Nude Photos Not Newsworthy, Held Within Right of Publicity

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

A magazine’s unauthorized publication of 20-year-old nude photographs of a recently-murdered woman, accompanied by a brief biography, did not qualify for the newsworthiness exception to the right of publicity under Georgia law, the U.S. Court of Appeals in Atlanta has ruled.

“Newsworthiness” Exception

A publisher may be precluded by the right of publicity from publishing one’s image for purely financial gain, as in an advertisement, but when the publication is newsworthy, the right of publicity gives way to the freedom of the press, the court observed.

The biographical piece fell within the newsworthiness exception to the right of publicity. However, the brief biography could not render the nude photographs newsworthy because the publication of the biography was merely incidental to the publication of the photographs, according to the court.

The photographs were in no conceivable way related to the “incident of public concern”—the victim’s death, the court found. The publisher could not make public images that the victim did not wish made public simply because she once wished to be a model and was later murdered.

Postmortem Rights

The magazine publisher could be held liable to the victim’s estate for publishing the images without compensating the estate, the court said. The Georgia Supreme Court had stated that a person who avoids exploitation during life is entitled to have his or her image protected against exploitation after death just as much, if not more, than a person who exploited the image during life.

The murder victim’s mother, as administrator of the estate, was entitled to control when and whether images of her daughter are made public in order to maximize the economic benefit to be derived from her daughter’s posthumous fame, the court concluded.

The decision is Toffoloni v. LFP Publishing Group, LLC, CCH Advertising Law Guide ¶63,480.

Calls for Antitrust Review of Microsoft’s Search Agreement with Yahoo! Begin

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

Yesterday, Microsoft Corporation and Yahoo! Inc. announced their plans to join forces to compete with Google in the Internet search and online advertising markets. Although neither the Federal Trade Commission nor the Department of Justice Antitrust Division have commented on the 10-year partnership between Yahoo! and Microsoft, there is already reaction on Capitol Hill.

“The deal between Yahoo and Microsoft--industry giants and direct competitors in Internet advertising and search markets--warrants our careful scrutiny,” said Senator Herb Kohl of Wisconsin. Kohl, who is chairman of the Senate Judiciary Committee’s Subcommittee on Antitrust, Competition Policy, and Consumer Rights, said the ”Subcommittee is concerned about competition issues in these markets because of the potentially far-reaching consequences for consumers and advertisers, and our concern about dampening the innovation we have come to expect from a competitive high-tech industry. The implications of this proposed joint agreement will be closely reviewed by my Subcommittee."

According to the companies’ July 29 announcement, “Microsoft will now power Yahoo! search while Yahoo! will become the exclusive worldwide relationship sales force for both companies' premium search advertisers.” For 10 years, Microsoft's Bing will be the exclusive search platform for Yahoo! sites. Microsoft will acquire an exclusive 10 year license to Yahoo’s core search technologies, and Microsoft will have the ability to integrate Yahoo! search technologies into its existing web search platforms, the companies explained. Full implementation of the agreement is expected within 24 months of regulatory approval.

Although the announcement does not mention Google by name, the companies said that by “providing a viable alternative to advertisers, this deal will combine Yahoo! and Microsoft search marketplaces so that advertisers no longer have to rely on one company that dominates more than 70 percent of all search.”

Consumer Group Reaction

Consumers groups, such as Consumer Watchdog, are also calling for FTC and Justice Department scrutiny of the agreement. Consumer Watchdog is asking for a thorough review “to ensure that there are no antitrust violations and that user privacy is guaranteed.”


Justice Department Response to 2008 Yahoo!/Google Proposal

The Microsoft/Yahoo! deal comes just eight months after the Antitrust Division scuttled an Internet advertising agreement between Yahoo! and Google. On November 4, 2008, the Department of Justice announced that Yahoo! Inc. and Google Inc. abandoned their proposed advertising agreement after they were informed that the government would file an antitrust lawsuit to block the implementation of the agreement. In its announcement, the Justice Department said that, “if implemented, the agreement between these two companies accounting for 90 percent or more of each relevant market would likely harm competition in the markets for Internet search advertising and Internet search syndication.” The text of the Justice Department's November 4, 2008, announcement appears at CCH Trade Regulation Reporter ¶50,234.

FTC, Minnesota Can Proceed with Claims Against Drug Company’s Acquisition

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

The federal district court in Minneapolis will allow the Federal Trade Commission and the State of Minnesota to proceed to trial with their claims against Lundbeck, Inc., in connection with the drug company’s 2006 acquisition of a drug—NeoProfen—used to treat a potentially-deadly congenital heart defect in premature babies.

The court denied Lundbeck’s motion for summary judgment and set a set a trial date of December 7, 2009.

When it acquired NeoProfen, Lundbeck—formerly Ovation Pharmaceuticals, Inc.—had already held the rights to Indocin (injectable indomethacin)—the only drug available to treat patent ductus arteriosus (PDA) in the United States. NeoProfen (injectable ibuprofen) had not been approved by the Food and Drug Administration to treat PDA but was used in Europe to treat the disease.

Government Allegations

The FTC alleged that—by acquiring the rights to NeoProfen—Lundbeck violated Sec. 7 of the Clayton Act and Sec. 5 of the FTC Act.

Similarly, the State of Minnesota argued that Lundbeck violated Sec. 7 of the Clayton Act by acquiring the rights to NeoProfen and violated Sec. 2 of the Sherman Act by willfully maintaining its monopoly power in the market for the sale of drugs for the treatment of PDA.

Same Market?

On its motion for summary judgment, Lundbeck contended that Indocin and NeoProfen were not in the same market. It maintained that doctors distinguish Indocin from NeoProfen based on clinical and safety attributes and that doctors do not switch between the drugs based on price. The court rejected the contention.

The FTC and Minnesota responded that Indocin and NeoProfen treated the same medical condition in the same patient population. In addition, a significant number
of hospitals stocked either Indocin or NeoProfen but not both, and hospitals considered price when purchasing drugs.

Market Power

The court also rejected Lundbeck’s argument that it lacked market power because the entry of a generic manufacturer of indomethacin was imminent. The FTC and the State of Minnesota pointed to manufacturing difficulties, and there was no agreement that generic indomethacin would be in the market within the calendar year, the court explained.

The July 21 decision in FTC v. Lundbeck, Inc., appears at 2009-2 CCH Trade Cases ¶ 76,682.

Some Administration Officials Oppose DOJ's Antitrust Enforcement Efforts: News Report

This posting was written by John W. Arden.

Christine Varney, who has pledged stricter antitrust enforcement during her tenure as chief of the Department of Justice Antitrust Division, is “finding some resistance from officials within the administration,” according to a front page story in the Sunday, July 26, New York Times.

Varney has begun investigations in the telecommunications, agricultural, and pharmaceutical industries and is examining the competitive effects of the Google book search settlement agreement, according to Times reporter Stephen Labaton.

However, some of these efforts are being opposed by administration officials who “fear that the crackdown is coming at a bad time, as corporate America is reels from the recession” or believe that “larger companies and industry alliances can provide consumer benefits by making their businesses more efficient,” the story said.

One example of the differences in opinion cited by the story involved Continental Airlines’ attempt to join the Star Alliance, a global airline network. Against some of the Antitrust Division’s recommendations, the Transportation Department granted antitrust immunity to Continental to join the alliance and approved a new joint venture among four of the alliance’s members.

The Antitrust Division had filed comments indicating that the applicants failed to demonstrate the required elements for the broad immunity sought and suggesting that the Department of Transportation grant a more limited immunity.

This conflict “became so heated that the president’s chief economic adviser, Lawrence H. Summers, was called in to mediate,” the article stated.

Proposed legislation to eliminate the antitrust exemption for commercial railroads (The Railroad Antitrust Enforcement Act of 2009) also was referenced as the subject of potential disagreement. Although the proposal (H.R. 233, S. 146) is supported by senior Democrats, the administration has not taken a position.

In addition, the administration’s proposal to overhaul financial regulation rejected antitrust enforcement “as a way to reduce the size of large companies considered too big to be allowed to fail,” Labaton wrote.

The article (“Antitrust Chief Hits Resistance in Crackdown”) appears here on the New York Times website.

Lighting Manufacturer Restrained from Terminating Likely New Jersey “Franchise”

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

A manufacturer of lighting for emergency response vehicles was temporarily restrained from terminating an entity that sold and installed the manufacturer’s products, a federal district court in Camden, New Jersey, has ruled.

After deciding the threshold issue that the New Jersey Franchise Practices Act (NJFPA) was likely applicable to the dispute, the court determined that the termination likely violated both the Act’s notice requirement and its “good cause” for termination requirement. Because the other prerequisites for injunctive relief were satisfied, the requested relief was granted and a preliminary injunction hearing scheduled.

The seller brought suit against the manufacturer after the manufacturer issued it a notice of termination. In addition to seeking the order prohibiting the manufacturer from terminating the parties’ Master Distributor Agreement and compelling the manufacturer to honor its obligations under the agreement, the seller alleged common law claims, including breach of contract.

What is a Franchise?

A franchise exists under the NJFPA if: (1) there is a “community of interest” between the franchisor and the franchisee; (2) the franchisor granted a “license” to the franchisee; and (3) the parties contemplated that the franchisee would maintain a place of business in New Jersey, according to the court.

In addition, in order to meet the Act’s definition of a “franchise,” a purported franchisee was required to establish that it made sales of the alleged franchisor’s products in excess of $35,000 per year and that those sales constituted at least 20 percent of the purported franchisee’s business.

Place of Business

The seller’s complaint asserted that at its Cherry Hill, New Jersey location, it established and maintains a sales/service desk at which it (1) displays the manufacturer’s products, banners, and logos; (2) offers for sale and sells the manufacturer’s products; and (3) demonstrates and trains technicians regarding the capabilities and use of the products.

Thus, the seller would likely prove that it maintained a place of business in New Jersey, the court held.

Trademark License

The seller was likely to prove that it was granted a license to use the manufacturer’s trademarks and trade name, the court determined.

The manufacturer contended that it had not granted the seller a license as contemplated by the NJFPA; rather, it merely granted the seller limited permission to sell a brand name product.

However, the manufacturer authorized the seller to use its mark solely for the purpose of promoting the manufacturer’s products in accordance with the parties’ agreement and required the seller to maximize the sale and use its best efforts to promote, introduce, demonstrate, and solicit orders for, and sell such products, and to protect and promote the good name of the manufacturer. Therefore, the license granted to the seller was more than just a limited license given to any retailer of a product, the court reasoned.

Community of Interest

The seller was likely to prove that it had a “community of interest” with the manufacturer under the meaning of the NJFPA, the court decided. Case law explained that a community of interest under the NJFPA existed when the terms of the parties’ agreement or the nature of the franchised business required the licensee to make a substantial investment in goods or skill that would be of minimal utility outside the franchise.

The seller’s argument that it had a community of interest with the manufacturer could be boiled down to a single sentence in its brief, indicating that, without the manufacturer’s products, the seller would have no business, the court noted.

The seller’s complaint asserted that, since 2001 when the parties’ relationship of over eight years began, the seller had invested in common marketing and promotional campaigns with the manufacturer pursuant to their agreement. Further, the seller alleged that its efforts resulted in converting a significant number of customers to the products of the manufacturer from the products of competing manufacturers. Those efforts would only inure to the benefit of the manufacturer if the parties’ agreement was terminated, according to the court.

Moreover, the agreement clearly required the seller to make such investments. It required the seller to maintain both inside and outside sales forces, use its best efforts to promote and sell the manufacturer’s products, and to offer promotions on those products at least twice each year.

Minimum Sales Threshold

The NJFPA’s minimum sales threshold for a “franchise” was also likely satisfied by the parties’ relationship, the court held. Under the NJFPA, an entity was required to establish that it made sales in excess of $35,000 per year of a franchisor’s products and that those sales accounted for at least 20 percent of the entity’s overall business to qualify the entity as a franchisee entitled to the Act’s protections.

A declaration submitted by the seller stated that in the preceding 12 months, the seller’s sales of the manufacturer’s products amounted to more than $1.9 million, and those sales represented approximately 37 percent of the seller’s overall business.

Because the seller had thus demonstrated that it would likely satisfy all of the Act’s requirements for a franchise, the NJFPA applied to the parties’ dispute.

Further details of the court’s ruling in Emergency Accessories & Installation, Inc. v. Whelen Engineering Co., Inc. will appear in the CCH Business Franchise Guide.

Transportation Department Provides Auto Dealers with Details on Cash-for-Clunkers Program

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


The Department of Transportation’s National Highway Traffic Safety Administration (NHTSA) issued its final rules today for the Cash-for-Clunkers program as required by the Consumer Assistance to Recycle and Save Act of 2009 (CARS Act).

The program is designed to stimulate new car sales and to assist auto dealers who have been hit hard by the economic downturn, as well as the bankruptcies of Chrysler and General Motors.

Generally, the program enables consumers to receive a credit towards a new vehicle, with a manufacturer’s suggested retail price of $45,000 or less, when they trade in a vehicle from model year 1985 or later, with a combined fuel economy, as determined by the Environmental Protection Agency, of 18 miles per gallon or less. The program covers eligible transactions from July 1, 2009, through November 1, 2009.

Dealer’s Obligations Under Implementing Rules

The rules establish the process by which dealers may participate in the program. Dealers wishing to participate must register to do so electronically. The required registration data includes identifying information and the identity and contact information for a designated CARS contact person.

Once registered, a dealer that receives an eligible trade-in vehicle must submit an application for reimbursement to NHTSA. For each individual sale, dealers must submit dealer data, new vehicle purchaser data, trade-in vehicle data, and new vehicle data. In addition, dealers must provide information establishing that the trade-in vehicle is eligible under the program.

The dealer must also certify to the Secretary of Transportation, that the vehicle will be transferred to a facility that will crush the vehicle. The dealer is required to disable the vehicle’s engine prior to transferring the vehicle to the disposal facility and provide a certification to the agency that it has done so at the time the dealer submits its request for reimbursement.

One additional obligation imposed on dealers, not specifically stated in the CARS Act, is a requirement that a dealer obtain clear title to the trade-in vehicle. A dealer is prohibited from submitting an application for reimbursement until title to the trade-in vehicle, free of all liens and encumbrances, is transferred to it. The rules state procedures to follow in the few states that do not issue titles in transactions involving some older vehicles.

Civil Penalties

To deter fraud, the rules impose civil penalties for violations of the CARS Act. Each violation can result in a civil penalty of up to $15,000.


The agency has established a website, providing information about the program, including instructions on how to determine if a vehicle is an eligible trade-in vehicle, how to participate in the program, and how to determine if a dealer is participating in the program, at http://www.cars.gov.

Insurer Escapes RICO Liability for Refusing to Replace Safety Belts

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


An individual could not proceed with a RICO claim against his automobile insurer, Allstate Indemnity Company, for refusing to inspect and replace, as a matter of policy, the collision-damaged safety belts in his automobile, the federal district court in Sacramento has ruled. Although the individual sufficiently alleged a RICO enterprise (Allstate Insurance Company), he failed to adequately allege the insurer's participation in the enterprise. Nor did he sufficiently allege mail and wire fraud as RICO predicate acts.

Enterprise

The insurer argued that the RICO enterprise (Allstate Insurance) was not distinct from the RICO “person” (Allstate Indemnity) because “a parent corporation is not distinct from its subsidiary for purposes of a RICO §1962(c) claim.” The court disagreed, however, and declared that a corporate parent was sufficiently distinct from its subsidiary. Although several federal appellate courts had ruled otherwise, neither the Ninth Circuit nor the U.S. Supreme Court had addressed the issue. In a similar case, however, the U.S. Supreme Court had ruled that a corporate owner or employee was distinct from the corporation itself because the corporation was a “legally different entity with different rights and responsibilities due to its different legal status.” In addition, the Ninth Circuit had ruled that the owner of a sole proprietorship was distinct from the proprietorship itself.

The ruling of a sister court from the Southern District of California, which found that a corporate parent was not per se distinct from its subsidiary and that a plaintiff must therefore allege “something more” than the mere fact that a parent and its subsidiary were legally separate entities, was rejected. Because the RICO statute had to be liberally construed to effectuate its remedial purpose, the court concluded that allegations of “something more” were not required.

Participation in Enterprise

In order state a RICO claim under §1962(c), a plaintiff must allege that the defendant participated in the conduct of an enterprise’s affairs, the court explained. More specifically, the plaintiff must allege that the defendant participated in the operation or management of an enterprise such that the defendant had some part in directing the enterprise’s affairs.

In this case, the individual failed to allege any facts pertaining to participation. Nevertheless, he argued that the operation or management of an enterprise was a question for the jury to decide. This argument was irrelevant, in the court's view, because the operation or management of an enterprise must first be alleged, and the individual failed to do that.

Mail, Wire Fraud

Because the individual failed to identify the communications that constituted mail and wire fraud, his allegations of predicate activity were deficient, according to the court. A pattern of racketeering activity was lacking, as well.

The June 30, 2009, decision in Robert Watts v. Allstate Indemnity Co., ED Cal., Civ. S-08-1877 LKK/GGH, will appear at CCH RICO Business Disputes Guide ¶11,700.

Advertisers' Use of Consumer Testimonials Debated Before Senate Subcommittee

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

A Senate subcommittee heard testimony today on a proposal by the Federal Trade Commission (FTC) to remove a safe harbor that has allowed advertisers to use consumer testimonials to tout weight loss and other products, even when the experience of the consumer is not typical. FTC Bureau of Consumer Protection Director David Vladeck delivered the Commission’s testimony before the Senate Commerce, Science, and Transportation Committee’s Subcommittee on Consumer Protection, Product Safety, and Insurance.

Last November, the Commission proposed revising its guides for endorsement and testimonial advertising practices to remove the “safe harbor” for disclaimers of typicality. It published the notice of proposed changes and request for comments on November 28.

Targeted by the revisions are testimonials, often used to promote weight-loss products, which usually include a disclaimer, such as: “Your results may vary.”

Vladeck said that these disclaimers do “not adequately inform consumers that the reported weight losses were, at best, outliers or extreme cases.”

As revised, the guides would call on advertisers using non-typical testimonials to make clear and conspicuous disclosures of generally expected results. The disclosures would level the playing field, according to Vladeck. Advertisers could not use testimonials with a disclaimer to avoid substantiation of their claims.

Industry Reaction

Industry representatives spoke out against the proposed changes to the guides, which have been in effect since 1980.

Jon Congdon--the president and co-founder of Product Partners LLC, a leading provider of health and wellness solutions sold under the brand name Beachbody—expressed “fear that the Commission’s proposal will have significant unintended and negative consequences for marketers and consumers.”

Congdon suggested that the Commission follow the “so-called 'net impression' rule in which they look at any advertisement, determine what it means to reasonable consumers, and then require substantiation of the claims that arise naturally from a commonplace interpretation of the advertisement.” This would allow the Commission to go after a marketer that uses a testimonial, even with a disclaimer, that gives a misleading impression of what the product or service is capable of doing, according to Congdon.

Greg Renker, a co-founder of Guthy-Renker--one of the world’s largest direct response television companies—supports clear disclosures under the existing guides. According to Renker it may be “difficult or impossible to say what the 'average' experience of a consumer” might be to satisfy the proposed guide.

Consumer Organization Support

Sally Greenberg, Executive Director of the National Consumers League (NCL), said that her consumer organization “fully supports the FTC’s review of and proposed changes to the Guides.” The NCL also supports the FTC’s efforts to require bloggers to disclose their relationship with companies that pay them to endorse a product or service.


The Guides Concerning the Use of Endorsements and Testimonials in Advertising appear at CCH Trade Regulation Reporter ¶39,038.

Arbitration Firm Agrees to Settle False Advertising Case

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


The National Arbitration Forum—the country’s largest administrator of credit card and consumer collections arbitrations—has agreed to get out of the business of arbitrating credit card and other consumer collection disputes, in order to settle a false advertising, consumer fraud, and deceptive trade practices action filed by Minnesota Attorney General Lori Swanson.

The Forum allegedly misrepresented its independence and hid from consumers and the public its extensive ties to the collection industry. The Forum is named as the arbitrator of consumer disputes in tens of millions of credit card agreements.

According to Attorney General Swanson’s complaint, the Forum allegedly told consumers and the public that it is independent and neutral, operates like an impartial court system, and is not affiliated with and does not take sides between the parties. The Forum allegedly worked behind the scenes, however, to convince credit card companies and other creditors to insert arbitration provisions in their customer agreements and then appoint the Forum to decide the disputes.

The complaint also alleged that the Forum has financial ties to the collection industry. The company allegedly arbitrated 214,000 consumer arbitration claims in 2006, nearly 60 percent of which were filed by laws firms with which the Forum is linked through ties to a New York hedge fund.

“The National Arbitration Forum remains committed to consumer arbitration as the best and most affordable option for consumers to resolve disputes quickly and efficiently. However, the FORUM lacks the necessary resources to defend against increasing challenges to arbitration on all fronts, including from state attorneys general and the class action trial bar,” said Mike Kelly, CEO of Forthright, which provides administrative services for the Forum.

Pending Federal Legislation

Legislative proposals pending in both houses of Congress threaten to eliminate pre-dispute arbitration, according to the Forum’s press release announcing the settlement. The Arbitration Fairness Act of 2009 (S. 931/H.R. 1020) would invalidate every pre-dispute contractual arbitration agreement that is part of a consumer, financial or franchise dispute. The Fairness in Nursing Home Arbitration Act (S. 512/H.R. 1237) would eliminate pre-dispute mandatory arbitration in all nursing home contracts. Legislation before the House to create a new Consumer Financial Protection Agency (H.R. 3126) would provide regulatory authority to restrict or eliminate consumer arbitrations.

In announcing the settlement on July 20, Attorney General Swanson said that she had accepted an invitation from Congressman Dennis Kucinich, Chairman of the Congressional Committee on Oversight and Government Reform, to testify before the Committee. She said she would ask Congress to prohibit the use of mandatory pre-dispute arbitration clauses in consumer contracts.

“The playing field is tilted against the ordinary consumer when credit card companies bury unfair terms like forced arbitration clauses in fine print contacts. Congress should change that,” said Swanson.

Labor Union Could Not Bring Action for Members Under California Unfair Competition Law

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


A labor union that did not suffer an actual injury could not bring a representative action on behalf of aggrieved employees under the California Unfair Competition Law (UCL), according to the California Supreme Court.

In an action against an employer for violations of the Labor Code, and in turn the UCL, injured union members and employees assigned their rights to the labor union. The legal concept of assignment refers to the transferability of all types of property, including causes of action. The employer successfully argued that under the UCL an assignment of a cause of action cannot confer standing on an uninjured labor union.

Standing

The union did not have standing to bring the UCL claim against the employer because it did not suffer an actual injury, according to the court. In 2004, California voters passed Proposition 64, which required private plaintiffs to show that they had lost money or property as a result of the alleged unfair competition.

Allowing a non-injured assignee of a UCL claim to take the place of the actual, injured employee would violate Proposition 64's standing requirement, according to the court. Therefore, the injured employees could not confer standing to the uninjured labor union.

Associational Standing

The court rejected the labor union's argument that Proposition 64 incorporated the federal doctrine of associational standing. The doctrine applied only when the plaintiff association has not itself suffered actual injury but is seeking to act on behalf of its members that did sustained injury.

The court concluded that associations suing under the UCL were not exempt from the statute's express standing requirements and that Proposition 64 did not incorporate the associational standing doctrine.

The June 29, 2009, decision is Amalgamated Transit Union v. The Superior Court of Los Angeles County, S151615, CCH State Unfair Trade Practices Law ¶31,845.

House-Passed Appropriations Bill Includes Measure to Resurrect GM, Chrysler Franchises

This posting was written by John W. Arden.

The U.S. House of Representatives yesterday passed a general financial services and appropriations bill that includes a provision attempting to restore automobile franchises terminated pursuant to the bankruptcy plans of General Motors and Chrysler Corp.

The Financial Services and General Government Appropriations Act, 2010 (H.R. 3170) cleared the House of Representatives last night by a 219 to 208 vote.

Appended to the general appropriations bill were two provisions (Sec. 245 and Sec. 246) that:

(1) Prohibit the use of any appropriated funds to obtain a financial interest in an automobile manufacturer “that deprives an automobile dealer of its economic rights under a dealer agreement” and does not assume each dealer agreement that is valid, pre-existing, and not lawfully terminated and

(2) Require bankrupt automobile manufacturers in which the federal government has an ownership interest—and their successor companies—to enter into a new dealership agreement with dealers having a valid agreement at the time of the bankruptcy filing.

White House Opposition

The dealership measure, authored by U.S. Rep. Steven C. LaTourette (R-Ohio), was left in the bill, despite strong opposition from the White House. In a July 15 statement of administrative policy, the Obama Administration supported passage of the bill, but “strongly opposes the language in the bill that attempts to restore prior Chrysler and General Motors (GM) franchise agreements.”

According to the statement, “the decision by Chrysler and GM to rationalize their dealer networks was a critical part of their overall restructuring to achieve long-term viability in order to save jobs in the long run, and to improve the prospects for the company’s repayment of the substantial taxpayer investments. Without the significant steps these automakers have taken to revamp their operations, the companies would have failed—imperiling ever GM and Chrysler dealer in the country.”

As previously reported, GM plans to reduce the number of its dealerships by 2,641—from 6,246 to 3,655—by the end of 2010. The U.S. Bankruptcy Court for the Southern District of New York ruled on June 9, 2009, that Chrysler could immediately terminate 789 Chrysler, Dodge, and Jeep franchises—about a quarter of its dealership base.

Job Losses

In a July 16 news release, Rep. LaTourette criticized President Obama’s Auto Task Force for encouraging automobile companies to terminate dealers, stating that the closure of GM and Chysler dealership would cause the loss of approximately 200,000 jobs.

“Under these policies the only jobs that will be stimulated will be clerks at the unemployment offices in the country,” said LaTourette.

The representative cast doubt on the financial necessity of closing dealerships. “The auto companies have never been able to demonstrate that the dealers are a drag on their bottom line,” he remarked. “I think many agree that the tramping of state franchise laws is wrong and many have no stomach for the way these dealers were treated.”

Further details regarding H.R. 3170 appear here at the Library of Commerce’s Thomas web site.

Agreement with State Attorneys General

In a related matter, the attorneys general of 30 states reached an agreement with GM regarding protections afforded under state laws to dealers and consumers. The attorneys general had filed an objection to the GM’s termination of 2,641 dealers in U.S. Bankruptcy Court for the Southern District of New York, contending that the bankruptcy plan would permit GM to ignore state motor vehicle anti-termination statutes.

The agreement, which was formally ratified by the bankruptcy court on July 5, required New GM to comply with state franchise and dealership laws going forward, honor warranties and comply with state lemon laws, and honor product liability claims for acceding involving cars sold before the bankruptcy. (See Trade Regulation Talk, July 8, 2009).

Class Action Approved in Vertical Price Restraint Case Against Babies ‘R’ Us, Manufacturers

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

The federal district court in Philadelphia yesterday granted class certification in an action against retail chain Babies ‘R’ Us, Inc. for allegedly conspiring with manufacturers to inflate prices for certain baby products in violation of federal antitrust law.

The action was brought by 13 consumers, who contended that Babies ‘R’ Us conspired with the manufacturers—such as Peg Perego USA, Inc. and BabyBjorn, AB—also named as defendants in the suit to restrict competition in the markets for strollers, baby carriers, and other baby products, from Internet discounting.

Protection from Internet Discounters

According to the complaining consumers, Babies ‘R’ Us demanded protection from Internet discounters and entered into agreements with the suppliers to combat the problem. As a result, the manufacturers purportedly adopted vertical price restraints and enforced these restraints against Internet retailers. It was also alleged that the manufacturers gave preferential treatment to Babies ‘R’ Us—their biggest customer.

The court certified subclasses that included “Babies ‘R’ Us customers who bought a certain brand and type of baby product during a certain period of time—roughly from 1999 to 2006—because the case involved separate alleged conspiracies. The court did, however, tweak some of the subclass definitions and dismiss some of the claims.

Dismissal of Some Claims

A claim against Kids Line LLC, a manufacturer of baby bedding and accessories, was dismissed without prejudice because the plaintiffs lack standing. None of the plaintiffs bought bedding set from Babies ‘R’ Us. Further, one named plaintiff was dismissed because the subclass for Peg-Perego products was limited to strollers and the named plaintiff bought only a Peg-Perego high chair. Another named plaintiff was dismissed because she bought her BabyBjorn carrier before the subclass period began. She thus fell outside the subclass.

Impact of “Watershed Decisions”

The court recognized “two watershed decisions” that were significant hurdles for the plaintiffs. The first was Leegin Creative Leather Products, Inc. v. PSKS, Inc., 2007-1 CCH Trade Cases ¶ 75,753, 127 S.Ct. 2705 (2007), where the Supreme Court declared that vertical price restraints are not per se illegal anymore but instead are evaluated under a rule of reason standard. Leegin did not preclude the class claims. The court decided that elements of the plaintiffs’ antitrust claims were “capable of proof at trial through evidence that is common to the class rather than individual to its members” as required by the second watershed decision—In re Hydrogen Peroxide Antitrust Litig., 2008-2 CCH Trade Cases ¶76,453, 552 F.3d 305 (3d Cir. 2008).

The Third Circuit's decision in the Hydrogen Peroxide case requires district courts to conduct a rigorous analysis when considering whether to certify a proposed class. According to the district court, before certifying a class courts must make a definitive determination that the requirements of Rule 23 of the Federal Rules of Civil Procedure.

Requirements of Federal Rule of Civil Procedure 23

Despite the tough standard adopted by the Third Circuit, the court concluded that the plaintiffs carried their burden under the numerosity, commonality, typicality, and adequacy requirements of Rule 23(a) and the predominance requirement of Rule 23(b)(3) of the Federal Rules of Civil Procedure. Under Rule 23(b)(3), the plaintiffs showed “that the questions of law or fact common to class members predominate over any questions affecting only individual members.” The court found predominance satisfied for each element of the plaintiffs' antitrust claims.

The plaintiffs also offered a viable method whereby damages can be reasonably estimated based on common evidence, as required by Hydrogen Peroxide.

Notice to Consumers

The plaintiffs were ordered submit a proposed form of notice to class members by August 14, explaining their rights. The defendants will have to file objections to the proposed form of notice by August 28.

The decision in Carol McDonough v. Toys ‘R’ Us, Inc., Civil Action No. 06-0242, will appear at 2009-2 CCH Trade Cases ¶ 76,675.

EU Privacy Law Applies to Social Networks Headquartered Outside of Europe

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

European data protection law applies to online social networking services (SNS), such as Facebook and MySpace, even if their headquarters are located outside Europe, according to the Article 29 Data Protection Working Party.

In an opinion adopted on June 12, 2009, the Working Party stated that SNS operators and, in many cases, third-party application providers are "data controllers," for purposes of European law.

As data controllers, SNS operators should disclose the ways they intend to process users' personal data, as well as the risks inherent from uploading data onto the SNS. Marketing activities by SNS operators must comply with the EU's Data Protection and ePrivacy Directives, the Working Party said.

Adoption of Security and Privacy Practices

The Working Party urged SNS operators to adopt robust security practices and privacy-friendly default settings, with particular care taken regarding the processing of the personal data of children and minors. A tool for lodging complaints regarding privacy and protection of personal data should be made available to members and non-members on the services' homepages.

The Working Party is an independent advisory body on data protection and privacy, composed of representatives from the national data protection authorities of the EU Member States, the European Data Protection Supervisor, and the European Commission.

Text of the Working Party's opinion on online social networking appears at CCH Privacy Law in Marketing ¶60,346.

Justice Department Calls “Reverse Payments” in Patent Settlements Presumptively Illegal

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

A patent litigation settlement involving a “reverse payment” to the alleged drug patent infringer in exchange for its agreement to withdraw its challenge to the patent and delay bringing its generic drug to market is presumptively unlawful under the antitrust law, according to a July 6 brief filed by the Department of Justice with the U.S. Court of Appeals in New York City.

The brief was filed in an action challenging a settlement agreement between drug maker Bayer AG and the generic defendant Barr Laboratories, Inc. regarding the antibiotic drug ciprofloxacin. The case is Arkansas Carpenters Health and Welfare Fund v. Bayer, AG, 05-2851-cv(L).

Alignment of Antitrust Division, FTC Positions

The Justice Department’s brief reflects a move toward an alignment of the Antitrust Division and FTC positions on reverse payment settlements.

In its brief, the Justice Department cites an FTC opinion, In the Matter of Schering-Plough Corp. (CCH Trade Regulation Reporter ¶15,525), which states that “the possible existence of a so-called ‘reverse payment’ raises a red flag that . . . mandates a further inquiry.”

That opinion was later vacated by the U.S. Court of Appeals in Atlanta in Schering-Plough Corp. v. FTC (2005-1 Trade Cases ¶74,716), which concluded that the FTC failed to establish that settlements of patent infringement litigation restrained trade.

When the FTC asked for U.S. Supreme Court review of the federal appellate court’s decision in 2006, the Solicitor General recommended that the Court deny the petition for review, saying that the case did not present “an appropriate opportunity . . . to determine the proper standards for distinguishing legitimate patent settlements, which further the important goals of encouraging innovation and minimizing unnecessary litigation, from illegitimate settlements that impermissibly restrain trade in violation of the antitrust laws.”

Text of the Justice Department brief appears here on the Department of Justice Antitrust Division website.

Monopoly Leveraging Claims Against Abbott Laboratories Rejected

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

HIV patients and their medical plans purchasing Norvir—a drug made by Abbott Laboratories that “boosts” the effectiveness of protease inhibitors used to fight the disease—failed to sufficiently allege monopoly leveraging claims against the pharmaceutical company, the U.S. Court of Appeals in San Francisco has ruled.

A decision of the federal district court in San Francisco (2008-1 Trade Cases ¶76,164), allowing the antitrust claims to proceed to trial, was reversed.

The patients and medical plans contended that Abbott leveraged its monopoly over Norvir to attempt to monopolize the market for its “boosted” protease inhibitor, Kaletra, which consisted of Abbott’s protease inhibitor compound lopinavir combined in a single pill with a boosting does of ritonavir (the generic name for Norvir).

It was alleged that Abbott dramatically increased the price of Norvir, but not the price of Kaletra, after the Food and Drug Administration approved the marketing of Norvir as a booster to be taken along with protease inhibitor sold by Abbott’s competitors. The purported effect was to raise the total cost to the patient of boosted protease inhibitor therapies provided by the competitors.

Refusal to Deal

The monopoly leveraging claimed failed, however, because the patients and medical plans did not allege a refusal to deal at the booster level (monopoly market) or below cost pricing at the boosted level (second market), as required by the U.S. Supreme Court’s decision in Pacific Bell Telephone Co. v. linkLINE Communications, Inc. (2009-1 Trade Cases ¶76,500). Abbot’s conduct was the functional equivalent of the price squeeze found unobjectionable in linkLINE, in the court’s view.

Settlement

The parties entered into a settlement agreement after the district court denied Abbott’s motion for summary judgment on the antitrust claims. The terms of the settlement depended on the outcome of the appeal.

Under the settlement agreement, Abbott was to take an interlocutory appeal on condition that, if the case ended up being dismissed, Abbott would pay no more than $10 million into a settlement fund. If the plaintiffs had prevailed, Abbott would have been required to pay up to an additional $17.5 million depending on the degree of success.

The July 7 decision is Doe v. Abbott Laboratories, 2009-1 Trade Cases ¶76,671.

Consumer Contract Arbitration Clause, Class Action Ban Held Unenforceable

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

Computer seller Dell, Inc. could not enforce an arbitration clause and contractual bar against class action claims in a suit brought by computer purchasers asserting that Dell imposed charges falsely characterized as sales tax in violation of the Massachusetts consumer protection statute, the Massachusetts Supreme Judicial Court has ruled.

Dell’s consumer contract provision compelling individual arbitration was unenforceable because it was contrary to the fundamental Massachusetts public policy favoring consumer class actions under the statute, the court held. Because the purchasers failed to allege facts sufficient to state a violation of the statute, however, their claims were dismissed with leave to amend.

Aggregation of Small Claims

The right to a class action in a consumer protection case was of particular importance when, as here, aggregation of small claims was likely the only realistic option for pursuing a claim, the court observed. The two named plaintiffs claimed damages of only $13.65 and $215.55, respectively.

Allowing companies that do business in Massachusetts to insulate themselves from small value consumer claims would create the potential for countless customers to be without an effective method to vindicate their statutory rights—a result clearly at odds with public policy, the court said.

Choice of Law

Massachusetts law was applicable despite Dell’s contractual choice of Texas law, the court determined. The court relied on cases including Brazil v. Dell, Inc. (ND Cal. 2007) CCH Advertising Law Guide ¶62,652, in which California's interest in protecting its citizens from “take it or leave it” agreements that incorporate one-sided protections was held to outweigh Texas's interest in “protecting its resident business's expectations of consistent legal standards.”

Enforcement of the contractual choice-of-law provision was declined because Texas law likely would result in the enforcement of the class action prohibition, leaving Massachusetts consumers and businesses without an effective remedy for small claims—a result contrary to the fundamental policy of the Commonwealth, the court explained.

Federal Preemption

The Federal Arbitration Act did not preempt the ruling that the arbitration agreement was unenforceable under Massachusetts law, the court added. Under the U.S. Supreme Court's decision in Doctor’s Associates, Inc. v. Casarotto, CCH Business Franchise Guide ¶10,915, 517 U.S. 681, 687 (1996) and Massachusetts precedent, generally applicable contract defenses may be applied to determine the validity of an arbitration agreement.

Severability

The contracts at issue did not contain a severability or savings clause. The court agreed with the Supreme Court of New Mexico, which had held, in Fiser v. Dell Computer Corp. (2008) CCH Advertising Law Guide ¶63,085, that a similar class action waiver was not severable because the class action bar was “part of the arbitration provision” and “central to the mechanism for resolving the dispute between the parties.”

Consumer Protection Law Claim

The purchasers did not state a violation of the consumer protection statute by claiming that Dell imposed charges falsely characterized as sales tax for optional service contract when no tax was due, the court ruled. The purchasers failed to allege that Dell did not remit the tax it collected to the Commonwealth, and the consumer protection statute had been held inapplicable to actions motivated by legislative mandate.

The court granted the purchasers leave to amend their complaint to allege facts to support their implied theory that Dell collected tax on sales of services contracts as part of an attempt to transfer the tax burden on repair parts from the repairer—whether Dell or a third party—to the customer.

The July 2 opinion in Feeney v. Dell Inc. will be reported in CCH Advertising Law Guide.

IP Addresses Not “Personally Identifiable Information”

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

Microsoft’s installation of software onto consumers’ computers that sent information about the computers to Microsoft—including the computers’ Internet Protocol (IP) addresses—did not violate the end user license agreement (EULA) entered into when consumers installed the Windows XP operating system, the federal district court in Seattle has ruled. The software—called “Windows Genuine Advantage”—was used to verify the validity of a user’s version of Windows XP.

The EULA prohibited Microsoft from transmitting “personally identifiable information” from the user’s computer to Microsoft without the user’s consent. One consumer, on behalf of a purported class of similarly situated consumers, asserted that collection of IP addresses violated this prohibition.

An IP address is a number that enables data to be transmitted via the Internet to a particular computer. Computers are assigned IP addresses by users’ Internet service providers. Some IP addresses are “static,” and remain constant, but many are “dynamic,” and change each time the user connects to the Internet.

An IP address is not personally identifiable information (PII), the court said. In order for information to be “personally identifiable,” it must identify a person. An IP address, however, identifies a computer, and it can only do that after matching the IP address to a list of particular Internet service provider’s subscribers. Thus, Microsoft’s IP addresses did not breach the EULA, the court concluded. Summary judgment in Microsoft’s favor was granted.

Further details on Johnson v. Microsoft Corp. , WD Wash., Case No. C06-0900RAJ, June 23, 2009, will appear in an upcoming issue of CCH Privacy Law in Marketing.

“Protections”

Many privacy laws and regulations provide greater protection to PII than non-PII, with the greatest degree of protection afforded to “sensitive” consumer information, such as a consumer’s Social Security number, financial account numbers, and medical history.

Federal Trade Commission Staff Report

A February 2009 Federal Trade Commission staff report (Self-Regulatory Principles for Online Behavioral Advertising, CCH Privacy Law in Marketing ¶60,300; CCH Trade Regulation Reporter ¶50,240) stated that the advertising industry has traditionally considered IP addresses to be non-PII, but new technologies are likely to make it easier to link IP addresses to specific individuals.

European Union Privacy Directives

Some European Union privacy and data protection officials have taken the position that IP addresses are “personal data,” for purposes of EU privacy directives.

In May 2008, the Article 29 Working Party—an independent advisory body on data protection and privacy—noted that “in most cases—including cases with dynamic IP address allocation—the necessary data will be available to identify the user(s) of the IP address.”

Therefore, the Working Party said, “unless [an] Internet Service Provider is in a position to distinguish with absolute certainty that the data correspond to users that cannot be identified, it will have to treat all IP information as personal data, to be on the safe side” (Article 29 Data Protection Working Party, Opinion on the review of the Directive 2002/58/EC on privacy and electronic communications, CCH Privacy Law in Marketing, ¶60,211).

In a February 2009 opinion, the Working Party said, “IP addresses relate to identifiable persons in most cases. Identifiability means identifiable by the access provider or by other means, with the help of additional identifiers such as cookies or in interactions with internet services with which the data subject is identified explicitly or implicitly” (Article 29 Data Protection Working Party, Opinion 1/2009 on the proposals amending Directive 2002/58/EC on privacy and electronic communications, CCH Privacy Law in Marketing, ¶60,297).

GM Reaches Agreement with State AGs Regarding Compliance with State Dealer Laws

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

The attorneys general (AGs) of 30 states have reached an agreement in principle with GM regarding protections afforded under state laws to dealers and consumers. The agreement requires New GM, a newly formed entity created by the U.S. Treasury, to comply with state laws governing the relationships between dealers and manufacturers. The agreement was formally ratified by the U.S. Bankruptcy Court for the Southern District of New York on July 5, and additional states are expected to participate.

The AGs had filed objections to GM’s plan to reduce the number of its dealerships by 2,641--from 6,246 to 3,605--by the end of 2010. The AGs contended that the bankruptcy plan would permit GM to ignore state statutes that protect dealerships from unfair terminations and other oppressive conduct by motor vehicle manufacturers.

Nebraska Attorney General Jon Bruning, who also serves as President of the National Association of Attorneys General, stated about the agreement:

"We are pleased GM was willing to work with the states to resolve our concerns so that consumers, dealers and the environment will continue to receive the protection of state law." The initial positions of GM and the Treasury Auto Task Force would have left thousands of GM customers and dealers without the protections afforded to them under state law. "I’m confident the concessions given to the states, while of great benefit, won’t interfere with the ability of new GM to function as a viable company nor should they add to the burden placed on taxpayers by the Treasury’s purchase of GM."

Texas Attorney General Greg Abbott called the bankruptcy court's decision a significant victory. In a July 6 statement, he added "the federal court ruled that franchise agreement disputes between General Motors and its Texas dealers will be decided by the Texas Department of Transportation, not a federal bankruptcy court 1,300 miles away in New York City."

GM Concessions

Specifically, among concessions sought and received by the state AGs, GM has agreed to:

(1) acknowledge that all dealers staying with the new GM will be protected by state franchise and dealer laws;

(2) accept responsibility for compliance with environmental laws for new company facilities and expand funds available to cleanup sites that will stay with the old GM;

(3) honor express warranties and comply with state lemon laws;

(4) accept responsibility for payment of state tax obligations;

(5) comply with state privacy laws, including state Do Not Call laws; and

(6) honor products liability claims for accidents occurring after the closing date that involve cars sold before bankruptcy.

Senate Antitrust Subcommittee Holds Hearing on Bowl Championship Series

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

The Senate Judiciary Committee's antitrust subcommittee held a hearing today on the fairness and antitrust implications of college football’s Bowl Championship Series (BCS). Senator Orrin Hatch (Utah), the Ranking Member on the antitrust subcommittee and a vocal critic of the BCS system, presided over the hearing, entitled “The Bowl Championship Series: Is it Fair and In Compliance with Antitrust Law?”

The BCS attempts to match the No. 1 and No. 2 teams within the bowl system to determine a college football champion. It also determines matchups in four other bowl games.

Some congressional lawmakers are calling for revising the system for determining a college football champion team. It has been suggested that a playoff system replace the way in which conferences and teams are selected for BCS bowl games.

University of Nebraska Chancellor Harvey Perlman, chair of the BCS Presidential Oversight Committee, defended the BCS system at the hearing. Perlman rejected the concept of a National Football League-style playoff system for determining the college football champion.

Also testifying was Michael Young, president of the University of Utah, whose 2008 undefeated Utes were denied an opportunity to play in the BCS national championship game. Young said that off-the-field agreements should not trump on-the-field performance.

Barry Brett, a partner in the New York City office of Troutman Sanders, represented the Mountain West Conference at the hearing. The Mountain West Conference, which includes the University of Utah, is one of the conferences that does not get an automatic bid to participate in the bowl games. Brett testified that the BCS system violates Secs. 1 and 2 of the Sherman Act. He contended that it limits output and consumer choice.

William Monts III, a partner at Hogan and Hartson in Washington, D.C., said that there was no output restriction resulting from the BCS system. He argued that a court reviewing the BCS systems under a rule of reason analysis would find that the system's several procompetitive benefits would outweigh the alleged anticompetitive, effects. Monts suggested that without the BCS, the old bowl system would return.

Telephone Consumer Protection Act Covers Text Messages Sent to Cell Phones

This posting was written by Jody Coultas, Editor of CCH Telemarketing Law Guide.

The Ninth Circuit Court of Appeals, in finding that the Telephone Consumer Protection Act (TCPA) applied to text messages, reinstated a class action against Simon & Schuster filed by a cell phone user who received an unsolicited text message from the company.

The cell phone user filed a TCPA class action after receiving a text message from Simon & Schuster, advertising its publication of a new novel. Simon & Schuster did not actually send the text message, but outsourced the promotional campaign to another company, which obtained a list of individual cell phone numbers from an agent of Nextones. The agent was authorized by Nextones to license the numbers of its subscribers.

The cell phone user had filled out a form stating that Nextones affiliates and brands could send promotional information. The list, in the form of a computer file, was sent to a service company that actually sent out the text messages to the wireless carriers for ultimate delivery to subscribers.

Automatic Telephone Dialing System

The district court granted Simon & Schuster summary judgment on the TCPA claim, finding that Simon & Schuster had not used an automatic telephone dialing system (ATDS) in violation of the TCPA and the cell phone user consented to receiving the message. The TCPA prohibits making calls to cellular telephones using an ATDS unless the call is for emergency purposes or it is made with the prior express consent of the telephone owner.

A genuine issue of material fact existed as to whether the system Simon & Schuster used was an ATDS, according to the appellate court. In order to determine whether a device is an ATDS, the court must determine whether the equipment had the capacity to store or produce telephone numbers to be called, using a random or sequential number generator.

The focus is on whether the system had the capacity to store, produce, or call randomly or sequentially generated numbers, not whether it actually did so. Because there was a question as to whether the system in this case had the requisite capacity, the appellate court remanded the case for further proceedings.

Text Message as “Call”

Based on a review of the language and history of the TCPA and Federal Communication Commission (FCC) rules, the Ninth Circuit found that a text message is a call within the meaning of the TCPA.

Because the TCPA was silent on the issue at hand, the court looked to the FCC because it was the agency with the authority to make rules and regulations to implement the TCPA. The FCC had previously determined that a text message falls within the meaning of “call” in the statute. Therefore, the court found that the text message in this case could be considered a call under the TCPA.

Consent to Call

Finally, the district court erred in finding that the cell phone user expressly consented to receiving the text message. Express consent is consent that is clearly and unmistakably stated. In this case, the cell phone user's consent to receive promotional materials from one company could not be construed as consent to receive promotional materials from Simon & Schuster, the appeals court held.

The June 19 decision is Satterfield v. Simon & Schuster, CCH Telemarketing Law Guide ¶31,142. It will also appear in CCH Privacy Law in Marketing and CCH Advertising Law Guide.

Art Buyer's Antitrust Claims Against Art Foundation, Authenticator Survive Dismissal

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

An art buyer's claims that the only two entities authenticating art works by Andy Warhol acted in concert to artificially restrict competition in the market for authentic Warhols sufficiently alleged a conspiracy or an attempt to monopolize, the federal district court in New York City has ruled.

While the buyer was barred from pursuing claims based on his own art purchase, owing to expiration of the statute of limitations and a lack of antitrust injury, he could seek damages arising from his inability to sell a painting because of the defendants' declarations that the work was a forgery. The defendants' motion to dismiss was granted in part and denied in part.

The complaining buyer asserted that the scheme had the effect of raising the prices of Warhol works held by one of the entities—The Andy Warhol Foundation for the Visual Arts, a not-for-profit charitable trust with considerable holdings of Warhol's works—and of ensuring that galleries and museums chose only the works owned by the Foundation so as to limit the risk that their authenticity would later come under attack.

Twombly Standard

The buyer's factual allegations in support of his antitrust claims satisfied the Twombly plausibility standard, the court found. These allegations included charges that the authentication board made unsolicited suggestions to owners of purported works to submit those works for authentication, that its authentication policies were inconsistently applied and allowed it to reverse prior determinations when doing so would further the conspiracy, and that it had denied the authenticity of works that its associates had previously authenticated or which the Foundation had been unable to purchase.

Further, the buyer averred facts indicative of anticompetitive conduct with a specific intent to monopolize and a dangerous probability of achieving monopoly power, the court stated.

Antitrust Injury

The complaining buyer did not suffer antitrust injury arising from the alleged price-inflationary aspects of the defendants' conspiracy, but could have been injured by the denial of authentication of his artwork—and the authentication board's double-stamping of “denied” on the work itself, the court said.

He did not buy the work at issue from the Foundation, and nowhere in his complaint did he claim that the work was ever sold by the Foundation or recognized by the authentication board as authentic. Therefore, his claims had to be dismissed to the extent that they were based on allegations that the defendants' actions artificially raised prices for Warhol works.

However, the buyer's assertions that the defendants' actions prevented him "from competing as a seller in the lucrative market for authentic Warhols" were sufficient to frame an antitrust injury, according to the court.

Statute of Limitations

Even if the complaining buyer had alleged antitrust injury from his inflated purchase price, such a claim was barred by the statute of limitations. The buyer bought the painting 18 years prior to filing suit and alleged no facts warranting a finding of fraudulent concealment that would defeat the limitations bar, the court explained.

He was not, however, precluded from pursuing claims based on the defendants' later denials of authentication—and, thus, the exclusion from the market for authentic Warhol works—even though the original denial occurred five years prior to the lawsuit.

The buyer alleged sufficient facts to invoke the continuing conspiracy exception based on the second denial, which occurred within the limitations period. The second denial was not a mere reaffirmation of the first, in the court's view. The defendants not only permitted, but encouraged, him to resubmit the painting with additional documentation. Thus, he could have suffered additional, distinct injury as a result of the second denial, the court found.

False Advertising

Letters by the defendants that allegedly fraudulently denied the authenticity of the painting could constitute false advertising in violation of Sec. 43(a) of the Lanham Act, the court decided. Although a statement of opinion was not actionable under the Lanham Act if it could not reasonably be seen as stating or implying provable facts about a competitor's goods or services, it was not clear, at this stage of the case, that the authenticators' letters were mere statements of opinion.

The decision is Simon-Whelan v. The Andy Warhol Foundation for the Visual Arts, Inc., 2009-1 Trade Cases ¶76,657.

Ad Industry Groups Announce Principles for Online Collection of Consumer Data

This posting was written by William Zale, Editor of CCH Advertising Law Guide and Do's and Don'ts in Advertising.

A group of the nation's largest media and marketing trade associations today released self-regulatory principles to protect consumer privacy in ad-supported interactive media.

The seven principles are designed to require advertisers and websites to clearly inform consumers about data collection practices and enable them to exercise control over that information.

This unprecedented collaboration represents the entire marketing-media industry and includes the American Association of Advertising Agencies (4A’s), the Association of National Advertisers (ANA), the Direct Marketing Association (DMA), the Interactive Advertising Bureau (IAB), and the Council of Better Business Bureaus (CBBB).

The CBBB, a leading organization dedicated to advancing marketplace trust, has agreed, along with the DMA, to implement accountability programs to promote widespread adoption of the seven principles.

FTC Commissioner’s Comments

“Consumers deserve transparency regarding the collection and use of their data for behavioral advertising purposes,” said FTC Commissioner Pamela Jones Harbour. “I am gratified that a group of influential associations—representing a significant component of the Internet community—has responded to so many of the privacy concerns raised by my colleagues and myself. These associations have invested substantial efforts to actually deliver a draft set of privacy principles, which have the potential to dramatically advance the cause of consumer privacy.”

The Commissioner commended the organizations for taking the important first step. “I am hopeful that successful implementation will follow,” Harbour said. “In the meantime, I encourage the entire privacy community to continue a dialogue that places the interests of consumers first.”

Seven Principles

The principles are designed to address consumer concerns about the use of personal information and interest-based advertising while preserving the innovative and robust advertising that supports the vast array of free online content and the ability to deliver relevant advertising to consumers. This self-regulatory program consists of the following seven principles.

• The Education Principle calls for organizations to participate in efforts to educate individuals and businesses about online behavioral advertising. To this end, the digital media industry intends, in a major campaign that is expected to exceed 500 million online advertising impressions, to educate consumers about online behavioral advertising, the benefits of these practices and the means to exercise choice, over the next 18 months.

• The Transparency Principle calls for clearer and easily accessible disclosures to consumers about data collection and use practices associated with online behavioral advertising. It will result in new, enhanced notice on the page where data is collected through links embedded in or around advertisements, or on the web page itself.

• The Consumer Control Principle provides consumers with an expanded ability to choose whether data is collected and used for online behavioral advertising purposes. This choice will be available through a link from the notice provided on the web page where data is collected. The Consumer Control Principle requires “service providers,” a term that includes Internet access service providers and providers of desktop applications software such as web browser “tool bars” to obtain the consent of users before engaging in online behavioral advertising, and take steps to de-identify the data used for such purposes.

• The Data Security Principle calls for organizations to provide reasonable security for, and limited retention of data, collected and used for online behavioral advertising purposes.

• The Material Changes Principle calls on organizations to obtain consent for any material change to their online behavioral advertising data collection and use policies and practices to data collected prior to such change.

• The Sensitive Data Principle recognizes that data collected from children and used for online behavioral advertising merits heightened protection, and requires parental consent for behavioral advertising to consumers known to be under 13 on child-directed websites. This principle also provides heightened protections to certain health and financial data when attributable to a specific individual.

• The Accountability Principle calls for development of programs to further advance these principles, including programs to monitor and report instances of uncorrected non-compliance with these principles to appropriate government agencies. The CBBB and DMA have been asked and have agreed to work cooperatively to establish accountability mechanisms under the principles.

The complete document appears here at the CBBB website.

Further details will be reported in CCH Advertising Law Guide, Do’s and Don’ts in Advertising, and CCH Privacy Law in Marketing.

Proposed Consumer Financial Protection Agency Would Take on Some FTC Duties

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

All consumer financial protection functions of the Federal Trade Commission would be transferred to a newly created federal agency, as part of the Obama Administration’s regulatory reform agenda.

The president’s proposal for a new consumer financial protection agency was released and sent to Congress on June 30.

The Consumer Financial Protection Agency would be established as an independent agency in the executive branch to regulate the provision of consumer financial products or services and consumer financial laws.

Consumer Financial Protection Functions

“Consumer financial protection functions” are defined in the proposal as “research, rulemaking, issuance of orders or guidance, supervision, examination, and enforcement activities, powers, and duties relating to the provision of consumer financial products or services, including the authority to assess and collect fees for those purposes.”

The plan calls for amendments to the Fair Credit Reporting Act, the Gramm-Leach-Bliley Act, and other laws to specify that they will be enforced by the new Consumer Financial Protection Agency.

It is unclear how the new agency would impact FTC enforcement actions targeting unfair and deceptive conduct against non-financial institutions under Sec. 5 of the FTC Act that implicate financial consumer protection.

With respect to pending actions that fall in the new agency’s jurisdiction, the new agency would be substituted for the FTC as a party to any related proceeding as of the transfer date.

Presumably, the Division of Financial Practices within the FTC Bureau of Consumer Protection would be moved to the new agency. The proposal specifically addresses the transfer of employees from the FTC to the new agency. It would provide for protections in the short term.

Administrative Procedures Act Rulemaking

As part of the proposal, the FTC would also be granted permission to conduct streamlined rulemaking under the Administrative Procedures Act (APA). The APA procedures would be much less time-consuming than procedures under the agency's current Magnuson-Moss authority.

The proposal is available here on the Department of Treasury website.