$8 Million Award for “Innovative” Advertising Claim Reversed

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

A jury award of more than $8 million against a Japanese basketball manufacturer (Molten) for falsely advertising its product design as “innovative” was reversed by the U.S. Court of Appeals for the Federal Circuit.

A competitor (Baden) brought suit alleging that Molten infringed its patent on basketball cushion technology. Baden recovered the damages award (CCH Advertising Law Guide ¶62,854) on its claim that Molten falsely advertised its basketballs in violation of Sec. 43(a) of the Lanham Act.

Molten contended that Lanham Act claims based on advertisements that falsely claim authorship of an idea are barred by the U.S. Supreme Court's decision in Dastar Corp. v. Twentieth Century Fox Film Corp., 539 U.S. 23 (2003). Baden contended that Dastar permitted it to proceed on the ground that Molten's “innovation” advertising misrepresented the “nature, characteristics, [or] qualities” of its basketballs in violation of Lanham Act Sec. 43(a)(1)(B).

Authorship of Innovation

Baden failed to argue on appeal that Molten's innovation claims were false for any reason other than a false attribution of the authorship of that innovation, the court said. Baden's claims therefore did not go to the nature, characteristics, or qualities of the goods.

To allow Baden to proceed with a false advertising claim that was fundamentally about the origin of an idea would be contrary to the Ninth Circuit's interpretation of Dastar in Sybersound Records, Inc. v. UAV Corp. (CCH Advertising Law Guide ¶62,894), the court concluded.

The opinion in Baden Sports, Inc. v. Molten USA, Inc. appears at CCH Advertising Law Guide ¶63,320.

New FTC Chair Promises Continuity in Enforcement Activity

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

FTC Chairman Jon Leibowitz told attendees of the American Bar Association’s Section of Antitrust Law Spring Meeting in Washington, D.C. that they can expect continuity at the agency as he begins his term as chairman.

Speaking at the enforcement roundtable on March 27, Leibowitz said that he intends to build on the accomplishments of past FTC chairs. He said that there will be continuity in merger enforcement and health care enforcement.

Leibowitz discussed a number of merger successes, including the blocked merger between two hospital providers in Northern Virginia and the preliminary injunction against the combination of CCC Information Services Inc. and Mitchell International Inc.—the first preliminary injunction won by the agency in six years.

Pay-for-Delay Drug Agreements

One of Leibowitz’s highest priorities will be stopping pay-for-delay agreements between brand name drug makers and generic competitors. The use of these agreements under which brand name companies pay generics to stay out of the marketplace will be stopped either through litigation or legislation, according to Leibowitz.

The chairman noted that Christine Varney, the nominee for Assistant Attorney General in charge of the Department of Justice Antitrust Division, considers pay-for-delay agreements to be anticompetitive. He predicted that that the two federal antitrust agencies will be much more in sync going forward.

Standard Setting

The Commission will continue to stay active in challenging anticompetitive standard setting activity. The agency suffered a significant defeat before the U.S. Court of Appeals in Washington, D.C. in this area. The appellate court vacated a Commission decision finding that technology company Rambus Inc. engaged in deceptive conduct as a participant in the standard setting process.

Consumer Protection

On the consumer protection front, Leibowitz forecast that the Commission would continue to be active, especially with respect to sub-prime lending. He noted that the FTC action against Bear Stearns Companies, LLC and its subsidiary, EMC Mortgage Corporation for allegedly engaging in unlawful practices in servicing consumers’ home mortgage loans. The companies agreed to pay $28 million to settle to settle the FTC charges.

Two of Chairman Leibowitz’s collegues—Commissioners Paula Jones Harbour and J. Thomas Rosch—also spoke during the Spring meeting.

Competition/Privacy Nexus

Commissioner Harbour said that one of her priorities for the remainder of her term will be developing an understanding of the interplay between privacy and competition. Firms compete on price and nonprice dimensions, and privacy could be one of those dimensions.

Harbour discussed the issue during a March 25 program, entitled “Section 2 and Article 82 Circling the High-Tech Sector: Will They Coordinate or Collide.” She also discussed datasets as antitrust markets, referring to her dissent in the Commission’s 2007 decision not to challenge the Google/DoubleClick combination. In the dissent, she questioned the impact on competition from the combination of the two companies’ datasets and the corresponding privacy concerns.

Roles of Federal Antitrust Agencies

Commissioner J. Thomas Rosch defended the FTC’s record—as well as Section 5’s prohibition on unfair methods of competition—during a March 25 program, entitled “FTC’s Section 5 Hearings: New Standards for Unilateral Conduct.”

Rosch answered the question of why there are two federal antitrust agencies by distinguishing the FTC from the Department of Justice Antitrust Division. Rosch said that the Department of Justice is an arm of the Administration. By contrast, the FTC is: (1) independent and not beholden to the Administration; (2) an expert agency; and (3) a prosecutor and a judge.

Commission’s Partiality?

Responding to criticism of the Commission’s record of siding with complaint counsel, Rosch remarked that he had some concerns with what could appear to be a lack of impartiality. However, he noted that Commission opinions were appealable to federal appellate courts, and that this appealability prevented the commissioners from “indulging themselves.”

In addition to making these comments, Rosch gave an update on the agency’s progress in issuing a report on unilateral conduct. He said that it was coming and was about three-quarters finished.

Franchisor Owed No Duty of Care to Injured Franchise Employee

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

A franchisor of tire businesses owed no duty of care to an employee of one of its franchisees who was injured at work when a tire he was retreading exploded, the U.S. Court of Appeals in St. Louis has ruled. Thus, a federal district court's ruling—granting summary judgment in favor of the franchisor on the employee's claims—was affirmed.

The employee alleged that his injuries were proximately caused by the franchisor's negligent inspection of the regulator controlling air pressure at the curing rim station where he was working and the failure to warn the franchisee of its dangers.

Control Over Franchise Operations

The employee asserted that the franchisor owed him a duty of care because it (1) "retained control" over the operations of its franchisee and (2) assumed a specific duty to protect the employee from this dangerous condition by conducting annual safety inspections of the franchisee's operations.

The franchisor had nothing resembling the detailed control over the operative details of the work performed by the employee that was required to create a general duty of care to the employee, the court held. The franchisee purchased and set up the compressed-air system and developed and imposed its own safety standards regarding the use of compressed air, and the franchisor inspected the equipment only once each year.

Voluntary Assumption of Duty

In addition, the franchisor did not voluntarily assume a specific duty of care to the franchisee or its employees when one of the franchisor's employees conducted a routine annual safety inspection of the franchisee's operations eight months prior to the accident, according to the court.

There was no assumed duty because: (1) there was no evidence the franchisor's employee knew of any malfunction or dangerous condition affecting the air-pressure regulator; (2) even if the franchisor's employee failed to detect a malfunction, that did not increase the risk of harm that already existed; and (3) there was no evidence that the actions of the franchisor or its employee caused the franchisee or its employees not to take their own measures to ensure that the compressed air system was working properly.

The March 3 not-for-publication opinion is Schreyer v. Bandag, Inc., CCH Business Franchise Guide ¶14,091.

Vacuum Cleaner Infomercial Could Be Misleading Ad Under Lanham Act

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

Vacuum manufacturer Oreck's infomercial, showing that a Dyson vacuum cleaner could not reach under a piece of furniture, could be misleading in violation of the Lanham Act, the federal district court in New Orleans has ruled. As demonstrated by counsel at oral argument, a Dyson attachment, which allowed it easily to reach under furniture, had been removed from the vacuum during the infomercial.

Oreck's depiction of the Dyson without the attachment, coupled with statements that the Dyson could not clean under furniture, could cause a reasonable consumer to think that the Dyson was incapable of cleaning under furniture in any circumstance, when it clearly could if the consumer used the attachments provided with the product. There was a triable issue of fact as to whether the advertisement actually deceived consumers, the court concluded.

Puffery

Oreck's argument that several of its advertising claims were puffery was rejected. While the word “bulky” standing alone might be puffery, the claim that a Dyson model was “too bulky to get under furniture” was specific, measurable, and capable of being proven false, the court found.

Oreck's infomercial claim that “no puff of dirt” was emitted when the bag was removed from one of its vacuums was verifiable. Similarly, Oreck did not engage in mere puffery by stating that emptying a Dyson “spread[s] dirt” and was “messy” and that washing the Dyson filters was “not very clean or sanitary” and a “dirty little secret.”

Whether the Dyson vacuum cleaner spread dirt when emptied according to Dyson's instructions and whether cleaning a Dyson filter required a user to come into contact with captured dust and dirt could be determined.

Finally, while no reasonable consumer would rely on the infomercial's description of the Dyson's weight as “backbreaking,” Oreck's claim that its XL Ultra 4120 weighed “only nine pounds” was verifiable, according to the court.

Prior Adjudications

Dyson's suit—based on a new Oreck advertising campaign—was not barred by res judicata or a settlement agreement in previous litigation between the parties, the court held. While many of the facts and issues were similar to the previous case, res judicata was inapplicable because the two actions were not based on the same nucleus of operative facts.

A previous infomercial featured a Hoover vacuum, and Dyson sued Oreck because that infomercial implied that all bagless vacuums were emptied in the same manner. By contrast, the “messy” vacuum depicted in the new infomercial was a Dyson. This specific attack on Dyson's vacuum was different in kind from the generic claim about bagless vacuums at issue in the earlier case and presented a more direct injury to Dyson. The parties' settlement agreement gave Oreck permission to continue making advertising claims it was making at the time of settlement only.

The March 4 opinion in Dyson, Inc. v. Oreck Corp. will be reported at CCH Advertising Law Guide ¶63,308.

“Light” Cigarettes Class Action to Advance Despite Preemption, Exemption Claims

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

Philip Morris Co. failed to prove that a class action claiming that the marketing of “light” cigarettes violated the Massachusetts Consumers Protection Act (CPA) was barred by the statute’s exemption for actions permitted by a regulatory board or officer, the Massachusetts Supreme Judicial Court has ruled.

A group of Marlboro Light cigarette consumers brought a class action under the CPA against cigarette manufacturer Philip Morris, asserting that Philip Morris engaged in an unfair or deceptive act by using the descriptors “light” and “lower tar and nicotine” on its packaging.

Preemption; Statutory Exemption

Philip Morris’s motion for summary judgment asserted that the class action was (1) preempted by the Federal Cigarette Labeling and Advertising Act (FCLAA) because the claims fell under the provision that forbids states from requiring additional health warnings on cigarette packaging and (2) barred by the exemption contained in the CPA because the Federal Trade Commission gave Philip Morris permission to use the descriptors in question.

In light of the Supreme Court ruling in Altria Group, Inc. v. Good (CCH Advertising Law Guide ¶63,232 and CCH State Unfair Trade Practices Law ¶31,749), the court denied Philip Morris’s preemption argument. The Supreme Court in Good held that the FCLAA did not preempt claims based on “light” descriptors brought under state consumer protection laws.

Furthermore, the class action was not barred by the exemption provision of the CPA, according to the court. The exemption provision states that the CPA is not applicable to “transactions or actions otherwise permitted … by any regulatory board or officer acting under statutory authority of the commonwealth or of the United States.”

In this case, Philip Morris argued that the FTC permitted the use of the “light” descriptors on the packaging for Marlboro Lights. The court concluded, however, that Philip Morris did not present any evidence that the FTC affirmatively permitted the practice in question because it did not point to any affirmative action by the FTC that affirmatively permitted the use of the descriptors.

Because Philip Morris did not meet the heavy burden of supporting the motion for summary judgment, the class action was allowed to proceed.

The March 16 decision in Aspinall v. Philip Morris, Inc., will appear in both CCH Advertising Law Guide , CCH State Unfair Trade Practices, and CCH Trade Regulation Reporter.

Convention Authority’s Preferred Promoter Agreement Might Be Anticompetitive

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

A Michigan county convention/arena authority and the private company that managed its facility could have engaged in a conspiracy in violation of federal antitrust law by entering into a preferred promoter agreement (PPA) with a concert/events promoter that included a reciprocal agreement for sharing arena and promoter revenue at the county’s facility as well as those of competitors, the federal district court in Grand Rapids has ruled.

The court denied a motion by the county authority and private management company to dismiss a competing arena’s antitrust claims.

Plausible grounds existed for an inference that the agreement had illegal anticompetitive effect, the court stated. None of a variety of arguments or scenarios advanced by the defendants was fatal to the competitor’s claim as a whole. Until the details of its antitrust theory were fleshed out and the record was further developed, “dismissal would be based on far greater speculation than would permitting this action to proceed to the next stage, said the court.

Immunity from Suit

Neither the county authority nor the management company was protected from the claims by state action immunity, the court found. Regarding the county authority’s protection as a municipality, it could not be assumed at pleading that the authority’s conduct was authorized by a clearly articulated state policy because it was not clear that the challenged conduct was a foreseeable consequence of what the state law authorized. Moreover, its conduct was not regulatory activity, but instead fell into the less-protected category of commercial market activity.

The arena management company, as a private entity, fell even further from the doctrine’s protection. The company failed to show that the contract was formed pursuant to a clearly articulated state policy that authorized anticompetitive conduct. Any relationship between the statutory authorization that governed the county authority and the competitor arena revenue siphoning provision of the PPA was “tenuous at best,” the court said.

Further, the company did not demonstrate that the State of Michigan could—and did—exercise control over the alleged misconduct. The claims could not be dismissed on the basis of the limited immunity available under the Local Government Antitrust Act either, the court added.

Interlocutory Appeal

On March 4, the court subsequently refused to certify its earlier ruling for interlocutory appeal. The defendants sought review of the court’s rulings regarding (1) whether they were entitled to antitrust immunity as a matter of law; (2) whether the plaintiff’s allegations, if true, constituted legally cognizable antitrust injury; and (3) whether the allegations, if true, established a relevant market, market power, and anticompetitive effects.

Immediate appeal was not warranted because there was no matter of controlling law that created substantial grounds for a difference of opinion about either the legal standard applied by the court for deciding the defendants’ immunity or the adequacy of the plaintiff’s complaint, in the court’s view.

The decisions in Delta Turner, Ltd. v. Grand-Rapids-Kent County Convention/Arena Authority appear at 2009-1 Trade Cases ¶ 76,530 and 2009-1 Trade Cases ¶ 76,531.

Product Discontinuation Was "Good Cause" for Dealership Termination

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

A manufacturer of construction equipment (Volvo) had "good cause" under the meaning of the Maine power equipment, machinery, and appliances dealer law to terminate a dealership after it discontinued production of Samsung branded construction equipment, the U.S. Court of Appeals in Chicago has determined.

Thus, a federal district court's award of $2.1 million in damages to the dealer on a jury's verdict for wrongful termination (CCH Business Franchise Guide ¶13,488) was reversed and the dispute remanded for entry of judgment in favor of Volvo.


Acquisition of Manufacturer

The parties' relationship began when Volvo acquired Samsung's construction equipment manufacturing business and assumed its obligations to its dealers. Volvo did not acquire the Samsung trademark, only the right to continue to manufacturer Samsung branded excavators for a three-year period, the court noted.

Volvo then began what it called the "Volvoization" of the Samsung excavator line; making changes to the excavator's design and rebranding them with the Volvo trademark. In the course of the transition, Volvo eventually terminated many of the Samsung dealerships, including the dealer at issue, whose territory included a portion of Maine.

After extensive litigation, the Seventh Circuit court eventually remanded the dispute to the district court after concluding that there was a genuine factual dispute over whether Volvo had good cause to terminate the dealer.

The Maine dealer law provided that "[t]here is good cause when the manufacturer discontinues production or distribution of the franchise goods." Whether Volvo had good cause under this subsection of the definition was the subject of the court's earlier remand to the district court.

Rebranding as Discontinuation

In the district court, Volvo argued that the "franchise goods" under this provision, meant Samsung-brand construction equipment. Thus, it contended, its rebranding of the excavators under the Volvo name constituted a discontinuation of the franchise goods. The district court erred in ruling that the Seventh Circuit had implicitly rejected this argument in the earlier appeal and that Volvo was thus prohibited from raising it under the law of the case doctrine, according to the court. Rather, the Seventh Circuit had merely concluded that there were facts in dispute on whether Volvo had violated the statute.

Because the dealer law stated that good cause to terminate a franchise existed "when the manufacturer discontinues production or distribution of the franchise goods," the key to the analysis was to pinpoint which goods were the "franchise goods." That, in turn, depended on the statutory definition of "franchise" and the language of the dealer agreement.

Franchise as Trademark License

The statute's definition of "franchise" centered on the grant of a license to use the franchisor's trademark or trade name in the marketing of goods and services. Further, the Samsung dealership agreement appointed the dealer as "a nonexclusive dealer in the Territory for the sale of the Products" upon the terms and conditions set forth in the agreement. "The Products" were defined as "All Samsung Construction Equipment for sale in North America," “including their later improved or superseding models."

The main issue then became the meaning of the second quoted phrase, "including their later improved or superseding Models," the court reasoned. The Volvo excavators were a design descendent of the Samsung line, and from that fact the district court erred by concluding that the new Volvo-brand excavators could qualify as a "later improved or superseding model" of the Samsung-brand excavators.

The district court's reading did not account for the word "including." When a contractual text specified one thing "including" another, the ejusdem generis canon generally required that the latter item must be a kind of the former item. Thus, in the instant case, "the Products" covered by the agreement were Samsung-brand construction equipment "including their later improved or superseding models"—meaning later-improved or superseding models of Samsung-brand equipment, the court held. Accordingly, "franchise goods" for purposes of the dealer law included only Samsung branded equipment.

Because the statute defined "franchise" in terms of a trademark license and the agreement authorized the dealer to use only the Samsung trademark, discontinuation of the Samsung-brand line of excavators was a discontinuation of the "franchise goods" under the statute. The dealer never had a Volvo franchise and nothing in the statute protected it from termination of a franchise it never had, the court decided.

The March 4 decision is FMS, Inc. v. Volvo Construction Equipment North America, Inc., CCH Business Franchise Guide ¶14,092.

Refund Request Not Required Prior to Filing New Jersey Consumer Fraud Claim

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

Consumers do not have to request a refund or object to a charge prior to filing New Jersey Consumer Fraud Act (CFA) claims against a merchant, according to the New Jersey Supreme Court. The court affirmed the Appellate Division's holding with respect to the CFA claims.

The consumer purchased a new vehicle from a dealership, and paid the full purchase price listed in a document that served as the dealership's invoice. That invoice contained a $117 charged described as a “Registration Fee.” The consumer later learned that the applicable title and registration fee charged by the state motor vehicle commission was significantly less than the fee the dealer charged. The consumer filed a complaint against the dealership, alleging that the fee violated the CFA.

Ascertainable Loss

The dealership argued that the consumer could not maintain the CFA claim because she had not suffered any damages. The consumer never complained about the validity of the fee to the dealership and never asked for a refund. The trial court ruled in favor of the dealership and dismissed the CFA claim, holding that the consumer had not suffered an ascertainable loss. The case eventually made its way to the New Jersey Supreme Court.

The Supreme Court held that a consumer does not have to request a refund or object to an unconscionable fee before filing CFA claims against a merchant. The CFA does not implicitly or explicitly require plaintiffs to attempt to secure a refund from the offending merchant in order to prove an ascertainable loss.

Legislative history and intent played a key part in the court's determination that the CFA should be construed broadly to protect consumers from a wide range of unfair business practices. Reading a pre-suit demand requirement into the CFA would potentially allow the very unfair business practices the CFA was designed to deter, according to the court.

Overpayment v. Diminution of Value

In light of the dealership's concerns that this ruling will lead to unduly harsh consequences for a merchant's honest error, the court noted that the plaintiff's ascertainable loss was the overpayment and would not include any diminution in the value of the vehicle.

Because plaintiffs will not be able to recover based on the vehicle's full value for basic overcharges on the part of the defendant, damage awards will merely correct the merchant's error.

The decision is Bosland v. Warnock Dodge, Inc., CCH State Unfair Trade Practices Law ¶31,774.

Market Withdrawal Not “Good Cause” for Termination of Arkansas Franchise

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

The market withdrawal of a product or a trademark and trade name for the product did not constitute “good cause” to terminate a franchise under the Arkansas Franchise Practices Act, the Arkansas Supreme Court has ruled.

The issue was the first of three questions certified to the state supreme court by a federal district court in a dispute between a farm equipment manufacturer and an Arkansas dealer.

The dispute began after the manufacturer started dual-branding of its products—selling identical products in different colored paint and under a different brand to a competitor of the complaining dealer. Eventually, the manufacturer informed the complaining dealer that it was withdrawing from the market for the brand of equipment sold by the dealer. The dealer subsequently filed the instant suit against the manufacturer, alleging several common law and statutory claims.

List of Causes for Termination

The Arkansas Franchise Practices Act contains a list of eight occurrences constituting good cause for termination or cancellation of a franchise. Market withdrawal is not among them, the court noted. Had the legislature intended to include market withdrawal as good cause for termination, it could have done so.

The reasoning of the Fourth Circuit in the case of Volvo Trademark Holding Aktiebolaget v. Clark Machinery Co. (CCH Business Franchise Guide ¶13,786) was persuasive on the issue, according to the court. In Volvo, the Fourth Circuit held that the eight enumerated occurrences causes for termination in the Arkansas franchise law were the exclusive means by which a franchisor could properly terminate a franchise.

As noted by the Fourth Circuit, Arkansas subscribed to the legal principle of expression unius est exclusion alterius, meaning that the express designation of one thing could be properly construed to exclude another. In this case, the plain language of the franchise law prohibited an interpretation of good cause for termination that included a circumstance not specifically listed, such as market withdrawal.

Equipment Dealer Law

However, no liability is created under the Arkansas farm equipment dealer law by a manufacturer’s termination, cancellation, nonrenewal, or substantial change in competitive circumstances of the dealership agreement based on the rebranding of a product or the ceasing to use a particular trademark or trade name for a product while selling it under a different trademark or trade name, the state supreme court ruled on the second of the certified questions.

The particular section of the dealer law at issue prohibited a manufacturer’s attempt or threat “to terminate, cancel, failure to renew, or substantially change the dealership agreement based on the result of a natural disaster, including a sustained drought in the dealership market area, labor dispute, or other circumstances beyond the dealer’s control.”

The section proscribed only attempts or threats to terminate, cancel, fail to renew, or substantially change the circumstances of a dealership agreement, the court held. Actual termination, cancellation, failure to renew, or substantial change in the circumstances of a dealership was not addressed in that section.

The decision is Larry Hobbs Farm Equipment, Inc. v. CNH America LLC, CCH Business Franchise Guide ¶14,075.

Antitrust Has Role in Restructuring of Economy, Antitrust Institute Chief Testifies

This posting was written by John W. Arden.

In a Congressional subcommittee hearing on antitrust and the government-funded consolidation in the banking industry, American Antitrust Institute President Albert A. Foer urged Congress to (1) continuously consider competition policy concerns, which are at risk during an economic recession, (2) enact legislation that would allow the government to stop the formation of new organizations that may be later considered “too big to fail,” and (3) create the position of Deputy Assistant Attorney General for Emergency Restructuring in the Department of Justice Antitrust Division.

Foer delivered his testimony on March 17 before the U.S. House of Representatives Judiciary Committee, Subcommittee on Courts and Competition Policy. The Subcommittee was conducting a hearing, entitled “Too Big to Fail?: The Role of Antitrust Law in Government-Funded Consolidation in the Banking Industry.”

According to Foer, the chief issues with an organization declared “too big to fail” are not the organization’s size alone or even inadequate competition. The issues relate to the “creation of large organizations that are so deeply embedded in the economy that their failure is likely to have ripple effects” and the lack of government oversight to require the organizations to disclose the escalating risks of failure.

Antitrust agencies were not at fault for the recent emergency consolidations creating firms much too big to fail, he said. And there is likely no basis under current antitrust law to break up financial service and other firms deemed “too big to fail.” However, Congress can take significant steps to protect competition during the economic crisis.

According to Foer, Congress should:

Create a new Deputy Assistant Attorney General for Emergency Restructuring in the Department of Justice Antitrust Division. This person would participate in all aspects of national policy relating to financial institutions and their regulation, as well as other components of financial recovery planning that may impact competition. “If we care about preserving a competitive economy in the long run, we need an authoritative voice for competition policy at the negotiating table in order to ensure that we do not go down a road of permanent consolidation except where it is absolutely necessary to do so,” Foer said in his written statement.

Emphasize that competition policy concerns be taken into account during a recession and emergency consolidation situations. “In the context of emergency bailout consolidations, attention should be given to (a) assuring ultimate divestability of the components and (b) noting expanding the “failing company” defense beyond its traditional narrow limits. Consolidation in time of crisis is not likely to be remedied by market forces when the economy rebounds because entry barriers will be high and lenders and entrepreneurs are likely to be caution for years to come.”

Consider creating legislation allowing government to stop the formation of new organizations that are too big to fail. “In ordinary (non-crisis) economic times, either the Antitrust Division or the FTC would be empowered to declare a merger or acquisition that it has investigated pursuant to the Pre-Merger Notification Act as ‘potentially creating or exacerbating an unreasonable systematic risk’ . . . Flexible guidelines would define the conditions to be taken into consideration in making such a declaration. Such declaration would carry with it an automatic suspension of the merger for a period of ninety days, during which the Treasury Department would consult with the antitrust agencies, the Federal Reserve Board, and other national and international authorities that may have views on the effects of a future failure of the merged entity. The Treasury Department would then prepare a report to the President, taking into account likely beneficial effects as well as risks. If it does recommend stopping the merger, the President would have thirty days to make a final decision.”

Create a process for re-thinking where we are and where we want to be after the current crisis has settled down. Foer envisions the establishment of a special commission similar to the Temporary Economic Committee of the 1930s. The committee “should consider whether we should simplify the regulation of conglomerates by breaking them into smaller single-industry units; whether we should require a downsizing of financial service companies that have been deemed “too big to fail”; whether new governmental institutions are needed to deal with the emerging financial services sector; whether the extant “10% cap” on nationwide domestic deposits remains a viable limitation; whether new law is needed to for the special oversight of organizations deemed “too big to fail” and which cannot reasonably exit from that category; and whether new rules are needed for entities that are not within the financial services sector but represent systemic risks . . .”

Full text of the testimony appears here on the American Antitrust Institute’s website.

Focus on Franchising

This posting was written by John W. Arden.

News and notes on franchising and distribution topics:

 A new Consumer Protection Bill would “change the legal landscape” for franchising in South Africa, according to the March 2009 Nixon Peabody LLP Franchise Law Alert. Kandal H. Tyre and Andrew P. Loewinger write that the legislation, expected to be signed into law in the next few months, would explicitly include franchisees as “consumers”; would give franchisees consumer rights, such as the right to equality, privacy, and honest dealing; and would protect franchisees from false, misleading, or deceptive representations. The legislation would provide franchisees with presale disclosure of information and the right to cancel a franchise agreement without cost within 10 business days of signing the agreement. South Africa’s Competition Act already protects franchisees against tying of products and exclusive dealing by a dominant franchisor. The new Consumer Protection Bill would prohibit these practices regardless of whether the franchisor is considered dominant. Bundling or tying of products would be barred unless the franchisor can show (1) that the bundling results in economic benefits for consumers or (2) that the convenience of bundling outweighs any restriction on consumer choice. The bill would become effective 18 months after approval by South Africa’s stae president. The Alert (“New Franchise Legislation in South Africa”) appears here on the Nixon Peabody website.

 The State Bar of California’s Board of Legal Specialization (BLS) invites California franchise and distribution law attorneys to apply for board certification as a Franchise and Distribution Law Specialist. In 2007, California became the first state to certify specialists in this area of law. There are now approximately 20 board certified franchise and distribution law specialists.

To achieve this distinction, an attorney must practice franchise and distribution law for the past 5 years, pass a written examination, fulfill certain task and experience requirements, complete continuing education in franchise and distribution law or a related area, and be favorably evaluated by attorneys familiar with his or her work. Until July 2009, attorneys who meet the qualifications outlined in the alternative to the exam rule may apply for certification without taking the exam, but must meet the remaining requirements. Once certified, these specialists will be listed on the State Bar website, and they may identify themselves as “board certified.”

The specialization examination, the first step in the certification process, will be administered in San Francisco and Los Angeles, on Sunday, August 9, 2009 from 8:30 a.m. until 5:00 pm. This exam is given every other year and will be offered again in 2011. For more information about the specialization program, visit the franchise law page of www.californiaspecialist.org. A registration form for the exam appears here.

eBay Insufficiently Pled RICO Pattern, Enterprise Against Advertising Affiliates

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

Online auction company eBay Inc. failed to sufficiently plead an enterprise and a pattern of racketeering against advertising affiliates that allegedly engaged in a “cookie stuffing scheme” to collect unearned advertising fees from the auctioneer, the federal district court in San Jose, California has ruled.

eBay claimed that Digital Point Solutions, Inc. and other advertising affiliates had engaged in mail and wire fraud by surreptitiously placing, on the computers of third-party users, software that would cause the users’ web browsers to visit eBay’s website, where “cookies” would be placed on their computers.

The “cookies” identified the defending affiliates as the referring advertisers, eBay explained, and therefore permitted the affiliates to collect commissions on auction transactions that were subsequently made by the affected users, even though the users had not clicked on an affiliate’s ad.

Enterprise

According to eBay, Digital Point Solutions was the RICO enterprise through which the other defendants had associated for the common purpose of defrauding eBay of commission fees. eBay failed, however, to state clearly whether one defendant had associated with Digital Point Solutions at all relevant times or had done so during the certain periods only.

Although eBay surmised that this defendant may have functioned as a separate association-in-fact enterprise for certain time periods, the assertion was not articulated in sufficient detail, as required by the heightened pleading standards for fraud in the Federal Rules of Civil Procedure, the court held.

Pattern of Racketeering

eBay failed to sufficiently plead a pattern of racketeering activity, according to the court. Because the auctioneer failed to identify specific incidents of suspected “cookie-stuffing” activity, its claim was dismissed for failure to plead fraud with particularity, as required by the Federal Rules of Civil Procedure.

The February 24 decision is eBay Inc. v. Digital Point Solutions, Inc., CCH RICO Business Disputes Guide ¶11,627.

Online Advertisers’ Data Gathering Could Violate Federal Laws: Report

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

Online advertisers that collect data about consumers through click tracking, capturing search terms, and other methods could be violating federal laws, such as the Electronic Communications Privacy Act (ECPA) and the Communications Act, unless consent is obtained from one of the parties to the communication, according to a report released by the Congressional Research Service.

The report, entitled Privacy Law and Online Advertising: Legal Analysis of Data Gathering by Online Advertisers Such as Double Click and NebuAd, examines the application of federal statutes to online behavioral advertising. It also examines the Federal Trade Commission's self-regulatory principles and standards published by the Network Advertising Initiative.

The ECPA generally prohibits the interception of electronic communications. Concerns have been raised that online advertising providers, websites, and ISPs that agree to collect certain data generated by Internet traffic to behaviorally target advertising may be violating the ECPA.

Although the ECPA could apply to such data collection, the report concludes that online advertising providers, like DoubleClick, that partner to collect data from individual websites generally are not violating the law, because the websites are "parties to the communication" with the ability to consent to interception.

On the other hand, when the partnership is between the ISP and the online advertising provider, neither of the parties to the agreement to intercept web traffic is a party to the communications that are being intercepted. Therefore, consent would have to be obtained from individual customers of the ISPs.

In addition, privacy provisions of the Communications Act could apply to agreements between cable operators acting as ISPs and online advertising providers, according to the report. Section 631 of the Act provides that cable operators must provide notice to subscribers, informing them of the types of personally identifiable information the cable operator collects, how the information is disclosed, and how long it is kept, among other things. Cable operators are prohibited from collecting or disclosing personally identifiable information without a subscriber's prior written or electronic consent.

Online advertising provider NebuAd contends that Sec. 631 does not apply when cable operators are acting as cable modem service providers. Courts have not yet resolved this issue, the report said.

Full text of the report is reproduced at CCH Privacy Law in Marketing ¶60,306.

Rule Requiring Chain Restaurants to Post Calorie Content Upheld

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

A New York City regulation requiring chain restaurants to post calorie content for menu items was not federally preempted or unconstitutional under the First Amendment, the U.S. Court of Appeals in New York City has ruled. A federal district court decision upholding the regulation (CCH Advertising Law Guide ¶62,913) was affirmed.

The regulation, adopted in January 2008, requires all chain restaurants with fifteen or more establishments nationally to make statements showing calorie content precisely in the manner prescribed. The calorie information must be presented clearly and conspicuously, adjacent or in close proximity to the menu item, and the font and format of calorie information must be as prominent in size and appearance as the name or price of the menu item.

The mandatory disclosure requirement differs from a 2006 version of the regulation—applicable only to restaurants that voluntarily disclosed nutrition information—which had been held to be preempted by the federal Nutrition Labeling and Education Act (NLEA). Under the NLEA, restaurants generally are exempt from federal mandatory food nutrition labeling rules, but restaurants that choose to make nutrition content “claims” are subject to Food and Drug Administration regulation.

Federal Preemption

The court rejected the contention of the New York State Restaurant Association that New York City’s 2008 regulation, like the 2006 version, was federally preempted

The federal statutory scheme regulating labeling and branding of food is a “labyrinth,” the court said. A series of agency regulations interpreting the NLEA sometimes appeared to conflict and were difficult to harmonize.

The court determined that Congress intended to exempt restaurant food from the preemption provisions that were necessary to allow food to be sold interstate. In requiring chain restaurants to post calorie information on their menus, New York City merely stepped into a sphere that Congress intentionally left open to state and local governments.

First Amendment

In addressing the restaurant association’s First Amendment challenge, the court acknowledged that restaurants are protected by the Constitution when they engage in commercial speech. However, the First Amendment is not violated when the regulation at issue mandates a simple factual disclosure of caloric information and is reasonably related to New York City’s goal of combating obesity, the court held.

The opinion,New York Restaurant Association v. New York City Board of Health, will be reported in CCH Advertising Law Guide.

Estimation, Loss Valuation Providers Abandon Merger After FTC Wins Preliminary Injunction

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

CCC Information Services Inc. and Mitchell International, Inc. have abandoned their plans to merge and become “the leading provider of information, work-flow management systems, and integrated software to insurance companies and collision repair facilities.”

The companies announced the joint decision on March 11, just two days after the federal district court in Washington, D.C. granted the Federal Trade Commission’s request for a preliminary injunction blocking the merger.

“In light of the court's decision, we have jointly decided to terminate the merger,” stated Githesh Ramamurthy, Chairman and CEO of CCC. “A year ago when we announced the transaction, our stated objective was to deliver greater innovation to our customers and partners. This theme has remained a constant and will continue to be at the forefront of our efforts.”

FTC Challenge

The FTC had sought temporary injunctive relief pending the outcome of administrative litigation challenging the merger, valued at $1.4 billion. The agency challenged the transaction on the ground that it would hinder competition in the two relevant markets: (1) electronic systems used to estimate the cost of collision repairs, known as "estimatics," and (2) software systems used to value passenger vehicles that have been totaled, known as total loss valuation (TLV) systems.

According to the FTC’s administrative complaint, dated November 25, 2008, the merger-to-duopoly would have harmed insurance companies, repair shops, and ultimately U.S. automobile owners.

Preliminary Injunction

On March 9, the federal district court in Washington, D.C. found that the FTC raised questions necessitating investigation through an adjudicatory hearing at the Commission and made a proper showing that issuance of a preliminary injunction was in the public interest. The court ordered the companies to refrain from taking any steps toward combining, pending outcome of the administrative proceeding.

The order was released on March 9; however, the underlying opinion remained under seal. The court has instructed the parties to identify any facts that should be redacted as sensitive business information no later than March 13.

The text of the FTC complaint appears at CCH Trade Regulation Reporter ¶16,221.

Nominee Varney Describes Focus as Antitrust Chief

This posting was written by John W. Arden.

In a statement delivered in a confirmation hearing before the Senate Judiciary Committee on March 10, Christine Varney, nominee as Assistant Attorney General in charge of the Antitrust Division, described her focus and qualifications for the job.

“Strong antitrust enforcement and respect for our competition statutes are the primary safeguards of our distinctive free enterprise system,” said Varney, a Washington lawyer who served as Federal Trade Commissioner during the Clinton Administration. She set out three main areas on which she would focus if confirmed.

Areas of Focus

“First, we must rebalance legal and economic theories in antitrust analysis and enforcement,” she said. “The Antitrust Division can provide strong intellectual leadership in competition policy by advancing our collective understanding of competitive behavior and adapting our thinking to reflect our ever evolving markets.”

“Second, we need renewed collaboration between the Antitrust Division and the FTC, whose policies and processes have unfortunately diverged too frequently in recent years,” Varney observed. Such divergence and conflicts lead to uncertainty for consumers, businesses, and overseas antitrust enforcers.

“Third, we must continue our cooperation with worldwide antitrust authorities, discussing our differences with international enforcers respectfully and engaging with emerging antitrust regimes, such as China and India as they implement new antitrust laws.”

Antitrust Enforcement During Economic Crisis

Varney addressed the question of whether antitrust enforcement should be pursued in the current economic crisis. “I believe it is important to remember that robust antitrust enforcement is essential for the free market to function properly,” she said.

“In these tough economic times, more than ever, it is important to remember that clear and consistent antitrust enforcement—protecting competition and thus consumers while being conscious of the need for economic stability—is essential to a growing and healthy free market economy.”

The nominee expressed confidence that she is “well equipped” to meet the challenges of the position of chief antitrust enforcer. “I will approach the challenged we face from my unique vantage point as a former FTC Commissioner, which I believe will help me to bridge the gap that exists between the antitrust agencies on several crucial substantive and procedural issues.”

Varney’s written testimony appears here.

Merger Enforcement

The statement was followed by questions from the members of the Judiciary Committee, according to a posting to an ABA antitrust listserv by David Balto. Senator Herb Kohl (D-Wis.) asked Varney for her assessment of the "sharp cutback" in merger enforcement and enforcement against dominant firms during the Bush Administration. The nominee decline to discuss particular cases, but said she would enforce the law vigorously and stop horizontal mergers that cuase competitive harm.

Resale Price Maintenance

When asked about her view of the Supreme Court's decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc., Varney said she was surprised by the decision but believed that the law allowed the Department of Justice room to prosecute resale price maintenance. If not, she might support further legislation on the issue.

DOJ Monopoly Report

Senator Russ Feingold (D-Wis.) asked if Varney would review and potentially repudiate the Department of Justice's September 2008 report on single firm monopoly conduct ("Competition and Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act”). The nominee responded that she would review the report and that she felt that the conclusions the report drew were not appropriate. She said she would work with te Division staff and the FTC to determine if the report should be revised or some other action taken.

U.S. Supreme Court Orders Another Look at Drug Ad Case

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

In a suit asserting that advertising of the prescription drug Nexium violated the consumer protection statutes of the 50 states, the U.S. Supreme Court has vacated a lower court’s decision that the state law claims were federally preempted.

In August 2007, the U.S. Court of Appeals in Philadelphia held that the state law claims were preempted by the federal Food, Drug, and Cosmetic Act and regulations of the Food and Drug Administration (Pennsylvania Employees Benefit Trust Fund v. Zeneca, Inc., CCH Advertising Law Guide ¶62,622; CCH State Unfair Trade Practices Law ¶31,463).

According to a class action complaint, drug manufacturer Zeneca misleadingly advertised Nexium as superior to Prilosec (another Zeneca drug) for treating gastroesophageal reflux disease. The patent for Prilosec was due to expire in 2001.

The appellate court took the position that allowing generalized state consumer fraud laws to dictate the parameters of false and misleading advertising in the prescription drug context would pose an undue obstacle to both Congress's and the FDA's objectives in protecting the nation's prescription drug users.

The Supreme Court remanded the case to the appellate court for further consideration in light of the Court’s March 4, 2009 decision in Wyeth v. Levine, No. 06-1249. In Wyeth, the Court upheld a jury verdict of liability against a pharmaceutical manufacturer (Wyeth) in a case based on Vermont common law claims of negligence and strict liability for failure to warn of the dangers of injecting an anti-nausea drug directly into a patient’s vein.

Federal Preemption

In rejecting Wyeth’s contention of federal preemption, the Court observed that if Congress thought state law suits posed an obstacle to its objectives, it surely would have enacted an express preemption provision for prescription drugs at some point during the Food, Drug, and Cosmetic Act’s 70-year history. But despite the 1976 enactment of an express pre-emption provision for medical devices, Congress has not enacted such a provision for prescription drugs. Its silence on the issue, coupled with its certain awareness of the prevalence of state tort litigation, was viewed by the Court as powerful evidence that Congress did not intend FDA oversight to be the exclusive means of ensuring drug safety and effectiveness.

What effect, if any, the Wyeth decision will have upon the preemption issue in the Nexium case must now be determined by the U.S. Court of Appeals in Philadelphia.

Further details on the Court’s March 9 summary decision vacating and remanding Pennsylvania Employees Benefit Trust Fund v. Zeneca, Inc., No. 07-822, will be reported in CCH Advertising Law Guide and CCH State Unfair Trade Practices Law. The March 9 order list appears here.

Whole Foods Market Agrees to Divestitures to Settle FTC Suit

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

The FTC announced on March 6 that it has reached an agreement with Whole Foods Market, Inc., the largest premium natural and organic supermarket chain in the United States, to resolve the agency's charges that Whole Foods' acquisition of its closest rival, Wild Oats Markets, Inc., in 2007 violated federal antitrust laws.

Under a proposed consent order, Whole Foods would sell 32 premium natural and organic supermarkets and related assets in 17 geographic markets.

As a result of this settlement, American consumers will see more choices and lower prices for organic foods, said FTC Chairman Jon Leibowitz. Leibowitz further remarked that the settlement “allows the FTC to shift resources to other important matters and Whole Foods to move on with its business.”

Case History

After Whole Foods and Wild Oats announced in February 2007 their intention to merge, the FTC in June filed a federal court complaint seeking a temporary restraining order (TRO) and preliminary injunction, as well as an administrative complaint for permanent relief, claiming that the acquisition would be unlawfully anticompetitive. In each of the markets in which Whole Foods and Wild Oats overlapped, the agency claimed, they were each other’s closest competitor and competed directly on quality, service, and price.

Although the federal district court initially granted the TRO, in August 2007 it denied the FTC's motion for a permanent injunction pending an administrative proceeding (2007-2 Trade Cases ¶75,831), enabling the supermarket chains to consummate the transaction.

Administrative proceedings resumed after the U.S. Court of Appeals in Washington, D.C. reversed the district court’s denial of injunctive relief (2008-2 Trade Cases ¶76,233) in July 2008, finding that the FTC had demonstrated the requisite likelihood of success on the merits. The matter was scheduled to go to administrative trial this April.

Proposed Settlement

The 32 former Wild Oats stores that Whole Foods would have to divest under the proposed consent order comprise 13 currently-operating and 19 formerly-operating stores. These stores represent a significant portion of the Wild Oats stores that Whole Foods acquired and is currently operating, as well as all of the formerly operating Wild Oats stores for which leases still exist, within the alleged geographic markets.

The divestitures would provide competitive relief in the majority of geographic markets defined in the Commission’s administrative complaint and would allow consumers in these markets to once again enjoy competition among premium organic markets, the Commission noted. The agency added that newly divested stores also could provide a “springboard” from which an acquirer might expand into other geographic markets.

In addition to requiring the transfer or divestiture of all rights to 32 stores, the settlement also would require Whole Foods to divest related Wild Oats intellectual property, including unrestricted rights to the “Wild Oats” brand, which retains significant name recognition and loyalty among consumers, the FTC said. These assets will allow one or more Commission-approved buyers to re-establish competition with Whole Foods in the majority of the markets in which the agency alleged the acquisition would reduce competition and harm consumers through higher prices and reduced quality and services.

The proposed order would immediately place the responsibility for marketing and selling the stores with a divestiture trustee, who would have six months to sell the Wild Oats stores and related assets to one or more FTC-approved buyers. If the trustee were unable to sell the assets within six months, the Commission could extend the time provided to do so for an additional six months. The order also would require Whole Foods to maintain the viability and competitiveness of the stores until the divestiture is complete.

Opportunity for Public Comment

The proposed agreement will be subject to public comment through April 6, 2009, after which the Commission will decide whether to make it final. Comments should be addressed to the FTC, Office of the Secretary, Room H-135, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580.

The administrative action is In the Matter of Whole Foods Market, Inc. and Wild Oats Markets, Inc., Docket No. 9324. A news release on the proposed settlement appears here on the FTC website. An agreement containing consent orders and a decision and order—as well as other relevant documents—appear here.

Microsoft Vista False Advertising Suit Loses Class-Action Status

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

The federal district court in Seattle decertified customers’ Washington Consumer Protection Act (CPA) class action against Microsoft for allegedly false claims concerning its Vista operating system. However, the court denied Microsoft’s motion for summary judgment and will hear the customers’ CPA claims.

In 2006, Microsoft authorized computer manufacturers to place “Windows Vista Capable” stickers on computers about a year before Vista was released. The named plaintiff in the class action bought a Vista-capable computer and upgraded once the Vista software was released. Four versions of Vista were released, and the customer claimed that certain customers could only upgrade to the most basic version.

Deceptive Advertising Claim

The customer brought a CPA class action lawsuit against Microsoft, alleging that Microsoft engaged in a price inflation scheme and that the “Vista Capable” stickers were deceptive. Microsoft argued that because the advertising campaign made the distinction between the levels of Vista by noting that computers without a “Premium Ready” sticker could only run the basic version, the advertising was not deceptive or misleading.

Common Issues v. Individual Issues

Although originally certified, the class action was decertified after completion of discovery because common issues of law and fact did not predominate over the individual issues alleged in the complaint. Judges are free to revisit the issue of class certification when necessary in light of subsequent developments in the case.

Price Inflation Scheme

In order to state a CPA claim, the customer needed to show that Microsoft committed an unfair or deceptive act, that the “Vista Capable” designation had the capacity to deceive consumers, and that the deceptive act caused an injury. The customer claimed that Microsoft engaged in an unfair price inflation scheme by putting the Vista capable stickers on computers to artificially inflate the price and demand for computers.

However, the customer failed to present evidence of a specific shift in the demand for Vista capable computers on a class-wide level. The customer also failed to establish that the Vista capable stickers had a price effect on computers. Because the customer failed to present evidence of class-wide inflation, the court decertified the class action.

Pursuit of Individual Claims

Microsoft was not entitled to summary judgment, however, because the customer stated genuine issues of law and fact in the CPA complaint. The customer was not bound by the price-inflation theory by pursuing the individual claims.

The February 18 decision in Kelley v. Microsoft Corporation will appear in CCH State Unfair Trade Practices Law.

Google “Street View” Did Not Invade Property Owners’ Privacy

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

Pennsylvania residents (Aaron and Christine Boring) could not pursue common-law invasion of privacy or negligence claims against Internet search-engine operator Google for photographing their residence, outbuildings, and swimming pool and including the photographs in Google’s “Street View” display option for its online map service, the federal district court in Pittsburgh has ruled.

The Borings asserted that they lived on a private road that had been clearly marked with “No Trespassing” signs and that Google had physically intruded upon their seclusion and had unlawfully published private facts.

Invasion of Privacy

The couple did not substantiate their claim that Google’s intrusion and display of the photographs was highly offensive. The Borings had failed to take advantage of available procedures to have the images removed from the Google Street View service, the court noted.

The litigation had itself brought attention to them and the online images of their property. They did not bar others’ access to the images by eliminating their address from the pleadings or by filing an action under seal. The Boring’s failure to take steps to protect their own privacy and mitigate their alleged pain suggested that the intrusion and their suffering were less severe than contended, in the court’s view.

Negligence

The common-law negligence claims failed because Google did not owe a duty of care to the Borings to avoid posting photographs of private property, the court said. Simply stating that there ought to be a duty is not sufficient to support a negligence claims.

The decision is Boring v. Google, Inc., CCH Privacy Law in Marketing ¶60,298.

FTC Warns of Economic Stimulus Scams

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

Scammers are taking advantage of President Obama’s economic stimulus package to lure unsuspecting consumers into disclosing bank account and credit card information over the Internet, the Federal Trade Commission warned on March 4.

Eileen Harrington, acting director of the FTC’s Bureau of Consumer Protection, said the scams have “literally mushroomed up overnight.”

Removal of Scam Ads

The FTC is asking online media companies such as Facebook and Google to monitor their sites for scams and to take action to remove them. Facebook has already pulled scam ads, Harrington said, adding that this is a “showcase opportunity” for media companies to take action to protect consumers. “This should be a no-brainer for them,” she said.

Fraudulent E-mail

Scams can take the form of e-mail messages asking for bank account information ostensibly for the purpose of depositing a consumers’ share of stimulus funds into their account. However, the accounts are subsequently drained and the scammers disappear, according to the FTC.

Another scam involves e-mails that appear to be from government agencies and ask for information to verify that the recipient qualifies for a payment. The scammers then commit identity theft with the information. In other instances, scammers send e-mails with links that cause consumers to download malicious software or spyware that can result in identity theft, the agency noted.

Deceptive Websites

The FTC cautioned that many of the websites in question use deceptive names or images of President Obama and Vice President Biden. “Don’t fall for it," said Harrington. "If you do, you’ll get scammed.”

A news release and an archived webcast of the news conference appear here on the FTC website.

Wisconsin Unfair Sales Act’s Fuel Markup Requirement Is Unconstitutional

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

The motor vehicle fuel provisions of the Wisconsin Unfair Sales Act—mandating a minimum markup above an average terminal price or certain actual costs—were unconstitutional for violating the Sherman Act’s prohibition against restraints of trade, the federal district court in Milwaukee has ruled. An order enjoining the state from enforcing the provisions was therefore warranted.

Price Maintenance Among Competitors

By permitting retailers to match—but not undercut—competitors’ prices and forbidding sales below cost, the Act authorized and enforced resale price maintenance among competitors, “a per se violation of Sec. 1 of the Sherman Act since the early years of national antitrust enforcement.”

The minimum markup percentage created a range in which competitors could engage in collusive parallel pricing, which was exacerbated as the wholesale price of gasoline fluctuated, the court reasoned.

An argument that the restraint of trade amounted merely to a unilateral act of the state’s legislature was rejected. The restraint was not subject to consideration under the rule of reason because it was horizontal, in that it affected competing gasoline retailers in Wisconsin. Data suggested that the law kept gasoline prices higher than would otherwise be the case, thereby benefiting gas station owners at the expense of consumers, the court found.

State Action Immunity

The statutory provisions could not be saved from Sherman Act preemption on the basis of state action immunity, the court added. While the purposes of the restraint—namely, to regulate the sale of merchandise below cost in order to prevent deceptive advertising and unfair methods of competition—were “clearly articulated and affirmatively expressed as state policy,” evidence indicated that the pricing restraint was not actively supervised.

The markup percentage decreed by the statute was changed by the state legislature only once in the Act’s long history, and there was no program or effort to determine whether the “average posted terminal price” referenced by the provisions bore any relationship to the actual price paid by retailers.

A state could not simply authorize price setting and enforce the prices established by private parties, in the court’s view. The state’s purported enforcement efforts to ensure compliance with the Act did nothing to ensure the reasonableness of gas prices in Wisconsin. Through the Unfair Sales Act, the state had essentially displaced competition among gasoline retailers without substituting an adequate system of regulation, the court concluded.

The decision is Flying J, Inc. v. Van Hollen, 2009-1 Trade Cases ¶76,505.

Commissioner Leibowitz Named FTC Chairman

This posting was written by John W. Arden.

Confirming much speculation, President Barack Obama announced his intention to name Federal Trade Commissioner Jon Leibowitz as Chairman of the agency in a February 27 release.

Currently the only Democratic Commissioner of the FTC, Leibowitz has served as a member of the Commission since September 3, 2004. From 2000 to 2002, he was vice president for congressional affairs for the Motion Picture Association of America.

His prior government service has included working as the Democratic chief counsel and staff director for the U.S. Senate Antitrust Subcommittee from 1997 to 2000. He served as chief counsel and staff director for the Senate Subcommittee on Terrorism and Technology from 1995 to 1996 and the Senate Subcommittee on Juvenile Justice from 1991 to 1994. Previously, the Commissioner was chief counsel to Senator Herb Kohl (D-Wis.) and Senator Paul Simon (D-Ill.).

A Phi Beta Kappa graduate from the University of Wisconsin (1980), he attended the New York University School of Law, graduating in 1984.

"I am honored and grateful that President Obama has selected me to lead this remarkable agency,” Leibowitz said, in a statement released by the FTC on March 3. “I look forward to continuing our rich tradition of vigorous antitrust enforcement and consumer protection.”

Leibowitz succeeds William Kovacic, who became chairman in March 2008 when Chairman Deborah Platt Majoras resigned. According to published reports, Kovacic plans to stay on as a Commissioner.

Text of the President's February 27 announcement appears here on the White House website.

Text of the March 3 FTC statement appears here at the FTC website.

Arbitrator's Disregard of the Law Not Grounds for Vacating Award

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

The U.S. Supreme Court determined in Hall Street Associates, LLC v. Matel, Inc. (CCH Business Franchise Guide ¶13,871) that manifest disregard for the law was not a valid basis for vacating an arbitration award under the Federal Arbitration Act (FAA), according to a federal district court in St. Louis.

Thus, a franchisee’s attempt to vacate or modify an arbitrator’s award in favor of its franchisor—on the ground that the award was based on a manifest disregard for the law—was rejected.

Transfer of Franchise

The franchisee argued that the evidence before the arbitrator demonstrated that the franchisor attempted, without authorization, to transfer the pharmacy franchise at issue from the franchisee to another entity. The arbitrator’s knowing disregard of the unauthorized attempted transfer constituted a blatant and manifest disregard of the law, according to the franchisee.

However, because the Supreme Court in Hall Street held that manifest disregard was not a valid basis to vacate or modify an award under the FAA, a reviewing court could not engage in a general review of an arbitrator’s award to search for legal error, the court decided.

Ninth Circuit’s View

The district court’s interpretation of the Supreme Court’s reasoning in Hall Street differed markedly from the Ninth Circuit’s view, as recently announced in Comedy Club, Inc. v. Improv West Assoc., LP (CCH Business Franchise Guide ¶14,055). According to the Ninth Circuit, the Supreme Court in Hall Street did not reach the question of whether the manifest disregard of the law doctrine fit within the FAA's exclusive grounds to modify or vacate an arbitration award.

Instead, the Supreme Court listed several possible readings of the doctrine, including the Ninth Circuit's view that the manifest disregard doctrine was shorthand for a statutory ground under the FAA—specifically the section of the FAA stating that a court could vacate "where the arbitrators exceeded their powers." Thus, manifest disregard of the law remained a valid ground for vacatur or modification of an award in the Ninth Circuit.

Attorney Fees and Costs

The arbitrator’s award of attorney fees and costs to the pharmacy franchisor had a valid basis, the district court held. The court construed the franchisee’s contention that the award of attorney fees and costs was not supported by any factual or legal basis as invoking the FAA’s stipulation that awards could be modified where an arbitrator entered an award upon a matter not submitted to him.

Contrary to the franchisee’s contention, the parties’ agreement expressly permitted an arbitrator to make an award of attorney fees and costs. Thus, the award drew its essence from the agreement and was not subject to modification.

The opinion, Medicine Shoppe Int’l, Inc. v. Simmonds, DC Mo., Dckt. No. 4:08CV90 FRB, was decided February 11, 2009. It will appear in the CCH Business Franchise Guide.