FTC Addresses Consumer Privacy at Congressional Hearings

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

The Federal Trade Commission recently appeared before two congressional committees to testify about FTC efforts to protect consumer privacy.

Chairman Jon Leibowitz appeared before the Senate Commerce, Science, and Transportation Committee on July 27 and David Vladeck, Director of the FTC’s Bureau of Consumer Protection, appeared before the Subcommittee on Commerce, Trade, and Consumer Protection of the House Committee on Energy and Commerce on July 22.

The testimonies described the FTC’s actions to hold companies accountable for protecting consumer privacy (focusing on data security, identity theft, and children’s privacy) and protecting consumers from intrusive spam, spyware, and telemarketing.

The FTC has brought 28 actions charging businesses with failing to protect consumers’ personal information, 15 actions charging website operators with collecting information from children without parents’ consent, 15 spyware cases, and dozens of actions challenging illegal spam, including an action against a rogue Internet Service Provider that resulted in a temporary 30 percent drop in spam worldwide.

In addition, the FTC brought 64 actions alleging violations of the Do Not Call Rule, resulting in violators paying almost $40 million in civil penalties and giving up nearly $18 million, including consumer redress.

New Technologies, Business Models

The testimonies also described the FTC’s recent initiatives to examine consumer privacy protection in light of new technologies and business models, including hosting a series of roundtables discussions addressing (1) integrating privacy into everyday business practices; (2) simplifying consumer choices about commercial data practices, and (3) increasing transparency of those practices.

Chairman Leibowitz said that consumers do not understand the extent to which companies are collecting, using, aggregating, storing, and sharing their personal information, particularly with regard to companies’ affiliate information sharing.

Data Use Transparency

The Commission “is considering a number of other ways to increase transparency about commercial data practices,” Leibowitz said. In an upcoming report, the Commission will discuss ways to improve the disclosures in privacy policies. One possible approach is the use of standardized terms or formats, Leibowitz said. The Commission also favors giving consumers the right to opt-in to how their data will be used.

Repeal Common Carrier Exemption

Chairman Leibowitz renewed the FTC’s request for repeal of the telecommunications common carrier exemption from the FTC Act. Currently, the FTC Act exempts common carrier activities from the FTC Act’s prohibitions on unfair and deceptive acts or practices and unfair methods of competition.

House Legislation

David Vladeck expressed the FTC’s general support for two legislative proposals—H.R. 5777 (the “BEST PRACTICES Act”) and a discussion daft of legislation to require consumer notice and consent regarding collection and use of personal information.

H.R. 5777, the Building Effective Strategies To Promote Responsibility Accountability Choice Transparency Innovation Consumer Expectations and Safeguards Act (the "BEST PRACTICES Act"), was introduced by Bobby Rush (D-IL), Chairman of the Subcommittee on Commerce, Trade, and Consumer Protection, on July 19, to foster transparency about the commercial use of personal information. The text of Chairman Rush’s BEST PRACTICES Act can be found here.

The discussion draft of legislation proposed by Rick Boucher (D-VA), Chairman of the Subcommittee on Communications, Technology, and the Internet, would require consumer notice to and consent prior to collection and use of personal information. The text of Chairman Boucher's discussion draft bill can be found here.

The FTC supported overlapping provisions in both proposals’ concerning data security and accuracy, simplification of consumer choice in determining collection and use of personal information, and enhanced FTC rulemaking authority. David Vladeck also urged Congress to (1) require standardized, clear disclosures to enable consumers to compare privacy protections, (2) ensure that disclosures be given at the time of relevant transactions, and (3) not necessarily exempt business affiliates from consent requirements.

Chairman Leibowitz’s Senate testimony is available here. David Vladeck’s House testimony is available here.

Tobacco Firm Asks High Court to Reconsider Review of Extraterritorial Reach of RICO

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

British American Tobacco (Investments) Limited (BATCo) has petitioned the U.S. Supreme Court for rehearing of its June 28 denial of certiorari in British American Tobacco (Investments) Limited v. U.S. (Docket No. 09-980). BATCo asked the Court to consider the extraterritorial reach of RICO in light of its June 24 decision in Morrison v. National Australia Bank Ltd. (Docket No. 08-1191).

In Morrison, the Court held that the “conduct” and “effects” tests for determining the extraterritorial reach of a statute could not be used to provide a cause of action for foreign plaintiffs suing under sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 (and under SEC Rule 10b-5) for alleged misconduct in connection with securities traded on foreign exchanges.

Presumption Against Extraterritoriality

In U.S. v. Philip Morris USA Inc., CCH RICO Business Disputes Guide ¶11,688, the D.C. Circuit affirmed a finding that six tobacco companies were liable for conducting the affairs of a RICO enterprise, through a pattern of mail and wire fraud, in a scheme to deceive consumers about the adverse health effects of cigarette smoking.

According to BATCo, the D.C. Circuit created a “flawed exception” to the traditional presumption against extraterritoriality when it held that BATCO’s foreign activities were subject to RICO claims because the alleged misconduct had “substantial, direct, and foreseeable effects in the United States.”

BATCo asked the Supreme Court to decide whether the federal appellate court had: correctly held that the traditional presumption against extraterritoriality was irrelevant to the question of whether a statute was intended to reach a foreign corporation’s “wholly foreign conduct” when that conduct has allegedly had a direct and substantial domestic effect.

It also asked the Court to determine whether the appellate court had improperly:

(1) Ignored the presumption against extraterritoriality and affirmative evidence that Congress never intended RICO to apply extraterritorially;

(2) Borrowed the “ill-suited” effects test from federal securities and antitrust cases to determine the territorial reach of RICO;

(3) Approved a “watered-down” version of the effects test; and

(4) Relied on the domestic effects of the U.S. conduct of other co-defendants and of the overall alleged RICO scheme.

Text of the petition for rehearing in British American Tobacco (Investments) Limited v. United States (Docket No. 09-980) appears here.

Further information regarding BATCo’s original petition for Supreme Court review appears in a March 1, 2010 posting on Trade Regulation Talk.

“Technical” Violation of Minnesota Franchise Act Did Not Entitle Franchisee to Rescind Agreement

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

A cleaning business franchisor’s sale of a master franchise before its franchise registration was approved—but after its application for registration had been submitted—was a "technical" violation of the Minnesota Franchise Act that did not entitle the franchisee to rescind the franchise agreement in the absence of actual fraud, a federal district court in Minneapolis has decided.

Registration Violation

The franchisor submitted its franchise registration to the state on April 19, 2007, and the state approved the registration on July 26, 2007, the court noted. However, the franchisor entered into an "expedited" version of a master franchise with the franchisee on June 4, 2007, before its franchise registration was approved.

The franchisor argued that the franchisee was not entitled to rescind the parties’ agreements because on August 20, 2007, the parties entered into new franchise and master franchise agreements that explicitly superseded the earlier agreement and that the franchisee had ratified those agreements.

Equitable defenses were available in actions for rescission under the Minnesota Franchise Act, according to the court. To avoid unjust outcomes based on technical violations, absent actual fraud, franchisees did not have an absolute right to rescind a franchise that violated the Franchise Act, the Minnesota Supreme Court held in Clapp v. Peterson (Business Franchise Guide ¶7907).

The franchisor’s registration in the current dispute was just the type of "technical violation" that concerned the Clapp court. Thus, the franchisor’s equitable defenses were available and applicable, the court held.

Noncompete Covenant

Absent rescission of the franchise agreement, the franchisor could enforce the agreement’s noncompete covenant, which restrained the franchisee from unfairly competing against the franchisor for the duration of the agreement plus two years within a 50-mile radius of the franchise location or any other franchise. The covenant’s geographical and durational restrictions were reasonable and not greater than necessary to protect the interests of the franchisor, in the court's view.

Because the noncompete covenant was valid and the requisite elements of injunctive relief were satisfied, the court granted the franchisor’s request for a preliminary injunction prohibiting the franchisee from transferring or diverting customers to any competitor of the franchisor, using the franchisor’s trademarks in association with the competing business, and otherwise violating the terms of the noncompete provision.

The decision is Bonus of America, Inc. v. Angel Falls Services, LLC, CCH Business Franchise Guide ¶14,415.

Further information regarding CCH Business Franchise Guide appears here on the CCH Online Store.

House Oversight Committee Hears from Antitrust Agency Heads

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

The heads of the federal antitrust agencies provided an update to members of the House Judiciary Committee's Courts and Competition Policy Subcommittee this morning on their agencies' enforcement priorities and recent actions.

The July 27 hearing was the subcommittee's first oversight hearing to examine antitrust enforcement under the Obama Administration.

FTC Competition Priorities

A top competition priority at the Commission is to stop “pay-for-delay” agreements between branded and generic drug makers, according to the FTC testimony delivered by FTC Chairman Jon Leibowitz. The agency estimates that these sweetheart deals cost consumers $3.5 billion a year.

Efforts are under way in the courts and congress to reign in patent settlement agreements under which the brand-name drug firm pays its potential generic competitor to abandon a patent challenge and delay entering the market.

The agency is currently pursuing two major pay-for-delay cases: one against Solvay Pharmaceuticals (owned by Abbott Laboratories) and generic manufacturers (Watson Pharmaceuticals, Par Pharmaceutical, and Paddock Laboratories) regarding AndroGel, a testosterone replacement drug often used by victims of testicular cancer, and the other against Cephalon regarding the drug Provigil, a sleep disorder medication with nearly $1 billion in annual U.S. sales.

According to the FTC testimony, the agency is continuing to initiate new investigations into other pay-for-delay agreements. However, the testimony noted that legislation would be the most effective way to stop these deals.

The FTC’s tactics in investigating the patent settlement agreements have come under scrutiny. At the House subcommittee’s oversight hearing and a Senate subcommittee oversight hearing in June, the FTC chairman was questioned about the agency’s misuse of a subpoena in the Cephalon case.

A U.S. Magistrate Judge on July 13 ruled that the president and CEO of Watson Pharmaceuticals made a “colorable claim that the FTC may have exceeded its authority by using its investigative power to pressure Watson to enter into a business deal that the FTC considers desirable.” The CEO was entitled to limited discovery to determine if the agency acted outside its authority.

Today's FTC testimony also outlined other agency priorities, including revising the Horizontal Merger Guidelines. The FTC and the Department of Justice Antitrust Division in April released for public comment a proposed update of the Horizontal Merger Guidelines.

Since the last major revision to the Guidelines was in 1992, the agencies proposed revisions to more accurately reflect the way the FTC and Department of Justice currently conduct merger reviews. Last month, the comment period closed. According to the testimony, the agencies are currently considering the viewpoints of 31 commenters as they work to finalize the new guidelines.

Antitrust Division Enforcement Activities

Christine A. Varney, Assistant Attorney General in charge of the Department of Justice Antitrust Division, also noted the joint, ongoing review of the Horizontal Merger Guidelines in testifying on behalf of the Antitrust Division. She cited the effort as an example of the Antitrust Division's efficient and effective collaboration with the FTC on a number of fronts.

Assistant Attorney General Varney also discussed merger enforcement, which “continues to be a core priority for the Antitrust Division.” She cited the Antitrust Division's pending action against Dean Foods—the nation’s largest dairy processor—to undo the company's 2009 merger with Foremost Dairy.

“[T]his enforcement action is indicative of this Department of Justice's commitment to our nation's farming industries,” according to the testimony.

Commissioner Leibowitz’s testimony is available here on the FTC website. Assistant Attorney General Varney’s statement appears here on the Department of Justice website.

Consumer Class Action for KFC’s Refusal to Honor Coupons Can Proceed

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

KFC’s refusal to honor coupons offered on its website could constitute violation of the Illinois, Michigan, and California unfair trade practice laws, according to the federal district court in Chicago. Thus, a consumer class action—alleging breach of contract, fraud, and violation of the state unfair trade practice laws—was allowed to proceed.

In connection with its debut of a new grilled chicken product, KFC offered coupons on its website for a free grilled chicken mea. Oprah Winfrey agreed to promote the giveaway on her nationally-televised daytime program.

After more than 10 million coupons were downloaded, local KFC outlets began refusing to accept the coupons two days into the promotion. About 5.7 million customers across the country were denied the free meals and were instead offered a rain check for a free meal in the future.

Consumers filed Illinois Consumer Fraud and Deceptive Business Practices Act (ICFA), Michigan Consumer Protection Act (MCPA), and California Unfair Competition Law (UCL), False Advertising Law (FAL), and Consumers Legal Remedies Act (CLRA) based on their alleged reliance on the restaurant’s unfair conduct.

Illinois Consumer Fraud Statute

The consumers stated an ICFA claim against KFC, according to the court. KFC argued that the offering of a free meal did not fall within the scope of the ICFA because it was not within the definition of trade or commerce and the consumer claim was merely a breach of contract. However, “trade or commerce” is defined as the advertising, offering for sale, sale, or distribution of any services, property, or commodity. Because the goal of the advertising campaign was to promote future sales of the new meal, the coupons could be considered advertisements for the purposes of the ICFA.

Furthermore, KFC argued that the plaintiffs were not “consumers” under the ICFA because they did not purchase anything. However, the ICFA’s prohibition on advertising free prizes, gifts, or gratuities to any consumer would be rendered moot whether “consumers” were required to make a purchase.

The consumers’ ICFA claim was not barred because the restaurant complied with the rain-check exception defined by the Illinois Administrative Code. While it is a violation of the ICFA to advertise a product and then not meet customer demand, the raincheck exception negates the liability of a retailer that offers a rain check to purchase the advertised product within a reasonable time. The rain check offered by the restaurant was not identical to the original coupon and required additional terms.

Michigan Consumer Protection Act

Claims under Michigan law could also proceed. KFC argued that the complaining consumers did not show that the alleged unfair or deceptive practices occurred in “trade or commerce,” as required by the MCPA, because they did not actually purchase goods or services. However, it was sufficient for the consumers to show that KFC was in the business of providing consumer goods or services, according to the court. There was no requirement that the consumers actually purchase any KFC products.

California Statutes

Finally, KFC argued that certain plaintiffs were not “consumers” because they did not seek to purchase the new meal, and that a “transaction” did not take place. However, the CLRA protects any consumer from unfair or deceptive acts and does not define what goods a consumer must seek to acquire. Because the coupons were meant to induce consumers to buy the new meal, there was a transaction between the parties. Contrary to KFC’s claim, the rain check did not negate liability under the UCL or FAL, according to the court.

The decision is In re Kentucky Grilled Chicken Coupon Marketing & Sales Practices Litigation, CCH State Unfair Trade Practices Law ¶32,088.

Further information about CCH State Unfair Trade Practices Law appears here on the CCH Online Store.

Chrysler Required to Reinstate Dealership Terminated in Network Reduction

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

A balancing of the economic interests of a motor vehicle franchisor (Chrysler), a terminated dealer (Fury), and the public led to the conclusion that the Lake Elmo, Minnesota dealership should be reinstated to the Chrysler motor vehicle dealer network and have its franchise agreements renewed, as prescribed by Section 747 of the Consolidated Appropriations Act of 2010, an arbitrator has determined.

The dealer had been terminated in connection with Chrysler’s reorganization in bankruptcy and sought reinstatement through the binding arbitration procedures outlined in the statute (CCH Business Franchise Guide ¶14,281) that was signed into law on December 16, 2009.

The Act required an arbitrator’s determination as to whether a dealer should be added back to a franchisor’s dealer network to result from a balancing of the economic interests of the dealer, the franchisor, and the public at large.

According to the arbitrator, the factors to be considered in such balancing included:

(1) Chrysler’s overall business plan;

(2) Fury’s profitability during 2006, 2007, 2008, and 2009;

(3) Fury’s current economic viability;

(4) Fury’s satisfaction of the performance objectives of its franchise agreement;

(5) the demographic and geographical characteristics of the dealer’s market territory;

(6) Fury’s performance in relation to the criteria used by Chrysler to terminate it; and

(7) the length of Fury’s experience.

Reinstating Fury would not result in any meaningful harm to the economic interests of Chrysler, the arbitrator decided. Based on all of Chrysler’s dealership performance criteria, Fury scored within the top 29% to 47% of all dealers in the local and national markets during the two years prior to its termination.

The public interest would not be materially affected by a decision to restore Fury to Chrysler’s network, the arbitrator reasoned. There was no material public interest associated with the convenience of having, or the inconvenience of not having, the Fury dealership in Lake Elmo, Minnesota.

There were economic harms to Fury from not being reinstated, but they were not overwhelming. Fury would not fail to survive if Chrysler did not reinstate it; however, it certainly would be more vulnerable. Moreover, Fury would suffer the stigma of being only a used car dealer with no new car franchise.

While those harms were not overwhelming, they were also not trivial and were greater than any meaningful harms to Chrysler, which were largely non-existent, the arbitrator concluded.

A detailed summary of the arbitrator’s determination (Fury Dodge, LLC v. Chrysler Group, LLC, American Arbitration Association, Case No. 65-532 000047 10, June 25, 2010) appears at CCH Business Franchise Guide ¶14,406.

Further information regarding CCH Business Franchise Guide appears here on the CCH Online Store.

Baseball Rooftop Club Promoter Faces Suit Over Internet Ads

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

The proprietor of a “rooftop club” for viewing Chicago Cubs baseball games (Wrigley Done Right) stated Lanham Act claims of false advertising and false designation of origin against a promoter of competing venues (Ivy League Club and Wrigley Rooftop Club), the federal district court in Chicago has ruled.

False Advertising

An Internet advertisement that promoted the availability of services at the Ivy League club when it was under construction and not operating could constitute false advertising, the court held. From January 2008 until some time in 2009, the promoter allegedly advertised the availability of services at the Ivy League Club on its website, despite the fact that the facility was closed for renovation through the 2009 baseball season and lacked a license required for hosting patrons.

The promoter allegedly deceived consumers into booking reservations for inferior services by accepting reservations and later providing tickets at other facilities with less favorable viewing locations than the Ivy League Club’s.

The Ivy League Club allegedly booked a significant number of reservations as a result of these misleading advertisements, and the diversion of sales allegedly injured Wrigley Done Right’s business.

The promoter contended that construction delays did not amount to fraud and that website disclaimers were posted. However, the advertising and selling of seats at a nonoperating venue for a more than a year and a half went beyond mere “construction delay,” according to the court.

False Designation of Origin

The promoter’s advertising for the Wrigley Rooftop Club could constitute a false designation of origin, the court ruled.

The promoter and the Wrigley Rooftop Club allegedly sponsored an advertisement on the website ballparkrooftops.com featuring a photo of Wrigley Done Right’s building next to a link to the Wrigley Rooftop Club’s website. Wrigley Done Right allegedly was injured as a result of the misrepresentation because sales were diverted to the Wrigley Rooftop Club.

State Law

Claims under the Illinois Deceptive Trade Practices Act and Illinois Consumer Fraud Act would stand or fall based on the outcome of Lanham Act claims of false designation of origin and false advertising, the court added.

The July 12 opinion in Bluestar Management LLC v. Annex Club, LLC will be reported at CCH Advertising Law Guide ¶63,916

Further information about CCH Advertising Law Guide appears here on the CCH Online Store.

“Final Four” Ticket Distribution Process Might Be Illegal Lottery

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

The National Collegiate Athletic Association and Ticketmaster could have conducted an illegal lottery by charging nonrefundable “handling fees” to unsuccessful applicants for tickets to the 2009 NCAA men’s basketball “Final Four” games, the U.S. Court of Appeals in Chicago has ruled.

Unsuccessful ticket applicants who forfeited fees brought a proposed nationwide class action. They seek a declaration that the ticket allocation process constituted illegal gambling under Indiana law and assert violations of the Indiana Deceptive Consumer Sales Act, as well as common law claims of unjust enrichment, civil conspiracy, and monies had and received.

Nonrefundable Fees

According to the complaint, each person who applied for tickets to Final Four games submitted a single application with up to 10 entries. Each entry was a chance to win, at the most, two tickets and required a payment of a $6 “non-refundable handling fee.”

An applicant could win only once but was required to submit the full face value of the tickets for each entry. In order to maximize the chances for winning a single pair of $150 tickets, an applicant would have to submit $3,060 (the face value of ten pairs of tickets plus a $6 handling fee for each of 10 entries).

A successful applicant would receive a pair of tickets via overnight mail and, eventually, a $2,700 refund (the total ticket price for the remaining nine entries).

The $60 in handling fees would be forfeited to the NCAA. An unsuccessful applicant would receive a $3,000 refund (the entire up-front investment minus the handling fees).

Prize, Chance, Consideration

Under Indiana law, three elements are necessary to establish a lottery: (1) a prize, (2) an element of chance, and (3) consideration for the chance to win a prize. The NCAA argued that its ticket distribution process only granted an opportunity to purchase tickets at full price, which was not a prize.

The court held that the unsuccessful applicants alleged all elements of a lottery. They allegedly paid a per-ticket or per-entry fee (consideration) to enter a random drawing (chance) in hopes of obtaining scarce, valuable tickets (a prize).

The NCAA sought to rely on the bona fide business transaction exception to Indiana’s gambling statutes. However, Indiana law made it unlawful to conduct a lottery without regard to statutory provisions defining “gambling,” according to the court.

In Pari Delicto

Finally, the suit was not barred by the equitable doctrine of in pari delicto—“where the wrong of both parties is equal, the position of the defendant is the stronger.”

Indiana law made it unlawful to conduct lotteries or otherwise gamble knowingly. As alleged, the NCAA’s acts of knowingly conducting an unlawful lottery demonstrated a greater degree of fault than the applicants’ acts of unwittingly entering that lottery, the court determined.

The decision by federal district court in Indianapolis, holding that the doctrine of in pari delicto barred the unsuccessful applicants from seeking relief, was reversed and remanded on all counts. The claims under the Indiana Deceptive Consumer Sales Act and the common law all incorporated and to some extent relied on the lottery allegations, the appeals court noted.

The July 16 opinion in George v. National Collegiate Athletic Association will be reported at CCH Advertising Law Guide ¶63,913.

High Court Limits Scope of “Honest Services Fraud,” Restricting Reach of RICO

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

The recent Supreme Court decision in Skilling v. United States restricted the definition of “honest services fraud” to schemes involving bribery and kickbacks. In doing so, the decision restricted the reach of the federal Racketeer Influenced and Corrupt Organizations Act (through the mail and wire fraud statutes), as well.

Violations of the federal mail and wire fraud statutes, which make it a crime to use the interstate mails or wires to further a scheme or artifice to defraud, constitute predicate acts under RICO.

Although the Supreme Court held in McNally v. U.S. (483 U.S. 350; 1987) that the mail fraud statute protected property rights, not the “intangible rights to honest services,” Congress quickly nullified that decision by enacting the honest services fraud statute (18 U.S.C. §1346), which defined a “scheme or artifice to defraud” to include schemes and artifices that deprive others of their "intangible right of honest services."

Constitutionality

In Skilling, former Enron officer Jeffrey Skilling—who was convicted of conspiring to prop up Enron's stock price by overstating the company's financial health—challenged the constitutionality of the honest services fraud statute.

To satisfy due process, a penal statute must define a criminal offense: (1) with sufficient definiteness that ordinary people can understand what conduct is being prohibited and (2) in a manner that does not encourage arbitrary and discriminatory enforcement. According to Skilling, the honest services fraud statute did neither. First, the phrase “intangible right to honest services” failed to adequately define the behavior that it barred. Second, the statute’s “standardless sweep” allowed policemen, prosecutors, and juries to pursue personal predilections that facilitated opportunistic and arbitrary prosecutions.

The Court disagreed. Viewed in light of the “solid core” of pre-McNally case law, which "uniformly recognized bribery and kickback schemes as honest services fraud," and in light of federal statutes that prohibited and defined similar crimes, there was "no doubt" that Congress had intended the honest services fraud statute to include bribes and kickbacks. Therefore, a criminal defendant who has participated in a bribery or kickback scheme could not tenably assert that the phrase “intangible right to honest services” was unconstitutionally vague.

If Congress had intended the honest services fraud statute to reach further, however, it had to "speak more clearly." Construing the statute to proscribe a wider range of misconduct would raise due process concerns, according to the Supreme Court.

Flawed Conviction

Nevertheless, Skilling's conspiracy conviction was “flawed.” Because Skilling’s misrepresentation of Enron's financial health involved neither bribery nor kickbacks, his conviction could not rest on honest services fraud. Moreover, the government had based its conspiracy charge on securities fraud and money-or-property wire fraud in addition to honest services wire fraud.

The jury, however, had not identified the basis on which their conspiracy verdict rested. Accordingly, the Fifth Circuit's ruling was vacated and the case was remanded to determine whether Skilling's conviction could be upheld absent honest services wire fraud.

Concurrence

Justices Scalia and Thomas joined the majority in rejecting honest services fraud as a legitimate basis for Skilling's conviction, but they did so for a different reason. The justices thought that the statutory phrase "intangible right to honest services" was unconstitutionally vague.

The June 24 decision, Skilling v. United States, appears at CCH RICO Business Disputes Guide ¶11,875.

Further information regarding the CCH RICO Business Disputes Guide appears here on the CCH Online Store.

$295 Million Antitrust Class Action Settlement with De Beers Rejected

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

The U.S. Court of Appeals in Philadelphia has rejected a $295 million settlement in antitrust class action lawsuits against the De Beers family of companies for anticompetitive practices in the markets for gem-quality diamonds.

A decision certifying nationwide classes of direct and indirect purchasers for settlement purposes (2008-2 Trade Cases ¶76,304) was reversed, and the matter was remanded to the district court for further proceedings.

The purchasers had alleged a conspiracy to fix prices in the wholesale market for gem-quality diamonds through a web of pricing and output-purchase agreements and monopolization by De Beers.

There were two categories of plaintiffs. First, there were direct purchasers that acquired rough gem diamonds directly from De Beers or one of its competitors and asserted federal antitrust claims. The second class was composed of indirect purchasers. These entities and individuals acquired either rough or cut-and-polished gem diamonds but did not do so directly from De Beers or its competitors. They included consumers, jewelry retailers, and middlemen who asserted state law claims as a route to monetary relief because they lacked standing to bring a federal antitrust claim for damages.

Class of Indirect Purchasers

The appellate court remarked that it was tasked with considering for the first time whether a national class of indirect purchaser claimants under state law was sufficiently cohesive to warrant adjudication by representation.

The appellate court decided that the lower court should not have certified a nationwide class of litigants whose claims implicated the laws of multiple jurisdictions, since only some of those jurisdictions recognized the claims for which recovery was sought. It was improper to include in an indirect purchaser class plaintiffs whose claims arose in states that foreclosed indirect purchasers from recovering for price fixing or monopolization.

The parties could not salvage an improper certification order by saying that De Beers has stipulated out of existence defects in the commonality and predominance of the class claims.

The lower court was instructed to entertain on remand any renewed motions to certify classes that, at least as to state law claims, were not nationwide in scope. A certification order would have to sufficiently identify those claims and issues subject to the class treatment.

Injunctive Class

Certification of an injunctive class also was vacated by the appellate court. Objectors successfully argued that the class members did not show an imminent threat of prospective antitrust injury. In order to have standing under Sec. 16 of the Clayton Act, a plaintiff had to establish a prospective threat of loss or damage as a result of conduct prohibited elsewhere in antitrust law. De Beers’ willingness to stipulate to liability was sufficient in and of itself to establish a prospective threat of antitrust harm.

Moreover, the plaintiffs faced no significant threat of future antitrust harm in the absence of the injunction because, according to their experts, the market had become increasingly competitive and there is no longer any guarantee that the prices De Beers set would hold in the marketplace.

The July 13, 2010, decision in Sullivan v. DB Investments, Inc., No. 08-2784, will appear at 2010-2 Trade Cases ¶77,090.

Further information regarding CCH Trade Regulation Reporter appears here on the CCH Online Store.

Many Franchisors Fail to Report Franchisees' Sales to New York State Tax Authority

This posting was written by John W. Arden.

Only 400 of the thousands of franchisors having franchisees within the State of New York have filed annual information returns with the New York Department of Tax and Finance as required by a 2009 statute, according to state officials speaking at a July 14 meeting of the New York State Bar Association Franchise Law Committee.

Last year, New York enacted legislation requiring all franchisors having franchisees within the state to file annual information returns, reporting the gross sales of each franchisee within the state, sales by the franchisor to the franchisee, and any franchisee income reported to the franchisor. The law also requires the franchisor to report such information to the relevant New York franchisees.

The first report was to be filed by September 20, 2009, with a 90-day automatic extension process making the filing deadline December 20, 2009.

The officials made it clear that the Department of Tax and Finance was using the information returns primarily as a means of auditing the sales tax returns of the franchisees, said Bruce S. Schaeffer of Franchise Valuations, Ltd.

“Franchisors should be aware that they are risking substantial audit fees, penalties, and the potential for offending the authorities with respect to back taxes that may be found to be due,” said Schaeffer.

Attendees suggested an amnesty program from franchisors determined to be “out of compliance” with the law. The suggestion was taken under advisement, according to Schaeffer.

Text of the New York statute (New York Tax Law, Article 28, Sections 1136(i) and 1145(i)) appears at CCH Business Franchise Guide ¶4321.

Further information regarding the CCH Business Franchise Guide appears here on the CCH Online Store.

Public Interest Groups Urge FTC to Create Comprehensive Privacy Plan

This posting was written by John W. Arden.

Seventeen public interest and privacy groups sent a letter yesterday to Federal Trade Commission Chairman Jon Leibowitz, urging the FTC to “draft a comprehensive plan that both details the deficiencies in Americans’ privacy rights, and proposes comprehensive statutory and regulatory solutions to those problems.”

The letter asserted that U.S. privacy law was “in a state of disarray,” that existing laws “don’t adequately address new business practices,” and that entire industries have sprung up “with little or no regulation.”

“Under the guise of `self regulation,’ companies routinely revise privacy policies so that they can do essentially whatever they wish with the data they collect,” the letter stated. “Meanwhile, public support for stronger privacy safeguards is growing as consumer protests continue to mount.”

Opportunity to Act

After hosting a series of roundtable discussions on privacy challenges posed by technology and business practices that collect and use consumer data, the FTC is well positioned to issue a “wide-ranging report” addressing problems of online and offline data collection, the groups observed. The agency was urge to “seize this opportunity.”

The groups recommended that the Commission take the following steps:

 Propose a comprehensive privacy law that would provide consumers with safeguards and control over their personal information;

 Set out regulations for the collection of information by the online advertising industry to help ensure that consumers have meaningful control over their personal information;

 Identify specific new business practices that raise possible privacy concerns and propose solutions; and

 Improve the agency’s transparency so the public can understand the significance and effectiveness of an enforcement action.

Need for Comprehensive Regulation

The letter pointed out that current U.S. privacy law is piecemeal, protecting personal information in one area, while leaving it uncovered in another context.

“We believe a comprehensive overview of the problems and a discussion of the potential solutions—similar to the recent Federal Communications Broadband Plan—is the best way to begin to address these systemic problems.”

The letter was signed by 17 groups, including the ACLU, the Center for Digital Democracy, the Electronic Frontier Foundation, the Electronic Privacy Information Center, Public Citizen, US PIRG, and the World Privacy Forum.

Text of the letter appears here on the Center for Digital Democracy’s web site.

No Errors Made in Trial of Dealer’s Antitrust Claims Against Manufacturer, Other Dealers

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

A federal district court committed no error in evidentiary rulings or jury instructions regarding the evidence of conspiracy in a trial of a truck dealer’s claims that a truck manufacturer had conspired with other dealers to restrain trade in violation of federal antitrust law, the U.S. Court of Appeals in Philadelphia has ruled in an unpublished opinion.

A jury verdict in the defendant’s favor (2009-1 Trade Cases ¶76,660) was upheld.

Evidentiary Rulings

Admission of evidence regarding other litigation ongoing against the complaining dealer, an arrest of its top salesman, and the dealer’s termination for misappropriation of trade secrets was proper, the court decided. That evidence was relevant to the defendant’s presentation of alternative causes for the dealer’s decline in sales, a central element of the case.

Although the court did not explain its exclusion of 15 depositions taken in an unrelated action, that decision was not an abuse of discretion, in the appellate court’s view. Introduction of that evidence would have caused undue delay in the presentation of evidence, confused the issues presented in the action, and wasted the time of the trial court and jury.

Jury Instructions

Regarding the jury instructions on evidence of conspiracy, the trial court complied with an earlier appellate decision in the same case in instructing the jury on direct and circumstantial evidence, the appellate court stated.

The trial court had not improperly limited the evidence that the jury could consider. Contrary to the complaining dealer’s assertion, the court was not required to instruct the jury that it must accept the dealer’s offering of direct evidence as sufficient and credible to determine that the manufacturer conspired to violate Sec. 1, the appellate court added.

The July 7 decision is Toledo Mack Sales & Service, Inc. v. Mack Trucks, Inc., 2010-1 Trade Cases ¶77,084.

Further information about the jury verdict appears in a June 30, 2009 posting on Trade Regulation Talk. Details of an earlier decision of the U.S. Court of Appeals in Philadelphia—ruling that the dealer presented sufficient evidence of horizontal and vertical price fixing to send the matter to the jury—appears in a June 26, 2008 posting on Trade Regulation Talk.

Ninth Circuit Asked to Rehear Appeal of Antitrust State Action Immunity Decision

This posting was written by John W. Arden.

The American Antitrust Institute has filed an amicus brief, urging the U.S. Court of Appeals in San Francisco to rehear the appeal of a decision “that expands the state action defense to immunize alleged price fixing by car rental companies in California.”

On June 8, the appeals court held that the California Travel and Tourism Commission (CTTC) was shielded by the state action immunity doctrine from consumers’ claims that it conspired with passenger rental car companies to pass on CTTC tourism assessments to consumers (Shames v. California Travel and Tourism Commission, 2010-1 Trade Cases ¶77,044).

As required for state action immunity, the CTTC’s alleged anticompetitive conduct constituted an authorized and reasonably foreseeable result of a statutory authorization, the Ninth Circuit ruled. The California legislature had explicitly authorized tourism assessment fees on passenger car rentals in order to fund the promotion of state tourism. It appeared that the legislature envisioned the fee being uniformly passed on to rental car customers, according to the court.

Consumers had argued that active state supervision was required because the CTTC was industry-controlled. However, the appeals court held that state supervision was irrelevant because the CTTC was a state agency created by statute to promote tourism in California.

The dismissal of the consumers’ horizontal price fixing claims by the federal district court in San Diego (2008-2 Trade Cases ¶76,370) was upheld by the Ninth Circuit.

Amicus Brief

In its amicus brief supporting the plaintiffs’ petition for rehearing, the American Antitrust Institute (AAI) argued that rehearing is necessary because “the panel decision rests on a misunderstanding of both prongs of the `state action’ defense.”

"If left standing, this decision will encourage the misuse of state statutes to immunize unauthorized and unjustified agreements in restraint of trade to the detriment of the economy and in conflict with our fundamental national policy in favor of free and open competitive markets."

Specifically, the panel inferred immunity even the state law could not reasonably be read to authorize or even contemplate the alleged underlying illegal conduct—“namely a price-fixing cartel intended to exploit consumers and defeat the ordinary market process,” the AAI charged.

The panel interpreted a statute that permits an individual passenger car rental company to pass on some or all of the assessment to customers as authorizing competing businesses to agree collectively and with the CTTC to pass on the entire assessment, as well as airport concession fees, according to the amicus brief.

The AAI alleged that the panel exempted the CTTC from any active state supervision requirement, treating it as equivalent to a traditional state agency, even though the CTTC was dominated by private interests.

Supreme Court Standards

These rulings could not be reconciled with U.S. Supreme Court standards for the application of state action defense to private or quasi-governmental action, as set out in California Retail Liquor Dealers Assn. v. Midcal Aluminum, Inc, 445 U.S. 97, 1980-1 Trade Cases ¶63,201, the brief asserted.

According to the standards, the state must (1) clearly articulate its intention to replace competition with regulation in a sector of the economy and (2) actively supervise the regulatory scheme to ensure that it operates in the public interest.

The AAI argues that the California Tourism Marketing Act neither allows the CTTC or its participants to regulate the prices or pricing policies of car rental firms nor creates standards for reviewing the reasonableness of the pricing or pricing policies.

In addition, the Ninth Circuit panel erroneously conferred the status of state agency on the CTTC, therefore avoiding the requirement of active state supervision, the brief alleged. In reality, the CTTC is controlled by private industry in the very markets that the CTTC purports to regulate. As such, it is not a state agency for the purposes of state action immunity, the AAA argued.

The brief is Shames v. California Travel and Tourism Commission, No. 08-56750, United States Court of Appeals for the Ninth Circuit. Text of the brief appears here.

American Antitrust Institute

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

AOL Users May Seek Injunction Barring Release of Internet Search Records

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

California consumers could proceed with claims under that state’s Consumer Legal Remedies Act (CLRA) against Internet service provider AOL for unlawfully making public a database containing the Internet search records of more than 650,000 AOL members, the federal district court in Oakland has decided.

The consumers could pursue injunctive relief, although they failed to provide the requisite notice under the CLRA in order to pursue a claim for damages.

Misrepresentations

The consumers alleged that AOL made false representations in its privacy policy and other statements posted on AOL's website, which assured members that AOL would endeavor to maintain the privacy of their personal information. These allegations were specific enough to satisfy the requirements of Federal Rule of Civil Procedure 9(b), the court said.

The expectations of privacy fostered by these statements were material in terms of influencing AOL members' decisions whether to disclose sensitive information, in the court’s view. Accordingly, the consumers sufficiently pleaded causation for purposes of the CLRA.

The consumers adequately alleged that they sustained injury as a result of AOL’s conduct. “Damage” under the CLRA could encompass harms other than pecuniary damages, the court noted. AOL’s disclosure of highly sensitive personal information regarding its members—including names, addresses, credit card numbers, Social Security numbers, and medical information—was not something that members bargained for when they signed up and paid fees for AOL's service.

Injunctive Relief

The consumers could seek an injunction requiring AOL to:

(1) ensure that member search data does not appear as search results in Internet search engines;

(2) take all necessary steps to enforce a license to prohibit commercial and non-research use of members' search data;

(3) no longer store or maintain records associated with members' searches on AOL's search engine; and

(4) destroy all such records in its possession.

AOL allegedly engaged in a practice and policy of storing search queries containing confidential information and allegedly had taken no steps to ensure that such data would not be disclosed again in the future. Although AOL had pulled the leaked database from its website, the information already had been posted on a number of other public sites.

AOL allegedly did not attempt to retrieve this information or to prevent further republication. The consumers asserted that AOL continued to collect and disseminate the same types of data, the court said.

Damages

The CLRA requires plaintiffs to provide notice to the defendant of the alleged statutory violation and a demand to rectify the alleged violation within 30 days. There was no dispute that the consumers had failed to do so, according to the court.
The claim for damages was dismissed without prejudice, until 30 days or more after the plaintiff complied with the notice requirement. If AOL corrected the alleged wrongs or indicated that it would correct the wrongs within the 30-day period, it could not be held liable for damages.

Disposal of Records

The consumers failed to state a claim that AOL violated the California Consumer Records Act (CRA), the court determined. The CRA provided that businesses must take all reasonable steps to shred, erase, or otherwise destroy customer records that were no longer to be maintained and required businesses to maintain security procedures to protect consumers' personal information.

The CRA was inapplicable because it applied only when a business intended to discard records containing personal information. The alleged disclosure by AOL did not occur in the course of AOL's disposal of customer records, the court said.

The decision is Doe v. AOL LLC, CCH Privacy Law in Marketing ¶60,493.

Further information regarding CCH Privacy Law in Marketing appears here on the CCH Online Store.

User Consent Needed for Online Ad Tracking: EU Working Party

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

Online behavioral advertising providers are required to obtain the informed consent of users before installing tracking devices, such as cookies, on their computers, under the terms of the European Union’s online privacy rules, according to the Article 29 Data Protection Working Party.

Use of an “opt out” mechanism would not be sufficient to comply with the requirements of the recently revised ePrivacy Directive, the Working Party said in an opinion released June 24.

Behavioral Advertising

Behavioral advertising is defined as the continuous tracking of individuals across multiple websites. Commonly, tracking cookies are used to collect information about individual surfing behavior and to send users targeted advertisements. In most cases, according to the Working Party, individuals are unaware that this is happening.

Although online behavioral advertising may bring advantages to online businesses and users, the Working Party said, its implications for personal data protection and privacy are significant. Monitoring Internet surfing can give third parties a very detailed picture of a person’s online life. Thus, online advertising networks and browser vendors must employ simple and effective mechanisms for users to affirmatively give their consent for online behavioral advertising.

Equally simple and effective mechanisms should be established for users to withdraw consent, the Working Party added.

Consent

Currently, three of the four most widely used browsers are set by default to accept all cookies, the Working Party noted. Not changing a default setting cannot be considered meaningful consent, in most cases. Advertising networks and publishers should provide information about the purposes of tracking in a clear and understandable manner to enable users to make informed choices about whether they want their browsing behavior to be monitored.

Advertising network providers should work with browser manufacturers and developers to implement privacy by design in browsers, the Working Party recommended.

Ad network providers should enable individuals to exercise their rights to access their personal data stored by the networks and to make corrections and request erasure of such information. Ad networks also should implement retention policies that ensure information is automatically deleted after a reasonable period of time. These policies should apply to alternative tracking technologies, such as “Java cookies.”

Application to Children

In addition, in the Working Party’s view, online advertising networks should not serve behavioral advertising to children at all, because of inherent difficulties in obtaining informed consent and because of the vulnerability of children.

The Working Party is an independent advisory body on data protection and privacy, set up under Article 29 of the EU Data Protection Directive. It is composed of representatives from the national data protection authorities of the EU Member States, the European Data Protection Supervisor, and the European Commission.

Text of the Working Party’s Opinion 2/2010 on online behavioural advertising appears at CCH Privacy Law in Marketing ¶60,494.

Tennis Tour’s Demotion of Event Did Not Violate Federal Antitrust Law

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

The Association of Tennis Professionals, a non-profit corporation that operates a worldwide tour of men’s professional tennis tournaments, did not violate federal antitrust law by downgrading an event in Hamburg, Germany, to a lesser status as part of a reorganization of the tour, the U.S. Court of Appeals in Philadelphia has ruled.

The complaining owners of the tournament—the German and Qatar Tennis Federations—failed to establish a valid relevant market definition affected by the alleged conduct. A jury verdict finding against the Federations’ claims was affirmed.

The jury found that the Federations had failed to prove the ATP entered into a contract, combination, or conspiracy with any separate entity under Sec. 1 of the Sherman Act. It further found that the Federations did not establish a relevant product market under Sec. 2.

Relevant Market

The appellate court did not evaluate the jury’s finding regarding concerted action. Because the Federations did not carry their burden of proving a relevant market and this inadequacy was fatal to both claims, the appellate court stated, it did not need to decide whether the trial court’s jury instruction on the single entity defense was given in error.

The federations’ contention that insufficient Sec. 2 market proof did not establish insufficiency for purposes of a Sec. 1 claim as well was rejected by the appellate court. While inquiries into the scope of competition under Sec. 1 and Sec.2 were not necessarily the same, in this case the federations had asserted identical market definitions for both claims and the jury verdict forms posed the same question regarding proof of the relevant market for the purposes of both the Sec. 1 and Sec. 2 claims. Therefore, the jury’s conclusion that the Federations failed to prove a relevant market under Sec. 2 was equally applicable to Sec. 1 analysis, in the court’s view.

Quick-Look Analysis

The appellate court also found unavailing an additional argument by the federations that they did not need to prove a relevant market because the trial court should have told the jury to conduct a quick-look analysis, which did not require detailed market analysis. Quick look analysis was inappropriate for the alleged restraint, the court said.

Though the restraint the federations alleged was purportedly a horizontal one, for sports endeavors such as professional leagues or tennis tours ‘‘horizontal restraints on competition [were] essential if the product [was] to be available at all.’’

Because the contours of the market were not sufficiently well known or defined to permit a court to ascertain—without the aid of extensive market analysis—whether the challenged practice impaired competition, proof of relevant market was required under full-scale rule of reason analysis.

Even where anticompetitive effects were obvious, quick-look condemnation still would have been improper without assessing and rejecting the logic of proffered procompetitive justifications, the appellate court explained.

Justification

Given the justification offered by the ATP, which revolved around making the tour more competitive with other spectator sports and entertainment products though numerous modifications designed to improve the quality and consistency of its top-tier events, any presumption that quick-look analysis would suffice disappeared, the court concluded.

The application of quick-look analysis was a question of law to be determined by the court; the concept of ‘‘quick look’’ had no application to jury inquiry, the court added. Thus, the jury was properly instructed to analyze the alleged restraints under the rule of reason, and their finding that the Federations failed to prove the relevant market defeated the Sec. 1 claim.

The decision is Deutscher Tennis Bund v. ATP Tour, Inc, 2010-1 Trade Cases ¶77,080.

Further information regarding the CCH Trade Regulation Reporter appears here on the CCH Online Store.

Canadian Franchisees’ Class Action Against Quizno’s Allowed to Proceed

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

Class certification under Canada’s Class Proceedings Act was appropriate for an action brought by two Canadian Quizno’s franchisees on behalf of a class of all Canadian Quizno’s franchisees for breach of contract, illegal price maintenance, and conspiracy to fix prices, according to the Ontario Court of Appeal.

Even if the damage issues could not be handled on a class-wide basis, certification was proper because trial of the action’s common issues would significantly advance the litigation, the court determined

The appellate court affirmed a decision of the Ontario Superior Court of Justice, sitting as a divisional court, which reversed an earlier ruling by a motion judge that denied class certification (CCH Business Franchise Guide ¶7,398).

The franchisees alleged that Quizno’s, and the distributor that Quizno’s had selected to distribute food and other supplies to its Canadian franchises, established a price maintenance scheme in violation of the Competition Act through which large sums of money were extracted from the franchisees. The franchisees asserted that the prices they were contractually forced to pay for supplies pursuant to the scheme were inflated and commercially unreasonable.

Common Issues

In denying certification, the motion judge held that the franchisees failed to satisfy the common issue criterion for class certification because they failed to show that their damages, if any, could be proven in the aggregate on a class-wide basis.

The removal of the assessment of damages as a common issue had “the effect of an avalanche that buries the proposed common issues with an absence of commonality and a proliferation of individual issues.”

In reversing that ruling, the majority of the divisional court concluded that the motion judge’s reasoning was improperly focused on the issue of damages and that he committed reversible error in failing to consider the franchisees’ remaining proposed common issues.

There were enough significant common issues to each of the claims of illegal price maintenance, conspiracy, and breach of contract which would advance the litigation by proceeding on a class-wide basis, the divisional court ruled.

Price Maintenance

A finding of violation of the Competition Act’s price maintenance provision (since repealed in 2009, the court noted) did not require proof of loss or damage or a detailed analysis of the prices paid for each product by each franchisee and the prices that each franchisee would have paid but for the alleged illegal scheme.

The fact that franchisees would be required to show proof of loss or damage in order to recover damages for their price maintenance claim did not detract from the conclusion that breach of the price maintenance provision was a common issue that advanced the litigation.

If the court became satisfied that Quizno’s imposed sourcing fees and mark-ups by way of its distribution agreement in an attempt to influence upwards the prices paid by franchisees, and that the pricing scheme constituted illegal price maintenance, a substantial ingredient of liability for damages could be proven on a class-wide basis.

It was not necessary, at the class certification stage, to engage in debate over the relative strengths and weaknesses of the expert evidence presented by the two sides as the motions judge had done, the appellate court noted.

Conspiracy

In order to succeed on the conspiracy claim, the franchisees would be required to prove:

(1) that there was an illegal agreement to maintain prices between the defendants;

(2) that the distributor committed unlawful aiding and abetting conduct;

(3) that the defendants performed actions in furtherance of the conspiracy;

(4) that the defendants should have known the conspiracy would seriously harm the franchisees; and

(5) that the conspiracy caused damages to the franchisees.

The court affirmed the divisional court’s conclusion that—even in the absence of the fifth element (proof of the fact of loss)—the other elements of conspiracy were issues that would advance each franchisee’s claim and avoid duplication of factfinding and legal analysis.

Breach of Contract

A significant number of factual and legal issues integral to the franchisee’s breach of contract claim were common issues, the appellate court held, accepting the conclusions of the divisional court.

Issues that could be determined on a class-wide basis and advance the litigation included: the meaning of the contractual provisions, the existence and nature of any common law duty of fairness, and breach of contract by Quizno’s failure to provide the franchisees with specifications.

The June 24 decision is Quizno’s Canada Restaurant Corp. v. 2038724 Ontario Ltd. Text of the opinion will appear in the CCH Business Franchise Guide.

Further details regarding the CCH Business Franchise Guide appears here on the CCH Online Store.

Bill Aimed at Stopping Drug Company “Pay-for-Delay” Patent Settlements Passes House

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

The House of Representatives yesterday passed legislation that would restrict the ability of drug companies to enter into pay-for-delay patent settlements. The measure was one of a number of amendments to a war funding bill (H.R. 4899). The bill will now require action by the Senate.

Presumption of Anticompetitive Effects

Under the measure, patent settlements would be presumed to have anticompetitive effects and be unlawful where a potential generic competitor receives “anything of value” from a branded drug company in return for agreeing “to limit or forego research, development, manufacturing, marketing, or sales” of a competing drug.

Parties to an agreement would have to demonstrate that the procompetitive benefits of the agreement outweighed the anticompetitive effects of the agreement.

The proposed “Preserve Access to Affordable Generics Act'' would amend the Federal Trade Commission Act to authorize the agency to initiate a proceeding to challenge the agreements. The agency would also be authorized to issue regulations.

FTC Chairman’s Reaction

“Congress has taken a critical step towards ending a practice that is dramatically increasing the cost of prescription drugs,” FTC Chairman Jon Leibowitz said in a July 2 statement following the House vote.

“This bipartisan legislation would save American consumers and taxpayers billions of dollars by stopping sweetheart deals that delay the entry of low-cost generics, while at the same time allowing settlements that benefit consumers,” he said.

According to the Chairman, FTC economists estimate that the challenged deals cost consumers approximately $3.5 billion a year by delaying consumers’ access to lower-cost generic drugs. Leibowitz has frequently said that stopping pay-for-delay patent settlements in the pharmaceutical industry is one of the Commission’s highest antitrust priorities.

Industry Response

The Pharmaceutical Research and Manufacturers of America (PhRMA), which represents the country’s leading pharmaceutical research and biotechnology companies, has come out against the legislation.

“PhRMA believes including the provision on restricting patent settlements can discourage pro-consumer settlements that often bring generics to market years before patent expiration,” said PhRMA Senior Vice President Ken Johnson in a June 28 statement.

Market Adequately Alleged in ATM Network Price Fixing Case

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

The federal district court in San Francisco has refused to dismiss antitrust claims against members of the Star ATM Network—“the largest ATM Network in the United States”—on the ground that complaining customers failed to allege a legally adequate “relevant market.”

The customers' “all ATM Networks” market was both legally cognizable and adequately pled. Therefore, the complaint was sufficient to survive the pleadings stage.

The customers alleged that banks conspired to fix interchange fees in the Star ATM network for “foreign ATM transactions.” The dispute involved the alleged fixing of fees that one member of the Star ATM network charged another member when the customer of the second member used an ATM owned by the first.

“All ATM Networks”

The complaining customers plausibly alleged that Star and network members possessed market power in an “all ATM Networks” relevant market, the court ruled. Further, the plaintiffs alleged that the defendants set interchange fees at a level that was well above their costs and maintained the supracompetitive prices (and the resulting profits) for many years.

A prolonged period of substantially-above-cost pricing provided a strong indication that the defendants and Star possessed market power in the ATM networks market, in the court's view. Although the complaining customers did not expressly allege that the defendants’ conduct had an affect on marketwide prices and output in the all ATM networks market, that conclusion could be reasonably inferred from their allegations.

Single-Brand Market

The court rejected the plaintiffs’ alternative, narrower product market, which was limited to a single-brand, derivative market for “Star Network” foreign ATM transactions. This was not one of the “extremely rare” instances in which a valid single-brand market existed, the court noted.

Under the plaintiffs’ theory, the market for demand deposit accounts was a “foremarket” that gave rise to a “derivative aftermarket” consisting of foreign ATM transactions that were routed over the network that the customer’s new bank had chosen. Further, customers were allegedly economically locked into their chosen bank and locked into their bank’s choice of foreign ATM network providers—the Star Network.

According to the court, the market for demand deposit accounts and the market for ATM network services involved two different sets of consumers. Individuals, businesses, and others purchased deposit accounts; banks purchased ATM network services. The market for Star’s services, as well as the market for ATM networks generally, was not a derivative aftermarket of the market for demand deposit accounts.

The decision is In re ATM Fee Antitrust Litigation, 2010-1 Trade Cases ¶77,066.

Further information regarding the CCH Trade Regulation Reporter appears here on the CCH Online Store.