Google Settles FTC Privacy Charges Over Social Networking Service

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

Google, Inc. has agreed to settle Federal Trade Commission charges that it violated Gmail users’ privacy and acted deceptively when it introduced its social networking service Google Buzz last year. Google Buzz allows Gmail users to share status updates, comments, photos, and videos.

This is the first time the FTC has required a company to implement a comprehensive privacy program, the agency said in a March 30 news release.

Privacy advocates expressed concern about Buzz from the day it was launched. The FTC initiated its investigation in response to a complaint by the Electronic Privacy Information Center (EPIC) one week after Buzz made its debut. Google tweaked Buzz in response to criticism, but its practices failed to alleviate the agency’s concerns.

In its complaint against Google, the FTC delineated several deceptive or misleading practices it considered to be violations of Section 5(a) of the FTC Act.

The FTC alleged that Google’s Gmail Privacy Policy falsely represented that (1) Google would use Gmail users’ messages, contacts, and other account data only for providing Gmail services, and (2) Google would ask for users’ consent before using their personal information for a purpose other than for which is was collected.

In fact, Google used Gmail users’ information to populate Buzz without seeking users’ prior consent, according to the complaint.

The agency also contended that Google acted deceptively when it launched Buzz by (1) failing to disclose to Gmail users that Buzz’s default settings would publicly share certain previously private information, such as frequent email contacts and (2) misrepresenting Gmail users’ ability to opt-out of Buzz services.

User controls for limiting the sharing of personal information were “confusing and difficult to find,” the FTC said.

According to the FTC, Google’s Privacy Policy also falsely represented that Google complied with the US-EU Safe Harbor Framework. Google’s sharing of user information without obtaining consent allegedly violated the U.S. Safe Harbor Privacy Principles of Notice and Choice.

Under the proposed agreement and consent order, Google would be required, among other things, to:

• Comply with its stated information sharing practices;

• Not misrepresent the privacy and confidentiality of “covered information.” Covered information is defined to include first and last name, street address, physical address, location, telephone number, email address or other online contact information, such as user ids or screen names, lists of contacts, and persistent identifiers, such as static IP addresses;

• Establish and maintain a comprehensive privacy program designed to protect the privacy and confidentiality of covered information;

• Assess privacy risks associated with existing and when developing new products and services;

• Establish privacy controls and procedures; and

• Permit an independent privacy audit every other year for 20 years.

In a March 30 blog post (“An Update on Buzz”), Google apologized “for the mistakes we made with Buzz.”

Acknowledging that the launch of Google Buzz “fell short of our usual standards for transparency and user control—letting our users and Google down,” Google reassured users that “we are 100 percent focused on ensuring that our new privacy procedures effectively protect the interests of all our users going forward.”

Further information about In the matter of Google, Inc. File No. 102 3136, is available here on the FTC’s website.

A description of the agreement and consent order will be published soon in the Federal Register. Interested parties may submit written comments electronically or in paper form through May 2, 2011. Comments in electronic form should be submitted here.

Competition Can Serve Newspaper Industry, Public Interest: Varney

This posting was written by Mark Engstrom.

Christine A. Varney, Assistant Attorney General in charge of the Department of Justice Antitrust Division, addressed the Newspaper Association of America on March 21 concerning the role of the antitrust laws and the Antitrust Division in promoting competition in the newspaper industry.

Her remarks, “Dynamic Competition in the Newspaper Industry,” offered a perspective on competition issues for newspapers in light of the technological developments that have accompanied the advent of the Internet.

Preservation of Competition

After reminding listeners that the newspaper industry survived the explosive growth of radio and television through the use of competitive innovations, Varney discussed the Antitrust Division's role in preserving competition in the industry and explained the method of analyzing collaborations and mergers.

According to Varney, “vigilant antitrust enforcement” was needed to ensure that anticompetitive conduct did not “tip the market” in a particular direction. Vigorous competition would best serve consumer interests. Calls for antitrust immunity for news organizations have therefore been rejected.

Immunity for Joint Operating Agreements

Although the Newspaper Preservation Act (NPA) extended antitrust immunity to newspapers that signed joint operating agreements, many newspaper owners still faced significant difficulties.

Indeed, the NPA exemption “may well have contributed to industry sluggishness.” Any new exemption from the antitrust laws would thus appear to be “particularly inappropriate at this point” in time.

Mergers

Addressing the issue of mergers, Varney stated that the goal of the Antitrust Division was to identify and challenge competitively harmful mergers while avoiding unnecessary interference with mergers that were competitively benign.

Merger-specific efficiencies that would offset the potential harm posed by an increase in market concentration would be considered. Further, parties to a merger could defend the merger on the ground that one of them was failing.

Non-merger collaborations among newspapers did not raise competition issues when they enabled newspapers to cut costs, improve services, or offer new or better content, Varney assured.

The Antitrust Division's “agile” approach to newspaper collaborations allowed companies to request a business review by the division if the companies were uncertain about the legality of their collaborative conduct.

The text of the remarks is available here at the Department of Justice Antitrust Division’s website.

EC’s RICO Claims Against Tobacco Companies Fail

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

The European Community and 26 European countries could not pursue RICO claims against several tobacco companies that allegedly engaged in an elaborate money laundering scheme involving the sale of illegal drugs by criminal organizations and the sale of cigarettes by the defendants, the federal district court in Brooklyn has ruled.

Because the RICO claims were extra-territorial in nature, they did not state a legally cognizable right of action, and thus were dismissed.

Allegations

According to the plaintiffs, criminal organizations originating in Colombia and Russia smuggled into Europe drugs (cocaine and heroin, respectively) that were sold for Euros. The organizations then used European black-market money brokers to exchange the Euros for Colombian pesos and Russian rubles.

Subsequently, illicit cigarette importers purchased the dirty Euros from the money broker, at a discount, and used them to buy cigarettes from U.S. and European wholesalers, who would ship the cigarettes to the illicit importers after purchasing them from the defendant tobacco companies.

The plaintiffs further alleged that the defendant tobacco companies used other companies to handle their illicit transactions, including the management of special handling instructions for shipments that were sent to customers that the defendants knew were involved in criminal activities.

Finally, the plaintiffs alleged that the tobacco companies traveled around the world to negotiate business agreements with individuals who the defendants knew, or should have known, were involved in the laundering of narcotics proceeds.

Territoriality

Because the focus of RICO is the enterprise, a RICO enterprise must be a domestic enterprise, according to the court. Moreover, an analysis of the territoriality of an enterprise in a RICO complaint should “focus on the decisions effectuating the relationships and common interest of its members, and how those decisions are made.”

In this case, the RICO enterprise comprised the tobacco company defendants and associated distributors, shippers, currency dealers, wholesalers, money brokers, and other participants. The plaintiffs alleged that the tobacco companies had participated in the management of the enterprise through a pattern of racketeering activity.

Involvement in Scheme

Nothing in the plaintiffs’ complaint, however, indicated that the tobacco companies were involved in the planning, decision-making, or overall “corporate policy” of the drug smuggling, currency exchange, or currency purchase parts of the alleged scheme. Indeed, the complaint clearly and repeatedly stated that the overall corporate policy regarding those elements originated with European and South American criminal organizations.

In addition, the plaintiffs failed to allege how the defendants’ involvement in the purchase and shipment of cigarettes to wholesalers demonstrated that the defendants had organized, orchestrated, planned, or even participated in the other parts of the scheme.

When read as a whole, the complaint strongly suggested that the money laundering cycle was directed by Colombian and Russian criminal organizations, not the tobacco companies. Defendants thus appeared to be nothing more than sellers of fungible goods in a complex series of transactions that were directed by foreign gangs.

The decision is European Community v. RJR Nabisco, Inc, CCH RICO Business Disputes Guide ¶12,016.

Executive's Conviction for Obstructing Price Fixing Investigation Upheld

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

The U.S. Court of Appeals in Philadelphia last week upheld the conviction of a foreign executive in the carbon products industry for conspiring to obstruct a grand jury investigation into price fixing in the industry.

On appeal, the defendant challenged (1) the sufficiency of the evidence supporting the conviction, (2) two purported fundamental errors in the jury instructions, and (3) the denial of the defendant's asserted attorney-client privilege.

A grand jury sitting in the Eastern District of Pennsylvania returned a four-count indictment in 2004 against the former Chief Executive Officer of the United Kingdom-based Morgan Crucible Company. According to the indictment, the defendant, a U.K. citizen, conspired to fix prices with competitors and engaged in a scheme to mislead and obstruct a U.S. grand jury investigation. The individual was extradited from the United Kingdom; however, pursuant to the extradition order, he could not be prosecuted on the price fixing charge (Count One).

At trial, the defendant was convicted of violating 18 U.S.C. Sec. 371(Count Two) by conspiring to violate 18 U.S.C. Secs. 1512(b)(1) and 1512(b)(2)(B). He was acquitted on Count Three, alleging a violation of 18 U.S.C. Sec. 1512(b)(1) for corruptly persuading or attempting to corruptly persuade other persons with intent to influence their testimony in an official proceeding, and Count Four, alleging a violation of 18 U.S.C. Sec. 1512(b)(2)(B) for corruptly persuading other persons with intent to cause or induce those persons to alter, destroy, mutilate, or conceal records and documents, with intent to impair their availability for use in an official proceeding.

He was sentenced to 18 months of imprisonment and three years of supervised release. The court also imposed a $25,000 fine. The defendant's timely appeal followed.

Viewing the evidence presented at trial in the light most favorable to the government and construing all available inferences in the government's favor, a rational trier of fact could certainly conclude that the defendant corruptly persuaded others with intent to influence their grand jury testimony, the appellate court ruled. With respect to the jury instructions, the trial court did not err by refusing to adopt the defendant's proffered instruction regarding the meaning of the statutory language “corruptly persuades” or by failing to identify for the jury the overt acts alleged in the indictment.

Attorney-Client Privilege

Finally, the appellate court ruled that the trial court did not legally err in permitting counsel for the defendant's employer to testify at trial. The defendant had failed to establish that a personal attorney-client privilege protected his communications with the attorney.

The March 23, 2011, not-for-publication decision in U.S. v. Ian Norris, No. 10-4658, will appear at 2011-1 Trade Cases ¶77,390.

Court Rejects Google Book Settlement

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

The federal district court in New York City has rejected the Amended Settlement Agreement proposed by Google, Inc. and groups representing publishers and authors regarding Google’s creation of a digital library because the terms were not “fair, adequate, and reasonable.”

The settlement proposed to resolve claims that Google violated copyright laws in 2004 by scanning books, creating an electronic database, and displaying copyrighted “snippets" without the permission of copyright holders.

Settlement Terms

Pursuant to the terms of the proposed Agreement, Google would deposit at least $45 million into a settlement fund to pay rights holders for works digitized before May 5, 2009. Going forward, 70% of net revenues Google derived from sales and advertising in connection with the book project would go to the plaintiffs, according to a distribution plan.

In exchange, Google would be allowed to:

(1) Continue to digitize books and inserts;

(2) Sell subscriptions to an electronic books database;

(3) Sell online access to individual books;

(4) Sell advertising on pages from books; and

(5) Make other uses described in the Agreement.

Google would be required to obtain prior express permission from rights holders (“opt-in”) in order to display in-print books. However, Google could display out-of-print books without authorization, but its right to do so would cease when and if a rights holder directed Google to stop (“opt-out”).

The Agreement also would create an independent Book Rights Registry, initially funded by Google, which would handle licensing payments intended for copyright holders who were unable to be located. The registry would be required to use “commercially reasonable efforts to locate rights holders.

The court acknowledged that the Google book project would provide significant benefits, including that more books would be available to libraries, schools, researchers, and disadvantaged populations; older, out-of-print books would be preserved and given new life; and authors and publishers would gain new readers and additional sources of income. But the benefits were outweighed by serious concerns, according to the court.

Scope of Dispute

The Agreement was problematic because it would implement a forward-looking business arrangement beyond the scope of the lawsuit. The dispute originally dealt with Google’s use of an indexing and searching tool and its display of “snippets,” not the sale of complete copyrighted works, the court noted.

The Agreement, on the other hand, would release Google from liability for future acts and transfer to Google rights over the digital commercialization of millions of books in exchange for future financial arrangements.

Class Representation

The court observed that there was a substantial question about the existence of antagonistic interests between the named plaintiffs and certain members of the class with divergent interests, such as the academic author objectors, or rights holders who were not represented.

Orphan Works

The most troubling aspect of the Agreement was the opt-out provisions, in the court’s view. Rightholders with interests in out-of-print or unclaimed “orphan works” who did not wish to participate in the project would be required to “opt-out” rather than “opt-in.”

Absent class members who failed to opt out would be deemed to have released their rights, even as to future infringing conduct. It would be “incongruous with the purpose of the copyright laws to place the onus on copyright owners to come forward to protect their rights when Google copied their works without first seeking their permission,” the court said. The court urged the parties to revise the opt-out provision.

Matter Suited for Congress

The establishment of a mechanism for exploiting unclaimed “orphan works” was a matter more suited for Congress, according to the court.

“The questions of who should be entrusted with guardianship over orphan books, under what terms, and with what safeguards are matters more appropriately decided by Congress than through an Agreement among private, self-interested parties,” the court opined.

In addition, the fact that other nations objected to the Agreement, on the grounds that it would violate international principles and treaties, further supported the notion that the matter was best left to Congress.

Antitrust Concerns

As noted by Google competitors, the Agreement raised antitrust concerns. The Agreement would give Google a de facto monopoly over unclaimed works. The Agreement also arguably would give Google control over the search market. Third parties (except nonprofit entities) would not be allowed to “index and search” or display “snippets” from scanned books without the rights holders and Google’s permission.

“Google’s ability to deny competitors the ability to search orphan books would further entrench Google’s market power in the online search market,” the court observed.

The March 22 decision in The Authors Guild v. Google, Inc. will appear at CCH Guide to Computer Law ¶ 50,145 and 2011-1 Trade Cases ¶77,387.

$12 Million Punitive Damage Award to Hotel Franchisee Upheld

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

There was no due process violation in an Arkansas state court jury’s award of $12 million in punitive damages to a hotel franchisee in its dispute with a franchisor, an Arkansas appellate court has determined. Thus, the trial court erred in reducing the punitive damages awarded to $1 million, and its ruling was reversed.

The jury found that the franchisor committed fraud by failing to disclose a report prepared by one of its executives that he would oppose the franchisor’s re-licensing of a franchisee’s hotel and instead would advocate the licensure of a competing hotel in the franchisee’s area.

Amount of Punitive Damage Award

Three guideposts are considered in determining whether a punitive damages award was excessive under federal law:

(1) The degree of reprehensibility of the defendant’s conduct;

(2) The disparity between the harm or potential harm suffered by the plaintiff and the punitive damages award, also expressed as the ratio between compensatory and punitive
damages; and

(3) The difference between the punitive award and comparable civil penalties authorized or imposed in comparable cases.

The franchisor’s failure to disclose valuable information to the franchisee, who had worked with and trusted the franchisor for over half a century, showed a degree of reprehensibility that supported a significant punitive damages award, the court held.

Ratio of Punitive to Compensatory Damages

The ratio of punitive damages to compensatory damages was 1.19-to-1 ($12 million to $10.056), a ratio that was well within constitutional territory. Such a ratio was a far cry from the 145-to-1 or 500-to-1 ratios found constitutionally wanting in other cases. The ratio of 1.19-to-1 also fell easily within the range of generally accepted ratios that Arkansas courts approved in other punitive damages cases.

As for comparable civil penalties, the Arkansas “little FTC Act” imposed a $10,000 penalty for unconscionable trade practices and the Arkansas Civil Justice Reform Act, which was not in effect at the time this cause of action arose, limited punitive damages to $1 million in many circumstances, the court observed.

Those statutes militated in favor of reducing the jury’s award but they were not dispositive, in the court’s view. When balanced against the reprehensibility of the franchisor’s conduct and a punitive to compensatory ratio of 1.19 to 1, the analysis compelled a net result in favor of the jury’s full punitive damages award, the court ruled.

Evidence of Fraud

Substantial evidence supported the jury’s finding of fraud, the appellate court held. On appeal, the franchisor argued that because it had no fiduciary or other confidential or special relationship with the franchisee, it had no duty to disclose the existence of its executive’s report.

However, the franchisee had a long-term relationship with the franchisor, characterized by honesty, trust, and the free-flow of pertinent information, the court noted.

In light of the parties’ history and the assurances he had received, the franchisee was justified in assuming that there were no obstacles to his re-licensure, according to the court.

The decision is Holiday Inn Franchising, Inc. v. Hotel Associates, Inc. It will be reported at CCH Business Franchise Guide ¶14,563.

NASAA Project Group Seeks Public Comment on Multi-Unit Franchising

This posting was written by John W. Arden.

In connection with its work on a new commentary, the Franchise and Business Opportunities Project Group of the North American Securities Administration (NASAA) is seeking public comments on disclosure obligations under the FTC franchise rule and state franchise laws for the many forms of multi-unit franchising.

Multi-unit franchising includes arrangements such as area development or representation agreements, area or regional franchises, development agent agreements, subfranchises, and master franchises.

Parties involved in multi-unit franchising often have questions about disclosure obligations under the FTC rule and state laws, according to Dale E. Cantone, Deputy Commissioner of the Securities Division of the Maryland Attorney General’s Office and Chair of the Franchise and Business Opportunities Project Group.

Some multi-unit franchise issues have been addressed by the FTC in FAQs 9 and 13 (CCH Business Franchise Guide ¶6090), by NASAA in Sections 20.2, 20.3 and 20.4 of the Commentary on the 2008 Franchise Registration and Disclosure Guidelines (CCH Business Franchise Guide ¶5706), and by California in Release 18-F (CCH Business Franchise Guide ¶5050.49).

The NASAA project group intends to give expanded guidance on these and other issues and seeks comments on what should be addressed in the commentary.

Interested persons should submit issues, ambiguities, and problems as well as potential solutions. The group invites submission of any relevant cases, statutory provisions, regulations, papers, or other resources.

Comments should be sent by April 22, 2011. Persons comfortable with sharing ideas with attribution should send their comments directly to project group members Dale Cantone (dcantone@oag.state.md.us) and Theresa Leets (tleets@corp.ca.gov).

Those preferring to share ideas on a confidential basis should send comments to Warren Lewis of the Akerman law firm (warren.lewis@akerman.com), Ron Gardner of Dady & Gardner (rkgardner@dadygardner.com), or Chuck Modell of Larkin Hoffman (cmodell@larkinhoffman.com).

Dell’s Price Fixing Claims Against Display Panel Suppliers Survive Dismissal

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

The Foreign Trade Antitrust Improvements Act (FTAIA) did not require dismissal of Dell Inc.’s claims that suppliers of thin film transistor-liquid crystal display (TFT-LCD) panels engaged in a global price fixing conspiracy, the federal district court in San Francisco has ruled.

Generally, the FTAIA excludes from the reach of the Sherman Act anticompetitive conduct that causes only foreign injury.

Dell, a direct purchaser of both TFT-LCD panels and finished products that incorporate TFT-LCD panels, brought claims against numerous domestic and foreign defendants. The complaint alleged that defendants Sharp Corp., Hitachi Displays Ltd., and Epson Imaging Devices Corp. had pled guilty to criminal charges of conspiring to fix TFT-LCD panel prices, and that Sharp and Hitachi admitted that they conspired to fix prices as to Dell.

Dell asserted that it was an intended victim of the price fixing conspiracy and that the conspiracy was carried out, in part, in the United States.

Foreign Transactions

Some of the claims were based on master purchase agreements (MPAs) between Dell and certain of the defendants, the terms of which made clear that the transactions included foreign transactions between the defendants and Dell’s foreign affiliates.

The defending suppliers did not dispute that the federal district court had jurisdiction over claims based on products that they imported into the United States. However, they unsuccessfully argued that the court lacked jurisdiction over any claim based on a transaction that occurred outside the United States.

Foreign Injury, Domestic Effect of Conspiracy

The court rejected the defending supplier's contentions that Dell did not allege sufficient facts to establish that its foreign injury (paying higher prices abroad) was proximately caused by any domestic effect of the alleged conspiracy. Dell alleged that an important domestic effect of the conspiracy was the setting of a global price for all TFT-LCD products purchased from the defendants, which was negotiated at the technology company's Texas headquarters.

The negotiated worldwide price applied to all TFT-LCD products, wherever purchased, and was binding on the technology company and its subsidiaries. These allegations established a link between the challenged conduct, its domestic effect, and the technology company’s foreign injury.

The technology company pleaded sufficient facts to establish that the MPAs and subsequent price negotiations were a domestic effect of the alleged conspiracy that proximately caused its foreign injury, according to the court.

The March 16 decision is In re: TFT-LCD (Flat Panel) Antitrust Litigation, 2011-1 Trade Cases ¶77,382.

FTC Settles with Company Allegedly Using Deceptive “Consumer” Reviews

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

A company that produced the “Learn and Master Guitar program” has agreed to settle FTC allegations that it engaged in deceptive advertising of its products through online marketers who falsely posed as ordinary consumer or independent reviewers.

Through an online affiliate, the company—Nashville, Tennessee-based Legacy Learning Systems Inc.—advertised the program through endorsements in articles, blog posts, and other online editorial materials that included hyperlinks to the company’s website, according to the agency.

The FTC charged that the company disseminated deceptive advertisements by representing that online endorsements written by affiliates reflected the views of ordinary consumers or independent reviews, without clearly disclosing that he affiliates were paid for every sale they generated.

Legacy Learning Systems and its owner have agreed to pay $250,000 under the terms of a proposed FTC consent order. In addition, the company would be required under the consent order to submit monthly reports about their top 50 revenue generating affiliate marketers and to disclose that they are earning commissions for sales.

Guides Governing Endorsements, Testimonials

In 2009, the FTC issued its final Guides Concerning the Use of Endorsements and Testimonials in Advertising (CCH Trade Regulation Reporter ¶39,038A).

Under the guidelines, a positive review by a person connected to the seller—or someone who receives cash or in-kind payment to review a product or service—should disclose the material connection between the reviewer and the seller of the product or service, according to the FTC.

“Whether they advertise directly or through affiliates, companies have an obligation to ensure that the advertising for their products is not deceptive, said FTC Bureau of Consumer Protection Director David Vladeck.

“Advertisers using affiliate marketers to promote their products would be wise to put in place a reasonable monitoring program to verify that those affiliates follow the principles of truth in advertising.”

The FTC complaint is In the Matter of Legacy Learning Systems, Inc., CCH Trade Regulation Reporter ¶16,571.

Text of the complaint, the Agreement Containing Consent Order, and a news release appear on the FTC website.

Consumer Class Action Against Investment Firm Preempted by Securities Law

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

An investor’s California Unfair Competition Law (UCL) claims—based on alleged misrepresentations made by investment company Charles Schwab—were preempted by the Securities Litigation Uniform Standards Act of 1998 (SLUSA), and the investor could not seek diminution-in-share value as a remedy, according to the federal district court in San Jose, California. However, the investor was granted leave to amend the claims.

A UCL class action was filed on behalf of investors in a Charles Schwab fund allegedly suffered substantial losses after managers deviated from the stated investment strategy by relying heavily on high-risk residential mortgage-backed securities.

Standing

The company argued that the investor could not prove an actual injury stemming from lost money or property because the investment was actually profitable based on net gain. However, the UCL required only that the investor assert an identifiable trifle of economic injury to have standing.

The investor could conceivably show an injury at trial based on losses resulting from the alleged unlawful activity based on the fact that the investment would have gained more if the company had not committed the unlawful activity, according to the court.

A UCL claim could be predicated on a violation of the Investment Company Act (ICA) by an investment company, according to the court. There was no express bar prohibiting private enforcement of the ICA.

Federal Preemption

The SLUSA was enacted to prevent lawsuits concerning securities law violations being filed in state courts and prohibits class actions of more than 50 people if the claim is based on misrepresentations or omissions of a material fact in connection with the purchase or sale of a covered security.

To the extent that the UCL claims were based on the firm’s alleged misrepresentations, the court held that the claims were preempted. However, the investor was granted leave to amend the claim to state a UCL claim for violation of investors’ voting rights. Such a claim could state a UCL claim based on a violation of the Investment Company Act without implicating the SLUSA’s preemption of misrepresentation claims.

Damages

Damages are not available under the UCL, and the company argued that the investor could not bring a UCL claim for the difference in value of the stock. Rather, remedies under the UCL are limited to restitution and injunctive relief. Thus, the UCL claim was dismissed in part. However, the court stated that if the investor could fashion the claim to circumvent SLUSA preemption, a claim for restitution of the fees paid the company could be recovered as restitution.

The March 8 decision is Smit v. Charles Schwab & Co., Inc., CCH State Unfair Trade Practices Law ¶32,221.

FTC Testifies on the State of Online Consumer Privacy to Senate Committee

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

Industry stakeholders have made important progress in implementing “Do Not Track,” a mechanism proposed by the Federal Trade Commission last December that would allow consumers to choose not to have their Internet browsing tracked by third parties, the FTC said today in testimony before the Senate Committee on Commerce, Science and Transportation.

The FTC’s testimony discussed its efforts to protect consumer privacy through enforcement actions, consumer education, and policy initiatives like the FTC staff’s recent preliminary privacy report.

That report—titled “Protecting Consumer Privacy in an Era of Rapid Change”—proposed a framework to balance consumer privacy with industry innovation by building privacy protections into everyday business practices (“privacy-by-design”); simplifying privacy choices for consumers; and improving transparency with clearer, shorter privacy notices.

Consumer Choice Mechanisms

“Do Not Track is no longer just a concept, it is becoming a reality,” said FTC Chairman Jon Leibowitz,. “It’s encouraging to see companies responding positively to our call for more consumer choice about their online privacy.”

The testimony noted that two of the major Internet browser vendors—Microsoft and Mozilla—have announced that they are developing choice mechanisms for online behavioral advertising.

In addition, the World Wide Web Consortium has accepted a submission by Microsoft to consider a technical standard for a universal choice mechanism and has announced that it is conducting a workshop in April 2011 on how to incorporate Do Not Track preferences into Internet browsing.

In the FTC’s view, an effective Do Not Track regime would:

• Be implemented universally, so consumers do not have to opt out as they go from site to site;

• Have an opt-out mechanism that is easy to find and easy to use;

• Offer choices to consumers that are persistent and that would not be deleted if, for example, consumers cleared their cookies or updated their browsers;

• Be effective and enforceable; and

• Let consumers opt out of being tracked for reasons other than commonly accepted uses, such as fraud prevention.

Universal Opt-Out

“A robust, effective Do Not Track system would ensure that consumers can opt out once, rather than having to exercise choices on a company-by-company or transaction-by-transaction basis,” the testimony stated. “Such a universal mechanism could be accomplished through legislation or potentially through robust, enforceable self-regulation.”

Consumers may want to opt out of more than targeted ads, the FTC said. For example, they might want to prevent prospective employers or insurers from examining their browsing habits. An effective Do Not Track system would go beyond simply opting consumers out of receiving targeted advertisements; it would opt them out of having their behavior tracked online, the testimony states.

“Commission staff will monitor further industry innovation in this area, which may build upon existing industry initiatives and incorporate elements of the different mechanisms being proposed today,” said the FTC.

Privacy Protection Efforts

The Commission stated that protecting consumers’ privacy had been a priority for 40 years.

“During this time, the Commission has employed a variety of strategies to protect consumer privacy, including law enforcement, regulation, outreach to consumers and businesses, and policy initiatives,” the FTC said.

According to the testimony, in the last 15 years, the FTC has brought more than 300 privacy-related actions, including:

• 32 data security cases,

• 64 cases against companies for improperly calling consumers on the Do Not Call registry,

• 86 cases against companies for violating the Fair Credit Reporting Act (FCRA),

• 97 spam cases,

• 15 spyware (or nuisance adware) cases, and

• 15 cases against companies for violating the Children’s Online Privacy Protection Act (COPPA).

The FTC has obtained $60 million in civil penalties in Do Not Call cases; $21 million in civil penalties under the FCRA; $5.7 million under the CAN-SPAM Act; and $3.2 million under COPPA, the testimony noted.

The Commission vote to approve the testimony was 4-1, with Commissioner William E. Kovacic dissenting. Text of the testimony can be found here on the FTC website.

State Action Doctrine Bars Antitrust Challenge to Municipalities' Trash Hauling Contracts

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

Illinois municipalities’ exclusive contracts for the disposal of waste, including recyclables, were shielded under the state action doctrine from antitrust attack, the U.S. Court of Appeals in Chicago ruled yesterday.

The state-action doctrine allows municipalities to engage in conduct that would otherwise violate antitrust law when the conduct is authorized by the state under a policy to displace competition, the court explained.

The doctrine stems from the fact that the Sherman Antitrust Act does not apply to sovereign entities. It has been extended to shield municipalities from antitrust law when the municipality’s actions are authorized by the state pursuant to state policy to displace competition.

Complaining trash haulers and businesses that wished to hire a cheaper trash hauler sued several municipalities, claiming that their exclusive contracts ran afoul of federal antitrust law. The plaintiffs objected to the requirement that they use the specific company with which the municipality had an exclusive contract for removal of waste that is placed in large roll-off dumpsters.

The plaintiffs unsuccessfully argued that the municipalities' authority under Illinois law to enter into exclusive contracts was limited to the collection and disposal of garbage, refuse and ashes.

They contended that the municipalities did not have the power to make contracts concerning recyclables and that because recyclables were being placed in the roll-off dumpsters, the municipalities could not make exclusive contracts for the roll-offs’ removal.

The appellate court, however, was satisfied that Illinois Municipal Code gave the municipalities the authority to enter into the challenged contracts.

The fact that the contracts created monopolies did not alter the immunity determination. These anticompetitive effects were a foreseeable result of the states authorization of the exclusive contracts, in the court’s view. Dismissal of the antitrust claim (2010-1 Trade Cases ¶76,953) was affirmed.

The March 14, 2011, decision is Active Disposal, Inc. v. City of Darien, 2011-1 Trade Cases ¶77,381.

Class Action Waiver in AmEx Agreements Held Invalid

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

The U.S. Court of Appeals in New York City has once again held that a class action waiver provision contained in commercial contracts between merchants and charge card issuer/servicer American Express Co. was unenforceable.

In light of its 2010 decision in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp. (2010-1 Trade Cases ¶76,982), the U.S. Supreme Court vacated the Second Circuit’s earlier decision (2009-1 Trade Cases ¶76,478), rejecting the class action waiver provision.

The Supreme Court held in Stolt-Nielsen that, under the Federal Arbitration Act, the agreement of the parties was the basis for determining whether to subject claims to class action.

The appellate court decided that the waiver was void because it precluded the complaining merchants from enforcing their statutory rights under the antitrust laws.

The record demonstrated that the size of any potential recovery by an individual plaintiff would be too small to justify the expense of bringing an individual action.

The court noted that there was no rule that class action waivers in arbitration agreements were per se unenforceable or per se unenforceable in the context of antitrust actions.

The enforceability of a class action waiver in an arbitration agreement had to be considered on its own merits, in the court’s view.

The March 9 decision is In re American Express Merchants’ Litigation, 2011-1 Trade Cases ¶77,366.

Consumer’s Purchasing Habits Held Irrelevant in “Green” Marketing Case

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

A protective order against use of information about a consumer's purchasing habits has been issued by the federal district court in San Jose.

Household products manufacturer S.C. Johnson subpoenaed the information in a suit alleging that the company's labeling of its Windex glass cleaner and Shout stain remover misled consumers about the environmental safety of the products in violation of the California Unfair Competition Law and False Advertising Law.

In an earlier ruling, the court declined to dismiss the consumer's class action complaint alleging that S.C. Johnson's “Greenlist” label was deceptively designed to look like a third-party seal of approval (CCH Advertising Law Guide ¶63,741).

S.C. Johnson subpoenaed documents from the consumer's former employer, as well as retailers and credit card companies, in an effort to collect information to show that the consumer's attorney introduced him to the world of “green” products and that the consumer did not care about these products before filing this action, according to the court.

A party in federal court may seek a protective order if it believes its own interest is jeopardized by discovery sought from a third person.

The relevant issue in this consumer protection class action was whether the Greenlist label was deceptive and misleading, the court observed. Contrary to S.C. Johnson’s contention, the suit was not about the consumer's general purchasing habits.

The February 18 opinion in Koh v. S.C. Johnson & Son, Inc., CCH Advertising Law Guide ¶64,203.

Labeling on “Cobra Sexual Energy” Supplement Might Violate California Consumer Protection Laws

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

A purchaser of the Natural Balance dietary supplement Cobra Sexual Energy asserted deceptive labeling claims under California consumer protection laws with the particularity required for pleading fraud, the federal district court in San Diego has ruled.

Natural Balance argued unsuccessfully that the purchaser’s claims failed to meet the heightened standards for pleading fraud prescribed by Rule 9(b) of the Federal Rules of Civil Procedure.

Deception, Reliance, Injury

Under the California Unfair Competition Law (UCL), False Advertising Law (FAL), and Consumers Legal Remedies Act (CLRA), conduct is deceptive or misleading if it is likely to deceive an ordinary consumer.

The purchaser articulated the “what” and “who” of the misconduct by identifying “Cobra Sexual Energy” and its labeling as the allegedly deceptive product and Natural Balance as its manufacturer and marketer, the court found. The purchaser provided the “when” by stating that she bought the product this year at a CVS Pharmacy. The purchaser stated the “where” and “how” by providing pictures of the product’s labels and listing each challenged statement with an explanation of why it was deceptive or fraudulent.

The purchaser asserted reliance and injury in fact by alleging that she suffered an economic injury because she paid more for the product than she would have absent the deceptive statements on its labels, which she read and relied upon in buying the product, the court determined.

Natural Balance's arguments about whether the labels contained adequate warnings and whether the labels contained misrepresentations raised questions of fact that should not be decided on a motion to dismiss, according to the court.

Puffery

The allegedly deceptive labeling did not constitute puffery, the court held. Generalized, vague, and unspecified assertions constitute mere puffery upon which a reasonable consumer cannot rely and are not actionable under the UCL, FAL, and CLRA.

The purchaser allegedly relied on statements including “Cobra Sexual Energy”; “aphrodisiac plants to enhance . . . sexual energy”; “scientifically blending select, high-quality herbs”; “offering specialty supplements that work”; and “proprietary formulas.”

This was not the rare situation in which the issue of puffery should be decided on a motion to dismiss, the court said.

Amount in Controversy

The purchaser satisfied the federal Class Action Fairness Act's amount in controversy jurisdictional threshold by alleging that the amount in controversy exceeded $5 million, even though the purchaser did not specify the amount of economic injury suffered by her and the proposed class, the court decided.

There was no evidence that the amount was pled in bad faith, and it was not obvious that this suit could not involve that amount, the court noted. The purchaser alleged that the class would include thousands of individuals who purchased the product throughout the United States.

The February 24 opinion in Peviani v. Natural Balance, Inc. will be reported at CCH Advertising Law Guide ¶64,201.

Identity Theft Is Top Consumer Complaint of 2010

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

For the eleventh consecutive year, identity theft tops the list of consumer complaints to the Federal Trade Commission, according to an annual report issued March 8.

The 250,854 identity theft complaints accounted for 19 percent of the 1,339,265 total complaints lodged during the 2010 calendar year.

Debt collection complaints were in second place, with 144,159 (11 percent), followed by Internet services (5 percent); prizes, sweepstakes, and lotteries (5 percent); and shop-at-home and catalog sales (4 percent).

The number of identity theft complaints far outdistanced complaints in other categories in the top five.

For the first time, "imposter scams"--where imposters posed as friends, family, respected companies, or govcernment agencies to get consumers to sent them money--made the top 10, the agency noted.

Complaints by State, Metropolitan Areas

The 98-page report breaks out complaint data on a state-by-state basis and provides data for 50 metropolitan areas reporting the highest per capita incidence of fraud and the highest incidence of identity theft.

The states with the most fraud complaints per 100,000 people are Colorado, Maryland, Nevada, Alaska, Florida, Arizona, Washington, Delaware, New Hampshire, and Virginia. The states with the most identity theft victims per 100,000 people are Florida, Arizona, California, Georgia, Texas, Nevada, New Mexico, New York, Maryland, and Illinois.

The metropolitan areas of more than 100,000 people with the most consumer fraud complaints per 100,000 were (1) Dunn, North Carolina; (2) Greeley, Colorado; (3) Mount Vernon-Anacortes, Washington; (4) Boulder, Colorado; and (5) Thomasville-Lexington, North Carolina.

The metropolitan areas of more than 100,000 people with the most identity theft complaints per 100,000 were (1) Miami-Fort Lauderdale-Pompano Beach, Florida; (2) Brownsville-Harlingen, Texas; (3) Dunn, North Carolina; (4) McAllen-Edinburg-Mission, Texas; and (5) Madera, California.

The top 10 complaint categories were:

1. Identity Theft......................250,854 complaints.............19%
2. Debt Collection.....................144,159 complaints.............11%
3. Internet Services...................65,565 complaints..............5%
4. Prizes, Sweepstakes, Lotteries...64,085 complaints.............5%
5. Shop-at-Home, Catalog Sales......60,205 complaints..............4%
6. Imposter Scams......................60,158 complaints..............4%
7. Internet Auctions...................56,107 complaints..............4%
8. Foreign Money Offers.............43,866 complaints.............3%
9. Telephone, Mobil Services......37,388 complaints..............3%
10. Credit Cards.......................33,258 complaints...............2%

The FTC report (“Consumer Sentinel Nework Databook for January--December 2010”) appears here on the FTC website.

Appraisers Have Standing to Sue Software Developer for False Advertising

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

Real estate appraisers had standing to sue the software developer FNC, Inc. under the Lanham Act for falsely advertising that appraisal-report data submitted for FNC's AppraisalPort was accessible only by client lending institutions, when FNC allegedly used the data to build its National Collateral Database, which lending institutions consulted instead of commissioning new appraisals, the U.S. Court of Appeals in New Orleans has ruled.

The case fell just within the outer limits of the zone of interests protected by the Lanham Act, the court held, applying a five-factor test for determining prudential standing.

Nature of Injury

The nature of the injury weighed in favor of standing because the alleged false advertising about AppraisalPort injured the appraisers' interest in generating new business as competitors of the National Collateral Database. Deterioration of competitive position was precisely the kind of injury the Lanham Act was intended to redress, the court said.

Directness of Injury

The relatively indirect relationship between the alleged misconduct and injuries weighed against prudential standing. The appraisers were injured by the allegedly false advertising about AppraisalPort because FNC allegedly made the decision to misappropriate the data it received from the appraisers, the court noted.

Proximity to Injurious Conduct

The proximity of the appraisers to the allegedly injurious conduct weighed in favor of standing. No identifiable class of persons could be more immediate to the misappropriation of work product than the persons to whom the work product rightfully belonged, according to the court.

Speculativeness of Damages

That the damages claim was not speculative weighed in favor of standing, the court determined. The appraisers alleged that they suffered damages in the form of lost business and profits as a result of lenders' use of the National Collateral Database and that FNC earned substantial profits on the database that it would not have been able to earn in the absence of the misrepresentations it made in its advertisements for AppraisalPort.

Risk of Duplicative Damages

Finally, there was little risk that allowing the suit to proceed would subject FNC to a risk of duplicative damages or require a complex process of damages apportionment, according to the court. To the extent there was a risk that difficulties might arise with allocating damages between the members of the alleged class of appraisers, those difficulties were to be addressed in deciding the request for class certification.

Because FNC’s allegedly false advertisements were not, of their own force, injurious to the plaintiffs’ commercial interests, the plaintiffs’ injury was less direct than was typical under Sec. 43(a), the court observed. Critically, however, there was no participant in the market who was more directly injured by FNC’s anti-competitive conduct.

Each additional step in the asserted chain of causation involved a wrongful act by FNC, the court found. FNC’s alleged decision to couple its false advertisements with other forms of anti-competitive conduct did not make the false advertising any less unfair as a method of competition, the court concluded.

The February 24 opinion in Harold H. Huggins Realty, Inc. v. Torres will be reported at CCH Advertising Law Guide ¶64,185.

FTC Chair Leibowitz Nominated for Second Term

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

The White House announced on March 4 that President Barack Obama intends to nominate FTC Chairman Jon D. Leibowitz for a second seven-year term at the Commission. The chairman's term expired last September.

Leibowitz was sworn in as a member of the Commission in September 2004. President George W. Bush nominated Leibowitz in April 2004. He was appointed during a congressional recess after his nomination—and the nomination of Deborah Platt Majoras to serve as the agency's chair—was stalled in the Senate.

Leibowitz was designated as FTC chairman by President Obama in March 2009.

Before his time at the Commission, Leibowitz served as vice president for congressional affairs for the Motion Picture Association of America from 2000 to 2004. Prior to that, he worked on Capitol Hill.

Leibowitz was the Democratic chief counsel and staff director for the U.S. Senate Antitrust Subcommittee from 1997 to 2000. He also worked for Senators Herb Kohl (D., Wis.) and Paul Simon (D., Ill.).

FTC, Justice Department Take Aim at Business Opportunity, Employment Scams

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

The Federal Trade Commission (FTC), the Department of Justice, the Postal Inspection Service, and state law enforcement agencies announced a major law enforcement sweep and education effort aimed at targeting bogus business opportunity employment and money-making services.

At a March 2, 2011 briefing, David Vladeck, Director of the FTC’s Bureau of Consumer Protection, outlined “Operation Empty Promises,” the latest effort in an ongoing crackdown on scams that “exploit the misfortune of those who have seen their jobs disappear or their incomes shrink as a result of the economic downturn.”

Promises of Jobs, Business Opportunities

Vladeck said state and federal law enforcement agencies have brought more than 90 actions against alleged scammers targeting financially-strapped consumers with promises of jobs and opportunities to “be your own boss.”

He described one scheme perpetrated by Ivy Capital, whose telemarketers told consumers they could start their own profitable Internet business with the help of the company’s coaches and consultants.

Ivy Capital persuaded people to max out their credit cards to pay the expensive start-up fees, typically thousands of dollars, while promising that they could make between $3,000 to $10,000 per month, Vladeck explained.

Meanwhile, National Sales Group targeted people looking for work by creating a false impression that the company itself was hiring, or was recruiting or recommending employees on behalf of other companies.

“While they were promising work, they were working over their victims,” Vladeck said. The company not only failed to provide jobs, but also regularly made unauthorized charges to people’s credit cards, driving them deeper in debt, Vladeck added.

Increase in Complaints

North Carolina Attorney General Roy Cooper noted that complaints to his office about business opportunity, work-at-home schemes, and other employment related scams were up 11 percent last year. “We’re looking closely at business opportunities that seem to offer false hopes, and also reaching out to educate consumers on how to recognize and avoid fraud,” he said.

High Gasoline Prices on Island Not the Result of Price Fixing

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

Gas station operators on the island of Martha’s Vineyard in Massachusetts did not engage in price fixing in violation of the Sherman Act, despite maintaining prices that were considerably higher than on the Cape Cod mainland, the U.S. Court of Appeals in Boston has decided.

Summary judgment in favor of the gas station operators on the claims brought by summer and year-round island residents, as well as an island real estate agency, was affirmed.

Conspiracy v. Independent Parallel Pricing

Though features of the retail gasoline market on Martha’s Vineyard—including barriers to entry, inelastic consumer demand, and product homogeneity—made it susceptible to efforts by gas stations to sustain anticompetitive prices, those features facilitated not only conspiratorial pricing but also merely interdependent parallel pricing, the court stated.

Knowing these features of the market, each gas station operator was likely to reach its own independent conclusion that its best interests involved keeping prices high, including following price changes by a price "leader" (if one emerged), in confidence that the other station owners would reach the same independent conclusion.

There was no evidence or suggestion that the business risk, to any station on the island, of raising its prices was so great as to require communication among stations before any one of them would venture it, the court observed.

“Plus Factors”

Much of the evidence offered by the complaining island residents as "plus factors" for an inference of conspiracy did no more than corroborate that the Martha’s Vineyard gasoline market was an oligopolistic market highly conducive to parallel pricing, the court explained.

These "plus factors" included:

(1) The defendants’ parallel holding or increasing of prices while the wholesale cost declined;

(2) Deposition testimony by station operators that they did not know what margin over cost they needed to charge to turn a profit;

(3) The defendants’ motive to conspire;

(4) Barriers to entry;

(5) Inelastic demand; and

(6) Stable relative market shares over time among the four defendants.

This evidence did not explain whether the parallel pricing was achieved by agreement or mere interdependent decisions.

The remaining evidence of plus factors was that collusion could be revealed by variations in price from region to region (i.e. Martha’s Vineyard to Cape Cod), one defendant’s employment of a consultant to lobby for the denial of a petition for a new gas station on the island, and certain communications between two of the defendants’ principals.

This evidence did not tend to exclude the possibility that the alleged conspirators acted independently.

Thus, the evidence was not sufficient to permit a reasonable inference that the defendants’ behavior was more than mere conscious parallelism, the court concluded.

The decision is White v. R.M. Packer Co., Inc., 2011-1 Trade Cases ¶77,352.

Corporations Lack “Personal Privacy” Interests: High Court

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

Corporations do not have “personal privacy” interests for the purposes of a provision of the Freedom of Information Act, the U.S. Supreme Court held on March 1 in an 8 to 0 decision. AT&T could not block disclosure of certain documents under FOIA’s Exemption 7(C), which covers law enforcement records that “could reasonably be expected to constitute an unwarranted invasion of personal privacy.”

A trade association had submitted a FOIA request for documents AT&T had provided to the Federal Communications Commission Enforcement Bureau during an investigation of that company. The Bureau found that Exemption 7(C) applied to individuals identified in AT&T’s submissions, but not to the company itself, because corporations do not have “personal privacy” interests as required by the exemption.

The FCC upheld the Enforcement Bureau’s interpretation, but the U.S. Court of Appeals in Philadelphia disagreed, reasoning that “personal” is the adjective form of the term “person,” FOIA’s definition of which included corporations.

"Person" as Individual

The Supreme Court rejected the appellate court’s reasoning. Although “person” was a defined term in the statute, “personal” was not. When a statute does not define a term, the Court typically applies the term’s “ordinary meaning.”

Chief Justice Roberts, writing for the Court, stated that “personal” ordinarily referred to individuals. Corporations are not usually regarded as having personal characteristics, personal effects, or personal tragedy, he said.

“Adjectives typically reflect the meaning of corresponding nouns, but not always,” Roberts reasoned. “Sometimes they acquire distinct meanings of their own.” For example, Roberts explained, the meaning of “crabbed” was distinct from “crab,” and “corny” was distinct from “corn.”

Absence of Other Statutory References

AT&T did not cite any other instance in which a court had expressly referred to a corporation’s “personal privacy,” Roberts noted, and it did not identify any other statute that did so. In addition, the term “personal privacy,” as used in FOIA Exemption 6—regarding personnel and medical files—had been interpreted by the Court as involving an individual’s privacy rights.

Justice Kagan did not take part in the consideration or decision of the case.

The March 1 decision in Federal Communications Commission v. AT&T will appear in CCH Privacy Law in Marketing.

Texas Hospital Settles U.S., State Monopoly Claims

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

A Texas hospital has agreed to settle allegations brought by the U.S. Department of Justice Antitrust Division and the State of Texas that it unlawfully used contracts with commercial health insurers to maintain its monopoly for hospital services in violation of Section 2 of the Sherman Act.

The action is notable because it is the first unilateral conduct case brought under Sec. 2 of the Sherman Act in over a decade and because it is the first case brought by the Antitrust Division in the health care sector since the October 2010 civil antitrust lawsuit against Blue Cross Blue Shield of Michigan (BCBSM).

In BCBSM case, which is ongoing, the Justice Department and State of Michigan are challenging most favored nation (MFN) clauses in BCBSM’s agreements with hospitals. The government contends that the MFNs raised hospital prices and prevented other insurers from entering the marketplace. The complaint alleges violations of Sec. 1 of the Sherman Act and the state law analogue.

This latest complaint was filed on February 25 in the federal district court in Wichita Falls, Texas, against United Regional Health Care System of Wichita Falls—by far the largest hospital in Wichita Falls.

Relevant Product Markets

The complaint alleges monopoly power in two relevant product markets in Wichita Falls, Texas and the surrounding area:

(1) the sale of general acute-care inpatient hospital services (inpatient hospital services) to commercial health insurers, and

(2) the sale of outpatient surgical services to commercial health insurers.

United Regional has an approximately 90% share of the alleged inpatient hospital services market and a greater than 65% share of the outpatient surgical services market.

According to the complaint, in order to maintain its monopoly in the provision of inpatient hospital and outpatient surgical services, United Regional systematically required most commercial health insurers to enter into contracts that effectively prohibited them from contracting with United Regional’s competitors.

United Regional’s contracts required these insurers to pay significantly higher prices for services—13% to 27% more—if they contracted with a nearby competing facility, according to the Department of Justice.

The government contends that there was no valid procompetitive business justification for United Regional’s exclusionary contracts.

Proposed Consent Decree

Under the terms of a proposed consent decree, United Regional would be prohibited from entering into contracts that improperly inhibit commercial health insurers from contracting with its competitors.

In particular, United Regional is prohibited from conditioning the prices or discounts that it offers to commercial health insurers based on whether those insurers contract with other health-care providers and from inhibiting insurers from entering into agreements with United Regional’s rivals.

United Regional is also prohibited from taking any retaliatory actions against an insurer that enters into an agreement with a rival provider. The term of the consent decree is seven years.

The case is U.S. and State of Texas v. United Regional Health Care System of Wichita Falls. Further information will appear in the CCH Trade Regulation Reporter.

A press release, complaint, and proposed final judgment are available on the Department of Justice Antitrust Division website.