Nondisclosure of Affiliate's Rebates to Franchisor Did Not Violate FTC Franchise Rule

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

A franchisor of cleaning service businesses did not violate the FTC Franchise Rule—and therefore, did not fraudulently induce a franchisee to enter into an agreement—by failing to disclose in the Uniform Franchise Offering Circular (UFOC) provided to the prospective franchisee the "rebates" or "kickbacks" paid by an affiliate mailing services company to the franchisor, a federal district court in Baltimore has decided.

It was undisputed that, at the time of the franchisee’s decision to enter into an agreement with the franchisor, the North American Securities Administrators Association’s Uniform Franchise Offering Circular Guidelines—1993 (CCH Business Franchise Guide ¶5750) governed the contents of the UFOC used by the franchisor.

Disclosing Basis of Revenue

The relevant disclosure provision of those Guidelines was Item 8, which in part mandated a franchisor to disclose: "Whether, and if so, the precise basis by which the franchisor or its affiliates will or may derive revenue or other material consideration as a result of required purchases or leases."

The franchisee alleged that the affiliate made payments to the franchisor and that those payments constituted "rebates" or "kickbacks" that should have been disclosed in the UFOC, the court noted.

Assuming that the affiliate made payments to the franchisor, their disclosure was not required by Item 8. Instead, the franchisor was required to disclose whether its affiliate "will or may derive revenue" from required purchases, the court determined.

Required Purchase of Mail Services

The franchisor did, in fact, disclose that franchisees were required to purchase mail advertising services from its affiliate and also disclosed the cost of those services. The obvious implication of that disclosure was that the franchisor’s affiliate would derive revenue from those franchisee purchases, the court reasoned. No further disclosure was necessary.

Such an interpretation was consistent with the court’s finding that the franchisor’s disclosure documents drew a distinction between the affiliate, whom franchisees were required to purchase advertising services, and approved suppliers, from whom franchisees could purchase goods and services.

Amount of Payment Disclosed

What the affiliate did with the money it received from the franchisees for advertising services was immaterial, according to the court. What was material was how much the franchisees would have to pay the affiliate for advertising services. The franchisee here was fully informed of that.

The court’s conclusion was buttressed by the FTC’s Statement of Basis and Purpose—1979 (CCH Business Franchise Guide ¶6300) to the then-current version of its Franchise Rule. In that document, the FTC made a clear distinction between "affiliated persons" and "suppliers," thereby exposing the fallacy of the franchisee’s theory that the affiliate should be treated the same as an unaffiliated supplier.


The February 11 decision in Cleaning Authority, Inc. v. Neubert, will appear in CCH Business Franchise Guide.

Salons Can Pursue False Ad Suit Against Makers of “Salon Only” Products

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

Hair salon operators have standing to pursue a Lanham Act false advertising suit against manufacturers of “salon-only” hair products alleged to be widely available at mass retailers, the federal district court in New York City has ruled.

Constitutional Standing

The salon operators’ class action complaint satisfied the case-or-controversy requirement under Article III of the U.S. Constitution by asserting (1) a concrete and particularized injury, (2) causally connected to the conduct complained of, and (3) likely to be redressed by a favorable decision, the court held.

The manufacturers argued that any injury caused by the diversion of salon-only products to mass retailers did not flow from the false “salon-only” advertising.

The salon operators identified an injury separate from the injury created by the diversion, the court found. They asserted that their reputation was damaged because customers associated the “salon-only” advertising with the salons and therefore may stop patronizing the salons when they discover the falsity of the statements at issue.

The claimed causation was fairly straightforward: it was plausible that consumers would associate false advertising claims with the seller of the product, in addition to (or instead of) the product’s manufacturer, according to the court. Although the consumer’s decision ultimately caused injury to the salon operators, the manufacturers’ allegedly false statements had a “determinative or coercive effect” on the consumer’s decision.

If the manufacturers had engaged in false advertising, it was unlikely that they could successfully defend this action by showing that the salon operators could have avoided the effect of that violation of law by exiting the market for the manufacturers’ hair products. In any event, the operators sufficiently alleged the existence of a causal connection between the false advertising and the injury to their reputation based on past practices to establish standing, the court determined.

Statutory Standing

The salon operators had statutory standing under the Lanham Act because they had a reasonable interest in protecting themselves from the reputational damage allegedly resulting from the manufacturers’ advertising.

In Famous Horse Inc. v. 5th Avenue Photo Inc. (CCH Advertising Law Guide ¶64,046), the Second Circuit had held that a retail chain had alleged a “reasonable interest” and a reasonable basis for believing that its interest could be harmed by the supplier’s false advertising; the chain had an interest in maintaining its customers’ perception that its branded jeans, though discounted, were genuine, and the supplier’s false statements tended to undercut that perception.

Materiality

The salon operators stated a Lanham Act false advertising claim because the allegedly false statements related sufficiently to an inherent and material characteristic of the product to be actionable, the court decided. The claim that the products were sold only in salons went directly to a highly relevant aspect of the product. The “salon-only” claim differentiated these products from products sold at mass retailers and also indicated the superiority and cachet of the professional products.

Consumers might be willing to pay a premium for products sold exclusively through salons because they associated these products with professional expertise. The salon operators alleged facts sufficient to show that the false advertising claims were material to consumers’ purchasing decisions, the court concluded.

The decision in Salon FAD v. L’Oreal USA, Inc. appears at CCH Advertising Law Guide ¶64,162.

KFC Franchisees Had Ultimate Authority Over Advertising

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

The governing committee of the franchisee-controlled national advertising cooperative for restaurant franchisor KFC had the authority to adopt an advertising program and to amend the franchisor’s advertising proposals, according to the Delaware Chancery Court.

The franchisor’s position—that it had an effective veto power over the council—was rejected by the court.

Formation of the Advertising Cooperative

The KFC National Council and Advertising Cooperative (NCAC) was formed more than 40 years ago to deploy advertising funds raised from KFC franchisees under the franchise agreements, the court noted. In lieu of a board of directors, the NCAC committee served as the NCAC’s governing body and consisted of 17 members—13 franchisees and four franchisor-representatives.

The NCAC brought suit against the franchisor after an impasse developed over which entity (the NCAC or KFC) had authority to generate advertising plans for the KFC brand. Each party sought a declaration that the NCAC’s affairs should be governed as it saw fit.

Role of Cooperative

KFC claimed that the NCAC certificate of incorporation created a power-sharing arrangement between itself and the NCAC in which KFC had the sole authority to develop advertising plans and to present them to the committee for approval.

In KFC’s view, the committee could accept or reject those plans in total, but could not amend those plans over KFC’s objection and implement the amended plan. This view gave KFC veto power over the NCAC.

In contrast, the franchisees (using their majority control of the NCAC committee to bring this action) argued that the NCAC committee, like any corporate board, retained ultimate authority to manage the corporate and controlled its major function of determining the advertising plans and strategy for deploying the funds raised through franchisees.

The franchisees conceded that KFC had bargained for and won the sole authority to hire, fire, and direct a national advertising firm, but argued that KFC’s singular authority stopped there.

The franchisees contended that the NCAC Committee had the authority to modify KFC’s advertising proposals, consider alternatives proposed by franchisees, and to implement by majority vote an advertising plan that KFC did not approve. In the dispute, both parties sought declaratory relief that the NCAC’s affairs should be governed as it desired.

Ambiguous Certificate

The provisions of the NCAC certificate that bore directly on the division of power between KFC and the Committee were, to a certain extent, internally contradictory and overlapping, the court found. On balance, a close consideration of the certificate’s provisions setting out the respective roles of KFC and the Committee did not rule out either party’s interpretation as unreasonable, the court decided.

Although the language of the Certificate of Incorporation titled in the franchisee’s favor, the terms were ambiguous. Thus, parol evidence must be considered, the court held.

The interpretive rules normally applicable to construing certificates of incorporation under Delaware law did not apply with their normal force under these circumstances because the process by which the NCAC Certificate came into existence was dissimilar from a typical corporation. The franchisees bargained vigorously over the terms of the Certificate.

Extrinsic Evidence

Taken as a whole, extrinsic evidence of the parties’ course of conduct supported the franchisees’ position, the court determined. The evidence suggested that the parties never adhered to a strict franchisor proposes/Committee approves bifurcation that was the essence of the franchisor’s position.

KFC’s strongest argument in favor of its position was that its reading of the Certificate was more sensible as a business matter because the NCAC did not have the capability to effectively plan the advertising for a brand the size of KFC, in the court’s view.

Even though the franchisee’s position left KFC in a compromised position as against some of its competitors, the implementation of the franchisees’ position was not absurd given the history of the NCAC and the fact that the advertising dollars came from the franchisees themselves, the court ruled.

The franchisees had a strong incentive to be good shepherds of the KFC brand, and the NCAC was obligated to use the KFC marks “in good taste and consistent with the then current Bylaws of the NCAC.”

Moreover, the NCAC’s ability to advertise products was limited by the fact that the franchisees were permitted to sell only items that were approved by the franchisor.

The declaration requested by the franchisees was granted, at least in part, tempered by the realities regarding the franchisor’s continued role in the process.

The decision is KFC National Council v. KFC Corp., CCH Business Franchise Guide ¶14,542.

High Court Will Not Consider Retailer’s Resale Price Fixing Claim

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

The U.S. Supreme Court on February 22 denied a petition to review a decision of the U.S. Court of Appeals in New Orleans (PSKS, Inc. v. Leegin Creative Leather Products, Inc., 2010-2 Trade Cases ¶77,130), rejecting a Texas retailer’s resale price maintenance claims against the manufacturer of handbags and other accessories sold under the “Brighton” brand.

In an earlier decision in the matter, the Supreme Court held that vertical price restraints should be judged under rule of reason analysis (2007-1 Trade Cases ¶75,753).

The retailer purportedly had violated the manufacturer’s resale price maintenance policy by offering Brighton products at a discount. When the retailer refused to stop discounting the goods, the manufacturer ceased to sell Brighton goods to it. The retailer sued.

In its latest ruling, the Fifth Circuit affirmed dismissal of the action for failure to assert a valid relevant market or anticompetitive harm resulting from the manufacturer’s resale price maintenance program.

The retailer had asked the Supreme Court, among other things:

• Whether the appellate court’s rejection of its proof of market definition and power was proper, and

• Whether it was necessary to prove market power where it had presented direct evidence of anticompetitive effects and a lack of procompetitive justifications for the manufacturer’s conduct.

The petition is PSKS, Inc. v. Leegin Creative Leather Products, Inc., Dkt. 10-653, cert denied February 22, 2011. Further information is available here on the U.S. Supreme Court website.

Apple Subscription Service Draws Antitrust Scrutiny in U.S., EU: News Reports

This posting was written by John W. Arden.

Subscription terms set by Apple Inc. for media companies seeking to sell content on the iPad. iPhone, and its other devices have attracted the interest of antitrust officials in both the United States and the European Union, according to news reports.

The Wall Street Journal reported on February 18 that, according to unnamed sources, the Justice Department and Federal Trade Commission were examining whether the Apple “was running afoul of U.S. antitrust laws by funneling media companies’ customers into the payment system for its iTunes store—and taking a 30% cut . . . ”

Under Apple’s terms, companies selling digital subscriptions to content on Apple devices would have to make the content available for sale through the iTunes App Store at the best available price. They could not link to stores other than its App Store and could not offer better terms to subscribers elsewhere. This “most favored nation” clause could be considered anticompetitive if it distorts pricing.

U.S. antitrust enforcers would have to show that Apple has market power and was abusing it. Market definition is always a key issue.

While the iPhone is very popular, it has only a 16% share of smartphones and a very small share of the mobile telephone market, according to the Journal. Although Apple currently has about 75 percent of the tablet computer market, that share could drop when competitive brands start appearing.

Officials from the Justice Department, FTC, and Apple declined to comment to the Journal.

Meanwhile, a spokeswoman for the European Commission said that the Commission was “carefully monitoring the situation.”

The Independent, an Irish newspaper, quoted competition lawyer Guy Lougher of Pinsent Masons as predicting that the Apple subscription service was likely to appear on the European Commission’s radar “sooner rather than later.”

He added that a competition investigation would have to determine whether Apple has a dominant position in the market. Apple might successfully argue that the market is all digital media—a market where Apple does not have a monopoly.

The Wall Street Journal article (“Regulators Eye Apple Anew,” February 18, 2011) appears here. The Independent article (“Apple subscription service attracts regulators’ attention,” February 18, 2011) appears here.

Illegality of Contract Not a Bar to Illinois Consumer Protection Act Claim

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

A group of Mexican citizens living in the United States could bring an Illinois Consumer Fraud and Deceptive Business Practices Act (CFA) claim, despite a trial court finding that the claim was barred by the doctrine of illegality of contract and the statute of limitations, according to an Illinois appellate court.

The Mexican citizens alleged that the defendants falsely promised citizenship documents and adjustment to legal permanent residency status in exchange for $15,000. The trial court agreed with the defendants that the claims must be dismissed because the agreement between the parties was illegal and could not be enforced by the courts.

Immigration Services

The CFA, however, contains provisions created to deter abuses of people seeking immigration services. The statute requires a person offering such services to register with the Illinois Attorney General, provide written contracts, and post fees and other information in the primary language of the customer.
While the agreement was clearly illegal, the plaintiffs were not seeking to enforce the contract; they were attempting to recover money lost as a result of the CFA violation.

Allowing the claim to proceed would not be equivalent to enforcing an illegal contract, the court ruled. The defendants argued that the very actions the CFA prohibits could be used as a defense to CFA claims. Thus, the CFA claim was remanded for further proceedings.

Statute of Limitations

Claims under the CFA are subject to a three-year statute of limitations. Claims begin to accrue when the plaintiff knows or reasonably should know of his injury and also knows or reasonably should know that it was wrongfully caused.

Because the Mexican citizens were not reasonably aware of the injury until 2007—and the claim was filed in 2009—the claim was not barred.

The decision is Gamboa v. Alvarado, CCH State Unfair Trade Practices Law ¶32,195.

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

Plenty New on the Franchise Legal Front, Says WSJ

This posting was written by John W. Arden.

The year 2010 was another litigious one for the U.S. franchising “industry,” providing important new legal developments and trends, according to an article in The Wall Street Journal’s February 14 Small Business report

In a feature story (“Franchisee v. Franchiser: What’s new on the legal front? Plenty.”), reporter Richard Gibson asked prominent franchise lawyer Leonard D. Vines to “review the legal landmarks.”

Vines, a partner in the St. Louis office of Greensfelder, Hemker & Gale P.C., provided the following highlights.

Value menu pricing. Despite protests from franchisees, Burger King was allowed to require franchisees to sell a double cheeseburger for $1, a price franchisees said cost them money. The Burger King National Franchisee Association sued the franchisor, claiming that it had acted in bad faith in setting such a low price. The federal district court in Miami dismissed the action, ruling that Burger King had broad discretion in adopting marketing strategies and that the franchisees failed to show that the double cheeseburger “loss leader” threatened their viability. (National Franchisee Association v. Burger King Corp., CCH Business Franchise Guide ¶14,501) Further details are available in an earlier blog item (Trade Regulation Talk, December 27, 2010).

Franchisees as employees. A decision holding franchisees as employees of their franchisor sent shock waves throughout the franchising community, since an employer-employee relationship would place burdens on the franchisor, such as withholding federal and state taxes, paying for workers compensation insurance, and complying with wage laws. A Massachusetts federal court found that Coverall had misclassified its franchisees as independent contractors. Under Massachusetts law, an individual performing a service is considered an employee unless (1) the individual is free from control and direction in the performance of the service, (2) the service is performed outside the usual course of the business of the employer, and (3) the individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed. The franchisor failed to establish the second prong of the test—that the franchisees were “performing services that are part of an independent, separate, and distinct business from that of the employer,” according to the court. The franchisor in this case engaged in the same commercial cleaning business as the franchisees. (Awuah v. Coverall North America, Inc., CCH Business Franchise Guide ¶14,349 and ¶14,473) Additional information on this development appears in two previous blog items (Trade Regulation Talk, April 5, 2010 and October 25, 2010).

Various liability. A continuing hotbed of litigation, vicarious liability arises when a franchisor is held liable for the acts of its franchisee towards a third party. “The contention is that since a franchisor exerts so much control over the franchisee’s operations, the franchisee is effectively an agent of the franchiser, and as a result [the franchisor] should be held liable for the acts or omissions of the franchisee.” Vicarious liability can pose a dilemma for franchisors, says Vines. “If they exert too much control, they might be held liable for the franchisees’ conduct. If they do not exert enough control, they might be considered complicit, or seen as not properly training and education the franchisee.”

Disclosure. Whether a franchisor is obligated to disclose future business plans to a prospective franchisee has been a recurring issue. In Something Sweet v. Nick-N-Willy’s Franchise Co. (CCH Business Franchise Guide ¶14,398), a pizza franchisee purchased a carryout outlet, only to find out later that the franchisor intended to discontinue selling those types of franchises. The franchisee brought suit alleging that the failure to disclose this plan was a material omission that violated the Washington Franchise Investment Law. However, a Washington state court found that as long as the franchisor continued to support the carry-out franchises, there was no misrepresentation for failure to disclose plans. “According to this analysis, a franchiser is not obligated to disclose plans to a prospective franchisee if the plans wouldn’t adversely affect the franchisee’s ability to continue operating,” Vines observed. Further information on this case is available in a previous blog posting (Trade Regulation Talk, June 17, 2010).

Will the FTC Be Forced Out of Its Headquarters Building?

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

Over the years there have been legislative efforts to move the Federal Trade Commission out of its historic headquarters at 600 Pennsylvania Avenue to make the space available for the agency’s neighbor, the National Gallery of Art. The FTC and its staff have called the Apex Building home since 1938.

Legislation once again has been introduced in Congress calling for the transfer of the FTC building to the National Gallery. In response, the five FTC Commissioners sent a letter today to the leadership of the House Transportation and Infrastructure Committee, expressing their opposition to the move.

The proposed “Federal Trade Commission and National Gallery of Art Facility Consolidation, Savings, and Efficiency Act of 2011” was introduced on February 14 by House Transportation and Infrastructure Committee Chairman John Mica(Florida).

The measure (H.R. 690) would transfer control of the building at 600 Pennsylvania Avenue to the National Gallery of Art to enable the museum to house and exhibit works of art and to carry out administrative functions. The National Gallery would remodel the building with private funds, and the building would be renamed the North Building of the National Gallery of Art.

The FTC would be relocated to another government-owned building in Washington, D.C., under the proposal. The legislation lists two possible locations: (1) Federal Office Building Number 8 in Southwest Washington, D.C., and (2) 1800 F Street, N.W., Washington, D.C. But other locations could be considered.

A similar proposal introduced in the 109th Congress in 2005 by Rep. Mica called for the transfer of the Apex building to the National Gallery but did not specify where the FTC might be relocated.

Rep. Mica contends that moving the FTC would saves hundreds of millions of dollars in lease costs and building renovation costs. Presumably, the FTC would be consolidated into one location. Currently, the FTC has a satellite building and conference center at 601 New Jersey Avenue, N.W.

Commissioners’ Objections

The Commissioners oppose the efforts to move the FTC to another location.

“Forcing the FTC out of its federally-owned headquarters would displace our agency from a building that it has continuously occupied since it was designed and built for us over 70 years ago,” according to the letter.

The Commissioners also contend that the move will actually cost taxpayers more money. They argue that “the FTC would have to build new courtrooms for conducting adjudications as well as replace its extensive information technology infrastructure, including infrastructure for tracking, investigating, and fighting online and offline fraud.”

In addition, they suggest that taxpayers would still be responsible for maintenance and operations of the new North Building of the National Gallery. It also was suggested that the FTC’s move could also displace other federal agencies.

The letter concludes with a quote from President Franklin Roosevelt, as he laid the cornerstone for the FTC building in 1937:

“May this permanent home of the Federal Trade Commission stand for all time as a symbol of the purpose of the Government to insist on a greater application of the Golden Rule to the conduct of corporations and business enterprises in the relationship to the body politic.”

"Do Not Track" Bill Would Restrict Collection, Use of Online Activity Data

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

The proposed "Do Not Track Me Online Act of 2011" (H.R. 654) would give consumers the ability to prevent the collection and use of data on their online activities, according to the bill's sponsor, Rep. Jackie Speier (D, Calif.).

The measure would direct the FTC to prescribe, within 18 months after enactment, regulations concerning the collection and use of information obtained by tracking the Internet activity of an individual.

The proposal would not cover entities that store information on fewer than 15,000 individuals; collect information on fewer than 10,000 individuals during any 12-month period; or do not use information to study, monitor, or analyze the behavior of individuals as their primary business.

The do-not-track legislation was introduced on February 11, along with the proposed "Financial Information Privacy Act of 2011” (H.R. 653), which would amend the Gramm-Leach-Bliley Act to strengthen protections for nonpublic personal information provided by consumers to financial institutions.

BEST PRACTICES Act

A day earlier, Rep. Bobby Rush (D, Ill.) introduced the proposed "Building Effective Strategies To Promote Responsibility Accountability Choice Transparency Innovation Consumer Expectations and Safeguards Act" or the "BEST PRACTICES Act" (H.R. 611).

Similar to legislation introduced in the 111th Congress, the measure would require covered entities to provide notice to consumers of information collection practices. The FTC would have enforcement authority, under the proposal.

The bill also provides companies with a Safe Harbor program. In order to qualify, companies would have to set up a "Do-Not-Track" mechanism to allow consumers to opt-out of having the personal information that they provide made available to third parties, according to Rep. Rush.

Purchase in Reliance on False Label Is “Loss of Money” in California

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

Consumers who can truthfully allege they were deceived by a product’s label into spending money to purchase the product, and would not have purchased it otherwise, have “lost money or property” and have standing to sue under the California Unfair Competition Law (UCL) and False Advertising Law (FAL), as amended in 2004 by Proposition 64, the California Supreme Court has ruled.

“Made in U.S.A.”

According to the complaint at issue, a manufacturer of locksets falsely labeled them with “Made in U.S.A.” or a similar designation, the plaintiffs saw and relied on the labels in purchasing the locksets, and the plaintiffs would not have bought the locksets otherwise. The purchasers sought injunctive relief.

The court reversed and remanded for further proceedings a California appellate court’s decision that the purchasers lacked standing to sue under the UCL and FAL because they failed to allege any loss of money or property (CCH Advertising Law Guide ¶63,328).

Proposition 64

Before the California electorate enacted Proposition 64, private suits under the UCL and FAL could be brought by “any person acting for the interests of itself, its members or the general public.” Now private standing to sue is limited to any “person who has suffered injury in fact and has lost money or property” as a result of unfair competition or false advertising.

While the voters clearly intended to restrict standing, they just as plainly preserved standing for those who had had business dealings with a defendant and had lost money or property as a result of the defendant’s unfair business practices, according to the court.

Reliance on Misrepresentation

A consumer who relies on a product label and challenges a misrepresentation contained therein can satisfy the standing requirement in a suit for injunctive relief by alleging, as the plaintiffs have here, that he or she would not have bought the product but for the misrepresentation, the court held.

The purchasers allegedly selected the manufacturer’s locksets to purchase in part because they were “Made in U.S.A.”; they would not have purchased them otherwise; and, it may be inferred, they value what they actually received less than either the money they parted with or working locksets that actually were made in the United States, the court reasoned. They bargained for locksets that were made in the United States; they got ones that were not.

The same points may be made generally with regard to consumers who purchase products in reliance on misrepresentations, the court added.

The observant Jew who purchases food represented to be, but not in fact, kosher; the Muslim who purchases food represented to be, but not in fact, halal; the parent who purchases food for his or her child represented to be, but not in fact, organic, has in each instance not received the benefit of his or her bargain.

The January 27 decision in Kwikset Corp. v. Superior Court of Orange County will be reported at CCH Advertising Law Guide ¶64,151.

Retailer’s Request for Credit Cardholder’s Zip Code Violates California Law

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

When a store cashier asks for the zip code of a customer making a purchase with a credit card in California, the retailer violates California’s Song-Beverly Credit Card Act, the California Supreme Court has ruled.

A Williams-Sonoma customer filed a class action complaint alleging that when she was paying for a purchase with her credit card, the cashier asked for her zip code. Believing it necessary to complete the transaction, the customer provided the requested information and the cashier recorded it.

The trial court held that the customer failed to assert a violation of the Credit Card Act or a claim for invasion of privacy under the California Constitution, and a California appellate court affirmed that decision (CCH Advertising Law Guide ¶63,658; CCH Privacy Law in Marketing ¶60,400).

The California Supreme Court granted review, but only of the Credit Card Act claim.

Request for Personal Identification Information

The Act prohibits businesses that accept credit cards as payment for goods or services from requesting, or requiring as a condition to accepting the credit card as payment, the cardholder to provide personal identification information which the business records.

The statute’s express prohibition against “requesting” personal identification information was added in a 1991 amendment to prevent a retailer from making an end-run around the law by claiming the customer furnished personal identification data voluntarily, the court noted.

“Personal identification information” is defined as “information concerning the cardholder . . . including, but not limited to, the cardholder’s address and telephone number.”

Part of an Address

The California Supreme Court held that the Act’s prohibition applies not only to a complete address but also to a component of an address, such as a zip code. Otherwise, a business could ask not just for a cardholder’s zip code, but also for the cardholder’s street and city in addition to the zip code, so long as it did not also ask for the house number. Such a construction would render the statute’s protections hollow, the court said.

A cardholder’s zip code is similar to his or her address or telephone number, in that a zip code is both unnecessary to the transaction and can be used, together with the cardholder’s name, to locate the cardholder’s full address, according to the court. The retailer can then, as alleged in this case, use the accumulated information for its own purposes or sell the information to other businesses, the court added.

The court rejected contentions by Williams-Sonoma that the statute, as construed, violated due process and was unconstitutionally vague. The decision of the appellate court was reversed and remanded for further proceedings.

The February 10 decision in Pineda v. Williams-Sonoma Stores, Inc. will be reported in CCH Advertising Law Guide and CCH Privacy Law in Marketing.

OPEC Price Fixing Allegations Barred by Political Question, Act of State Doctrines

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

Gasoline retailers' price fixing claims against oil production companies—most of which were owned in whole or in part by the member nations of the Organization of Petroleum Exporting Countries (OPEC)—were properly dismissed, the U.S. Court of Appeals in New Orleans has ruled.

The allegations posed a nonjusticiable political question and had to be dismissed. Alternatively, judgment dismissing the class action complaints was appropriate because the complaints sought a remedy that was barred by the act of state doctrine.

The case involved two class actions brought by U.S. gasoline retailers. One action accused Citgo Petroleum Corporation, which is wholly-owned by Venezuela through its national oil company, of conspiring with OPEC member nations “to raise, fix, and stabilize the price of gasoline and other oil-based products in the United States.”

Conspiracy to Fix Prices

A consolidated class action complaint sued Citgo and other oil production companies for conspiring to fix prices. The consolidated complaint did not directly name OPEC or its members as coconspirators but described the formation and function of OPEC as background for its allegations.

Both complaints alleged an overarching conspiracy between OPEC member nations to fix the price of crude oil and refined petroleum products in the United States, according to the court. As a result, they were barred by the political question doctrine.

Political Question

The political question doctrine excluded from judicial review controversies that revolved around policy choices and value determinations constitutionally committed for resolution to the legislative and judicial branches.

The U.S. Supreme Court’s 1962 decision in Baker v. Carr, 369 U.S. 186, outlined factors indicating the presence of a nonjusticiable political question, according to the appellate court. Each one of the Baker factors counseled declining to adjudicate the merits of the complaints.

The dominant consideration in any political question inquiry was whether there was a constitutional commitment of the issue to one of the political branches of the government. In this case, the core of the alleged conspiracy consisted of agreements entered into by foreign sovereign states to limit production of crude oil.

A pronouncement on the legality of other sovereigns’ actions fell within the realm of delicate foreign policy questions committed to the political branches, in the court’s view.

The appellate court noted that the federal government had emphasized in a non-binding statement of interest that the case would result in the frustration of various objectives “vital interest to the United States’ national security.”

The government’s brief underscored that the damaging consequences of the litigation were likely to include immediate disruption of oil imports into the United States, the undermining of relationships with OPEC nations on issues such as counterterrorism and nuclear non-proliferation, the undermining of relationships with non-OPEC nations that have a stake in the questions presented, and the frustration of other national priorities, including foreign investment.

Moreover, there were no judicially manageable standards for resolving the antitrust claims—another factor in the political question inquiry. The Sherman and Clayton Acts were inadequate to provide judicially manageable standards for resolving such momentous foreign policy questions, the court explained.

Lastly, other Baker considerations weighed against an adjudication of the case on the merits: the impossibility of deciding without an initial policy determination of a kind clearly for nonjudicial discretion; the impossibility of a court’s undertaking independent resolution without expressing lack of the respect owing to the coordinate branches of government; an unusual need for unquestioning adherence to a political decision already made; and the potential of embarrassment from multifarious pronouncements by various departments on one question.

Act of State Doctrine

The appellate court alternatively held that, under the act of state doctrine, the retailers failed to state a claim on which relief can be granted. The act of state doctrine is rooted in constitutional separation-of-powers concerns, the court explained. It prohibits judicial review of the acts of state of a foreign government.

Adjudication of the suit necessarily would have called into question the acts of foreign governments with respect to exploitation of their natural resources—an inherently sovereign function—the court ruled. The granting of any relief to the retailers effectively would have ordered foreign governments to dismantle their chosen means of exploiting the valuable natural resources within their sovereign territories.

The February 8, 2011, decision, In Re: Refined Petroleum Products Antitrust Litigation, No. 09-20084, will appear at 2011-1 Trade Cases ¶77,328.

U.S. Price Fixing Charges Against LCD Maker Held Adequate

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

The federal district court in San Francisco has refused to dismiss an indictment against Taiwan-based AU Optronics Corporation and nine Taiwanese individuals for participating in an alleged conspiracy to fix the prices of thin-film transistor liquid crystal display (TFT-LCD) panels.

According to the indictment, the conspiracy drove up prices of TFT-LCDs for use in notebook computers, desktop computer monitors, and televisions in the United States and elsewhere.

Rule of Reason?

The defendants argued that criminal Sherman Act violations based entirely on foreign conduct were subject to rule of reason analysis and that the government had to allege and prove that the defendants acted with the knowledge that their conduct would likely cause anticompetitive effects in the United States. As a result, the defendants argued that the government's indictment was insufficient as pleaded.

However, because price fixing was generally considered a per se violation of the antitrust laws, the indictment was not dismissed on the ground that the government failed to allege that the defendants acted with the knowledge that the challenged conduct would likely cause anticompetitive effects in the United States. When per se violations are alleged, the government need not prove a defendant’s intent to produce anticompetitive effects, the court ruled.

Bill of Particulars

The court also denied the defendants' motion for a bill of particulars. The indictment adequately advised the defendants of the charges against them, and the defendants sought extremely detailed evidence to which they were not entitled through a bill of particulars.

The indictment set forth the dates of the conspiracy and the specific time periods each of the defendants were alleged to have participated in it, a description of the type of antitrust conspiracy charged and the specific types of TFT-LCDs covered by the indictment, a description of the goals of the conspiracy, as well as a detailed description of the means and methods by which those goals were to be accomplished.

In addition, the discovery provided to the defendants obviated the need for a bill of particulars. While the discovery was voluminous, the government provided it in a fashion designed to help the defendants prepare their defense. Moreover, the individual defendants had stated to the court that they were familiar with the allegations against them.

The January 28 decision is United States v. Chen, 2011-1 Trade Cases ¶77,322.

Refusal to Sell Parts to Competitor Could Be Monopolization

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

A company in the business of providing heavy lift helicopter services and supplying replacement parts to other owners of several particular models could have engaged in unlawful monopolization or attempted monopolization by refusing to sell parts to a competing operator of heavy helicopter services, the federal district court in Portland, Oregon, has decided.

The defending parts seller/services competitor was obligated to sell parts to other owners of a particular model of heavy lift helicopter under a 14-year-old contract with the manufacturer. The claims were neither time-barred nor insufficient as a matter of law, the court held. The defending company’s motion for summary judgment on the antitrust claims was therefore denied.

Statute of Limitations

Although the complaining helicopter services operator first suffered injury upon the parts seller’s initial refusal to deal following execution of its contract with the manufacturer well before the four-year limitations period applicable to federal antitrust actions, the Sherman Act claims were not barred under the statute of limitations, the court ruled.

Even if the parts seller’s initial refusal to deal was final, any damages suffered within the four-year limitations period were not time-barred unless all of the damages resulted solely from that initial refusal.

Any overt act inflicting damages generally was its own cause of action with a fresh four-year statute of limitations, and any new injury within the limitations period resulting from a continuing violation was a separate cause of action.

Questions of fact existed as to whether the refusal to deal was final and irrevocable or was instead continuing, given allegations that the company had provided some service manuals and updates in prior years and that it had ultimately reversed course and begun providing parts and service again on the heels of an antitrust settlement with another heavy lift helicopter services competitor sixteen years after that initial refusal, the court observed.

Merits of Claims

Even if federal jurisprudence demanded the termination of a prior course of dealing as a prerequisite to finding a refusal to deal illegal under federal antitrust law, the claims against the defendant did not fail on the merits, the court said.

Given that the manufacturer of the parts had provided overhaul manuals and parts to helicopter operators prior to the entry of a contract between itself and the defending parts supplier/helicopter services provider—and that the defendant had thereafter abruptly ceased to sell parts to those operators—a reasonable juror could conclude that the defendant unilaterally terminated a voluntary course of dealing with the complaining competitor, in the court’s view.

The legitimacy of the defendant’s claim that it had decided not to follow the manufacturer’s course—owing to liability concerns—was a factual issue not suitable for summary judgment, the court concluded.

Other disputed questions of material fact also precluded summary judgment, including whether there was a relevant market for heavy lift helicopters, whether the defendant’s decision to not provide parts or manuals was motivated by good business sense or monopolistic intent, and whether it improperly prohibited third-party manufacturers from dealing with the plaintiff.

The January 26 decision is Evergreen Helicopters, Inc. v. Erickson Air-Crane Inc., 2011-1 Trade Cases ¶77,327.

Credit Report Resellers Settle FTC Data Privacy Allegations

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

Three companies whose business is reselling consumers’ credit reports have agreed to settle FTC charges that they did not take reasonable steps to protect consumers’ personal information—failures that allowed computer hackers to access that data. Under the terms of proposed consent orders, the companies would be required to strengthen their data security procedures and submit to audits for 20 years.

The Commission voted 5-0 to issue the three administrative complaints and to accept the consent agreement packages containing the proposed consent orders for public comment. These are the FTC’s first cases against credit report resellers for their clients’ data security failures.

According to administrative complaints, the three resellers buy credit reports from the three nationwide consumer reporting agencies (Equifax, Experian, and TransUnion) and combine them into special reports that they sell to mortgage brokers and others to determine consumers’ eligibility for credit.

Due to their lack of information security policies and procedures, the companies allegedly allowed clients without basic security measures—such as firewalls and updated antivirus software—to access their reports. As a result, hackers accessed more than 1,800 credit reports without authorization via the clients’ computer networks, according to the FTC.

Violation of Section 5, Gramm-Leach-Bliley Rules

Even after becoming aware of the data breaches, the companies allegedly failed to make reasonable efforts to protect against future breaches. The FTC alleged that the companies’ failure to employ reasonable and appropriate measures to secure the personal information they maintain and sell is an unfair practice in violation of Sec. 5 of the FTC Act.

The resellers allegedly violated the Gramm-Leach-Bliley Safeguards Rule by failing to design and implement information safeguards to control the risks to consumer information; to regularly test or monitor the effectiveness of their controls and procedures; to evaluate and adjust their information security programs in light of known or identified risks; and to have comprehensive information security programs.

Commissioners’ Statement

A statement, issued by Commissioner Julie Brill, and joined by Chairman Jon Leibowitz and Commissioners J. Thomas Rosch and Edith Ramirez, noted that in future actions civil penalties will be imposed “against resellers of consumer reports who do not take adequate measures to fulfill their obligations to protect information contained in consumer reports, as required by the Fair Credit Reporting Act.”

The settlements involve SettlementOne Credit Corp., ACRAnet, Inc., and Fajilan and Associates, Inc. A news release, complaints, and agreements containing the proposed consent orders appear here on the Federal Trade Commission website.

Further details will appear in the CCH Trade Regulation Reporter.

Wrongful Termination: "Community of Interest" Under the Wisconsin Fair Dealership Law

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

A conflict seems to have developed between the federal courts' interpretation of the Wisconsin Fair Dealership Law and that of the Wisconsin courts. The Seventh Circuit in Home Protective Services, Inc. v. ADT Security Services, Inc., CCH Business Franchise Guide ¶13,266, affirmed a district court ruling finding no "community of interest" for a plaintiff that derived 95 percent of its revenue from the defendant and devoted 95 percent of its personnel hours to its arrangement with the defendant.

This decision was recently followed by the federal district court in Milwaukee. Stucchi USA, Inc. v. Hyquip, Inc. (E.D. Wis. July 28, 2010), CCH Business Franchise Guide ¶14,437.

However, the Wisconsin Court of Appeals, in the case of Water Quality Store, LLC v. Dynasty Spas, Inc., CCH Business Franchise Guide ¶14,426, held that the federal construction of Wisconsin statutes need not be followed by Wisconsin courts, citing particularly the Home Protective Services v ADT case.

It referenced a subsequent decision by the Wisconsin Supreme Court, Central Corp. v Research Products Corp., CCH Business Franchise Guide ¶13,560, which resurrected earlier case law, Ziegler Co., Inc. v. Rexnord, Inc.(Wis. S. Ct. 1983), CCH Business Franchise Guide ¶8882.

The Wisconsin Court of Appeals found there was a "community of interest" between a spa distributor and manufacturer, even though the manufacturer did not require an investment and even though the distributor was immediately able to find a replacement brand of spas to distribute --though not at the same volume.

Franchisor Could Be Liable Under Workers' Compensation Act

In an unusual situation, a Kentucky appellate court found that a franchisor of sandwich shops could be liable for the payment of workers' compensation benefits for an injured employee of a franchisee under the Kentucky Workers' Compensation Act because the nature of the relationship between the franchisor and the franchise could have constituted "remuneration" under the Act, and the franchisee could fit the Act's definition of a "subcontractor." Uninsured Employers' Fund v. Brown (Ky. Ct. App. September 3, 2010), CCH Business Franchise Guide ¶14,453.

Thus, the court reversed decisions of an administrative law judge and the Kentucky Board of Workers' Claims. Classification as a subcontractor is usually desired by franchisors, but in this case, it may have backfired.

Discovery Limited for Experts' Reports and Communications

Federal Rules of Civil Procedure 26 (3) (A) and (B), relating to experts' draft reports and expert-attorney communications, have been changed, effective December 1, 2010. This means such documents will no longer be discoverable except for:

(1) Those that relate to the expert's compensation;
(2) Facts and data provided by counsel that the expert considered; and
(3) Assumptions provided by counsel that the expert considered.

(Report of the Judicial Conference Committee on Rules of Practice and Procedure to the Chief Justice of the United States and Members of the Judicial Conference of the United States.)

Constructive Trust Imposed on Defense Counsel's Fees

In a cautionary tale for franchise attorneys who represent clients that walk on the wild side, the Federal Trade Commission's imposition of a constructive trust on attorneys' fees paid to defense counsel who should have known their clients were crooks was upheld by the U.S. Court of Appeals in San Francisco. Federal Trade Commission v. Network Services Depot, Inc., CCH Business Franchise Guide ¶14,447.

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

High Court Agrees to Review Vermont Prescriber Privacy Law

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

The U.S. Supreme Court has agreed to decide whether the First Amendment prohibits the enforcement of a Vermont law that restricts access to information in prescription drug records.

At issue is a decision of the U.S. Court of Appeals in New York City (CCH Privacy Law in Marketing ¶60,558) holding that a Vermont statute regulating the collection and use of data identifying health care providers’ prescribing patterns impermissibly restricted commercial speech.

The statute banned the sale, transmission or use of prescriber-identifiable data for marketing or promoting a prescription drug unless the prescriber gave consent.

The appellate court determined that Vermont had failed to show that the statute directly and materially advanced the substantial state interests of lowering health care costs and protecting public health. The law had been challenged by three data-mining companies.

Similar laws in New Hampshire and Maine have been upheld by the U.S. Court of Appeals in Boston (CCH Privacy Law in Marketing ¶60,270 and CCH Privacy Law in Marketing ¶60,527, respectively).

The petition is Sorrell v. IMS Health Inc., Docket 10-779, cert granted January 7, 2011.

FTC to Hold Public Forum on “Cramming”

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

The FTC announced that it will host a public forum in Washington, D.C. on May 11, 2011, to examine how the government, businesses, and consumer protection organizations can work together to prevent consumers from being hit with unauthorized third-party charges on their phone bills—a practice known as "cramming."

Despite its ongoing enforcement efforts, the agency noted, cramming continues to harm individuals and small businesses. Therefore, it is holding this forum to determine what more can be done to prevent it.

Government agencies, consumer advocates, and industry representatives are invited to participate in the forum to discuss ways to reduce cramming through business practices, law enforcement, and possible legislation.

Participants will be asked to take up specific ideas such as allowing consumers to request a block on all third-party billing, and requiring third parties to get written approval from consumers before placing charges on their phone bills.

Other issues forum participants will discuss include:

(1) How telephone bill cramming harms individual consumers and small businesses;

(2) How consumers and competition can benefit from third-party billing on telephone bills for products and services such as voicemail, developing or hosting websites, or other enhanced services;

(3) The steps that billing companies and telephone carriers currently take to detect, monitor, and prevent cramming;

(4) Best practices being used by the industry to reduce cramming, such as improving disclosure of third-party charges to consumers; and

(5) The types of goods and services charged on telephone bills, and the difference between landline and wireless billing practices.

Persons interested in being panelists may submit requests by sending an e-mail by March 4 to: crammingforum@ftc.gov. Requests should include a statement detailing any relevant expertise in working on or studying cramming, especially the topics specified above, and complete contact information. Panelists selected to participate will be notified by April 8, 2011.

The FTC also invites the public to submit comments online on any of the topics mentioned above, using the form available here.