Indictment Charges Former Airline Executives with Conspiracy to Fix Fuel Surcharges

This posting was written by John W. Arden.

Four former airline executives have been charged with a conspiracy to fix surcharges on air cargo shipments from the U.S. to South and Central American, following Hurricanes Katrina and Rita, in a one-count indictment returned yesterday in the federal district court in Miami.

Guillermo “Willy” Cabeza, George Gonzales, Rodrigo Hernan Hildalgo, and Luis Juan Soto allegedly conspired to suppress and eliminate competition by agreeing to impose an increase to fuel surcharges on air cargo from September 2005 to at least November 2005.

According to the indictment, the four executives engaged in discussions—including during a meeting near Miami’s Kendall-Tamiami Executive Airport—agreeing to impose an increase in fuel surcharges; participated in communications to implement and monitor the agreement; and accepted payments at collusive and noncompetitive rates.

The former executives are charged with price fixing in violation of the Sherman Act, which carries a maximum penalty for each individual of 10 years in prison and a $1 million fine. A fine may be increased to twice the gain derived from the crime or twice the loss suffered by victims of the crime.

Cabeza and Soto are former presidents of Miami-based air cargo carriers. Gonzales is the former chief commercial officer of a Peruvian air cargo carrier. Hildalgo is the former vice president of sales and marketing of a Miami-based air cargo carrier.

The indictment is the result of the Justice Department’s ongoing investigation into price fixing in the air transportation industry. Thus far, 18 airlines and 14 executives have been charged. More than $1.6 billion in criminal fines have been imposed, and four executives have been sentenced to serve prison time. Charges are pending against 10 individuals.

Further information is available here on the Department of Justice Antitrust Division’s website.

FTC Should Expand Coverage, Streamline Disclosures of Business Opportunity Rule: Staff

This posting was written by John W. Arden.

The Federal Trade Commission should expand coverage of its Business Opportunity Rule to cover work-at-home businesses and streamline required disclosures in an “easy-to-read” document, the FTC staff recommended in a report released today.

The proposed changes are intended to make it easier for legitimate business opportunity sellers to comply with the rule, while continuing to protect business opportunity purchasers from fraud, according to the report.

Text of the 174-page staff report, a news release, and the Federal Register notice appears on the FTC website. The Commission solicited public comment on the staff report through January 18, 2011.

Franchise Rule Revision

On January 23, 2007, the FTC approved the first revision of the 1979 franchise disclosure rule (16 CFR Part 436, “Disclosure Requirements and Prohibitions Concerning Franchising”). At the same time, the agency issued an interim rule for business opportunity ventures (16 CFR Part 437, “Disclosure Requirements and Prohibitions Concerning Business Opportunities”). Previously, the franchise rule covered the sale of both franchises and business opportunities.

Notice of Rulemaking

The FTC had published a Notice of Proposed Rulemaking for a separate, narrowly-tailored trade regulation rule covering business opportunity sales (“Business Opportunity NPR,” 71 Federal Register 19054, April 12, 2006).

The agency received more than 17,000 comments, the overwhelming majority from the multi-level marketing industry, which expressed concerns about the burdens the proposed rule would have on them. The Commission also received 187 comments from individual consumers and consumer groups in favor of the proposal.

It published a revised Notice of Proposed Rulemaking in 2008 (73 Federal Register 16,110, March 28, 2008) and conducted a public workshop on June 1, 2009 on the proposed amended disclosure requirements.

Contents of Report

The report summarizes the rulemaking record to date, analyzes the alternatives, and sets forth the staff’s recommendations for the proposed rule and the disclosure form to be used under the rule. The report has not been endorsed or adopted by the Commission.

Staff recommendations included that the Commission should retain the business opportunity rule, that enforcement history demonstrated a need for the rule, compliance with the proposed rule is less burdensome than compliance with the current rule, and that the proposal avoids broadly covering all multi-level-marketing companies.

Under the proposal, business opportunity sellers would be required to make disclosures of information to potential buyers in a one-page document in English or Spanish. The information includes identifying information of the seller, an indication of whether the seller was making earnings claims, legal actions within 10 years, any cancellation or refund policy, and contact information of 10 business opportunity purchasers within the last three years.

The proposed disclosure document appears in English and Spanish on the FTC website.

Public Comments

Interested persons may submit comments on the staff report through January 18, 2011. Comments filed in electronic form should be submitted here. Comments filed in paper form should be mailed or delivered to: Federal Trade Commission/Office of the Secretary, Room 113, Annex S, 600 Pennsylvania Avenue, NW, Washington, D.C. 20580.

Overpayment Caused By Deceptive Ad Could Be Recoverable Under Massachusetts Law

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

A baby formula purchaser stated a Massachusetts Consumer Protection Act (CPA) claim against the formula manufacturer that allegedly engaged in unlawful and deceptive advertising, according to the federal district court in Boston.

Mead Johnson & Company sent out direct mailings and developed print advertisements for its Enfamil LIPIL baby formula, stating that it was the only formula on the market that improved brain and eye development and contained two important nutrients.

The purchaser alleged that she and other consumers chose to pay more for Enfamil than for other brands based on these statements and that the statements were deceptive because other brands of baby formula contained the nutrients as well. Accordingly, the purchaser filed a class action under the CPA.

Pleading Requirement

To state a CPA claim, the purchaser needed to meet the heightened pleading standard of Federal Rule of Civil Procedure 9(b). The manufacturer argued that the purchaser failed to meet the Rule 9(b) standard by not including (1) the exact amount of loss, (2) the advertisements that were untrue as opposed to misleading, and (3) the dates of the advertisements.
It was sufficient to allege that the purported class consisted of purchasers that bought the baby formula from September 25, 2005 to the present and to include copies of the advertisements.

Ascertainable Injury

Some Massachusetts courts have held that overpayment for a product is not a recoverable injury where the purchaser no longer has the products and did not suffer any other injury from the product. However, the federal district court rejected the magistrate judge’s recommendation that the claim be dismissed for lack of injury.

The Massachusetts Supreme Judicial Court has held that overpayment was recoverable if the underlying advertisement was false. The facts of the case were more analogous to cases in which the purchaser had standing based on pleading of an injury stemming from his decision to pay a higher price because of a company’s advertising.

Puffery

A jury could find the statements made in the advertising deceptive because a reasonable consumer would have chosen the Enfamil over cheaper products because of the advertising. Finally, it was reasonable to rely on the statements made in the advertising because they were specific enough to be interpreted as more than a mere opinion or puffery.

The decision is Martin v. Mead Johnson Nutrition Co., CCH State Unfair Trade Practices Law ¶32,145.

Further information regarding CCH State Unfair Trade Practices Law appears here.

Online Retailer Faces Class Action for Allegedly Negligent Rebate Ad

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

An online purchaser established that class certification should have been granted on claims that online retailer Buy.com misleadingly advertised a $30 Connect 3D memory card with a $30 rebate, which Connect 3D failed to pay, a California appellate court has ruled.

The purchaser alleged negligent misrepresentation and violations of the California Unfair Competition Law and the California Consumers Legal Remedies Act (CLRA).

The class was defined in the purchaser's memorandum of points and authorities as all persons in the United States who purchased a Connect 3D product from Buy.com, Inc. that included a rebate offer and whose rebate submissions were approved for payment, excluding anyone who was paid a rebate by Buy.com.

The trial court erred by holding that the class was not ascertainable because of an inconsistency with the class definition in a proposed order, the appellate court held.

While relief under the CLRA was limited to proposed class members who bought products for consumer use, the class could be certified even though some members of the class were not consumers, according to the court.

Nationwide Class, California Law

Even though the proposed class was nationwide, common issues of law predominated, the court found. A California choice-of-law provision in Buy.com’s terms of use agreement was applicable. Buy.com was headquartered in California. The allegedly misleading rebate information on Buy.com’s website originated from California. The due diligence Buy.com allegedly failed to perform would have been performed in California.

Buy.com unsuccessfully contended that the purchaser's claims were vague. The purchaser alleged that every member of the class must have seen and relied on Buy.com's negligent misrepresentations that the rebate was available.

The decision is Kershenbaum v. Buy.com, Inc., CCH Advertising Law Guide ¶64,005.

Treating Franchisee as Independent Contractor Violated Workers’ Compensation, Wage Laws

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

A franchisor of janitorial cleaning businesses violated Massachusetts law by improperly requiring the franchisee-employee to pay for insurance and by failing to pay the franchisee-employee within a week of the pay period during which the wages were earned, a federal district court in Boston has determined. A group of the franchisees filed suit against the franchisor as representatives of a putative class action.

Misclassification

In an earlier ruling (Business Franchise Guide¶14,349), the court held that the franchisor had misclassified the franchisees as independent contractors.

The franchisee-employee argued that five categories of fees were improperly withheld from his wages by the franchisor due to this misclassification, despite the fact that he agreed to those fees in his franchise agreement. The five categories were:

(1) Franchise fees;

(2) Royalty and management fees;

(3) Insurance;

(4) Supplies and equipment; and

(5) Chargebacks—fees charged by the franchisor to its cleaning workers when a customer did not pay its bill for cleaning services.

Damages

The franchisor argued that the franchisee-employee was entitled only to damages incurred directly from the misclassification and that the fees were not directly related to the misclassification because they were the result of a freely undertaken contractual obligation.

The franchisor was correct that damages incurred must relate to the classification; however, there were certain statutory costs that a Massachusetts employer must bear, the court noted. Under Massachusetts law an employer was required to contribute to workers’ compensation insurance in the event that an employee was injured on the job. Had the franchisor provided the franchisee-employee with its statutorily mandated workers’ compensation insurance, the franchisee-employee would not have had to purchase the extensive liability insurance required by the parties’ agreement.

To the extent that the franchisee-employee paid premiums for insurance that the franchisor was statutorily required to provide, the franchisee-employee was damaged by his misclassification, the court ruled.

Similarly, the franchisor’s use of chargebacks was an attempt to circumvent the Massachusetts Wage Act. Under the parties’ agreement, the franchisor "advanced" wages to the franchisee-employee after he provided cleaning services, but did not consider the wages earned until the customer paid its bill.

The franchisee-employee had completed his job when he had performed all of the cleaning services that it required. At that time, he earned his wage. To impose an additional contingency of payment from a customer on the franchisee-employee, particularly where he had no involvement in collecting the payment, was an improper attempt by the franchisor to exempt itself from the Wage Act, the court held.

Although the franchisor improperly withheld chargebacks from the employee, all such wages were subsequently repaid. Nonetheless, such repayments were made after the statutory period. Thus, the franchisee-employee was entitled to interest on the chargebacks prior to their repayment.

Public Policy Towards Franchising

The franchisor’s system of doing business pursuant to which the franchisor would bill the cleaning clients and then remit payment to its franchisee-employees was not unlawful as against public policy under Massachusetts law, the court ruled.

The franchisee-employee plaintiff pointed out that the franchisor’s system of doing business was essentially to charge employees for performing work. The franchisee-employee argued that, although the Massachusetts legislature had not spoken on the issue, such a system must be against public policy in Massachusetts and that, at least in the cleaning industry, a franchise system must be unlawful. However, such a public policy argument required some indication from the Massachusetts legislature, executive, or judicial branches that the system was unlawful, according to the court.

Instead, there was no indication from any branch of the government that the franchise distribution system was disfavored. Indeed, the franchisor pointed to numerous statutes that appeared to condone a franchise distribution system, the court noted.

The decision is Awuah v. Coverall North America, Inc., CCH Business Franchise Guide ¶14,473.

Certification of RICO Class of Prescription Drug Purchasers Reversed

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

A district court abused its discretion by certifying a class of labor unions and insurance companies that allegedly paid too much for the prescription drug Zyprexa, the U.S. Court of Appeals in New York City has ruled.

According to the plaintiffs, drug manufacturer Eli Lilly misrepresented the safety and efficacy of Zyprexa, which resulted in a greater demand and a higher price for the drug.

The plaintiffs’ RICO claims were inappropriate for class treatment, however, because common issues of reliance and causation did not predominate over individual issues.

Predominance

Common issues predominated when the resolution of common legal or factual questions, such as injury and proximate cause, could be achieved through generalized proof, and when those issues were more substantial than the issues that were subject to individualized proof, the court noted. In this case, a generalized proof of proximate cause was not possible under the plaintiffs’ “excess price” theory of injury.

The plaintiffs described a chain of causation in which the manufacturer distributed misinformation about Zyprexa, doctors relied on that misinformation and prescribed the drug for their patients, and then plaintiffs, as third-party payors (TPPs), paid an excessive price for the patients’ prescriptions.

Link Between Misrepresentations, Overpayment

This narrative, the court observed, skipped over several steps and obscured the attenuated link that existed between the alleged misrepresentations that were made to doctors and the overpayment injuries that were incurred by the plaintiffs.

Before the TPPs made any payments, for example, they: (1) relied on the advice of pharmacy benefit managers and their own Pharmacy and Therapeutics Committees in placing the drug on their formularies and (2) failed to negotiate a lower price for the drug.

The plaintiffs’ theory of liability thus rested on the independent actions of third and even fourth parties, the court explained. Moreover, the TPPs alone were in a position to negotiate a lower price for Zyprexa.

Therefore, proximate cause with respect to price could have been shown through reliance by the TPPs alone; it could not have been shown through reliance by the doctors, according to the court.

Causation

Doctors did not generally take price into consideration when they made decisions regarding prescriptions. Therefore, even if proximate cause with respect to price could have been shown through doctor reliance, that reliance did not constitute a but-for cause of the excessive price that the plaintiffs had paid for each prescription, in the court’s view.

The decision is UFCW Local 1776 v. Eli Lily and Co., CCH RICO Business Disputes Guide ¶11,936.

Further information about CCH RICO Business Disputes Guide appears here.

New York Law Implementing Tobacco Settlement Not Shown to Violate Federal Antitrust Laws

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

Earlier this week, the U.S. Court of Appeals in New York City rejected claims that New York’s Escrow and Contraband Statutes—which were enacted in furtherance of a 1998 Master Settlement Agreement (MSA) between cigarette manufacturers and the states—violated the federal antitrust laws. Judgment in favor of the defendants (2009-1 Trade Cases ¶76,504, 592 F. Supp. 2d 684) was affirmed.

The litigation began in 2002. The putative class action was brought by cigarette importers, who were not participants in the MSA. They contended that the challenged statutes coerced manufacturers who had not joined the MSA to join the alleged market-sharing agreement set up by the MSA. According to the plaintiffs, under the MSA, participating manufacturers fixed and maintained inflated prices and penalized gains in market share.

The Escrow Statute required each cigarette manufacturer either (1) to join the MSA as a participating manufacturer or (2) to make annual payments into a state escrow fund. It required cigarette manufacturers to make per-cigarette payments to the state according to a statutorily specified formula.

The Contraband Statute enforced these payment obligations by requiring cigarette manufacturers to certify their compliance with the Escrow Statute.

At the outset, the appellate court rejected the notion that the Sherman Act preempted the New York statutes. The plaintiffs failed to prove that the challenged statutes granted regulatory power to private parties in violation of the antitrust laws that caused them injury. According to the appellate court, the plaintiffs merely showed that the challenged statutes operated as a flat tax that was imposed on manufacturers who had not joined the MSA and whose only arguably “anti-competitive” effect was to raise cigarette prices.

State Action Immunity

The importers' failure “to prove that New York’s Escrow and Contraband Statutes authorize[d] Sherman Act violations obviate[d] the need for detailed analysis of whether their alleged anti-competitive aspects [we]re clearly articulated, affirmatively expressed, or actively supervised,” according to the court. However, it considered these factors in concluding that any potentially anti-competitive aspects of the statutes were shielded from antitrust attack under the state action doctrine.

The appellate court agreed with an approach taken by a number of its sister circuits—that the MSA and statutes enacted in furtherance of it constitute unilateral state action exempt from the application of the antitrust laws. However, “out of an abundance of caution,” it applied the Midcal test to determine whether the conduct was state action immune from antitrust preemption.

The challenged statutes were clearly articulated and affirmatively expressed as state policy. Moreover, New York’s control and active enforcement of escrow payment obligations satisfied the requirement that the conduct by actively supervised by the state. The legislative enactments of state policy neither mandated nor authorized private parties to exercise unsupervised power to restrain trade, the court held.

The October 18, 2010, decision in Freedom Holdings, Inc. v. Cuomo, Docket No. 09-0547-cv, will appear at 2010-2 Trade Cases ¶77,195.

Class Action Preferable to Thousands of Suits on Dietary Supplement Claims

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

A purchaser of the dietary supplement Relacore established that a class action, rather than the prosecution of thousands individual small claims, was the superior method for proceeding on allegations that Carter-Reed Company violated the New Jersey Consumer Fraud Act by falsely representing that the product would shrink belly fat and improve mood, among other benefits, the New Jersey Supreme Court has ruled.

The core issues were (1) whether common issues of law and fact predominated, (2) whether the class action was superior to a myriad of individually litigated cases, and (3) whether a class action—given the number of individual claims involved—was manageable.

Carter-Reed did not dispute that the claims met the class action requirements of numerosity, commonality, typicality, and adequacy of representation.

Predominance of Common Issues

Carter-Reed argued that the purchaser had challenged only the marketing of Relacore as a weight-reducing dietary supplement and that class certification inevitably would spawn a host of individual questions concerning why a particular consumer bought Relacore and whether the advertised benefits were realized.

However, the purchaser's detailed allegations asserted that Relacore provided none of the advertised benefits, that no sound scientific evidence supported Carter Reed’s representations about Relacore, and that Carter Reed’s entire marketing scheme was nothing more than a web of lies, according to the court.

A corporate defendant engaged in a marketing scheme founded on a multiplicity of deceptions should not be in a better position in fending off a motion for class certification than a defendant engaged in a sole marketing deception, the court reasoned.

The alleged out-of-pocket ascertainable loss was the purchase price of a bottle of Relacore. While individual questions remained as to the number of bottles purchased by each class member without refunds, these questions did not present an insuperable obstacle, the court found.

Superiority, Manageability

The class action was a superior means for resolving the dispute despite a 30-day refund policy that Carter-Reed offered in some of its advertising but that did not appear on Relacore packaging and labeling, the court determined.

Denying class certification on manageability grounds was disfavored in general and not in any way justified in this case, the court held. If discovery indicates that some of Carter's Reed's claims for Relacore were scientifically sound, then the trial court would have options including subdividing, or in a worst-case scenario, decertifying the class.

The burden would be on the plaintiff to provide the necessary evidence to support the allegations that justified the grant of class certification, the court observed.

The September 29 opinion in Lee v. Carter-Reed Co., LLC, will be reported at CCH Advertising Law Guide ¶64,004 and CCH State Unfair Trade Practices Law ¶32,144.

ABA Forum on Franchising Is “Healthy and Stable,” Says Chair

This posting was written by John W. Arden.

The American Bar Association Forum on Franchising remains “healthy and stable,” in spite of the nation’s economic woes and the ABA’s overall loss of membership, said Forum Chair Ronald K. Gardner during an October 15 “State of the Forum” address.

The group’s membership is down about two percent this year, a smaller decrease than experienced by the ABA overall. Attendance at last week’s annual meeting was up significantly from the 2009 meeting.

Last year, 650 attended the annual meeting in Toronto, nearly 200 fewer than the near-record number of 836 who attended the 2008 meeting in Austin. This year’s meeting, held at the Hotel Del Coronado near San Diego, rebounded to draw 746.

Financially, the Forum is “extraordinarily strong,” due to the efforts of Finance Officer Harris J. Chernow and his predecessors, said Gardner, managing partner of Dady and Gardner P.A. in Minneapolis.

“In the next couple of years, we hope to return to steady membership growth,” he said.

During the annual business meeting, the group elected new officers and governing committee members by adopting—by unanimous voice vote—the report and recommendation of the nominating committee.

Joseph J. Fittante, Jr. of Larkin Hoffman Daly & Lindgren Ltd. will serve as chair of the group from 2011 to 2013. Other members of the Governing Committee will be Kerry Bundy of Faegre & Benson (2011 to 2014); Eric Karp of Witmer Karp Warner & Ryan LLP (2011 to 2014); Kathy Kotel of Carlson Restaurant Worldwide (2011 to 2013); James Goneia of Aamco (2011 to 2013); Diane Green-Kelly of Reed Smith (2011 to 2013); and Michael Lindsey of Paul Hastings (2011 to 2013).

Highlights of the annual meeting included a plenary session entitled “Strategic and Tactical Decision-Making: What Do Your Peers Think of Your Decisions,” led by Kerry L. Bundy, Dr. Melissa M. Gomez, Harris Chernow, and Joseph Schumacher, and the Annual Franchise and Distribution Developments session, presented by Bethany L. Appleby and William K. Whitner.

Program co-chairs were Deb Coldwell of Hayes & Boone LLP and Kathy Kotel of Carlson Restaurants Worldwide, Inc.

The 2011 annual meeting is scheduled for October 18-21 at the Baltimore Marriott Waterfront Hotel in Baltimore. The program chairs will be Michael Lindsey and Karen Satterlee.

Barkoff, Selden Receive Rudnick Award from ABA Forum on Franchising

This posting was written by John W. Arden.

Rupert M. Barkoff and Andrew C. Selden are co-recipients of the second Lewis G. Rudnick Award for their contributions to the American Bar Association Forum on Franchising and the development of franchise law. The award was presented on October 14, during the Forum’s annual meeting in San Diego.

Barkoff, a partner in the Atlanta office of Kilpatrick Stockton LLP, and Selden, a shareholder in the Minneapolis office of Briggs and Morgan, are former chairs of the Forum on Franchising and members of the group’s governing committee.

In announcing the award before the opening session of the annual meeting, Forum chair Ron Gardner noted that both recipients practiced franchise law for nearly 40 years, have been consistently recognized as outstanding practitioners, have served as leaders and active members of the Forum, and together created the Fundamentals of Franchising, a signature program used to train novices about the intricacies of franchise law. They are co-editors of the book, Fundamentals of Franchising, which is in its Third Edition.

The Rudnick Award was created last year in remembrance of Lewis Rudnick, a founding member of the Forum and its second chair, who died in January 2009. He helped establish the Franchise Law Journal, the Forum’s quarterly publication. As senior partner of Rudnick & Wolfe (currently DLA Piper), he trained several generations of some of America’s leading franchise lawyers.

The Award is intended to honor those who have made substantial contributions to the Forum and to franchise law as a discipline, while comporting themselves in accordance with Lew Rudnick’s high standards of professionalism.

The inaugural Lewis G. Rudnick Award was presented to John R.F. Baer of Greensfelder, Hemker & Gale, P.C. at last year’s annual meeting.

Future Leaders Awards

In addition to the Rudnick Award, the Forum bestowed the 2010 Future Leader Awards to Dawn Newton of Fitzgerald Abbott & Beardsley LLP in Oakland, California and Jane Edmonds of Cassels Brock in Toronto.

Pop-up Ad Prior to Software Download Could Be Deceptive

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

Online purchasers of McAfee antivirus software stated plausible claims under the California Unfair Competition Law (UCL) that they were deceived by a pop-up ad into inadvertently purchasing a third-party product, the federal district court in San Jose has ruled.

After completing their McAfee purchase, but before downloading the McAfee software, the purchasers clicked a “Try It Now” button in a pop-up ad. Doing so enrolled them in a non-McAfee $4.95 per month subscription product called “PerfectSpeed,” as they discovered later upon noticing charges on their credit or debit card statements.

Billing Information Transfer

The pop-up was the result of a partnering arrangement between McAfee and Arpu, Inc., a company that places online advertisements that enable the purchase of products with a single click, in this case using the purchasers’ credit card information transferred from McAfee, according to the class action complaint. The purchasers alleged that McAfee received an undisclosed fee for each customer who subscribed to Arpu’s services through the ad on McAfee’s site.

The purchasers alleged that McAfee transfers the confidential billing information of its customers without adequately disclosing (1) the nature of the services to which customers are subscribing, (2) the consumer’s commitment to pay recurring monthly fees for the service, (3) the terms and conditions of the subscription service, (4) the identity of the billing party, and (5) the manner by which the customer may cancel the service.

Fraudulent, Unfair Business Practice Claims

The purchasers’ complaint describing the allegedly misleading web pages and pop-up ad was specific enough to give McAfee the notice required by the heightened fraud pleading standard under Rule 9(b) of the Federal Rules of Civil Procedure, the court determined.

In asserting that McAfee’s business practices were fraudulent under the UCL, the purchaser’s basic contention was that the pop-up ad led consumers to believe that clicking on it was a necessary step to download the McAfee software. While noting that visual cues in the pop-up—such as a “30 DAY FREE TRIAL” notice—tended to undermine the purchasers’ claims, the court nevertheless concluded that the purchasers alleged facts sufficient to state a plausible claim for relief.

The purchasers also stated a claim that McAfee’s business practices were unfair under the UCL because the deception was unscrupulous and caused injury to consumers which outweighed its benefits, the court held.

The court rejected the purchasers’ claim under the California Consumers Legal Remedies Act (CLRA) that the sale or lease of the PerfectSpeed software was a sale or lease of “goods” or “services” under the act. While acknowledging that the decision was a close call, the court observed that the CLRA expressly limited “goods” to tangible chattels.

To the extent the purchasers argued that the PerfectSpeed subscription should be considered a service, they did not allege enough facts as to the nature of the services provided to allow the court to draw that conclusion. McAfee’s motion to dismiss the CLRA claim was granted with leave to amend.

The October 5 opinion in Ferrington v. McAfee, Inc., Case No.: 10-CV-01455-LHK, will be reported at CCH Advertising Law Guide ¶64,007.

Jury’s Verdict Against Poultry Producer for Engaging in Unfair Practices Upheld

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

The U.S. Court of Appeals in Denver yesterday upheld a jury’s determination that the largest poultry integrator in Oklahoma engaged in unfair practices in violation of the Packers and Stockyards Act (PSA). In 2008, the Oklahoma jury awarded a group of chicken farmers more than $21 million on their claims under the relatively obscure law. The amount was, however, ultimately reduced by the district court to approximately $14.5 million.

The integrator, O.K. Industries, Inc., engaged in almost every stage of the production and wholesale of poultry, expect the raising of broiler chickens to slaughtering age. It entered into non-negotiable contracts with the chicken farmers or “growers” who raised the chickens, using only chicks and supplies provided by the integrator.

Section 202 of the PSA provides: “It shall be unlawful . . . for any live poultry dealer with respect to live poultry, to: (a) Engage in or use any unfair . . . practice or device . . . .”

The growers alleged that the integrator engaged in a series of unfair practices that had the effect of reducing production, depressing grower pay, and increasing resale prices. According to the growers, the integrator: (1) exercised extensive control over them in almost every aspect of production and pay; (2) increased the number of days between chicken flocks that it placed with them; (3) reduced the number of chickens per square foot of housing space or “bird density”; (4) exercised control over the specifications for the chicken houses; and (5) shared detailed information with other integrators that it did not share with the growers. The growers’ expert concluded that the integrator underpaid the growers by up to $14,511,935.

After concluding that it had jurisdiction to hear the appeal—an issue raised sua sponte—the appellate rejected the integrator’s argument that several trial errors required that the judgment be reversed and dismissed, or in the alternative, that a new trial be granted. The court noted that the integrator failed to properly preserve some of the issues for appeal.

Among the other rejected arguments on appeal was the integrator’s assertion that the growers failed to state a claim based on the integrator’s “strained interpretation of the phrase ‘with respect to live poultry’” in the PSA. According to the integrator, the PSA applied only to unfair practices involving chickens that had actually hatched. A practice that reduces chick production by incubating fewer eggs is a practice “with respect to live poultry” as much as a practice that reduces chick production by destroying chicks that have already hatched, the court explained. The integrator’s practices ultimately reduced the price it paid to the growers for live poultry, according to the court.

The October 13, 2010, decision in Been v. O.K. Industries, Inc., No. 08-7078, will appear at CCH 2010-2 Trade Cases ¶77,188.

“Smart Grid” Needs Consumer Education, Choice to Protect Privacy: Department of Energy

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

The long-term success of “Smart Grid” energy technologies depends upon understanding and respecting consumers’ reasonable expectations of privacy, security, and control over who has access to energy-usage data, the U.S. Department of Energy said in a report released October 5, 2010. The report, Data Access and Privacy Issues Related to Smart Grid Technologies, focuses on the ways legal and regulatory regimes are evolving to protect consumer privacy and choice, while promoting the growth of innovative energy-management services and technologies that rely on detailed energy-usage data.

Advances in Smart Grid technology could significantly increase the amount of information about personal energy consumption that is available to utility companies and third parties, the report found. For example, “advanced metering” technology that closely monitors electricity usage could reveal such personal details as consumers’ daily schedules, whether their homes are equipped with alarm systems, whether they own expensive electronic equipment like plasma TVs, and whether they use certain types of medical equipment.

“Consumers rightfully expect that the privacy of this information will be maintained,” the DOE said. At the same time, access to consumer data will be necessary to achieve the goals that Smart Grid technologies will advance, such as improved reliability in power delivery, reduced transmission costs, and increased energy efficiency.

According to the DOE, information privacy and access, in the context of a Smart Grid, are complementary values, rather than conflicting goals.

“The practical impact of a Smart Grid depends on its capacity to encourage and accommodate innovation,” the DOE said, “while making usage data available to consumers and appropriate entities and respecting consumers’ reasonable interests in choosing how to balance the benefits of access against the protection of personal privacy and security.”

Utility companies, the DOE said, should be able to access and use consumer-specific energy usage data (CEUD) for utility-related business purposes, such as managing their networks, coordinating with transmission and distribution-system operators, and billing for services. The report recommended, however, that consumers be able to choose whether to affirmatively opt in to any non-utility, third-party use of their CEUD through a secure and trustworthy process. In particular, according to the DOE, the practice of disclosing or selling CEUD to third parties for the purpose of targeted advertising should require affirmative and informed consumer consent.

Consumer education will be critical to the successful adoption and deployment of Smart Grid technologies like advanced metering, the DOE said.

“It is important for consumers to understand the long-term benefits of these technologies, like lowering energy bills,” the report stated.

The Federal Communications Commission’s National Broadband Plan issued last spring called for the DOE to study the privacy and access implications of Smart Grid technologies, and how they were likely to affect the communications needs of utilities. The report complements a companion DOE report, also released October 5, 2010, Informing Federal Smart Grid Policy: The Communications Requirements of Electric Utilities.

Full text of the DOE’s report, Data Access and Privacy Issues Related to Smart Grid Technologies, is available here on the DOE’s website and will be published in CCH Privacy Law in Marketing.

Preliminary Injunction Denied in Private Suit to Block Airline Merger
This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

After the merger of UAL Corporation, parent of United Airlines, and Continental Airlines, Inc, received regulatory approvals from the Department of Justice, the Department of Transportation, and the European Commission, the federal district court in San Francisco rejected a request for a preliminary injunction blocking the merger in a private suit.

Forty-nine named plaintiffs who had purchased commercial air travel for personal use, and intended to purchase tickets in the future, sought the temporary relief pending trial on the merits.

A private plaintiff may obtain injunctive relief upon a showing of threatened loss or damage, and only when the antitrust injuries are personal. To advance the requisite showing of an antitrust violation—and thereby warrant injunctive relief—both the existence of a relevant market and the pending acquisition’s likelihood of causing anticompetitive effects had to be established.

Relevant Market

The plaintiffs failed to define a valid relevant market for purposes of evaluating the competitive effects of the transaction. The court rejected the three proposed alternative relevant markets:

(1) A market for business passengers served by “network carriers,” characterized as airlines operating on a “hub-and-spoke” business model;

(2) A market of 13 “airport-pairs,” as opposed to “city-pairs”; and

(3) A market consisting of the United States airline industry as a whole.

“Despite a vigorous and forceful attempt, plaintiffs have not carried their burden, under any injunctive relief merits standard, of demonstrating the existence of a viable relevant geographic and product market,” the court said.

The plaintiffs failed to show why "low cost carriers" or LCCs, which traditionally operate on a point-to-point basis, focus on high density routes rather than small communities, and utilize a single aircraft type, should be excluded from a relevant product market limited to business passengers served by network or legacy carriers. The substantial evidence suggested that the LLCs should not be excluded.

With respect to the proposed market defined by "airport-pairs," the expert for the plaintiffs contended that there were "time-sensitive passengers" who were willing to pay more for access to a preferred airport in a particular metropolitan area. Even if some passengers would not use an alternative airport, city-pairs remained the appropriate market, according to the court. Competition from adjacent airports disciplined pricing and had to be considered when defining the relevant market. According to the defendants' expert, twelve of thirteen airport-pairs cited by the plaintiffs' expert were subject to competition from adjacent airports. The court questioned the plaintiffs' expert's "failure to conduct any significant economic or other analysis."

As for the third proposed market, the court said that it "can be more quickly dispatched than the two previously discussed alternatives." The proposed nationwide market failed to examine individual markets involving passenger origins and destinations. Boundaries of a product market were determined by the reasonable interchangeability for or the cross elasticity of demand between the product itself and substitutes for it. The plaintiffs failed to show how, for example, a flight from San Francisco to Newark would compete with a flight from Seattle to Miami, the court explained.

Standing, Injury

Although the plaintiffs had established standing as consumers of airline tickets, they failed to establish any significant harm they would personally suffer that would warrant preliminary injunctive relief. The plaintiffs failed to demonstrate any irreparable harm as a result of the merger or that the balance of equities tipped at all, let alone sharply in their favor.

The plaintiffs did not demonstrate in any way that they themselves would suffer any specific harm were preliminary injunctive relief denied. Because the plaintiffs failed to satisfy their burden on the merits and failed to prove irreparable harm, the court denied the motion for a preliminary injunction.

The decision is Malaney v. UAL Corporation, 2010-2 Trade Cases ¶77,187.

Focus on Franchising

This posting was written by John W. Arden.

News and notes on franchising and distribution topics:

□ The New Brunswick Franchises Act will come into force on February 1, 2011, three-and-a-half years after receiving Royal Assent, according to Osler, Hoskin & Harcourt LLP. The statute (Bill 32) requires franchisors to make presale disclosures to prospective franchisees, imposes a duty of good faith and fair dealing on parties to franchise agreements, and guarantees franchisees the right of association. On June 10, 2010, New Brunswick published two franchise regulations. The first (Regulation 2010-92) established disclosure requirements similar to those of Ontario, Alberta, and Prince Edward Island, while the second (Regulation 2010-93) sets out a mediation procedure. Under the procedure, a party to a dispute may notify the other of the nature of the dispute and the desired outcome. The parties must attempt to resolve the dispute within 15 days. If it is not resolved, a notice to mediate may be delivered and the parties must then follow the mediation process set out in the regulation, which includes an option to decline by the party receiving the notice of mediation.

□ Tunisia has enacted two laws that form the framework of franchise regulation in that country, according to a Nixon Peabody Franchise Law Alert. Law No. 2009-69, enacted on August 12, 2009, defined a franchise agreement and franchise network and required a franchisor to provide a disclosure document to a prospective franchisee 20 days before an agreement is signed. Decree No. 2010-1501, enacted on June 21, 2010, lists the information that the disclosure document must contain, including the legal structure of the franchisor’s business, identity and address of the franchisor, history of the franchisor’s business, trademark registrations, a list of current and former franchisees in Tunisia, the nature and amount of investment required for the franchise business, and the franchisor’s financial statement. The Decree further requires franchise agreements to set out the rights and obligations of the franchisor and franchisee with respect to services provided by the franchisor, payments required of the franchisee, term of the franchise agreement, and conditions for renewal, termination provisions, and the geographical scope of the exclusive use of the trademarks. Further information can be found here in the September 29, 2010 Franchise Law Alert.

□ Although it seems hard to believe at times, some businesses have more than survived the Not-So-Great Recession. One of these success stories has been McDonald’s Corporation, which recently reported a 4.6% annual sales increase at stores open at least 13 months. According to an article posted on the Mintlife website (“How McDonald’s Thrived During the Recession,” September 21, 2010), the hamburger giant used the following strategies to prosper during the tough economic times:

Recession-friendly pricing. As early as November 2008, observers recognized the importance of McDonald’s “recession-friendly” Dollar Menu. “When recession strikes, cost becomes paramount.”

New Products for Different Markets. The introduction of new products-–from salads and premium coffee to fruit smoothies--gave more people a reason to visit the Golden Arches.

Reduced Advertising Costs. The franchisor took advantage of lower local television advertising rates to put on an all-out promotional blitz without having to substantially increase its advertising spend.

Improved Operations. Spurred on by President and CEO Ralph Alvarez, McDonald’s focused on improving operations and increasing efficiency throughout the company.

Rapid Price Adjustments. The fast food leader began using computer systems for in-store decision-making to rapidly adjust prices based on current customer demand.

Supreme Court Opens New Term by Declining Review of Four Antitrust Decisions

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

On the opening day of its 2010-2009 term, the U.S. Supreme Court denied review of four antitrust decisions involving price discrimination, price fixing, and conspiracy to restrain trade.

Price Discrimination

Left standing by the court was a decision of the U.S. Court of Appeals in Philadelphia (2010-1 Trade Cases ¶76,865), rejecting a food distributor’s price discrimination claims against food manufacturer Michael Foods, Inc. and favored food service management company Sodexo, Inc.

The appellate court had ruled that the complaining regional food distributor and Sodexo—the world's largest food service management company—were not "competing purchasers" for purposes of the Robinson-Patman Act.

The food distributor asked the Supreme Court specifically whether, in order to establish competitive injury under the Robinson-Patman Act, a plaintiff had to prove that the favored and disfavored purchasers bought discriminatorily priced products at the exact same moment at which they or their customers competed to resell those products.

The petition is Feesers, Inc. v. Michael Foods, Inc., Docket No. 09-1499, cert. filed June 2, 2010, review denied October 4, 2010.

Price Fixing

The Court refused to review a decision of the U.S. Court of Appeals in Philadelphia (2010-1 Trade Cases ¶76,893) rejecting a terminated motor vehicle dealer’s price fixing claims against auto maker Mercedes-Benz. The decision affirmed summary judgment in favor of the automobile manufacturer on the dealer’s antitrust counterclaims.

The dealer questioned (1) whether the lower courts’ rulings were contrary to antitrust summary judgment precedent and (2) whether requiring a damage expert to independently verify antitrust liability was contrary to antitrust law and rules regarding the admission of expert testimony.

The petition is Coast Automotive Group, Ltd. v. Mercedes Benz, U.S.A, Dkt. 09-1509, cert. filed June 8, 2010, review denied October 4, 2010.

Filed Rate Doctrine

Home purchasers were denied review of a decision of the U.S. Court of Appeals in New Orleans (2010-1 Trade Cases ¶76,968), barring price fixing claims against title insurers under the federal “filed rate” doctrine.

The home purchasers—alleging a conspiracy to fix the price of title insurance—questioned (1) whether the federal "filed rate" doctrine bars Texas state antitrust and state unfair practices claims where Texas law expressly forbids these practices and (2) whether a federal court of appeals should have addressed or certified to the Texas Supreme Court the key unresolved questions of whether the plaintiffs’ Texas state law claims are barred by Texas law.

The petition is Winn v. Alamo Title Insurance Co., Dkt. 10-19, cert. filed June 28, 2010, review denied October 4, 2010.

Preemption

The Court will not review a California appellate court decision (2010-1 Trade Cases ¶77,065), holding that California Cartwright Act claims against Federal Communications Commission (FCC) licensees were preempted by the Federal Communications Act.

The state appellate court upheld dismissal of allegations that the FCC licensees hoarded or warehoused licenses and made misrepresentations to the FCC in order to retain licenses.

Complaining licensees asked (1) whether any or all state-law claims for damages, arising out of fraud, tortious interference with contractual relations and unfair competition, which are in some way associated with an FCC-issued license, are state “regulation” of rates and market entry; (2) whether preemption is limited to only those claims that directly affect the regulation of rates and market entry; and (3) whether the Federal Communications Act’s savings clause for actions arising under antitrust law applies to claims under both state and federal antitrust law.

The peitition is Havens v. Mobex Network Services, LLC, Dkt. 09-1518, cert. filed June 10, 2010, review denied October 4, 2010.

Retail Chain’s Data Security Breach Did Not Injure Customers

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

Retail grocery chain customers whose financial information was stolen during a breach of the chain's computer system did not sustain actual harm and could not pursue claims for negligence and implied contract under Maine common law, according to Maine’s highest court.

The customers asserted that they were injured by Hannaford's failure to prevent and notify them of the breach.

Dealing with Fraudulent Charges

The expenditure of time and effort to identify and remediate fraudulent charges on their credit and debit card accounts did not constitute a cognizable injury, in the absence of physical harm, economic loss, or identity theft, the court held.

The time and effort expended by the customers represented the ordinary frustrations and inconveniences confronted by everyone in daily life, the court said. The question had been certified to the court by the federal district court in Portland, Maine (CCH Privacy Law in Marketing ¶60,382).


The decision is In re Hannaford Bros. Co. Customer Data Security Breach Litigation, CCH Privacy Law in Marketing ¶60,534.

Further information about CCH Privacy Law in Marketing appears here.

FTC Seeks Comments on Proposed Revisions to “Green Guides”

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

Marketers use unqualified general environmental marketing claims--such as “green” and “eco-friendly”--at their peril, according to the Federal Trade Commission. Consumers could interpret unqualified claims as suggesting that the product had no negative environmental impact.

In an effort to educate marketers, the agency today released a proposed, revised version of its “Green Guides” emphasizing the importance of qualifying general environmental benefit claims.

Examples of qualified-general claims include: “ green--made with renewable materials” and “eco-friendly—made with recycled materials.” The guidance states that marketers must use clear and prominent qualifying language to convey to consumers that a general environmental claim refers only to a specific and limited environmental benefit.

As the FTC works toward issuing final guidelines for environmental marketing claims, the proposed, revised guidelines were released for public comment until December 10. The agency stressed that the guidelines apply to business-to-business transactions and not just business-to-consumer marketing and said that it would attempt to increase businesses' familiarity with the revised guides through various outreach programs.

The revised proposal has been in the works for some time. The agency last revised the Green Guides in 1998. In November 2007, the FTC sought comment on a number of general issues, including the continuing need for and economic impact of the guides, the effect of the guides on the accuracy of environmental claims, and whether the Commission should provide guidance on certain environmental claims--such as carbon neutral, sustainable, and renewable--not previously addressed in the guides. The agency also held three public workshops to explore emerging environmental marketing claims.

In addition, the agency contracted with a private consumer research firm to conduct a study in 2009 to determine how consumers perceive claims such as "green" and "eco-friendly." The Commission's consumer perception study is available here on the FTC website.

Certifications and Seals of Approval

In addition to offering new guidance on "renewable energy" claims, "renewable materials" claims, and "carbon offset" claims, the revised guidelines have a new section devoted to the use of certifications and seals of approval to communicate environmental claims.

The agency cautions marketers against using unqualified seals or certifications. Marketers should accompany seals or certifications with clear and prominent language limiting the general environmental benefit claim to the particular attribute or attributes for which they have substantiation, according to the agency.

Conflicts with Other Federal, State Policies

The agency addressed business concerns that it guidance might conflict with other federal, state, or local laws or regulations. The agency said that while some state laws might be different from the Green Guides, the differences did not necessarily present a conflict.

A company following the Green Guides provisions on biodegradability and compostability could still comply with California's specific requirements that plastic bags and containers labeled as "biodegradable" and "compostable" meet ASTM standards, the agency noted. The Commission explained that it consults with other federal agencies to ensure that it does not issue guidance that duplicates or possibly conflicts with their regulations.

The guidelines do not have the force of law. The agency can challenge under the FTC Act environmental claims that are inconsistent with the guidelines, but it must prove that those claims are unfair or deceptive.

Recent Enforcement Actions

In its announcement about the proposed revisions, the agency noted several recent actions involving false or unsubstantiated environmental claims. Among those were three actions charging marketers with making false and unsubstantiated claims that their products were biodegradable. The agency has also challenged claims that products made of bamboo were manufactured using an environmentally friendly process.

“In recent years, businesses have increasingly used 'green'marketing to capture consumers’ attention and move Americans toward a more environmentally friendly future, said FTC Chairman Jon Leibowitz in a statement accompanying the proposed revisions. "But what companies think green claims mean and what consumers really understand are sometimes two different things. The proposed updates to the Green Guides will help businesses better align their product claims with consumer expectations.”

The FTC notice, which will appear shortly in the Federal Register, is available here.

Visa, MasterCard Settle U.S./State Antitrust Suit, While American Express Vows to Fight

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter, and Sarah Borchersen-Keto, CCH Washington Correspondent.

The Department of Justice and seven states have filed a civil antitrust suit against the three largest credit and charge card transaction networks in the United States, challenging rules that allegedly restrict price competition at the point of sale.

MasterCard and Visa have agreed to settle the charges; however, American Express announced that it had no intention of settling the case.

“We want to put more money in consumers’ pockets, and by eliminating credit card companies’ anticompetitive rules, we will accomplish that,” Attorney General Eric Holder said announcing the action on October 4. “We need to ensure that every consumer has access to more choices and lower prices. And that simply will not happen unless, and until, American Express’s restrictive rules are changed.”

The Department of Justice alleges that the credit card companies bar merchants from offering consumer discounts, rewards and information about card costs, which results in consumers paying more for their purchases.

According to the Justice Department, U.S. merchants paid around $35 billion last year in credit card acceptance costs, with American Express charging the highest fees and implementing the most restrictive merchant rules.

The government alleges that the challenged merchant restraints harmed competition in two relevant markets:

(1) The market for general purpose card network services to merchants, and

(2) The market for general purpose card network services to travel and entertainment merchants, where fees are even higher than those charged to general merchants.

MasterCard, Visa, and American Express are alleged to have market power in both markets. “Each Defendant’s vertical Merchant Restraints are directly aimed at restraining horizontal interbrand competition,” according to the complaint. The restraints purportedly prohibit merchants from fostering competition among credit card networks at the point of sale.

Under the proposed settlement with MasterCard and Visa, which is awaiting approval in the federal district court in Brooklyn, New York, the two companies would allow their merchants to offer consumers discounts or rebates for using a cheaper form of payment. Merchants could inform customers as to which cards would result in lower business costs, thereby enabling cost savings to be passed on to the consumer.

Merchants that currently accept only Visa or MasterCard, or both, would benefit as soon as the final judgment became final. However, merchants that accept American Express cards will remain bound by restrictions imposed by American Express pending the outcome of the litigation. With the highest merchant fees of any network, American Express has the greatest incentive to maintain its rules and to prevent merchants from encouraging customers to use lower-cost methods of payment.

State Enforcement

Ohio Attorney General Richard Cordray took the lead on behalf of the seven state attorneys general in the case. The attorneys general of Connecticut, Iowa, Maryland, Michigan, Missouri, and Texas also signed onto the litigation. The states brought the action under federal antitrust law in their respective sovereign capacities and as parens patriae on behalf of their citizens.

American Express Statement

The Justice Department’s actions represent “an extraordinary retreat by the antitrust division,” said American Express chairman and CEO Kenneth Chenault. “Instead of promoting competition, it now seeks to promote regulation that would ultimately limit competition. We will defend the rights of our cardmembers at the point of sale and our own ability to negotiate freely with merchants.”

He added that American Express is “confident” the courts will recognize the “perverse anticompetitive nature of the government’s case, noting that the government’s new approach would give an unfair advantage to Visa and MasterCard.

Asked at a news conference about the possibility of a settlement with American Express, Assistant Attorney General for Antitrust Christine Varney replied, “we remain open at any point in time whenever a party wants to address our concerns . . . there is a settlement that is filed with MasterCard and Visa, so the terms upon which we would be willing to settle will be very clear to everyone.”

Details of the complaint and proposed consent decree, U.S. v. American Express Co., et al., No. CV-10-4496, will appear in CCH Trade Regulation Reporter.

Schwarzenegger Again Vetoes Amendments to California Data Breach Law

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

Proposed legislation to amend California's data security breach notification law was vetoed by Governor Arnold Schwarzenegger on September 29, 2010.

Senate Bill 1166 would have required any agency, person, or business required to issue a notification under existing law to meet additional requirements regarding that notification.

The legislation would have required security breach notifications to be written in plain language and to contain certain specified information, including contact information regarding the breach, the types of information breached, and, if possible to determine, the date of the breach.

It also would have required notification to the California Attorney General of breaches affecting more than 500 California residents.

Schwarzenegger vetoed an identical bill in 2009.

Veto Statement

In a message to the members of the California Senate, Schwarzenegger said:

“California's landmark law on data breach notification has had many beneficial results. Informing individuals whose personal information was compromised in a breach of what their risks are and what they can do to protect themselves is an important consumer protection benefit. This bill is unnecessary, however, because there is no evidence that there is a problem with the information provided to consumers. Moreover, there is no additional consumer benefit gained by requiring the Attorney General to become a repository of breach notices when this measure does not require the Attorney General to do anything with the notices.

“Since this measure would place additional unnecessary mandates on businesses without a corresponding consumer benefit, I am unable to sign this bill.”

Further information about CCH Privacy Law in Marketing appears here.

Conduct of Venezuelan Officials Not Subject to Civil RICO Claims

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

A Venezuelan businessman and his investment company could not pursue civil RICO claims against Venezuelan government officials and their associates because the action exceeded the territorial reach of federal RICO law, the federal district court in New York City has ruled.

The businessman alleged that the defendants had him unjustly imprisoned, for political reasons, and damaged his business through fraud, extortion, and the private abuse of public authority.

According to the businessman, the defendants engaged in a wide-ranging money-laundering scheme that used U.S. banks to hold, move, and conceal the fruits of their unlawful activity.

Extraterritorial Reach

The Second Circuit held, in Alfadda v. Fenn (CCH RICO Business Disputes Guide ¶7774), that foreign entities were not immunized from RICO’s reach. That holding, however, was essentially overruled by the U.S. Supreme Court’s June 24, 2010 decision in Morrison v. National Australia Bank Ltd. (130 S.Ct. 2869), the district court reasoned.

Addressing the extraterritorial reach of the federal securities laws, the Supreme Court in Morrison concluded that a presumption against extraterritoriality applied whenever a statute offered “no clear indication of an extraterritorial application.” The Supreme Court also repudiated the Second Circuit’s use of an “effects test” and a “conduct test” to evaluate the reach of statutes that were silent on the issue extraterritoriality.

Applicability of Morrison

Because the reasoning of Morrison was applicable to RICO, which did not manifest any concern with foreign enterprises, the presumption against extraterritoriality was applicable in this case, the court held.

The businessman argued that the presumption was successfully rebutted because his RICO claims were predicated on violations of the federal money-laundering statutes, which were extraterritorial in nature. RICO, however, did not apply in contexts where, as here, the enterprise and the impact of any predicate activity upon it were entirely foreign.

The Morrison decision itself was effectively nullified by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law on July 21, 2010, a month after the Morrison decision was issued.

Dodd-Frank effectively expanded the territorial reach of the antifraud provisions of the federal securities laws, but it did not address the territorial reach of RICO.

The August 24, 2010, decision is Cedeno v. Intech Group, Inc., CCH RICO Business Disputes Guide ¶11,914.