EC Investigates Google for Abuse of Dominance

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

The European Commission (EC) announced today that it has opened an in-depth antitrust investigation into Google Inc.'s methods for displaying search results.

According to the EC announcement, the investigation will look into whether Google abused a dominant market position in online search by:

(1) Lowering the ranking of unpaid search results of so-called vertical search services and by according preferential placement of its own vertical search services;

(2) Lowering the “Quality Score" for sponsored links of competing vertical search services and thereby influencing the price paid for advertising and the corresponding rankings;

(3) Imposing exclusivity obligations on advertising partners that prevent certain types of competing ads; and

(4) Restricting the portability of online advertising campaign data to competing online advertising platforms. The EC is attempting to determine whether Google engaged in this conduct in an effort to shut out competitors.

Complaints by Search Service Providers

The EC said that the formal investigation followed complaints from search service providers. While not named in the EC announcement, the three complaining firms have been identified as U.K.-based search service and price comparison site Foundem, French legal search engine eJustice, and Microsoft-owned shopping site Ciao.

The EC noted that the investigation did not imply it had proof of any infringements.

IComp, the Initiative for an Online Competitive Marketplace, in a November 30 statement, expressed hope that the EC decision “will contribute towards the development of a healthier and more competitive online marketplace.” Foundem is among the members of the Internet business organization.

Google Response

In response to the EC announcement, Google posted a statement on its European Public Policy Blog, saying that it would “work closely with the Commission to answer their questions.” According to the post, Google “will continue to review complaints about Google's search and search advertising.”

Dealer’s Payments Were Not “Franchise Fees” under Hawaii Law

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

A jury had sufficient evidence supporting its finding that none of the alleged payments made by a motor vehicle dealer to a manufacturer constituted "franchise fees" under the meaning of the Hawaii Franchise Investment Law, a federal district court in Honolulu has determined.

Accordingly, the jury’s finding that the manufacturer did not violate the statute when it ceased distributing motor vehicles in North America and offered the dealer the option of becoming a service-only dealer was upheld. The dealer’s motions for a new trial, to amend the judgment, and for relief from the judgment, were denied.

The dealer’s main argument was that the parties’ sales and service dealership agreement constituted a franchise agreement under the Hawaii Franchise Investment Law that required the dealer to pay "franchise fees," the court observed.

Required Payments

The dealer asserted that payments for the following items constituted statutory franchise fees:

(1) signs and financial statements;
(2) advertising;
(3) bank flooring arrangements;
(4) use of the franchisor’s communication system; and
(5) training.

With respect to signs and financial statements, the dealership agreement did require the dealer to install signs and submit monthly financial statements to the manufacturer. However, the evidence showed that the dealer failed to comply with these requirements.

The owner of the dealership testified that the "signage never changed" for the duration of the business relationship. Although deficient with signage and monthly financial statements, the dealer continued to operate as the manufacturer’s dealer, suggesting that those requirements were not franchise fees, as they were not required for the right to do business with the manufacturer.

Payments to Third Parties

Payments made by the dealer for newspaper advertising were to a third party, not to the manufacturer, and did not establish that the payments were franchise fees paid for the right to do business with the manufacturer.

Similarly, payments for flooring finance arrangements were not made to manufacturer itself. The dealer was not restricted to any particular lender and ended up selecting a bank that had no special relationship with the manufacturer.

Use of Communication System

The dealer failed to establish that the required use of the franchisor’s communication system constituted a franchise fee. Evidence suggested the dealer was required to use the manufacturer’s communications system, but the dealer did not always use that system, the court found. Since the manufacturer nevertheless continued to do business with the dealer, the jury could have concluded that the manufacturer’s communications system was not required for the dealer to continue its business.

Finally, the jury did not have to credit a vague assertion that a training charge was for actual live training as opposed to, for example, software that the dealer’s personnel could have needed to refer to on a regular basis in the course of their jobs.

The decision is JJCO, Inc. v. Isuzu Motors America, Inc., CCH Business Franchise Guide ¶14,486.

Antitrust Division’s Activities Preserve and Promote Competition: Agency Official

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

A report on the Department of Justice Antitrust Division's recent activities was presented by Carl Shapiro, the Deputy Assistant Attorney General for Economics at the Antitrust Division, on November 18 at the American Bar Association Section of Antitrust Law Fall Forum in Washington, D.C.

In prepared remarks entitled “Update from the Antitrust Division,” Shapiro focused on the Division’s attempts to preserve and promote competition through criminal enforcement, civil non-merger enforcement, competition advocacy, and merger enforcement (including an explanation of the new Horizontal Merger Guidelines).

Criminal Cases

Shapiro observed that during Fiscal Year 2010, the Antitrust Division concentrated on “rooting out and prosecuting cartels and other collusive agreements.” It filed 60 criminal cases, involving 84 corporate and individual defendants, and obtained fines in excess of $550 million. While the fines obtained were down from previous years, "the Division's commitment to criminal enforcement remains steadfast," Shapiro said.

He added that of the individual defendants sentenced, 76% were given prison time, including an average 10-month prison term for foreign nationals, whose incarceration continues to be a priority of the Division.

Civil Non-Merger Suits

Shapiro stated that reviewing and challenging anticompetitive conduct “is a critical component of the Division’s mission to preserve and promote competition.” During Fiscal Year 2010, the Division resolved competitive concerns with negotiated consent decrees in four civil non-merger cases—U.S. v. Smithfield Foods and Standard Farms LLC (2010-1 Trade Cases ¶76,880); U.S. v. Idaho Orthopedic Society(2010-2 Trade Cases ¶77,142); U.S. v. Adobe Systems, Inc. (CCH Trade Regulation Reporter ¶50,982); and U.S. v. KeySpan Corporation (CCH Trade Regulation Reporter ¶50,975).

In addition, the Division filed civil antitrust lawsuits against Blue Cross Blue Shield of Michigan and (together with seven states) against American Express, MasterCard, and Visa.

In the first suit, the Division challenged “most-favored nations” (MFN) clauses in Blue Cross’s agreements with hospitals that allegedly limit the discounts the hospitals can offer to Blue Cross’s competitors. These MFN clauses raise prices, prevent other insurers from entering the marketplace, and discourage hospital discounts, Shapiro said.

The second suit challenged rules, policies, and practices imposed by the three largest credit and charge card networks in the U.S. These rules “impede merchants from promoting or encouraging the use of a competing credit or charge card with lower acceptance fees,” he explained.

MasterCard and Visa were willing to resolve these antitrust concerns at the time the Division filed the compliant, agreeing to allow merchants to offer consumer discounts and rebates; express a preference for a particular credit card; promote particular cards through communications to customers; and communicate the cost incurred by the merchant when a consumer uses a particular credit card.

Litigation continues against American Express, which has stated its intention to fully litigate the matter.

Competition Advocacy

The official trumpeted the Antitrust Division's recent competition advocacy efforts, involving a wide range of industries and topics, including telecommunications, financial markets, health care, agriculture, and patents.

Shapiro highlighted the agency's involvement in a proposal by Delta and US Airways to swap more than 300 takeoff and landing slots at LaGuardia and Ronald Reagan Washington National Airport.

The Division filed formal comments with the Department of Transportation, supporting a proposed DOT order that would permit the slot transfers, subject to the carriers’ disposal of 14 pairs of “slot interests” at Ronald Reagan Washington National Airport and 20 pairs of slot interests at LaGuardia Airport to “eligible new entrant and limited incumbent carriers.”

The divestiture of these slot interests eased concerns that the transaction would have reduced competition between Delta and US Airways on a number of routes at the two airports, thereby harming consumers.

Merger Enforcement

According to Shapiro, Hart Scott Rodino filings reached only 716 for Fiscal Year 2009, down from 2,201 during Fiscal Year 2007. Newly released figures show a 50% increase in Fiscal Year 2010 to 1,170. About 1.9% of the filings resulted in a Department of Justice Second Request. The Division challenged 19 mergers.

Shapiro discussed the Antitrust Division's recent issuance of revised Horizontal Merger Guidelines. The guidelines were the product of a lengthy and collaborative process with the Federal Trade Commission. The primary motivation behind their creation was to “promote transparency by describing more accurately how the Agencies actually evaluate horizontal mergers.”

He illustrated the principles articulated in the revised Guidelines through an analysis of the agency's investigation into the proposed merger of United Airlines and Continental Airlines and of the agency's complaint challenging the merger proposal between Baker Hughes Inc. and BJ Services Company.

Text of the prepared remarks appears here on the Antitrust Division’s website.

Insurance Agency Was Not a “Franchise” Under Arkansas Relationship Law

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

An insurance agent was not a “franchisee” of an insurance company, entitled to the protections of the Arkansas Franchise Practices Act, because she did not have the unqualified authority to sell policies or commit the company to an insurance contract other than a temporary binder policy, which could be cancelled at any time at the company’s discretion, the Arkansas Supreme Court has decided.

The state supreme court affirmed a ruling by an Arkansas trial court, granting the insurance company summary judgment on the agent’s claim that the company violated the Arkansas franchise law by terminating the agency contract.

The agent had no authority to set or change prices, as evidenced by her complaint that the insurance company continued to change policies and increase prices, resulting in her loss of business, according to the court. She had no authority to change the premium, the date on which payment was due, or the terms of the insurance policy.

She admitted that she did not sell any tangible product, that she did not charge money outside of the premium paid to the insurance company for insurance services, and that the money changing hands consisted of premiums she forwarded to the insurance company.

Thus, the evidence showed that only policies acceptable to the insurance company could be underwritten under the agent’s contract and that only the insurance company could commit itself to provide coverage, the court held.

Under the Arkansas Franchise Practices Act, the unqualified authority to sell or distribute goods or services was an essential component of a “franchise” agreement. The agent lacked that authority, the court ruled.

The November 11 decision in Gunn v. Farmers Insurance Exchange will be reported at CCH Business Franchise Guide ¶14,891.

Bogus Mortgage Relief Schemes Targeted by FTC

This posting was written by Sarah Borchersen-Keto, CCH Washington Correspondent.

The Federal Trade Commission is moving to stop bogus mortgage providers from taking millions of dollars in fees from homeowners without providing promised services in return.

The FTC issued the Mortgage Assistance Relief Services (MARS) Rule on November 19. The rule bans providers of mortgage foreclosure rescue and loan modification services from collecting fees until homeowners have a written offer from their lender or servicer that they consider acceptable. All provisions of the rule except the advance-fee ban will become effective December 29, 2010. The ban on advance fees will go into effect on January 31, 2011.

“These scammers, often armed with official looking documents and false claims of connection to government programs for homeowners, sell legal services they can’t—and don’t deliver,” said FTC Chairman Jon Leibowitz.

The Chairman added that scammers also tell homeowners not to pay their mortgage, resulting in consumers losing their homes. “Hundreds of thousands of consumers have lost hundreds of millions of dollars this way,” he said.

Under the MARS Rule, companies must tell consumers what their services will cost, and that they are not associated with the government or the consumer’s lender. They are also barred from advising consumers to stop communicating with their lender.

“It’s an enforcement tool with teeth,” Leibowitz said, adding that if companies don’t comply, then the FTC has authority to impose hefty fines.

The MARS Rule makes an exception for attorneys who are engaged in the practice of law, live in the state where the consumer or dwelling is located, and comply with state laws governing attorney conduct in relation to the rule. In addition, attorneys must place any fees collected into a client trust account.

Details regarding the MARS Rule appear here on the FTC website. Text of the rule will be reported in the CCH Trade Regulation Reporter.

Securities Litigation Reform Act Barred RICO Claims Against Tax Shelter Scheme

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

The Private Securities Litigation Reform Act (PSLRA) barred RICO claims against a law firm that allegedly participated in a scheme to promote an illegitimate tax shelter, the U.S. Court of Appeals in New Orleans has ruled.

The scheme required investors to purchase and sell offsetting digital options contracts through limited liability companies (LLCs) that were created solely for that purpose. Each taxpayer would claim a tax basis (in an LLC) that was increased by the cost of the options purchased but was not decreased by the price of the options sold.

The plaintiffs (investors) argued that the PSLRA was inapplicable because the options contracts were not securities; nor were their ownership interests in the LLCs.

Investment Contracts

Ownership interests in the LLCs were “investment contracts” that constituted securities within the meaning of the securities laws, the court concluded. In SEC v. W.J. Howey Co. (328 U.S. 293), the U.S. Supreme Court defined an investment contract as “a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party . . . “

The investors argued that their profits were not derived “solely” from the efforts of others because they had retained control of the LLCs. However, economic reality governed over form, and the investors’ control was merely theoretical.

The investors, for example, did not allege that they had exercised any managerial authority over the LLCs. Rather, the LLCs—according to the terms of the investment contracts—were directed and managed by various consulting and brokerage entities for the purpose of implementing the tax scheme.

“Passive” Investors

In addition, the investors had expressly alleged that they did not know that the digital options transactions had little or no true economic substance. The investors thus portrayed themselves as “passive” investors who depended—both in reality and according to their investment contracts—upon the efforts of others for their profits.

Their ownership interests in the LLCs were therefore investment contracts that constituted securities, according to the court.

The decision, Affco Investments 2001 LLC v. Proskauer Rose, L.L.P., will appear at CCH RICO Business Disputes Guide ¶11,941.

Pfizer Ordered to Pay $95 Million for Deceptive Marketing of Neurontin

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

Pharmaceutical company Pfizer, Inc. violated the California Unfair Competition Law (UCL) by marketing its prescription drug Neurontin for a number of off-label uses and deceptively representing the efficacy of the drug for certain uses, according to the federal district court in Boston.

Based on these violations, Pfizer was ordered to pay restitution of more than $95 million to the Kaiser Health Care Plan for its payment of reimbursements in excess of the cost of alternative drugs that would have been as effective as or more effective than Neurontin.

Off-Label Marketing

Neurontin was approved by the Food and Drug Administration for the treatment of epilepsy in 1993, but Pfizer began marketing the drug for the treatment of migraines, bipolar disorder, and other conditions for which there was no scientific proof.

After spending about $200 million on Neurontin from 1996 to 2004, Kaiser Foundation Health Plan, Inc. and Kaiser Foundation Hospitals (collectively Kaiser) filed the UCL claims—along with civil RICO claims—in federal district court in Boston.

In March 2010, a jury found that Pfizer engaged in a RICO enterprise that committed mail and wire fraud in the marketing of Neurontin and awarded Kaiser more than $47 million, which was trebled to more than $142 million. The court then took up the issue of whether the conduct violating the federal RICO law also violated the UCL.

Fraudulent Business Practices

In order to state a claim under the fraud prong of the UCL, Kaiser needed to show that members of the public were likely to be deceived by the misrepresentations and false advertising. Evidence of actual reliance on the misrepresentations was also required. Reliance is proven through evidence that the misrepresentation was an immediate cause of the injury-producing conduct and that the injury would not have happened but for the misrepresentations.

Kaiser presented sufficient information to meet the causation requirement of the UCL, according to the court. The UCL requires evidence of an actual reliance on the alleged misrepresentations. It was reasonable to conclude that Kaiser would not have sanctioned the use of Neurontin had it known of the misrepresentations about the efficacy of the drug and that physicians would have changed their prescribing behavior had Kaiser changed its policy towards Neurontin.

Standing

Pfizer argued that Kaiser Hospitals did not have standing because it did not actually purchase the drugs. However, Kaiser Foundation Health Plan was partnered with Kaiser Hospitals, and Kaiser Foundation Health Plan had standing to bring the claim. Thus, a ruling on independent standing was unnecessary. Any damages would be awarded to the health plan.

Pfizer further argued that Kaiser could not recover damages under the UCL for the cost of Neurontin prescriptions written outside of California. However, Massachusetts choice-of-law rules apply the law of the state where a plaintiff takes action in reliance on misrepresentations. Thus, the UCL applied because Kaiser was located in California, was targeted by the company in California with the false representations, and relied on the misrepresentations in California.

Statute of Limitations

Although the law in California as to whether the discovery rule applies to UCL claims as a whole is unsettled, the rule applied in this case because the claims were based on fraud. Courts have also applied the fraudulent concealment rule to UCL claims. Pfizer argued that many of the claims in the multidistrict litigation were barred by the UCL four-year statute of limitations because the claim was filed more than four years after the allegedly illegal activity took place.

Pfizer fraudulently concealed the negative testing and information that formed the basis of the UCL claim, according to the court. The claim accrued in 2002 when the fraud became known publicly through a whistleblower suit filed against the company. The unsealing of a related suit in Delaware did not put a hospital in California on notice.

Remedies

The UCL empowers courts to restore any money or property that may have been acquired by means of such unfair competition. Kaiser could recover amounts it paid for the drug as a result of the misrepresentations even though the hospital purchased the drug through a wholesaler or other intermediary rather than directly from Pfizer. The appropriate measure of damages was the difference between the cost of the drug and the cost of the cheaper and more optimal drug that would have been prescribed, according to the court.

The November 3 decision is In re Neurontin Marketing and Sales Practices Litigation, CCH State Unfair Trade Practices Law ¶32,159.

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

Class Certified in Infant Formula Advertising Case

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

A class was certified by the federal district court in Ft. Lauderdale in an action alleging that Mead Johnson’s advertising and labeling misrepresented its Enfamil LIPIL infant formula as the only baby formula containing the breast milk nutrients DHA and ARA in violation of the Florida Deceptive and Unfair Trade Practices Act and False and Misleading Advertising Law.

Lower-priced store brand and private label formulas allegedly contained the same nutrients in equal or greater amounts.

The case involved issues common to the proposed class, including whether the representations about the product were true, whether an objective consumer acting reasonably in the circumstances would be deceived, what measure of loss was proper, and whether the class members were entitled to injunctive relief, the court found.

Typicality

Claims asserted by the named plaintiff were typical because she purchased Enfamil LIPIL, she testified she was deceived by Mead Johnson’s representations, and she was exposed to the same messages as class members even if they had viewed different labels.

The named plaintiff had purchased Enfamil LIPIL within the relevant four-year statute of limitations and thus could not be held an inadequate class representative on the theory that her claims were time-barred, the court determined.

Predominance of Common Issues

Common issues predominated, namely whether Enfamil LIPIL contained nutrients that other brands of infant formula did not and whether Mead Johnson’s representations would deceive a reasonable consumer. Because the controversy involved many questions of law and fact, a class action would be superior to other available methods for fair and efficient adjudication, the court concluded.

The decision is Nelson v. Mead Johnson Nutrition Co., November 1, 2010. Text of the decision will appear at CCH Advertising Law Guide ¶64,048.

Further information about CCH Advertising Law Guide appears here.

FTC, Nevada Condition Hospital Operator's Acquisition of Psychiatric Facilities on Divestitures

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

Universal Health Services, Inc. completed its acquisition of Psychiatric Solutions, Inc., yesterday, after reaching settlements with the Federal Trade Commission and the State of Nevada resolving antitrust concerns.

Universal Health Services is one of the nation’s largest hospital management companies. It operates 25 general acute care hospitals and 102 behavioral health facilities located in 32 states, Washington, D.C., and Puerto Rico. Psychiatric Solutions operates 94 inpatient behavioral health facilities in 32 states, Puerto Rico, and the U.S. Virgin Islands.

Psychiatric Services Markets

The FTC alleged in its administrative complaint, announced on November 15, that the acquisition as proposed posed substantial antitrust concerns in three local markets for acute inpatient psychiatric services. The three acute inpatient psychiatric services markets are: (1) the State of Delaware; (2) the Las Vegas metropolitan statistical area; and (3) the Commonwealth of Puerto Rico.

The proposed acquisition also would have resulted in the combined entity controlling approximately 60 percent or more of the acute inpatient psychiatric beds in each of the affected markets.

The FTC proposed consent order would require the divestiture of four facilities that provide acute inpatient psychiatric care, as well as related outpatient clinics, contracts, commercial trade names, and real property, in the three markets. A Hold Separate Order requires the parties to maintain the viability of the divestiture assets until the facilities are transferred to a Commission-approved buyer.

Horizontal Merger Guidelines

In its Analysis to Aid Public Comment, the agency considered the competitive effects of the proposed acquisition in light of the 2010 joint Department of Justice/FTC Horizontal Merger Guidelines (CCH Trade Regulation Reporter ¶13,100).

The FTC noted that, under the recently revised guidelines, an acquisition is presumed to enhance market power or facilitate its exercise if it increases the Herfindahl-Hirschman Index (HHI) by more than 200 points and results in a post-acquisition HHI that exceeds 2,500 points.

The agency contends that the proposed acquisition far exceeds these thresholds, with the post-acquisition HHIs range from 3916 to 4942, and with an increase in HHI levels of 1428 to 2610 points above pre-acquisition levels.

State Enforcement

The State of Nevada also challenged the transaction. The state attorney general's office filed a complaint alleging violations of federal and state law in the federal district court in Las Vegas. The state's complaint also cites the 2010 Horizontal Merger Guidelines and its HHI thresholds.

Under a final judgment resolving the state's antitrust concerns, Universal Health Services is required to divest two local psychiatric hospitals—Montevista Hospital and Red Rock Behavioral Health Hospital. These are the same facilities that must be divested under the FTC consent order. In addition, the parties agreed to reimburse the attorney general its attorney fees and costs resulting from the investigation.

The case is State of Nevada v. Universal Health Services, Inc., Alan B. Miller, and Psychiatric Solutions, Inc., No. 2:10-cv-01984.

The FTC action is In the Matter of Alan B. Miller, Universal Health Services, Inc., and Psychiatric Solutions, Inc., FTC Docket No. C-4309.

Further details will appear in the CCH Trade Regulation Reporter.

FTC Conditionally Approves Mall Operator Combination

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

To resolve FTC concerns over its acquisition of a portfolio of outlet centers from Prime Outlets Acquisition Company LLC, mall operator Simon Property Group, Inc. has agreed to divest an outlet center located in Southwest Ohio and to life certain lease restrictions on tenants under the terms of a proposed FTC consent order.

If approved by the Commission, the FTC consent order would resolve allegations that the acquisition would harm competition in the market for outlet centers in parts of Southwest Ohio, Chicago, and Orlando.

Radius Restrictions

In addition to requiring the divestiture of either Prime Outlets-Jeffersonville or Simon’s Cincinnati Premium Outlets in Southwest Ohio, the proposed consent order would require Simon to remove radius restrictions for tenants with stores in its outlet malls serving the Chicago and Orlando markets.

Many of Simon’s leases include radius restrictions that prevent the tenants from opening other stores in outlet malls within a specified distance, according to the FTC. Removing these restrictions will allow competing outlet centers or outlet mall developers wanting to enter the markets to sign leases with tenants that otherwise would have been unable to do so.

Relevant Markets

In defining the relevant markets, the FTC alleged that outlet centers generally attract customers from large geographic areas, often exceeding 60 miles. The agency identified three relevant geographic markets in which to analyze the effects of the acquisition: Southwest Ohio, Chicago, and Orlando.

Prime Outlets-Jeffersonville and Simon’s Cincinnati Premium Outlets are the only outlet centers in Southwest Ohio.

Simon and Prime operate the only outlet centers serving the Chicago metropolitan area. Simon owns Lighthouse Place Premium Outlets in Michigan City, Indiana; Chicago Premium Outlets in Aurora, Illinois; and Gurnee Mills in Gurnee, Illinois. Prime Outlets are located in Huntley, Illinois, and Pleasant Prairie, Wisconsin.

In Orlando, Simon owns one outlet center—Orlando Premium Outlets—and Prime owns two outlet centers—Prime Outlets-Orlando and Prime Outlets-Orlando Marketplace. Three other outlet centers in the Orlando area are owned by neither Simon nor Prime.

The proposed consent order is In the Matter of Simon Property Group, Inc., FTC File No. 101-0061. Text of the Agreement Containing Consent Orders appears here on the FTC website. A news release appears here.

Further details will appear at CCH Trade Regulation Reporter ¶16,519.

Busy Week of Antitrust Developments in Aviation Industry

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

The Department of Transportation's antitrust immunity grants to two groups of air carriers seeking to jointly market trans-Pacific routes were among a number of interesting antitrust developments in the aviation industry this week.

American Airlines and Japan Airlines (JAL), members of the oneworld alliance, announced on November 10 that the DOT had granted final approval to their request for antitrust immunity with respect to their trans-Pacific joint business. The arrangement has also been approved by Japan's Ministry of Land, Infrastructure, Transport and Tourism. Both airlines anticipate launching their coordinated services in early 2011, according to their joint statement.

American and JAL filed their application for antitrust immunity for the joint business agreement (JBA) in February 2010. At that time, the carriers said that, under an immunized JBA, American and JAL would cooperate commercially on flights while continuing to operate as separate legal entities. They would coordinate fares, services, and schedules.

United Airlines, Continental Airlines, and ANA also announced on November 10 that the DOT issued a final order granting antitrust immunity for their trans-Pacific joint venture under which the carriers intend to jointly develop flight schedules and sales activities. United Continental Holdings, Inc. is the holding company for United and Continental, which recently merged to form the world's largest airline. ANA is a leading Japanese provider of air transportation services.

Southwest/AirTran Merger

Earlier this week, Southwest Airlines Co. and AirTran Holdings, Inc. announced that the Department of Justice Antitrust Division had issued a “second request” in its investigation into the combination of the low-cost air carriers.

A second request is issued when the antitrust agency reviewing the deal determines during the initial waiting period that it needs additional information and/or documents to complete its analysis of competitive effects under the Hart-Scott-Rodino (HSR) Antitrust Improvements Act. The second request extends the waiting period imposed by the HSR Act until 30 days after the parties have substantially complied with the request.

Second requests are not uncommon in federal antitrust reviews of large mergers. The Justice Department issued a second request in the recently consummated United/Continental merger.

“Both parties are in the process of gathering information to respond to the second request and will continue to work cooperatively with the DOJ as it reviews the transaction,” according to the carriers' joint statement of November 9. Southwest and AirTran expect the transaction, which was announced on September 27, 2010, to close in the first half of 2011.

Air Cargo Cartel

Meanwhile, on the other side of the Atlantic, the European Commission (EC) announced on November 9 that 11 air cargo carriers had been fined a total of nearly €800 million for operating a worldwide cartel. Air Canada, Air France-KLM, British Airways, Cathay Pacific, Cargolux, Japan Airlines, LAN Chile, Martinair, SAS, Singapore Airlines, and Qantas were fined a total of €799.445.000 by the EC for coordinating surcharges for fuel and security over a six year period. Lufthansa (and its subsidiary Swiss) received full immunity from fines under the EC's leniency program.

The EC fines follow a number of guilty pleas from these same carriers to price fixing charges filed by the U.S. Department of Justice since August 2007.

Name-Brand Retailer Can Pursue False Ad Suit Against Wholesaler of Counterfeit Jeans

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

Famous Horse, operator of the name-brand clothing retailer V.I.M., had standing to assert a Lanham Act claim that wholesalers of counterfeit Rocawear jeans falsely advertised that V.I.M. was a satisfied customer, the U.S. Court of Appeals in New York has ruled.

Standing to Sue

The federal Circuits have split on the issue of standing under Sec. 43(a) of the Lanham Act, the court observed. The Seventh, Ninth, and Tenth Circuits have applied a strong categorical requirement that a commercial plaintiff bringing an unfair competition claim must be in competition with the alleged false advertiser. The Third, Fifth, and Eleventh Circuits applied a more flexible standard.

Famous Horse had standing whether the more flexible reasonable interest test or the stronger categorical requirement was applied. Famous Horse, which sold genuine Rocawear jeans, was clearly in competition with the wholesalers, who sold counterfeit Rocawear jeans, the court found.

The V.I.M. chain of stores, according to Famous Horse, was known for selling genuine name-brand clothing at very low prices. Famous Horse alleged that it was uniquely affected by the wholesalers’ sale of counterfeit Rocawear jeans in two ways: first, its reputation as a discount store was harmed because consumers believed that it sold Rocawear jeans at inflated prices compared to counterfeit jeans supplied by the wholesalers; and second, consumers who learned of counterfeit Rocawear jeans on the market would believe that V.I.M. similarly peddled counterfeit clothes.

Reasonable Interest to Protect

The court held that Famous Horse alleged a reasonable interest to be protected against the wholesalers’ alleged false advertising as well as a reasonable basis for believing that this interest would be damaged by the alleged false advertising.

Proof of actual losses would be difficult, in the court’s view, given that V.I.M. stores operated in a large market that included luxury retailers selling name brands at full price, discounters of various stripes, and numerous counterfeiters selling fake versions of name brands. Famous Horse alleged sufficiently plausible claims, however, to overcome a motion to dismiss.

The opinion in Famous Horse, Inc. v. 5th Avenue Photo Inc. will be reported at CCH Advertising Law Guide ¶64,046.

Written Contract Requirement of Arizona Sales Representative Law Not a Statute of Frauds

This posting was written by John R. F. Baer of Greensfelder, Hemker & Gale, P.C, author of CCH Sales Representative Law Guide.

The Arizona Sales Representative Contract Law’s requirement of a written contract is not a statute of frauds, the federal district court in Phoenix has ruled.

The absence of a written contract did not preclude a claim by a sales representative under the law. The law was designed to protect sales representatives, and the burden was on the principal to prepare a written contract, according to the court.

The legislature, at least initially, did not intend to create a statute of frauds, since having a written contract was optional in the original statute.

The court found nothing in the legislative history to support a conclusion that the legislature intended, by adding the writing requirement in 2006, to fashion a statute of frauds that would prevent a sales representative from recovering unless there is a writing, the court held.

The decision is Armored Group, LLC v. Supreme Corp., CCH Sales Representative Law Guide ¶10,334.

Further information regarding the CCH Sales Representative Law Guide appears here.

California Court Applies Washington Franchise Law to California Franchise

This posting was written by John W. Arden.

A California garbage removal franchisee, bringing a wrongful termination action against its Canadian franchisor, was entitled to enforce a contractual choice of law in order to bring the action under the Washington Franchise Investment Protection Act rather than under the California Franchise Relations Act, according to a California court of appeals.

In 2003, the franchisee entered into an agreement to operate a franchise in the Los Angeles area with 1-800 Got Junk?, a franchisor headquartered in Vancouver, British Columbia.

The franchise agreement expressly provided that the contract be “construed and interpreted according to the laws of the state of Washington.” The franchisor’s Uniform Franchise Offering Circular stated that “Washington law governs this agreement, and this law may not provide the same protections and benefits as local law . . . ”

In May 2007, the franchisor terminated the franchise for failure to report some jobs and the gross revenues derived from such jobs and failure to pay a percentage of revenues to the franchisor. The franchisor maintained that the franchisee’s falsifying of reports was a material default of the franchise agreement, justifying termination of the franchise without an opportunity to cure.

The franchisee denied any wrongdoing, alleging that its drivers pocketed money from at least three jobs without reporting the payments to the franchisee or the franchisor.

The franchisee filed suit against the franchisor in Los Angeles County, charging that the franchisor terminated the agreement without cause, in violation of Section 19.100.180 of the Washington Franchise Investment Protection Act, which limits the circumstances in which a franchisor can terminate a franchise without providing notice or an opportunity to cure.

The franchisee also alleged breach of contract, breach of the implied covenant of good faith and fair dealing, tortuous interference with prospective economic advantage, defamation, and acting with a discriminatory motive under the California Fair Dealership Law.

Choice of Washington Law

In an unusual twist, the California franchisee pled application of Washington law, while the franchisor asked the California trial court to avoid its contractual choice of law in order to apply California law. The franchisor argued that the choice of law provision in its franchise agreement was unenforceable because there was no reasonable basis for application of Washington law.

Nevertheless, the trial court enforced the contractual provision, stating that there was a reasonable basis for the franchisor to designate Washington as the law governing the agreement, since Washington is the state closest to the franchisor’s Vancouver headquarters. The trial court found it puzzling that the franchisor’s founder and president said he did not know why Washington law was selected, since he was in a position to know.

“The objective facts are that it is reasonable for a company doing business in many states to designate the laws of one state in a contract that will be used in many states,” the trial court judge said. “If the company’s lawyers are already familiar with the laws of that one state and find them favorable, they will not have to spend so much time and energy learning the law of remaining states . . . “

The franchisor then sought a writ of mandate to vacate the trial court ruling.

The court of appeal found that there were two issues presented: (1) whether a reasonable basis existed for the parties’ choice of Washington law and (2) whether enforcement of the choice of law is barred by the California Franchise Relations Act.

Under California law, a contractual choice of law is enforceable unless either (a) the chosen state has no substantial relationship to the to the parties or the transaction and there is no other reasonable basis for the parties’ choice or (b) application of the law of the chose state would be contrary to a fundamental policy of a state that has a materially greater interest than the chosen state.

Reasonable Basis

Even though there was no substantial relationship between the franchisee or the transaction and the State of Washington, the franchisee satisfied the alternative prong of the test—that there was a reasonable basis for the selection of Washington law.

There is a benefit to a franchisor and franchise system in having a single set of rules to apply to all franchisees—a benefit that has been recognized by many courts examining choice of law issues, the court found. Further, the State of Washington is the closest U.S. jurisdiction to the franchisor’s headquarters in Vancouver.

Fundamental Public Policy

Moreover, the franchisor failed to establish that the application of Washington law contravened the fundamental public policy embodied in the California Franchise Relations Act.

The Franchise Relations Act serves to protect California franchisees from abuses by franchisors in connection with the termination and nonrenewal of franchises. The statutory scheme generally prohibits termination of a franchise prior to the expiration of its term except for good cause, which is defined as the failure to comply with any lawful requirement of the franchise agreement after being given at least 30 days notice and a reasonable opportunity to cure the failure. There are specific grounds for immediate notice of termination.

The Act includes an antiwaiver provision that “{a]ny condition, stipulation or provision purporting to bind any person to waive compliance with any provision of this law is contrary to public policy and void.”

Waiver of Compliance

The antiwaiver provision does not categorically prohibit choice of law provisions, the court held. It only voids choice of law provisions that require a franchisee to waive compliance with the protections of the Franchise Relations Act. Thus, the critical inequity is whether the enforcement of the choice of law provision in this case would diminish the franchisee’s rights under the Franchise Relations Act.

“A comparison of the CFRA and the WFIPA shows that Washington affords a franchisee far greater protection from summary termination of a franchise,” the court ruled.

While the California statute contained 11 grounds for immediate termination, without notice or right to cure, the Washington statute authorized such termination in only four situations: (1) the franchisee’s bankruptcy or insolvency, (2) the franchisee’s assignment for the benefit of creditors, (3) the franchisee’s voluntary abandonment of the franchise, and (4) the franchisee’s conviction or plea of no contest to a charge of violating any law relating to the franchise business.

Providing superior protection from summary termination is not a waiver of compliance with the California Franchise Relations Act, in the court’s view. “California public policy is not offended if the franchisor contractually obligates itself to give notice and an opportunity to cure in situations where the CFRA would permit immediate termination of a franchise.”

Accordingly, the enforcement of the choice of law provision was not barred by the antiwaiver provision of the California Franchise Relations Act, the court concluded.

The decision is 1-800-Got Junk? LLC v. Superior Court of Los Angeles County, B221636, filed October 21, 2010. It will appear in the CCH Business Franchise Guide.

Monopoly Claims Against Food Products Company Fail

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

Retailers and other direct purchasers of “Fresh Del Monte Gold” pineapples failed to establish that Del Monte Fresh Produce Company improperly monopolized the market for fresh, whole, extra-sweet pineapples, the U.S. Court of Appeals ruled in a November 3 summary order.

A September 30, 2009, decision of the federal district court in New York City granting summary judgment in favor of Del Monte was affirmed.

In order to succeed on a Sherman Act, Sec. 2 monopolization claim, the plaintiffs had to establish both: possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power. The second element required proof of exclusionary or anticompetitive effects, the court explained.

The complaining purchasers did not raise a triable issue with respect to whether Del Monte’s challenged conduct had the requisite anticompetitive effect of delaying competitors’ entry into the market. They alleged that Del Monte improperly monopolized the market by (1) sending so-called “threat letters” to competitors and others giving the impression that the Fresh Del Monte Gold was patented and (2) engaging in sham patent litigation with respect to a related variety of pineapples.

There was no indication how the patent litigation involving the related variety of pineapples caused anticompetitive effect in a different pineapple market. The court noted that the effects of the threat letters “slightly more complex.” However, an inference that the threat letters had anticompetitive effects was not reasonable where the testimony of Del Monte's competitors showed that factors other than the threat letters delayed competitors’ entry into the relevant market.

Relevant Product Market

The appellate court assumed for sake of argument that Del Monte possessed monopoly power in the market for a particular variety of fresh extra-sweet pineapples; however, the lower court rejected the complaining purchasers’ relevant product market definition.

The district court concluded that the particular type of pineapple was not so unique as to constitute a separate submarket. The complaining purchasers failed to offer sufficient evidence of exceptional market conditions to justify the single brand market. Because the complaining purchasers did not argue that Del Monte had monopoly power in the broader pineapple market, their monopoly claims failed.

The lower court also rejected the plaintiffs’ expert's testimony on the relevant product market because of its insufficient factual basis and its unreliability. The expert's analysis overlooked relevant facts which showed that other types of pineapples were reasonable substitutes. While the expert utilized the 1997 version of the Department of Justice/FTC Merger Guidelines to formulate the market, the guidelines were applied in an overly mechanical fashion, in the court’s view.

Although an analysis of cross-price elasticity of demand (which was not undertaken) was not mandatory in determining a relevant product market, the analysis might have assisted the expert in defining the relevant market.

The November 3, 2010, summary order in American Banana Co. v. Del Monte Fresh Produce Co., No. 09-4561, will appear at 2010-2 Trade Cases ¶77,221.

Google Data Collection Violated Canadian, UK Law: Privacy Officials

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

Google Inc.’s collection of personal information from unsecured wireless networks while gathering WiFi data for use in the “Street View” feature of its online mapping service has violated the privacy laws of both Canada and the United Kingdom, according to officials of both nations.

An investigation by Canada’s Office of the Privacy Commissioner determined that the incident was the result of an engineer’s careless error, as well as a lack of controls to ensure that necessary procedures to protect privacy were followed.

“Our investigation shows that Google did capture personal information—and, in some cases, highly sensitive personal information such as complete e-mails,” said Canadian Privacy Commissioner Jennifer Stoddart. “This incident was a serious violation of Canadians’ privacy rights.”

Technical experts from the Office examined the data collected by Google in an on-site examination at Google’s Mountain View, California headquarters. The experts conducted an automated search for data that appeared to constitute personal information. To protect privacy, they manually examined only a small sample of data flagged by the automated search.

Google asserted that it was unaware of the presence of the payload data collection code when it began using software to collect information on WiFi “hot spots” for its location-based services. Although the code was reviewed before being installed on Street View cars, the review was only to ensure that the code did not interfere with the Street View operations.

“This incident was the result of a careless error—one that could easily have been avoided,” Stoddart said.

Privacy Commissioner’s Recommendations

The Privacy Commissioner recommended that Google adopt controls to ensure that necessary procedures to protect privacy are duly followed before products are launched. She also recommended that Google enhance privacy training of its employees.

Google was urged to delete the Canadian payload data it collected, to the extent that the company does not have any outstanding obligations under Canadian and American laws preventing it from doing so, such as preserving evidence related to legal proceedings.

The Privacy Commissioner will consider the matter resolved upon receiving, by February 1, 2011, confirmation from Google that it has implemented her recommendations.

Text of the October 19 Preliminary Letter of Findings in the Privacy Commissioner’s investigation of Google appears at CCH Privacy Law in Marketing ¶ 60,547.

“Serious Breach” of UK Law

Google’s collection of payload data—including entire e-mails and passwords—without the consent of the data subjects was a serious breach of the United Kingdom’s privacy law, the UK Information Commissioner’s Office (ICO) said in a November 3 letter to Google’s global privacy counsel.

“It is my view that regulatory action is appropriate in this case in order to ensure that effective privacy controls are built into Google products and services, and in order to ensure that an incident such as the collection of payload data by GSV cars is not repeated,” said Information Commissioner Christopher Graham.

“It is my view that as an alternative to the issuance of an Enforcement Notice under section 40 of the Data Protection Act 1998, that the data controller should sign an undertaking,” Graham stated.

The Commissioner said that the undertaking would require Google to institute a policy ensuring that Google employees and engineers are trained on legal requirements regarding data protection in the UK.

Within nine months, Google would be required to facilitate a consensual audit by the ICO of the above internal privacy and security practices. Google also would be required to delete the UK payload data it collected, to the extent that Google has no other outstanding legal obligation to retain such data.

Further information is available here on the ICO’s website.

On October 27, the Federal Trade Commission recently closed its investigation of Google’s data collection practices without assessing a fine or penalty (see November 3 posting on Trade Regulation Talk).

FTC Ends Investigation of Google “Street View” Data Collection Practices

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

The Federal Trade Commission has ended its investigation of Google’s data collection practices related to its “Street View” program, according to a letter sent to Google on October 27 by David Vladeck, the Director of the FTC’s Office of Consumer Protection.

Street View allows users of Google’s mapping service to view ground-level photographs of specific locations, which are taken by cameras attached to cars driven by Google employees.

In 2007, the company installed software on its Street View cars to collect data about wireless network access points for the purpose of improving its location-based services. Earlier this year, Google discovered that the software on the Street View cars had also been collecting some “payload” data contents of communications sent over unsecured wireless networks. Google asserted that the collection of payload data was inadvertent and that it had not used the data.

Vladeck said the FTC’s staff has concerns about the internal policies and procedures that gave rise to this data collection. In the FTC’s view, Google’s internal review processes were inadequate.

Google was urged to develop and implement procedures to ensure that it collects only information necessary to fulfill a business purpose, disposes of information no longer necessary to accomplish that purpose, and maintains the security of information collected.

Because Google had made assurances that it would improve its processes and would delete the payload data, the FTC decided to end its inquiry without assessing a fine or penalty.

Text of Vladeck’s letter appears here on the FTC website.

Consumers Could Not Pursue Divestiture of InBev’s Acquisition of Anheuser-Busch

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

Missouri beer consumers were not entitled to equitable relief undoing the now-consummated acquisition of Anheuser-Busch Companies, Inc. by InBev NV/SA on the ground that the transaction violated Sec. 7 of the Clayton Act, the U.S. Court of Appeals in St. Louis has decided.

Judgment on the pleadings in favor of the defendants (2010-1 Trade Cases ¶76,900) was affirmed on the ground that the divestiture remedy that the plaintiffs sought would not be appropriate.

The beer consumers had argued that the merger would eliminate InBev, the world’s largest brewer, as a “perceived” and “actual” potential competitor in the U.S. beer market. The district court rejected as conclusory allegations that InBev intended to enter the U.S. market de novo and that any rational market participant had tempered its pricing activities in the existing market because it viewed InBev as a potential de novo entrant.

While the plaintiffs raised the same arguments on appeal, the appellate court “focus[ed] instead on an independent reason why the district court did not err in dismissing the Complaint.”

Approval of Merger, Delay in Filing

The appellate court noted the “unusual posture” of the case. The merger had been approved by the Department of Justice, and the parties had combined their sizeable operations into one corporate entity. Moreover, the plaintiffs’ delay in filing their lawsuit and their motion for preliminary injunction were inexcusable. While divestiture was the only available remedy, it “would not be appropriate as a matter of law,” the court held.

“Fashioning appropriate equitable antitrust relief requires that courts balance the benefit to competition against the hardship or competitive disadvantage the remedy may cause,” the court explained. The remedial equities balanced overwhelmingly in favor of denying the remedy.

The October 27, 2010, decision in Ginsburg v. InBev NV/SA, appears at 2010-2 Trade Cases ¶ 77,205.

Supplement Marketer's Compliance with FTC Consent Decrees to Be Reconsidered

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

The U.S. Court of Appeals in Philadelphia has ruled that a lower court clearly erred when it denied the Federal Trade Commission's motion to hold a supplement and cosmetics marketer, its sole shareholder, and a consultant in contempt for violation of consent decrees resolving an earlier FTC enforcement action.

The lower court's decision denying the contempt motion (2009-2 Trade Cases ¶76,708) was vacated, and the matter was remanded to the lower court for further proceedings.

Consent Decrees

The FTC contended that the defendants violated consent decrees reached in 2000 with the agency. The consent decrees resolved FTC claims that the defendants made unsubstantiated representations pertaining to a dietary supplement and a cosmetic cream. In relevant part, the consent decrees prohibited the defendants from making unsubstantiated claims and misrepresenting the results or conclusions of any test, study, or research.

It was an abuse of discretion to deny the motion for contempt to the extent the defendants' claims for a calcium supplement were unsupported by competent or reliable scientific evidence, the appellate court held. The defendants did not support claims that the supplement was unique in its ability to increase bone density or that it was superior to prescription osteoporosis medicines.

However, the lower court did not clearly err by finding that representations about the supplement's ability to increase bone density in the hip were in accord with the consent decree. The issue of whether claims that the calcium supplement was more absorbable than other calcium supplements violated the consent decree was remanded so that the district court could address these particular claims more exhaustively.

The district court did not properly consider the FTC's contention that the defendants misrepresented scientific research in violation of the underlying consent decrees. Rather, the district court improperly focused on the product’s overall salutary effects. Although some of the representations were unlikely to survive careful factual scrutiny, the initial resolution of each issue was left to the district court, according to the appellate court.

Substantial Compliance

Although the defense of substantial compliance was available in a contempt proceeding, the district court failed to support its determination that the defendants were entitled to the defense, the appellate court held. In order to avail oneself of the defense, a party had to show that it (1) had taken all reasonable steps to comply with the valid court order, and (2) had violated the order in a manner that was merely “technical” or inadvertent.”

The district court recognized that some violations occurred but concluded that the defendants complied with “the spirit” of the consent decrees. However, the court neither identified the misconduct nor explained why the conduct qualified as a “technical” or inadvertent” violation of the consent decrees.

Absent specific findings addressing this second step of the substantial compliance test, the appellate court was unable to conduct meaningful appellate review. Thus, the district court’s finding that the defendants substantially complied with the consent decrees was vacated.

The October 26 decision in FTC v. Lane Labs-USA, Inc., will appear at 2010-2 Trade Cases ¶77,204.