Gasoline Franchisor’s Withdrawal from Market Did Not Violate PMPA

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

In Santiago-Sepúlveda v. Esso Standard Oil Co. (Puerto Rico), Inc., (CCH Business Franchise Guide ¶14,604) the U.S. Court of Appeals in Boston held that a gasoline station franchisor did not violate the PMPA in connection with its withdrawal from the Puerto Rico market because its successor did comply with the PMPA’s requirement, for the most part, to offer franchises to the franchisees of the withdrawing franchisor in "good faith."

The argument by the franchisees that any term violating a state law in any respect comprised a violation of the PMPA’s good faith requirement was rejected. Such a per se rule would put at risk a vast number of market withdrawals. The court noted that the offered franchise agreements, comprising interrelated contracts spanning about 100 pages, included hundreds of clauses, of which the lower court invalidated only five in part.

Dealer Terminated for Good Cause for Poor Sales Performance

In Ralph Gentile, Inc. v. Division of Hearings and Appeals, (CCH Business Franchise Guide ¶14,626), a Wisconsin state appellate court held that a motor vehicle dealer materially breached its dealership agreement with a franchisor by failing to achieve satisfactory sales performance.

Under the Wisconsin Fair Dealership Law, "just provocation" for termination had four elements:

(1) The terminated dealer materially breached the agreement;

(2) The breached provision was reasonable and necessary;

(3) The breach was caused by matters within the dealer’s control; and

(4) The dealer failed to cure the breach within a reasonable time after receiving written notice of the breach.

The sales-effectiveness rating used by the franchisor for determining the performance of the dealer was ruled proper, and the facts clearly showed that the dealer’s sales performance was well below the sales-effectiveness ratings earned by its predecessor.

Understating Start-Up Costs in UFOC Could Be Fraud

In Love of Food I, LLC v. Maoz Vegetarian USA, Inc., (D. Md., CCH Business Franchise Guide ¶14,633) allegations of common law fraud based on the franchisor’s understatements of start-up costs in a UFOC survived a motion to dismiss. The initial costs were allegedly understated by 85% or more. The franchisor argued that cost projections were statements of opinion and could not constitute fraud because they were not susceptible to exact knowledge at the time they were made. However, the court held that erroneous projections could supply a basis for fraud under Maryland law.

Nexus Questionnaires Sent to Firms Doing Business in Philadelphia Without “Physical Presence”

Practitioners should be aware that an alert was issued by the Philadelphia Department of Revenue to notify taxpayers that the department's audit unit is currently working to find businesses having tax nexus with Philadelphia but located outside of the city. Nexus questionnaires are being sent out explaining business nexus and asking those businesses to report any activity they have in Philadelphia.

If a taxpayer's business has nexus with Philadelphia and is not filing and paying Philadelphia business taxes, taxpayers are advised to contact the department to bring the company into tax compliance by entering into the Voluntary Disclosure Program. Taxpayers who meet the conditions of the program may be eligible for a waiver of all penalties owed (Amnesty Support Group and Nexus Project, Philadelphia Department of Revenue, May 13, 2011).

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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.

Reebok Settles FTC Claims That It Misrepresented Benefits of “Toning” Shoes

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

The Federal Trade Commission announced yesterday that Reebok International Ltd. agreed to resolve charges that the company deceptively advertised its “toning shoes,” including EasyTone walking shoes, RunTone running shoes, and EasyTone flip flops.

According to the FTC, ads for the shoes claimed that sole technology featuring pockets of moving air created “micro instability” that toned and strengthened muscles as you walked or ran.

In one television commercial, Reebok represented that the EasyTone toning shoes were proven to strengthen hamstrings and calves by up to 11 percent, and that they toned the buttocks “up to 28 percent more than regular sneakers, just by walking,” the FTC alleged.

Consumer Redress

As part of a settlement, Reebok has agreed to pay a $25 million judgment to be used for consumer redress distributed either through the FTC or through a class action lawsuit. Reebok also will be required to change its marketing for the relevant products, as it continues to sell the footwear.

Strengthening, Toning Claims

Reebok has agreed to refrain from making the challenged claims. A proposed consent decree would prohibit the company from representing that toning shoes and other toning apparel are effective in strengthening muscles, or that using the footwear will result in a specific percentage or amount of muscle strengthening or toning, unless the claims are true and backed by scientific evidence.

Future health or fitness-related efficacy claims for toning shoes and other toning apparel would have to be true and backed by scientific evidence. The proposed consent decree also would require Reebok to refrain from misrepresenting any tests, studies, or research results regarding toning shoes and other toning apparel.

Reebok has agreed to notify retailers and instruct them to remove marketing materials and cover portions of boxes making the challenged claims.

Reebok’s Reaction

Although Reebok agreed to settle the FTC’s allegations, it issued a statement defending its advertising practices.

“Settling does not mean we agreed with the FTC’s allegations; we do not,” Reebok said in a statement posted on the company’s web site. We fully stand behind our EasyTone technology – the first shoe in the toning category inspired by balance-ball training. We have received overwhelmingly enthusiastic feedback from thousands of EasyTone customers, and we remain committed to the continued development of our EasyTone line of products.”

The FTC filed the complaint and proposed consent decree on September 28 in the U.S. District Court for the Northern District of Ohio. A news release, complaint, and stipulated final judgment and order appear here on the FTC website.

Further details regarding Federal Trade Commission v. Reebok International Ltd., will appear in the CCH Trade Regulation Reporter.

Alleged Horse-Breeding Scheme May Have Violated Federal RICO Law

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

Investors could proceed with civil RICO claims against defendants that allegedly engaged in a fraudulent investment scheme that involved the leasing of thoroughbred mares for a single breeding season, the federal district court in Lexington, Kentucky, has ruled.

The defendants unsuccessfully argued that the plaintiffs were required to allege that each defendant had personally made misrepresentations or had used the mails or wires in order state a claim. They were unsuccessful, as well, in their argument that the plaintiffs did not allege a valid “investment” claim under RICO §1962(a).

Mail, Wire Fraud

Although the U.S. Court of Appeals for the Sixth Circuit required plaintiffs to identify with specificity the actions that each defendant had taken in furtherance of an alleged fraud, the mail and wire fraud statutes did not require a showing that each defendant had personally made a misrepresentation, the court explained.

To plead fraud with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure, a plaintiff had to allege only that each RICO defendant had participated in a scheme to defraud “knowing or having reason to anticipate [that] the use of the mail or wires would occur and that each such use would further the fraudulent scheme.”

Investment of Racketeering Income

The defendants unsuccessfully argued that the plaintiffs failed to plead a valid “investment” claim under RICO §1962(a).

According to the defendants, the plaintiffs failed to allege that specified defendants had used or invested income from a pattern of racketeering activity to acquire an interest in, or to operate an enterprise engaged in, interstate commerce.

The plaintiffs, however, “clearly alleged” that the specified defendants had invested income from their racketeering activity (the proceeds they received from the mare leases) into a business that was used to facilitate the cover up of the alleged fraud, according to the court.

The decision in ClassicStar Mare Lease Litigation will appear at CCH RICO Business Disputes Guide ¶12,106.

Further information regarding CCH RICO Business Disputes Guide is available here.

Senators Question Whether Google Channels Searchers to Its Secondary Internet Businesses

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

Lawmakers expressed concern about Google’s decision to expand into secondary Internet businesses and addressed charges that the Google search engine channels customers to its own businesses, during a September 21 hearing by the Senate Judiciary’s Subcommittee on Antitrust, Competition Policy and Consumer Rights.

The hearing was held to consider the competitive impact of the conduct of Google, which has been criticized for allegedly manipulating search results for its own benefit. The Federal Trade Commission is currently investigating Google’s business practices.

“Our inquiry centers on whether Google biases [Internet search] results in its favor, as its critics charge, or whether Google simply does its best to present results in a manner which best serves consumers, as it claims,” said Subcommittee Chairman Herb Kohl (D, Wis.)

“[A]s the dominant firm in Internet search, Google has special obligations under antitrust law to not deploy its market power to squelch competition,” Senator Kohl added.

"Cooperating with FTC's Investigation"

Eric Schmidt, Executive Chairman of Google Inc., defended the company from suggestions that it was hindering competition. Schmidt said that Google was “fully cooperating with the FTC’s investigation” and noted that “every decided antitrust suit that has been brought against Google regarding our search results has been dismissed.

In a statement issued following the hearing, Senator Mike Lee (R, Utah) said that he was “disappointed” by Schmidt’s testimony.

“I had hoped to hear the company acknowledge the responsibilities that accompany its preeminent position in the Internet search market and address concerns many have raised about Google’s possible anticompetitive activities,” the subcommittee ranking member said. “Unfortunately, I fear that some of the testimony in today’s hearing may only encourage those who are calling for legal enforcement or government regulation.”

Massachusetts Labor Laws Clarified for Franchising Context

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

The Massachusetts Supreme Judicial Court has answered four questions that were certified to it by a federal district court for the District of Massachusetts in a dispute between Coverall, a franchisor of janitorial service businesses, and individuals who entered into janitorial franchise agreements with Coverall.

The federal court had determined in earlier rulings that those individuals who were Massachusetts residents were employees who had been improperly classified as independent contractors by the franchisor. The certified questions related to the calculation of damages for one of the individual plaintiffs in the action.

The first two questions were related and asked:

(1) Whether, under Massachusetts law, a franchisor could lawfully use customer accounts-receivable financing to pay a franchisee who is characterized as an employee under the Massachusetts Wage Act; and

(2) Whether an employer could lawfully withhold wages to an employee if the employer and employee agree that such wages are not earned until a customer remits payment.

The answer to both questions was "no," according to the Massachusetts high court.

The contracts between the parties required the individual to:

(1) Pay an initial franchise fee;

(2) Pay monthly royalty and management fees;

(3) Maintain janitorial bonding, workers’ compensation insurance for himself and any employees, unemployment insurance as required by law, and comprehensive liability insurance, all policies naming Coverall as an additional insured; and

(4) Provide replacement supplies and equipment.

The contract further provided for accounts receivable financing whereby Coverall would pay the individual interest-free advances for amounts billed to, but not yet collected from customers. If a customer failed to pay within 90 days, the individual was required to repay Coverall the advance in the form of a chargeback.

Wage Act

The Massachusetts Wage Act required an employer to pay the wages earned to an employee within a fixed period of days after the end of a pay period, according to the court. Where an employee has completed the labor, service, or performance required of him, by common understanding he has "earned" his wage.

That a Coverall customer did not pay its bill within a week after the pay period did not affect the plaintiff individual’s right to wages he had earned. Since the individual was an employee, the obligation to pay him earned wages rested with Coverall, not with third parties, the court held.

The accounts receivable financing system incorporated into the individual’s contract with Coverall, in which wages were classified by Coverall as advances that could be recouped, violated the special contracts provision of the Wage Act, the court ruled. That provision prohibited a person from exempting himself from the Wage Act’s provisions by a special contract or other means. Coverall was not free to withhold, much less recapture, the employee’s earned wages.

In answering the remaining questions, the Massachusetts court determined that the employees could recover as damages incurred any insurance premiums that they were obliged to pay to Coverall under the terms of their contract. In light of the federal district court judge’s statement that he welcomed other advice about Massachusetts law that was relevant to the case, the court addressed the franchise fees that the individual agreed to pay Coverall in order to enter into what the district court determined to be a direct employment relationship. The Massachusetts court’s view was that such fees constituted "special contracts," not usual between employers and employees.

In substance they operated to require employees to buy their jobs from employers. In that respect, they violated public policy. Examined in the context of the Wage Act, the franchise fees paid by the plaintiff individual did not represent a clear and established debt. To the extent that such fees were paid back to Coverall out of wages earned from Coverall, they represented a prohibited assignment of an employee’s future wages to his employer, the court opined.

The court emphasized that its concerns over franchise fees related to the potentially exploitative nature of payments by an employee to an employer for the purpose of securing employment and noted that it expressly did not conclude that franchise fees violated public policy when they were agreed to by parties who were not in an employer-employee relationship.

The opinion is Awuah v. Coverall N.A., Inc., CCH Business Franchise Guide ¶14,671.

Further information regarding CCH Business Franchise Guide appears here.

Decertification of Yogurt Digestive Health Action Denied

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

The federal district court in Santa Ana, California, has refused to decertify a class of YoPlus yogurt purchasers who asserted that General Mills and Yoplait USA falsely represented that YoPlus yogurt products promoted digestive health, in violation of California’s Unfair Competition Law (UCL) and Consumers Legal Remedies Act (CLRA). The court ealier held that class certification was warranted under both the U.S. Supreme Court’s decision in Wal-Mart v. Dukes, 131 S.Ct. 2541 (2011) and the Ninth Circuit’s recent decision in Stearns v. Ticketmaster, ADVERTISING LAW GUIDE ¶64,386, which directly addressed the issue of class certification of claims brought pursuant to the UCL and the CLRA.

The claims met the commonality and predominance requirements for class certification because they presented core issues of law and fact, and those issues predominated over the issues in the case that would have to be determined on an individual basis, according to the court. These common issues included (1) whether General Mills communicated a representation—through YoPlus packaging and other marketing, including television and print advertisements—that YoPlus promoted digestive health; (2) if so, whether that representation was material to individuals purchasing YoPlus; (3) if the representation was material, whether it was truthful; in other words, whether YoPlus does confer a digestive health benefit that ordinary yogurt does not; and (4) if reasonable California consumers who purchased YoPlus were deceived by a material misrepresentation as to YoPlus’ digestive health benefit, what is the proper method for calculating their damages.

Neither Wal-Mart nor Ticketmaster contradicted the findings of commonality and predominance in this case, the court determined. The claims centered upon a common question: did the defendants state a false claim of a digestive health benefit that a reasonable person would have been deceived by, for purposes of the UCL, or would have attached importance to, for purposes of the CLRA? While individualized determinations may be required to calculate damages, those determinations did not warrant decertification. The common question was sufficiently central to satisfy commonality, and, when compared to individualized aspects of the suit, still predominated.

The April 20, 2011, and the September 12, 2011, decisions in Johnson v. General Mills, Inc., SACV 10-00061, will appear at ADVERTISING LAW GUIDE ¶64,412 and ¶64,413.

Franchisor Did Not Commit Fraud, Violate Minnesota Franchise Act in Franchise Sale

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

A janitorial business franchisor did not commit common law fraud or violate the anti-fraud provisions of the Minnesota Franchise Act (MFA) in connection with the sale of a franchise to three franchisees because the franchisor made no untrue statements of material fact or misrepresentations, a federal district court in Minneapolis has decided.

The claims were initially brought as part of a putative class action against the franchisor, but the motion for class certification was denied in an earlier ruling (CCH Business Franchise Guide ¶14,335). After proceeding jointly through discovery, the parties agreed that the franchisor would move for summary judgment on the claims of three representative plaintiffs.

As to the first of the three plaintiffs, the franchisor’s alleged statement to that "[i]f you buy more, you’ll get more" was not untrue, the court held. The franchisor structured its franchising business to correlate the amount of business it promised to offer a franchisee with the amount of initial investment made by the franchisee. In that sense, it was true that the more a franchisee bought (or the larger his initial investment), the more he would receive in gross billings of offered accounts, the court determined.

Puffery

The statement that owning one of the franchises was a "good business" and that the business could continue for "a long time" were puffery, the court ruled. In general, puffery includes statements of exaggerated boasting or vague, subjective claims of superiority. The franchisee’s counsel contended that the franchisor’s puffery should be evaluated in the context of the lack of sophistication of the franchisee—an immigrant with limited English ability and business acumen. However, immigrants were not a group so gullible that they could not recognize obvious puffery, the court reasoned.

The first plaintiff also asserted that the franchisor falsely represented a guarantee of $1,000 per month in account billings, but the franchisee admitted in his deposition that he was not promised any level of profits or income. Even if such a representation was made by the franchisor, any reliance on representations regarding profitability was unreasonable as a matter of law because it was directly contradicted by the franchise agreement, the court held.

The fraud claimed by the second of the three plaintiffs hinged on the franchisor’s alleged representations that he could earn as much money as a medical doctor or Ph.D., and its failure to inform him that declined accounts would be counted against the amount of business the franchisor was obligated to provide.

Reliance of Statement

The franchisee could not have reasonably relied on the alleged statement because it was made after he signed the franchise agreement, the court held. Further, the statement directly contradicted the franchisor’s Uniform Franchise Offering Circular (UFOC), which disclaimed any representations as to profitability or income level and was incorporated into the franchise agreement. The franchisee could not impose liability under a common law or MFA-based fraud claim merely because he chose not to read the UFOC, according to the court.

The franchisor could not have defrauded the third plaintiff by allegedly failing to disclose that any offers of accounts that the franchisee declined would count against the total amount of accounts that the franchisor was obligated to offer the franchisee, the court ruled. A reasonable jury would find that the franchisee received a version of the franchisor’s UFOC that unambiguously made such a disclosure, the court decided.

Evidence showed that: (1) the franchisee admitted, while a prospective franchisee, to receiving a "black book" from the franchisor; (2) the franchisor’s May 28, 2002 UFOC was bound as a black book; (3) the franchisee signed a written acknowledgment of having received the May 28, 2002, UFOC; and (4) most importantly, the franchisee produced the first two pages of the May 28, 2002 UFOC in the course of the litigation.

Statute of Limitations

The third franchisee’s claim that the franchisor violated the MFA by making misrepresentations regarding profitability, the availability of evening accounts, and the ability to hire employees was time-barred by the Act’s three-year statute of limitations.

Had the franchisor made the alleged statements, and if they were false, the franchisee would have been aware of the facts constituting the claim within months of purchasing his franchise, the court decided. Thus, even if the discovery rule applied to the MFA to toll the statute of limitations, the claim was barred. The franchisee knew all of the facts constituting the claim in early 2003 but did not file the claim until approximately five years later.

The decisions in Moua v. Jani-King of Minnesota, Inc., will appear at CCH Business Franchise Guide ¶14,665 and ¶14,681.

Internet Provider’s Fast Service Claims Did Not Violate State Unfair Trade Practice Laws

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

A New York Internet subscriber could not state a New York deceptive business practices law claim against Time Warner Cable for allegedly misrepresenting the speed of its “Road Runner” Internet service, according to the federal district court in New York City.

A California Internet subscriber also failed to state a California Unfair Competition Law (UCL) claim based on violations of the California False Advertising Law (FAL) and Consumer Legal Remedies Act (CLRA).

Time Warner advertised its Road Runner Internet service as having “blazing speed,” being “always on connection,” and the “fastest, easiest way to get online.” These representations allowed Time Warner to charge up to more than 100% of the fees charged by competitors, according to the subscriber.

However, Time Warner failed to disclose that it interfered with and limited subscribers’ access to their Internet connections and their attempts to engage in peer-to-peer communications.

New York and California subscribers sought to represent a class of all Road Runner service customers.

In response, Time Warner argued that the service agreement included express provisions permitting the network management practices at issue. The company further argued that the statements at issue were mere puffery and not actionable under either the New York or California laws.

To state a claim under the New York law (New York General Business Law Sec. 349), the subscriber had to show that the challenged advertising was directed at consumers, the advertising would mislead a reasonable consumer in a material way, and that the subscriber suffered an injury as a result of the advertising. To state a UCL claim under the unlawful prong, the subscriber needed to show that the company violated another law.

While some of the statements were puffery, others could be actionable. However, the claims failed because there was no evidence that the Internet connection was not always available or that the speed of the service was slower than competing services, according to the court.

The decision in Fink v. Time Warner Cable will appear at CCH State Unfair Trade Practices Law ¶32,322.

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

Quarterback’s Publicity Rights Claim Against Video Game Maker Rejected

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

The First Amendment barred former Rutgers quarterback Ryan Hart’s New Jersey common law right of publicity claim based on misappropriation of his likeness in the Electronic Arts video game NCAA Football, the federal district court in Trenton has ruled.

Hart asserted the right of publicity in a class action complaint on behalf of other players. The court held that the First Amendment trumped the right of publicity because EA’s use of Hart’s likeness was “transformative” and also because the use was clearly related to the game and not simply an advertisement for an unrelated product.

Transformative Test

Borrowed from the copyright fair use doctrine, the transformative test balances the competing interests of the right of publicity and the First Amendment by protecting works that add significant elements of expression beyond the mere literal depiction or imitation of a celebrity for commercial gain.

Elements of EA’s own expression found in the game justified the conclusion that its use of Hart’s image was transformative, the court held. NCAA Football contained virtual stadiums, athletes, coaches, fans, sound effects, music, and commentary, all of which were created or compiled by the game's designers. Over 100 virtual teams and thousands of virtual players were included.

Focusing on Hart’s virtual image alone, the court acknowledged that a virtual player bore resemblance to Hart and was designed with Hart’s physical attributes, sports statistics, and biographical information in mind. However, the game permitted users to alter Hart’s virtual player, control the player’s throw distance and accuracy, change the team of which the player is a part by downloading varying team names and rosters, and incorporate players from historical teams into the gameplay.

EA created the mechanism by which the virtual player could be altered, as well as the multiple permutations available for each virtual player image, the court noted.

Rogers Test

Because EA’s use of Hart’s likeness was clearly related to the game and not simply an advertisement for an unrelated product, the court determined that the right of publicity claim also was barred under the test developed in Rogers v. Grimaldi, 875 F.2d 994 (2d Cir. 1989). The Rogers test had been applied in cases when the appropriation of a celebrity likeness created a false and misleading impression that the celebrity was endorsing a product.

As explained in Seale v. Gramercy Pictures, 949 F.Supp. 331 (ED Pa. 1996), applying Rogers to a Pennsylvania right of publicity claim, if a name or likeness is used solely to attract attention to a work that is not related to the identified person, the user may be subject to liability for a use of the identity in advertising. On the other hand, the use of a person’s name and likeness to advertise a work concerning that individual does not infringe the right of publicity, according to the court.

The transformative test provided the best analysis, in the court’s view, but EA was entitled to protection under either the transformative test or the Rogers test, the court concluded.

The September 9 opinion in Hart v. Electronic Arts, Inc. will be reported at CCH Advertising Law Guide ¶64,395.

Further information regarding CCH Advertising Law Guide appears here.

Settlement Preliminarily Approved in Cathode Ray Tube Price Fixing Class Action

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

The federal district court in San Francisco has given preliminary approval to a $10 million settlement resolving price fixing claims brought on behalf of indirect purchasers of products contain cathode ray tubes (CRTs) against manufacturer Chunghwa Picture Tubes, Ltd.

A special master will hold a hearing to determine the sufficiency, fairness, reasonableness, and adequacy of the proposed settlement in March 2012.

Indirect Purchaser Claims

The indirect purchaser claims were brought on behalf of all persons or entities who or which indirectly purchased in the United States CRT products manufacture red or sold by defending CRT makers or their subsidiaries between March 1995 and November 2007. The net settlement fund will be no less than $5 million. The settlement calls for $2.5 million in attorneys’ fees and sets aside $2.5 million for costs, including costs of notice and administration of the settlement funds.

Last year, the court refused to dismiss the indirect purchasers’ claims based on an alleged failure to adequately plead a conspiracy, the Foreign Trade Antitrust Improvements Act (FTAIA), or an alleged lack of standing.

The complaint met the pleading standards articulated by the U.S. Supreme Court in Bell Atlantic Corp. v. Twombly (550 U.S. 544, 2007-1 Trade Cases ¶75,709) and Ashcroft v. Iqbal (129 S. Ct. 1937, 2009-2 Trade Cases ¶76,785).

The plaintiffs were not required to plead detailed, defendant-by-defendant allegations. It was sufficient that they made allegations that plausibly suggested that each defendant participated in the alleged conspiracy. The complaints contained allegations concerning certain defendants’ participation in alleged unlawful meetings and agreements.

Regarding the FTAIA argument, the indirect purchasers alleged a conspiracy that was carried out both in the United States and abroad, that involved a substantial amount of import and domestic commerce, and that targeted and injured American consumers.

Illinois Brick Repealer Statutes

The court also ruled that the indirect purchasers adequately alleged standing to assert state antitrust violations predicated on the Illinois Brick repealer statutes of Arizona, California, Iowa, Kansas, Michigan, Minnesota, Mississippi, Nebraska, Nevada, New Mexico, North Carolina, North Dakota, South Dakota, Tennessee, Vermont, West Virginia, and Wisconsin.

The indirect purchasers alleged that they paid higher prices for CRT products than they would have paid in the absence of the conspiracy and that prices of CRT products were directly correlated to the prices of CRTs.

CRTs purportedly account for approximately 60 percent of the cost of manufacturing computer monitors and a slightly smaller percentage of the cost of manufacturing televisions.

The decisions are Cathode Ray Tube (CRT) Antitrust Litigation, 2011-2 Trade Cases ¶77,592 and 2011-2 Trade Cases ¶77,593.

Bridgestone Agrees to Plead Guilty to Fixing Prices for Marine Hose

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

Bridgestone Corporation has agreed to plead guilty and to pay a $28 million criminal fine for its role in conspiracies to rig bids and to make corrupt payments to foreign government officials in Latin America related to the sale of marine hose and other industrial products, the Department of Justice announced yesterday.

The company has agreed to cooperate with the Justice Department in its ongoing investigations and has committed to extensive remediation and to enhance its compliance program and internal controls.

Conspiracy to Rig Bids, Fix Prices, Allocate Markets

According to a two-count criminal information filed on September 15 in the federal district court in Houston, the Japan-based Bridgestone conspired to rig bids, fix prices, and allocate market shares of marine hose in the United States and elsewhere in violation of Sec. 1 of the Sherman Act and, separately, conspired to make corrupt payments to government officials in various Latin American countries to obtain and retain business in violation of the Foreign Corrupt Practices Act (FCPA). The challenged conduct took place between 1999 and 2007.

As part of the antitrust conspiracy, Bridgestone and others allegedly agreed to allocate shares of the marine hose market, agreed to establish a price list for marine hose in order to implement and monitor the conspiracy, and agreed not to compete for one another’s customers through bid rigging.

Payments to Government Officials

With respect to the FCPA count, Bridgestone was charged with authorizing and approving corrupt payments to foreign government officials employed at state-owned entities in order to secure sales of marine hose in Mexico and other Latin America countries. The 11-page criminal information details e-mail exchanges purportedly detailing the company’s efforts to influence foreign officials through local sales agents.

Bridgestone, best known for its tires, is the fifth company to be charged in the Department of Justice Antitrust Division’s investigation into bid rigging in the marine products industry.

Last year, Parker ITR S.R.L. of Italy agreed to plead guilty and to pay a $2.29 million criminal fine for its role in the conspiracy. Two subsidiaries of the Swedish company Trelleborg AB, one based in Virginia and the other in France, agreed to plead guilty and pay a total of $11 million in criminal fines in 2009. British marine hose manufacturer Dunlop Oil & Marine Ltd. agreed to plead guilty and pay $4.54 million fine in 2008. Manuli Rubber Industries SpA of Italy also agreed to plead guilty to similar charges and to pay more than $2 million in criminal fines.

In addition, a number of industry executives have been charged with participating in the marine hose conspiracy, including Bridgestone’s former general manager of international engineered products, Misao Hioki.

While most of the executives have pleaded guilty, two have been acquitted. In 2008, an Italian national and a Florida man who both worked for Manuli were found not guilty of participating in the antitrust conspiracy by a jury in West Palm Beach, Florida. A German national and former executive with Dunlop's former parent company—Phoenix AG—who was indicted in 2007 is awaiting trial.

Company’s Response

Bridgestone issued in statement today, saying that the $28 million fine is a significant reduction from the applicable sentencing guidelines due to the company’s “extraordinary” cooperation in the investigation and remediation efforts. As part of the remediation efforts, Bridgestone has dismantled its International Engineered Products Department, closed its Houston office of Bridgestone Industrial Products of America, Inc., terminated many of its third party agents, and taken remedial actions with respect to its employees.

The Justice Department has been investigating Bridgestone’s involvement in international cartel activities relating to the sale of marine hose since May 2007, according to the statement.

The case is U.S. v. Bridgestone Corp., Criminal No. H-11-651.

A Department of Justice press release on the development appears here. Bridgestone’s statement appears here.

FTC Proposes Amendments to Children’s Online Privacy Protection Rule

This posting was written by John W. Arden.

The Federal Trade Commission has proposed amendments to the Children’s Online Privacy Protection Rule in order to ensure that the rule continues to protect children’s privacy, as online technologies evolve. The agency is seeking public comment on the proposal through November 28, 2011.

According to a September 15 press release, the proposed amendments would give parents control over what personal information websites may collect from children under 13 years of age.

The Children’s Online Privacy Protection Act (COPPA) (CCH Trade Regulation Reporter ¶27,590) requires operators of websites or online services directed to children under 13—or those having actual knowledge that they are collecting personal information from children under 13—to obtain verifiable consent from parents before collecting, using, or disclosing such information.

The FTC rule implementing COPPA—the Children’s Online Privacy Protection Rule (CCH Trade Regulation Reporter ¶38,059)—became effective in 2000.

In April 2010, the Commission sought public comment on the COPPA Rule, posing numerous questions for public consideration, holding a public roundtable, and reviewing 70 comments from industry representatives, advocacy groups, academics, technologists, and members of the public.

Proposed changes to the rule, released today, include:

Definitions. The FTC proposes updating the definition of “personal information” that may not be collected from children under 13 without parental consent to include geolocation information and certain “persistent identifiers” such as tracking cookies used for behavioral advertising. The agency further proposed a change to the definition of “collection” to allow children to participate in interactive communities, without parental consent, as long as the operators take reasonable measures to delete children’s personal information before it is made public.

Parental notice. The Commission seeks to streamline and clarify the direct notice that operators must give parents prior to collecting children’s personal information in a succinct “just-in-time” notice rather than just in a privacy policy.

Parental consent mechanisms. New proposed methods of obtaining verifiable parental consent would include electronic scans of signed parental consent forms, video-conferencing, and use of government-issued identification checked against a database. These new methods would supplement the existing methods of obtaining parental consent, which include signed parental consent forms, parents’ use of a credit card in connection with a transaction, and parents' calls to a toll-free telephone number. The FTC proposes eliminating parental consent through “e-mail plus,” an e-mail to a parent coupled with another step such as sending an e-mail confirmation.

Confidentiality and security. Proposed rules would strengthen confidentiality and security by requiring that operators ensure that any third party to whom they disclose personal information has reasonable procedures to protect that information, retain the information for only as long as reasonably necessary, and properly delete that information.

Safe harbor. The FTC proposes to strengthen its oversight of self regulatory “safe harbor programs” by requiring groups to audit their members at least annually and to report the results of audits to the Commission.

The 122-page notice of proposed rule and request for comments appears here on the FTC website.

Submission of Comments

Interested persons may submit comments online here or may send a hard copy of comments to: Federal Trade Commission, Office of the Secretary, Room H-113 (Annex E), 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580.

Write “COPPA Rule Review, 16 CFR Part 312, Project No. P-104503” on the submissions.

Consent Decree Permitting Comcast/NBC Joint Venture Approved

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

The federal district court in Washington, D.C. has approved a consent decree resolving Department of Justice Antitrust Division concerns over a joint venture between Comcast Corp. and General Electric Co.’s subsidiary NBC Universal Inc.

The joint venture combined Comcast—the nation’s largest cable operator and Internet service provider—and NBC Universal's cable networks, filmed entertainment, and television programming, including the NBC broadcast network. It is managed and 51 percent owned by Comcast, with GE holding 49 percent ownership.

The consent decree resolved allegations that the transaction, as originally proposed, would lessen competition substantially in the market for video programming distribution by allowing Comcast to disadvantage its traditional competitors—direct broadcast satellite and telephone companies that provide video services—as well as emerging online video distributors (OVDs).

The consent decree was found to be in the public interest. However, the court imposed additional steps to monitor implementation of the final judgment.

The parties were required to report to the court for two years regarding the consent decree’s non-appealable arbitration mechanism for OVDs seeking to obtain the joint venture’s video programming content. An annual hearing was also required.

The case is U.S. v. Comcast Corp. A memorandum order, finding the consent decree in the public interest, appears at 2011-2 Trade Cases ¶77,584. The final judgment appears at 2011-2 Trade Cases ¶77,585.

Acting Antitrust Chief Defends U.S. Challenge to AT&T/T-Mobile Merger

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

Sharis Arnold Pozen, Acting Assistant Attorney General in charge of the Department of Justice Antitrust Division, discussed civil antitrust enforcement efforts at the 38th annual Fordham Competition Law Institute’s international antitrust law and policy conference on September 7.

In what panel moderator A. Paul Victor called her “maiden speech” as newly appointed acting antitrust chief, Pozen talked about how civil non-merger enforcement was "alive and well" at the Antitrust Division.

Pozen had intended to focus her comments on non-merger enforcement, saying that she had said a lot about mergers recently. A week earlier, Pozen had delivered remarks at a press conference on the filing of the U.S. suit challenging AT&T Corporation’s proposed acquisition of T-Mobile USA Inc. Moreover, a trial had just begun in the Justice Department’s action to halt H&R Block Inc.’s proposed acquisition of 2SS Holdings, Inc., the maker of TaxACT do-it-yourself tax preparation software.

Horizontal Merger Guidelines

The official took issue with the suggestion that the Justice Department’s complaint in the AT&T/T-Mobile case did not reflect recent changes to the joint FTC/Justice Department Horizontal Merger Guidelines. Commentators have suggested that the Justice Department’s complaint in the case relies too heavily on market share analysis and structural presumptions.

In her remarks at Fordham, Pozen said that the complaint in the AT&T/T-Mobile case does in fact represent the approach taken in the Horizontal Merger Guidelines and current Antitrust Division practice. She reiterated that the combination is a four-to-three merger that takes out an innovator.

The Horizontal Merger Guidelines (CCH Trade Regulation Reporter ¶13,100), which were revised in August 2010, recognize the continuing need for market definition in merger analysis; however, the focus is on the competitive effects of a transaction. The analysis need not start with market definition, according to the revised guidelines.

There has also been speculation that Sprint Nextel’s private suit challenging the AT&T/T-Mobile transaction could represent an effort by Sprint to bolster a weak Justice Department case. Pozen refused to comment on the Sprint suit other than to say that Sprint’s case was also before Judge Ellen Huvelle. Pozen did not know whether the suits would be combined.

Further information about the Justice Department’s lawsuit to block the AT&T/T-Moble deal appears here in an August 31 posting on Trade Regulation Talk.

Non-Merger Enforcement

With respect to civil, non-merger enforcement, Pozen discussed a number of recently-filed cases in sectors that “affect consumers’ pocketbooks.” In the health care industry, she explained that the Antitrust Division filed its first lawsuit since 1999 challenging a monopolist with engaging in traditional anticompetitive unilateral conduct. United Regional Health Care System of Wichita Falls—the largest hospital in Wichita Falls—agreed to settle allegations 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.

Another action noted in the health care area was the Antitrust Division’s ongoing lawsuit against Blue Cross Blue Shield of Michigan, challenging the health insurer’s use of most favored nation (MFN) clauses in its provider agreements with various hospitals. The insurer has appealed a federal district court’s denial of its motion to dismiss (2011-2 Trade Cases ¶77,568), and the Justice Department has asked for dismissal of the appeal.

In another “key industry for consumers,” the Justice Department is pursuing claims against American Express, challenging payment card rules that allegedly restrict price competition at the point of sale. MasterCard and Visa have agreed to settle similar civil charges (2011-1 Trade Cases ¶77,529).

Pozen noted that the Antitrust Division is “vigilantly watching for signs of anticompetitive conduct across the economy.” She also pointed out that the Antitrust Division was willing to litigate to judgment if necessary. This point is reflected in the ongoing litigation against Blue Cross Blue Shield of Michigan and American Express.

International Cooperation, Coordination

The acting antitrust chief said that she worked closely with her predecessor, Christine Varney, setting antitrust priorities. Among these priorities is a commitment to international cooperation, which she intends to carry forward.

The recent Memorandum of Understanding between the Antitrust Division and FTC and China’s three antitrust agencies (CCH Trade Regulation Reporter ¶13,512) is a first step towards an enduring relationship, said Pozen. She noted that the federal antitrust agencies were pursuing a similar agreement with India, as that country develops its competition regime.

Pozen reminded practitioners that antitrust agencies around the globe are talking to each other. She noted that many parties recognize the benefits of international coordination in investigations and suggested that permitting the agencies to share information can be beneficial to all who are involved.

Ad Network’s Online Behavioral Profiling Could Violate New York Law

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

An individual could not go forward with purported class-action claims that an advertising network violated the Computer Fraud and Abuse Act (CFAA) by monitoring her web browsing habits, but she could pursue claims under New York’s deceptive business practices statute and New York common law, the federal district court in New York City has determined.

The network purchased advertisement display space from websites and displayed ads of interest to a computer user. The network’s clients were advertising companies and agencies.

The network allegedly used “browser cookies”—text files that gather information about a computer user’s Internet habits—to create “behavioral profiles.” The network also allegedly used “flash cookies” to “respawn” the browser cookies when they were deleted by users, without users’ consent.

The individual also accused the network of using “history sniffing” code that was invisible to computer users. This code contained a list of hyperlinks, examined the user’s computer’s browser information to determine whether the computer had previously visited those hyperlinks, and transmitted the results to the network’s servers for the purpose of selecting ads to display on the user’s computer.

Computer Fraud and Abuse Act

The individual could not satisfy the $5,000 minimum damages threshold for civil actions under the CFAA, the court said. She failed to quantify any damage that the network caused to her computers, systems, or data that could require economic remedy. Although she alleged that the network impaired the functioning of her computer, diminishing its value, she did not make specific allegations as to the cost of repairing or investigating this alleged damage.

The collection of her personal information, and any associated invasion of her privacy, would not be compensable under the CFAA, which redressed only economic damages or loss. The collection of demographic information did not constitute damage to consumers or unjust enrichment to the collectors.

The individual’s inability to delete or control the network’s cookies might constitute a de minimis injury, but not an injury sufficient to meet the $5,000 CFAA threshold, according to the court. Even if losses could be aggregated for purposes of the CFAA before a class was certified, damages resulting from the placement of cookies on multiple computers of prospective class members could not be aggregated because these losses would not result from the “same act” by the network.

In addition, even if the individual represented a class of consumers, she would have to show that she had been personally injured.

New York State Law Claims

The advertising network’s behavioral profiling conduct could constitute a deceptive business act or practice under New York law, in the court’s view. The network’s use of flash cookies and history sniffing code could constitute deceptive conduct that misled consumers into believing their digital information was private, when in reality it was being tracked by the network.

The individual and similarly-situated consumers allegedly were harmed in that they suffered the loss of privacy through the exposure of their personal and private information. The individual was not required to allege reliance to plead a claim under the New York statute.

Although collection of personal information did not cause an economic injury, such nonpecuniary harm to privacy had been recognized as an actionable injury for purposes of the New York statute, the court said. The network’s conduct also could constitute a trespass to chattels under New York common law.

Advertiser Liability

The individual failed to allege facts demonstrating that any of the companies whose products were advertised by the network (the “advertisers”) had engaged in any deceptive conduct or trespass. Claims against the advertisers were dismissed with prejudice.

The decision is Bose v. Interclick, Inc., CCH Privacy Law in Marketing ¶60,665.

Further information regarding CCH Privacy Law in Marketing appears here.

Breach Notification, Disposal Standards Added to Illinois Personal Information Protection Act

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

The Illinois Personal Information Protection Act has been amended to provide additional safeguards and penalties surrounding the protection of personal information, including prevention of and response to a security breach.

A new provision added to the Act requires the disposal of “materials containing personal information in a manner that renders the information unreadable, unusable and undecipherable.” The law containing the amendments (H. 3025, Public Act No. 483) was approved on August 22, 2011 and will be effective on January 1, 2012.

Detailed Notification of Breach

The amended Act provides additional details as to what security breach notifications must contain. Previously, the Act required entities to notify affected individuals that a breach had occurred, but it did not specify what the notification should include.

The changes require notifications to include:

• Toll-free numbers and addresses for consumer reporting agencies;

• The toll-free number, address, and website for the Federal Trade Commission; and

• A statement that the individual can obtain information from these sources about fraud alerts and security freezes.

Application to Storage of Data

The amended Act will apply security breach notification requirements to any data collector that maintains or stores computerized data. The current version of the Act does not apply to data collectors that merely stored data for others. Moreover, service providers will be required to cooperate with data owners or licensees in regard to the breach.

Data Disposal Requirements

The new data disposal provision specifies the following proper methods for disposal of personal information:

• Paper documents containing personal information may be redacted, burned, pulverized, or shredded so that personal information cannot practicably be read or reconstructed; and

• Electronic media or other non-paper media containing personal information may be destroyed or erased so that personal information cannot practicably be read or reconstructed.

Any person, entity, or third-party is subject to a civil penalty of $100 (capped at $50,000) per individual whose personal information was not disposed of properly, and the attorney general may bring a civil suit to impose a penalty.

Text of Public Act No. 483 appears here. The current version of the Illinois Personal Information Protection Act is reported at CCH Privacy Law in Marketing ¶31,300.

Patented Grape Varieties Were Not Relevant Markets for Monopoly Suit

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

A claim by table grape producers in California that the state's table grape commission violated federal antitrust law through a scheme involving the bad faith licensing and enforcement of alleged patent rights on grape varieties was properly dismissed for failure to identify a valid relevant product market, the U.S. Court of Appeals for the Federal Circuit in Washington, D.C. has ruled.

Dismissal of the producers’ Sherman Act, Sec. 2 claims (2009-1 Trade Cases ¶76,522) was affirmed.

Relevant Product Market

The producers claimed that the relevant product market consisted of several distinct patented varieties of table grapes and that the existence of the plant patents limited the myriad other varieties of table grapes from being substitutes for the patented varieties in the worldwide markets.

The complaining producers could not rely on the naked assertion that non-infringing grape varieties were not an adequate substitute for a patented product, especially when it was undisputed that other vines possessed at least some of the relevant characteristics that defined that product, the court reasoned.

The grape producers needed—but failed—to make some allegation that, if proved, would define the market or submarket with reference to consumer demand for the product and consumer demand for its reasonable substitutes.

The aspects of an invention that may have led the Patent and Trademark Office to issue a patent were not per se coterminous with the features of the patented product that may lead consumers to select that product over other similar ones, the court concluded.

The decision is Delano Farms Co. v. The California Table Grape Commission, 2011-2 Trade Cases ¶77,578.

California Enhances Data Breach Notification Requirements

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

Under new legislation that will take effect next year, persons and entities doing business in California will be required to make additional disclosures in the event that the security of their computerized data systems are breached.

Existing law requires companies doing business in California to disclose data breaches involving the personal information of California residents.

The recent legislation (Senate Bill 24, Chapter 197) amended California Civil Code Sec. 1798.82, adding several specific requirements as to the form and substance of breach notifications. As amended, the statute requires breach notifications to be in plain language.

At a minimum, notifications must contain the following:

• The name and contact information of the notifying person or business.

• The types of personal information that were the subject of the breach.

• The date or estimated date of the breach.

• Whether notification was delayed as a result of a law enforcement investigation.

• A general description of the breach incident.

• The toll-free telephone numbers and addresses of the major credit reporting agencies, if the breach exposed California residents’ Social Security, driver's license, or identification card numbers.

At the discretion of the notifying company, the security breach notification may also include any of the following:

• Information about what the notifying company has done to protect individuals whose information has been breached.

• Advice on steps that persons whose information has been breached may take to protect themselves.

In addition, if notification is made to more than 500 California residents as a result of a single breach of the security system, the notifying company must electronically submit a single sample copy of the notification, excluding any personally identifiable information, to the California Attorney General.

The legislation was signed by Governor Jerry Brown on August 31, 2011, and will take effect on January 1, 2012. Similar bills were vetoed by former Governor Arnold Schwarzenegger in 2009 and 2010.

The current version of the law appears at CCH Privacy Law in Marketing ¶30,500.

Sprint Files Own Antitrust Suit to Block AT&T/T-Mobile Combination

This posting was written by John W. Arden.

In the wake of the Department of Justice’s filing of an antitrust lawsuit to block AT&T Corp.’s proposed acquisition of T-Mobile USA Inc. on August 31, mobile wireless carrier Sprint Nextel brought its own antitrust action today, seeking to prohibit the acquisition as a violation of Section 7 of the Clayton Act.

Sprint filed the lawsuit against AT&T Corp., AT&T Mobility, T-Mobile USA Inc., and Deutsche Telekom (T-Mobile’s parent) in the federal district court in the District of Columbia as a related case to the Department of Justice’s lawsuit.

The suit alleged that the proposed $39 billion acquisition would harm consumers and competition in the market for mobile wireless services. Specifically, Sprint claimed that completion of the transaction would:

• Harm retail consumers and corporate customers by causing higher prices and less innovation.

• Entrench “duopoly control” by “Ma Bell” descendants AT&T and Verizon of the almost quarter of a trillion dollar wireless market.

• Injure Sprint and other independent wireless carriers.

According to Sprint, a combined AT&T and T-Mobile would control more than three-quarters of the wireless market and 90 percent of the profits. The combined companies would be able to use its control over backhaul, roaming, and spectrum and its increased market position to exclude competitors, raise their costs, restrict their access to handsets, damage their businesses, and ultimately less competition, Sprint charged.

According to last week’s Department of Justice complaint, the four nationwide providers of mobile wireless service—Verizon, AT&T, Sprint, and T-Mobile—account for more than 90 percent of the national market. T-Mobile, the smallest of the four, has historically challenged the top three competitors by providing value, innovation, and aggressive pricing.

The elimination of T-Mobile as an independent, low-priced alternative rival would therefore “remove a significant competitive force from the market” and “substantially reduce competition,” the Justice Department claimed.

On August 31, Sprint issued a statement supporting the Department of Justice lawsuit, but did not hint that it was considering filing an action of its own.

“The DOJ today delivered a decisive victory for consumers, competition and our country,” the news release said. “By filing suit to block AT&T’s proposed takeover of T-Mobile, the DOJ has put consumers’ interests first. Sprint applauds the DOJ for conducting a careful and thorough review and for reaching a just decision–one which will ensure that consumers continue to reap the benefits of a competitive U.S. wireless industry. Contrary to AT&T’s assertions, today’s action will preserve American jobs, strengthen the American economy, and encourage innovation.”

A news release on Sprint’s filing of today’s action appears here.

Further information about the Justice Department’s lawsuit appears here in an August 31 posting on Trade Regulation Talk.

Hospital’s Antitrust Challenge to Washington Certificate-of-Need Regulation Fails

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

Washington state regulations requiring hospitals to obtain a certificate of need from the Washington State Department of Health in order to perform certain procedures, such as stent implantation and laser angioplasty, were not preempted by Sherman Act, Section 1,
the U.S. Court of Appeals in San Francisco has ruled.

A complaining hospital contended that the regulations prevented it from providing the procedures, known as elective percutaneous coronary interventions (PCI), on a nonemergency basis.

Judgment in favor of the Washington State Department of Health on the hospital’s antitrust claim (2010-2 Trade Cases ¶77,294) was upheld.

Federal Preemption

The PCI regulations were a unilateral restraint of trade not subject to preemption, the court held. The regulations were complete upon enactment, and did not delegate any regulatory power to incumbent licensees.

The court rejected the hospital’s argument that the PCI regulations granted regulatory power to incumbent licensees by calculating the need for a new certificate based in part on the number of PCI procedures they perform, thereby allowing the incumbent licensees to manipulate the number of PCIs they perform so as to exclude competing hospitals from the elective PCI market.

Nothing about the PCI regulations involved private discretion to engage in per se anticompetitive
conduct. Absent a hybrid restraint or other per se violation of the antitrust laws, there was no preemption.

The decision in Yakima Valley Memorial Hosp. v. Washington State Dept. of Health will appear in CCH Trade Regulation Reporter.

Monetary Relief Against Diet Product Marketers Sued by FTC Upheld

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

A permanent injunction and nearly $2 million monetary judgment entered against the marketers of two purported weight loss products—a "Chinese Diet Tea" and the "Bio-Slim Patch"—for engaging in deceptive advertising prohibited by the FTC Act were proper, the U.S. Court of Appeals in New York City has ruled.

The federal district court in Bridgeport, Connecticut, did not exceed its authority in awarding monetary relief, and it committed no error in calculating the award or ordering the marketers to disgorge the full proceeds from their sale of the products, the appellate court said. The judgment of the lower court (2009-2 Trade Cases ¶76,840) was affirmed.

Authority to Grant Monetary Relief

The statute on which the district court’s jurisdiction was based—Sec. 13(b) of the FTC Act—empowered the court to award ancillary equitable remedies, including equitable monetary relief such as disgorgement of wrongfully obtained funds, in the appellate court’s view.

That the marketers’ funds were wrongfully obtained was not in question, as the marketers had conceded liability with respect to the marketing of both products. There was no evidence that any of the marketers’ gains were "just" gains because the products in no instance worked as advertised, the court noted.

By authorizing courts to issue injunctive relief, Sec. 13(b) invoked the equitable jurisdiction of the court. A money judgment was thus permitted as a form of ancillary relief because, once its equitable jurisdiction had been invoked, the court had "the power to decide all relevant matters in dispute and to award complete relief."

An argument that the express provision of FTC Act Sec. 19 for monetary damage limited Sec. 13(b) to its explicit terms was rejected. The statute made clear that nothing within Sec. 19 affected the authority of the FTC under any other provision of law, the court observed.

Calculation of Relief

The marketers were not entitled to a reduction of the monetary award on account of bounced checks, credit card chargebacks, or other expenses. Their incomplete records did not allow them to calculate the losses from bounced checks and chargebacks that could be attributed to the two products at issue, only the losses across their entire line of products, which numbered more than 60.

The district court’s refusal to apply a loss estimate equal to the two products’ share of the marketers overall share was within its discretion, in the appellate court’s view.

The district court’s monetary award was not an impermissible legal—rather than equitable—award, the appellate court also held. The lower court’s failure to identify particular funds in the defendants’ hands that were specifically traceable to the fraudulently marketed products did not force the court "to conform its award to the ancient remedy of constructive trust" or limit its judgment to the profits generated by the two products at issue.

Where the basis of a claim was a violation of the FTC Act, the court had to determine only that the nature of the underlying remedies sought was historically equitable.

The substance of the monetary judgment comported with the equitable remedy of disgorgement, the appellate court concluded. Disgorgement did not require a district court to apply equitable tracing rules to identify specific funds subject to return.

The decision is Federal Trade Commission v. Bronson Partners, LLC, 2011-2 Trade Cases ¶77,574.