Thursday, April 30, 2009

Utah Supreme Court Refuses to Broaden State Antitrust Law to Cover Unfair Acts and Practices

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

The Utah Unfair Practices Act was unambiguous in its focus on competition and monopolistic behavior and made unlawful only unfair methods of competition, according to the Utah Supreme Court. Therefore, the court declined to expand the reach of the Act beyond anticompetitive methods to unfair and discriminatory practices as defined by the federal Cigarette Rule.

Similarities to FTC Act

A consumer unsuccessfully argued in a suit against a furniture store and a process server that, because of similarities between the Utah Unfair Practices Act and the Federal Trade Commission Act, the Utah Act should be extended to cover unfair and discriminatory practices as defined by the federal Cigarette Rule. The FTC uses the Cigarette Rule, which was originally adopted to regulate unfair or deceptive advertising or labeling of cigarettes, to determine whether an act is unfair under the federal Act.

Prohibition of Unfair or Deceptive Practices

Unlike the FTC Act, the Utah statute (Utah Code §13-5-1 to §13-5-18) lacked an independent reference to unfair acts or practices. The FTC Act made unlawful "[u]nfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce." On the other hand, the Utah Act contained no language prohibiting unfair or deceptive practices in commerce. A directed verdict in favor of the furniture store and process server was affirmed.

The April 17 decision in Garrard v. Gateway Financial Services, Inc. appears at 2009-1 Trade Cases ¶76,571. It will be published in the CCH State Unfair Trade Practices Law.

Antitrust Division Announces New Leadership Team

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

The Department of Justice Antitrust Division has announced a new leadership team, naming four new deputy assistant attorneys general.

Molly S. Boast, currently a partner at the New York Law firm of Debovoise & Plimpton LLP and a former Director of the FTC Bureau of Competition, will be one of two deputies who will oversee civil matters.

William Cavenaugh Jr., of the New York law firm of Patterson, Kelknap, Webb & Tyler LLP, will be the other deuputy. In his 24 years with the firm, Cavenaugh served as the Co-Chair of the firm, Chair of the Litigation Department, and a Litigation partner. He has extensive trial and litigation experience in complex antitrust, patent and commercial matters.

Philip J. Weiser, who is currently a Professor and Associate Dean for Research at the University of Colorado, will return to the Antitrust Division in July as Assistant Attorney General for for International, Policy, and Appellate Matters. Weiser was a Senior Counsel to Assistant Attorney General Joel Klein in the late 1990s.

Carl Shapiro is already at work as the Deputy Assistant Attorney General for Economic Analysis. He is taking a leave of absence from the University of California at Berkeley, where he is Transamerica Professor of Business Strategy in the Haas School of Business and a Professor of Economics. Shapiro was the Antitrust Division's Economics Deputy from August 1995 to June 1996.

Also noted in the announcement were the appointments of Sharis Arnold Pozen, the new Chief of Staff and Counsel, and Gene Kimmelman, the new Chief Counsel for Competition Policy and Intergovernmental Relations.

Before she came to the Department of Justice in February 2009, Pozen was a partner at the Washington, D.C. office of Hogan & Hartson. In her 14 years in the firm’s Antitrust, Competition, and Consumer Protection Group, Pozen worked on a variety of antitrust matters in the technology and healthcare industries.

Kimmelman most recently served as Vice President for Federal and International Affairs at Consumers Union (CU), the nonprofit organization that publishes Consumer Reports and From 1995 to 2009, he directed CU's federal and international policy programs. Kimmelman is a recognized expert in telecommunications, Internet/media policy, product liability, and antitrust law, according to the Department of Justice.

A news release announcing the appointments appears here on the Department of Justice website.

Wednesday, April 29, 2009

Possible Rival Lacked Antitrust Standing to Sue Veterinary Products Maker

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

Antitrust claims against the dominant manufacturer and seller of veterinary diagnostic products in the United States, which were brought by a potential new entrant in the market, were properly dismissed because the complaining company lacked standing to bring the claims, the U.S. Court of Appeals in San Francisco has ruled.

Summary judgment in favor of the defending manufacturer (2008-1 Trade Cases ¶76,078) was affirmed by a not-for-publication decision.

Antitrust Injury

In order to establish antitrust standing, a plaintiff must adequately allege and prove antitrust injury, the court explained. Only an actual competitor or one ready to be a competitor can suffer antitrust injury.

Intent, Preparedness to Enter Market

The complaining company failed to show that it had a genuine intent to enter the market and a preparedness to do so, the court ruled. The company had meager background or experience in the animal testing services industry. Its founder and chief executive officer had no background education or experience in molecular diagnostic testing, or in the relevant science, technology, and business generally.

Moreover, the complaining company operated through a skeleton crew of part-time outside consultants who lacked any background or experience in the prospective business. It had taken only preliminary steps to engage in its proposed business.The company submitted no specific evidence of its ability to finance its nascent enterprise.

Absence of Contracts

There was no evidence of consummated contracts between the company and distributors or end-users and no evidence of other types of contracts that one might expect from a business that was ready to enter the marketplace, in the court’s view.

The not-for-publication decision in Cyntegra, Inc.v. Idexx Laboratories, Inc. appears at 2009-1 Trade Cases ¶76,574.

Tuesday, April 28, 2009

Maryland Amends Antitrust Law to Make Resale Price Maintenance Per Se Illegal

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

Legislation clarifying that resale price maintenance (RPM), also known as vertical price fixing, remains per se illegal in the State of Maryland was signed into law on April 14 by Governor Martin O’Malley. The measure—Laws of 2009, Chapters 43 and 44—will take effect on October 1, 2009.

Response to Leegin Decision

The amendment to the Maryland Antitrust Act signifies the first legislative action taken to reverse 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.

For Maryland and other states that are statutorily-required to interpret their own antitrust laws in accordance with the prevailing judicial interpretations of federal antitrust law, the High Court’s ruling effectively changed state law as well.

During a Maryland Senate Judiciary Committee hearing on February 25, American Antitrust Institute President Albert Foer argued that the decision to apply the per se rule rather than the rule of reason standard “generally determines who wins an RPM case, and indeed determines whether legitimate cases are even initiated."

Foer contended that use of the rule of reason standard for RPM increases retail prices, primarily victimizing two groups—average retailers and end-use consumers—while protecting profit margins of manufacturers and mass merchandisers. Since the Leegin ruling was delivered, he noted, the practice of setting minimum prices has become far more commonplace.

Federal Legislative Efforts

The Maryland law is not the only initiative being taken to address or even undo the Supreme Court decision. A proposal to restore the rule of per se illegality for vertical agreements to fix minimum prices has been introduced by Sen. Herb Kohl (D-Wis.) in each of the last two sessions of Congress. Hearings on the current “Discount Pricing Consumer Protection Act” (S. 148) will be held in May.

At a meeting of retailers, online merchants, consumer advocates, and antitrust experts in Washington, D.C. last December, representatives from the House Judiciary Committee stated their intention to hold hearings to address the RPM issue this spring.

In February, the FTC began a series of workshops to address the problems of RPM by exploring how to best distinguish between uses of RPM that benefit consumers and those that do not. The next two workshops will be held in Washington, D.C. on May 20 and 21. At these workshops, panels will focus on the history of the practice, empirical evidence on the effects of RPM, and how it should be analyzed under the antitrust laws. Further information regarding these workshops can be found here on the FTC website.

While no other state has considered legislation similar to Maryland’s, more than 30 states took the position that RPM should remain per se illegal, in briefs with the Supreme Court during its consideration of the Leegin case. It is expected that the legislative action by the State of Maryland will prompt at least a few other states to follow its lead.

Monday, April 27, 2009

Misrepresenting Product as “Safest” Could Be Deceptive Act

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

An injured user of sumo wrestling equipment could pursue a claim that the manufacturer violated the Colorado Consumer Protection Act (CPA) by knowingly misrepresenting its product as “safest,” the federal district court in Denver has ruled.

Although the manufacturer’s representation of its product as the “best built” was puffery, the manufacturer’s representation of the product as the “safest” was a measurable statement of fact, the court determined.

While attending a corporate conference, the plaintiff participated in a mock sumo wrestling contest in which the two contestants put on the sumo equipment and tried to push each other out of a circle or onto the floor. The plaintiff fell backwards during the contest and sustained serious brain injuries when her head hit the floor. The manufacturer had represented that the sumo equipment was the "best built, and safest," which the plaintiff argued was deceptive and false advertising.

“Best Built"

The advertising claim that the sumo equipment was the "best built" constituted mere puffery and was not actionable under the CPA, according to the court. The manufacturer argued that the "best built" statement was an exaggerated opinion that could not be calibrated or measured.

General statements of opinion that are not meant to be relied on by the consumer are typically considered mere puffery and not actionable under the CPA. In this case, the statement that the equipment was the best built could not be measured objectively and was merely the opinion of the manufacturer. Therefore, the manufacturer was awarded summary judgment for this portion of the claim.


Unlike the "best built" claim, the manufacturer's representation that the sumo equipment was the "safest" could reasonably be seen as a statement of fact and, therefore, was actionable under the CPA, according to the court. "Safest" could conceivably be objectively measured. It would be reasonable to assume that the manufacturer's representation that its suit was the "safest" was a statement of quality made with the purpose of having it accepted as fact.

Although the manufacturer argued that it did not know about the safety of the equipment because there had been few injuries caused by the sumo equipment, the court found that a reasonable jury could find that the manufacturer knew that its equipment was no more safe than any other sumo equipment on the market, and therefore was not the "safest."

In depositions, the manufacturer’s owner and general manager testified that its sumo suits were essentially identical to those of competitors, and a purchaser testified that the manufacturer’s helmets were more easily damaged than another manufacturer’s equipment.

Summary judgment was inappropriate because a jury could find that the manufacturer should have known that its product was more easily damaged, less durable, and therefore less safe than other products on the market, the court concluded.

The decision, Giles v. Inflatable Store, Inc., appears at CCH State Unfair Trade Practices ¶31,801 and will appear at CCH Advertising Law Guide ¶63,370.

Friday, April 24, 2009

Enviga Drinker’s Tighter Pants Not Basis for Consumer Fraud Claim

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

A purchaser of the soft drink Enviga failed to assert an ascertainable injury under the New Jersey Consumer Fraud Act by claiming that her pants got tighter after she started drinking the “calorie burning” product, the federal district court in Camden, New Jersey has ruled.

The purchaser challenged as misleading Coca-Cola's advertising that 60 to 100 calories would be burned daily by drinking three cans of the beverage.

After reading the product label’s representations about calorie burning, the purchaser started drinking Enviga. She escalated her consumption to three cans daily based upon the advertising.

The purchaser testified that she did not weigh herself and was not attentive to her calorie intake during her two-and-a-half months of Enviga use. She claimed that she gained five pounds and that she knew this because her pants fit more tightly.


Even if the purchaser did fail to lose weight, this failure was held not to be causally attributable to Enviga’s inefficacy. The court said that the slight weight gain, if it occurred at all, was more likely attributable to subtle changes in diet, slightly less exercise, or natural weight fluctuations.

Enviga purports to cause the loss of only 60 to 100 calories daily, or the equivalent of approximately one apple, the court noted.

Despite counsel’s insistence that the purchaser’s diet remained rigidly consistent during the relevant period, the purchaser testified that her diet did indeed vary, including the inconsistent consumption of fruit juice and coffee with soy milk, as well as varying snack foods. Given these facts, and taking as true that the purchaser’s pants fit more tightly, the inferences that she failed to lose weight, and that Enviga caused her failure to lose weight, were patently unreasonable, the court concluded.

Because the purchaser's only claim failed, her pending motion for class certification was rendered moot.

The April 16 opinion in Franulovic v. Coca-Cola Co. will be reported at CCH Advertising Law Guide ¶63,348.

Thursday, April 23, 2009

Motor Vehicle Dealer Not Damaged by Phase-Out of Oldsmobile Line

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

A motor vehicle dealer's breach of contract claim against General Motors (GM) for phasing out its Oldsmobile line of vehicles necessarily failed because, as a result of the dealer's actions to mitigate its damages, it suffered no loss, the U.S. Court of Appeals in Richmond, Virginia, has held.

GM had entered into an agreement authorizing a dealer to operate an Oldsmobile dealership from November 2000 through October 2005. Only weeks later, GM announced its decision to terminate the Oldsmobile line, the court observed.

After being informed of the decision, the dealer, without consulting GM, purchased a nearby Nissan dealership in order to mitigate the anticipated loss of Oldsmobile sales. The dealer purchased the goodwill of the Nissan dealership for $1 million and entered into a Nissan dealership agreement that required it to separate its GM and Nissan facilities after a period of time.

In December 2001, the dealer informed GM of the dealership acquisition and the fact that the Oldsmobile dealership would be sharing the building with the Nissan operation for two years. Soon thereafter, GM sent the dealer a letter agreement, stating that the addition of the Nissan dealership without GM’s approval was a material breach of the dealership agreement.

Contract, Statutory Claims

In September 2005, the dealer filed an action against GM, alleging actual and anticipatory breach of the dealership agreement and violations of the West Virginia motor vehicle dealer law. The action initially claimed $2.47 million in “mitigation costs.”

The trial court dismissed the damage claim based on the fact that the dealer had profited from its mitigation. The dealer then added a claim for lost profits. An expert’s testimony on lost future profits, based on sales during a single baseline year, was excluded for failure to meet the standards of Federal Rule of Evidence 702, as clarified by Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, and Kumho Tire Co. v. Carmichael, 526 U.S. 137 (1999). Because the dealer lacked any evidence of lost future profits, the trial court entered judgment as a matter of law in favor of GM.

On appeal, the dealer argued that it was entitled to the $1 million it paid for the goodwill for the Nissan dealership, the $526,641 it paid to separate the Nissan and Oldsmobile dealership facilities, plus $1,972,985 in lost profits during the remaining term of its Oldsmobile dealership, for a total claimed loss of $3,499,626.

Lack of Economic Loss

Through its efforts at purported mitigation, the dealer had acquired a Nissan dealership with a total value of $5 million by the end of the term of its Oldsmobile dealership agreement in 2006, according to the appeals court. The $5 million figure did not even take into account the dealer's profits from the sale of at least 2,000 Nissan vehicles.

Based on the dealer's own appraisal of the value of the Nissan dealership in 2006, the Nissan dealership's increase in value more than compensated the dealer for all of its alleged mitigation damages and lost profits. It was clear that the dealer suffered no economic loss and therefore no legally cognizable damage as a result of GM's alleged breach, the appeals court held.

West Virginia Dealer Law

GM did not violate the West Virginia motor vehicle dealer law by enforcing facility requirements that were "unreasonable considering current economic conditions" or "not otherwise justified by reasonable business considerations," the court determined. Under the agreement with GM, the dealer was required to obtain GM's prior written consent before it added the Nissan line, and the dealer failed to do so.

In addition, the dealer specifically agreed in its contract with Nissan, entered into over four months prior to GM's sending of the letter agreement, that it would maintain separate facilities for the Nissan dealership. Thus, the dealer could not claim the GM's insistence that GM and Nissan dealerships be separated within two years violated the statute, the court reasoned.

The unpublished decision is C&O Motors, Inc. v. General Motors Corp., CCH Business Franchise Guide ¶14,110.

Wednesday, April 22, 2009

Healthcare Product Ads Falsified Studies; $11 Million Awarded for Corrective Advertising

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

GE Healthcare has been barred from falsifying scientific study results in advertisements for its Visipaque x-ray contrast medium product. The federal district in Trenton, New Jersey entered a permanent injunction and ordered GE to pay over $11.3 million to a competitor (Bracco Diagnostics) for corrective advertising. The court issued a 175-page opinion after a 39-day bench trial.

The crux of Bracco’s case was that GE violated the Lanham Act by falsely advertising Visipaque as superior to Bracco’s product, Isovue. GE Healthcare advertised establishment claims asserting that studies showed Visipaque to be superior in several ways, including renal and cardiovascular safety, lower costs, and less discomfort.

Literal Falsity, Injunction

In late 2002 and early 2003, GE focused its ad claims on a study published in the New England Journal of Medicine in early 2003 (the NEPHRIC study). Visipaque sales spiked following publication of the study.

The study concluded that renal damage may be less likely in high-risk patients when iodoxanol (the scientific name for Visipaque) is used rather than a “low-osmolar, nonionic contrast medium” (LOCM). The study was based on a head-to-head comparison of Visipaque with Omnipaque, an older GE Healthcare product. Both Omnipaque and Bracco’s Isovue are LOCMs.

While the greater number of GE’s advertisements were true, the court ruled that GE’s advertising of Visipaque as proven superior to all LOCMs was literally false. Based on the NEPHRIC study and other studies presented at trial, the court enjoined GE’s literally false claims of renal and cardiovascular safety, lower costs, and less discomfort.

Commercial Advertising and Promotion

While scientific articles are not commercial speech subject to regulation, secondary dissemination of the NEPHRIC article in GE’s advertisements did constitute commercial speech, the court held.

Oral statements made by GE Healthcare sales representatives, as evidenced by sales call notes, constituted commercial advertising or promotion. The sales call notes, albeit limited in number, were part of a full-scale marketing plan by GE to claim the benefits of Visipaque over LOCM alternatives through sales calls, websites, print marketing materials, and more, according to the court.

Lost Profits

Bracco’s request that GE Healthcare be required to disgorge its profits was declined. GE’s actions were not willful or deliberate, the court found. The creation of confusion and deception among customers due to GE’s advertising campaign was based on scientific studies and articles that had limited applicability. No scientific studies had explicitly found the converse of GE’s advertisements, the court noted.

Bracco failed to prove that it failed to win bids from large accounts as a result of GE’s conduct. Bracco also failed to carry its burden of showing that there was any causal connection between GE’s advertisements and the increasing sales of Visipaque to individual doctors and hospitals.

Corrective Advertising

Bracco did succeed in recovering over $11.3 million in costs incurred for corrective advertising. Damages could be presumed from the literally false ad claims, and GE failed to substantiate a claim that there was no connection between Bracco’s corrective advertising and GE’s false advertising. Bracco was not entitled to clinical study expenses allegedly incurred to refute GE’s false claims because such studies were undertaken as a regular cost of business in the healthcare industry, according to the court.

Future Disputes

The court ordered that any dispute between the parties arising from GE’s future advertising be submitted for resolution to a neutral panel or individual of the parties’ choice, such as the National Advertising Division (“NAD”), a division of the Council of Better Business Bureau.

The March 25, 2009 opinion in Bracco Diagnostics, Inc. v. Amersham Health, Inc. will be reported at CCH Advertising Law Guide ¶63,347.

Tuesday, April 21, 2009

Varney Confirmed by Senate to Head Department of Justice Antitrust Division

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

The U.S. Senate on April 20 confirmed the nomination of Christine Anne Varney to serve as Assistant Attorney General in charge of the Department of Justice Antitrust Division. Eighty-seven senators voted to confirm Varney. Only one, Senator Jim Bunning (Kentucky), voted no, with 11 senators not voting.

Varney will return to government service after more than a decade as a partner at Hogan & Hartson’s Washington, D.C. office. There she headed up the firm’s Internet Practice Group. She also recently served on President Barack Obama’s transition team.

During the Clinton Administration, Varney was an FTC Commissioner from 1994 to 1997. Prior to becoming an FTC Commissioner, Varney was Secretary to the Cabinet.

Varney received her J.D. from Georgetown University in 1986. She received her M.P.A. from Syracuse University in 1978, and her B.A. from The State University of New York, University at Albany in 1977.

Varney’s nomination was announced on January 22, along with three other assistant attorney general nominees: David Kris, Assistant Attorney General for National Security; Tony West, Assistant Attorney General for Civil Division; and Lanny Breuer, Assistant Attorney General for Criminal. West and Breuer were also confirmed by the Senate on April 20. Kris was confirmed on March 25.

In an April 20 news release, announcing the confirmations on April 20, Attorney General Eric Holder said: “These exceptional individuals will help lead the Department with dedication, sound judgment and integrity, whether it’s aggressively enforcing the antitrust laws, overseeing civil enforcement in the Department’s largest litigation division, or combating traditional crimes such as financial fraud or drug trafficking.”

He added, “I look forward to working with them to advance the interests of justice on behalf of the American people.”

A report on Varney's testimony at a Senate Judiary Committee confirmation hearing (Trade Regulation Talk, March 11, 2009) appears here.

Monday, April 20, 2009

Vehicle Retailer Held Liable Under Consumer Fraud Act for False Internet Ad

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

An out-of-state consumer was entitled to damages in a New Jersey Consumer Fraud Act (CFA) claim against an in-state seller of used vehicles that advertised over the Internet, according to the New Jersey Supreme Court. A lower court’s judgment and award of more than $25,000 in damages—plus attorneys’ fees and costs—was reinstated.

The consumer, living in Missouri, placed a bid for a used vehicle in an online auction run by the retailer, which was doing business in New Jersey. The online advertisement for the vehicle stated that the frame and convertible top were in good condition. The retailer spoke with the consumer on the telephone and stated that the car was in good enough condition to drive from New Jersey to Missouri.

After the consumer won the auction, the retailer informed the consumer that the car was probably not safe enough to drive across the country. The automatic headlights and windshield wipers did not work and the car lacked a spare tire. Nevertheless, the consumer paid for the car and had the retailer ship it to Missouri.

Once it arrived, the consumer had it inspected by a repair shop, which found that the frame was nearly rusted in half—thereby disqualifying it from registration in Missouri—and the top was in poor condition. The consumer filed a CFA claim in New Jersey against the retailer for losses sustained as a result of the allegedly false advertising.


At trial, the retailer asserted that he did not misrepresent the condition of the car and that, in any event, he was not a “dealer” subject to the reach of the CFA. The trial court found that, contrary to the advertisement, the car did not have a solid frame, the engine did not “run strong,” the headlights and windshield wipers did not function, the car had been owned by more than one person, and the radio was not original equipment.

It further found that the retailer qualified as a “dealer” under the CFA and that the retailer had violated the CFA by clear and convincing evidence. The trial court awarded $25,953 in trebled damages, $29,950 in attorneys’ fees, and $6,544 in costs.

The state appellate court dismissed the CFA claim on the ground that the trial court should have entered judgment for the retailer at the close of the consumer’s case instead of deferring consideration and hearing the retailer’s evidence. It did, however, award the compensatory damages of $8,651 under a common law fraud claim.

"Textbook" Claim

On review, the New Jersey Supreme Court found that the seller pled and proved a “textbook” CFA claim. The CFA prohibits any person from committing any unconscionable commercial practice, deception, fraud, or misrepresentation of a material fact in connection with the sale or advertisement of any merchandise.

The definition of “person” was “sufficiently expansive to ensnare [the retailer].” He could not claim that he was exempt from coverage as a member of a regulated industry or learned profession.

An assertion that the retailer was not a “dealer” subject to the CFA was unavailing. It was “simply irrelevant” whether the retailer qualified as a “dealer” within the state lemon law, which expressly stated that it did not limit rights or remedies under any other law. Accordingly, the Supreme Court reinstated the trial court judgment in all respects.

The April 8 decision is Real v. Radir Wheels, Inc., CCH State Unfair Trade Practices ¶31,802.

Friday, April 17, 2009

Federal Trade Commission Seeks Comments on Existing Rule, Two Proposed Rules

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

This week, the Federal Trade Commission (FTC) announced that it was seeking public comments in three rulemaking proceedings. Today, the agency issued a request for comments on its existing Cooling-Off Rule, which governs “door-to-door” sales of consumer goods and services. Yesterday, the agency asked for public comments on a revised proposed rule that would prohibit market manipulation in the petroleum industry and on a new proposal that would require certain vendors of personal health records and related entities to provide notice to consumers following a security breach.

Cooling-Off Rule

As part of its systematic review of its rules and guides, the FTC is seeking public comments on the costs and benefits of its Cooling-Off Rule. The rule, which was put in place in 1972 and last amended in October 1995, makes it an unfair and deceptive practice for anyone engaged in the “door-to-door” sale of consumer goods or services with a purchase price of $25 or more to fail to provide a buyer with certain oral and written disclosures regarding the buyer’s right to cancel within three business days, according to the agency. The FTC is seeking comments on whether modifications to the rule are needed to increase its benefits, reduce its costs, or address relevant changes in technology or economic conditions. The rule, 16 CFR Part 429, appears at CCH Trade Regulation Reporter ¶38,030.

The request for public comment has not yet been published in the Federal Register; however, it is available on the FTC’s website.

Written comments concerning the Cooling-Off Rule must be received no later than June 22, 2009. Comments should refer to “Cooling-Off Rule Regulatory Review, 16 CFR 429, Comment, Project No. P087109.” They should be mailed or delivered to: Federal Trade Commission/Office of the Secretary, Room H-135 (Annex M), 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. Comments can also be submitted in comments in electronic form at:

Rule Prohibiting Petroleum Market Manipulation

On April 16, a revised notice of proposed rulemaking was released by the FTC for the proposed rule prohibiting fraudulent conduct that could distort conditions in wholesale petroleum markets. The revised proposal (16 CFR Part 317) follows comments and concerns raised over earlier versions of the proposed rule.

“Like the initially proposed Rule, the revised proposed Rule would prohibit conduct that injects false information into market transactions,” according to the agency’s revised notice. “However, the revised proposed Rule more precisely identifies the conduct prohibited, and thus achieves a more appropriate balance between consumer protection interests and compliance burdens.”

The revised proposed rule would not impose any affirmative duties, obligations, or record-keeping requirements. Instead, it would prohibit a person from knowingly engaging in conduct—including making any untrue statement of material fact—that operates or would operate as a fraud or deceit on any person. In addition, it would prohibit a person from intentionally failing to state a material fact which both makes a given statement misleading under the circumstances and distorts or tends to distort market conditions for a covered product.

Violations of the revised proposed rule, if adopted, could result in the imposition of civil penalties of up to $1 million per violation per day, in addition to any relief available to the Commission under the FTC Act.

The FTC anticipates that the revised proposal will appear in the Federal Register on or about April 21, 2009. It is currently available on the FTC’s website.

Written comments must be received by May 20, 2009. Comments, should be labeled “Market Manipulation Rulemaking, P082900” and sent to: Federal Trade Commission, Market Manipulation Rulemaking, P.O. Box 2846, Fairfax, VA 22031-0846. Courier or overnight deliveries should be delivered to: Federal Trade Commission/Office of the Secretary, Room H-135 (Annex G), 600 Pennsylvania Avenue, N.W., Washington, DC 20580. Comments can also be filed in electronic form at:

Health Breach Notification Rule

The FTC also released on April 16 a proposed rule authorized by the Health Information Technology for Economic and Clinical Health Act or the "HITECH Act," which was contained in the recently enacted American Recovery and Reinvestment Act of 2009. The Act requires the Commission to issue a temporary rule requiring vendors of personal health records and related entities to notify consumers if the security of their health information is breached.

The proposed rule also stipulates that if a service provider to one of these entities experiences a breach, it must notify the entity, which in turn must notify consumers of the breach. The proposed rule contains additional requirements governing the standard for what triggers the notice, as well as the timing, method, and content of notice. It also requires entities covered by the proposed rule to notify the FTC of any breaches.

The proposed rule would be temporary pending congressional action with respect to establishing requirements for security breach notifications. The HITECH Act requires the Department of Health and Human Services to study, in consultation with the FTC, potential privacy, security, and breach notification requirements and submit a report to Congress containing recommendations by next February.

The Commission proposes to issue the Health Breach Notification Rule as a new Part 318 of 16 CFR. It is anticipated that the notice of proposed rulemaking for the Health Breach Notification Rulemaking, Project No. R911002, will appear in the April 20, 2009, Federal Register. It is currently available on the FTC’s website.

Written comments on the proposal must be received on or before June 1, 2009. Comments should refer to “Health Breach Notification Rulemaking,Project No. R911002.” They should be mailed or delivered to: Federal Trade Commission/Office of the Secretary, Room H-135 (Annex M), 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. Comments can also be filed in electronic form at:

Wednesday, April 15, 2009

Treatise Helps Guide Professionals Through Maze of Distribution Law Issues

This posting was written by John W. Arden.

The world of product distribution has changed dramatically in recent years. Revolutionary marketing relationships, new business formats, international expansion, and business consolidations have all impacted the way products are distributed and the law that governs distribution.

To help steer attorneys and their clients through the maze of distribution law issues, Wolters Kluwer Law & Business has just issued a new edition of CCH Product Distribution Law Guide, a treatise by the law firm of Foley & Lardner LLP first published in 1999.

The CCH Product Distribution Law Guide provides expert analysis for a broad range of disciplines that affect product distribution—from franchise law and antitrust to product liability and e-commerce.

Twenty five attorneys from Foley & Lardner collaborated to offer practice tips, discussions from both legal and business perspectives, best practices, and strategies for obtaining desired results.

The Guide covers vital topics, such as structuring distribution, franchise, and purchasing agreements; understanding territorial rights; defining exclusive agreements; dealing with insolvency and bankruptcy; terminating or modifying relationships; acquiring a product line for a supplier or franchisor; complying with antitrust laws; establishing international distribution arrangements; handling litigation or alternative dispute resolution; preventing and defending product liability claims; initiating product recall programs; and integrating e-commerce into existing distribution chains.

The new edition of CCH Product Distribution Law Guide is available as a one-volume looseleaf publication and also on the Internet from CCH. For further information, call 800-248-3248 or visit the Product Distribution Law page on the Wolters Kluwer Law & Business website.

Tuesday, April 14, 2009

FTC Action Challenging Patent Settlement Agreements Transferred

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

An action brought by the FTC and the State of California—challenging agreements in which Solvay Pharmaceuticals, Inc. allegedly paid generic drug makers Watson Pharmaceuticals, Inc. and Par Pharmaceutical Companies, Inc. to delay generic competition to Solvay’s branded testosterone-replacement drug AndroGel—has been transferred to the federal district court in Atlanta.

The patent settlement agreements at issue were entered into in the federal district court for the Northern District of Georgia.

The FTC and the state brought the action in the federal district court in Los Angeles, alleging that the settlement agreements harmed competition by having brand-name and generic pharmaceutical companies agree not to compete and instead share monopoly profits. (See “FTC, California Sue Drug Makers for Delaying Generic Competition,” Trade Regulation Talk, February 10, 2009)

Avoiding Eighth Circuit

In arguing for the transfer, the defendants suggested that the FTC sought to avoid Eleventh Circuit law and to create a split among the federal appellate courts regarding the legality of reverse-payment patent settlement agreements. The FTC in 2005 lost a challenge to a patent settlement agreement in the U.S. Court of Appeals in Atlanta (2005-1 Trade Cases ¶74,716).

“Because of the close ties between this antitrust case and the underlying patent cases, the judge in the Northern District of Georgia is more appropriate to hear this case,” the federal district court in Los Angeles held. The court decided that the FTC was not forum shopping when it filed the action in California.

While the court noted the agency’s efforts to create the circuit split, it concluded that this strategy “bears little weight on the determination of transfer in the interest of justice and convenience of the parties and witnesses.”

Application for Stay of Transfer

The court ordered the transfer of the case on April 8. The next day, the court denied the FTC’s emergency ex parte application for a stay pending transfer. Thus, the defendants’ joint motion to dismiss will be heard in the federal district court for the Northern District of Georgia. Private actions that followed the government suit in the federal district court in Los Angeles were transferred as well.

The April 8 decision in FTC v. Watson Pharmaceuticals, Inc., will appear in CCH Trade Regulation Reporter.

Monday, April 13, 2009

Facebook Obtains Order Barring Phishing, Spamming Scheme

This posting was written by Cheryl Beise, Editor of CCH Guide to Computer Law, and Thomas A. Long, Editor of CCH Privacy Law in Marketing.

Social networking website operator Facebook, Inc. was entitled to an ex parte temporary restraining order against Internet marketers that allegedly used Facebook's website to engage in a phishing and spamming scheme, in violation of the CAN-SPAM Act, the Computer Fraud and Abuse Act, and California law, the federal district court in San Jose has determined. Facebook asserted that the scheme compromised the accounts of a substantial number of Facebook users.

The marketers allegedly sent out seemingly legitimate e-mails to multiple Facebook users, asking them to click on a link, which led to a phishing site designed to trick users into divulging their Facebook login information. The marketers then allegedly used the information to send spam to the users' "friends." As the cycle was repeated, the number of compromised Facebook accounts increased exponentially.

A TRO was warranted because of the strong possibility of irreparable injury to Facebook's reputation and to the personal privacy of Facebook users, the court said.

The balance of hardships clearly favored Facebook because it was required to expend significant time and resources to combat the marketer's activities. The marketers would suffer little or no hardship if enjoined from conducting their allegedly illegal scheme.

The order granting a temporary restraining order is Facebook, Inc. v. Wallace, CCH Guide to Computer Law ¶49,699 and CCH Privacy Law in Marketing ¶60,308.

Friday, April 10, 2009

Illinois Prosecutors Seek State RICO Law

This posting was written by John W. Arden.

In order to help them fight political corruption, white collar crime, and gang activity, the Cook County, Illinois chief prosecutor and the head of her special prosecution bureau are urging the Illinois legislature to pass a state racketeering law, according to an article posted on the Chicago Tribune website on April 7.

A new state RICO law would give law enforcement officials “a little more bite” in handling political corruption and some of the more violent gang and drug conspiracy cases, said Cook County States Attorney Anita Alvarez.

The current state racketeering law—called the Narcotics Profit Forfeiture Act (725 ILCS 175/1 to 175/11)—covers only narcotics cases.

Alvarez proposes that the state enact a statute based on the federal Racketeer Influenced and Corrupt Organizations Act (RICO), as 29 other states, Puerto Rico, and the Virgin Islands have done.

A state RICO law could help the state investigate political corruption cases, such as the case against former Governor Rod Blagojevich, according to Assistant State's Atty. John Robert Blakey, chief of the office's Special Prosecutions Bureau and the son of G. Robert Blakey, the Notre Dame law professor credited with drafting the federal RICO statute.

The prosecutors said that they hope the Illinois General Assembly would consider RICO legislation this term. Such a bill has not attracted a sponsor as of yet.

Further information about state RICO laws—including full text of the statutes—appears in the CCH RICO Business Disputes Guide.

Thursday, April 09, 2009

Nightclub’s Scanning of Driver’s Licenses Violated Alberta Privacy Law

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

A Calgary nightclub’s collection and retention of patrons’ driver’s license information violated the Alberta Personal Information Protection Act, the Court of Queen’s Bench of Alberta has decided.

An order by the Alberta Privacy Commission that required the nightclub to destroy information gathered by scanning the driver’s licenses and to cease collecting the data was affirmed.

The order was issued after one patron complained to the Commissioner’s office about the practice and expressed concern that the information was being gathered for marketing purposes.

The nightclub operator contended that it scanned and stored images of patrons’ driver’s licenses—and the information on the licenses—in order to identify individuals who posed a security threat to and to ban them from its establishment. Collection of the information was not reasonably related to this purpose, according to the court. The nightclub operator provided no evidence as to its scanning system’s effectiveness in deterring violent behavior and enhancing the security of its staff and patrons.

Although the complainant did not ask that the nightclub be required to cease collection of driver’s license information, the Privacy Commissioner was entitled to exceed the complainant’s request for relief, the court said.

The decision is Penny Lane Entertainment Group and Alberta Information and Privacy Commissioner and Engfield, CCH Privacy Law in Marketing ¶60,314.

Wednesday, April 08, 2009

Chemicals Giant to Divest Assets to Settle FTC Merger Challenge

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

German-based BASF, the world’s largest chemical company, agreed on April 2 to settle FTC charges that its proposed $5.1 billion acquisition of rival chemical manufacturer Ciba Holding Inc. would be anticompetitive and violate federal law by reducing competition in the worldwide markets for two high-performance pigments.

Under the terms of a proposed consent order that would allow the transaction to proceed, BASF would be required to sell all assets—including the intellectual property related to the two pigments, bismuth vanadate and indanthrone blue—to a Commission-approved buyer within six months.

Pigments are small particles used to impart color to a range of products, including inks, coatings, plastics, and fibers. Both of the products at issue are high-performance pigments, offering superior durability and light-fastness compare to other types of chemical pigments. This makes them particularly suited for products exposed to sunlight and weather, such as automotive coatings. There are no viable substitutes for the two pigments in the applications for which they are used.

Unilateral Market Power

The Commission’s complaint alleged that the worldwide markets for both pigments are highly-concentrated. By eliminating competition between BASF and Ciba, the proposed transaction would allow the combined firm to exercise unilateral market power, the FTC contended, and increase the likelihood of coordinated interaction with the remaining firms in each market. Entry into either relevant market is not likely to be timely or sufficient to counteract the anticompetitive effect of BASF’s acquisition of Ciba.

Other Relief

In addition to the divestitures, the proposed consent order would require BASF to provide other relief to the eventual acquirer—such as supply agreements and protections for confidential information—and to facilitate the hiring of key employees.

The order also would allow the FTC to appoint an interim monitor to ensure that BASF complies with all of its obligations and a divesture trustee to sell the relevant assets if BASF failed to sell them within six months after the consent agreement is accepted by the Commission for public comment.

Canada Competition Bureau

On April 6, Canada’s Competition Bureau announced that commitments made by BASF to the Bureau, the European Union Competition Directorate, and the FTC resolved the Bureau’s competition concerns about the proposed acquisition.

The case is In the Matter of BASF SE, FTC File No. 081 and Docket No. C-4253. Further details appear here at the FTC website and at CCH Trade Regulation Reporter ¶16,286.

Tuesday, April 07, 2009

Alleged Boycott of Racetracks for Bigger Share of Wagers Could Be Illegal

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

Various horsemen’s groups—organizations comprised of horse owners and trainers—could have illegally boycotted Kentucky racetrack operators in an effort to raise the amounts they received from advanced deposit wagering (ADW), the federal district court in Louisville, Kentucky, has ruled.

The complaining racetracks had standing to assert the claims and pled sufficient facts to support a finding of unlawful price fixing. Rejected was a contention by the defending horsemen’s groups that the Interstate Horseracing Act (IHA) created an implied legislative immunity from antitrust liability. The defendants’ motion to dismiss the complaint on all three grounds was denied.

According to the racetracks, the horsemen’s groups controlled the price of the “signal”—the broadcast of off-site races—by refusing to allow its sale unless each ADW operator agreed to pay them a specified percentage of the “takeout” (the profit from race betting shared by tracks, horsemen’s groups, ADW operators, offtrack betting parlors, and various governmental agencies).

The alleged group boycott produced a detrimental effect when the horsemen’s groups prevented signals from being sold, resulting in fewer wagering opportunities for the ultimate individual consumer, it was asserted. The setting of a minimum cost of the signal that was higher than any the ADW operators had been paying amounted to an inflation of prices.


The racetracks satisfied each requirement for antitrust standing, the court decided. Their allegations sufficiently described harm to competition. They further asserted that the defendants’ alleged antitrust activities were the direct cause of several specific injuries: (1) the inability to sell their signal, (2) the consequential decrease in wagering opportunities, and (3) a higher price to an ADW operator to purchase the signal.

Although each horsemen’s group could individually veto signal sales, thereby causing similar injuries to tracks and ADW operators, that behavior was not independent and separate from the alleged collusion. Since no independent cause of the injuries could be identified, the racetracks met that element of antitrust standing as well.

Implied Immunity

The IHA did not so heavily regulate the horseracing industry that it authorized the defending groups’ individual actions, the court determined. While the IHA’s provisions created the rules under which racetracks could legally market and facilitate interstate horse race wagering, including requiring consents from various parties before any track could sell its signal or before any wagering can occur, it neither created nor envisioned any other supervision or regulatory scheme. It left regulation of the horse wagering industry to the respective state racing commissions. Its limited provisions did not conflict either directly or indirectly with antitrust principles, let alone possess a clear repugnancy to the antitrust laws.

An argument that implied immunity could apply, despite the absence of active supervision, was rejected by the court. The IHA’s purpose—to ensure that horsemen were compensated for their contributions to the successful operation of an offtrack
betting system—was neither at odds with nor inhibited by antitrust laws. The IHA provided no standards or oversights to regulate the horsemen’s power to veto signal sales, the court said.

Extended Immunity

Also rejected was an argument that the IHA’s proper application required immunity from the antitrust laws under a theory of “extended immunity”—that if certain concerted action by individuals affiliated in a group was immune from antitrust laws, so too were acts by a group consisted of those groups of individuals. In essence, the defendants contended that because individual horsemen could not comply with both the IHA and antitrust laws, the IHA created implied antitrust immunity for groups of horsemen, and by extension, groups of those horsemen’s groups.

However, to conclude that individual horsemen must be immune from antitrust liability under the IHA misconstrued the circumstances of the case and the statutory scheme. Individual horsemen did not need immunity because no individual could exercise a horsemen’s veto or take any action under the IHA, the court observed.

Sufficiency of Allegations

Finally, the racetracks’ complaint satisfied the pleading requirements enunciated in Bell Atlantic Corp. v. Twombly (2007-1 Trade Cases ¶75,709), the court held. The alleged presence of a tangible, and agreed upon, licensing agreement dictating minimum prices for ADW operators purchasing signals made the existence of a combination or conspiracy amongst the horsemen plausible.

The description of the relevant market as the “sale and licensing of the right to receive simulcast signals and to accept wagers on horse racing at locations other than the host racetrack” in the United States was a plausible relevant market. The assertion of an agreement that set a floor for the price of a signal was plausibly construed as price fixing, and their factual allegations further illustrated a plausible finding of a group boycott to raise prices.

The March 20 decision is Churchill Downs Inc. v. Thoroughbred Horsemen’s Group, LLC, 2009-1 Trade Cases ¶76,555.

Monday, April 06, 2009

Gift Card Suit Brought Under State Laws Not Federally Preempted

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

A national bank failed to establish that federal law and regulations preempted a gift card holder's class action complaint, asserting state law claims against the bank for imposing inactivity fees on the card, the federal district court in Chicago has ruled.

When the holder first used his $30 card 11 months after receiving it as a gift, he discovered that the bank already had deducted $12.50 to pay five months of inactivity fees. This prompted him to file suit against the bank in Illinois state court, alleging breach of fiduciary duty; unjust enrichment; and violation of various state consumer fraud and deceptive trade practices acts. The bank removed the case to federal court based on the Class Action Fairness Act of 2005.

National Bank Act, Federal Regulations

The bank argued that the state law claims were barred by the National Bank Act, which preempts unduly burdensome and duplicative state regulations. The bank further cited a regulation of the federal Office of the Comptroller of the Currency that authorized the charging of fees to "customers." A customer was defined as a party who obtained a product or service from a bank.

The gift card holder alleged that he obtained a product or service from the bank only after inactivity fees had been deducted from his card balance. At an early stage of the litigation, there did not appear to be an irreconcilable conflict between the state law claims and the federal law and regulations.

Fraud Pleading

The holder failed to plead with particularity the statutory consumer fraud claims but could pursue a common law unjust enrichment claim, the court determined. The consumer protection claims failed to meet the heightened standards for pleading fraud under Rule 9(b) of the Federal Rules of Civil Procedure.

Unjust Enrichment

The bank contended that the unjust enrichment claim failed because the parties had entered into a contract. While this was a correct statement of the law, the argument could not succeed at an early stage of the case when the holder's theory was that no contract was formed when the inactivity fees were charged.

The bank's reliance on the law of Ohio as governing under the card holder agreement was misplaced when the claim was quasi-contractual and could not by its very nature be governed by the terms of the agreement. The law of Illinois explicitly recognized that an unjust enrichment claim may be brought by a plaintiff seeking recovery of a benefit transferred to the defendant by a third party, according to the court.

The opinion in Green v. Charter One Bank, N.A. appears at CCH Advertising Law Guide ¶63,221.

Friday, April 03, 2009

Legislation to Ban “Pay-to-Delay” Drug Agreements Introduced in Congress

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

A bill to prohibit brand name drug manufacturers from compensating generic drug makers to delay the entry of a generic drug into the market was introduced in the House of Representatives by Rep. Bobby Rush (D-Illinois) on March 25.

The legislation specifically addresses, and seeks to ban, provisions in settlements of patent infringement litigation between pharmaceutical companies that involve "reverse payments"—payouts by the brand name drug maker to the generic maker in return for an agreement by the generic to keep its drug off the market for some specified amount of time.

Dubbed the "Protecting Consumer Access to Generic Drugs Act of 2009," the measure (H.R. 1706) would have an effect similar to a proposal introduced in the Senate by Herb Kohl (D-Wisconsin) on February 3. That bill (S. 369), the "Preserve Access to Affordable Generics Act," remains under consideration by the Senate Judiciary Committee.

While aiming to accomplish similar goals, the bills would address the matter through different statutes. The House bill would declare a “pay-to-delay” agreement an unfair and deceptive act prohibited by the FTC Act, and would grant the FTC the authority to enforce the legislation. The Senate bill would instead amend the Clayton Act, calling the conduct "Unlawful Interference with Generic Marketing."

Another difference between the bills concerns their definitions of what constitutes an applicable "agreement." The House bill refers solely to those constituting an agreement under the FTC Act, while the Senate bill would ban those that are considered agreements by the Sherman Act as well. Both would allow the FTC to create exceptions through its rulemaking process.

Text of H. R. 1706 appears here. Text of S. 369 appears here. Further information about both bills is available at the Library of Congress “Thomas” website.

Thursday, April 02, 2009

Pesticide Manufacturers’ Distribution Chain Not Vertical Price Fixing

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

Two manufacturers of pesticides did not illegally conspire with their distributors to set minimum resale prices of certain termiticide products in violation of federal antitrust laws, the U.S. Court of Appeals in Richmond, Virginia, has ruled.

A federal district court’s grant of summary judgment against the Sherman Act claim asserted by a putative class of pest control service providers was affirmed.

The pest control service providers claimed that the manufacturers instituted a manner of distribution in which their termiticides were sold to them, the end consumers, through distributors that acted only as facilitators of the transactions, enabling the manufacturers to set the price at which the termiticides were ultimately resold.

Under the non-exclusive agency agreements that bound the distributors to the manufacturers, the agent-distributors received commissions for the sales they facilitated, but never actually held title to the products. The agreements specified that the manufacturers constituted the sellers of the termiticides to the pest control service providers.

The 1926 U.S. Supreme Court decision—U.S. v. General Electric Co., 272 U.S. 476—permitted manufacturers to lawfully set minimum prices for their products when there was a genuine principal-agent relationship between them and their distributors. Such relationships existed in this case, the court noted.

An argument by the pest control service providers that the General Electric decision was implicitly overruled by more a recent Supreme Court decision involving resale price maintenance—Leegin Creative Leather Products v. PSKS, Inc. (2007-1 Trade Cases ¶75,753)—was rejected. Leegin did not eliminate the agency defense to a claim of resale price maintenance, the appellate court stated.

Unlike General Electric, which addressed what types of relationships constituted agreements to set prices for purposes of the Sherman Act, Leegin instead concerned whether such agreements, once proven, should be considered per se unlawful or evaluated for their reasonableness.

The two cases dealt with separate and distinct issues and different elements of Sec. 1 liability. Thus, no part of Leegin’s reasoning case the slightest bit of doubt on the underpinnings of the rule of General Electric, the court concluded.

An additional argument that the purported agency relationships between the defending manufacturers and their distributors were a sham was also rejected by the appellate court. Factors indicating that the challenged relationships constituted genuine agency included the fact that the manufacturers bore the risk of loss on termiticides until they were delivered into the hands of the end customers, the strong business justifications of the particular manufacturer-distributor arrangements, and the absence of evidence that the supposed agency agreements were the product of coercion.

The March 24 decision is of Charlotte v. Bayer Corp., 2009-1 Trade Cases ¶76,547.

Wednesday, April 01, 2009

Punitive Damages Award Left Standing in Tobacco Advertising Fraud Case

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

The U.S. Supreme Court has left undisturbed a $79.5 million punitive damages award in an Oregon wrongful death suit against Philip Morris for deceit.

After granting review of the case in June 2008 and hearing oral argument in December, the Court on March 31 issued a one-sentence decision that review had been “improvidently granted.”

The suit was brought by a smoker’s widow, who claimed that Philip Morris committed fraud by using its advertising power in a 40-year publicity campaign to undercut published concerns about the dangers of smoking. A jury found Philip Morris liable for its deceit in knowingly and falsely leading the decedent to believe that smoking was safe, awarding $821,000 in compensatory damages and $79.5 million in punitive damages.

Prior Decision Vacating Punitive Damages Award

In a 2007 decision in the case (CCH Advertising Law Guide ¶62,420), the Court vacated the punitive damages award on the ground that the Due Process Clause of the U.S. Constitution prohibited an award of punitive damages based in part on harm to nonparties. The trial court refused the company's proposed instruction that the jury could not seek to punish Philip Morris for injury to other persons not before the court.

The Court remanded the case to the Oregon Supreme Court to determine whether a new trial was required or whether the amount of the punitive damages award should be changed.

Reinstatement by Oregon Supreme Court

The Oregon Supreme Court, in January 2008, reinstated the punitive damages award in full (CCH Advertising Law Guide ¶62,859). The court held that Philip Morris had failed to preserve for review any claim that the jury instructions actually given were erroneous.

Before the constitutional standard could be addressed, state law standards for instructing the jury on punitive damages had to be considered, the court determined. Philip Morris' proposed instruction was incorrect because it would have told the jury that (1) Oregon statutory factors for justifying a punitive damages award were discretionary (instead of mandatory) and (2) one factor to be considered was the motivation to make illicit profits (rather than the profitability of the misconduct). Thus, even if Philip Morris' instruction articulated the correct due process standard, it misstated Oregon law, and the trial court did not err by refusing to give it, the court concluded.

The Oregon Supreme Court’s 2008 decision is left standing by the U.S. Supreme Court’s March 31 decision.

The amount of Philip Morris’s liability reportedly has grown to over $150 million, by application of the interest on the damages award.

Further details on the decision in Philip Morris USA, Inc. v. Williams, No. 05-1256, March 31, 2009, will be reported in CCH Advertising Law Guide.