High Court Further Delineates RICO’s Causation Requirement

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

The City of New York was not directly injured by an out-of-state vendor’s failure to file Jenkins Act reports with the tobacco tax administrator of New York State, the U.S. Supreme Court has ruled. Absent a showing that the vendor proximately caused the City’s injury (loss of excise tax revenue), the City had no RICO claims against the vendor.

In a plurality (4-3) opinion written by Chief Justice Roberts, the court concluded that proximate cause was absent because “multiple steps” separated the alleged fraud from the asserted injury.

The decision of the Second Circuit (CCH RICO Business Disputes Guide ¶11,547), which found a direct connection between the vendor’s conduct and the City’s loss, was therefore reversed. The case was remanded for further proceedings.

Jenkins Act

The federal Jenkins Act required cigarette vendors to file monthly reports with out-of-state tobacco tax administrators if consumers from the state had purchased cigarettes from the vendor. In each report, the vendors were required to identify: (1) the name and address of every state resident who had purchased cigarettes from the vendor and (2) the brands and quantities of cigarettes that each resident had purchased.

According to the City of New York, the vendor’s failure to report Jenkins Act information to the State of New York prevented the City from acquiring the information it needed to collect “tens if not hundreds of millions of dollars a year” in tobacco tax revenue from City residents who had failed to pay the tax.

Proximate Cause

In Holmes v. Securities Investor Protection Corp. (RICO Business Disputes Guide ¶7968), the Court “reiterated” that “the general tendency of the law, with regard to damages at least, is not to go beyond the first step” of the causation chain. The Court’s decisions confirmed that this general tendency applied “with full force” to proximate cause inquiries under RICO.

Because the City’s theory of causation required the Court to move “well beyond” the first step, its theory did not meet RICO’s direct relationship requirement.

More specifically, the conduct directly responsible for the City’s harm was the resident cigarette purchasers’ failure to pay municipal tobacco taxes, and the conduct constituting the alleged fraud was the vendor’s failure to file Jenkins Act reports. Therefore, the Court reasoned, the conduct that directly caused the City’s injury was distinct from the conduct that the City identified as fraudulent. The relationship between fraud and injury was too attenuated.

Link Between Fraud and Injury

The City’s claim suffered from the same defect that plagued the plaintiff’s claim in Anza v. Ideal Steel Supply Corp. (RICO Business Disputes Guide ¶11,076). In Anza, the Court determined that a steel company’s alleged fraud (the failure to charge and remit sales tax to the State of New York) did not proximately cause a competitor’s injury (the inability to compete based on price) because the link between the two was “attenuated.”

In fact, the disconnect in this case between the vendor’s alleged fraud and the City’s asserted injury was even sharper than it was in Anza. In this case, the City’s theory of liability rested on separate actions (failing to file Jenkins Act reports and failing to pay cigarette taxes) that were carried out by separate parties (the vendor and the vendor’s customers who resided in New York City). In Anza, the steel company’s theory of liability rested on separate actions that were carried out by the same party (the defendant steel company).

Put simply, the vendor had an obligation to file the Jenkins Act reports with New York State, not with New York City, and the City’s harm was directly caused by the cigarette purchasers, not by the vendor.

Incentive to Sue

One consideration that the Court has used to analyze RICO’s “direct relationship” requirement was “whether better situated plaintiffs would have an incentive to sue.” In this case, the State of New York was better situated than the City to seek recovery from the vendor. Further, the State had an incentive to sue because it imposed a tax on cigarettes ($2.75 per pack) that was nearly double the City’s tax ($1.50 per pack).

Foreseeability

Foreseeability was not used to evaluate proximate cause. Significantly, proximate cause did not turn on foreseeability in Anza, and no party asked the court to revisit that decision. The Court’s precedents were clear: the focus of a proximate cause inquiry in the context of RICO was the directness of the relationship between the conduct and the harm. Foreseeability was not part of the inquiry.

Systematic Scheme

The City could not escape the attenuated relationship that existed between the alleged fraud and the alleged injury by arguing that the vendor had engaged in a “systematic scheme” to defraud the City of tax revenue and by asserting that this scheme had “embraced all those indirectly harmed” by the vendor’s conduct.

If the City could do that, the Court’s proximate cause precedent for RICO actions would become a “mere pleading rule.” Because the only fraudulent conduct alleged was a Jenkins Act violation, the City had to show that the vendor’s failure to file Jenkins Acts reports with the State of New York had led directly to the City’s injuries. This it could not do.

Dissent

The dissenting Justices concluded that the vendor’s failure to provide Jenkins Act reports to the State of New York had proximately caused New York City to lose tobacco tax revenue. In addition to characterizing the State as a “conduit” that was “roughly analogous to a postal employee,” the dissenting Justices incorporated intent and foreseeability into their proximate cause analysis.

According to the dissent, finding common-law cases that denied liability for a wrongdoer’s intended consequences was difficult, particularly where, as here, the consequences were foreseeable.

The dissenting Justices also opined that the concept of directness in tort law was used to “expand liability (for direct consequences) beyond what was foreseeable, not to eliminate liability for what was foreseeable.”

Finally, the Justices noted that Congress had modeled RICO §1964(c) on the civil action provision of the federal antitrust laws. They found no antitrust analogy, however, that suggested a lack of causation given the circumstances of this case.

The January 25 decision, Hemi Group LLC v. City of New York, is available here on the U.S. Supreme Court web site. It will appear in the February edition of CCH RICO Business Disputes Guide.

Direct Marketing Association Releases New Guidelines for Endorsements, Testimonials

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

The Direct Marketing Association (DMA) announced on January 25 that its Board of Directors has approved recommended changes to DMA’s Guidelines for Ethical Business Practice for testimonials and endorsements in all channels.

DMA developed and recommended these amendments to keep the guidelines consistent with the Federal Trade Commission’s Guides for Testimonials and Endorsements, as revised in October 2009. (For further information on the FTC guides, see Trade Regulation Talk, October 5, 2009.)

Typical Results/Performance

Under DMA’s new Guidelines, marketers must clearly and conspicuously disclose the generally expected or typical results/performance of the advertised products or services, if the claims made are not typical of what a user could expect under normal circumstances.

This requirement contrasts with the previous version of DMA’s Guidelines and the 1980 version of the FTC Guides, both of which allowed marketers to describe unusual results in a testimonial as long as they included a disclaimer such as “results not typical.” DMA’s revised Guidelines and the FTC Guides no longer allow for this safe harbor.

Endorser Disclosures

DMA’s revised Guidelines also reinforce the need for marketers to disclose any material connections between marketers and their endorsers that the consumer would not expect.

A material connection refers to a connection between the endorser and marketer that materially affects the weight or credibility of the endorsement, such as payments or free products or an employer/employee relationship. This includes endorsements that are conveyed by bloggers or other “word-of-mouth” marketers.

Celebrity Endorsements

DMA’s Guidelines also address celebrity endorsements. Marketers should ensure that their celebrity endorsers disclose their relationships with marketers when making endorsements outside the context of traditional advertisements, such as on talk shows or in social media, and they should not knowingly make statements that are false or unsubstantiated.

Blogs, Social Networking, Word-of-Mouth Marketing

The Guidelines apply to both traditional and new interactive media, including but not limited to social networking sites, online message boards, blogging, and “word-of-mouth” marketing. The Guidelines are enforced by the DMA’s Committee on Ethical Business Practices through its casework process.

Further details on the revised DMA guidelines will appear in Do’s and Don’ts in Advertising and CCH Advertising Law Guide.

Premerger Notification Thresholds Adjusted Downward for 2010

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

The FTC has revised its thresholds for acquisitions and mergers subject to the report-and-wait requirements of the Hart-Scott-Rodino (HSR) Act. These thresholds, which will become effective February 22, 2010, were adjusted downward for the first time based on the change in the Gross National Product (GNP).

Pursuant to the HSR Act, plans for large acquisitions and mergers must be disclosed to the Department of Justice and the FTC to enable the federal antitrust enforcement authorities to examine their competitive effects and have an opportunity to challenge them under the antitrust laws prior to consummation. Only the transactions that exceed the jurisdictional thresholds need to be reported on the Notification and Report Form.

Revised Thresholds

Under the revised thresholds, acquisitions that result in an acquirer holding an aggregate total amount of the voting securities and assets of the acquired party in excess of $253.7 million will be reportable (down from the current $260.7 million), unless otherwise exempted. No transaction resulting in an acquiring person holding $63.4 million or less (down from $65.2 million or less) of assets or voting securities of an acquired person will need to be reported.

The reportability of transactions falling between these boundaries is based on the “size of person” test. Under the “size of person” test, transactions valued at more than $63.4 million but less than $253.7 million will be reportable if one party has sales or assets in excess of $126.9 million and the other $12.7 million (down from $130.3 million and $13 million, respectively).

Filing Fees

Along with notifying the agencies, parties must pay premerger filing fees. The fees are based on the size of the transaction. Under the revised thresholds, a $45,000 filing fee will be required for reportable transactions valued at less than $126.9 million (down from $130.3 million); a $125,000 filing fee will be required for reportable transactions valued at least $126.9 million but less than $634.4 million (down from $651.7 million); and a $280,000 filing fee will be assessed on the largest transactions.

Interlocking Directorates

The FTC has also released its annual recalculation of profits and sales thresholds applicable in determining whether an individual can serve as an officer or director of two or more competing corporations.

Under the new threshold amounts, effective January 21, 2010, interlocking management is prohibited if each of the companies has capital, surplus, and undivided profits in excess of $25,841,000 and the competitive sales of each corporation exceed $2,584,100. These figures were also adjusted downward. Under Sec. 8 of the Clayton Act, the FTC is required to recalculate the figures annually based on changes in the GNP.

Further information regarding the HSR thresholds will appear at CCH Trade Regulation Reporter ¶ 4231. An explanation of the rules for interlocking directorates will appear at CCH Trade Regulation Reporter ¶ 4575.

Details are available here at the FTC website.

Ticketmaster/Live Nation Combination Gains Antitrust Approval

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

In order to proceed with its proposed acquisition of concert promoter Live Nation, Inc., ticket seller Ticketmaster Entertainment, Inc. will be required to license ticket software to Anschutz Entertainment Group (AEG) and divest a subsidiary ticketing business, Paciolan, to either Comcast-Spectacor or another suitable buyer. Ticketmaster has also agreed to subject itself to court-ordered restrictions on its behavior.

The remedies are intended to preserve the competition that Ticketmaster faced from Live Nation, a new ticketing entrant. By 2009, Live Nation, which was Ticketmaster’s largest customer for primary ticketing services, was providing primary ticketing services to more than 15 percent of the capacity at major U.S. concert venues, according to the Justice Department.

Federal, State, Canadian Antitrust Concerns

The concessions would resolve U.S., Canadian, and state antitrust concerns over the combination of Ticketmaster—the largest provider of ticketing services in the world—and Live Nation—the world’s largest promoter of live concerts.

The U.S. Department of Justice and 17 state attorneys general filed a civil antitrust lawsuit on January 25 in the federal district court in Washington, D.C., challenging the merger. At the same time, the federal and state enforcers filed a proposed consent decree, which if approved, would resolve the suit.

The Canada Competition Bureau announced the same day that a consent agreement was filed with the Competition Tribunal to resolve that country’s concerns over the combination. The Justice Department and Canada Competition Bureau said in statements that they cooperated closely throughout the investigation and worked together to obtain the same remedy to preserve competition in both countries.

Licensing Ticketing Software

The settlements require Ticketmaster to license a copy of its primary ticketing software to AEG. AEG is Live Nation’s principal competitor and an operator of some of the most important concert venues in the country. With a copy of the Ticketmaster software, AEG will be able to market a ticketing system that is an attractive choice to venues, according to the Justice Department. AEG will have incentives similar to Live Nation to provide better services at lower prices.

Within five years, AEG can purchase the Ticketmaster ticketing software, decide to create its own software, or partner with a ticketing company other than Ticketmaster. The Justice Department said that this remedy enhances short and long term competition in the primary ticketing market.

Divestiture of Subsidiary

The settlement requires Ticketmaster to divest more ticketing than it will gain through its acquisition of Live Nation, according to the Justice Department. The settlement requires the divestiture of the Paciolan assets within 60 days. Paciolan is used by hundreds of venues to sell tickets including major concert venues around the country.

Comcast-Spectacor, a sports and entertainment company with management relationships with a number of concert venues and ticketing experience, has already signed a letter of intent to purchase those assets. If the assets are not sold to Comcast-Spectacor, then they must be divested to a buyer suitable to the Department of Justice and the Canada Competition Bureau.

Behavioral Remedies

The settlements also contain conduct restrictions. According to the Justice Department, the settlement provides tough anti-retaliation provisions that will keep the merged company in check and put them under a court order for ten years.

“The linked structural and behavioral remedies in this settlement preserve and protect competition, while allowing the parties to achieve any consumer benefits that are associated with the merger, Christine A. Varney, Assistant Attorney General in charge of the Department of Justice Antitrust Division, said in remarks prepared for delivery at a January 25 briefing, announcing the settlement.

Details of the complaint and proposed consent decree in U.S. v. Ticketmaster Entertainment Inc. and Live Nation Inc., 1:10-cv-00139, appear here at the Daprtment of Justice Antitrust Division website. Further details will appear in CCH Trade Regulation Reporter.

Other Recent Merger Enforcement Activity

The Ticketmaster/Live Nation is the most high profile merger action announced recently by the Antitrust Division recently; however, there has been a recent uptick in merger-related developments at the agency.

On January 22, the Department of Justice, joined by three state attorneys general, filed an action in the federal district court in Milwaukee, challenging Dean Foods Company’s April 2009 acquisition of Foremost Farms USA’s Consumer Products Division.

The action is notable because the acquisition has been consummated and the transaction was not reportable under the Hart-Scott-Rodino Antitrust Improvements Act. The lawsuit not only seeks to undo the acquisition of the two dairy processing plants, but also seeks to require Dean Foods to notify the Justice Department at least 30 days prior to any future acquisition involving a milk processing operation.

Text of the complaint in U.S. v. Deans Foods Co. appears here on the Department of Justice Antitrust Division website.

A day earlier, the Antitrust Division announced that Smithfield Foods Inc. and Premium Standard Farms LLC agreed to pay $900,000 in civil penalties to settle “gun jumping” charges. A proposed consent decree, awaiting approval in the federal district court in Washington, D.C., would resolve charges that, while the merger was pending, Smithfield exercised operational control over a significant segment of Premium Standard’s business. The Justice Department is not challenging the underlying merger, which the companies closed in May 2007.

Further details regarding U.S. v. Smithfield Foods, Inc. appear here on the Department of Justice Antitrust Division website.

In another Justice Department action, which was filed in 2007, newspaper publishers Daily Gazette Company and MediaNews Group Inc. (now known as Affiliated Media Inc.) agreed to restructure a newspaper joint operating arrangement and take other steps to restore competition under the terms of a proposed consent decree filed in the federal district court in Washington, D.C.

The proposed consent decree and other documents in U.S. v. Daily Gazette Co. are available here on the Department of Justice Antitrust Division website.

Cruise Passengers' State Unfair Trade Practices Act Claims Preempted by Admiralty Law

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

Art purchasers could not maintain Washington Consumer Protection Act, Connecticut Unfair Trade Practices Act, and Florida Deceptive and Unfair Trade Practices Act claims against a seller of art at auctions on cruise ships that were governed by admiralty law, according to the federal district court in Seattle.

The purchasers contended that the art dealer made misrepresentations regarding the value and authenticity of works being sold at auctions conducted on cruise ships in international waters. However, claims brought under state unfair trade practices laws were preempted by admiralty law.

The purchaser argued that admiralty jurisdiction was inapplicable because the conduct at issue occurred on both land and sea. However, the location and connection tests for admiralty jurisdiction were satisfied.

Location Test

The location test was satisfied because the tort giving rise to the claims occurred on navigable waters, the court held. The purchasers claimed that the dealer made misrepresentations about the works being sold at auction and that they relied on these misrepresentations to their detriment. The auctions were held, the misrepresentations were allegedly made, and the purchasers contracted to pay for the artworks on cruise ships in international waters. I was immaterial whether the misrepresentations were repeated on land and where the artwork was delivered.

Connection Test

Applying the connection test, the court held (1) that the activity alleged by the purchasers had a substantial relationship to traditional maritime activities and (2) that the tort at issue had a potentially disruptive impact on maritime commerce. The fact that auctions are commonly part of the “cruise ship experience” satisfied the first part of the test. The conduct alleged had a potentially disruptive impact on maritime commerce since public knowledge of fraudulent conduct on cruise ships could harm the industry.

Because the damages provisions o0f the Washington, Connecticut, and Florida unfair trade practices laws provide for the recovery of attorneys fees and trebled damages, they conflicted with established admiralty law and were therefore preempted.

Conduct Occurring Wholly Outside State

The purchasers could not state a Florida Deceptive and Unfair Trade Practices Act (DUTPA) claim because the statute was preempted by the Commerce Clause, the court ruled. The dealer argued that the DUTPA was preempted by the Commerce Clause because the conduct occurred in international waters. The Commerce Clause precludes the application of a state statute to commerce that takes place wholly outside of a state’s borders, whether or not the commerce has effects within the state.

Applying the DUTPA to conduct that occurred in international waters would result in the regulation of commerce wholly outside Florida’s boundaries and would impose inconsistent regulatory schemes on trading partners.

The decision is In re: Park West Galleries, Inc. Litigation, CCH State Unfair Trade Practices Law ¶31,976.

License Agreement Was Not “Franchise” Under FTC Rule

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

An agreement that permitted a dealer to produce, sell, and install a licensor’s patented and trademarked gutters in a limited territory was not a "franchise" under the meaning of the FTC franchise disclosure rule, a federal district court in Florence, South Carolina, has ruled.

Thus, the dealer could not proceed with its claim that the licensor violated the South Carolina "little FTC Act" by failing to provide it with a disclosure statement as required by the FTC rule.

The licensor notified the dealer in 2001 that it was terminating their agreement and requested the payment of accrued royalties and the return of a gutter-fabricating machine, as required by the agreement. When the dealer failed to comply, the licensor filed the instant suit, seeking injunctive relief and asserting other claims.

Subsequently, the dealer asserted various counterclaims—including one brought under the South Carolina “little FTC Act”—and continued to use the fabricating machine without paying royalties during the eight years the suit has been pending in both state and federal court.

Caption of Agreement

The actual contract was captioned as a license agreement and had been described by both a South Carolina appellate court and the South Carolina Supreme Court as a license agreement. However, that was not determinative of whether a franchise agreement existed.

As noted by the dealer, an FTC staff advisory opinion provided that "[w]hether a business relationship constitutes a franchise, is not dependent upon what the parties call the relationship …[r]ather, a relationship is covered by the Franchise Rule if it satisfies the definitional elements of a franchise set forth in the Franchise Rule" (FTC Informal Staff Advisory Op. 98-4, 1998, CCH Business Franchise Guide ¶6493).

“Franchise” Definition

In determining whether a commercial relationship constitutes a franchise for purposes of the FTC rule, courts have looked to see (1) whether the relationship involved the distribution of goods or services associated with a franchisor’s trademark or trade name; (2) whether the franchisor had authority to exert a significant degree of control over the franchisee’s method of operation, or provide significant assistance in the franchisee’s method of operation; and (3) whether the franchisor must pay at least $500 within six months after the franchise business began.

The first prong of the analysis was not in dispute, as the agreement involved the sale or distribution of goods associated with the licensor’s trademark. However, as to the second prong, the controls or assistance had to be related to the franchisee’s entire method of operation, not merely its method of selling a specific product or products which represented a small part of the franchisee’s business, according to the court.

Control Over Method of Operation

The dealer pointed to numerous terms from the agreement—including limitations on territory, limitations on the ability to sell the product through lumberyards and home centers, and accounting and sales reporting requirements—as evidence that the licensor exercised a great deal of control over the dealer’s method of operation. However, it was readily apparent from the terms of the agreement that these limitations only restricted the dealer’s operations with respect to the gutter product line, the court determined.

It was not disputed that the sale and installation of those gutters was but one of multiple products and services provided by the dealer. Thus, the level of control exerted by the licensor over the dealer’s method of operation was not significant for purposes of the FTC franchise rule, the court held.

Franchise Fee

There was no evidence that any franchise fee was paid to the licensor by the dealer as required by the third prong of the analysis, the court determined. Although the dealer paid the licensor a sum of money at the inception of the business relationship, that payment was made in exchange for the purchase of the gutter-fabricating machine. It was not in the form of a franchise fee as required by the rule. Thus, the agreement was not a franchise as a matter of law.

Therefore, the dealer was denied partial summary judgment on its "little FTC Act" counterclaim. Even if the business relationship between the parties was a franchise, the dealer still would be required to establish that the failure to comply with the FTC franchise rule constituted a per se violation of the Act, an issue on which the dealer failed to provide persuasive authority, the court noted.

The decision is Englert, Inc. v. LeafGuard USA, Inc., CCH Business Franchise Guide ¶14,297.

Cable TV Subscribers May Bring Class Antitrust Action Against Provider

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

A proposed class of approximately two million non-basic cable television programming service customers in the Philadelphia area were entitled to proceed as a class with antitrust claims against their cable provider, Comcast Corporation, because they sufficiently demonstrated that common issues of law and fact predominated over individual matters in the litigation, the federal district court in Philadelphia has ruled. The predominance requirement was the only certification issue remaining in dispute.

Sherman Act Claims

The class representatives alleged a per se Sherman Act, Sec. 1 claim based on market allocation and a rule of reason Sherman Act Sec. 1 claim that certain transactions with other programming providers amounted to contracts and conduct in restraint of trade.

In addition, they alleged a Sherman Act Sec. 2 claim of monopolization and attempted monopolization. The attempted monopolization claim was based on anticompetitive conduct not only in the cable transactions, but also in regard to the provider's:

(1) Refusal to deal with a potential competitor,

(2) Substantial interference with the potential competitor's access to the contractors needed to build competing cable systems, and

(3) Pricing campaigns designed to prevent or destroy competition from the potential competitor.

The subscribers had previously been granted class certification in 2007 (2007-1 Trade Cases ¶75,696). Reconsideration of that decision was granted in light of an appellate holding in a hydrogen peroxide price fixing suit (2008-2 Trade Cases ¶76,453), suggesting that trial courts had been applying too lenient a standard of proof to the issue of whether proposed class plaintiffs would be able to use common evidence to prove antitrust impact.

Antitrust Impact

In the instant suit, the proposed class offered sufficient expert testimony to meet its burden of demonstrating that the element of antitrust impact was capable of proof at trial through evidence that was common to the class rather than individual to its members, the court said.

The common evidence of antitrust impact alleged by the class included swaps and transactions in the relevant geographic market that eliminated competition and resulted in increased prices, as well as the clustering of the Philadelphia market and regional sports programming content that led to decreased competition from direct broadcast satellite (DBS) competitors and, consequently, higher prices for all class members.

Geographic and Product Markets

The expert offered ample basis in support of his relevant geographic market definition and his market structure analysis to show that Comcast possessed market power in the geographic and product markets, the court found.

The court did, however, reject the expert’s theory of market allocation based on an allegation that cable companies acquired by Comcast had previously-competed for the award of original cable franchises, as well as a contention that the non-compete clauses contained in the acquisition agreements made reentry by the acquired firms into the Philadelphia market unlikely.

A market performance analysis, which offered several economic explanations for Comcast's ability to charge higher prices, included at least one theory susceptible to proof at trial through available evidence common to the class.

Anticompetitive Effects

The class failed to demonstrate that three of the expert’s contentions regarding the anticompetitive effects of Comcast’s clustering activity could be proven through common evidence:

(1) That its clustering activity made it economically feasible for the company to withhold regional sports programming from its competitors, resulting in reduced penetration rates by DBS competitors;

(2) That it reduced benchmark competition, on which customers rely to compare the prices charged by competitors in a market; and

(3) That it increased Comcast’s bargaining power in its negotiations with its content providers, such as cable networks, which allowed Comcast to negotiate lower prices for its content.

The class met its burden of demonstrating that Comcast’s clustering activity affected prices by reducing the extent of competition provided by overbuilders. The class successfully showed that the presence of an overbuilder constrained cable prices, the court noted.

Damages

Further, the subscribers made an adequate showing that there was a common methodology available to measure and quantify damages on a class-wide basis. Their damages expert's econometric analysis, which estimated benchmark prices against which to compare actual prices during the relevant period in the Philadelphia market, was appropriate, the court decided. His use of the national average DBS penetration rate for Comcast markets was a valid screen for the model.

The decision is Behrend v. Comcast Corporation, 2010-1 Trade Cases ¶76,869.

New Jersey Expands Coverage of Franchise Practices Act

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide, and John W. Arden.

Legislation to extend protections of the New Jersey Franchise Practices Act to wholesale distribution businesses was signed into law on January 16.

The state expanded the coverage of its franchise relationship/termination law by revising the concept of “place of business” within the statutory definition of “franchise.”

Amendments contained in Assembly Bill No. 2491 (Chapter No. 235) were a reaction to the legislature’s finding that “the courts have in some cases more narrowly construed the Franchise Practices Act than was intended by the Legislature.”

Specifically, the legislation changed the previous “franchise” definition, which covered distribution businesses that required customers to come to its “place of business” to buy goods but did not cover distribution businesses that incurred the extra burden of going to its customers to make sales and deliver products.

The previous version defined “place of business” as “a fixed geographical location at which the franchisee displays for sale and sells the franchisor’s goods or offers for sale and sells the franchisor’s services. Place of business shall not mean an office, a warehouse, a place of storage, a residence or a vehicle.”

The enactment adds the following clause (in italics) to the last sentence of the definition:

“Place of business shall not mean an office, a warehouse, a place of storage, a residence or a vehicle, except that with respect to persons who do not make a majority of their sales directly to consumers, `place of business’ means a fixed geographical location at which the franchisee displays for sale and sells the franchisor’s goods or offers for sale and sells the franchisor’s services, or an office or a warehouse from which franchisee personnel visit or call upon customers or from which the franchisor’s goods are delivered to customers.”

The amendment was effective immediately. Text of the amending law appears here on the website of the New Jersey Legislature.

“Pay-for-Delay” Deals Keep Generic Drugs Off Market, Cost Consumers Billions: FTC Study

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

“Pay-for-delay” patent litigation settlement agreements cost U.S. consumers an estimated $3.5 billion per year, according to a study issued by the Federal Trade Commission on January 13.

Under these agreements, brand-name drug makers pay their generic competitors to keep cheaper alternatives off the market. As such, the agreements are a “win-win” for the drug companies, but a losing proposition for consumers, who miss out on generic pricing that can be a much as 90 percent less than brand prices, according to the FTC staff.

The study found that the number of agreements with payment and delay have increased from zero in 2004 to a record 19 agreements in Fiscal Year 2009. According to the study, the cost to consumers from “pay-for-delay” deals is an estimated $3.5 billion per year—or $35 billion over 10 years.

The study also found that settlement deals featuring payments by branded drug firms to generic competitors kept generics off the market for an average of 17 months longer than agreements that do not include a payment.

Most of the agreements reached since 2005 are still in effect and currently protect at least $20 billion in sales of brand-name drugs from generic competition.

Text of the FTC staff study (“Pay-for-Delay: How Drug Company Pay-Offs Cost Consumers Billions”) is available here on the FTC website.

At a joint press conference announcing the release of the study, FTC Chairman Jon Leibowitz and several members of Congress—including Representatives Chris Van Hollen (D, Md.), Bobby Rush (D., Ill.), and Mary Jo Kilroy (D, Ohio)—renewed their call for legislation that would put an end to such patent settlements.

Chairman Leibowitz said that these agreements force consumers to pay inflated price or to forgo their medication. He urged Congress to adopt a provision to stop these agreements as part of the health care reform bill.

“Ending this practice as part of health care reform is one simple, effective, and straightforward way for Congress to help control drug costs,” the Chairman said.

Justices Needle Counsel in Oral Argument of NFL Licensing Antitrust Case

This posting was written by John W. Arden.

While NFL teams prepared to do battle in league divisional playoff games, lawyers clashed in the U.S. Supreme Court last Wednesday on whether the NFL and its 32 teams engaged in an illegal antitrust conspiracy by granting an exclusive trademark license to apparel manufacturer Reebok International.

On January 13, the Supreme Court heard arguments on behalf of the league, a complaining apparel manufacturer (American Needle, Inc.), and the Solicitor General.

Under review was a decision by the U.S. Court of Appeals in Chicago, rejecting American Needle’s Sherman Act Section 1 claim on the ground that the league and teams were acting as a single entity when collectively licensing their intellectual property through a jointly-owned licensing affiliate (American Needle, Inc. v. National Football League, 2008-2 Trade Cases ¶76,259).

In its petition for review, American Needle asked:

(1) Whether the league and its teams were a single entity exempt from rule of reason claims under Section 1 of the Sherman Act “simply because they cooperate in the joint production of NFL football games, without regard to their competing economic interests, their ability to control their own economic decisions, or their ability to compete with each other and the league” and

(2) Whether the league’s license agreement with Reebok—under which the teams agreed to refrain from competing with each other in the licensing and sale of apparel—was subject to a rule of reason claim.

The league and its teams also asked the Supreme Court to review the decision, on the grounds that the federal circuit courts were divided on the question and in order to secure a uniform rule recognizing the single-entity nature of the NFL as a highly integrated joint venture.

The FTC and Department of Justice Antitrust Division had filed an amicus brief, urging the Court to deny review.

American Needle’s Argument

Opening the argument was Glen D. Nager, representing American Needle, who stated that “there is a longstanding consensus, judicial and legislative, that agreements among sports teams about whether and how they will participate in the marketplace is subject to scrutiny under the Sherman Act, Section 1.”

He referred to NCAA v. Board of Regents of the University of Oklahoma (1984-2 Trade Cases ¶66,139) as most directly on point. “In that case, the Court held that a policy of the NCAA that restricted the ability of member institutions of the NCAA to sell TV rights violated Section 1. Just as with the NFL, the decisions of the NCAA were ultimately controlled by the vote of its members, and for that reason, the Court held that the NCAA was a horizontal restraint.”

Some of the justices questioned Nager about what kind of joint action by the league—such as scheduling games or prohibiting teams from playing outside the league—would not be subject to scrutiny under the rule of reason.

Justice Breyer went farther, arguing that there might not be competition between the teams in the market for licensed apparel, since fans of a particular team were not likely to purchase items identified with a rival team.

Finally, Justice Scalia asked whether the only issue was whether the lower court was wrong to dismiss the suit on the ground of unitary operation by the league. When Nager answered in the affirmative, Justice Scalia asked “Well, why am I worrying about this other stuff?” Nager replied “Because Counsel has an obligation to respond to questions.”

On the issue of unitary operation, Nager answered that the exclusive license constituted concerted activity because it was “between separately owned and controlled businesses.”

Solicitor General’s Perspective

Malcolm Stewart argued on behalf of the United States as amicus curiae, supporting neither party’s theory.

He focused on “a rather mundane aspect of the NFL commissioner’s powers”—that is, the power to incur expenses to carry on the ordinary business of the league. This might include renting office space, hiring employees, and procuring supplies. If the commissioner decides from which company to procure supplies, “our view is that that’s the conduct of a single entity,” he observed.

It was the delegation of authority to the commissioner that would be subject to a Section 1 challenge, rather than the commissioner’s decision to grant a license to a single licensee or multiple licensees, Stewart indicated. It would be “highly unlikely that such a challenge would prevail.” Chief Justice Roberts wondered why that would be so.

NFL’s Position

Gregg H. Levy, arguing on behalf of the NFL, stated that the formation of a sports league—like the formation of any joint venture—may be subject to scrutiny under Sherman Act Sction 1. However, in this case, there was no challenge to venture formation.

“There is no dispute that the NFL, including its licensing arm, NFL Properties, is a lawful venture. If venture formation is not an issue, then decisions by the venture about the ventures’s product are unilateral venture decisions, unilateral venture actions. They are not concerted actions of the—of the venuture’s members.”

Justice Kennedy then asked a series of questions regarding whether the sales of NFL apparel was considered at the time the league was formed and even whether that was a relevant inquiry.

Levy said that the decision to use licenses of league intellectual property as a promotional tool goes back to the 1960s. Upon questioning by Justice Sotomayor, he said that there was some exploitation of intellectual property by franchises prior to the creation of NFL Properties in 1963.

Levy explained that the purpose of licensing was to promote the game and that NFL teams were not independent sources of economic power in generating the game. However, Justice Scalia observed that the purpose of the licensing could be to make money.

“But—but don’t tell me that . . . absent this agreement, there would not be an independent, individual incentive for each of the teams to sell as many of its own . . . shirts or helmets as possible.”

According to Levy, the purpose of the licensing is “to promote the attractiveness of the game product, to get more people interested in watching the games on television, to get more people interested in buying tickets to the game.”

Justice Scalia disagreed and said that could be a triable issue.

Justice Sotomayor later summarized:

“I’m very swayed by your arguments, but I can see a counterargument that promoting T-shirts is only to make money. It doesn’t really promote the game. It promotes the making of money. And once you fix prices for making money, that is a Sherman Act violation.”

Text of the 65-page transcript in American Needle, Inc. v. National Football League appears here on the U.S. Supreme Court website.

Second Circuit Revives Consumers’ Price Fixing Claims Against Major Music Labels

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

Consumers who claimed they were overcharged for Internet music can proceed with an antitrust action against the country’s largest music recording companies for conspiring to fix prices and terms of use for music sold over the Internet, the U.S. Court of Appeals in New York City has decided.

Judgment in favor of the defending music recording companies was vacated, and the matter was remanded to the district court for further proceedings.

The federal district court in New York City in October 2008 dismissed the action (2008-2 Trade Cases ¶76,338), holding that the complaint did not state a claim under the U.S. Supreme Court’s decision in Bell Atlantic Corp. v. Twombly (2007-1 Trade Cases ¶75,709).

The district court concluded that the alleged facts, considered alone and collectively, did not place the defendants' conduct “in a context that raise[d] a suggestion of a preceding agreement,” as Twombly required.

Parallel Conduct

According to the appellate court, the complaint alleged parallel conduct. The consumers alleged that the defendants formed joint ventures to sell music online—MusicNet and pressplay—in an effort to control the price and terms of distribution for Internet music.

When the defendants eventually began to sell Internet music through entities they did not own or control, they allegedly agreed to a wholesale price floor for songs, and enforced these price floors through most favored nation clauses (MFNs) in their license agreements. The MFN agreements specified that the retailers had to pay each defendant the same amount per song, according to the plaintiffs.

Suggestion of a Preceding Agreement

These allegations of parallel conduct were placed in a context that raised a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action, the appellate court held.

The court pointed to the plaintiffs’ contention that the defendants—EMI, Sony BMG Music Entertainment, Universal Music Group Recordings, Inc., and Warner Music Group Corp.—together controlled over 80 percent of digital music sold to end purchasers in the United States. In addition, the plaintiffs alleged behavior that would plausibly contravene each defendant’s self-interest “in the absence of similar behavior by rivals.”

The court noted that the defendants would have acted contrary to their interests if they sold Internet music at high prices and with unpopular, restrictive terms through their joint ventures. A prominent computer industry magazine had suggested that “nobody in their right mind will want to use” the joint ventures’ services. Moreover, the alleged price fixing was the subject of state and federal investigations.

The appellate court rejected the defendants' arguments that the claims had to be dismissed because the plaintiffs failed to allege facts that tended to exclude independent self-interested conduct as an explanation for the defendants’ parallel behavior and failed to identify the specific time, place, or person related to each conspiracy allegation. Such standards were not imposed on the plaintiffs, according to the appellate court.

Application of Dagher

The appellate court also found that the U.S. Supreme Court’s decision in Texaco Inc. v. Dagher (2006-1 Trade Cases ¶75,143) did not support dismissal in this case. Dagher’s holding that a lawful joint venture’s pricing policy was not a per se illegal price fixing agreement between competitors was inapplicable.

The plaintiffs challenged the MusicNet and pressplay joint ventures as shams. Even if the joint ventures were presumed lawful, the plaintiffs were still free to challenge their activities pursuant to the rule of reason.

The text of the January 13, 2010, decision in Starr v. Sony BMG Music Entertainment, No. 08-5637-cv, will appear at 2010-1 Trade Cases ¶76,866.

Price Discrimination Judgment Against Food Manufacturer, Food Service Vacated

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

Because a complaining regional food distributor and the world’s largest food service management company were not “competing purchasers” for purposes of the Robinson-Patman Act, the U.S. Court of Appeals in Philadelphia has reversed a judgment in favor of the complaining distributor on its price discrimination claims against food manufacturer Michael Foods, Inc. and favored food service management company Sodexo, Inc.

The complaining distributor, Feesers, Inc., could not satisfy the competitive injury requirement of a prima facie case of price discrimination under Sec. 2(a) of the Robinson-Patman Act.

Because a prima facie case of price discrimination under Sec. 2(a) could not be established against Michael, Sodexo could not be held liable for inducement under Sec. 2(f) of the Act. The appellate court instructed the district court to enter judgment as a matter of law for
Michael and Sodexo.

Competing Purchasers

“[T]he timing of the competition and the nature of the market” compelled the appellate court to conclude that Feesers and Sodexo were not competing purchasers. The setting for the dispute was the food service industry.

The appellate court explained that the food service industry consists of a three-tier distribution system. Manufacturers sell products to distributors, who resell those products to operators, including self-operators, and food service management companies.

Feesers sold food to self-operator institutions and food service management companies. Sodexo sold food in conjunction with its food service management services. Feesers alleged that Michael Foods offered Sodexo egg and potato products at a discounted price that was unavailable to Feesers.

Inference of Competitive Injury

The district court had decided that Feesers was entitled to an inference of competitive injury, even though Sodexo sold food only to institutional customers in conjunction with its food management services, while Feesers primarily supplied institutional customers that self-operated their dining services programs. According to the district court, the defendants were
unable to rebut the presumption.

The appellate court held that any competition between Feesers and Sodexo occurred at the time a potential customer was deciding whether to self-operate or hire a food service management company. However, Michael did not make a sale until the institutional customer chose a particular distributor or food service management company.

Any resulting sale of Michael’s products would have occurred after that competition had ended. Therefore, Feesers and Sodexo were not competing purchasers.

The January 7 decision in Feesers, Inc. v. Michael Foods, Inc., will appear at 2010-1 Trade Cases ¶76,865.

Congress Should Ban “Pay-for-Delay” Drug Patent Settlements: Consumer Groups

This posting was written by John W. Arden.

In a letter sent yesterday, the American Antitrust Institute and six consumer groups urged Congressional leaders to include a ban on so-called “pay-for-delay” drug patent settlements in the final health reform legislation under consideration by the Senate and the House of Representatives.

Exclusion Payments

Under such patent settlements, manufacturers of brand-name drugs pay potential generic competitors to stay out of the market. These “exclusion payments” can significantly impede the entry of generic drugs on the market, costing consumers an estimated $3.5 billion per year, according to a Federal Trade Commission estimate cited by the groups.

“Attacking the exclusion payment problem is a critical element of health care reform,” said Albert Foer, president of the American Antitrust Institute (AAI). “Because of the exclusion payments, consumers have paid billions more for drugs, and have been denied the competition and low prices they deserve.”

Addressed to Representative Nancy Pelosi (D, Calif.) and Senator Harry Reid (D, Nev.), the letter specifically supports the inclusion of language from the House bill—championed by Representative Bobby Rush (D, Ill.)—“which clarifies that these payments are per se illegal.”

Incentive to Challenge Patents

The letter further advocates the inclusion of provisions of Senate Bill No. 1315—introduced by Senator Bill Nelson (D, Fla.)—that provide an incentive for multiple generic manufacturers to challenge patents.

Currently, the Hatch-Waxman Act grants a 180-day exclusive period to the first manufacturer attempting to market a generic drug. The first-to-file manufacturer retains this exclusivity regardless of whether its challenge is successful or whether it is paid off by the branded drug manufacturer to stay out of the market, according to the letter.

“When this occurs, no other manufacturer has the opportunity to bring that generic drug to market, resulting in consumer harm,” the organizations asserted.

Senator Nelson’s bill would eliminate the incentives of the 180-day exclusivity right, the letter stated:

If a first-to-file generic manufacturer’s challenge is unsuccessful, then a right to an exclusivity period should not persist, destroying any incentive another manufacturer may have to bring a subsequent challenge to a weak or illegitimate patent. S. 1315 . . . would permit manufacturers that file subsequent successful challenges to patents to share in the 180-day exclusivity period. Expanding the exclusivity period is vitally important, since it removed the barrier to entry that has protected collusive settlements between brands and first-filing generics.

The letter was signed by AAI, Consumers Union, Families USA, The National Association on Prescription Drug Prices, Consumer Federation of America, US PIRG, and Community Catalyst.

Text of the January 11 letter appears here on the AAI website. A news release is available here.

FTC News Conference

In a related development, the Federal Trade Commission announced that it will hold a news conference tomorrow at 12:30 p.m. in Washington, D.C. to announce an FTC staff analysis showing that pay-for-delay deals between brand and generic drug companies are costing American consumers billions a year and to encourage inclusion of the House-passed pay-for-delay provision in the final version of the health care reform bill.

Further information appears here on the FTC website.

Invalid Market Definition Dooms Physicians’ Claim of Exclusion from Network

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

A cardiology practice group and its member physicians could not maintain claims that an operator of several Arkansas hospitals conspired with insurers to restrain trade and monopolized, attempted to monopolize, and conspired to monopolize the market for in-hospital cardiology services in central Arkansas by excluding the group from health insurance network coverage, the U.S. Court of Appeals in St. Louis has decided.

The plaintiffs' relevant market allegations were insufficient as a matter of law, the court said. Dismissal of the claims (2009-1 Trade Cases ¶76,473) was affirmed.

Relevant Product Market

The complaint improperly defined the product market by how consumers paid for cardiology services, in the court's view. A relevant product market could not be defined by reference to whether patients who received services were privately insured. Such a theory "lack[ed] support in both logic and law," according to the court.

The general issue when determining a relevant product market concerned the choices available to consumers. Thus, the plaintiff had to look to alternative patients who were able to pay the required fees, not just those who paid using private insurance.

For purposes of the antitrust claims, it did not matter which kind of insurance the patients had, or whether private insurance and government insurance were reasonably interchangeable, because the lawsuit was not about the options available to patients. Rather, it was about the options available to shut-out cardiologists.

Relevant Geographic Market

The plaintiffs' limitation of the relevant geographic market to a single city was overly narrow. The definition failed to describe the geographic areas where customers could turn for cardiology procedures from the starting point of the defendant's trade area, the court observed.

By limiting the market to a city, the plaintiffs gerrymandered the relevant market to the location where cardiology procedures took place. In so doing, the complaint alleged that a low percentage of patients within the city left the proposed market, but ignored the possibility of a high percentage of patients entering the proposed market from outside the city.

An antitrust plaintiff had to allege a geographic market in which the defendant supplier drew a sufficiently large percentage of its business, the court explained. This failure to allege a coherent relevant geographic market provided an adequate and independent means of affirming dismissal of the claims.

Discovery Costs

The appellate court also ruled that the lower court did not abuse its discretion by declining to tax the defendant's discovery-related copying costs upon the unsuccessful plaintiffs after it had dismissed the suit.

No judicial decision required a district court to tax discovery-related expenses, the appellate court noted. To the contrary, numerous district courts within the appellate circuit had similarly refused to tax such costs.

The decision is Little Rock Cardiology Clinic PA v. Baptist Health, 2009-2 Trade Cases ¶76,849.

Pharmaceutical Companies Agree to Settle Multi-State Antitrust Suit

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

Abbott Laboratories and Fournier Industrie et Sante and Laboratories Fournier, S.A. have agreed to settle an antitrust action brought by 23 states and the District of Columbia, alleging that they conspired to block generic competition for the cholesterol-lowering drug Tricor.

The settlement agreement requires the pharmaceutical companies to refrain from illegal efforts to block generic competition to Tricor and to pay the states approximately $22.5 million. The $22.5 million settlement fund is intended to reimburse state governmental
agencies and cover their legal fees and costs in bringing the case.

"Abbott and Fournier devised a complex scheme that illegally blocked cheaper generic drugs from entering the market," said Edmund G. Brown Jr., Attorney General of California, one of the plaintiff states.

The settlement is the result of one of the country's first legal actions challenging pharmaceutical companies for "product hopping," a strategy to block generic competition by making slight changes to the formulation of a drug.

The companies purportedly made minor changes in the form and dosage strength of Tricor that did not provide any significant health benefits over previous Tricor formulations. These minor changes interfered with and delayed any Food and Drug Administration (FDA) approval of the generics.

Patent Infringement Lawsuits

The states contended that Abbott and Fournier also filed more than a dozen lawsuits against generic drug manufacturers Teva Pharmaceuticals and Impax Laboratories because the law prohibits the FDA from approving a generic drug for 30 months after patent-infringement
lawsuits have been filed.

After the 30-month automatic stays expired, all of the suits were eventually dismissed, according to the California Attorney General's Office.

States participating in the settlement include Arizona, Arkansas, California, Connecticut, Florida, Idaho, Iowa, Kansas, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New York, North Carolina, Oregon, Pennsylvania, South Carolina, Texas, Washington and West Virginia, along with the District of Columbia.

Private Actions

The states’ lawsuit—filed in 2008 in the federal district court in Delaware—followed private suits brought by generic drug makers, as well as direct and indirect purchasers of the drug. The private actions also alleged that the pharmaceutical companies manipulated the statutory framework regulating the market.

In October 2009, the federal district court in Delaware approved a settlement of claims brought against Abbott and Fournier by consumers and third-party payors, such as health insurers and employee benefit plans. That settlement was valued at approximately $65 million.

A January 7 news release on the settlement appears here on the California Attorney General’s website. Text of the settlement agreement is available here.

FTC Seeks Public Comment on Children’s Online Privacy Program

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

The Federal Trade Commission is seeking public comment on proposed guidelines to help website operators comply with the FTC’s Children’s Online Privacy Protection Rule, the FTC announced on January 6.

Safe Harbor Programs

The proposed guidelines were submitted to the FTC by a nonprofit organization known as iSAFE, Inc. under a provision of the Children’s Online Privacy Protection Act aimed at industry self-regulation (18 U.S.C. Sec. 6503). This provision allows nonprofit groups and companies to request FTC approval of proposed guidelines—known as safe harbor programs—that govern compliance with the Rule.

The Rule requires operators of websites that collect personal information from children under the age of 13 to notify parents and obtain their consent before collecting, using, or disclosing any such information.

Since the Rule took effect on April 21, 2000, four groups—the Children’s Advertising Review Unit of the Council of Better Business Bureaus, the Entertainment Software Rating Board, TRUSTe, and Privo, Inc.—have received FTC approval for their safe harbor programs.

Questions on Proposed Guidelines

The FTC is seeking public comment about the proposed iSAFE guidelines. Specifically, the FTC requests input as to:

 Whether the guidelines provide “the same or greater protections for children” as those contained in the Rule;

 Whether the mechanisms used to assess operators’ compliance are effective;

 Whether incentives for operators’ compliance with the guidelines are effective; and

 Whether the guidelines provide adequate means for resolving consumer complaints.

The comment period will last for 45 days. More information about iSAFE’s safe harbor application is available here on the FTC’s website.

Website Commenter Did Not Waive First Amendment Right to Anonymity

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

An anonymous poster of a comment on a newspaper website did not waive his or her First Amendment right to remain anonymous by registering for an account with the website, the federal district court in Kansas City has ruled.

A plaintiff bringing a lawsuit against a Springfield, Missouri police officer, who allegedly injured him, was not entitled to an order compelling disclosure of the poster’s identity.

The poster—who was not a party to the lawsuit—had written a comment to a story on The Springfield News-Leader website about prosecutors’ decision to drop charges against the officer in connection with the facts underlying the suit. In the comment, the poster suggested that the City of Springfield had knowledge of the officer’s alleged violent tendencies.

The News-Leader required website users to register for an account in order to post comments. When registering for this account, users were not required to provide their first or last names or any other personal information.

Privacy Policy

The website’s privacy policy disclosed what information the News-Leader would gather from its online users and how that information would be used, generally in a commercial manner. The privacy policy stated that, in some cases, the News-Leader may use and share personally-identifiable information.

Nothing on the face of the privacy policy hinted that users might be waiving their constitutional right to anonymous free speech by posting comments or materials on the website, according to the court.

Given the presumption against waiver and the boilerplate language of the privacy policy, it could not be said that the poser was aware that he or she could be waiving the right to speak anonymously, let alone the significance of such waiver.

The decision in Sedersten v. Taylor appears at CCH Privacy Law in Marketing ¶60,414.

FTC Orders Marketers of “Cancer Cures” to Stop Deceptive Claims

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

A unanimous Federal Trade Commission (FTC) has concluded that Daniel Chapter One, an herbal products company, and its executive violated the FTC Act while marketing four dietary supplements—BioShark, 7 Herb Formula, GDU, and BioMixx—as cancer cures and treatments.

Chief Administrative Law Judge D. Michael Chappell’s August 2009 initial decision, finding against the marketers, was upheld in an opinion written by Commissioner J. Thomas Rosch.

Jurisdiction

At the outset, the Commission explained the FTC's jurisdiction over the respondents. The marketers contended that the agency lacked jurisdiction because they were a religious ministry organized and operated for charitable purposes.

The FTC's jurisdiction extended to a corporation organized to carry on business for its own profit or that of its members. By engaging in commercial activities, the marketers operated a commercial enterprise. They were not a business organized or engaged in only charitable purposes outside the FTC's jurisdiction, the Commission explained.

Constitutional Challenges

In upholding the ALJ's decision, the Commission rejected a number of arguments raised by the marketers under the Due Process Clause and the First Amendment of the U.S. Constitution. The marketers contended that the ALJ improperly shifted the burden of proof to them and banned truthful statements about dietary supplements.

Attorneys for the FTC were not required to produce evidence that consumers were actually misled by the marketer's promotional efforts and representations in order to assess the “overall net impression” of the advertising. Therefore, the Commission rejected the marketers' contention that the ALJ's failure to require the FTC attorneys to do so amounted to resorting to “presumptions” or “shifting the burden of proof” to the marketers in violation of the Due Process Clause and the First Amendment.

The ALJ and the Commission determined the “overall net impressions” of the representations, based not only on the text of the advertisements itself, but also on the interaction of other factors that operated to create that impression, such as testimonials, bold type, visual images, and mutually reinforcing language.

The Commission also rejected the argument that the marketers' representations about the efficacy of the supplements were merely ideas, opinions, beliefs, or theories, protected by the First Amendment. Rather, the advertising included representations of fact.

The marketers made assertions not just about what they believed those products might do, but represented that the supplements would treat or cure cancer, prevent or shrink tumors, and ameliorate the side effects of radiation and chemotherapy, the Commission concluded. The representations were commercial speech, which was accorded less protection than other constitutionally protected forms of speech.

Moreover, any disclaimers made by the marketers did not dispel the overall net impressions that the products would treat or cure cancer.

The ALJ did not violate Due Process in reaching his findings of fact under a “preponderance of evidence” standard instead of a “clear and convincing evidence” standard, it was noted. Under both the Administrative Procedure Act and the Commission’s rules, the proper standard to be applied in FTC Act cases challenging deceptive practices was the preponderance of evidence standard.

Substantiation

The challenged representations were not substantiated, the Commission also concluded. The representations needed to be substantiated by “competent and reliable scientific evidence.” However, the marketers did not possess or rely on any competent and reliable scientific evidence to support the overall net impressions conveyed by the advertisements at issue.

Remedies

The Commission upheld the ALJ's order that prohibited the marketers from making any representation about the efficacy, performance, or health-related benefits of any dietary supplement, food, drug, or other health-related product, service, or program, unless the representation was true, non-misleading, and, at the time it was made, substantiated by competent and reliable scientific evidence. However, the order was modified in the interest of brevity to the extent that it required notice of the agency's determination to customers.

The Commission rejected the marketers' contentions that the remedy would violate the Religious Freedom Restoration Act of 1993 or would unconstitutionally encroach on their rights under the religious guarantees of the First Amendment.

The order imposed no burden on the exercise of religion. It only applied to the marketers' commercial advertising, according to the Commission.

The Commission’s decision and final order, issued December 18, 2009, and announced on December 24, 2009, In the Matter of Daniel Chapter One, a corporation, and James Feijo, FTC Docket No. 9329, will appear at 2009-2 Trade Cases ¶76,853.

Antitrust Institute Picks "Best" and "Worst" Developments of Decade

This posting was written by John W. Arden.

When it came to antitrust developments during the last decade, the FTC and the European Commission were heroes, while the U.S. Supreme Court and the Bush Administration were zeros, according to rankings published last week by the American Antitrust Institute (AAI).

The AAI released a list of the 10 “most positive” and 10 “least helpful” antitrust developments, as compiled by Institute Director Robert H. Lande.

The “most positive” developments (in no particular order) were:

1. The emergence of Europe as a true equal of the U.S. in the enforcement of competition law.

2. The rise of post-Chicago antitrust analysis.

3. Continued development of the Department of Justice’s leniency program, including significant increases in cartel fines.

4. The European Union, FTC, and private cases against Intel.

5. The FTC’s Section 2 activity in the standard-setting area.

6. The FTC’s actions in the pharmaceutical reverse payments area.

7. The election of President Obama and the appointments of Assistant Attorney General Christine Varney and FTC Chairman Jon Leibowitz.

8. Competition advocacy on the part of the FTC and the large number of valuable reports produced by the FTC and Department of Justice.

9. The International Competition Network (ICN).

10. The emergence of the AAI as an effective voice in the antirust world.

The “least helpful” developments (in no particular order) were:

1. Every Supreme Court antitrust decision during the decade—including Trinko and Twombly—and the lower courts’ subsequent decimation of notice pleading.

2. The appointments of Justices Roberts and Alito to the Supreme Court and a large number of lower court judges not favorably disposed to antitrust.

3. The Department of Justice’s 2001 settlement with Microsoft.

4. The Bush Administration’s non-enforcement record, including the Department of Justice’s decision not to challenge the Whirlpool-Maytag deal.

5. The DC Circuit’s Rambus opinion.

6. The Oracle/PeopleSoft opinion, including Judge Walker’s disregard for consumer testimony.

7. Every Department of Justice amicus brief filed from 2001 to 2008.

8. Judge Jackson’s predilection for interviews and, partially for this reason, the loss of much of his Microsoft decision.

9. The Department of Justice’s Section 2 report (fortunately, the FTC refused to sign on, which made it DOA).

10. Runaway intellectual property rights, led by the Federal Court of Appeals (however, the Supreme Court is beginning to restore some balance with competition concerns).

The American Antitrust Institute is an independent, non-profit education, research, and advocacy organization based in Washington, D.C. Its stated mission is to “increase the role of competition, assure that competition works in the interests of consumers, and challenge abuses of concentrated economic power in the American and world economy.” Further information about the AAI appears here on the organization’s website.

Justice Department Suggests Modifications to Airline Alliance

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

The Department of Justice has sent comments to the Department of Transportation, suggesting that an application of antitrust immunity for an airline alliance involving American Airlines, Inc., British Airways PLC, Iberia Lineas Aereas De Espana, S.A., and other carriers should be conditioned on “slot divestitures or carveouts, as appropriate.”

American, British Airways, and Iberia recently applied to the U.S. and European Union authorities for permission to cooperate more closely on transatlantic flights through the creation of a joint business agreement.

The “oneworld alliance” members have asserted that the benefits of the proposed agreements justify unrestricted immunity and that any carve-out would jeopardize the alliance.

According to the Justice Department's December 21, 2009, comments, a grant of unrestricted immunity would likely result in significant competitive harm in six transatlantic markets where American currently competes with British Airways and Iberia.

The Justice Department suggests that fares could increase by as much as 15 percent between six pairs of cities: (1) Boston and London, (2) Chicago and London, (3) Dallas and London, (4) Miami and London, (5) Miami and Madrid, and (6) New York and London.

Text of the comments of the Department of Justice appears here on the Antitrust Division’s web site.