Firms' Gap Insurance Demands Did Not Violate Sherman, Bank Holding Company Act

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

A seller of motor vehicle gap insurance products could not maintain Sherman Act or Bank Holding Company Act claims against a financial services firm and two affiliate entities for the firm's refusal to purchase, from car dealers, credit transactions that included the complaining seller's gap insurance products, the federal district court in Covington, Kentucky, has held.

The complaining insurance seller failed to allege a cognizable antitrust injury stemming from the defendants' conduct and did not establish an unlawful tying arrangement prohibited by the Bank Holding Company Act, the court determined. Dismissal of the claims was granted.

Gap insurance is a type of policy covering the difference, in the event of a "total" loss, between what a car buyer owes on a car and what the primary insurance carrier pays out as its market value at the time of loss. The defendants allegedly would buy credit transactions containing gap insurance products only if those products were on their "approved list," which included products from their own subsidiary but not the complaining company.

Antitrust Injury

The only injury that the plaintiff alleged from the defendants' tying, reciprocal dealing, and exclusive dealing related to its own ability to sell gap insurance products, the court observed. Even if the defendants' alleged actions caused it to lose business, that injury alone was not an antitrust injury because no harm occurred either to the consumer or to competition as a whole.

Although the insurance seller claimed that the conduct decreased competition within the market, it did not allege facts that demonstrated competition was actually diminished. It failed to state how many gap insurance providers existed and how many were on the approved list, thus rendering it impossible to tell the extent to which competition may have been affected.

Moreover, the insurance seller failed to allege an injury that flowed from that which made the defendants' act unlawful. Its alleged injury flowed from its exclusion from the approved list, not from the alleged tying arrangement itself. The Sherman Act did not prohibit use of an approved list by a buyer, or restrict that buyer's freedom to select the entity from which it would purchase products, noted the court.

Tying, Reciprocal Dealing, Exclusive Dealing

Even if the insurance seller had not failed to plead antitrust injury, which was fatal to its Sherman Act claims, its allegations against the defendants had not described a tying arrangement, reciprocal dealing, or exclusive dealing that was prohibited by the Sherman Act, in the court's view.

Bank Holding Company Act

The defending financial services firm and its two affiliate entities did not engage in an unlawful tying arrangement prohibited by the Bank Holding Company Act (BHCA) through their credit transaction purchasing practices, the court stated. The complaining gap insurance seller was unable to establish the first element for a BHCA claim—the firm's imposition of an anticompetitive tying arrangement by conditioning an extension of credit upon borrower's obtaining additional credit or services from the bank—because the defendants did not extend any credit or provide a service. Rather, they purchased credit transactions that had already been completed between the car dealer and the car buyer.

No tying arrangement existed because the defendants did not require dealers to include gap insurance products in the credit transactions the defendants purchased, or even to buy gap insurance products at all.

The decision is Midwest Agency Services, Inc. v. J.P. Morgan Chase Bank, N.A., 2010-1 Trade Cases ¶76,940.

Hospitals’ Steering of Patients to Equipment Providers Did Not Violate Antitrust Law

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

An Alabama hospital and a corporation that operated several hospitals in the same area, along with their affiliated joint ventures that provided durable medical equipment (DME), did not violate the Sherman Act or Alabama antitrust law by allegedly using their control of hospital services to coerce patients into buying or renting DME (including beds, wheelchairs, and oxygen tanks) from those affiliates.

A motion to dismiss the claims of competing DME providers, who were allegedly excluded as a result of the hospital defendants' steering of patients to their affiliates, was granted.

Standing

As an initial matter, the court decided that the competing DME providers had standing to assert the claims. The plaintiffs' allegations in the case—that the hospitals were channeling patient choice to their captive DME providers—were sufficient to show the necessary injury to competition.

The failure of the plaintiffs to allege an actual increase in prices or an actual deterioration in the quality of DME did not defeat the claim of an antitrust injury. If the allegations were proven true, competition would have been injured because the competing DME vendors no longer had access to the patients who needed DME.

The plaintiffs' damages in the case were not premised on their ability to profit while patients “paid an artificially inflated price.” Though the complaining DME providers' injuries were indirect and speculative, their potential damages were duplicative, and the patients were more direct victims, the DME providers were efficient enforcers of the antitrust law. They were much better positioned than consumers to detect an antitrust violation earlier and did not suffer from the same collective-action problems that individual consumers with relatively small injuries did.

Reciprocal Dealing

The complaining DME competitors failed to offer sufficient factual allegations in support of a coercive reciprocity claim, the court found. While reciprocal dealing arrangements could constitute an illegal restraint of trade when coercive, reciprocal dealing was not by itself illegal.

The plaintiffs made no allegation that the hospital staff's continued employment, pay, benefits, or access to the hospital were in any way conditioned on the staff referring patients to their hospital's DME providers. Nothing in the complaint suggested that the hospitals and their staff otherwise had a buyer-seller or other comparable commercial relationship, the court noted.

Refusal to Deal

The defendants did not engage in an unlawful refusal to deal by failing to provide the competing DME providers access to discharged patients, the court added. While the complaining DME competitors sufficiently alleged agreement between the hospitals and their captive DME providers to state a claim that they were acting in concert, the concerted actions in which they engaged did not state an antitrust claim for which relief could be granted.

The hospitals' unilateral termination of their prior voluntary course of dealing, which had been demonstrated by a DME rotational assignment system, did not suggest a willingness to forsake short-term profits. The hospitals terminated the course of dealing after entering into joint ventures with their respective DME providers, and there was nothing in the plaintiffs' complaint, outside of conclusory allegations, plausibly suggesting that the decision to cease the rotational system and exclude competing DME providers from access to the hospitals was for any purpose other than increasing both the short-term and long-term profits of their DME providers, the court said.

Monopolistic Conduct

The defendants did not engage in monopolization, attempted monopolization, or conspiracy to monopolize the market for the distribution of DME through their Montgomery and Prattville hospitals, the court also ruled. The complaining DME providers failed to allege either that a single entity (a single hospital) or multiple entities acting in concert (the two hospital distributors of DME) engaged in monopolizing activity.

The only allegation of parallel conduct arose from the fact that the hospitals entered into joint ventures with their respective DME providers during the same broadly-defined time period.

In the absence of any allegations of concerned activity between the hospitals' two DME providers, the only theory that could possibly support the claims was one based on shared monopoly, which was not recognized as a viable cause of action, the court explained.

The decision—Precision CPAP, Inc. v. Jackson Hospital—appears at 2010-1 Trade Cases ¶76,939.

Government Contractor May Have RICO Liability for Human Trafficking

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

RICO claims predicated on forced labor and human trafficking could proceed against defense contractor Kellogg, Brown, and Root (KBR), the federal district court in Houston has ruled. The claims were filed by a Nepali man who allegedly was forced to work in Iraq and the family members of twelve Nepali men who were executed in Iraq by a group of terrorists.

Forced Transport, Labor

According to the plaintiffs, a Nepal-based company had recruited workers from Nepal and Sri Lanka to work in a luxury hotel in Amman, Jordan, and in other areas where their lives would not be in danger. When the workers arrived in Jordan, however, their passports were confiscated and another defendant—a Jordanian subcontractor—transported them to Iraq, against their will, to work under the supervision of KBR.

The subcontractor used an unprotected automobile caravan to transport the workers to an air base near Ramadi. The caravan was traveling on the “highly dangerous” Amman-to-Baghdad highway when terrorists stopped the lead cars and took twelve of the workers hostage. The terrorists videotaped hostage statements, sent a copy of the videotape to the Foreign Ministry of Nepal, and then executed the hostages.

The plaintiff, who survived the trip, worked at the air base as a warehouse laborer under the supervision of KBR. After hearing about the deaths of the twelve, the survivor “expressed his desire to return to Nepal,” but KBR told him that he could not leave until he had fulfilled his employment contract. The gravamen of the plaintiffs' complaint was that the defendants had formed a RICO enterprise to procure cheap foreign labor, and thus increase profits, through human trafficking and forced labor.

Jurisdiction

The court found that subject matter jurisdiction existed because the Military Extraterritoriality Jurisdiction Act had extended extraterritorial indictability to parties employed by the U.S. armed forces (including KBR). Nevertheless, the court applied the “conduct test” and the “effects test” to avoid resting jurisdiction on a “relatively murky” area of the law. Although the conduct test was not met, the effects test was.

The effects test asked whether conduct outside of the United States had a substantial adverse effect on U.S. investors or securities markets, the court noted. The plaintiffs alleged that KBR’s acquisition of “cheap labor” through human trafficking had benefited the defendants, disadvantaged their competitors, and adversely affected the U.S. labor market. They also alleged that U.S. taxpayers had funded KBR’s contracts and the racketeering enterprise had passed money through the U.S. banking system.

Because these allegations sufficiently identified “substantial” domestic effects, the court’s adjudication of the plaintiffs’ RICO claims was proper.

Standing

The plaintiffs' alleged injuries—lost wages, out-of-pocket fees, and the loss of alternative employment—were sufficient to establish RICO standing, in the court's view. Although the Fifth Circuit had not addressed the question of whether the family member of a deceased individual had standing to assert RICO claims, the Fourth Circuit’s determination that RICO claims survived the death of an injured party was persuasive.

Enterprise

The absence of a decision-making structure did not prevent the formation of an association-in-fact enterprise composed of KBR and the Jordanian subcontractor, the court determined. The plaintiffs sufficiently alleged that the defendants had worked cooperatively to accomplish an illegal purpose: the acquisition of cheap labor through trafficking and forced labor.

Pattern of Racketeering

Assertions that KBR “regularly” employed workers that were transported into Iraq against their will were sufficient to allege a threat of continued criminal activity. According to the plaintiffs, 92 laborers were brought into Iraq—against their will in 2003 and 2004—to work under the supervision of KBR.

These facts were sufficient to allege that the acquisition of cheap workers, against their will, was part of KBR’s modus operandi. The continuity element of a pattern of racketeering was therefore met, the court concluded.

Predicate Acts

The predicate acts of forced labor and human trafficking were sufficiently pled, according to the court. The fact that the complaint did not explicitly allege physical force was inconsequential because “conduct other than the use, or threatened use, of law or physical force may, under some circumstances, have the same effect as the more traditional forma of coercion—or may even be more coercive”

In this case, the plaintiffs’ complaint made the acts of forced labor and human trafficking plausible, which was all that was necessary to allege RICO predicate acts.

The decision is Adhikari v. Daoud & Partners, CCH RICO Business Disputes Guide ¶11,824

Gift Card Fees, Expiration Dates Limited by Federal Reserve Rules

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

The Federal Reserve Board has announced final rules that restrict the application of fees and expiration dates to store gift cards, gift certificates, and general-use prepaid cards. The rules become effective August 22, 2010. The rules become effective August 22, 2010.

The Board developed the rules as required by Title IV of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CCH Advertising Law Guide ¶11,900)

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

Exclusions, Marketing Compliance

The rules do not apply to reloadable prepaid cards that are not marketed or labeled as a gift card or gift certificate and prepaid cards received through a loyalty, award, or promotional program, according to the Board. The exclusion will not apply if a reloadable prepaid card is advertised or offered by suggesting the potential use of the card as a gift, according to the Official Staff Interpretations accompanying the rules.

For example, if a card issuer selling a variety of cards sets up at a retailer a promotional display topped by a sign prominently stating “Gift Cards,” the exclusion might not apply to general-purpose reloadable cards.

Similarly, if a banner ad for “Gift Cards” is prominently displayed on the home page of a website, general-purpose reloadable cards sold on the site might not be excluded from the rules’ restrictions on fees and expiration.

Fees

The rules prohibit imposition of dormancy, inactivity, or service fees unless: (1) there has been at least one year of inactivity on the certificate or card; (2) no more than one such fee is charged per month; and (3) the consumer is given clear and conspicuous disclosures about the fees.

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

Expiration

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

The expiration date restrictions apply to a consumer’s funds, and not to the certificate or card itself. The rule includes provisions intended to give consumers a reasonable opportunity to purchase a certificate or card with at least five years before the certificate or card expiration date. The rules prohibit any fees for replacing an expired certificate or card, or for refunding the remaining balance, if the underlying funds remain valid.

State Laws, Limited Preemption

The rules prescribe standards for determining whether state laws that govern dormancy, inactivity, or service fees, or expiration dates, are preempted. A state law is not preempted due to inconsistency with federal law if the state law is more protective of consumers.

A state law that is inconsistent may be preempted even if the Board has not issued a determination. However, a financial institution might not be immune from violations of state law if the institution chooses not to comply with the state law and the Board later determines that the state law is not preempted.

Access to State Laws, Smart Chart

Subscribers to the CCH Advertising Law Guide on the Internet have access to more detailed coverage gift certificate and gift card laws in more than 35 states.

A Smart Chart™ gives users quick access to the types of certificates and cards that are subject to—and exempt from—the laws. Coverage of fee restrictions, expiration date restrictions, and disclosure requirements is provided, along with links to the law texts.

FTC Seeks Comments on Revising COPPA Rule

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

The FTC announced on March 24 that it is seeking public comments on the costs and benefits of the agency’s Children’s Online Privacy Protection Act (COPPA) Rule.

The COPPA Rule has not changed since its adoption ten years ago. Changes to the online environment over the past five years, including children’s increasing use of mobile technology to access the Internet, warrant reexamining the Rule, the agency said.

COPPA imposes requirements on operators of websites or online services that are aimed at children under 13 years of age, or that knowingly collect personal information from children under 13.

The COPPA Rule requires that online operators notify parents and get their permission before collecting, using, or disclosing children’s personal information. It also imposes security requirements and restrictions on use of information collected about children.

Issues the FTC would like to see addressed are:

• What implications for COPPA enforcement are raised by mobile communications, interactive television, interactive gaming, or other similar interactive media?

• How are automated systems—those that filter out any personally identifiable information prior to posting—being used to review children’s Internet submissions?

• Do operators have the ability to contact specific individuals using information collected from children online, such as persistent IP addresses, mobile geolocation data, or information collected in connection with behavioral advertising? Should the Rule’s definition of “personal information" be expanded accordingly?

• Are there additional technological methods for obtaining verifiable parental consent that should be added to the COPPA Rule? Should any of the current methods be removed?

• Are parents exercising their right under the Rule to review or delete personal information collected from their children? What challenges do operators face in authenticating parents?

• Does the Rule’s process for the FTC’s approval of self-regulatory guidelines (safe harbor programs) enhance compliance? Should the criteria for FTC approval and oversight of the guidelines be modified?

The 90-day comment period will end on June 30, 2010.

The Request for Public Comment on the Federal Trade Commission’s Implementation of the Children’s Online Privacy Protection Rule is posted here on the FTC’s website. The FTC’s March 24 Press Release is available here.

UFOC Disclaimers Did Not Preclude Franchisee Reliance on Nondisclosure

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

The general language of the exculpatory clauses in a coffee shop franchisor’s Uniform Franchise Offering Circular (UFOC) did not preclude several prospective franchisees from reasonably relying on the franchisor’s nondisclosure of the financial losses of its parent company, a Colorado appellate court has decided.

A Colorado trial court’s judgment—dismissing the franchisees’ claim of fraudulent nondisclosure of the historic losses of the franchisor’s parent—was vacated.

Financial Losses of Parent Company

The losses were unlike the financial performance of the franchisor’s company stores, which the franchisor’s UFOC explained was not predictive of franchise results at a different location and under a different management, according to the appellate court. Rather, ongoing parent company losses could foreshadow its insolvency, which could destroy the value of the franchise, regardless of its location or management.

No clause in the UFOC either referred to information about the parent company’s financial condition or negated reasonable inferences that could be drawn from assumptions about this information.

The trial court made no finding that the franchisees had been discouraged from relying on inferences concerning parent company financial information. The only finding was that franchisees had been told that financial information about the parent would not be provided.

Neither of the disclaimers cited by the trial court disclaimed reliance on undisclosed information. Thus, the trial court’s paraphrasing of the disclaimers as “[franchisees] acknowledged that they were not relying on any other information at the time they entered into their Franchise Agreements” was overbroad, the appellate court held.

FTC Franchise Rule

The Federal Trade Commission franchise rule did not preempt Colorado common law, which allegedly required the franchisor to disclose that the parent company had been, or was, unprofitable. The appellate court rejected the franchisor’s contention that, because the parent company was not a guarantor, the franchise rule prohibited the disclosure of financial information about the parent.

The plain language of Section 436.1(a)(20) of the 1979 franchise rule would not preclude a general comment, such as “The franchisor is the wholly owned subsidiary of _________, which has not shown a profit during its _____ years of operation,” according to the court. The section did not preempt common law alleged to require disclosure of the parent financial information.

The franchise rule sought to protect franchisees from unfair or deceptive practices and, as mentioned in the FTC commentary for the 2007 rule, disclosures did not “create a safe harbor for franchisors engaging in otherwise unlawful conduct.”

Preemption of State Law

The FTC addresses preemption in Section 436.10(b), explaining:

“The FTC does not intend to preempt the franchise practices laws of any state or local government, except to the extent of any inconsistency with part 436. A law is not inconsistent with part 436 if it affords prospective franchisees equal or greater protection, such as registration of disclosure documents or more extensive disclosures.”

Because of the reference to “franchise practices laws,” there could be no preemption of common law claims, the court held. In any event, the reference to “inconsistency” limited the court’s inquiry to direct conflict, not express or field preemption.

There was no inconsistency between the prohibition against disclosing a parent’s financial statements absent a guarantee and merely informing prospective franchisees that the franchisor’s parent has been, or is, unprofitable.

The decision—Colorado Coffee Bean LLC v. Peaberry Coffee Inc.—will appear at CCH Business Franchise Guide ¶14,325.

Drug Store Chain, Supplement Maker Executives Settle FTC Deceptive Ad Claims

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

Walgreen Company has agreed to pay nearly $6 million to settle FTC charges that the company deceptively advertised its “Wal-Born” line of dietary supplements, the agency announced today.

Cold Prevention Claims

In its complaint filed in the federal district court in Chicago, the FTC contended that the drug store chain improperly claimed that its supplements could prevent colds, fight germs, and boost the immune system.

Under the proposed settlement, Walgreens would be barred from claiming that its products prevent or treat cold or flu symptoms, or protect against cold and flu viruses by boosting the immune system, unless there is scientific evidence to back up the claims. The $5.97 million settlement with Walgreens includes $1.2 million that will be used to pay consumers as the result of a separate class action suit.

In addition to the proposed Walgreens settlement, the FTC announced that a federal district court in Cleveland had approved a settlement in a separate case with two principal officers of Improvita Health Products Inc., the manufacturer of Walgreens’ “Wal-Born” and other supplements.

Under that settlement, the individuals will be required to pay $565,000 and will be barred from making unsupported claims for their cold and flu treatments. In addition, they must (1) take steps to ensure that their employees comply with the settlement and (2) comply with standard FTC record-keeping and reporting requirements.

The FTC suit against the corporate defendant, Improvita Health Products, Inc., remains in litigation.

Prior Actions

The FTC’s agreements with Walgreens and the Improvita officers come after the agency settled similar cases last year involving two other pharmacy chains, CVS Pharmacy, Inc. (CCH Trade Regulation Reporter ¶16,359) and Rite Aid Corporation (CCH Trade Regulation Reporter ¶16,331).

The action is FTC v. Walgreen Co., FTC File No. 092 3134, and FTC v. Improvita Health Products Inc., FTC File No. 072 3189. A press release, the complaints, and the consent decrees appear here on the FTC website.

Further details will appear in CCH Trade Regulation Reporter.

Google's Sponsored Links Not False Ads or Designations of Origin

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

Google's publishing of “sponsored links” in response to an online search for a building materials seller's “Styrotrim” trademark could not constitute false advertising or false designations of origin, affiliation, connection, or association of a competitor with the seller in violation of the Lanham Act, the federal district court in Sacramento has ruled.

Ad Words Program

The seller challenged the use of “Styrotrim” as a suggested keyword in Google's AdWords program, through which advertisers bid for placement of sponsored links in keyword search results.

The seller contended that Google's placement of competitors above the seller’s business on results pages confused consumers into believing that competitors' products were preferable to the seller’s and, in essence, was a form of “bait and switch” advertising.

Lack of Direct Competition

Although Google might provide advertising support for others in the seller’s industry, Google did not directly sell, produce, or otherwise compete in the building materials market. Without a showing of direct competition, the seller failed to state a claim for false advertising under the Lanham Act, according to the court.

Even if a “sponsored link” might confuse a consumer, with several different sponsored links appearing on a page it was hardly likely that a consumer might believe each one was the true producer or origin of the Styrotrim product. As such, the seller failed to properly plead a false designation of origin.

Communications Decency Act Immunity

Under the Communications Decency Act, Google was an interactive computer service immune from common law claims including fraud. The seller argued that Google was exposed to liability as an “information content provider” because, through its keyword suggestion tool, Google in fact did participate in the content of advertisements.

Keyword suggestion, however, was a “neutral tool” that did nothing more than provide options that advertisers could adopt or reject, in the court's view.

The opinion in Jurin v. Google Inc. appears at CCH Advertising Law Guide ¶63,777.

Subway Can Pursue Suit Challenging Quiznos' Comparative Ads

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

Lanham Act claims challenging Quiznos' television commercials and an Internet contest, comparing the amount of meat in Quiznos and Subway sandwiches, could not be rejected on summary judgment because there were numerous unresolved issues of material fact, the federal district court in Hartford has ruled.

Twice the Meat

Quiznos contended that the claims made in its Cheesesteak Commercial were true because its Prime Rib sandwich actually contained two times as much meat as the Subway Cheesesteak sandwich. However, field testing of 651 franchises conducted by Quiznos showed that 27.65% of franchises failed to meet Quiznos’ standard of 5 oz. of meat, and 10.29% made sandwiches with less than 4 oz. of meat, the court found.

A comprehensive survey of 4,370 Quiznos franchises revealed that 44.14% of the Prime Rib sandwiches tested contained less than 5 oz. of meat, and 5.86% contained less than 4 oz. of meat.

The parties appeared to agree that the Subway Cheesesteak sandwich contained at least 2.5 ounces of meat. In addition, the Subway Cheesesteak was available with a double portion of meat for an extra $1.00.

Literal Falsity

Quiznos unsuccessfully argued that the commercial could not be literally false because it was ambiguous. The court determined that the commercial clearly conveyed the “twice the meat” message by direct side-by-side comparison of the two sandwiches along with commentary by “men on the street” indicating that the Subway sandwich has “little meat” or “no meat,” as well as by the text frame reading that the Quiznos sandwich had “more than 2x the meat.”

Implied Falsity—Price Message

Genuine issues of fact were created by the parties' conflicting surveys of whether Quiznos Ultimate Italian commercial conveyed a price message. Given Quiznos' claim that its sandwich contained a double portion of meat, if the competing products were perceived as costing the same, consumers arguably were misled into believing that the Quiznos sandwich would be a better value for the money.

Internet Video Contest

Finally, there were genuine issues of fact as to whether false representations were made in connection with Quiznos' Internet-based contest, which solicited videos through the domain name “meatnomeat.com.”

Four posted sample videos depicted a Subway sandwich as having no meat or less meat than a Quiznos sandwich. Quiznos' contention that the posting of the videos did not constitute commercial speech for the purpose of influencing customer to buy Quiznos' products was unpersuasive, according to the court.

The opinion, Doctor's Associates, Inc. v. QIP Holder LLC, is reported at CCH Advertising Law Guide ¶63,763.

Mortgage Relief Scheme Violated New Jersey Consumer Fraud Act

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

A real estate lawyer and his client engaged in a fraudulent mortgage relief scheme that violated the New Jersey Consumer Fraud Act (CFA) by misleading mortgage holders, according to the U.S. Bankruptcy Court in Trenton, New Jersey.

The mortgage holders filed for Chapter 13 bankruptcy in an attempt to save their home from foreclosure. They then entered into an agreement with the real estate lawyer’s client, Frederick Cleveland, to sell the house for $555,000. Cleveland was to pay off $510,000 on the two existing mortgages on the house and another $46,000 to the mortgage holders to pay for the Chapter 13 plan.

Instead, Cleveland borrowed $646,400 and took $100,000 for himself. The mortgage holders were unaware that the monthly payments they made to Cleveland were not being used to service the financing and did not understand that if Cleveland failed to pay the new lender, they could lose their home.

Misrepresentations

In preparing the closing documents, the real estate lawyer misrepresented the sale price and falsely told the mortgage holders that Cleveland was investing his own cash.

Although the mortgage holders were not going to receive any money, the real estate lawyer told them they would receive payments from a trust account. Cleveland eventually defaulted on the new loan and the lender initiated foreclosure proceedings.

The real estate lawyer and Cleveland violated the CFA by making false and misleading statements regarding a mortgage relief plan, according to the court. The CFA prohibits the use of any unconscionable commercial practice, deception, or fraud.

Sophisticated Consumer Exception

Although Cleveland argued that the mortgage holders could not avail themselves of the CFA because they were sophisticated parties and could not be misled, the court found that there was no statutory exception for sophisticated consumers.

Even if a business practice was not fraudulent or deceptive, that practice could nevertheless violate the CFA if it was unconscionable. Here, Cleveland found the mortgage holders in a very vulnerable position and took advantage of them for personal gain.

Damages, Attorney’s Fees

An award of actual damages, attorneys’ fees, and other appropriate equitable relief was available to the mortgage holders. The mortgage holders suffered an ascertainable loss because the new mortgage was $646,400, even though they had owed only $529,608. Thus, the damage award was over $350,000, treble the difference between the loss and what the mortgage holders actually received.

The court noted that the mortgage holders could submit proof of their attorneys’ fees and costs, as well as seek other equitable remedies. The real estate lawyer was held jointly liable for the damages, costs, and fees because he conspired with his client to violate the CFA.

The mortgage holders' lawyer stated that this was the first reported case in New Jersey concerning mortgage foreclosure rescue schemes.

The decision is In re O'Brien, CCH State Unfair Trade Practices Law ¶32,012.

Late Opt-Outs Permitted in Antitrust Class Action Against Insurers, Brokers

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

In an antitrust class action against insurance companies and brokers, a federal district court did not abuse its discretion when it extended the “opt-out” deadline and modified the settlement class so that late-filing opt-outs could elect to be excluded from the class settlement, the U.S. Court of Appeals in Philadelphia has ruled in a not-for-publication opinion.

Accordingly, settling defendants were not entitled to a permanent injunction blocking the late-filing opt-outs from pursuing state court antitrust litigation.
Several class action suits were filed in 2004 against insurance brokers and insurers for their participation in an alleged bid rigging conspiracy.

In February 2009, a final judgment and order, approving a class-wide settlement, was filed. Pursuant to the order, all members of the class released any and all claims against the settling defendants that could have been raised in the class action suit.

The settling defendants filed motions to enjoin two companies from pursuing state court actions because the companies failed to opt out in a timely fashion.

In response, the companies filed motions in the district court to extend the “opt-out” deadline and to modify the settlement class so that each could elect to be excluded from the class settlement.

The district court exercised reasonable discretion in granting the motion to extend the deadline after concluding that the late-filers' failure to meet the “opt-out” deadline was “excusable neglect,” the appellate court ruled.

In light of the deadline extension, and the subsequent removal of the late-filing opt-outs from the settlement class, the district court correctly denied the defendants' motion for a permanent injunction barring the late-filing opt-outs' state court litigation.

The March 9 decision, In re: Insurance Brokerage Antitrust Litigation, appears at 2010-1 Trade Cases ¶76,923.

Tax Software Firms, Organization Partnering with IRS Were Immune from Antitrust Suits

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

A group of private sector tax software companies and an organization that allied those companies in a free tax preparation and e-filing service partnership with the Internal Revenue Service (IRS) were protected under the implied immunity doctrine from claims asserted by a putative class of taxpayers and tax preparers that the companies and organization violated federal antitrust law by agreeing among themselves to limit their offering of free electronic-filing ("e-filing") services to the taxpayers, according to the U.S. Court of Appeals in Philadelphia. Dismissal of the claims was affirmed.

The claims originally had been dismissed at the federal district court level in 2008 (2008-1 Trade Cases ¶76,193). However, the plaintiffs were granted leave to amend their complaint on the basis that it might be possible for them to allege facts triggering an exception to conduct-based implied antitrust immunity that had been created by the Supreme Court in 1973. The plaintiffs did replead, attempting to invoke this exception, but their claims were again dismissed last year.

Conduct-Based Immunity

The defending companies and organization were entitled to conduct-based immunity because their allegedly anticompetitive conduct was compelled by the terms of the partnership agreement and appeared to be consistent with the IRS's policy regarding electronic tax preparation and filing, the appellate court decided.

Rejected was an argument that the conduct-based implied antitrust immunity was accorded to private parties like the defendants only when they were acting at the direction of a government agency and providing a government service. The specific nature of a private entity's conduct did not need to be the provision of a governmental function, provided the conduct was directed by a federal agency, pursuant to a defined government program or policy. Whether the particular activity in question was of a private or governmental nature was immaterial, the court noted.

Free to File” Partnership Agreement

It was clear that the IRS was statutorily authorized to enter into the "Free File" program partnership agreement with the defending companies and organization, and that the agreement and its accompanying Memorandum of Understanding explicitly required the defendants to restrict the availability of free electronic tax preparation and filing services under the program, the court explained.

The IRS's decision to limit the availability of free services under the Free File program was part of its ongoing attempt to achieve the statutory goal of increased e-filing through cooperation with the private sector.

Exception to Implied Immunity Doctrine

The implied immunity doctrine exception articulated by the Supreme Court in Otter Tail Power Co. v. United States (1973-1 Trade Cases ¶74,373) was inapplicable, the court added. That exception pertained only to cases in which (1) a private entity had insisted on anticompetitive restrictions in its contract with a government agency and (2) those restrictions hindered the government.


Allegations that the challenged output ceiling provisions in the partnership agreement were inserted at the defendants' insistence and hampered the IRS's ability to fulfill its goal of increasing electronic filing were directly refuted by the agency the following year, in the Management Response portion of a report issued by the Treasury Inspector General for Tax Administration analyzing the partnership agreement.

The decision is Byers v. Intuit Inc., 2010-1 Trade Cases ¶76,928.

Cosmetics Firm Resolves California Resale Price Fixing Suit

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

A company that markets cosmetics and skin care products has agreed to settle a civil suit brought by the State of California, alleging that it engaged in vertical price fixing in per se violation of the California Cartwright Act and the California Unfair Competition Law.

The state alleged that the northern California-based company entered into distribution agreements with resale price maintenance components, including prohibitions on pricing below suggested retail prices.

Under the terms of a final judgment approved by a California trial court, the cosmetics company was prohibited from entering into agreements to fix resale prices.

In addition, the company was required to pay a $70,000 civil penalty under the Unfair Competition Law and $50,000 to cover investigation costs and expenses.

Further details regarding The People of the State of California v. DermaQuest, Inc. will appear at 2010-1 Trade Cases ¶76,922.

State v. Federal Antitrust Law

The case is a reminder that resale pricing practices can run afoul of state antitrust laws, even if such conduct is no longer considered per se illegal under federal antitrust law.

In 2007, the U.S. Supreme Court in Leegin Creative Leather Products, Inc. v. PSKS, Inc., 2007-1 Trade Cases ¶75,753, reversed a 96-year-old precedent applying the per se rule to vertical price fixing.

And California is not the only state to challenge vertical price fixing. Following the Supreme Court’s decision in Leegin, furniture maker Herman Miller, Inc. entered into a consent decree resolving a multi-state complaint, alleging resale price fixing in violation of federal and state antitrust law.

Herman Miller was prohibited from agreeing with dealers to fix the resale price at which its furniture was advertised or sold to end-user consumers and from terminating a dealer or discriminating against a dealer to secure a commitment from the dealer to adhere to the manufacturer's suggested resale prices. The manufacturer was also required to pay a monetary payment of $750,000 under the consent decree.

The consent decree settled charges brought by the States of Illinois, Michigan, and New York that the manufacturer violated federal and state antitrust laws by entering into agreements with dealers to fix the prices at which its furniture was offered to consumers.

The case is State of New York, et al. v. Herman Miller, Inc., No. 08-civ-02977 , 2008-2 Trade Cases ¶76,454.

FTC Commissioner Jones Harbour Resigns

This posting was written by John W. Arden. Editor of CCH Trade Regulation Reporter.

Following the Senate confirmation of her successor last week, Federal Trade Commissioner Pamela Jones Harbour submitted her resignation as Commissioner, effective April 6, 2010.

Commissioner Jones Harbour will be succeeded by Julie Brill, who was confirmed by the Senate on March 3, along with fellow FTC nominee Edith Ramirez.

Brill will serve a seven-year term, starting from September 26, 2009, the date that Jones Harbour’s term expired.

“During my six and one-half years on the Commission, I have had the privilege of serving with eight tremendously talented Commissioners,” said Jones Harbour. “I thank all of them for their fellowship and friendship, and for always keeping me "on my game."

She also thanked FTC senior managers and career staff for their substantive expertise and their devotion to the agency’s competition and consumer protection missions.

“These individuals are the real driving force behind the Commission's tradition of excellence, and I will always be proud of all we have accomplished together,” said the Commissioner.

The March 10 statement by Jones Harbour appears here on the FTC website.

LifeLock Agrees to Settle FTC, State Suits Challenging Identity Theft Protection Claims

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

Identity theft service LifeLock, Inc. has agreed to pay $12 million and to refrain from making deceptive claims to settle FTC and state charges that it misrepresented its services. The company also is required to take more stringent measures to safeguard the personal information collected from customers.

In addition to LifeLock, the FTC complaint named co-founders Richard Todd Davis and Robert Maynard, Jr., who will be barred from making the same misrepresentations as LifeLock.

Since 2006, LifeLock’s ads have claimed that it could prevent identity theft for consumers willing to sign up for its $10-a-month service, according to the FTC.

“While LifeLock promised consumers complete protection against all types of identity theft, in truth, the protection it actually provided left enough holes that you could drive a truck through it,” said FTC Chairman Jon Leibowitz. Lifelock's services are widely advertised by displaying the CEO’s Social Security number on the side of a truck.

The FTC challenged claims that LifeLock would prevent unauthorized changes to customers’ address information, that it constantly monitored activity on customer credit reports, and that it would ensure that a customer always would receive a telephone call from a potential creditor before a new account was opened.

LifeLock allegedly misrepresented its own data security. The FTC contended that LifeLock’s data was not encrypted, and sensitive consumer information was not shared only on a “need to know” basis.

According to the agency, the company’s data system was vulnerable and could have been exploited by those seeking access to customer information.

The FTC and state settlements with LifeLock bar deceptive claims and prohibit the company from misrepresenting the “means, methods, procedures, effects, effectiveness, coverage, or scope of any identity theft protection service.” They also bar misrepresentations about the risk of identity theft and the manner and extent to which LifeLock protects consumers’ personal information.

The settlements further require LifeLock to establish a comprehensive data security program and obtain biennial independent third-party assessments of that program for twenty years.

A press release concerning FTC v. LifeLock, Inc., FTC File No. 072 306, announced March 9, 2010, appears here on the FTC website. Text of the complaint and proposed final judgment appear here.

Further details will appear in the CCH Trade Regulation Reporter.

Voting Equipment Company Resolves U.S., State Concerns over Acquisition

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

Election Systems & Software, Inc.—the largest provider of voting equipment systems in the United States—has agreed to settle an antitrust complaint filed by the U.S. Department of Justice and nine state attorneys general, challenging its 2009 acquisition of Premier Election Solutions Inc.

A proposed consent decree, awaiting approval in the federal district court in Washington, D.C., is intended to restore competition lost as a result of the consummated acquisition by requiring ES&S to divest voting equipment systems assets to a buyer approved by the Justice Department.

The assets to be divested include the means to produce all versions of Premier’s hardware, software, and firmware used to record, tabulate, transmit, or report votes, including the Assure 1.2 system, and a license to better serve disabled voters.

Combination of Close Competitors

The federal and state antitrust enforcers alleged that the consummated transaction violated the Clayton Act by combining what customers considered to be the two closest competitors in the provision of voting equipment systems. The two companies were certified in more jurisdictions than any other vendor, offered a complete suite of voting equipment system products, and had good reputations.

The investigation of the transaction did not begin until after the companies had combined their assets and dismantled many of Premier’s operating divisions. ES&S was not required to report the proposed acquisition to the Justice Department and FTC because the cash value of the transaction was $5 million, significantly below the mandatory reporting threshold for mergers under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.

Senator Schumer’s Concerns

Soon after the acquisition was announced, however, the Justice Department heard from critics of the transaction. Senator Charles E. Schumer, chairman of the Senate committee that oversees election issues, sent a letter to U.S. Attorney General Eric Holder, urging the Justice Department to conduct a full and fair review” of the acquisition. A news release on Senator Schumer's reaction appears here.

The Chairman of the Senate Rules and Administration Committee later announced that the committee’s staff would launch a formal review of potential problems posed by the merger. A report expressing the committee’s concerns with the acquisition was submitted to the Justice Department in January.

American Antitrust Institute Views

Also in January, the American Antitrust Institute (AAI) sent a letter to Christine Varney, Assistant Attorney General in charge of the Department of Justice Antitrust Division, stating that the “likely competitive harm from the acquisition will be felt in the loss of any real competition in the competitive bidding process by which political subdivisions acquire voting technology and services.”

AAI “urge[d] the Division to strictly scrutinize this transaction and ensure a final remedy that preserves and promotes competition among multiple, qualified private vendors of voting technology and services to all political subdivisions in the years to come.”

Text of the letter appears here.

The state attorneys general that joined the suit were Arizona, Colorado, Florida, Maine, Maryland, Massachusetts, New Mexico, Tennessee, and Washington.

A Department of Justice press release appears here. Text of the complaint and the proposed consent decree in U.S. v. Election Systems & Software, Inc., Case 1:10-cv-00380, appear on the Department of Justice Antitrust Division website. Further details will be reported in CCH Trade Regulation Reports.

Michigan Blue Cross Drops Acquisition Plan After U.S. Threatens Suit

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

Blue Care Networks of Michigan and Sparrow Health System announced on March 8 that they were ending their agreement that would have enabled Blue Care Network to acquire the membership of Lansing, Michigan-based Physicians Health Plan of Mid-Michigan.

Blue Care Network is a nonprofit HMO owned by Blue Cross Blue Shield of Michigan. Physicians Health Plan of Mid-Michigan is a not-for-profit HMO owned by Sparrow, the largest hospital system in Lansing.

According to a joint statement, both organizations concluded that the transaction would not receive regulatory clearance without litigation.

The Department of Justice issued a statement on March 8, praising the decision. The Department had threatened to challenge the transaction on the ground that it would have given Blue Cross-Michigan control over nearly 90 percent of the commercial health insurance market in the Lansing area. Text of the Justice Department statement appears here on the Department of Justice Antitrust Division website.

“We welcome the decision by Blue Cross-Michigan and Physicians health Plan of Mid-Michigan to abandon their deal, which will preserve competition among health insurance companies in Lansing,” said Christine Varney, Assistant Attorney General in charge of the Department of Justice Antitrust Division. “The merger would have likely led to higher prices, lower levels of service, and decreased quality of health care for consumers.”

The Michigan Attorney General’s office worked with the Justice Department in investigating the competitive effects of the proposed merger.

In a March 8 statement, Michigan Attorney General Mike Cox called the collapse of the transition “great news for Michigan residents.” He went on to say that “[c]ompetition is the force that keeps prices down and quality up.”

Cox also questioned how the company could afford to buy other companies when it recently claimed to be struggling financially. He noted that Blue Cross Blue Shield of Michigan and its subsidiaries have spent over $350 million buying other companies since 2005, while claiming millions in losses and asking for massive rate increases.

The statement appears here on the Michigan Attorney General’s website.

Sub-Distributor Failed to Adequately Allege Illinois “Franchise”

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

A sub-distributor of electrical components failed to adequately allege that its relationship with a distributor was a "franchise" under the meaning of the Illinois Franchise Disclosure Act, according to the federal district court in Chicago.

Accordingly, the sub-distributor’s counterclaim against the distributor for violations of the Act’s registration, anti-fraud, and "good cause" for termination provisions was dismissed.

After the distributor terminated the parties’ agreements and brought suit for failure to pay for delivered goods, the sub-distributor responded with several counterclaims, including the alleged violations of the Illinois Franchise Disclosure Act.

Association with Distributor’s Trademark

The sub-distributor argued that it pled sufficient facts to permit the court to infer the existence of a franchise relationship under federal notice pleading standards. However, the sub-distributor’s counterclaim was devoid of any allegation that it used the distributor’s name or mark in marketing the distributor’s electrical components, as required by the statutory definition of "franchise," the court ruled.

Although it could be inferred that the sub-distributor used the distributor’s tradename or mark because the components at issue were alleged to be unique, it was certainly not a necessary inference, the court commented. Moreover, there was no allegation that the operation of the sub-distributor’s business was substantially associated with the distributor’s mark.

Franchise Fee Requirement

The sub-distributor cited caselaw and argued that it was not required to make allegations specific to the Franchsie Disclosure Act's requirements for a "franchise." However, the sub-distributor failed to allege that it operated a business under the distributor’s mark or paid the distributor a "franchise fee," two of the elements necessary to establish a franchise.

Notice pleading required a plaintiff to plead sufficient facts to make a claim plausible on its faith and the sub-distributor’s alleged facts did not reach even that low threshold.

The decision is BJB Electric v. North Continental Enterprises, CCH Business Franchise Guide ¶14,317.

Company Owner Not Liable for Violations of Iowa Anti-Spam Law

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

An individual who co-owned and operated a corporation that sent a large number of unsolicited commercial e-mails in an effort to generate leads for a mortgage broker could not be held jointly and severally liable to an Internet service provider for $236 million in statutory damages under Iowa's anti-spam statute, the U.S. Court of Appeals in St. Louis has decided.

A ruling of the federal district court in Davenport, Iowa (CCH Privacy Law in Marketing ¶60,257) was reversed and remanded.

The individual could not be held directly liable for her conduct because she did not use an interactive computer service to “initiate” the sending of spam, the court said.
She was not the person who hit the “send” button transmitting the spam. The “spamming operation” was conducted by another owner-operator of the company. The individual's acting as a liaison between her corporation and mortgage-lead purchasers was not sufficient for liability.

The statute required not only that she initiated the sending of spam, but that she did so via an interactive computer service. There was no evidence that the individual ever used an interactive computer service.

The statute did not create liability for conspiracy or aiding and abetting. The individual could not be held liable under common-law theories of conspiracy and aiding and abetting because the ISP did not establish that it had sustained the requisite actual damages, according to the court.

The decision is Kramer v. Perez, CCH Privacy Law in Marketing ¶60,440.

FDA Calls on Food Companies to Correct Labeling Violations

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

The U.S. Food and Drug Administration has notified 17 food manufacturers that the labeling for 22 of their food products violates the Federal Food, Drug, and Cosmetic Act.

The action follows an October 2009 statement by Commissioner of Food and Drugs Margaret Hamburg, M.D., encouraging companies to review their labeling to ensure that they were in compliance with FDA regulations, and were truthful and not misleading.

Letter to Industry

In an open letter to Industry dated March 3, 2010, Dr. Hamburg underscored the importance of providing nutrition information that consumers could rely on.

“Today, ready access to reliable information about the calorie and nutrient content of food is even more important, given the prevalence of obesity and diet-related diseases in the United States,” Dr. Hamburg said in the letter.

She also expressed her hope that the warning letters would clarify the FDA’s expectations for food manufacturers as they review their current labeling.

Front-of-Package Labeling Initiative

Dr. Hamburg has made nutrition labeling a priority for the FDA. The warning letters are the agency’s most recent action to help improve consumers’ ability to make nutritious choices.

The FDA soon will propose guidance regarding calorie and nutrient labeling on the front of food packages and plans to work collaboratively with the food industry to design and implement innovative approaches to front-of-package.

Warning Letters

The violations cited in the warning letters include unauthorized health claims, unauthorized nutrient content claims, and the unauthorized use of terms such as “healthy,” and others that have strict, regulatory definitions.

Companies that received warning letters have 15 business days to inform the FDA of the steps they will take to correct their labeling, according to the FDA’s press release.

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Firm: Dreyers Grand Ice Cream, Inc.

Product: Nestle Drumstick Classic Vanilla Fudge

Type of Claim of Major Topic Area: The front panel shows that the product has no trans fat, but it doesn't have a disclosure statement to alert consumers that the product has significant levels of saturated fat and total fat.

Action: Warning Letter

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Firm: Dreyers Grand Ice Cream, Inc.

Product: Dreyers Dibs Bite Sized Ice Cream Snacks Vanilla Ice Cream with Nestle Crunch Coating

Type of Claim of Major Topic Area: The front panel shows that the product has no trans fat, but it doesn't have a disclosure statement to alert consumers that the product has significant levels of saturated fat and total fat.

Action: Warning Letter

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Firm: Gorton's, Inc.

Product: Gorton's Fish Fillets

Type of Claim of Major Topic Area: The front panel shows that the product has no trans fat, but it doesn't have a disclosure statement to alert consumers that the product has significant levels of sodium, saturated fat and total fat.

Action: Warning Letter

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Firm: Schwan's Consumer Brands

Product:Mrs. Smith's Coconut Custard Pie

Type of Claim of Major Topic Area: The front panel shows that the product has no trans fat, but it doesn't have a disclosure statement to alert consumers that the product has significant levels of saturated fat and total fat.

Action: Warning Letter

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Firm: Spectrum Organic Products, Inc.

Product: Organic All Vegetable Shortening

Type of Claim of Major Topic Area: The front panel shows that the product has no trans fat, but it doesn't have a disclosure statement to alert consumers that the product has significant levels of saturated fat and total fat.

Action: Warning Letter

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Firm: Spectrum Organic Products, Inc.

Product: Organic All Vegetable Shortening

Type of Claim of Major Topic Area: The product makes nutrient content claims such as "cholesterol free," "less saturated fat than butter," and "good source of … monounsaturated fat," but does not meet the legal requirements to make these claims.

Action: Warning Letter

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Firm: Beech-nut

Product: Beechnut DHA Plus line of products

Type of Claim of Major Topic Area: The product makes claims on its website such as "no added refined sugar" and "plus vitamins and minerals," which are not allowed on products intended for children under 2 yrs of age because appropriate dietary levels have not been established for children in this age range.

Action: Warning Letter

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Firm:Beech-nut

Product: Beechnut Whole Grain Oatmeal with mixed fruit

Type of Claim of Major Topic Area: The product makes claims such as "low sodium," "plus fiber," and "plus vitamins & minerals," which are not allowed on products intended for children under 2 yrs of age because appropriate dietary levels have not been established for children in this age range.

Action: Warning Letter

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Firm:PBM Products

Product:Parent's Choice Little Puffs Plus Calcium Blueberry Naturally Flavored

Type of Claim of Major Topic Area: The product makes claims such as "plus calcium," which are not allowed on products intended for children under 2 yrs of age because appropriate dietary levels have not been established for children in this age range.

Action: Warning Letter

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Firm:PBM Products

Product: Parent's Choice Little Puffs Made with Whole Grains Peach-Mango Naturally Flavored

Type of Claim of Major Topic Area: The product makes claims such as "a good source of calcium," "a good source of Vitamin D," and "a good source of iron," which are not allowed on products intended for children under 2 yrs of age because appropriate dietary levels have not been established for children in this age range.

Action: Warning Letter

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Firm: Nestle

Product: Juicy Juice Brain Development Fruit Juice Beverage

Type of Claim of Major Topic Area: The product makes claims such as "no sugar added," which are not allowed on products intended for children under 2 yrs of age because appropriate dietary levels have not been established for children in this age range.

Action: Warning Letter (issued 12/2009)

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Firm: Nestle

Product: Juicy Juice All-Natural 100% Juice Orange Tangerine and Juicy Juice All-Natural 100% Juice Grape

Type of Claim of Major Topic Area: The product labels imply that the products are 100% juice when they are actually
juice blends with added flavors.

Action: Warning Letter (issued 12/2009)

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Firm: Nestle Nutrition

Product: Gerber's 2nd Foods Carrots

Type of Claim of Major Topic Area: The product makes claims such as "healthy," "excellent source of … Vitamin A," and "no added sugar," which are not allowed on products intended for children under 2 yrs of age because appropriate dietary levels have not been established for children in this age range.

Action: Warning Letter

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Firm: Nestle Nutrition

Product: Gerber Graduates Puffs

Type of Claim of Major Topic Area: The product makes claims such as "good source of iron, zinc, and Vitamin E," which are not allowed on products intended for children under 2 yrs of age because appropriate dietary levels have not been established for children in this age range.

Action: Warning Letter

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Firm: Redco Foods

Product: Salada Naturally Decaffeinated Green Tea

Type of Claim of Major Topic Area: The product makes claims that it will treat, prevent, or cure diseases such as Alzheimer's disease, rheumatism, and cancer. These types of claims are not allowed on food products.

Action: Warning letter

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Firm: Redco Foods

Product: Salada Naturally Decaffeinated Green Tea

Type of Claim of Major Topic Area: The product makes claims on the product website that it is effective in the prevention of cardiovascular disease, but this claim has been not authorized for this product.

Action: Warning letter

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Firm: Redco Foods

Product: Salada Naturally Decaffeinated Green Tea

Type of Claim of Major Topic Area: The product makes claims such as "fortified with antioxidants," but the claim does not meet the requirements of the antioxidant regulation.

Action: Warning letter

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Firm: Sunsweet Growers

Product: Antioxidant Blend Dried Fruit Mix

Type of Claim of Major Topic Area: The product makes claims such as “full of nutritious antioxidants,” but the claim does not meet the requirements of the antioxidant regulation.

Action: Warning letter

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Firm: Fleminger Inc.

Product: TeaForHealth Green Tea products Dr. Lee's TeaForHealth 710EGCG inabottle Green TeaTea For Health 710EGCG Ready-To-Drink Natural Brewed Green Tea

Type of Claim of Major Topic Area: The product makes claims that it will treat, prevent, or cure diseases such as Alzheimer's disease, diabetes, and cancer. These types of claims are not allowed on food products.

Action: Warning Letter

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Firm: Fleminger Inc.

Product: TeaForHealth Green Tea products Dr. Lee's TeaForHealth 710EGCG inabottle Green TeaTea For Health 710EGCG Ready-To-Drink Natural Brewed Green Tea

Type of Claim of Major Topic Area: FDA has authorized a qualified health claim for green tea, but the claims for these products do not meet the criteria established by FDA.

Action: Warning Letter

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Firm: Fleminger Inc.

Product: TeaForHealth Green Tea products Dr. Lee's TeaForHealth 710EGCG inabottle Green TeaTea For Health 710EGCG Ready-To-Drink Natural Brewed Green Tea

Type of Claim of Major Topic Area: The product makes claims such as "drink high antioxidant green tea," but the claim does not meet the requirements of the antioxidant regulation.

Action: Warning Letter

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Firm: POM Wonderful

Product: POM Wonderful 100% Pomegranate Juice

Type of Claim of Major Topic Area: The product makes claims that it will treat, prevent, or cure diseases such as hypertension, diabetes, and cancer. These types of claims are not allowed on food products.

Action: Warning Letter

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Firm: Ken's Foods, Inc.

Product: Ken's Healthy Options Salad Dressings

Type of Claim of Major Topic Area: The product makes claims such as, "Healthy Options," but has more fat than is allowed in products labeled as "healthy."

Action: Warning Letter

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Firm: Pompeian, Inc.

Product: Pompeian Imported Extra Light Olive Oil

Type of Claim of Major Topic Area: The product makes nutrient content claims such as "light," and "high in good monounsaturated fat," but doesn't meet the requirement to make these claims.

Action: Warning Letter

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Firm: Pompeian, Inc.

Product: Pompeian Imported Extra Light Olive Oil

Type of Claim of Major Topic Area: The product makes claims that it will treat, prevent, or cure diseases such as heart disease and cancer. These types of claims are not allowed on food products.

Action: Warning Letter

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Firm: Diamond Food,Inc.

Product: Diamond of California Shelled Walnuts

Type of Claim of Major Topic Area: The product label makes claims that the product can help prevent heart disease. FDA has authorized a claim relating walnuts and heart disease, but the claim on this product doesn't meet the requirements to make the claim.

Action: Warning Letter

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Firm: Diamond Food,Inc.

Product: Diamond of California Shelled Walnuts

Type of Claim of Major Topic Area: The product makes claims that it will treat, prevent, or cure diseases such as heart disease, arthritis and cancer. These types of claims are not allowed on food products.

Action: Warning Letter

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Firm: First Juice, Inc.

Product: Organic Fruit and Veggie Juice Beverage products

Type of Claim of Major Topic Area: The product make claims such as "plus calcium," and "50% less sugar," which are not allowed on products intended for children under 2 yrs of age because appropriate dietary levels have not been established for children in this age range.

Action: Warning Letter

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Firm: First Juice, Inc.

Product: Purple carrot products

Type of Claim of Major Topic Area: The products make claims that the products will "reduce the risk of cancer and stroke," This claim has not been authorized by FDA for use on food products.

Action: Warning Letter

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Firm: Want Want Foods

Product: Baby Mum-Mum Original Selected Superior Rice Rusks

Type of Claim of Major Topic Area: The product make claims such as "low in fat," and "no added fats for oils," which are not allowed on products intended for children under 2 yrs of age because appropriate dietary levels have not been established for children in this age range.

Action: Warning Letter

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Firm: Nature's Path Foods, Inc.

Product: Organic Flax Plus Multibran Cereal

Type of Claim of Major Topic Area: The product label includes the nutrient claim, "excellent source of Omega-3+," which has not been approved for use on food products.

Action: Untitled Letter

Senate Confirms Brill and Ramirez as FTC Commissioners

This posting was written by John W. Arden.

Julie Simone Brill and Edith Ramirez were confirmed by the Senate yesterday as Federal Trade Commissioners. Brill will serve a seven-year term, starting from September 26, 2009, while Ramirez will serve a seven-year term, starting from September 26, 2008.

“We look forward to welcoming the newly confirmed Federal Trade Commissioners Julie Brill and Edith Ramirez,” said FTC Chairman Jon Leibowitz. “They are both exceptionally talented and committed, and will bring a wealth of experience, knowledge, and new energy to the Commission.”

The Chairman remarked how the announcement was “bittersweet” because of the imminent departure of Commissioner Pamela Jones Harbour.

“She has been a wonderful colleague and dedicated public servant over the years, and will be greatly missed,” Leibowitz said.

The two new Commissioners were nominated by the Obama Administration on November 17, 2009. Brill was nominated to succeed Commissioner Jones Harbour, whose term expired last September. Ramirez was nominated to serve the vacancy created by the departure of Commissioner Deborah Platt Majoras in March 2008.

Brill has served as Senior Deputy Attorney General and Chief of Consumer Protection for North Carolina since February 2009. Prior to that, she was an Assistant Attorney for Consumer Protection and Antitrust for the State of Vermont for more than 20 years. She is an adjunct faculty member at Columbia Law School.

Ramirez was a partner in the Los Angeles office of Quinn Emanuel Urquhart Oliver & Hedges, specializing in intellectual property and complex litigation. She is a graduate of Harvard Law School, where she worked on the Harvard Law Review with President Obama.

For the first time in nearly two years, the Federal Trade Commission has a full complement of members. The addition of two new Commissioners brings the membership to three Democrats (Commissiioners Leibowitz, Brill, and Ramirez) and two Republicans (Commissioners William Kovacic and J. Thomas Rosch).

Repeal of Health Insurance Antitrust Exemption Passes House

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

Health insurers would lose their exemption from the federal antitrust laws under the proposed "Health Insurance Industry Fair Competition Act," which was overwhelmingly approved by the House of Representatives on February 24. The measure (H.R. 4626) passed 406 to 19.

Specifically, the bill would amend the McCarran-Ferguson Act to add a provision stating that the Act does not "modify, impair, or supersede the operation of any of the antitrust laws with respect to the business of health insurance."

Freestanding Measure

The measure was introduced by Representatives Tom Perriello (D-Virginia) and Betsy Markey (D-Colorado) on February 22. The freestanding measure followed a similar bill, which had been incorporated into the comprehensive health care bill passed by the House last year.

The now-stalled "Affordable Health Care for America Act" (H.R. 3962) contained a provision repealing the McCarran-Ferguson Act exemption for health insurance as well as medical malpractice insurance from certain antitrust violations, including price fixing, market allocation, or monopolization.

Upholding “Free Market Protections”

House Judiciary Committee Chairman John Conyers, Jr. (D-Michigan) said that the bill "will uphold free-market protections by making insurance companies legally accountable for collusion schemes to fix prices, divide up markets and customers to restrict choice, and use monopoly power to sabotage anyone who seeks to offer meaningful competitive choice to consumers."

House Judiciary Committee Ranking Member Lamar Smith (R-Texas) said the Health Insurance Industry Fair Competition Act "has all the substance of a soup made by boiling the shadow of a chicken." Smith contended that the McCarran-Ferguson Act's federal antitrust exemption promotes competition by allowing small and medium-sized insurers to aggregate information for underwriting purposes so they can compete effectively against larger companies.

Impact on Premiums

According to Smith, the Congressional Budget Office had concluded that the impact on health insurance premiums resulting from the repeal of the antitrust exemption would likely to be quite small. In any event, Smith ultimately offered his reluctant support for what he called the "ineffective bill."

Following passage by the House, the bill was received by the Senate on February 25 and then read for the first time and placed on the Senate Legislative Calendar on February 26. It was read the second time and placed on the Senate Legislative Calendar under General Orders on March 1.

Further information about the bill, including full text, is available here at the Library of Congress Thomas legislative website.

Sham Drug Patent Litigation, Not Reverse Payments, Could Have Violated Antitrust Law

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

The manufacturer of a branded drug used to treat male hypogonadisma and three generic drug manufacturers could have conspired to restrain trade in violation of federal antitrust law by entering into settlements of sham patent infringement litigation under which the generic drug makers kept their versions off the market in exchange for a portion of the branded manufacturer's monopoly profits, the federal district court in Atlanta has ruled.

However, several other antitrust claims brought by the FTC and putative classes of direct and indirect purchasers were not similarly viable.
Specifically, the court rejected claims that the reverse payment aspect of the settlements rendered them illegal and the drug makes had violated antitrust law by agreeing not to compete.

Also rejected were (1) claims by all of the plaintiffs that the drug companies had attempted to monopolize the market for the generic version through an overall scheme that included improper patent listing in the Food and Drug Administration's Orange Book, the filing of sham litigation, and the reverse payment settlements and (2) claims by indirect purchasers that the defendants' actions violated the common law and antitrust laws of 40 states.

Therefore, the defendants' motions to dismiss were granted as to the claims of the FTC and indirect purchasers and granted in part and denied in part as to the claims of the direct purchasers.

Noerr-Pennington Immunity

Three of the defendants asserted immunity under the Noerr-Pennington doctrine, which provides that no antitrust liability may arise from petitioning the government for an anticompetitive outcome. Immune petitioning activity may include legislative lobbying and administrative and judicial proceedings. However, there is a well-established exception to the Noerr-Pennington doctrine for sham litigation.

In this case, the complaining putative class of direct purchasers sufficiently alleged that the branded manufacturer's infringement actions were objectively baseless on the grounds that the generic versions clearly did not infringe the original patent covering the drug and the patent clearly did not meet the written description requirement as to the drug's composition ranges, the court reasoned.

The drug manufacturers did not unreasonably restrain trade simply by entering into settlements under which the generic drug makers were paid to keep their generic versions off the market, the court found. Because the complaining drug purchasers and FTC did not allege that the settlements exceeded the scope of the manufacturer's patent on the drug, it did not matter that the companies settled their patent disputes with reverse payments.

By their nature, patents created an environment of exclusion and crippled competition. Thus, the anticompetitive effect was already present. It was irrelevant whether the patent might ultimately be found invalid. Moreover, the conduct was not illegal per se. Per se illegality analysis did not apply to reverse payments, the court noted.

The February 22 decision is In re: Androgel Antitrust Litigation (No. II), 2010-1 Trade Cases ¶76,914.

Current Gasoline Franchisees May Not Claim Constructive Termination, Nonrenewal: High Court

This posting was written by John W. Arden.

Gasoline station franchisees may not maintain actions for constructive termination or constructive nonrenewal under the federal Petroleum Marketing Practices Act (PMPA) after accepting renewal agreements from a franchisor and continuing to operate their franchises, the U.S. Supreme Court ruled in a unanimous decision on March 2.

The high court held that (1) franchisees cannot recover for constructive termination under the PMPA if the franchisor’s allegedly wrongful conduct did not compel the franchisees to abandon their franchises and (2) franchisees that sign a renewal agreement and continue to operate their franchises may not maintain a claim for constructive nonrenwal under the PMPA.

Petroleum Marketing Practices Act

The PMPA (15 U.S.C. §2801—§2807, CCH Business Franchise Guide ¶6940) establishes federal minimum standards for the termination and nonrenewal of gasoline franchises, authorizing franchisors to end a franchise relationship only for enumerated causes and with advance written notice. To enforce these requirements, franchisees may bring suit in federal court for equitable relief, compensatory and punitive damages, attorney’s fees, and costs.

For many years the franchisor (Shell Oil Company) provided its Massachusetts franchisees with a rent subsidy that reduced the monthly rent of franchise premises for every gallon of gasoline sold. The subsidy was renewed annually by written notice, and franchisor representatives made oral representations that the subsidy or something like it “would always exist.”

Discontinuation of Rent Subsidy

In 1998, the franchisor assigned its rights and obligations to a joint venture (Motiva), which ended the volume-based rent subsidy and offered franchisees renewal agreements that contained a new formula for calculating rent. These actions generally resulted in an increase of rent.

Sixty-three franchisees filed suit against Shell and the joint venture in July 2001, alleging that the discontinuation of the rent subsidy constituted a breach of contract under state law and a “constructive termination” within the PMPA. They further claimed that the joint venture’s offer of new franchise agreements calculating rent in a different way amounted to a “constructive nonrenewal.”

After trial of these claims in the federal district court in Boston, a jury found against the franchisor and the joint venture on all claims. Both defendants had unsuccessfully moved for judgment as a matter of law on the PMPA claims, arguing that they could not be held liable for constructive termination or nonrenewal because none of the franchisees abandoned their franchises.

On appeal, the First Circuit affirmed in part and reversed in part, holding that a franchisee is not required to abandon its franchise to recover for constructive termination. A simple breach of contract can amount to constructive termination, the court held, if the breach resulted in “such a material change that it effectively ended the lease . . . ” On the other hand, the First Circuit agreed with the defendants that a franchisee continuing to operate under a renewal agreement cannot maintain a claim for lawful nonrenewal under the PMPA. (Marcoux v. Shell Oil Products Co, LLC, CCH Business Franchise Guide ¶13,890).

Supreme Court Petitions

Subsequently, both the franchisees and the franchisor filed petitions for review by the U.S. Supreme Court. (Mac's Shell Service, Inc. v. Shell Oil Products Co., Docket No. 08-240, and Shell Oil Products Co. v. Mac's Shell Service, Inc., Docket No. 08-372) The Supreme Court granted their petitions on June 15, 2009.

Petitioning franchisees contended that there was a split among the circuits on “whether a franchisor can lawfully present its franchisees with the Hobson’s choice of accepting unlawful contract terms or risking their livelihoods on a chance that a court will grant a preliminary injunction.”

They cited a 1986 Ninth Circuit decision—Pro Sales, Inc. v. Texaco, U.S.A., CCH Business Franchise Guide ¶8604—that recognized the “Catch-22” situation and rejected such a requirement.

Supreme Court Rulings

On review, the Supreme Court concluded that “a necessary element of any constructive termination claim under the Act is that the franchisor’s conduct forced an end to the franchisee’s use of the franchisor’s trademark, purchase of the franchisor’s fuel, or occupation of the franchisor’s service station.”

The PMPA uses the word “terminate,” which ordinarily means “put an end to,” the court said. Thus, when given its ordinary meaning, the Act is violated only if a franchise is put to an end.

“Requiring franchisees to abandon their franchises before claiming constructive termination is also consistent with the general understanding of the doctrine of constructive termination,” Justice Alito wrote. In order for an employee to recover for constructive discharge, he or she generally must quit the job. A tenant claiming constructive eviction must actually move out.

Contentions that this interpretation of the PMPA fails to give franchisees protection from unfair and coercive acts by their franchisors “ignores the fact that franchisees still have state-law remedies available to them,” the Court explained.

On the constructive nonrenewal claim, the Court held that a franchisee choosing to accept a renewal agreement cannot be allowed to thereafter claim wrongful nonrenewal. The plain text of the PMPA says that there is a violation of the statute when the franchisor “fails to renew” a franchise for reasons not provided by the statute. Thus, the threshold requirement of a wrongful nonrenewal action is that there is a nonrenewal.

Continuation or Extension of Relationship

The Act speaks of a franchisor’s failure to reinstate, continue, or extend the franchise relationship, the Court stated. In a situation like this one, the franchises had been continued and extended.

Finally, the Court noted that the PMPA authorizes franchisors to respond to market demands by proposing different contractual terms at the expiration of a franchise agreement. The statute allows franchisors to refuse to renew franchise relationships when the franchisees refuse to agree to changes proposed “in good faith and in the normal course of business.”

Allowing franchisees to sign renewal agreements and then pursue wrongful nonrenewal claims would undermine this procedure and frustrate the franchisors’ ability to propose new terms.

The 20-page opinion in Mac’s Shell Service, Inc. v. Shell Oil Products Co. LLC is available here on the U.S. Supreme Court website. It will appear in CCH Business Franchise Guide.