Trade Regulation Tidbits

This posting was written by John W. Arden.

News, updates, and observations:

 A recent article in The Economist magazine asks whether the Obama Administration will back up its “tough talk” on antitrust enforcement (“Return of the Trustbusters,” August 27 print edition). “Companies are likely to find themselves scrutinised at least as intensively as they were under the administration of Bill Clinton, when many senior antitrust officials in the justice department and Federal Trade Commission (FTC) cut their teeth on a celebrated anti-monopoly lawsuit against Microsoft.” While new antitrust chief Christine Varney believes that the Bush Administration’s lax antitrust enforcement contributed directly to the economic crisis, that view is “debatable, to say the least,” according to the article. The Bush Administration did pursue cartel activity enthusiastically, obtaining record convictions, jail sentences, and fines, the story contends. Varney’s efforts to ramp up enforcement will face several obstacles, including the U.S. Supreme Court (which has issued several decisions narrowing trustbusters’ room to maneuver) and the “possible disagreement within Mr. Obama’s cabinet.” Given the “wretched state of the economy,” some administration officials are questioning whether to “risk upsetting the few bits that are growing strongly with gratuitous antitrust cases.” Text of the article appears here.

 On August 17, the American Antitrust Institute filed an amicus brief, urging the U. S. Court of Appeals in New Orleans to adopt a presumption of illegality for resale price maintenance agreements and to overturn the lower court's dismissal of the amended complaint filed in PSKS, Inc. v. Leegin Creative Leather Products, Inc. The brief, which appears here, also argues that the lower court erred in requiring the plaintiff to meet a strict test of market definition. In 2007, the Supreme Court reversed the Court of Appeals’ decision (PSKS, Inc. v. Leegin Creative Leather Products, Inc., 2006-1 Trade Cases ¶75,166), applying the per se rule to uphold an award of $3,975,000 to a retailer that was terminated by its manufacturer for discounting. The high court declared that vertical price restraints are no longer per se illegal, but instead should be evaluated under the rule of reason standard (2007-1 CCH Trade Cases ¶ 75,753).

 Maine’s new privacy law—which prohibits the collection of personal information for marketing purposes from a minor without parental consent and bans “predatory marketing” to minors—is being challenged in a lawsuit brought by media and online companies, including AOL, eBay, and Yahoo. The lawsuit, filed August 26 in the federal district court in Maine, claims that the law violates the First Amendment rights of adults, as well as minors and online operators. The Maine statute (“An Act to Prevent Predatory Marketing Practices Against Minors,” Public Law 230) was signed by the Governor on June 2, 2009, and will take effect on September 12, 2009. Text of the law appears here on the Maine State Legislature’s website. Further details about the law appear in an August 12, 2009 posting on Trade Regulation Talk.

Remedies Imposed on Kevin Trudeau for Violation of FTC Consent Decree Vacated

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

Infomercial pitchman Kevin Trudeau has convinced a federal appeals court to vacate a $37.6 million sanction and a three-year ban on his appearance in infomercials awarded in a Federal Trade Commission (FTC) enforcement action.

Yesterday, the U.S. Court of Appeals in Chicago affirmed a district court finding that Trudeau was in contempt of a 2004 consent decree; however, the court was “troubled” by the sanctions imposed to remedy the contempt. The court vacated the sanctions and remanded for further proceedings.

The Duel

“For years Trudeau has dueled with the FTC in and out of court,” the appellate court noted. The agency’s earliest attacks were in the late 1990s. Trudeau entered into various consent decrees to resolve the FTC enforcement actions.

The current contempt proceeding involves Trudeau’s violation of a September 2004 consent decree (CCH Trade Regulation Reporter ¶15,653). Under the terms of that decree, Trudeau agreed to pay $2 million for consumer redress and to refrain from advertising in infomercials any products, except books. Thus, Trudeau could sell his books through infomercials under the consent decree, as long as the infomercial for the book did not “misrepresent the content of the book.”

In 2007, Trudeau began promoting his book, entitled The Weight Loss Cure “They” Don’t Want You to Know About, through infomercials. The FTC challenged Trudeau’s claims in the Weight Loss Cure infomercial, arguing that the author misled consumers by describing a weight loss program that was “easy,” “simple,” and able to be completed at home. The federal district court in Chicago found Trudeau in contempt and ordered monetary and injunctive relief (CCH 2007-2 Trade Cases ¶75,949).

Contempt Finding

Trudeau was properly found in contempt for violating the 2004 FTC consent decree, the appellate court ruled. To succeed on its contempt petition, the FTC had to show that: (1) the underlying order set forth an unambiguous command; (2) Trudeau violated that command; (3) Trudeau's violation was significant; and (4) Trudeau failed to take reasonable and diligent steps to comply with the order.

The agency established that Trudeau misrepresented the content of the book when he asserted that the diet protocol was “easy” and when he said that dieters who completed the protocol could eat “anything you want.”

The author unsuccessfully argued that he merely quoted or paraphrased the book or offered his subjective opinion when he described the protocol as “easy.” While the book repeatedly stated that the protocol was “easy,” the author failed to mention in the infomercials that the protocol involved the combination of daily injections, heavily restricted diets, colonics, organ cleanses, and daily exercise, among dozens of other restrictions.

Use of the term “easy” did not constitute mere puffing in the context of the infomercials, and even if part of Trudeau’s pitch was mere puffery, the infomercials were still loaded with statements that were patently false, the court explained.

Monetary Sanction

The $37.6 million monetary sanction imposed on Trudeau could not be upheld as a proper compensatory sanction, according to the appellate court. The $37.6 million figure might ultimately be correct; however, the lower court’s order lacked two key ingredients needed in any compensatory contempt sanction: (1) the order failed to explain how the court arrived at the $37.6 million figure; and (2) the order lacked any mention of how the sanction should be administered. The matter was remanded to allow the court to provide greater detail on how it arrived at the specific amount of the sanction imposed.

The district court would need to explain the method it used to calculate the award, why the court chose that method, and how the evidence of record supported the figures plugged into that method. Because the district court had broad discretion to fashion an appropriate remedy in a civil contempt action, the appellate court did not direct the district court on which calculation method to employ. Whether the court chose consumer losses or ill-gotten gains, it would have to explain why it chose the calculation method it did and how the record supported its calculations.

Further, the lower court's order would need to outline how the sanction should be administered. The author's requests for greater procedural safeguards on remand—such as a neutral factfinder (presumably a jury or at least a different district judge) and a proof-beyond-a-reasonable-doubt standard—were also rejected by the appellate court.

Infomercial Ban

The three-year ban on Trudeau appearing in infomercials for any product, including books and other publications, was vacated.

Civil contempt sanctions were either compensatory or coercive, the court explained. The infomercial ban was clearly not compensatory. Nor was it a proper coercive contempt sanction. A coercive sanction seeks to bring the contemnor’s conduct into compliance with the court’s order. An essential ingredient to any coercive contempt sanction is the opportunity to purge, according to the court.

A “purgeable” sanction is one that allows the contemnor to free himself of the sanction by complying with the court’s order. The infomercial ban, however, lasted for three years, no matter what Trudeau did. Thus, the infomercial ban was vacated.

The text of the August 27, 2009, decision in FTC v. Trudeau, No. 08-4249, will appear at CCH 2009-2 Trade Cases ¶76,718.

FTC Issues Final Rule on Notification of Health Information Security Breaches

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

The Federal Trade Commission has issued a final rule requiring certain Web-based businesses to notify consumers when the security of their electronic health information is breached.

The rule, which will take effect on September 24, 2009, applies to both vendors of personal health records—which provide online repositories that people can use to keep track of their health information—and entities that offer third-party applications for personal health records.

Third-party applications could include, for example, devices such as blood pressure cuffs or pedometers, whose readings consumers can upload into their personal health records. Consumers may benefit by using these innovations, but only if they are confident that their health information is secure and confidential, according to the Commission.

Non-HIPAA Entities

Many entities offering these types of services are not subject to the privacy and security requirements of the Health Insurance Portability and Accountability Act (HIPAA), which applies to health care service providers such as doctors' offices, hospitals, and insurance companies.

Congress directed the FTC to issue the rule as part of the American Recovery and Reinvestment Act of 2009. The Recovery Act requires the Department of Health and Human Services to conduct a study and report by February 2010, in consultation with the FTC, on potential privacy, security, and breach-notification requirements for vendors of personal health records and related entities that are not subject to HIPAA. In the meantime, the Act requires the Commission to issue a rule requiring these entities to notify consumers if the security of their health information is breached.

The Final Rule requires vendors of personal health records and related entities to notify consumers following a breach involving unsecured information. In addition, if a service provider to one of these entities has a breach, it must notify the entity, which in turn must notify consumers.

Notice to Consumers, Media, FTC

The rule specifies the timing, method, and content of notification. In the case of certain breaches involving 500 or more people, notice must be provided to the media. Entities covered by the rule also must notify the FTC.

The Final Rule, which was published at 74 Federal Register 42962, August 25, 2009, appears at CCH Trade Regulation Reporter ¶38,066. It will also appear in CCH Privacy Law in Marketing.

Illinois Amends Franchise Disclosure Act

This posting was written by John W. Arden.

Legislation bringing the Illinois Franchise Disclosure Act of 1987 in line with the 2007 FTC Franchise Rule was signed by Governor Pat Quinn on August 24.

The measure requires that franchise disclosure statements be prepared in accordance with the FTC Franchise Rule (16 C.F.R. Part 436, CCH Business Franchise Guide ¶6010), provides new exemptions from the registration requirement, and makes registration deadlines consistent with the FTC Franchise Rule's renewal requirements.

Exemptions from Registration

Amendments exempt from the registration requirement (1) franchisors that have a net worth of at least $15 million or a net worth of at least $1 million and are at least 80 per cent owned by a corporation with a net work of $15 million; (2) sales to franchisees having been in business for at least five years and having a net worth of at least $5 million; and (3) sales to “insiders” of the franchisor.

Franchisors exempt from registration requirements still must provide prospective franchisees with disclosure documents.

Registration Deadlines, Disclosure Statement Amendments

Registrations of a franchise shall expire 120 days after the franchisor’s fiscal year end, and franchisors must file updated disclosure statements prior to expiration of a registration.

Disclosure statements will have to be amended within 30 days after the close of each quarter of a franchisor’s fiscal year, reflecting material changes to the disclosures.

Further amendments repeal the registration requirement for franchise brokers and impose fees for the filing of an initial large franchisor exemption ($500) and renewal of the exemption ($100).

The legislation (Public Act 096-0648) also amends the Illinois Business Brokers Act of 1995 and the Illinois Business Opportunity Sales Law of 1995. Amendments to these laws update references to the franchise disclosure requirements in the laws’ exemption provisions.

The amendments will take effect on October 1, 2009. Text of the amending law appears here on the Illinois General Assembly's website.

Justice Department Forces Transistor Maker to Divest Acquired Assets . . .

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

The Department of Justice announced on August 20 that it has reached a proposed settlement with California-based semiconductor device maker Microsemi Corporation, requiring the company to divest all of the assets it acquired from rival Semicoa Inc. in July 2008.

The Department challenged the deal in December 2008, alleging that it eliminated or reduced competition in the development, manufacture, and sale of certain semiconductor devices used in critical military and space programs, thereby resulting in increased prices and slower delivery of components essential to the security of the United States.

The devices at issue—small signal transistors and ultrafast recovery rectifier diodes—are used to control the flow of electric current. Both are used in critical military and civil applications, ranging from satellites to nuclear missile systems.

Prior to the acquisition, Microsemi and Semicoa were the only manufacturers of small signal transistors qualified for these applications and were each poised to become qualified for their ultrafast recovery rectifier diodes, which were in short supply, according to the Department.

The proposed settlement—which has been filed but not yet approved by the federal district court in Santa Ana, California—would resolve the lawsuit.

The action is U.S. v. Microsemi Corp. A news release on the settlement appears here. Other documents can be found here on the Department of Justice Antitrust Division website.

. . . While Approving Oracle’s Takeover of Sun Microsystems

Oracle Corporation and Sun Microsystems Inc. announced on August 20 that the Department of Justice has approved their proposed combination and terminated the waiting period under the Hart-Scott-Rodino Act.

The deal—valued at approximately $7.4 billion, or $5.6 billion net of Sun’s cash and debt—was approved by Sun’s shareholders on July 16. Closure awaits certain other conditions, including clearance by the European Commission, which has until September 3 to decide whether to allow the acquisition or launch an investigation into its legality.

Sun and Oracle initially announced the proposed acquisition in April. According to company statements, the deal is aimed at combining “best-in-class enterprise software and mission-critical computing systems” so that Oracle could engineer and deliver an integrated system—applications to disk—to its customers.

A press release on the Department of Justice’s approval of the deal appears here on the Oracle website.

False Claims Act Amendments Expand Liability for Private Sector

This posting was written by Reuben Guttman, Partner, Grant & Eisenhofer, Washington, D.C.

Since the Civil War, the Federal False Claims Act (FCA), now codified at 31 U.S.C. 3729 et seq., has provided a means of redress against private entities whose “false or fraudulent” conduct caused the loss of taxpayer dollars.

While the Federal FCA was promulgated to recover federal monies squandered as a result of wrongdoing, today 23 states—including New York, California, Texas, Florida, Illinois, and Michigan—have their own state False Claims Acts, which provide parallel means of redress allowing for the recovery of state monies lost through fraud or fraudulent conduct.

Standing of Individual Plaintiffs

An individual with independent knowledge of false or fraudulent claims made to secure government money may bring suit in the name of the federal government even where that person does not have the traditional “injury in fact” needed to satisfy U.S. Constitution Article III standing requirements. Subject to certain statutory restrictions, they need not have sustained personal injury; rather they need only have independent knowledge of the wrongdoing

Because these individuals have been assigned a portion of the claim through bounty provisions of the FCA, the Supreme Court has held that, as a partial assignee of the claim through a bounty award, whistleblowers—known as “relators”—have standing to sue on behalf of the government (See Vermont v. Stevens, 529 U.S. 765 (2000)).

The efforts of relators have led to the recovery of billions of dollars for federal and state governments. While a substantial portion of this money has been recovered on behalf of Medicare and Medicaid systems, dollars have also been returned to an array of other government agencies or programs.

Suits Against Government Contractors

The False Claims Acts have even been used to go after contractors that make representations about compliance with statutes and regulations, including those addressing unfair competition, the environment, and labor practices. For example, a false certification of independent pricing attached to a competitive bid may give rise to liability under the False Claims Act where treble damages and civil penalties of between $5,000 and $11,000 can be accorded.

In U.S. ex rel. Bunk v. Birkart et al., the Justice Department, acting in conjunction with “Relators,” successfully sought recovery under the FCA for predicate violations of competition requirements attached to a bidding process.

Under new legislation, the federal False Claims Act (“FCA”) will take an even more prominent role in protecting from fraud the increase of federal spending to meet the nation’s financial crisis. With federal funds going to a range of projects—from state infrastructure “shovel ready” road building to Internet connectivity, green energy innovation and high-tech transportation solutions—there are simply more federal expenditures in the pipeline for the FCA to cover.

Recent Amendments

Specifically, on May 20, 2009, President Obama signed into law Senate Bill 386, the Fraud Enforcement and Recovery Act (“FERA”), which makes important amendments to the FCA. Most significantly, the new legislation clarifies what was known as the “presentment requirement.”

The prior version of the False Claims Act, 31 U.S.C. 3729(a)(1) attached liability for any person who “knowingly presents, or causes to be presented, to an officer or employee of the United States Government or a member of the Armed Forces of the United States a false or fraudulent claim for payment or approval.” Those defending false claims cases argued that the claim had to be presented to the government itself.

In Allison Engine Co. v. U.S., 123 S. Ct. 2128 (2008), the Supreme Court picked up on this argument and—to some extent—narrowly interpreted the scope of the FCA to potentially exclude from the orbit of liability situations where false claims for payment or approval were presented to private contractors using or intending to use government money.

Recognizing that an extension of this logic could potentially preclude whistleblowers from seeking redress where false claims were presented to private sector agents of the government, or the wrongdoing involved the use of government monies in the hands of a private actor, Congress clarified the intent of the statute by modifying the presentment language.

The amended version of the statute now makes it unlawful to “knowingly present, or cause to be presented, a false or fraudulent claim for payment or approval.” Thus, the amended statute eliminates the phrase “to an officer or employee of the United States government […]”. The amended statute thus places greater importance on the word “claim” itself and defines “claim,” 31 U.S.C. 3729(b)(2), to essentially encompass any false or fraudulent claim made to a private sector entity operating or using government money.

A false claim can now occur even where the private actor is operating on behalf of the government and has not yet been reimbursed, but will be reimbursed, with government monies.

Liability of Bailout-Fund Recipients

Under the new law, bailout-fund recipients’ potential liability under the FCA is clear. Upon passage of the legislation, the President stressed the importance of protecting taxpayer dollars needed for economic recovery under the Troubled Asset Relief Plan (“TARP”), run by the U.S. Treasury to shore up financial institutions, and other stimulus programs. The new legislation has confirmed the ability of private whistleblowers to take action against lenders whose false or fraudulent conduct implicates the misuse of federal dollars.

For those legal practitioners who do not specifically practice under the False Claims Act, it is important to understand that the statute can be a means to seek redress where obligations under a myriad of other laws, a condition of receipt of federal funds, have not been met.

Further information on the False Claims Acts and other whistleblower laws and policy appears here at Whistleblowerlaws.com.

New Jersey Dealership Was Constructively Terminated Without Good Cause

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

A forklift manufacturer’s actions—geared towards forcing a dealer out of its role as an authorized dealer of the manufacturer’s forklifts—amounted to constructive termination without good cause, in violation of the New Jersey Franchise Practices Act (NJFPA), according to a New Jersey appellate court.

A trial court’s ruling and award of compensatory damages for lost profits in the amount of $679,414 were affirmed. An award of $3,533,642 in attorneys’ fees was also upheld, but an award of $477,611 in expert witness fees was reversed.

Effective Termination

The manufacturer argued that the NJFPA prohibited only actual terminations and, because the dealer was never terminated, there was no violation. However, the manufacturer’s conduct was geared to terminating the dealer as a franchisee, the court determined. That conduct included breaching the parties’ agreement by the appointment of a competing dealer in the dealer’s exclusive territory.

Indeed, a letter from one of the manufacturer’s officers to the dealer included the statements: (1) "it's my intent to ask our people to begin a search for another dealer to represent [the manufacturer’s] products in Northern New Jersey;" and (2) "I'm prepared to continue selling [the manufacturer’s] parts to [the dealer] for a year after any new [authorized] dealer is appointed," the court noted. Effectively, it was a termination letter, the court determined.

The record established that the manufacturer’s officers were well aware that the NJFPA prohibited them from terminating the dealer unless they could establish "good cause." The manufacturer's efforts to create the appearance of substantially deficient performance by the dealer, and its assertion that the dealer breached a best efforts provision in the parties' agreement failed, the court ruled. The manufacturer’s effort to force out the dealer was thwarted only by virtue of the dealer’s filing of the instant action.

Requirement of Good Cause

The NJFPA was remedial legislation designed to protect franchisees from the superior bargaining power of franchisors, the court reasoned. In the absence of a substantial failure of franchisee compliance, the statutory requirement of good cause prohibited a franchisor from terminating for other reasons, even if they reflected a sound and nondiscriminatory business strategy.

The legislature’s decision not to recognize a valid business reason as constituting "good cause" for termination in the NJFPA distinguished the Act from the less-protective franchise statutes in other states, the court remarked. Further, the manufacturer provided no persuasive authority to support its argument against liability for constructive termination.

The manufacturer’s assertion that the letter from its officer was merely a suggestion to the dealer to end its relationship with the manufacturer was an obvious revision of history and its claim that it did not constructively terminate the dealer was disingenuous, according to the court.

In addition to the letter, the manufacturer’s decision to stop providing annual business plans to the dealer was further evidence that it expected to abandon the dealer in favor of another dealer. The court rejected the manufacturer’s position that if the dealer wanted to claim damages under the NJFPA for termination, it was required to withdraw from the agreement and thus allow itself to be terminated. Such a requirement would fly in the face of the Act's purposes of leveling the playing field between the typically more powerful franchisor and less powerful franchisee, the court held.

Loss of Exclusivity

The dealer's loss of the exclusivity of its territory, in and of itself, could qualify as such a change in the agreement's terms that constituted constructive termination, the court held. In the instant case, the "change" that the manufacturer proposed for the dealer upon appointing a competing dealer to the dealer’s territory would have gone even further than a mere loss of exclusivity; instead of simply establishing the competing dealer as a second dealer in the franchise territory, the manufacturer would have eliminated the dealer as an authorized dealer by ending its ability to purchase new forklifts and parts.

The manufacturer’s conduct proved its intent for the cessation of exclusivity to undermine the dealer’s franchise, according to the court. It appointed the competing dealer and blanketed the dealer's territory with the message that the competing dealer was its favored dealer in the territory in all regards, without informing the complaining dealer. It also provided discounts, rebates, and other subsidies to the competing dealer that let it undercut the complaining dealer’s prices.

Attorney Fees, Expert Witness Fees

The trial court's awarding of $3,533,642 in attorney fees to the dealer under the NJFPA's attorney fee provision was not an abuse of discretion, the court held. The trial court found that the work, expenses, and fee requests were reasonably required to establish the dealer’s NJFPA claim and to refute the counterclaim that the manufacturer asserted.

The Act’s authorization of an award of “costs of the action" did not encompass the award of expert witness fees, the court decided. Thus, the trial court’s award of costs to the dealer was reduced from $724,817 to $247,206 to reflect the deletion of $477,611 that the trial court had awarded for expert witness fees.

The decision is Maintainco, Inc. v. Mitsubishi Caterpillar Forklift, CCH Business Franchise Guide ¶14,195.

Sunscreen Manufacturer Denied Injunction Against Comparative Ad

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

The federal district court in Wilmington, Delaware denied a sunscreen manufacturer’s request for a preliminary injunction, filed as part of a Delaware Deceptive Trade Practices Act, against a competing manufacturer that ran a print advertisement comparing the “sport” sunscreens produced by the two companies.

Comparative Illustration, Bar Graph

The competing manufacturer provided retail stores with a display case that featured an illustration comparing the effects of a layer of the two sunscreen products. According to the manufacturer, the advertisement falsely represented that its sunscreen did not protect consumers from UVA rays because it did not contain the same chemicals as the competing product.

The print ad also contained a bar graph that directly compared the two products, which the manufacturer argued was inaccurate, not to scale, and employed an irrelevant analysis. Therefore, the manufacturer sought a preliminary injunction against the competitor to remove the print advertisement from the retailers.

Literal Falsity v. Interpretation

Because the manufacturer failed to demonstrate the requisite likelihood of success to justify the extraordinary relief of an injunction, the court denied the request. There was nothing literally false about the statements made in the sunscreen advertisement, according to the court, because it was open to interpretation.

While the illustration could be seen as stating that the manufacturer’s sunscreen did not protect against UVA rays, it could also be interpreted as stating that not using sunscreen did not protect against UVA rays.

Clear and Unambiguous Message

The graph at issue did not impart a clear or unambiguous message that could be the basis for a preliminary injunction, according to the court. Each manufacturer presented evidence concerning the data contained in the bar graph. Because the matter was better suited to be fleshed out during the course of the litigation, the court denied the motion for the preliminary injunction.

The August 5 decision in Schering-Plough Healthcare Products, Inc. v. Neutrogena Corp., will appear at CCH State Unfair Trade Practices Law ¶31,872

Closing of GM, Chrysler Dealerships Raises Termination Issues for Bankruptcy Courts

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

With the noticed closings of so many GM and Chrysler dealerships, wrongful termination statutes have become a question before the bankruptcy courts.

Simply put: Does the right of a bankrupt undergoing reorganization to reject contracts supersede the wrongful termination statutes that afford protection to dealers under many state relationship laws?

Rather than face the issue head on, however, an accommodation was reached. On July 5, 2009, the attorneys general (AGs) of 30 states 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 relationship laws. It was formally ratified by the U.S. Bankruptcy Court, 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, contending that the plan would have permitted GM to ignore state statutes that protect dealerships from unfair terminations and other oppressive conduct by motor vehicle manufacturers.

Greater Statutory Protections

And in light of the current economic slump particularly affecting the automotive industry, state legislatures appear to be moving to provide greater protections for their in-state dealerships and distributorships.

For example, the new Alabama Heavy Equipment Dealer Act prohibits suppliers from unilaterally amending, terminating, or refusing to renew a dealer agreement without "good cause," which is limited to withdrawal by the supplier from the market and certain performance deficiencies. The law also requires suppliers to provide advance written notice and an opportunity to cure in most instances of an amendment, termination, or failure to renew a dealer agreement. (Senate Bill No. 308 was approved and became effective May 22, 2009. See CCH Business Franchise Guide ¶4105).

In another attempt to protect its auto dealers, Illinois went further, recently amending its statute to eliminate language in the motor vehicle dealer law that a manufacturer has good cause to cancel, terminate, or fail to extend or renew the franchise or selling agreement to all franchisees of a line make when the manufacturer permanently discontinues the manufacture or assembly of such line.

It also (1) makes it a violation for a manufacturer to require or coerce a motor vehicle dealer to underutilize their facilities by requiring them to cease operations for the selling or servicing of any vehicles with another manufacturer and (2) provides an itemized list of reasonable compensation for the value of a motor vehicle dealer's business and business premises. (Senate Bill No. 1417 was approved and became effective May 22, 2009. See CCH Business Franchise Guide ¶4135).

Maine too amended its motor vehicle dealer law by deleting language stating that good cause for termination exists when a manufacturer discontinues production or distribution of the franchise product. (Senate Bill No. 483 was approved and became effective June 11, 2009. See CCH Business Franchise Guide ¶4195).

Impairment Write-Downs and Loan Guarentee Ratios—A Problem?

Many venture capital firms and other buyers of franchise companies over the past decade used substantial leveraging in their acquisitions. Many of these loans have certain financial ratios that must be maintained often involving net worth. In some instances, there are also personal guarantees.

As we have written often, Financial Accounting Standards Board (FASB) 141 and 142 require purchasers of intangible property (IP)—as opposed to owners of self-created IP—to test their IP assets (including “goodwill”) at least annually for impairment. If, as in many cases, the value of purchased franchise agreements, distributorship, or dealership agreements has been reduced (“impaired”), such as Chrysler dealerships purchased within the past 10 years, prudent auditors will be asking whether franchise company management is honestly valuing their IP in light of potential loan problems that could affect them personally. Beware!

Lost Future Royalties: Must Expenses Be Proven? Is There a Mitigation Defense?

In a recent decision, a franchisor’s claim for lost future royalties was denied because it failed to submit any evidence as to its own operating expenses. (Rocky Mountain Chocolate Factory v. SDMS, DC Colo., CCH Business Franchise Guide ¶24,093)

Under Colorado law, future royalties, like all future damages, are subject to the “rule of certainty.” On that basis, a federal district court ruled that a franchisor’s claim for lost future royalties was basically a claim for lost profits and that without evidence of both revenues and expenses, the court was left to speculate about the amount.

Additionally, the court left open the possibility of a mitigation defense against a claim for lost profits based on imminent franchisee failure. The court noted that it was not clear that the franchisor would have been entitled to future damages even if it had provided evidence of expenses because the franchisee cast doubt at trial on its continued financial viability because of its persistent operating losses.
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Additional information on the issues discussed above is available in CCH Franchise Regulation and Damages by Byron E. Fox and Bruce S. Schaeffer.

Rejection of Thermostat Buyer’s Antitrust Claims Against Honeywell Upheld

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

A consumer’s putative class action—alleging that Honeywell International, Inc. violated Maine’s antitrust statute by misrepresenting its trademark on circular thermostats and threatening rival manufacturers with litigation—was properly found to have been barred by the statute of limitations and to have failed to state cognizable injury, the Maine Supreme Judicial Court has ruled. Summary judgment in favor of Honeywell was affirmed.

Statute of Limitations

The consumer’s antitrust claims were based on his purchase of three Honeywell thermostats in Maine in approximately 1986 and his purchase of a single thermostat in New Hampshire in 2001. The cause of action based on the purchases in Maine accrued at the time of his injury—in 1986, 18 years before he filed suit. Therefore, the claim fell well outside of Maine’s six-year statute of limitations, the court determined.

Rejected were contentions that the statute of limitations should have been tolled under the continuing violation doctrine and the fraudulent concealment exception.

The consumer’s alleged purchase of a single thermostat in New Hampshire 15 years later did not serve to revive the cause of action, the court held. In addition, the consumer failed to present sufficient facts to prove fraudulent concealment, particularly given that many of the facts relevant to fraudulent concealment had been publicly available in the documents filed by Honeywell with the U.S. Patent and Trademark Office in 1968 and 1986.

Antitrust Standing, Injury

The consumer lacked standing to assert a claim based on the single thermostat purchase in New Hampshire in 2001 because his allegations were insufficient to demonstrate that he suffered injury from the alleged conduct, the court held. The consumer expressed uncertainty about the location of the store at which he bought the thermostat, the price he paid for it, and whether he received any discounts or rebates for the purchase.

He had no sales slip, invoice, or other evidence of what he paid. Without such evidence, the court noted, he could not prove that he had paid an inflated price, as opposed to the possibility that price increases were absorbed at the retail level.

Partial Dissent

An opinion filed by two justices, partially dissenting from the majority holding, contended that the consumer should have been entitled (1) to complete discovery with respect to the antitrust claim based on the 2001 purchase and (2) to have the issue of antitrust injury and damages addressed in a decision on his motion for class certification before the court ruled on Honeywell’s summary judgment motion.

The partially dissenting justices did agree with the majority that any claim based on the 1986 purchases was time-barred. However, they argued, that majority’s characterization of the claim based on the New Hampshire purchase in 2001 as speculative was premature.

If the consumer had been allowed to present his expert’s opinion that much of the injury and damages were common to the class—and if the expert could convince the trial court that common proof was sufficient—then the consumer’s lack of a receipt for the purchase might not have impeded his claim or his status as a class representative, the partial dissent argued.

The decision in McKinnon v. Honeywell International, Inc. appears here. It will be reported at 2009-2 Trade Cases ¶76,704.

State Law Consumer Fraud Suit Based on "All Natural" Ad Claim Not Preempted

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

Federal law does not preempt class action claims that beverage manufacturer Snapple deceptively marketed its iced tea and juice drinks as “all natural” in violation of the New Jersey Consumer Fraud Act and common law, the U.S. Court of Appeals in Philadelphia has ruled.

A Snapple purchaser sought to pursue a class action on the theory that the drinks were not all natural because they contained high fructose corn syrup (HFCS), a highly processed sugar substitute. While first challenging other Snapple advertising claims, the purchaser dropped those theories in the lower court leaving only the challenge to the HFCS labeling.

The court reversed and remanded for further proceedings a lower court decision (CCH Advertising Law Guide ¶63,038) that the state law claims were impliedly preempted. The lower court had held that the federal Food, Drug, and Cosmetics Act and the Food and Drug Administration regulations thoroughly occupied the field of beverage labeling.

Express Preemption

Snapple argued that the purchaser’s claims were expressly preempted by the federal Nutrition Labeling and Education Act (NLEA) enacted in 1990. However, Snapple waived this contention by failing to raise it in the lower court with respect to the purchaser’s HFCS claim, the court determined.

Snapple did not raise any express preemption argument in response to the HFCS claim and explicitly disclaimed the applicability of express preemption to this claim, according to the court.

Implied “Field” Preemption

Snapple next contended that the purchaser’s claim that HFCS is not “natural” was preempted because federal law comprehensively regulated the misbranding of food in general, and juice beverages in particular. However, the NLEA’s express preemption provision demonstrated that Congress recognized the existence of state laws relating to beverages generally and juice products specifically and therefore enacted only limited exceptions in the NLEA, according to the court.

The FDA had stated that it did not intend to occupy the field of food and beverage labeling, even with regard to juice products regulations, the court noted. For example, in a 1986 rule concerning juice drinks, the FDA stated that it would not use its authority to preempt state requirements unless there was a genuine need to stop the proliferation of inconsistent requirements.

The court’s review of the federal regulatory scheme led to the conclusion that neither Congress nor the Food and Drug Administration intended to occupy the fields of food and beverage labeling and juice products.

Implied “Conflict” Preemption

Finally, Snapple argued “conflict” preemption based on a 1991 FDA policy statement on the use of the word “natural.” Implied conflict preemption is applicable when it is impossible for a private party to comply with both state and federal requirements.

The court determined that policy statement was informal and lacked preemptive weight. The policy statement predated an FDA request for public comments on use of term “natural,” and the agency later declined to define the term in a formal rule.

Neither the policy statement, nor an FDA letter indicating that some forms of HFCS may be classified as “natural,” had the force of law required to preempt conflicting state law, the court concluded.

The August 12 opinion in Holk v. Snapple Beverage Corp. appears here. It will be reported in CCH Advertising Law Guide.

Facebook Not Complying with Canadian Privacy Law: Report

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

In order to comply with Canadian privacy law, popular social networking website operator Facebook must take greater responsibility for the personal information in its care, according to Canadian Privacy Commissioner Jennifer Stoddart.

On July 16, Stoddard released a report detailing the results of an investigation into Facebook’s privacy policies and practices.

The investigation was prompted by a complaint from the Canadian Internet Policy and Public Interest Clinic, a public-interest legal clinic based at the University of Ottawa. Stoddart said that the investigation identified several areas where Facebook needs to better address privacy issues and bring its practices in line with Canadian privacy law.

Privacy Information Confusing or Incomplete

An overarching concern was that information provided by Facebook about its privacy practices was often confusion or incomplete. For example, the “account settings” page described how to deactivate accounts, but not how to delete them, which actually removes personal data from Facebook’s servers.

The Privacy Commissioner’s report recommends more transparency to ensure that the social networking site’s nearly 12 million Canadian users have the information they need to make meaningful decisions about how widely they share personal information.

Access by Third Parties

The investigation also found that Facebook lacks adequate safeguards to effectively restrict third-party application developers from accessing users’ profile information, the investigation found.

The report recommended technological measures to ensure that developers can access only the user information actually required to run a specific application and to prevent the disclosure of personal information of any of the user’s friends who are not themselves sighing up for an application.

Deactivated Accounts

The Privacy Commission also recommended that Facebook change its policy of indefinitely keeping the personal information of people who have deactivated their accounts. According to the report, the practice violates Canada’s federal Personal Information Protection and Electronic Documents Act (PIPEDA). To comply with PIPEDA, Facebook should delete personal information in deactivated accounts after a reasonable length of time.

The Office of the Privacy Commissioner will review after 30 days the actions Facebook takes to comply with the recommendations. The Commissioner is empowered to go to Canadian federal court to seek to have her recommendations enforced.

Text of the Privacy Commissioner’s report appears at CCH Privacy Law in Marketing ¶60,350.

Focus on Franchising

This posting was written by John W. Arden.

News and notes on franchising and distribution topics:

 The Franchise and Business Opportunity Project Group of the North American Securities Administrators Association (NASAA) has proposed that states amend their franchise disclosure laws to change the delivery rules for franchise disclosure documents. The group proposes that states (1) eliminate the requirement that franchisors provide a disclosure document at the “first personal meeting” with prospective franchisees and (2) revise statutory provisions requiring disclosure within “10 business dates” to require delivery “14 calendar days” prior to the signing of an agreement or payment of money. The proposal follows the franchise delivery requirements of the new FTC franchise disclosure rule, which was adopted in 2007. The NASAA project group has solicited internal and public comment on this proposal. The comment period, which began on July 29, extends through August 18, 2009. Further information on the proposal and the procedure for filing written comments appears here at the NASAA website.

 U.S. franchisors faced with a sluggish domestic economy are discovering “willing investors and growth opportunities overseas,” according to an article published August 11 in the Wall Street Journal. The article—by reporter Richard Gibson—says that the overseas push is fueled in large part by saturation of the U.S. market. However, in this challenging economy, the ability of overseas master franchisees to bankroll franchise operations has become even more important, as domestic franchisees find it more difficult to obtain bank loans to finance their businesses. The numbers are compelling. McDonald’s Corp. has opened 286 foreign units this year, compared with only 53 U.S. units. Subway has opened 1,432 units abroad and only about 1,230 here at home. Meanwhile, Curves International Inc. has experienced double-digit growth abroad, particularly in Brazil, Central Europe, and Eastern Europe. Japan is now its biggest overseas market, with 744 locations. It opened its first unit in China in May. Text of the story (“U.S. Franchises Find Opportunity to Grow Abroad”) appears here on the Wall Street Journal online.

 The New York State Department of Taxation and Finance is creating an automatic 90-day extension process for franchisors required by a new law to report gross sales of each franchisee within the state, sales by the franchisor to the franchisee, and any franchisee income reported to the franchisor, according to Troy Flanagan of the International Franchise Association. New legislation, effective on April 7, 2009, requires franchisors to file annual information returns with the State Department of Taxation and Finance on or before March 20. That return must cover the four quarterly sales tax periods immediately preceding. 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. Returns filed on or before March 20, 2010, must cover the period from September 1, 2009 through February 28, 2010. Prior to the initial September 20, 2009, deadline, the Department will post on its website instructions to request an automatic 90-day extension to December 20, 2009. All future annual deadlines will be given a similar treatment, according to Flanagan. Further information on the reporting requirement appears here at the Department website.

New Maine Law Bans Collection of Personal Information, “Predatory Marketing” to Minors

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

A new Maine statute prohibits the collection of health-related or other personal information for marketing purposes from a minor without parental consent and “predatory marketing” to minors.

Under the “predatory marketing” provisions of the new law, a person may not use any health-related information or personal information regarding a minor for the purpose of marketing a product or service to that minor or promoting any course of action for the minor relating to a product.

Violations of the statute are unfair trade practices under the Maine Unfair Trade Practices Act and are also subject to civil penalties of up to $20,000 per violation.

A person about whom information is unlawfully collected or who is the object of predatory marketing in violation of this statute may bring an action for injunctive relief and actual damages or up to $250 in statutory damages for each violation, whichever is greater. The statute provides for an award of attorneys fees and costs upon the finding of a violation.

“An Act to Prevent Predatory Marketing Practices Against Minors” (Public Law 230) was signed by the Governor on June 2, 2009, and will take effect on September 12, 2009.

Text of the law appears here on the Maine State Legislature’s website. It will be reported at CCH Privacy Law in Marketing ¶31,902.

DOJ-USDA Announce Joint Workshops on Antitrust Issues in Agriculture . . .

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

The Department of Justice announced on August 5 that it would, for the first time, hold a series of joint public workshops with the U.S. Department of Agriculture (USDA) to explore competition issues affecting the agriculture industry in the 21st century and the appropriate role for antitrust and regulatory enforcement in that industry.

The joint workshops will address the dynamics of competition in agriculture markets, including, among other issues, buyer power (also known as monopsony) and vertical integration. They also will examine legal doctrines and jurisprudence and current economic learning.

The workshops, which will begin in early 2010 and take place in Washington, D.C. and elsewhere, will provide an opportunity for farmers, ranchers, consumer groups, processors, agribusinesses, and other interested parties to provide examples of potentially anticompetitive conduct and to discuss any concerns about the application of the antitrust laws to the agricultural industry.

The Justice Department and USDA seek comments from interested parties on the application of antitrust laws to monopsony and vertical integration in the agricultural sector, including the scope, functionality, and limits of current or potential rules.

They also invite input on additional topics that might be discussed at the workshops, including:

• The impact of agriculture concentration on food costs,

• The effect of agricultural regulatory statutes or other applicable laws and programs on competition,

• Issues relating to patent and intellectual property affecting agricultural marketing or production, and

• market practices such as price spreads, forward contracts, packer ownership of livestock before slaughter, market transparency, and increasing retailer concentration.

Comments may be submitted to the Department of Justice through December 31, 2009. Comments in paper form should be submitted to: Legal Policy Section, Antitrust Division, Department of Justice, 450 5th Street, N.W., Suite 11700, Washington, D.C. 20001, while the electronic versions of comments should be submitted to: agriculturalworkshops@usdoj.gov.

A press release on the public workshops appears here on the Department of Justice Antitrust Division website.


. . . While Antitrust Division Official Previews Issues to Be Examined

At a conference in St. Louis on August 7, Deputy Assistant Attorney General Philip J. Weiser discussed the current state of affairs in agriculture markets and previewed some of the areas expected to be addressed in the upcoming series of joint DOJ/USDA public workshops on competition issues in the agricultural industry.

Weiser—who is in charge of Policy, Appellate, and International Matters at the Antitrust Division—discussed the role that concerns about agricultural competition played in spurring the enactment of the Sherman Act, particularly trusts controlling the price of livestock in Chicago and cottonseed oil in the South.

Reflecting on the changing nature of the agriculture marketplace, given the technology advances of the last 20 years, Weiser noted the emergence of large firms using patented biotechnology to produce larger crop yields and the Antitrust Division’s activity in evaluating mergers within the industry.

According to Weiser, topics of the upcoming public workshops will include:

• The state and nature of competition in a range of agricultural market segments.

• The impact of vertical integration.

• Concerns about “buyer power” (monopsony).

• Other regulatory regimes, such as the Packers and Stockyards Act.

• Questions about the nature of transparency in the marketplace.

The remarks—“Toward a Competition Policy Agenda for Agriculture Markets"—was delivered at the 11th annual conference of the Organization for Competitive Markets. Text of the speech appears here at the website of the Department of Justice Antitrust Division.

Antitrust Challenge to State Law Implementing Tobacco Master Settlement Fails

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

The U.S. Court of Appeals in St. Louis has rejected a cigarette manufacturer’s claims that an Arkansas law implementing the 1998 Master Settlement Agreement (MSA) between the states and large tobacco companies violated the Sherman Act.

The challenged “Allocable Share Amendment” was neither a per se nor hybrid restraint of trade in violation of the Sherman Act, in the court’s view. Accordingly, dismissal of the antitrust claims (2006-1 Trade Cases ¶75,175) was affirmed.

Under the MSA, the settling tobacco companies agreed to make annual payments for the benefit of the settling states. The amount of each payment is based on the settling tobacco company’s relative national market share. Thus, settling tobacco companies that increase production must increase their proportionate MSA payments.

The MSA allowed settling states to enact statutes requiring nonparticipating manufacturers (NPMs) to make annual payments to an escrow account to settle or pay judgments in potential lawsuits. The State of Arkansas passed such a statute, and later amended it through the Allocable Share Amendment, to ensure that sufficient funds were collected to cover potential liabilities.

The complaining cigarette manufacturer, which was an NPM, challenged the amendment on the ground that it pressured NPMs to charge higher prices to offset escrow payments. It contended that the law was preempted by the Sherman Act because it violated the antitrust laws.

Anticompetitive Effect

Even though the Allocable Share Amendment had an anticompetitive effect, it was not a per se violation of the Sherman Act, the appeals court ruled, because it did not mandate or authorize antitrust conduct in all cases. An anticompetitive effect was insufficient to constitute an antitrust violation. Thus, the “irreconcilable conflict” required for preemption by the Sherman Act was not met.

The higher prices purportedly prevented the complaining tobacco company from competing with other competitors, including those that participated in the MSA. The statutory scheme, however, did not force NPMs to raise prices in all cases. The Allocable Share Amendment did not expressly allow price-fixing or output-fixing or other illegal behavior, nor did it place “irresistible pressure” on the complaining manufacturer to violate the antitrust laws.

The Allocable Share Amendment was also not a hybrid restraint of trade, according to the court. A hybrid restraint of trade occurs when the state passes a law that reinforces a decision by multiple companies to set a pricing scheme in violation of the Sherman Act. The complaining manufacturer alleged that the Allocable Share Amendment imposed on NPMs a parallel cost or pricing structure. However, the Allocable Share Amendment did not mandate a minimum price or cost requirement for NPMs. Moreover, the escrow amount was neither tied to nor authorized by manufacturers participating in the MSA.

State Action Immunity

The court also ruled that the state was immune from Sherman Act liability under the state action doctrine. The MSA was reviewed and approved by Arkansas’s attorney general, properly enacted by the state’s legislation, and duly signed by the governor. Thus, it could be readily characterized as state action.

The challenged Allocable Share Amendment automatically received immunity, pursuant to the U.S. Supreme Court’s 1984 decision in Hoover v. Ronwin (1984-1 Trade Cases ¶65,980).

Dissent

One of the judges on the panel dissented from the majority’s holding that plaintiffs failed to state a cause of action on their Sherman Act claim. The dissenter suggested that the apparent effect of the challenged amendment was to enforce a parallel pricing structure dictated by the tobacco companies that participated in the MSA, which in turn fixed the relative market shares of cigarette manufacturers for the duration of the MSA. The scheme deprived NPMs of the competitive advantage they held based on their choice not to enter into the MSA and interfered with the market forces that establish cigarette prices, the dissent maintained.

In any event, the issue of whether the statute created a hybrid restraint would not be reached because the state action immunity doctrine shielded the state from Sherman Act liability.

The August 4 decision in Grand Rivers Enterprises Six Nations, Ltd. v. Beebe will appear at 2009-2 Trade Cases ¶76,694.

Ads Touting Sport Drink’s Sweat-Like Formula Not Enjoined

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

In a false advertising and trademark dilution case, PepsiCo subsidiary Stokely-Van Camp’s request for a preliminary injunction against Coca-Cola’s advertising of its Powerade ION4 sports drink was declined by the federal district court in New York City.

The court described the dispute as “an advertising battle between two major consumer products companies over one company’s comparison of its beverage to human sweat.”

Stokely-Van Camp (SVC) is the maker of Gatorade, the top-selling sports drink with annual sales of over $4 billion and over 75 percent of the U.S. market.

In March 2009, Coca-Cola launched its reformulated Powerade ION4, which it sought to position as more like human sweat than both old Powerade and Gatorade Thirst Quencher. Coca-Cola differentiated its new product as a sweat replacer, in particular, based on the inclusion of calcium and magnesium, small amounts of which are lost in sweat.

"Incomplete" Sports Drink

Early in its campaign, Coca-Cola launched an aggressive advertising blitz attacking Gatorade head-on. Ads included the claim “DON’T SETTLE FOR AN INCOMPLETE SPORTS DRINK” emblazoned above a half-bottle of Gatorade, along with the claim “MISSING TWO ELECTROLYTES* Ca CALCIUM Mg MAGNESIUM.”

Coca-Cola discontinued the comparative ads expressly targeting Gatorade in early May after SVC filed suit in April. Coca-Cola continued to advertise Powerade ION4 with claims including “The Complete Sports Drink.”

Trademark Dilution

SVC asserted that the advertisements showing half a bottle of Gatorade constituted trademark dilution by tarnishment in violation of the Lanham Act and New York law. However, SVC’s request for preliminary injunctive relief based on trademark dilution was moot, in light of the fact that the ads comparing Powerade ION4 to Gatorade were discontinued, the court ruled.

False Advertising

With regard to SVC’s Lanham Act false advertising claims, the request for preliminary injunctive relief barring Coca-Cola from advertising that Gatorade is “incomplete” and “missing” two electrolytes also was moot, the court held.

SVC argued that its request to enjoin Coca-Cola from running these ads was not moot because Coca-Cola’s alleged record of following a “cheat and retreat” strategy revealed bad faith and a likelihood that it would resume the ads. However, SVC’s fear that Coca-Cola would resume the ads was speculative and did not warrant a preliminary injunction, in light of Coca-Cola’s sworn declarations and testimony under oath that it would not resume the ads during the course of the litigation, according to the court.

Coca-Cola’s continuing advertising of Powerade ION4 as “The Complete Sports Drink” was not proven literally false, the court added. Claims that a product is “The” something-or-other are commonly viewed as mere puffery, the court said. In addition, advertising terms like “complete” have been held to be puffery because they are subjective and could not be proven true or false.

SVC contended that the advertising misleadingly implied that Gatorade was less effective because it lacked calcium and magnesium. However, a Lanham Act claim of implied falsity could not succeed without evidence that consumers viewed the ads as communicating a misleading impression. SVC had not conducted any research to produce such evidence, the court noted.

Unclean Hands

SVC’s own unclean hands precluded issuance of a preliminary injunction against Coca-Cola, the court ruled. Although SVC complained of Coca-Cola’s touting of calcium and magnesium, the evidence at the preliminary injunction hearing demonstrated that SVC too had marketed the advantage of adding calcium and magnesium to Gatorade Endurance Formula.

Some of SVC’s claims appeared to have gone further in that they suggested that calcium and magnesium provide performance or hydration benefits, while Coca-Cola only touted the addition of calcium and magnesium, without claiming that they actually do anything for the consumer other than replace the trace amounts that are lost in sweat, the court concluded.

The August 4 opinion in Stokely-Van Camp, Inc. v. Coca-Cola Co. will be reported in CCH Trade Regulation Reporter and CCH Adertising Law Guide.

EC Proposes Amendments to Block Exemption for Supply, Distribution Agreements

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

The European Commission (EC) proposed a revised Block Exemption Regulation and Guidelines on supply and distribution agreements, including franchise and other types of vertical agreements, on July 28. The proposed amendments would address recent market developments, including the increased buying power of large retailers and Internet sales.

Block exemptions create safe harbors from EC competition law for categories of agreements, relieving the contracting parties from the need to individually analyze the legality of those agreements under the general EC rules regarding vertical agreements. The current block exemption for those types of agreements (Commission Block Exemption Regulation N° 2790/1999) is due to expire in May 2010.

Proposed Amendments

Based on its analysis of the existing supply and distribution agreement block exemption, which has been in effect since 1999, and on stakeholders' comments, the EC found that the existing rules are working well overall and should not be fundamentally modified.

However, in light of recent market developments, the EC suggested amending the existing regulation and guidelines to take into account the increased buying power of big retailers and the evolution of Internet sales.

To address those developments, the EC proposed that the block exemption be available only to vertical agreements in which the supplier's market share does not exceed 30 percent.

The EC's proposal also refined, in the context of Internet sales, the distinction between sales made as a result of active marketing and “passive sales” made as a result of the consumer taking the initiative.

In addition, the proposed amendments address certain conditions imposed in relation to Internet sales, such as a requirement imposed by a supplier that the distributor should have a "brick and mortar" shop before engaging in Internet sales.

Commission Statement

Of the proposed revision, EC Competition Commissioner Neelie Kroes stated:

"Competitive and efficient distribution are essential for consumer welfare and for our economy. The review launched today aims to ensure that the assessment of supply and distribution agreements under the competition rules takes account of recent market developments, namely further increased market power at the level of buyers and new forms of distribution including the opportunities brought by the Internet."

The Commission invited interested parties to submit comments about the proposed revisions by September 28, 2009.

A press release on the proposal appears here on the European Union’s Europa web site. Further information on the proposal—and instructions on how to submit written comments—appear here.

Antitrust, False Advertising Claims Against Credit Bureaus Dismissed

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

Antitrust and false advertising claims brought by Fair Isaac Corporation against the major U.S. credit bureaus—in connection with their joint development of a new credit score competing with Fair Isaac’s—were dismissed by the federal district court in Minneapolis on July 24.

In 2006, Fair Isaac—the developer of the dominant credit score (FICO)—initiated its action against the credit bureaus—Trans Union, Experian, and Equifax—for violating the antitrust laws and engaging in false advertising while jointly developing the “VantageScore” credit score, with the goal of eliminating FICO scores.

Fair Isaac's claims against Equifax were later dismissed with prejudice consistent with a confidential settlement negotiated between the companies.

Antitrust Injury, Standing

According to the court, Fair Isaac lacked standing to seek damages or pursue injunctive relief under the antitrust laws. In order to have standing to seek damages, Fair Isaac had to establish that it suffered antitrust injury—an injury of the type the antitrust laws were intended to prevent and that flowed from that which made the defendants' acts unlawful.

The credit bureaus successfully argued that Fair Isaac did not have standing to recover damages for lost profits because the alleged lost profits would have resulted from an increase in competition rather than a reduced ability to compete. Fair Isaac would not be harmed if the credit bureaus agreed to artificially set the price of VantageScore higher than the price dictated by market forces, because consumers would reject VantageScore in favor of FICO scores, the court explained.

Elimination of Competitor

Even if the alleged goal of the conspiracy was to "eliminate" Fair Isaac from the credit scoring industry, this did not automatically establish injury of the type the antitrust laws were designed to prevent, according to the court. Fair Isaac maintained a dominant presence in the credit scoring market. The alleged goal of eliminating Fair Isaac would be accomplished, if at all, by persuading consumers that VantageScore credit scores were as good as or better than FICO scores and employing temporary price discounts to entice consumers to switch to VantageScore.

A strategy of persuading the market that one product was equal or superior to another product and that the price of the first product presented a higher value proposition than the second was the very nature of competition. The performance of the products as they competed in the market would determine which product prevailed.

Essence of Competition

Moreover, an alleged price fixing conspiracy would have depended on convincing the market (particularly, certain key lenders) that greater value can be realized by switching from FICO scores to VantageScore credit scores. This was the very essence of competition, in the court's view. Even considering the defendants' alleged "bad acts"—such as the use of “disinformation" and false statements, and the ability to manipulate the price of FICO scores relative to VantageScore credit scores by controlling the aggregated credit data and the sale of credit scores—the complaining company failed to establish antitrust standing, according to the court.

Injunctive Relief

Fair Isaac also lacked antitrust standing to seek injunctive relief, the court held, because the company did not face a sufficiently impending or imminent threat to satisfy the standing requirement under Sec. 16 of the Clayton Act.

Evidence suggesting that Fair Isaac lost some small amount of business to VantageScore was not sufficient. Moreover, while a private party might not be required to wait until it was eliminated as a result of alleged antitrust violations to pursue injunctive relief, Fair Isaac still had to satisfy the legal requirement of immediacy for antitrust standing to seek injunctive relief. Despite Fair Isaac's contention that the defendants had simply halted their plans temporarily during the pendency of the lawsuit, with the intention of resuming their efforts when the lawsuit was over, Fair Isaac could presumably take action at that time to protect itself.

Lastly, Fair Isaac had contended that the success of the conspiracy depended on the participation of all three bureaus, and the complaining company had entered into a "preferred partnership" with one of the three bureaus in connection with a settlement agreement of the claims in the dispute, the court noted.

False Advertising

The court rejected Fair Isaac's false advertising claims brought under Sec. 43(a) of the Lanham Act. Statements concerning the extent to which lenders actually used the defending credit bureaus' in-house credit scores and Vantage-Score credit scores in making lending decisions were not literally false or literally false by necessary implication, according to the court.

Fair Isaac contended that, at the time the statements were made, few if any lenders used the in-house scores or VantageScore. However, the credit bureaus successfully argued that the challenged statements failed to convey the implied message that an appreciable number of lenders used the in-house scores or VantageScore in making lending decisions. Moreover, because the statements were susceptible to more than one reasonable interpretation, they could not be literally false.

In addition, representations that VantageScore was better than other credit scores (or even the best in the industry) because it used better technologies and methodologies amounted to mere puffery.

The credit bureaus allegedly represented that VantageScore "allow[ed] credit grantors to evaluate consumer creditworthiness with significantly greater precision," was "more predictive than what's in the market," was "the most accurate scoring algorithm attainable," and was based on the "most up-to-date information available." These claims were merely vague, subjective representations of product superiority, in the court's view.

The decision is Fair Isaac Corp. v. Experian Information Solutions Inc., 2009-2 Trade Cases ¶76,691.

Heart Device Maker Abandons Acquisition After FTC Challenge

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

Mechanical heart pump manufacturer Thoratec Corporation abandoned its proposed $282 million acquisition of rival HeartWare International, Inc. on July 31, after the deal, which was announced in February 2009, came under attack by the FTC.

FTC Administrative Complaint

The FTC charged in an administrative complaint on July 28 that the transaction would substantially reduce competition in the U.S. market for left ventricular devices (LVADs). On July 30, the Commission announced that it would seek a preliminary injunction in federal court to stop the transaction and limit the harm to competition, pending completion of the administrative trial.

According to an FTC administrative complaint, Thoratec—the “world’s leading supplier of LVADs”—currently has a monopoly on the commercial sale of the devices in the United States and sought to maintain its monopoly by acquiring HeartWare, thus eliminating the only significant threat to its continued dominance of the LVAD market.

LVADs are surgically-implantable miniature blood pumps designed to support and sustain patients suffering from end-stage heart failure, typically a fatal condition. LVADs provide full circulatory support by assuming the work of the left ventricle, the heart’s primary pump chamber.

End-stage heart failure patients have severely weakened hearts, and the only curative treatment is a heart transplant. LVADs provide temporary support for end-stage heart failure patients awaiting a donor heart and may function as a permanent therapy for patients ineligible to receive a heart transplant.

Thoratec’s flagship product (the “HeartMate II”), and that product’s predecessor, are the only LVADs currently on the market that are approved for commercial sale by the FDA, the agency noted. HeartWare is one of a small number of companies developing LVADs—and by far the biggest threat to Thoratec, the FTC asserted.

HeartWare’s device, the “HVAD,” is currently being used by patients participating in clinical trials and is positioned to be the next LVAD approved by the FDA. It offers a novel design that promises superior reliability with fewer surgical complications, the agency said.

Competition from HeartWare has already forced Thoratec to innovate even though the HVAD is still in clinical trials, according to the administrative complaint. The competition will intensify once HeartWave’s HVAD receives FDA approval, resulting in lower prices and enhanced features that will increase the availability and quality of these lifesaving devices.

Thoratec’s Response

On July 31, Thoratec announced that it would not proceed with the proposed acquisition. Thoratec President and CEO Gary Burbach declared in a press release that litigation to pursue the acquisition was not in “the best long-term interests” of the company’s shareholders, given what would likely be “a protracted, costly and unpredictable litigation process.

Subsequently, the FTC issued a statement calling the announcement “a major victory for the patients who rely on these critically important life-saving medical devices.”

FTC Bureau of Competition Director Richard Feinstein said “[n]ow that Thoratec and HeartWare have called off their proposed merger, U.S. consumers who are already facing increasing health care costs will reap the benefits of both current and future competition between these two companies.”

Further details regarding In the Matter of Thoratec Corp. and HeartWare International, Inc. appear here at the FTC website.