Franchisor Might Be Entitled to Future Lost Royalties from "Abandoned" Franchise

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

A transmission service shop franchisor’s claim for lost future royalties from a franchisee that allegedly abandoned its franchise rose above the level of mere speculation, a federal district court in Chattanooga, Tennessee, has held. Thus, the claim withstood a motion to dismiss by the franchisee.

Tennessee law, which governed the franchise agreement, provides for the award lost future profits for breach of contract, in some circumstances. Although the traditional rule held that anticipated damages were too speculative, courts have recognized that an injured party may recover anticipated profits when their nature and occurrence are established with reasonable certainty.

In defending this case, the franchisee relied upon the decision in Postal Instant Press, Inc. v. Sealy (CCH Business Franchise Guide ¶10,893), which denied future royalties to a franchisor on the ground that the franchisee’s breach of the franchise agreement was not the proximate cause of the franchisor’s loss of royalties. The court found that the franchisor had chosen to terminate the agreement, thus depriving itself of future royalties.

The Sealy decision has come under scrutiny in recent years. Some courts have adhered to its reasoning that future lost royalties are too speculative. Other courts have rejected that reasoning, holding that a franchisor should be entitled to royalties as if the franchise relationship continued for the term of the contract.

More recent cases addressing the issue have focused on individual facts in determining how speculative the future royalties would be.

The franchisee in this case sought to dismiss a significant portion of the damages requested at a very early stage. The motion to dismiss was based solely on the pleadings, and there was very little evidence to consider in determining whether to dismiss such a significant portion of the franchisor’s case.

The amended complaint alleged that the principal of the franchisee contemplated retirement from operating the franchise. Instead of transferring his obligations under the agreement to his son, he abandoned the agreement and transferred the assets of the franchise to his son, who began operating a competing transmission shop.

It could not be determined at this early stage whether the franchisor made factual allegations with respect to all material elements necessary to sustain a recovery under some viable legal theory, the court held.

The decision is Moran Industries v. Mr. Transmission of Chattanooga, CCH Business Franchise Guide ¶14,428.

UAL/Continental Asset Transfer Assuages Antitrust Division’s Merger Concerns

This posting was written by Georgia Koutouzos, Editor of CCH Aviation Law Reporter.

In light of the recent agreement by United Airlines and Continental Airlines to transfer takeoff and landing slots and other assets at Newark Liberty Airport to Southwest Airlines, the U.S. Department of Justice announced on August 27 that it has closed its investigation into the proposed merger of UAL Corporation, United’s parent company, and Continental.

The two carriers entered into the arrangement with Southwest in response to the DOJ's principal concerns regarding the competitive effects of the proposed United/Continental merger.

The Justice Department’s investigation determined that the proposed merger would combine the airlines’ largely complementary networks, resulting in overlap on a limited number of routes where United and Continental offer competing nonstop service.

The largest of those routes are between United’s hub airports and Continental’s hub at Newark Airport, where Continental has a high share of service and where there is limited availability of slots, making entry by other airlines particularly difficult.

The transfer of slots and other assets at Newark to Southwest—a low cost carrier that currently has only limited service in the New York metropolitan area and no Newark service—resolves DOJ's principal competition concerns and is likely to significantly benefit consumers on overlap routes as well as on many other routes, the agency said. The slot transfer is through a lease that permanently conveys to Southwest all of Continental’s rights in the assets, in compliance with FAA rules.

Text of the Department of Justice news release appears here.

In announcing the settlement in an August 27 statement, United and Continental said that the slot pair transfer was expected to have minimal impact on combined carrier's route network.

Jeff Smisek, Continental's Chairman, president and CEO, described the leasing arrangement as “a fair solution that would allow Continental and United to create an airline that will provide customers with an unparalleled global network and top quality products and services, while enhancing domestic competition at Newark.”

In a further statement, UAL Corporation chairman, president and CEO Glenn Tilton said that he looked forward to the airlines’ stockholders’ votes on September 17 and expected to close the merger by October 1, 2010.

Continental and United announced an all-stock merger of equals on May 3, 2010. In July, the airlines’ proposed merger received clearance from the European Commission, which found that the transaction would not raise competitive concerns in Europe or on trans-Atlantic routes.

Preliminary Injunction Halts Termination of Likely New Jersey “Franchise”

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

An engine manufacturer and its authorized dealer likely shared a “community of interest” under the meaning of the New Jersey Franchise Practices Act (NJFPA), a federal district court in Camden, New Jersey, has ruled in a not-for-publication decision. Moreover, the relationship satisfied the Act’s gross sales requirement that more than 20 percent of a franchisee’s gross sales were intended to be derived from the franchise before the franchisee was entitled to statutory protections, according to the court. Thus, the dealer was likely to succeed in establishing that it was a “franchise” protected by the statute, and its request for a preliminary injunction enjoining termination by the manufacturer was granted.

The dealer brought suit against the manufacturer, seeking to enjoin it from terminating their agreement. The manufacturer did not dispute that the dealer would be irreparably harmed if the injunction was not granted, and that the balance of the hardships between the parties, as well as the public interest, favored granting the injunction. The only preliminary injunction factor that the manufacturer disputed was the dealer’s likelihood of success on the merits. The manufacturer argued that the parties did not share the “community of interest” necessary to show that the relationship constituted a “franchise” under the NJFPA.

Caselaw indicated that a community of interest existed “when the terms of the agreement between the parties or the nature of the franchise business requires the licensee, in the interest of the licensed business’s success, to make a substantial investment in goods or skill that will be of minimal utility outside the franchise.

Indicia of Control

The relationship between the parties had the indicia of control that were the hallmark of a community of interest, the court decided. The dealer stood to lose all of the following tangible and intangible indicia of control if terminated: (1) the larger building the dealer moved to in order to accommodate business related to the manufacturer that it would not be able to fully utilize; (2) special tools and a computer system to service business related to the manufacturer, and its intangible investment in mastering such equipment; (3) signage, advertisements, apparel, and its investments in producing such items and in developing a customer basis that associated the dealer with the manufacturer’s products; (4) investments made in training employees in the manufacturer’s products, including approximately $20,000 in travel and expenses; and (5) a substantial inventory of parts for the manufacturer’s products that the dealer would have significantly less opportunity to sell, according to the court.

Unequal Bargaining Power

Courts defining a community of interest under the NJFPA also focused on the importance of unequal bargaining power between franchisor and franchisee, the court noted. A substantial portion of the dealer’s business came from the warranty work it performed for the manufacturer, the consumer relationships that emerged from such work, and customers who found the dealer through listings for dealers of the manufacturer’s products. In sum, the dealer relied heavily upon the manufacturer but the manufacturer could easily send its warranty work elsewhere and the dealer’s sales did not yield a substantial portion of the manufacturer’ profits.

The manufacturer pointed out that much of the dealer’s investments in the relationship were not required by the dealer agreement but were voluntary. However, the court’s inquiry was not limited to the four corners of the parties’ agreement. Business relationships evolved and, at the very least, the manufacturer assented to the dealer’s franchise-related expenses. Whether or not the agreement required such investments, it clearly contemplated such future investments, the court reasoned. For example, the agreement set extensive terms for the dealer’s use of the manufacturer’s mark in literature and advertising. The fact that the dealer sold products and services for the manufacturer’s competitors did not defeat the relationship’s character as a franchise.

Symbiotic Relationship

Moreover, the parties shared a symbiotic relationship that was characteristic of a community of interest in that the manufacturer conceded that its dealers were necessary to its profitability and satisfied customers of the dealer were likely to become repeat customers for both parties. The fact that the interests of the parties were sometimes at odds did not defeat the existence of a community of interest, the court ruled.

The July 29, 2010, decision in Engines, Inc. v. MAN Engines and Components, Inc., Civil Action No. 10-277, appears at CCH Business Franchise Guide ¶14,431.

Supermarkets’ Profit Share Agreement During Labor Unrest Was Anticompetitive

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

California’s three largest grocery chains violated federal antitrust law by entering into an agreement to share profits amongst themselves and with a fourth chain during, and for a short period after, an anticipated labor dispute, the U.S. Court of Appeals in San Francisco has ruled in a divided opinion.

Denial of summary judgment to the defending grocery chains (2005-1 Trade Cases ¶74,805) was affirmed, while the denial of summary judgment to the plaintiff, the State of California, was reversed and remanded.

The profit-sharing agreement at issue was a provision within a Mutual Strike Assistance Agreement (MSAA) entered into by the defending chains and the fourth chain. In the MSAA, the chains agreed to lock out their union employees within 48 hours of a strike against any one or more of them, a traditional tactic in labor disputes to combat the union’s anticipated use of "whipsaw tactics," in which unions strike or picket only one employer in a multiemployer bargaining unit.

The profit-sharing provision constituted an offensive weapon used by the chains to prevail in the dispute, in the court’s view. It was designed to maintain each defendant’s pre-labor dispute market share. Such a provision, however, was not "needed to make the collective-bargaining process work." Thus, it was not immunized from antitrust review by the nonstatutory labor exemption, the court decided.

Per Se Illegality

The profit-sharing provision was not so obviously anticompetitive to constitute an antitrust violation under a pure per se approach because it was of relatively short duration and because the chains controlled less than a 100 percent share of the relevant market, the court held.

In contrast to previous cases in which profit-sharing agreements were to endure for decades or permanently, the grocery chains’ agreement was written to last only as long as the labor dispute, and to continue for a mere two weeks after the termination of any strike or lockout.

Moreover, unlike firms in most of the prior profit-sharing cases, the defendants were not the only supermarkets in the affected areas. While the State of California was correct that a profit-sharing plan need not cover the entire market in order to affect competition, the distinction in anticompetitive effect between a plan covering the entire market and one that did not was worthy of consideration, the court said.

“Quick Look” Analysis

Under a "quick look" rule of reason analysis, the court concluded that the agreement created a great likelihood of anticompetitive effects, and that those effects were not outweighed or neutralized by any plausible procompetitive benefits. Rejected was a contention by the supermarket chains that the MSAA, and the profit-sharing plan within it, would aid them in achieving lower labor costs, thereby resulting in a procompetitive benefit that more than offset any temporary harm to competition.

Neither the potentially short duration nor the less-than-full market share "significantly affect[ed] the anticompetitive `principal tendency’ of the profit sharing agreement," the court stated.

Given that the great likelihood of anticompetitive effect could easily be ascertained, the burden of proof shifted to the defending grocery chains to show empirical evidence of procompetitive effect, the court determined. The chains failed to meet this burden.

Lowering wages and benefits in order to increase their ability to lower prices and compete more effectively with other companies was not cognizable as a procompetitive benefit. The chain of contingencies rendered such alleged benefits purely speculative.

Dissent

A dissenting opinion argued that, while the majority correctly concluded that the MSAA lay outside the nonstatutory labor exemption, it was premature to conclude that the State of California was entitled to summary judgment on the merits of its Sherman Act Section 1 claim.

There existed genuine issues of material fact regarding whether the effects of the chains’ agreement was anticompetitive or procompetitive or even had an impact on the market as a whole at all. The record was "bereft of market analyses or an explanation of the actual anticompetitive effects of the MSAA," the dissent contended.

The August 17 decision in State of California v. Safeway, Inc. appears at 2010-2 Trade Cases ¶77,134.

“Community of Interest” Made Distribution Arrangement a Wisconsin “Dealership”

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

Evidence supported a determination by a Wisconsin state court jury that there was a “community of interest” under the meaning of the Wisconsin Fair Dealership Law (WFDL) between a spa manufacturer and a dealer, a Wisconsin appellate court has ruled.

Thus, the parties’ relationship qualified as a "dealership" within the WFDL, and termination without notice or an opportunity to cure violated the statute, justifying a damage award of $264,800 to the dealer.

The parties began their relationship in 2000 when they entered into a “letter of intent/dealer agreement” under which the dealer was to sell and service spas made by the manufacturer. With a few exceptions early in the relationship, the dealer promoted and sold only spas made by the manufacturer until the manufacturer terminated the agreement in 2007.

It was undisputed that the manufacturer’s termination letter did not provide the dealer with the requisite notice or opportunity to cure any claimed deficiency, as required by the WFDL, and the dealer brought suit. A jury determined that a “dealership” existed under the statute and that the dealer was entitled to $264,800in compensatory damages.

The manufacturer’s primary argument on appeal was that the relationship was not within the WFDL because there was no “community of interest” between the parties. It asserted that the dealer was not dependent on the manufacturer for its economic livelihood because the he was able to find other sources of spas to sell following the termination.

In 2008, the year following termination, the dealer did deal in spas of two other manufacturers, selling a total of 28 spas compared to the 36 spas made by the manufacturer sold in 2006.

Ability to Replace Product Line

The manufacturer relied on the federal case, Home Protective Services, Inc. v. ADT Security Services, Inc. (CCH Business Franchise Guide ¶13,266), for its theory that the dealer’s ability to find other spas to sell so quickly was dispositive. However, federal court decisions applying Wisconsin law were not precedential authority for Wisconsin courts.

The Wisconsin appellate court rejected the analysis in Home Protective Services because it could not be reconciled with the Wisconsin Supreme Court’s most recent application of the community of interest standard in Central Corp. v. Research Products Corp. (CCH Business Franchise Guide ¶13,560).

Central Corp. involved a 20-year relationship between a wholesaler and manufacturer with no written contract. The manufacturer’s products comprised approximately 8-9 percent of the wholesaler’s sales and profits over the years. The court looked to an earlier Wisconsin Supreme Court decision, Ziegler Co., Inc. v. Rexnord, Inc. (CCH Business Franchise Guide ¶8882) in making its decision.

Financial Interest, Interdependence

In Ziegler, the Wisconsin Supreme Court established two guideposts for finding a community of interest—a continuing financial interest and interdependence. The Ziegler court also identified 10 facets of the business relationship to consider in determining whether there was a continuing financial interest and interdependence. Applying these facets, the Central Corp. court identified the factors that warranted a trial.

The Seventh Circuit’s focus on whether the alleged dealer was able to find another supplier of goods after termination—even on less advantageous terms—did not appear in the standard for a community of interest as formulated by the Wisconsin Supreme Court.

The Ziegler facets were analyzed to determine the degree of continuing financial interest and interdependence to determine whether the alleged dealer had a stake in the relationship large enough to make the grantor’s termination power a threat to the dealer’s economic health. That standard did not depend upon the existence or amount of damages that occurred after termination, but on the degree of continuing financial interest and interdependence that existed before the termination.

Viewing the evidence most favorably to the dealer, a reasonable fact-finder could conclude that both parties operated on the premise that the dealer had an exclusive territory in central Wisconsin.

One highly significant factor supporting a finding of a community of interest was that between 60 and 70 percent of the dealer’s business was in spa sales. Another highly significant factor was that, except for five spas from another manufacturer that were sold in early 2001 or 2002, the dealer sold only spas made by the manufacturer.

Testimony indicated that the dealer’s gross sales for the entire business was approximately $400,000 per year during the relationship with the manufacturer, with about $260,000 from spa sales. The fact that the dealer made a large percentage of its revenues from the manufacturer’s spas indicated that both parties had a continuing financial interest in the relationship and that the dealer was highly dependent on this relationship for its economic health.

It was true that the manufacturer did not require the dealer to (1) make an investment, other than the purchase of spas; (2) purchase a specific number of spas; (3) spend any specific amount on advertising, (4) do specific kinds of advertising, or (5) lay out its showroom in a specific manner. However, this evidence, in the context of all the other evidence and details concerning the relationship, did not require a ruling as a matter of law that there was no community of interest.

The decision is Water Quality Store, LLC v. Dynasty Spas, Inc. will appear at CCH Business Franchise Guide ¶14,426.

Brokers, Insurers Did Not Constitute Hub-and-Spoke RICO Enterprises

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

Purchasers of commercial and employee-benefit insurance policies failed to sufficiently allege a series of “hub-and-spoke” RICO enterprises comprising brokers and insurers that allegedly conspired to participate in unlawful and deceptive “allocation” schemes to steer unwitting purchasers from the brokers to their insurance company partners, and thereby deny the purchasers the benefits of a competitive market, the U.S. Court of Appeals in Philadelphia has ruled.

The brokers and insurers allegedly used the federal mails and wires to knowingly and intentionally misrepresent that they would:

(1) Act in the best interest of their clients in providing unbiased advice and assistance in the selection of appropriate insurance products and services and

(2) Act as fiduciaries in placing insurance on the best possible terms and at the best available price, the court noted. According to the purchasers, the defendants acted to further their own financial interests at the expense of their clients.

Broker-Centered Enterprises

Although the plaintiffs adequately alleged bilateral agreements (regarding the steering of business and the payment of contingent commissions) between the brokers and each of their insurance company partners, they failed—with one exception—to adequately plead “broker-centered” hub-and-spoke enterprises that included a broker hub and all of the broker’s strategic insurance partners, the court concluded.

Because the plaintiffs failed to plead facts that plausibly suggested collaboration (rather than mere parallel conduct) among the insurers, their hub-and-spoke structures lacked a unifying “rim,” the court explained, and thus failed the basic requirement that members of an enterprise function as a unit.

Put another way, the plaintiffs’ allegations could not support the inference that the insurers had associated together for the common purpose of engaging in a course of conduct.

Bid-Rigging Allegations

Allegations of bid rigging by one of the brokers, however, sufficiently provided the missing “rim” for that broker’s hub-and-spoke configuration. The plaintiffs identified a hierarchical structure through which the broker, in accordance with its “broking plan,” decided which insurer would be asked to submit a sham bid.

The common purpose of this broker-centered enterprise was “to increase profits by deceiving insurance purchasers about the circumstances surrounding their purchase.” The allegations of bid rigging thus indicated that there was a relationship among the insurers in the enterprise. If proved, the bid rigging activities would plausibly show that the insurers had joined together in pursuit of a common purpose, according to the court.

Although the district court believed that the insurers’ participation in the alleged bid rigging transactions was done in an ad hoc manner, the appellate court disagreed. Even if the transactions were carried out ad hoc, a RICO enterprise did not require a systematic plan that “ordain[ed] in advance” who would provide a sham bid for a particular transaction, the court instructed.

Decisions could be made on an ad hoc basis—by any number of methods—without destroying the broker-centered enterprise. Members were not required to have to have fixed roles and participants did not have to maintain non-interchangeable and non-substitutable functions.

The district court also “appeared to believe” that the purchasers’ bid-rigging allegations did not go beyond the bilateral relationships that were established between the broker and the individual insurers. According to the district court, interrelationships among the insurers were not adequately pled. In the appellate court’s view, however, allegations that the insurers had agreed to provide the broker with sham bids “plausibly suggested” a broker-mediated interrelationship among the insurers.

Through this interrelationship, the insurers were allegedly able to advance their common interest in higher profits to a greater extent than would have been possible on the strength of the bilateral relationships alone.

Conducting the Enterprise’s Affairs

The district court expressed doubt that the defendants had conducted the affairs of this broker-centered enterprise and not simply their own affairs. The appellate court observed, however, that the interests of an enterprise would often coincide with those of its members. If defendants banded together to commit violations that they could not accomplish alone, then they were “cumulatively … conducting” the affairs of the association-in-fact enterprise.

In this case, allegations that the broker solicited rigged bids from its insurance partners and directed the placement of insurance contracts plausibly implied that the broker had participated in the operation or management of the enterprise, the court determined. In addition, allegations that the insurers had furnished sham bids to the broker sufficiently indicated the insurers’ involvement in the enterprise’s operation.

The Third Circuit’s August 16 opinion in Insurance Brokerage Antitrust Litigation will be reported at CCH RICO Business Disputes Guide ¶11,896.

FTC Seeks Comments on Proposed Changes to HSR Form, Instructions

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

The FTC has proposed modifications to the Hart-Scott-Rodino premerger notification form and related rules and instructions.

The agency is seeking public comments, through October 18, on the proposed changes, which are intended to streamline the form and focus on the information most needed by the agencies in their initial merger review.

Among the changes would be the addition of a new Item 4(d), which would require filing parties to submit certain documents that merging parties might already be including with their Item4(c) documents. Item 4(d) documents would include:

• Offering memoranda laying out the details of a company for prospective buyers;

• Certain studies and reports prepared by investment bankers, consultants, or other third- party advisors prepared for an officer or director for the purpose of evaluating or analyzing competition and other market issues; and

• Documents discussing synergies and/or efficiencies likely to result from a transaction.

In addition, the Commission has proposed the deletion of items that do not provide helpful information. Cited as examples are Item 3(c)—which requires filing parties to provide overly-detailed information regarding the number and classes of voting securities to be acquired—and Item 5(a)—which requires the reporting of 2002 revenues.
The Commission also has proposed the elimination of Item 4(b)’s requirement to submit a company’s most recent regularly prepared balance sheet.

The proposed revised form and instructions appear here and will be reported at CCH Trade Regulation Reporter ¶50,255.

Comments about the proposed modifications should refer to “HSR Forms Changes.” They can be filed in electronic form here.

A comment may also be filed in paper form. It should include the “HSR Forms Changes” reference both in the text and on the envelope and should be mailed or delivered to: Federal Trade Commission, Office of the Secretary, Room H-135 (Annex Q), 600 Pennsylvania Avenue, NW, Washington, DC 20580.

Attorney Is Liable for Unsolicited Fax Ads; Amount of Damages to Be Determined

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

An estate planning attorney is liable in a class action under the federal Telephone Consumer Protection Act (TCPA) for sending “Daily Plan-It” documents to a list of accountants who did not request the documents, the federal district court in Chicago has ruled.

The attorney is liable for $500 in statutory damages for each fax received, the court held. The recipients seek an award of over $4.2 million for 8,430 successfully transmitted faxes, although further proceedings are needed to resolve a dispute over proof of receipt.

Nonadvertising Content

The crucial question in determining liability, according to the court, was whether the editorial, nonadvertising content of each fax made the advertising content “incidental” to the rest of the document. The attorney argued that under the regulations of the Federal Communication Commission, the Daily Plan-It is not an “advertisement” within the meaning of the TCPA, which prohibits the sending of unsolicited fax advertisements.

Two factors weighed in favor of the attorney’s position: (1) the Daily Plan-Its were sent on a regular, twice monthly schedule; and (2) the editorial content changed from issue-to-issue.

The remaining factors weighed in favor of the recipients. First, the recipients were neither paid subscribers nor had they initiated membership with the attorney to receive the faxes. Second, the attorney’s identifying information, presented with prominent font size and graphics, comprised slight more than 25 of the page of each of 41 different Daily Plan-It document.

Finally, the faxes, although appearing to be sent by the attorney on his own behalf, were created and sent by a marketing firm as part of a paid campaign. The faxes were advertisements, the court determined.

Opt-Out Notice

The attorney argued that there was a question of fact regarding whether some of the faxes were “unsolicited” under the TCPA because many of the potential recipients were his current and former business associates and students.

However, none of the 41 Daily Plan-Its included a clear and conspicuous opt-out notice stating that a recipient could request that the sender not transmit any future unsolicited fax advertisements. So the attorney was liable for every fax received regardless of whether he had an established business relationship with any of the recipients, the court concluded.

The August 3 opinion in Holtzman v. Turza will be reported in CCH Advertising Law Guide and CCH Privacy Law in Marketing, publications of Wolters Kluwer Law & Business.

Federal Antitrust Agencies Issue Revised Guidance for Merging Competitors

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

The Federal Trade Commission and the Department of Justice announced today the issuance of revised Horizontal Merger Guidelines. The guidelines are intended to outline for merging parties, courts, and antitrust practitioners how the federal antitrust agencies evaluate the likely competitive impact of mergers and whether those mergers comply with U.S. antitrust law.

The guidelines have not been thoroughly overhauled since 1992. The 1992 guidelines were updated in 1997 to include a discussion of merger-specific efficiencies that might justify approval of a transaction (CCH Trade Regulation Reporter ¶13,104).

At the outset, the revised guidelines explain that the agencies seek to identify and challenge competitively harmful mergers while avoiding unnecessary interference with mergers that are either competitively beneficial or neutral.

The focus is on the competitive effects of a transaction. The revised guidelines detail the categories and sources of evidence that the antitrust agencies consider informative in predicting the likely adverse competitive effects of a merger.

Role of Market Definition, Market Concentration

The analysis need not start with market definition, according to the revised guidelines. “Evidence of competitive effects can inform market definition, just as market definition can be informative regarding competitive effects,” the guidelines explain.

The draft guidelines, which were released on April 20, had been criticized by some commentators for failing to recognize the significance of market definition in merger analysis.

Among the comments from the American Bar Association Section of Antitrust Law in response to the draft guidelines was a suggestion that the guidelines make clear that market definition remained a necessary element of merger analysis under Sec. 7 of the Clayton Act in order to be consistent with judicial precedent.

On the other hand, the American Antitrust Institute concluded that the guidelines draft “rightly downplays the centrality of market definition to the enforcement process.”

Recognizing the continuing need for market definition in merger analysis, the revised guidelines update the thresholds that determine whether a transaction warrants further scrutiny by the agencies. The Herfindahl-Hirschman Index (HHI) measures for market concentration have been raised in order to be more consistent with current agency practice.

Approach of Enforcers

The heads of both the FTC and the Department of Justice Antitrust Division said the revised guidelines more accurately reflect the methods their staffs use to review mergers than the earlier guidelines.

“The revised guidelines better reflect the agencies’ actual practices,” said Christine Varney, Assistant Attorney General in charge of the Department of Justice Antitrust Division. “The guidelines provide more clarity and transparency, and will provide businesses with an even greater understanding of how we review transactions.” Text of Varney's statement appears here on the Department of Jusitice website.

In a statement released this afternoon, FTC Chairman Jon Leibowitz called the revised guidelines “a clear and systematic description of the techniques the FTC and the Antitrust Division of the Department of Justice use to review mergers, and a document that has received bi-partisan and unanimous support from the Commission.”

Commissioner J. Thomas Rosch, however, issued a statement saying that the guidelines “are still flawed both as a description of how the staff (at the Commission at least) conducts ex ante merger review and what the Agencies should tell courts about merger analysis.”

“These Guidelines do not describe the way that the Bureau of Competition and enforcement staff at the Commission proceed today,” Rosch continued. “They also do not reflect the way that the courts proceed.”

Rosch questioned an “overemphasis on economic formulae and models.” He expressed concern that the revised guidelines create “the misimpression that non-price factors are far less significant than price factors to the Commission” and “fail to offer a clear framework for analyzing non-price considerations.”

Significant Advancements

Despite the criticisms, Rosch concurred with the issuance of the guidelines in light of significant advancements made by the revised guidelines. Rosch said that the revised guidelines corrected a misimpression of the 1992 guidelines that proof of market structure and shares were “gating items” without which competitive effects cannot be considered.

“The revised guidelines properly consider competitive effects first, and market definition second, thereby making clear that while market definition is important to assessing competitive effects and that the market must be defined at some point in the process, ultimately merger analysis must rest on the competitive effects of a transaction,” the commissioner said.

Rosch also pointed to the revised guidelines’ list of empirical evidence that might illuminate a transaction’s competitive effects as a substantial contribution.

2006 Commentary

The revised guidelines note that the “Commentary on the Horizontal Merger Guidelines,” which the agencies jointly issued in 2006 (CCH Trade Regulation Reporter ¶50,208), remains a valuable supplement to the guidelines. Some of the revisions reflect refinements and changes previously identified in the commentary.

The revised Horizontal Merger Guidelines are available here on the FTC website. They will appear at CCH Trade Regulation Reporter ¶13,100.

Tobacco Settlement Agreement, State Statute Did Not Create Cost-Sharing Pact, Output Cartel

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

The Master Settlement Agreement (MSA)—a multi-billion dollar settlement of national tobacco litigation—and a related Louisiana escrow statute did not create and implement a cost-sharing agreement and output cartel that constituted a per se violation of the Sherman Act, the U.S. Court of Appeals in New Orleans has ruled.

The state’s escrow statute requires tobacco manufacturers not participating in the MSA to either join the settlement or make an annual deposit into a qualified escrow account based on the quantity of cigarettes they sold in the state. A grant of summary judgment in favor of the Louisiana Attorney General was affirmed.

Escrow Statute

The court explained that any argument by the complaining non-participating manufacturers that the escrow statute alone violated antitrust laws per se was foreclosed by its own recent decision in Xcaliber Int’l Ltd. LLC v. Caldwell (2010-2 Trade Cases ¶77,099).

In that ruling, the court had reasoned that the escrow statute did not mandate or authorize conduct that necessarily constituted a violation of the antitrust laws in all cases. Nor did not place irresistible pressure on a private party to violate the antitrust law in order to comply with the statute.

Even considering the MSA and escrow statute together, the court agreed with the rationale offered by the Sixth, Eighth, and Ninth Circuits when they rejected similar suits.

Source of Anticompetitive Behavior

Those courts reasoned that the genesis of the alleged anticompetitive behavior did not stem from either the MSA or the statutory scheme the state enacted to give effect to the MSA’s provisions, but from the participating manufacturers’ behavior following the MSA’s enactment.

This behavior consisted primarily of increasing cigarette prices in order to keep sales volume—and consequently the payments they owed to the settling states—down.

Despite the price hike, the manufacturers were able to maintain a stable market share. The statutory scheme merely offered a disincentive for non-participating manufacturers to engage in price competition against the participating manufacturers, in that an increase in their market share would have subjected them to higher escrow payments, the court concluded.

The August 10 decision in S&M Brands Inc v. Caldwell appears at 2010-2 Trade Cases ¶77,122.

Debit Card Posting Procedure, Resulting in Overdraft Fees, Was an Unfair Business Practice

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

Wells Fargo Bank’s “high-to-low” resequencing of debit card charges—which resulted in millions of overdraft fees charged to customers—was an unfair and fraudulent business practice that violated the California Unfair Competition Law (UCL), according to the federal district court in San Francisco.

Restitution in a class action, based on the difference between a low-to-high posting system and the result of the high-to-low system used during the relevant period, will total close to $203 million.

Change in Processing Procedures

In April 2001, Well Fargo changed its procedures for processing debit items presented for payment against accounts. In the new posting system, debit card purchases were posted from the highest dollar amount to the lowest, resulting in the most expensive debits being paid first.

The new high-to-low posting order maximized the number of overdraft fees imposed, while the previous system maximized the number of debit items covered.

In 2001, Wells Fargo also began commingling debit card purchases, checks, and Automated Clearing House transactions and posting the entire group from highest-to-lowest dollar amount. Finally, the bank implemented a secret “shadow line” program, in which the bank authorized transactions into overdrafts, but did so with no warning that an overdraft was in progress.

A class of Wells Fargo account holders filed the UCL charges, arguing that the overdraft policy and bookkeeping was unfair and fraudulent.

Federal Preemption

The court rejected Wells Fargo’s argument that the National Bank Act (NBA) preempted the UCL claims. The NBA vests national banks with authority to exercise all powers necessary to carry on the business of banking and preempts state laws that impair a bank’s exercise of federal powers.

However, there was a material difference between the bank’s authority to establish overdraft fees and the method of calculating each fee versus the bank’s practices aimed at multiplying the number of overdrafts during the posting process. Thus, the UCL claim was not preempted. The account holders’ UCL claim essentially challenged the bookkeeping practices of the bank rather than its power to calculate fees.

Standing to Represent Class

The class representatives had standing to bring the UCL claims based on the payment of hundreds of dollars in overdraft fees, according to the court. To have standing to represent a class in a UCL action, the class representatives needed to show that the bank’s overdraft policies and deceptive acts were an immediate cause of an ascertainable injury.

The class representatives presented evidence of reliance on the bank’s deceptive omissions and marketing materials that an overdraft would not go through and of actual losses of money as a result of the unfair and deceptive business practices.

Based on the evidence of Wells Fargo’s “profiteering,” the court found that the overdraft policies and bookkeeping violated the UCL, which prohibits unlawful, unfair, and fraudulent acts. To state a UCL cause of action under the unfair prong, the account holders had to show that the policy was tethered to a legislatively declared policy of restraining a bank’s discretion in arranging transactions or show an actual or threatened impact on competition.

Based on California’s declared policy of restraining a bank’s discretion in arranging transactions and the conclusion that the policy was adopted solely to maximize profits, the policy violated the UCL. Internal memos and e-mails showed that the bank’s sole motive was to maximize the number of overdraft fees from certain customers.

Secrecy, Misleading Information

Keeping the overdraft bookkeeping procedures secret and presenting customers with misleading information were fraudulent business practices under the UCL, according to the court.

To state a UCL cause of action under the fraudulent prong, the account holders had to show that members of the public were likely to be deceived by the allegedly fraudulent actions at issue. Well Fargo’s failure to inform customers of its policies and misleading propaganda likely led to class members to expect that the actual posting order of their debit-card purchases would mirror the order in which they were transacted.

Allowing purchases to go through even though the funds were not available also led customers to believe that they had sufficient funds to cover the purchases, the court found.

The August 10 decision in Gutierrez v. Wells Fargo Bank, N.A. appears here. It will be published at CCH State Unfair Trade Practices Law ¶32,117.

Novartis’ Acquisition of Alcon Gains FTC Approval with Eye Care Drug Divestitures

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

Novartis AG has agreed to sell an injectable eye care drug used in cataract surgery as part of a settlement resolving FTC charges that Novartis’s proposed acquisition of Alcon, Inc., would have created a monopoly in the market for injectable miotics.

Novartis and Alcon are the only two U.S. providers of the class of drugs known as injectable miotics.

Injectable miotics are a class of prescription drugs used to induce miosis, or constriction of the pupil. They are used during cataract surgery to shrink the pupil, which helps surgeons determine whether a rupture has occurred in the eye.

Under the terms of a proposed FTC consent order announced today, Novartis has agreed to sell its drug Miochol-E to Bausch & Lomb, Inc. The only other miotics product in the market is Miostat, which is owned by Alcon.

Currently, Swiss-based Novartis owns 25 percent of Alcon, and Swiss-based Nestle holds the controlling interest in Alcon. In January 2010, Novartis proposed to acquire shares that represented approximately 52 percent of the outstanding stock of Alcon for approximately $28.1 billion.

Novartis has reported that closing of its acquisition of 77 percent majority ownership of Alcon should be completed late in the third quarter or in the fourth quarter of 2010.

International Cooperation

The FTC said in an August 16 statement that it cooperated with enforcement counterparts in Australia, Canada, Mexico, and the European Commission (EC) in reviewing the transaction.

Novartis has agreed to a series of divestitures to resolve the Canada Competition Bureau’s concerns over its proposed acquisition of Alcon, according to an August 9 Competition Bureau announcement.

In addition to selling assets and associated licences related to the sale of Miochol-E in Canada, Novartis agreed to divest Solocare Aqua—a multi-purpose contact lens cleaner and disinfecting solution—and Zaditor—an ophthalmic anti-allergy agent.

In Europe, Novartis also agreed to divest several products in the ophthalmological pharmaceutical and consumer vision care areas. The EC’s investigation examined a large number of ophthalmological pharmaceutical markets and consumer vision care markets across Europe.

The EC said in an August 9 announcement that the markets in question were: ophthalmological anti-infective, antiinflammatory/anti-infective combinations, anti-allergics, decongestants, antiseptics, mydriatics and cycloplegics, diagnostic agents, non steroidal anti-inflammatories, injectable miotics, anti-glaucoma products, artificial tears, and multipurpose solutions for contact lenses.

Depending on the product in question, competition concerns arose in either a few or a larger number of EC member states.

The FTC complaint and proposed consent order, In the Matter of Novartis AG, FTC Dkt. C-4296, are available here on the FTC website. Further details will appear in CCH Trade Regulation Reporter.

Federal Consumer Privacy Bill Introduced in House

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

A proposed federal consumer privacy law titled “Building Effective Strategies to Promote Responsibility Accountability Choice Transparency Innovation Consumer Expectations and Safeguards Act” (“BEST PRACTICES Act”) was introduced in the House of Representatives on July 19 by Rep. Bobby L. Rush (D, Ill.).

According to Rush, the bill (H.R. 5777) would establish a flexible framework of basic rights for consumers while also outlining obligations for companies based on fair information principles. The measure would cover both online and offline collection, use, and retention of information about consumers.

The bill would grant enforcement authority to the Federal Trade Commission and the states, including civil penalty authority; would authorize a limited private right of action; and would preempt certain state laws that require covered entities to implement requirements with respect to the collection, use, or disclosure of consumer information.

The preemption provision would not apply to state laws that address financial information or health information, data breach laws, trespass, contract or tort laws, or other laws that relate to acts of fraud.

If enacted, the “BEST PRACTICES Act” would:

• Require companies that collect personal information to disclose their practices with respect to the collection, use, disclosure, merging, and retention of personal information, and to explain consumers' options regarding those practices;

• Require companies to provide disclosures of their practices in concise, meaningful, timely, and easy-to-understand notices;

• Require companies to obtain "opt-in" consent to disclose information to a third party;

• Establish a "safe harbor" that would exempt companies from the "opt-in" requirement, provided those companies participate in a universal opt-out program operated by self-regulatory bodies and monitored by the FTC;

• Require companies to have reasonable procedures to assure the accuracy of the personal information they collect, as well as means for consumers to access and correct or amend certain information; and

• Require companies to have reasonable procedures to secure information and to retain personal information only as long as is necessary to fulfill a legitimate business or law enforcement need.

Text of the bill, which was referred to the House Energy and Commerce Committee, appears here at the Thomas website of the Library of Congress.

ABA Antitrust, Franchise Groups Announce New Officers

This posting was written by John W. Arden.

The American Bar Association has announced new officers for its Section of Antitrust Law and Forum on Franchising.

On August 10, Allan Van Fleet, a shareholder of Greenberg Traurig LLP, started a one-year term as chair of the ABA Section of Antitrust Law. Head of the firm’s litigation practice group in Houston, Van Fleet is also a member of Greenberg Traurig’s global antitrust litigation and competition law practice group.

In the official announcement, he pledged to maintain the quality of the section’s programming, publications, and public comments on competition and consumer protection topics.

Van Fleet has served in numerous leadership roles in the Section of Antitrust Law, including vice chair, committee officer responsible for oversight of 27 substantive committees, delegate to the ABA House of Delegates, and chair of committees on legal ethics and professional responsibility, business torts and unfair competition, and continuing legal education.

A graduate of Rice University and Columbia University School of Law, he has been active in the State Bar of Texas, as former director and current member of a committee to revise the state rules of professional conduct for lawyers.

On August 1, several officers of the ABA Forum on Franchising began new terms. Michael Joblove and Leslie Curran became members of the Forum’s Governing Committee, while Joseph Fittante began his second term on the Committee.

Forum Chair Ron Gardner of Dady & Gardner appointed two Governing Committee members to new officer positions. Ms. Curran will serve as Diversity Officer and Kathy Kotel will be Membership Officer.

The new Governing Committee members will serve with the current officers: Kerry Bundy (Marketing Officer), Harris Chernow (Finance Officer), Deb Coldwell (Publications Officer), Mr. Fittante (Program Officer), Karen Satterlee (Women’s Caucus Liaison), and Leslie Smith (Technology Officer).

John Pratt is the new chair of the International Franchise and Distribution Division. Kerry Olson is another new member of the Divison. Lee Plave will serve a second term. Brian Balconi will serve as chair of the Corporate Counsel Division. Heather Bias has joined the Division and Andra Terrell will serve a second term. Roland Baggett III is a new member of the Litigation and Alternative Dispute Resolution Division.

Max Schott is the new editor in chief of the Franchise Lawyer newsletter. Beatta Krakus has joined the editorial board.

State’s Bulk Sale of Motor Vehicle Records Did Not Violate Federal Driver’s Privacy Law

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

The federal Driver’s Privacy Protection Act (DPPA) permitted the State of Texas to sell drivers motor vehicle (DMV) records in bulk to private entities that certified that they had a lawful purpose for acquiring the data, the U.S. Court of Appeals in New Orleans has decided.

A provision of the Texas Transportation Code allowed individuals and companies to buy magnetic tapes of driver’s license records, upon certification of a lawful purpose.

Plaintiffs bringing a purported class action on behalf of individuals with drivers licenses issued by the State of Texas asserted that the purchasing entities did not use all of the records immediately and maintained databases or resold the information.

The plaintiffs did not contend that the entities used any of the records for a purpose other than the permissible purposes listed in the DPPA; nor did they allege that records resold to third parties were used for impermissible purposes. Instead, they argued that maintaining records not actually used for the purpose stated at the time of purchase was itself an impermissible purpose under the DPPA.

The text and legislative history of the DPPA indicated that Congress intended to allow states to distribute DMV information in bulk, according to the court. Purchasers of the data were not required to actually use all of the data, as long as they did not use any of the information for a purpose not permitted by the DPPA. The DMV database was analogous to a set of legal reporters purchased by an attorney who intended to do research using the set, but was unlikely to read every single opinion, the court said.

In addition, the purchasing entities were not required to make use of the DMV records before reselling them to third parties for one or more of the DPPA’s permissible purposes. Dismissal of the DPPA claims with prejudice was affirmed.

The decision in Taylor v. Acxiom Corp. will appear at CCH Privacy Law in Marketing ¶60,510.

Magazine Publisher Boycott of Wholesaler Not Plausible

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

A defunct magazine wholesaler failed to plausibly allege a conspiracy to drive it out of business among national magazine publishers, distributors, and wholesalers, the federal district court in New York City has ruled. The wholesaler’s claims were dismissed with prejudice.

The wholesaler—the second largest magazine wholesaler in the United States before it was forced into liquidation bankruptcy proceedings in 2009—alleged that it was the victim of a boycott that came in response to its imposition of a surcharge on all single-copy magazines shipped.

According to the wholesaler, the surcharge was intended to create an incentive to eliminate the waste and inefficiency caused by the shipping of excessive copies of magazines. The wholesaler contended that the publishers responded to the surcharge by cutting off 80% of its magazine supply.

Plausibility Standard

The wholesaler’s complaint had to be dismissed with prejudice because it failed to meet the plausibility standard of Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007-1 Trade Cases ¶75,709), and its progeny, the court held. The ultimate goal of the alleged conspiracy—to eliminate two of the four largest magazine wholesalers—was not plausible.

Publishers and national distributors had an economic self-interest in having more wholesalers—not fewer. More wholesalers yielded greater competition, which was good for suppliers. Moreover, the defendants had different reactions to the wholesaler’s “take it or leave it” surcharge, which undermined the wholesaler’s theory of conscious parallel conduct.

Parallel Conduct

The defendants’ decision to stop doing business with the wholesaler—the key parallel conduct allegation—did not create an inference of collusion. The defendants responded to the wholesaler’s unilateral demand, a negative stimulus, by pursuing similar but predictable policies to protect their business interests.

It was plausible that each of the publisher defendants unilaterally stopped shipping magazines to the wholesaler rather than pay the surcharge, the court explained.

The August 2 decision in Anderson News LLC v. American Media, Inc. appears at 2010-2 Trade Cases ¶77,114.

Further information about CCH Trade Regulation Reporter appears here on the CCH Online store.

Racing Body’s Single-Tire Rule, Exclusive Supply Contracts Not Antitrust Violations

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

A supplier of racing tires and a motorsports sanctioning body did not violate federal antitrust law through the adoption of a so-called "single-tire rule" and entry into related exclusive supply contracts, the U.S. Court of Appeals in Philadelphia has ruled.

A federal district court decision granting summary judgment on a competing tire supplier’s claims in favor of the supplier and sanctioning body (2009-2 Trade Cases ¶76,748) was affirmed.

Single-tire rules generally require that a specific tire type and brand be used on one or more wheel positions for one or more classes of cars for a series of races or racing seasons.

Automotive racing sanctioning bodies often choose to adopt a single-tire rule, the appellate court noted, in much the same manner as they create specification ("spec") rules concerning other components of a race car, such as carburetors, mufflers, or chassis. Thus, tires are not the only equipment subject to a single source or manufacturer rule.

Coercion

The complaining tire supplier failed to demonstrate the existence of a genuine issue of material fact as to whether the defending tire supplier coerced, or otherwise improperly interfered with, the determinations of the sanctioning body and the other sanctioning bodies to adopt the single-tire rule and to enter into the exclusive supply contracts, the appellate court stated.

While coercion was not an essential element of every successful antitrust claim, it was a fundamental consideration in the present circumstances—namely, where various sports sanctioning bodies have freely adopted their own equipment rules and then freely entered into exclusive contracts with the respective suppliers, the court noted. Neither the lengthy duration of the contracts nor their renewal terms represented real evidence of coercion or interference.

Business Justifications

The sanctioning bodies presented more than sufficient pro-competitive or business justifications for their actions. The appellate court agreed with the lower court that the sanctioning bodies properly adopted the single-tire rule because they believed that such a rule created more exciting races, ensured equal access to a uniform product, led to increased safety, and lowered the costs of tires by eliminating so-called "tire wars,"—a practice in which the manufacturers constantly introduced improved products in order to push the competitors into buying new tires each race to keep on the same level as their rivals.

Antitrust Injury

The complaining supplier suffered no cognizable antitrust injury because it had the opportunity to bid on exclusive supply deals—and previously had done so with some success. In fact, the court observed, the complaining supplier’s whole challenge to the single-tire rule had a simple but serious flaw: it was the company that actually pioneered and promoted the whole idea in the first place.

Finally, the district court’s denial of the supplier’s request for leave to amend its complaint in order to add an express refusal to deal or group boycott claim was proper, the appellate court held. Given that the motion was filed sometime after the expiration of the deadline stated in the court’s own scheduling order, that it would have constituted the supplier’s fourth amendment to its pleading, and that any attempt to add a new claim would have been moot in light of the ruling on the merits of the supplier’s existing claims, the lower court’s refusal to allow further amendment did not constitute an abuse of discretion.

The decision is Race Tires America, Inc v. Hoosier Racing Tire Corp ., 2010-2 Trade Cases ¶77,111.

Connecticut Barred from Disclosing Information from Antitrust Investigation

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

The Connecticut state attorney general’s office was barred from disclosing material and information gathered during an investigation of possible antitrust violations in the insurance industry, pursuant to a subpoena duces tecum and interrogatories, to persons outside of the office, the Connecticut Supreme Court has decided.

The attorney general’s office could not disclose the materials and information obtained from the target to persons outside of the office in connection with taking oral testimony. However, the state could provide information to officials of other states and the federal government, so long as those officials agreed to abide by the same confidentiality restrictions to which the Connecticut state attorney general was subject.

A lower court improperly construed the confidentiality provisions of a section of the Connecticut Antitrust Act that authorized the state attorney general to demand discovery prior to the institution of any action or proceeding, the state's highest court ruled.

The lower court had denied a request from the target of the investigation—Brown and Brown, Inc.—for a judgment declaring that the state attorney general's office could not disclose any documents or information received pursuant to a subpoena duces tecum and interrogatories because the statute prohibited such disclosure to the public.

Brown and Brown—an independent insurance intermediary that provided a variety of insurance and reinsurance products and services—contended that the requested materials and information contained trade secrets and other valuable commercial and financial information.

The attorney general had argued that the subpoenaed information could be used and shared to the extent necessary to advance the state's investigation and to prepare cases for prosecution, which could require sharing documents with persons outside of the attorney general's office.

State Attorney General’s Statement

The Connecticut Attorney General’s Office issued a statement, in response to the decision on August 2, saying that the opinion “in no way limits our authority to subpoena documents and witnesses, and enforce compliance.”

The office did concede, however, that it would “impose some parameters on our ability to show or share documents with others outside the office.” Attorney General Richard Blumenthal said that he was reviewing the court’s decision and would consider seeking legislative action to overrule its impact.

According to the statement, the investigation into Brown and Brown is continuing as part of an ongoing larger insurance investigation.

The decision is Brown and Brown, Inc. v. Blumenthal, Attorney General, official release date August 10, 2010. It will appear at 2010-2 Trade Cases ¶77,115.

Intel Settlement Is Administration’s Most Important Enforcement Victory: Antitrust Group

This posting was written by John W. Arden.

The Federal Trade Commission’s settlement of administrative charges of monopolization against Intel Corporation is “the most important antitrust enforcement victory achieved so far by the Obama Administration,” according to Bert Foer, president of the American Antitrust Institute (AAI).

A proposed consent order, announced yesterday by the FTC (see blog story below), would resolve the agency’s December 2009 complaint, alleging that Intel (1) unlawfully maintained its monopoly in the markets for x86 Central Processing Units (CPUs) for desktops, notebooks, and servers, as well as smaller relevant markets and (2) sought to acquire a second monopoly in the relevant graphics markets.

The agency alleged that the conduct violated Section 5 of the FTC Act, which prohibits unfair methods of competition and unfair acts or practices.

The settlement will benefit competition and consumers worldwide, Foer said. “In light of the crucial importance of the $30-billion-plus chip market to the United States and the world economy, this action ranks high on the FTC’s all time list of accomplishments.”

The consent order would apply to markets for graphic chips and chipsets, in addition to CPUs, and would prevent Intel from leveraging its CPU monopoly into those other markets.

For the first time, the FTC clearly prohibited “market share discounts” and “first dollar discounts” by a dominant firm because of the anticompetitive effects, the AAI noted. The settlement also would prevent Intel from retaliating against original equipment manufacturers or retailers that use or carry chips made by Intel’s rivals. Furthermore, the settlement would prohibit Intel from selling its products below cost.

For a period of six years, the chipmaker would be required to allow graphic chips made by its rivals to seamlessly interface with their x86 chips. It would also be prohibited from engaging in predatory design-making changes that have the sole effect of harming rivals—with the burden on Intel to show a new design’s consumer benefits.

“The FTC’s settlement carefully preserves Intel’s incentive and ability to innovate, while adopting a burden that is less favorable to the manufacturer than most case law provides,” said Foer.

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.”

Text of AAI’s statement on the settlement appears here on the group’s website.

Intel Agrees to Settle FTC Allegations of Anticompetitive Conduct

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

FTC Chairman Jon Leibowitz, joined by Commissioner Julie Brill and Bureau of Competition Director Richard Feinstein, announced today a proposed consent order to resolve the agency’s action against Intel Corporation for allegedly stifling competition in the markets for computer chips.

The agency’s December 2009 complaint (CCH Trade Regulation Reporter ¶16,398) alleged that Intel unlawfully maintained its monopoly in the markets for x86 Central Processing Units (CPUs) for desktops, notebooks, and servers, as well as smaller relevant markets, and sought to acquire a second monopoly in the relevant graphics markets. The conduct allegedly violated Sec. 5 of the FTC Act, which prohibits unfair methods of competition and unfair acts or practices.

Chairman Leibowitz said that the relief obtained from Intel in this “exceptionally important case” goes well beyond relief achieved elsewhere, including a private settlement with AMD Corp.-- Intel’s only significant competitor in the relevant x86 CPU markets--and international enforcement actions. Intel has been fined by the European Commission and Korea Fair Trade Commission for anticompetitive practices.

The FTC settlement applies, not only to CPUs, but also to graphics processing units (GPUs), and chipsets. It prohibits Intel from using threats, bundled prices, or other offers to exclude or hamper competition or otherwise unreasonably inhibit the sale of competitive CPUs or GPUs, according to the agency.

The FTC settlement order is intended to protect competition and not any single competitor. Chairman Leibowitz noted that the conduct restrictions would provide a level playing field for AMD and smaller rival VIA Technologies. Both the international settlements and the settlement between Intel and AMD focused primarily, if not exclusively, on AMD’s ability to compete in CPU market.

The settlement also prohibits Intel from deceiving computer manufacturers about the performance of non-Intel CPUs or GPUs. Intel allegedly redesigned its compiler and library software to reduce the performance of competing CPUs and failed to disclose the effects of its redesigned compiler on the performance of non-Intel CPUs.

Under the proposed consent order, Intel would be required to take steps to prevent future misrepresentations related to its compilers and libraries used by software developers to write software and make it work efficiently. In addition, Intel would be required to implement a $10 million fund to reimburse customers who relied on Intel’s statements regarding its compilers or libraries for the costs associated with recompiling their software using non-Intel compilers or library products.

Commissioner Brill said that the case reflected the FTC's efforts to maintain competition in high tech markets--a top priority at the Commission. She said that the Commission would not hesitate to challenge conduct involving complex, high tech products in innovative markets in the future.

Intel Response

“This agreement provides a framework that will allow us to continue to compete and to provide our customers the best possible products at the best prices,” said Doug Melamed, Intel senior vice president and general counsel. “The settlement enables us to put an end to the expense and distraction of the FTC litigation,” he added.

Intel admitted no wrongdoing. In response to the agency’s complaint, Intel had argued that microprocessor prices had fallen and that innovation had dramatically increased during the relevant period. Intel also challenged the FTC’s “unbounded application” of Section 5 of the FTC Act.

At the time the FTC issued its complaint, Melamed took issue with the “unprecedented remedies” sought by the agency. According to the FTC officials, however, the parties agreed on terms that included most of the relief outlined by the agency in the complaint’s Notice of Contemplated Relief.

The proposed consent order, In the Matter of Intel Corporation, FTC Dkt. No. 9341, will appear at Trade Regulation Reporter ¶16,483.

A story on the issuance of the administrative complaint ("FTC Sues Intel for Monopolization") was posted December 16, 2009 on Trade Regulation Talk.

FTC Amends Telemarketing Sales Rule to Cover Debt Relief Companies

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

The FTC has amended the Telemarketing Sales Rule to apply to for-profit companies that sell debt relief services over the telephone, including credit counseling, debt settlement, and debt negotiation services that aim to reduce credit card or other unsecured debt.

The FTC summarized the amendments as follows:

Advance fee ban. Debt relief companies may no longer charge a fee before they settle or reduce a customer’s debt.

Disclosures. Debt relief companies will be required to make four specific disclosures to consumers, including how long it will take for consumers to see results, how much it will cost, the negative consequences that could result from using debt relief services, and key information about dedicated accounts if they choose to require them.

Misrepresentations. Debt relief companies will be prohibited from making misrepresentations, including specific misrepresentations commonly made in this area.

Inbound calls. The amendments extend the Telemarketing Sales Rule to cover calls consumers make to these firms in response to debt relief advertising.

The advance fee ban provision is effective on October 27, 2010. All other amended provisions are effective on September 27, 2010.

Dedicated Account for Payments

As part of the advance fee ban, the amended rule specifies that debt relief companies may require that consumers set aside their fees and savings for payment to creditors in a “dedicated account” if the following five conditions are met:

• The dedicated account is maintained at an insured financial institution;

• The consumer owns the funds (including any interest accrued);

• The consumer can withdraw the funds at any time without penalty;
• The provider does not own or control or have any affiliation with the company administering the account; and

• The provider does not exchange any referral fees with the company administering the account.

According to an FTC fact sheet, the Government Accounting Office studied the debt settlement industry and identified allegations of fraud, deception and other questionable activities that involve hundreds of thousands of consumers.

An industry trade association estimated that perhaps 1,000 firms offered debt settlement services. Two industry trade associations estimated that their 250 member firms had 425,000 customers (combined).

Based on information that one of the industry associations provided, nearly two-thirds of enrolled consumers, almost all of whom had paid in advance, dropped out of the programs within the first three years and did not get the services for which they had paid. The fees for an individual consumer were hundreds or thousands of dollars, depending on the amount of debt and state law in the consumer’s state of residence.

The FTC’s enforcement actions have helped over 475,000 consumers who have been harmed by deceptive and abusive practices by various types of debt relief companies, according to the agency.

A July 29 news release on the rule amendment appears here on the FTC website. Text of the Federal Register notice appears here.

Further information regarding the rule amendment will appear in CCH Trade Regulation Reporter, CCH Advertising Law Guide, and CCH Privacy Law in Marketing.