Valuing Franchises in Divorce Cases Is a Matter of Discretion

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

A review of the cases shows that the standard methods for calculating the value of assets do not always control the methodology used in divorce valuations.

Three cases illustrate the variety of definitions and the general assertions that value in divorce proceedings is not necessarily a mathematical construct as much as it is a matter of the discretion of the court.

Courts may or may not be bound by accepted definitions of “fair value” for appraisal rights (and allowing for no discount factors) or “fair market value,” which provides for discounts for lack of marketability and illiquidity and supposes a transaction between a hypothetical willing buyer and willing seller.

In Alexander v. Alexander (Ind. App. Ct., May 20, 2010), one of the marital assets that needed to be valued was a Century 21 franchise. The competing valuations were described by the court:

The business appraisals disagreed in several areas, best summarized as follows: (1) Strauch eliminated all of the interest expenses incurred by the corporation, and Stover found the expenses to be legitimate expenses (2) Strauch increased the cash flow of the business, and Stover used the actual Federal Income Tax Returns filed by the parties to reflect the expenses and income of the business.

One expert ascribed a value of $288,600 to the franchise, while the other came in at $35,800. Not surprisingly, the court effectively cut the baby in half and arrived at a value of $119,475. More importantly, the court discussed and accepted (although modified) certain discounts to the valuation—basically adopting the mechanics of a “fair market value” analysis.

In contrast, the court—in the case of In re Marriage of Thornhill (Colo. S. Ct., June 1, 2010)—was called upon to adopt “fair value” for appraisal rights as the standard for valuation of closely held businesses for divorce proceedings and expressly declined to do so.

Experts for both the wife and the husband had provided valuations that initially were within $18,000 of each other, at approximately $2.5 million. However, significant disparity in the final valuations resulted from the application of a 33 percent marketability discount by the husband’s expert, while the wife’s expert applied no marketability discount, citing the rationale of the court’s in a decision with respect to appraisal rights. (Pueblo Bankcorporation v. Lindoe, Inc., 63 P.3d 353, Colo. 2003)

But the appellate court declined to accept any required mechanism as a matter of law, stating that, by statute, the proper method of determining value was within the “discretion” of the trial court.

The third case that should be noted is Brown v. Brown(792 A.2d 463, N.J. Super. Ct. App. 2002), where a New Jersey appellate court did extend a rule prohibiting the use of marketability discounts in shareholder dispute cases to divorce proceedings—effectively adopting “fair value” for appraisal rights as the appropriate valuation standard for New Jersey divorces.

This case was expressly rejected by the court in In re Marriage of Thornhill. In fact,most courts have left the decision as to the applicability of marketability discounts in valuations within divorce proceedings to the trial court’s discretion. (See Erp, 976 So. 2d. at 1239; Fausch v. Fausch, 697 N.W.2d 748; and Matter of Marriage of Tofte, 895 P.2d 1387)

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Additional information on the issues discussed above is available in CCH Franchise Regulation and Damages by Byron E. Fox and Bruce S. Schaeffer.

Antitrust Chief Addresses New Merger Guidelines, Global Cooperation

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

At Georgetown’s Global Antitrust Enforcement Symposium in Washington, D.C. on September 21, Assistant Attorney General Christine A. Varney, chief of the Department of Justice Antitrust Division, delivered remarks concerning international cooperation in antitrust investigation and enforcement.

Varney began by discussing the issuance of revised Horizontal Merger Guidelines by the Antitrust Division and the FTC in August 2010. While the revised Guidelines “provide transparency into the agencies’ current enforcement analysis,” they “contain no surprises,” setting forth concepts and considerations that had long been central to the agencies’ merger review and incorporating much of the Commentary the agencies issued in 2006 for the then-extant Guidelines.

The revised guidelines merely reflected a refinement in approach to merger review to incorporate advances in economic learning and changes in business realities, according to Varney.

The assistant attorney general then focused on future global enforcement, providing the historical context of international cooperation, explaining the challenges of achieving convergence with other competition agencies around the world, describing the state of cooperation at present, and offering initial thoughts on the direction that cooperation efforts should take in the coming decade and beyond.

The efforts at convergence in the past decade have been “a very positive step,” she said, because convergence reinforces international case cooperation and helps businesses operate more efficiently. However, Varney acknowledged, convergence on everything was “unlikely,” owing to the wide range of competitive landscapes found in different jurisdictions.

“The Antitrust Division has been working hard to bring greater cooperation to international cooperation enforcement by facilitating discussion of important issues,building bilateral and multilateral relationships, and learning how best to coordinate investigations and remedies in a globalized age,” according to Varney.

Within these efforts has been a “special emphasis on encouraging procedural fairness and transparency, as evidenced by the agency’s involvement in two OECD Working Party roundtables focused on those topics.

Varney cited the combination of Cisco and Tandberg as an example of the Antitrust Division taking into account remedies secured by the European Commission (EC) in closing its own investigation. She noted that the Justice Department has also enhanced its relationships with numerous other competition enforcers, including China, Russia, and the EC.

Looking toward the next decade, Varney stated that the concept of convergence should focus on substantive legal and economic analysis, rather than uniformity of processes and procedures, because of the differing legal proceedings and traditions employed by the competition regimes around the world.

She observed that convergence has already largely occurred in some areas of competition thinking—such as price fixing, market allocations,and anticompetitive horizontal mergers—but not nearly as much in the substantive analysis of unilateral conduct.

Going forward,“we must above all focus our efforts on deep and meaningful dialogue and continued cooperation on the basic principles that the competition community has already accepted,” she concluded.

The complete text of Varney’s remarks,entitled “International Cooperation: Preparing for the Future,” appear here. The remarks will be reported at CCH Trade Regulation Reporter ¶ 50,260.

Non-Signatory Not Obligated to Arbitrate Claims Against Manufacturer, Distributor

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

The doctrine of direct benefits estoppel did not obligate an oil drilling company to arbitrate its claims against a manufacturer and a distributor of mooring ropes because the drilling company did not “embrace” the Purchase Order Agreements between the manufacturer and distributor that contained a mandatory arbitration clause, according to the U.S. Court of Appeals in New Orleans.

A federal district court’s dismissal of the drilling company’s suit—based on the application of the doctrine of direct benefits estoppel—was reversed, and the case was remanded for further proceedings.

To fulfill the drilling company’s order for mooring ropes, the distributor entered into Purchase Order Agreements with the manufacturer that incorporated a mandatory arbitration provision. The drilling company was not shown to have been furnished a copy of those agreements, and its orders for the mooring ropes did not contain an arbitration clause, the court noted.

After the mooring ropes allegedly failed—damaging the drilling company’s rigs—the company brought suit against the manafucturer and distributor for breach of warranty, fraud, and other claims.

The district court held that the drilling company was required to arbitrate its claims because they were premised on the manufacturer’s failure to perform according to the Purchase Order Agreements.

“Embracing” Contract

Direct benefits estoppel involved non-signatories who, during the life of a contract, “embraced” the contract, despite their non-signatory status, and then attempted to repudiate the arbitration clause in the contract during litigation, the appellate court observed.

A non-signatory could embrace a contract containing an arbitration clause either by:

(1) knowingly seeking and obtaining direct benefits from the contract or

(2) seeking to enforce the terms of the contract or asserting claims that must be determined by reference to the contract.

The first of those two possibilities was not satisfied because there was no evidence that the drilling company had any knowledge of the Purchase Order Agreements at the time that it purchased and received the ropes. Thus, the drilling company did not have the knowledge required to support the “knowingly exploited” theory of direct benefits estoppel.

Since the drilling company did not seek to enforce a specific term of the Purchase Order Agreements, the second theory of direct benefits estoppel could apply only if the drilling company’s claims could be determined solely by reference to the Purchase Order Agreements.

Non-Contractual Claims

As a plaintiff, the drilling company was not required to base its claims on the Purchase Order Agreements and could, disclaim any reliance upon them, the court held. The drilling company argued that all of its claims were based either on pre-purchase misrepresentations or on obligations imposed by law. Thus, the second theory of direct benefits estoppel did not apply.

The September 15 decision in Noble Drilling Services, Inc. v. Certex USA, Inc. will appear in the CCH Business Franchise Guide.

Tech Firms Resolve U.S. Antitrust Challenge to Hiring Practices

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

As the Department of Justice Antitrust Division continues its investigation into the use of “no solicitation” agreements among employers to hold down employee salaries and defections, six high technology companies have agreed to modify their recruiting practices to settle a federal antitrust action.

The Antitrust Division alleged that the companies entered into agreements that restrained competition between them for highly skilled employees. Under the terms of a proposed consent decree, the companies would be prohibited from entering into an agreement not to cold call or recruit an employee.

The civil complaint and proposed consent decree were filed on September 24 in the federal district court in Washington, D.C. The consent decree, if approved by the court, would resolve the government's suit.

Ban on Recruitment "Cold Calling"

The Department of Justice alleged that the six companies—Adobe Systems Inc., Apple Inc., Google Inc., Intel Corp., Intuit Inc. and Pixar—entered into five substantially similar agreements that banned "cold calling" of employees for recruitment purposes.

Senior executives of the companies purportedly entered the express agreements and enforced them. According to the government, the agreements—some of which date back to 2005—were naked restraints of trade that were per se unlawful under Sec. 1 of the Sherman Act.

The government contended that the agreements to ban “cold calling” were not justified by the legitimate collaborative projects in which the companies engaged. They were broader than reasonably necessary for any collaboration between the companies. The agreements were not tied to any specific collaboration, nor were they narrowly tailored.

Investigation of Employment Practices

In announcing the matter on September 24, the Justice Department said that the complaint arose out of a larger investigation by the Antitrust Division into employment practices by high tech firms. The statement went on to say that the Antitrust Division continues to investigate other similar no solicitation agreements.

This is not the first Justice Department action to challenge alleged efforts to hold down employee wages. In its Competitive Impact Statement explaining the settlement, the government cited a 1996 consent decree resolving an alleged agreement to curb competition between residency programs for senior medical students and residents of other programs (U.S. v. Assn. of Family Practice Residency Directors, W.D. Missouri, 1996-2 Trade Cases ¶71,533). The consent decree enjoined prohibitions on the solicitation of residents from other programs.

While the companies did not admit to any wrongdoing, the investigation opened the door for private antitrust claims from employees. Recent efforts to pursue antitrust class actions challenging employer efforts to damp wages have, however, not proven successful.

In Reed v. Advocate Health Care(N.D. Illinois, 2009-2 Trade Cases ¶76,758), the federal district court in Chicago rejected a class action against a purported conspiracy to suppress wages of registered nurses. Similarly, a federal district court in New Jersey refused to certify a putative class alleging a conspiracy among major U.S. oil companies to exchange information concerning employee competition.

Summary judgment was ultimately entered in favor of the defending oil companies in the long-running matter (In re: Compensation of Managerial, Professional and Technical Employees Antitrust Litigation, D. New Jersey, 2006-1 Trade Cases ¶75,096; 2008-2 Trade Cases ¶76,438).

A new release on the proposed settlement appears here on the Antitrust Division’s website. Text of the complaint and proposed consent decree appear here.

The proposed consent decree in U.S. v. Adobe Systems, Inc. will appear at CCH Trade Regulation Reporter ¶50,982.

California Consumer Protection Laws Govern Nationwide Class in Ticketing Fee Case

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

A California trial court was directed to grant a motion certifying a nationwide class action against Ticketmaster under the California Unfair Competition Law (UCL) and False Advertising Law (FAL), in a decision by a California appellate court.

Ticketmaster allegedly misled consumers into believing that the “Order Processing Charge” and the “UPS Delivery” fee charged on its website were pass-through costs when in fact both fees were sources of profit for Ticketmaster. The trial court had found that the consumers failed to establish the court's jurisdiction over the claims of out-of-state plaintiffs.

Ticketmaster's requirement that each purchaser agree that any dispute be resolved by courts located in California and be governed by California law established sufficient contact to permit jurisdiction in California consistent with due process, according to the court. Ticketmaster had its headquarters and principal place of business in California.

Extraterritorial Application of Laws

No express geographic restriction was contained in the UCL. The UCL broadly prohibited “any unlawful, unfair or fraudulent business act or practice.” There appeared no reason why the UCL should not be applied to an out-of-state plaintiff’s claim through a contractual choice of law and forum selection provision imposed by Ticketmaster on its customers.

Although the FAL expressly limited its coverage to misleading statements made or disseminated from California, it nevertheless recognized the illegality of making false statements to “the public in any state.” This reflected the legislature's intent that the FAL should provide extraterritorial protection from false claims made in California, the court noted.

The opinion in Schlesinger v. Superior Court of Los Angeles County appears at CCH Advertising Law Guide ¶63,987.

Further details regarding the CCH Advertising Law Guide appear here.

Tax Lien Bidding Scheme Would Not Be Civil RICO Violation

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

Tax lien purchasers in Cook County, Illinois, were not liable for RICO violations that competitors asserted after the defendants allegedly conspired to violate the county’s “single simultaneous bidder rule” (SSBR) in an effort to win a greater share of the tax liens that the county sold at an annual tax auction, the federal district court in Chicago has ruled.

The SSBR was purportedly designed to prevent related entities rom “gaming” the auction by bidding on the same property at the same time and benefiting from the county’s system of fairly apportioning liens among multiple winning bidders.

In Cook County, investors bid on the right to pay delinquent taxes on a specific property in exchange for the right to collect the taxes, plus interest and a penalty, from the property owner. Investors bid on the penalty (between zero and eighteen percent of the delinquent tax bill) that they are willing to accept from the property owner in exchange for extinguishing the lien, the court noted. The lowest bidder wins the auction.

Scheme to Defraud County, Competing Investors

According to the plaintiffs, the defendants participated in a scheme to defraud the county treasurer and competing investors by:

(1) Falsely representing that they were non-related bidders;

(2) Falsely affirming that they would follow the SSBR;

(3) Secretly acting in concert to bid on the same properties (at the lowest penalty rate) in order to increase their share of the tax lien pool; and

(4) Injuring other bidders by reducing the number of liens they obtained.

Proximate Cause

The plaintiffs could not show that their injuries were proximately caused by the defendants’ purported violations of the SSBR. Although the U.S. Supreme Court had determined otherwise (Bridge v. Phoenix Bond & Indemnity Co., CCH RICO Business Disputes Guide ¶11,500), its determination was based on an “inaccurate” description of the county’s method of allocating liens that received multiple winning bids, according to the court.

The Supreme Court was under the impression that liens receiving multiple winning bids were distributed to winning bidders on a rotational basis, in order to insure that the liens were “fairly” apportioned. In reality, however, the county required auctioneers to break any tie by awarding the lien to the bidder who first submitted the winning bid.

Although the ultimate winner was chosen at random when the first bidder could not be identified—and the auctioneers were required to “spread the choices fairly” so no single buyer would be favored—the evidence did not indicate which liens had been awarded under the “first winning bidder” system and which were awarded under the “fair” (equal apportionment) system.

Subjective, Discretionary Method

Both systems used a “subjective, contingent, discretionary method of awarding liens that depended on the conduct of other parties.” Neither system allocated winning bids under the pro rata system that had guided the Supreme Court’s proximate cause analysis, the court observed.

Consequently, the causal link between the plaintiffs’ injuries and the defendants’ purported violations of the county’s SSBR was “uncertain” and proximate cause could not be established, in the court’s view.

Finally, the dearth of evidence regarding the number and identity of the liens that the plaintiffs would have won in the absence of the defendants’ alleged violations of the SSBR “further complicate[d]” any assessment of how those violations would have affected the value of the plaintiffs’ lien portfolio.

Ultimately, the uncertainty inherent in the manner in which the liens were awarded, coupled with the plaintiffs’ “failure to present evidence at nearly every level of the proximate cause inquiry,” led the court to conclude that the plaintiffs failed to demonstrate any genuine issue of material fact that would allow their RICO claims to survive summary judgment.

The decision is Phoenix Bond & Indemnity Co. v. Bridge, CCH RICO Business Disputes Guide ¶11,913.

Further information about CCH RICO Business Disputes Guide appears here.

Facebook’s Advertising Charges Could Violate California Unfair Competition Law

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

Social networking website Facebook PPC could be held liable under the California Unfair Competition Law (UCL) for unfair business practices related to a breach of an advertising contract, but not for fraudulent or unlawful business practices, according to the federal district court in San Jose, California.

Sports website Rootzoo entered into an advertising contract with Facebook that allowed Rootzoo to place advertisements on portions of Facebook’s website with embedded links to external sites.

Facebook gives advertisers the choice between two payment structures: “cost per click” or cost per thousand impressions. In selecting the “cost per click” option, Rootzoo specified the maximum amount it was willing to pay for each click and each day.

Each advertising contract contained a disclaimer stating that third parties may generate clicks that could affect the cost of the advertising and that advertisers accept the risk and cannot hold Facebook liable for those fraudulent clicks.

Despite the disclaimer, Rootzoo alleged that Facebook made representations that it would charge for only certain types of clicks and that it had measures in place to ensure advertisers would be charged only for legitimate clicks. Rootzoo filed the UCL claim after Facebook billed for allegedly invalid clicks.

Unlawful, Unfair, Fraudulent Practices

The UCL prohibits unlawful, unfair, and fraudulent business practices and unfair, deceptive, untrue, or misleading advertising. Each prong applies separately in each case and a party need only meet one of the three criteria—unlawful, unfair, or fraudulent—to state a UCL cause of action.

Rootzoo’s UCL claim under the unfair prong could go forward based on the alleged breach of contract, according to the court. Although California courts have found that systematic breaches of contract may state a claim under the unlawful prong of the UCL, the court determined that the issue was better analyzed under the unfairness prong.

Because Rootzoo’s claims based in fraud were too general, they could not be brought under the unfairness prong. However, the claim based on Facebook’s systematic breach of the advertising contract was not subject to Rule 9(b) and was sufficient to withstand the motion to dismiss.

Heightened Pleading Standard

Because Rootzoo could not meet the heightened pleading standard of Federal Rule of Civil Procedure 9(b) that applies to UCL claims under the fraudulent prong, the court dismissed the claim. Rootzoo alleged that Facebook misrepresented how advertisers were billed, misrepresented the methods in place to protect advertisers from paying for invalid clicks, and failed to disclose that it charged for invalid clicks.

Rule 9(b) requires evidence of the time, place, and specific content of the false representations in order to give defendants notice of the particular misconduct at issue. In this case, Rootzoo’s allegations were too general and lacked any evidence of reliance on the alleged misrepresentations. Thus, the claim was dismissed.

The decision, In re Facebook PPC Advertising Litigation, appears at CCH State Unfair Trade Practices Law ¶32,125. It also will appear at CCH Advertising Law Guide ¶63,980 and CCH Guide to Computer Law ¶50,022.

Further details regarding CCH State Unfair Trade Practices Law appear here.

Antitrust Institute to Study Competition, Consolidation in Airline Industry

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter, and John W. Arden.

In light of recent consolidation in the airline industry, the American Antitrust Institute (AAI) will undertake a new study on competition in the U.S. airline industry, according to a September 20 announcement.

The study is motivated by the 2008 merger of Delta and Northwest and the recently proposed merger of United and Continental, both of which the AAI opposed.

Significant, Rapid Consolidation

“We have reached the point where the positive or negative effects of significant and rapid consolidation in the U.S. airline industry should be documented,” said AAI Vice President and economist Diana Moss, the lead researcher for the study. “Future merger decisions and aviation law policy can benefit from objective, empirical analysis.”

Consolidation in the airline industry has reduced the number of legacy network carrier systems from six to four, assuming the United/Continental deal is consummated, the AAI noted. The organization believes that American and U.S. Airways might counter the mergers with one or more deals of their own.

The study will assess the effect of recent airline mergers on fares and other fees; quality of service (including flight delays and cancellations); capacity expansions and restrictions; entry by low-cost and other legacy carriers; and choices available to the U.S. travel consumer.

It will attempt to determine whether the claimed cost savings from the mergers are actually realized and the extent to which the savings are passed on to air travelers. The study will also examine the effect of consolidation on low-cost carriers, in particular whether mergers create opportunity for collusion or establish price umbrellas under which low-cost carriers can compete less vigorously.

Justice Department Merger Review

In addition to the mergers themselves, the AAI is concerned with the lack of transparency in the Justice Department’s review of airline mergers. In approving both the Delta/Northwest transaction and the United/Continental combination, the Justice Department issued brief announcements. The AAI is urging the Department of Justice to provide additional statements that will facilitate evaluation of the assumptions and predictions implicit in the Antitrust Division’s analysis.

“The DOJ’s press release approving the United/Continental merger is an example of a common failure to provide sufficient information and explanation to help the public understand the reasoning behind its decisions,” said AAI President Albert Foer. “The public should not be satisfied with an explanation that `The department conducted a thorough investigation.’ Of course we take that for granted.”

In addressing the 2008 Delta/Northwest merger, the Justice Department made no mention of apparent competitive problems, stating instead that the merger would produce “substantial and credible efficiencies.”

The AAI urged the Justice Department to make additional statements that will facilitate public evaluation of the Antitrust Division’s analysis.

Participation in Study

In conducting the study, the AAI will seek input from all affected airlines and related industry groups. Those interested in participating should contact Dr. Moss at aai@antitrustinstitute.org.

Further information regarding the study—and the organization itself—is available here on the AAI website.

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

Franchise Agreements’ Arbitration Clause Was Unenforceable Under California Law

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

The arbitration clause in franchise agreements between a Texas payday loan franchisor and two California payday loan franchisees was neither severable nor enforceable under California law, according to the U.S. Court of Appeals in San Francisco.

A federal district court did not err in declining to sever the unconscionable portions and refusing to enforce the entire arbitration clause (CCH Business Franchise Guide ¶13,966).

The dispute centered on the franchisees' claims that the franchisor made material misrepresentations and omissions regarding its franchises and that the franchisor's business model did not comply with California law.

The franchisees alleged violations of the California Franchise Investment Law, unfair trade practices, fraud, and breach of contract, among other things. The franchisor filed a motion to dismiss or, alternatively, to stay the action pending arbitration. After the district court held the arbitration clause unconscionable and unseverable, the franchisor appealed.

Abitrability of Claims

On appeal, the franchisor argued that, under the “crux of the complaint rule,” the question of arbitrability should be determined by an arbitrator because the franchisees’ complaint did not contain a specific challenge to the arbitration clause. However, the Ninth Circuit did not create a rule under which a plaintiff must plead a separate and distinct challenge to the arbitration clause in order to have a court determine arbitrability, the court reasoned.

In most cases in which the validity of the arbitration clause was distinct from contract claims, a court would not expect the plaintiff to raise claims against the arbitration clause in the complaint because such claims would be unrelated to the plaintiff’s principle prayer for relief.

An independent challenge to the arbitration clause would become relevant only when the plaintiff was required to oppose a motion to compel arbitration. In such a case—and in this one—the challenge to the arbitration clause would come in the pleadings resulting from a motion to compel. Thus, to determine arbitrability, it was necessary to look at the franchisees’ complaint and motion papers to determine if the franchisees’ objections to the arbitration clause were severable from the challenge to the validity of the franchise agreement as a whole.

Unconscionability of Clause

The franchisees contended that the arbitration clause was both procedurally and substantively unconscionable, because it:

(1) Was not mutually entered into;

(2) Improperly limited the franchisee’s damages;

(3) Impermissibly shortened the statute of limitations;

(4) Contained invalid place and manner restrictions;

(5) Sought to negate the franchisee’s unwaiveable rights under the California Franchise Investment Law; and

(6) Wrongly banned class and consolidated actions.

These contentions were clearly attacks on the arbitration clause alone and separate from the franchisees’ claims that the franchisor’s misrepresentations fraudulently induced them into purchasing franchises, the appellate court held. Thus, the question of arbitrability of the parties’ dispute was properly decided by the district court.

Choice of Law

California law governed the question of the unconscionability of the arbitration clause, and the district court’s decision to apply California law to determine that the arbitration clause was unconscionable was affirmed.

On appeal, the franchisor argued that Texas law should govern because the agreements contained a choice of Texas law clause. California’s choice of law rules applied to determine which state’s law governed the unconscionability issue, the appellate court observed.

It was undisputed that Texas had a substantial relationship to the parties and the transaction because the franchisor’s principle place of business was there and the agreements were executed there. However, enforcement of the arbitration clause would contravene the fundamental California public policy in favor of protecting franchisees from unfair and deceptive business practices, as established by the California Franchise Investment Law (CFIL).

Case law demonstrated California’s established public policy against arbitration clauses that forced franchisees to waive the limitations period, bar class actions, or limit punitive and consequential damages in violation of the CFIL’s anti-waiver provisions, the appellate court noted.

Under Texas law, the arbitration clause in the parties’ agreement would be enforceable. Thus, Texas law was in conflict with that of California on the issue. The question came down to which state had a materially greater interest in having its law regarding unconscionability of arbitration agreements applied in the dispute, according to the court.

Of the two, California’s interest was greater. Texas had a significant general interest in enforcing contracts executed there and by its citizens, and in protecting its franchisors from significant liabilities. However, California had a substantial, case-specific interest in protecting its resident franchisees from losing statutory protections against fraud and unfair business practices. Because the franchises were operated in California by California citizens, California would suffer a significant impairment of its public policy if the arbitration clause was enforced against its citizens.

Severability

The district court did not abuse its discretion by declining to sever the unconscionable portions of the arbitration clause and refusing to enforce the arbitration clause in its entirety, the court ruled. Four of the five paragraphs of the arbitration clause were unconscionable, or at least unenforceable, under California law.

After determining that the majority of the arbitration clause was substantively unconscionable and imposed on the franchisees without any opportunity to negotiate, the district court ruled that unconscionability “permeated” the entire arbitration clause and was “overwhelming.” This ruling was not an abuse of discretion, the appellate court held.

The September 16 decision in Bridge Capital Fund Corp. v. Fastbucks Franchise Corp. will appear in the CCH Business Franchise Guide.

White House Names Elizabeth Warren to Advise New Consumer Financial Protection Bureau

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

In a post to the White House blog today, Harvard Law School professor Elizabeth Warren said that she has agreed to serve as an Assistant to the President and Special Advisor to Treasury Secretary Timothy Geithner on the Consumer Financial Protection Bureau. An official White House announcement followed.

The agency was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The law transfers functions relating to consumer financial protection from the Federal Trade Commission and the federal banking agencies to the Bureau of Consumer Financial Protection, an independent bureau within the Federal Reserve System.

In the coming months, it should become clearer how the new agency and the FTC will share their consumer protection authority. The relevant consumer laws include the Equal Credit Opportunity Act, the Fair Debt Collection Practices Act, the Truth in Lending Act, and provisions of the Gramm-Leach-Bliley Act and the Fair Credit Reporting Act, among others that pertain to mortgages and credit. The law calls on the agencies to coordinate with respect to rulemaking where there is an overlap of authority.

Within the FTC Bureau of Consumer Protection, the Division of Financial Practices currently regulates the marketing of certain financial products as well as the provision of debt collection and relief services. It also enforces consumer protection laws in the mortgage servicing industry.

The new agency is expected to promulgate reforms that make mortgage documents, credit card agreements, and student loans easier to understand.

Warren, who is credited with developing the concept of a federal financial consumer watchdog agency, explained: “the new consumer bureau is based on a pretty simple idea: people ought to be able to read their credit card and mortgage contracts and know the deal."

"The new law creates a chance to put a tough cop on the beat and provide real accountability and oversight of the consumer credit market," she added.

“The Consumer Financial Protection Bureau will be a watchdog for the American consumer, charged with enforcing the toughest financial protections in history,” the President said in announcing the appointment. “I am very grateful that Elizabeth has agreed to serve in this important role of getting the Consumer Financial Bureau up and running and making it as effective as possible.”

The president has called Warren a “tremendous advocate” for consumer protection. There was speculation that Warren might be named by President Obama as an interim director to head up the new agency. The interim appointment would have avoided a potentially difficult Senate confirmation process. Warrens' appointment to the advisor role sidesteps any controversy over avoiding the confirmation process.

She has written extensively on the subject, including authoring or co-authoring several books and treatises for Aspen Publishers.

Illinois Beer Distribution Law Discriminated Against Out-of-State Brewers

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

The Illinois beer wholesalers law, as construed by the Illinois Liquor Control Commission, unconstitutionally discriminated against out-of-state brewers by permitting in-state brewers to distribute their products directly to retailers while withholding that privilege from out-of- state brewers, the federal district court in Chicago has ruled.

The judicially-selected remedy for that discrimination—withdrawal of the self-distribution privilege from in-state brewers rather than extension of the privilege to out-of-state brewers—was temporarily stayed until March 31, 2011, to provide the Illinois General Assembly an opportunity to act on the matter, if it so desired.

Acquisition of Distributor

Out-of-state brewer Anheuser-Busch, Inc. brought suit after a ruling by the Illinois Liquor Control Commission found that its planned acquisition of a 100% ownership interest in an Illinois distributor would violate the beer law, which precluded out-of-state brewers from possessing an ownership interest in a licensed Illinois distributor.

According to the Commission, in-state brewers were permitted to perform the distribution function in Illinois, but out-of-state brewers like Anheuser-Busch were prohibited from doing the same.

Under the Commerce Clause, a law discriminating against interstate commerce is subject to a rule of virtual per se illegality. To avoid the rule, the state must demonstrate that the law advanced a legitimate local purpose that could not be served by reasonable nondiscriminatory alternatives.

Twenty-First Amendment Analysis

The Commission argued that the discrimination at issue affected Anheuser-Busch only insofar as it wanted to act as a distributor. It did not affect Anheuser-Busch in its capacity as a brewer. In applying a Twenty-First Amendment analysis, the Commission concluded that the discrimination was constitutional as long as it had some connection to the distributorship or retail tiers of a state’s three-tier alcoholic beverage licensing system.

The court disagreed, finding that the cases cited by the Commission did not support that view. Those cases held that the Twenty-First Amendment permitted states to enact laws that distinguish between retailers and distributors based on the location of their operations only where discrimination against out-of-state producers was not an issue.

Legitimate Local Purpose

In order to demonstrate a legitimate local purpose that was advanced by the beer law’s discrimination, the Commission contended that Anheuser-Busch’s exclusion from the distributor tier was justified by (1) the relative small size of the current in-state brewers, as compared with Anheuser-Busch, and (2) the importance of regulatory control and the risk of tax evasion.

The argument regarding the small size of the in-state brewers currently distributing beer in Illinois failed because the beer law permitted all in-state brewers to distribute, not just small in-state brewers, and prohibited all out-of-state brewers from distributing, not just large ones, the court determined.

The Commission failed to cite evidence to support its second—regulatory and tax—argument. Case law interpreting the Commerce Clause demanded more than mere speculation to support discrimination. The Commission also failed to establish that the state’s regulatory objectives could not be achieved through nondiscriminatory means.

Because the legislative process offered more flexibility for solving the constitutional deficiency than was available judicially, the enforcement of the court’s chosen remedy was temporarily stayed to permit the legislature to avail itself of a much broader range of possible solutions, if it so chose.

The decision is Anheuser-Busch, Inc. v. Schnorf, CCH Business Franchise Guide ¶14,458.

Class Certification Denied in Plastics Additives Price Fixing Case

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

The federal district court in Philadelphia has refused to grant class certification to two groups of direct purchasers of certain types of plastics additives used to manufacture or process plastics because the complaining purchasers failed to demonstrate that individual injury was capable of proof by evidence common to the proposed classes.

Because the plaintiffs' price fixing claims would require individual treatment, class certification was unsuitable, the court found.

The plaintiffs sought certification of two subclasses: purchasers of organotin heat stabilizers (tins) and purchasers of epoxidized soybean oil (ESBO). Four other groups of products that were originally at issue were no longer at issue because the plaintiffs settled their claims with respect to these products against the defendants.

The plaintiffs claimed that the remaining class members were impacted by the alleged conspiracy because they paid higher prices for tins and/or ESBO than they would have in the absence of the conspiracy. However, the plaintiffs could not demonstrate impact common to the class.

The court rejected the four methods that they proposed:

(1) the defending manufacturers' pricing behavior, including references to list prices and price increase announcements;

(2) an economics expert's questionable opinion that the characteristics of the tins and ESBO markets were vulnerable to a price fixing conspiracy;

(3) the expert's analysis of the pricing structure in these markets, suggesting that every purchaser would have been impacted by the conspiracy because prices moved similarly over time; and

(4) the expert's market-wide regression analysis, which was not indicative of individual impact.

Hydrogen Peroxide Antitrust Litigation Standard

The decision demonstrates the hurdles facing antitrust plaintiffs attempting to satisfy the requirements for certification under Rule 23 of the Federal Rules of Civil Procedure.

An earlier order certifying a class in the case was vacated by the U.S. Court of Appeals in Philadelphia, and the lower court was instructed to revisit the certification request and apply the standard set forth in the Third Circuit's 2008 In re Hydrogen Peroxide Antitrust Litigation decision (2008-2 Trade Cases ¶76,453).

The lower court said that in its earlier order “in line with what we believed to be common practice at the time, we declined to balance the credibility of the parties’ experts on the issue of the predominance of common evidence demonstrating impact.”

Citing the Hydrogen Peroxide decision, the court explained that, in order to determine whether the requirements for class certification under Rule 23 of the Federal Rules of Civil Procedure were met, it would need to "delve beyond the pleadings" and "resolve all factual or legal disputes relevant to class certification, even if they overlap with the merits."

The decision is In re Plastics Additives Antitrust Litigation, 2010-2 Trade Cases ¶77,159.

eBay's Advertising of Tiffany Jewelry Not Proven Misleading

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

The famous jeweler Tiffany failed to establish that online marketplace eBay engaged in misleading advertising under the Lanham Act in connection with the sale of counterfeit “Tiffany” jewelry on its site, the federal district court in New York City has ruled.

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

Prior Decisions

Following trial in 2008, the court rejected Tiffany’s false advertising claims (CCH Advertising Law Guide ¶63,019). The court found that eBay’s advertising was not literally false and or likely to mislead consumers because authentic items were offered for sale, and inauthentic items were only listed on eBay due to the illicit acts of third parties.

On appeal, the U.S. Court of Appeals in New York City agreed that eBay’s ads were not literally false but ordered the trial court to take a fresh look at whether eBay’s advertising was likely to mislead or confuse consumers, in light of evidence that eBay knew that “Tiffany” products advertised and sold on eBay often were counterfeit (CCH Advertising Law Guide ¶63,792).

Likelihood of Confusion

On remand, the trial court noted that Tiffany had not produced extrinsic evidence of deception such as a consumer survey typically required to prove that a substantial portion of consumers in fact were misled by advertising.

Instead, Tiffany relied on (1) declarations of three eBay customers who believed that they bought counterfeit Tiffany goods on eBay, (2) testimony from a Tiffany employee that Tiffany had received numerous emails complaining of counterfeit Tiffany goods on eBay, and (3) 125 emails sent by customers to eBay complaining of counterfeit Tiffany goods.

Because none of the complaining customers referred to any eBay advertisements, the court held that no extrinsic evidence indicated that the ads were misleading or confusing.

Intent to Deceive

An exception to the extrinsic evidence rule exists, according to the court. When an advertiser has intentionally set out to deceive the public, and the conduct is of an egregious nature, a presumption arises that consumers are, in fact, being deceived.

Tiffany contended that eBay’s intent to deceive was proven at trial by the fact that eBay continued advertising the availability of Tiffany products on its website after it had been notified that a sizable portion of the products were counterfeit. The court held that Tiffany waived this argument by failing to raise it before, during, or after trial, or on appeal.

eBay’s conduct could not be found egregious because there was no proof that eBay was aware those consumers were being misled by its advertisements, the court concluded. In addition, eBay took substantial steps to prevent and detect the sale of counterfeit goods on its website.

The opinion in Tiffany (NJ) Inc. v. eBay, Inc., filed September 13, 2010, will be reported at CCH Advertising Law Guide ¶63,967.

FTC Requires Dun & Bradstreet to Divest Previously Acquired Marketing Data Firm

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

To settle an FTC challenge to a 2009 acquisition, the Dun & Bradstreet Corporation has agreed to divestitures aimed at addressing the potential competitive harm caused by the transaction.

An FTC consent order resolves a May 2010 FTC complaint against Dun & Bradstreet, over its $29 million acquisition of Quality Educational Data (QED), a division of Scholastic, Inc.

The agency alleged that the transaction combined Dun & Bradstreet’s Market Data Retrieval and QED—the only two significant competitors in the K-12 data market, according to the agency.

As a result of the acquisition, Market Data Retrieval—which describes itself as “the market’s first choice for marketing information and services for the K-12, higher education, library, early childhood, and related education markets"—allegedly holds over 90 percent of the K-12 data market.

The $29 million acquisition was below the threshold that would have triggered pre-merger filing requirements, and therefore the companies were not required to notify the FTC and Department of Justice.

Divestiture, Customer Option

The FTC consent order requires Dun & Bradstreet to divest to MCH Inc.—an institutional and educational data company active in the K-12 data market—an updated K-12 database, the QED name, and certain associated intellectual property.

Dun & Bradstreet has also agreed to offer its customers the option to terminate their contracts with the firm without penalty so that they can consider doing business with MCH and to release certain Dun & Bradstreet employees from restrictions on their ability to work for MCH. In addition, Dun & Bradstreet is required to provide MCH with technical assistance for up to one year. Finally, the order calls for the appointment of a Commission-designated monitor to ensure compliance with its terms.

Expedited Order

To “enable MCH expeditiously to acquire the divested assets and begin to compete during the upcoming back-to-school selling season," the Commission took the unusual step of issuing its final order in advance of the comment period. Dun & Bradstreet was required to complete the divestiture of the QED K-12 data business assets not later than five days after the order became final.

Normally, the agency does not issue a final order until it considers all comments received during the comment period. The agency explained, however, that the settlement remained subject to public comment. The Commission could reopen and modify its Decision and Order or commence a new administrative proceeding if necessary in light of the public comments.

Dun & Bradstreet Response

Dun & Bradstreet said in a September 10 statement that although it did not believe that the acquisition violated the federal antitrust laws, “our agreement to sell a package of assets acquired in the 2009 acquisition of QED preserves important enhancements to MDR’s offerings, while addressing the concerns raised by the FTC.”

The administrative action is In the Matter of the Dun & Bradstreet Corporation, FTC Docket No. 9342. Further details will appear at CCH Trade Regulation Reporter ¶16,497.

Text of the agreement containing the consent order, the decision and order, and a news release appear here on the FTC website.

Class Action for Junk Faxes Prohibited by New York Law

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

The federal district court in Brooklyn lacked jurisdiction over an individual’s purported class action under the Telephone Consumer Protection Act (TCPA) against a sender of unsolicited fax advertisements, the U.S. Court of Appeals in New York City has held.

Federal courts lack federal question jurisdiction under the TCPA, and the federal Class Action Fairness Act could not be used to establish federal diversity jurisdiction because New York law prohibited class actions for statutory damages under the TCPA.

The case was before the court on remand from the U.S. Supreme Court (Privacy Law in Marketing ¶60,474), which had vacated a prior decision by the appellate court and remanded the case for further consideration in light of the Supreme Court’s decision in Shady Grove Orthopedic Associates, P.A. v. Allstate Ins. Co., 130 S.Ct. 1431 (2010).

New York Civil Practice Law

In the prior decision, the appellate court had affirmed a decision of the federal district court in Brooklyn (Privacy Law in Marketing ¶60,473) that class actions could not be brought in New York under the TCPA because New York Civil Practice Law Sec. 901(b) provided that class actions could not be brought under statutes that imposed a penalty or a “minimum measure of recovery” unless that statute specifically authorized class actions.

Preemption

In Shady Grove, the Supreme Court held that Sec. 901(b) did not apply to state-law claims in federal court, regardless of whether Sec. 901(b) was “substantive” or “procedural” in nature, because Sec. 901(b) was preempted by Federal Rule of Civil Procedure 23, which authorized class-action suits in federal courts when various criteria were met.

The appellate court distinguished Shady Grove from the present case, however, reasoning that the TCPA provided its own basis for determining that jurisdiction was lacking.

Claims Not Permitted by State Law

Even if Sec. 901(b) was preempted by Rule 23, the appellate court said, the TCPA unambiguously precluded claims from being brought under its provisions if the claims were not permitted by state law. Federal courts were constrained to respect that limitation on the TCPA.

Because the TCPA used state law to define the federal cause of action, and the state refused to recognize that cause of action, there remained nothing to which any grant of federal jurisdiction could attach, the court concluded.

The decision is Holster v. Gatco, Inc., CCH Privacy Law in Marketing ¶60,523.

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

Sherman Act Did Not Preempt Wisconsin’s Gasoline Pricing Regulations

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

The U.S. Court of Appeals in Chicago last week ruled that Wisconsin’s gasoline pricing regulations under the Wisconsin Unfair Sales Act did not violate federal antitrust laws. The Wisconsin Unfair Sales Act, which prohibits retailers of motor vehicle fuel from selling the fuel below cost, was not unconstitutional on the ground that it was preempted by the Sherman Act.

To be preempted, the state regulatory scheme had to irreconcilably conflict with the federal scheme, the appellate court explained. The Act requires similar markups by wholesalers and refiners who sell motor vehicle fuel at retail.

A supplier of motor vehicle fuel, which maintained that it could sell motor vehicle fuel for substantially less than the statutory minimum and still make a profit, sued to enjoin enforcement of the minimum markup provisions of the Act as they related to motor vehicle fuel. The supplier argued that the motor vehicle fuel provisions facilitated price fixing by establishing a minimum price for gasoline among retailers, allowing competitors to meet but not beat others’ prices, and providing a private mechanism for enforcement. Wisconsin had created a scheme that allows retail sellers of gasoline to collude on prices to the detriment of consumers, it was alleged.

However, the Wisconsin Unfair Sales Act did not mandate or authorize Wisconsin gasoline dealers to engage in conduct that was illegal under the Sherman Act, the court ruled. The state set the minimum price formula, and the Act, on its face, did not require or authorize private participation in setting the minimum price. Thus, the minimum markup provisions were unilaterally imposed by the state and therefore not preempted by the Sherman Act.

Permanent Injunction Dissolved

A permanent injunction barring Wisconsin from enforcing the Act was dissolved, even though the state did not appeal the lower court’s decision in favor of the complaining supplier. In March 2009, Wisconsin Attorney General J.B. Van Hollen announced that his office would not appeal the district court’s decision striking down the “minimum markup law.” Van Hollen said in the statement that clarifying the statute was a task better left for the state legislature than the federal appellate court.

Trade Association Intervention

The Wisconsin Petroleum Marketers & Convenience Store Association (WPMCA), an organization representing more than 80 percent of the convenience stores in Wisconsin, did, however, file an appeal. The WPMCA was permitted to intervene after the state officials declined to appeal.

In a September 3 statement, the WPMCA said that “the decision marks the 10th time an appellate court has ruled in favor of keeping the law in place.”

The text of the September 3, 2010, decision in Flying J, Inc. v. J.B. Van Hollen, Attorney General of Wisconsin, No. 09-1883, will appear in CCH Trade Cases.

En Banc Rehearing Denied in Cipro Reverse Payment Patent Settlement Suit

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

Despite the urging of the federal antitrust enforcement agencies and 34 states, the full U.S. Court of Appeals in New York City will not consider an antitrust challenge to a settlement in a patent infringement lawsuit involving the antibiotic ciprofloxacin hydrochloride (Cipro).

The court on September 7 denied the petition filed by direct purchasers of Cipro for rehearing en banc of a three-judge panel's decision (2010-1 Trade Cases ¶76,989), which rejected antitrust claims based on a purported "pay-for-delay" settlement.

The Department of Justice, the FTC, and 34 states–led by Vermont, California, and Florida—had filed briefs with the court, calling for en banc review. (See June 8, 2010 posting on Trade Regulation Talk.)

Market-Sharing Agreement?

The plaintiffs challenged the patent settlement agreement between the owner of the patent for the active ingredient in Cipro and potential generic manufacturers of Cipro as an illegal market-sharing agreement. Under the settlement, Bayer, which holds the Cipro patent, agreed to pay Barr Labs—the alleged infringer—to settle the suit in exchange for Barr's agreement to stay out of the marketplace during the life of the patent, it was argued.

When the decision was handed down in April, the three-judge panel said that it was bound by an earlier Second Circuit decision—Joblove v. Barr Labs., Inc. (In re Tamoxifen Citrate Antitrust Litig.), 2006-2 Trade Cases ¶75,382.

In Tamoxifen, a divided court held that a reverse payment settlement of a patent lawsuit involving a drug used to treat breast cancer did not violate the antitrust laws. Under Tamoxifen, a settlement agreement did not exceed the scope of the patent and was valid where (1) there was no restriction on marketing noninfringing products; (2) a generic version of the branded drug would necessarily infringe the branded firm's patent; and (3) the agreement did not bar other generic manufacturers from challenging the patent.

Dissent

Judge Rosemary Pooler, who also dissented in the Tamoxifen case, issued a dissent. She said that the Tamoxifen decision "unambiguously deserves reexamination." Following the Tamoxifen decision, there "was a dramatic surge in the practice of pharmaceutical patent holders paying potential competitors to concede the validity of their patents," according to the dissent.

The September 7, 2010, order, In re: Ciprofloxacin Hydrochloride Antitrust Litigation, 05-2851-cv(L), will appear in CCH Trade Regulation Reports.

Air Cargo Firm Agrees to Plead Guilty to Price Fixing, Pay Criminal Fine

This posting was written by John W. Arden.

Polar Air Cargo LLC has agreed to plead guilty and to pay a $17.4 million criminal fine for its role in a conspiracy to fix prices in the air transportation industry, the U.S. Department of Justice announced on September 2.

The air cargo firm joined and participated in a conspiracy to fix the cargo rates charged to some customers for international air cargo shipments between the U.S. and Australia from at least as early as January 1, 2000 through April 30, 2003, according to a one-count felony charge filed in the U.S. District Court for the District of Columbia.

The Long Beach, California company carried out the conspiracy by agreeing on certain components of cargo rates during meetings, in conversations, and through communications with co-conspirators. As part of the conspiracy, Polar Air Cargo monitored and enforced adherence to agreed-upon rates.

The price fixing charges carry a maximum fine of $10 million for offenses committed before June 22, 2004. The fine may be increased to twice the gain derived from the crime or twice the loss suffered by victims of the crime, if either amount is greater than the statutory maximum fine.

In the plea agreement, which is subject to court approval, Polar Air Cargo agreed to cooperate with the Justice Department’s ongoing antitrust investigation.

Polar Air Cargo becomes the 17th airline charged in an ongoing investigation into price fixing in the air transportation industry. More than $1.6 billion in criminal fines have been imposed. Four executives have been sentenced to serve prison time, while charges are pending against three other executives.

Airlines that have pleaded guilty to antitrust charges are British Airways Plc, Korean Air Lines Co. Ltd., Qantas Airways Limited, Japan Airlines International Co. Ltd., Martinar Holland N.V., Cathay Pacific Airways Limited., SAS Cargo Group A/S, Societe Air France, Koninklijke Luchtvaart Maatschappij N.V. (KLM Royal Dutch Airlines), EL AL Israel Airlines Ltd., LAN Cargo Airlines Co. Ltd., Areolinhas Brasileiras S.A., Cargolux Airlines International S.A., Nippon Cargo Airlines Co. Ltd., Northwest Airlines LLC, and Asiana Airlines Inc.

Airline executives who have pleaded guilty are Bruce McCaffrey of Qantas, Keith Packer of British Airways, Franciscus Johannes de Jong of Martinair, and Timothy Pfeil of SAS.

In August 2009, Jan Lillieborg, former vice president of global sales for SAS Cargo, was indicted for participating in a conspiracy to suppress and eliminate competition by allocating customers and coordinating surcharge increases for international air shipments to and from the United States.

On August 26, 2010, Joo Ahn Kang, former president of Asiana, and Chung Sik Kwak, former vice president of the Americas region of Asiana, were indicted for participating in a conspiracy to suppress and eliminate competition by fixing passenger airfares for travel between the U.S. and Korea.

Agreement to Impose Licensing Restrictions Would Not Amount to Patent Misuse

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

The U.S. Court of Appeals for the Federal Circuit, sitting en banc, has decided that an alleged agreement between potential competitors to impose licensing restrictions that suppressed an alternative technology for recordable and rewritable compact discs (CDs) would not amount to patent misuse.

A CD maker that admitted to infringement appealed an International Trade Commission (ITC) decision that banned the company from importing recordable and rewritable CDs, following a complaint from patent holder U.S. Philips Corporation. The divided appellate court sustained the ITC’s decision that the patent misuse doctrine did not bar Philips from enforcing its patent rights against the CD maker.

Patent Misuse Doctrine

The majority opinion explained that the patent misuse doctrine limited a patentee’s right to impose conditions on a licensee that exceeded the scope of the patent right. The court ruled that even if an agreement existed between Philips and potential rival Sony Corporation to suppress the technology embodied in a Sony patent, such an agreement would not constitute patent misuse and would not be a defense to Philips’s claim of infringement against the CD maker.

Such an agreement would not have had the effect of increasing the physical or temporal scope of the patent in suit, which was prohibited under the patent misuse doctrine, the court explained.

The assertion of misuse arose not from the terms of the license itself but rather from an alleged collateral agreement between the competing developers. Moreover, the agreement did not have the effect of suppressing potentially viable technology that could have competed with the chosen standards.

Noting that “courts and commentators have questioned the continuing need for the doctrine of patent misuse, which had its origins before the development of modern antitrust doctrine,” the court said that proof of an antitrust violation “does not establish misuse of the patent in suit unless the conduct in question restricts the use of that patent and does so in one of the specific ways that have been held to be outside the otherwise broad scope of the patent grant.”

Dissent

The dissent framed the question at issue as whether the existence of an antitrust violation—in the form of an agreement to suppress an alternative technology designed to protect a patented technology from competition—constitutes misuse of the protected patents. The dissent contended that the majority's holding that it did not constitute patent misuse seemed “directly contrary to the Supreme Court’s view of patent misuse in its recent Illinois Tool Works decision [2006-1 Trade Cases ¶75,144, 126 S.Ct. 1281], where the Court concluded that `[i]t would be absurd to assume that Congress intended to provide that the use of a patent that merited punishment as a felony [under the Sherman Act] would not constitute “misuse.’”

Federal Trade Commission Amicus Brief

The Federal Trade Commission had filed an amicus brief in the case, stating that, to the extent the court draws on antitrust law to resolve the patent misuse claim, it should recognize that pro-competitive efficiencies could justify some competitive restraints, but only if they were reasonably necessary to facilitate a productive collaboration between companies, such as a joint venture to invent, develop, and commercialize new technologies.

The brief also emphasized that, under the flexible rule of reason framework, some inherently suspect business practices may be deemed anticompetitive without any elaborate analysis of market power or proof of actual harm to competition. The agency did not side with any party and did not take a position on whether other patent law considerations might warrant applying different standards than those used in antitrust law.

A copy of the February 16 filing can be found here on the FTC website.

American Antitrust Institute Amicus Brief

In its January 2010 amicus brief, the American Antitrust Institute (AAI) urged the Federal Circuit to treat agreements by potential competitors in a patent pool not to license their patents outside the pool as “inherently suspect” and therefore grounds for patent misuse. AAI contended that Philips failed to rebut the presumption that its agreement with Sony to include the Sony patent in the pool was unreasonable.

A copy of the brief appears here on the AAI website.

The August 30 decision in Princo Corporation v. International Trade Commission, 2007-1386, will appear at 2010-2 Trade Cases ¶77,147.

Drug Manufacturer's Alleged Patent Scheme May Have Violated Sherman Act

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

The manufacturer of a branded constipation drug could have violated federal antitrust law by allegedly improperly listing an invalid patent on the drug in the U.S. Food and Drug Administration (FDA) Orange Book and then filing infringement litigation against companies seeking to market generic versions, the federal district court in Wilmington, Delaware, has ruled.

An argument that the alleged conduct was protected under the Noerr-Pennington doctrine was rejected. The manufacturer’s motion for dismissal of the suit was denied.

The putative class of direct purchasers sufficiently alleged that the manufacturer's overall scheme to forestall competition and illegally maintain its monopoly power with respect to the drug constituted a violation of Sec. 2 of the Sherman Act, the court determined.

The purchasers alleged that during and prior to the proposed class period, the manufacturer held a 100 percent share of the market for the drug. The scheme further consisted of the manufacturer obtaining a non-exclusive license to the patent, which it considered invalid, and its outright purchase of that patent only after having listed it in the Orange Book despite its presumed invalidity.

Antitrust Injury

The asserted conduct caused antitrust injury to purchasers, the court held. As a result of the alleged scheme, the approval process for a generic competitor was delayed by the FDA. This purportedly caused the putative class of purchasers to pay more than they otherwise would have paid for the drug during the exclusionary period.

The emergence of generics typically resulted in price competition that enabled drug purchasers both to buy generic versions of a drug at a substantially lower price and to buy the branded version at a reduced price, the court explained.

The plaintiffs' allegations were of the type that generally passed muster in the context of causation. The complaint sufficiently conveyed a causal nexus between the alleged injury and the manufacturer's purportedly monopolistic behavior, the court added.

Noerr-Pennington Immunity

The drug purchasers' claims were not barred under the doctrine of Noerr-Pennington immunity, which shields from antitrust liability individuals' efforts to petition the government for redress. The infringement litigation could have been objectively baseless, thereby falling outside the protection of the doctrine.

The purchasers demonstrated by clear and convincing evidence the lack of any objectively reasonable argument that the patent was valid. Thus, the manufacturer knew or should have known that it was invalid when pursuing the infringement suit, in the court's view.

The decision is Rochester Drug Co-Operative, Inc. v. Braintree Laboratories, 2010-1 Trade Cases ¶77,140.