Bill Protecting Online Shoppers Signed Into Law

This posting was written by John W. Arden.

Legislation aimed at protecting consumers from aggressive sales tactics on the Internet was signed by the President on December 29.

The “Restore Online Shoppers’ Confidence Act” (S.3386) intends to protect online consumers from unfair and deceptive sales tactics on the Internet by:

(1) Requiring companies that offer goods or services on other companies' websites to make material disclosures and to obtain express informed consent before charging consumers' financial accounts;

(2) Prohibiting companies from transferring their customers' billing information to companies that are offering goods or services on their websites; and

(3) Requiring companies that use "negative options" (i.e., require consumers to take an affirmative action to reject goods or services) to disclose material terms of a transaction, obtain a consumer’s express informed consent, and provide simple mechanisms for a consumer to stop recurring charges on a credit card, debit card, or bank or financial account.

The new law will be enforced by the Federal Trade Commission, and violations are to be treated as violations of a rule under the Federal Trade Commission Act. The law also may be enforced through civil actions brought by state attorneys general, which must provide prior written notice to the Commission.

FTC Chairman Jon Leibowitz voiced his support of the measure upon its passage by the House of Representatives on December 15.

We’re pleased Congress passed this legislation,” Leibowitz said in a December 15 statement. “Too many companies are trying to use phony monthly billing to rip off Americans, and this bill will help strengthen our hand. Consumers should be able to make informed decisions, so the terms and conditions of any offer must be disclosed clearly and conspicuously.”

Further information about the legislation appears in a December 20 posting on Trade Regulation Talk. Text of the measure appears here in the December 15 Congressional Record.

Payroll Tax Violations Constituted Good Cause for Termination of Franchises

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

Donut shop franchisees’ failure to comply with payroll tax laws violated their contractual obligation to obey all laws and constituted good cause for termination of three franchises under the meaning of the New Jersey Franchise Practices Act, the federal district court in Newark has ruled.

The franchisees breached the franchise agreements’ “obey all laws” clause by failing to comply with payroll tax laws and did so in a non-curable manner. The payroll violations were not inadvertent or isolated mistakes, but were part of a calculated effort to disguise the true nature of the payments.

Evidence overwhelmingly showed that the franchisees inappropriately failed to treat various payments made on behalf of their employees (for things such as rent, travel, and tuition) as wages, according to the court.

The “obey all laws” clause authorized the franchisor to terminate the agreement without cure if it had “proof” that the franchisee had committed a felony. Nothing in the agreement, however, suggested that the proof must rise to a level to support a criminal conviction, the court noted. Thus, for the purpose of this civil proceeding, it was sufficient for the franchisor to show at trial that it had proof sufficient to establish a criminal conviction by a preponderance of the evidence.

The franchisor presented proof demonstrating by the preponderance of the evidence that the franchisees committed all three elements of tax evasion:

(1) A tax deficiency,

(2) The affirmative act of attempted evasion of payment of taxes, and

(3) Willfulness.

The tax violations clearly fell within the purview of the “obey all laws” clause because compensation of the franchise employees pertained to the operation and maintenance of the franchises, the court determined.

Furthermore, the fact that the franchisor did not prove damages was not relevant. The franchisor did not seek damages, but merely declaratory relief. The franchisees’ attempt to argue that the franchisor had unclean hands in terminating the franchises and in bringing suit was rejected.

The decision in Dunkin’ Donuts Franchised Restaurants LLC v. Strategic Venture Group, Inc. will appear at CCH Business Franchise Guide ¶14,494.

Requiring Franchisees to Sell Low-Priced Menu Items Did Not Breach Duty of Good Faith

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

A national association of Burger King franchisees failed to adequately allege that Burger King breached the express duty of good faith in the parties’ franchise agreements by requiring franchisees to sell low-priced menu items, a federal district court in Miami has ruled.

The franchisees challenged the franchisor’s Value Meal menu pricing policy, which required them to sell two items—a double cheeseburger and the similar Buck Double—for $1.00, below what it cost the franchisees to produce and sell the items.

In an earlier ruling (Business Franchise Guide ¶14,387), the court held that the agreements expressly granted Burger King the discretion to set maximum prices for products sold by its franchisees.

Bad Faith

The franchisees did not deny that they were required to allege facts indicative of bad faith and that conclusory assertions were inadequate. However, none of the facts they asserted as a basis for their claims were sufficient to support a claim of bad faith, the court held.

The purpose of the provision in the agreements entitling Burger King to set prices was to give it broad discretion in framing business and marketing strategy by adopting those measures it judged necessary to successfully compete. Thus, the franchisees were required to allege some facts suggesting (1) that Burger King did not believe that the prices it set would be helpful to the competitive position of the business and (2) that Burger King deliberately adopted prices that would injure the franchisees operations.

Below-Cost Pricing

The franchisees principally relied on their allegation that they suffered a loss on each double cheeseburger and Buck Double they sold because they could not produce them at a cost of less than $1.00. Even if true, there was nothing inherently suspect about such a pricing strategy for a firm selling multiple products.

There were numerous reasons why a firm selling multiple products could choose to set the price of a single product below cost, the court observed. Such as strategy could help to build goodwill and customer loyalty or serve as loss leaders to generate increased sales or higher-margin products.

The issue of Burger King’s good faith was not about whether such a strategy was wise or ultimately successful, but whether—in the absence of other evidence of improper motive—it was so irrational and capricious that no reasonable person would have made such a decision.

Good Faith Exercise of Judgment

There was nothing about the pricing decision that suggested Burger King was doing anything other than promoting the performance of its franchisees, the court determined. The agreement clearly gave Burger King the discretion to set a below-cost price for any product as long as that pricing decision was one that the franchisor, in the good faith exercise of its judgment, believed to be desirable and necessary.

Furthermore, the franchisees failed to allege the kind of serious injury that would support an inference of bad faith. Rather than a claim of substantial impact of their overall business, the franchisees focused on the losses incurred on the two products sold below cost.

In order to raise a claim of bad faith by pointing to injuries allegedly caused by the pricing decision, the franchisees were required to allege that the damage to their overall business was so severe as to deprive them of their reasonable expectations under the contract. They came nowhere close to such an allegation, in the court’s view.

Since the association failed to plead facts suggesting a breach of an express duty of good faith, it could not assert a claim that Burger King breached an express duty of good faith, the court found.

The decision in National Franchisee Association v. Burger King Corp., CCH Business Franchise Guide ¶14,501.

Further information about CCH Business Franchise Guide is available here.

Antitrust Division Sues Lucasfilm for Conspiring to Restrict Employee Recruiting

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

In September, the Department of Justice Antitrust Division announced a complaint and proposed consent decree arising out of an investigation into the use of “no solicitation” agreements among high technology companies to hold down employee salaries and defections.

As a result of its investigation, the Department of Justice filed a complaint on December 21 against Lucasfilm Ltd., a digital animation studio, for entering into agreements with rival Pixar to restrain employee recruitment for digital animators and other employees.

Lucasfilm and Pixar allegedly agreed not to cold call each other's employees; agreed to notify each other when making an offer to an employee of the other company; and agreed, when offering a position to the other company's employee, not to counteroffer with compensation above the initial offer.

At the same time the complaint was filed, the Justice Department Antitrust Division filed a proposed consent decree, which, if approved by the court, would resolve the lawsuit. The settlement would prohibit Lucasfilm from entering into agreements restraining
employee recruitment.

Pixar was not a named as a defendant in the complaint against Lucasfilm, because Pixar would be prohibited from entering into these types of agreements under the settlement announced in September (Trade Regulation Reporter ¶50,982).

The complaint and consent decree, announced in September, also name Adobe Systems Inc., Apple Inc., Google Inc., Intel Corp., and Intuit Inc.

"The agreement between Lucasfilm and Pixar restrained competition for digital animators without any procompetitive justification and distorted the competitive process," said Christine Varney, Assistant Attorney General in charge of the Department of Justice Antitrust Division. "The proposed settlement resolves the department's antitrust concerns."

The case is U.S. v. Lucasfilm Ltd. A December 21 news release on the settlement, a copy of the complaint, and a copy of the proposed final judgment appear on the Antitrust Division website.

Further details will appear in CCH Trade Regulation Reporter.

Blue Cross Blue Shield of Michigan Seeks Dismissal of Government Antitrust Suit

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

Blue Cross Blue Shield of Michigan has asked the federal district court in Detroit to dismiss an antitrust suit brought by the U.S. Department of Justice and the State of Michigan, challenging provisions in the company's contracts with Michigan hospitals.

Blue Cross has raised four separate and independent grounds for dismissal of the government's attack on the health insurance provider's use of “most favored nation” (MFN) clauses.

The government alleges that Blue Cross raised hospital prices to competing health care plans and inflated the costs of health care services and insurance through the use of MFN clauses in its agreements with hospitals.

Some of the MFN clauses require hospitals to provide services to Blue Cross’s competitors at no less than Blue Cross pays. Other MFN clauses give Blue Cross an even better rate than the rate available to other plans.

Immunity, Abstention

In a December 17 motion to dismiss and brief, Blue Cross argues immunity under the state action doctrine of Parker v. Brown, 317 U.S. 341, 1940-1943 Trade Cases ¶56,250. According to the dismissal motion, state action immunity is appropriate because the State of Michigan created Blue Cross pursuant to a comprehensive health care regulatory structure under Michigan Public Act 350 of 1980.


The company contends that, as a quasi-public, state-created health care corporation, it only needs to show that the challenged conduct reasonably flowed from Michigan's policy to displace competition. The company asserts that, although it did not need to show that the conduct was actively supervised, the conduct was in fact actively supervised.

Blue Cross also makes the argument that, independent of the state action doctrine, the principles of abstention, set forth in Burford v. Sun Oil. Co., 319 U.S. 315 (1943), require the court to refrain from hearing the case because of its disruptive effect on state policy.

Sufficiency of Allegations

The complaint fails to allege viable legal claims under the U.S. Supreme Court's decisions in Bell Atlantic Corp. v. Twombly, 2007-1 Trade Cases ¶75,709, and Ashcroft v. Iqbal, 2009-2 Trade Cases ¶76,785, Blue Cross also argues. The insurer questions the alleged relevant markets and contends that the government failed to plausibly allege facts supporting a viable theory of legal harm.

“The government has failed to allege any specific facts that support their conclusion that anticompetitive effects of most favored nation clauses outweigh the benefits to payers and consumers,” said Jeffrey Rumley, Blue Cross vice president and chief legal counsel in a December 17 statement. “They rely upon conclusory allegations because they have no facts. Competition worked as it should here.”

Lastly, Blue Cross seeks dismissal of the Michigan antitrust law claims on the ground that the state laws specifically exempt the challenged conduct from their reach.

Pfizer, Warner-Lambert Must Defend RICO Claims for Off-Label Marketing of Neurontin

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

Two consumers who suffered from bipolar disorder could proceed with RICO claims against Pfizer, Inc., and Warner-Lambert Co.—manufacturers of the prescription drug Neurontin—because the consumers were able to show that their treating physicians had prescribed Neurontin in reliance on allegedly fraudulent “off-label” marketing statements by the manufacturers, the federal district court in Boston has ruled.

More specifically, medical information letters that the treating physicians had received from the manufacturers created a triable issue of fact on the issue of proximate cause.

Clinical Trials

The letters showed that the manufacturers had discussed a clinical trial that purportedly revealed favorable results when Neurontin was used for mood disorders. The manufacturers failed, however, to mention the negative results of three other trials that studied the use of Neurontin for the treatment of bipolar disorder. Moreover, Pfizer failed to produce (for a previous bellwether trial) reliable scientific evidence that Neurontin was effective in treating bipolar disorder.

According to the court, the consumers had to show that this conduct caused the treating physicians to prescribe Neurontin when the physicians would otherwise have used alternative treatments. Because a finder of fact could reasonably infer that a treating physician would not prescribe a drug if aware of “overwhelmingly and uniformly negative evidence” about the drug’s efficacy, the manufacturers’ motion for summary judgment against the two consumers was denied.

Failed Claims

The court determined that four other consumers could not proceed with RICO claims against the manufacturers because their treating physicians testified that they had prescribed Neurontin to their patients based on their independent medical judgment. Indeed, the treating physicians denied having received any unsolicited, off-label “detailing” by the manufacturers’ sales representatives.

Moreover, they stated that their knowledge about the efficacy of Neurontin for off-label indications was informed by their clinical experiences with the drug and by information they received from trusted colleagues.

Because no admissible, non-hearsay evidence showed that the treating physicians had received or read any misleading or fraudulent publications about Neurontin’s use for off-label indications, the manufacturers’ motion for summary judgment against the four consumers was granted.

Third-Party Payors' Claims

Similarly, third-party payors (TPPs) could not proceed with their RICO claims, the court decided. Because the TPPs did not rely on the manufacturers’ alleged misrepresentations directly, the TPPs were unable to show that their injuries were proximately caused by manufacturer misrepresentations regarding the efficacy of Neurontin.

The TPPs did not proffer any evidence regarding the number and identity of prescribing physicians that had purportedly relied on the alleged fraud. Because proximate cause could not be established, the TPPs’ RICO claims did not withstand summary judgment.

The decision is Neurontin Marketing and Sales Practices Litigation, CCH RICO Business Disputes Guide ¶11,970.

Congress Approves Measure Aimed at Deceptive Internet Sales

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

Legislation aimed at protecting consumers from certain aggressive sales tactics on the Internet has cleared Congress.

The proposed “Restore Online Shoppers’ Confidence Act” (S. 3386), which passed the House of Representatives on December 15, would create new rules for companies using post-transaction marketing and negative options. The measure passed the Senate on November 30 and was presented to the President on December 17.

“We’re pleased Congress passed this legislation,” FTC Chairman Jon Leibowitz said in a December 15 statement. “Too many companies are trying to use phony monthly billing to rip off Americans and this bill will help strengthen our hand. Consumers should be able to make informed decisions, so the terms and conditions of any offer must be disclosed clearly and conspicuously.”

Protections for Online Consumers

The FTC statement explains that the legislation would provide important protections for online consumers. It would prohibit a post-transaction third-party seller—a seller who markets goods and services online through an initial merchant after a consumer has initiated a transaction—from charging a consumer for any good or service sold in an online transaction, unless the seller clearly discloses all the material terms of the transaction and has obtained the consumer’s consent directly from the consumer before charging them.

The sellers must obtain directly from the consumer the full financial account number to be charged. In addition, the legislation would make it unlawful for any online seller to transfer a consumer’s financial account number to a third party seller.

Negative Option Plans

The legislation would also restrict marketers that use negative option plans, under which the seller interprets the consumer’s silence or failure to reject goods or services, or to cancel the sales agreement, as acceptance of the offer.

The proposed Restore Online Shoppers’ Confidence Act would make it unlawful for a seller to charge a consumer for any good or service with a negative option feature in an online transaction, unless:

(1) The seller clearly discloses to the consumer all the material terms of the transaction;

(2) The seller has obtained the consumer’s consent before charging them; and

(3) The seller provides a simple way for the consumer to stop charges.

Further details regarding this bill will appear in CCH Trade Regulation Reporter.

FTC Orders Complete Divestiture of Rival in Merger Challenge

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

Polypore International, Inc. has been ordered by the FTC to divest Microporous Products L.P., a rival manufacturer of battery separators, that it acquired in 2008. The Commission on December 13 released a provisionally-redacted public version of its unanimous decision, finding the acquisition anticompetitive.

Polypore previously announced that the FTC had upheld divestiture relief ordered earlier this year by Chief Administrative Law Judge (ALJ) D. Michael Chappell.

The Commission ruled that the merger of the two producers of battery separators—membranes placed between the positive and negatively-charged plates in batteries to prevent electrical short circuits—for flooded lead-acid batteries was illegal in three of the four North American markets identified in the complaint. However, the acquisition was not likely to harm competition in a fourth market for separators used to make batteries for backup power supply.

At the time of the acquisition, only one other firm, Entek International LLC, supplied flooded lead-acid battery separators to North American customers.

Relevant Markets

FTC attorneys established four distinct relevant product markets:

(1) separators for batteries used primarily in golf carts;

(2) motive separators for batteries used primarily in forklifts;

(3) separators used in car batteries for starters, lighting, and ignition (SLI); and

(4) uninterruptible power source (UPS) separators used in batteries that provide backup power in the event of power outages.

The record supported the relevant product markets based on the end use of separators, according to the Commission. Based on design and functionality, a separator manufactured for a particular end use or customer was not reasonably interchangeable with other separators. Moreover, prices were set according to end use.

Hypotehetical Monopolist Test

The FTC's expert applied the hypothetical monopolist test to each market using a critical loss analysis and concluded that a hypothetical monopolist that supplied separators for each end use would lose less than 10% of its sales in response to a 5% price increase.

The Commission noted that, under the 2010 Horizontal Merger Guidelines (Trade Regulation Reporter ¶13,100), a product market is defined by asking whether a hypothetical monopolist of the proposed product market could impose a small but significant and nontransitory increase in price or “SSNIP” without losing sufficient sales to render the price increase unprofitable.

Product Markets

Polypore argued unsuccessfully that two separate product markets existed: (1) a market for polyethylene or “PE” separators and (2) a market consisting only of Flex-Sil, a separator made of rubber, primarily for deep-cycle applications.

The Commission found unpersuasive Polypore's expert's opinions that PE separators belonged in a single relevant market because they were highly differentiated and could be tailored to work across applications and that Flex-Sil constituted a separate relevant market because Flex-Sil had unique performance characteristics and was sold at a premium.

Relevant Geographic Market

The Commission also found a relevant geographic market limited to North America.

Polypore had argued that the market was global in scope. Because battery separators were tailored to a particular customer and type of battery, and sold through individualized negotiations, separator suppliers set separator prices based in part on customer location, according to the Commission.

Moreover, because separators were differentiated along a variety of dimensions according to customer demand, a customer could not easily defeat a discriminatory price increase through arbitrage. Additionally, North American battery manufacturers did not consider foreign supply a reasonable competitive alternative to local supply due primarily to cost and quality.

Analytical Framework

The Commission applied a traditional burden-shifting framework in reviewing the merger. This analytical approach did not, however, exhaust the possible ways to prove a Clayton Act, Sec. 7 violation on the merits, according to the Commission. In a consummated merger, post-acquisition evidence of actual anticompetitive harm could be sufficient to establish Sec. 7 liability without separate proof of market definition.

Under the traditional framework, the FTC attorneys could establish a presumption of liability by showing that the transaction led to undue concentration in the relevant market. The prima facie case could be bolstered based on market structure with evidence showing that anticompetitive unilateral or coordinated effects were likely.

Because the FTC established a prima facie case of probable harm, the burden of production shifted to Polypore to rebut the government's evidence. However, Polypore did not satisfy the burden of production.

The Commission rejected Polypore's argument that market entry by Entek or other manufacturers or the strength of sophisticated power buyers with substantial leverage would counteract any potential anticompetitive effects from the acquisition. Thus, the merger was found to violate Sec. 7 of the Clayton Act.

Remedy

The FTC ordered complete divestiture of all of the acquired assets, including a plant in Feistritz, Austria. Polypore argued that the remedy, and in particular the portion of the order requiring divestiture of Microporous’s plant in Feistritz, was overbroad and punitive. However, the Commission concluded that complete divestiture was necessary to restore lost competition to the relevant North American markets.

“[C]omplete divestiture provides the greatest likelihood that the asset package will restore competition and be sufficiently viable to readily attract an acceptable buyer,” it was decided.

Despite the objections of the merged entity, the final order also included ancillary relief, requiring Polypore to refrain from depleting Microporous’s workforce and to grant to the divestiture buyer a license to certain Polypore intellectual property that was incorporated into Microporous’s operations or battery separators during the course of the FTC investigation, litigation, and pending divestiture.

Concurring Opinion

Commissioner J. Thomas Rosch wrote a concurring opinion, suggesting “an alternate analytical framework that would focus on the competitive effects of this transaction instead of focusing initially on defining the precise contours of the relevant market and only then considering the transaction’s competitive effects.”

Commissioner Rosch concluded “especially where, as here, the merger at issue is consummated, it is generally preferable to determine whether a merger has had anticompetitive effects by reference to the parties’ motives for the transaction and the actual effects resulting from the merger instead of trying first to define with precision the dimensions of relevant market based on the testimony of paid expert economists and the predictive economic tools described in the Merger Guidelines.”

The decision is In the Matter of Polypore International, Inc., FTC Docket No. 9327. A news release on the subject appears here on the FTC website. Text of the opinion will appear at 2010-2 Trade Cases ¶77,267.

Commerce Department Task Force Issues Green Paper on Internet Privacy Protection

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

The government should develop a dynamic framework for the protection of consumers’ commercial data online—including the adoption of a set of baseline principles akin to a “Privacy Bill of Rights”—while supporting innovation and evolving technology, according to a green paper issued December 16 by the Commerce Department’s Internet Policy Task Force.

The green paper—titled Commercial Data Privacy and Innovation in the Internet Economy: A Dynamic Policy Framework—reviews the technological, legal, and policy contexts of current commercial data privacy challenges; describes the importance of developing a more dynamic approach to commercial privacy both in the United States and around the world; and discusses policy options.

The green paper is meant to stimulate further public discussion with the domestic and global privacy policy community, according to the task force.

Rather than expressing a commitment to specific policy proposals, it addresses areas of policy and possible approaches. More specific proposals may be considered, as appropriate, in a future white paper, the task force said.

“America needs a robust privacy framework that preserves consumer trust in the evolving Internet economy while ensuring the Web remains a platform for innovation, jobs, and economic growth,” said Commerce Secretary Gary Locke.

“Self-regulation without stronger enforcement is not enough,” he warned. “Consumers must trust the Internet in order for businesses to succeed online. Today’s report is a road map for considering a new framework that is good for consumers and businesses.”

Fair Information Practice Principles

The government should adopt a baseline commercial data privacy framework built on an expanded set of Fair Information Practice Principles (FIPPs), the task force said. Baseline FIPPs would be comparable to a “Privacy Bill of Rights.”

“Revitalized FIPPs should emphasize substantive privacy protection rather than simply creating procedural hurdles,” the task force stated. “To promote informed consent without imposing undue burdens on commerce and on commercial actors, FIPPs should promote increased transparency through simple notices, clearly articulated purposes for data collection, commitments to limit data uses to fulfill these purposes, and expanded use of robust audit systems to bolster accountability.”

High priority should be given to FIPPs that enhance transparency regarding data privacy practices, encourage greater detail in purpose specifications and use limitations, and foster the development of verifiable evaluation and accountability, in the task force’s view.

Voluntary, Enforceable Codes of Conduct

The green paper urges the government to encourage the development of voluntary, enforceable privacy codes of conduct in specific industries through the collaborative efforts of multi-stakeholder groups, the Federal Trade Commission, and a new Privacy Policy Office within the Department of Commerce.

Codes of conduct should address emerging technologies and issues not covered by current application of baseline FIPPs. To encourage the development of such codes, the task force said the Administration should consider a variety of options, including public statements of Administration support, stepped up FTC enforcement, and legislation that would create a safe harbor for companies that adhere to codes to conduct.

Establishment of Privacy Policy Office

According to the green paper, the Commerce Department should establish a Privacy Policy Office (PPO) to serve as a center of commercial data privacy expertise. The proposed PPO would have the authority to convene discussions of commercial data privacy implementation models, best practices, codes of conduct, and other areas that would benefit from bringing stakeholders together. The PPO would work in concert with the Executive Office of the President as the Administration’s lead on international outreach on commercial data privacy policy.

The PPO would not have any enforcement authority. In the opinion of the task force, the FTC should remain the lead consumer privacy enforcement agency for the U.S. government.

Increased International Cooperation

The U.S. government should continue to work toward increased cooperation among privacy enforcement authorities around the world and should develop a framework for mutual recognition of other countries’ commercial data privacy regimes, the task force said.

Global privacy interoperability should build on accountability, mutual recognition and reciprocity, and should be based on enforcement cooperation principles pioneered in the Organisation for Economic Cooperation and Development (OECD) and Asia-Pacific Economic Cooperation (APEC).

Federal Data Security Breach Standards

The green paper recommended that the government consider adopting a comprehensive commercial data security breach framework for electronic records. Such a framework should include breach notification provisions and should encourage companies to implement strict data security protocols.

States would be allowed to build upon the framework in limited ways, the task force said. A federal framework should track the effective protections that have emerged from state security breach notification laws and policies.

Review of Electronic Communications Privacy Act

The Administration should review the Electronic Communications Privacy Act (ECPA), with a view to addressing privacy protection in cloud computing and location-based services, the green paper determined. This effort should ensure that, as technology and market conditions change, the ECPA protects individuals’ expectations of privacy and punishes unlawful access to and disclosure of consumer data.

Comments Sought

The Commerce Department is seeking public comments on the plan to further the policy discussion and ensure the framework benefits all stakeholders in the Internet economy. Comments are due on or before January 28, 2011. Written comments may be submitted by mail to the National Telecommunications and Information Administration, U.S. Department of Commerce, 1401 Constitution Avenue, N.W., Room 4725, Washington, DC 20230. Online submissions in electronic form may be sent to privacynoi2010@ntia.doc.gov.

Text of the 88-page green paper is available here on the Commerce Department’s website.

FTC Chairman’s Statement

“The Department of Commerce’s Green Paper is a welcome addition to the ongoing dialogue about protecting consumers’ privacy,” said FTC Chairman Jon Leibowitz. “It places special emphasis on policies that will preserve the viability of the Internet as it evolves through innovation, transforms the marketplace, and spurs economic growth. We think it will make a significant contribution to the growing and critical debate about how best to protect the privacy of American consumers.”

Online Hotel Reservation Agencies Could Be Liable for Deceptive Fees

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

New York residents who used online hotel reservation agencies to book hotel rooms in New York City stated a claim under the New York unfair trade practices law for the agencies’ charging of allegedly deceptive and unfair fees, according to the federal district court in New York City.

The hotel patrons used hotel reservation websites—including Hotels.com, Expedia, and Priceline—to purchase hotel rooms in New York City.

Invoices provided after purchase allegedly failed to disclose that the agencies pocket a tax differential earned on the markup when they resell rooms online that they acquired at a discount. Tax charges and service fees were allegedly bundled so that patrons did not know the amount of each of the service fees or taxes. Further, patrons were allegedly deceived into believing that the agencies offer the lowest possible rate on hotel rooms.

Coverage of New York Residents

Because the New York law (General Business Law §349—§350-f) does not apply to out-of-state plaintiffs who were not deceived in New York, non-New York residents were dismissed from the action by the court.

The hotel reservation agencies argued that the named plaintiffs could not state claims because the alleged deception did not occur in New York. While the agencies argued that the point of deception was where the patrons accessed the Internet to visit the websites and reserve hotel rooms, the patrons argued that the deception took place in New York, where the hotels were located, because the deceptive acts did not take place until the patrons checked out and received an invoice.

The court ruled that the allegedly deceptive acts took place at the time the reservation was made and therefore the place of deception was the state in which the patron resided and made the reservation. Thus, the New York General Business Law claims brought by non-New York residents were dismissed.

Online Rates, Taxes

The court rejected the assertion that the agencies deceived patrons into believing that it was always cheaper to book through an online travel agency than to book directly with a hotel. Patrons were given complete information by the agencies and were no so unreasonable as to believe the agencies did not profit from the transactions.

However, the court denied a motion to dismiss based on the failure of the agencies to disclose that the amount of tax they collected from patrons was “always” greater than what they were charged by the hotel whose rooms the agency resold. The fact that the agencies “always” pocketed this difference could be material to a patron searching for the lowest possible rates for a hotel.

The decision in Chiste v. Hotels.com L.P. will be reported at CCH State Unfair Trade Practices Law ¶32,165.

Further information about CCH State Unfair Trade Practices Law appears here.

Trade Regulation Tidbits

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

News, updates, and observations:

 The European Commission (EC)announced on December 14 revised rules for the assessment of cooperation agreements between competitors, so-called horizontal cooperation agreements. The rules describe how competitors can cooperate without infringing EU competition rules, by providing a framework for the analysis of R&D, product, purchasing, commercialization, standardization, standard terms, and information exchange agreemenets. The EC announcement noted that a new chapter on information exchanges and a substantial revision of the chapter on standardization agreements were among the key features of the reforms. The revisions exempt from the competition rules certain R&D, specialization, and production agreements that are unlikely to raise competition concerns, according to the EC. The new Horizontal Guidelines and Regulations can be found here on the European Competition Commission website.

 The FTC has released its Performance and Accountability Report (PAR)for Fiscal Year (FY) 2010. The report demonstrates how the FTC has managed its resources, highlights major accomplishments in fulfilling the FTC's two core goals (protecting consumers and promoting competition), and outlines plans for addressing future challenges, Conducted in accordance with the Reportes Consolidation Act of 2000, the PAR combines the Performance Report and the agency's financial statements and audit opinion. It compares and evaluates each year's actual performance to the established measures and targets set forth in the FTC's 2009-2014 Strategic Plan and the annual Government Performance and Results Act Performance Plan. The FY 2010 independent financial audit resulted in the FTC's fourteenth consecutive unqualified opinion, the highest audit opinion. The 152-page PAR is available here on the FTC website.

New Charges Brought in Antitrust Division's Municipal Bond Investigation

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

A federal grand jury in New York City indicted three former executives of a financial services company for their participation in fraud schemes and conspiracies related to bidding for contracts for the investment of municipal bond proceeds and other municipal finance contracts, the Department of Justice announced on December 9.

One executive also was indicted for witness tampering in connection with the Justice Department’s ongoing investigation into anticompetitive and fraudulent conduct in the municipal bond industry.

Fraud Schemes and Conspiracies

“The individuals charged today allegedly participated in complex fraud schemes and conspiracies that subverted competition in the market for municipal finance contracts and deprived municipal bond issuers of the benefits of their investments to the detriment of the public,” said Christine Varney, Assistant Attorney Generl in charge of the Department of Justice Antitrust Division.

“This type of anticompetitive activity in our financial markets will not be tolerated and the Antitrust Division will continue to prosecute those who engage in this illegal conduct,” Varney remarked. “This includes individuals who purposely seek to obstruct the government’s investigation.”

Investment Agreements

The charged conspiracies and schemes all related to a type of contract—known as an investment agreement—and other municipal finance contracts provided to public entities, such as state, county, and local governments and agencies throughout the United States.

Major financial institutions—including banks, investment banks, insurance companies, and financial services companies—are among the providers of investment agreements and other related municipal finance contracts.

Public entitles typically hire a broker to conduct a competitive bidding process among various providers prior to awarding these agreements and contracts, according to the Justice Department.

One of the defendants, a Belgian national currently residing in Moscow, was arrested at John F. Kennedy International Airport in New York City on December 1 on a criminal complaint that was filed under seal on September 16.

The criminal complaint charged that the individual participated in a scheme to defraud a municipal bond issuer with respect to the investment of municipal bond proceeds.

Superseding Indictment

The indictment alleges that these three individuals conspired with Beverly Hills-based Rubin/Chambers, Dunhill Insurance Services Inc. (CDR), and others in order to obtain from CDR information about the prices and other information related to competiting bids. They then used the information to determine their employer's bid, according to the indictment.

Charges against CDR and some of its current and former executives were the first to be filed in the Justice Department's ongoing investigation. A superseding indictment was filed on December 7 in the case against CDR to include violations of the honest services statute in three counts alleging wire fraud.

A news release on the charges appears here on the Department of Justice Antitrust Division’s website. Further details will appear in CCH Trade Regulation Reporter.

Costco Faces False Patent Marking Claims

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

In a qui tam complaint filed on behalf of the United States, a plaintiff stated false patent marking claims by alleging that Costco marked its premium Kirkland Signature brand diapers with two expired United States patent numbers, knowing that the patents had expired, with intent to deceive the public, the federal district court in Chicago has ruled.

The false patent marking statute (35 U.S.C. §292) provides that “[w]hoever marks upon, or affixes to, or uses in advertising in connection with any unpatented article, the word `patent’ . . . for the purpose of deceiving the public” will be fined up to $500 for each offense.”

Knowledge

Costco allegedly marked its Kirkland diaper products with the expired patents that did not cover the items within the packaging. One patent allegedly had expired in October 2007 and the other in September 2009. The complaint also contained facts that could support a reasonable inference that Costco had knowledge that its Kirkland diapers were no longer covered by the patents at issue at the time of marking, the court found.

Costco allegedly had experienced in-house counsel, retained outside intellectual property legal counsel, an internal compliance officer, and a long history of patent litigation. Costco had publicly affirmed its commitment to investing in protecting its intellectual property of its Kirkland brand products.

Fraud Pleading

The claims identified the entity responsible for the alleged fraud, the conduct through which the fraud was accomplished (false patent marking), the item falsely marked, and a temporal and geographical frame of reference for the conduct at issue, according to the court.

The allegations of fraud were pleaded with the particularity required to pass muster under Rule 9(b) of the Federal Rules of Civil Procedure, the court determined.

The November 22 opinion in Englehardt v. Costco Wholesale Corp. will be reported in CCH Advertising Law Guide.

Publisher's Use of Murder Victim’s Nude Photos Violated Right of Publicity

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

In a Georgia common law right of publicity suit, the publisher of Hustler Magazine was liable for the unauthorized publication of nude photographs of murdered professional wrestler Nancy Benoit, and Benoit's estate could seek to recover punitive damages, the federal district court in Atlanta has ruled.

The appropriation of another’s name and likeness without consent and for the financial gain of the appropriator is a tort in Georgia. LFP Publishing Group did not dispute that it appropriated Ms. Benoit’s name and likeness without her consent.

Financial Gain

Contrary to LFP's contention, the photographs were published for financial gain, the court held. Hustler is sold for the images it contains, the court said. The cover of the March 2008 magazine read, “Wrestler Chris Benoit’s Murdered Wife Nude.” No reasonable juror could conclude that LFP did not publish the photographs and the article for financial gain, the court determined.

Damages

The estate produced sufficient evidence of damages as measured by the value of the use of the appropriated publicity. The evidence showed that LFP made significant profits off the March 2008 issue, the court found. Yet LFP did not pay the estate anything for the photographs.

Newsworthiness Exception

The Eleventh Circuit had already held inapplicable the newsworthiness exception to the right of publicity (Toffoloni v. LFP Publishing Group, LLC, CCH Advertising Law Guide ¶63,480). Contrary to LFP's contention, there was no reason to revisit this ruling, according to the court.

Punitive Damages

In Georgia, punitive damages may be awarded in tort cases where there is clear and convincing evidence that a defendant’s actions showed “willful misconduct, malice, fraud, wantonness, oppression, or that entire want of care which would raise the presumption of conscious indifference to consequences.” LFP argued that it acted innocently because it believed that the photographs were subject to the newsworthiness exception. However, what LFP believed at the time of publication was a question for the jury, the court concluded.

The November 23 opinion in Toffoloni v. LFP Publishing Group, LLC will be reported in CCH Advertising Law Guide.

Congress Passes Bill Limiting Application of FTC “Red Flags Rule”

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

This January, lawyers, doctors, and small businesses will most likely not have to comply with a Federal Trade Commission regulation, known as the "Red Flags Rule," which will require certain businesses to develop written identity theft prevention programs.

Yesterday, Congress passed legislation that will limit the application of the rule to financial institutions and creditors that regularly use consumer reports or furnish information to consumer reporting agencies.

The proposed "Red Flag Program Clarification Act of 2010" (S. 3987) now awaits the President's signature.

The FTC's Red Flags Rule (16 CFR Part 681) was promulgated under the Fair and Accurate Credit Transactions Act (FACTA). The rule, which is set to take effect on January 1, 2011, will require certain businesses and organizations to develop a written program that identifies and detects identity theft warning signs or "red flags."

As written, the FTC rule would apply to small businesses—such as health care providers—that do not require full payment at the time of service. However, the Red Flag Program Clarification Act of 2010 would amend the Fair Credit Reporting Act to prevent the application of the rule to entities that advance funds for expenses incidental to services provided.

FTC Chair's Statement

In a statement issued today, FTC Chair Jon Leibowitz said that he was "pleased that Congress clarified its law, which was clearly overbroad."

The chairman's statement went on to say that the rule gives businesses the flexibility to tailor their written ID theft detection program to the nature of the business and the risks it faces.

Businesses with a high risk for identity theft may need more robust procedures—like using other information sources to confirm the identity of new customers or incorporating fraud detection software. Groups with a low risk for identity theft may have a more streamlined program—for example, simply having a plan for how they’ll respond if they find out there has been an incident of identity theft involving their business.

The effective date for the Red Flags Rule has been delayed a number of times, as the agency awaited clarification from Congress or the courts. Most recently, the FTC postponed enforcement until December 31, 2010.

Reaction from Professional Associations

The American Bar Association lauded Congress for clarifying how the FTC should apply the Red Flags Rule. The ABA had sued the FTC to block the rules. The federal district court in Washington, D.C. last year ruled that the FTC lacked authority to apply its Red Flags Rules to attorneys (2009-2 Trade Cases ¶76,825).

"At last, the American legal profession has clear and final relief from attempts to solve a non-existent problem that would have created paper-pushing and raised legal costs," said ABA Chair Stephen Zack in a December 7 statement.

The American Medical Association also issued a statement on December 7, saying that "the bill will help eliminate the current confusion about the rule’s application to physicians."

Bank of America Agrees to Pay $137 Million to Avoid Charges in Bid Rigging Probe

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

As a condition of admission into the Department of Justice's antitrust corporate leniency program, Bank of America has agreed to pay a total of $137.3 million in restitution to federal and state agencies for its role in a conspiracy to rig bids in the municipal bond derivatives market.

As a result of its agreement to make full restitution, as well as its voluntary disclosure of its anticompetitive conduct and its ongoing cooperation, Bank of America will not be required to pay penalties for the bidding activity, according to a December 7 Justice Department announcement.

Antitrust Leniency Program

Bank of America reported the bidding irregularities to the Justice Department in 2004. The illegal conduct took place between 1998 and 2003. The Antitrust Division accorded Bank of America conditional leniency in 2007.

The antitrust leniency program protects applicants from criminal conviction for a violation of the U.S. antitrust laws. The program protects the first offender to come forward, so long as the company was not the originator or leader of the conspiracy and the company cooperates with the investigation and meets other obligations, including the payment of restitution.

Bank of America has now entered into restitution agreements with the U.S. Securities and Exchange Commission (SEC), the Internal Revenue Service (IRS), the Office of the Comptroller of Currency (OCC), and 20 state attorneys general.

Bank of America agreed to pay the IRS $25 million. Through its resolutions with the OCC and SEC, Bank of America will make payments of $9.2 million and $36.1 million, respectively, to the counterparties affected by the practices, according to Bank of America.

Multi-State Settlement

Bank of America has agreed to pay the state attorneys general $62.5 million in restitution and to refrain from conspiring to rig bids for municipal bond derivatives. The states will also receive $4.5 million for the costs related to the investigation.

The states involved in the multi-state settlement are: Alabama, California, Connecticut, Florida, Illinois, Kansas, Maryland, Massachusetts, Michigan, Missouri, Montana, Nevada, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, and Texas.

Text of the state settlement agreement appears here on the California Attorney General’s website.

Bank of America Statement

Bank of America said in a December 7 statement that it was “pleased to put this matter behind it, and has already voluntarily undertaken numerous remediation efforts.” The financial institution said that it: “continues to cooperate with all agencies on their inquiries into practices by various companies participating in the municipal derivatives markets during this time period.”

Ongoing Investigation

The Justice Department's ongoing investigation into bidding practices in the municipal bond derivatives market has resulted in guilty pleas by from eight executives for antitrust and related federal crimes.

Indictments have been brought against other alleged participants in the conspiracy, and a trial of Beverly Hills-based Rubin/Chambers, Dunhill Insurance Services Inc. and some of its current and former executives is expected to begin in September 2011. Municipal bonds are used by state agencies, municipalities, and others to finance a variety of projects, including school construction and street repairs.

During a conference call, Christine Varney, Assistant Attorney General in charge of the Antitrust Division, declined to indicate whether other banks were cooperating with the government on this issue, noting only that “the investigation continues apace.”

Resale Price Fixing Claims Against Mattress Maker Lacked Support

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

Consumers failed to support their resale price fixing claims against Tempur-Pedic North America, Inc., the manufacturer of visco-elastic Tempur-Pedic foam mattresses, the U.S. Court of Appeals in Atlanta has ruled.

The consumers challenged the manufacturer's practice of setting the minimum retail prices the distributors could charge for its mattresses and adhering to those minimum prices in the sales it made through its website.

The appellate court explained that vertical resale price maintenance claims had to be evaluated using rule of reason analysis. Under rule of reason analysis, complaining consumers had to show either actual or potential harm to competition. Regardless of whether the consumers alleged actual or potential harm to competition, they had to identify the relevant market in which the harm occurred.

Relevant Market

The consumers' skimpy allegations of the relevant submarket limited to visco-elastic foam mattresses were legally insufficient to support vertical resale price maintenance claims, the court ruled. The consumers argued that, because their complaint was dismissed on a Federal Rule of Civil Procedure 12(b)(6) motion, they did not have the chance to add facts in discovery which would have established visco-elastic foam mattresses as a separate relevant
product submarket.

The consumers nevertheless had the obligation to indicate that they could provide evidence plausibly suggesting the definition of the alleged submarket, the court explained. The complaint alleges, without elaboration, that “[v]isco-elastic foam mattresses comprise a relevant product market, or submarket, separate and distinct from the market for mattresses generally, under the federal antitrust laws.”

This conclusory statement merely begged the question of what, exactly, made foam mattresses comprise this submarket. The complaint provided no factual allegations of the cross-elasticity of demand or other indications of price sensitivity that would indicate whether consumerstreated visco-elastic foam mattresses differently than they did mattresses
in general.

Even if the consumers had alleged a proper relevant market, they failed to adequately allege that the retail price maintenance agreements had anticompetitive effects.

Horizontal Price Fixing

The consumers' horizontal price fixing claims against Tempur-Pedic were also rejected. They argued that the mattress maker's dual-distribution system—under which its mattresses were sold both through its authorized distributors and directly to consumers through the manufacturer's own website—constituted a horizontal price fixing conspiracy.

The consumers did not, however, meet their burden to present allegations showing why an inference that the manufacturer and its distributors entered into a price fixing agreement was more plausible than an inference that the manufacturers and distributors set prices independently and happened to set the same price because it made economic sense to do so.

Potential costs to the manufacturer of fixing prices with its distributors would have outweighed any benefits that the manufacturer would have realized by doing so, particularly where independent economic activity would have yielded the same benefits with none of the costs.

The December 2 decision is Jacobs v. Tempur-Pedic International, Inc. It will appear at 2010-2 Trade Cases ¶77,250.

Vermont Prescriber Privacy Law Violates First Amendment

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

A Vermont statute regulating the collection and use of data identifying health care providers’ prescribing patterns impermissibly restricted commercial speech in violation of the First Amendment, the U.S. Court of Appeals in New York City has held.

A district court decision (CCH Privacy Law in Marketing¶60,330) denying declaratory and injunctive relief from enforcement of the statute, sought by three data-mining companies, was reversed and remanded.

The statute banned the sale, transmission, or use of prescriber-identifiable data (“PI data”) for marketing or promoting a prescription drug unless the prescriber gave consent. The law restricted speech and did not regulate merely non-expressive conduct, the court said. Restricting the sale of prescription information was a restriction on disclosure of information, which was a regulation of speech.

Substantial State Interests

Vermont alleged that the law advanced three substantial state interests: (1) protecting the public health, (2) protecting the privacy of prescribers and prescribing information, and (3) containing health care costs.

Vermont purportedly sought to discourage marketing practices regarding new brand-name prescription drugs that may not be efficacious or which may not be more effective than generic alternatives.

The state’s asserted interest in medical privacy was too speculative to qualify as a substantial state interest, in the court’s view. Vermont had not shown any effect on the integrity of the prescribing process or the trust patients have in their doctors from the use of PI data in marketing.

Lowering Costs, Protecting Public Health

Vermont did have a substantial interest in both lowering health care costs and protecting public health, but the court held that Vermont failed to show that the statute directly and materially advanced those interests.
The statute did not directly restrict the prescribing practices of doctors or the marketing practices of pharmaceutical companies. Rather, it restricted the information available to marketers so that their practices will be less effective and less likely to influence the prescribing practices of physicians.

This indirect approach was antithetical to a long line of Supreme Court cases stressing that courts must be very skeptical of government efforts to prevent the dissemination of information in order to affect conduct.

More Limited Restriction

In addition, Vermont's interests could be served as well by a more limited restriction on commercial speech, according to the court. The statute targeted the use of PI data to market all brand-name prescription drugs, not merely new brand-name drugs or those brand-name medications for which there were no generic alternatives. Thus, the statute banned speech beyond what the state’s evidence purportedly addressed.

There were alternative means to promote its interests, such as mandating the use of generic drugs as a first course of treatment, absent a physician’s determination otherwise, for all those patients receiving Medicare Part D funds.

The decision is IMS Health Inc. v. Sorrell, CCH Privacy Law in Marketing ¶60,558.

Antitrust Agencies Defend Health Care Enforcement Efforts at Congressional Hearing

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

The FTC and Department of Justice were called upon to defend their records of antitrust enforcement in the health care industry by House Judiciary Committee Chair John Conyers (D, Mich.) at a hearing held yesterday by the Judiciary Committee’s Subcommittee on Courts and Competition Policy.

The hearing considered the role of antitrust in light of the health care reform effort. Conyers expressed concern that the enforcers were not following through with President Obama’s plan to reinvigorate antitrust enforcement in the health care area.

“Pay-for-Delay” Drug Patent Settlements

FTC Bureau of Competition Director Richard A. Feinstein delivered the FTC testimony. Chief among the anticompetitive tactics targeted by the FTC are “pay-for-delay” drug patent settlements, in which a branded drug company compensates a generic competitor for not bringing its lower-cost drug to market for a certain period of time, according to the agency’s testimony.

Agency challenges to mergers involving hospitals, drug manufacturers, and medical device makers were also discussed.

“The FTC has an important role to play: by protecting and promoting competition we can help to lower costs and improve quality,” Feinstein said. “Years of experience have shown us that continued effective antitrust enforcement is a necessary component of any plan to improve health care.”

The FTC testimony is available here at the FTC website.


Health Care Delivery, Insurance

Sharis A. Pozen, Chief of Staff and Counsel to the Assistant Attorney General in charge of the Department of Justice Antitrust Division, delivered a statement on behalf of the Antitrust Division. Pozen’s remarks focused on two areas:

(1) The importance of encouraging innovation and efficiency in health care delivery and the ways in which coordination and integration among health care providers can help achieve these goals while still preserving competitive markets; and

(2) The importance of measured, responsible antitrust enforcement in preserving open and vigorous competition in health insurance markets.

The Justice Department’s civil antitrust lawsuit against Blue Cross Blue Shield of Michigan alleging that the insurer used its dominance to impose anti-competitive “Most Favored Nation” provisions in its agreements with Michigan hospitals was cited as an example of the agency’s “measured enforcement to prevent . . . anticompetitive behavior.”

With respect to merger enforcement, Pozen warned that the Justice Department “will carefully review mergers in the health insurance industry and will continue to challenge those mergers that are likely to substantially lessen competition.”

Text of the remarks is available here on the Department of Justice Antitrust Division’s web site.


Accountable Care Organizations

Conyers spoke about the perceived disparity in prosecutorial treatment between health care providers on the one hand and health insurers on the other. He questioned the continuing need for antitrust immunity for health insurance companies, while physicians fear antitrust attack for coordinated activity.

Pozen noted that Accountable Care Organizations or ACOs are a good example of how providers might work together to provide more efficient, high-quality care without inhibiting competition. The Affordable Care Act permits the formation of ACOs to enable competing physicians and other providers to coordinate care for Medicare beneficiaries in an effort to improve quality and lower costs.

Pozen said that the Justice Department was actively working with Health and Human Services and the FTC as the ACO regulator process evolves. She added that the Justice Department was committed to “providing efficient, quick review to any new business model that plans to deliver integrated care.”

A video webcast of the hearing is available here on the House Judiciary Committee’s website.

FTC Privacy Report Proposes “Do Not Track” Mechanism for Web Users

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

The Federal Trade Commission has proposed, as part of a framework to balance the privacy interests of consumers with innovation that relies on consumer information, the implementation of a “Do Not Track” mechanism for Internet users.

Described in a preliminary staff report, the mechanism would likely be a persistent setting on consumers’ web browsers, the FTC said, and would enable consumers to choose whether to allow the collection of data regarding their online searching and browsing activities.

“Technological and business ingenuity have spawned a whole new online culture and vocabulary—email, IMs, apps and blogs—that consumers have come to expect and enjoy,” said FTC Chairman Jon Leibowitz. “The FTC wants to help ensure that the growing, changing, thriving information marketplace is built on a framework that promotes privacy, transparency, business innovation, and consumer choice.”

Failure of Self Regulation

The report—titled “Protecting Consumer Privacy in an Era of Rapid Change”—states that industry efforts to address privacy through self-regulation “have been too slow, and up to now have failed to provide adequate and meaningful protection.” The framework outlined in the report is designed to reduce the burdens on consumers and businesses.

The proposed framework also is intended to inform policymakers, including Congress, as they develop solutions, policies, and potential laws governing privacy, and to guide and motivate industry as it develops more robust and effective best practices and self-regulatory guidelines.

Leibowitz added that the FTC, in addition to making policy recommendations, “will take action against companies that cross the line with consumer data and violate consumers’ privacy—especially when children and teens are involved.”

“Privacy by Design”

To reduce the burden on consumers and to ensure basic privacy protections, the report recommends that companies adopt a “privacy by design” approach by building privacy protections into their everyday business practices. Such protections would include security measures for consumer data, limited collection and retention of such data, and reasonable procedures to promote data accuracy.

Companies also should implement and enforce procedurally sound privacy practices throughout their organizations, including assigning personnel to oversee privacy issues, training employees, and conducting privacy reviews for new products and services.

Consumer Choice

Consumers should have the opportunity to make choices about the collection and sharing of their data at the time and in the context in which they are making decisions—not after having to read long, complicated privacy policies that they often cannot find.

The report adds that, to simplify choice for both consumers and businesses, companies should not have to seek consent for certain commonly accepted practices, such as product fulfillment, fraud prevention, and legal compliance.

A “Do Not Track” mechanism would constitute a simplified means of consumer choice, the report said, allowing consumers to opt out of the collection of information about their Internet behavior for targeted ads.

Transparency

The report also recommended other measures to improve the transparency of information practices, including consideration of standardized notices that allow the public to compare information practices of competing companies. Consumers should have “reasonable access” to the data that companies maintain about them, particularly for non-consumer facing entities such as data brokers. In addition, the report proposed that stakeholders undertake a broad effort to educate consumers about commercial data practices and the choices available to them.

Text of the report is available here on the FTC website.

“Safe Harbor” Proposed

In response to the report, Senator John Kerry (D-Mass.) stated, “The Federal Trade Commission’s report should be a wakeup call for every Internet user in this country. The report confirms that many companies—both online and offline—don’t do enough to protect consumer privacy.”

Kerry continued, “The report also makes clear that properly protected information and respect for consumer trust can be good for both business and consumers.”

The senator called for the creation of FTC-approved safe harbor programs through which organizations can establish procedures to ensure compliance with standards on data protection, disclosures on information collected and the uses of such information, and the right of consumers to opt out.

“Those actors participating in safe harbor programs would be subject to FTC oversight and penalties,” Kerry said, “but because of their voluntary participation and commitment to high standards, they would be free from a private right of action and the complaint and adjudication process.”

EC Investigates Google for Abuse of Dominance

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

The European Commission (EC) announced today that it has opened an in-depth antitrust investigation into Google Inc.'s methods for displaying search results.

According to the EC announcement, the investigation will look into whether Google abused a dominant market position in online search by:

(1) Lowering the ranking of unpaid search results of so-called vertical search services and by according preferential placement of its own vertical search services;

(2) Lowering the “Quality Score" for sponsored links of competing vertical search services and thereby influencing the price paid for advertising and the corresponding rankings;

(3) Imposing exclusivity obligations on advertising partners that prevent certain types of competing ads; and

(4) Restricting the portability of online advertising campaign data to competing online advertising platforms. The EC is attempting to determine whether Google engaged in this conduct in an effort to shut out competitors.

Complaints by Search Service Providers

The EC said that the formal investigation followed complaints from search service providers. While not named in the EC announcement, the three complaining firms have been identified as U.K.-based search service and price comparison site Foundem, French legal search engine eJustice, and Microsoft-owned shopping site Ciao.

The EC noted that the investigation did not imply it had proof of any infringements.

IComp, the Initiative for an Online Competitive Marketplace, in a November 30 statement, expressed hope that the EC decision “will contribute towards the development of a healthier and more competitive online marketplace.” Foundem is among the members of the Internet business organization.

Google Response

In response to the EC announcement, Google posted a statement on its European Public Policy Blog, saying that it would “work closely with the Commission to answer their questions.” According to the post, Google “will continue to review complaints about Google's search and search advertising.”

Dealer’s Payments Were Not “Franchise Fees” under Hawaii Law

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

A jury had sufficient evidence supporting its finding that none of the alleged payments made by a motor vehicle dealer to a manufacturer constituted "franchise fees" under the meaning of the Hawaii Franchise Investment Law, a federal district court in Honolulu has determined.

Accordingly, the jury’s finding that the manufacturer did not violate the statute when it ceased distributing motor vehicles in North America and offered the dealer the option of becoming a service-only dealer was upheld. The dealer’s motions for a new trial, to amend the judgment, and for relief from the judgment, were denied.

The dealer’s main argument was that the parties’ sales and service dealership agreement constituted a franchise agreement under the Hawaii Franchise Investment Law that required the dealer to pay "franchise fees," the court observed.

Required Payments

The dealer asserted that payments for the following items constituted statutory franchise fees:

(1) signs and financial statements;
(2) advertising;
(3) bank flooring arrangements;
(4) use of the franchisor’s communication system; and
(5) training.

With respect to signs and financial statements, the dealership agreement did require the dealer to install signs and submit monthly financial statements to the manufacturer. However, the evidence showed that the dealer failed to comply with these requirements.

The owner of the dealership testified that the "signage never changed" for the duration of the business relationship. Although deficient with signage and monthly financial statements, the dealer continued to operate as the manufacturer’s dealer, suggesting that those requirements were not franchise fees, as they were not required for the right to do business with the manufacturer.

Payments to Third Parties

Payments made by the dealer for newspaper advertising were to a third party, not to the manufacturer, and did not establish that the payments were franchise fees paid for the right to do business with the manufacturer.

Similarly, payments for flooring finance arrangements were not made to manufacturer itself. The dealer was not restricted to any particular lender and ended up selecting a bank that had no special relationship with the manufacturer.

Use of Communication System

The dealer failed to establish that the required use of the franchisor’s communication system constituted a franchise fee. Evidence suggested the dealer was required to use the manufacturer’s communications system, but the dealer did not always use that system, the court found. Since the manufacturer nevertheless continued to do business with the dealer, the jury could have concluded that the manufacturer’s communications system was not required for the dealer to continue its business.

Finally, the jury did not have to credit a vague assertion that a training charge was for actual live training as opposed to, for example, software that the dealer’s personnel could have needed to refer to on a regular basis in the course of their jobs.

The decision is JJCO, Inc. v. Isuzu Motors America, Inc., CCH Business Franchise Guide ¶14,486.

Antitrust Division’s Activities Preserve and Promote Competition: Agency Official

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

A report on the Department of Justice Antitrust Division's recent activities was presented by Carl Shapiro, the Deputy Assistant Attorney General for Economics at the Antitrust Division, on November 18 at the American Bar Association Section of Antitrust Law Fall Forum in Washington, D.C.

In prepared remarks entitled “Update from the Antitrust Division,” Shapiro focused on the Division’s attempts to preserve and promote competition through criminal enforcement, civil non-merger enforcement, competition advocacy, and merger enforcement (including an explanation of the new Horizontal Merger Guidelines).

Criminal Cases

Shapiro observed that during Fiscal Year 2010, the Antitrust Division concentrated on “rooting out and prosecuting cartels and other collusive agreements.” It filed 60 criminal cases, involving 84 corporate and individual defendants, and obtained fines in excess of $550 million. While the fines obtained were down from previous years, "the Division's commitment to criminal enforcement remains steadfast," Shapiro said.

He added that of the individual defendants sentenced, 76% were given prison time, including an average 10-month prison term for foreign nationals, whose incarceration continues to be a priority of the Division.

Civil Non-Merger Suits

Shapiro stated that reviewing and challenging anticompetitive conduct “is a critical component of the Division’s mission to preserve and promote competition.” During Fiscal Year 2010, the Division resolved competitive concerns with negotiated consent decrees in four civil non-merger cases—U.S. v. Smithfield Foods and Standard Farms LLC (2010-1 Trade Cases ¶76,880); U.S. v. Idaho Orthopedic Society(2010-2 Trade Cases ¶77,142); U.S. v. Adobe Systems, Inc. (CCH Trade Regulation Reporter ¶50,982); and U.S. v. KeySpan Corporation (CCH Trade Regulation Reporter ¶50,975).

In addition, the Division filed civil antitrust lawsuits against Blue Cross Blue Shield of Michigan and (together with seven states) against American Express, MasterCard, and Visa.

In the first suit, the Division challenged “most-favored nations” (MFN) clauses in Blue Cross’s agreements with hospitals that allegedly limit the discounts the hospitals can offer to Blue Cross’s competitors. These MFN clauses raise prices, prevent other insurers from entering the marketplace, and discourage hospital discounts, Shapiro said.

The second suit challenged rules, policies, and practices imposed by the three largest credit and charge card networks in the U.S. These rules “impede merchants from promoting or encouraging the use of a competing credit or charge card with lower acceptance fees,” he explained.

MasterCard and Visa were willing to resolve these antitrust concerns at the time the Division filed the compliant, agreeing to allow merchants to offer consumer discounts and rebates; express a preference for a particular credit card; promote particular cards through communications to customers; and communicate the cost incurred by the merchant when a consumer uses a particular credit card.

Litigation continues against American Express, which has stated its intention to fully litigate the matter.

Competition Advocacy

The official trumpeted the Antitrust Division's recent competition advocacy efforts, involving a wide range of industries and topics, including telecommunications, financial markets, health care, agriculture, and patents.

Shapiro highlighted the agency's involvement in a proposal by Delta and US Airways to swap more than 300 takeoff and landing slots at LaGuardia and Ronald Reagan Washington National Airport.

The Division filed formal comments with the Department of Transportation, supporting a proposed DOT order that would permit the slot transfers, subject to the carriers’ disposal of 14 pairs of “slot interests” at Ronald Reagan Washington National Airport and 20 pairs of slot interests at LaGuardia Airport to “eligible new entrant and limited incumbent carriers.”

The divestiture of these slot interests eased concerns that the transaction would have reduced competition between Delta and US Airways on a number of routes at the two airports, thereby harming consumers.

Merger Enforcement

According to Shapiro, Hart Scott Rodino filings reached only 716 for Fiscal Year 2009, down from 2,201 during Fiscal Year 2007. Newly released figures show a 50% increase in Fiscal Year 2010 to 1,170. About 1.9% of the filings resulted in a Department of Justice Second Request. The Division challenged 19 mergers.

Shapiro discussed the Antitrust Division's recent issuance of revised Horizontal Merger Guidelines. The guidelines were the product of a lengthy and collaborative process with the Federal Trade Commission. The primary motivation behind their creation was to “promote transparency by describing more accurately how the Agencies actually evaluate horizontal mergers.”

He illustrated the principles articulated in the revised Guidelines through an analysis of the agency's investigation into the proposed merger of United Airlines and Continental Airlines and of the agency's complaint challenging the merger proposal between Baker Hughes Inc. and BJ Services Company.

Text of the prepared remarks appears here on the Antitrust Division’s website.

Insurance Agency Was Not a “Franchise” Under Arkansas Relationship Law

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

An insurance agent was not a “franchisee” of an insurance company, entitled to the protections of the Arkansas Franchise Practices Act, because she did not have the unqualified authority to sell policies or commit the company to an insurance contract other than a temporary binder policy, which could be cancelled at any time at the company’s discretion, the Arkansas Supreme Court has decided.

The state supreme court affirmed a ruling by an Arkansas trial court, granting the insurance company summary judgment on the agent’s claim that the company violated the Arkansas franchise law by terminating the agency contract.

The agent had no authority to set or change prices, as evidenced by her complaint that the insurance company continued to change policies and increase prices, resulting in her loss of business, according to the court. She had no authority to change the premium, the date on which payment was due, or the terms of the insurance policy.

She admitted that she did not sell any tangible product, that she did not charge money outside of the premium paid to the insurance company for insurance services, and that the money changing hands consisted of premiums she forwarded to the insurance company.

Thus, the evidence showed that only policies acceptable to the insurance company could be underwritten under the agent’s contract and that only the insurance company could commit itself to provide coverage, the court held.

Under the Arkansas Franchise Practices Act, the unqualified authority to sell or distribute goods or services was an essential component of a “franchise” agreement. The agent lacked that authority, the court ruled.

The November 11 decision in Gunn v. Farmers Insurance Exchange will be reported at CCH Business Franchise Guide ¶14,891.