Continuity and Change Were FTC Themes for 2009

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

In a speech to attendees of the American Bar Association’s Section of Antitrust Law Spring Meeting in Washington, D.C. in March, the newly-appointed FTC Chairman Jon Leibowitz said that he intended to build on the accomplishments of past FTC chairs and that there
would be continuity in enforcement.

The pledge for continuity was reiterated by Leibowitz in September at Fordham University’s annual conference on international antitrust law and policy. At that time, however, Leibowitz said that in addition to continuity, there would be change.

Merger Enforcement

There was continuity in merger enforcement. The agency wrapped up its challenge to specialty grocer Whole Foods Market, Inc.’s acquisition of rival Wild Oats Markets, Inc. in March 2009. The case was originally filed in 2007, when the parties announced their intention to merge.

In addition, the FTC approved two major mergers in the pharmaceutical industry. In October, the FTC conditionally approved Pfizer, Inc.’s proposed $68 billion acquisition of Wyeth, and Schering-Plough Corporation was permitted to proceed with its proposed $41.1 billion acquisition of Merck & Co. Inc. Outside the pharmaceuticals sector, the FTC approved the combination of Japanese consumer electronics makers Panasonic Corporation and Sanyo Electric Co., Ltd.

Administrative challenges also led parties to abandon mergers in 2009. The agency blocked the combination of providers of drycast hardscape sold at home improvement centers.

Two mergers in the health care area were abandoned. CSL Limited’s proposed $3.1 billion acquisition of Talecris Biotherapeutics Holdings Corporation was called off after the agency challenged the deal on the ground that it would substantially reduce competition in the U.S. markets for plasma-derivative protein therapies. And Thoratec Corporation abandoned its proposed $282 million acquisition of rival HeartWare International, Inc., after the FTC charged that the transaction would substantially reduce competition for left ventricular
devices.

Also in the health care area, Southwest Virginia’s dominant hospital system agreed to settle an FTC challenge to its 2008 acquisition of an outpatient imaging center and an outpatient surgical center.

Monopolization, Unfair Methods of Competition

In discussing change at the FTC in his Fordham address, Leibowitz talked about challenging monopolization and expanding the agency’s use of its authority to prohibit unfair methods of competition under the FTC Act.

The agency’s December complaint against computer chip maker Intel Corporation for monopolization can be seen as an example of change at the agency.

The FTC announced on December 16 that it had issued an administrative complaint against Intel for monopolizing the markets for central processing units and creating a monopoly in the markets for graphics processing units. The vote to issue the complaint was 3-0, with Commissioner William E. Kovacic recused.

Commissioner J. Thomas Rosch issued a separate statement, in which he concurred in part and dissented in part. Commissioner Rosch said that he concurred in the issuance of a complaint based on pure FTC Act, Section 5 claims, but dissented on public policy grounds to the extent the complaint contained Sherman Act, Section 2 ‘‘tag-along’’ claims.

New Administration Signals New Enforcement Priorities for 2009 Antitrust Division

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

A new administration meant new leadership and new enforcement priorities at the Department of Justice Antitrust Division in 2009.

Former FTC Commissioner Christine A. Varney was confirmed by the Senate in April to serve as Assistant Attorney General in charge of the Department of Justice Antitrust Division. Soon thereafter, Varney took steps to reverse some of the policies set by the prior administration.

First, in May, Varney withdrew a September 2008, Antitrust Division report, entitled “Competition and Monopoly: Single-Firm Conduct Under Section 2 of theSherman Act” (CCH Trade Regulation Reporter ¶50,231), which examined whether and when specific types of single-firm conduct violate Section 2 of the Sherman Act.

The antitrust chief said that withdrawing the report “is a shift in philosophy and the clearest way to let everyone know that the Antitrust Division will be aggressively pursuing cases where monopolists try to use their dominance in the marketplace to stifle competition and harm consumers.”

Patent “Reverse Payments”

The current Antitrust Division has also taken a tougher stand on patent litigation settlements involving a “reverse payments.” In July, the Department of Justice filed a brief with the U.S. Court of Appeals in New York City, considering an action challenging a settlement agreement between drug maker Bayer AG and the generic defendant Barr Laboratories, Inc.

The Justice Department said that a patent litigation settlement involving a “reverse payment” to the alleged drug patent infringer in exchange for its agreement to withdraw its challenge to the patent and delay bringing its generic drug to market should be viewed as presumptively unlawful.

The move brings the Justice Department’s position closer to that espoused by the FTC on “pay-for-delay” patent settlement agreements between drug makers.

Horizontal Merger Guidelines

Another example of increased coordination between the Antitrust Division and the FTC was the September announcement to explore the possibility of revising the agencies’ joint horizontal merger guidelines. The agencies kicked off workshops in December to consider changes to the guidelines. The workshops will continue in January 2010.

Mergers and Acquisitions

Despite the Antitrust Division’s efforts to strengthen antitrust enforcement, the agency still faced criticism. Some in the tech sector took issue with the Justice Department’s decision in August not to challenge the merger of Oracle Corporation and Sun Microsystems Inc., which is valued at $7.4 billion.

Since the Justice Department’s announcement approving the deal, Oracle has offered some proposed remedies in an effort to satisfy the competition concerns of the European Commission regarding the maintenance of MySQL as an open source database in competition with Oracle’s proprietary databases following the merger.

Cartel Enforcement

In 2009, as in past years, the Justice Department continued to make cartel enforcement a priority. The Justice Department continued to obtain guilty pleas from companies and executives in connection with investigations into conspiracies to fix cargo rates for international air shipments and to fix prices for Thin Film Transistor-Liquid Crystal Display panels.

A new focus for the Antitrust Division in 2009 was bid rigging in the municipal bonds industry

New York’s Intel Suit Was Highlight of 2009 State Antitrust Enforcement

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

In a busy year for state antitrust enforcers, the biggest news story for 2009 was New York State’s filing of a monopoly complaint against computer chip maker Intel Corporation.

On November 4, the state filed its suit, charging that “Intel violated state and federal anti-monopoly laws by engaging in a worldwide, systematic campaign of illegal conduct . . . to maintain its monopoly power and prices in the market for microprocessors.” The filing followed an investigation that was originally announced in January 2008.

A number of other state enforcement news stories from 2009 resulted from long-running investigations announced in past years.

Microsoft Settlement

The State of Mississippi and Microsoft resolved an antitrust dispute in June that was valued at up to $100 million. Mississippi was the last state to settle its antitrust allegations that sought to recover overcharges on behalf of consumers. The settlement involved the largest cash payment made to a state government by Microsoft (2009-1 Trade Cases ¶76,649).

Insurance and Reinsurance Industries

Onging investigations of the insurance and reinsurance industries netted settlements in 2009. Taking the lead in this area, Connecticut announced a $1.3 million settlement with The Hartford Financial Services Group, Inc., which the state attorney general called “the first antitrust settlement of its kind in the reinsurance industry.”

The settlement resolved claims that The Hartford participated in several anticompetitive schemes that illegally inflated insurance and reinsurance costs nationwide. The Hartford, which is no longer involved in the reinsurance market, cooperated with the state's investigation.

Litigation continues against one of the world's largest reinsurance brokers—Guy Carpenter & Company, LLC.

Earlier in the year, Marsh & McLennan Companies, Inc. agreed to pay $2.4 million in restitution to settle allegations made by the Connecticut Attorney General that the company engaged in bid rigging and price fixing.

Connecticut's settlement with Marsh—announced in March—was preceded by a settlement with nine other states announced in January 2009. Under that settlement, the states—Florida, Hawaii, Maryland, Massachusetts, Michigan, Oregon, Pennsylvania, Texas, and West Virginia—were paid $7 million by Marsh.

Medicare Reimbursement, Hospital Boycott

In May, the State of Illinois ended an antitrust action filed in 2007 against two physicians groups for conspiring to refuse to offer certain primary health care services to new Medicaid patients in the central part of the state in order to increase Medicaid reimbursement rates for such services.

On May 1, an Illinois circuit court approved a settlement between the state and Christie Clinic, P.C., resolving the dispute (2009-1 Trade Cases ¶76,608). The other named clinic, Carle Clinic Association, settled the suit in December 2008.

Texas and the largest hospital system in Houston entered into a consent decree in January prohibiting Memorial Hermann Healthcare System from agreeing with health plans to boycott competing hospitals (2009-1 Trade Cases ¶76,479).

Aftermarket Auto Filters

In other state enforcement news, Florida filed a lawsuit in April, joining a nationwide group of actions consolidated in the federal district court in Chicago, alleging that nine of the largest manufacturers of aftermarket auto filters in the United States have conspired to fix prices and allocate customers since 1999.

State Law Enactments

There were also some significant state law developments in 2009. The State of Maryland passed a law in 2009 clarifying that resale price maintenance (RPM) remains per se illegal in the state.

This was the first legislative action taken in response to the U.S. Supreme Court's ruling, in Leegin Creative Leather Products, Inc, v. PSKS, Inc. (2007-1 Trade Cases ¶75,753), that RPM should be held to a rule of reason standard rather than declared per se illegal under federal antitrust law.

Other state laws enacted in 2009 could benefit state enforcers, including legislation that increased civil penalties for antitrust violations in Connecticut and Colorado.

Effective October 2009, the Connecticut Antitrust Act was amended to increase the available civil penalty in actions instituted by the attorney general up to $100,000 for individuals and up to $1 million for other entities.

The maximum civil penalty that can now be imposed for a violation of Colorado Antitrust Act was increased from $100,000 to $250,000, under a law that took effect in August 2009.

T-Mobile Awarded Injunction, Damages for Competitor’s Violation of Unfair Competition Law

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

T-Mobile USA, Inc. was granted a permanent injunction and a final judgment of $5 million against competitors that sold counterfeit products, illegally used T-Mobile's trademark, and falsely advertised its products in violation of the California Unfair Competition Law (UCL), according to the federal district court in Los Angeles.

T-Mobile alleged that the competitors engaged in an unlawful enterprise involving the acquisition, sale, and alteration of large quantities of T-Mobile prepaid wireless telephones and other materials used to activate service or acquire airtime.

The competitor acquired bulk quantities with the actual or constructive knowledge and intent that they would not be activated for use on the T-Mobile prepaid wireless network and that the handsets would be computer-hacked.

The hacked handsets were sold overseas under the T-Mobile trademark. The case was part of T-Mobile's ongoing fight to curb misuse of its products.

The competitors were permanently enjoined from purchasing, selling, and unlocking any T-Mobile prepaid handsets or activation materials. Because the alleged actions constituted violations of the UCL and other laws, the competitor was also ordered to pay $5 million to T-Mobile in damages.

The decision is T-Mobile USA, Inc. v. C-Tech Wholesale, Inc., CCH State Unfair Trade Practices Law ¶31,962.

Trade Regulation Talk Cited as Top 10 Business Law Blog

This posting was written by John W. Arden.

Trade Regulation Talk was listed in the top 10 of the “50 Great Business Law Blogs” selected by the Career Overview website on December 10.

The 50 blogs were described as “filled with news, legislation, cases and counsel that every lawyer can read and use.”

The “Top Ten” were chosen as the best on the web “because they are popular, helpful, and powerfully thorough.”

Others in the top ten included the Wall Street Journal Law Blog, the ABA Journal Blawgs, and the Womble Carlyle Trade Secrets Blog.

The remaining 40 blogs were divided into the following categories: corporate law, contract law, copyright law, and labor law.

The entire list appears here on the Career Overview blog.

Reliance Not Required for RICO Claim Predicated on Mail Fraud . . .

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

A district court erred in holding that reliance was an element of a RICO claim predicated on mail fraud, the U.S. Court of Appeals in Richmond, Virginia, has ruled.

The lower court improperly limited the U.S. Supreme Court’s decision in Bridge v. Phoenix Bond & Indemnity Co. (CCH RICO Business Disputes Guide ¶11,500)—which states that reliance is not required in RICO mail fraud actions—to cases involving third-party reliance.

The Bridge Court held that a plaintiff asserting a RICO claim predicated on mail fraud “need not show, either as an element of its claim or as a prerequisite to establishing proximate causation, that it relied on the defendant's alleged misrepresentations.”

Although Bridge did, in fact, involve a plaintiff who had been harmed by a third party’s reliance on the defendant’s misrepresentations, the Court’s holding was not limited to circumstances involving third-party reliance.

“[U]sing the mail in furtherance of a scheme to defraud is a predicate act of racketeering under RICO, even if there is no reliance on the misrepresentation,” the appellate court explained.

Nevertheless, the district court’s grant of summary judgment was affirmed because the plaintiffs failed to demonstrate, or even allege, that they were misled about any fraudulent behavior.

The decision is Biggs v. Eaglewood Mortgage, LLC, CCH RICO Business Disputes Guide ¶11,775.

. . . But Failure to Plead Reliance Could Still Bar Claim

Health care and welfare funds that allegedly paid excessive prices for the prescription drug Lipitor lacked standing to pursue RICO claims against the drug’s manufacturer (Pfizer), the federal district court in New York City has ruled.

The plaintiffs (and other third-party payors) complained that Pfizer had allegedly made fraudulent misrepresentations to physicians and pharmacy benefit decision makers about Lipitor’s comparative efficacy and safety.

The plaintiffs did not, however, plead reliance on those misrepresentations, and thus failed to establish that their overpayments were proximately caused by Pfizer's misconduct.

In Bridge v. Phoenix Bond & Indemnity Co. (CCH RICO Business Disputes Guide ¶11,500), the U.S. Supreme Court noted that the complete absence of reliance could prevent a plaintiff from establishing proximate cause.

Although the plaintiffs pled reliance on Pfizer’s allegedly false claim that its marketing of Lipitor was lawful, that reliance was irrelevant, the appellate court explained, in light of the plaintiffs’ failure to allege that the physicians who prescribed the drug had relied on the drug maker’s misrepresentations.

The decision is Southern Illinois Laborers' and Employers' Health and Welfare Fund v. Pfizer Inc., SD N.Y., CCH RICO Business Disputes Guide ¶11,779.

Absent Community of Interest, Distributor Was Not Wisconsin “Dealer”

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

The relationship between a hardwood flooring distributor and a manufacturer was not a "dealership" under the meaning of the Wisconsin Fair Dealership Law (WFDL) because the relationship did not involve a "community of interest," according to a federal district court in Milwaukee.

Community of Interest

For parties to share a community of interest, the business relationship must be significant enough to threaten the financial health of the dealer, if the grantor were to decide to exercise its power to terminate, according to the court. A dealer's financial health was considered threatened if termination would cause it to sustain a significant economic impact.

To determine whether termination would cause a significant economic impact, courts examined: (1) the percentage of revenues and profits the alleged dealer derived from the grantor; and (2) the amount of time and money an alleged dealer had sunk into the relationship. The ultimate question was whether the grantor has the alleged dealer "over a barrel," the court noted.

In the instant dispute, the manufacturer was not in a position to exploit the distributor such that the parties had a community of interest for two principal reasons. (1) the distributor derived only a small percentage of its total profits from the distribution of manufacturer’s products and (2) the distributor sunk a relatively modest amount of time and money into the relationship.

Percentage of Profits

With respect to revenues and profits, the distributor generated only slightly more than five percent of its gross profits from the manufacturer’s products in 2006, less than two percent in 2007, and slightly over three percent in 2008. Single digit figures such as those indicated that the manufacturer did not have the distributor over a barrel, the court reasoned.

The distributor claimed that revenue generated from the sale of the manufacturer’s flooring represented roughly 25 percent of its total sales of hardwood flooring. That figure was misleading because the distributor derived substantial profits from other aspects of its business, the court noted.

Sunk Costs

With respect to sunk costs, the distributor’s unrecoverable investment in the manufacturer’s product line was not so significant that it allowed the manufacturer to behave opportunistically, the court determined.

The relationship between the parties was of relatively short duration, commencing in 2004 and ending in 2008. For part of that relationship, some of the distributor’s employees could have spent as much as 25 percent of their time on the distribution of the manufacturer’s products and received training specific to them. However, none of those employees worked solely on business involving the manufacturer’s products. Nor did the distributor invest a substantial sum of unrecouped funds into the relationship.

Recouped Investment

Much of the money it did expend had likely been recouped in the form of sales. It was not as though the distributor had been left with substantial unsaleable inventory or unusable buildings, as a fast food franchisee could be. Nor had the distributor been selling the manufacturer’s products at a loss in an effort to build a market, only to have the manufacturer pull the rug out from under it just as the line was beginning to look profitable, the court observed.

The community of interest standard was a relatively demanding one and the record did not support the distributor’s assertion that the manufacturer had it over a barrel.

The decision is F&C Flooring Distributors, Inc. v. Junckers Hardwood, Inc., CCH Business Franchise Guide ¶14,280.

Class Certified in Privacy Action over Sale of Missouri Driver’s License Data

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

Class certification has been granted by the federal district court in Kansas City to Missouri residents whose personal information was allegedly obtained by a data mining company from the Missouri Department of Revenue and sold to an online database operator, in violation of the federal Driver’s Privacy Protection Act (CCH Privacy Law in Marketing ¶25,500).

The data mining company allegedly acquired a large database from the Department of Revenue by falsely claiming that the information in the database was to be used to verify the identity of individuals doing business with the company. The database contained driver’s license information about class members, including their Social Security numbers.

The company allegedly transferred the information to the online database operator, which made the information available for sale on its website. The Department of Revenue allegedly authorized or participated in the dissemination of the class members’ personal data.

It was estimated that at least 300,000 Social Security numbers were in the database, which was sufficient to establish numerosity for class certification purposes, the court said. Class members’ claims involved several common issues of law and fact. The named class representative asserted that her claims emanated from the same legal theory or offense as the claims of the class.

A class action was superior to other methods of adjudicating the claims, in the court's view. Given the large number of potential plaintiffs and the commonality of their claims, class action treatment would be more efficient than individual adjudications.

The class was defined to include all licensed drivers in the state of Missouri whose personal information from their motor vehicle records was obtained, disclosed, or used by the defendants between July 21, 2004 and the present.

The decision is Roberts v. The Source for Public Data, CCH Privacy Law in Marketing ¶60,404.

European Commission, Microsoft Settle Dispute over Browser Tying

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

The European Commission (EC) adopted a decision on December 16 that renders legally binding a set of commitments that were offered by Microsoft to boost competition on the web browser market.

The commitments address EC concerns that Microsoft may have tied its web browser Internet Explorer to the Windows PC operating system in breach of European Union rules on abuse of a dominant market position.

Under the commitments approved by the Commission, Microsoft will make available for five years in the European Economic Area (through the Windows Update mechanism) a “Choice Screen” enabling users of Windows XP, Windows Vista and Windows 7 to choose which web browser(s) they want to install in addition to, or instead of, Microsoft’s browser Internet Explorer. The commitments also provide that computer manufacturers will be able to install competing web browsers, set those as default and turn Internet Explorer off.

“Millions of European consumers will benefit from this decision by having a free choice about which web browser they use,” stated EC Competition Commissioner Neelie Kroes. “Such choice will not only serve to improve people’s experience of the Internet now but also act as an incentive for web browser companies to innovate and offer people better browsers in the future.”

Microsoft Senior Vice President and General Counsel Brade Smith declared the EC’s decision “a major step forward.”Smith added that the company “look[s] forward to building on the dialogue and trust that has been established between Microsoft and the Commission and to extending our industry leadership on interoperability.”

The decision follows a Statement of Objections sent to Microsoft in January 2009, outlining the EC’s preliminary view that Microsoft may have infringed Article 82 of the EC Treaty by abusing its dominant position in the market for client PC operating systems and distorted competition through the tying of Internet Explorer to Windows.

According to the EC, the tie distorted competition by giving Microsoft an artificial distribution advantage not related to the merits of its product on more than 90 percent of personal computers.

The Commission’s preliminary view was that this tying hindered innovation in the market and created artificial incentives for software developers and content providers to design their products or web sites primarily for Internet Explorer. The approved commitments address these concerns, the EC said.

This decision, which does not conclude whether there is an infringement, legally binds Microsoft to the commitments it has offered and ends the EC’s investigation. If Microsoft were to break its commitments, the EC could impose a fine of up to 10 percent of Microsoft’s total annual turnover without having to prove any violation of EU antitrust rules.

A clause in the settlement allows the EC to review the commitments in two years. Microsoft will report regularly to the EC, starting in six months’ time, on the implementation of the commitments and under certain conditions make adjustments to the Choice Screen upon EC request.

Justice Department Statement

In response to the announcement, Assistant Attorney General Christine Varney of the Department of Justice Antitrust Division issued a statement in which she commended the EC and Microsoft for resolving their disputes and lauded the settlement. “A settlement that helps to clarify obligations under European law allows the industry to move forward,” Varney remarked.

Interoperability

While the settlement ends litigation over Microsoft’s alleged tying, the EC’s investigation regarding interoperability continues. Kroes hailed Microsoft’s contemporaneous publication of an improved version of its July 2009 commitments to allow interoperability between third party products and several Microsoft products—including Windows, Windows Server, Office, Exchange, and SharePoint.

Under these commitments, Microsoft pledged to publish the technical specifications of the programs so that interoperability could be achieved by any interested party. Although this initiative was described as “very welcome” by Kroes, she noted that its “arrangements remain informal vis-a-vis the Commission.”

Therefore, Kroes cautioned, “[T]he Commission will carefully monitor the impact of Microsoft’s proposals on the market and take its findings into account in its assessment of the pending antitrust investigation.”

Self-Insured Employer May Sue Medical Device Maker for False Ads, Deception

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

A self-insured employer (Kinetic Co.) had standing to sue a medical device manufacturer (Medtronic, Inc.) under Minnesota false advertising, deceptive practices, and consumer fraud laws, the federal district court in Minneapolis has ruled.

Kinetic filed a class action, seeking to represent third-party payors for medical services, alleging that Medtronic continued to sell implantable cardiac defibrillators after it knew of the risk of potentially catastrophic battery failure. After recalling the product, Medtronic allegedly agreed to provide a free replacement device for a Kinetic employee but declined to reimburse Kinetic for the second implantation surgery.

Employer-Provided Health Care

This nation has adopted a health care regime under which employers provide, either from their own funds, or through insurance, for their employees’ medical needs, the court observed.

The fact that Medtronic never sold its defibrillators to Kinetic or other third-party payors did not defeat standing. Medtronic was wrong to assert that the third-party payors—which ultimately reimbursed the physicians or hospitals which held the device in inventory—were barred from any recovery. Medtronic was not protected by marketing its products through intermediaries, according to the court.

Particularity in Pleading, Public Benefit

Kinetic met the requirement of pleading fraud with particularity, under Rule 9(b) of the Federal Rules of Civil Procedure and satisfied the requirement under Minnesota law that private suits for false advertising and consumer fraud must benefit the public.

The class action complaint alleged that 87,000 defibrillators were implanted after Medtronic knew of potentially lethal defects before it decided to inform consumers. The alleged misrepresentations and failures to disclose were made to the public at large and lulled third-party payors and medical providers into underestimating the true risks of using its products.

When setting their insurance rates and premiums, third-party payors attempt to predict upcoming costs, the court said. But they could not predict or easily account for acts of intentional concealment and fraud, as alleged here.

Medtronic’s decision to deny third-party payors recompense was an effort to pass off the cost and expense it caused to innocent employers or insurers who, as a result, either charged the public more to cover the cost of health care, or absorb the cost themselves, according to the court. Kinetic’s effort to place this cost where it allegedly ought to be borne might well provide a public benefit.

Kinetic Co. failed to state claims under consumer fraud laws of states other than Minnesota. The court granted leave to replead with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure.

The December 4 opinion in Kinetic Co. v. Medtronic, Inc. will be reported at CCH Advertising Law Guide ¶63,682.

Motor Vehicle Dealership Reinstatement Measure Signed into Law

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

More than 2,000 motor vehicle dealers that had their franchises terminated in connection with the federal government-funded restructuring of General Motors and Chrysler earlier this year now have an opportunity to seek reinstatement of their franchises under legislation signed yesterday by President Obama.

Under the new law, dealerships that were not lawfully terminated under state laws on or before April 29, 2009, shall be authorized to request reinstatement or continuation of their franchise agreements or to be added as a franchisee to the dealer network of their former franchisor in the geographical area where the dealership was located when its franchise was terminated, not assigned, nonrenewed, or discontinued.

Such an election by the dealership would have to occur within 40 days of the legislation’s enactment.

Those seeking reinstatement or continuation must make a request for binding arbitration. The arbitrator would be required to balance the economic interests of the dealership, the economic interest of the manufacturer, and the economic interest of the public at large and decide whether or not the dealership should be reinstated or continued.

The factors considered by the arbitrator include:

(1) The dealership’s profitability in 2006, 2007, 2008, and 2009,
(2) The manufacturer’s overall business plan,
(3) The dealership’s current economic viability,
(4) The dealership's satisfaction of performance objectives,
(5) The demographic and geographic characteristics of the market territory,
(6) The dealership’s performance in relation to the manufacturer’s criteria, and
(7) The length of experience of the dealership.

The dealership reinstatement measure is contained in H.R. 3288, the Consolidated Appropriations Act of 2010 (Public Law 111-117).

Full text of the reinstatement provision (Sec. 747) will appear at CCH Business Franchise Guide ¶14,281.

FTC Sues Intel for Monopolization

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

The Federal Trade Commission (FTC) announced today that it has issued an administrative complaint against Intel Corporation for engaging in monopolization. An administrative trial could begin next September.

Intel is charged with monopolizing the markets for Central Processing Units (CPUs) and creating a monopoly in the markets for graphics processing units (GPUs).

“Intel has engaged in a deliberate campaign to hamstring competitive threats to its monopoly,” said FTC Bureau of Competition Director Richard A. Feinstein. “It’s been running roughshod over the principles of fair play and the laws protecting competition on the merits. The Commission’s action today seeks to remedy the damage that Intel has done to competition, innovation, and, ultimately, the American consumer.”

Relevant Markets, Monopoly Power

A CPU is a type of microprocessor used in a computer and is often described as the “brains” of a computer. Intel’s unit share in the CPU markets at issue has exceeded 75 percent in each of the years since 1999, and its share of revenue in these markets has consistently exceeded 80 percent during that time, the FTC alleged.

The FTC identified a second set of relevant product markets for GPUs, in which Intel is likely to obtain monopoly power. GPUs originated as specialized integrated circuits for the processing of computer graphics but have evolved to take on greater functionality, the agency explained.

Unfair Methods of Competition, Unfair Acts and Practices

The agency contended that the computer chip maker maintained its monopoly in the CPU markets and strengthened its monopoly position in the GPU markets through unfair methods of competition and unfair acts or practices that date back to 1999 and continue to today.

According to the FTC, Intel used threats and rewards aimed at the world’s largest computer manufacturers, including Dell, Hewlett-Packard, and IBM, to coerce them not to buy rival computer CPU chips. In addition, allegedly, Intel secretly redesigned key software, known as a compiler, in a way that deliberately stunted the performance of competitors’ CPU chips.

The agency also contends that, once Intel found itself falling behind the competition in the critical market for GPUs, the chip maker embarked on a similar anticompetitive strategy to smother potential competition from GPU chips.

Relief Sought

To remedy the anticompetitive damage alleged in the complaint, the FTC is seeking an order which includes provisions that would prevent Intel from using threats, bundled prices, or other offers to encourage exclusive deals, hamper competition, or unfairly manipulate the prices of its CPU or GPU chips. The FTC said that it also might seek an order prohibiting Intel from unreasonably excluding or inhibiting the sale of competitive CPUs or GPUs, and prohibiting Intel from making or distributing products that impair the performance of non-Intel CPUs or GPUs.

Commissioner Rosch’s Partial Dissent

The Commission vote approving the administrative complaint was 3-0, with Commissioner William E. Kovacic recused, and Commissioner J. Thomas Rosch issuing a separate statement in which he concurred in part and dissented in part.

Commissioner Rosch, in his separate statement, said that he concurred in the issuance of a complaint based on pure FTC Act Section 5 claims, but dissented on public policy grounds to the extent the complaint contained Sherman Act, Section 2 “tag-along” claims.

“The collateral consequences of including any Section 2 claims are very unfavorable for both Intel and the Commission,” Rosch said. Because Intel was facing a suit filed by the New York Attorney General under Section 2 in addition to a number of Section 2 treble damage class actions, Rosch argued that perhaps “as a matter of policy the Commission should not spend public resources on a duplicate claim.”

Rosch also pointed to the risk that private plaintiffs might free ride off of the Commission’s work or that the Commission could be placed in a position where an unfavorable outcome in those cases could be cited against it.

FTC Case “Misguided”

Intel posted the following response on its website:

"Intel has competed fairly and lawfully. Its actions have benefitted consumers. The highly competitive microprocessor industry, of which Intel is a key part, has kept innovation robust and prices declining at a faster rate than any other industry. The FTC's case is misguided. It is based largely on claims that the FTC added at the last minute and has not investigated. In addition, it is explicitly not based on existing law but is instead intended to make new rules for regulating business conduct. These new rules would harm consumers by reducing innovation and raising prices."

According to Intel senior vice president and general counsel Doug Melamed, "This case could have, and should have, been settled. Settlement talks had progressed very far but stalled when the FTC insisted on unprecedented remedies—including the restrictions on lawful price competition and enforcement of intellectual property rights set forth in the complaint—that would make it impossible for Intel to conduct business."

"The FTC's rush to file this case will cost taxpayers tens of millions of dollars to litigate issues that the FTC has not fully investigated,” said Melamed, who served in the Department of Justice Antitrust Division during the Clinton Administration. “It is the normal practice of antitrust enforcement agencies to investigate the facts before filing suit. The Commission did not do that in this case.”

Other Actions Against Intel

In November, New York State filed an action charging Intel with monopolization in violation of the Donnelly Act and Section 2 of the Sherman Act. (See Trade Regulation Talk, November 4, 2009 posting).

In addition, Intel has agreed to pay $1.25 billion to Advanced Micro Devices (AMD) and to abide by a set of business practice provisions to resolve antitrust litigation and patent cross-license disputes, the companies announced on November 12, 2009. AMD agreed to drop all pending litigation against the computer chip maker, including a case in the federal district court in Delaware and two
cases in Japan.

Earlier this year, Intel was fined €1.06 billion by the European Commission based on similar allegations. (See Trade Regulation Talk, May 15, 2009 posting.)

The administrative complaint is In the Matter of Intel Corporation, FTC Docket No. 9341, December 16, 2009. Text of the complaint, statements by the Commissioners, and a news release appear here on the FTC website. Further details will appear in CCH Trade Regulation Reporter.

Senate Committee Hears from FTC Nominees

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

The two nominees to serve as commissioners at the Federal Trade Commission testified today before the Senate Commerce, Science and Transportation Committee.

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, told the committee of their accomplishments and their plans if confirmed as commissioners.

The committee also heard from persons nominated for other positions: David L. Strickland (nominated as Administrator of the National Highway Traffic Safety Administration U.S. Department of Transportation), Nicole Y. Lamb-Hale (nominated as the Assistant Secretary for Manufacturing and Services, U.S. Department of Commerce), and Michael A. Khouri (nominated as Commissioner of the Federal Maritime Commission).

Brill, who had served for many years in the Vermont Attorney General’s Office, was proudly introduced by Senator Patrick Leahy of Vermont. Brill said that her top priority, if confirmed as an FTC member, would be “focusing on economic scams that have been so pernicious to consumers during the economic crisis,” such as “get rich quick” scams.

Brill described what she would bring to the Commission as: “passion for aggressively protecting consumers, humility and grace in exercising authority, and the need to carefully balance the interests and concerns of businesses, consumers, and other stakeholders in legislative, regulatory and law enforcement initiatives.”

In light of Brill’s experience with state enforcement, the nominee said that she hoped to build upon the bonds that already exist between the FTC and the state attorneys general. She expressed her belief that the FTC has done a good job in the consumer protection area, especially lately.

In introductory remarks, Committee Chairman John D. Rockefeller, IV (West Virginia) said that Edith Ramirez would bring extensive experience in complex business litigation and that he appreciated her critical eye for mergers and business combinations which may potentially harm consumers.

Ramirez said that she was confident that her experience and background, including her activities in her community, would enable her to bring a fresh perspective to the issues confronting the FTC.

She said that “the Commission’s duty to combat deceptive and unfair business practices and to foster competition has never been greater, particularly in the areas that have the greatest impact on the daily lives of ordinary Americans such as financial services, healthcare, energy, and technology.”

Ramirez said that she would make it a priority to help ordinary Americans understand the role of the FTC and its consumer protection mission.

National Banks’ “No Fee” Gift Card Ads Could Violate State Consumer Laws

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

In two suits against that TD Bank, N.A. and Commerce Bank, N.A., consumer claims that the banks deceptively advertised “no fee” gift cards in violation of state consumer protection laws were not preempted by the National Bank Act or federal regulations, the federal district courts in Philadelphia and Camden, New Jersey have ruled.

On the front of the cards appeared a “Good Thru” date in large, raised letters. Very small print on the back of the cards stated that use was subject to terms and conditions accompanying the card. Each card came prepackaged in a decorative box, tied shut. Inside was a hidden pouch with a cardboard folding envelope containing a piece of paper stating terms and conditions of the card.

Dormancy Fees

In class action complaints, the consumers alleged that the cards were subject to “dormancy fees.” If the cards were not used for a specified number of months after issuance, the banks would deduct $2.50 monthly, silently reducing the value of the cards prior to the “Good Thru” date.

No issue date appeared anywhere on the cards. There allegedly was no mechanism, such as an 800 number or website, that a cardholder could use to ascertain the issue date or fees deducted.

The banks’ advertising campaigns allegedly claimed that, unlike other bank cards, their gift cards had “no fees.”

Banks’ Power to Assess Fees

To the extent that the New Jersey Consumer Fraud Act claims in Mann v. T.D. Bank, N.A. were based on the banks’ assessment of dormancy fees, the claims were federally preempted, the federal district court in Camden ruled.

The court relied on SPGGC, LLC v. Ayotte (1st Cir. 2007) CCH Advertising Law Guide ¶62,824. In that case the First Cicuirt held that enforcement of a New Hampshire Consumer Protection Act prohibition against sale of gift certificates containing dormancy fees would “significantly interfere” with the issuing bank’s powers under the National Banking Act and regulations of the Office of the Comptroller of the Currency (OCC).

State Laws Barring Deceptive Advertising

Not all state laws affecting a national bank’s practice of issuing gift cards are preempted, however.

In Mann, the court went on to hold that the New Jersey Consumer Fraud Act, as applied to the banks’ allegedly deceptive marketing and advertising, did not “significantly interfere” with their federally created powers.

Similarly, in Mwantembe v. TD Bank, N.A., the federal district court in Philadelphia held that enforcing the Pennsylvania Unfair Trade Practices and Consumer Protection Law would not interfere with the banks’ operations or unduly impair their ability to sell gift cards. There are no federal regulations directing what disclosures a national bank must provide in connection with the issuance of a gift card, according to the court.

State laws of general application, which merely require all businesses, including banks, to abide by contracts and refrain from making misrepresentations to customers, do not impair a bank’s ability to exercise its gift-card issuing powers, the court concluded.

U.S. Supreme Court

Both courts cited the U.S. Supreme Court’s 2009 decision in Cuomo v. Clearing House Ass’n, LLC (CCH Federal Banking Law Reporter ¶101-126). Cuomo reversed a trend of expanding the scope of federal preemption for national banks and dispelled the notion that all state laws affecting national banks are preempted, the court said in Mwantembe.

OCC Guidance

In addition, both courts found that the banks’ argument of conflict preemption was not supported by an OCC guidance document on gift card disclosures (OCC Bulletin 2006-34).

The OCC advised national banks that it “expects national bank gift card issuers to take appropriate actions to ensure that critical information is provided in a form that is likely to be readily available to recipients, as well as purchasers, of gift cards.”

The November 12, 2009 opinion in Mann v. T.D. Bank, N.A. will be reported at CCH Advertising Law Guide ¶63,679.

The November 17, 2009 opinion in Mwantembe v. T.D. Bank, N.A. will be reported at CCH Advertising Law Guide ¶63,678.

FTC Hears Views on Regulation of Online Privacy

This posting appeared in the December 15, 2009 issue of Telecommunications Reports.

One member of the Federal Trade Commission has called for "comprehensive privacy legislation," while the agency's chairman has offered a more measured aspiration for a regulatory approach to online privacy, intended to serve both consumers and companies that track them better than the status quo.

Speaking at the FTC's Dec. 7 privacy roundtable in Washington, FTC Commissioner Pamela Jones Harbour—who noted that her time at the agency is "coming to a close" (her term expired in September)—said that her call for comprehensive legislation was not a disparagement of efforts by Rep. Rick Boucher (D., Va.) for online privacy protections, but that "the privacy debate goes far beyond" online concerns.

"Real change cannot just be aspirational," she observed.

Commissioner Jones Harbour said that for every company taking a good faith approach to a privacy policy, there is another trying to "parse and evade commission guidance." She suggested that the current "turbulent economic times are forcing companies to seek out new sources of income" through the collection and sale of consumer data.

Looking forward, she said, "I know the Commission will continue to be the thought leader on privacy," and pledged to continue to do her part to "push" the FTC on this issue.

“Watershed Moment in Privacy”

Recalling the history of privacy jurisprudence, FTC Chairman Jon Leibowitz said, "We're at another watershed moment in privacy," adding that it is time for the FTC to act. He suggested that among the factors increasing threats to online privacy is the ever-decreasing cost of storing and analyzing data.

Chairman Leibowitz said that, as the agency pursues its privacy proceeding over the next six months, he hopes to "find a way [that is] better for consumers and fairer for companies as well." He noted that "we all know consumers don't read privacy disclosures very well" and suggested that it might be possible "to meet consumer expectations" of privacy in other ways that will work for companies.

He suggested that consideration should be given to how to treat "vulnerable categories of consumers such as children."

The text of the Chairman Leibowitz’s introductory remarks appears here on the FTC website.

Views of Business, Consumer Groups

Richard Smith, a consultant with Boston Software Forensics who made two presentations during the roundtable, echoed Chairman Leibowitz's point about the low cost of data storage, saying, "It actually costs more to delete the information off of drives" than to store it.

Susan Grant, director-consumer protection at the Consumer Federation of America, warned that "if people were to realize that their rights are being violated," their trust and willingness to use online tools such as search engines would be eroded.

Michael Hintze, associate general counsel at Microsoft Corp., called for "a multifaceted approach [to privacy] from the beginning," adding that "anonymization [of data] is important but not a silver bullet." Asked to defend the benefits of wireless location-based services, Mr. Hintze acknowledged that it is "cool." However, he added, "it is one thing to know where your customer is right now; it's another to keep a record of every place they've been for last three years."

David Hoffman, director-security policy and global privacy officer at Intel Corp., said privacy assurances should include limitations on the use and collection of data, as well as limitations on how long the data can be retained. He also advised looking carefully "at any regulations that require companies to maintain data longer than they otherwise would for business purposes," such as for homeland security purposes, because simply retaining the data longer increases the potential for data breaches.

Alessandro Acquisti, an economics professor at Carnegie Mellon University, observed, "There are problems that education and transparency can't address," in part because "privacy costs are often long-term" and it has "been proven over and over that we are very bad at making decisions when benefits are short-term but risk is long-term."

Jules Polenetsky, co-chairman and director of the Future of Privacy Forum, said, "We need a little bit of experimentation and leeway to create a [privacy preferences] feature that will succeed in the marketplace" and that "you need a little bit of room for people to delight users" with new ways of using information.

Peder McGee, a senior attorney in the FTC's Division of Privacy and Identity Protection who co-moderated one of the panels, said that some panelists' proposals for allowing consumers to decide whether to seek out information about a company's privacy policy and use of data "seem[] to put a lot of burden on consumer to find out about things that aren't very transparent."

Telecommunications Reports is published by Telecommunications Reports International, a Division of Aspen Publishers, a Wolters Kluwer Company. Further information about Telecommunications Reports is available here at www.tr.com.

EU Adopts New Rules on Data Breaches, Cookies, Spyware

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

Telecommunications service providers in European Union member states will be required to notify customers of security breaches that compromise their personal data, under new amendments to the EU’s Directive on Privacy and Electronic Communications ("ePrivacy Directive,” CCH Privacy Law in Marketing ¶40,110).

The amendments to the ePrivacy Directive were part of a sweeping telecommunications reform package approved by the European Parliament on November 24, 2009.

The breach notification rules are the first of their kind in Europe, although unlike breach notification laws in the United States, the ePrivacy Directive’s notice requirements will be limited to telecommunications providers.

The legislation also reinforces protection against the interception of users’ communication through the use of spyware and cookies stored on a user’s computer or other device. The amended ePrivacy Directive requires websites to provider users with better information and easier ways to control whether they want cookies stored on their computers.

The amendments also (1) give Internet service providers the right to protect their business and their customers through legal action against spammers and (2) substantially strengthen the enforcement powers of national data protection authorities.

“The new provisions will bring vital improvements in the protection of the privacy and personal data of all Europeans active in the online environment,” according to European Data Protection Supervisor Peter Hustinx.

“The improvements relate to security breaches, spyware, cookies, spam, and enforcement of rules,” he said. “But it is now crucially important to broaden the scope of the security breach provisions to all sectors and further define the procedures for notification.”

The revised ePrivacy Directive, as amended by the European Parliament and adopted by the European Council, must be implemented by the member states within 18 months.

The amendments to the ePrivacy Directive will be reflected in CCH Privacy Law in Marketing. They appear on pages 71 to 83 of the telecom legislation found here on the European Union website.

High Court Hears Arguments on Class Arbitration in Price Fixing Case

This posting was written by John W. Arden.

The U.S. Supreme Court today heard arguments on whether the Federal Arbitration Act (FAA) permits the imposition of class arbitration when the parties’ agreement is silent on the issue.

The Court is reviewing a decision of the U.S. Court of Appeals in New York City (2008-2 Trade Cases ¶76,355), holding that purchasers of shipping services could proceed with class arbitration of their price fixing claims against four major maritime shipping companies.

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

In their petition for certiorari, the maritime shipping companies argued that Supreme Court review was appropriate in light of a split among the circuits and because the case was free of threshold issues that previously thwarted review of the question.

The companies contended that “the Second Circuit’s decision that class arbitration may be imposed on parties whose arbitration contract does not provide for it cannot be reconciled with [the Supreme] Court’s FAA precedents.” Stolt-Nielsen SA v. Animalfeeds International Corp., Docket No. 08-1198, cert. granted June 15, 2009.

Authority of Arbitrators

Arguing for the shipping companies, Seth P. Waxman pointed out that—unlike courts—arbitrators derive their authority “solely from the consent of the parties to a particular agreement.”

When an agreement reveals no intent to add participants, arbitrators who nevertheless extend the process to hundreds of parties to other contracts “violate the basic principle reflected in the FAA that their authority is created and circumscribed by an agreement,” according to Mr. Waxman.

In a discussion with Justice Breyer, the petitioners' lawyer stated that there were two questions before the Court (1) whether there was a meeting of the minds between the parties on the issue of class arbitration and (2) if there was no meeting of the minds, and the contract was truly silent, whether ordering class arbitration would be permissible under the FAA.

Mr. Waxman answered his own questions—that no meeting of the minds was objectively revealed and therefore the arbitrator exceeded his authority under the FAA in requiring class arbitration. There was no express provision one way or the other, and maritime law governing the contract looks to the custom and practice in the industry, which is to not allow class arbitration.

Contract Interpretation

Speaking on behalf of the purchasers of shipping services, Cornelia T.L. Pillard maintained that the arbitrators only did what they were asked to do—interpret the contract. “They did not impose their own policy judgment,” she said. They relied on the broad language of the agreement and on the fact that “many other arbitrators had read similar language to permit class arbitration.”

By agreeing to arbitrate “any disputes,” the parties gave the arbitrators the authority to use class arbitration, among other procedures, that was appropriate to a particular case, she said.

There was an extensive discussion—between Justice Scalia and Ms. Pillard—about whether the arbitrators in the case agreed to permit class arbitration or simply did not agree to prohibit it. Ms. Pillard maintained that once the arbitrators had “affirmative general authorization” to choose any appropriate procedures, the shippers would have had to show the parties’ intent to preclude class arbitration.

Chief Justice Roberts pointed out that there is a difference “between allowing something and a background rule that requires it if you don’t say anything about it.” Later, he summed up, “So we have to decide, when . . . the contract says nothing about class actions, whether the background rule should be you can go ahead—or the background rule should be, you can’t go ahead.”

Justice Ginsburg opined that if the purchasers win this case and obtain class arbitration, that the shippers would insert “express no-class-action terms” in all their future contracts.

Ms. Pillard agreed, but said “at least it was incumbent on them to do that here if this was something they were so concerned about. . . . “

The 71-page transcript of the oral argument appears here on the U.S. Supreme Court website.

Exclusive Dealing Suit Proceeds to Trial

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

A medical products company could have illegally foreclosed competition in the U.S. market for sharps containers in violation of federal antitrust law by offering purchasers discounts and rebates under market share contracts and by entering in exclusive contracts with group purchasing organizations (GPOs), the federal district court in Boston has ruled.

Summary judgment against the claims of the plaintiffs—a certified nationwide class of direct purchasers (2009-2 Trade Cases ¶76,746)—was denied, clearing the last hurdle to trial in the case. The trial was scheduled to begin on December 7.

Sharps containers are products or systems used to dispose of needle-inclusive biohazard products such as syringes and blood collection devices. The contracts at issue allegedly gave purchasers discounts if they purchased virtually all their needs from the company.

Market Share Discounts

Rejected was an argument by the company that the market share discounts could not have violated the Sherman Act because they were governed by predatory pricing case law, and predatory pricing could not be proven because the discounted prices were still above cost.

The case dealt with exclusionary dealing, not predatory pricing, the court noted. While above-cost market share discounts did not, on their own, constitute improper exclusionary dealing that violated the Sherman Act, the class' assertion of additional coercive factors could suffice to demonstrate illegal conduct.

The class pointed to obstacles, both contractual and practical, that allegedly prevented hospitals from terminating the contracts, the court observed. They contended that the lack of a termination clause in the contracts effectively forced customers to buy all their requirements from the company for an indefinite duration. They also presented evidence indicating that the company policed and bullied its customers to ensure satisfaction of their ex ante purchasing requirements.

In addition, the class offered proof that the at least some of the contracts applied not just to single products, but across a range of bundled items. Such programs could be exclusionary even whether the discounts were above cost, since even an equally efficient rival might find it impossible to compensate for lost discounts on products that it did not produce, the court explained.

The court concluded that summary judgment on the claim based on market share contracts was not warranted, given the class's showing of:

(1) Substantial foreclosure of the market,
(2) Above cost loyalty discounts,
(3) Indefinitely long affirmative exclusionary purchasing commitments,
(4) Bundling,
(5) Policing and enforcement of the contracts in order to prevent departure, and
(6) Anticompetitive motive

Exclusive GPO Pacts

The class's exclusive dealing claims based on the GPO contracts were similarly viable, the court decided. GPOs negotiate contracts between manufacturers/suppliers and their member hospitals. The exclusive pacts allegedly foreclosed competitors unfairly from the most efficient distribution channel for medical supplies, the GPO services market.

The plaintiffs' expert defined a relevant market based on evidence that rivals' alternatives for selling their products were not reasonably interchangeable. This demonstrated market foreclosure raised rivals' costs and created barriers to entry. This showing, along with evidence that GPOs exiting the sole source agreements would have to abandon their entire contracts—accepting lower administrative fees—and that the selection process by which GPOs chose sole source manufacturers was not competitive, sufficed to survive summary judgment, the court said.

Market Power

The court also held that the defending company could have possessed the substantial market or monopoly power required for a violation of Sec. 2 of the Sherman Act. The company's declining market share did not preclude a finding of market power. Given that the parties'
experts disagreed substantially as to whether the company's prices and profit margins did in fact fall during the relevant period, a genuine issue of material fact existed as to the company's market power, the court found.

The decision is Natchitoches Parish Hospital Service District v. Tyco International, Ltd., 1:05-CV-12024-PBS, November 20, 2009. It appears at 2009-2 Trade Cases ¶76,815.

Short Seller's Price Fixing Claims Against “Prime Brokers” Barred

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

The federal securities law preempted a claim against large financial institutions that served as “prime brokers” in short sale transactions for artificially inflating fees imposed on short sellers in violation of the antitrust laws, the U.S. Court of Appeals in New York City has ruled.

Dismissal of the antitrust claim with prejudice (2007-2 Trade Cases ¶75,988), on the ground of implied preclusion of the antitrust laws by the securities laws, was affirmed.

A short seller profits from borrowing stocks that it believes will drop in price from a prime broker, selling them on the open market, and then purchasing replacement securities to return to the broker. The broker charges the short seller a borrowing fee.

A complaining short seller alleged that since 2000 prime brokers charged artificially inflated borrowing fees by agreeing on which securities to designate arbitrarily as hard-to-borrow and setting minimum borrowing fees for these securities.

Applying the reasoning of the U.S. Supreme Court's 2007 decision in Credit Suisse Securities (USA) LLC v. Billing, 2007-1 Trade Cases ¶75,738, the Second Circuit ruled that the short seller's price fixing claims were barred.

In Credit Suisse, the Supreme Court ruled that federal securities law implicitly precluded application of the antitrust law to the underwriters’ alleged anticompetitive conduct. The Court articulated four considerations that bear upon whether “the securities laws are ‘clearly incompatible’ with the application of the antitrust laws” in a particular context:

(1) Location within the heartland of securities regulations;
(2) SEC authority to regulate;
(3) Ongoing SEC regulation; and
(4) Conflict between the two regimes.

All four Billing considerations weighed in favor of implied preclusion, it was decided. The appellate court concluded that (1) short selling was squarely within the heartland of the securities business and (2) the Securities Exchange Commission not only had authority to regulate the role of the prime brokers in short selling and the borrowing fees charged by prime brokers under Sec. 10(a) of the Securities Exchange Act of 1934, but the agency exercised its authority to regulate the role of the prime brokers in short selling.

Lastly, the court concluded that antitrust liability would create actual and potential conflicts with the securities regime. Antitrust liability would inhibit the brokers from engaging in other
conduct that the SEC currently permits and that benefits the efficient functioning of the short selling market. There was a potential conflict because, in the future, the SEC might decide to regulate the borrowing fees charged by brokers.

Details of the December 3 decision, In re Short Sale Antitrust Litigation, 08-0420-cv, appears at 2009-2 Trade Cases ¶76,822..

Trade Regulation Tidbits

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

News, updates, and observations:

 On November 27, the European Commission (EC) announced the appointment of Joaquin Alumnia as the new Commissioner-designate for Competition, for a term running through October 31, 2014. Almunia, 61, previously served as the EC Commissioner for Economic and Monetary Affairs. A career politician, he was the Socialist Party candidate for prime minister of Spain in 2000. He would replace Neelie Kroes, who served as Commissioner for Competition since November 2004 and has been appointed as Commissioner-designate of the EC Digital Agenda. The appointments must be approved by the European Parliament, which is expected to hold individual hearings on the Commissioners-designate January 11-19 and to vote on the new Commission as a whole on January 26, 2010. Further details appear here on the European Union's Europa website.

 A group of 59 senators from both sides of the aisle have sent a letter to the Acting Head of the Delegation of the European Commission (EC) to the United States, requesting that the EC complete expeditiously its investigation of Oracle Corporation's proposed acquisition of Sun Microsystems Inc. Oracle announced on November 9 that the EC had issued a statement of objections (SO) concerning the proposed merger, despite U.S. approval of the transaction. The U.S. Department of Justice approved the plan in August, concluding the merger would not be anticompetitive. In a November 24 statement, Senator John Kerry (D, Massachusetts), who signed the letter, said: “The EC is within its sovereign rights to set the rules for operation in its market, but with our Department of Justice having made a compelling case that the merger does not pose a threat to competition, it is fair to ask the EC for the basis on which a delay on decision making is warranted and to make a decision one way or the other.” Orrin Hatch (R, Utah), another signatory, said “I have become increasingly concerned about the growing body of evidence that foreign regulatory agencies are unfairly using their review processes to impede the business of American corporations,” said Senator Orrin Hatch (Utah), another signatory.

 An increase in false advertising litigation and other dispute resolution might be the product of the “dismal economy,” according to a November 22 New York Times article. The number of complaints filed with the National Advertising Division of the Council of Better Business Bureaus is on track to set a record this year. The 82 formal complaints so far in 2009 follows 84 challenges in 2008, 62 challenges in 2007, and 52 challenges in 2006. Although there are no numbers available regarding the Lanham Act false advertising lawsuits filed this year, lawyers are reporting a corresponding increase. “In this economy, where margins are a bit tighter, a lot of marketing departments have decided to become more aggressive in going after their competitors in hopes that they can either protect their market position or capture an additional market share,” said John E. Villafranco, partner at Kelley, Drye & Warren and contributor to CCH Advertising Law Guide. (“Best Soup Ever? Suits Over Ads Demand Proof.)”

 A number of appointments of FTC senior staff were announced by the agency on November 30. Among them, Cecelia Prewett was named as Director of the Office of Public Affairs; Jessica Rich and Charles Harwood were named as Deputy Directors in the Bureau of Consumer Protection; and Norm Armstrong, Jr. was named Deputy Director in the Bureau of Competition. FTC Chairman Jon Leibowitz also announced a number of personnel changes within the Bureau of Consumer Protection. Joel Winston was named Associate Director of the Division of Financial Practices; Maneesha Mithal was named Associate Director of the Division of Privacy and Identity Protection; and Mark Eichorn was named Assistant Director of the Division of Privacy and Identity Protection. An announcement appears here on the FTC website. A list of senior FTC enforcement personnel appears at CCH Trade Regulation Reporter ¶9557.

Enfamil Ad Claims Enjoined; Store Brand Awarded $13.5 Million

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

A jury awarded $13.5 million to store brand infant formula producer PBM Products on a finding that Mead Johnson & Co. falsely advertised its Enfamil® LIPIL® formula in violation of the Lanham Act.

After the jury returned its verdict on November 10, the federal district court in Richmond, Virginia enjoined Mead Johnson from publishing any advertisement containing a false representation about PBM’s infant formula. PBM supplies store-brand infant formulas to Walmart, Sam's Club, Target, Kroger, Walgreens, and other retailers.

The December 1 injunction order expressly bars Mead Johnson from making the following claims: “It may be tempting to try a less expensive store brand, but only Enfamil LIPIL is clinically proven to improve brain and eye development,” and “There are plenty of other ways to save on baby expenses without cutting back on nutrition.”

The court directed Mead Johnson to retrieve any and all advertisements, promotional materials, or other literature containing the above claims.

The December 1 order does not articulate the basis for entering the injunction. In an earlier ruling (see Trade Regulation Talk, May 28, 2009), the court had denied PBM’s motion for a preliminary injunction (CCH Advertising Law Guide ¶63,417; 2009-1 CCH Trade Cases ¶76,619).

Laches Defense

Mead Johnson unsuccessfully contended that PBM’s suit was barred by the defense of laches on the theory that PBM had not diligently pursued its Lanham Act claim.

Mead Johnson argued that its challenged ad claims in a 2008 mailer had been made for more than two years. The court viewed the two-year Virginia statute of limitation period for fraud as analogous to false advertising under the Lanham Act, which lacks a statute of limitations.

Contrary to Mead Johnson’s contention, the 2008 Mailer took a new approach in tone and message towards store brand infant formula, according to the court. Mead Johnson consciously decided that its marketing should be more aggressive and risky, as it had witnessed a decrease in its sales and an increase in store brand sales, the court said.

The 2008 Mailer and its attack on store brands was the result of that marketing decision. On these facts, the court determined that Mead Johnson had not shown that PBM lacked diligence in pursuing its Lanham Act claim.

The December 1 order in PBM Products, LLC v. Mead Johnson Nutrition Co. will be reported in CCH Trade Regulation Reports and CCH Advertising Law Guide.

Franchisee’s Solicitation of Minor over Internet Warranted Immediate Termination

This posting was written by John W. Arden.

A franchisee’s arrest for soliciting a minor over the Internet warranted immediate termination of a franchise, without an opportunity to cure, under a “Damage to Goodwill” provision of the franchise agreement, according to a Florida circuit court.

A breach of contract claim brought by the franchisee’s wife and partner—arguing that she should not be bound by the actions of the franchisee—was rejected by the court.

In 1999, the husband and wife purchased an AmeriSpec franchise, with territory in Rhode Island and Massachusetts. In late 2004, the couple sold the franchise and purchased another existing AmeriSpec franchise in Sarasota, Florida, taking assignment of the franchise agreement.

Notice of Immediate Termination

On January 26, 2006, the husband was arrested and charged with transmitting harmful material to a minor by use of a computer and with using a computer for child exploitation. After learning of the arrest and negative publicity, the franchisor terminated the agreement immediately by letter dated February 6, 2006.

The termination letter cited a provision of the franchise agreement permitting termination of the franchise agreement upon receipt of notice for the franchisee’s engaging “in conduct which reflects materially and unfavorably upon the operation and reputation of the Franchised Business or the AmeriSpec system.”

Subsequently, the franchisee was convicted and/or pled guilty to multiple violations of Florida Statutes 847.0138. He currently is registered with the Florida Department of Law Enforcement as a sexual offender.

Liability for Acts of Partner

The franchisee’s wife and partner then brought an action against the franchisor for breach of contract and unjust enrichment, among other claims. The franchisor moved for summary judgment on the contract and unjust enrichment claims. The court framed the issue as whether the wife and partner “is bound by the actions of her partner and husband under the terms of the franchise agreement and Florida law.”

Initially, the court noted that both the husband and wife signed the franchise agreement as the franchisee. “Only one ‘franchise’ was granted, and there is no indication in the agreement that the rights of [the husband and wife] were divisible or separate.”

Florida law holds that individual partners are liable jointly and severally for all obligations of the partnership and that a partnership is liable for a partner’s actionable conduct. Florida Statutes 620.8305. Thus, the husband and wife were liable for the actions of the other.

The decision is Cleveland v. AmeriSpec, Inc., Circuit Court of the 12th Judicial Circuit, Case No. 2007 CA 008747 NC, November 16, 2009. Full text of the decision will appear at CCH Business Franchise Guide ¶14,267.

Recent Acquisition Challenges Reflect Federal/State Antitrust Cooperation

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

The Federal Trade Commission and the Department of Justice Antitrust Division have separately announced two recent acquisition challenges that reflect federal and state antitrust cooperation.

Infectious Waste Collection, Treatment

Yesterday, the Justice Department’s Antitrust Division announced an action, filed jointly with the attorneys general of the states of Missouri and Nebraska, that will require Stericycle Inc. to divest certain infectious waste collection and treatment services assets in order to proceed with its acquisition of MedServe Inc.

Stericycle is the largest provider of infectious waste collection and treatment services in the United States, and MedServe is the second-largest provider of infectious waste collection and treatment services in the United States.

The Justice Department and states filed a complaint in the federal district court in Washington D.C., on November 30. They alleged that the transaction, as originally proposed, would create a monopoly in the provision of infectious waste collection and treatment services for large quantity generator (LQG) customers, such as hospitals, large laboratories, and other large medical facilities, in the states of Kansas, Missouri, Nebraska, and Oklahoma.

A proposed consent decree, if approved by the federal district court, would resolve the charges by requiring divestiture of all of MedServe's assets primarily used in the provision of infectious waste collection and treatment services to large customers in Kansas, Missouri, Nebraska and Oklahoma. These assets include a treatment facility in Kansas and transfer stations in all four states.

Additionally, Stericycle would have to notify the Department of Justice and the attorneys general before acquiring any other assets in the region and would be prohibited from reacquiring the divested assets for 10 years.

Details of the complaint and proposed consent decree in U.S., State of Missouri, and State of Nebraska v. Stericycle, Inc., Case No.: 1:09-cv-02268, appear here on the website of the Department of Justice Antitrust Division. They will appear in the CCH Trade Regulation Reporter.

Cemetery Services

Last week, the FTC and the State of Nevada announced separate settlements with Service Corporation International (SCI), which would resolve antitrust challenges to an acquisition by the nation’s largest cemetery operator of the largest seller of cemetery services in the Las Vegas area.

In order for SCI, the third-largest provider of cemetery services in Las Vegas, to complete its proposed acquisition of local rival Palm Mortuary, Inc., SCI will have to divest Davis Memorial Park, currently its only cemetery in the Las Vegas area, as well as the funeral home on the same property.

The proposed FTC consent order would require SCI to give the Commission prior notice before acquiring any interest or assets related to the provision of cemetery services in the Las Vegas area.

In addition to the divestitures required under the state settlement agreement, SCI has agreed to notify the attorney general for the next three years of future acquisitions that involve cemetery service or funeral service markets where the company already has a presence in the state. Additionally, SCI has agreed to reimburse the state for its attorney fees and costs resulting from the investigation. The state settlement is subject to court approval.

In a November 25 announcement of the state settlement, Nevada Attorney General Catherine Cortez Masto spoke of her office's collaboration with the FTC on the investigation.

“Although my office has always had positive relationships with federal antitrust enforcers on earlier cases and joint training initiatives, the collaboration on this merger review with the Federal Trade Commission has been exceptional,” she said.

The FTC administrative complaint and proposed consent order, In the Matter of Service Corporation International, FTC Docket No. C-4275, appear here on the FTC website. Further details will appear at CCH Trade Regulation Reporter ¶16,393.