Blogging in Absent Employee’s Name Could Be False Endorsement

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

A former employee of an interior design firm who had a personal Twitter following of approximately 1,250 people had standing to pursue a Lanham Act false endorsement claim against the firm for its alleged use of her personal Twitter and Facebook accounts to promote its business when the former employee was in the hospital, the federal district court in Chicago has ruled.

The former employee satisfied the prudential standing requirement for a false endorsement claim because she had developed a protected, commercial interest in her name and identity through her use of social media in the Chicago design community, according to the court.

There was undisputed evidence in the record that during the former employee’s hospitalization, design firm employees accessed her personal Facebook account and accepted friend requests at least five times and posted 17 Tweets on her personal Twitter account.

Stored Communications Act

The court said that the firm’s unauthorized access to the former employee’s Twitter and Facebook accounts could constitute violations of the Stored Communications Act (SCA) if the former employee could show that she suffered actual damages as a result of the firm’s unlawful access to her accounts. The SCA claim required further discovery on the issue of damages.

Right to Publicity

The former employee could not pursue an lllinois Right of Publicity Act claim, the court held. The firm’s employees who used the account did not pass themselves off as the plaintiff and thus did not appropriate her identity within the meaning of the Act, the court determined. Before leaving the firm, the former employee had publicly thanked her temporary replacements for their “amazing posts.”

The decision is Maremont v. Susan Fredman Design Group, Ltd., CCH Guide to Computer Law ¶40,312.

Further information regarding CCH Guide to Computer Law appears here.

Franchisor Not Liable to Pay Workers’ Comp to Franchisee’s Employee

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

A franchisor of sandwich shops was not a "contractor" under the meaning of the Kentucky Workers’ Compensation Act (KWCA) and therefore was not liable for the payment of workers’ compensation benefits for the injured employee of a franchisee, the Kentucky Supreme Court has decided. Thus, a ruling by a Kentucky appellate court (CCH Business Franchise Guide ¶14,453) was reversed.

Although the appellate court correctly determined that an Administrative Law Judge (ALJ) erred in interpreting the KWCA, the appellate court should not have reversed the ALJ’s ruling, which properly analyzed the facts of the case under the statute and came to the correct conclusion that the franchisor was not a "contractor," the supreme court held.

Coverage of Franchise Relationships

The ALJ’s legal error was in concluding that the General Assembly could not have intended the KWCA to encompass the relationship between a franchisor and franchisee simply because the statute failed to mention such a relationship.

Like the appellate court, the Kentucky Supreme Court was not convinced that the KWCA’s failure to mention franchisor-franchisee relationships evinced an intent on the part of the General Assembly to preclude a franchisor from ever being considered a statutory employer of its uninsured franchisee’s employee. Nothing prevented a franchisor that contracted with another for work that was a regular part of the franchisor’s business from being considered a "contractor" simply because the other party to the contract, the purported "subcontractor," was its franchisee.

Franchisor as “Contractor”

The ALJ’s opinion included findings supporting its conclusion that the franchisor was not a "contractor." While the franchisor did retain some rights (such as the right to be named an additional insured and given notice of cancellation of insurance policies), the relationship was clearly much different than that contemplated by the KWCA.

The ALJ found that the franchisor was in the business of franchising, not the business of selling sandwiches. Thus, the franchisee did not perform a regular or recurrent part of the franchisor’s business, and the ALJ’s finding that the franchisor was not a "contractor" was supported by substantial evidence, the supreme court determined.

The decision is Doctors’ Associates v. Uninsured Employers’ Fund, CCH Business Franchise Guide ¶14,736.

Antitrust Division Will Not Challenge Designated Supplier Program for College Apparel

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

A proposal by the Worker Rights Consortium—a nonprofit corporation aiming to improve working conditions and labor standards—to implement a "designated suppliers program" that would enable colleges and universities to ensure that apparel with their school names and insignia is made in factories providing fair labor conditions will not be challenged by the Department of Justice Antitrust Division.

The Justice Department informed the corporation in a December 16, 2011, business review letter that the proposed conduct was unlikely to lessen competition in the collegiate apparel sector.

Licensing Requirements

According to the proposal, the program would establish licensing terms that will require licensees and any factory that manufactures collegiate apparel to adhere to specified fair labor standards. The terms would include requirements that licensees pay the factories with which they contract a sufficient amount that the factories can pay their employees a living wage and that the licensees ensure that the factories guarantee workers the freedom to engage in collective bargaining.

Effect on Competition

The Justice Department noted that incorporation of the proposed licensing terms was optional, and it was unlikely to have a substantial effect on licensing competition among potentially participating schools. It also was not likely to have a substantial effect on downstream competition for apparel sales. Moreover, the letter said, the factories affected by the proposed licensing terms would probably "constitute only a tiny portion of the labor market, making significant anticompetitive effects in that market unlikely."

In issuing the letter, Sharis A. Pozen, Acting Assistant Attorney General in charge of the Antitrust Division, stated that the program, "can be viewed as precompetitive in that it may facilitate competition in a new area, by providing assurances that apparel was produced under conditions meeting the Designated Suppliers Program standard."

The letter is Worker Rights Consortium, Business Rev. Ltr. No. 11-2, December 16, 2011, CCH Trade Regulation Reporter ¶44,111. A news release on the development appears here.

Release Agreement Barred Michigan Franchise Law Claims

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

Michigan Franchise Investment Law claims brought by a terminated insurance agency franchisee against its franchisor were barred by a release agreement that waived the franchisee’s right to bring any claims in exchange for the franchisor’s waiver and deferral of certain franchise fees, a federal district court in Detroit has decided.

The franchisee alleged that the franchisor violated the Michigan franchise law by:

(1) Making untrue statements of material fact and omitting material fact; and

(2) Failing to provide a copy of its Uniform Franchise Offering Circular at least ten business days prior to the execution of the parties’ franchise agreements.

However, the release agreement signed by the parties approximately two years after the execution of their franchise agreements provided for a blanket waiver of any and all claims the franchisee held against the franchisor, including claims under the franchise statute.

The franchisee adduced no evidence refuting the conclusion that the release was fairly and knowingly made, according to the court. The release was a short, two-page document, the bulk of which was comprised of the paragraph setting out the terms of the franchisee’s release of his claims.

Although the franchisee asserted that he did not grasp the clear intent of the release and that the franchisor failed to inform him that by signing the release he was waiving his rights to sue the franchisor, given the clear and unambiguous terms of the release, this alleged failure to inform fell short of a misrepresentation of the contract or other fraudulent or overreaching conduct.

The franchisee argued that the release was void under the Michigan Franchise Investment Law provision that a "requirement that a franchisee assent to a release, assignment, novation, waiver, or estoppel which deprives a franchisee of rights and protections provided in this act" is "void and unenforceable if contained in any documents relating to a franchise."

However, the release was not a "document relating to a franchise" within the meaning of that provision because the franchisee was not required to release his franchise law claims as a condition of the franchise agreements, the court determined.

Moreover, the Michigan Franchise Investment Law also stated that this provision did not preclude a franchisee, after entering into a franchise agreement, from settling any and all claims. Under the circumstances in which the release was executed more than two years after the franchise agreement in exchange for the waiver of fees, the release was more akin to a settlement of claims than a "document relating to a franchise."

The decision is NBT Associates, Inc. v. Allegiance Insurance Agency CCI, Inc., DC Mich., CCH Business Franchise Guide ¶14,726.

Senators Concerned with Impact of Google’s Practices on Competition

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

Allegations regarding Google's search engine practices raise important competition concerns, according to Senators Herb Kohl (D, Wisconsin) and Mike Lee (R, Utah).

In a December 19 letter to FTC Chairman Jon Liebowitz, the senators, who serve as Chairman and Ranking Member of the Senate Judiciary Committee’s antitrust subcommittee, pointed to Google's business practices that they believe “warrant a thorough investigation by the FTC.”

The antitrust subcommittee held a hearing in September to examine the effect of Google's conduct on competition and heard testimony from Google's Executive Chairman Eric Schmidt and others. The letter detailed a number of issues raised at the hearing.

Steering Users to Own Products, Services

The senators questioned whether Google is using its market power in general Internet search “to steer users to its own web products or secondary services and discriminating against other websites with which it competes.”

Google has changed its business model, according to the senators, and “now owns a large and growing array of search-dependant products and services.” With control of vertical search sites, such as Google Maps, Google Travel, and Google Flight Search, many question whether it is possible for the company to be “an unbiased general or ‘horizontal’ search engine.”

Impact on Other Websites

Another issue to be examined is the impact of Google’s practices on websites, such as Yelp! and Nextag and on innovation. At the subcommittee hearing, Yelp! CEO Jeremy Stoppelman and Nextag CEO Jeffrey Katz testified that Google’s practice of favoring its own content harms them directly by depriving their sites of user traffic and advertising revenues. Both CEOs testified that they would not attempt to launch their companies today given Google’s current practices.

The senators also encouraged the FTC to consider Google’s market share of Internet searches done on mobile devices. In light of Google’s ownership of the Android operating system and its proposed acquisition of mobile phone maker Motorola Mobility, some “have raised concerns that Google, as a condition of access to the Android operating system, require phone manufacturers to install Google as the default search engine,” according to the letter.

AT&T Abandons Planned Acquisition of T-Mobile

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

Facing an antitrust challenge from the Department of Justice and regulatory hurdles raised by the Federal Communications Commission (FCC), AT&T Inc. on December 19 abandoned its planned acquisition of T-Mobile USA Inc. from Deutsche Telekom AG. AT&T said that it decided to call off the acquisition “after a thorough review of options”

The Justice Department Antitrust Division, seven states, and the Commonwealth of Puerto Rico alleged in a complaint filed in the federal district court in Washington, D.C. that the combination of two of the four largest providers of mobile wireless telecommunications services would violate the antitrust laws. (See “Department of Justice Seeks to Block AT&T’s Acquisition of T-Mobile," Trade Regulation Talk, August 31, 2011.)

The FCC staff had reviewed the transaction and found a number of public interest harms. The staff found that the deal would substantially lessen competition in ways that no conditions would appear to remedy. The staff concluded that removing T-Mobile as a competitor would create the incentives for AT&T and other competitors to raise prices.

Government Response

“Consumers won today,” Sharis Pozen, Acting Assistant Attorney General in charge of the Antitrust Division, said in a written announcement. “Had AT&T acquired T-Mobile, consumers in the wireless marketplace would have faced higher prices and reduced innovation. We sued to protect consumers who rely on competition in this important industry. With the parties’ abandonment, we achieved that result.”

The Federal Communications Commission agreed. “The FCC is committed to ensuring a competitive mobile marketplace that drives innovation and investment, creates jobs and benefits Consumers,” FCC Chairman Julius Genachowski said in a brief statement. “This deal would have done the opposite.”

AT&T Statement

In a December 19 press release, AT&T said that it agreed with Deutsche Telecom AG “to end its bid to acquire T-Mobile USA, which began in March of this year.” However, the actions of the Department of Justice and FCC to block the transaction do not change the realities of the U.S. wireless industry, according to the company. “It is one of the most fiercely competitive industries in the world, with a mounting need for more spectrum that has not diminished and must be addressed immediately. The AT&T and T-Mobile USA combination would have offered an interim solution to this spectrum shortage. In the absence of such steps, customers will be harmed and needed investment will be stifled.”

AT&T Chairman and CEO Randall Stephenson reaffirmed the company’s commitment to "lead the mobile Internet revolution."

“To meet the needs of our customers, we will continue to invest. However, adding capacity to meet these needs will require policymakers to do two things. First, in the near term, they should allow the free markets to work so that additional spectrum is available to meet the needs of the U.S. wireless industry, including expeditiously approving our acquisition of unused Qualcomm spectrum currently pending before the FCC. Second, policymakers should enact legislation to meet our nation’s long-term spectrum needs.”

Other Voices

The American Antitrust Institute congratulated the U.S Department of Justice Antitrust Division and the FCC for “bringing to a swift end AT&T’s adventurous test of U.S. merger controls.” Companies planning highly-concentrating horizontal mergers will have to think twice “no matter how much political clout they think they can bring to the table.” Preventing this merger saved many jobs, according to the AAI. “It is an important victory for antitrust and American consumers.”

Congress Restricts Funds for FTC Report on Food Marketing to Children

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

Federal legislation to fund the FTC and other agencies for Fiscal Year (FY) 2012, which was approved by Congress on December 17, would restrict the FTC from issuing principles or guidelines governing food marketing.

The “Consolidated Appropriations Act, 2012” states that none of the funds appropriated to the agency may be used "to complete the draft report, entitled ‘Interagency Working Group on Food Marketed to Children: Preliminary Proposed Nutrition Principles to Guide Industry Self-Regulatory Efforts,’ unless the Interagency Working Group on Food Marketed to Children complies with Executive Order 13563."

Cost-Benefit Analysis

The executive order, issued January 18, 2011, requires government agencies, among other things, to conduct a cost-benefit analysis when issuing regulations. Agencies also are expected to invite and consider public comments on proposals.

Food Marketing Guidelines

The restriction on FTC funding was part of the House of Representatives' version of appropriations measure. The House Committee Report did not support the FTC, either as part of the Interagency Working Group on Food Marketed to Children or acting independently, issuing “principles or guidelines governing food marketed to children unless a peer-reviewed scientific study conclusively demonstrates that regulating food marketing directed to children is the most effective way of changing long-term eating behavior and reducing obesity.”

Interagency Working Group

The House Committee Report advised the agency not to rely on any guidance issued by the Interagency Working Group on Food Marketed to Children to engage in enforcement actions under its existing authority.

The Interagency Working Group on Food Marketed to Children—comprised of Centers for Disease Control and Prevention, the FTC, the Food and Drug Administration, and the U.S. Department of Agriculture—was convened in 2009 to develop nutrition standards for foods marketed to children and define the scope of marketing to which those standards.

The Working Group released preliminary proposed voluntary principles to guide industry self-regulation for public comment in April 2011. FTC Bureau of Consumer Protection Director David C. Vladeck testified before a House subcommittee hearing on October 12 regarding the agency’s participation in the working group.

FY 2012 Appropriations

The bill authorizes $311,563,000 in funding for the FTC in FY 2012. This is $20,200,000 above the FY 2011 enacted level and $14,437,000 below the budget request. The figures are based on Senate recommendations. The House version had called for an appropriation of $284,067,000, which would have been $7,296,000 less than fiscal year 2011 and $41,933,000 less than the request.
The spending measure does not include other provisions included in an earlier Senate bill. Proposed increases to the Hart-Scott-Rodino (HSR) Act premerger filing fees are not in the final measure.

Also missing was language in the Senate measure that would have precluded the conveyance of the FTC headquarters building on Pennsylvania Avenue to the National Gallery of Art or other entity unless the government received fair market value for the property.

Store’s Inadequate Data Security Could Be Unfair Practice Under Illinois Law

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

A customer of Michaels Stores stated an Illinois Consumer Fraud and Deceptive Business Practices Act claim against the craft store for engaging in an unfair business practices relating to the failure to implement adequate security at its PIN pads, according to the federal district court in Chicago.

Michaels’ PIN pads, used by consumers to pay by debit/credit cards, were replaced by a modified PIN pad that captured consumers’ debit and credit information. A properly operating PIN pad encrypts the cardholder’s PIN (personal identification number), temporarily stores the encrypted PIN, and transmits the information to a transaction manager, and a card company or bank for verification. “Skimming” is the unauthorized capture of debit or credit card information by unauthorized persons called “skimmers.”

Michaels reported that—between February 8 and May, 2011—“skimmers” placed approximately 90 fraudulent PIN pads in 80 of its stores in 20 states. At the time, Michaels was not in compliance with VISA’s global mandate for encrypted PIN pad terminals or other security requirements.

Failure to Protect Information, Notify Customers

Several customers filed suit on behalf of all customers whose financial information was stolen from Michaels. They alleged that Michaels failed to adequately protect their financial information and failed to notify the customers of the security breach in violation of the Illinois Consumer Fraud and Deceptive Business Practices Act (CFA), 815 Ill. Comp. Stat. 505/1.

To state a claim under the CFA, the customer must allege that Michaels engaged in a deceptive or unfair practice, intended for the customer to rely on the deception, the deception occurred in the course of conduct involving trade or commerce, the customer suffered actual damages, and the damages were proximately caused by the deception.

Unfair Practices

A business practice is unfair under the CFA if it offends public policy, is immoral, unethical, oppressive, or unscrupulous, or caused substantial injury to consumers.

Because the skimmers substituted legitimate devices with counterfeit devices, the store ignored its obligation to implement procedures and practices preventing criminal conduct. This lack of action constituted a CFA violation, according to the court.

Customers also must allege a purely economic injury in order to state a CFA claim. A customer does not suffer actual damage simply because of the increased risk of future identity theft. Here, the customer sufficiently alleged that they suffered actual injuries when they lost money from unauthorized withdrawals and/or bank fees, the court decided.

Deceptive Practices

The customer, however, failed to show that Michaels engaged in a deceptive practice, according to the court. To state a CFA claim based on deceptive practices, a plaintiff must show there was either a communication containing a deceptive misrepresentation or a deceptive omission. There was no evidence that Michaels made any statements to customers.

The decision is In re: Michaels Stores Pin Pad Litigation, CCH State Unfair Trade Practices Law ¶32,379.

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

FTC Subpoenas, Civil Investigative Demands Enforced in Monopolization Probe

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

In an FTC investigation into a consumer products manufacturer’s potentially monopolistic practices in the market for condoms, the agency was entitled to seek information on products other than condoms because the inquiry extended to the manufacturer’s products other than condoms, the U.S. Court of Appeals in Washington, D.C. has ruled.

An order granting enforcement of the Commission’s subpoena and the associated civil investigative demands (CID) (2010-2 Trade Cases ¶77,215) was affirmed.

The manufacturer accounts for approximately 70 percent of the latex condoms sold in the United States. It offers retailers a discount based on the amount of shelf space they devote to its condoms.

Exclusionary Bundling

The Commission’s inquiry lawfully extended to the possibility that the manufacturer was engaging in the exclusionary bundling of rebates to retailers that sold the manufacturer’s condoms, as well as its other products, in order to acquire or maintain a monopoly in the U.S. market for condoms.

Pursuant to a Resolution Authorizing Use of Compulsory Process, the Commission had issued a subpoena seeking, among other things, production of documents related to the manufacturer’s sales and distribution of condoms in the United States and Canada. In addition, the Commission issued a CID seeking information about cost, pricing, production, and sales of the company’s condoms in the United States and Canada.

When the manufacturer turned over to the Commission documents and data sets relating to its condom business with the information on other products redacted, it petitioned the Commission either to limit or to quash the subpoena and the CID. The Commission denied the request, and a federal district court granted the agency’s petition to enforce the subpoena and the CID.

The district court later denied the manufacturer’s motion to stay the enforcement order pending appeal (2011-2 Trade Cases ¶77,720). Earlier this year, the Commission denied review of the manufacturer’s petition to quash, limit, or stay four subpoenas ad testificandum directed to the company’s employees (CCH Trade Regulation Reporter ¶16,682).

Relevance, Burden

The district court did not err in finding the request to be “reasonably relevant” to the Commission’s investigation and not unduly burdensome. The Commission maintained that its Resolution contemplated an investigation into the possibility that the manufacturer was engaged in exclusionary practices in which products other than condoms might play a role, include bundling discounts. However, the manufacturer’s claims rested upon an unduly narrow interpretation of the Resolution. Deferring to the Commission’s own interpretation of its Resolution, the district court correctly interpreted the resolution to include an inquiry that implicated the manufacturer’s products other than condoms.

The court declined to decide whether the Commission’s bundling theory under LePage’s Inc. v. 3M, 324 F.3d 141, ultimately would be successful in the District of Columbia Circuit. According to the court, an inquiry into the bundling of rebates on condoms and other types of products with the purpose of sustaining market power in the market for condoms is arguably within the condemnation of the Sherman Act as the Third Circuit construed it in LePage’s. However, the court said that the LePage’s decision
was not the law of the D.C. Circuit, and had been roundly criticized.

The Commission could lawfully investigate whether the manufacturer’s practices would constitute a violation of the law in the Third Circuit, the court explained.

The December 13 decision in FTC v. Church & Dwight Co. will appear at 2011-2 Trade Cases ¶77,721.

Government Suit to Block AT&T Acquisition of T-Mobile Stayed

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

The federal district court in Washington, D.C. on December 12 stayed further proceedings in a federal/state enforcement action seeking to block AT&T Corporation’s proposed acquisition of T-Mobile USA Inc. from Deutsche Telekom.

The stay came at the request of the Justice Department and AT&T. The parties must inform the court by January 12, 2012, of the status of the proposed transaction.

The Justice Department, seven states, and the Commonwealth of Puerto Rico allege in the suit that the combination of two of the four largest providers of mobile wireless telecommunications services would violate the antitrust laws. (See “Department of Justice Seeks to Block AT&T’s Acquisition of T-Mobile,” Trade Regulation Talk, August 31, 2011).

AT&T and Deutsche Telekom are “actively considering whether and how to revise our current transaction to achieve the necessary regulatory approvals,” according to a December 12 AT&T statement.

The stay order in U.S. v. AT&T Inc. appears here on the Department of Justice Antitrust Division website.

Washington Franchise Law Covers Out-of-State Franchisees

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

The “franchisee bill of rights” provision of the Washington Franchise Investment Protection Act (WFIPA)—requiring franchisors and franchisees to deal with each other in good faith and listing several prohibited acts, practices, and unfair methods of competition—applied to the relationship between a California hotel franchisee and a Washington franchisor, according to the U.S. Court of Appeals in San Francisco.

A ruling (CCH Business Franchise Guide ¶14,367) that the WFIPA did not apply to the termination of the franchise—because the franchisee's hotel operation did not occur "in this state"—was reversed.

The provision at issue (Wash. Rev. Code Section 19.100.180), commonly referred to as the “franchisee bill of rights,” did not contain language limiting its application to the relationship between a franchisor and a franchisee “in this state,” the appellate court noted.

In contrast, several other of the WFIPA’s provisions contained an explicit statement that they applied only to actions “in this state.” Those provisions included requirements that the offer or sale of any franchise “in this state” must be registered in the state and that any franchise broker selling or offering a franchise “in this state” must register with the state.

Originally, the term “in this state” was not defined in WFIPA, the court observed. The statute was amended in 1991 to provide a definition of the term, largely in response to a law professor’s article recommending the clarification. However, that professor did not recommend that the legislature add a territorial limitation to the franchisee bill of rights. He recommended only that the legislature define the limitation where it already existed in the WFIPA. The Washington legislature did no more than what the professor recommended, the court determined.

By its terms, the definition of “in this state” provided by the 1991 amendments applied only to the specific provision making it unlawful to offer or sell a franchise “in this state” if it was unregistered or not exempt (Wash. Rev. Code Section 19.100.020).

The district court erred in concluding that the “overall statutory scheme,” as well as the 1991 amendments, evinced a legislative intent to confine the reach of the WFIPA to only those franchises operating “in this state,” the appellate court held.

As a matter of general principle, if a state law did not have limitations on its geographical scope, courts would apply it to a contract governed by that state’s law, even if parts of the contract were performed outside of the state. The fact that the WFIPA’s provisions relating to sales of franchises contained a territorial limitation did not lead to the conclusion that WFIPA’s bill of rights was similarly limited. Rather, the inclusion of explicit territorial limitations in the sale-related provision, and the failure to include such a limitation in the bill of rights, suggested the opposite conclusion.

The dispute was remanded to the federal district court for consideration of the merits of the franchisee’s WFIPA counterclaim and consideration of the availability of a remedy under the Washington “little FTC Act.”

The Ninth Circuit’s December 7 ruling in Red Lion Hotels Franchising, Inc. v. MAK, LLC, will appear in the CCH Business Franchise Guide.

Georgia Hospital Combination Was Immune from FTC Challenge

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

The effective merger of two Georgia hospitals was immune under the state action doctrine from an FTC challenge, the U.S. Court of Appeals in Atlanta has ruled. Dismissal of the Commission’s complaint for injunctive relief pending the completion of an administrative proceeding (2011-1 Trade Cases ¶77,508) was affirmed.

In an April 2011 administrative complaint, the FTC alleged that a local hospital authority’s purchase of Palmyra Park Hospital’s assets from HCA, Inc. and subsequent lease to Phoebe Putney Health System, Inc.—the operator of Phoebe Putney Memorial Hospital—would substantially lessen competition or tend to create a monopoly in the inpatient general acute-care hospital services market in Georgia’s Dougherty County and surrounding areas.

The agency sought injunctive relief to prevent the consummation of the plan prior to the completion of the administrative proceeding.

The appellate court agreed with the Commission that the joint operation of the two Albany, Georgia, hospitals—Phoebe Putney Memorial Hospital and Palmyra Park Hospital—“would substantially lessen competition or tend to create, if not create, a monopoly.” However, the question was whether the anticompetitive conduct was immunized by the state-action doctrine.

The FTC alleged that the acquisition included three stages:

(1) The local hospital authority’s purchase of Palmyra Park Hospital’s assets from HCA using Phoebe Putney’s money,

(2) The hospital authority’s immediate provision of control of the hospital to Phoebe Putney under a management agreement, and

(3) Phoebe Putney’s entry into a lease with the hospital authority to grant the local hospital operator managerial control of Palmyra Park Hospital’s assets for 40 years.

The FTC contended that the private parties used the hospital authority to shield the transaction from antitrust scrutiny.

State Action Immunity

While the doctrine of state action immunity protects the states from liability under the federal antitrust laws, the same protection does not extend automatically to political subdivisions, such as the hospital authority, the appellate court explained.

In order for the hospital authority to enjoy state-action immunity, it had to show that the state generally authorized it to perform the challenged action and clearly articulated a state policy authorizing anticompetitive conduct.

The acquisition of Palmyra Park Hospital, Inc. from hospital operator HCA Inc. and its subsequent operation by Phoebe Putney Health System, Inc., at the behest of the Hospital Authority of Albany–Dougherty County, were “authorized pursuant to a clearly articulated state policy to displace competition, the court held.

Through the Hospital Authorities Law, the Georgia legislature clearly articulated a policy authorizing the displacement of competition. The Georgia legislature granted local hospital authorities the power to acquire hospitals. In granting the power to acquire hospitals, the legislature must have anticipated that such acquisitions would produce anticompetitive effects, the court reasoned. “Foreseeably, acquisitions could consolidate ownership of competing hospitals, eliminating competition between them.”

The appellate court rejected the Commission’s argument that it could dispose of the immunity issue because the plan at issue constituted only private action, since it was formulated by Phoebe Putney Health System and HCA, Inc. and presented by Phoebe Putney Health System to the hospital authority.

FTC Bureau of Competition Director’s Reaction

“The Eleventh Circuit agrees with the Commission that this deal will create a monopoly and eliminate competition,” said FTC Competition Bureau Director Richard Feinstein in response to the decision. “We remain very concerned that it will raise healthcare costs dramatically in Albany, Georgia. We are considering all our options.”

Details of the December 9, 2011, decision in FTC v. Phoebe Putney Health System, Inc., No. 11-12906, will appear in CCH Trade Regulation Reporter.

Banks Failed to Plead Reliance on Payment Processor’s Advertising

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

In a case arising from a massive data security breach at credit and debit card payment processor Heartland Payment Systems, card-issuing banks had standing to pursue a claim against Heartland under the Florida Deceptive and Unfair Trade Practices Act (FDUTPA) for making false promotional statements about its data security practices, but failed to state claims under consumer protection laws of California, Colorado, Illinois, New Jersey, New York, Texas, and Washington, the federal district court in Houston has ruled.

Heartland allegedly made some detailed, factual promotional statements about its data security practices that could support banks’ claims of negligent misrepresentation under the common law of New Jersey, but the banks’ conclusory allegations of reliance were inadequate, the court held.

Data Security Breach

The card-issuing banks’ claims arose from a breach of Heartland’s computer systems by three hackers—an American and two unknown Russians. They installed programs that allowed them to obtain payment-card numbers and expiration dates for approximately 130 million accounts, as well as cardholder names for some accounts.

Puffery vs. Actionable Misrepresentations

Advertising claims that are vague and highly subjective constitute nonactionable puffery.

Heartland’s slogans—“The Highest Standards” and “The Most Trusted Transactions”—were puffery, the court found. Similarly, statements such as “layers of state-of-the-art security, technology and techniques to safeguard sensitive credit and debit card account information” were nonactionable.

However, Heartland also allegedly made statements that were factually concrete, verifiable, and subject to proof, including “[w]e maintain current updates of network and operating system security releases and virus definitions, and have engaged a third party to regularly test our systems for vulnerability to unauthorized access”; “we encrypt the cardholder numbers that are stored in our databases using triple-DES protocols, which represent the highest commercially available standard for encryption”; and “Exchange has passed an independent verification process validating compliance with VISA requirements for data security.”

Reliance

Although some of Heartland’s alleged statements might be actionable, the banks’ allegations of reliance where wholly conclusory, according to the court. It was unclear, for example, if the card-issuer banks’ reliance was through their joining, remaining in, or withdrawing from the Visa and MasterCard networks, or what relationship Heartland’s statements had to any such actions. The banks’ fraud and negligent misrepresentation claims were dismissed with leave to amend.

Florida Deceptive and Unfair Trade Practices Act

Heartland argued that only consumers, as the word is traditionally used, may assert claims under the FDUTPA.

The Florida legislature amended the FDUTPA in 2001 to authorize suit by a “person”—rather than a “consumer”—who has suffered loss from a violation. The Act’s purpose is “[t]o protect the consuming public and legitimate business enterprises,” the court observed.

It is unclear if the word “consuming” applied only to “public” or also to “legitimate business enterprises,” the court said. The more natural reading, in the court’s view, is that this clause listed two independent groups that the Act seeks to protect: first, “the consuming public,” and second, “legitimate business enterprises.” The question was close, but the legislature’s use of the word “person” in creating a private right of action suggested a broader reach than the word “consumer.”

Consumer Protection Laws of Other States

The banks’ claims under the New Jersey, New York, and Washington statutes were dismissed without leave to amend.

The banks’ relationship with Heartland existed only by virtue of their participation in the Visa and MasterCard networks. This relationship is far different from the direct, downstream relationship between a consumer of a good and its manufacturer or seller, within the scope of the New Jersey Consumer Fraud Act, the court found. Under the New York Deceptive Acts and Practices Law, the banks were not “consumers,” nor was the conduct at issue “consumer oriented.”

The banks failed to allege facts suggesting that their claim affected the public interest, under the Washington Consumer Protection Act, the court added. The only group likely to be injured in the same fashion—incurring expenses for replacement cards and fraudulent transactions—consisted of other issuer banks. This group was both too small and too specialized to constitute a substantial portion of the public.

The claims under the California, Colorado, Illinois, and Texas were dismissed with leave to amend.

The banks’ conclusory allegations of reliance were insufficient to state claims under the California Unfair Competition Law, the Illinois Consumer Fraud Act, and the Texas Deceptive Trade Practices Act, the court held.

Because the banks’ complaint did not include allegations about pricing, they failed to state a violation of the Colorado Consumer Protection Act’s prohibition against “false or misleading statements of fact concerning the price of goods, services, or property or the reasons for, existence of, or amounts of price reductions.”

The December 1 opinion in In re: Heartland Payment Systems, Inc. Customer Data Security Breach Litigation will be reported at CCH Advertising Law Guide ¶64,508.

Further details regarding CCH Advertising Law Guide appear here.

FTC Promotes Competition in Health Care, High Tech, Energy Markets, Chairman Testifies

This posting was written by John W. Arden.

In testimony before a House subcommittee yesterday, Federal Trade Commission Chairman Jon Leibowitz highlighted the agency’s recent efforts to promote competition and benefit consumers in the pharmaceutical, hospital, high tech, and energy markets.

“As members of this Subcommittee well know, competitive markets are the foundation of our economy, and effective antitrust enforcement is essential for those markets to function well,” Leibowitz told the House Judiciary Subcommittee on Intellectual Property, Competition, and the Internet.

“Vigorous competition promotes economic growth by keeping prices down, expanding output and the variety of choices available to consumers, and promoting innovation.”

Pay-for-Delay Agreements

In the health care industry, the FTC has focused on ending anti-competitive "pay-for-delay" pharmaceutical agreements, blocking anticompetitive mergers, and developing policy guidance regarding new health-care collaborations, said Leibowitz.

One of the Commission’s top competition priorities has been ending anticompetitive "pay-for-delay" agreements—settlements of patent litigation in which a branded drug manufacturer pays a generic drug manufacturer to keep its product off the market for a time. “Settlements like these enable branded manufacturers to buy more protection from competition than the assertion of their patent rights alone would provide.”

For the last 15 years, the agency has taken the position that these pay-for-delay agreements violate the antitrust laws. Some courts have upheld these agreements, causing them to become commonplace.

Health Care Mergers

This year the FTC has brought several merger enforcement actions in the health care markets of hospitals, dialysis centers, pharmaceutical manufacturers, and pharmacies, said Leibowitz. The Commission also continues to review mergers between pharmaceutical manufacturers and is investigating a merger involving pharmacy benefits managers.

“With the costs of prescription drugs increasing faster than other health care costs, the Commission is committed to preventing pharmaceutical and related mergers that may allow companies to exercise market power by raising prices,” the chairman noted.

Technology Industries

The Commission has ongoing investigations into potentially anticompetitive conduct by dominant firms in high-profile, high-tech industries. In 2009, a Commission action against Intel Corporation alleged that the computer chip giant used exclusive dealing agreements that punished companies wanting to utilize or distribute competing products. This blocked competitors from reaching consumers with their products and unlawfully
maintained Intel’s monopoly, he said.

Another probe of the high-tech industry—involving the Google-AdMob merger—culminated in a Commission decision not to file a case. “Taking account of Apple’s anticipated entry into the market, the Commission determined that future competition in mobile advertising was not likely to be harmed by the merger.”

Energy Markets

In view of the importance of gasoline pricing to consumers and businesses, the FTC is conducting an investigation of petroleum industry practices and pricing. Among the issues under investigation are whether producers, refiners, transporters, marketers, or traders have:

(1) Engaged in practices that has lessened or may lessen competition in the production, refining. Transportation, distribution, or wholesale supply of crude oil or petroleum products or

(2) Provided false or misleading information about the wholesale price of crude oil or petroleum products to a federal department or agency.

The Commission monitors daily retail and wholesale prices of gasoline and diesel fuel in 20 wholesale regions and approximately 360 retail areas across the country.

Chairman Leibowitz also summarized the agency’s international initiatives and consumer protection enforcement actions, including those focused on Internet fraud and privacy.

Text of the Chairman’s prepared statement appears here on the FTC website.

U.S. Closes Investigation into Google’s Acquisition of Online Advertising Service Provider

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

Google Inc.’s proposed acquisition of Admeld Inc., an online display advertising service provider, will not be challenged by the Department of Justice Antitrust Division. The Justice Department has closed its investigation into the transaction.

In a December 2 statement, the Antitrust Division said that the transaction was not likely to substantially lessen competition in the sale of display advertising.

According to the statement, the Antitrust Division’s investigation focused on the potential effect of the proposed transaction on competition in the display advertising industry. Both Google and Admeld provide services and technology to web publishers that facilitate the sale of those publishers’ display advertising space, the Antitrust Division noted.

The government also evaluated whether Google’s acquisition of Admeld would enable Google to extend its market power in the Internet search industry to online display advertising through anticompetitive means.

The division said it will continue to rigorously enforce the antitrust laws to ensure that transactions affecting evolving markets such as display and other forms of online advertising, as well as search, do not inhibit competition or innovation in any way.

Competitor Could Not Join State's Antitrust Challenge to Hospital Acquisition

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

A private medical center did not have the right to intervene in an enforcement action by the State of Maine, challenging a proposed acquisition of two cardiology practices by the state's largest health system and its affiliated hospital, Maine's Supreme Court has held. Denial of the medical center's motion to intervene was therefore affirmed.

The medical center seeking to intervene asserted that it was the defending hospital's principal competitor and would potentially be driven from the market as a result of the proposed merger. However, the medical center failed to show that the disposition of the action would impair or impede its ability to protect its interests through independent litigation.

Maine law authorized only the state attorney general—not private parties—to institute proceedings in equity to prevent and restrain antitrust violations, the state's high court explained.

Because private parties were not bound by the government litigation, any liability to private parties could be determined separately under Maine's statutory framework. Thus, there was no entitlement in a private party to intervene as of right in a state antitrust enforcement action in Maine without evidence of bad faith or malfeasance on the part of the government such that intervention was necessary to protect the public's interests. The medical center made no such evidentiary showing, the court said.

The private medical center also was properly refused permissive intervention into the matter, in the court's view. Such a joinder would have unduly burdened the proceedings, and the medical center had been given an adequate alternative method to participate in the enforcement action—the submission of oral and written comments to the trial court overseeing the action.

The case, State of Maine v. MaineHealth, appears in the CCH Trade Regulation Reporter at 2011-2 Trade Cases ¶77,702.

Seventh Circuit to Rehear Potash Price Fixing Conspiracy Claim

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

The U.S. Court of Appeals in Chicago, sitting en banc, will rehear a case brought by purchasers of potash, alleging a global price fixing conspiracy among producers.

A three-judge panel of the court had rejected the claims on the ground that the Foreign Trade Antitrust Improvements Act (FTAIA) applied to bar the suit (2011-2 Trade Cases ¶77,611). The panel’s opinion and judgment were vacated on December 2.

The panel had concluded that the assertion that the defendants “conspired to coordinate potash prices and price increases so as to fix, raise, maintain, and stabilize the price at which potash was sold in the United States at artificially inflated and anticompetitive levels” was wholly conclusory and insufficient to satisfy the pleading standards established by the U.S. Supreme Court in Bell Atlantic Corp. v. Twombly (2007-1 Trade Cases ¶76,785).

The complaint purportedly described anticompetitive conduct aimed at the potash markets in Brazil, China, and India—not the U.S. import market.

The rehearing order is Minn-Chem, Inc.v. Agrium Inc., December 2, 2011.

Twombly-Iqbal Standard “a Mess”

In a posting on the Wolters Kluwer Antitrust Connect blog, Christopher L. Sagers, Professor at Cleveland-Marshall College of Law, wrote that there is a growing consensus that the Twombly-Iqbal standard “is a mess,” having destabilized the our entire system of civil litigation and adopting a pleading system foreign to fundamental procedural principles.

The en banc order in this case is very welcome, wrote Sagers, since the three-judge panel’s opinion exempted from antitrust challenge a conspiracy “that was alleged to have caused billions of dollars in consumer injury, even while acknowledging plaintiffs had adequately alleged a worldwide conspiracy to inflate potash prices, had supported their claims with elaborate plus-factors pleading, and had alleged that contemporaneously with the conspiracy potash prices in the United States increased by six hundred percent.”

The blog posting appears here on the Antitrust Connect blog.

FTC Should Attempt to Block Express Scripts’ Acquisition of Medco: Antitrust Institute

This posting was written by John W. Arden.

The American Antitrust Institute (AAI) has asked the Federal Trade Commission to seek an injunction against Express Scripts’ acquisition of Medco Health Solutions, which “poses a threat to substantially lessen competition in the provision of pharmacy benefit manager services throughout the United States.”

In a November 30 letter addressed to FTC Chairman Jon Leibowitz, the AAI stated that the combination of two of the three largest national pharmacy benefit management services (PBMs)—and the additional vertical integration that such a combination fosters—would threaten competition and raise prices to large plan sponsors and, ultimately, consumers.

The three largest providers of PBM services control more than 80 percent of the “large plan sponsor market,” and the combined Express Scripts-Medco firm would control approximately 50 percent of that market, according to AAI President Albert A. Foer and Advisory Board Member Dan Gustafson. The third of the “big three” PBMs is CVS Caremark.

This market share is particularly concerning because of the structure of the market and the substantial barriers to entry and expansion, the letter said. The three major PBMs already have significant cost advantages from economies of scale and from vertical integration in mail order and specialty pharmacy distribution.

“When faced with these difficult entry and expansion barriers, the remaining second tier PBMs cannot adequately constrain potential anticompetitive conduct because of their smaller size, geographic limitations, lack of buyer power, and, in some cases, perceived conflicts regarding their corporate affiliation with plan sponsors.”

Large Plan Sponsors

More than 40 of the “Fortune 50” corporations rely on the three largest PBM providers. “Not surprisingly, when one of the big three PBMs loses a large plan sponsor, it almost inevitably [goes] to another one of the big three.”

Smaller competitors typically lack adequate claims-processing capabilities to serve national accounts and have only limited ability to secure discounts and rebates from drug suppliers and to provide lower dispensing fees from pharmacies.

Specialty and Mail Order Distribution

The proposed combination of Express Scripts and Medco is likely to lead to the merged entity’s exercise of enhanced buyer market power in the market for specialty and mail order pharmacy distribution, according to the letter.

“The proposed merger would heighten the risk that these major PBMs would push compensation to many retail pharmacies below what would be competitive levels, ultimately leading to higher prices and lost jobs. An adverse impact on the delivery of pharmaceutical services at the retail level should be sufficient by itself to raise serious concerns about the proposed merger.”

Exclusion of Rivals in Specialty Pharmacy Services

The merged firm would have the ability and incentive to exclude rivals in the provision of specialty pharmacy services, it was alleged. All of the big three PBMs have acquired specialty pharmaceutical companies recently, reducing the number of independent specialty pharmacies and giving the big three power over the downstream specialty pharmacy distribution chain.

Exclusion of Rivals in Mail Order Pharmacy Services

The merger would create the largest mail order pharmacy in the country, accounting for nearly 60 percent of all mail order prescriptions processed, according to the AAI.

“This poses several potential competitive threats. First, further consolidation of the PBM market would exacerbate the competitive disadvantages that smaller, second tier PBMs without vertically integrated mail order operations already face. Second, consolidation of mail order pharmacies threatens to lead to anticompetitive self-dealing. A vertically integrated PBM can channel prescriptions to its own mail order facilities instead of to retail pharmacy competitors, even if the cost of filling the prescription is more than it would be at a local pharmacy.”

Small community pharmacies may also be threatened by this mail order business, the letter maintained.

In light of these competitive threats, the AAI urged the FTC to seek to enjoin the merger.

Text of the letter appears here on the American Antitrust Institute’s website.

User Failed to Allege Injury from LinkedIn’s Disclosure of Information, Browsing Histories

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

An individual lacked standing to pursue privacy-related claims against online social networking website operator LinkedIn for disclosing his personal information, including personally identifiable browsing histories, to third-party advertising and marketing companies through the use of cookies and web beacons, the federal district court in San Jose has decided.

The individual asserted that LinkedIn’s conduct violated the federal Stored Communications Act and California’s Constitution, Unfair Competition Law, False Advertising Law, Consumer Legal Remedies Act, and common law.

Tracking of Browsing Habits

LinkedIn allegedly assigned each registered user a unique user identification number. Then, LinkedIn’s website linked and transmitted the user ID number to third-party tracking cookies, allowing third parties to track users’ online activity and to aggregate data on their browsing habits. The individual asserted that LinkedIn added social information, such as the name of each user and the other LinkedIn profiles they viewed and interacted with; which enabled the third parties to determine the personal identity of the user.

Emotional Harm

The individual failed to allege that he sustained an injury that would confer Article III standing to sue. He alleged that he suffered embarrassment and humiliation, but it was unclear from the face of the complaint what information was disclosed that would cause the individual emotional harm, the court said. He did not allege that his browsing history was actually linked to his identity by LinkedIn and transmitted to any third parties. The allegation that his sensitive information might be transmitted in the future was too theoretical for purposes of establishing standing.

Economic Harm

The individual asserted that he was economically harmed by LinkedIn’s practices because his browsing history was personal property with market value, and LinkedIn took that property from him without compensating him. This purported injury was too abstract and hypothetical to support Article III standing, in the court’s view.

The individual relied on allegations that the data collection industry generally considered consumer information valuable and that he was not compensated for use of his information, but he did not describe how he was foreclosed from capitalizing on the value of his personal data or how he was deprived of the data’s economic value simply because his unspecified personal information was collected by third parties.

He did not allege that his credit card number, address, or Social Security number were stolen and published or that he was a likely target of identity theft as a result of LinkedIn’s practices, the court noted. Nor did he allege that his personal information was exposed to the public. The complaint was dismissed with leave to amend.

The decision is Low v. LinkedIn Corp., CCH Privacy Law in Marketing ¶60,695.

Illinois Attorney General’s Price Fixing Suit Not a Removable “Class Action”

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

A suit filed by the Illinois Attorney General against eight manufacturers of liquid crystal display (LCD) panels for alleged price fixing in violation of the Illinois Antitrust Act was not a "disguised" class action subject to removal to federal district court under the Class Action Fairness Act of 2005 (CAFA), according to the U.S. Court of Appeals in Chicago.

The appellate court denied a petition for permission to appeal a district court’s remand order on the ground that the appellate court lacked jurisdiction over an appeal.

Parens Patriae Suit

A class action had to be brought by a "representative person" under Rule 23 of the Federal Rules of Civil Procedure or the state equivalent, the appellate court explained. The state attorney general’s action, which sought relief on behalf of the state as a purchaser LCD panels and as parens patriae for harmed residents, was brought under the Illinois Antitrust Act, which did not impose any of the familiar Rule 23 constraints.

Mass Action?

The appellate court also rejected the defendants’ argument that the case was a mass action because "monetary relief claims of 100 or more persons are proposed to be tried jointly on the ground that the plaintiffs’ claims involve common questions of law or fact."

Only the Illinois Attorney General made a claim for damages, precisely as authorized by the Illinois Antitrust Act. Moreover, a suit is not a mass action if the claims were asserted on behalf of the general public and not on behalf of individual claimants or members of a purported class. Looking to the complaint as a whole, the state was the real party in interest. The court rejected the notion that Illinois resident purchasers were the real parties in interest based on a claim-by-claim analysis.

Developments in Other Circuits

The Seventh Circuit decision follows similar decisions in two other federal circuits. The U.S. Court of Appeals in San Francisco (2011-2 Trade Cases ¶77,615) recently held that parens patriae actions filed by the Attorneys General of Washington and California on behalf of their state citizens, alleging an LCD price fixing conspiracy in violation of state antitrust laws, did not constitute class actions under CAFA.

In West Virginia ex rel. McGraw v. CVS Pharm., Inc., 646 F.3d 169, the U.S. Court of Appeals in Richmond, Virginia, earlier this year, held that an action brought by the West Virginia Attorney General against five pharmacies, alleging that they sold generic drugs to in-state consumers without passing along the cost savings in violation of three state statutes, was not a class action under CAFA. On November 28, the U.S. Supreme Court denied a petition for review of that decision.

The decision in LG Display Co., Ltd. v. Madigan appears at 2011-2 Trade Cases ¶77,686.

Facebook Agrees to Make Changes to Privacy Practices

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

Social networking website operator Facebook has agreed to settle Federal Trade Commission charges that it deceived consumers by telling them they could keep their information on Facebook private, and then repeatedly allowing the information to be shared and made public, the FTC announced today.

The proposed settlement requires Facebook to take steps to make sure it lives up to its promises in the future, including giving consumers clear and prominent notice and obtaining consumers' express consent before their information is shared beyond the privacy settings they have established.

"Facebook is obligated to keep the promises about privacy that it makes to its hundreds of millions of users," said FTC Chairman Jon Leibowitz. "Facebook's innovation does not have to come at the expense of consumer privacy. The FTC action will ensure it will not."

According to the FTC:

• Facebook changed its website so certain information that users may have designated as private was made public, without warning users of the change or getting their approval.

• Facebook represented that third-party apps that users' installed would have access only to user information that they needed to operate. In fact, the apps could access nearly all of users' personal data, including data the apps didn't need.

• Facebook told users they could restrict sharing of data to limited audiences—for example with "Friends Only." In fact, selecting "Friends Only" did not prevent their information from being shared with third-party apps their friends used.

• Facebook falsely claimed that it certified the security of participating apps, that it would not share users’ personal information with advertisers, and that it complied with the U.S.-EU Safe Harbor Framework for international data transfers.

• Contrary to promises made to users, Facebook continued to allow access to photos and videos posted by users, even after the users had deactivated or deleted their accounts.

The proposed settlement bars Facebook from making further deceptive privacy claims, requires that the company get consumers' approval before it changes the way it shares their data, and requires that Facebook obtain periodic assessments of its privacy and data protection practices by independent, third-party auditors for the next 20 years.

Facebook also would be required to prevent anyone from accessing a user's material later than 30 days after the user has deleted his or her account.

The Commission vote to accept the consent agreement package containing the proposed consent order for public comment was 4-0.

The agreement will be subject to public comment through December 30, 2011, after which the Commission will decide whether to make the proposed consent order final.

More information on the proposed settlement in In the Matter of Facebook, Inc., File No. 092 3184, is available here on the FTC’s website.

Computer Fraud and Abuse Should Be RICO Predicate Act: Department of Justice

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

In a statement before a House Judiciary subcommittee on November 15, a U.S. Department of Justice official proposed amending the federal RICO statute to make violations of the Computer Fraud and Abuse Act (CFAA) a RICO predicate act.

Richard Downing, Deputy Section Chief for Computer Crime and Intellectual Property, testified before the House Judiciary Subcommittee on Crime, Terrorism and Homeland Security. In his prepared statement, Downing emphasized the importance of addressing more targeted, sophisticated, and serious cyber crime and cyber intrusions.

According to Downing, computer technology has become a key tool of organized crime, which now:

(1) Hacks into public and private computer systems, including systems key to national security and defense;

(2) Hijacks computers for the purpose of stealing identity and financial information;

(3) Extorts lawful businesses with threats to disrupt computers; and

(4) Commits a range of other cyber crimes.

The Obama administration has taken significant steps to ensure that the American people, businesses, and governments build better protections against cyber threats, he said.

“Through this ongoing work, it has become clear that our Nation cannot improve its ability to defend against cyber threats unless certain laws that govern cybersecurity activities are updated, including the Computer Fraud and Abuse Act.”

RICO Predicate Act

Among the changes proposed by the Department of Justice is making CFAA offenses subject to the Racketeering Influenced and Corrupt Organizations Act.
Downing urged Congress to update the RICO statute because RICO could be an effective tool to fight criminal organizations that use the Internet to commit their crimes.

“The Administration’s proposal would simply make clear that malicious activities directed at the confidentiality, integrity and availability of computers should be considered criminal activities under the RICO statute,” the official noted.

Downing’s statements were issued as part of a broader proposal to update the CFAA, including amendments to ramp up sentencing and other penalties, furnish better tools for investigators and prosecutors, and provide enhanced deterrence for malicious activity directed at critical infrastructure.

The full text of Downing’s statements is available here on the Department of Justice website.

FTC Releases Final Version of Business Opportunities Rule

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

The Federal Trade Commission has approved changes to and released the final version of its business opportunity rule that will be effective on March 1, 2012.

The rule (16 CFR Part 437, "Disclosure Requirements and Prohibitions Concerning Business Opportunities") is intended to ensure that consumers have the information they need when considering buying a work-at-home program or any other business opportunity. The Commission vote approving the final amendments to the Business Opportunity Rule was a unanimous 4-0.

Simplified Disclosures

The changes made to the rule simplify the disclosures that business opportunity sellers must provide to prospective buyers. The simplified disclosures will help prospective purchasers assess the risks of buying a business opportunity, while minimizing compliance burdens on businesses, according to the FTC.

The final rule applies to business opportunities previously covered under the rule, as well as work-at-home offers such as envelope stuffing and craft assembly opportunities. The final rule requires business opportunity sellers to give consumers specific information to help them evaluate a business opportunity.

Sellers must disclose five key items of information in a simple, one-page document:

(1)The seller's identifying information;

(2) Whether the seller makes a claim about the purchaser's likely earnings (and, if the seller checks the "yes" box, the seller must provide information supporting any such claims);

(3) Whether the seller, its affiliates or key personnel have been involved in certain legal actions (and, if yes, a separate list of those actions);

(4) Whether the seller has a cancellation or refund policy (and, if yes, a separate document stating the material terms of such policies); and

(5) A list of persons who bought the business opportunity within the previous three years.

Misrepresentations and omissions are prohibited under the rule, and for sales conducted in languages other than English, all disclosures must be provided in the language in which the sale is conducted.

Furthermore, the rule permits earnings claims to be made by sellers of business opportunities only if the seller:

(1) Has a reasonable basis for its claim at the time the claim is made;

(2) Has in its possession written materials that substantiate its claim at the
time the claim is made;

(3) Makes the written substantiation available upon request to the prospective
purchaser and to the Commission; and

(4) Furnishes to the prospective purchaser an earnings claim statement in a required format.

The announcement of a final business opportunity rule completes the process that started on April 12, 2006, when the Commission published an Initial Notice of Proposed Rulemaking and proposed creating a business opportunity rule separate from the franchise rule.

A press release on the action appears here on the FTC website. Text of the Federal Register notice appears here.

The final version of the rule, along with its extensive Statement of Basis and Purpose, will appear in the CCH Business Franchise Guide.

Officials Immune for Enforcing Town’s Ban on Restaurant Franchises

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

Several employees of the town of Springdale, Utah, were entitled to qualified immunity for acting to enforce a town ordinance that banned franchised restaurants in connection with a suit brought by a sandwich shop franchisee contesting the constitutionality of the ordinance, according to a federal district court in Salt Lake City, Utah.

“Formula Restaurants”

In order to preserve the unique character of Springdale—a small, historic town just outside Zion’s National Park—the town passed the ordinance banning "formula restaurants" in 2006. The ordinance specifically defined "formula restaurant or delicatessen" as any "business which is required by contractual or other arrangement to provide any of the following: substantially identical named menu items, packaging, food preparation methods, employee uniforms, interior décor, signage, exterior design, or name as any other restaurant or delicatessen in any other location."

The ordinance went on to state that "formula restaurants and formula delicatessens" were "incompatible with the [town’s] general plan …because of the limited amount of private land available within the town’s boundaries; the large size or scale required of such uses; excessive noise, odor or light emissions; their excessive use of limited resources and the undue burden they place on public utilities and services, or because they are of a character hereby found to be in conflict with the town’s general plan."

Nonrenewal of License

After initially issuing a business license to the franchisee for operation of a sandwich shop, the town refused to renew the license upon realizing that the planned shop was to be a franchised Subway restaurant. In addition, the town’s fire marshall refused to perform a fire inspection of the business.
Unable to open for business as a result, the franchisee filed suit against the town, various town employees, and members of the town council for monetary damages and declaratory and injunctive relief. The franchisee subsequently stipulated to the dismissal of the council members, agreeing that they were entitled to legislative immunity.

Immunity

Qualified immunity insulated government officials from personal civil liability as long as their conduct did not violate clearly established statutory or constitutional rights of which a reasonable person would have known, the court noted. Faced with the officials’ contention that qualified immunity applied, the franchisee bore the burden of showing that a reasonable official should have known that his specific conduct violated the franchisee’s rights under clearly established law.

The franchisee correctly contended that state governments could not significantly burden interstate commerce through discriminatory, protectionist legislation. the court remarked. However, the franchisee failed to demonstrate that facially neutral laws prohibiting franchise restaurants had been clearly established as violating that constitutional principle, the court decided.

The franchisee identified a single Eleventh Circuit case on point, Cachia v. Islamorada (CCH Business Franchise Guide ¶13,974), holding that a local regulation banning franchise restaurants should be subject to a heightened level of scrutiny under the Dormant Commerce Clause. With no Supreme Court or Tenth Circuit cases on point, and only one circuit case explicitly suggesting the ordinance could potentially be unconstitutional, the law governing this area was not clearly established, the court held.

The decision is Izzy Poco, LLC v. Springdale, CCH Business Franchise Guide ¶14,715.

Alaska High Court Declines to Follow Current FTC Interpretations

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

The Alaska legislature’s directive that courts should give great weight to the Federal Trade Commission and federal court interpretations of the Federal Trade Commission Act when interpreting the Alaska Unfair Trade Practices and Consumer Protection Act (CPA) did not require the Alaska Supreme Court to overrule previous decisions under the law, the state high court held.

An electric company alleged that it incurred lost profits and expenses because of a construction company’s (1) inability to timely provide permits, materials, and instructions as required by a contract entered into by the parties and (2) presentation of falsified requests for additional compensation in the amount of $5.7 million.

The electric company brought an action against the construction company, claiming misrepresentation, failure to make disclosures, and violation of CPA. At the close of trial, the court refused to direct a verdict for the electric company and gave a jury instruction based on the existing Alaska standards on unfair and deceptive practices rather than based on current FTC Act interpretations, as requested by the electric company.

In three special verdicts, the jury found that the construction company did not breach any contractual or common law obligations and did not engage in unfair trade practices. Instead, the jury found that the electric company breached contractual obligations to the construction company, breached the implied covenant of good faith and fair dealing, engaged in misrepresentations, and committed unfair trade practices. The jury awarded the construction company damages of more than $98,000, which was trebled under the CPA.

The electric company appealed, arguing that the trial court erred in refusing to grant it a directed verdict and refusing to give a jury instruction based on current interpretations of unfairness and deception promulgated by the FTC and federal courts, as required by a directive of the Alaska legislature.

Legislative Directive

In 1974, the Alaska legislature directed Alaska courts to give due consideration and great weight to the FTC and federal interpretation of the Federal Trade Commission Act in order to provide uniformity in unfair trade laws.

However, in State v. O’Neill Investigations, Inc. (609 P.2d 520, Alaska 1980), the Alaska Supreme Court held that the CPA had a “fixed meaning” derived from agency and judicial interpretation of the Federal Trade Commission Act. Since that case, the federal standards for unfair and deceptive practices have changed, while Alaska courts have continued to follow the standard set forth in O’Neill.

In this case, the state high court ruled that the trial court properly followed the O’Neill standards because incorporating current federal interpretations into the CPA would result in a loss of protection for Alaska consumers and businesses. It concluded that Alaska courts should continue to adhere to the CPA case law precedents for unfairness and deception.

“We decline to abandon our prior case law: We do not adopt the FTC’s 1980 policy statement now codified at 15 U.S.C. §45(n) as the standard for evaluating whether a practice be deemed unfair under the Alaska UTPA. We also decline to depart from our precedent regarding the definition of a deceptive practice. We thus conclude that the trial court did not err in evaluating [the electric company’s] motions or formulating jury instruction 28 according to our prior definitions of deceptive or unfair trade practices.”

The November 4 decision is ASRC Energy Services Power and Communications, LLC v. Golden Valley Electric Association, Inc., CCH State Unfair Trade Practices Law ¶32,352.

Equipment Dealer Was Not Connecticut “Franchise”

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

The relationship between a terminated dealer of outdoor power equipment and a manufacturer was not a "franchise" under the meaning of the Connecticut Franchise Act (CFA) because the dealer failed to show that more than 50% of its business resulted from the relationship, the U.S. Court of Appeals in Chicago has ruled.

A federal district court’s grant of summary judgment in favor of the manufacturer on the dealer’s CFA claim (Business Franchise Guide ¶14,551) was affirmed.

Association with Franchisor’s Trademark

To qualify as a “franchise” under the CFA, the dealer must be substantially associated with the franchisor’s trademark. To be substantially associated with the franchisor’s trademark, the dealer must show that most, if not all, of its business was derived from association with the franchisor, the court noted.

Based on the "most or all" formulation, federal courts have found that a franchise existed only where at least half of the plaintiff’s business resulted from its relationship with the defendants.

In the district court, resolution of the dealer’s CFA claim hinged on testimony submitted by the dealer’s president. Much of that testimony, in which the president detailed the gross profits and gross sales of the business, was stricken by the court as inadmissible expert testimony on the grounds that the dealer had not disclosed the president as an expert witness.

Gross Profits

Regardless of whether the president’s statements were considered to be expert or lay testimony, they were inadmissible as based on the president’s opinion rather than any objective analysis. Both lay and expert testimony was inadmissible where it consisted of unsupported inferences from raw data, according to the court.

In this instance, the president’s opinion that sales and gross profits from its Sprinkler Hose division should have been disregarded was inadmissible. If the sales and gross profits from the division were included in the overall calculations, the total gross profits of the dealer’s business derived from the parties’ relationship ranged from 34.41% to 41.37%.

Gross Sales

Although the federal district court excluded the president’s opinion on whether the sales of the manufacturer’s products by Home Depot should be included in the total sales figures for the dealer, given the president’s role as the dealer’s president and secretary, he could likely assess the appropriateness of including those sales, according to the appellate court. However, in light of the purpose of the CFA, it made sense only to include only the amount of commissions on Home Depot sales that the dealer would lose as a result of its termination, not the full sales price of those products, in determining the dealer’s gross sales.

If only the commissions the dealer would lose from the Home Depot sales were used in determining the dealer’s gross sales of the manufacturer’s products, the manufacturer’s products still accounted for less than 50% of the dealer’s total sales. In the relevant years, the total gross sales of the dealer’s business that derived from the parties’ relationship ranged from 26% to 35%.

Failure of Business

Finally, the fact that the dealer went out of business shortly after its termination failed to establish, on its own, that the dealer was substantially associated with the manufacturer’s trademark under the CFA, the court determined. No court had relied solely on the fact that a company went out of business to conclude that a franchise relationship existed between two parties, the court observed.

More importantly, the dealer’s claim that the termination caused it to go out of business was inconsistent with the position it took before the federal district court that the loss of the relationship with the manufacturer "was not the death knell” because the dealer could have survived “absent a dire economy."

The decision is Echo, Inc. v. Timberland Machines & Irrigation, Inc., CCH Business Franchise Guide ¶14,714.

Leibowitz Recites FTC Accomplishments, Future Plans at Nomination Hearing

This posting was written by John W. Arden.

At a hearing on his nomination for a second term as Commissioner yesterday, FTC Chairman Jon Leibowitz recounted some of the achievements of the agency during the last few years and spoke about a “portfolio of issues” that he plans to address during his next term.

Speaking before the Senate Committee on Commerce, Science, and Transportation, Leibowitz said that it has been “a wonderful opportunity” to serve on the FTC for the past seven years, including more than two years as Chairman.

“Just three years shy of our centennial, the FTC is the nation’s premier consumer protection agency,” he said in a prepared statement. “We play a critical role in freeing the marketplace from predatory, fraudulent, and anticompetitive conduct that tilts the playing field against consumers and honest business people.”

According to the Chairman, the “small agency with a big mission” has prioritized the pursuit of unfair and deceptive practices aimed at financially distressed consumers, addressed consumer privacy from both enforcement and policy perspectives, focused on health care competition, and monitored closely petroleum markets.

The growth of the Internet, together with the economic downturn, has fueled a resurgence of “last dollar frauds” aimed at the most vulnerable consumers. These include foreclosure rescue scams, sham debt relief, and bogus job opportunities. The Commission has partnered with state attorneys general and other state agencies to bring more than 400 cases against such schemes.

Consumer privacy has been—and will continue to be—a major focus on Commission enforcement and policy, according to Leibowitz. In the past decade, the FTC has brought more than 100 spam and spyware cases, more than 30 data security cases, and nearly 80 cases for violation of the Do Not Call rule.

Last December, the FTC issued a report setting forth critical self-regulatory principles that seek to promote consumer privacy, while allow industry to innovate on the Internet, he said.

“Of course, protecting privacy in the face of new technologies will remain a challenge. We are aware of this Committee’s concerns about the privacy implications of mobile apps, flash cookies, geolocation, and facial recognition; the value of industry-wide codes of conduct; and the difficulty safeguarding privacy when users of electronic devices every year seem to grow younger as well as more tech-savvy than their parents.”

Health care competition will remain a top priority for the Commission, particularly challenging hospital mergers that are likely to raise prices and “pay for delay” pharmaceutical settlements, he said.

In light of the impact of gasoline prices on American families, the FTC will continue to monitor petroleum markets closely. Recently, the FTC staff issued a study on examining the various factors that increase the price of gasoline, including OPEC’s inherently anticompetitive behavior and the rising demand in China and India.

The agency will continue to issue industry studies such as the periodic reports about the marketing of violent entertainment to children and the marketing of healthy food to children, the Chairman concluded.

Text of Commissioner Leibowitz’s prepared statement appears here on the FTC website.

Consumer Class Claims on Health Care Discount Ads Rejected

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

Consumers could not pursue deceptive advertising claims against providers of a health care discount program as a class action because the claims were governed by the varying consumer protection laws of different states and factual variations abounded, included varying advertisements in different states, the U.S. Court of Appeals In Cincinnati has ruled.

In 2007, Universal Health Card and Coverdell & Company created a program designed to provide health care discounts to consumers. Membership in the program was touted as giving consumers access to a network of health care providers that had agreed to lower their prices for members.

Universal placed ads in newspapers around the country encouraging customers to visit its website or call its toll-free hotline to learn more about the program and to sign up for a membership. Coverdell was responsible for maintaining the network of health care providers and for reviewing Universal’s advertising materials.

Consumers discovered that health care providers listed in the discount network had never heard of the program, and complained that the newspaper advertisements, designed to look like news stories and dubbed “advertorials,” were deceptive. Two disenchanted consumers sued Universal and Coverdell seeking to represent a nationwide class of all people who had joined the program.

State Consumer Protection Laws

Ohio’s choice of law rules made it clear that the consumer protection laws of the state where each injury took place would govern these claims, the court determined. In view of this and the consumers’ appropriate concession that the consumer protection laws of the affected states varied in material ways, the court found that no common legal issues favored a class-action approach to resolving this dispute.

Varied Ads, Need for Particularized Proof

Advertisements for the program varied to account for the different requirements of each state’s consumer protection laws—a point the consumers acknowledges but could not overcome, according to the court.

In addition, a key part of the consumers’ claim was that the program was worthless because the listed healthcare providers near the consumers did not offer the promised discounts or because there were no listed providers near them in the first place. But to establish the point, the consumers would need to make particularized showings in different parts of the country, the court said.

Even if callers heard identical sales pitches, Internet visitors saw the same website, and purchasers received the same fulfillment kit, these similarities established only that there was some factual overlap, not a predominant factual overlap among the claims and surely not one sufficient to overcome the key defect that the claims had to be resolved under different legal standards.

The court affirmed a decision striking the class allegations and dismissing this lawsuit without prejudice against both Universal and Coverdell.

The November 10 opinion in Pilgrim v. Universal Health Card, LLC will be reported at CCH Advertising Law Guide ¶64,467.

Prior Settlements Did Not Preclude Antitrust Suit Against Bar Review Course Provider

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

The U.S. Court of Appeals in San Francisco last week reversed the dismissal of an antitrust class action against West Publishing Corporation, its BAR/BRI subsidiary, and Kaplan, Inc., brought on behalf of law students and lawyers purchased bar review courses between August 2006 and March 2011.

Bar to Current Action?

The lower court had erred in concluding that earlier settlements barred the claims in the current action that BAR/BRI engaged in monopolistic behavior and paid Kaplan large sums of money to refrain from entering the bar review market.

The appellate court concluded that a $49 million settlement with consumers who purchased a BAR/BRI course between August 1, 1997, and July 31, 2006, (Rodriguez v. West Publishing Corp., 2009-1 Trade Cases ¶76,614) did not bar the current suit for damages and prospective relief.

The current plaintiffs’ interests in a monetary recovery were not represented by the plaintiffs in the earlier suit. In addition, the earlier settlement did not preclude the current plaintiffs from seeking injunctive relief for alleged conduct that took place before that settlement was entered.

Shared Lawyer, Interests

Although they shared a lawyer and some interests with the earlier class, the earlier settlement did not necessarily address all their potential interests, nor were those similarities sufficient for a finding of virtual representation, in the appellate court’s view.

Another antitrust suit brought in 2007 on behalf of two individual law students who intended to take the bar exam in 2010 (Schall v. West Publishing Corp.) did not bind the plaintiffs in the current action.

The plaintiffs in the current class action were not a party to this earlier action and their interests in a monetary recovery and injunctive relief were not represented in the suit. Thus, they could not be bound by the disposition of that case.

The November 7, 2011, not-for-publication decision in Stetson v. West Publishing Corp., No. 08-55818, appears at 2011-2 Trade Cases ¶77,671.