Monday, November 30, 2009

Franchisor’s Eviction Was “Expiration” of Lease Under the Federal Gasoline Dealer Law

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

An oil company’s eviction for nonpayment of rent from the premises on which it franchised a gasoline station qualified as a "loss of the franchisor’s right to grant possession of the leased marketing premises through expiration of an underlying lease" under the meaning of the Petroleum Marketing Practices Act (PMPA), according to a federal district court in San Juan, Puerto Rico. Thus, the franchisor’s termination of the gasoline dealer’s franchise following the eviction did not violate the PMPA.

Nonpayment of Rent

The dealer’s primary argument was that an eviction for nonpayment of rent was not an "expiration of the underlying lease" for purposes of the Act. The court was unaware of any precedent in the First Circuit addressing whether a franchisor’s eviction was an appropriate "loss of the right to grant possession" of the leased premises under the PMPA, it observed. However, the First Circuit interpreted the term "expiration" broadly to encompass losses of the lease that were voluntary or involuntary.

Neither the PMPA nor the cases interpreting it placed any importance on the actual cause of the underlying lease’s expiration, the court noted. Instead, courts evaluated the nature of the lessor and lessee’s relationship and the franchisor’s intent in terminating the franchise.

There was no evidence that the relationship between the franchisor and the landlord was anything but at arm’s length. It was not a situation in which the franchisor lost the lease only to be rid of the franchisee and to take the property for itself. Indeed, the dealer never left the premises after the franchise termination and eventually bought the property from the landlord.

Strategic Breach

The franchisor’s strategic breach of its lease with the landlord was just the sort of reasonable business decision that could justify a franchise termination under the PMPA, the court decided.

The decision is Rivera v. Caribbean Petroleum Corp., CCH Business Franchise Guide ¶14,245.

Saturday, November 28, 2009

AstraZeneca Not Liable For Marketing of Nexium

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

A group of consumers alleging false advertising in the sale of heartburn medication failed to state an Arkansas Deceptive Trade Practices Act (DTPA) claim against AstraZeneca Pharmaceuticals, Inc. (AZ) because the claim fell within the safe harbor provision of the statute, according to the Arkansas Supreme Court.

In 2001, AZ's medication Nexium was approved by the Food and Drug Administration (FDA) for marketing as a heartburn medication. Nexium was meant to take the place of AZ's other heartburn medication Prilosec when the patent for Prilosec expired.

The consumers argued that AZ falsely advertised its heartburn medication, causing consumers to purchase a more expensive medication that was not "more powerful" and did not actually work "better" than a similar medication, as advertised. At the time of the complaint, one pill of Nexium cost $4.46, while the over-the-counter Prilosec cost $0.59 per pill.

Safe Harbor

The safe harbor provision of the DTPA, which barred the claim, provided that the statute does not apply to advertising that is subject to and complies with laws administered by a federal agency.

In this case, federal law specifically authorized pharmaceutical companies to promote drugs to consumers and physicians in a manner supported by the labeling approved by the FDA. Because the FDA-approved labeling indicated that the approved dose of the medication was superior to the similar drug, the advertising complied with the labeling.

The decision is DePriest v. AstraZeneca Pharmaceuticals, L.P., CCH State Unfair Trade Practices Law ¶31,932.

Thursday, November 26, 2009

Discontinuation of Truck Line Did Not Terminate Franchise

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

A truck manufacturer and one of its subsidiaries did not terminate, cancel, or fail to renew a truck dealer’s franchise when they discontinued the production of the subsidiary’s truck line because the dealer continued to have the right to sell parts and provide service for the manufacturer’s products, a federal district court in Brattleboro, Vermont, has ruled. Thus, the manufacturer and subsidiary did not violate the Vermont motor vehicle dealer law.

The motor vehicle dealer law prohibited the termination of franchises unless the manufacturer satisfied the law’s notice requirement, had "good cause" for termination, and acted in good faith.

Continuation of Part Sales, Service

Although the manufacturer discontinued the manufacture of the line of trucks, as it had reserved the right to do in the parties’ agreement, the dealer could continue to sell parts and provide service for the line of trucks, and the agreement remained in effect with regard to everything but selling new trucks, according to the court.

Because the dealer law’s termination provision applied only when a franchise had been terminated, cancelled, or not renewed—and the dealer’s entire franchise agreement had not been terminated, cancelled, or not renewed—the dealer failed to state a claim for which relief could be granted.

Constructive Termination

The dealer argued that the defendants constructively terminated its franchise. It contended that a constructive termination occurred when a franchisor took actions that were not expressly a termination of the agreement, but had a sufficiently adverse effect upon the franchisee. However, the dealer made no allegations that its dealership could not survive or that the discontinuation of the manufacture of the truck line would have an adverse effect, the court observed.

The dealer could continue to provide parts and service to trucks of the line under the agreement, and the dealer’s franchises for other of the manufacturer’s brands continued in effect. Thus, even if a claim for constructive termination was cognizable under the dealer law, the dealer did not adequately plead such a termination, the court held.

The decision is L&B Truck Services, Inc. v. Daimler Trucks N.A. LLC, CCH Business Franchise Guide ¶14,249.

Wednesday, November 25, 2009

Price Fixing Claims Against Title Insurers Dismissed

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

Groups of title insurance companies did not engage in a price fixing conspiracy in violation of federal or California antitrust law through their participation in rate-setting organizations in several states, the federal district court in San Francisco has decided in an unpublished opinion.

The companies' alleged conduct and motive to conspire, in light of the characteristics of the title insurance market, were insufficient to state a claim of illegal price fixing, under the pleading standard established by the U.S. Supreme Court in Bell Atlantic Corp. v. Twombly (2007-1 Trade Cases ¶75,709).

Participation in the same trade associations was not sufficient to establish a conspiracy. Likewise, assertions about when the organizations held meetings, and about which of the defendants' representatives attended those meetings, contained no information that could be construed as invitations to conspire or responsive actions by the defendants, the court explained.

Claims of "plus factors"—such as high market concentration, stability of the defendants' prices despite a decline in costs, and the homogeneity of title insurance policies—did not support the complaining consumers' argument that conspiracy could be inferred from the parallel behavior. An equally plausible inference was that the defendants merely engaged in conscious parallelism.

The decision is In re California Title Insurance Antitrust Litigation, 2009-2 Trade Cases ¶76,803.

Tuesday, November 24, 2009

Franchisor Could Have Illegally Tied Supplies to Franchises

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

A franchisee of 13 fast food restaurants adequately alleged a tying arrangement against a franchisor under a Kodak lock-in theory, according the federal district court in Columbus, Ohio.

The franchisee claimed that the franchisor (1) used its control over franchise rights to compel the franchisee to accept hamburger buns from a lone approved bun vendor and (2) imposed a four percent surcharge on food supplies from a lone approved food supply vendor.

The franchisor argued that the claim was deficient because it failed to plead a relevant market or facts suggesting that the franchisor had market power over a tying product. However, the franchisee successfully alleged market power in the tying product—franchise rights—through a lock-in theory, the court held.

In Eastman Kodak Co. v. Image Technical Services, Inc. (1992-1 Trade Cases ¶69,839), the U.S. Supreme Court held that market power was inferred under a lock-in theory if the seller had monopoly power in an aftermarket product where, once a customer bought one product, he or she was locked in to buying another product by the seller’s rules.

Changed or Concealed Rules

The assertion of an antitrust claim under a Kodak lock-in theory required specific factual allegations that the defendant either changed its rules after the initial sale was made or concealed the rules from its customers.

The language in the parties’ franchise agreements did not suggest that the franchisor would be able to eliminate all competition by naming an exclusive supplier or could impose a surcharge on approved suppliers. Rather, it suggested that that competition was welcome so long as suppliers met the franchisor’s standards and possessed adequate quality controls and capacity, the court noted.

Indeed, the franchisee alleged that the market for the tied products (hamburger buns and other food supplies) was competitive prior to the alleged tie. Consequently, the franchisor’s alleged naming of an exclusive bun supplier would satisfy the change in policy requirement of an illegal tying claim, the court ruled.

Market Power

The franchisee adequately plead market power under a Kodak lock-in theory because the parties’ franchise agreements did not put a potential franchisee on notice that the franchisor would be able to eliminate all competition by naming an exclusive supplier or could impose a surcharge on approved suppliers, the court held. This was especially true in light of the franchisee’s allegations that the market for the allegedly illegally tied supplies—hamburger buns and food—was competitive prior to the alleged tie.

Thus, the court rejected the franchisor’s assertion that the franchisee’s illegal tying claim should be dismissed because any requirement that the franchisee purchase buns and food from approved suppliers was contract and would not support an antitrust claim.

The franchisor cited Queen City Pizza, Inc. v. Domino’s Pizza, Inc. (1997-2 Trade Cases ¶71,909, Business Franchise Guide ¶11,224) for the proposition that no tying claim would lie where a defendant’s power to force a plaintiff to purchase the alleged tying product stemmed not from the market, but from the plaintiff’s contractual agreement to purchase the tying product.

Queen City did not provide grounds for dismissal because, unlike the franchisees in Queen City, the franchisee in this case was not claiming that the market power was contractually established, the court decided. Instead, the franchisee asserted a Kodak-type lock-in theory of market power, specifically alleging that at the time the franchisee entered into the agreements, he could not have reasonably anticipated being required to purchase buns and food supplies from exclusive suppliers.

The decision is Burda v. Wendy’s International, Inc., CCH Business Franchise Guide ¶14,240. It will also appear in CCH Trade Regulation Reporter.

Monday, November 23, 2009

Nationwide Class Certified in “Click Fraud” Action under California Unfair Competition Law

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

A nationwide class was certified by the federal district court in Los Angeles in an action against online advertising service provider Citysearch for breach of contract and fraudulent business practices in violation the California Unfair Competition Law.

The class consisted of all persons or entities in the United States who entered into form contracts for pay-per-click advertising through, paid money for this advertising service, and experienced click fraud by reason of double clicks or Citysearch’s failure to apply automatic filters to traffic from its syndication partners up through March 23, 2007.

Breach of Contract

If proven, the alleged breach of contract—namely, failing to filter and otherwise monitor for click fraud—would be objectively unreasonable conduct that could be established without resort to individualized proof, the court determined.

Unfair Competition Law

Citysearch's business practices were alleged to be fraudulent, in violation of the Unfair Competition Law, as likely to deceive its customers into believing that they will not be charged for “invalid” clicks.

Citysearch allegedly routinely charged its customers for clicks that it knew—or by the exercise of reasonable care, should have known—were not clicks that originated from potential customers who actively and legitimately chose the advertiser’s link.

Because the statutory fraud claim arose out of Citysearch’s common course of conduct towards all class members, and the “reasonable consumer” standard would be employed to adjudicate the claim, common questions predominated, the court held.

Class certification was denied as to a claim of unfairness under the statute because questions of individual expectations about Citysearch's business practices were relevant.

Nationwide Class

Application of California law to the breach of contract claims was appropriate because all versions of the contract in force during the class period contained a choice of law clause stating that California law governed, according to the court.

The California Unfair Competition Law could be applied to the nationwide class because Citysearch had not shown that any differences between California law and the law of other jurisdictions were material nor that other states had an interest in applying their laws in this case, the court concluded.

The November 9 opinion in Menagerie Productions v. Citysearch will be reported at CCH Advertising Law Guide ¶63,641.

Friday, November 20, 2009

Contractor Could Proceed with RICO Claim Alleging Extortionate Credit Line

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

A construction contractor sufficiently alleged a RICO conspiracy by three individuals who allegedly engaged in a scheme to force the contractor to accept an extortionate line of credit, the federal district court in Cleveland has ruled.

According to the contractor, one of the defendants refused to pay him $168,000 for gutter and siding work he had performed for the defendant’s company, a second defendant offered to assist him with a loan of $150,000 (in the form of cash from an illegal gambling operation), and a third defendant offered him “protection and collection services” in exchange for money.

Breach of Contract v. Extortion

Although the defendants tried to characterize the contractor’s RICO claim as a simple breach of contract claim, the contractor alleged that he: (1) was offered a $150,000 loan from one of the defendants; (2) reasonably believed that the defendants had previously used extortion to collect or attempt to collect similar debts; and (3) reasonably believed that the defendants had a reputation for using extortion to collect those debts (or to punish debtors that failed to repay them). These allegations sufficiently identified a claim for an extortionate extension of credit, in the court’s view.

More specifically, the allegations indicated that one defendant had refused to pay for gutter and siding work so another defendant could offer an extortionate line of credit.

They also indicated that the actions of the third defendant—attempting to gain a monetary benefit by implicitly and explicitly threatening violence and harm if the contractor did not pay for protection services—established a state law extortion claim that was punishable by imprisonment for more than a year.


According to the court, the contractor sufficiently alleged that his injuries—$168,000 in unpaid charges for gutter and siding work—were proximately caused by the defendants’ scheme to force him to accept an extortionate line of credit.

The decision is Matteo Gutter Systems v. Millenia Housing Management Ltd., CCH RICO Business Disputes Guide, ¶11,762.

Thursday, November 19, 2009

$4.8 Million Gift Card Controversy Sent Back to State Court

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

Because the amount in controversy in a lawsuit on behalf of New Jersey purchasers of Landry's Restaurants gift cards was at most $4.8 million, the federal district court in Trenton sent the case back to New Jersey state court, where it had been filed.

Landry's had removed the case to the federal court, asserting that the amount in controversy met the $5 million threshold for federal jurisdiction under the Class Action Fairness Act (CAFA).

Dormancy Fees for Nonuse

The purchaser of a $25 card alleged that Landry’s gift cards purchased by New Jersey residents between April 2006 and March 2009 imposed a “dormancy fee” after 12 months of nonuse. The purchaser sought to represent other New Jersey residents who purchased the cards.

The gift cards allegedly violated the New Jersey Gift Certificate Law (Sec. 56:8-110 of the Consumer Fraud Act), which prohibited imposition of dormancy fees on gift certificates and cards within 24 months after the date of sale.

The purchaser also alleged that the gift cards violated the New Jersey Truth-in-Consumer Contract, Warranty and Notice Act, a law prohibiting a consumer contract or notice stating that any of its provisions are void or unenforceable without specifying the provisions that are void or unenforceable in New Jersey.

Based on the documents produced in discovery, the maximum number of unlawful gift cards sold was 9,269. Given undisputed maximum damages of $520 per potential class member, the amount in controversy was at most $4,819,880. Therefore, it appeared to a legal certainty that CAFA’s requisite jurisdictional amount in controversy of $5 million was not met.

The opinion in Delaney v. Landry’s Restaurants, Inc. will be reported at CCH Advertising Law Guide ¶63,655.

Wednesday, November 18, 2009

Revised Google Book Settlement Attempts to Address U.S. Competition Concerns

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

After consulting with the U.S. Department of Justice, lawyers representing the parties in a copyright dispute brought by authors and publishers against online search engine Google have filed a revised settlement agreement with the federal district court in New York City.

The settlement would resolve claims that Google violated copyright laws by scanning books, creating an electronic database, and displaying excerpts without the permission of copyright holders. Google has denied the claims.

On November 13, 2009, the revised settlement proposal was filed with the court for preliminary approval. The revised proposal comes after the Justice Department expressed concerns that an earlier settlement agreement could harm competition. Specifically, the Justice Department questioned the proposed settlement’s pricing terms and its creation of "de facto exclusive rights for the digital distribution of orphan works."

The latest settlement proposal, which narrows the scope of the books involved, "clarifies how Google's algorithm will work to price books competitively," according to the parties. It will simulate the prices in a competitive market. Moreover, the new proposal removes the so-called "most-favored nation" clause, which pertains to licensing of unclaimed works.

The Justice Department had contended that the most-favored nation clause in the earlier settlement could discourage potential competitors from attempting to compete with Google in digital-book distribution.

Whether these concessions will satisfy the Justice Department's competition concerns is unclear. It has been reported that the Justice Department will provide its views on the revised settlement early next year.

Another change to the proposed settlement limited its scope to books published in the U.S., Great Britain, Canada, and Australia. This change was prompted by objections by foreign governments, rather than the Department of Justice.

Text of the revised settlement agreement in The Authors Guild, Inc. v. Google, Inc., appears here. In the next week, the federal district court is expected to set a date for a “fairness hearing.”

Tuesday, November 17, 2009

Gift Card and Certificate Fees, Expiration Dates Would Be Limited by Proposed Rules

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

The Federal Reserve Board has announced proposed rules that would restrict the application of fees and expiration dates to store gift cards, gift certificates, and general-use prepaid cards.

The proposal would implement the gift card provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009, Public Law 111-24, signed by President Obama May 22, 2009. Title IV of the Act—relating to gift certificates, gift cards, and prepaid cards (CCH Advertising Law Guide ¶11,900)—becomes effective August 22, 2010.

(Further information on the Credit Card Accountability Responsibility and Disclosure Act of 2009 appears in a May 27, 2009 posting on Trade Regulation Talk.)

Covered products include retail gift cards, which can be used to buy goods or services at a single merchant or affiliated group of merchants, and network-branded gift cards, which are redeemable at any merchant that accepts the card brand.

Consistent with the statute, the proposed rule would not apply to other types of prepaid cards, including reloadable prepaid cards that are not marketed or labeled as a gift card or gift certificate, and prepaid cards received through a loyalty, award, or promotional program, according to the Board.

Dormancy, Inactivity, or Service Fees

The proposed rules would limit imposition a dormancy, inactivity, or service fee. Dormancy, inactivity, and service fees may be assessed only for a certificate or card if: (1) there has been at least one year of inactivity on the certificate or card; (2) no more than one such fee is charged per month; and (3) the consumer is given clear and conspicuous disclosures about the fees.

Fees subject to the proposed restrictions would include monthly maintenance or service fees, balance inquiry fees, and transaction-based fees, such as reload fees and point-of-sale fees.

Expiration Dates

The proposed rules would prohibit the sale or issuance of a gift certificate, store gift card, or general-use prepaid card that has an expiration date of less than five years after the date of issuance or the date funds are last loaded.

The expiration date restrictions would apply to a consumer’s funds, and not to the certificate or card itself. The proposal includes provisions intended to help ensure consumers have at least five years to use a certificate or card from the date of purchase. The proposed rule would prohibit the imposition of any fees for replacement of an expired card or certificate if the underlying funds remain valid

State Laws, Preemption

The Board would determine—upon its own motion or upon the request of a state, financial institution, or other interested party—whether the Act and rules preempt state law relating to electronic fund transfers, to dormancy, inactivity, or service fees, or to expiration dates of gift certificates, store gift cards, or general-use prepaid cards.

A state law that is inconsistent may be preempted even if the Board has not issued a determination. However, a financial institution would not be shielded by immunity for violations of state law if the institution chooses not to make state disclosures and the Board later determines that the state law is not preempted.


Comments on the proposal must be submitted within 30 days after publication in the Federal Register, which is expected shortly.

Subscribers to the CCH Advertising Law Guide on the Internet have access to more detailed coverage gift certificate and gift card laws in more than 35 states. A Smart Chart™ gives users quick access to the types of certificates and cards that are subject to—and exempt from—the laws. Coverage of fee restrictions, expiration date restrictions, and disclosure requirements is provided, along with links to the law texts.

Two Intended FTC Nominees Announced by White House

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

Update: Nominations for the two FTC Commissioners were sent to the Senate on November 17. Julie Brill was nominated to serve a seven-year term from September 26, 2009. She would succeed Commissioner Pamela Jones Harbour. Edith Ramirez was nominated for a seven-year term from September 26, 2008, to fill the vacancy created by the departure of Commissioner Deborah Platt Majoras in March 2008 The announcement appears here on the White House website.

The Obama Administration announced on November 16 two candidates to serve as Federal Trade Commissioners.

The President named Julie Brill, Senior Deputy Attorney General and Chief of Consumer Protection for North Carolina, and Edith Ramirez, a partner in the Los Angeles office of Quinn Emanuel Urquhart Oliver & Hedges, LLP. Both are Democrats.

The White House announcement did not specify which potential nominee would fill the vacancy created by the departure of Deborah Platt Majoras in March 2008 and which candidate would replace Commissioner Pamela Jones Harbour, an Independent whose term expired on September 26.

Before joining the North Carolina Department of Justice in February 2009, Brill was an Assistant Attorney General for Consumer Protection and Antitrust for the State of Vermont for over 20 years. Prior to her career in law enforcement, Brill was an associate at Paul, Weiss, Rifkind, Wharton & Garrison in New York and clerked for Vermont Federal District Court Judge Franklin S. Billings Jr. She is an adjunct faculty member at Columbia Law School.

Ramirez is a graduate of Harvard Law School, where she worked on the Harvard Law Review with President Obama. She served as a law clerk to the Honorable Alfred T. Goodwin, U.S. Court of Appeals for the Ninth Circuit. In her current practice, Ramirez specializes in intellectual property and complex litigation matters.

A White House announcement on nominees for the FTC has been expected for weeks. A September 8 posting on Trade Regulation Talk discussed speculation concerning these nominations.

FTC Chairman Jon Leibowitz had commented at Fordham University’s International Antitrust Law Conference on September 24 that it was highly likely that the nominees would be named soon. Chairman Leibowitz went on to say that the Commission was working well despite the absence of a fifth member.

In addition to Leibowitz and Harbour, the two other current members of the Commission are Republicans William E. Kovacic and J. Thomas Rosch. Kovacic’s term expires in September 2011, and Rosch’s term expires one year later.

At the same time as the FTC candidates were named, the White House announced nominees for ambassadors to Nepal and Trinidad and Tobaggo. A nominee for the federal co-chair of the Appalachian Regional Commission was also announced.

“These individuals bring a depth of experience to their respective roles, and I am confident they will serve my administration and the American people well," Presidet Obama said. "I look forward to working with them in the months and years ahead.”

Text of the announcement appears here on the White House website.

Monday, November 16, 2009

Class Certification Denied in Prepaid Calling Card Consumer Fraud Case

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

In a suit alleging that prepaid calling card service providers violated the consumer fraud acts of 11 states by marketing cards providing less than the advertised number of calling minutes, the federal district court in Brooklyn denied class certification.

A class action was not superior to other available methods for fairly and efficiently adjudicating the controversy, the court determined.

The prepaid calling card industry's deceptive practices had been the subject of extensive, repetitive private litigation as well as repeated enforcement actions by the Federal Trade Commission and several state attorneys general. Deceptive and abusive practices in the industry had been widely documented, according to the court.

In tests conducted by the FTC in connection with recent enforcement actions, the cards were found to provide half or less than half of the advertised minutes.

Class Litigation v. Regulatory Solution

In general, it would be inappropriate to deny those wronged civilly a fallback, court-supervised remedy when the administrative law segment of our justice system has neglected to provide an available superior form of protection, the court said. There are, however, instances where the litigation remedy is relatively so inferior as to warrant denying it altogether in hope that administrative justice would prevail.

The superior and sensible way to deal with this controversy, involving a multibillion-dollar national and international communications industry that served millions of people in every state, many of them poor and uneducated, was for the FTC or another federal agency with authority in the area to issue appropriate regulations, in the court’s view.

Lack of Federal Diversity Jurisdiction

The case was dismissed because the named plaintiff's individual claim arising from the purchase of a $2 calling card did not satisfy the $75,000 amount-in-controversy requirement for federal diversity jurisdiction, and there was no basis for federal question jurisdiction over the plaintiff's state law claims.

The November 10, 2009 opinion in Ramirez v. Dollar Phone Corp. will be reported at CCH Advertising Law Guide ¶63,639.

Friday, November 13, 2009

Focus on Franchising

This posting was written by John W. Arden.

News and notes on franchising and distribution topics:

□ The U.S. Supreme Court has scheduled oral argument on January 19, 2010, on Mac’s Shell Service Inc. v. Shell Oil Products Co., a case involving constructive nonrenewal claims brought by Shell gasoline station operators under the Petroleum Marketing Practices Act (PMPA). The U.S. Court of Appeals in Boston (CCH Business Franchise ¶13,890), held that the PMPA did not support a claims for constructive nonrenewal where a franchisee had signed and continued to operate under the complained of renewal agreement. On June 15, 2009, the Supreme Court granted the petitions of the franchisees and Shell (see June 16, 2009 posting at Trade Regulation Talk). The franchisees asked the Court to consider “the scope of the protections afforded by the PMPA to franchisees who face termination or nonrenewal of their franchise agreements unless they accept onerous contract terms.’’ They alleged that there was a split among the circuits “over whether a franchisor can lawfully present its franchisees with the Hobson’s choice of accepting unlawful contract terms or risking their livelihoods on a chance that a court will grant a preliminary injunction.” The petitions are Mac's Shell Service, Inc. v. Shell Oil Products Co., Dkt. 08-240, and Shell Oil Products Co. v. Mac's Shell Service, Inc., Dkt. 08-372.

□ The ABA Forum on Franchising is presenting a teleconference and live audio webcast of “Mediating Franchise Disputes,” a CLE program presented from 1 p.m. to 2:30 p.m. EST on Tuesday, December 3, 2009. This program— “one of the best programs presented at the 32nd Annual Forum on Franchising”—will cover the benefits and strategies used in mediations, as well as how to effectively draft mediation clauses. Moderated by Earsa Jackson of Strassburger & Price, the program will feature Michael K. Lewis of JAMS, Peter R. Silverman of Shumaker, Loop & Kendrick, and Peter J. Klarfeld of Grey Plant Mooty. Further information appears here on the ABA website.

□ The plenary session on Annual Franchise and Distribution Law Developments is always a highlight of the annual meeting of the ABA Forum on Franchising. This year’s plenary session—presented on October 16 by Joel R. Buckberg and Jon P. Christiansen—was no different. Each year since 2002, the presentation has been accompanied by a soft-cover bound volume containing more details of the developments and trends of the year. The introduction to this year’s book included a particularly interesting list of themes and trends from the reporting period of August 1, 2008 through July 31, 2009:

■ The extraordinary impact of automobile industry contraction, manufacturer bankruptcy, brand terminations, and dealer network shrinkage produced a sizable number of challenges to auto industry practices and efforts to restructure.

■ Franchisee challenges to franchise selling practices using deceptive practice statutes gained traction with appellate courts and demonstrated desperation in selling tactics, even for experienced franchisors.

■ Arbitration provisions continued to face uncertain enforcement, but challenges to arbitration awards were unsuccessful for the most part.

■ The U. S. Court of Appeals for the Ninth Circuit and its District Courts, the Federal Trade Commission and the California Department of Corporations again ignored each other’s policies on negotiation of franchise agreements and fostered their contradictory policy approaches to franchise empowerment.

■ There was no meaningful harmonization of the revised FTC Franchise Rule and state franchise laws, regulations, exemptions, and exclusions.

■ Damages for early termination of franchise relationships became less certain of collection, particularly where the franchisee’s history of unprofitable operation made its viability for the remainder of the franchise term speculative.

■ Bankruptcy court decisions highlighted the unfortunate risks that reward entrepreneurship with asset liquidation when a franchise, a franchisee and the franchisee’s financing are mismatched.

■ In-term non-competition covenants came under attack in the Ninth Circuit, applying California law, and in Georgia, where the state’s constitution supplied the firepower, in both cases to curtail the scope of these restrictions substantially.

■ Courts once again wrestled with legal principles underlying voluntary choice of law, fundamental public policy identification for conflict of laws purposes, and the applicability of state franchise statutes, producing some inconsistency and reduced predictability in case outcomes.

Further information about the ABA Forum on Franchising and its publications appears here.

Thursday, November 12, 2009

Principal and Sales Rep Could Be Liable for Attorney’s Fees on Separate Claims

This posting was written by John R.F. Baer of Sonnenschein Nath & Rosenthal, author of CCH Sales Representative Law Guide.

When a sales representative presented two claims against its principal, one for pre-termination commissions and one for post-termination commissions, the claims were to be treated separately for determining whether to award attorney’s fees and costs under the New Jersey Sales Representatives’ Rights Law, a New Jersey appellate court has ruled.

In addition, the court reversed the trial court’s award of over $218,000 in attorney’s fees to the principal under the New Jersey rule governing inadvisable rejection of an offer of judgment

Successful Claim

The sales representative successfully contended that he was entitled to an award of fees under the statute on his claim for pre-termination commissions. However, this did not preclude his liability for fees in pursuing his unsuccessful claim for post-termination commissions.

There was no dispute that the principal was obligated and failed to pay $12,774 in pre-termination commissions. The true dispute was over the claim for post-termination commissions, which had questionable legal underpinnings and was hotly contested, according to the court.

Possibly Frivolous Claim

The statute provided for an award of attorney’s fees to a principal when “an action" brought by a sales representative against a principal is frivolous. The court interpreted the word "action" as referring to a single claim, not the entire collection of claims.

On remand, the trial court was directed to determine (1) what attorney’s fees and costs were due to the sales representative for the principal’s unlawful withholding of the stipulated pre-termination commissions, (2) whether the sales representative frivolously pursued the claim for post-termination commissions, and(3) if so, what amount of fees were incurred in defending that claim.

A dissenting opinion expressed the view that a principal should be permitted to recover attorney’s fees and costs under the Sales Representatives’ Rights Law only when the entire action under the statute lacks merit.

Offer of Judgment, Rejection

The trial court’s $218,000 fee allowance to the principal under the rule governing inadvisable rejection of an offer of judgment could not stand because it conflicted with the fee-shifting provision of the Sales Representatives’ Rights Law, the court held.

After rejecting the principal’s offer of judgment, the sales representative prevailed on the pre-termination commissions claims but did not prevail on the hotly contested claim for post-termination commissions.

The sales representative would have been liable under the rule for the principal’s attorney’s fees if the version of the rule in effect when the principal’s offer was made and rejected had been applied. Because the offer of judgment rule was procedural in nature, a later version of the rule—incorporating the limitation on fee allowances in conflict with fee-shifting statutes such as the Sales Representatives’ Rights Law—applied retrospectively to bar the fee allowance.

The principal’s mistake was in submitting an offer of judgment that did not distinguish between the sales representative’s separate claims for pre-termination and post-termination commissions, the court observed.

Had the principal complied with its statutory obligation to timely pay the sales representative’s earned pre-termination commissions, any further pursuit of damages for post-termination commissions would not have had the protection of the Sales Representatives’ Rights Law and could have rendered the representative vulnerable for an inadvisable rejection of the offer of judgment.

The opinion in Kas Oriental Rugs, Inc. v. Ellman will be reported at CCH Sales Representative Law Guide ¶10,316.

Wednesday, November 11, 2009

NFL Cannot Remove Judge from Oversight Authority for Antitrust Consent Decree

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

A federal district court judge can continue to oversee a 1993 settlement agreement that resolved an antitrust class action brought on behalf of professional football players against the National Football League, the U.S. Court of Appeals in St. Louis decided yesterday.

1993 Settlement

In April 1993, Hon. David S. Doty, U.S. District Judge for the District of Minnesota, issued an order (1993-2 Trade Cases ¶70,299), approving the settlement resolving a dispute arising out of various NFL player rules that had been the source of numerous disputes between players and the NFL.

Pursuant to the terms of the settlement, the court retained jurisdiction over its enforcement through appointment of a special master, who heard disputes on an expedited basis, subject to review by the court. In the years that followed, the court resolved numerous disputes over the terms of the settlement agreement and parallel Collective Bargaining Agreement that govern player employment in the NFL.

Present Dispute

In response to a decision by the district court against one of the member teams, the NFL filed a motion to terminate the district court’s oversight of the consent decree. In addition, the league requested that Judge Doty remove himself from the case because of a perception that he was biased. The district court denied the motions, and the U.S. Court of Appeals in St. Louis has now affirmed.

Modification of Settlement Agreement

It was not an abuse of discretion for the federal district court to deny the NFL’s motion under Rule 60(b) of the Federal Rules of Civil Procedure to end the court's oversight of the settlement agreement, according to the appellate court. The league did not establish any changed circumstances warranting modification of the consent decree.

The NFL unsuccessfully argued that the district court’s oversight of the settlement agreement was no longer permissible because it amounted to unlawful meddling in the collective bargaining process, which was prohibited by the U.S. Supreme Court’s 1996 decision in Brown v. Pro Football, Inc., 518 U.S. 231, 1996-1 Trade Cases ¶71,445. Brown did not constitute a change in the law requiring modification of the settlement agreement, the court explained.

Also rejected was the NFL's argument that the recertification of the players union, the resumption of collective bargaining, and the diminishing number of original class members who continued to play football constituted circumstances that warranted modification of the settlement agreement.


Judge Doty was not required to recuse himself from overseeing enforcement of the settlement agreement, the appellate court also held. The NFL argued that the judge should have recused himself because of his comments in the press and ex parte meetings with NFL Players Association representatives.

The judge's comments referring to rulings that he made many years earlier and relating to matters long since resolved would not be interpreted by the average person as reflecting bias, it was held. Moreover, the judge’s statement that he had laughed at an NFL request that the court end its oversight of the settlement agreement did not demonstrate that the judge failed to take the request seriously. The district court responded to the request with an eight-page order that addressed the legal issues that the NFL raised.

To the extent that Judge Doty’s statements were jocular and informal, the average observer would see that as reflective of his down-to-earth approach to resolving the oft-contentious disputes brought to him by the parties, the appellate court explained.

The appellate court did note, however, that “although we do not believe that the articles created a reasonable perception of bias . . . the district judge would have been well advised not to opine publicly about his role in enforcing an ongoing consent decree.”

Ex Parte Meetings

Finally, to the extent that the league relied on the ex parte meetings to support recusal, its motion was untimely. Although the NFL had been aware of the court's practice of exchanging pleasantries in chambers with representatives of the players association for a number of years, it voiced a complaint only after receiving an adverse decision with which it strongly disagreed, according to the appellate court.

The November 10 decision in Reggie White, et al. v. National Football League, will appear at 2009-2 Trade Cases ¶76,790.

Tuesday, November 10, 2009

After U.S. Clearance, EC Questions Oracle’s Acquisition of Sun

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

Oracle Corporation announced on November 9 that the European Commission (EC) has issued a statement of objections (SO) concerning the company’s proposed acquisition of Sun Microsystems Inc.

The SO follows a decision by the U.S. Department of Justice not to challenge the transaction. The Justice Department terminated the waiting period under the Hart-Scott-Rodino Act in August.

“Oracle plans to vigorously oppose the [European] Commission’s Statement of Objections as the evidence against the Commission’s position is overwhelming,” according to a company statement. “Given the lack of any credible theory or evidence of competitive harm, we are confident we will ultimately obtain unconditional clearance of the transaction.”

At the time of Oracle’s disclosure, the EC had not made the SO public. However, the EC announced in September that it had opened an in-depth investigation into Oracle’s acquisition of Sun.

Competition Concerns in Databases Market

According to the EC, its initial market investigation indicated that the combination of the U.S. technology companies would raise serious competition concerns in the market for databases—a key element of company IT systems.

EC Competition Commissioner Neelie Kroes said the transaction would combine “the world’s leading proprietary database company” and “the world’s leading open source database company.”

In its November 9 statement, Oracle said that “the database market is intensely competitive with at least eight strong players, including IBM, Microsoft, Sybase and three distinct open source vendors.”

According to Oracle, “there is no basis in European law for objecting to a merger of two among eight firms selling differentiated products. Mergers like this occur regularly and have not been prohibited by United States or European regulators in decades.”

Justice Department Reaction

In response to the EC’s action, Deputy Assistant Attorney General Molly Boast of the Department of Justice Antitrust Division issued a statement on November 9, reiterating the Antitrust Division’s earlier determination that “the merger is unlikely to be anticompetitive.”

Boast pointed to the number of open-source and proprietary database competitors to justify the U.S. position. “We remain hopeful that the parties and the EC will reach a speedy resolution that benefits consumers in the Commission’s jurisdiction,” Boast said.

The Department of Justice statement appears here on the DOJ website.

Monday, November 09, 2009

Australian Commission May Audit Franchisors, Seek Redress for Franchisees, Provide Warnings

This posting was written by John W. Arden.

Amendments to the Australian Franchising Code of Conduct, announced on November 5, will enable the Australian Competition and Consumer Commission to conduct random audits of compliance with the Code, seek redress on behalf of all franchisees subject to a particular franchise agreement, and issue public warnings “about rogue or unscrupulous” franchisors.

The changes came in response to a December 2008 report by the Joint Committee on Corporations and Financial Services and the Senate Standing Committee on Economics and took into account comments on a government discussion paper on franchising and state franchising reports.

The Franchising Code will be amended to state that it does not limit any common law requirement of good faith in relation to a franchise agreement to which the Code applies and to clarify parties’ obligations with respect to end-of-term arrangements and mediation.

Good Faith, Pecuniary Penalties

The government did not implement the parliamentary report’s recommendations to provide statutory requirement of good faith or pecuniary penalties for breach of the Franchising Code of Conduct.

“The Government accepts the intent of the good-faith recommendation of the report of the Joint Committee on Corporations and Financial Services (the Ripoll report) and will introduce measures into the Franchising Code to prevent behaviors that are inappropriate in franchising agreements,” said the media release from the Small Business Minister Craig Emerson.

Study of Unconscionable Conduct

An expert panel will be established to investigate and report on the need to add further provisions to the Franchising Code to prevent behaviors inappropriate in a franchise agreement. The panel will consider whether to incorporate into the Australian Trade Practices Act a list of examples of unconscionable conduct or a statement of principles regarding unconscionable conduct.

The panel will consult with representatives from franchising and retail tenancy, small business organizations, the Australian Competition and Consumer Commission, and other interested parties. It will issue a report by the end of January 2010.

A November 5 media release on the announcement appears here on the website of the Australian Government’s Ministers for Innovation, Industry, Science and Research.

Friday, November 06, 2009

Using Motor Vehicle Data to Solicit Legal Clients Would Violate Federal Privacy Law

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

A purported class of individuals could pursue claims against attorneys for violating the Driver's Privacy Protection Act (DPPA) by unlawfully obtaining personal information pursuant to the Freedom of Information Act (FOIA) from the South Carolina Department of Motor Vehicles (SCDMV) for the impermissible purpose of soliciting clients, the federal district court in Greenville, South Carolina has ruled.

The attorneys allegedly sent several FOIA requests to the SCDMV seeking information regarding individuals who purchased automobiles during specific periods of time, including the name, address, and telephone number of the buyer; the dealership where the automobile was purchased; the type of vehicle purchased; and the date of the purchase.

The attorneys then mailed a letter to the individuals, whose information was obtained, offering a free consultation and inviting the individuals to hire the attorneys to represent them in a lawsuit against certain dealerships. The letter included the label “ADVERTISING MATERIAL.”

Litigation, State-Action Exceptions

This conduct would not fall under the DPPA's “litigation exception,” according to the court. The DPPA provides that a state DMV may disclose personal information for use in connection with an investigation in anticipation of litigation. The exception permitted the attorneys to request information in an attempt to obtain evidence, but not to find and solicit clients.

The attorneys also did not qualify for the DPPA's state-action exception by functioning as “private attorneys general.” The attorneys did not allege that they provided any information to any government agency.

Knowledge, Damages Requirements

The individuals did not have to allege that the attorneys knowingly violated the DPPA, only that they knowingly obtained their personal information, the court said. The individuals were not required to plead actual damages in order to receive statutory liquidated damages under the DPPA.

The DPPA did not violate the Commerce Clause, the court determined. The personal information regulated by the DPPA was in interstate commerce and was therefore a proper subject of congressional regulation.

The decision is Maracich v. Spears, CCH Privacy Law in Marketing ¶60,380.

Thursday, November 05, 2009

Facebook Privacy Settlement Gets Initial OK; Intervention Denied

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

A proposed settlement between social networking website operator Facebook and a class consisting of Facebook members, resolving privacy claims over Facebook’s “Beacon” advertising program, has been preliminarily approved by the federal district court in San Jose.

The complaining Facebook members had asserted that their privacy rights were violated by the Beacon program, which allegedly caused information about books, movies, and other products purchased by Facebook members on participating sites—such as Blockbuster and eBay—to be posted publicly on Facebook’s “news feed” without permission.

The settlement would resolve all claims against Facebook and several participating retailers. The agreement would also require Facebook to shut down the Beacon program and to contribute $9.5 million to a “settlement fund” devoted to the formation of a non-profit foundation for the purpose of promoting online privacy, safety, and security (CCH Privacy Law in Marketing ¶60,377).

Class Certification, Settlement Terms

The parties were advised that, when seeking final approval, they should be prepared to establish that the requirements for unconditional certification of the class have been met, specifically with regard to the issue of whether there was sufficient “typicality” between class members who may have claims under the Video Privacy Protection Act (VPPA), 18 U.S.C. §2710, and those who did not.

Final approval would also require a sufficient showing that the terms of the settlement were reasonable, specifically in light of the potential VPPA claims and the apparent availability of statutory penalties under the statute.

Notice of the proposed settlement was to be given to the class through (1) an internal Facebook message in the “Updates” portion of the Inbox section of users’ personal accounts, targeting users whose personal information was likely to have been transmitted to Facebook via Beacons and (2) a court-approved summary form of publication notice, to be published in one daily issue of the national edition of USA Today.

Motion to Intervene

A motion by representatives of class action plaintiffs pursuing Video Privacy Protection Act claims against Blockbuster in a federal district court in Texas were not entitled to intervene in the California action for the purpose of opposing the settlement, the court ruled.

The Texas action also arose out of the Beacon program, but the plaintiffs alleged claims only under the VPPA and named Blockbuster as the sole defendant. The Texas action predated the California action by approximately four months.

The motion to intervene was untimely, the court said. The intervenors were aware of the existence of the California action no later than September 2008 and were aware of the pending settlement by early May 2009. The intervenors’ delay in bringing its motion caused prejudice to the parties, including the time and money expended in continuing to negotiate and finalize the settlement agreement.

The intervenors failed to demonstrate a “significantly protectable” interest that would not be adequately protected absent intervention, according to the court.

Moreover, the intervenors were able to make their objections known to the court through the process of moving to intervene. The substance of those objections was taken into account in determining whether conditional approval of the settlement was warranted.

The preliminary approval and notice order and the order denying leave to intervene were issued October 23. The orders in Lane v. Facebook, Inc. appear at CCH Privacy Law in Marketing ¶60,393 and ¶60,394.

Wednesday, November 04, 2009

New York State Charges Intel with Monopolization

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

Intel Corporation unlawfully maintained its monopoly in the market for x86 central processing unit (CPUs) in violation of New York’s Donnelly Act and Sec. 2 of the Sherman Act, the State of New York alleges in an 83-page complaint filed today in a federal district court in Delaware.

The state is seeking injunctive relief and damages on behalf of its governmental agencies as well as New York consumers who purchased products containing x86 CPUs.

According to the complaint, Intel “engaged in a systematic worldwide campaign of illegal, exclusionary conduct to maintain its monopoly power and prices in the market for x86 microprocessors, the ‘brains’ of Personal Computers (PCs).” Intel allegedly bribed and bullied computer makers in an effort to deprive Advanced Micro Devices, Inc. of distribution channels for its competing microprocessors.

“Rather than compete fairly, Intel used bribery and coercion to maintain a stranglehold on the market,” said New York Attorney General Andrew M. Cuomo, in a statement announcing the complaint.

“Intel’s actions not only unfairly restricted potential competitors, but also hurt average consumers who were robbed of better products and lower prices," Cuomo charged."These illegal tactics must stop and competition must be restored to this vital marketplace.”

European Commission Fine

New York’s complaint follows a May 2009 European Commission (EC) decision fining the computer chip maker €1.06 billion (approximately $1.44 billion U.S.) for violating EC antitrust rules prohibiting the abuse of a dominant position. The EC found that Intel engaged in illegal anticompetitive practices to exclude competitors from the market of computer chips called x86 CPUs.

In addition to imposing the fine, the EC ordered Intel to cease the challenged practices. In September, the EC made public a redacted version of its May decision. Intel has announced that it was appealing the EC decision to the Court of First Instance of the European Community.

Federal Trade Commission Investigation

The Federal Trade Commission has also been conducting an investigation of Intel’s allegedly anticompetitive practices. Intel announced in June 2008 that the FTC had issued a subpoena related to its “business practices with respect to competition in the microprocessor market.”

At that time, the company explained that it had been working closely with the FTC since 2006 on an informal inquiry into competition in the microprocessor market and that it had provided the Commission staff with a considerable amount of information and thousands of documents.

Tuesday, November 03, 2009

Pulse Oximeter Maker Liable for Sole Source Discounts, Not Budling

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

A federal district court in California did not err in discarding a jury's finding that a manufacturer of pulse oximeters violated federal antitrust law through its offering of bundled discounts to customers, but confirming the jury's liability finding on two other bases, the U.S. Court of Appeals in San Francisco has decided in an unpublished opinion.

The manufacturer could have acted illegally through sole source agreements and market share discounts it offered to customers, the appellate court said. In addition, the trial court's calculation of damages suffered by a complaining competitor was proper. Therefore, each of the trial court's rulings was upheld.

Antitrust Liability

The manufacturer did not violate Sec. 2 of the Sherman Act through the bundled discounts it offered to customers. The defending manufacturer's discounts were not alleged to have resulted in prices that were below an appropriate measure of its costs. Because no anticompetitive tying or pricing was asserted, the discounts could not, as a matter of law, have violated the statute, the court stated.

Rejected by the appellate court was an argument that the bundling practices were actually illegal market-share agreements, rather than general bundled discounts. Even if it could have been concluded that certain bundling contracts were exclusive dealing arrangements, in that the discounts were conditioned upon a near-complete exclusivity requirement, the evidence concerning the pervasiveness and effects of the varied bundling arrangements was insufficient to support a finding that the arrangements foreclosed competition in a substantial share of the relevant market. Therefore, the trial court did not err in vacating a jury verdict of liability regarding the bundling agreements.

The trial court correctly determined that a reasonable jury, based on the evidence presented at trial, could have concluded that the defending manufacturer violated the federal antitrust laws through sole source agreements and market share discounts it offered to customers. Sufficient evidence had been introduced to support the jury's finding.

On appeal, both parties offered the same evidence that had been presented to the jury and reviewed by the district court. The defending manufacturer failed to proffer any reason at appeal that compelled reversal of the jury's verdict.


The district court did not err in its calculation of damages resulting from the manufacturer's antitrust violations. The court properly determined, based on the evidence presented at trial, that all harm incurred by a complaining competitor on account of the defending manufacturer's anticompetitive business dealings with customers occurred before July 2001, as adherence to that cutoff date did not “absolutely lack evidentiary support.”

The competitor itself had stated that “the period between 1998 and 2001” was “when all harm was done” to it. Therefore, the court did not abuse its discretion in denying the competitor a new trial on damages, the appellate court said.

In addition, an apparent awarding of some post-July 2001 damages was not error, the appellate court noted. That award was based on a conclusion that the competitor should receive damages associated with oximetry monitor sales lost pre-July 2001, which consequently included the flow of lost sensor sales stemming from the lifespan of those devices.

Because of this installed base of monitors, the district court correctly determined that a hard stop on damages would cut them off prematurely. Moreover, because the competitor offered unreasonable models for calculating damages, it was proper for the court to adopt the defendant manufacturer's model—the only reasonable alternative—as its basis for calculating damages, the court concluded.

Concurring Opinion

A concurring opinion contended that the majority arrived at the correct result with respect to the bundling agreements, but for the wrong reason. According to the concurrence, the majority's conclusion—that the evidence on record was insufficient to support the jury's liability verdict that the manufacturer's bundling contracts constituted exclusive dealing arrangements—applied only with respect to the theory that bundling itself was a form of exclusive dealing. However, such a theory no longer held water after Cascade Health Solutions v. PeaceHealth (2007-2 Trade Cases ¶75,846), the concurring opinion argued.

The court should have based its decision instead on the ground that the complaining competitor had waived the argument that the bundling agreements at issue should be treated as market-share discounts.

The October 28 memorandum decision is Masimo Corp.v. Tyco Health Care Group, L.P., 2009-2 Trade Cases ¶76,780.

Monday, November 02, 2009

FTC, Canada Competition Bureau Approve Schering-Plough’s Acquisition of Merck

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

Schering-Plough Corporation can proceed with its proposed $41.1 billion acquisition of Merck & Co. Inc. under the terms of a proposed FTC consent order, according to the agency's October 29 announcement.

The consent order would settle FTC charges that the transaction, as originally proposed, could have reduced competition in a range of animal health markets in which the companies compete and in the market for human drugs known as NK 1 receptor antagonists, which are used to treat nausea and vomiting resulting from chemotherapy and surgery.

The companies are two of the leading animal health suppliers in the United States. According to the FTC, the proposed acquisition raised significant concerns in markets where Merck—through Merial Limited, an animal health joint venture with Sanofi-Aventis S.A—and Schering-Plough directly compete. Merck would be required to sell its interest in Merial, under the proposed consent order.

In the market for NK 1 receptor antagonists, Merck’s Emend was the first and only approved treatment for human use. Schering-Plough, however, was in the process of licensing its own NK 1 receptor antagonist, rolapitant, to a third party when the company’s acquisition of Merck was announced.

The transaction, therefore, likely would have reduced the combined firm’s incentives to launch rolapitant, delaying or eliminating a future entrant into the market for NK 1 receptor antagonist drugs for nausea and vomiting. Under the terms of the FTC’s consent order, Schering-Plough would be required to sell assets related to rolapitant.

Canada Competition Bureau Approval

Canada's Competition Bureau also announced on October 29 that it has reached an agreement with Merck and Schering-Plough to resolve competition concerns with respect to their proposed merger. The Competition Bureau said that it worked closely with the FTC in its investigation. The relief imposed by the Competition Bureau is the same as that which would be required under the proposed FTC consent order.

The complaint and proposed consent order, In the Matter of Schering-Plough Corporation, a corporation, and Merck & Co. Inc., FTC Docket No. C-4268, will appear at CCH Trade Regulation Reporter ¶16,383.