Jury Rejects Conspiracy Claim Against Heavy Truck Manufacturer

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

A federal jury in Philadelphia decided on June 11 that a truck dealership failed to prove by a preponderance of the evidence that a defending truck manufacturer engaged in a conspiracy in violation of Section 1 of the Sherman Act.

The jury trial followed last year's federal appellate court decision (2008-1 Trade Cases ¶76,189), which permitted the truck dealership to proceed to trial with its claim that a defending truck manufacturer conspired with other dealers to restrain trade.

The U.S. Court of Appeals in Philadelphia decided that the complaining Ohio dealership had presented sufficient evidence of an agreement between competing dealers and the manufacturer for a jury to find an unlawful conspiracy. However, the jury found otherwise.

In light of the jury’s verdict, judgment was entered in favor of the manufacturer.

The case is Toledo Mack Sales & Service, Inc. v. Mack Trucks, Inc., U.S. District Court, Eastern District of Pennsylvania, No. 2:02-cv-4373, June 11, 2009. The civil judgment and verdict slip appear at 2009-1 Trade Cases ¶76,660.

Supreme Court to Review Ruling that NFL Licensing Pact Was Not Antitrust Conspiracy

This posting was written by John W. Arden.

Contrary to the recommendation of the FTC and the Department of Justice Antitrust Division, the U.S. Supreme Court today granted review of a Seventh Circuit ruling that the National Football League and its 32 members did not engage in an illegal antitrust conspiracy by granting an exclusive trademark license to apparel manufacturer Reebok International.

The U.S. Court of Appeals in Chicago had rejected a complaining apparel manufacturer’s Sherman Act Section 1 claim on the ground that the league and teams were acting as a single entity when collectively licensing their intellectual property through a jointly-owned licensing affiliate (American Needle Inc. v. National Football League, 2008-2 Trade Cases ¶76,259).

Intraenterprise Conspiracy

Acting as a single entity, the league and its members were incapable of conspiring among themselves under the intraenterprise conspiracy doctrine espoused in Copperweld Corp. v. Independence Tube Corp. (1984-2 Trade Cases ¶66,065), the appeals court held.

An assertion by the complaining manufacturer that the 32 teams could not be considered a single entity—because they each controlled their own intellectual property and their actions deprived the market of independent sources of economic power—was rejected by the appeals court. The teams could function only as one source of economic power when collectively producing NFL football, the court explained.

Questions for Review

In its petition for review, the complaining manufacturer asked:

(1) Whether the league and the teams were a single entity exempt from rule of reason claims under Section 1 of the Sherman Act “simply because they cooperate in the joint production of NFL football games, without regard to their competing economic interests, their ability to control their own economic decisions, or their ability to compete with each other and the league” and

(2) Whether the license agreement between the league and its members and Reebok International—under which the teams agreed to refrain from competing with each other in the licensing and sale of apparel and to refrain from granting licenses for a period of ten years—was subject to a rule of reason claim “where the teams own and control the use of their separate logos and trademarks and, but for their agreement not to, could compete with each other in the licensing and sale of Team Products.”

(American Needle, Inc. v. National Football League, Petition for a Writ of Certiorari, Docket No. 08-661, filed November 17, 2008)

Respondents’ Brief

In an unusual move, the league and its teams urged the Supreme Court to review the decision. Although the result reached by the appeals court was correct, the respondents explained, the courts of appeals were divided on the question. This division “opens the door to repeated, costly antitrust suits that burden not only the joint venture participants, but also the federal courts.”

Thus, the respondents supported the grant of certiorari “in an effort to secure a uniform rule that (i) recognizes the single-entity nature of highly integrated joint venture and (ii) obviates the uncertainty, chilling effects, and forum shopping that inevitably results from the current conflict among the circuits.”

(American Needle, Inc. v. National Football League, Brief for the NFL Respondents, No. 08-661, filed January 21, 2009).

"Friend of the Court" Brief

Subsequently, the FTC and Department of Justice Antitrust Division filed an amicus brief, urging the Supreme Court to deny review of the decision. Contrary to the respondents’ views, the joint brief concluded that the Seventh Circuit decision did not conflict with any decision of another court of appeals. Furthermore, the agencies argued that neither the petitioner nor the NFL respondents presented a question warranting review.

The respondents’ claim that “the principle implicated by the question presented is not limited to professional sports leagues” and “has important implications throughout the economy” was rebuffed by the agencies.

“[T]he somewhat idiosyncratic nature of the relationship between individual NFL teams and the league as a whole makes this case an unsuitable vehicle for resolving broader questions of the kind the NFL respondents identify,” the amicus brief concluded.

(American Needle, Inc. v. National Football League, Brief for the United States as Amicus Curiae, No. 08-661, filed May 28, 2009).

Franchisor’s Presale Representations Did Not Violate Florida Franchise Act

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide, and John W. Arden.

An ice cream shop franchisor’s alleged misrepresentations about a prospective franchisee’s chances for success did not violate the Florida Franchise Act, absent evidence that the franchisee relied on a misrepresentation in making its decision to purchase the franchise, the U.S. Court of Appeals in Atlanta has decided.

Reliance

Although the franchisee argued that it did not need to show reliance, that argument was contrary to Florida law. The parties' franchise agreement included a detailed disclaimer and explanation regarding the risks of owning and operating a franchise and encouraged franchisees to conduct an independent investigation of their chances for success.

The agreement did not promise that the purchaser would profit, the court observed. Evidence demonstrated that the purchaser understood the agreement and conducted an independent investigation of its prospect for success.

"Little FTC Act"

The franchisor also did not violate the Florida "little FTC Act" by allegedly causing two of its franchisees, acting as its agents, to make misrepresentations to the complaining franchisee about the franchise's prospects or chances for success, the court ruled.

The franchise agreement clearly stated that other franchisees did not have the authority to make representations on the franchisor's behalf about profit margins, the court noted.

It also included a detailed discussion of financial information, including the average gross revenues from the franchisor's franchises, but added that "[a]ctual results vary from unit to unit, and we cannot estimate the results of any particular Franchise."

Further, the agreement encouraged prospective franchisees to conduct an independent investigation of the cost and expenses it would incur, which the prospective purchaser did conduct. Under these circumstances, it was not likely that a consumer acting reasonably would have been deceived by the alleged statements made by the two existing franchisees, the court held.

The June 3 not-for-publication decision is Cold Stone Creamery, Inc. v. Lenora Foods I, LLC, CCH Business Franchise Guide ¶14,144.

New York State Requires Franchisors to Report Franchisees’ Sales

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide, and John W. Arden.

New York State has enacted legislation requiring all franchisors having franchisees within the state to file annual information returns with the State Department of Taxation and Finance, reporting the gross sales of each franchisee within the state, as well as the sales by the franchisor to the franchisee and any franchisee income reported to the franchisor. The franchisor must also report such information to the relevant New York franchisees.

The new requirements were contained in amendments to Section 1136 of the New York Tax Law. The legislation, one of the state’s voluminous budget bills (A. 157, Chapter No. 57), became effective on April 7, 2009.

Filing Requirement

The returns must be filed annually on or before March 20 and must cover the four sales tax quarterly periods immediately preceding that date. The returns must be filed electronically, in a manner prescribed by the Commissioner of the Department of Taxation and Finance.

However, the law provides that the first returns must be filed on or before September 20, 2009 and cover the period of March 1, 2009 through August 1, 2009. The returns filed on or before March 20, 2010 shall cover the period from September 1, 2009 to February 28, 2010.

A further amendment—Section 1145(i)—sets out penalties for failure to provide the required information.

In a May 27, 2009 letter to franchisors, the New York State Department of Taxation and Finance said that it was contacting franchisors to make them aware of the new requirement. The department stated that directions for filing the returns are being written and asked franchisors to provide lists of New York-based franchisees.

New York is the first jurisdiction to require such reporting by franchisors. Text of the provisions—New York Tax Law, Article 28, Sections 1136(i) and 1145(i)—appear at CCH Business Franchise Guide ¶4321.

Reaction of Franchise Bar

The enactment of these new requirements “is unprecedented, aberrant, anomalous and could prove deeply threatening to franchisees and franchising,” wrote New York franchise lawyer David J. Kaufmann in a column (“Many Unhappy Returns”) to be published in the New York Law Journal.

The new reporting requirement will allow the New York State Department of Taxation and Finance to compare the revenue figures from the franchisor with that reported by franchisees on their New York tax returns. If the franchisees are found to underreport revenues, the state will pursue them “through audits and resulting civil—or even criminal—actions."

Although New York is the first jurisdiction to impose such a reporting requirement, “we imagine many other states, and perhaps even the Internal Revenue Service, will follow New York’s lead by enacting similar franchisor reporting requirements,” wrote Kaufmann.

He further warned that franchisees may perceive franchisor reporting as interference in their businesses and that the reporting requirement may establish a new type of “tax nexus” between out-of-state franchisors and New York State.

In a June 9 Franchise & Distribution Bulletin, the law firm of Sonnenschein Nath & Rosenthal noted that reporting requirements “are similarly being considered in other states and are consistent with recent trends showing that states have been very aggressively pursuing all opportunities for additional tax revenue in order to relieve huge budget deficits.”

Conspiracy Claims Against Steel Producers Survive Motion To Dismiss

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

Purchasers of steel products sufficiently alleged a multi-year antitrust conspiracy among domestic steel producers to reduce the production of steel products in the highly concentrated U.S. market, the federal district court in Chicago has ruled.

The complaint adequately stated facts that address the questions of who, what, when, and where to give the defending producers an idea of where to begin their response. Therefore, a joint motion to dismiss for failure to state a claim upon which relief can be granted was denied.

The purchasers contended that, despite increasing demand, the defending producers on three occasions coordinated production cuts for the express purpose of raising the price of steel products. The purchasers alleged that, absent a collusive agreement, these production cuts were against the individual competitive interests of each participating producers.

While alleging no specific evidence of a conspiracy, the claims supported a plausible inference that the producers' success at restricting the production of raw steel was the result of an unlawful agreement, the court decided.

In addition to averments of parallel conduct, the purchasers alleged a number of other facts plausibly suggesting an agreement to curtail production. The purchasers pointed to seven separate facts that suggested a conspiracy:

(1) a market structure ripe for collusion;

(2) coordinated supply cuts representing an abrupt departure from each firm's prior behavior;

(3) the appearance that the cuts were contrary to the independent competitive interest of each producer in light of pricing and domestic demand for steel;

(4) the timing of production cuts in relation to trade meetings where industry executives made statements directly to competing executives calling for industry-wide production restraint;

(5) private trade association meetings;

(6) executive statements suggesting collective action and agreement; and

(7) supracompetitive profits resulting from the alleged coordinated action.

The defending producers contended that the complaint did not meet the plausibility standard for pleadings set forth in Bell Atlantic Corp. v. Twombly (2007-1 Trade Cases ¶75,709). The court rejected the producers' attempt to parse the complaint and argue that none of the allegations—such as quoted public statements, parallel capacity decisions, and trade association meetings—supported a plausible inference of conspiracy.

The June 12 decision is Standard Iron Works v. Arcelormittal, 2009-1 Trade Cases ¶76,650.

Limits on Treble Damages for Antitrust Amnesty Applicants Extended for One Year

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

The Antitrust Criminal Penalty Enhancement and Reform Act of 2004 (ACPERA) has been amended to extend for one year provisions that protect successful amnesty applicants under the Department of Justice Antitrust Division corporate leniency program from treble damages in private suits.

The “Antitrust Criminal Penalty Enhancement and Reform Act of 2004 Extension Act” (Public Law 111-30) was signed into law on June 19, 2009. Enactment came just two days after the measure received Senate approval and ten days after it passed the House of Representatives. The legislation was introduced on June 3.

Portions of ACPERA had been scheduled to sunset on June 22, 2009. According to the original law, limitations on recovery against an amnesty applicant cease to have effect five years after the law's June 22, 2004, date of enactment. The extension ensures that antitrust amnesty agreements entered into until June 22, 2010, will shield successful applicants from treble damages.
Senator Herb Kohl (D-Wis.), chairman of the Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights, called the limitations on civil liability “an important part of the Division’s Leniency Policy.”

The limitations “removed a significant disincentive to participation in the leniency program--the concern that, despite immunity from criminal charges, a participating corporation might still be on the hook for treble damages in any future antitrust lawsuits.”

Remarking that “the incentives in this program are critical to the success of the Antitrust Division's criminal antitrust enforcement,” Sen. Patrick Leahy (D-Vt.) said that “the one-year extension will allow the Department of Justice to continue this successful program while Congress assesses the long-term direction of the Department of Justice's leniency program.” Sen. Leahy chairs the Senate Judiciary Committee.

Further information about the legislation appears here at the Library of Congress Thomas website.

$86 Million Restitution Award for Starbucks Baristas Reversed

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

A California appellate court has reversed a $86 million-plus restitution judgment awarded in a California Unfair Competition Law (UCL) class action brought against Starbucks by current and former baristas for permitting shift supervisors to share money placed in collective tip boxes.

In 2004, a former Starbucks barista filed a class action, alleging that the company's practice of permitting supervisors to share tips violated a provision of the California Labor Code and, in turn, the UCL.

Baristas are entry-level, part-time hourly employees who work the cash register and make drinks, while shift supervisors are part-time, hourly employees who perform the same tasks as the baristas, as well as conducting basic supervisory tasks. The baristas and supervisors rotate jobs and work as a team throughout the day.

Collective Tip Allocation Policy

Starbucks mandates that “all baristas and shift supervisors who worked that week” share in the weekly collective tips. However, store managers and assistant managers are prohibited from receiving any portion of the tips.

Section 351 of the California Labor Code states that (1) no employer or agent shall collect, take, or receive any gratuity or part of a gratuity left for an employee by a patron and (2) a gratuity is the sole property of the employee or employees to whom it is given.

In this case, the trial court certified the class and—after a bench trial—awarded the class members $86 million in restitution, plus interest. Starbucks appealed.

The appellate court concluded that the Starbucks tip-allocation policy did not violate California law, and that the lower court's decision was improperly based on a line of tip-pooling decisions inapplicable to the issue at hand.

Tip Sharing

The tips in this case had not been given to particular employees by the customers, and were not shared with store managers or assistant managers. There was nothing in the case law to suggest that tips from a collective box could not be shared by all employees in proportion to hours worked, even if some employees had limited supervisory tasks.

The tip-allocation policy did not violate the Labor Code, or the UCL, because it did not allow agents or employers to share in tips left for employees, the appellate court held.

Supervisors as “Agents”

The baristas argued that the shift supervisors who shared in the tips were "agents" of Starbucks. However, the appellate court found that they were not agents because they did not "supervise, direct, or control" other employees.

Therefore, the lower court's decision was reversed, and the appellate court directed judgment to be entered in Starbuck's favor.

The June 2 decision is Chau v. Starbucks Corp., CCH State Unfair Trade Practices Law ¶31,827.

GM Should Not Be Allowed to Avoid Dealership Protection Laws: State AGs

This posting was written by John W. Arden.

Texas and Nebraska Attorneys General are strongly objecting to General Motors’ bankruptcy plans to drastically reduce its number of dealerships in the United States, while avoiding state dealership protection laws.

In its April 27 viability plan, GM has announced an intention to reduce the number of its dealerships by 2,641—from 6,246 to 3,605—by the end of 2010.

On June 12, Texas Attorney General Greg Abbott filed objections in the federal bankruptcy court in New York City, arguing that the bankruptcy plan would allow GM to ignore state statutes that protect dealerships from unfair terminations and other oppressive conduct by motor vehicle manufacturers.

According to Abbott, the bankruptcy plan would allow GM to free itself from laws limiting its ability to terminate or modify franchises, to skirt laws protecting dealers from coercion in the ordering of new vehicle inventory, to deny dealers of their rights to market other brands, to alter dealer rights to relocate, and to limit dealer warranty claims.

The right of states to provide legal protections for dealers has been long established—and was recognized by the U.S. Supreme Court in New Motor Vehicle Board of California v. Orrin W. Fox Co., 439 U.S. 96 (1978)—the Texas Attorney General said.

The attorney general’s objections are scheduled to be considered at a hearing of the bankruptcy court on June 30. A statement on the objections appears here on the website of the Attorney General of Texas.

Meanwhile, Nebraska Attorney General Jon Bruning is promising to take direct action against GM and urging his colleagues to do likewise.

On June 15, Bruning sent a letter to all other state attorneys general, expressing an intention to file suit against the company “to try and put a stop to its illegal tactics.”

“What GM is trying to do in Nebraska and other states is unconscionable,” said Bruning. “That is why I’m leading an effort involving other state attorneys general.”

By ignoring state laws that protect consumers and dealers, GM leaves consumers vulnerable by depriving or deferring warranty service and avoiding lemon laws, said Bruning. This behavior not only violates consumer protection laws, but also may violate antitrust laws, he observed.

Further details on the Nebraska Attorney General’s views appear here in a June 15 news release.

Internet Name Registrar Could Have Violated Antitrust Law to Get Contracts

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

Internet domain name registry operator VeriSign, Inc., could have violated federal antitrust law by allegedly conspiring with, or engaging in predatory conduct against, the Internet Corporation for Assigned Names and Numbers (ICANN), the U.S. Court of Appeals in San Francisco has ruled.

VeriSign's conduct was purportedly intended to set artificially high prices for its registry services and to ensure that it would receive successor contracts with ICANN without having to go through a competitive bidding process.

Dismissal of Sherman Act, Sec. 1 and 2 claims brought against VeriSign by an organization composed of participants in the Internet domain name system (such as Web site owners) was therefore reversed and remanded.

VeriSign acts as the sole operator of the ".com" and ".net" Internet domain name registries pursuant to separate agreements with ICANN, which coordinates the Internet domain name system on behalf of the U.S. Department of Commerce.

Conspiracy

The automatic renewal term of the contract for the ".com" domain was an actionable restraint on trade because it was sufficiently alleged to have been the product of a conspiracy between VeriSign and ICANN in which VeriSign participated with the intent to restrain trade, the appellate court held.

Further, the pricing provisions of the contract, which provided for a seven percent per year increase in the allowable registration fee, could give rise to antitrust liability because that increase was alleged to exceed the rate competitive market conditions would produce.

An argument that an antitrust claim could not be based on price increases alone was rejected because the pricing at issue was not alleged to be unilateral action in the context of a monopolization claim but concerted action intended to restrain trade.

The renewal and pricing terms of the ".net" contract, on the other hand, were not similarly actionable because they were reached as a result of competitive bidding, not conspiratorial action, the court stated.

Attempted Monopolization

The organization's extensive factual allegations of predatory conduct, in which VeriSign engaged in order to secure the ".com" agreement, sufficed to state a claim for attempted monopolization, in the appellate court's view.

It was noted that the trial court, in concluding that the organization had failed to state a claim for predatory conduct, had erroneously construed that allegation in the complaint as pertaining solely to VeriSign's litigation against ICANN, rather than to the predatory and harassing activities that accompanied that litigation. These alleged activities included actions such as paying lobbyists to support its positions, stacking ICANN's public meetings, paying bloggers to attack ICANN's position, planting news stories critical of ICANN in mainstream media, and threatening various investigations and lawsuits. Thus, the lower court's reliance on the Noerr-Pennington doctrine—which immunizes only litigation activity, but not other forms of threats or harassment—was misplaced.

However, as with the Sec. 1 claim, the claim of predatory conduct in the ".net" registration market was insufficiently stated, the court added. The complaint's allegations did not reflect any assertion that VeriSign's predatory activity had any bearing on the competitive bidding process that resulted in the ".net" agreement.

Relevant Market

The organization's claim that VeriSign attempted to monopolize the market for expiring domain names also should not have been dismissed, the appellate court decided. The viability of the claim turned on the issue of relevant market, namely whether the organization adequately pled the existence of a separate market.

According to the organization, expiring domain names were more valuable than other names because, in all likelihood, they had already been advertised by the previous owner and already had Web traffic. In light of these market conditions, which had not been explained to the district court, the appellate court was not prepared to affirm the lower court's ruling that no separate market existed.

The June 5 decision is Coalition for ICANN Transparency, Inc. v. VeriSign, Inc., 2009-1 Trade Cases ¶76,642.

Settlement of Ameritrade Data Breach Litigation Preliminarily Approved

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

The federal district court in San Francisco has preliminarily approved a settlement of class action claims against online investment broker Ameritrade for allegedly failing to prevent a data security breach that exposed accountholders' private information to spammers and rendered the same information vulnerable to others.

Although the court was concerned that the broker had agreed to pay class counsel $1.87 million in attorney's fees, while the class itself was to receive no monetary award, the proposed settlement was deemed "within the range of possible approval."

The Attorney General of Texas had originally objected to the settlement as merely a promise by the broker to conduct security measures that a responsible company should conduct anyway. However, after negotiations between the attorney general and the broker, the attorney general agreed to withdraw its objections because of amendments made to the proposed settlement.

The amended settlement agreement, after final approval, would provide class members with a one-year subscription for an anti-virus, anti-spam Internet security product. The broker agreed to post a warning on its website regarding "stock-touting" spam, to retain independent experts to conduct bi-annual penetration tests of its electronic data, and to engage in other practices aimed at preventing identity theft.

Under the changes made to the settlement in response to the Texas attorney general's objections, individual class members would retain the right to pursue future claims arising from identity theft. In addition, the settlement will not release any claims of a governmental entity.

The decision is In re TD Ameritrade Accountholder Litigation, CCH Privacy Law in Marketing ¶60,333.

A fairness hearing for the approval of the settlement is scheduled for September 10, 2009. Further information about the litigation and settlement appears here.

High Court to Consider Class Arbitration in Price Fixing Case, Constructive Nonrenewal under PMPA

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

The U.S. Supreme Court on June 15 agreed to take up two important issues facing antitrust and trade regulation practitioners.

In one case, the Court agreed to decide whether the Federal Arbitration Act (FAA) permits the imposition of class arbitration when the parties’ agreement is silent on the issue.

The Court granted a petition filed by international shipping companies seeking review of a decision of the U.S. Court of Appeals in New York City (2008-2 Trade Cases ¶76,355) holding that purchasers of the shipping services could proceed with class arbitration of their price fixing claims against the shipping companies.

The federal appellate court held that class arbitration was permissible, even though the arbitration clauses in the underlying maritime agreements did not specifically provide for it.

The petitioners argued that review was appropriate in light of a split among the circuits on the issue, and because the case was free of threshold issues that previously thwarted review of the question.

Moreover, the petitioners contended that “the Second Circuit’s decision that class arbitration may be imposed on parties whose arbitration contract does not provide for it cannot be reconciled with [the Supreme] Court’s FAA precedents.”

The petition is Stolt-Nielsen SA v. v. Animalfeeds International Corp. Dkt. 08-1198.

On the same day, the Court agreed to review of a decision of the U.S. Court of Appeals in Boston (Business Franchise Guide ¶13,890), rejecting the constructive nonrenewal claims brought by Shell gasoline station operators under the Petroleum Marketing Practices Act (PMPA).

The appellate court held that the PMPA did not support a claim for constructive nonrenewal where a franchisee had signed and continued to operate under the renewal agreement complained of. The Court granted the petition of the franchisees and Shell.

The franchisees asked the Court to consider “the scope of the protections afforded by the PMPA to franchisees who face termination or nonrenewal of their franchise agreements unless they accept onerous contract terms.’’

According to the petitioners—gasoline station operators—the circuits “are fundamentally split over whether a franchisor can lawfully present its franchisees with the Hobson’s choice of accepting unlawful contract terms or risking their livelihoods on a chance that a court will grant a preliminary injunction.”

There is a split between the First and Ninth Circuits on the issue. The franchisees contended that, under the First Circuit decision in Marcoux v. Shell Oil Products Co, LLC, a dealer presented with a questionable lease must either sign the lease and forgo the claim that the lease violates the Act or refuse to sign, receive a notice of termination, and risk the franchise on a chance that a district court will grant injunctive relief.

The franchisees contend that the Ninth Circuit, on the other hand, recognized the Catch -22 situation, and rejected such a requirement on the franchisee. In Pro Sales, Inc. v. Texaco, U.S.A. (Business Franchise Guide ¶8604), the U.S. Court of Appeals in San Francisco rejected a reading of the PMPA that would force a franchisee to choose between accepting an unlawful and coercive contract in order to stay in business or rejecting the contract and going out of business.

The petitions are Mac's Shell Service, Inc. v. Shell Oil Products Co., Dkt. 08-240, and Shell Oil Products Co. v. Mac's Shell Service, Inc., Dkt. 08-372.

Customers Could Sue Grocer Only if Damaged by Data Breach

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

Customers of Maine-based supermarket chain Hannaford could pursue claims for breach of implied contract, negligence, and unfair trade practices under Maine law against the chain for failing to prevent a data security breach and for failing to notify them of the breach, but only if they could establish actual damages, according to the federal district court in Portland, Maine.

The alleged security breach resulted in the theft of an estimated 4.2 million debit and credit card numbers, expiration dates, PINs, and other personal information belonging to Hannaford customers.

Lawsuits over the breach from six states—Florida, Maine, New Hampshire, Massachusetts, New York, and Vermont—had been consolidated into a single case before the Maine court.

Breach of Implied Contract

The customers asserted that, at the point of a grocery sale, a merchant and customer implicitly agree that the merchant will guarantee the security of the customer's electronic data.

Although the court rejected the argument that Hannaford had made an implied commitment to prevent every intrusion under any circumstances whatsoever, the court concluded that a jury could find that there was an implied contractual term that Hannaford would use reasonable care in its custody of the customer's card data.

Negligence

Hannaford's assertion that the "economic loss" doctrine barred the customers from pursuing claims for negligence under Maine law was rejected.

Courts in some jurisdictions had applied the economic loss doctrine to prevent tort recovery for purely economic damages incurred by parties to a contractual relationship, unless there was also personal injury or property damage. Courts in Maine, however, did not apply the doctrine this broadly. The doctrine in Maine was limited to claims seeking tort recovery for a defective product's damage to itself.

Unfair Trade Practices

Failure to disclose the breach to customers could have been an unfair or deceptive practice, for purposes of Maine's Unfair Trade Practices Act (UTPA), the court said.

A jury could find that, if Hannaford had disclosed the breach immediately upon learning of it, customers would not have purchased groceries at its stores with debit and credit cards during the period between discovery of the breach (February 27, 2008) and containment of the breach (March 10, 2008). This nondisclosure would be an omission that was important to consumers and likely to affect their conduct regarding a product.

In addition, the Federal Trade Commission's pursuit of more than 20 complaints against corporations—including several retailers—for failing to use reasonable and appropriate security measures to prevent unauthorized access to personal information stored on computer networks supported accepting the customers' allegations as stating a claim under Maine's UTPA, the court reasoned.

Actual Damages

Each customer would be able to recover against Hannaford only if Hannaford's misconduct caused a direct loss to the customer's account. Consumers who did not have a fraudulent charge actually posted to their account could not recover; the only harm they could assert was the emotional distress that their accounts might be in peril, which was not actionable in the absence of monetary damages.

Consumers who had fraudulent charges posted to their accounts that were subsequently reversed and were no longer outstanding could not seek damages for alleged consequential losses, such as overdraft fees or a bank loan to cover them, a fee for insisting on changing an account when the issuing bank thought it was unnecessary, loss of accumulated reward points, time spent in convincing the issuing bank to reverse charges, or temporary lack of access to funds and inability to use a credit or debit card.

These alleged damages were too remote, not reasonably foreseeable, and speculative, in the court's view.

The decision is In re Hannaford Bros. Co. Customer Data Security Breach Litigation, CCH Privacy Law in Marketing ¶60,336.

Former Sales Director Can Pursue Claims for Misuse of His Name

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

Joseph Krause—the former sales director of the Philadelphia Soul arena football team—can pursue claims for Lanham Act false designation of origin and state law misappropriation of name against the team and its part owner, rock musician Jon Bongiovi (a.k.a., Jon Bon Jovi), the federal district court in Philadelphia has ruled.

Krause alleged that the team’s record-breaking ticket sales were due to his favorable reputation in the sports and entertainment industry. Following the team’s 2008 national championship season, Krause was given a one-week notice of termination when the Arena Football League suspended its 2009 season.

E-Mail to Fans

After Krause’s termination, the team allegedly sent an e-mail to fans from Krause’s Philadelphia Soul e-mail address. The team allegedly sought to trade on Krause’s good name and reputation with the fan base and cause confusion as to Krause’s association with the unpopular decision to cancel the 2009 season and the resulting controversy over season ticket refunds.

Standing to Sue

The court held that Krause had standing to sue for a false designation of origin in violation of the Lanham Act. Although his damages were speculative, this was outweighed by factors supporting standing: the nature of the alleged injury (loss of reputation and goodwill among the public and Philadelphia fans), the directness of the injury from the false designation of the e-mail, Krause’s status as the most clearly identifiable party to bring an enforcement action, and the lack of risk of duplicative damages.

Use of Name, Likelihood of Confusion

Krause succeeded in alleging that his name was protectable mark that had secondary meaning in the sports and entertainment business. Krause relied on Lewis v. Marriott Int’l, Inc. (ED Pa. 2007), CCH Advertising Law Guide ¶62,815, in which the court held that a hotel chain’s use of a chef’s name to promote wedding packages at a Philadelphia hotel could constitute Lanham Act false advertising.

Although Krause did not allege that his name was specifically used in advertisements to promote the Philadelphia soul, he was did not have to make allegations regarding advertising in order to establish false designation of origin, according to the court.

The e-mail at issue contained the line “From: Joe Krause [mailto:jkrause@philadelphiasoul.com].” Krause alleged that the Philadelphia Soul sought to cause confusion among fans as to Krause’s association with the season’s cancellation and that the e-mail actually deceived, or tended to deceive, members of the public. These allegations satisfied the likelihood of confusion element of a false designation of origin claim, the court determined.

Misappropriation of Name

Krause also asserted a state law claim for the tort of invasion of privacy by misappropriation of name, a common law cause of action recognized by the Pennsylvania Supreme Court. Krause adequately pled that the team and Bongiovi sought to appropriate the value of his name by benefiting from his goodwill and reputation with the team’s fans. No pleading of secondary meaning was required to sustain the misappropriation of name claim, the court noted.

The June 4 opinion in AFL Football LLC v. Krause will be reported at Advertising Law Guide ¶63,434.

Suit Challenging Discount Club Marketing Practices Not Time Barred

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

Claims that the marketing firm Vertrue, Inc. and its affiliates violated the federal Electronic Funds Transfer Act (EFTA) by enrolling consumers in a discount club and imposing unauthorized monthly charges in billing statements were not barred by the law’s one-year statute of limitations, the U.S. Court of Appeals in Cincinnati has ruled.

Margaret Wike, who in March 2006 asserted class action claims on behalf of other consumers, successfully appealed a ruling that her EFTA claims were time-barred.

The court also held that the federal district court in Nashville should reconsider the question of whether Wike should be allowed to add claims under the federal Racketeer Influenced and Corrupt Organizations (RICO) Act alleging that Vertrue had ensnared hundreds of thousands of consumers in a deceptive marketing scheme.

Telemarketing Preauthorization of Funds Transfer

The court set out the facts underlying Wike’s complaint as follows. In February 2005, Wike called America Online (AOL) to set up an Internet service account for a friend. An AOL representative told Wike that she was eligible to claim a free $50 Wal-Mart gift card. With Wike’s permission, the AOL rep transferred Wike’s call to another operator who would provide more details. That operator turned out to be a telemarketer for Influent, which sold memberships in discount clubs and other programs for Vertrue.

The telemarketer confirmed Wike’s name, address and telephone number and told her that, as a Galleria member, she would receive a “membership kit” explaining how to claim her Wal-Mart gift card. Galleria membership, the telemarketer explained, was not free: Wike would be billed $1 that day and, after a 30-day trial period, $19.95 each month thereafter, unless and until Wike cancelled her membership. Wike agreed, provided her Visa debit-card number, and declined an offer for a second discount club the telemarketer pitched.

Wike claims she never received the promised membership kit (which Vertrue insists it sent), though she acknowledges she might have disregarded it as junk mail. Nor did Wike question the first $19.95 charge for “galleriausa” on her March 2005 bank-account statement, mistakenly believing that it pertained to an unrelated purchase.

A second monthly charge, which showed up in April, got Wike’s attention. She called Galleria’s support number several times over the ensuing months, asking that her membership be canceled and the monthly charges refunded. None of this worked—she received no refunds, and the monthly charges continued—until October 2005, when Wike canceled her account and received a partial refund.

EFTA Statute of Limitations Trigger

Wike claimed that Vertrue violated the EFTA’s restriction on “preauthorized electronic fund transfer[s],” which may be permitted by consumers “only in writing,” a copy of which must be given “to the consumer when made.”

The question presented was whether EFTA’s one-year statute of limitations was triggered in February 2006 when the telemarketer arranged the funds transfer (in which case Wike’s March 2006 EFTA claim was time-barred) or when the first of the recurring transfers of funds from Wike’s bank account occurred less than a year before the lawsuit (in which case Wike’s EFTA claim was timely).

The district court, confronting a difficult question that no federal court of appeals had yet faced, held that the EFTA claim was time-barred because the statute imposed obligations on Vertrue before the first recurring transfer took place.

The better view, according to the appellate court, was to pin accrual on an identifiable date when the plaintiff has been injured and an EFTA duty necessarily has been violated—the date of the first funds transfer.

Remanding the case to the district court for further proceedings on the EFTA claim, the appellate court directed consideration of the question of whether Wike should be allowed to amend her complaint to add a RICO claim.

The June 2 decision in Wike v. Vetrue, Inc. will be reported at CCH Advertising Law Guide ¶63,431.

Bill to Extend ACPERA’s Detrebling Provisions Passes House

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

Legislation to delay the sunsetting of provisions of the Antitrust Criminal Penalty Enhancement and Reform Act of 2004 (ACPERA) passed the U.S. House of Representatives on June 9.

The proposed legislation—“Antitrust Criminal Penalty Enhancement and Reform Act of 2004 Extension Act” (H.R. 2675)—would extend for one year provisions of ACPERA that protect successful amnesty applicants under the Department of Justice Antitrust Division corporate leniency program from treble damages in private suits.

Portions of ACPERA are currently scheduled to sunset on June 22, 2009. According to the law, limitations on recovery against an amnesty applicant cease to have effect five years after the law’s June 22, 2004 date of enactment. Unless the extension is enacted, antitrust amnesty agreements entered into after the expiration date would not shield successful applicants from treble damages.

H.R. 2657 was introduced on June 3 by Representative Hank Johnson (D-Georgia) and referred to the Judiciary Committee, which took no action. On June 9, Johnson moved to suspend the rules and pass the bill. The motion was agreed to on a voice vote, and the bill was received in the Senate today.

In making his motion, Johnson argued that ACPERA promotes “the detection and prosecution of illegal cartel behavior by giving participants in a price-fixing cartel powerful incentives to report the cartel to the Justice Department and cooperate in the prosecution of the cartel.”

Before ACPERA, the Justice Department could offer leniency to the co-conspirator that helps prosecute a cartel, but the co-conspirator would remain fully liable for treble damages in private litigation.

“In the first half of this year, ACPERA has aided the Antitrust Division in securing jail sentences in 85 percent of its individual prosecutions and over $900 million in criminal fines,” Johnson stated.

Earlier, extension of ACPERA’s sunsetting provisions was advocated by the Antitrust Section of the American Bar Association.

In a May 8 letter, the Antitrust Section called on leaders in the House and Senate Judiciary Committees to extend these provisions for five years. Antitrust Section Chair James A. Wilson further suggested that Congress use the five-year extension to evaluate the efficacy of the detrebling provisions.

“While the Section is inclined to believe that the detrebling provision has made an important contribution to the overall effectiveness of the government’s leniency program, with no discernable ill effect on the deterrent and remedial objectives of enforcement,” Wilson wrote, “it also recognizes that legitimate questions have been raised by those who hold a differing view and we note that there has been insufficient time under the ACPERA regime to permit a full evaluation of the benefits and costs of the provision.”

Text of the letter appears here on the ABA website.

High Court Delineates Structure of RICO Association-in-Fact Enterprise

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

An association-in-fact enterprise in a federal RICO claim must have an ascertainable structure beyond that inherent in a pattern of racketeering activity, the U.S. Supreme Court ruled in a 7-2 decision on June 8.

In a criminal RICO case against a loosely-organized group of individuals who had participated in numerous bank thefts over an eight-year period, the Court concluded that a trial court did not err by instructing a jury that an enterprise existed when a group of individuals, without structural hierarchy, associated solely for the purpose of carrying out a pattern of racketeering acts.

Structure

An association-in-fact enterprise must have at least three structural features: (1) purpose; (2) relationships among those associated with the enterprise; and (3) longevity that was sufficient to permit its members to pursue the enterprise’s purpose.

The term “structure,” however, did not need to appear in the jury instructions, the Court held. As long as the substance of the relevant point was adequately expressed, the language of a jury instruction was subject to the “considerable discretion” of the trial judge.

Informing the jury that it had to find an “ascertainable” structure would be “redundant and potentially misleading,” at least in a criminal context, where the jury had to determine beyond a reasonable doubt that the elements of the crime were present.

Finally, qualifying the meaning of “ascertainable structure” with the phrase “beyond that inherent in the alleged pattern of racketeering activity” was appropriate, as long as the qualifying phrase was interpreted to mean that the existence of the enterprise was a separate element that must be proved.

Enterprise Element

As the Court explained in United States v. Turkette (RICO Business Disputes Guide ¶6100), the existence of an enterprise was an element of RICO that was distinct from the pattern of racketeering element; proof of one did not necessarily establish the other.

Nevertheless, the Court cautioned that it would be a mistake to interpret the qualifying phrase to mean that the existence of an enterprise could never be inferred from evidence showing that persons associated with the enterprise had engaged in a pattern of racketeering activity. In Turkette, for example, the Court recognized that the evidence used to prove a pattern of racketeering and the evidence used to prove an enterprise “may in particular cases coalesce.”

Attributes

The petitioner—an individual who had participated in the bank thefts—unsuccessfully argued that an association-in-fact enterprise must have some additional structural attributes, such as a structural hierarchy, role differentiation, a unique modus operandi, a chain of command, professionalism and sophistication of organization, diversity and complexity of crimes, membership dues, rules and regulations, uncharged or additional crimes aside from predicate acts, an internal discipline mechanism, regular meetings regarding enterprise affairs, an enterprise name, and induction or initiation ceremonies or rituals.

These attributes, however, could not be fairly inferred from the language of RICO, according to the Court.

Nothing in the RICO statute supported the structural requirements asserted by the petitioner, the Court determined, and nothing exempted the enterprise whose associates had engaged in spurts of activity punctuated by periods of inactivity.

Jury Instructions

The jury instructions in this case were “correct and adequate,” in the Court’s view. The instructions explicitly informed the jurors that they could not convict the individual defendants under RICO unless they found that the government had proven the existence of an enterprise. The instructions also made it clear that the enterprise was a separate element from the pattern of racketeering activity.

The instructions adequately stated that the enterprise had to have the structural attributes that could be inferred from the statutory language. More specifically, the trial judge told the jury that the government was required to prove that there was an ongoing organization with some sort of framework—formal or informal—for carrying out its objectives, and that the various members and associates of the association had functioned as a continuing unit to achieve a common purpose.

Telling the jury that the existence of an association-in-fact enterprise was often more readily proven by determining what the enterprise does, rather than by performing abstract analysis of its structure, was appropriate. The instruction properly conveyed the point made in Turkette—that proof of a pattern of racketeering activity may be sufficient in a particular case to permit a jury to infer the existence of an association-in-fact enterprise.

Dissent

Dissenters Justice Stevens and Justice Breyer would have limited the term “enterprise” to “business-like entities” because nothing in the text or legislative history of the RICO statute indicated that Congress had intended to reach an “ad hoc association of thieves” whose purpose and activities were limited to sporadic acts of theft.

According to the dissenting justices, the RICO statute and the Court’s earlier decisions indicated that Congress had used the term “enterprise” in the sense of a business organization. Although the dissenters agreed with the majority that the word “structure” was not “talismanic,” they nevertheless would have stipulated that jury instructions must convey the requirement that the alleged enterprise had an existence apart from the alleged pattern of predicate acts.

The majority permitted juries to infer the existence of an enterprise “in every case involving a pattern of racketeering activity undertaken by two or more associates.” By allowing the government to prove both elements with the same evidence, the majority rendered the enterprise requirement “essentially meaningless” in associated-in-fact cases, the dissent maintained.

In the dissenters' view, proof of the separate existence of an association-in-fact enterprise would “generally require evidence of rules, routines, or processes through which the entity maintains its continuing operations and seeks to conceal its illegal acts.”

The decision, authored by Justice Alito, is Boyle v. United States, Docket No. 07-1309, issued June 8, 2009. The opinion will appear in CCH RICO Business Disputes Guide.

Bankruptcy Court Allows Chrysler to Terminate 789 Franchises

This posting was written by John W. Arden.

A bankruptcy court ruled yesterday that auto maker Chrysler LLC could immediately terminate 789 Chrysler, Dodge, and Jeep franchises in accordance with its plan to cut costs and quickly emerge from bankruptcy, according to an Associated Press report.

In an oral ruling late Tuesday afternoon, Judge Arthur J. Gonzalez of the U.S. Bankruptcy Court for the Southern District of New York allowed Chrysler to terminate approximately one-quarter of its dealership base.

More than 25 attorneys, representing hundreds of franchisees across the country, had argued that termination of the franchises was unnecessary and would not result in substantial savings.

A written decision on the ruling is forthcoming

Further information regarding the Chapter 11 bankruptcy case—In re Chrysler LLC, Case No. 09 B 50002 (AJG)—appears on the court website.

Biopharmaceutical Firm Drops Attempted Acquisition of Competitor

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

CSL Limited and Talecris Biotherapeutics Holdings Corporation announced on June 9 their decision to abandon a proposed combination in light of an FTC challenge to the transaction.

The FTC moved to block CSL’s proposed $3.1 billion acquisition of Talecris on the ground that the transaction would substantially reduce competition in the U.S. markets for four plasma-derivative protein therapies: Immune globulin (Ig), Albumin, Rho-D, and Alpha-1.

In addition to issuing an administrative complaint, the Commission sought a preliminary injunction in the federal district court in Washington, D.C., to stop the transaction pending completion of the administrative trial.

FTC Bureau of Competition Director Richard Feinstein called the decision to drop the deal “a tremendous victory for the patients who rely on these lifesustaining treatments.” He added that Commission staff “was fully prepared to demonstrate the anticompetitive harm that would have resulted from this acquisition.”

Dr. Brian McNamee, CEO and Managing Director of CSL, said that, while the company disagreed with the FTC case and matters included in their complaint, “CSL’s Board of Directors did not believe that entering into a protracted litigation process with the FTC, with its inherent risks, substantial costs, and lengthy distraction of CSL management and staff from planning and running our businesses, would be in the best interests of our takeholders.”

Under the merger agreement, CSL is required pay Talecris a $75 million break fee.

The FTC news release on the development appears here on the Commission’s website. CSL Limited’s announcement appears here on the company website.

Bill Requires Bankrupt Auto Makers to Reimburse Dealers from Federal Funds

This posting was written by John W. Arden.

A bill to require bankrupt automobile manufacturers that receive funds from the federal government to use such funds to fully reimburse dealers for inventory of vehicles and parts has been proposed in House Bill No. 1256.

The measure—proposed as the Auto Dealers Assistance Amendment (#1270)—would require manufacturers to use any funding received from the U.S. Treasury while in bankruptcy to:

(1) Fully reimburse dealers rejected in bankruptcy for the cost of all parts and inventory in the dealer’s possession on the date of the bankruptcy and all other obligations owed under franchise and dealership agreements, and

(2) Provide dealers rejected in bankruptcy with at least 180 days to shut down their businesses and sell off their inventories through a “wind down period.”

The amendment further specifies that a bankruptcy court may not allow a bankrupt dealer to obtain access to debtor-in-possession funding unless the credit agreements expressly provide for reimbursement and wind-down as provided by the measure.

U.S. Senator Bob Corker (R-Tenn.) introduced the amendment on June 4.

“We continue to receive assurances from Chrysler and GM that their dealers across Tennessee and across the country will be treated fairly,” said Corker. “We understand that a bankruptcy is inherently painful and our efforts aren’t to interfere.

“We filed this amendment to apply pressure on the automakers to keep their word to rejected dealerships and fully reimburse them for their inventories of vehicles and parts,” he continued. “We hope Chrysler and GM will take these appropriate actions and make this amendment unnecessary.”

A statement by Senator Corker and text of the amendment appear on the Senator’s website.

Expedia Marked Up “Service Fees,” Held Liable for $184 Million

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

In a nationwide class action, travel booking website Expedia was liable for $184 million in damages, based on its breach of contract in charging service fees in excess of the actual costs of making hotel reservations, the Washington Superior Court in King County has ruled. Additional proceedings are needed to resolve disputed questions of fact on a separate claim under the Washington Consumer Protection Act.

Expedia breached its “terms of use” for both online and telephone reservations, which provided that “service fee goes to covering costs.” The court cited employee e-mails as evidence that service fees were marked up to increase profits.

Voluntary Payment Defense

As a defense to the breach of contract claims, Expedia contended that the payments at issue were voluntary. Under the voluntary payment doctrine, money voluntarily paid by a party under a claim of right with full knowledge of the facts by the person making the payment cannot be later recovered on the ground that the claim was illegal, or that there was no liability to pay in first place. The court held the doctrine inapplicable because the admitted, undisclosed inclusion of a profit component in the fees did not equate with full knowledge.

The court found that an award of $184,470,451—the full amount of the services fees collected based on the breach of contract—was warranted.

Consumer Protection Law

On the consumer protection claim, the class of consumers challenged Expedia’s bundling of tax and service fees from May 17, 2002 through June 11, 2008 and its failure to disclose the true nature or separate amounts of its fees and taxes. The consumers contended that these practices had the tendency or capacity to mislead and constituted an unfair and deceptive practice under the Washington statute.

Expedia maintained that hotel wholesale rate disclosure would affect its bottom line and that consumers “know” that the service fees include markup and can choose whether the pay the price or not.

The parties’ contentions implicate the “reasonableness” standard applicable under the statute, the court said. The unresolved questions of fact precluded summary judgment on the consumer protection claim.

Unresolved issues of fact also existed as to whether Expedia’s allegedly deceptive practice caused the injury asserted and whether the asserted public interest would outweigh Expedia’s legitimate business concerns.

The May 28 opinion in Expedia Hotel Taxes and Fees Litigation appears at CCH Advertising Law Guide ¶63,421.

Senior Citizens Entitled to Triple Restitution for Breach of California Unfair Competition Law

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

A class of senior citizens could receive triple restitution under the California Civil Code for violations of the California Unfair Competition Law (UCL) by a life insurance company that allegedly engaged in deceptive business practices to induce the purchase of high-commission annuity contracts with large surrender penalties, according to a California appellate court.

The senior citizens alleged that they were duped into buying high-commission annuity contracts with large surrender penalties from the National Western Life Insurance Company in violation of the UCL. The class sought restitution of the allegedly improper surrender penalties and enhanced remedies for each cause of action under California Civil Code Sec. 3345.

Enhanced Remedies for Senior Citizens

Section 3345 authorizes trebling either the amount authorized under a statute or the amount the trier of fact imposed in its discretion. It requires that the action (1) be brought by or on behalf of senior citizens or disabled persons seeking redress for unfair methods of competition and (2) be one in which the trier of fact is authorized by a statute to impose a penalty the purpose or effect of which is to punish or deter.

National Western was granted judgment on the pleadings without leave to amend because the trial court found that that the only available remedy under the UCL did not have the purpose or effect of punishment or deterrence as required by Section 3345. Therefore, Section 3345 was not applicable to the UCL action and the case was dismissed, the trial court held.

According to the appellate court, the language of Section 3345 did encompass actions under the UCL brought by or on behalf of senior citizens. Contrary to the trial court’s ruling, UCL restitution awards have a deterrent purpose and effect.

Damages v. Restitution

It was well established that private plaintiffs could not receive damages—much less treble damages—under the UCL.In this case, however, the senior citizens did not seek to justify monetary relief other than restitution under the UCL. Therefore, the court found that Section 3345 applied to unfair competition actions involving a fine, civil penalty, or any other deterrence remedy.

Section 3345 was enacted as a specific remedy in actions concerning deceptive business practices aimed at senior citizens. It was consistent with the goal of the legislature to construe Section 3345 to apply to UCL actions. Therefore, the trial court’s order was vacated and a new order was entered denying National Western’s motion for judgment on the pleadings.

The May 21 decision—Clark v. The Superior Court of Los Angeles (National Western Life Insurance Co.)—will be reported in CCH State Unfair Trade Practices Law.

California Unfair Competition Class Standing Hurdle Removed in Tobacco Ad Case

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

In a class action, the standing requirements of the California Unfair Competition Law (UCL) apply only to class representatives, not to class members, the California Supreme Court has ruled. The court reversed an order decertifying a class of California smokers on the theory that all class members were required to demonstrate standing.

The smokers alleged that tobacco companies violated the UCL by conducting a decades-long campaign of deceptive advertising and misleading statements about the addictive nature of nicotine and the relationship between tobacco use and disease.

The court further held that a class representative is not required to plead or prove with “an unrealistic degree of specificity” reliance on particular advertisements or statements when the unfair practice is a fraudulent advertising campaign.

California Proposition 64

California Proposition 64 mandated that a class representative in a UCL action comply with the civil procedural requirements applicable to California class actions. After Prop 64, a UCL class action is a procedural device that enforces substantive law by aggregating many individual claims into a single claim of a representative plaintiff.

These procedural modifications to the UCL, however, left entirely unchanged the substantive rules governing business and competitive conduct. Nothing a business might lawfully do before Proposition 64 is unlawful now, and nothing earlier forbidden is now permitted, the court explained.

Standing

Proposition 64 did not alter accepted principles of class action procedure that treat the issue of standing as referring only to the class representative and not the absent class members, the court found. Imposing an unprecedented standing requirement on unnamed class members would undermine the guarantee made by Proposition 64’s proponents that the initiative would not undermine the efficacy of the UCL as a means of protecting consumer rights.

Requiring all unnamed members of a class action to individually establish standing would effectively eliminate the class action lawsuit as a vehicle for the vindication of such rights. The UCL remedies provision, left unchanged by Proposition 64, offered additional support for the conclusion that the initiative was not intended to have any effect at all on unnamed members of UCL class actions, the court noted.

Causation of Injury—Reliance

Proposition 64 provided that a private suit under the UCL can be brought only by “a person who has suffered injury in fact and has lost money or property as a result of the unfair competition.” While it was clear that the phrase indicated there must be some connection between the injury and the defendant’s conduct, the parties disagreed about the type of causation the plaintiff must demonstrate.

There is no doubt that reliance is the causal mechanism of fraud, the court said. However, a plaintiff need not demonstrate individualized reliance on specific misrepresentations to satisfy the reliance requirement.

When, as in this case, a plaintiff alleges exposure to a long-term advertising campaign, the plaintiff is not required to plead with an unrealistic degree of specificity that the plaintiff relied on particular advertisements or statements, according to the court. An allegation of reliance is not defeated merely because there was alternative information available to the consumer-plaintiff, even regarding an issue as prominent as whether cigarette smoking causes cancer, the court added.

The class decertification order was reversed and the case was remanded for further proceedings to determine whether the class representatives could establish standing and, if not, whether leave to amend should be granted to add a new class representative.

The May 18 decision in Tobacco II Cases will be reported in CCH Advertising Law Guide and CCH State Unfair Trade Practices Law.

Food Products Maker Held in Contempt for Discriminatory Pricing

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

Michael Foods, Inc., a national food products manufacturer, has been held in contempt of a recent order (2009-1 Trade Cases ¶76,609), enjoining it from discriminating in price for the sale of food in favor of Sodexho, Inc., the world’s largest food service management company, and to the detriment of a complaining wholesale food distributor.

The federal district court in Harrisburg, Pennsylvania, found that Michael Foods required the complaining distributor to accept unlawfully higher prices as a condition of continued sales pending appeal of a judgment against it and ultimately terminated its direct sales to the complaining distributor after the distributor sought relief from the court.

As a remedy, Michael Foods was enjoined from refusing to sell its products to the complaining distributor on the same terms as they were sold to Sodexho, so long as the complaining distributor otherwise met its standards as a customer.

(For details regarding the decision and order, see Trade Regulation Talk, May 18, 2009.)

Disobedience With Court Order

Because the order was valid and known to Michael Foods, the only issue was whether the manufacturer’s conduct constituted disobedience with the order. With respect to pricing pending appeal, Michael Foods was aware that the proper course of action would have been to seek a stay of the injunction, according to the court.

Instead, it chose a path intended to circumvent the court’s order and to continue its unlawful price discrimination by selling its products to the complaining distributor at a higher price than Sodexho.

As for Michael Foods’s termination of direct sales to the complaining distributor, the manufacturer was not in contempt of the order for refusing to deal, but rather for its continued dealings with the complaining distributor in defiance of the order. Michael Foods continued to violate the order through its ongoing sales to the complaining distributor through third parties.

Additional Link in Distribution Chain

Michael Foods attempted to avoid its obligations under the Robinson-Patman Act in defiance of the injunction by inserting an additional link into the distribution chain through its sales to a third party for resale to the complaining distributor, in the court’s view.

Meanwhile, Michael Foods continued to sell products to Sodexho (through its distributor) at the far lower prices. Thus, the court rejected Michael Foods’s argument that the order did not specifically prohibit it from refusing to deal with the complaining distributor, and that the court would have had no power to do so.

The May 26 decision in Feesers, Inc. v. Michael Foods, Inc., will appear at 2009-1 Trade Cases ¶ 76,628.

Amnesty Applicant Not Ordered to Identify Itself, Assist in Private Antitrust Suit

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

The federal district court in San Francisco will not require a company that was granted conditional leniency under the Department of Justice Antitrust Division corporate leniency program to identify itself to, and cooperate with, plaintiffs in a private antitrust action, alleging a conspiracy to fix prices in the thin film transistor-liquid crystal display (TFT-LCD) industry.

The plaintiffs—direct purchasers of TFTLCD panels—sought a motion to compel the amnesty applicant to comply with the Antitrust Criminal Penalty Enhancement and Reform Act of 2004 (ACPERA) or forfeit any rights under the Act.

The ACPERA (CCH Trade Regulation Reporter ¶27,750) limits the liability in a private antitrust action of a successful amnesty applicant that has cooperated with the government’s investigation and prosecution of the underlying conspiracy. The amnesty applicant’s liability might be limited to actual damages, instead of the usual treble damages.

Grant of Conditional Leniency

The Justice Department confirmed that it granted conditional leniency to an applicant, and that the applicant satisfied its obligations under the leniency agreement to fully cooperate with the government in its investigation into the TFT-LCD price fixing conspiracy.

Several corporations and individuals were successfully prosecuted for their roles in the conspiracy. The Justice Department, however, argued that the ACPERA did not authorize the court to grant the plaintiffs’ requested relief.

The court sided with the Justice Department and Samsung, the company identified by the plaintiffs as the amnesty applicant. While the court agreed that an amnesty applicant’s cooperation was most valuable early in the litigation, it concluded that the language of ACPERA suggested that the court’s assessment of an amnesty applicant’s cooperation occurred at the time of imposing judgment or otherwise determining liability and damages. Therefore, the amnesty applicant’s conduct would not be considered until the amnesty applicant sought to limit liability under ACPERA later in the suit.

Sunsetting of Provisions

The decision is probably the first to consider a federal district court’s authority under the ACPERA to compel an amnesty applicant to cooperate with private antitrust plaintiffs. It comes as the provisions in the 2004 law that provide amnesty applicants with an opportunity to avoid treble damages are about to sunset. According to the law, the provisions cease to have effect 5 years after the date of enactment. The law was enacted on June 22, 2004.

The American Bar Association Section of Antitrust Law has called on leaders in the House and Senate Judiciary Committees to extend these provisions. It has also suggested that Congress evaluate the efficacy of the detrebling provisions.

The May 19 decision is In re TFT-LCD (Flat Panel) Antitrust Litigation, 2009-1 Trade Cases ¶76,626.

Franchisee Liability for Lost Future Profits: Another Blow to Sealy?

This posting was written by Bruce S. Schaeffer of Franchise Valuations, Ltd., co-author of CCH Franchise Regulation and Damages.

The Texas Court of Appeals for the Second District—applying Georgia law in a case of first impression for both Georgia and Texas—has held that a "terminated" franchisee was liable for lost future profits over the full remainder of a 25-year term (Progressive Child Care Systems, Inc. v. Kids `R' Kids International, Inc., CCH Business Franchise Guide ¶14,018).

Is this the death knell of Postal Instant Press, Inc. v. Sealy (CCH Business Franchise Guide ¶10,893), which invalidated an award of lost future royalties and advertising fees to a franchisor that had terminated a franchisee for failure to pay royalties? I think not.

For one thing, there was no possibility of the franchisor in the Texas case double-dipping or collecting royalties from the same site twice because the "terminated" franchisee simply stopped paying and kept his child care franchises running at the same sites under a different name—Legacy Learning Center, rather than Kids `R' Kids.

For another, the franchisee simply left the system, falling more under the abandonment justification for such lost future royalties found in other cases. See It's Just Lunch Franchise, LLC v. BLFA Enterprises, LLC, CCH Business Franchise Guide ¶12,620.

In that case, the court held that “under Sealy, a franchisor who has terminated the franchise agreement cannot recover for future profits,” but nevertheless found It’s Just Lunch to be outside Sealy. "The Sealy court expressly refused to consider whether damages for future profits would be available where, as alleged in It's Just Lunch's complaint, the franchisee terminated the agreement."

Attorney "Mal Practice"

There was a recent comment thread on "mal practice" on the ABA Franchise Forum's listserv (from whence comes the strange spelling in two words) concerning the practice of franchise law by the ignorant.

As one would expect from such a diverse crowd, the responses ranged from the learned to the mundane, from the sanctimonious to failed attempts at humor. But the point was well taken—proctologists should not perform brain surgery, and the lawyers who do house closings should not prepare franchise documents.

Proof of how bad an outcome can result from such ignorant representation is found in State of Nebraska ex rel Counsel for Discipline of the Nebraska Supreme Court v. Orr(Neb. S. Ct. January 30, 2009, CCH Business Franchise Guide ¶14,064).

As I have repeatedly said, the same problem—lack of expertise—can be extremely troubling when using generalized knowledge experts (as opposed to franchise valuation experts) to establish damages or value franchises in mediation, arbitration or litigation. See, e.g., Schaeffer and Ogulnick, “Why Valuing Franchise Businesses is Different from Valuing Other Businesses,” Institute of Business Appraisers, Business Appraisal Practice (Spring 2008).

Rescission as Punishment

A Colorado trial court in Quizno's Franchising II v. Zig Zag Restaurant Group (D. Colo. 2008) CCH Business Franchise Guide ¶14,046, used rescission as the measure of damages to punish a franchisor’s vendetta of “in-house pique” against a franchisee who was terminated as the result of one unreliable field test of the amount of meat in a sandwich.

The court held the sandwich shop franchisee was entitled to rescission-type damages in the amount of $349,797 and post-judgment interest at the rate of 24 percent for the franchisor’s wrongful termination.

Under well-settled Colorado law, contract damages are normally based on benefit-of-the-bargain. However, the court ruled that when there is a substantial breach with irreparable injury—and ordinary contract damages are inadequate, difficult, or impossible to assess—then it is appropriate to award rescission-type damages. The object was not just to return the parties to the moment before the breach, but to return them to the moment before the contract was entered into.

The franchisor's argument that it terminated the franchise because the franchisee breached its agreement by materially impairing its goodwill was rejected. To the contrary, the court held that the franchisor breached the agreement by wrongfully terminating the franchisee.