Distributor, Manufacturer May Share “Community of Interest” under Wisconsin Dealer Law

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

A "community of interest" under the meaning of the Wisconsin Fair Dealership Law (WFDL) could have existed between a Wisconsin toy distributor and a French manufacturer, bringing the distributorship within the anti-termination provisions of the dealer law, the federal district court in Milwaukee has decided.

The distributor raised several genuine issues of material fact as to whether a "community of interest" existed on the manufacturer's motion for summary judgment on the distributor’s WFDL claims. Thus, the motion was denied, and the dispute was ordered to proceed to trial.

In 2001, the distributor became the manufacturer’s exclusive toy distributor for the United States. The manufacturer unilaterally terminated the distribution relationship in 2006, and the distributor brought suit, alleging that the manufacturer failed to comply with provisions of the WFDL requiring notice and "good cause" for termination and repurchase the distributor’s entire inventory of the manufacturer’s toys.

The manufacturer argued that the distributor was not a “dealer” entitled to the protections of the WFDL because, among other reasons, there was no "community of interest" between the parties.

Substantial Obligations

There was a genuine issue of material fact about whether the relationship was the type of intertwined, dependent relationship that the WFDL was designed to protect, the court ruled. The agreement imposed substantial obligations on the distributor to buy, sell, and promote the manufacturer’s products. The agreement specified minimum purchase quotas and minimum sales, the court noted. The distributor was required to maintain appropriate inventory levels and was not allowed to distribute toys that competed against the manufacturer’s toys.

Percentage of Time and Revenue

The court concluded that the distributor raised a genuine issue of fact about whether the percentage of time it devoted to the manufacturer’s products and whether the revenue it received from the manufacturer’s products constituted a community of interest. The distributor’s sales of the manufacturer’s products accounted for over 20% of its business, a percentage that weighed slightly in favor of finding a community of interest.

Exclusive Right to Sell

The fact that the distributor had the exclusive right to sell the manufacturer’s Erector brand of toys in the United States weighed heavily in favor of finding a community of interest. The distributor used the manufacturer’s brand name as part of its efforts to sell the products but it did not use the name on its exterior signage or on its vehicles. Such use appeared to be minimal and that aspect of the relationship did not satisfy the WFDL, the court held.

The distributor’s rented warehouse was not devoted exclusively to the manufacturer’s products and was adaptable to other uses upon termination of the parties’ agreement. The distributor raised a genuine issue of material fact regarding its investment in inventory but not in physical facilities or goodwill.

Personnel Devoted to Manufacturer’s Line

The distributor raised a genuine issue of material fact as to whether the personnel devoted to the manufacturer helped to establish a community of interest. The distributor had one employee who worked solely on the manufacturer’s products and contended that every one of its employees worked in furtherance of sales of the manufacturer’s products.

The distributor alleged that it spent $150,000 annually to present the products at a toy fair, $80,000 annually to lease a showroom at a toy fair, and $85,000 to $90,000 annually in marketing expenses, raising an issue of fact about whether its expenditures on advertising and promotion supported a community of interest.

Considering all of the circumstances in a light most favorable to the distributor, the court held that the relationship and the resultant revenues were significant to the distributor’s business. The distributor contended that the termination caused the entire business to collapse. However, the reason for the distributor’s ultimate demise was contested. Thus, the case was allowed to proceed to trial.

The February 10 decision in Brio Corp. v. Meccano S. N. appears at CCH Business Franchise Guide ¶14,305.

Investment Firm Not Liable Under RICO for Customer's Money Laundering Scheme

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

The receivers of seven insurance companies that lost nearly $200 million to Martin Frankel, an investor who had purchased the companies in order to loot their assets, could not prevail in a RICO conspiracy claim against Dreyfus Service Corp., the investment company that Frankel used to launder the insurance companies’ funds before moving them to his personal Swiss bank account, the U.S. Court of Appeals in New Orleans has ruled. Their claim failed because Dreyfus was not aware of Frankel’s money laundering activities.

According to the receivers, Dreyfus was liable for treble damages under RICO because the investment company had “effectively joined the conspiracy” by deliberately turning a blind eye to Frankel’s “obviously suspicious” activities.

Had Dreyfus discharged its duties properly, the receivers argued, the investment company would have uncovered Frankel’s money laundering scheme and the insurance companies’ losses would have been averted.

Deliberate Ignorance

The receivers tacitly acknowledged that no one at Dreyfus actually knew about Frankel’s ongoing activities. Nevertheless, they argued that constructive knowledge—and thus a violation of the federal money laundering statute, a RICO predicate act—could be established under the doctrine of deliberate ignorance. Deliberate ignorance existed when a conscious effort was made to avoid positive knowledge of unlawful conduct so one's personal knowledge could be denied if the lawbreaker was caught, the court observed. The doctrine required a conscious action that, in light of the known facts, amounted to a “charade of ignorance.”

Although the structure and speed of Frankel’s transactions were “suggestive of money laundering” and Dreyfus’s efforts to identify the origin, legitimacy, and ultimate destination of the funds passing through its accounts were “non-existent,” evidence failed to show that anyone at Dreyfus either knew or “purposely contrived” to avoid knowing that Frankel was engaging in money laundering, the court decided.

Purposeful Contrivance

The receivers argued that purposeful contrivance was present because Dreyfus’s management: (1) knew that the structure of their corporate policies on the creation, verification, and maintenance of investment accounts created a high probability that the accounts would be used for money laundering; (2) knew what steps it could take to detect money laundering activity; and (3) declined to take those steps. At worst, however, Dreyfus’s activities rose to the level of recklessness, in the court's view. Frankel’s transactions went unnoticed because Dreyfus had not trained its service personnel to recognize the signs of money laundering.

The opinion is Chaney v. Dreyfus Service Corp., CCH RICO Business Disputes Guide ¶11,803.

FTC Finds Sensitive Data Leaked from Organizations to P2P Networks

This posting was written by Cheryl Beise, Editor of CCH Guide to Computer Law.

The Federal Trade Commission announced on February 22 that it has notified nearly 100 organizations that personal information emanating from the organizations' computer networks had been shared and was available on peer-to-peer (P2P) file-sharing networks where it could be accessed and used to commit identity theft or fraud. The information included sensitive data about customers and/or employees.

Notices Sent to Private, Public Entities

The notices went to both private and public entities, including schools and local governments, the agency said. Entities contacted ranged in size from businesses with as few as eight employees to publicly-held corporations employing tens of thousands. The agency also said it opened non-public investigations of other companies whose customer or employee information has been exposed on P2P networks.

The notification letters urged the entities to review their security practices—and. if appropriate, the practices of contractors and vendors—to ensure that they are reasonable, appropriate, and in compliance with the law. The agency posted samples of the letters (Letter A, Letter B, and Letter C), which advise recipients, “It is your responsibility to protect such information from unauthorized access, including taking steps to control the use of P2P software on your own networks and those of your service providers.”

The FTC warned that failure to prevent such information from being shared to a P2P network may constitute a violation of law, including the Gramm-Leach-Bliley Act and Section 5 of the FTC Act.

“Unfortunately, companies and institutions of all sizes are vulnerable to serious P2P-related breaches, placing consumers’ sensitive information at risk,” said FTC Chairman Jon Leibowitz.

“Companies should take a hard look at their systems to ensure that there are no unauthorized P2P file-sharing programs and that authorized programs are properly configured and secure,” Leibowitz counseled.

Notification of Customers, Employees

The FTC also recommended that the entities identify affected customers and employees and consider whether to notify them that their information is available on P2P networks. Many states and federal regulatory agencies have laws or guidelines about businesses notification responsibilities in these circumstances, the agency noted.

Text of the announcement appears here on the FTC website.

To help businesses manage the security risks presented by file-sharing software, the FTC released a new business education brochure, “Peer-to-Peer File Sharing: A Guide for Business,” describing the risks and recommend ways to manage them.

Further information about the FTC’s privacy and data security enforcement actions can be found here.

U.S., EC Clear Agreement Between Microsoft and Yahoo!

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

Microsoft Corporation and Yahoo! Inc. announced on February 18 that they would begin implementing their proposed search agreement, after receiving clearance from the Department of Justice Antitrust Division and the European Commission (EC).

In an announcement the same day, the Antitrust Division said it had closed its investigation into proposed Internet search and paid search advertising agreement between the companies without taking action. The EC also issued a statement that it had concluded that the deal would not significantly impede effective competition in Europe.

Yahoo!’s algorithmic and paid search platforms will be transitioned to Microsoft, under the parties' proposal. Yahoo! will become the exclusive relationship sales force for both companies’ premium search advertisers globally.

According to the parties' statement, “the companies’ unified search marketplace will deliver improved innovation for consumers, better volume and efficiency for advertisers and better monetization opportunities for web publishers.”

Competition with Google

Both the Antitrust Division and the EC suggested that the transaction would allow Microsoft/Yahoo! to compete more effectively with Google.

“The proposed transaction will combine the back-end search and paid search advertising technology of both parties,” the Antitrust Division explained in its statement. “U.S. market participants express support for the transaction and believe that combining the parties' technology would be likely to increase competition by creating a more viable competitive alternative to Google, the firm that now dominates these markets.”

The transaction “is not likely to harm the users of Internet search, paid search advertisers, Internet publishers, or distributors of search and paid search advertising technology,” in the government's view.

According to the parties, the transaction was also cleared by regulators in Australia, Brazil, and Canada.

New Health Care Proposal Would End Pay-for-Delay Drug Settlements

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

President Barack Obama announced on February 22 his latest proposal for health care reform. One of the provisions of the proposal is aimed at preventing delays in generic drug competition by targeting “pay-for-delay” settlements between drug companies.

Presumption of Illegality

Under the proposal, agreements in which a generic drug manufacturer receives anything of value from a brand-name drug manufacturer would be presumed unlawful if the generic drug manufacturer agrees to limit or forego research, development, marketing, manufacturing, or sales of the generic drug.

The presumption of illegality could be overcome only if the parties to the agreement could demonstrate by clear and convincing evidence that the procompetitive benefits of the agreement outweighed the anticompetitive effects of the agreement.

The FTC would have enforcement authority to address the problem. The proposal also would require the Chief Executive Officer of the branded pharmaceutical company to certify to the accuracy and completeness of any agreements required to be filed with the FTC.

A summary of the new proposal appears here on the White House website.

FTC Chairman’s Reaction

FTC Chairman Jon Leibowitz issued a statement in response to the announcement, expressing his appreciation for the inclusion of restrictions on pay-for-delay settlements.

“When drug companies agree not to compete, consumers lose,” said FTC Chairman Leibowitz. “Ending pay-for-delay settlements will help control drug costs. We’re delighted about the President’s resolute support for this bipartisan initiative.”

Consumer Can Pursue Claim That “Greenlist” Label Was Misleading

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

A class action complaint alleging that a “Greenlist” label used by household cleaning products manufacturer S.C. Johnson was deceptively designed to look like a third party seal of approval could not be dismissed on the grounds that injury was not sufficiently alleged and that no reasonable consumer could have found the label misleading, the federal district court in San Jose has ruled.

Under the California Unfair Competition Law and False Advertising Law, suit may only be brought by a person who has suffered injury in fact and has lost money or property as a result of a violation.

The consumer sufficiently alleged that he did not receive the benefit of the bargain in that SCJ's Windex cost more than similar products without misleading labeling, according to the court.

On the question of whether the label was misleading, SCJ pointed out that the Greenlist label made no mention of a third party, described Greenlist as a “rating system” not a seal of approval, and directed consumers to SCJ's own website for further information. However, given the alleged context, it was plausible that a reasonable consumer would interpret the Greenlist label as being from a third party, the court found.

While the attributes identified by SCJ were relevant to the inquiry and might weaken the case for deceptiveness, they did not allow a ruling on the issue as a matter of law.

Guidelines issued by the Federal Trade Commission provided that a product label containing an “environmental seal,” such as a globe icon with the text “Earth Smart” around it, “is likely to convey to consumers that the product is environmentally superior to other products” and would be deceptive “[i]f the manufacturer cannot substantiate this broad claim,” the court noted.

The opinion in Koh v. S.C. Johnson & Son, Inc., No. C-09-00927 RMW, ND Cal., appears at CCH Advertising Law Guide ¶63,741

Supplement Purchasers Allowed to Proceed with Unfair Competition Class Action

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

An order denying certification in a consumer’s California Unfair Competition Law (UCL) and Consumer Legal Remedies Act (CLRA) class action against the nutritional supplement retailer GNC was reversed because the trial court’s opinion was based on improper legal criteria and incorrect legal assumptions, according to a California appellate court.

Sale of a Controlled Substance

The consumer purchased an over-the-counter nutritional supplement containing androstenediol, a Schedule III controlled substance, from GNC. It is illegal to sell or possess a Schedule III controlled substance without a prescription, but the retailer failed to disclose that its product contained androstenediol.

The consumer (1) alleged that the retailer violated the UCL by selling the supplement in violation of the California Health and Safety Code and other state statutes and (2) sought restitution and injunctive relief. In June 2004, the action was coordinated with five other class actions in Los Angeles Superior Court.

According to the court, the UCL class action claim presented two predominant issues—whether the retailer’s sales were unlawful and whether the profits from those sales must be restored to the class.

Individualized Proof

In a UCL class action, once the named plaintiff shows that he suffered an injury-in-fact and lost money or property as a result of the unfair competition, no further individualized proof of injury or causation is required to impose liability against the defendant in favor of absent class members.

The trial court had erroneously assumed that individualized issues predominated because the court would need to determine whether the legality of the sale was material to each class member.

Misrepresentations

The consumer also alleged that GNC violated the CLRA by misrepresenting the source, sponsorship, approval, or certification of supplement and by misrepresenting that the supplements were of a particular standard, quality, or grade.

The consumer sufficiently alleged that a reasonable consumer would find the legality of a product important when deciding whether to purchase that product, according to the court. To state a CLRA class action, the consumer needed to show that all class members suffered some damage as a result of the alleged misrepresentation that the supplement was legal. Because these misrepresentations were made to class members, an inference of reliance arose as to the entire class.

The decision—Steroid Hormone Product Cases—appears at CCH State Unfair Trade Practices Law ¶31,995.

Price Fixing Claims Against Urethane Producers Take Shape

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

In multidistrict litigation consisting of numerous putative class action lawsuits alleging a conspiracy among urethane chemical producers to fix prices of polyether polyol products, 56 opt-out plaintiffs sufficiently alleged a federal antitrust claim based on charges of conspiratorial conduct prior to 1999, the federal district court in Kansas City, Kansas, has ruled.

The court declined, however, to exercise supplemental jurisdiction over claims that were brought by European plaintiffs under European law and barred claims against two individual executives under the statute of limitations. The defendants’ motions to dismiss the claims were, therefore, granted in part and denied in part.

Pleading

The complaining purchasers corrected the pleading deficiencies that led to dismissal of their claims of a conspiracy existing prior to 1999 (2009-2 TRADE CASES ¶76,754), the court decided. In support of these pre-1999 conspiracy allegations, the plaintiffs’ second amended complaints included allegations of meetings and communications, involving specific participants and locations, in furtherance of the alleged conspiracy.

Rejected was an argument that the plaintiffs failed to plead sufficient non-conclusory facts to state a plausible claim for the pre-1999 period because they did not allege the particular dates, participants, products discussed, markets discussed, agreements reached, and actions taken for each meeting or communication alleged for that time period, or the specific way in which all of the meetings and communications were connected. Requiring such allegations would impose an overly strict pleading standard, the court said.

Statute of Limitations

The court refused to dismiss the pre-1999 claims as time-barred on the ground that the complaining purchasers had failed to sufficiently allege affirmative acts of fraudulent concealment for that time period. The plaintiffs could rely on their allegations of false and pretextual announcements and letters by the defendants during that time period—such as a statement that prices were being increased because of rising costs—as acts of fraudulent concealment. They did not have to plead with particularity why the alleged misrepresentations were actually false, such as by alleging facts showing that costs were not in fact rising. Nevertheless, the plaintiffs did so plead by claiming that the price increases actually resulted from the alleged price fixing conspiracy instead of from rising costs.

The plaintiffs’ allegations of secret meetings, communications, and agreements to conceal the conspiracy also sufficed as affirmative acts of concealment, the court said. Claims against two individuals—who were executives for one of the chemical producing companies—were time-barred, however, because fraudulent concealment of the alleged conspiracy could not toll the limitations period sufficiently to render the claims timely, the court found.

The statute of limitations, as it related to the individual defendants, began to run, at the latest, when the plaintiffs admittedly discovered the existence of a claim against the individuals’ employer—November 23, 2004, the date upon which the first polyether polyols class action had been filed. This was approximately four years and four months before the individuals were first made parties to the suit.

The court rejected the plaintiffs’ argument that their claims should have been tolled for more than three more years because they did not discover that they had claims against the individuals until December 2007. Once the plaintiffs discovered in November 2004 that the employer was a member of the alleged conspiracy, their exercise of due diligence should have led them to investigate and discover the identity of additional individual defendants who acted on behalf of the employer, the court explained.

Four years was ample time to conduct that inquiry. As the plaintiffs themselves conceded, they actually did discover that they had claims against the individuals well within that window, the court noted. The plaintiffs offered no explanation for their subsequent failure to add those individuals as defendants to the suit at that time or within the year that followed.

European Law Claims

Finally, the court chose not to exercise supplemental jurisdiction over claims brought by 26 European plaintiffs under European law. Litigation of the claims would raise novel and complex issues of European law, such as the issue of cross-jurisdictional tolling from the filing of a class action complaint and the issue of the effect of some nations’ joining the European Union (EU) only after the defendants’ price fixing conduct, the court said.

The court added that while it could determine any question of European law to the best of its ability, it would do so without the benefit of review by and instruction from the European Court of Justice and the European Commission. Given the state of European antitrust law, such law would be more ably interpreted and applied in Europe, in the court's view.

In addition, resolution of the European law claims in the United States would undermine principles of international comity. Dismissal of the claims would also have been appropriate under the doctrine of forum non conveniens, the court concluded.

The decision is In re: Urethane Antitrust Litigation, 2010-1 Trade Cases ¶76,903.

Senate Banking Committee at Impasse over New Financial Consumer Protection Agency

This posting was written by Sarah Borchersen-Keto, CCH Washington Correspondent.

Democrats and Republicans on the Senate Banking Committee have failed to agree on the creation of a new financial consumer protection agency.

After reaching an impasse on the financial regulation overhaul with Ranking Member Richard Shelby (R-Alabama) on February 11, Committee Chairman Chris Dodd (D-Connecticut) tapped Senator Bob Corker (R-Tennessee) to lead negotiations on the Republican side.

The next day, Corker described the prospect of a stand-alone financial consumer protection agency as a “nonstarter.”

Corker said that consumer protection should be part of any financial regulatory reform package, but does not support the creation of a stand-alone agency for consumer protection. He suggested that the issue of consumer protection be set aside for the time being in order to focus on areas of consensus.

“I will work to see if we can find a way to enhance consumer protection without negatively impacting the safety and soundness of our financial system, and if we cannot, this will not be a bill I can support,” Corker stated. While agreeing to work with Dodd, he had not promised to support anything less than a reform bill that can attract bipartisan support.

Meanwhile, White House press spokesman Robert Gibbs reiterated President Obama’s support for strong consumer protection.

“The president still believes it is a great priority to have the independent authority to ensure that consumers in this reform are protected,” said Gibbs.

The spokesman failed to indicate whether President Obama would insist on the creation of a separate agency.

“Without knowing what exact vehicle might come in a bipartisan proposal from the Senate, obviously we would look at this assuming that strong consumer protections and authority was in that legislation.

U.S. Not Immune from Suit for False Advertising

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

The United States was not immune from a software company's claim that the Department of Justice violated the Lanham Act by falsely representing that the company's TrustedAgent product would be included in DOJ’s information security solution for Federal Information Security Management Act compliance, the federal district court in the District of Columbia has ruled.

The Lanham Act was amended in 1999 to provide that the United States is not immune from suit for violations.

Commercial Advertising and Promotion

The software company (Trusted Integration, Inc.) stated a Lanham Act claim by asserting injury to its interstate business from the Department of Justice's allegedly false and deceptive advertisement of a product that it was selling to the company's potential customers, the court determined.

A Lanham Act claim may be based on a likelihood of damage from commercial advertising or promotion that misrepresents the nature, characteristics, qualities, or geographic origin of another person's goods, services, or commercial activities.

Trusted Integration alleged that government agencies sought to purchase their Federal Information Security Management Act compliance solution from the DOJ. DOJ’s advertisements to its potential customers allegedly portrayed TrustedAgent as “a key component,” even though DOJ had no intention of actually including it in the final product and had formally announced that it was selling its own alternative.

The company further alleged that the DOJ “repeatedly referenced” TrustedAgent in its demonstration to potential customers, and that this gave customers the “false sense” that TrustedAgent would be included in the final product.

The January 20 decision in Trusted Integration, Inc. v. United States of America, Civil Action No. 09-898 (ESH), appaers at CCH Advertising Law Guide ¶63,737.

NCAA Fails to Obtain Dismissal of Ex-College Basketball Player’s Antitrust Claims

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

Edward O’Bannon, a member of the University of California, Los Angeles men’s basketball team in the early 1990s, can proceed with antitrust claims against the National Collegiate Athletic Association (NCAA) and its “licensing arm” for excluding him and other college athletes from the licensing market, the federal district court in Oakland decided on February 8.

In the same decision, the court dismissed the similar but “truncated” antitrust claims of Craig Newsome, a member of Arizona State University football team from 1993 to 1994.

Use of Images

Under NCAA rules, student athletes are not compensated for the use of their images in NCAA licensed products. O’Bannon asserted that the actions of the NCAA and its licensing arm excluded him and other former student athletes from the collegiate licensing market. He claimed that, because the NCAA had rights to images of him from his collegiate career, the association, along with its co-conspirators, fix the price for the use of his image at “zero.”

O’Bannon pointed to a 2007 agreement between the NCAA and Thought Equity Motion, Inc. to offer “classic” college basketball games online that would allow the use of his image without compensation paid to him.

Conspiracy to Fix Prices, Boycott

O’Bannon sufficiently alleged a conspiracy to fix the price of former student athletes’ images at zero and to boycott former student athletes in the collegiate licensing market. The athlete pleaded sufficient facts to make out a prima facie case that the challenged conduct constituted a conspiracy to unreasonably restrain trade in the U.S. “collegiate licensing market,” under a rule of reason analysis.

A claim that the conduct restrained trade under a per se rule of illegality could not be pursued, however, because the allegations did not suggest the existence of a horizontal agreement to fix prices or to engage in a group boycott, according to the court.

The athlete alleged that NCAA rules enabled the association to enter into licensing agreements with companies that distribute products containing student athletes’ images. Student athletes allegedly did not consent to these agreements and did not receive compensation for the use of their images.

As a result, O’Bannon alleged, the NCAA’s actions excluded him and other former student athletes from the collegiate licensing market.

Newsome’s truncated complaint was dismissed, however, because it did not contain sufficient allegations to make out a prima facie case under a rule of reason analysis. Among other things, the football player did not plead a relevant market, the court explained.

Statute of Limitations

Although the complaint was filed more than a decade after O’Bannon played college basketball, the statute of limitations did not bar his antitrust claims, the court ruled. The 2007 agreement between the NCAA and a company to offer “classic” college basketball games online supported an inference that O’Bannon’s image was included in that agreement.

Text of the February 8, 2010, decision in Edward O’Bannon v. National Collegiate Athletic Assn., No. C09-1967 CW, appears at 2010-1 Trade Cases ¶76,899.

Right of Publicity Action

In a separate case before the same judge, former Arizona State and Nebraska quarterback Samuel Michael Keller brought a class action complaint, asserting that Electronic Arts and the NCAA violated his right of publicity by using his likeness without consent in video games.

The court rejected EA’s and NCAA’s motions to dismiss Keller’s California right of publicity, civil conspiracy, and unfair competition law claims.

The February 8, 2010 opinion in Keller v. Electronic Arts, Inc., No. C 09-1967 CW, is reported at CCH Advertising Law Guide ¶63,760.

HIV Drug Maker Could Have Violated Federal Antitrust Law Through Price Hike

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

HIV patients and their medical plans directly purchasing protease inhibitor (PI) drugs to fight the disease sufficiently alleged that the manufacturer of a PI drug marketed under the name “Norvir,” which had been found to boost the effectiveness of other PI drugs, could have violated federal antitrust law in several ways by raising the price of stand-alone Norvir over 400 percent, the federal district court in Oakland, California, has ruled. An omnibus motion to dismiss the claims was therefore denied.

Predatory Pricing

The drug maker, Abbott Laboratories, could have engaged in predatory pricing with regard to its own combined PI product (a drug named “Kaletra” that utilized Norvir with lopinavir) and the broader “boosted” market by raising the price of stand-alone Norvir so dramatically, in the court's view.

In maintaining its price for Kaletra, the manufacturer essentially offered a substantial discount on Norvir as a result of its bundling with lopinavir. The purchasers alleged that when the full amount of this discount was attributed to lopinavir—a competitive product in the “boosted” market—the resulting price was below the manufacturer's average variable cost to produce lopinavir.

This allegation supported their claim that the manufacturer engaged in unlawful predatory pricing through bundled discounting, the court found.

Exclusionary Conduct

Further, Abbott could have engaged in exclusionary conduct in violation of Sec. 2 of the Sherman Act by raising the price of stand-alone Norvir over 400 percent because the change disrupted a longstanding course of dealing. Liability under Sec. 2 could arise when a defendant voluntarily altered a course of dealing and anticompetitive malice motivated that conduct, the court explained.

The purchasers adequately alleged that Abbott had a duty to deal, according to the court. They claimed that the manufacturer had voluntarily engaged in licensing agreements with its competitors that allowed the competitors to market their PIs along with Norvir, and these agreements induced the competitors to rely on Norvir's availability on the market subject to normal, inflation-level price increases.

Given that the manufacturer's massive price hike on Norvir came about following the company's recognition that Kaletra would face new competition in the “boosted” PI market, and was not accompanied by a commensurate rise in its price for Kaletra, the increase could have been motivated by anticompetitive malice, the court determined.

Constructive Refusal to Deal

An argument that the allegations could not amount to an actionable refusal to deal because the manufacturer never refused outright to sell Norvir was rejected. Case law did not require outright refusal, the court noted. The price increase on Norvir placed other drug competitors in the untenable position of selling their boosted PIs at a price that could not compete with Kaletra; thus, the price increase signified a constructive refusal to deal.

Monopolization

The direct purchasers also adequately stated a claim that Abbott engaged in unlawful monopolization of the “boosting market” based on its reasonable pricing of Norvir for several years, thereby inducing its competitors to rely on the availability of the drug on these terms and to forgo development of their own PI boosters, the court added.

The conduct could have enabled the manufacturer to suppress competition in the boosting market. The court rejected arguments that the claims were not plausible and that the manufacturer's patent rights enabled it to license its product as it pleased. The complaining purchasers did not allege unlawful conduct arising from the manufacturer's licensing activity, but from its deception of its competitors, the court reasoned.

The decision is Safeway, Inc v. Abbott Laboratories, 2010-1 Trade Cases ¶76,896.

Justice Department Opposes New Google Book Settlement

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

Despite the substantial progress reflected in the proposed amended settlement agreement in The Authors Guild Inc. et al. v. Google Inc., the U.S. Department of Justice has advised the federal district court in New York City that class certification, copyright, and antitrust issues remain.

The settlement agreement between Google and the authors and publishers aims to resolve copyright infringement claims brought against Google by The Authors Guild and five major publishers in 2005, arising from Google's efforts to digitally scan books contained in several libraries and to make them searchable on the Internet.

In a Statement of Interest filed with the court on February 4, the Justice Department said:

“Although the United States believes the parties have approached this effort in good faith and the amended settlement agreement is more circumscribed in its sweep than the original proposed settlement, the amended settlement agreement suffers from the same core problem as the original agreement: it is an attempt to use the class action mechanism to implement forward-looking business arrangements that go far beyond the dispute before the court in this litigation.”

On September 18, 2009, the Justice Department submitted views to the court on the original proposed settlement agreement.

At that time, it proposed that the parties consider changes to the agreement, such as imposing limitations on the most open-ended provisions for future licensing, eliminating potential conflicts among class members, providing additional protections for unknown rights holders, addressing the concerns of foreign publishers and authors, and providing a mechanism by which Google’s competitors can gain comparable access. (For further inforamtion on the Justice Department's objections, see September 21, 2009 posting on Trade Regulation Talk.)

In last week’s filing, the Justice Department recognized that the parties made substantial progress on a number of these issues.For example, the proposed amended settlement agreement:

 Eliminates certain open-ended provisions that would have allowed Google to engage in certain unspecified future uses,

 Appoints a fiduciary to protect rights holders of unclaimed works,

 Reduces the number of foreign works in the settlement class, and

 Removes a “most-favored nation” provision that would have guaranteed Google optimal license terms into the future.

The changes, however, do not fully resolve the government's concerns. The agency commented that the revised amended settlement agreement still confers significant and possibly anticompetitive advantages on Google as a single entity, thereby enabling the company to be the only competitor in the digital marketplace with the rights to distribute and otherwise exploit a vast array of works in multiple formats.

The Justice Department’s filing with court regarding the amended settlement is available here on the Department of Justice Antitrust Division’s web site.

Review of Horizontal Merger Guidelines Likely to Result in Update: Antitrust Division Official

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

A joint review of the Horizontal Merger Guidelines by the federal antitrust agencies is likely to result in an update of the guidelines, said Molly S. Boast, Deputy Assistant Attorney General at the Department of Justice Antitrust Division, on February 8.

Boast made the remark during the Practising Law Institute’s “Antitrust & the Deal, 2010” program in New York City.

The Antitrust Division and the Federal Trade Commission are working together to determine whether the Guidelines (CCH Trade Regulation Reporter ¶13,104), which were issued in 1992 and revised in 1997 to add an efficiencies discussion, should be updated to reflect current practice and economic thinking.

The process has included five workshops, which were conducted over the last two months, as well as an internal review of staffers at the agencies.

A majority of the workshop participants and the staff—but not an overwhelming majority—have expressed a preference for an update, Boast noted. She did not offer a publication date for the update.

One of the goals of the guidelines is to provide transparency or insight into how the government conducts its merger analysis. According to Boast, the current guidelines do not reflect precisely how things are done at the agencies.

A consensus has developed around a need for a flexible analysis under the guidelines. There is a growing view that merger analysis should not be based on a rigid, sequential approach.Methods for determining market concentration could also be updated, according to Boast.

An update could revise the Herfindahl-Hirschman Index (HHI) thresholds to express accurately how the agencies use HHIs. There could be a move to deemphasize HHIs, the official suggested.

California’s Tax Authority Joins New York’s in Going After Franchisors

This posting was written by Bruce S. Schaeffer of Franchise Valuations, Ltd., co-author of CCH Franchise Regulation and Damages.

As most franchise practitioners know by now, New York recently enacted a statute amending Sec. 1136 of the Tax Law to mandate that all franchisors file information returns giving the names and addresses of all their franchisees in the state. The legislation also provides that information on all payments from franchisees to franchisors and records of all sales from franchisors to their franchisees will be required.

An even more onerous situation has evolved in California, where the California Franchise Tax Board has begun contacting non-resident franchisors about their nexus status for tax purposes.

State regulators are taking the position that non-resident franchisors must either register as resident corporations with the Secretary of State or have their California franchisees withhold seven percent of royalty payments.

Section 18662-2 of California's tax code is being cited as justification for this interpretation. Specifically:

Withholding at source is also required in the case of rentals or royalties for the use of, or for the privilege of using in this State, patents, copyrights, secret processes and formulas, good will, trademarks, brands, franchises, and other like property of such intangible property having a business or taxable situs as defined in Regs. 17951-1 through 17951-5, 17952 and 17953 in this State, and payments of prizes, premiums, rewards, winnings, etc., to nonresidents

“Constructive” Wrongful Termination, Attorneys Fees, and Expert Fees

On occasion, the issue under wrongful termination statutes is whether or not there has been a “constructive” wrongful termination. A recent New Jersey case is instructive.

In Maintainco, Inc. v. Mitsubishi Caterpillar Forklift (CCH Business Franchise Guide ¶14,195) a forklift manufacturer's forcing out an authorized dealer was held to have amounted to “constructive” termination in violation of the New Jersey Franchise Practices Act (NJFPA). The manufacturer argued that the NJFPA prohibited only actual terminations; thus, because the dealer was never terminated, there was no violation.

However, the record established that the manufacturer’s officers were well aware that the NJFPA prohibited them from terminating the dealer unless they could establish "good cause," and the court rejected the manufacturer's assertion that the dealer had breached a best efforts provision in the parties' agreement.

The court held that a dealer's loss of an exclusive territory, in and of itself, could qualify as a constructive termination. Therefore, the trial court’s ruling and its award of compensatory damages for lost profits to the dealer in the amount of $679,414 were affirmed. Additionally, the trial court's substantial award of attorney fees to the dealer in the amount of $3,533,642 was also upheld, but an award of $477,611 in expert witness fees was reversed.

Termination: The Insurance Agent Cases

It started with a Connecticut case against Nationwide Insurance, alleging that a terminated agent was entitled to the protection afforded a franchisee under Connecticut law. It was imperfectly resolved. There were similar cases in Missouri and Washington.

This was recently followed by Michigan, in a case of first impression, holding that an insurance agent could maintain a cause of action under the Michigan Franchise Investment Law if it could show it paid a franchise fee (which the court thought to be unlikely but could not so rule on the pleadings).Bucciarelli v. Nationwide Mutual Insurance Co.(E.D. Mich. 2009) CCH Business Franchise Guide ¶14,200.

In another insurance agent case, a California appellate court overturned a trial court holding that the relationship between an insurance company and one of its agents was that of franchisor/franchisee, entitling the agent to the protections of the California Franchise Investment Law and the California Franchise Relations Act. The court found there was no actual, present controversy, which was a requirement to bring the claim as a declaratory judgment action.

Thus, the trial court erred in reaching the merits of the agent’s claims and was ordered to vacate its summary judgment to the insurance company on the merits (Business Franchise Guide 2008-2009 New Developments Transfer Binder ¶13,897). The court was directed to issue a new order granting summary judgment on the sole ground that declaratory relief was not appropriate. Vice v. State Farm Mutual Automobile Insurance Co. (Cal. Ct. App. 2009)CCH Business Franchise Guide ¶14,219.
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Additional information on the issues discussed above is available in CCH Franchise Regulation and Damages by Byron E. Fox and Bruce S. Schaeffer.

FTC Proposes Rule for Combating Rogue Mortgage Assistance Relief Services

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

Providers of mortgage assistance relief services—or MARS—would be prohibited from engaging in unfair and deceptive practices, under a proposed Federal Trade Commission rule announced today.

Among the prohibited conduct would be the unfair practice of charging up-front fees for foreclosure rescue and mortgage modification services.

In its notice for proposed rulemaking (NPR), the FTC is seeking public comment on a rule that would regulate for-profit providers of mortgage assistance relief services (16 CFR Part 322).

“Mortgage assistance services based on negotiating with the lender or servicer to obtain a loan modification or some other type of foreclosure relief have mushroomed in the past two years,” according to the Commission. During that time, the agency has filed 28 law enforcement actions against these providers.

Misrepresentation of Services, Results

In these enforcement actions, the FTC has alleged that MARS providers misrepresented the services that they will perform and the results they will obtain for consumers.

In addition, some providers misrepresented that they were closely affiliated with the government, various nonprofit programs, or the consumer’s own lender or servicer. Some have also claimed that they offer legal services, when attorneys were either not employed at the company or provided little or no legal work for consumers.

MARS Defined

The proposed rule would define a “mortgage assistance relief service” to include “any service, plan or program, offered or provided in exchange for consideration on behalf of the consumer, that is represented, expressly or by implication, to assist or attempt to assist the consumer” in negotiating a modification of any term of a loan or obtain other types of relief to avoid delinquency or foreclosure.

According to the FTC, the definition “is intended to apply to every solution that may be marketed by covered providers to financially distressed consumers as a means to avoid foreclosure or save their homes.”

Prohibited Representations

The rule would prohibit misrepresentations of any material aspect of any mortgage assistance relief service. A non-exclusive list of claims that could violate the proposed rule includes:

 Likelihood and time to provide services or obtain results;

 Affiliation with public or private entities;

 Payment and other obligations under existing mortgage loans;

 Refund and cancellation policies; and

 The completion of promised services.

Required Disclosures

MARS providers would be required under the rule to make clear and prominent disclosures in an effort to assist consumers in making decisions about mortgage assistance relief services. For-profit status would need to be disclosed. A disclaimer disavowing any affiliation with the government or the consumer’s lender would be needed. The total amount consumers would have to pay for the provider’s services would have to be disclosed.

In addition, providers would need to disclose that there was no guarantee that consumers’ lenders would agree to change their loan terms.

Prohibition on Collection of Advance Fees

The Commission proposes to ban MARS providers from requiring that consumers pay in advance for their services. A large number of those responding to the Commission’s s June 2009 Advance Notice of Proposed Rulemaking (ANPR) urged the Commission to propose a rule prohibiting or restricting the collection of fees for mortgage relief services until the promised services were completed.

“The Commission believes that requiring that consumers pay advance fees for mortgage assistance relief services meets the standard for an unfair practice under Section 5(n) of the FTC Act,” according to the NPR. The NPR noted that the Commission reached the same conclusion in the Telemarketing Sales Rule with respect to the charging of an advance fee for credit repair services, money recovery services, and guaranteed loans or other extensions of credit.

The FTC, however, did provide some alternatives to a ban on advance fees. The agency asked whether it should: (1) limit or cap advance fees instead of banning them outright; (2) allow MARS providers to use independent third-party escrow accounts to hold fees until they achieve the results; and (3) include a right of rescission.

Assisting and Facilitating

The rule would also reach those who furnish key support to MARS providers engaged in unlawful conduct. The proposed rule would prohibit any person from providing “substantial assistance or support” to a MARS provider if that person knows or consciously avoids knowing that the provider is violating any provision of the proposed rule.

The NPR is available here on the FTC website and will be published in the Federal Register. Further details will appear in the CCH Trade Regulation Reporter.

Pennsylvania Residents Can Proceed with Trespass Claims over Google “Street View”

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

Two Pennsylvania residents (the Borings) could go forward with common-law trespass claims against Internet search-engine operator Google for photographing their residence, outbuildings, and swimming pool and including the photographs in Google's "Street View" option for its online map service, the U.S. Court of Appeals in Philadelphia has held in a non-precedential decision.

The Borings, who live on a private road in Pittsburgh, alleged that Google entered their property without permission and despite a "no trespassing" sign.

Trespass

A federal district court had dismissed the claims (CCH Privacy Law in Marketing ¶60,298), ruling that the Borings failed to allege facts sufficient to support a plausible claim that they suffered any damage as a result of Google’s trespass. (See March 5, 2009 posting on Trade Regulation Talk).

In its denial of the Borings’ motion for reconsideration (CCH Privacy Law in Marketing ¶60,323), the district court explained that, although nominal damages are available for the tort of trespass in Pennsylvania, the residents did not request nominal damages in their amended complaint, as required by Pennsylvania law.

Damages

Trespass is a strict liability tort, the appellate court noted. The district court effectively made damages an element of the claim, which was erroneous. The Borings’ assertion that Google entered onto their property without permission was sufficient to state a claim for trespass. There was no requirement that damages be pleaded, either nominal or consequential.

“Of course,” the appellate court said, “it may well be that, when it comes to proving damages from the alleged trespass, the Borings are left to collect one dollar and whatever sense of vindication that may bring, but that is for another day.”

To receive more than one dollar, the Borings would have to prove that the trespass was the legal cause of actual harm or damage, the court said. Their complaint, however, alleged sufficient facts to survive a motion to dismiss.

Invasion of Privacy

The appellate court affirmed the dismissal of the Borings’ claims for common-law invasion of privacy, on the ground that the Borings failed to allege facts that would support a conclusion that Google’s entry onto their property and its capturing of images for the Street View service would be highly offensive to a reasonable person.

“No person of ordinary sensibilities would be ashamed, humiliated, or have suffered mentally as a result of a vehicle entering into his or her ungated driveway and photographing the view from there,” the court said.

In the court’s view, Google’s actions were arguably less intrusive than a knock on the door of a private residence, which the Restatement (Second) of Torts cited as an example of conduct that would not be highly offensive to a person of ordinary sensibilities. The view of the Borings’ house, garage, and pool could be seen by any person who entered onto their driveway, including a visitor or a delivery person.

The heart of the Borings’ complaint appeared not to be Google’s fleeting presence in the driveway, but, rather, the photographic image captured at that time, according to the court. “The existence of that image, though, does not in itself rise to the level of an intrusion that could reasonably be called highly offensive,” the court said.

Unjust Enrichment

Dismissal of the Borings’ claims for unjust enrichment was also affirmed. The Borings did not allege that they conferred any benefit to Google, let alone a benefit for which they could reasonably expect to be compensated.

Injunctive Relief

The Borings also failed to set out facts supporting a plausible claim of entitlement to injunctive relief. There was no allegation of injury resulting from Google’s retention of the photographs, which was unsurprising, the court said, because the allegedly offending images had been removed from the Street View service.

Full text of the January 28 decision in Boring v. Google, Inc., 3rd. Cir., No. 09-2350, will appear in CCH Privacy Law in Marketing.

Intel’s Motion for Disqualification of Commissioner Rejected

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

The FTC on January 19 issued an opinion in which it denied Intel Corporation’s motion to disqualify Commissioner J. Thomas Rosch from participating in adjudicative proceedings against the computer chip maker, even though Commissioner Rosch served as Intel’s primary outside antitrust counsel from about 1987 until mid-1993.

The Commission also released a statement by Commissioner Rosch, explaining his decision not to recuse himself in the matter. That statement was dated December 18, 2009—just two days after the agency issued its complaint against Intel for monopolizing the markets for Central Processing Units (CPUs) and creating a monopoly in the markets for graphics processing units (GPUs). (For further information on the FTC complaint against Intel, see the December 16, 2009 posting on Trade Regulation Talk.)

Matters Not “Substantially Related”

In an opinion written by FTC Chairman Jon Leibowitz, the Commission concluded that the current matter, which concerned conduct from 1999 to the present, and the matters upon which Commissioner Rosch previously advised Intel were not “substantially related.”

The FTC’s previous investigation in which Commissioner Rosch represented Intel principally focused on conduct that took place from 1985 through 1990. There was no pertinent nexus between the facts at issue in the prior representation and the current Intel matter, the Commission said.

Intel also failed to identify any basis for a reasonable person to question Commissioner Rosch’s ability to be impartial in adjudicating the proceeding, according to the Commission.

Commissioner Rosch’s Statement

In his separate statement, Commissioner Rosch explained his reasons for declining to recuse himself from further participation in the Intel proceeding. The Commissioner noted that disqualification was not supported under applicable standards for judges and FTC Commissioners, government ethical regulations, and California’s Rules of Professional Conduct.

Moreover, the Commissioner questioned Intel’s decision not to object to his participation in proceedings sooner. Intel did not move to disqualify Commissioner Rosch until the day before the Commission’s final vote to pursue administrative litigation. Over a period of approximately 18 months, “Intel never suggested (nor did any other participant for that matter) that there was any basis for disqualification,” Commissioner Rosch noted.

The Commission opinion and order denying motion for disqualification, In the Matter of Intel Corp., Dkt. 9341, appears here on the FTC website. Further details will appear in CCH Trade Regulation Reporter.

Magazine Shielded from Suit for Placing Musicians’ Names Near Tobacco Ads

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

Rolling Stone magazine’s feature article “Indie Rock Universe”—presented in a gatefold format enclosed in full-page cigarette advertising—was fully protected noncommercial speech, a California appellate court has ruled.

The musicians complained that their names were used without authorization to advertise Camel cigarettes through placement in close proximity to R.J. Reynold’s expressions of corporate sponsorship for independent music.

The musicians asserted statutory and common law right of publicity claims, as well statutory unfair competition claims, under California law.

The publishers’ motion to strike the complaint under the California anti-SLAPP statute was granted. The statute applies to “strategic lawsuits against public participation” presenting claims based on acts in furtherance of a person’s rights of free speech or petition. The musicians failed to demonstrate a probability of prevailing, according to the court.

Noncommercial Speech

In considering whether the article was commercial or noncommercial speech, the court relied on the analytical framework developed in the 2002 decision of Kasky v. Nike, Inc. (CCH Advetising Law Guide ¶60,496).

In that case, the California Supreme Court held that Nike’s allegedly false statements in a public relations campaign constituted commercial speech and could give rise to California false advertising and unfair competition claims brought by a private citizen on behalf of the public.

Unlike Nike, the “speakers” in the present case—the publishers of Rolling Stone—did not have a direct business interest in Camel cigarettes—the goods that were the subject of the speech at issue, the court found. The musicians failed to cite a case, and the court’s research disclosed none, in which a magazine’s editorial content had been held to be transformed into commercial speech merely because of its proximity to advertisements touching on the same subject matter.

Actual Malice

To prevail, the musicians were required to provide clear and convincing evidence that the publishers acted with actual malice.

At best, the court said, the evidence raised a triable issue of negligence in publishing the gatefold. It was undisputed that the magazine’s editorial staff played no part in designing the Camel ad and that R.J. Reynold‘s staff had no role in designing the feature article.

Freedom of the Press

In addition to the freedom of speech, the court agreed with the publishers that the freedom of the press also barred the musicians’ causes of action. The freedom of the press had been extended to the content and placement of advertisements. Of the magazine’s 215 pages, no less than 108 were devoted to full-page advertisements.

The gatefold layout might intensify the readers’ exposure to the ads because the pages ran contiguously and because the format required readers to lift the advertising pages to the left and to the right to access the feature, instead of just mindlessly turning them, the court noted.

However, the court saw no principled legal distinction between a page of editorial content that was preceded and followed by full-page ads, and the gatefold format, in which the ads appeared on the reverse side of the feature’s pages.

The January 28 opinion in Stewart v. Rolling Stone LLC, California Court of Appeal, First Appellate District, Division One, No. A122452, is reported at CCH Advertising Law Guide ¶63,736.