New Consumer Protection Agency, FTC Powers Approved by House Committee

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

The House Energy and Commerce Committee yesterday approved legislation creating a new Consumer Financial Protection Commission, streamlining FTC rulemaking procedures, and broadening the FTC's authority to seek relief in court.

The committee reported favorably the proposed “Consumer Financial Protection Agency Act of 2009” (H.R. 3126), as amended, by a vote of 33 to 19.

This was the second House panel to approve the bill. The House Financial Services Committee reported favorably on the measure on October 22.

The legislation calls for a new Consumer Financial Protection Agency with broad rulemaking authority to prohibit unfair, deceptive, and abusive acts and practices with respect to financial products and services, among other responsibilities. The new agency would take over some of the consumer protection functions of the federal banking agencies and the FTC.

Effect on FTC Jurisdiction

The proposed legislation states that it preserves the FTC's authority under the FTC Act. However, the Electronic Funds Transfer Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Truth in Lending Act, and certain provisions of the Gramm-Leach-Bliley Act would come within the jurisdiction of the new Consumer Financial Protection Agency.

The Energy and Commerce Committee amended the legislation to strengthen the FTC's authority where it has shared jurisdiction with the new agency. Where there is shared jurisdiction, the version of the legislation approved by the House Financial Services Committee required the FTC to provide 30 days' notice to the Consumer Financial Protection Agency of its intention to file an enforcement action and the new agency would have the right to intervene.

The House Energy and Commerce Committee-approved version would eliminate the “waiting period” imposed on the FTC. Under the Energy and Commerce Committee-approved version, the FTC would merely be required to provide notice upon initiating an enforcement action.

The Energy and Commerce Committee-approved version would also impose a reciprocal notification requirement, such that the new agency would be required to notify the FTC of its enforcement actions, and the FTC would have a right to intervene.

A provision that would have substituted the director of the new agency for the FTC as a party to any pending actions after the creation of the new agency was stricken from the Energy and Commerce Committee version of the measure.

The Energy and Commerce Committee approved an amendment that would establish the new agency as a five-member independent commission, similar to the FTC, instead of having the agency headed by a single director. There would also be no automatic transfer of staff from the FTC to the new agency as originally proposed.

FTC Rulemaking Procedures

H.R. 3126 would streamline FTC rulemaking authority. It would grant the agency the authority to promulgate rules using Administrative Procedure Act (APA) “notice and comment” rulemaking procedures. The new APA procedures would replace the FTC’s current Magnuson-Moss rulemaking procedures, which are far more time-consuming.

Civil Penalty Authority

Energy and Commerce Committee Chairman Henry Waxman (California) introduced “an amendment to further strengthen the FTC’s litigation authority.” The amendment, which was approved in a 19 to 17 vote, would add language to the Consumer Financial Protection Agency Act authorizing the FTC to seek civil penalties in federal court actions for violations of Sec. 5 of the FTC Act.

Currently, the FTC can file an action in federal court to obtain injunctive relief and it can seek civil penalties for violations of its existing consent decrees. However, the agency must first present actions seeking civil penalties for violations of Sec. 5 of the FTC Act to the Department of Justice, which decides whether to file the suit.

Ranking Republican Member Joe Barton (Texas) unsuccessfully opposed the amendment, saying that it was wise to keep the Department of Justice in the process as a check on the FTC.

FTC Reaction

FTC Chairman Jon Leibowitz issued a statement, lauding the Committee’s passage of the bill.

“Americans are still experiencing a period of extreme financial distress, and the modest new authority given to our agency will help ensure that we have the tools necessary to fight fraud and go after those who perpetrate it,” the statement said. “We commend the House Energy and Commerce Committee, and especially Chairman Waxman, for their visionary work on behalf of consumers.”

“Steam” Dryer Claims Could Be Lanham Act False Advertising

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

Allegations that Whirlpool’s advertisements for “steam” clothes dryers were literally false could not be rejected at the summary judgment stage of a Lanham Act false advertising case brought by competitor LG Electronics, the federal district court in Chicago has ruled.

LG alleged that the advertised dryers did not actually employ steam to remove odors and wrinkles from fabrics. Whirlpool's “steam” dryers worked by introducing a spray of cool water into a hot, spinning dryer drum where heat and moving air speeded evaporation of moisture from the dampened clothes.

Whirlpool unsuccessfully contended that the advertised dryers satisfied the meaning of “steam” employed by Consumer Reports, other magazines, and other competitors. Whirlpool identified no binding precedent holding that the behavior of competitors was relevant to whether its own advertising claims were literally false. Evidence from Consumer Reports articles and the like was inadmissible on summary judgment to prove the truth of the matters asserted, according to the court.

Whirlpool did not respond to LG's contention that the advertising was literally false because it necessarily implied the unambiguous message that Whirlpool's dryers created and used steam whereas conventional dryers did not.

Disputed Definition of “Steam”

Whirlpool's expert testimony that its dryers met the definition of steam as “vapor arising from a heated surface” was not conclusive, given the existence of competing definitions.

Considering the context of the advertising claims—touting the use of steam as a new way to care for clothes—a finder of fact could conclude that Whirlpool necessarily implied the unambiguous message that Whirlpool’s dryers refreshed clothing by a process not previously available in Whirlpool’s non-steam dryers, the court found. Finally, Whirlpool failed to support its contention that the use of the word “steam” in an LG-owned patent for conventional dryers constituted an admission that “vapor arising from a heated surface” in Whirlpool's dryers constituted steam.

Implied Falsity—Consumer Survey

A consumer survey was admissible to support allegations that Whirlpool’s advertisements conveyed an implied message to consumers, the court held. The LG survey consultant had designed and supervised over 500 consumer surveys in the areas of trademark, trade dress, advertising perception, and advertising claim substantiation.

Whirlpool contended that the survey was unreliable because LG's expert ignored the results of open-ended questions, improperly based his opinion solely on the result of a closed-ended question at the end of the survey, and used a “control” commercial too different from the “test” commercial. Whirlpool’s criticism was held to address the weight of the study, rather than its admissibility. Evaluating technical deficiencies and awarding weight to this evidence was the province of the trier of fact.

Expert Testimony—Consumer Perception

A thermodynamics expert's testimony for LG on consumer perception as to the definition of steam was stricken because he had no expertise in consumer perception, according to the court. However, his testimony that Whirlpool “steam” dryers did not create thermodynamic steam was not stricken because Whirlpool's objections went to the weight of the testimony, and Whirlpool would be free to cross-examine him regarding his application of the definition of steam to Whirlpool’s steam dryers.

The deicision is LG Electronics U.S.A. v. Whirlpool Corp., CCH Advertising Law Guide ¶63,596.

Buyers' Monopolization Claims over Patented Drug Resurrected

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

Purchasers of a patented antidiuretic drug could maintain federal antitrust claims against the drug's manufacturer and exclusive licensed marketer for allegedly abusing the patent system to unlawfully maintain a monopoly over the drug, the U.S. Court of Appeals in New York City has decided.

Dismissal of the suit for lack of standing and failure to state a claim (2007-1 Trade Cases ¶75,726) was therefore vacated, and the matter was remanded.

As an initial matter, the appellate court rejected an argument by the defendants that the appeal properly belonged in the Federal Circuit. The Federal Circuit had exclusive jurisdiction over appeals when the district court's jurisdiction was based on patent law, the court noted. However, patent law had not created the cause of action in the case, and the purchasers' right to relief did not necessarily depend on resolution of a substantial question of federal patent law.

While their Walker Process-based legal theories (antitrust claims stemming from fraudulent procurement of a patent) did depend on patent law, an additional theory they maintained—that the marketer violated the antitrust laws when it filed a sham citizen petition asking the Food and Drug Administration (FDA) to require additional testing of a generic equivalent—did not.

Antitrust Standing

The purchasers had standing to recover overcharge damages resulting from the defendants' alleged conduct, the court said. Such an injury plainly was of the type the antitrust laws were intended to prevent.

Although the conduct at issue targeted the manufacturer's and marketer's competitors, the purchasers' claimed injury of higher prices was inextricably intertwined with the conduct's anticompetitive effects and thus flowed from that which made the acts unlawful.

The purchasers were proper plaintiffs, even though their injuries were derivative of the direct harm experienced by the defendants' competitors. While competing drug makers might have been the parties most motivated to enforce the laws, the purchasers too were significantly motivated due to their natural economic interest in paying the lowest price possible.

The overcharge damages they sought differed from the lost profits of which the competitors could complain and would have been left unremedied were they denied standing, the court added. This difference signified a lack of potential for duplicative damages, even assuming some overlap. Moreover, the claims did not rest on tenuous assumptions about the beneficial effects of generic competition.

Walker Process Claims

The appellate court declined to decide whether the purchasers had standing per se to raise their Walker Process claims. As they were challenging an already tarnished patent, the purchasers were entitled to antitrust standing without altering the limits on who can start a challenge to a patent's validity. Therefore, they had standing to raise Walker Process claims for patents that were already unenforceable due to inequitable conduct, and the lower court erred by concluding to the contrary, in the appellate court's view.

The direct purchasers adequately pled an antitrust claim under each of their legal theories, the court held. Given that the alleged fraudulent omissions made to the Patent and Trademark Office occurred over a number of years, the defendants' intent to deceive was sufficient to plausibly support a finding of Walker Process fraud. The fact of non-disclosure sufficed to properly allege materiality, the court added.

The purchasers' allegations also adequately made out a sham litigation claim, a claim based on improper FDA Orange Book listing, and the claim based on a citizen petition theory, the court concluded.

The October 16 decision is In re: DDAVP Direct Purchaser Antitrust Litigation, 2009-2 Trade Cases ¶76,770.

Marketing for “Phased Out” Cell Phone Could Violate California Unfair Competition Law

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

Wireless telephone subscribers stated California Unfair Competition Law (UCL) and Consumer Legal Remedies Act (CLRA) claims against AT&T, based on the company’s marketing and sale of a premium cell phone that it was allegedly in the process of phasing out, according to a California appellate court.

The subscribers purchased premium cell phones, which AT&T marketed as technologically advanced and capable of working around the world. However, the subscribers alleged that AT&T had no intention to continue to support and service the cell phones and was making changes to its wireless system that would substantially degrade service to subscribers using the phones.

To phase out the cell phones, AT&T sent the subscribers replacement phones that did not work around the world and cost significantly less than the original phone.

Misleading Representations

The subscribers stated a UCL cause of action against AT&T, according to the court. The UCL claim was based on the fraud prong of the UCL, and focused on AT&T’s representations that, although true, were likely to mislead the public. A business practice is deemed deceptive in violation of the UCL if a reasonable consumer was likely to be deceived. In light of the conduct alleged, the court could not conclude as a matter of law that reasonable consumers would not have been deceived.

Although AT&T argued that the subscribers had to plead the specific advertisements or representations they relied upon in making their purchasing decisions, the court found that a determination could not be made as a matter of law that the claim was not viable.

The subscribers alleged that, prior to their purchase of the cell phones, they conducted research and encountered advertisements and press releases explaining the advanced features of phone and improvements being made to the network the phone utilized. The subscribers did not need to present the specific advertisements to the court in order to have standing to bring the claims.

False Advertising Claim

Because they failed to show an injury in fact, the subscribers did not have standing to bring a California False Advertising Law (FAL) claim against AT&T, according to the court.

The subscribers alleged that AT&T violated the FAL by offering a free upgrade phone to owners of the phone at issue, but the phone offered did not have the same capabilities as the original phone.

In order to have standing, the subscribers needed to establish an injury in fact and loss of money or property as a result of a violation of the FAL. Even if it could be said that the return of an allegedly useless phone constituted an injury in fact, the subscribers did not suffer an injury because they declined to return their phones.

The decision is Morgan v. AT&T Wireless Services, Inc., CCH State Unfair Trade Practices Law ¶31,919.

Antitrust Division Asked to Investigate Bestseller Book Pricing

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

The American Booksellers Association—a trade organization representing locally owned, independent booksellers—has asked the Department of Justice Antitrust Division to investigate alleged predatory pricing by Amazon.com, Wal-Mart, and Target.

In its October 22 letter, the trade group requested a meeting with Christine Varney, Assistant Attorney General Antitrust Division, and Molly Boast, Deputy Assistant Attorney General for Civil Matters, to discuss the retailers' pricing of recent best sellers and its impact on small bookstores.

Price War in Internet Sales

The trade association points to recent reports that Amazon.com, WalMart.com, and Target.com have engaged in a price war in the pre-sale of new hardcover bestsellers, which typically retail for between $25 and $35. The companies are currently selling these and other titles for between $8.98 and $9—losing money on each unit, according to the trade association.

Predatory Pricing

The group contends that Amazon.com, Wal-Mart, and Target are using these predatory pricing practices to attempt to win control of the market for hardcover bestsellers. These companies are purportedly using “mega bestsellers . . . as a loss leader to attract customers to buy other, more profitable merchandise.” As a result, “the entire book industry is in danger of becoming collateral damage in this war.”

The association also called on the Antitrust Division to scrutinize the loss-leader pricing of digital content. The letter points to Amazon.com's purported below-cost pricing of digital editions of new hardcover books.

Private Suits

Over the years, the American Booksellers Association has filed Robinson-Patman Act suits against publishers and book stores for alleged price discrimination, with varying success. In the 1990s, the trade group obtained settlements from major publishers in price discrimination actions. Around the same time, the Federal Trade Commission (FTC) dropped investigations into price discrimination by the country’s largest book retailers (Trade Regulation Reporter ¶24,109).

Government Enforcement

Generally, the FTC, and not the Department of Justice, has been the federal antitrust agency that has taken the lead in enforcing the Robinson-Patman Act. However, the number of cases has dropped significantly in recent decades. The FTC has not issued a Robinson-Patman Act complaint since its action against spice company McCormick & Co. in 2000 (Trade Regulation Reporter ¶24,711).

Classes of Disabled Franchise Patrons Certified in ADA Action Against Burger King

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

Ten separate classes of Californian mobility-impaired patrons of ten Burger King restaurant franchises were entitled to be certified against the franchisor, Burger King, for violations of the Americans with Disabilities Act (ADA) and two California statutes, according to a federal district court in San Francisco.

The plaintiffs had sought to proceed as one large class of mobility-impaired patrons of 92 California Burger King franchises. However, the physical differences among the 92 franchises would predominate over the common issues because there was no common blueprint among them, the court determined.

Whether or not any store was ever out of ADA compliance would have to be determined store-by-store, feature-by-feature, before turning to the easier question of whether Burger King—as the franchisor/lessor—would have a duty to force the franchises to remediate. Thus, ten separate classes were certified for disabled patrons of each of the ten individual franchises where a named plaintiff encountered alleged access barriers.

Commonality

Burger King did not dispute that the plaintiffs established commonality for each separate class of patrons of the ten restaurants because every patron of a particular restaurant faced identically alleged access barriers. Because all mobility-impaired patrons of a particular restaurant who used wheelchairs faced identical facilities and identical access barriers, their common interest in assuring that all the features at the particular restaurant were in statutory compliance would predominate over any individual differences among them, the court held.

Typicality

The typicality requirement for certification was not disputed by Burger King and was satisfied because the named plaintiffs all used wheelchairs or scooters, the court ruled. By relying on a combination of census data showing that there were more than 150,000 people in California who used wheelchairs and scooters, declarations from numerous potential class members, and evidence of Burger King’s popularity, the plaintiffs satisfied the numerosity requirement.

Adequacy of Class Counsel

Burger King challenged the adequacy of the proposed class counsel on the grounds that five separate law firms sought joint appointment as lead counsel. It was best to have only one law firm as class counsel, the court commented, citing its own 35-years of practice and presiding experience. Thus, the plaintiffs were ordered to submit a memorandum and declaration explaining why anyone other than a single, court-selected attorney and his firm should be appointed as class counsel.

Franchisees as Defendants

Burger King's motion to add the franchisees/lessees of the ten restaurants as defendants was granted by the court. The plaintiffs did not dispute that the franchisees/lessees were jointly and severally liable with Burger King for any violations, or that the claims against them did not arise out of the same transactions and occurrences. Thus, because the joinder of the franchisees/lessees to the action would be useful in efficiently affecting any necessary injunctive relief at the stores under their control, Burger King's motion to add them to the action was granted.

The decision is Castaneda v. Burger King Corp., CCH Business Franchise Guide ¶14,238

Trade Regulation Tidbits

This posting was written by Jeffrey May and John W. Arden.

News, updates, and observations:

 President Barack Obama on October 17 commented on Congressional efforts to repeal the antitrust exemption for the health insurance industry. (See October 15, 2009 posting on Trade Regulation Talk.) In his weekly address, the President discussed the industry’s efforts to derail health care reform to protect its profits and bonuses. “[T]hey’re earning these profits and bonuses while enjoying a privileged exception from our antitrust laws, a matter that Congress is rightfully reviewing.” The White House did not go so far as to announce the President's support for legislative efforts to repeal the antitrust exemption. Appearing on ABC’s "This Week with George Stephanopoulos" on Sunday, October 18, David Axelrod, Senior Advisor to the President, was noncommittal on the legislation. “We’ll see what Congress does,” he said.

 A Minnesota-based packaged-ice company and three of its former executives have admitted to allocating customers, have agreed to plead guilty, and have agreed to pay a $9 million criminal fine, the Department of Justice has announced. The company and the individual defendants have agreed to cooperate with the Justice Department's ongoing antitrust investigation into the industry. The separate charges were filed in the federal district court in Cincinnati under seal in September. The seals were lifted on October 13. A news release on the plea agreement appears here on the U.S. Department of Justice Antitrust Division website.

 On October 16, the Maine House Joint Standing Committee on the Judiciary voted to recommend repeal of a recently-enacted state privacy statute, in light of constitutional issues raised by a federal court challenge to the law. The controversial law—“An Act to Prevent Predatory Marketing Practices Against Minors” (Public Law 230)—prohibits the collection of health-related or other personal information for marketing purposes from a minor without parental consent and bars “predatory marketing” to minors.

On August 28, 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. 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.) On September 8, U.S. District Court 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 acknowledging the constitutional defects of the law, documenting the state’s promise to refrain from enforcing the law, citing the legislature’s promise to revise the law in the next session, and putting Maine plaintiff attorneys on note that suits brought under the law would have to overcome constitutional questions raised in the action. (See September 14 posting on Trade Regulation Talk.)

After its hearing last week, committee members and staff indicated that a new legislative proposal—curing defects in the current law—would be introduced when the legislature convenes its next session in January 2010. None of the judicial or legislative action thus far repeals the law or bars private actions enforcing the law.

Letters to Competitor’s Customers Not “Advertising” Within Lanham Act

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

A Guardian Life Insurance agency did not engage in “commercial advertising or promotion” within the meaning of the Lanham Act's false advertising prohibition by sending letters to MetLife customers using an agency name and logo formerly used by MetLife, the federal district court in Chicago has ruled.

The Guardian agency was set up by the former managing director of a MetLife agency, who had been replaced. The new agency had hired 21 former MetLife agents, some of whom had retained MetLife client files.

One of the new agency’s letters to Metlife customers announced a move to a larger location, and a second letter enclosed forms to “help make this transition . . . seamless to you.”

Direct Communications

The allegedly deceitful announcements were direct communications, not advertising, in the court’s view. “Advertising is a form of promotion to anonymous recipients, as distinguished from face-to-face communication,” the Seventh Circuit explained in First Health Group Corp. v. BCE Emergis Corp. (CCH Advertising Law Guide ¶60,408).

The agency's letters were not sent to anonymous recipients, the court noted. They were directed to individuals on client lists. The second letter enclosed a highly individualized transfer of assets form containing not just the customer's name but his or her social security number and MetLife account number.

Although the announcements might give rise to claims under state law, they were not actionable under the Lanham Act, either as advertising or trademarks (in light of the MetLife's abandonment of the agency name and logo), the court concluded.

The September 16 opinion in Metropolitan Life Insurance Co. v. O’M & Associates LLC, will be reported at CCH Advertising Law Guide ¶63,616.

McDonald’s Faces Class Action After Refusing to Redeem $5 Gift Card for Cash

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

The holder of a $5 McDonald’s gift card has standing to sue fast food giant McDonald’s under California law based on McDonald’s alleged failure to redeem the card for cash, the federal district court in San Diego has ruled.

The California gift certificate statute (CCH Advertising Law Guide ¶30,515) provides that any gift certificate with a cash value of less than $10 is redeemable in cash. The statute defines “gift certificate” to include gift cards.

In a class action complaint, the gift card holder asserted claims under the California Unfair Competition Law (UCL) and the common law of unjust enrichment based on violation of the gift certificate statute.

Standing

McDonald’s argued that the gift card holder lacked standing to assert a UCL claim because he could still redeem his gift card for McDonald’s products and therefore did not lose money or property as a result of the unlawful conduct.

The holder responded that he did not want McDonald’s products and that McDonald’s unlawful conduct had caused him to keep the gift card that could only be used for products he did not wish to consume.

The court held that the holder had standing to pursue the UCL claim based on his allegation that he was denied money to which he had a right under the gift card statute. Likewise, the holder had standing to sue on the ground that McDonald’s was unjustly enriched by its practice of refusing cash redemptions on unused card balances of less than $10.

False Advertising

The holder also brought a UCL claim based on the California False Advertising Law, but the court rejected this theory.

The holder alleged that a statement on the back of the card—“[t]he value on this card may not be redeemed for cash . . . unless required by law”—was deceptive and misleading. The holder maintained that the statement led average consumers to believe that they could not redeem gift cards for cash and failed to disclose the right to redeem cards with balances of less than ten dollars for cash.

The holder’s false advertising theory failed, in the court’s view, because he did not allege that he relied on the language on the back of the gift card and, as a result of that reliance, lost money or property.

The September 21, 2009 opinion in Marilao v. McDonald’s Corp. will be reported at CCH Advertising Law Guide ¶63,615 and CCH State Unfair Trade Practices Law ¶31,917.

Despite Lower Turnout, ABA Forum on Franchising Is in Good Shape: Chair

This posting was written by John W. Arden.

In spite of sharply lower attendance at the ABA Forum on Franchising’s 32nd annual meeting, the “State of the Forum” is still “very, very good,” according to an October 16 address by Ronald Gardner, new chair of the group.

Attendance at last week’s annual meeting in Toronto was down by nearly 200 from last year’s near-record number—from 836 to 650. Nevertheless, the turnout was better than expected in view of overall economic conditions, said Gardner, managing partner of Dady and Garner in Minneapolis.

Other indicators are all positive, Gardner noted. Membership retention is at or above other ABA units. The Forum continues to be on solid financial footing. And the group has been able to lock in annual meeting facilities at favorable rates through 2013.

In Forum business, the group voted unanimously to amend its bylaws to expand the size of the governing committee from nine to 12 at-large members.

Three nominees were elected unanimously to serve terms on the governing committee. Serving new terms from 2010 through 2013 will be Leslie Curran of Plave Koch PLC in Reston, Virginia; Joseph Fittante of Larkin Hoffman in Minneapolis; and Michael Joblove of Genovese Joblove & Battista in Miami.

The Forum was revisiting the location of its 1989 meeting—the Westin Harbour Castle Hotel in Toronto.

Highlights of the meeting included a plenary session on “Engineering Healthy Franchise Relationships,” led by franchise relationship expert Greg Nathan, and the Annual Franchise and Distribution Developments session, presented by Joel R. Buckberg of Baker Donelson Bearman Caldwell & Berkowitz in Nashville and Jon P. Christiansen of Foley & Lardner LLP in Milwaukee. The annual reception and dinner was held at the Royal Ontario Museum.

Program co-chairs were Kerry Bundy of Faegre & Benson LLP in Minneapolis and Larry Weinberg of Cassels Brock & Blackwell LLP in Toronto.

The 2010 annual meeting is scheduled for October 13-15 at The Hotel Del Coronado in Coronado, California. The program chairs will be Deborah Coldwell of Haynes and Boone LLP in Dallas and Kathy Kotel of Carlson Restaurants Worldwide of Carrollton, Texas.

Baer Receives First Rudnick Award for Contributions to Franchise Law

This posting was written by John W. Arden.

The ABA Forum on Franchising on October 15 presented the inaugural Lewis G. Rudnick Award to John R. F. Baer in recognition of his contributions to the development of the Forum and franchise law as a discipline. Baer is a partner in the Chicago office of Sonnenschein Nath & Rosenthal, LLP.

The “lifetime achievement award” was created in remembrance of Lewis Rudnick, who died on January 24, 2009, at age 73. Recognized by the Forum as “one of the true giants of the franchise bar,” Rudnick was a founder of the Forum and its second chair (1981-1983). He helped establish the Franchise Law Journal, the Forum’s quarterly publication. As senior partner of Rudnick & Wolfe (currently DLA Piper), Rudnick trained several generations of some of America’s leading franchise lawyers.

“Most important, Lew was a kind man and consummate gentleman, who treated everyone with respect and demonstrated the personal qualities to which all lawyers should aspire,” said Edward Wood Dunham, immediate past chair of the Forum, in announcing the creation of the award.

The Rudnick Award is intended to honor members of the Forum who, over the course of distinguished careers as franchise lawyers, have made substantial contributions to the development of the Forum and to franchise law as a discipline, while comporting themselves in accordance with Lew Rudnick's high standards of professionalism, decency, and collegiality.

In presenting the first Rudnick Award, new Forum Chair Ron Gardner cited Baer’s thousands of hours of work for the Forum as a frequent speaker, author of more than a dozen Franchise Law Journal articles, editor of the Franchise Lawyer newsletter, associate editor of the Franchise Law Journal, member of the governing committee, and publications officer.

He is the chair of the Illinois Attorney General’s Franchise Advisory Board and editor of the CCH Sales Representative Law Guide, Gardner said. In addition, Baer is currently Vice Chair of the International Franchising Committee of the International Bar Association’s International Sales, Franchising and Product Law Section and formerly vice president of the Franchising Committee of Union Internationale des Avocats.

Baer has mentored many leading franchise lawyers during his long career in the field—and did all these things “with a smile,” Gardner said.

The presentation occurred during the opening session of the main program of the 32nd annual meeting of the Forum on Franchising, held in Toronto on October 14-16.

Additional Awards

Gardner referred to three additional annual awards, intended to recognize franchise lawyers at earlier stages in their careers, to encourage young and/or diverse practitioners to become and remain involved in the Forum, and to help them identify pathways to Forum leadership.

Those three awards are: (1) Chair's Award for Substantial Written Work or Presentation; (2) Chair's Future Leader Award; and (3) Chair's Explorers Award.

These awards will be presented for the first time at next year’s annual meeting, to be held October 13-15, 2009, at The Hotel Del Coronado, Coronado, California.

Members of Homeowner's Group Could Not Sue Group's Board for RICO Violations

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


In a case of first impression, members of a homeowner association lacked standing to sue the president of the association’s board, the members and managers of a limited liability company (LLC) that controlled the board, the LLC itself, and an associated construction company for violations of the fedearl RICO law, the federal district court in New Orleans has ruled. The defendants allegedly engaged in a racketeering scheme that diverted homeowner assessments for their own use.

A shareholder derivative suit analysis was used to determine whether the members of the homeowner’s association had standing to sue, even though the members paid regular dues and assessments rather than an initial share price, and thus were not classic shareholder-mode claimants. Under the derivative suit analysis, courts asked: (1) whether the racketeering activity was directed against the corporation; (2) whether the alleged injury to shareholders merely derived from, and thus was not distinct from, the injury to the corporation; and (3) whether state law provided that the sole cause of action accrued in the corporation.

In this case, the alleged misconduct was directed at the homeowner association’s funds, not at the homeowners themselves, the court explained. In addition, the homeowners’ injuries were derivative of the association’s injuries and were not distinct from them. Finally, Louisiana law did not provide standing for members of a homeowner's association to sue the association for breaches of fiduciary duty by the association’s officers.

The case, Joffrion v. Tufaro, USDC ED La., appears at CCH RICO Business Disputes Guide ¶11,743.

Repeal of Antitrust Exemption for Health Insurance Industry Considered on Capitol Hill

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

Senate Judiciary Committee Chairman Patrick J. Leahy kicked off a congressional hearing on a proposal to repeal the antitrust exemption for the health insurance industry by saying that “the exemption, since it was enacted in 1945, has served the financial interests of the insurance industry,” but not the interests of consumers.

“There is no reason why health insurers should be accorded immunity to engage in what would be illegal if being done by any other company,” Leahy said. The senator from Vermont called for a level playing field where the health insurance industry plays by the same rules of competition as do other industries.

In September, Leahy introduced the proposed "Health Insurance Industry Antitrust Enforcement Act of 2009" (S. 1681) to repeal the McCarran-Ferguson Act exemption to the extent it shields health and medical malpractice insurance providers from antitrust liability for price fixing, bid rigging, and market allocations.

At the October 14 hearing, the committee heard from Christine A. Varney, Assistant Attorney General in charge of the Department of Justice Antitrust Division, and Senate Majority Leader Harry Reid of Nevada, among others.

Justice Department Testimony

“The Department of Justice generally supports the idea of repealing antitrust exemptions,” Assistant Attorney General Varney said in delivering the Justice Department’s views on the McCarran-Ferguson exemption. She noted however that the Justice Department took no position as to how and when Congress should address the issue.

Varney began the testimony explaining that “the McCarran-Ferguson Act was designed to . . . delegate[e] to the states the authority to continue to regulate and tax the business of insurance.” The antitrust exemption for the business of insurance was based on state regulation.

The testimony cited Antitrust Law, the Phillip E. Areeda and Herbert Hovenkamp antitrust treatise, for the proposition that the exemption, which applies in the presence of “even minimal state regulation,” has protected the industry from the “most egregiously anticompetitive claims, such as naked agreements fixing price or reducing coverage . . .”

“Repealing the McCarran-Ferguson Act would allow competition to have a greater role in reforming health and medical malpractice insurance markets than would otherwise be the case,” according to the Justice Department testimony. The possible justifications for the McCarran-Ferguson Act in 1945 may no longer be valid, it was suggested. The state action immunity defense could still shield insurers’ conduct that is state regulated. Moreover, an exemption for collective activity may not be necessary in light of the increasingly sophisticated antitrust analysis of potentially procompetitive collective activity, the testimony noted.

Senate Majority Leader’s Testimony

In his testimony, Senate Majority Leader Harry Reid urged passage of the legislation to repeal the antitrust exemption for the health insurance industry. He said that the industry should be subject to the same federal oversight as every other industry.”

Reid called assertions by insurance companies that they are subject to state antitrust laws “laughable.”

Senator Hatch’s Views

Senator Orrin Hatch (Utah), ranking member of the Judiciary Committee’s subcommittee on antitrust, competition policy, and consumer rights, suggested that, rather than “demonize” the health insurance industry, Congress should analyze the exemption’s impact on the health insurance industry. Hatch said that he remained “open to considering any measures that promote competition in the insurance sector,” including changes to the McCarran-Ferguson Act. However he said that he had “seen little evidence to justify a complete repeal of the antitrust exemption for the insurance industry.” Hatch suggested that a ban on collaboration in the health insurance industry could result in higher prices for consumers.

Pfizer’s Acquisition of Wyeth Clears Antitrust Hurdles

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

Pfizer, Inc.’s proposed $68 billion acquisition of Wyeth was conditionally approved by the Federal Trade Commission (FTC) today. The agency signed off on the combination of the pharmaceutical giants, subject to divestitures aimed at preserving competition in multiple U.S. markets for animal pharmaceuticals and vaccines.

The FTC alleged that, if the acquisition were to proceed as proposed, it could have had anticompetitive effects in 21 U.S. markets for vaccines, antibiotics, and other treatments for animals. It was determined, however, that the transaction did not raise anticompetitive concerns in the markets for human pharmaceuticals.

In announcing the complaint and proposed consent order, the FTC took the somewhat unusual step of issuing a separate statement. Commission statements are more commonly issued when the agency seeks to explain a decision not to take an action or when there are dissenting views. In this matter, there were no dissents. Only two commissioners approved the proposed settlement, with Commissioners Pamela Jones Harbour and William E. Kovacic recused.

The statement was issued by the Commission to explain [the] decision, provide greater visibility into this important investigation, and, in the event that there are future such transactions, describe the framework . . . used in [the] analysis.”

The Commission’s statement noted that the transaction involved the combination of the largest prescription pharmaceutical company in both the United States and the world (Pfizer) and the twelfth-largest prescription pharmaceutical company in the United States (Wyeth). It explained the agency’s investigation into the competitive effects analysis of the acquisition with respect to markets for human pharmaceuticals, including Alzheimer’s disease treatments.

While it was determined that the merger was not likely to substantially reduce competition or potential competition in any relevant human health market in which Pfizer and Wyeth might compete, the Commission expressed its intention to monitor the markets and continue to evaluate future transactions “to ensure that any merger or acquisition does not undermine the pharmaceutical industry’s competitiveness.”

International Approvals

Canada’s Competition Bureau also approved the transaction today, subject to the divestiture of a significant number of animal health products. The U.S. and Canadian approvals are the last significant antitrust hurdles for the acquisition. Today’s settlements follow clearances from competition authorities in Europe in July, and more recently in China and Australia in September. Approval in each of these jurisdictions was also conditioned on the divestment of certain animal health assets. The FTC’s announcement noted that the U.S. agency’s cooperation with its foreign counterparts.

Details of the complaint and proposed consent order, In the Matter of Pfizer
Inc. and Wyeth, FTC Dkt. C-4267, appear on the FTC website and will appear at CCH Trade Regulation Reporter ¶16,376.

The statement of the Canada Competition Bureau appears on the Competition Bureau's website.

Apple, Google Boards of Directors Lose Members as FTC Investigates Overlaps

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

Google announced yesterday that a member of its corporate board of directors, who was also a member of Apple’s corporate board, had stepped down.

Google did not give a reason for the resignation of Dr. Arthur Levinson. However, it follows an August 3 announcement by Apple that Google's chief executive officer, Eric E. Schmidt, was stepping down from Apple's board.

At that time, Apple said that Schmidt's departure was a mutual decision and necessary in light of growing competition between the firms.

“Unfortunately, as Google enters more of Apple's core businesses, with Android and now Chrome OS, Eric's effectiveness as an Apple Board member will be significantly diminished, since he will have to recuse himself from even larger portions of our meetings due to potential conflicts of interest,” said Steve Jobs, Apple's CEO.

FTC Reaction

In response to Google’s announcement about Levinson’s resignation, FTC Chairman Jon Leibowitz said:

“Google, Apple, and Mr. Levinson should be commended for recognizing that overlapping board members between competing companies raise serious antitrust issues and for their willingness to resolve our concerns without the need for litigation.”

Leibowitz added that the agency would “continue to monitor companies that share board members and take enforcement actions where appropriate.”

Government Challenges

The FTC disclosed in August that it was investigating Google/Apple interlocking directorates. Sec. 8 of the Clayton Act conditionally prohibits interlocking directorates in competing corporations. Yet, government challenges to the overlaps are rare.

Over the last few decades, there have only been a handful of government challenges. The most recent Department of Justice complaint alleging a Clayton Act, Sec. 8 violation was filed in 2007. In that case, the government challenged CommScope Inc.'s proposed $2.6 billion acquisition of Andrew Corporation to preserve competition for drop cable.

The government contended that the transaction would have given CommScope the ability to appoint directors to the board of Andes, a substantial competitor, in violation of Sec. 8 of the Clayton Act. The suit was resolved by a consent decree (2008-2 Trade Cases ¶76,247). (See December 10, 2007 entry, Trade Regulation Talk.)

Yesterday’s announcement by the FTC could signal a move toward greater scrutiny of interlocks, however, especially between high profile companies like Google and Apple.

The Google announcement appears here on the company website. Commissioner Leibowitz’s statement is available here.

FTC Challenges Privacy Safe Harbor Certification Claims

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

Six U.S. businesses have agreed to refrain from misrepresenting the extent to which they participate in any privacy, security, or other compliance program sponsored by a government or any third party, under the terms of proposed Federal Trade Commission consent orders.

The consent orders would settle the first FTC challenges to deceptive claims regarding certification under an international privacy safe harbor program administered by the U.S. Department of Commerce in consultation with the European Commission.

The cases were brought with the assistance of the Department of Commerce. The Department of Commerce maintains a public website where it posts the names of companies that have self-certified to the safe harbor.

The companies claimed that they were current participants in the safe harbor, even though their certifications had lapsed, according to the agency.

The safe harbor provides a mechanism for U.S. companies to transfer data outside the European Union consistent with European law. To join the safe harbor, a company must self-certify to the U.S. Department of Commerce that it complies with seven principles and related requirements.

Companies are required to recertify every yearin order to retain their status as “current” members of the safe harbor framework, the FTC explained.

The FTC announced the complaint and proposed consent orders on October 6, which are available in the CCH Trade Regulation Reporter and here on the FTC website.

North Carolina Data Breach Law Amended . . .

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

North Carolina’s data breach notification law has been amended to add to the information that must be included in a breach notice.

Session Law 2009-355 (S.B. 1017) provides that breach notices must include the toll-free numbers and addresses for the major consumer reporting agencies and the toll-free numbers, addresses, and website addresses for the Federal Trade Commission and the North Carolina Attorney General’s Office. The notices must also include a statement that the notified persons can obtain information from these sources about preventing identity theft.

Businesses providing notice to consumers of data security breaches must also notify the Consumer Protection Division of the Attorney General’s Office of the nature of the breach, the number of affected consumers, steps taken to investigate the breach, steps taken to prevent a future breach, and information about the timing, distribution, and content of the notice.

The updated statute, which took effect October 1, 2009, will appear at CCH Privacy Law in Marketing ¶30,500.

. . . California Data Breach Amendment Sent to Governor

A bill that would require California security breach notifications to be written in plain language and to contain certain specified information was sent to Governor Arnold Schwarzenegger on September 11, 2009.

Senate Bill 20 would amend the state's data breach notification law to require notifications to include contact information regarding the breach, the types of information breached, and the date of the breach. The bill also would provide that a security breach notification may include other specified information, at the discretion of the entity issuing the notification.

Notice to Attorney General

Under the proposed amendments, any agency, person, or business required to provide a security breach notification under existing law to more than 500 California residents as a result of a single breach would have to submit a sample copy of the notification electronically to the Attorney General.

The bill also would amend the substitute notice provisions of California's security breach notification law to require that an entity providing substitute notice also provide notice to the Office of Privacy Protection within the State and Consumer Services Agency.

The current version of the statute appears at CCH Privacy Law in Marketing ¶30,500.

Hospital's Exclusive Pact with Medical Group Not Monopolization

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

A southwest Colorado hospital did not engage in monopolization or attempted monopolization in violation of federal or Colorado antitrust law by entering into an exclusive contract for nephrology physician services with one medical group and terminating the staff privileges of a competing kidney doctor, the U.S. Court of Appeals in Denver has decided.

A federal district court's grant of summary judgment in favor of the hospital (2008-2 Trade Cases ¶76,279) was affirmed.

The appellate court did not address the lower court's grounds for rejecting the terminated doctor's claims—that the hospital lacked monopoly power or the dangerous probability of achieving it.

Addressing that rationale on appeal was unnecessary because the decision could be affirmed "on any basis that [had] adequate support in the record," the court stated. The hospital sufficiently presented two such bases, in the court's view—the doctor's failures to establish anticompetitive conduct and antitrust injury.

Anticompetitive Conduct

The hospital's refusal to deal did not constitute anticompetitive conduct within the meaning of Sec. 2 of the Sherman Act or its state log analog, the appellate court held. A business, even a putative monopolist, had no antitrust duty to deal with its rivals, the court explained.

Forcing the hospital to share the source of its competitive advantage—its facilities—would lessen its incentive to undertake the risky investment in new endeavors or facilities. The hospital was entitled to recoup its investment without sharing with a competitor, in the court's view.

Moreover, the hospital's conduct was actually procompetitive, the court said. The exclusive contract with the medical group ensured consumers greater access to full-time nephrology services in the area and avoided a scenario in which the hospital prematurely exhausted the loss reserves it had set aside for its investment, not only chilling future investment but again leaving the area without any nephrologists.

Denominating the claim as sounding in monopoly leveraging did nothing to save it, the court added.

Antitrust Injury

The complaining physician also failed to show that he could have suffered antitrust injury from either the hospital's termination of his staff privileges or its entry into the exclusive contract with the rival medical group. In seeking reinstatement of active medical staff privileges, the excluded physician sought not the prevention or breaking apart of a monopoly, but the chance to share in that monopoly, according to the court. Thus, whatever the physician's injury, it was not one the antitrust laws were designed to protect consumers from suppliers, rather than suppliers from each other, the court noted.

Requiring the hospital to accommodate the excluded physician's demand would not necessarily benefit consumers, since the hospital could still impose terms and conditions to prevent him from undercutting the hospital's own nephrology practice.

Even if the physician sought an order in which the hospital had to share its facilities with him in a manner that was likely to help consumers, it would have been inappropriate for the judiciary to so dictate the terms of such an arrangement, the appellate court counseled. "The federal judiciary is not a price control agency," the court declared.

The September 29 decision in Four Corners Nephrology Associates, P.C. v. Mercy Medical Center of Durango appears at 2009-2 Trade Cases ¶76,756.

Facebook Settles Privacy Claims over “Beacon” Ad Program

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

Social networking website Facebook has agreed to shut down its controversial “Beacon” advertising program, as part of a settlement of a class action lawsuit brought by Facebook members, alleging that the program violated their privacy rights.

Launched in November 2007, Beacon allegedly caused information about books, movies, and other products purchased by Facebook members on participating sites—such as Blockbuster and eBay—to be posted publicly on Facebook’s “news feed,” without permission.

Facebook members were allegedly “opted in” to Beacon automatically and were not notified of their participation in the program.

Class Action

The complaining members filed suit against Facebook and several participating retailers (including Fandango, Hotwire, and Overstock.com) in August 2008, alleging violations of the Electronic Communications Privacy Act, the Computer Fraud and Abuse Act, the Video Privacy Protection Act, the California Consumer Legal Remedies Act, and the California Computer Crime Law.

Proposed Settlement

Facebook admitted no wrongdoing in the settlement agreement, which was filed with the federal district court in San Jose on September 18, 2009. The agreement includes a provision under which Facebook will contribute $9.5 million to a “settlement fund,” devoted to the formation of a non-profit foundation for the purpose of promoting online privacy, safety, and security.

“We learned a great deal from the Beacon experience,” said Barry Schnitt, Director of Policy Communications for Facebook. “For one, it was underscored how critical it is to provide extensive user control over how information is shared. We also learned how to effectively communicate change that we make to the user experience.”

The settlement is awaiting judicial approval.

The proposed settlement agreement is Lane v. Facebook, Inc., Case No. 5:08-cv-03845-RS, dated September 18, 2009. Text of the agreement will appear at CCH Privacy Law in Marketing ¶60,377.

On Opening Day of Term, High Court Denies Review of Three Trade Regulation Cases

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

The U.S. Supreme Court opened its 2009-2010 term yesterday by denying review of three trade regulation decisions—concerning resale price fixing, Lanham Act false advertising, and arbitration of an in-term restrictive covenant in a trademark license.

Resale Price Maintenance

Left standing by the Court was a decision by the U.S. Court of Appeals in Richmond, Virginia (2009-1 Trade Cases ¶76,547), holding that two pesticide manufacturers did not conspire with their distributors to set minimum resale prices of certain termiticide products.

In their petition for review, complaining providers of pest control services asked: (1) whether resale price agreements, through which retailer agents raised consumer prices, is controlled by Leegin Creative Leather Products, Inc. v. PSKS, Inc. (2007-1 Trade Cases ¶75,753), 551 U.S. 877 (2007) or United States v. General Electric Co., 272 U.S. 476 (1926); and (2) whether it was established that the manufacturer's resale price agreements with retailers violated §1 of the Sherman Act under Leegin.

The petition is Valuepest.com of Charlotte, Inc. v. Bayer Corp., Docket 08-1584, cert. filed June 22, 2009.

Lanham Act False Advertising

The Supreme Court declined to review a decision by the U.S. Court of Appeals for the Federal Circuit (2009-1 Trade Cases ¶76,553, CCH Advertising Law Guide ¶63,320), reversing a jury award of more than $8 million against a Japanese basketball manufacturer for falsely advertising its product design as “innovative.”

On appeal, the manufacturer contended that Lanham Act claims based on advertisements that falsely claim authorship of an idea were barred by the U.S. Supreme Court’s decision in Dastar Corp. v. Twentieth Century Fox Film Corp., 539 U.S. 23 (2003).

In its petition, the manufacturer had asked whether Dastar established an authorship limitation on false advertising claims brought under Section 43(a)(1)(B) of the Lanham Act. The petition is Baden Sports, Inc. v. Molten USA, Inc., Docket 08-1477, cert. filed May 28, 2009.

Restrictive Covenant

The Court denied a petition for review of a decision of the U.S. Court of Appeals in San Francisco (2009-1 Trade Cases ¶76,482, CCH Business Franchise Guide ¶14,055), which held on remand from the U.S. Supreme Court that an arbitrator manifestly disregarded California law by enforcing an in-term restrictive covenant in a trademark license.

On October 6, 2008, the Supreme Court vacated an earlier decision of the appeals court (2008-1 Trade Cases ¶76,129, CCH Business Franchise Guide ¶13,703) in light of the Court’s decision in Hall Street Associates, LLC. v. Mattel, Inc., 128 S.Ct. 1396 (2008).

In a petition for review, a party to the trademark license asked whether a decision vacating an arbitration award on the non-statutory ground of "manifest disregard" was inconsistent with U.S. Supreme Court precedent and whether an arbitrator's good faith but erroneous interpretation of state law constituted a basis for vacating an arbitration award under the Federal Arbitration Act.

The petition for review is Improv West Associates v. Comedy Club, Inc., Docket 08-1525, cert filed June 8, 2009.

FTC Releases Revised Guides for Endorsements, Testimonials in Advertising

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

Can an advertiser be held liable for a blogger’s misleading statements about the advertiser’s products? What about the blogger?

Maybe, says the Federal Trade Commission, in releasing today its final Guides Concerning the Use of Endorsements and Testimonials in Advertising.

The revised guides will take effect on December 1, 2009. The proposed revisions were announced last November. (See Trade Regulation Talk story of November 21, 2008.)

Most of the revisions were adopted as announced at that time, with minor modifications.

The existing guides (16 C.F.R. Part 255) were published in 1980. The guides are advisory in nature and are designed to help advertisers avoid using deceptive testimonials or endorsements in marketing their products.

The revised guidelines address the role of blogs and other new consumer-generated media to market products and make other changes to bring the guidelines up to date.

Blog Endorsements

In discussing the role of blog endorsements in advertising, the FTC provides an example of a situation in which an advertiser would incur liability for a blogger’s misleading statements. Liability arises when an endorser-sponsor relationship is established.

According to the guides, an advertiser is subject to liability under Sec. 5 of the FTC Act for a blogger’s endorsement where:

 The advertiser initiates the process that leads to the endorsement (by utilizing a blog advertising service to locate a blogger who will promote the advertiser’s products on a personal blog or by providing products to a well-known blogger, for example);

 The advertiser requests that the blogger try a product and write a review of the product on the blog; and

 The blogger recommends the product using misleading or unsubstantiated claims (and not just the blogger’s opinion about subjective product characteristics).

The blogger would also be liable under the FTC Act if the blogger failed to adequately disclose any payment for services.

Non-typical Consumer Testimonials

The FTC has also decided to go forward with its proposed elimination of a safe harbor for non-typical consumer testimonials accompanied by disclaimers of typicality. The guides dating from 1980 allow advertisers to describe unusual results in a testimonial as long as they included a disclaimer such as “results not typical.” Starting December 1, advertisers will be expected to disclose “the generally expected performance in the depicted circumstances” under the revised guides.

The FTC’s proposal faced much resistance from the weight-loss products industry. Many advertisers in that industry had argued that they would not be able to determine what the generally expected performance would be in the depicted circumstances, and thus would not be able to use aspirational testimonials. (See Trade Regulation Talk story of July 22, 2009.)

According to the FTC, the effect of the revision is to treat ads that use testimonials the same as all other ads. Sect. 5 of the FTC Act requires advertisers to have substantiation for the messages that consumers reasonably take from their ads. The agency believes that an advertiser should not be exempt from those basic obligations simply because it used a consumer testimonial to communicate its claims.

The FTC’s notice of the adoption of the revised guides appears here on the FTC website.

The Guides Concerning the Use of Endorsements and Testimonials in Advertising, effective through November 30, 2009, appear at CCH Trade Regulation Reporter ¶39,038.

FTC Administrative Law Judge Dismisses Claims Against Marketers of Purported Cancer Cure

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

Federal Trade Commission (FTC) attorneys failed to prove that the operator of a dietary supplement business participated in the creation or dissemination of allegedly deceptive and false advertisements that appeared on the Internet for an herbal remedy, according to an administrative law judge presiding over the case. Thus, the ALJ dismissed the complaint without reaching the issue of whether the advertisements in were, in fact, false or misleading in violation of the FTC Act.

The agency had alleged that RAAX11, which purportedly contains agaricus blazei murill mushroom extract and chysobalanus icaco extract, was falsely marketed as a treatment or cure for cancer. An administrative complaint was issued against Gemtronics, Inc. and its owner Bill Isely on September 16, 2008. The ALJ’s initial decision dismissing the case was issued on September 16, 2009, and released today.

According to the ALJ’s decision, Isely, after being diagnosed with prostate cancer, had ordered the agaricus mushroom product for himself from the supplement manufacturer, Takesun do Brasil, on the website—www.agaricus.net. The challenged claims appeared on that website.

Information about Isely’s efforts to battle cancer using the supplement appeared the www.agaricus.net website. However, Isely contended that he had no control over the website or the claims that appeared on it. Isely eventually became a wholesale purchaser of RAAX11 and began offering RAAX11 for sale on his own website.

The threshold determination under Section 12(a) of the FTC Act was whether Isely and his company “disseminated” or “caused to be disseminated” the challenged advertisements on the www.agaricus.net website, as alleged in the Complaint, according to the ALJ.

The ALJ decided that neither Isely nor his company was responsible for the www.agaricus.net website. The FTC failed to demonstrate that Isely sold RAAX11 through the www.agaricus.net website or that Isely and his company were the exclusive source for RAAX11 in the United States. In addition, it was not established that Isely had full knowledge of the challenged advertisements or that Isely had the ability to control the www.agaricus.net website.

Liability for dissemination or causing dissemination, of advertisements requires proof of the respondent's participation in the creation or dissemination of the advertisements, the ALJ explained. Moreover, neither Gemtronics nor Isely was an officer, director, shareholder, or other principal of Takesun do Brasil or the www.agaricus.net website. Therefore, standards for liability arising from purported “ability to control” or “knowledge” did not apply to determine the respondents’ liability for the challenged advertisements for RAAXll on the www.agaricus.net website.

Opportunity for Appeal

Complaint counsel has 30 days to appeal the decision to the full Commission. The ALJ’s initial decision is subject to review by the Commission on its own motion or at the request of any party. The initial decision will become the final decision of the Commission 30 days after it is served on the parties, unless either a party files a timely notice of appeal, or the Commission places the case on its own docket for review.

The text of the administrative complaint is available at CCH Trade Regulation Reporter¶16,191.

Details of the ALJ’s initial decision, In the Matter of Gemtronics, Inc. and William H. Isely, FTC Dkt. 9330, will appear in CCH Trade Regulation Reporter. The initial decision appears here on the FTC website.

Sales Representatives' Statements Could Constitute Advertising Under Lanham Act

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

Dental equipment companies Dentsply and Tulsa Dental Products could have engaged in commercial advertising or promotion under the Lanham Act by encouraging their sales representatives to contact all of the customers of a small competitor (Guidance Endodontics) and make false and disparaging statements about its business, the federal district court in Albuquerque has ruled.

The element of “commercial advertising or promotion” was not controlled purely by the instances of disparaging statements for which there was direct evidence. Both direct and circumstantial evidence were to be considered in determining whether there had been sufficient dissemination of the statements at issue.

Guidance Endodontics presented evidence of the following:

(1) Three specific instances of a representative of Dentsply or TDP contacting customers of Guidance, making a false statement that Guidance could no longer provide certain products, and, in two cases, attempting to persuade the customer to buy the defendants’ products instead;

(2) Dissemination of the same false information among the defendants’ sales representatives and other employees;

(3) A rash of mysterious telephone calls inquiring whether Guidance could still supply certain products; and

(4) An internal policy of extremely competitive marketing on the defendants’ part.

Based on this evidence, viewed in the light most favorable to Guidance, and on the fact that Guidance and the defendants shared target markets, the court held that Guidance created genuine issues of material fact as whether the defendants had made false or misleading representations constituting commercial advertising or promotion within the meaning of the Lanham Act.

The court further held that New Mexico law was applicable to the dispute, as the place where the injury occurred, and that Dentsply and Tulsa Dental Products could have violated the New Mexico Unfair Practices Act. Knowledge of the falsity of the sales representatives’ statements was imputed to the defendants.

The decision is Guidance Endodontics, LLC v. Dentsply International, Inc., CCH Advertising Law Guide ¶63,569.