Federal Antitrust Agencies Advise High Court to Vacate NFL Licensing Decision

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

The federal antitrust agencies filed a joint amicus curiae brief in the U.S. Supreme Court, recommending that the Court vacate a decision of the U.S. Court of Appeals in Chicago (2008-2 Trade Cases ¶76,259), holding that the National Football League and its 32 members did not engage in an illegal antitrust conspiracy by granting an exclusive trademark license to apparel manufacturer Reebok International.

The appellate court had rejected a complaining apparel manufacturer's Sherman Act Section 1 claim on the ground that the league and teams were acting as a single entity when collectively licensing their intellectual property through a jointly-owned licensing affiliate.

The government initially had urged the Court to reject the petition for review. However, on June 29, 2009, the Court granted the petition, which asked:

(1) whether the league and the teams were a single entity exempt from rule of reason claims under Section 1 of the Sherman Act and

(2) whether the license agreement between the league and its members and Reebok International—under which the teams agreed to refrain from competing with each other in the licensing and sale of apparel and to refrain from granting licenses for a period of ten years—was subject to a rule of reason claim.

The American Antitrust Institute and the Consumer Federation of America also filed an amicus curiae brief urging the Court to reverse the Seventh Circuit’s ruling. The brief maintains that the appeals court radically expanded the Copperweld doctrine.

The petition is American Needle, Inc. v. National Football League, Dkt. 08-661.

Text of the amicus brief appears here at the Department of Justice website.

Agency Heads Discuss Antitrust Convergence, Recent Developments

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

Speaking on the topic of international convergence at Fordham University’s 36th Annual Conference on International Antitrust Law and Policy, the heads of the two federal antitrust agencies commented on increased convergence between their respective agencies.

Agencies “In Sync”

In his September 24 remarks, FTC Chairman Jon Leibowitz noted that the FTC and Department of Justice Antitrust Division were much more in sync in recent months, pointing to the recently announced decision for a joint review of the horizontal merger guidelines as an example.

Another indication of growing consensus between the agencies includes Assistant Attorney General Christine Varney’s decision to withdraw the Antitrust Division’s September 2008 report, entitled “Competition and Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act.”

When the Justice Department’s report was released last September, three of the four FTC members objected to it. According to Leibowitz, consistency at home will help efforts to promote international antitrust convergence.

Merger Review

Antitrust Division chief Varney noted that there has been a trend toward convergence in the area of merger review. Varney expressed her belief that “openness to others’ ideas and new approaches is critical to our efforts towards greater convergence.” This openness is reflected in the decision to hold joint Department of Justice/FTC workshops to review the horizontal merger guidelines, as well as the European Commission’s review of its merger review practices and remedies and subsequent 2004 issuance of guidelines regarding horizontal mergers and a 2005 Merger Remedies Study.

Varney also noted that, while there have been “strides towards convergence regarding the standards for single-firm conduct,” there was “a need to continue making progress on that front.” Varney pledged to work toward convergence, noting that a lack of unity regarding single-firm conduct standards presented significant issues for international businesses.

Varney’s September 24 speech is available here on the Department of Justice website.

Fines Imposed by the European Competition Commission

At a later session of the Fordham program, European Commission (EC) Competition Commissioner Neelie Kroes told attendees that fines are starting to deter cartel behavior. “Never, ever under-estimate the effect [of] large fines,” Kroes said. Despite the absence of the threat of jail terms for antitrust violations, “senior management across all sectors . . . are now starting to understand that we mean business.”

Kroes explained that fines were not deterrent in previous decades. “Now, taking better account of the economic impacts of abuses and cartels, we fine in order to deter, linking the fine to the relevant sales of the infringing company,” the official said. “If we catch recidivists—the French glass company Saint-Gobain is a good example—the fine increases are severe.”

Last November, Saint-Gobain was fined 896 million Euros for its role in an illegal market sharing agreement.

The fines are imposed without regard to the nationality of the company, according to Kroes. “I would like to point out that only 13 of the 180 companies fined by the European Commission in my term are based in the U.S.,” she added.

The Commissioner’s remarks appear here on the European Union’s “Europa” website.

Consumer Class Actions Against Apple Dismissed

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

Two class actions—claiming that Apple violated California Unfair Competition Law (UCL) and Consumer Legal Remedies Act (CLRA) by manufacturing defective computers—were dismissed by the federal district court in San Jose.

One class action focused on a defect affecting the Apple PowerBook G4, while the other focused on a defect in the Apple iMac.

PowerBook G4 Claim

Apple designed, manufactured, and sold personal computers, including the PowerBook G4. After buying the PowerBook G4, a number of purchasers discovered that a memory slot was defective, affecting the computer’s performance. One purported class member alleged that Apple had deleted consumer complaints about the memory slots from its website and had refused to repair the defective slot for free.

The consumers brought a UCL action, based on both an alleged breach of implied warranty and a generalized claim of consumer harm, but failed to state a cognizable injury, according to the court.

A standalone claim under the unfair prong of the UCL required the consumers to allege a substantial consumer injury that could not have been avoided. The failure to disclose a defect that might shorten the effective life span of a product that functions precisely as warranted throughout the term of its express warranty cannot be the subject of a UCL claim. Because the defect in this case did not manifest itself until after the expiration of the express warranty, the UCL claim was dismissed.

The CLRA claim—based on Apple’s alleged affirmative misrepresentations—was also dismissed for failure to state a claim. The complaint charged that Apple had a duty to disclose a known defect and that failure resulted in an injury to customers. However, Apple was under only a duty to disclose a known defect if there was a safety concern associated with the defect, the court held. Accordingly, the CLRA claim was dismissed with leave to amend.

The decision is Berenblat v. Apple, Inc., CCH State Unfair Trade Practices Law ¶31,885.

iMac Claim

In the second action, two consumers who purchased the Apple iMac personal computer in 2006 alleged that Apple knowingly or recklessly ignored a defect that affected the display screen, in violation of the UCL and CLRA.

According to the court, the purchaser failed to state a CLRA class action claim against Apple. The CLRA required the purchaser to show that Apple was required to make the disclosure or that Apple gave the public misleading information. Because the purchaser did not sufficiently plead when and where the manufacturer made an affirmative representation that contradicted its alleged omission, the CLRA claim was dismissed.

The court noted that the alleged defect manifested itself more than a year after the expiration of the express warranty, casting doubt on the viability of the CLRA claim in general.

The purchasers did not state a UCL claim against Apple because the allegations did not meet the heightened pleading standard of Federal Rule of Civil Procedure 9(b), according to the court. The purchaser’s claim was overly generalized. A generalized allegation with respect to consumer expectations was not sufficient to maintain a UCL claim based on the unfairness prong.

The decision is Hovsepian v. Apple, Inc., CCH State Unfair Trade Practices Law ¶31,893.

Insurance Agent Could Be “Franchisee” Under Michigan Franchise Sales Law

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

The Michigan Franchise Investment Law could apply to insurance agency contracts, the federal district court in Detroit has decided. Thus, an insurance company was not entitled to judgment on the pleadings on an agent’s claim that it committed deceptive practices in the sale of an agency in violation of the Franchise Investment Law.

The company argued that the Michigan insurance code comprehensively regulated the industry and that applying the franchise law would be incompatible with such comprehensive state regulation. It also pointed to decisions from other states holding that franchise laws in those states were inapplicable to the insurance industry.

There were no Michigan decisions directly addressing the question, the court observed. However, neither the Franchise Investment Law nor the laws of other states explicitly provided an exception for insurance agency agreements. Instead, the relevant statutes—including Michigan’s—simply specified generic characteristics of the contracts that they did cover.

In determining whether insurance agency agreements were governed by the franchise statutes, the courts in other states simply considered whether the agreements exhibited the required characteristics, according to the court. However, absent clearer direction from the Michigan statutes or courts, the court refused to hold as a matter of law that the Franchise Investment Law did not apply to insurance agency agreements.

“Offering, Selling” Goods or Services

The agency agreement at issue fell within the Franchise Investment Law’s requirement that a franchisee be “granted the right to engage in the business of offering, selling, or distributing goods or services under a marketing plan or system prescribed in substantial part” by a franchisor, the court held.

The company argued that Michigan courts have stated that insurance agents were merely “order takers,” while insurance companies owned the insurance polices and actually sold them.

The Illinois franchise sales statute was identical in relevant part to Michigan’s, and an Illinois court had ruled that insurance agents did not fall within the protections of the Illinois law because “the right to sell consists of an unqualified authorization to transfer a product at the point and moment of the agreement to sell or authority to commit a grant to sell” and the insurance agents did not have that authority,

However, that Illinois decision ignored part of the language of the Illinois state and which was identical to Michigan’s, the court reasoned.

A person was a franchisee under the Michigan Franchise Investment Law if he was engaged in selling, offering, or distributing goods or service. The legal meaning of “offering” required that an acceptance would create a contract, and either transfer ownership or create a legal obligation to transfer ownership, the court noted.

If the agent did not own insurance policies and was not authorized to contractually bind the insurance company, he could not offer them in this sense, the court reasoned. But if the word “offering” in the Franchise Investment Law was interpreted to have only such a meaning, the word would have been redundant of the word “selling,” the court determined. Therefore, the term “offer” in the statute must be interpreted more broadly, and less technically, to refer to making goods or services available in a practical, rather than a legal, sense.

By soliciting orders for insurance coverage, with the intention and expectation that the orders would be accepted, insurance agents would fall within this definition. Thus, the agency agreement fell within this part of the “franchise” definition in the Franchise Investment Act, the court held.

Franchise Fee

The issue of whether the agent paid the company a “franchise fee,” as required of a franchisee, could not be determined on the pleadings, the court ruled.

The agent’s claim that he was required to purchase excessively-priced office supplies as a condition of becoming the company’s agent seemed unlikely. However, the court could not make such a factual determination on the pleadings.

An allegation that the agent’s payment for office furniture and computers was a franchise fee was entitled to a presumption of truth at this stage of the litigation. The agent claimed that he was required to pay $12,900 for four-year-old furniture and approximately $3,000 for four-year-old computers.

The purchase of goods was not considered to be a franchise fee under the statute when the goods were purchased at bona fide wholesale prices. However, the agent adequately alleged that the prices paid for the furniture and computers were excessive.

The decision is Bucciarelli v. Nationwide Mutual Insurance Co., CCH Business Franchise Guide ¶14,200.

For a previous blog posting on whether an insurance agent could be considered a "franchisee," see the May 21, 2009 entry on Trade Regulation Talk.

Antitrust Division Commits to Examine Competition in Dairy Industry

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

Christine A. Varney, Assistant Attorney General in charge of the Department of Justice Antitrust Division, told attendees of a field hearing of the Senate Judiciary Committee in St. Albans, Vermont, that the agency was "committed to a careful and comprehensive examination of the [agriculture] marketplace."

Varney's September 19 comments, entitled "Crisis on the Farm: The State of Cooperation and Prospects for Sustainability in the Northeast Dairy Industry," followed a call from Senator Herb Kohl (D.-Wis.) to scrutinize antitrust enforcement in the dairy industry.

Senator Kohl, Chairman of the Senate Agriculture Appropriations panel and Chairman of the Senate Subcommittee on Antitrust, Competition Policy and Consumer Rights, on September 15 sent letters to Secretary of Agriculture Tom Vilsack and Assistant Attorney General Varney, asking them to look into the consolidation of milk processors and anticompetitive practices in agriculture.

Kohl urged them to hold a workshop on dairy issues in Wisconsin, as part of recently-announced workshop series to explore competition issues affecting the agriculture industry in the 21st century.

On August 5, the Justice Department and the Department of Agriculture announced that they would hold joint public workshops to consider the appropriate role for antitrust and regulatory enforcement in the industry.

In her remarks, Varney said that competition issues affecting agriculture were a priority for her. The upcoming hearings reflect this fact, she noted. According to Varney, two particular issues facing the dairy industry—buyer power and vertical integration—will be most likely among those explored in the workshops.

Text of Varney’s written statement appears here on the Department of Justice Antitrust Division’s website.

Store-Brand “Compare To” Statements Could Be False Advertising

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

“Compare To” statements by a manufacturer of store brand joint care dietary supplements (Perrigo Company) were not mere puffery and could constitute false advertising under the Lanham Act and New York law, the federal district court in Central Islip New York has ruled.

The statements could convey a false message of equivalence in formulation and efficacy as compared to branded Rexall Sundown Osteo Bi-Flex products, in the court’s view.

Perrigo countered with false advertising claims against Rexall Sundown, one of which survived summary judgment review.

Product Equivalence Message

Most of Perrigo’s “Compare To” statements invited a comparison of the products’ ingredients, according to the court. The competing products were likely to be shelved near each other in stores, making it more likely that a consumer would understand the Perrigo Products to be equivalent to the national brand.

Much of the text on the side and rear panels of the Perrigo Products matched the prior packaging for Osteo Bi-Flex. Perrigo’s sponsored website stated that a comparison of the active ingredients might reveal that the only differences between the two products were the inactive ingredients, such as the colors etc. and the price.

A consumer survey commissioned by Rexall Sundown raised genuine issues of fact as to whether the “Compare To” statements created a false message of product equivalence in terms of ingredients and/or efficacy that was likely to deceive consumers, the court found.

In addition, a leading U.S. specialist in the field plant-derived drugs stated that the store brand Perrigo products and Rexall Sundown's Osteo Bi-Flex were “significantly different,” based on the higher ratio of an anti-inflammatory ingredient in Osteo Bi-Flex.

Materiality

To prove false advertising, Rexall Sundown was required to demonstrate that a false or misleading representation involved an inherent or material quality of the product. A rational trier of fact could conclude that the disputed issues related to core ingredients and/or efficacy of the supplement, according to the court. In addition, the manner in which the Compare To statements were conveyed—in prominent highlighting and in close proximity to product performance claims—contributed to their materiality.

National Brand’s Ingredient Concentration Advertising

Perrigo raised a disputed issues of fact as to whether Rexall Sundown falsely advertised the key ingredient of its Osteo Bi-Flex products as “10 times more concentrated,” the court held. A consumer survey commissioned by Perrigo concluded that the “10 times more concentrated” claim caused a meaningful proportion of prospective consumers to think that Osteo Bi-Flex provided greater performance benefits than, or was superior to, other products.

Injury and causation could be presumed from comparative superiority claims, the court noted. Perrigo created a triable issue as to whether it was “obvious” that Rexall Sundown's claim targeted Perrigo products and, thus, that injury should be presumed.

Fatal Delay

Perrigo was barred from challenging other claims that Rexall Sundown had featured on packaging and in advertising since the late 1990s.

Perrigo contended that it had no reason to know that the claims were false until the National Advertising Division issued a decision regarding the claims in 2007 (CCH Advertising Law Guide ¶62,608). However, under the doctrine of laches, the court found Perrigo’s delay in bringing suit both inexcusable and prejudicial, in light of Rexall-Sundown's substantial investments in its packaging and advertising.

The September 10 opinion in Rexall Sundown v. Perrigo Co. will be reported in CCH Advertising Law Guide and CCH Trade Regulation Reports.

FTC, Justice Department to Explore Updating Merger Guidelines

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

The Horizontal Merger Guidelines, which are used by the federal antitrust agencies to evaluate the potential competitive effects of mergers and acquisitions, will be the subject of a series of upcoming public workshops.

The goal of the workshops will be to determine whether the Merger Guidelines accurately reflect the current practice at the Department of Justice and the FTC as well as to take into account legal and economic developments that have occurred since the last significant revision of the Merger Guidelines in 1992 (Trade Regulation Reporter ¶13,104). The agencies announced the workshops and request for public comment on September 22.

“The bulk of the Merger Guidelines is over 17 years old,” said FTC Chairman Jon Leibowitz in announcing the review. “The 1992 Guidelines explicitly stated that they would be revised from time to time. We think the time has come to do that.”

“In light of legal and economic developments that have occurred since the last major revision of the guidelines, it is an appropriate time for the antitrust agencies to conduct a review of the guidelines to determine whether any revisions should be made to better protect American consumers and businesses from anticompetitive mergers,” said Christine A. Varney, Assistant Attorney General in charge of the Department of Justice Antitrust Division.

“Having guidelines that offer more clarity and better reflect agency practice provides for enhanced transparency and gives businesses greater certainty when making merger decisions, resulting in a more competitive marketplace that benefits consumers,” she noted.

The first workshop will be held in Washington, D.C., on December 3, 2009, followed by workshops in Chicago, New York City, and San Francisco. A final workshop also will be held in Washington, D.C. in January 2010.

A September 22 news release on the workshops appears here on the FTC website. Further details appear here.

Justice Department, States Object to Google Book Search Settlement

This posting was written by Janette Spencer-Davis, Editor of CCH Copyright Law Reporter, and Jeffrey May, Editor of CCH Trade Regulation Reporter.

The Department of Justice and five state attorneys general were among the hundreds of commenters objecting to the settlement agreement between Google and the Association of American Publishers and the Authors Guild.

Pursuant to the terms of the agreement, awaiting approval in the federal district court in New York City, Google would pay $125 million, while earning the right to continue to digitize books and inserts; sell subscriptions to an electronic books database; sell online access to individual books; sell advertising on pages from books; and make other uses described in the agreement.

The agreement also creates an independent Book Rights Registry that would ultimately keep licensing payments intended for copyright holders that cannot be located.

On September 18, the Justice Department proposed that the parties consider a number of changes to the agreement that might help address the government’s concerns, including:

 Imposing limitations on the most open-ended provisions for future licensing,

 Eliminating potential conflicts among class members,

 Providing additional protections for unknown rights holders,

 Addressing the concerns of foreign authors and publishers,

 Eliminating the joint-pricing mechanisms among publishers and authors, and

 Providing some mechanism by which Google’s competitors can gain comparable success.

A Friday, September 18, Department of Justice news release appears here. The statement of interest filed with the court appears here.

State Attorney General Objections

The objections of the attorneys general focused primarily on unclaimed payments. Several stated that the agreement’s proposed treatment of unclaimed payments would circumvent state unclaimed property laws and could “constitute a misdemeanor.”

Some states require that abandoned property, including unclaimed payments, be deposited with the state treasurer. The states might also be interested in the antitrust impact of the settlement.

Connecticut Attorney General Richard Blumenthal has been reported as saying that the settlement might raise antitrust and copyright issues. A press release on Blumenthal’s comments appears here.

The final “fairness hearing” on the settlement is scheduled to take place on October 7, 2009.

Antitrust Goes to the Movies: The Informant!

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

It’s been nearly 13 years since the U.S. Department of Justice announced what was at the time the largest criminal antitrust fine in history. On October 15, 1996, Archer Daniels Midland Co. (ADM) agreed to plead guilty and pay a $100 million criminal fine for its role in two international conspiracies to fix prices for animal feeds.

Now, all these years later, the story of the man who cooperated with the government to expose the global antitrust conspiracy comes to the silver screen.

The Informant!—a Steven Soderbergh film opening today around the country—tells the story of Mark E. Whitacre, a rising star at ADM, the Decatur, Illinois-based agriculture processing company. Whitacre agreed to become an undercover mole to help the FBI investigate price fixing at ADM in the early 1990s.

For about two-and-a-half years, Whitacre acted as an undercover cooperating witness and secretly taped hundreds of hours of conversations and meetings with top ADM officials and the other conspirators held around the globe.

Whitacre doesn’t turn out to be the ideal government informant. The Seventh Circuit characterized Whitacre’s role in the investigation “as troublesome and, at times, criminal,” noting that he “he lied, cheated, stole and then lied some more.” However, the tapes helped bust the conspiracy.

Not only did ADM plead guilty and agree to pay a record fine, but three high-level ADM executives, including Whitacre himself, were also convicted of conspiring to fix prices. In addition, the whistle blower was convicted of embezzling from ADM, while the antitrust investigation was ongoing.

If you don’t get enough of antitrust at the office, then you might want to head to the movies this weekend to see Matt Damon take on the role of antitrust’s most infamous informant.

The initial reviews for The Informant! are positive. Critic Roger Ebert awarded the film four stars (see the full review here). The Rotten Tomatoes website, which collects reviews from a variety of sources and averages them into a single score, gave the movie a 76 percent (94 positive reviews out of 124 collected). Its consensus summary is “A charismatic turn by star Matt Damon and a consistently ironic tone boost this quietly funny satire about a corporate whistle-blower.”

Here is a link to the indictment against Whitacre.

The 7th Circuit decision affirming convictions of the other two ADM execs (2000-1 Trade Cases ¶72,944) appears here.

Dell Agrees to $4 Million Restitution, Penalties to Settle False Advertising Case

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

New York Attorney General Andrew M. Cuomo has announced that Dell and its subsidiary, Dell Financial Services (DFS), have agreed to pay the attorney general’s office $4 million in restitution, penalties, and costs to resolve charges of fraudulent and deceptive business practices that scammed consumers across New York State.

The settlement follows a decision of the New York Supreme Court, Albany County (CCH Advertising Law Guide ¶63,084), which held that Dell engaged in repeated misleading, deceptive, and unlawful business conduct, including false and deceptive advertising of financing promotions and warranty terms, in violation of New York law.

The lawsuit charged that Dell engaged in bait and switch advertising with respect to its “no interest” financing promotions, misled consumers to believe they had qualified for promotional financing, failed to adequately disclose the terms of its “next day” service contracts, and failed to provide consumers with warranty service and promised rebates.

Mandated Disclosures

Along with the $4 million in restitution, penalties, and fees, the settlement also requires Dell to make sweeping changes to its advertising, sales and financing practices, according to the attorney general’s press release.

Among other things, Dell will be required to advise consumers before they purchase an “at home” or “on site” service contract that they may be required to engage in diagnostic activity over the telephone that includes consumers themselves opening their computers to access internal components. The settlement also requires Dell to disclose in its advertisements for promotional financing the estimated percentage of consumers who will actually qualify for the promotion.

Consumer Claims

New York consumers who were harmed can file a claim for restitution using special claim forms posted on the attorney general’s website, www.nyagdell.com.

Eligible New York consumers include:

• Consumers who financed their computers (and paid interest) after being led to believe that they had qualified for a no-interest promotion (e.g., 90 days, 6 months, 12 months);

• Consumers who did not receive promised rebates;

• Consumers who had difficulty getting Dell to make repairs that were covered by a Dell warranty or service contract;

• Consumers who did not get the promised next day/on site service under service contracts.

Consumer, Privacy Groups Call for Federal Regulation of Online Tracking

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

A coalition of ten consumer and privacy advocacy organizations issued a statement on September 1, calling on Congress to enact legislation to protect consumer privacy in response to threats from the growing practices of online behavioral tracking and targeting.

The coalition outlined its concerns and recommended principles for consumer information privacy legislation in letters sent to the House Energy and Commerce Committee; its Subcommittee on Commerce, Trade, and Consumer Protection; and its Subcommittee on Communications, Technology, and the Internet.

Invasion of Privacy

“Tracking people’s every move online is an invasion of privacy,” the coalition said. “Online behavioral tracking is even more distressing when consumers aren’t aware who is tracking them, that it’s happening, or how the information will be used.”

According to Amina Fazlullah of U.S. Public Interest Research Group (U.S. PIRG), “The rise of behavioral tracking has made it possible for consumer information to be almost invisibly tracked, compiled and potentially misused on or offline. It’s critical that government enact strong privacy regulations whose protections will remain with consumers as they interact on their home computer, cell phones, PDAs or even at the store down the street.”

Beth Givens, Director of the Privacy Rights Clearinghouse, said “The record is clear: industry self-regulation doesn't work. It is time for Congress to step in and codify the principles into law.”

In the coalition’s view, consumer privacy legislation should ensure that:

• Sensitive information is not collected or used for behavioral tracking or targeting.

• Behavioral data is not collected from minors or used, to the extent that age can be inferred.

• Websites and ad networks do not retain or use behavioral data for more than 24 hours without affirmative consent.

• Behavioral data is not used to unfairly discriminate against people or in any way that would affect an individual's credit, education, employment, insurance, or access to government benefits.

A news release, with attached copies of the letters to Congressional leaders, appears here on U.S. PIRG's website. Full text of the coalition’s report (“Online Behavioral Tracking and Targeting, Legislative Primer, September 2009") is available here.

Settlements, Fees Upheld in Antitrust Class Action Against Insurers

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

In a class action alleging a bid rigging and market allocation conspiracy between insurance brokers and insurance carriers, the U.S. Court of Appeals in Philadelphia has upheld final approval of a $121 million settlement with insurer Zurich Financial Services and a $28 million settlement with insurance broker Arthur J. Gallagher & Co.

An award of $29.95 million for attorney fees and expenses in conjunction with the Zurich settlement was also affirmed.

Class certification requirements of Federal Rule of Civil Procedure 23(a) and (b) were satisfied with respect to both settlement classes, and both settlements were fair under Rule 23(e). Thus, objections to the settlement agreements and attorney fees award from dissatisfied class members were properly rejected.

Private Civil Actions, State Investigations

The settlements at issue followed the consolidation of a number of private civil actions. At about the same time, insurance industry investigations were being conducted by various state attorneys general and state departments of insurance.

Under the Zurich settlement, the insurer agreed to establish a $100 million settlement fund. In addition, Zurich entered into settlements with the states, requiring monetary payments. As a result, Zurich agreed to pay $121.8 million to settlement class members.

The Gallagher settlement provided for the payment of $28 million to settlement class members and included an agreement to implement various business reforms. Gallagher agreed to pay up to $8.885 million for class counsel’s attorney fees, litigation expenses, and incentive awards, but no party objected.

Certification of Settlement Class

Objecting class members challenged certification of the settlement class, arguing that there was a predominance of individual issues as opposed to common ones. However, common questions of law and fact existed with respect to each of the elements of the Sherman Act claim, the appellate court held.

For purposes of the Zurich settlement, common questions included whether Zurich conspired with any defending insurance brokers. There were also common questions with respect to the resulting anticompetitive effects of the alleged conspiracy. Moreover, whether class members were proximately injured by Zurich’s conduct was capable of proof on a class-wide basis, even if the amount of damage that each plaintiff suffered could not be established by common proof, the appellate court noted.

Refusal to Certify Subclasses

The district court did not abuse its discretion in refusing to certify separate subclasses, despite the variety of policyholders. Objectors argued that the court should have utilized subclasses or required separate representation for complaining insurance policyholders who purchased a primary insurance policy from or through one of the defendants and policyholders who purchased additional insurance policies in excess of their primary insurance coverage from or through one of the defendants.

The decision did not render the plan of allocation unfair, according to the appellate court. Divergent interests did not exist between the allocation groups to necessitate subclasses. All of the class members shared a unified interest in establishing Zurich’s liability for engaging in anticompetitive conduct, which increased the cost of premiums for all policyholders.

Moreover, the allocation plan was carefully devised to ensure a fair distribution of the settlement fund to the various types of claimants. Policyholders who likely incurred the most damage were entitled to a larger proportion of the recovery than those whose injuries were less severe.

An objector’s “nearly identical challenges” to the Gallagher settlement were also rejected. The essential elements of the antitrust claims involved common questions of law and fact that predominated over individual issues.

Attorney Fees

An award of $29.95 million for attorney fees, expense reimbursements, and incentive awards in the Zurich settlement was upheld by the appellate court. The district court properly concluded that class counsel’s efforts produced at least $100 million for the settlement class, plus $29.95 million separately designated for their fees.

The reasonableness of the fee award was properly evaluated under a percentage of recovery method, even though the settlement was not a typical common fund. Thus, the fee award was 23% of the minimum recovery attributable to class counsel’s efforts or, alternatively, 19.9% of the minimum recovery if expenses and incentive awards were subtracted from the total award. A lodestar cross-check also supported the award, according to the appellate court.

The September 8 decision is In re Insurance Brokerage Antitrust Litigation, 2009-2 Trade Cases ¶76,733. Text of the decision appears here.

Constitutional Attack on Maine Privacy Law Results in Negotiated Order: Challenger

This posting was written by John W. Arden.

A lawsuit challenging the constitutionality of a new Maine privacy law that prohibits the collection of personal information for marketing purposes from minors without parental consent and bars “predatory marketing” to minors has apparently culminated in a negotiated order, according to one of the plaintiffs.

A blog posting by NetChoice—a coalition of trade associations, eCommerce businesses, and online consumers—indicated that, on September 8, federal judge John Woodcock instructed the plaintiffs and Maine officials to work out acceptable language for an order settling the lawsuit.

The parties agreed to an order:

(1) Acknowledging the constitutional defects of the law,

(2) Documenting the state’s promise to refrain from enforcing the law,

(3) Citing the legislature’s promise to revise the law in the next session, and

(4) Putting Maine plaintiff attorneys on notice that suits brought under the law would have to overcome the constitutional questions raised in the action.

Text of the blog item appears here on “The Voice of the eCommerce Industry.”

Statutory Prohibitions

The statute at issue (“An Act to Prevent Predatory Marketing Practices Against Minors,” Public Law 230, see text here) was enacted on June 2, 2009 and became effective on September 12, 2009.

It specifically prohibits the collection of health-related or personal information from a minor for marketing purposes without first obtaining verifiable parental consent. It further bars the sale or transfer of unlawfully collected information. Use of such health-related or personal information for the purpose of marketing a product or service to the minor is prohibited as “predatory marketing.”

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.

Constitutional Challenge

On August 26, the challengers filed an action for injunctive relief in the federal district court in Maine, claiming that the statute violates the First Amendment rights of adults, as well as minors and online operators; violates the Commerce Clause; and is preempted by the federal Children’s Online Privacy Protection Act.

The plaintiffs’ memorandum in support of its motion for injunctive relief alleged that the prohibitions against collecting, transferring, or using information about minors impermissibly regulates protected speech and unconstitutionally restricts the ability of minors to receive information. The statute also violates the Commerce Clause by subjecting interstate Internet commerce to inconsistent regulatory rules, according to the plaintiffs.

On September 2, Maine Attorney General Janet Mills announced that she would not enforce the law, due to her concerns about its constitutionality. (See September 3, 2009 posting on Trade Regulation Talk.)

Neither the Attorney General’s decision not to enforce the law nor the negotiated order between the parties to the lawsuit precludes a private plaintiff from bringing a action under the law.

Thus, the blog item’s conclusion that “This Court Order squashes the threat of the [Maine privacy law]” may be overly enthusiastic.

Claims that Company Schemed to Monopolize Market for Drug Proceed

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

Pfizer Inc. and its subsidiary Warner-Lambert Company LLC have failed to convince the federal district court in Newark, New Jersey, to dismiss claims that the drug maker engaged in an "overall scheme" to monopolize the market for gabapentin anhydrous products by forestalling, if not completely preventing, generic competition for Warner-Lambert's anti-epilepsy drug Neurontin.

In two separate decisions, the court denied motions to dismiss claims filed by direct purchasers, including wholesale drug distributor Louisiana Wholesale Drug Company, and antitrust counterclaims filed in a patent infringement action against generic competitor Purepac Pharmaceutical Company.

Overall Scheme

Both sets of plaintiffs sufficiently alleged that Warner-Lambert engaged in monopolization and attempted monopolization in violation of Section 2 of the Sherman Act, according to the court. They alleged an "overall scheme to forestall, preclude, and delay generic competition" for Neurontin.

As part of the scheme, Warner-Lambert allegedly manipulated the prosecution of a patent to delay its issuance, improperly listed patents in the Food and Drug Administration (FDA) Orange Book to obtain additional stays of approval for generic applicants, filed objectively baseless patent infringement actions, and engaged in the fraudulent promotion of the drug for off-label uses.

Antitrust violations were not asserted on the basis of any of those activities independently. Rather, an overall pattern of alleged abuse of the regulatory process was targeted.

Antitrust Injury

Both the direct purchasers and the generic competitor sufficiently alleged antitrust injury, a threshold requirement for antitrust standing, the court held. Moreover, the alleged injuries flowed from the drug company's purported violations of Sec. 2 of the Sherman Act.

Warner-Lambert contended that there was no causal link between some of the challenged conduct—such as the allegedly sham patent litigation and fraudulent promotion of the drug for off-label uses—and the direct purchasers' alleged injury.

It suggested that allegations concerning the patent litigation could not support antitrust claims because generic competition was impossible regardless of the 30-month stay imposed by the patent actions and that the inability of generic manufacturers to obtain even tentative FDA approval until after the stays associated with the patent suits expired was an independent barrier to generic entry.

Further, Warner-Lambert contended that the direct purchasers' alleged injury was not connected to any off-label marketing of Neurontin. However, at the motion to dismiss stage, the direct purchasers sufficiently alleged that they suffered an antitrust injury in the form of overcharges on their purchases of gabapentin anhydrous and that such injuries flowed from the allegedly unlawful conduct, according to the court.

The generic competitor's standing to assert counterclaims could be supported by Warner-Lambert's alleged manipulation of the regulatory advantages afforded by its patents for Neurontin to prevent generic entry into the Neurontin marketplace, the court decided. Moreover, it had already been determined that the generic drug company had sufficiently alleged a causal connection between the challenged conduct and the injury imposed.

Noerr-Pennington Doctrine

In addition, the antitrust claims were not dismissed on the ground that Warner-Lambert's conduct in prosecuting a patent and its efforts to enforce patents against generic manufacturers through infringement actions were immune from antitrust liability under the Noerr-Pennington doctrine, which shields government petitioning activity from antitrust attack.

The generic competitor alleged that the branded drug company manipulated the prosecution of a patent, not to promptly obtain government action in its favor but rather to delay its issuance, forestall generic competition for Neurontin, and improperly preserve its patent monopoly.

The branded drug company allegedly withheld prior art, abandoned a patent application that had already been approved approximately one month before the patent was scheduled to issue, and filed unnecessary continuation applications. Abuse of the Patent Office's administrative and regulatory process itself was not entitled to immunity, the court explained.

The direct purchasers also adequately alleged facts which, if proven, would show that Warner-Lambert engaged in unlawful manipulation of the patent approval process for one of the patents.

Although Warner-Lambert's aggressive practice of filing patent infringement cases against generic drug companies was presumptively immune from antitrust scrutiny under the Noerr-Pennington doctrine, a determination could not be made on a motion to dismiss. Judgment on the issue could be resolved later in the proceedings, the court explained.

The two decisions are In re Neurontin Antitrust Litigation, 2009-2 Trade Cases ¶76,723, and In re Gabapentin Patent Litigation, DC N.J., 2009-2 Trade Cases ¶76,724.

Facebook Agrees to Privacy Safeguards After Canadian Investigation

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

Online social networking site operator Facebook has agreed to add significant new privacy safeguards and make other changes in response to the Privacy Commissioner of Canada’s recent investigation into Facebook’s privacy policies and practices, the Privacy Commissioner announced on August 27.

On July 16, Privacy Commissioner Jennifer Stoddart issued a report on an in-depth investigation triggered by a complaint from the Canadian Internet Policy and Public Interest Clinic (CCH Privacy Law in Marketing ¶60,350).

Stoddart was particularly concerned about the risks posed by the over-sharing of personal information with third-party developers of Facebook applications, such as games and quizzes.

Facebook was given 30 days to respond to the Commissioner’s report and explain how it would address the outstanding concerns. Following a review of Facebook’s formal response and discussions with company officials, Stoddart said she is now satisfied that Facebook is on the right path to addressing the privacy gaps on its site.

Changes to Privacy Practices

Facebook has agreed to make changes to help users better understand how their personal information will be used and, ultimately, make more informed decisions about how widely to share that information. The Commissioner’s office will follow up with Facebook as the changes are implemented.

With regard to third-party application developers, Facebook has agreed to retrofit its application platform to prevent any application from accessing information until express consent is obtained for each category of a user’s personal information the developer wishes to access.

According to Facebook, implementing the necessary significant technological changes to its application platform will take one year.

Facebook also agreed to make it clear to users that they have the option of deleting their accounts, rather than merely deactivating them. In addition, Facebook agreed to change the wording of in its privacy policy to explain what will happen in the event of a user’s death.

Further information on the agreement is available here on the Privacy Commissioner’s website.

FDA Filing by Drug Company Was Not Sham Petitioning, Monopolization

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

The federal district court in New York City has refused to disturb a jury's verdict that Sanofi-Aventis (Aventis) did not violate Section 2 of the Sherman Act by filing a petition with the Food and Drug Administration (FDA), purportedly in an effort to delay approval of generic competition to its rheumatoid-arthritis drug sold under the name “Aravae.”

Complaining wholesale drug distributors' motions for judgment as a matter of law—or, alternatively, for a new trial—were denied.

Citizen Petition

Shortly after Aventis' period of patent exclusivity for Aravae expired, the drug company filed a "Citizen Petition," asking the FDA to impose certain conditions on the approval of applications for generic versions of Aravae.

The FDA ultimately denied the petition and approved applications for six generic manufacturers to produce and sell generic leflunomide, including one manufacturer who did so pursuant to an agreement with Aventis to sell an "authorized generic" version of the drug.

In denying the petition, the FDA noted that Aventis' request for relief "seem[ed] to be based on a false premise." An action was later filed on behalf of a class of wholesale drug distributors who alleged they were injured by the delayed market entry of generic leflunomide that they claimed was the direct result of Aventis' petition, an alleged act of monopolization in violation of Sec. 2 of the Sherman Antitrust Act.

Noerr-Pennington Doctrine

Although the court had previously denied Aventis' motion for summary judgment based on the Noerr-Pennington doctrine (2008-2 Trade Cases ¶76,339), it upheld the jury's determination that the drug company's conduct was protected by the doctrine, which shields government petitioning activity from antitrust attack.

The first question of the two-pronged test for determining whether government petitioning was protected from antitrust attack by the Noerr-Pennington doctrine—or actionable under the sham exception—was whether the petitioning was objectively baseless. The jury concluded that the petition was not "objectively baseless."

The wholesale drug distributors argued that the petition was objectively baseless because it was not only contrary to FDA statutes, regulations, and practices, but also lacked medical or scientific basis. However, there was ample evidence introduced at trial that tended to show that the issues raised by the Citizen Petition, which concerned dosage strengths and labeling, were sufficiently novel and unsettled to permit an objectively reasonable drug company to perceive some likelihood that the FDA would grant the relief requested, according to the court.

The August 28 decision in Louisiana Wholesale Drug Co., Inc. v. Sanofi-Aventis will appear at 2009-2 Trade Cases ¶76,720.

Administration Reportedly Considering Two for FTC Vacancies

This posting was written by John W. Arden.

The Obama Administration is considering two candidates for open positions on the Federal Trade Commission, according to a story published by Reuters on September 3.

There has been an open position on the Commission for the last 18 months—since Deborah Platt Majoras resigned in March 2008. The term of Commissioner Pamela Jones Harbour expires this month. She is not expected to be nominated for another term.

The two candidates reportedly under consideration are Julie Brill, Senior Deputy Attorney General and Chief of Consumer Protection for North Carolina, and Edith Ramirez, a partner with Quinn Emanuel Urquhart Oliver & Hedges, LLP, a 400-plus lawyer firm based in Los Angeles.

Brill, a graduate of Princeton University and New York University School of Law, previously served as Assistant Attorney General of the Consumer Protection Division of the Vermont Attorney General’s Office. She has received several honors in her government service, including Privacy International’s 2001 Brandeis Award for work on privacy issues and the 1995 National Association of Attorneys General Marvin Award for leadership in advancing the goals of the organization. Brill is a Lecturer-in-Law at Columbia Law School.

Ramirez is a graduate of Harvard-Radcliffe College and Harvard Law School, where she worked on the Harvard Law Review with President Barack Obama. In her law practice, she has handled a broad range of complex business litigation, including matters involving copyright and trademark infringement, antitrust, and unfair competition. She served in the Obama presidential campaign as Director of Latino Outreach in California.

The Federal Trade Commission is headed by five Commissioners, nominated by the President and confirmed by the Senate, each serving a seven-year term. No more than three Commissioners can be of the same political party. Currently, the Commission is chaired by Democrat Jon Leibowitz. The other members are Commissioner Jones Harbour, an Independent, and Republicans William E. Kovacic and J. Thomas Rosch.

The Reuters story appears here.

Do Market Concentration, Pricing Practices Warrant Antitrust Probe of “Big Beer”?

This posting was written by John W. Arden.

By announcing plans to raise beer prices during a recession, while beer demand slumps, the two major beer producers in the U.S. are “almost begging for an antitrust review of the industry,” according to an article posted August 31 on Slate magazine’s “The Big Money” blog.

Both Anheuser-Busch InBev and MillerCoors have announced price increases for the coming months, despite flat sales. The two companies increased prices at about the same time last year. The planned increases could raise the price of a 12-pack by about a dollar in some markets.

But “with 80% market share, it’s pretty easy for them to raise prices without seeing too many volume decreases,” Dinesh Gauri, assistant professor of marketing at Syracuse University, told the Wall Street Journal.

Declining Volume, Increased Prices

Despite beer volumes declining at the sharpest rates in more than a decade, both beer giants reported strong profits this year. Adjusted income for MillerCoors rose 27% in the first six months of 2009, as compared to the first six months of 2008. Anheuser’s North American division experienced a 29% increase in earnings in the first half of the year.

Although both companies cite rising expenses as the cause of their planned increases, critics have noted that “key price drivers”—such as hops and barley—are not seriously increasing in price. Nevertheless, beer prices have risen faster (up 4.6 percent) than consumer goods overall (down 2.1 percent) this year.

The parallel price increases “raise a red flag,” according to Aliza Rosenbaum and Rob Cox, writing on the “Big Money” blog. The companies’ ability to raise prices, “while their customers are hurting most, highlights the tremendous pricing power that has accompanied consolidation in the industry in recent years.”

Waning Competition

Between 1947 and 1995, the number of U.S. brewers decreased by more than 90 percent. When the “big three” (Anheuser, Miller, and Coors) were still around, there was competition in the U.S. market, according to Rosenbaum and Cox.

However, the June 2008 joint venture of Miller and Coors and the July 2008 acquisition of Anheuser Busch by global brewing giant Inbev changed the landscape of the industry. Since then, the “big two” have shown no interest in competing on price.

If the Obama Administration takes a stricter approach to antitrust enforcement, “big beer” may be in its sights, according to the article. An antitrust investigation may be politically popular, particularly since the big brewers are “for all intents and purposes, foreign-owned.”

The article (“Breaking Up Big Beer: Should Obama go after the bloated brewers?”) appears here on “The Big Money” website.

Maine Attorney General Will Not Enforce New Privacy Law for Minors

This posting was written by John W. Arden.

Maine Attorney General Janet Mills has announced that—because of constitutionality concerns—she will not enforce a recently-enacted state privacy law that prohibits the collection of personal information for marketing purposes from minors without parental consent and bars “predatory marketing” to minors.

According to a story posted yesterday on Digits, the Wall Street Journal technology blog, the attorney general indicated that, pending review of the law by the Senate Judiciary Committee in January, she will not prosecute parties that fail to comply with the law.

Constitutional Issues

“Attorney General Mills shares many people’s concerns about the constitutional issues presented by the statute and the rights of minors to access information, and therefore she will not be enforcing the law,” said Kate Simmons, spokesperson for Attorney General Mills.

Those voicing concerns about the constitutionality of the law include a group of companies and organizations (including AOL, eBay, Reed Elsevier, and Yahoo) that filed an August 26 lawsuit, claiming that the statute violates the First Amendment rights of adults, as well as minors and online operators.

Private Right of Action

The attorney general’s refusal to prosecute will not preclude enforcement of the law by private parties, who have a private right of action under the privacy law and under the Maine Unfair Trade Practices Act.

Violations of the privacy statute constitute unfair trade practices under the Maine Unfair Trade Practices Act, which subjects violators to civil penalties of up to $20,000 per violation.

In addition, 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 under the privacy law 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.

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 is scheduled to take effect on September 12, 2009. Text of the law appears here on the Maine State Legislature’s website.

The article—by report Marisa Taylor—appears here on the Wall Street Journal’s Digits blog. Further details about the law appear in an August 12, 2009 posting on Trade Regulation Talk.

Former Pfizer Sales Rep Awarded $51.5 Million in Marketing Fraud Settlement

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

Whistleblower lawsuits filed under the qui tam provisions of the False Claims Act triggered the government investigation that led to Pfizer’s agreement to pay $2.3 billion for fraudulently marketing drugs for off-label uses, according to today’s Department of Justice press release announcing the settlement.

Over $51.5 million of the settlement proceeds were awarded to John Kopchinski, a former Pfizer sales representative, West Point graduate, and Gulf War veteran. Another $50.5 million was divided between five other False Claim Act “relators” or whistleblowers.

Qui Tam

“Qui tam” is short for qui tam pro domino rege quam pro se ipso in hac parte sequitur, meaning “[he] who sues in this matter for the king as [well as] for himself,” according to Wikipedia.

Under the False Claims Act, 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. See the August 24, 2009 Trade Regulation Talk posting, “False Claims Act Amendments Expand Liability for Private Sector.”

Pfizer has agreed to pay $1 billion to resolve allegations under the False Claims Act that the company illegally promoted four drugs—Bextra, an anti-inflammatory withdrawn from the market in 2005; Geodon, an anti-psychotic; Zyvox, an antibiotic; and Lyrica, an anti-epileptic drug.

False Claims to Government Health Care Programs

Pfizer allegedly caused false claims to be submitted to government health care programs for uses that were not medically accepted indications and therefore not covered by those programs. The civil settlement also resolves allegations that Pfizer paid kickbacks to health care providers to induce them to prescribe these, as well as other, drugs.

The federal share of the civil settlement is $668,514,830 and the state Medicaid share of the civil settlement is $331,485,170. This is the largest civil fraud settlement against a pharmaceutical company in history, according to the Department of Justice.

Criminal Liability

Pfizer subsidiary Pharmacia & Upjohn Company Inc. has agreed to plead guilty to a felony violation of the Food, Drug and Cosmetic Act for misbranding Bextra with the intent to defraud or mislead.

Under the Food, Drug and Cosmetic Act, a company must specify the intended uses of a product in its new drug application to FDA. Once approved, the drug may not be marketed or promoted for so-called “off-label” uses—i.e., any use not specified in an application and approved by FDA.

Pfizer promoted the sale of Bextra for several uses and dosages that the FDA specifically declined to approve due to safety concerns, according to the Department of Justice. The company will pay a criminal fine of $1.195 billion, the largest criminal fine ever imposed in the United States for any matter. Pharmacia & Upjohn will also forfeit $105 million, for a total criminal resolution of $1.3 billion.

State Consumer Protection Laws

In addition, Pfizer announced that it has reached agreements with attorneys general of 42 states and the District of Columbia to settle state civil consumer protection law allegations related to past promotional practices concerning Geodon. The company will pay a total of $33 million to the settling states.

The settlement documents appear here on the Department of Justice website.

A detailed fact sheet jointly posted by the U.S. Department of Health & Human Services and U.S. Department of Justice is here.

The False Claims Act complaint of John Kopchinski is posted here.

FTC Raises Fees for Accessing Do-Not-Call Registry . . .

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

The Federal Trade Commission has announced increases to the fees for accessing the Telemarketing Sales Rule’s Do-Not-Call Registry.

Rule revisions will increase the annual fee for access to the registry for each area code of data to $55 per area code (up from $54), or $27 per area code of data during the second six months of an entity’s annual subscription period. The maximum amount that would be charged to any single entity for accessing area codes of data is increased to $15,058 (up from $14,850). The fee increase takes effect October 1, 2009.

The final rule increasing fees appears here in the Tuesday, August 24, 2009 issue of the Federal Register.

. . . Announces Settlement Prohibiting Deceptive “Robocalls”

On September 1, 2009, the same day the Telemarketing Sales Rule’s prohibition on “robocalls” took effect, the FTC announced a settlement with a warranty company that prohibits the company and its owner from making any prerecorded calls to trick consumers into buying vehicle service contracts under the guise that they were extensions of original vehicle warranties.

The agency alleged that the company, Transcontinental Warranty, Inc., bombarded consumers with millions of the prerecorded calls earlier this year.

Transcontinental Warranty is one of several companies behind the auto warranty scam that the FTC sued in response to a flood of complaints about the robocalls, which used random, prerecorded voice messages to deceive consumers into thinking that their vehicle warranties were about to expire, according to the agency.

The FTC also has filed a complaint against the telemarketers who made the prerecorded calls, Voice Touch, Inc., Network Foundations, LLC, and Voice Foundations, LLC, as well as their three principals. That case is still pending in federal court. The court has barred the defendants from making any further deceptive robocalls until the litigation is resolved.

Under the proposed consent decree, Transcontinental and its owner, Christopher Cowart, will be barred from the deceptive tactics they used to sell its vehicle service contracts.

The defendants also will be prohibited from selling Transcontinental’s customer lists or trying to collect money from people who were victimized by the scam. In addition, they will be required to cooperate in the FTC’s ongoing investigation of the related case. The proposed settlement includes a $24 million judgment against the defendants, which is suspended because of their inability to pay.

A press release and the proposed consent decree in FTC v. Transcontinental Warranty, Inc., FTC File No. 0923110, appears here.

New Rule on Prerecorded Messages to Be Enforced

In announcing the settlement on September 1, the FTC took the opportunity to remind telemarketers that it would begin enforcing a new rule restricting prerecorded calls.

Telemarketers who transmit prerecorded messages to consumers without their prior written agreement could face penalties of up to $16,000 per call.

There are some prerecorded calls that will not be subject to the new rule, such as those that deliver purely “informational_ messages, and calls from politicians, banks, telephone carriers, and most charitable organizations, according to the agency.

Further information on the new rule appears here on the FTC website.