FTC, Georgia Denied Preliminary Injunction Blocking Hospital Acquisition

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

Earlier this week, the federal district court in Albany, Georgia, denied a request from the Federal Trade Commission (FTC) and the State of Georgia for a preliminary injunction blocking a proposed hospital acquisition pending FTC administrative proceedings. The court ruled that the challenged transaction was state action immune from the antitrust laws.

In April, the FTC issued an administrative complaint challenging Phoebe Putney Health System, Inc.'s proposed acquisition of rival Palmyra Park Hospital, Inc. from HCA Inc. The FTC alleged that the proposed acquisition would create “a virtual monopoly for inpatient general acute care services sold to commercial health plans and their customers in Albany, Georgia and its surrounding area.” According to the FTC, the acquisition would eliminate competition between the only two hospitals in Albany and in Dougherty County.

The FTC and state alleged that the acquisition included three stages: (1) the local hospital authority’s purchase of Palmyra Park Hospital’s assets from HCA using Phoebe Putney’s money, (2) the hospital authority’s immediate provision of control of the hospital to Phoebe Putney under a management agreement, and (3) Phoebe Putney’s entry into a lease with the hospital authority to grant the local hospital operator managerial control of Palmyra Park Hospital’s assets for 40 years.

Scope of Transaction

The court began its analysis by defining the scope of the transaction under review. The court rejected the defendants’ contention that only the local hospital authority’s purchase of Palmyra Park Hospital’s assets was at issue. The defendants viewed the breadth of Clayton Act, Section 7 too narrowly. They maintained that the lease and its terms did not yet exist and had not even been negotiated. Moreover, the defendants argued that neither the putative lease nor the management agreement was alleged to have competitive impact beyond the acquisition of the subject hospital itself by the hospital authority. The court decided that the management agreement and lease should constitute a part of the acquisition subject to review.

State Action Immunity

The FTC contended that the private parties used the hospital authority as a “‘strawman’ in an attempt to shield an overtly anticompetitive transaction from antitrust scrutiny.” In order to obtain protection under state action immunity doctrine, the hospital authority had to establish action (1) by a political subdivision of the state, (2) undertaken pursuant to state statutes authorizing the challenged action, (3) the anticompetitive effects of which are reasonably foreseeable to the legislature based on the statutory power granted to the political subdivision.

It was undisputed that the authority was a political subdivision of the State of Georgia. In addition, the Georgia Code authorized the challenged conduct of acquiring and leasing hospital property for purposes of meeting the healthcare needs of the community. The court’s analysis hinged on the third element: whether the alleged suppression of competition was a reasonably foreseeable result of the conduct authorized and the powers granted to the hospital authority under Georgia law.

The court concluded that the conduct was reasonably foreseeable. When the legislature equipped a hospital authority with the broad power to lease a hospital to another (the lessee) and grant the lessee the right to operate said hospital, it contemplated that the lessee could have once been a competitor of the authority’s newly acquired and leased hospital, the court reasoned. Whether the hospital authority authorized the purchase of the hospital without considering, among other factors, the anticompetitive adverse effect of the acquisition on healthcare in the community was irrelevant.

Because the hospital authority was immune for its anticompetitive conduct, any actions taken by the private actors to prompt or engender that conduct was also immune. Phoebe Putney would not be able to exercise control over Palmyra Park Hospital operations independent of the hospital authority. Thus, the Palmyra Park Hospital’s actions in the transaction would be considered those of the hospital authority, which was entitled to immunity, the court concluded.

The June 27, 2011, decision in FTC v. Phoebe Putney Health System, Inc., Case No. 1:11-cv-58 (WLS), will appear at CCH 2011-1 Trade Cases ¶77,508.

Antitrust Chief Details Accomplishments of Last Two Years

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

Christine Varney, Assistant Attorney General in charge of the Department of Justice Antitrust Division, told attendees of a U.S. Chamber of Commerce event on June 24 in Washington, D.C. that after more than two years on the job, "the time is ripe to examine whether the Antitrust Division has been steadfast in ensuring vigorous enforcement of the antitrust law, as I promised upon confirmation." Varney talked about civil merger and non-merger enforcement, among other topics.

Merger Enforcement

With respect to merger enforcement, Varney said the Antitrust Division was committed to going to court “where the parties have been unwilling to resolve the anticompetitive aspects of their transactions.”

Two current merger challenges were cited: H&R Block Inc.’s proposed acquisition of the maker of TaxACT do-it-yourself tax preparation software, and the combination of point-of-sale (POS) terminal sellers VeriFone Systems Incorporated and Hypercom Corporation. She also noted the recent settlement in a third matter involving the acquisition of a Tyson Foods Harrisonburg chicken processing complex by George’s, Inc.

Varney also discussed mergers and acquisitions that involved vertical theories. Among the transactions that have arisen in the past few years were: ticket seller Ticketmaster Entertainment, Inc.’s acquisition of concert promoter Live Nation, Inc.; a joint venture between Comcast Corp. and General Electric Co.’s subsidiary NBC Universal Inc.; and Google’s acquisition of ITA Software Inc.—a company that develops and licenses a search software product used by the travel industry to perform flight searches and offer airfare comparison and booking websites.

The transactions demonstrate that “business is frequently looking for strategic acquisitions that offer the synergies and efficiencies presented by combining various levels of production.”

As with the purely horizontal transactions, the Antitrust Division reviewed these transactions "in light of their specific facts and market conditions and evaluated the competitive harms," said Varney. "In each case, we concluded that the transactions, as proposed, would give rise to competitive harm, and while we were prepared to sue, the parties agreed to consent decrees that addressed our concerns."

Civil Non-Merger Enforcement

Varney also mentioned that the Antitrust Division remained active in civil non-merger enforcement. She pointed to two matters in ongoing litigation—the Antitrust Division’s lawsuit challenging Blue Cross Blue Shield of Michigan’s Most Favored Nation Clauses with hospitals, and the Antitrust Division’s challenge to merchant fees in its lawsuit against American Express.

Another example of civil enforcement was the recent settlement in the Justice Department’s first case since 1999 challenging a monopolist with engaging in traditional anticompetitive unilateral conduct against United Regional Health Care System of Wichita Falls—a dominant health care provider.

Competition Advocacy

The antitrust chief discussed competition advocacy and regulatory outreach across the government. The Division works with a broad range of federal and state agencies to promote competition principles in important industries, including agriculture, telecommunications, energy, financial services, and healthcare.

“Among my competition advocacy priorities when I arrived at the Division was to explore the appropriate role for antitrust and regulatory enforcement in American agriculture, and this required collaboration at many levels,” said Varney, citing a series of workshops hosted by the Antitrust Division and the U.S. Department of Agriculture.

The Division has worked collaboratively with the Department of Transportation, the Federal Energy Regulatory Commission, the Securities and Exchange Commission, and the U.S. Commodities Futures Trading Commission, said Varney.

An example of cooperation with other federal and state agencies has been the ongoing municipal bonds investigation. The Division played a “key role” in obtaining an agreement from Bank of America to pay $137.3 million in restitution and disgorgement to state and federal agencies for its participation in a conspiracy to rig bids in the municipal bond derivatives market and as a condition of its admission into the Department of Justice’s Antitrust Corporate Leniency Program.

Bank of America entered into agreements with the SEC, the Internal Revenue Service, Office of the Comptroller of the Currency, and 20 state attorneys general.

Text of the remarks (“Vigorously Enforcing the Antitrust Laws: Developments at the Division”) appear here on the Department of Justice Antitrust Division website.

Mowing Equipment Maker's Pricing Practices Not Discriminatory

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

A mowing equipment manufacturer and its exclusive wholesale distributor in the Louisville, Kentucky area did not violate the Robinson-Patman Act through an alleged discriminatory pricing scheme, the U.S. Court of Appeals for the Sixth Circuit in Cincinnati has ruled.

A federal district court's dismissal of a dealer's secondary-line price discrimination claim against the manufacturer and its distributor with prejudice (2010-1 Trade Cases ¶76,894) was proper.

The trial court initially declined to dismiss the price discrimination claim based on the belief that the dealer was alleging that the manufacturer actually set or controlled the distributor's prices. The court subsequently vacated that decision, however, after it determined that such a belief was incorrect. Based upon this determination, there were insufficient factual allegations to support the dealer's claim, the lower court held. The appellate court agreed.

Indirect Purchaser Doctrine

The complaining dealer did not plausibly allege the existence of a dummy or strawman arrangement that could satisfy the Act's different purchasers requirement using the "indirect purchaser" doctrine. That doctrine prevented a manufacturer from insulating itself from Robinson-Patman Act liability by using a dummy wholesaler to make sales at terms actually controlled by the manufacturer.

Following the U.S. Supreme Court's tightening of the pleadings standards in Bell Atlantic Corp. v. Twombly (2007-1 Trade Cases ¶75,709) and Ashcroft v. Iqbal(2009-2 Trade Cases ¶76,785), a plaintiff could no longer use the discovery process to obtain the pricing information it needed to make its case after filing suit, the appellate court said.

The dealer's allegation that the manufacturer monitored the distributor's prices was insufficient. Simply providing advertising and warranty programs, or giving suggested retail prices, could not be enough to satisfy the indirect purchaser doctrine.

The June 21 decision in New Albany Tractor, Inc. v. Louisville Tractor, Inc., No. 10-5100, will be reported at 2011-1 Trade Cases ¶77,498.

Massachusetts Bill Would Clarify Franchisee Status Under Labor Laws

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

A newly introduced Massachusetts bill would amend the Massachusetts labor, unemployment insurance, and workers’ compensation statutes by stating that an individual who owns a franchisee or is party to a franchise agreement would not be considered an employee of the franchisor. House Bill No. 3513 was introduced and referred to committees June 9, 2011.

The introduction of the legislation comes in the wake of Massachusetts rulings involving a franchisor of janitorial cleaning business (Coverall) and allegations that its business model was subject to the coverage of three Massachusetts labor statutes.

In a 2006 decision, Coverall North America, Inc. v. Commissioner(CCH Business Franchise Guide ¶13,491), the Massachusetts Supreme Court held that the purchaser of a janitorial cleaning business franchise, whose relationship with the franchisor differed in some key respects from the typical franchise relationship, was not an independent contractor or even a franchisee, but was an "employee" under the meaning of the Massachusetts unemployment insurance law. Thus, the franchisor was required to pay contributions for the purchaser's reported earnings pursuant to the unemployment statute.

More than three years later, in Awuah v. Coverall North America, Inc. (CCH Business Franchise Guide 14,349), a federal district court held that the franchisor had misclassified its Massachusetts franchisees as independent contractors under the meaning of the Massachusetts Independent Contractor Statute. Instead, the franchisees were employees of the franchisor under the statute, according to the court.

Finally, a federal district ruled in the same case that the franchisor violated the Massachusetts workers’ compensation law and Wage Act by improperly requiring the franchisee-employee to pay for insurance and by failing to pay the franchisee-employee within a week of the weekly or bi-weekly pay period during which the wages were earned (Awuah v. Coverall North America, Inc., CCH Business Franchise Guide ¶14,473).

Further information about CCH Business Franchise Guide appears here.

Google Acknowledges FTC’s Investigation of Business

This posting was written by John W. Arden.

In a blog item posted this morning, Google Inc. acknowledged that the Federal Trade Commission has begun an investigation into its business.

“Yesterday, we received formal notification from the U.S. Federal Trade Commission that it has begun a review of our business,” the posting stated. “We respect the FTC’s process and will be working with them (as we have with other agencies) over the coming months to answer questions about Google and our services.”

The blog item (“Supporting choice, ensuring economic opportunity”) indicated that Google was still uncertain of “exactly what the FTC’s concerns are . . .” However, the Internet giant maintained that it intended to continue its practice of doing what is best for the user, providing the most relevant answers as quickly as possible, labeling advertisements clearly, operating transparently, and engendering loyalty rather than locking in users.

The agency investigation has been the subject of much discussion since the Wall Street Journal reported in its June 24 edition that the FTC was launching a “broad, formal” antitrust investigation into whether Google has abused its dominance in the Web search advertising market.

“The people familiar with the matter said issues in the FTC probe are expected to include whether Google searches unfairly steer users to the company’s own growing network of services at the expense of rival providers,” according the Journal article (“Feds to Launch Probe of Google”) by Thomas Catan and Amir Efrati.

Companies providing products and services on the Web have complained that Google’s dominant search engine gives it the power to determine which businesses succeed or fail. Google is alleged to have used others’ content without permission, manipulated search results to favor its own products, and acquired competitors that threaten its dominant position.

The investigation is expected to take at least a year and may or may not result in formal charges, according to the Journal.

Some commentators are comparing an antitrust probe of Google to the Justice Department’s antitrust investigation and lawsuit against Microsoft Corp. in the 1990s.

“If history is any guide, the probe may represent the beginning of the end of Google’s dominance,” writes Dan Lyons in an article in The Daily Beast. “That’s what happened to Microsoft. The software maker was never the same after going through a three-year antitrust trial brought against it by the Department of Justice. The trial ran from 1998 to 2001 and ended up with Microsoft agreeing to relatively minor settlement terms.”

The trial itself was such a distraction that Microsoft lost focus, “missing out on almost every big trend in tech—Internet search, digital music and movies, social networking, Internet advertising, tablet computers,” Lyons writes.

Google recently has been the subject of antitrust scrutiny. Late last year, the European Commission (EC) opened an in-depth antitrust investigation into Google’s method of displaying search results. The EC is attempting to determine whether Google search display practices were designed to shut out competitors.

Specifically, the EC is investigating whether Google abused its dominant market position in online search by (1) lowering the ranking of unpaid search results of so-called vertical search services and according preferential placement of its own vertical search services; (2) lowering the "Quality Score" for sponsored links of competing vertical search services and thereby influencing the price paid for advertising and the corresponding rankings; (3) imposing exclusivity obligations on advertising partners that prevent certain types of competing ads; and (4) restricting the portability of online advertising campaign data to competing online advertising platforms.

Earlier this year, the Department of Justice Antitrust Division filed suit to block Google’s $700 million acquisition of travel search provider ITA Software, Inc., a leading producer of airfare pricing and shopping systems used by travel companies such as Travelocity, Kayak, and Orbitz.

The Justice Department entered a proposed settlement agreement with Google, allowing the acquisition to proceed. Under the proposed settlement agreement, the company would be required to continue to license ITA’s software to airfare websites, to offer the websites ITA’s next generation product, to refrain from entering into agreements that would restrict airlines’ right to share booking information with Google’s competitors, and to establish internal firewalls to prevent unauthorized use of competitively sensitive information from ITA’s customers. (See Trade Regulation Talk, April 12, 2011.)

Secret Partnership to Purchase McDonald’s Franchise Was Deceptive, Illegal

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

A partnership formed by two brothers to purchase a McDonald’s franchise and to conceal the existence of the partnership—in order to contravene McDonald’s policy against selling to partnerships—was deceptive conduct in violation of the Washington Franchise Investment Protection Act and a Washington securities statute that rendered the partnership agreement unlawful, a Washington appellate court has held. A ruling by a Washington state court that the partnership was illegal and unenforceable was affirmed.

The brothers decided to purchase a McDonald’s franchise and agreed that one of them would apply for the franchise and the other would supply a portion of money required for the purchase and for other initial operating costs. They were aware that McDonald’s sold franchises only to individuals who owned the entire equity interest in the franchise and not to partnerships. They agreed to conceal the existence of their partnership and the investor brother’s involvement,

More than one year after the franchise purchase, the franchisee brother died and his estate rejected the investor brother’s claim for an interest in the partnership. The investor brother filed suit against the estate, alleging that he was entitled to receive his share of the partnership interest from the estate.

Violation of Securities, Franchise Laws

The partnership violated a Washington securities statute that made it unlawful for any person—in connection with the offer, sale, or purchase of any security—to engage in any act that operated as a fraud on any person, the court determined. The partnership violated the statute because the brothers set out to deceive McDonald’s and did so with knowledge of the franchisor’s policy against selling to partnerships.

A contention that the partnership did not qualify as a security was without merit, the court held. However, even if the partnership did not qualify as a security, the brothers violated the Washington Franchise Investment Protection Act’s provisions making it unlawful for any person—in connection with the purchase of a franchise—to employ any scheme to defraud or engage in any act operating as a fraud upon any person.

Culpability

The investor brother was equally culpable as the franchisee brother in perpetrating the fraud on McDonald’s, the court ruled. Under Washington law, if parties to an illegal contract, such as the partnership, were not equally at fault, the less culpable party could bring an action based on the illegal contract, the court noted. In this case, the investor brother was equally active in pursuing the franchise purchase and provided the franchisee brother with knowledge and information concerning the advisability of purchasing a McDonald’s franchise in general and in various locations.

There was no evidence that the franchisee brother cheated the investor brother out of any profits or otherwise attempted to defraud him, unlike the facts of the case cited by the investor brother. It was the franchisee brother’s estate—not the franchisee brother—that refused to recognize the partnership and share the profits with the investor brother, the court observed.

The decision in Marte v. Hernandez will appear at CCH Business Franchise Guide ¶14,622.

Further information about CCH Business Franchise Guide appears here.

Antitrust Division Updates 2004 Merger Remedy Guidance

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

To reflect changes in the merger landscape and lessons learned over the last seven years, the Department of Justice Antitrust Division has updated its 2004 guidance on merger remedies.

The Policy Guide to Merger Remedies is used by Antitrust Division staff in analyzing proposed remedies in its merger matters. It also provides transparency into the Antitrust Division’s approach to merger remedies for the business community, the antitrust bar, and the broader public, according to the Justice Department’s June 17 announcement of the update. The text of the updated policy guide appears at CCH Trade Regulation Reporter ¶13,172.

The key principles the Antitrust Division applies in analyzing merger remedies remain the same:

(1) Effectively preserving competition;

(2) Focusing on preserving competition, not protecting individual competitors; and

(3) Carefully applying legal and economic principles to the particular facts of a specific case.

Structural, Conduct Provisions

The policy guide states that effective merger remedies typically include structural provisions, conduct provisions, or a combination. In horizontal merger matters, the Antitrust Division continues to rely predominantly on structural remedies, sometimes in combination with conduct remedies, which usually prescribe certain aspects of the merged firm’s post-consummation business conduct. However, the Antitrust Division has found that, in many vertical transactions, tailored conduct relief can prevent competitive harm while allowing the merger’s efficiencies to be realized.

The most common forms of conduct relief are firewall, nondiscrimination, mandatory licensing, transparency, and anti-retaliation provisions, as well as prohibitions on certain contracting practices, according to the policy guide.

Misinterpretation of 2004 Guidance

The policy guide notes that some had misinterpreted the Antitrust Division’s 2004 guidance on remedies to mean that if a structural remedy is not available in a particular merger matter, or would be ineffective, the Antitrust Division must let the transaction proceed. That interpretation does not accurately reflect the policy or practice of the Antitrust Division, it was noted.

“In every case, the Antitrust Division focuses on the specific facts of the proposed transaction,” said Christine Varney, Assistant Attorney General in charge of the Antitrust Division. “We are prepared to clear a merger, block a merger or accept a remedy that maintains efficiencies as long as the result eliminates any competitive harm. In the current environment of increasing transnational mergers and complex vertical transactions, the Antitrust Division must be ever nimble in its efforts to ensure that any remedies effectively preserve competition, promote innovation and protect consumers. The updated policy guide takes into account these changes.”

Fix-It-First Remedies

In most merger cases, the Antitrust Division will require identification of a package of assets to be divested pursuant to a consent decree. However, the policy guide explains that the Antitrust Division will consider a fix-it-first remedy—a structural solution implemented by the parties that the Antitrust Division accepts before a merger is consummated—so long as the remedy need not be monitored.

A fix-it-first remedy may preserve competition in the market more quickly and effectively than a decree and provide the parties with the maximum flexibility in fashioning the appropriate divestiture, it was noted.

A news release on the issuance of the updated policy guide appears here on the Department of Justice Antitrust Division website. Text of the updated policy guide appears here.

FTC Opens Investigation into Gasoline Prices

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

The FTC is looking into the recent rise in prices at the gas pump. The agency disclosed the investigation in a June 20 letter to Senator Maria Cantwell (D, Wash.).

In a March 25 letter, a bi-partisan group of senators, led by Cantwell, asked the agency whether it was fully utilizing its “regulatory authority . . . to ensure that American consumers are paying a fair price for gasoline.”

At that time, the senators requested information on: (1) FTC efforts to enforce the Petroleum Market Manipulation Rule since it was finalized in 2009; (2) steps taken or planned to be taken by the Commission in response to recent price volatility in the petroleum market; and (3) FTC current and planned efforts to work with the Commodity Futures Trading Commission and other agencies to prevent fraud or deceit in the petroleum market.

In light of substantial increases in crude oil and refined petroleum product prices and profit margins this year and other developments, the FTC decided that an investigation was appropriate, according to a letter signed by FTC Chairman Jon Leibowitz.

“[T]he Commission has opened an investigation and has authorized the use of compulsory process to determine whether certain oil producers, refiners, transporters, marketers, physical or financial traders, or others (1) have engaged or are engaging in practices that have lessened or may lessen competition—or have engaged or are engaging in manipulation—in the production, refining, transportation, distribution, or wholesale supply of crude oil or petroleum products; or (2) have provided false or misleading information related to the wholesale price of crude oil or petroleum products to a federal department or agency.”

The agency is trying to determine whether there has been a violation of Section 5 of the FTC Act (CCH Trade Regulation Reporter ¶25,245), the Commission’s Petroleum Market Manipulation Rule (CCH Trade Regulation Reporter ¶38,065), or Sections 811 or 812 of the Energy Independence and Security Act of 2007 (CCH Trade Regulation Reporter ¶27,801; ¶ 27,802).

“The information to be secured through this investigation may include, but is not limited to, utilization and maintenance decisions, inventory holding decisions, product supply decisions, product import and export strategies and volumes, product output decisions, capital planning decisions, product margins and profitability, and any other information which may be relevant to determining whether there is a reason to believe that there have been violations of any of the foregoing statutes or of the Rule,” the letter states.

Oil and Gas Price Fraud Working Group

The FTC also said that it would continue to assist the recently announced federal/state Oil and Gas Price Fraud Working Group. The group was established to help identify civil or criminal violations in the oil and gasoline markets, and to ensure that American consumers are not harmed by unlawful conduct.

The group includes representatives from the Justice Department, the FTC, the Commodity Futures Trade Commission, the Department of the Treasury, the Federal Reserve Board, the Securities and Exchange Commission, the Department of Agriculture, the Department of Energy, and the states.

A press release, including the text of the letter from Commissioner Liebowitz, appears here on Senator Cantwell's website.

Green Drop on Bottled Water Label Not Misleading for “Reasonable Consumer”

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

No reasonable consumer would be misled to think that the green drop on the label of Fiji bottled water represented a third party organization’s endorsement or that Fiji water was environmentally superior to that of the competition, a California appellate court has ruled.

A purchaser attempted to assert violations of California false advertising and consumer protection statutes based on the state’s Environmental Marketing Claims Act. That Act incorporated the definition of “environmental marketing claim” contained in the Federal Trade Commission’s Guides for the Use of Environmental Marketing Claims (CCH Advertising Law Guide ¶15,640).

Environmental Marketing Claims

The purchaser cited the following general principle stated in the FTC guides:

“It is deceptive to misrepresent, directly or by implication, that a product, package or service offers a general environmental benefit.”

The purchaser contended that the Fiji green drop was deceptive because it implied that an independent third party organization had endorsed Fiji water as environmentally superior when, in fact, the green drop was purely a marketing creation.

The guides included a “globe icon” as an example of a symbol likely to mislead; but the court observed that a symbol of the earth would be more suggestive of a seal of an environmental organization than a green drop, the drop being the most logical icon for its particular product—water.

The FTC provided guidelines and a “safe harbor” for advertisers wanting to make environmental marketing claims, according to the court, provided only that the claims do not mislead reasonable consumers.

A green drop on the back of every bottle of Fiji water appeared next to the website name, “fijigreen.com,” confirming to a reasonable consumer that the green drop symbol was associated with Fiji water, not an independent third party organization, the court added.

The court viewed the case as distinguishable from Koh v. S.C. Johnson & Son, Inc. (N.D. Cal. 2010) CCH Advertising Law Guide ¶63,741. In Koh, a household cleaning product label made express representations of environmental superiority, used the trademarked name “Greenlist,” a name not immediately apt to be associated with the product or its manufacturers, and identified the name as a rating system, which further suggested an independent source that rated other manufacturers’ products as well.

The May 26 opinion in Hill v. Roll International Corp. will be reported at CCH Advertising Law Guide ¶64,317.

City, County Could Bring Consumer Protection Act Claim for Discriminatory Lending Practices

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

The City of Memphis and Shelby County, Tennessee have standing to assert Tennessee Consumer Protection Act (CPA) claims against Wells Fargo Bank for allegedly discriminatory lending practices that took place in those jurisdictions, according to the federal district court in Memphis.

Between 2000 and 2009, Wells Fargo allegedly steered mostly African-American borrowers into loans they could not afford, resulting in a disproportionately high number of foreclosures in predominantly African-American neighborhoods in Memphis and Shelby County.

Standing to Sue

Wells Fargo argued that the City and County lacked standing to assert the CPA claims because they did not suffer an injury-in-fact as a result of the allegedly unlawful business practices. In order to have standing to assert the CPA claims, a plaintiff must show an injury fairly traceable to the illegal practices.

CPA claims are liberally construed, and Tennessee courts have held that the CPA applies to mortgage transactions, according to the court.

Governmental agencies may bring claims under the CPA, the court held. The CPA does not require the plaintiff to suffer the unfair act; it requires only that the plaintiff suffer damages as a result of the unfair act.
The alleged injury, lost property values and tax revenue, were fairly traceable to the allegedly discriminatory lending practices of Wells Fargo. Thus, the court found that the municipalities had standing to assert the claims.

The decision is City of Memphis v. Wells Fargo Bank, N.A., CCH State Unfair Trade Practices Law ¶32,271.

Further details regarding CCH State Unfair Trade Practices Law appear here.

Domestic  Enterprise Was Within  Ambit of RICO Law, Despite Foreign  Racketeering Acts

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

A civil RICO claim alleging a domestic enterprise was not barred by the U.S. Supreme Court’s finding in Morrison v. Nat'l Australian Bank Ltd. (RICO Business Disputes Guide ¶11,932), even though the alleged predicate acts purportedly constituted foreign conduct, the federal district court in Pittsburgh has ruled.

In Morrison, the Supreme Court concluded that “when a statute gives no clear indication of an extraterritorial application, it has none.” In this case, the defendants unsuccessfully argued that RICO could not apply to foreign conduct merely because the enterprise was domestic.

Significantly, RICO did not prohibit racketeering activity per se (its predicate acts were independently criminalized by statute); it prohibited racketeering acts that were related, in specific ways, to an enterprise. RICO thus focused, in the context of territorial analysis, on domestic rather than foreign enterprise, according to the court. As a result, a claim involving a domestic enterprise fell within the ambit of RICO.

The underlying purposes of RICO supported this conclusion, the court explained. A major purpose of the RICO statute, for example, was to protect legitimate enterprises by attacking and removing persons that had infiltrated them for unlawful purposes.

The decision is In Re: Le-Nature’s, Inc., W.D. Pa., RICO Business Disputes Guide ¶12,056.

Recent Merger Cases Demonstrate International Cooperation: Antitrust Division Official

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

At the second annual Chicago Forum on International Antitrust Issues on June 9, Rachel Brandenburger, special advisor for international matters at the Department of Justice Antitrust Division, cited four recent merger cases as examples of successful international cooperation among enforcement agencies.

The 2010 review of the Cisco/Tandberg merger was described as a model of cooperation between the United States and the European Commission (EC). In that matter, the Department of Justice Antitrust Division decided not to challenge Cisco Systems Inc.'s acquisition of videoconferencing competitor Tandberg ASA (Trade Regulation Reporter ¶50.251) based at least in part on the commitments that Cisco had made to the EC.

Brandenburger also cited the Antitrust Division’s efforts with the Canada Competition Bureau to put together an antitrust remedy for ticket seller Ticketmaster Entertainment, Inc.’s acquisition of concert promoter Live Nation, Inc. A 2010 consent decree (2010-2 Trade Cases ¶77,113) resolved U.S. antitrust concerns by ordering divestitures and behavioral restrictions. The same day the Justice Department announced its proposed relief, the Canada Competition Bureau announced that a consent agreement was filed with the Competition Tribunal to resolve that country's concerns over the combination.

The recent clearance of the acquisition of software patents and patent applications from the software company Novell Inc. by a joint venture consisting of Microsoft Inc., Oracle Inc., Apple Inc., and EMC Corp. was also discussed. In April, both the Antitrust Division and Germany’s Bundeskartellamt announced that the joint venture, CPTN, could proceed with the first phase of the acquisition after addressing competition concerns through divestitures. Brandenburger noted that the review marked the first time in 20 years that the Antitrust Division worked with Germany’s Bundeskartellamt on a merger. The close cooperation between the Antitrust Division and the Bundeskartellamt was aided by waivers from the parties that enabled the agencies to exchange otherwise confidential information.

Brandenburger also pointed to a transaction resolved just last month. In May, the Antitrust Division announced that Unilever N.V. agreed to divestitures intended to preserve competition in certain hair care product markets to resolve U.S. antitrust concerns over its proposed $3.7 billion acquisition of Alberto-Culver Company (Trade Regulation Reporter ¶50,992). In announcing the settlement, the Justice Department said that it cooperated with the United Kingdom Office of Fair Trading, the Mexico Federal Competition Commission, and South Africa's Competition Commission in conducting the investigation.

Outside the merger area, the ongoing investigation of cartel activity in the air transportation industry is an example of anti-cartel cooperation with competition authorities on five continents, according to Brandenburger.

Chicago Forum on International Issues

The Chicago Forum on International Antitrust Issues was held June 9-10 at Northwestern University School of Law. Billed as “a premier Midwest conference examining the latest developments in competition regulation around the globe,” the program featured presentations on antitrust enforcement in the U.S., Canada, Mexico, Europe, and the BRIC countries (Brazil, Russia, India, and China), among other jurisdictions.

Government speakers included FTC Commissioner William E. Kovacic and representatives from the Canada Competition Bureau and the Mexico Federal Competition Commission.

Further information regarding the annual conference is available here.

Consumer Suit Proceeds Against Donald Trump and Trump University

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

Individuals who paid $35,000 apiece to enroll in Trump University seminars, hoping to “Learn from the Master,” can pursue common law fraud and California consumer protection law claims against Donald Trump and Trump University, the federal district court in San Diego has ruled.

The court separately addressed claims against Trump and the university in two opinions issued the same day.

Fraud

The fraud claims against Trump himself focused on the allegation that he lied about “hand picking” instructors. Trump maintained that the named plaintiffs in the class action complaint did not sustain any damages in reliance on the alleged misrepresentation.

To the extent that the plaintiffs did rely on Trump’s alleged misrepresentations, they may have sustained damages of up to $35,000 apiece, the court determined and declined Trumps motion to dismiss.

In claims against the university, three of four named plaintiffs stated claims of fraud by alleging that they signed up for seminars in reliance on university speakers’ statements that included a misrepresentation about providing exclusive access to a list of properties handpicked by Donald Trump.

False Advertising, Consumer Protection Laws

One plaintiff stated a claim of false advertising under California law by alleging that she purchased a $35,000 seminar based on misleading statements at a $1,500 seminar made for the purpose of inducing her purchase, according to the court.

California Unfair Competition Law (UCL) and Consumers Legal Remedies Act (CLRA) claims based on the fraud allegations survived, although the court dismissed the California statutory claims brought by two of the four named plaintiffs who were not California residents. Claims under the New York deceptive acts and practices statute were rejected because none of the plaintiffs took classes in New York.

Puffery

The court agreed with Trump’s contention that his alleged statement “no course offers the same depth of insight, experience and support as the one bearing my name” constituted mere puffery and thus could not support claims under the UCL or CLRA.

The May 16 opinions in Makaeff v. Trump University LLC will be reported in CCH Advertising Law Guide.

Further information about CCH Advertising Law Guide appears here.

Franchisor May Be Entitled to Recover for Loss of Franchise Property Through Eminent Domain

This posting was written by John W. Arden.

A purported restaurant franchisor might be entitled to compensation for lost goodwill resulting from the loss of franchise property in California through eminent domain, according to a California state appellate court.

Although the franchisor did not qualify as the “owner” of the business displaced by eminent domain, it may have been entitled to compensation as the assignee of the franchisee’s right to compensation.

Inverse Condemnation Action

An inverse condemnation action brought by the franchisor against a California city was remanded with instructions for the trial court to determine the franchisor’s rights as an assignee and to empanel a jury to determine the amount of compensation for lost goodwill.

The property that the franchisor subleased to a franchisee was taken by eminent domain by the City of El Cajon, California for construction of a police facility. Subsequently, the franchisee assigned any claim it had for lost goodwill compensation to the franchisor.

The franchisor sued the city, alleging that it was entitled to compensation both for ownership of the franchised restaurant and as assignee of the franchisee’s right to compensation.

The proceeding was bifurcated, with the trial court first considering whether the franchisor had any right to compensation, either as the owner of the restaurant or as the assignee of the franchisee’s rights. If that issue were decided in the franchisor’s favor, a jury would determine the amount of goodwill owed the franchisor, if any.

“Owner” or Business

Relying on Redevelopment Agency v. International House of Pancakes, 9 Cal. App.4th 1343 (1992), the city argued that a franchisor was not entitled to compensation for lost goodwill. It further argued that the franchisee was the business owner and the franchisee’s assignment was ineffectual because it already waived its right to receive any condemnation award.

The trial court concluded that the franchisee—not the franchisor—was the owner of the business. It was the party that held a business license. Moreover, an assignment of the franchisee’s right to compensation was ineffectual because the franchisee had no interest to assign, the court held.

Franchise Relationship?

On appeal, the franchisor attempted to distinguish the IHOP case by claiming that it was not a franchisor and the operator of the restaurant was not a franchisee. The court disagreed, pointing out that the franchisor granted the operator the right to use its system, trade name, and trademark. The operator was obligated to run the restaurant in compliance with the franchisor’s operations manual and to purchase supplies only from the franchisor or its approved suppliers.

The agreement between the parties stated that the relationship was not a partnership, joint venture, or agency. The fact that the operator did not pay a franchise fee was unavailing.

Moreover, the focus on the franchisor-franchisee relationship in IHOP was misplaced, the court observed. The claimant was not barred from recovering goodwill damages because it was a franchisor; it was barred because it was not the owner of the business.

In this case, there was no indication of ownership by the franchisor. The agreement between the parties required the operator to indemnify the franchisor of all claims or liabilities related to the premises. Like the claimant in IHOP, the franchisor established a method of operation intending to immunize or insulate itself from the risks and liabilities inhere in the ownership of a business. The court asked how an agreement that insulated the franchisor from the obligations of ownership could make the franchisor an owner of the business for the sole purpose of condemnation proceedings.

Thus, the appellate court held that the franchisor was not the owner of the business within the meaning of California Civ. Proc., §1263.510.

Assignment of Right to Compensation

Even though the franchisor could not receive goodwill compensation as the owner of the franchise premises, it might be entitled to recover compensation under the assignment of the franchisee’s right.

The trial court had based its denial of compensation under the assignment on an agreement in which the franchisee waived all rights to interest in any condemnation award or settlement. The trial court interpreted this provision as a waiver of any condemnation recovery from a condemning governmental agency. If the franchisee had no right to recover from the government, then there was no right to assign to the franchisor, it reasoned.

The appellate court held that the waiver clause was intended to benefit the franchisor, rather than the city. A landlord and tenant may apportion a condemnation award any way they see fit, including having the tenant assign rights to the landlord. It appeared more likely that the parties were defining their respective rights between themselves rather than benefitting a nonparty to the agreement, in the court’s view.

To construe the waiver provision as the city suggested would unjustly allow it to avoid paying any compensation for lost goodwill.

On remand, the trial court was directed to determine whether the franchisor had proven the remaining statutory elements for entitlement to compensation as an assignee. If so, the court had to conduct a jury trial on that compensation.

The June 7 decision is Galardi Group Franchise & Leasing LLC v. City of El Cajon. The decision will appear in CCH Business Franchise Guide.

Political Robocalls Held Subject to Identification Requirements of Federal Law

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

The State of Maryland could proceed with a Telephone Consumer Protection Act (TCPA) suit against a corporation that provided various services to candidates for political office, for broadcasting prerecorded voice messages to more than 112,000 telephone numbers belonging to Maryland residents, the federal district court in Baltimore has determined.

The messages allegedly did not identify the caller or disclose on whose behalf the call was being made, as required by the TCPA.

The corporation had been hired to serve as a political consultant by a candidate in the 2010 Maryland gubernatorial election. The message—which was broadcast via an automated dialing system on election day, primarily to registered Democrats residing in Baltimore City and Prince George’s County—stated that the incumbent governor had been “successful” in the election and did not need the recipients’ votes. The message did not indicate that the calls were made on behalf of the opposing candidate.

Political robocalls are not exempt from the TCPA’s identification and disclosure requirements, the court said. Those requirements were not limited to calls made for a commercial purpose; they apply to any calls made with an autodialer.

Liability of Corporation, Owner, Employee

Even though the calls were placed by a third-party telemarketing company, the corporation could be liable under the TCPA as an entity responsible for initiating the calls.

The corporation allegedly went to the telemarketer’s website, uploaded a prerecorded message and a list of phone numbers, and directed the telemarketer to broadcast the message to those numbers. The corporation was in a position to ensure that the content of the message complied with the TCPA, according to the court.

The corporation’s owner and its employee could be individually liable under the TCPA. The statute authorized state attorneys general to bring actions against “any person” who violated the disclosure requirements, the court said. The State contended that the owner and employee personally participated in the violations.

First Amendment

The TCPA did not violate the First Amendment, in the court’s view. The TCPA section at issue imposed technical requirements that applied to all prerecorded phone messages. The requirements were content-neutral and subject to intermediate scrutiny.

The government had a substantial interest in protecting residential privacy. The disclosure requirements allowed call recipients to terminate the call and to contact the caller to prevent future unwanted calls.

The TCPA was narrowly tailored; the statute allowed the continued use of autodialers while protecting the right of the recipient to choose whether or not to receive a message. The corporation had ample alternative channels for communication. The TCPA also promoted the government’s interest in preventing citizens from being misled as to the originators of recorded phone messages, the court said.

The May 25 decision is State of Maryland v. Universal Elections, Inc., CCH Privacy Law in Marketing ¶60,634.

Google’s Privacy Improvements Satisfy Canadian Enforcer

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

Google Inc. has implemented remedial measures to reduce the risk of future privacy violations, such as those that occurred during Google’s collection of WiFi data for its “Street View” service in 2010, according to Canadian Privacy Commissioner Jennifer Stoddart.

Collection of Personal Information

Stoddart initiated an investigation under Canada’s federal private-sector privacy law after Google admitted that it had collected data transmitted over unprotected wireless networks installed in homes and businesses around the globe.

Personal information collected included complete e-mails, usernames and passwords, and home telephone numbers. Stoddart’s investigation concluded that the incident was largely a result of Google’s lack of proper privacy policies and procedures.

New Training, Procedures

The Office of the Privacy Commissioner issued findings and recommendations in October 2010 and asked for a response by February 2011. Stoddart announced on June 6 that the Office is satisfied with the measures that Google has agreed to implement, including the augmentation of privacy and security training provided to all employees; the implementation of a system for tracking projects that collect, use, or store personal information; and the establishment of a process for conducting periodic audits and reviews of privacy practices. Google also told the Office that it had begun to delete the data it collected in Canada.

“Google appears to be well on the way to resolving serious shortcomings in the way in which it addresses privacy issues,” Stoddart said. “However, given the significance of the problems we found during our investigation, we will continue to monitor how Google implements our recommendations.”

More information on the Canadian Privacy Commissioner’s findings can be found here.

Trade Regulation Tidbits

This posting was written by the editorial staff of the CCH Trade Regulation Reporter.

News, updates, and observations:

 House Judiciary Committee Ranking Member John Conyers, Jr. (D, Mich.) and Congressman Ed Markey (D, Mass.), a senior member of the Energy and Commerce Committee and former chairman of the Communications, Technology and the Internet Subcommittee, held a press conference on June 1 to raise antitrust and public interest concerns surrounding the proposed merger of AT&T and T-Mobile wireless telecommunication companies.

"It is time for the Department to exercise its power and look closely at this national, horizontal merger," said Rep. Conyers. “The AT&T–T-Mobile deal is like a telecommunications time machine that would send consumers back to a bygone era of high prices and limited choice," Congressman Markey said. "AT&T and Verizon have divided the nation into Bell East and Bell West. Approving consolidation of the number of nationwide carriers from 4 to 3 and then inevitably to 2 would return consumers to a duopoly in the national wireless market."

 Rep. Ron Paul (R, Texas) recently introduced two bills that would make it easier for dietary supplement marketers to make health claims for their products.

The proposed Freedom of Health Speech Act (H.R. 2045) would require the FTC to prove health claims false before censoring them. Under the measure, the FTC would be prohibited from commencing an investigation into false advertising by an advertiser of dietary supplements unless it possesses before the commencement of such investigation clear and convincing evidence that the advertisement is false and misleading. In a false advertising action against a dietary supplement advertiser, the burden of proof would be on the FTC "to establish by clear and convincing evidence that the advertisement is false, that the advertisement actually caused consumers to be misled into believing to be true that which is false, and that but for the false advertising content the consumer would not have made the purchase at the price paid." With respect to claimed health benefits for a dietary supplement, the FTC would be required to "additionally establish based on expert scientific opinion and published peer-reviewed scientific evidence that the claim is false."

The proposed "Health Freedom Act" (H.R. 2044) would revoke Food and Drug Administration rules prohibiting nutrient-disease relationship claims. It would also prohibit the federal government from prohibiting claims that a dietary supplement mitigates, treats, or prevents a disease or condition, unless the claim has been proven false following a trial on the merits. Both measures were introduced on May 26.

 The FTC on June 6 released the agenda for a public workshop addressing legal and policy issues surrounding the inclusion of patented technology in collaboratively set industry standards. The workshop will be held on June 21 at the FTC’s Conference Center at 601 New Jersey Avenue, NW, Washington, DC. Commissioner Edith Ramirez will provide opening remarks and Bureau of Economics Director Joseph Farrell will offer closing remarks. Industry experts will participate in roundtable discussions of the following key issues: disclosure of patent rights prior to adoption of a standard; disclosure or negotiation of licensing terms for patents prior to adoption of a standard; and licensing strategies following implementation of a standard, including the significance of commitments to license patents on RAND terms.

There will also be a presentation on standard setting organization experiences with ex ante disclosure of licensing terms by Professor Jorge Contreras. Additional information is available here on the FTC website.

Guidance for Online Advertising Under Review by FTC Staff

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

The FTC is seeking public comment through July 11, 2011, on its guidance document published in 2000 that advises businesses how federal advertising law applies to advertising and sales on the Internet. The agency is looking for input on how its "Dot Com Disclosures: Information About Online Advertising" should be modified to reflect the dramatic changes to the online world since 2000. The May 3, 2000, FTC staff paper appears at CCH Trade Regulation Reporter ¶50,175.

The FTC staff has identified the following questions on which it has a particular interest in obtaining the public's views:

(1) What issues have been raised by online technologies or Internet activities or features that have emerged since the business guide was issued (e.g., mobile marketing, including screen size) that should be addressed in a revised guidance document?

(2) What issues raised by new technologies or Internet activities or features on the horizon should be addressed in a revised business guide?

(3) What issues raised by new laws or regulations should be addressed in a revised guidance document?

(4) What research or other information regarding the online marketplace, online advertising techniques, or consumer online behavior should the staff consider in revising "Dot Com Disclosures"?

(5) What research or other information regarding the effectiveness of disclosures --and, in particular, online disclosures --should the staff consider in revising "Dot Com Disclosures"?

(6) What specific types of online disclosures, if any, raise unique issues that should be considered separately from general disclosure requirements?

(7) What guidance in the original "Dot Com Disclosures" document is outdated or unnecessary?

(8) What guidance in "Dot Com Disclosures" should be clarified, expanded, strengthened, or limited?

(9) What issues relating to disclosures have arisen from such multi-party selling arrangements in Internet commerce as (1) established online sellers providing a platform for other firms to market and sell their products online, (2) website operators being compensated for referring consumers to other Internet sites that offer products and services, and (3) other affiliate marketing arrangements?

(10) What additional issues or principles relating to online advertising should be addressed in the business guidance document?

(11) What other changes, if any, should be made to "Dot Com Disclosures"?

Comments can be filed until July 11, 2011, at: https://ftcpublic.commentworks.com/ftc/dotcomdisclosures . Alternatively, comments, noted as "Dot Com Disclosures, P114506," can be submitted in paper form to: Federal Trade Commission, Office of the Secretary, Room H-113 (Annex I), 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580.

U.S. Urges High Court Not to Review Decision Enforcing Subpoenas in Antitrust Investigation

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

The U.S. Supreme Court should not review a decision of the U.S. Court of Appeals in San Francisco (CCH 2011-1 Trade Cases 77,467) enforcing grand jury subpoenas served on law firms in an antitrust investigation, the Department of Justice contended in a May 26 brief filed with the Court. The subpoenas sought non-privileged, pre-existing corporate records of the law firms’ clients.

The law firms had petitioned the Court to review the appellate court's decision, applying a per se rule enforcing a grand jury subpoena notwithstanding a civil protective order, and allowing prosecutors to obtain discovery materials from a parallel civil action, regardless of any countervailing considerations.

The underlying civil suits were filed by private plaintiffs against the law firms' clients—foreign producers of thin-film transistor-liquid crystal display panels (TFT-LCD)—soon after the government's investigation into alleged price fixing in the TFT-LCD industry became public.

The private litigation resulted in the production by the civil defendants of documents originating outside the United States. The Department of Justice served grand jury subpoenas on four law firms, seeking foreign-origin documents and deposition transcriptsfrom the class actions. A federal district court quashed certain subpoenas, and the Justice Department appealed.

“By a chance of litigation, the documents have been moved from outside the grasp of the grand jury to within its grasp,” the appellate court explained. “No authority forbids the government from closing its grip on what lies within the jurisdiction of the grand jury.”

The appellate court noted that the government had not engaged in any bad faith tactics, and the law firms did not claim that the documents were privileged. The per se rule of enforcement of grand jury subpoenas applied.

In response to the law firms' contention that review of the appellate court decision would resolve a split among the federal circuit courts on the issue of grand jury subpoena enforcement, the government argued that “no other court of appeals would have decided this case differently.”

The government conceded that “the circuits have adopted somewhat different positions on when grand jury subpoenas may be used to obtain materials covered by a civil protective order.” However, it noted that the law firms “significantly overstate the difference between the rule applied in the Fourth, Ninth, and Eleventh Circuits (which petitioners characterize as a “per se” approach) and the rule applied by the First and Third Circuits, which apply a rebuttable presumption that a grand jury subpoena should be enforced even when there is a civil protective order.”

The government also suggested that review was unnecessary because the question of how and when grand jury subpoenas can require production of material covered by civil protective orders rarely arises.

In addition, the government took issue with one law firm's argument that the subpoenas were unreasonable or oppressive because they were directed to lawyers. There was no risk posed to the attorney-client relationship, according to the government's brief. The subpoenas sought information that was produced in discovery, not information bearing on the representation of a client.

The petitions are White & Case LLP v. U.S., Dkt. No. 10-1147, filed February 25, 2011, and Nossaman LLP, v. U.S., Dkt. No. 10-1176, filed March 4, 2011

Infant Formula Maker’s Ads About Store Brands Barred

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

Infant formula manufacturer Mead Johnson was properly enjoined from publishing any advertisement containing a false representation about store brand infant formula produced by PBM Products, the U.S. Court of Appeals in Richmond has ruled.

In addition to affirming the permanent injunction (CCH Advertising Law Guide ¶63,672), the court upheld the trial court’s rejection of Mead Johnson’s defamation and Lanham Act counterclaims (CCH Advertising Law Guide ¶63,764).

The injunction expressly barred Mead Johnson from making the following claims:

“It may be tempting to try a less expensive store brand, but only Enfamil LIPIL is clinically proven to improve brain and eye development,” and

“There are plenty of other ways to save on baby expenses without cutting back on nutrition.”

Irreparable Harm, Inadequate Remedy at Law

PBM suffered irreparable harm, the court held. Mead Johnson’s advertising misled customers. PBM’s reputation was, and potentially continued to be, damaged. The entire goal of Mead's 2008 mailer was to deter mothers from considering a switch to store brand formula.

The remedies at law were inadequate, the court determined. While the jury awarded PBM $13.5 million in damages, the damages judgment compensated PBM for harm that flowed directly from the mailer. The injunction prevented Mead Johnson from infecting the marketplace with the same or similar claims in different advertisements in the future.

Balance of Hardships, Public Interest

The balance of hardships favored PBM, and the public interest heavily favored injunctive relief, the court said.

The general public interest in preventing false and misleading advertising was perhaps heightened when, as in this case, the misleading information pertained to issues of public health and infant wellbeing. The injunction was not overbroad because it only reached the specific claims that the district court found to be literally false, according to the court.

PBM’s “Compare to” Ad Claims

Mead Johnson's Lanham Act false advertising counterclaims were properly rejected because they were untimely under the analogous two-year Virginia statute of limitation and the doctrine of laches, and because Mead Johnson failed to establish that PBM's “Compare to” ads were impliedly false.

Defamation

Because false advertising was substantially synonymous with lying, in the court’s view, Mead Johnson could not establish defamation under Virginia law based on a press release issued by the CEO of PBM Products declaring that “Mead Johnson Lies About Baby Formula . . . Again.” Mead Johnson was held to have engaged in false advertising in this case, and it did not dispute that it had distributed false statements about PBM's formulas on prior occasions, the court observed.

The decision is PBM Products, LLC v. Mead Johnson & Co.,CCH Advertising Law Guide ¶64,264.

Further information about CCH Advertising Law Guide appears here.

Attempt to Enforce California Post-Term Covenants Not to Compete Can Be Malicious Prosecution

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

In an unusual action for malicious prosecution, the Court of Appeal of California, First District, in a not-for-publication opinion, has held that U-Haul’s actions in bringing a lawsuit in California to enforce a covenant not to compete violated California Business and Professions Code §16600. This holding basically makes such covenants unenforceable in California.

The fact that U-Haul had brought such actions in the past, which had been dismissed, was sufficient to establish probable cause and malice, allowing the terminated franchisee’s case to go forward for malicious prosecution and as a class action. The mere presence of such unenforceable language in the franchise agreement was considered grounds for pursuing the class action.

The decision is Robinson v. U-Haul Co. of California, CCH Business Franchise Guide ¶14,481.

Franchisor’s “Physical Presence” Not Needed for Income Taxation in Iowa

The essence of the much-discussed recent decision in KFC Corporation v. Iowa Department of Revenue, CCH Business Franchise Guide ¶14,518, is the court’s holding that “a physical presence is not required under the dormant Commerce Clause of the United States Constitution in order for the Iowa legislature to impose an income tax on revenue earned by an out-of-state corporation arising from the use of its intangibles by franchisees located within the State of Iowa.”

The court reasoned, “[B]y licensing franchises within Iowa, KFC has received the benefit of an orderly society within the state and, as a result is subject to the payment of income taxes.”

Colorado Barred from Enforcing Requirement That Mail-Order Sellers Provide Information About Buyers

In a strange procedural case that specifically ignored the issue of standing, the Direct Marketing Association has obtained an injunction from a federal district court in Colorado, barring the state’s taxing authority from enforcing a requirement that mail order sellers provide buyers and the state’s tax authorities with information returns about Colorado purchases subject to the use tax. (The Direct Marketing Association v. Huber, (D. Colo. January 28, 2011), CCH Colorado State Tax Reporter ¶201-018)

“Successful” Beer Law Litigants Awarded $0 in Attorney Fees

Beer distributors who were “successful” in their suit against a brewer and a successor brewer under the New Jersey Malt Alcoholic Beverages Act were nonetheless awarded zero dollars in legal fees by the federal district court in New Jersey. (Warren Distributing Co. v. Inbev USA, LLC, (D. N.J., February 28, 2011), CCH Business Franchise Guide ¶14,564)

The three beer wholesalers were deemed “successful” litigants under the meaning of the Act because a jury determined that the defending brewers did not pay them the fair market value of their distribution rights. However, even a cursory assessment of the litigation indicated that the wholesalers’ success was, at best, “pyrrhic” and, therefore, unworthy of an award of any attorney fees, according to the court.

The court went on to note that, in truth, the wholesalers were not the prevailing party in the litigation because the brewers recovered a significantly larger damages award on their unjust enrichment counterclaim than the wholesalers recovered on their beer law claims.

That fact alone merited a significant reduction in an award of attorney fees to the wholesalers, the court determined. Further, the jury award of $390,007 to the wholesalers was nugatory when compared to the $41 million the wholesalers had requested.

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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.

Focus on Franchising

This posting was written by John W. Arden.

News and notes on franchising and distribution topics:

□ The program for the 34th annual meeting of the ABA Forum on Franchising has been released by the American Bar Association. Entitled “Flying the Flag of Franchising,” the meeting will be held October 19-21, 2011 in Baltimore. The meeting will start with three concurrent intensive programs on Wednesday, October 19: Fundamentals of Franchising, Best Practices for Managing Your Franchise Disclosure and Registration Practice, and Anatomy of a Franchise Litigation Case. Highlights of the regular two-day program are two plenary sessions (the annual presentation on franchise and distribution law developments and a session on techniques to improve communications and enhance outcomes) and 24 workshops. Other events include a newcomers’ networking night, the annual reception/dinner at the B&O Railroad Museum, a community service event, and a tour of Annapolis. The meeting will be held at the Marriott Baltimore Waterfront. The program co-chairs are Michael K. Lindsey and Karen B. Satterlee. Further details regarding the meeting appear here on the ABA website.

□ The International Distribution Institute will present a conference on agency, distribution, and franchising on June 16-18 in Amsterdam. Among the scheduled presentations will be a panel discussion on the ICC international franchising model contract (with John Pratt, John R.F. Baer, Carl Zwisler, Dedier Ferrier, and Guy Gras); appointing an agent/sales representative for the U.S. (John R.F. Baer); establishing a franchising network in the U.S.: a general overview (Carl Zwisler); a panel discussion on applicable law and jurisdiction (John Pratt, Carol Xueref, Thomas J. Tallerico, and Carl Zwisler); and what a franchisor should know before negotiating a franchise agreement in Brazil, China, Japan, and the United States (Carl Zwisler, Luciana Bassani, Paul Jones, Souichirou Kozuka, and John R.F. Baer). Further details are available here.

□ The national Girl Scout organization’s constructive termination of a Wisconsin council as part of a plan to eliminate two thirds of the councils nationally violated the Wisconsin Fair Dealership Law (WFDL), according to the U.S. Court of Appeals in Chicago. The national organization attempted to implement a “realignment plan” due to a decline in membership. In a decision written by Judge Richard Posner, the Court of Appeals held that the council qualified as a dealership within the WFDL. “From a commercial standpoint, the Girl Scouts are not readily distinguished from Dunkin’ Donuts,” the court stated. “The principal or at least the most readily defensible objectives of dealer protection laws is to prevent franchisors from appropriating good will created by their dealers.” These concerns apply to nonprofit enterprises that enter into dealership agreements as defined by the law, the court observed. The complaining council “manages a rolling inventory of Girl Scout-branded cookies, operates camps that are identified as ‘Girl Scout camps,’ and proselytizes for Girl Scouting in the communities that it serves, building up good will both for the local council and the national brand.” Thus, the court declined to read an exemption for nonprofits into the WFDL. Contrary to the national organization’s claim, the realignment of the councils was not “good cause” for termination or change in the competitive circumstances of the council. “There is no evidence that the proposed redrawing of boundaries is ‘essential’ or even helpful to the attainment of the national organization’s expressive goals.” The appeals court directed the federal district court in Milwaukee to enter summary judgment for the council on the WFDL claim. The May 31 decision is Girl Scouts of Manitou Council, Inc. v. Girl Scouts of the United States of America. It will be reported in CCH Business Franchise Guide.