Focus on Franchising

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

News and notes on franchising and distribution topics:

□ A provision of the recently-enacted health care reform legislation, the Patient Protection and Affordable Care Act, requires restaurants that are part of a chain with 20 or more locations doing business under the same name to disclose nutritional information. The new law requires restaurants to display the number of calories contained in standard menu items (1) on the menu listing the item for sale, (2) in a written form available on the premises upon consumer request, and (3) on menu boards. Establishments will be required to display a succinct statement concerning suggested daily caloric intake, as specified by the Secretary of Health and Human Services by regulation, to enable the public to understand the significance of the provided nutrition information. Compliance with the law’s restaurant labeling provisions, which are reported at CCH Business Franchise Guide ¶14,357, will be required upon completion of implementing regulations by the Food and Drug Administration (FDA). The FDA is required to publish proposed regulations within one year of the law’s enactment.

□ On April 20, the European Commission (EC) approved a revised Block Exemption Regulation and Guidelines on supply and distribution agreements, including franchise and other types of vertical agreements. Block exemptions create safe harbors for categories of agreements, relieving the contracting parties from having to individually analyze the legality of those agreements under the general EC rules regarding vertical agreements. As revised, manufacturers remained free to decide how to distribute their products. But in order to benefit from the block exemption, they can not have a market share in excess of 30% and their distribution or supply agreements must not contain any hardcore restrictions of competition, such as fixing the resale price or re-creating barriers to the European Union's single market. The new rules, which come into force in June, also specifically addresses the question of online sales. Once a distributor is authrorized, it must be fee to sell on a website as well as in their traditional shops and physical points of sales. Further details about the new block exemption can be found here on the Europa website of the European Commission. Text of the block exemption appears here.

□ South Africa has adopted a new franchise law as part of its Consumer Protection Act 68 of 2008, according to Field Fisher Waterhouse LLP. Key features of the initial provisions of the Act, which became effective on April 24, are (1) a mandatory 10-day “cooling off” period after the signing of a franchise agreement—during which time a franchisee may withdraw without incurring any liability and (2) a requirement that all franchise agreements be in writing and signed by franchisees. The definition of “franchise agreement” is broad and includes master franchise agreements and other arrangements (such as reseller agreements) that normally are not considered franchises. The main sections of the Act—which reportedly will extend fundamental consumer rights to franchisees—is expected to become effective on October 24, 2010. An article on the new law appears here on the Field Fisher Waterhouse website.

Reverse Payment Patent Settlement Could Get Second Look from Full Second Circuit

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

Federal Trade Commission Chairman Jon Leibowitz cited a decision handed down today by a three-judge panel of the U.S. Court of Appeals in New York City as “further evidence that courts are rethinking their approach to pay-for-delay settlements.”

Although the Second Circuit rejected an antitrust challenge to a settlement in a patent infringement lawsuit, it invited the plaintiffs to petition for rehearing en banc.

The court concluded that it was bound by an earlier Second Circuit circuit decision--Joblove v. Barr Labs., Inc. (In re Tamoxifen Citrate Antitrust Litig.), 2006-2 Trade Cases ¶75,382. In Tamoxifen, a divided court held that a reverse payment settlement of a patent lawsuit involving a drug used to treat breast cancer did not violate the antitrust laws.

In this latest decision, the court said: "we believe there are compelling reasons to revisit Tamoxifen with the benefit of the full Court’s consideration of the difficult questions at issue and the important interests at stake." The court referred to: "the 'exceptional importance' of the antitrust implications of reverse exclusionary payment settlements of patent infringement suits."

At issue in the current dispute are patent settlement agreements between Bayer AG/Bayer Corporation--owner of the patent for the active ingredient in the antibiotic ciprofloxacin hydrochloride (Cipro)--and potential generic manufacturers of Cipro. Direct purchasers of Cipro alleged that the settlements constituted market-sharing agreements in violation of the antitrust laws. They contended that Bayer paid generic drug companies to delay entry into the prescription drug market, thereby blocking the entry of low-cost generic versions of Cipro.

The court stated the question as: "whether patent settlements in which the generic firm agrees to delay entry into the market in exchange for payment fall within the scope of the patent holder’s property rights, or whether such settlements are properly characterized as illegal market-sharing agreements." The court noted that authorities are divided on the question.

Divided Authorities

Courts generally have held that the right to enter into reverse exclusionary payment agreements fall within the terms of the exclusionary grant conferred by the branded manufacturer’s patent, the court explained. On the other hand, the FTC and the current Department of Justice Antitrust Division contend that reverse exclusionary payment settlements violate antitrust law.

Tamoxifen Standard

Under Tamoxifen, a settlement agreement did not exceed the scope of the patent where (1) there was no restriction on marketing noninfringing products; (2) a generic version of the branded drug would necessarily infringe the branded firm’s patent; and (3) the agreement did not bar other generic manufacturers from challenging the patent. The complaining direct purchasers of Cipro did not argue that the patent infringement lawsuit was a sham or that the Cipro patent was procured by fraud, and they could not demonstrate that the settlement agreement exceeded the scope of the Cipro patent, the court explained.

FTC Chairman’s Statement

In a statement issued following the Second Circuit’s decision, FTC Chairman Leibowitz expressed hope that “the courts will put an end to these deals.” He stressed that, “[i]n the meantime, the FTC will continue to explain, in court and in the halls of Congress, why these sweetheart deals for drug companies are such a bad deal for American consumers and taxpayers.”

The April 29, 2010, decision, In re: Ciprofloxacin Hydrochloride Antitrust Litigation, Docket Nos. 05-2851-cv(L), 05-2852-cv(CON), appears at 2010-1 Trade Cases ¶76,989.

Agency Heads Discuss Revisions to Merger Guidelines at ABA Antitrust Meeting

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

Antitrust practitioners reviewing proposed revisions to the federal antitrust agencies’ Horizontal Merger Guidelines should have a better understanding of current agency practice, according to federal antitrust enforcers speaking April 23 at an enforcement roundtable during the American Bar Association’s Section of Antitrust Law Spring Meeting in Washington, D.C.

The proposed revisions to the guidelines, which outline how the federal antitrust agencies evaluate the likely competitive effects of mergers in order to determine compliance with U.S. antitrust law, were released on April 20 in anticipation of the meeting. The proposed revised guidelines appear at CCH Trade Regulation Reporter ¶ 50,252.

Reflection of Agency Practice

Christine Varney, Assistant Attorney General in charge of the Department of Justice Antitrust Division, told meeting attendees at the enforcement roundtable that, while the proposed revised guidelines are not all that different in substance from the current 1992 guidelines, the 1992 guidelines do not reflect the actual practice at the agencies. This latest update is an effort to be transparent, according to Varney.

The antitrust chief reminded attendees that each transaction is viewed on the facts of that transaction. She noted the importance of direct evidence of a potential merger’s competitive effects in evaluating a merger. The role of direct evidence in merger analysis is reflected in the proposed updated guidelines, Varney said.

FTC Chairman Jon Leibowitz also described the proposed revisions to the guidelines as an effort to explain to practitioners and judges what the agencies are doing when evaluating the competitive effects of mergers.

Leibowitz discussed the role of direct evidence of competitive effects in actions challenging Evanston Northwestern Healthcare Corporation’s 2000 acquisition of Highland Park Hospital and Western Refining, Inc.’s proposed acquisition of rival energy company Giant Industries, Inc., in 2007. He suggested that the judge in the latter case took a mechanistic view of the Horizontal Merger Guidelines in rejecting the FTC’s request for a preliminary injunction blocking Western Refining’s acquisition of Giant Industries.

Market Concentration

The proposed updates also raise the Herfindahl-Hirschman Index (HHI) measures for market concentration in order to be more consistent with current agency practice, Leibowitz explained. As a result, mergers that would have appeared to be highly concentrated under the 1992 guidelines, based on HHI measures, would be considered only moderately concentrated under the proposed revised updates.

According to the guidelines, mergers that cause a significant increase in concentration and result in highly concentrated markets are presumed to be anticompetitive.

Merger Enforcement

Both agency heads took the opportunity to tout recent merger enforcement activity. Chairman Leibowitz said that the FTC was on “a little bit of a winning streak” in the merger enforcement area. He pointed to the decision of CCC Information Services Inc. to abandon its merger with Mitchell International Inc., in light of the agency’s challenge to the transaction.

The federal district court in Washington, D.C. had granted the FTC’s request for a preliminary injunction (PI) to block the transaction pending administrative litigation. The 2009 decision was the agency’s first PI win since 2003, according to the Commissioner.

Assistant Attorney General Varney discussed the Antitrust Division’s recent settlement with Ticketmaster Entertainment, Inc. In order to proceed with its proposed acquisition of concert promoter Live Nation, Inc., ticket seller Ticketmaster was required to license ticket software and divest a subsidiary ticketing business. In addition, behavioral remedies were imposed on Ticketmaster.

Varney told attendees that the agency’s preference was for structural relief, but that sometimes there is a need for both structural and behavioral remedies.

Canada Competition Bureau Merger Procedures

Canada Competition Commissioner Melanie Aitken, who was also on the roundtable panel, discussed recent changes to the merger review process north of the border. Aitken said that the changes “make for a far more effective merger review process.”

While she described the process as “Made in Canada,” Aitken noted that the reforms, which have to do with process and not substance, bring the merger review process more in line with U.S. practice. For instance, the two-stage review process replicates the second request process utilized by the federal antitrust agencies in the United States. Aitken said that the changes make coordination with her counterparts in the United States easier.

High Court Rules Class Arbitration in Price Fixing Case Was Improper

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

International shipping companies should not be forced to defend in class arbitration customers' price fixing claims where their arbitration clause was “silent” on the class arbitration issue, the U.S. Supreme Court ruled today in a five-to-three decision.

Finding that the arbitration panel erred in imposing class arbitration, the Court said: “instead of identifying and applying a rule of decision derived from the [Federal Arbitration Act] or either maritime or New York law, the arbitration panel imposed its own policy choice and thus exceeded its powers.”

Class Arbitration

A putative class action was brought against the shipping companies after a Department of Justice criminal investigation revealed an illegal price fixing conspiracy in 2003. After it was determined that the parties were required to arbitrate their antitrust dispute, the customers sought class arbitration of their claims. The arbitration panel granted the request but stayed the proceeding to allow the parties to seek judicial review.

The federal district court in New York City vacated the arbitration panel's clause-construction award (2006-2 Trade Cases ¶75,353); however, the federal appellate court subsequently reversed the district court and upheld the award. The federal appellate court held that class arbitration was permissible, even though the arbitration clauses in the underlying maritime agreements did not specifically provide for it (2008-2 Trade Cases ¶76,355).

“[P]arties may specify with whom they choose to arbitrate their disputes,” explained Justice Samuel Anthony Alito, writing for the majority, explained, in reversing the appellate court. The High Court cautioned courts and arbitrators “to give effect to the intent of the parties.”

Agreement Required

It followed that a party may not be compelled under the FAA to submit to class arbitration unless there was a contractual basis for concluding that the party had agreed to do so. In this matter, the parties had stipulated that there was “no agreement” on that issue, the Court noted.

Moreover, an agreement to authorize class arbitration could not be inferred based on the parties' “agreement to arbitrate" because class-action arbitration changed the nature of arbitration, according to the Court.

Dissent

The dissenting opinion, authored by Justice Ruth Bader Ginsburg, argued that the majority was improperly addressing an issue not ripe for judicial review. The dissent contended that,
even if the matter was ripe for judicial review, the Court should have rejected it on the merits. The Court should have affirmed the Second Circuit judgment confirming the arbitrators’ clause-construction decision.

Text of the April 27 decision in Stolt-Nielsen S.A. v. Animalfeeds International Corp., 2010-1 Trade Cases ¶76,982, is posted here on the U.S. Supreme Court website.

Hotel Franchisor Not Liable for Patrons’ Contracting of Disease at Franchise

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

A hotel franchisor that never voluntarily took on the task of maintaining the pool and spa at a franchised hotel was not directly or vicariously liable for hotel patrons’ alleged contracting of Legionnaires Disease, a federal district court in Springfield, Illinois, has decided.

Accordingly, the franchisor was entitled to summary judgment on the patrons’ claims based on an alleged duty of the franchisor to maintain the pool and spa (negligence, wrongful death, and two statutory claims) and on the claims based on the theory of apparent agency.

Negligence

It was clear that the franchise agreement did not create a duty on the part of the franchisor toward the patrons of the hotel, the court held. The franchisee owned the hotel, and the franchisor neither owned nor operated the hotel. The agreement specifically provided that the franchisee was an independent contractor. However, the face of the agreement was not controlling on the issue of duty, the court observed.

A franchisor must make sure that the franchisee maintained the required level of quality associated with the franchised brand in order to protect its trademarks. This monitoring could include setting standards for the operation of the franchise, retaining the right to inspect the franchise operation periodically, and retaining the right to withdraw the franchise or to close an aspect of the franchise operation for failure to comply with the franchisor’s standards.

A franchisor would not be responsible for the operation of a franchised hotel unless it asserted more direct control than these limited rights associated with maintaining the quality of its brand, according to the court.

The complaining patrons presented no evidence that the franchisor went beyond the limited steps necessary to maintain the level of quality associated its brand, the court determined. The franchisor made visual inspections of the pool and spa area twice a year at most and retained the right to close the pool and spa if the water was cloudy.

The franchisor also required, in its Rules and Regulations, that the hotel comply with the law. However, the franchisee had to meet these requirements anyway. The franchisor did not exercise sufficient control over the hotel to be considered an operator of the hotel.

Apparent Agency

To support an apparent agency theory of liability, the patrons presented evidence that one of the affected individuals believed that the franchisor operated the hotel. She testified that she believed this based on the franchisor’s commercial she saw on television.

The patrons also presented evidence that the franchisor operated a reservation system that used an "800" telephone number and an Internet website. Moreover, the franchisor operated a frequent traveler program in which customers could accumulate points that would entitle them to a free night’s stay at a participating franchise. However, none of that evidence
demonstrated that the franchisor held out the franchisee as its agent, the court ruled.

The use of the brand name showed a franchise relationship, but the existence of a franchise did not create an agency. In fact, the only evidence of representations regarding the relationship between the franchisor and the franchisee were the parties’ repeated disclaimers of any agency: the plaque in the lobby of the hotel that declared that the hotel was independently owned and operated, and a disclaimer on the franchisor’s website and in its directory, according to the court.

The decision is Braucher v. Swagat Group, LLC, CCH Business Franchise Guide ¶14,355

Denny’s Failure to Disclose Sodium Content of Meals Not a Deceptive Act

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

A restaurant patron could not state an Illinois Consumer Fraud and Deceptive Business Practices Act (CFA) against Denny’s Corporation for failing to disclose the sodium content of its meals, according to the federal district court in Chicago.

The patron began eating meals at Denny’s in 2004. He alleged that 75 percent of the meals at Denny’s contained an amount of sodium that far exceeds the daily recommended amount outlined by the Centers for Disease Control and Prevention (CDC). While the CDC recommends limiting sodium intake to 1,500 milligrams a day, one particular meal offered by Denny’s contained 5,600 milligrams.

Concealment of Sodium Content

Based on the health concerns associated with excessive sodium intake, the patron alleged that Denny’s knowingly concealed the amount of sodium used in its meals and that he and other customers would not have eaten at Denny’s had that information been made available.

Absence of Deceptive Communication

Because there was no deceptive communication presented as evidence, the CFA claim was dismissed by the court. To state a CFA claim, the patron needed to show a deceptive act or practice by Denny’s, intent on the part of Denny’s to deceive customers, and actual damages as a result of the deception.

The patron also needed to present a communication from Denny’s that contained a deceptive misrepresentation or omission. Consumers cannot maintain CFA claims without evidence of a communication even when the claim is based on an omission of material facts, according to the court:

"The Illinois Supreme Court has recently made it clear that a consumer cannot maintain an ICFA claim absent some communication from the defendant, either a communication containing a deceptive misrepresentation or one with a deceptive omission. De Bouse, 235 Ill. 2d at 555, 922 N.E.2d at 316."

The decision is Ciszewski v. Denny’s Corp., CCH State Unfair Trade Practices Law ¶32,026.

Former Players Can Pursue Publicity Rights Claims Against NFL

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

Former professional football players’ right of publicity claims against the National Football League could not be dismissed on the theory that NFL promotional videos did not constitute commercial speech and were entitled to First Amendment protection as expressive works, the federal district court in St. Paul has ruled.

The NFL allegedly violated the right of publicity statutes and common law of the 50 states by using the players’ names and images in promotional videos such as the “History” series, which included videos called the “Fabulous Fifties” and “Sensational 60s.”

Commercial Speech v. Expressive Works

While the films were not pure infomercials, their overwhelmingly positive tone belied the NFL’s contention that they were documentaries and supported the player’s contention that they were advertisements, according to the court.

Giving the players the benefit of all reasonable inferences at the stage of a motion to dismiss, they made out a plausible claim that the films referenced a specific product, NFL football, and that the constitutional protection to be afforded the films did not outweigh the players’ interests in their own identities.

Copyright Preemption

The Copyright Act did not preempt the right of publicity claims. The subject of a right of publicity—the name and likeness of a celebrity or other individual—was not a “work” within the subject matter of copyright law, the court reasoned.

Lanham Act False Endorsement

On Lanham Act false endorsement claims, a determination could not be made on the pleadings alone that the NFL’s use in promotional videos of former professional football players’ names and images was not “explicitly misleading” or likely to cause confusion, the court held.

The opinion in Dryer v. National Football League will be reported at CCH Advertising Law Guide ¶63,807.

Final Claims Dismissed in Novell’s Antitrust Suit Against Microsoft

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

Software developer Novell, Inc. could not pursue two claims remaining in an antitrust action against Microsoft because Novell transferred the claims to a third party in an asset purchase agreement, the federal district court in Baltimore has ruled.

Novell alleged that Microsoft’s anticompetitive conduct in 1994-1996 damaged Novell’s ability to market its office productivity applications, including WordPerfect and Quattro Pro. In 2007, the district court dismissed as time-barred Novell’s claims alleging anticompetitive conduct in the office productivity applications market (2007-2 Trade Cases ¶75,901, CCH Computer Cases ¶49,423).

Novell’s remaining monopolization and restraint of trade claims, alleging harm in the operating systems market, were allowed to proceed because they were tolled during the pendency of the government’s action against Microsoft.

Assignment of Claims

In an Asset Purchase Agreement dated July 23, 1996, Novell assigned to Caldera, Inc., claims “held by Novell at the Closing Date and associated directly or indirectly with any of the DOS Products.”

Novell contended that the agreement meant to assign only claims for harm inflicted on the DOS products themselves, not on the operating system market, which comprised the actual market in which the DOS Products competed. However, the plain language of the assignment clause did not limit its application to claims inflicting “harm” on the DOS products; rather, it assigned claims “associated” with the DOS products, according to the court.

The APA assignment language encompassed the present claims because they were “associated directly or indirectly with the DOS Products.”

Merits

Despite finding that Novell lacked standing to pursue the claims at issue, the court nevertheless addressed the merits of each claim. If Novell had not transferred the claims to Caldera, Novell’s restraint of trade claim would have been decided in favor of Microsoft, but its monopolization claim would have proceeded to trial.

Novell alleged that Microsoft violated Sec. 2 of the Sherman Act by exclusive dealing—entering into “agreements with OEMs and others not to license or distribute Novell's office productivity applications.” To be considered “exclusive,” an agreement must expressly preclude a party from doing business with the defendant's competitors or engage in other conduct that has the practical effect of exclusivity.

Microsoft's agreements with computer manufacturers (OEMs) did not foreclose a substantial share of the software applications market, and its agreements with distributors were not exclusive or otherwise anticompetitive—they simply provided modest rebates for increased sales and “blended share” of Microsoft products.

With regard to its Sherman Act Sec. 1 claim, Novell’s evidence raised sufficient factual issues to preclude summary judgment. Although a monopolist generally has a right to refuse to cooperate with a competitor, Novell’s evidence suggested more, including that Microsoft acted out of predatory motives and affirmatively misled Novell about Windows 95 functionality and licensing.

The opinion, In re Microsoft Corp. Antitrust Litigation, is reported at CCH Guide to Computer Law ¶49,927. It will appear in CCH Trade Regulation Reporter.

FTC Proposes Updates to Horizontal Merger Guidelines

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

Following a series of joint public workshops held by the FTC and Department of Justice over the past six months, the FTC is seeking public comment on a proposed revision of the Horizontal Merger Guidelines.

The updated guidelines—which outline how the federal antitrust agencies evaluate the likely competitive impact of mergers and whether those mergers comply with U.S. antitrust law—are being revised jointly by the federal antitrust agencies.

The guidelines were issued by the two agencies in 1992 and were last revised in 1997 (CCH Trade Regulation Reporter ¶13,104). The revisions are designed to more accurately reflect the way the agencies currently conduct merger reviews, according to the FTC’s April 20 announcement.

For instance, the proposed guidelines state that “merger analysis does not consist of uniform application of a single methodology.” Rather, it is a fact-specific process through which the agencies use a variety of tools to analyze the evidence to evaluate competitive concerns. In addition, the proposed guidelines explain that “market definition is not an end in itself: it is one of the tools the Agencies use to assess whether a merger is likely to lessen competition.”

Many parts of the proposed guidelines reflect refinements and changes previously identified in the “Commentary on the Horizontal Merger Guidelines, which the agencies jointly issued in 2006 (CCH Trade Regulation Reporter ¶50,208).

According to the FTC, the proposed revision includes an updated section on coordinated effects, an updated explanation of the hypothetical monopolist test, and a simplified discussion of how the agencies evaluate market entry. The proposed guidelines also include new sections on powerful buyers, mergers between competing buyers, and partial acquisitions.

Public comments are being accepted until May 20, 2010. Details appear here at the FTC web site.

Steak House Chain May Have Engaged in Racketeering Scheme to Violate Immigration Laws

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

Former employees of a Ruth’s Chris Steak House franchise in Birmingham, Alabama, sufficiently alleged that the franchisor, the franchisee, and the owner of the franchise had engaged in a racketeering scheme to violate federal immigration laws, the U.S. Court of Appeals in Atlanta, Georgia, has ruled.

According to the plaintiffs, the restaurant knowingly hired illegal aliens, allowed them to work under assumed names, and gave them Social Security numbers that belonged to former employees.

Alleged Immigration Violations

The plaintiffs alleged that the defendants had violated Immigration and Nationality Act (INA) provisions that made it a federal crime to: (1) knowingly hire ten or more illegal aliens during a twelve-month period; (2) conspire to commit—or to aid and abet—the unlawful importation, transportation, or harboring of illegal aliens, or the inducing of illegal aliens to enter or reside in the U.S.; (3) encourage or induce an alien to enter or reside in the U.S., with knowledge or in reckless regard of the fact that doing so would be illegal; and (4) knowingly or recklessly conceal, harbor, or shield an illegal alien.

Allegations that the defendants violated the first INA provision were insufficiently pled, the court determined, because the plaintiffs failed to allege that the defendants knew they were hiring employees that were brought into the U.S. illegally. Violations of the second INA provision were insufficiently pled because the relevant allegations were conclusory.

Successful Pleadings

Regarding the third INA provision, the court ruled that district court had improperly held that knowingly hiring illegal aliens—and then supplying them with fraudulent Social Security numbers that facilitated their employment—did not encourage or induce illegal aliens to enter or reside in the U.S.

Under RICO, the terms “encouraging” and “inducing” were broadly interpreted to include the act of “helping” illegals to enter or reside in the U.S. Although the district court had concluded that the “mere employment” of illegal aliens was not enough to encourage or induce them to enter the country or reside here, the plaintiffs had alleged more than mere employment. They alleged that the defendants had facilitated the employment of illegal aliens by giving them Social Security numbers that belonged to former employees.

This was sufficient to plead a RICO predicate act based on the INA provision that prohibited encouraging or inducing.

Finally, knowingly providing an illegal alien with employment, an assumed identity, an assumed Social Security number, and cash-based pay—all for the purpose of concealing, harboring, and shielding them from detection—was sufficient to establish a RICO predicate act based on a violation of the fourth INA provision.

The text of the April 9, 2010 decision in Edwards v. Prime Inc. will appear at CCH RICO Business Disputes Guide ¶11,835.

Senate Judiciary Committee’s DOJ Oversight Hearing Touches on Antitrust Issues

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

The “Antitrust Division’s revitalized enforcement” was among the “many good things” accomplished by the Justice Department over the last year, Senator Herb Kohl (D-Wis.) said, commencing a Department of Justice oversight hearing held yesterday by the Senate Judiciary committee.

“Revitalized Enforcement”

Kohl applauded Attorney General Eric H. Holder Jr. for his efforts. Kohl said that, “as our economy rebounds, the Antitrust Division’s revitalized enforcement has fostered a competitive marketplace that encourages innovation and economic development while ensuring consumers have access to high quality goods at the best prices.”

In prepared testimony, the attorney general touted merger enforcement efforts as well as cartel enforcement at the Justice Department Antitrust Division.

“The Department has acted against six merger transactions already in Fiscal Year 2010, reaching settlements to protect competition in the vast majority, including the combination of Ticketmaster and Live Nation, and is currently litigating against Dean Foods, the nation’s largest dairy processor,” Attorney General Holder said. He also noted that the nearly a quarter of a billion in criminal fines were obtained against Antitrust Division defendants so far in the current fiscal year.

While the Justice Department’s role in fighting terrorism was the focus of much of the hearing, antitrust issues were discussed. Before turning to non-antitrust issues, Senator Chuck Grassley (R, Iowa) thanked Attorney General Holder for the Justice Department’s efforts to put on joint antitrust hearings with the Department of Agriculture on the topic of competition in the agriculture marketplace.

The first hearing in the series was held in Iowa on March 12. Attorney General Holder and Agriculture Secretary Tom Vilsack were in attendance.

Comcast/NBC Universal Merger

Senator Al Franken (D, Minn.) expressed his concerns with the proposed merger of Comcast and NBC Universal, now under review by the Department of Justice.

In light of his experience in the entertainment industry, Franken offered his assistance to the Justice Department as it reviews the transaction. The attorney general said that the Justice Department would be glad to work with him and listen to his concerns.

Senator Franken has expressed concern with the enforceability of potential commitments offered by the parties to resolve federal antitrust concerns. He said that he wanted to make sure that merger conditions have “enough teeth” and “long enough life.”

Attorney General Holder said that he was not at liberty to talk about Comcast/NBC deal specifically because of the ongoing investigation. He did say, however, that the Justice Department has enforcement mechanisms to ensure compliance with conditions imposed on merging parties.

Links to a webcast of the Judiciary Committee’s April 14 hearing, as well as Attorney General Holder’s prepared testimony and Senator Kohl’s remarks, are available here.

Trade Regulation Tidbits

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

Notes on recent state enforcement actions:

 American International Group (AIG) has agreed to pay $9 million to settle a lawsuit by the State of Ohio alleging violations of the state’s antitrust laws. AIG, the world’s largest insurance company, was alleged to have conspired with insurance broker Marsh & McLennan and other insurers to eliminate competition in the commercial casualty insurance industry. The state’s complaint asserted that the insurers and Marsh agreed to provide customers with fictitious quotes creating the false impression that competitive bidding had produced the best possible price, during a period extending from 2001to 2004. As a result of the settlement, more than $3 million will be distributed to the 26 public entities, including universities, schools, cities, and counties. Approximately $4 million will be put aside in a fund that will be distributed by the court once the antitrust case has been completely resolved. In an April 7 announcement, Ohio Attorney General Richard Cordray noted that while it was “a good settlement for Ohio," the litigation had not concluded. The state is pursuing claims against Marsh & McLennan, ACE American Insurance Co., The Chubb Corporation, and Hartford Financial Services Group.

 The New York Attorney General's Office has filed litigation in state court challenging mattress maker Tempur-Pedic International, Inc.'s alleged restrictions on dealer discounting. The state contends that Tempur-Pedic prohibited its retailers from discounting its mattresses. Mattress retailers acknowledge that adhering and agreeing to the manufacturer's suggested retail prices is required to remain as a Tempur-Pedic retailer, according to the allegations. The state is seeking restitution to consumers and disgorgement under New York state law.

 Connecticut Attorney General Richard Blumenthal announced on April 1 that the La Quinta Inn hotel chain has formally agreed to cease "call-arounds"—a potentially anticompetitive practice in which competing hotels exchange current room rate and occupancy information. The state attorney general's antitrust investigation into the hotel industry, which remains ongoing, has found that the call-around practice is prevalent in the hospitality industry and raises serious antitrust concerns because the information can be manipulated to raise or stabilize rates charged for hotel rooms. According to Blumenthal, the investigation has revealed that certain competitors of La Quinta have used call-around information to raise their prices on a regular basis, violating the Connecticut Antitrust Act. La Quinta's agreement to end call-arounds covers all La Quinta Inn and La Quinta Inn & Suites hotels nationally. The prohibition does not prevent hotels from reviewing commercially available reports and information, communicating with any other hotel or motel on behalf of a specific guest seeking to relocate, or communicating with any other hotel/motel to accommodate guests in the event of a state of emergency, disaster or similar situation. Further details appears here on the Connecticut Attorney General's website.

Buyers of Municipal Derivatives Adequately Allege Conspiracy to Fix Prices, Allocate Customers

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

Municipalities and other purchasers of municipal derivatives adequately alleged a conspiracy to allocate customers and fix prices for municipal derivatives, the federal district court in New York City has ruled. A motion to dismiss a second consolidated class action complaint (SCAC) was denied.

The defending financial services companies sought dismissal on the ground that the SCAC failed “to allege any facts showing a single conspiracy among all the defendants, or among any subset of defendants regarding the entire municipal derivatives industry.” The SCAC provided more specific allegations regarding certain defendants' involvement in the conspiracy than was alleged in the original consolidated class action complaint.

The plaintiffs relied on information obtained “in the context of a settlement process” from a defendant that had entered into the antitrust corporate leniency program administered by the Department of Justice Antitrust Division, as well as information provided by a confidential witness who is cooperating with the Justice Department in its antitrust investigation.

The SCAC was viewed in light of developments in state and federal investigations into the municipal derivatives industry. Although pending government investigations might not, standing alone, satisfy an antitrust plaintiff’s pleading burden, government investigations could be used to bolster the plausibility of Sherman Act, Sec. 1 claims, the court explained.

Statute of Limitations

The original complaint was ultimately dismissed because the claims were based upon events that occurred outside of the applicable statute of limitations period. The SCAC, however, sufficiently alleged fraudulent concealment so as to toll the statute of limitations.

Because allegations of bid rigging and price fixing were self-concealing, the plaintiffs were not required to show that the defendants took independent affirmative steps to conceal their conduct. Rather, the named plaintiffs needed to plead only ignorance of the violation and due diligence, both with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure.

They alleged that they were put on notice of their antitrust claims only after one of the defendants participated in the Department of Justice Leniency Program, approximately one year before the complaint was filed. With respect to due diligence, the named plaintiffs pled with particularity the inquiries that were made, to whom they were made, regarding what, and with what response.

Preclusion of Claims

The claims were not precluded by “an extensive set of federal regulations governing the operation of the market for tax-exempt municipal debt,” the court decided. The defendants unsuccessfully argued that private antitrust enforcement was precluded because awarding damages to the named plaintiffs would conflict with Internal Revenue Service and Treasury Department regulations governing tax-exempt debt, including the reinvestment of municipal bond proceeds.

Implied preclusion analysis turned on four considerations:

(1) whether the underlying market activity lies squarely within the heartland of the IRS regulations;

(2) whether the IRS had the authority to regulate the activities in question, namely a conspiratorial agreement to rig bids and fix prices;

(3) whether the IRS has regularly exercised its legal authority to regulate the alleged price fixing and bid rigging practices; and

(4) whether application of the antitrust laws to the challenged conduct would conflict with application of the IRS regulations.

Only the first prong weighed in favor of implied preclusion. The investment of tax-exempt municipal bond proceeds—the underlying market activity—fell squarely within the heartland of IRS regulation. The other three considerations weighed against implied preclusion, in the court's view.

The text of the decision in Hinds County, Mississippi, v. Wachovia Bank, appears at 2010-1 Trade Cases ¶76,954.

Utah Enacts Phishing, Pharming, Spyware Prohibitions

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

The new Utah “E-Commerce Integrity Act,” which was signed by Governor Gary R. Herbert on March 26, 2010, prohibits certain Internet-related conduct, including phishing and pharming. The law (Senate Bill 26) also repeals Utah’s “Spyware Control Act” and enacts new restrictions on the use of spyware.

“Phishing” is defined by the law as making a communication under false pretenses purporting to be by or on behalf of a legitimate business and using that communication to induce another person to provide identification information or property.

“Pharming” is described as the creation or operation of a website that falsely represents itself to be associated with a legitimate business and that induces others to provide identifying information or property. The statute prohibits the use of spyware to collect, through intentionally deceptive means, personally identifiable information.

Civil Action, Remedies

A civil action may be brought against violators of the phishing and pharming provisions by an Internet service provider that is adversely affected by the violation; an owner of a website, computer server, or a trademark that is used without authorization in the violation; or the state attorney general. Remedies include actual damages or a civil penalty of up to $150,000 per violation.

Civil actions to enforce the law’s spyware provisions may be brought by the state attorney general, an Internet service provider, or a software company that expends resources in good faith to assist authorized users harmed by a violation, as well as a trademark owner whose mark is used to deceive authorized users.

Damages, Fees, Costs

Plaintiffs may seek actual damages and liquidated damages of at least $1,000 per violation, not to exceed $1 million for a pattern or practice of violations, and attorney’s fees and costs. Courts are authorized to award treble damages for willful and knowing violations.

Utah’s “E-Commerce Integrity Act” will take effect on July 1, 2010. Text of the law appears at CCH Privacy Law in Marketing ¶34,442.

UK Commissioner May Order Fines for Serious Breaches of Data Protection Act

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

New enforcement powers aimed at helping the United Kingdom’s Information Commissioner’s Office (ICO) deter data security breaches came into effect under UK law on April 6, 2010.

The ICO is now authorized to order organizations to pay up to £500,000 as a penalty for serious violations of the Data Protection Act (CCH Privacy Law in Marketing ¶49,100).

The ICO may impose a monetary penalty notice if a data controller has seriously contravened the Act’s data protection principles and if the contravention was likely to cause substantial damage or substantial distress.

In addition, the contravention must either have been deliberate or the data controller must have known or ought to have known that there was a risk that a contravention would occur and failed to take reasonable steps to prevent it.

According to the ICO, the power to impose a monetary penalty is part of the ICO’s overall regulatory tool kit, which includes the power to serve an enforcement notice and the power to prosecute those involved in the unlawful trade in confidential personal data.

Further information regarding the new enforcement powers appears here on the ICO website.

Magazine Telemarketers Enjoined from Violating FTC Act, Telemarketing Sales Rule

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

The federal district court in Las Vegas has a “small surprise” for some telemarketers who sold magazines to consumers at their places of employment.

Telemarketers for Publishers Business Services, Inc. purportedly began their sales pitches with “I just wanted to ask you a few questions on your personal buying habits and if you could help me we have a small surprise for you . . . .” According to the court, the telemarketers’ surprise was a bill for hundreds of dollars for supposedly free magazine subscriptions lasting up to 60 months.

Yesterday, the court issued a permanent injunction against the company prohibiting violations of the Federal Trade Commission Act and the FTC’s Telemarketing Sales Rule (TSR). The consumer protection agency’s request for monetary relief will be considered at a later date.

The telemarketers' “lead” calls, “verification” calls, and subsequent calls to obtain payment all violated federal law, the court held. There was evidence that consumers believed that the telemarketers’ offers were either free or for a nominal amount, and that there was no long-term obligation or no obligation at all. While some of the challenged representations might have been literally true, the overall net impression of the representations had a tendency to mislead consumers into agreeing to long-term obligations to pay the telemarketers hundreds of dollars, the court decided. Further, the subsequent communications to induce payment used misleading representations.

Telemarketing Sales Rule's Business-to-Business Exemption

The telemarketers argued that the business-to-business exemption of the TSR shielded them from the rule’s requirements, because they only called businesses. The court noted that the TSR does not define “business” and that no other court had addressed what “business” meant in the context of the TSR exemption.

Under a natural and plain reading of the exemption, a telemarketer was exempt when it solicited a business regarding purchases on behalf of the business, the court explained. The limited scope of the exemption was apparent, to exclude only telemarketing calls to businesses for business purchases. However, PBS was calling consumers at work. The court rejected the defendants’ argument that their interpretation of the business-to-business exemption was consistent with the industry usage of the term, the FTC’s published regulatory intent, and congressional intent.

The texts of the April 7, 2010, order and permanent injunction in FTC v. Publishers Business Services, Inc., 2:08-cv-00620, appears at 2010-1 Trade Cases ¶76,955.

The FTC’s May 2008 complaint in the matter appears here on the FTC's website.

Senator Calls for Close FTC Scrutiny of Google’s Acquisition of Mobile Ad Provider AdMob

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

A key U.S. Senator this week urged the Federal Trade Commission to closely scrutinize Google’s proposed acquisition of mobile advertising service provider AdMob. Senator Herb Kohl (Wisconsin), Chairman of the Senate Judiciary Committee’s Subcommittee on Antitrust, Competition Policy, and Consumer Rights, expressed his concerns in an April 6 letter to FTC Chairman Jon Leibowitz. Shortly after Google announced its acquisition of AdMob for $750 million last November, the FTC requested further information.

Senator Kohl pointed out that the deal’s critics argue that the combination would allow Google to “leverage its dominance of PC-based search advertising market into the emerging mobile advertising market.” Google-AdMob’s combined market dominance potentially could result in higher mobile advertising prices and lower revenues for applications developers, Kohl said.

Google and AdMob contend that the mobile advertising market is too nascent to determine if any one transaction will result in dominance. According to Senator Kohl, however, the stakes are too high to avoid protecting competition in an emerging market where revenues are predicted to leap from $416 million in 2009 to $1.56 billion in 2013. “[T]he incipiency of the smart phone advertising market is not in itself a reason for the FTC to desist from taking any necessary action to enforce the antitrust laws or protect competition,” Senator Kohl wrote. Advertising accounted for 97% of Google’s $23.7 billion in revenues in 2009.

Senator Kohl also urged the Commission to ensure that consumers’ privacy would be safeguarded if the deal is approved. “[T]he combined firm will gain access to a treasure trove of data on millions of consumers’ behavior, search and product preferences,” Senator Kohl noted.

Senator Kohl’s letter arrived amidst news reports that FTC lawyers are preparing to challenge the Google-AdMob deal on antitrust grounds. Any action taken by the FTC would need to be cleared by the agency's Bureau of Competition and approved by the FTC Commissioners.

Challenge to Consummated Acquisition in Dairy Market Survives Motion to Dismiss

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

The federal district court in Milwaukee today refused to dismiss one of the two counts in a complaint filed by the U.S. Department of Justice and the States of Illinois, Michigan, and Wisconsin against Dean Foods Company for violating Section 7 of the Clayton Act. In the complaint, the government challenged Dean's consummated acquisition of the Consumer Products Division of Foremost Farms USA, a dairy cooperative headquartered in central Wisconsin.

The government alleged that the acquisition adversely affected two types of markets: the markets for the sale of school milk to individual school districts located throughout the State of Wisconsin and the Upper Peninsula (UP) of Michigan (Count 1); and the market for the sale of fluid milk to purchasers, such as retailers, distributors, food service companies, located in Wisconsin, the UP, and northeastern Illinois (Count 2).

Dean, the country's largest processor and distributor of milk and other dairy products, sought to dismiss Count 2. Dean "critique[d] the premise on which plaintiffs' proposed geographic market is based, and criticize[d] the sufficiency with which it is defined." Dean argued that the government improperly defined the geographic market based on the region in which Dean and Foremost competed for fluid milk sales prior to the acquisition. While a geographic market was comprised of the area where customers look to buy a product and not the region in which the seller attempts to sell its product, that did not mean that the geographic area where the parties competed was not the relevant geographic market, the court explained.

The court also rejected challenges to the sufficiency of the pleading of the relevant geographic market. The government's geographic market definition was based on a hypothetical monopolist's ability to impose a small but significant and nontransitory increase in price ("SSNIP") on certain targeted buyers. The test is described in section 1.22 of the joint Federal Trade Commission/U.S. Department of Justice Horizontal Merger Guidelines. The court noted that the Merger Guidelines were not binding, but that they were considered to be persuasive authorities.

The court accepted the geographic market despite Dean's contentions that the plaintiffs had not sufficiently pled: (1) the identities and particular locations of customers that defendant could target for price discrimination; (2) that targeted customers could not defeat a SSNIP by turning to more distant sellers; and (3) that targeted customers could not defeat a SSNIP through arbitrage. The court refused to apply the highly specific pleading standard advocated by Dean.

The text of the April 7, 2010, order in U.S. v. Dean Foods Co., Case 2:10-cv-00059-JPS, appears at 2010-1 Trade Cases ¶76,952.

Ramirez, Brill Sworn In as New Federal Trade Commissioners

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

Edith Ramirez and Julie Brill were sworn in as new Federal Trade Commissioners by FTC Chairman Jon Leibowitz on April 5 and 6, respectively. Ramirez filled an open position on the Commission, and Brill now occupies the vacancy created by the departure of Pamela Jones Harbour. Harbour, whose term ended last September, resigned effective April 6.

Prior to joining the FTC, Ramirez was a partner at Quinn Emanuel Urquhart & Sullivan, LLP in Los Angeles. Before joining Quinn Emanuel, she was an associate at Gibson, Dunn & Crutcher, LLP, in Los Angeles and clerked for the Hon. Alfred T. Goodwin in the U.S. Court of Appeals for the Ninth Circuit. Ramirez’s term will expire on September 25, 2015.

Brill comes to the FTC from the North Carolina Department of Justice, where she served as Senior Deputy Attorney General and Chief of Consumer Protection and Antitrust. Prior to her move to the North Carolina Department of Justice, Brill was an Assistant Attorney General for Consumer Protection and Antitrust for the State of Vermont for over 20 years. Brill’s term will expire on September 25, 2016.

Further information about the swearing in of Commissioner Ramirez appears here on the FTC website. Further information on the swearing in of Commissioner Brill appears here.

A statement from Commissioner Harbour on her resignation appears here.

Cleaning Service Franchisees Qualify as “Employees” Under Massachusetts Law

This posting was written by John W. Arden.

Cleaning service franchisees were employees—rather than independent contractors—within the Massachusetts Independent Contractor statute, according to the federal district court in Boston.

Under the statute (Mass. Gen. Laws ch. 149, §148B), an individual performing a service is considered an employee unless:

(1) the individual is free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact; and

(2) the service is performed outside the usual course of the business of the employer; and

(3) the individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.

The franchisor (Coverall North America, Inc.) failed to carry its burden of establishing all three elements, the court held. In particular, the franchisor failed to establish the second prong of the test—that the franchisees were “performing services that are part of an independent, separate, and distinct business from that of the employer.”

Cleaning Business v. Franchising Business

In attempting to establish that the franchisor and its franchisees are distinct businesses, the franchisor argued that it is not in the commercial cleaning business, but is in the franchising business, the court noted.

The franchisor maintained that it sells franchises and trains and supports the franchises, but neither cleans any establishment nor employs anyone who cleans any establishment. It further claimed that “numerous courts have accepted that the functions and business of a franchisor are separate and distinct from those of a franchisee and that their shared economic interest does not make one the employer of the other.”

The court agreed that there have been rulings that shared economic interests do not make one the employer of the other, but that such rulings did not establish the conclusion that the functions and business of a franchisor are separate and distinct from those of a franchisee.

“Coverall’s argument is not unlike arguments made by other employers in Massachusetts who also required their employees to sign agreements stating that they were independent contractors,” the court stated.

“Ponzi Scheme”

According to the court, “[d]escribing franchising as a business in itself, as Coverall seeks to do, sounds vaguely like a description for a modified Ponzi scheme—a company that does not earn money from the sale of goods or services, but from taking in more money from unwitting franchisees to make payments to the previous franchisees.”

Such a description does not apply to the franchisor, the court said. As a result of the expenditure of time, skill, effort, and money, Coverall developed the system used by its franchisees. It trains franchisees and provides them with uniforms, contracts with all customers, and receives a percentage of revenue earned on every cleaning service.

“These undisputed facts establish that Coverall sell cleaning services, the same services provided by these plaintiffs,” the court found.

Because the franchisees did not perform services outside the usual course of Coverall’s business, the franchisor failed to establish that the franchisees were independent contractors, in the court’s view.

The decision is Awuah v. Coverall North America, Inc., Civil Action No. 07-10287-WGY, March 23, 2010. It will appear in the CCH Business Franchise Guide.

Reaction

In a March 29 news release, the International Franchise Association (IFA) said that the ruling will “severely impact the ability of franchise businesses to operate, create jobs and provide millions in economic output” in Massachusetts.

“We feel the judge did not take fully into account the unique attributes of franchising and the federal regulatory oversight of the franchise business model,” said David French, IFA Vice President of Government Relations.

“Wrongfully defining franchisees as employees of the franchisor instead of business owners, as the ruling does, threatens the viability of franchising as a business model in Massachusetts and will likely lead to franchise companies ceasing operations,” he stated.

The IFA is supporting legislation filed in Massachusetts that would change the independent contractor law to require violation of all three prongs for an entity to be deemed a “misclassified worker.”

Evidence That eBay’s Ads Misled Consumers Merits Another Look

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

In light of evidence that online marketplace eBay knew that “Tiffany” products advertised and sold on eBay often were counterfeit, the U.S. Court of Appeals in New York ordered a trial court to take a fresh look at whether eBay’s advertising was likely to mislead or confuse consumers in violation of the Lanham Act.

The court remanded the case to the federal district court in New York City, which had held that the evidence at trial did not support Tiffany’s claims that eBay’s advertising violated the Lanham Act (CCH Advertising Law Guide ¶63,019).

Advertising of "Tiffany" Goods

eBay advertised the sale of Tiffany goods on its website in various ways. Among other things, eBay provided hyperlinks to “Tiffany,” “Tiffany & Co. under $150,” “Tiffany & Co.,” “Tiffany Rings,” and “Tiffany & Co. under $50.” eBay also purchased advertising space on search engines, in some instances providing a link to eBay's site and exhorting the reader to “Find tiffany items at low prices.”

Yet the trial court found, and eBay does not deny, that “eBay certainly had generalized knowledge that Tiffany products sold on eBay were often counterfeit,” the appellate court observed.

eBay did not infringe or dilute Tiffany’s trademarks, and the advertising was not literally false because some genuine Tiffany merchandise was offered for sale on eBay. However, the reasons given for rejecting the claim that the advertising was misleading were inadequate, the court held.

Fair Use

Even if eBay’s use of Tiffany's mark was a nominative fair use, it did not follow that eBay did not use the mark in a misleading advertisement, the court reasoned. The mere fact that the incorporation of another’s brand in an advertisement may be a permissible fair use under trademark law did not preclude a claim that the advertisement was false or misleading.

Knowledge

eBay could not rely on its lack of knowledge as to which particular listings on its website offered counterfeit Tiffany goods. This fact, while relevant to the question of contributory trademark infringement, shed little light on whether the advertisements were misleading insofar as they implied the genuineness of Tiffany goods on eBay's site, the court said.

Sellers’ Fraud

Finally, the court was unconvinced by the theory that eBay's advertisements were misleading only because the sellers of counterfeits made them so by offering inauthentic Tiffany goods. This consideration was relevant to Tiffany's direct infringement claim, but less relevant, if relevant at all, to the question of whether the advertising was likely to mislead or confuse consumers.

It was true that eBay did not itself sell counterfeit Tiffany goods. Only the fraudulent vendors did, and that in part was why eBay did not infringe Tiffany's mark.

But eBay did affirmatively advertise the goods sold through its site as Tiffany merchandise. The law required that eBay be held accountable for the words that it chose insofar as they misled or confused consumers, the court concluded.

The April 1 opinion in Tiffany (NJ) Inc. v. eBay Inc. will be reported in CCH Advertising Law Guide.

Consumer Debtors Could Pursue Civil RICO Suit Based on Arbitration Fraud

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

Consumer debtors pursuing a civil RICO action sufficiently alleged a pattern of racketeering involving arbitration fraud by a private equity firm and one of its subsidiaries, the federal district court in St. Paul, Minnesota has ruled.

Both companies allegedly maintained a financial interest in: (1) a dispute resolution service that had become an affiliate of the National Arbitration Forum (NAF) and (2) an organization that prosecuted arbitrations in front of the NAF. This affiliation created a “clear conflict of interest.”

To support allegations that the NAF’s arbitration hearings were biased, the debtors proffered statistics showing that consumers had won less than 0.2 percent of the 18,000 disputes that the NAF had arbitrated in California between 2001 and 2007.

The debtors also referred to a lawsuit against the NAF in which a former NAF employee had claimed that the NAF routinely engaged in fraudulent and corrupt practices, including “telling arbitrators to rule in favor of creditors and asking creditors how the arbitrators should rule.”

Finally, the debtors noted that a House Committee had discovered, in Congressional hearings about consumer arbitrations, that more than 70 percent of the NAF arbitrations it reviewed should have been dismissed rather than resolved in favor of the lender.

The debtors sufficiently pled a pattern of racketeering, through mail and wire fraud, even though they identified only two specific mailings and no use of the interstate wires. “Thousands” more mailings—including communications from the NAF to consumers, creditors, and its own arbitrators—would “undoubtedly” be revealed through discovery, the court explained.

Further, “it strain[ed] credulity” to believe that the NAF did not use the interstate wires to send any e-mails in support of the wide-ranging fraud that the debtors were alleging.

Because the debtors were not privy to the NAF’s e-mail system, the identification of specific examples of wire fraud would be “almost impossible” without discovery. The debtors’ allegations were therefore sufficient at the pleading stage of the proceedings, and the defendants’ motion to dismiss was denied.

The decision in National Arbitration Forum Trade Practices Litigation appears at CCH RICO Business Disputes Guide ¶11,816.