicitor General urged the Court not to review a decision of the U.S. Court of Appeals in New York City (2005-2 Trade Cases ¶74,992) that involved facts similar to Schering. The FTC has argued that the Eleventh Circuit's Schering decision and the Second Circuit decision are bad law.

Text of the Federal Trade Commission’s statement appears here on the FTC website.

Friday, May 23, 2008

Manufacturer’s Rep Was Not a Wisconsin “Dealer”

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

A representative for a manufacturer of bathtub products was not a “dealer” within the meaning of the Wisconsin Fair Dealership Law because the representative could not establish that it was granted the right to sell or distribute the manufacturer’s products or the right to use the manufacturer’s commercial symbols to the extent anticipated by the Fair Dealership Law.

The federal district court in Milwaukee granted the manufacturer summary judgment on the representative’s claim that its relationship was terminated without “good cause” in violation of the Fair Dealership Law.

The representative commenced a relationship with the manufacturer's predecessor in 1988 and operated as the representative for that company in an exclusive territory pursuant to an oral agreement, the court noted. The predecessor was purchased by the manufacturer in 2002 and entered into a written contract continuing its representation for the defendant manufacturer.

Representation Agreement

The contract limited the representative's use of the manufacturer's trademarks and specified that the representative would solicit and receive orders from plumbing wholesalers in the region and obtain commissions on products sold and distributed by the manufacturer. Sales of the manufacturer's products ranged from 37 to 43 percent of the representative's income from 1999 to 2004. Following the manufacturer's announcement of its intent to terminate the relationship, the representative brought suit.

Right to Sell or Distribute Goods

In determining whether a party satisfied the Fair Dealership Law’s requirement that "dealers" have a right to sell or distribute goods, the most important factor was the party's ability to transfer the product itself (or title to the product) or commit the grantor to a transaction at the moment of the agreement to sell, according to the court. The representative acknowledged that it was not able to commit the manufacturer to a sale. However, it argued that, under the circumstances, it was the functional equivalent of a dealer of the manufacturer's products. The representative encouraged a broad reading of the statutory term "distribute" and insisted that the totality of the circumstances demanded that it be considered a dealer under the statute.

The representative pointed to evidence that the predecessor's distribution network was a very important aspect of the manufacturer's acquisition of the predecessor. The fact that the representative invested many years into developing a sales market for the manufacturer and its predecessor did not turn it into a dealer, the court reasoned.

Next, the representative asserted that it actively facilitated the delivery of the manufacturer's products to customers and that delivery could qualify as distribution under the Fair Dealership Law. That argument did not withstand scrutiny, the court ruled, because there was no evidence that the representative was required to purchase vehicles to deliver the manufacturer's products or to build storage facilities.

Warranty Work

The representative's argument that it assumed a significant amount of the warranty risk of every sale by performing a significant amount of warranty and service work—actions that could reveal a right to sell under the statute—was also rejected. There was no evidence that the representative was required by the manufacturer to offer and perform warranty work or to assume any warranty risk, and any service work performed by the representative was "on a gratis basis."

The March 31 decision is Northland Sales, Inc. v. Maax Corp.,CCH Business Franchise Guide ¶13,877.

Wednesday, May 21, 2008

Bill Would Prohibit Anticompetitive Conduct in Production, Pricing of Petroleum

This posting was written by John W. Arden.

A bill attempting to use antitrust law to “put the beaks” on increasing gasoline prices passed the U.S. House of Representatives yesterday by a 324-to-84 margin.

The “Gas Price Relief for Consumers Act of 2008” (H.R. 6074) would amend the Sherman Act to prohibit any foreign state, instrumentality or agent of a foreign state, or any other person from combining to (1) limit the production or distribution of petroleum products, (2) set or maintain the price of petroleum products, or (3) take any action in restraint of trade for petroleum products when such action has a direct, substantial, and reasonably foreseeable effect on the market, supply, price, or distribution of petroleum products.

The legislation also would eliminate sovereign immunity for foreign states violating the prohibitions, direct the Department of Justice to establish a Petroleum Industry Task Force to develop enforcement policies, and require the Government Accountability Office to conduct a study of the effects of mergers on competition in the petroleum markets.

“This legislation will address the loopholes and exemptions that oil companies exploit at the great expense of our citizens,” said U.S. Representative Steve Kagen (D-Wis.), sponsor of the bill. “By passing the Gas Price Relief for Consumers Act, the House agrees that it is time to give U.S. authorities the ability to prosecute anticompetitive conduct committed by international cartels that restricts supply and drive up prices.”

The measure was introduced and referred to the House Judiciary Committee on May 15. In passing the House on May 29, the bill received the support of 103 Republicans, as well as 221 Democrats.

A press release on the bill appears here on Congressman’s Kagen’s website.

Tuesday, May 20, 2008

FTC's Finding of Price Fixing by Texas Doctors' Group Upheld

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

The Federal Trade Commission's determination that the conduct of the North Texas Specialty Physicians (NTSP), an organization of independent physicians and physician groups principally located in and around the city of Fort Worth, amounted to horizontal price fixing has been upheld by the U.S. Court of Appeals in New Orleans.

The Commission's 2005 decision (2005-2 Trade Cases ¶75,032) affirmed an administrative law judge's initial decision that the NTSP had illegally fixed prices in its negotiations with payors, including insurance companies and health plans. The court did, however, remand the matter to the Commission to modify a provision in the remedial order that was overly broad.

Horizontal Price Fixing

The FTC properly concluded that certain aspects of the non-risk contract business of NTSP, when considered on the whole, combined to result in horizontal price fixing, the court held. These practices included the disclosure to all affiliated physicians of the median, mean, and mode results of polls to determine the minimum rates physicians would accept, the “reminder” to physicians of those results when subsequent polls were taken for the purpose of establishing a minimum price, and NTSP’s use of that minimum price when it negotiated with payors on behalf of physicians.

NTSP’s participating physicians took collective action to obtain higher fees from payors. That physicians could reject offers negotiated by NTSP did not establish that there was no agreement on price. Although NTSP argued that it was a single entity—a “memberless, non-profit corporation”—antitrust liability did not depend upon a particular form or business structure.

The challenged practices erected barriers between payors and physicians who otherwise would have been willing to negotiate directly with those payors, according to the court. NTSP also erected obstacles to price communications between payors and physicians. The Commission properly concluded that NTSP engaged in concerted action to increase its bargaining power. The fact that there was no evidence in the record that NTSP obtained higher prices for its physicians than other physicians received did not foreclose a determination that NTSP’s practices had anticompetitive effects.

Procompetitive effects proffered by NTSP did not meet the threshold that they “might plausibly be thought to have a net procompetitive effect, or possibly no effect at all on competition,” in the court's view.


At the outset, the court determined that the agency had jurisdiction over NTSP. If the organization’s efforts to maintain physicians’ fees were successful, the advantages of competition would have been adversely affected for out-of-state employers and payors, the court reasoned. NTSP unsuccessfully argued that its alleged anticompetitive conduct was not “in or affecting commerce” because effects on interstate commerce had to be “more than de minimis when considered in proportion to the parties’ business as a whole” and its conduct “was never shown to have even a de minimis effect on the business of any payor as a whole.”

“Inherently Suspect” Analysis

The FTC properly scrutinized the challenged conduct through the somewhat-abbreviated “quick-look” rule-of-reason analysis. Quick-look analysis is appropriate when the likelihood of anticompetitive effects is obvious. In this instance, the anticompetitive effects of certain of NTSP’s practices were obvious, and procompetitive justifications could not result in a net procompetitive effect or no effect at all.


Because one provision in a remedial order was overly broad and internally inconsistent, the court remanded the matter to the Commission to modify its order. The provision could have had the effect of compelling NTSP to messenger contracts or become a party to contracts sent to it by payors, regardless of potential risks to the NTSP, its member physicians, and its patients.

The provision prohibited the respondent from facilitating an agreement among members with respect to their provision of physician services: (1) to negotiate on behalf of any physician with any payor; (2) to deal, refuse to deal, or threaten to refuse to deal with any payor; (3) regarding any term, condition, or requirement upon which any physician deals, or is willing to deal, with any payor, including, but not limited to, price terms; or (4) not to deal individually with any payor, or not to deal with any payor through any arrangement other than respondent.

The May 14, 2008, decision in North Texas Specialty Physicians v. FTC, 06-60023, will appear at 2008-1 Trade Cases ¶76,146. Further details appears here on the FTC website.

Monday, May 19, 2008

FTC Issues Compliance Guide for Revised Franchise Rule

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

The Federal Trade Commission issued its long-awaited Compliance Guide on May 5 to assist franchisors in complying with the 2007 revised franchise disclosure rule.

The Compliance Guide does not modify the new version of the franchise rule or exhaustively cover every requirement of the rule, the FTC cautioned, but is intended to explain the requirements of the rule, particularly its provisions that depart from the familiar Uniform Franchise Offering Circular Guidelines. The lengthy document provides numerous filled-in sample tables and charts to guide franchisors in their compliance efforts.

The Compliance Guide explains in detail what types of relationships are covered by the rule, what types are not covered, and what types are exempt. It also exaines the exclusions from the new rule and discusses who is responsible for compliance anhd the manner in which disclosures my be furnished. Each of the rule’s 23 disclosure items are then discussed.

General discussions of disclosure document preparation and updating, finacial performance representations, and additional prohibitions are included.

The Franchise Rule—2007 Compliance Guide appears here on the FTC website. It will be reported at CCH Business Franchise Guide ¶6086.

Friday, May 16, 2008

Competition Is “Critical” to Airline Industry: Justice Department

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

The Department of Justice (DOJ) considers competition in the airline industry to be “critical,” and will consider each merger proposal on the basis of its individual merits, the House Aviation Subcommittee heard May 14.

James J. O’Connell, deputy assistant attorney general in the Department of Justice Antitrust Division, said he could not comment on the specifics of the Delta-Northwest Airlines merger proposal, but stressed that in any airline merger review the department would consider the entire spectrum of competitive effects, including the impact on both domestic and foreign routes.

Since receiving jurisdiction for reviewing airline mergers in 1988, the DOJ has “actively worked to ensure that mergers that would threaten to harm competition are not permitted to proceed,” according to O’Connell.

Three-Player Industry

Meanwhile, House Transportation and Infrastructure Committee chairman James L. Oberstar (D-Minn.) reiterated his concerns that a Delta-Northwest merger would result in an industry of three major carriers that would put at risk the consumer benefits of airline deregulation.

Subcommittee chairman Jerry F. Costello (D-Ill.) added that the long term implications of a series of mergers could have a major effect on the future of the industry.

House Transportation Committee ranking member John L. Mica (R-Fla.), told the hearing that he expects the merger to pass regulatory muster, based on the fact that he does not see the merged airline creating a monopoly position. Mica noted that the industry is under “tremendous pressure” and warned that if a three-carrier industry faces additional strains then “the government would be left holding the financial bag.”

Merger Agreement

On April 14, 2008, Delta and Northwest announced an agreement to combine the airlines to create a $17.7 billion enterprise, to be called Delta and to be headed by Delta CEO Richard Anderson. The enterprise would provide access to more than 390 destinations in 67 countries and produce more than $35 billion in aggregate annual revenues, according to the announcement.

The companies emphasized that the merger would produce a more competitive, financially secure airline; would not entail closures of any hubs; would help the airlies deal with rising oil prices; and combine Delta's strengths in the South, Mountain West, Northeast, Europe, and Latin America with Northwest's leading positions in the Midwest, Canada, and Asia.

The chief executives of the merging airlines testified before House and Senate Committees on April 24, 2008 (see Trade Regulation Talk, April 25, 2008),

Thursday, May 15, 2008

Trade Regulation Tidbits

This posting was written by John W. Arden.

News, updates, and observations:

 In May 14 testimony before the U.S. House Committee on Transportation and Infrastructure, the president of the American Antitrust Institute (AAI) warned that a proposed merger between Delta and Northwest Airlines could spur additional consolidation in the U.S. airline industry. AAI President Albert A. Foer urged the Department of Justice to “not only apply the standard antitrust analysis that requires the divestiture of overlapping city pairs in concentrated markets” but to also “pay attention to systems competition.” Foer recommended that the DOJ examine whether the number of national networks existing after consolidation would provide American consumers with a satisfactory range of choice, price, and service. Efficiency claims put forth by Delta and Northwest should be analyzed with great skepticism and weighed against (1) inefficiencies due to other “diseconomies of scale and scope,” (2) the cost of consummating the merger, and (3) the reduction in competition arising from the merger. Text of the written testimony appears here on the AAI website.

 The International Franchise Association has set its lobbying sights on repealing or amending the Rhode Island Fair Dealership Act of 2007 (CCH Business Franchise Guide ¶4390). The IFA “has retained local counsel and is supporting an effort to significantly mitigate the most onerous provisions of the 2007 law,” including the provision giving franchisees an opportunity to “cure” any claimed deficiency and the “litigiously vague” good cause for termination or nonrenewal provision. Two pending bills (H. 8150 and S. 2592) would delete the definition of “good cause”; repeal the requirement of giving dealers 90 days’ notice of termination, nonrenewal, or substantial change in competitive circumstances; excise the 60-day “cure” provision; and prohibit grantors from coercing a dealer to purchase a quantity of goods so large that it may not be resold within a reasonable period of time in the ordinary course of business. The amending legislation has the support of leaders in both the Rhode Island House and Senate, according to the IFA.

Tuesday, May 13, 2008

RICO Claims Based on Franchisor Misrepresentations About Sourcing Reinstated

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

Previously dismissed civil RICO claims against a sandwich shop franchisor were reinstated after the federal district court in Green Bay, Wisconsin, concluded that its original decision was in error.

Originally, the court held that the franchisor's use of express disclaimers and non-reliance clauses in its franchise agreement had fatally undermined the franchisees' allegations of fraudulent misrepresentations and concealment, offenses that provided the basis for plaintiffs' RICO claims. Upon closer examination, however, the court decided that this determination was erroneous.

Overcharging by Approved Vendors

Franchisees argued that the franchisor had knowingly caused them to be overcharged for essential goods and services by demanding kickbacks from approved vendors, even though the franchisor had induced franchisees, through contrary representations, to purchase their franchises.

The court had relied on three Seventh Circuit decisions to support its earlier conclusion that the terms of the franchise agreement were dispositive as a matter of law. That reliance demonstrated "manifest error" because none of the Seventh Circuit decisions had held that the terms of a contract could preclude the possibility of a fraud claim regardless of the facts alleged.

Case law suggested that the degree of sophistication of the plaintiffs should be considered. In this instance, the franchisees' complaint suggested that they had a greater degree of sophistication than the average consumer. However, not even the franchisor contended that the contracts at issue involved equally sophisticated commercial enterprises. These considerations, coupled with the uncertainty in federal law regarding the significance of reliance in a civil RICO claim, made it clear that dismissal of the franchisees' claims was "at best premature."

Negotiations for Benefit of Franchisees

Among other things, the franchisor's Uniform Franchise Offering Circular represented that "we and our affiliates negotiate purchase agreements with suppliers for the benefit of Franchisees." Initially, the term "benefit" was deemed "too vague and indefinite" to support a fraud claim. Upon reconsideration, however, the court concluded that this determination should be left for trial, or at least for a more complete development of the record.

Newly Discovered Evidence

An assertion that reconsideration was warranted by "newly discovered evidence," however, was rejected. According to the court, the evidence characterized as "new" was neither new nor fatal to the court's analysis of the plaintiffs' fraud claims. Nevertheless, the court's original judgment was vacated—because its original decision was based on an erroneous finding of law—and the franchisees' RICO and fraud claims were reinstated.

The April 16 decision in Westerfield v. The Quizno's Franchise Co., LLC appears at CCH RICO Business Disputes Guide ¶11,475.

Monday, May 12, 2008

Ad Program Using State Vehicle Registration Information Did Not Violate Federal Law

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

A company that contracted with the Florida Department of Highway Safety and Motor Vehicles (DMV) to mail notices to Florida vehicle owners, reminding them to renew vehicle registrations, did not violate the federal Driver's Privacy Protection Act (DPPA) by using information in vehicle owners' registration files to sell targeted advertising that was placed in the envelopes along with the renewals, the federal district court in Jacksonville has decided.

The company's advertising program used a "household view" developed from the vehicle identification numbers, the dates of purchase, and the zip codes for all vehicle-owning households in the participating county to determine which ads to place in each particular envelope.

Carrying Out Government Functions

The DPPA generally prohibits any state DMV from disclosing personal information in motor vehicle records to any person or entity. The DPPA permitted, however, disclosure of such information for use by any government agency in carrying out its functions, or any entity acting on behalf of a federal, state, or local agency in carrying out its functions. This exception would include use of the information by the Florida DMV itself, the court said.

Florida law contemplated that a function of state agencies may be to enter into agreements with vendors who place advertising in government publications in exchange for bearing the costs of production or publication or for compensation. One of the DMV's acknowledged functions was mailing out registration notices, and Florida law specifically allowed the DMV to contract with private vendors to financially support this function with advertising included in the renewal mailings.

Nondisclosure of Information to Advertisers

Unlike the conduct by the Florida DMV that was found violative of the DPPA in the case of Collier v. Dickinson (CCH Privacy Law in Marketing ¶60,109), the advertising program in the current case did not involve disclosure of registrants' personal information to the advertisers, the court noted. That information remained in the control of the DMV and the contractor.

Revenue generated from the disclosure of personal information to the contractor was not used for general purposes; rather, it was used to defray the expense of the renewal process. In addition, the program was directly supervised by DMV officials, who approved each advertisement.

Contractor Acting for DMV

The contractor acted "on behalf of" the DMV, for purposes of the exception, in the court's view. The contractor had contracted with the state to completely redesign, repackage, and administer the mailing of the registration renewal reminders—actions that the contractor could not have taken except while acting "on behalf of" the DMV.

“Making Available” Personal Information

Allowing advertisers to use the DMV envelope to send their ads did not constitute "making available" personal information in violation of the DPPA, the court determined. The term "make available" meant that the information is made available for viewing.

Although the contractor manipulated the information in the DMV's files to allow its sponsors to select certain categories of registrants to receive particular ads, the advertisers were not provided with the registrants' names and addresses. The effect on registrants' privacy was no different than if every registrant received the same ad.

The April 9 decision is In re Imagitas, Inc. Driver's Privacy Protection Act Litigation, CCH Privacy Law in Marketing, ¶60,202.

Friday, May 09, 2008

Class of Direct Purchasers of Antidepressant Drug Certified in Monopoly Case

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

The federal district court in Philadelphia has certified a class comprised of approximately 100 direct purchasers of the branded antidepressant Wellbutrin SR to pursue monopoly claims against the drug's maker—GlaxoSmithKline—for delaying the entry of generic competition.

The class contended that GlaxoSmithKline engaged in monopolization through fraudulent assertions to the U.S. Patent and Trademark Office and the filing of frivolous patent infringement actions against generic-drug manufacturers seeking to market less expensive version of the drug. The class sought to recover the overcharges resulting from the challenged conduct.

Class Requirements

The court ruled that the class met the requirements of Federal Rules of Civil Procedure 23(a) and 23(b)(3). Rejected was the drug maker's argument that a conflict existed between the national wholesalers and other class members because the national wholesalers benefited from anticompetitive activity that prevented entry of generic drugs into the market.

Regardless of whether some class members profited from the alleged activity, the controlling question was whether the class members suffered an overcharge. If an overcharge occurred, all class members were entitled to recover, whether or not some plaintiffs experienced a net benefit while others experienced a net loss.

Rule 23(b)(3) required that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.

The direct purchaser plaintiffs maintained that the impact of the alleged conduct could be established by common proof and methodology based on publicly available data as well as information obtained through discovery. They presented a colorable method for establishing common impact, thereby satisfying the predominance inquiry as to class wide impact.

Moreover, the superiority requirement was met because denying certification would require each direct purchaser to file suit individually at the expense of judicial economy and litigation costs for each party and would create a risk of inconsistent results for the defendant and for all direct purchasers.

Assignment of Claims

Certification was not denied, even though the named plaintiffs were assignees of direct purchasers. Antitrust claims could be assigned, and the drug maker's challenge to the validity of an assignment did not require the rejection of one of the class representatives. The merits of the defense would not distract the particular named plaintiff to the detriment of the class itself, according to the court.

The May 2, 2008, decision in In re Wellbutrin SR Antitrust Litigation, Civ. Action No. 04-5525, will appear at 2008-1 CCH Trade Cases ¶76,140.

Tuesday, May 06, 2008

FTC Modifies Order to Permit Nine West to Set Resale Prices

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

An FTC consent order that prohibited Nine West Group, Inc., a major manufacturer and seller of women's shoes, from engaging in resale price maintenance (RPM) agreements with dealers has been modified by the Commission in light of the 2007 U.S. Supreme Court decision in Leegin Creative Products, Inc. v. PSKS, Inc. (2007-1 CCH Trade Cases ¶75,753).

The Commission granted in part an October 2007 petition from Nine West Footwear Corporation, successor to Nine West Group, Inc., to modify a 2000 FTC order (FTC Complaints and Orders Transfer Binder 1997-2001, ¶24,707). The order banned Nine West, for a 20-year period, from threatening or penalizing dealers that sell below the company’s designated retail prices.

Nine West had argued that the Leegin decision, which reversed a long-standing precedent that held all RPM agreements per se illegal, constituted a dramatic change in antitrust law and required that the order be reexamined. The American Antitrust Institute and a number of state attorneys general had asked the Commission to deny the petition.

State Settlements

In 2000, Nine West also entered into separate settlements with the attorneys general for 56 U.S. states, territories, commonwealths, and possessions. Nine West's settlement with the attorneys general required the company to pay $34 million. The money collected was to be used to fund women's health, educational, vocational, and safety programs. The FTC's action does not affect the state orders.

The modified order regarding In the Matter of Nine West Group Inc., FTC Dkt. C-3937, announced May 6, 2008, will appear in the CCH Trade Regulation Reporter.

The FTC news release and Nine West’s petition appear on the FTC website.

Monday, May 05, 2008

Bill Extending Antitrust Exemption for College Financial Aid Awards Passes House

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

Colleges and universities would be allowed to collaborate with each other about administering need-based financial aid without fear of violating antitrust laws, under a bill approved on April 30 by the House.

The bill—the Need-Based Educational Aid Act (H.R. 1777)—would make permanent the current antitrust exemption the institutions now enjoy. The exemption is set to expire on September 30.

For more than 50 years, several private schools have used common practices to assess students’ financial needs and to give the same financial aid awards to students admitted to more than one member of the group of schools.

In the late 1980s, the Antitrust Division challenged the practice. Congress in 1992 passed a temporary antitrust exemption authorizing the schools to continue the practice. Congress has extended that safe harbor on several occasions.

Supporters of the measure say it is necessary to ensure that a greater number of students receive aid.

“The need-based financial aid system makes financial aid available to the broadest number of students solely on the basis of demonstrated need,” remarked Rep. John Conyers (D-Mich.), chairman of the House Judiciary Committee.

“The schools have been concerned that without this exemption, they would be required to compete – through financial aid awards – for the very top students, which could result in a system in which the very top students receive an excess of the available aid while the rest of the applicant pool receives less or none at all,” said Rep. Conyers.

Sponsored by Representative William Delahunt (D-Mass.), the bill was introduced in the House on March 29, reported by the Judiciary Committee on April 10, and passed the House by voice vote on April 30. The legislation was received in the Senate, read twice, and referred to the Judiciary Committee on May 1.

Thursday, May 01, 2008

Ninth Circuit Reaffirms Direct Purchaser Rule, Denies Hospital’s Antitrust Standing

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

The U.S. Court of Appeals in San Francisco yesterday refused to create an exception to the direct purchaser rule of Illinois Brick Co. v. Illinois (U.S. Sup. Ct. 1977), 431 U.S. 720, 1977-1 Trade Cases ¶61,460, which generally bars recovery by indirect purchasers in federal antitrust cases.

The court ruled that the plaintiff-appellant—Bamberg County Memorial Hospital & Nursing Center—lacked standing under the doctrine, because it only indirectly purchased from defendant Johnson & Johnson.

Bamberg, which had had a contractual relationship with Johnson & Johnson (J&J), sued the medical supplies manufacturer for impermissibly leveraging its monopoly power in sutures to create a monopoly in the endomechanical products market.

Another hospital and a distributor of medical devices also sued J&J for antitrust violations. The three separate cases had been consolidated by the district court in Santa Ana, California.

Despite Bamberg’s contract with J&J, the hospital ultimately purchased J&J’s sutures (used to close wounds) and endomechanical products (used primarily for minimally invasive laparoscopic surgery) through a separate contract with a third-party distributor. The distributor was the immediate purchaser of sutures and endos from J&J.

Hospital’s Contractual Relationships

Bamberg was a member of a group purchasing organization (GPO), which negotiated agreements with J&J on the hospital’s behalf. Those agreements set the pricing options for the relevant products. Bamberg then executed its own contracts with J&J pursuant to the terms of the GPO agreements.

While the contracts allowed the hospital to order products either directly from J&J or from an authorized distributor, the hospital chose the latter option and selected a distributor that was not owned or otherwise controlled by the manufacturer. The contract with the distributor specified the terms of purchase for the J&J sutures and endos. Thus, the hospital's contract with J&J did not result in the procurement of any goods directly from the manufacturer, the court explained.

The hospital did not pay J&J directly for any goods, and J&J did not ship any goods directly to the hospital. Rather, Bamberg paid the distributor directly for its orders (at a price equal to the price negotiated under the GPO agreement with the manufacturer, plus the distributor’s markup), and the distributor delivered the products to the hospital.

Proposed Exception

That the distributor arguably had a smaller stake in contesting the price did not justify carving out an exception to the direct purchaser rule for a plaintiff who (1) contracted directly with the defendant; (2) challenged the lawfulness of that contract; and (3) was charged artificially high prices by the defendant in its contract.

The court noted that such an exception would still present problems of multiple liability and force courts to engage in complex factual inquiries to determine how damages should be apportioned between parties. Moreover, there were clearly other motivated plaintiffs, distributors and hospitals alike, who unquestionably met the direct purchaser requirement and could serve the role of private attorney general contemplated by Sec. 4 of the Clayton Act.

The April 30, 2008, decision in Delaware Valley Surgical Supply Company, Inc., et al v. Johnson & Johnson, will appear in CCH Trade Cases.