Tuesday, September 30, 2008

Retailer’s Selling Returned Item as “New” Could Violate Texas Deceptive Trade Practices Law

This posting was written by Andrew Soubel, Editor of CCH State Unfair Trade Practices Law.

Although a consumer failed to state a Texas Deceptive Trade Practices—Consumer Protection Act (DTPA) claim for a retailer’s misleading statements about its reason for reducing the price of a grinder and for "bait advertising," the consumer successfully stated DTPA claims for the retailer’s nondisclosure of material information and for representing that the grinder was new when it had been returned.

The consumer alleged that the retailer violated the DTPA by reducing the price of the grinder without informing the consumer that the grinder had been purchased, returned, and refurbished. The consumer also alleged that the retailer knew or should have known that the grinder had not been reassembled properly.

When the customer used the grinder, the grinding wheel came off and ripped into his leg, causing a severe injury. The consumer eliminated any fact issues as to whether there was a price reduction when he incorporated the testimony of the retailer's representative, who stated that the purchase receipt revealed that the grinder was sold at full price.

The consumer failed to produce any evidence that the retailer made any misleading statements regarding a price reduction. Because there were no issues of material fact, the court dismissed the claim.
Bait Advertising

The complaint failed to allege facts sufficient to state a DTPA claim against the retailer for "bait advertising." Bait advertising is a practice by which a seller seeks to attract customers by advertising low prices for products that the seller does not intend to sell in more than nominal amounts. However, the court found the consumer failed to allege any evidence that he bought the grinder in reliance upon any advertising, much less "bait advertising."

Nondisclosures, Misrepresentations

Nevertheless, the consumer did state a DTPA claim against the retailer for not disclosing that the grinder had previously been purchased and returned. Under the DTPA, a deceptive act occurs if a defendant fails to disclose material information to a consumer. There must be an intent to induce the consumer into a transaction he would not otherwise have entered, and the defendant's actions must be the producing cause of an injury.

In this instance, there was sufficient evidence indicating that the grinder had been previously purchased and that the product was defective when sold. The consumer sufficiently alleged fact issues as to whether the retailer knew of the defect, whether the retailer intended to induce the consumer into the transaction, and whether the conduct was a producing cause of his injuries to state a claim, the court found.

Passing Off “Used” as “New”

Finally, the consumer alleged that the grinder was a returned item that had been disassembled and refurbished and that the retailer passed it off as new. It is a violation of the DTPA to represent that merchandise is original or new if it has been reconditioned, reclaimed, or used.

Texas had little case law addressing this section of the DTPA, but cases generally held that returned items that were subsequently sold as new fit the definition of "used." The court held that the consumer sufficiently raised fact issues as to whether the grinder was in fact a used item that was returned with a defect, whether the fact was material to the transaction, and whether the misrepresentation was a producing cause of the consumer's injuries to state a claim.

The decision is Jackson v. Wal-Mart Associates, Inc., CCH State Unfair Trade Practices Law ¶31,657.

Monday, September 29, 2008

Established Manufacturer’s Comparative Ads Presumed to Cause Injury to New Entrant

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

In light of unrefuted allegations that Oregon Cutting Systems Group—an established manufacturer of chainsaw components—engaged in deliberate, literally false, and material advertising that directly compared its chain to that of newly established competitor Trilink Saw Chain, a presumption arose under the Lanham Act that the advertising deceived the competitor's customers and caused it financial injury, the federal district court in Atlanta has ruled.

Oregon Cutting Systems (Oregon) was denied summary judgment on the Lanham Act claims because it failed to rebut the presumption of injury. In addition, there was an unresolved question of fact whether Trilink Saw Chain (Trilink) could recover "damage control costs" for testing it conducted in response to the allegedly false advertising.

Abstracts of Tests

In 2005, Oregon had an estimated 57 percent of the market share for saw chain sales. Nevertheless, it considered Trilink, which entered the market that year, a threat.

In March 2006, Oregon created one-page abstract, containing summaries of the results of internal tests Oregon performed on both companies’ chains. Oregon discussed the contents of the abstract with several customers and provided copies of the abstract at various times between March and November 2006.

During the summer of 2006, Oregon hired a third-party lab to conduct further tests, prepared a six-page memorandum on the results, and disseminated the memorandum to customers. It also prepared a brochure, “Eight Important Considerations In Choosing Your Partner for Saw Chain,” which it distributed to its customers.

False Advertising Claim

Trilink brought suite in 2007, alleging that the abstract, memorandum, and brochure contained literally false or misleading statements intending or having the capacity to deceive potential purchasers as to the “strength, performance, and safety” of its chain. The suit alleged that the statements violated Section 43(a) of the Lanham Act and the Georgia Uniform Deceptive Trade Practices Act and that Oregon committed trademark infringement and tortious interference with Trilink’s business relations.

Oregon filed several motions for summary judgment, including one attempting to strike the request for monetary damages, claiming that Trilink failed to establish that it was injured by the alleged false advertising.

Actual Harm v. Presumption of Harm

While a showing of false and deceptive advertising is sufficient to warrant injunctive relief, parties seeking monetary relief have often been required to establish actual harm to their businesses, the court observed. Since marketplace damages are difficult and expensive to prove, many courts—including the 11th Circuit—“routinely presume that literally false advertising actually deceives consumers.” In the context of a preliminary injunction, the 11th Circuit will presume irreparable harm when a false, comparative statement is made.

The district court concluded that a presumption of causation and harm should apply to claims for actual damages when a defendant disseminates a willfully deceptive comparative advertising.

In this case, Trilink alleged—and Oregon did not dispute—that Oregon engaged in deliberate, literally false, material advertising that directly compared Trilink’s chain to Oregon’s chain. Thus, Trilink was entitled to a presumption that the advertising deceived its customers, causing Trilink financial injury.

Profits Award

Trilink could pursue an award of profits, the court held. Where an established company specifically disparages a market newcomer through deliberately false advertisements, the newcomer would not be required to prove that the advertisements benefited the disseminator before being awarded an accounting of profits.

So long as the newcomer could provide evidence of the established manufacturer's gross sales, the newcomer would be eligible for a discretionary award of profits, the court said.

The September 12 decision in Trilink Saw Chain, LLC v. Blount, Inc. appears at CCH Advertising Law Guide ¶63,101.

Thursday, September 25, 2008

Virginia Ban on Unsolicited Bulk E-Mail Held Unconstitutional

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

The unsolicited bulk electronic mail provisions of the Virginia Computer Crimes Act were unconstitutional because the statute prohibited anonymous transmission of all bulk e-mails, including those containing political, religious, or other speech protected by the First Amendment, the Virginia Supreme Court decided.

Felony Prosecution

Criminal jurisdiction existed in Loudoun County, Virginia for felony prosecution of a North Carolina sender of unsolicited bulk electronic mail to America Online users because AOL’s e-mail servers were located in Loudoun County, the court held.

Because the use of the computer network of an e-mail service provider or its subscribers was an integral part of the crime charged—and because the use of AOL’s servers was the “immediate result” of the sender’s acts, he was amenable to prosecution in Virginia.

Overly Broad Statute

The bulk e-mail sender had standing to challenge the statute as overly broad because overbreadth was a function of substantive First Amendment law protected by the due process clause of the Fourteenth Amendment from impairment by the states, the court found. The prohibition against intentional use of false e-mail routing information was not a form of trespass excluded from First Amendment protection.

In transmitting and receiving e-mails, e-mail servers use a protocol requiring that routing information contain an Internet Protocol (IP) address and a domain name for the send and recipient of each e-mail. The only way a sender can publish an anonymous e-mail is to enter a false IP address or domain name, according to the court.

Right to Engage in Anonymous Speech

The right to engage in anonymous speech, particularly anonymous political or religious speech, was “an aspect of the freedom of speech protected by the First Amendment, the court noted. The statute was no limited to instances of commercial or fraudulent transmission of e-mail, nor was it restricted to transmission of illegal or otherwise unprotected speech, such as pornography or defamatory speech.

The statute was substantially overbroad and could not be saved by a limiting construction that would amount to a material and substantive rewrite that only the legislature could do, the court concluded.

The September 12 decision in Jaynes v. Commonwealth of Virginia appears at CCH Advertising Law Guide ¶63,096.

Wednesday, September 24, 2008

Major League Baseball’s Licensing Practices Not Anticompetitive

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

The exclusive licensing agent for Major League Baseball (MLB) did not place unreasonable restraints on trade through its organization and intellectual property licensing activities, the U.S. Court of Appeals in New York City has ruled.

A grant of summary judgment in favor of the licensor, on antitrust counterclaims brought by a plush bear manufacturer that the licensor had sued for failing to acquire the requisite trademark licenses for some of its products (2006-2 Trade Cases ¶75,325), was therefore affirmed.

Rule of Reason

In concluding that the complaining manufacturer had failed to adduce evidence of adverse competitive effects or sufficient market power to inhibit competition market-wide, the lower court properly analyzed the licensor’s operations under the rule of reason, the appellate court decided.

The group’s role in licensing MLB intellectual property, including club and league trademarks, was not a naked restraint on trade. It facilitated the efficient protection and quality control of MLB intellectual property, the court noted. The mere fact that the manufacturer did not receive a license for its products was not sufficient to show such an effect. The record did not show any reduction in the licensing of the clubs’ intellectual property overall. To the contrary, the number of licenses granted had steadily increased over
the last 20 years.

No evidence was presented of an unlawful horizontal agreement on price. The league member clubs’ agreement to share equally in the profits from the agent’s intellectual property licensing did not, as the manufacturer contended, constitute per se illegal price fixing.

Quick Look Analysis

Quick look analysis also was inappropriate because the casual observer could not summarily conclude that the group’s arrangement had an anticompetitive effect on customers, the court observed.

An antitrust case concerning blanket music licensing, which the U.S. Supreme Court had decided under the rule of reason, was instructive in foreclosing the imposition of per se or quick-look liability, in the appellate court’s view. Like the exclusive licensing agent under attack in that suit (Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 1979-1 Trade Cases ¶62,558), MLB’s licensor not only expanded output, but also could offer a large number of products that individual intellectual property owners would not have been able to match.

Rejected was a contention that another Supreme Court decision (National Collegiate Athletic Assn v. Board of Regents of the University of Oklahoma, 1984-2 Trade Cases ¶66,139), in which a plan by college athletics’ governing body to set a maximum on the number of games that could be broadcast was found to have unreasonably restrained competition, governed the conduct at issue in the present case.

Aside from the fact of revenue sharing, none of the factors relied on by the Court to reach that conclusion found even a superficial parallel with respect to the claims against MLB’s licensor. Moreover, the court explained, ample precedent existed in which courts had declined to apply the per se rule to sports leagues where cooperation among competitors could “under some circumstances have legitimate purposes as well as anticompetitive effects.

The September 12 decision is Major League Baseball Properties, Inc. v. Salvino, 2008-2 Trade Cases ¶ 76,303.

Tuesday, September 23, 2008

NASAA Releases Proposed Commentary to Franchise Registration and Disclosure Guidelines

This posting was written by John W. Arden.

A proposed Commentary to the 2008 Franchise Registration and Disclosure Guidelines was released for internal and public comment on September 23 by the Franchise and Business Opportunities Project Group of the North American Securities Administrators Association.

The 2008 Commentary contains “practical guidance about complying with the new Franchise Registration and Disclosure Guidelines and addresses questions of interpretation that have arisen about those Guidelines,” according to NASAA.

In the 2008 Franchise Registration and Disclosure Guidelines, NASAA adopted the new disclosure requirements of the FTC’s Amended Franchise Rule, with a new state cover page, new filing instructions, and new application forms.

“As of the date of this Commentary, state franchise examiners have reviewed thousands of Franchise Disclosure Documents prepared under the new disclosure requirements, and those examiners and franchisors have raised questions of interpretation,” the Introduction to the Commentary states.

“Although the FTC staff has provided guidance by posting a number of ‘Frequently Asked Questions’ (‘FAQs’) about the Amended FTC Franchise Rule and has published a Compliance Guide, some practice issues remain.”

The commentary addresses issues such as:

--Whether a franchisor may add clarifying information when disclosing the total investment necessary to begin operation of a franchise (Answer: no);

--Whether a franchisor can present information on numerous parent companies in a chart for Item 1 purposes (Answer: yes);

--Are felonies of all kinds required to be disclosed in Item 3 (Answer: yes);

--Does Item 10 require disclosure of financing arrangements requiring payments within 30 days on open account financing? (Answer: no);

--How must franchisees be listed in an exihibit for Item 20? (Answer: alphabetically by state, with cities in alphabetical order, and franchisees within each city in alphabetical order.

--Must international outlets be listed in Item 20? (Answer: no)

Text of the notice of request for comments appears here and the proposed commentary appears here on the NASAA website.

The internal and public comment period will remain open through October 23, 2008. Written comments should be sent to Dale E. Cantone, Chair of the Franchise and Business Opportunities Project Group, and to the NASAA Legal Department:

Dale E. Cantone, Deputy Securities Commissioner
Maryland Securities Division
200 St. Paul Place
Baltimore, MD 21202-2020
Telephone: 410-576-6368
e-mail: dcatone@oag.state.md.us

with a copy to:

Lesley Walker
Associate Council
750 First Street NE, Suite 1140
Washington, DC 20002-4251
Telephone: 202-737-0900
e-mail: lw@nasaa.org

Monday, September 22, 2008

Franchisor Could Reject Franchise Transferees for Lack of English Proficiency

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

A restaurant franchisor did not breach a franchise agreement by withholding its consent to a franchise transfer to two prospective transferees who failed to pass the franchisor’s English Language Proficiency Test, according to the federal district court in Los Angeles.

The franchisor required the franchisee and the prospective transferees, who were of Middle Eastern origin, to execute a rider on the contract for the sale of the franchise expressly requiring the transferees to pass the language proficiency exam, which tested “whether, in [the franchisor’s view], an individual has a sufficient command of the English language to serve customers and conduct business with [the franchisor], with suppliers and with other parties.”

After both of the prospective transferees failed the exam, the franchisor informed them and the franchisee that it could not approve the sale. The franchisee subsequently closed his franchise and brought suit against the franchisor.

Arbitrary and Unreasonable Requirement

The franchisee argued that the requirement that the prospective transferees pass the language proficiency exam in order to receive the franchisor’s consent to the sale was arbitrary and unreasonable. However, the argument failed for several independent reasons, the court determined.

There was substantial evidence that franchisees must be proficient in both written and spoken English to complete required training, understand and comply with corporate operating instructions, communicate with suppliers, and interact with customers.

The franchisee contended that the proficiency exam misjudged the prospective transferees’ English proficiency, since the transferees’ proficiency had been sufficient in prior commercial contexts. However, that contention was undercut by one of the transferee’s repeated need to use an interpreter during her deposition, the court observed.

Contract Provision

The franchisee had agreed in the franchise agreement that it would follow all of the franchisor’s system requirements, one of which, set out in the franchisor’s company manual, was the English language proficiency requirement. The franchisee and the prospective transferees expressly agreed to the proficiency requirement in the rider to the contract for sale.

The decision is De Walshe v. Togo’s Eateries, Inc., CCH Business Franchise Guide ¶13,956.

Saturday, September 20, 2008

Delinquent Cigarette Retailers May Be Liable Under RICO for NYC’s “Lost Taxes”

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

The City of New York had standing to bring civil RICO claims against out-of-state cigarette retailers that failed to submit monthly sales reports to the State of New York, the U.S. Court of Appeals has ruled. The retailers’ conduct allegedly prevented the city from collecting tens, perhaps hundreds, of millions of dollars a year in excise taxes.

Monthly Sales Reports

Congress enacted the Jenkins Act in 1949 to require cigarette retailers to file monthly sales reports with the tobacco tax administrators of the states where they had shipped cigarettes. The reports include information such as the name and address of each out-of-state consumer who purchased cigarettes during the prior month, and the quantity of cigarettes that each had purchased.

The City of New York alleged that that the retailers had engaged in a pattern of racketeering activity by committing a “predicate act” of mail or wire fraud each time they used the mails or wires to sell cigarettes to city residents without complying with the Act’s reporting requirements. To succeed in its RICO claim, the city had to show: (1) a substantive RICO violation under Section 1962; (2) an injury to its business or property; and (3) causation (i.e., the alleged injury occurred “by reason of “the substantive RICO violation).

Substantive Violation

To state a claim under RICO Section 1962, the city had to allege that the retailers conducted an enterprise through a pattern of racketeering activity. It was “settled law” in the Second Circuit that a Jenkins Act violation could form the basis of a wire or mail fraud conviction.

The City identified RICO persons—employees and/or officers of the retailers—who allegedly directed the enterprise to: (1) conceal cigarette sales from state tax authorities by not filing Jenkins Act reports and (2) use misrepresentations to sell cigarettes via the mails or wires to residents of New York City. It further alleged that this conduct amounted to a scheme to defraud the City of its use taxes because it deprived the City of the information it needed to charge and collect those taxes.

According to the court, these allegations sufficiently alleged a fraudulent scheme or artifice that was furthered by the use of mails or wires.

As to the “enterprise” requirement, the U.S. Supreme Court has determined that a plaintiff must allege and prove the existence of two distinct entities: a RICO “person” and an enterprise that is not simply the same person referred to by a different name.

Although the City’s allegations were sufficient to meet the distinctiveness requirement with respect to enterprises that the court characterized as the “primary” enterprises (i.e., corporate entities that were alleged to be passive enterprises , with officers and/or directors acting as RICO persons who conduct the affairs of the enterprise in violation of RICO) , the court determined that they were not sufficient with respect to the alleged association-in-fact enterprises (associations consisting of a defendant entity and a third party, with RICO persons consisting of a defendant entity and a third party, with RICO persons consisting of the defendant entities and, in general, the officers and/or directors of the entities that compose the enterprise).


The retailers unsuccessfully argued that the City’s “lost taxes” did not constitute an injury to the City’s business or property because the loss was not incurred in a commercial transaction. The retailers based this argument on dicta that the court expressly rejected. Because lost taxes could indeed constitute an injury to the City’s business or property for purposes of RICO, the City adequately satisfied RICO’s injury requirement, in the court’s view.


The City also met RICO’s causation requirement, according to the court. More specifically, the City alleged that it had been injured (via lost revenues) by the retailer’s RICO violations (the predicate acts of mail and wire fraud), which were committed in furtherance of a scheme to defraud the City of taxes. The purported loss of tax revenue was directly caused by the alleged schemes to defraud the City. The fact that the State of New York also may have been injured by the schemes did not render the injury any less direct.

The September 2 decision is City of New York v. Smokes-Spirits.com, Inc., CCH RICO Business Disputes Guide ¶11,547.

Thursday, September 18, 2008

Franchise Agreement’s Arbitration Clause Unenforceable; No “Meeting of Minds”

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

There was no meeting of the minds between a franchisor of window covering businesses and a franchisee concerning the arbitration provision in their franchise agreement because of an advisement in the franchisor’s Uniform Franchise Offering Circular (UFOC) that the provision may not be enforceable under California law, a California state appellate court has ruled.

Accordingly, the court upheld a trial court denial of arbitration of the franchisee’s claims for rescission and damages.

In reaching its conclusion, the trial court relied on Laxmi Investments, LLC v. Golf USA (CCH Business Franchise Guide ¶11,706). In Laxmi, the Ninth Circuit refused to enforce a forum selection clause requiring that arbitration between an Oklahoma franchisor and a California franchisee be held in Oklahoma, since the UFOC advised the franchisee that the clause might not be enforceable under California law. The appeals court held that the parties had never clearly agreed to an Oklahoma forum.

In this case, the franchisor’s UFOC included a California appendix that stated:

“The franchise agreement requires binding arbitration. The arbitration will occur at Dallas County, Texas with the costs being borne by the losing party. This provision may not be enforceable under California law. The franchise agreement requires application of the laws and forum of Texas. This provision may not be enforceable under California law.”

The franchisor contended that the trial court erred in relying on Laxmi, without analyzing the later case of Bradley v. Harris Research, Inc. (CCH Business Franchise Guide ¶12,221). However, the trial court did consider Bradley and properly found it was distinguishable, the appellate court held.

In Bradley, the Ninth Circuit held that the Federal Arbitration Act preempted that portion of the California Franchise Relations Act that rendered unenforceable forum selection provisions restricting venue to a forum outside of the state. However, in Laxmi, the Ninth Circuit concluded that even if that statutory provision was preempted, the parties did not agree to the out-of-state forum.

The Bradley court did not consider a UFOC advisement that the arbitration provision might be unenforceable under California law because the UFOC delivered by the franchisor was not made part of the record. Thus, in Bradley, there was no evidence in the record to support a Laxmi analysis.

Accordingly, Bradley did not overrule the reasoning in Laxmi, and the trial court correctly relied on Laxmi to hold that the arbitration provision was unenforceable, according to the appellate court.

The decision is Winter v. Window Fashions Professionals, Inc., to be reported at CCH Business Franchise Guide ¶13,965.

Wednesday, September 17, 2008

NFL’s Use of Announcer’s Voice Violated Right of Publicity

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

The National Football League's use of an announcer’s voice in a film about the making of a computer game (“The Making of Madden NFL 06”) violated the Pennsylvania right of publicity statute, but a trial was needed to decide the announcer’s false endorsement claim under the Lanham Act, according to the U.S. Court of Appeals in Philadelphia.

Preemption by Copyright Act

Pennsylvania’s right-of-publicity statute prohibits unauthorized use of a name or likeness. The court held that the Copyright Act did not expressly preempt the right of publicity because (1) the right of publicity claim required an element of proof not needed for copyright infringement—a showing that the announcer's voice had “commercial value” and (2) a voice is not copyrightable.

The right of publicity claim was not impliedly preempted, as being in conflict with federal law, because a release signed by the announcer, authorizing the NFL to use the his voice, preserved his right of publicity by excluding endorsements.

Apart from the copyright preemption issue, the court said there was no dispute that the NFL violated the Pennsylvania law, as held by the district court (CCH Advertising Law Guide ¶62,549 and ¶62,559) based on findings that the announcer's voice had commercial value, that the film was a commercial advertising vehicle, and that the use of the announcer's recordings was outside the terms of his consent in signing a contractual release.

False Endorsement

On the Lanham Act claim of false endorsement, a trial was needed to resolve issues of fact as to whether consumers were likely to have been confused by the NFL's use of the announcer's voice in the film, the appellate court determined. A grant of summary judgment in favor the announcer on this claim (CCH Advertising Law Guide ¶62,549) was vacated and remanded for trial.

The court rejected the NFL’s First Amendment defense to the false endorsement claim. The infomercial-like film shown on NFL’s cable channel was commercial speech rather than artistic expression, the court found, contrary to the NFL's argument that the film’s promotional aspects were inextricably intertwined with artistic and informational elements.

While commercial speech receives some First Amendment protection, the protection would not apply if consumers were likely to be misled or confused by the challenged conduct, in violation of the Lanham Act, according to the court.

Contractual Release

The NFL’s defense based on the announcer’s contractual release failed as well. The release authorized the NFL to use the announcer's voice provided that the use did not constitute an endorsement of any product or service. If the use at issue was a false endorsement prohibited by the Lanham Act, it would fall outside the scope of the release, the court said.

The September 9 opinion in Facenda v. N.F.L. Films, Inc. will be reported at CCH Advertising Law Guide ¶63,094.

Tuesday, September 16, 2008

Australian Commission Proposes Data Breach Notification, Other Changes to Privacy Act

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

The Australian Law Reform Commission (ALRC) has recommended sweeping changes to Australia's privacy laws—including the addition of breach notification requirements—in a report released August 11. The 2,700-page report, entitled “For Your Information: Australian Privacy Law and Practice,” was the culmination of a research and consultation exercise conducted over two years.

"Although the federal Privacy Act is only 20 years old, it was introduced before the advent of supercomputers, the Internet, mobile phones, digital cameras, e-commerce, sophisticated surveillance devices and social networking websites—all of which challenge our capacity to safeguard our sensitive personal information,” ALRC President Professor David Weisbrot said. “The Privacy Act has worked pretty well to date, but it now needs a host of refinements to help us navigate the Information Superhighway."

Privacy Principles

The report recommends simplifying and streamlining the Privacy Act and related laws, as well as amending the Act to prescribe a single, uniform set of Privacy Principles to apply to all federal government agencies and the private sector.

A key proposal by the ALRC calls for government agencies and business organizations to be required to notify individuals—and the Privacy Commissioner—when there is a risk of serious harm occurring as a result of a data breach.

According to the ALRC, the Privacy Commissioner's complaint-handling procedures need to be strengthened, and federal courts should be empowered to impose significant civil penalties for serious or repeated breaches of the Privacy Act.

Private Cause of Action

In addition, Australian federal law should provide for a private cause of action for individuals who have suffered serious invasions of privacy, the report said. Courts should be empowered to tailor appropriate remedies, such as an order for damages, an injunction, or an apology. The ALRC's recommended formulation sets a high bar for plaintiffs, having due regard to the importance of freedom of expression and other rights and interests.

The report also calls for improvements to Australian laws and regulations on cross-border data flows, health privacy, and children's privacy. In particular, intensified efforts to educate young people about privacy issues are necessary, the ALRC said.

The full text of the report is available here at the Austrlian Law Reform Commission website.

Monday, September 15, 2008

FTC Testifies Before Congress on Call Centers, Prepaid Calling Cards

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

Last week, the FTC offered testimony regarding two bills pending in Congress.

Call Center Consumer’s Right to Know Act

On September 11, Lois Greisman, Associate Director of the Division of Marketing Practices at the FTC Bureau of Consumer Protection, testified before the before the U.S. House of Representatives Committee on Energy and Commerce, Subcommittee on Commerce, Trade, and Consumer Protection regarding the proposed “Call Center Consumer’s Right to Know Act” (H.R. 1776). The bill would require call center employees to disclose, in telephone calls with consumers, the physical location of the call center. The testimony offered suggestions for improving the legislation.

First, the requirement that the caller disclose his or her physical location could be tailored more precisely to apply only to call centers operating outside the United States. As currently drafted, the obligation to disclose physical location would apply broadly to all entities that have telephone contact with consumers, whether operating in the United States or abroad. Narrowing the disclosure requirement would reduce unnecessary compliance burdens upon domestic entities, such as a local pizza parlor, that do business by telephone, according to the testimony.

Second, the testimony recommends clarification of the definition of the term “call center.” The agency contends that there is ambiguity over whether a reference to the Internet is intended to bring within the bill’s scope all on-line transactions, including on-line service assistance. Third, the agency questions the wisdom of a provision that imposes an annual certification requirement on U.S. companies that use call centers.

Finally, the Commission notes that jurisdictional issues could significantly complicate enforcement of the bill. The testimony suggested that an agency “well-versed in labor and foreign trade issues would likely be better suited than the FTC to administer and enforce” the proposed measure.

Text of the testimony appears here on the FTC website. Further details regarding H.R. 1776 appear here.

Prepaid Calling Card Consumer Protection Act

A day earlier, FTC Chairman William Kovacic told the Senate Committee on Commerce, Science, and Transportation that the proposed “Prepaid Calling Card Consumer Protection Act” (S. 2998) would greatly benefit the agency by providing it with “a powerful tool to bring enforcement actions against the distributors of prepaid calling cards.”

According to the testimony, the measure “is directed at the conduct of prepaid calling card service providers—carriers—as well as distributors, and therefore would implicitly give the FTC jurisdiction over common carriers engaged in the deceptive practices prohibited by the proposed legislation. Consumers would benefit greatly from legislation giving the FTC jurisdiction over such practices by the telecommunication carriers.”

The testimony notes that the legislation also would give the FTC authority to seek civil penalties for violations, thus providing an additional remedy to those already available to the Commission.

In the Commission’s testimony, Kovacic noted that agency recently brought two cases alleging deceptive marketing of prepaid calling cards. In March, the FTC sued Clifton Telecard Alliance, a national distributor of prepaid calling cards. In May, the FTC filed a similar action against several companies alleged to act as a common enterprise in distributing prepaid calling cards out of Florida, Massachusetts, and New Jersey. The Commission also has other active prepaid calling card investigations, according to the testimony.

Commissioner Kovacic’s testimony appears here on the FTC website.

Friday, September 12, 2008

Privacy Rights in Social Security Numbers Clash with Rights to Public Records in Recent Decisions

This posting was written by Tom Long, Editor of CCH Privacy Law in Marketing, and John W. Arden.

Two court decisions weighing the privacy rights in protecting individuals’ Social Security Numbers against the rights to access and publish public documents were issued on August 22 by courts in Virginia and New Jersey.


A decision by the federal district court in Richmond, Virginia held that a state law regulating the use of Social Security Numbers (SSNs) was unconstitutional as applied to a website operated by a privacy-rights advocate, who opposed the posting of land records online without redacting the SSNs contained in the records.

On her website, the advocate posted examples of public records that were available online and that contained SSNs. She stated that her reason for posting the records was to demonstrate to members of the public that their own personal information could be available online.

The Virginia SSN law (CCH Privacy Law in Marketing ¶34,660) provided that "a person shall not ... [i]ntentionally communicate another individual's social security number to the general public." Prior to an amendment that took effect July 1, 2008, the law contained an exception for records required by law to be open to the public.

The advocate sought declaratory and injunctive relief against enforcement of the law, asserting that her activities would be subject to fines, investigative demands, and injunctions should she continue to display the SSNs on her website. That prospect would chill her free speech.

First Amendment v. State Interest

Although the advocate's website was not part of the traditional news media, it undertook a government watchdog role that was protected by the First Amendment, in the court's view. Her site was "analytically indistinguishable from a newspaper."

It would not be difficult to conclude that protection of SSNs from public disclosure should qualify as a state interest of the highest order, the court held. However, the state's assertion of this interest was undercut by its own conduct in making the SSNs publicly available through unredacted release on the Internet, which it had done for several years.

The burden of redacting private information from state records could not be placed on those who would publish truthful information that is in records the state had made available to the public, according to the court.

The decision, Ostergren v. Mcdonnell, appears at CCH Privacy Law in Marketing ¶60,243.

Public Records Act v. Duty to Safeguard Information

In the New Jersey decision, an employee of a company that created computer-based searching tools for the title insurance industry was denied production of government records by a New Jersey county under the New Jersey Open Public Records Act (OPRA) without the redaction and removal of SSNs from the records, at the employee's expense.

The access rights embodied in OPRA were tempered by the state legislature's finding and declaration that "a public agency has a responsibility and an obligation to safeguard from public access a citizen's personal information with which it has been entrusted when disclosure thereof would violate the citizen's reasonable expectation of privacy."

The employee had filed a request for approximately eight million pages of real estate documents that were stored on microfilm. After a dispute arose over the request, the employee filed a complaint with a state trial court, seeking to compel the county to provide microfilmed copies of all land title records from 1984 to the present. The trial court found that, although the records were accessible under both OPRA and the common law, the right of access did not extend to SSNs appearing on the documents.

On appeal, the New Jersey Superior Court, Appellate Division, found that the term "government record" under the OPRA did not include a portion of any document that disclosed a person's SSN.

Redaction of SSNs

Prior to allowing access to a government record, the government custodian of that record was required to redact the portion of the document disclosing the SSN, unless the SSN was part of a record required by law to be made, maintained, or kept on file by a public agency. However, the real estate documents were government records statutorily required to be maintained on file, and SSNs were part of those records, thereby falling within the exception, the court said.

There were competing interests that had to be balanced before a determination could be made as to whether SSNs included in the records should remain unredacted in documents the employee sought. When diverse pieces of information—such as a name, SSN, address, bank or mortgage holder, and simulated signature—were assembled into a package, a privacy interest was implicated, in the court's opinion.

The employee did not provide any significant countervailing interest in the disclosure of SSNs; rather, he argued that reading an exception to disclosure of the SSNs into OPRA as "inimical to the public interest" would create "a huge loophole" that would virtually eliminate OPRA as an independent right of access to records. This argument was rejected. The significant privacy interest clearly outweighed the negligible public interest in disclosure of an individual's SSN to a commercial entity gathering information to compile a database for sale to other commercial entities.

The decision, Burnett v. County of Bergen, appears at CCH Privacy Law in Marketing ¶60,244.

Thursday, September 11, 2008

Trade Regulation Tidbits

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

News, updates, and observations:

 The Association of National Advertisers, a marketing industry trade group, sent a letter to the Justice Department on September 4, asking the government to block an advertising deal between Google Inc. and Yahoo! Inc. According to a September 7 news release, the group is concerned that the deal could raise the price of search advertising. It also is worried about the "concentration of power" that the alliance represents. The Google/Yahoo! agreement, announced in June, would give Internet search engine Google the right to sell search and other text ads on Yahoo! sites, sharing the revenue with Yahoo! Inc. According to Yahoo!, the non-exclusive agreement enables it to run ads supplied by Google alongside Yahoo!'s search results and on some of its Web properties in the United States and Canada. When Google and Yahoo! announced the agreement, they said that they had voluntarily agreed to delay its implementation for up to three and a half months to give the Department of Justice time to review the arrangement. On June 16, the American Antitrust Institute (AAI) issued "seven important questions that ... need to be answered before the Department of Justice and the public should decide what to do about the agreement between Google and Yahoo!" In a news release, AAI questioned, among other things, the deal's impact on competition among the Google, Microsoft, and Yahoo! platforms; how long a better method of searching the Internet might take to implement; whether the deal would create new barriers to entry; to what extent does search advertising compete with display advertising; and whether a combined Google-Yahoo! would produce a strong monopoly position in search advertising that would enable them to leverage themselves into a dominat position in display advertising.

 Meanwhile, the Justice Department is considering a court action against the Google-Yahoo! advertising deal, according to an article published in the September 9 issue of the Wall Street Journal. After “deposing witnesses and issuing subpoenas for documents to support a challenge to the deal,” the Justice Department has hired former antitrust chief Sanford M. Litvack to “examine the evidence gathered so far and to build a case if the decision is made to proceed,” says the Journal. Litvack, who served as Assistant Attorney General in charge of the Antitrust Division during the Carter administration, reportedly resigned last week from the Hogan & Hartson law firm.

 With the presidential race heating up, the candidates’ stands on antitrust issues are receiving more scrutiny. The American Antitrust Institute (AAI) has posted on its website a report on the presidential candidates’ positions on competition policy. “Perspectives on Antitrust: Comparison Between McCain and Obama (Aug. 08)” compiles statements made by the candidates and their campaigns on a number of issues. Senators Obama and McCain both have expressed a belief that antitrust laws should be vigorously enforced, have stated concerns about unchecked merger activity, and have questioned the DHL-UPS consolidation. They differ on the issue of network neutrality. Whereas Senator Obama “strongly supports the principle of network neutrality to preserve the benefits of open competition on the Internet,” Senator McCain’s campaign opposes “prescriptive regulation” like net neutrality, but “believes that an open marketplace with a variety of consumer choices is the best deterrent against unfair practices.” While Senator Obama has been extremely critical of the Bush Administration’s antitrust enforcement record, Senator McCain has not weighed in on the issue.

 As part of its ongoing agency initiative "FTC at 100: Into Our Second Century," the FTC will hold a self-assessment roundtable on Thursday, September 25 at Northwestern University School of Law in Chicago. The roundtable, which is free and open to the public, will focus on the agency's deployment of resources in its pursuit of its competition and consumer protection missions, including the use of enforcement and other available tools, as well as the effectiveness of the agency in pursuing its core missions. The over-arching goal of the self-assessment is to revisit fundamental questions about the possibilities for improvement prior to the Commission's 100th anniversary in 2014, to enable the FTC to be the strongest possible agency at that juncture. The initiative's first roundtable event was held in Washington, D.C. in July, and additional roundtables will be held in various domestic and international locations this fall. The Chicago roundtable will be held from 9:15 a.m. to 5:00 p.m. on Thursday, September 25 at the Searle Center at Northwestern University School of Law, located at Wieboldt Hall, 340East Superior Street, Chicago, IL. Pre-registration is not required. A full agenda for the roundtable, including a list of panelists, can be found here on the FTC website.

Wednesday, September 10, 2008

DOJ, States Urge Supreme Court to Overturn “Price Squeeze” Decision

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

The U.S. Department of Justice and nine states have advised the U.S. Supreme Court to overrule a decision of the U.S. Court of Appeals in San Francisco, allowing a “price squeeze” claim to proceed against a telecommunications company. The views of the U.S. and the nine states were contained in separate “friend-of-the-court” briefs, supporting the petitioning telecommunications company.

The divided appellate court had ruled on September 11, 2007, that complaining Internet service providers (ISPs) selling digital subscriber line (DSL) Internet access to retail customers were not barred from claiming that the incumbent telecommunications company serving as their supplier at the wholesale level had violated Section 2 of the Sherman Act by virtue of an alleged price squeeze.

Wholesale v. Retail Prices

The complaining ISPs claimed that the incumbent company had engaged in an unlawful price squeeze by intentionally charging them wholesale prices that were too high in relation to prices at which it provided retail services and necessary equipment to end-user customers.

During one period, the company allegedly charged wholesale prices that actually exceeded retail prices, thereby making it impossible for independent ISPs to compete in the retail market.

DOJ Arguments

In its brief, the Justice Department argued that “[i]n the absence of an antitrust duty to deal, an allegation that a vertically-integrated defendant’s wholesale prices are too high in relation to its retail prices for retail-rivals to compete does not allege a claim under Section 2 of the Sherman Act.” According to the Justice Department, the appellate court erred in allowing the ISPs to proceed on their claims in the absence of an antitrust duty to deal or predatory-pricing allegations.

States' Call for “Bright Line” Rule

The nine states (Alabama, Colorado, Florida, Kansas, Nebraska, Oklahoma, Utah, Virginia, and Washington) called for a bright-line rule that would be rational and predicable. They suggested a ruling barring price-squeeze claims against a firm that has no antitrust duty to deal.

The states offered three reasons for reversal: (1) the appellate court’s decision protects competitors rather than competition and would have undesirable effects on consumers; (2) determining a wholesale price that was fair relative to retail pricing was an exercise for which courts were ill-suited; and (3) the appellate court’s decision was incompatible with the reasoning in the U.S. Supreme Court’s decision in Verizon Comms. Inc. v. Law Offices of Curtis V. Trinko, LLP, 2004-1 Trade Cases ¶74,241.

The appeals court decision is LinkLine Communications, Inc. v. SBC California, Inc. (2007-2 Trade Cases ¶75,875). The petition is Pacific Bell Telephone Co. v. LinkLine Communications, Inc., Docket No. 07-512, filed October 17, 2007, granted June 23, 2008.

Tuesday, September 09, 2008

Justice Department’s Monopoly Report Sparks Controversy

This posting was written by John W. Arden.

The Department of Justice’s report on Sherman Act Section 2 enforcement—and the critical reaction by three FTC Commissioners—has prompted swift responses in both antitrust and political circles.

The report, “Competition and Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act,” was released yesterday morning by the Department of Justice. By yesterday afternoon, three FTC Commissioners had issued a statement, calling the report “a blueprint for radically weakened enforcement” of monopoly law.

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.

Details regarding the content of the report and the criticism by FTC Commissioners Pamela Jones Harbour, Jon Leibowitz, and J.Thomas Rosch appear in yesterday’s “Trade Regulation Talk” posting.

Reactions to the report, and the split between the two federal antitrust enforcement agencies, came quickly.

“Failing to Vigorously Enforce Antitrust Law”

“The Justice Department’s report on Competition and Monopoly is yet another example of this Justice Department’s unfortunate record of failing to vigorously enforce antitrust law,” said U.S. Senator Herb Kohl (D-WI), Chairman of the Senate Antitrust Subcommittee, in a statement released yesterday.

“In many respects, the report represents an abandonment of the command of Section 2 of the Sherman Act, which prohibits illegal attempts to monopolize of to maintain a monopoly,” Senator Kohl stated.

“If followed, the Justice Department’s interpretation of this fundamental law written nearly 120 years ago to protect consumers could make it virtually impossible to prevent many forms of abusive conduct by dominant firms, such as predatory pricing and tying.”

Need for More Aggressive Approach

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

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

“Shared View” of Antitrust Enforcement

However, Thomas O. Barnett, assistant attorney general in charge of the Antitrust Division, said that the report reflected a “shared view” of antitrust enforcement among academics, economists, and others. He maintained that the DOJ views in the report were “pro-consumer.”

Some observers have focused not on the substance of the report, but on how far apart the two federal antitrust enforcers stand on these issues.

For instance, antitrust professor and author Herbert Hovenkamp commented to the Times about the “growing rift” between the FTC and DOJ. “It’s warfare, and the level of rhetoric is pretty high.”

A September 9 New York Times article, entitled "Antitrust Document Exposes Rift," appears here. A story from the September 9 Washington Post, entitled "Justice's Monopoly Guidelines Assailed," appears here.

Monday, September 08, 2008

DOJ Report on Monopoly Law Could Weaken Antitrust Enforcement: FTC Commissioners

This posting was written by John W. Arden.

A major report on monopolization under the antitrust law, issued today by the U.S. Department of Justice, could radically weaken enforcement of Section 2 of the Sherman Act, according to FTC Commissioners Pamela Jones Harbour, Jon Leibowitz, and J. Thomas Rosch.

The Department of Justice report (“Competition and Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act”) examined whether—and when—specific types of single-firm conduct may violate Section 2 of the Sherman Act by harming competition and consumer welfare. It drew extensively on a series of hearings conducted by the Department of Justice and Federal Trade Commission between June 2006 and May 2007, as well as incorporating commentary found in scholarly literature and court decisions, the DOJ stated.

Section 2 prohibits firms from illegally acquiring or maintaining a monopoly—that is, the ability to exclude competitors and profitably raise price significantly above competitive levels for a sustained period of time. Although possessing monopoly power is not unlawful, using an improper means to seek or maintain monopoly power is unlawful when it can harm competition and consumers, according to the Justice Department.

Among the observations in the report:

Enforcement of Section 2 has been, and should continue to be, a key component of antitrust enforcement.

Market share is an important factor in proving the existence of monopoly power. Firms maintaining a market share of more than two-thirds for a significant period of time will be presumed to possess market power, absent evidence to the contrary.

No single test for anticompetitive conduct works well in all cases.

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

Section 2 prohibitions based on clear and objective criteria are likely to increase economic growth and benefit consumers.

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

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

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

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

The Department will continue to explore ways of strengthening cooperation with counterparts in foreign jurisdictions and to encourage convergence on enforcement policies in this area.

The 213-page report appears here on the Department of Justice website. A news release on the report appears here.

FTC Responses

Only hours after the release of the report, the FTC issued a statement that it “does not join or endorse” it. A joint statement by Commissioners Harbour, Leibowitz, and Rosch was highly critical of the DOJ’s findings, citing two “overarching concerns.”

The first concern is that the report “is 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 concern is that the report “seriously overstates the level of legal, economic, and academic consensus regarding Section 2” and that “the testimony gathered during the hearings was not representative of the views of all Section 2 stakeholders.”

The Commissioners expressed misgivings that “voices representing the interests of consumers were not adequately heard” and that the report relied too heavily on economic theory in the application of antitrust law.

Furthermore, the Justice Department report consistently adopted standards for the finding of a violation that are tougher, sometimes much tougher, than existing standards under Section 2 case law, according to the three Commissioners. The Department’s “premises lead it to adopt law enforcement standards that would make it nearly impossible to prosecute a case under Section 2.”

The response asserted that the FTC “stands ready to fill any Sherman Act enforcement void that might be created if the Department actually implements the policy decisions expressed in its Reports.”

Chairman’s Statement

FTC Chairman William E. Kovacic did not join the statement issued by Commissioners Harbour, Leibowitz, and Rosch. In a separate statement, Commissioner Kovacic said that the Justice Department’s report would have benefited from a fuller examination of the history of modern doctrine and policy.

He had hoped for “a DOJ/FTC report on the unilateral conduct deliberations [that] would devote consideration effort to put modern developments in context—to examine how the U.S. antitrust system developed as it did, and to assess what that history means for the future of U.S. and global competition policy."

A news release on the Commissioners’ statements appears here on the FTC web site. The statement by Commissioners Harbour, Liebowitz, and Rosch appears here. Chairman Kovacic’s statement appears here.

Friday, September 05, 2008

Online Advertising Provider May Be Liable for Failing to Prevent “Click Fraud”

This posting was written by Mark Engstrom, Editor of CCH State Unfair Trade Practices Law.

An individual who purchased "pay-per-click" advertising from an online provider of "lifestyle" guides to local businesses, entertainment, and events could proceed with California Unfair Competition Law (UCL) claims against the provider and related entities for failing to prevent "click fraud" and refusing to refund disputed charges, the federal district court in Los Angeles has ruled.

“Click fraud” was defined as purposeful clicks on online advertisements by someone other than a potential customer.

Unfair Practices

The individual alleged that the advertising service falsely led its customers to believe that it was taking proactive measures to prevent click fraud, and that it proactively researched and developed processes, policies, and technologies to identify invalid clicks.

Because the individual was not a "competitor" of the online provider, a fairness inquiry required the court to balance the impact of the practices at issue against the reasons, justifications, and motives for those practices.

In the court's view, the inquiry did not require that the alleged unfairness be "tethered to some legislatively declared policy," as the California Supreme Court had held in 1999, because the state high court had expressly limited that holding to "competitor" lawsuits that were brought under the unfair prong of the UCL. Thus, the individual's allegations were sufficient to defeat the advertising service's motion to dismiss.

Unlawful Practices

The individual also pursued a click fraud claim under the "unlawful" prong of the UCL. The provider sought dismissal of this claim because the individual averred that the provider's "unlawful" conduct constituted a breach of their service agreement.
According to the provider, a breach of contract could not form the basis of a UCL claim. The court disagreed, explaining that a breach of contract could form the predicate act for a UCL claim, if the action also constituted conduct that was unlawful, unfair, or fraudulent. In this instance, the plaintiff alleged that the conduct at issue was fraudulent. Therefore, he stated a viable claim under the "unlawful" prong of the UCL.


The individual lacked standing to seek injunctive relief. Because he did not appear to be a current customer—and was unlikely to be a future customer—of the provider, he was not entitled to prospective relief.

Whether he had standing to seek restitutionary relief, however, was a different matter. The individual alleged that the provider had refused to refund $69.75 in disputed advertising charges that had been automatically deducted from his credit union account through a direct debit arrangement. This loss constituted an injury under the UCL.

Although the credit union ultimately refunded the disputed charges, the individual had lost the use of his money during the two-month interim period that preceded the refund and followed the automatic deduction. According to the court, a claim seeking recovery for the loss of one's use of money was a claim for restitutionary relief under the UCL. Nevertheless, the parties failed to disclose whether the advertising service "had ever possessed the money at issue." Therefore, a genuine issue of material fact existed as to whether the individual had standing to seek restitutionary relief.


The court declined to decide whether a fraud claim under the UCL required proof of actual reliance pursuant to Proposition 64 (a state initiative that amended the UCL to restrict private lawsuits to persons who have lost money or property as the result of unfair competition) because the issue that was currently before the California Supreme Court in three other cases.

The decision is Lambotte v. IAC/Internactive Corp., CCH State Unfair Trade Practices Law ¶31,640

Thursday, September 04, 2008

Third Party Beneficiaries May Be “Consumers” Under Texas Deceptive Trade Practices Law

This posting was written by Andrew Soubel, Editor of CCH State Unfair Trade Practices Law.

A widow could pursue a Texas Deceptive Trade Practices Act (DTPA) claim, on behalf of her children, against funeral and cemetery operators for deceptive acts in the burial of their father, the Texas Court of Appeals has ruled. The children were “consumers” with standing to bring the action under the DTPA as third party beneficiaries.

During the decedent's illness, his wife purchased a cemetery plot. After his death, the cemetery initially buried the decedent’s body in the wrong plot. Sometime later, the widow went to visit the grave and discovered that the decedent had been moved to the correct plot. The widow brought suit on behalf of her children, alleging that the funeral and cemetery operators improperly buried the decedent and then moved the body without her consent.


The defendants argued that the children lacked standing to bring suit because they were not “consumers” within the DTPA. The statute defines a "consumer" as "one who seeks or acquires by purchase or lease, any goods or services." It was undisputed that the widow was the person who purchased the cemetery plot. However, the court held that a third-party beneficiary may qualify as a consumer as long as the transaction was specifically required by or intended to benefit the third party and the goods or service were rendered to benefit the third party.

The court noted that no Texas decision addressed who the intended beneficiaries were when a cemetery plot or funeral service was purchased, but Texas courts had allowed immediate family members to bring common-law actions for mishandling a corpse. If a company taking possession of a body had a duty to a decedent's children, the court reasoned that the defendants' interment services were intended for the benefit of the decedent's family and that each family member was a consumer.

Unconscionable Acts

The defendants' actions were unconscionable in violation of the DTPA, the court ruled. The DTPA allowed for recovery for any unconscionable action or course of action that produced damage. To prove an unconscionable action or course of action, a plaintiff had to show that the defendant took advantage of her lack of knowledge and that the resulting unfairness was glaringly noticeable, flagrant, complete, and unmitigated.

The interment services company argued that the relevant inquiry should be limited to the time of the transaction. However, the company and the consumer entered into a purchase and perpetual care agreement that obligated the company to maintain the plot. The company moved the decedent's body without the family's permission, which could not have occurred accidentally but only as the result of an intentional act and only with the company's knowledge. Therefore, the court held the company committed an unconscionable act.

The August 7 decision is Service Corporation International v. Aragon, CCH State Unfair Trade Practices Law ¶31,645.

Wednesday, September 03, 2008

TV Station Divestiture Required to Satisfy Acquisition Concerns

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

The Department of Justice Antitrust Division has filed a complaint and proposed consent decree in the federal district court in Washington, D.C. that would require Raycom Media, Inc., an owner/operator of 46 television stations in 18 states, to divest the local CBS affiliate in Richmond, Virginia.

Earlier this year, Raycom agreed to divest the station (WTVR-TV) to obtain regulatory approval of its acquisition of three broadcast television stations, including the Richmond NBC affiliate, from Lincoln Financial Media Company.

FCC Ownership Limitations

Federal Communications Commission limitations on television station ownership required Raycom to sell one of its two Richmond stations. An agreement between the parties provided for the divestiture of the station within 90 days of closing the transaction with Lincoln Financial Media. If Raycom failed to divest the station within 90 days, the Justice Department would file suit seeking divestiture. The transaction has closed, but Raycom has not sold the Richmond station.

Without the divestiture, Raycom would own two of the four local broadcast stations in the Richmond market, which likely would have led to higher prices for those seeking to advertise on local broadcast television, according to the Justice Department. Prior to the transaction, the two stations competed head-to-head in Richmond for buyers of advertising time.

Spot Advertising Market

Combined, the two stations earned more than 50% of the broadcast television spot advertising revenue in Richmond. Thus, the government alleged that the divestiture was required to assure continued competition for spot advertising in the Richmond broadcast television market.

Under the prosposed consent decree, the Antitrust Division has the right to approve the purchaser of the station to ensure that the sale will restore the competition in the market that existed before Raycom purchased the Lincoln station.

The case is U.S. v. Raycom Media, Inc., Civil Action No. 1:08-cv-01510, filed August 28, 2008. A news release appears here on the Department of Justice Antitrust Division website. Further details will appear in CCH Trade Regulation Reporter.

Tuesday, September 02, 2008

Trade Regulation Tidbits

This posting was written by John W. Arden.

News, updates, and observations:

 The U.S. Supreme Court failed to “rein in” potentially expansive use of mail-and-wire-fraud based civil RICO claims when it unanimously refused to require that a RICO plaintiff asserting a claim predicated on mail fraud plead and prove that it relied on the alleged misrepresentations, Robert A. Schwinger wrote in an August 18 “Outside Counsel” column in the New York Law Journal. In Bridge v. Phoenix Bond & Indemnity Co., the Supreme Court held that a showing of “first party reliance” is not an element of a civil RICO claim predicated on mail fraud. Although a RICO plaintiff may need to show “that someone relied on the defendant’s misrepresentations” to satisfy the causation element of a Civil RICO claim, “third-party reliance” can suffice. Thus, civil RICO remedies “may be available in a broader range of circumstances than some had hoped,” according to Schwinger. Challenges to RICO causation when a third-party relied on the fraud are likely to be fact intensive and may be left to the trier of fact. Schwinger characterized Bridge as the latest in a series of decisions in which the Court refused to narrow RICO to make it conform to notions of what Congress intended it to be. Those who “would seek to rein in the statute would be better served by focusing their persuasive efforts not on courts through the inventive arguments of counsel, but rather on lobbying and the legislative process.” Text of the article appears here.

 Whether it’s to protect an online operating manual, other confidential information, or customer credit and debit card numbers, franchisors need to address data security issues before they “blow up in their faces,” according to an article by Henfree Chan and Bruce S. Schaeffer appearing in the August 2008 issue of Franchising World. Although information security was once considered just a technical problem, it is now “everybody’s problem.” The authors of the article (“Penetration Testing: Why Franchise Systems Need Information Security”) provide five basic tips: (1) protect information stored on laptops through the use of passwords and full-disk encryption; (2) always use passwords and change them regularly; (3) classify and encrypt all sensitive information, especially personal, identifiable information; (4) develop a vulnerability/patch management process for managed software; and (5) conduct regular penetration checks for all Internet-facing applications and the corporate network perimeter to ensure that the proper mitigating controls are in place. The article appears here on the International Franchise Association website.

 “Antitrust Advice for the New Administration” is the theme of the Summer issue of Antitrust, the magazine of the ABA Section of Antitrust Law. In his “Editor’s Note” column, Mark D. Whitener, a former Deputy Director of the FTC Bureau of Competition, gives six “suggestions”: (1) appoint agency heads who are good managers, (2) devote more resources to measuring the effects of merger policy, (3) don’t let up on international advocacy, (4) build a domestic policy agenda that recognizes the Supreme Court’s central role, (5) minimize the differences between the FTC and the Department of Justice, and (6) keep antitrust focused on law enforcement, not regulations, and minimize substantive “agendas.” In an introduction to an edited transcript of roundtable discussion held during the Spring Meeting in March, Larry Fullerton noted a widespread agreement on the value of the DOJ’s cartel program, the Supreme Court’s recent engagement in antitrust issues, the risk of “untethering” FTC Act Section 5 from the Sherman Act, and the need for a more formal clearance agreement between the DOJ and FTC. Disagreements included the value of keeping the current emphasis on cartel and horizontal merger enforcement at the DOJ. Most panelists seemed to believe that the new administration should not make new legislation a priority.

Former FTC Chairman Tim Muris set out three principles for running the agencies: play an active role in promoting the market economy, focus resources on conduct that poses the greatest threat to consumers, and use all policy instruments to address competition and consumer protection problems. Another former FTC Chairman, Robert Pitofsky, said he believed that “for the last four or five years the antitrust laws have been underenforced.” The current administration does not bring actions alleging resale price maintenance, exclusive dealing, tie-ins, or vertical mergers. “That doesn’t seem to be adequate enforcement.” R. Hewitt Pate, former Assistant Attorney General in the Antitrust Division, disagreed, declaring the “the state of American antitrust enforcement is very good indeed.” There has been broad acceptance of the hierarchy of enforcement in the U.S. and around the world. “[C]hange is not what we need in antitrust. Things are working pretty well.” A. Douglas Melamed, former Acting Assistant Attorney General in the Antitrust Division, said that the antitrust agencies "are in very good shape and are getting better.” He did observe that the FTC and DOJ have to engage the courts more. “I think they have to bring more cases so that they can actually influence the development of the law.” Finally, Mario Monti, former Commissioner for Competition for the European Union, recommended that the U.S. “reconsider the justification for dual federal enforcement and the levels of enforcement between the federal and state” and called on Congress to reduce the number of exemptions and immunities from antitrust.

The Summer issue also contains brief essays on the future of antitrust by figures such as Bert Foer, Eleanor Fox, Senator Herb Kohl, and Janet McDavid.