Leibowitz, Ohlhausen Confirmed as FTC Commissioners

This posting was written by John W. Arden.

Federal Trade Commission Chairman Jon Leibowitz and Maureen K. Ohlhausen were confirmed yesterday by the U.S. Senate to serve as FTC Commissioners. On voice votes, the Senate confirmed the nomination of Leibowitz to serve a second term as Chairman of the Commission and the nomination of Ohlhausen to serve as a Commissioner.

“My fellow Commissioners and I look forward to welcoming Maureen Ohlhausen as a new Commissioner,” said Leibowitz. “Her exception experience, knowledge, and leadership will be of great service to the Federal Trade Commission and American consumers.”

“I am humbled and grateful to the Members of the U.S. Senate for their confidence in my continued service at the nation’s premier consume protection agency,” he added.

Leibowitz has chaired the agency since 2009 and has been a commissioner since 2004. Under his leadership, the Commission has focused on stopping scams that prey on consumers during the economic downturn, preserving competition in the health care industry, restricting anticompetitive “pay-for-delay” patent settlements in the pharmaceutical industry, and promoting competition and innovation in the technology sector. He is a graduate of the University of Wisconsin and New York University School of Law.

Ohlhausen, a partner at Wilkinson Barker Knauer LLP since 2009, was nominated to fill one of the two Commission positions reserved for Republicans. The other position is held by J. Thomas Rosch. At Wilkinson Barker, she has specialized in privacy, data protection, and cybersecurity. Prior to joining the firm, she spent 11 years at the FTC, as attorney advisor to Commissioner Orson Swindle, head of the FTC Internet Access Task Director of the Office of Policy Planning, and Director of the Office of Policy Planning.

She is a senior editor of the American Bar Association Antitrust Law Journal and has taught privacy law and unfair trade practices as an adjunct professor at George Mason University School of Law. Ohlhausen is a graduate of University of Virginia and George Mason University School of Law

Employees’ Civil RICO Claim Did Not Allege Wage Fraud by Healthcare Providers

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

RICO claims predicated on wire fraud and forced labor could not proceed against a health care consortium that allegedly engaged in a scheme to obtain free labor and services from employees by cheating them out of their wages and overtime pay, the federal district court in Central Islip, New York, has ruled. The employees failed to sufficiently allege the predicate acts of mail and wire fraud.

Wire Fraud

Employees of the consortium’s health care facilities alleged that their paychecks were wired to them and that the wirings included false representations stating that they were properly compensated for all of the time they worked. According to the employees, the wire payments “actually represented an amount less than the full amount of wages” they earned. Nevertheless, the employees were fully aware of the number of hours they had worked. The wire payments thus would not have furthered the consortium’s scheme, the court concluded. Rather, the payments would have put the employees on notice of the scheme by revealing their employers’ failure to fully compensate them for the hours they had worked. The employees’ wire fraud claim was therefore unavailing.

Forced Labor

The employees alleged that their employers threatened “serious financial harm” by telling them that their employment would be in jeopardy if they failed to complete all of their assigned tasks. They further alleged that they were forced to work, “out of fear of losing their jobs,” during meal breaks, before and after scheduled shifts, and during training sessions. Finally, the employees alleged that they feared “reputational harm” for failing to perform the required labor and services.

To the extent that their forced labor claims were premised on coercive conduct that forced the employees to work overtime without pay, the claims were clearly subsumed within their Fair Labor Standards Act claim and thus were preempted. To the extent that the claims were predicated on conclusory allegations that the employers had procured their labor by threatening to fire them, or by berating them in public for not finishing their work, the allegations did not state a claim under the forced labor statute, according to the court.

The employees failed to cite a single case that supported the novel theory that threatening to fire an at-will employee or berating an employee in public constituted “forced labor.”

The decision is DeSilva v. North Shore-Long Island Jewish Health System, Inc., CCH RICO Business Disputes Guide ¶12,183.

House Passes Repeal of Antitrust Exemption for Health Insurance

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

The business of health insurance would no longer enjoy the McCarran-Ferguson Act antitrust exemption, under a provision in the proposed “Protecting Access to Healthcare Act” or “PATH Act,” which passed the House of Representatives on March 22. The McCarran-Ferguson exemption would continue to apply to life insurance, annuities, property and casualty insurance, and other non-health types of insurance.

The proposed PATH Act (H.R. 5), which would repeal portions of the two-year-old health care overhaul, was amended to include the proposed “Health Insurance Industry Fair Competition Act of 2012.” The amendment, contained in Title IV of the PATH Act, was introduced by Rep. Paul Gosar (R, Ariz.).

“[I]t is time for this exemption to be repealed so that we can empower health insurance companies to compete more aggressively . . .” said Congressman Gosar, who has been a practicing dentist for over 25 years.

Ban on Class Actions

The amendment would prohibit federal antitrust class action suits against health insurers. “Frivolous lawsuits cause defensive medicine that drive up the cost of medicine, hinder access to specialty care for patients, and often enrich trial attorneys,” according to Rep. Gosar. Congressman Gosar serves as the vice chairman of a health care subcommittee of the House Committee on Oversight and Government Reform.

The ban on class actions has been criticized by some House Democrats. "If you eliminate class actions, you have effectively destroyed the McCarran-Ferguson repeal," decried Rep. John Conyers (D, Mich.).

Amendments to California Franchise Laws Proposed

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

California has recently introduced legislation that would make numerous modifications and additions to both the Franchise Relations Act and the Franchise Investment Law.

Franchise Relations Act

The "Level Playing Field for Small Businesses Act of 2012" would amend the Franchise Relations Act to provide that good cause in a termination case consists of a substantial and material breach of the franchise agreement after the franchisee is given written notice and 60 days to cure the failure.

The bill would would be require terminations to be in accordance with the current terms and standards equally applicable to all franchisees, with limited exceptions. Exempted would be situations in which immediate termination of a franchisee was reasonable where the franchisee establishes that the event was caused in substantial manner by conduct of the franchisor.

Under the measure, immediate termination would not be permitted unless the franchisee’s noncompliance was substantial and material. The proposal would delete existing provisions regarding nonrenewals by a franchisor and instead require a franchisor to renew a franchise unless the franchisee has substantially and materially breached the franchise agreement, and would require the renewal to be under the same terms as the existing agreement, or if the franchisee elects, under the franchise terms then being offered to new franchisees.

The bill would also prohibit a franchisor, upon termination or expiration of a franchise, from enforcing against the franchisee any covenant not to compete and require the parties to a franchise agreement to deal with each other in good faith.

Franchise Investment Law

The measure would amend the Franchise Investment Law by making it unlawful for a person offering or selling a franchise to intentionally misrepresent, among other things, the prospects or chances for success of a franchise, the known required total investment for a franchise, and efforts to sell or establish more franchises than a market or market area can sustain.

Under the proposal, it would be unlawful for a franchisor to refuse to recognize and deal fairly and in good faith with an independent franchisee association. In addition, civil liability for damages would be extended to any violation of the Franchise Investment Law.

The proposal, Assembly Bill No. 2305, was introduced February 24, read the first time on February 27, and referred to Committees on the Judiciary on March 26. Text of the bill appears here on the California Legislative Information website.

High Court Review Sought in Georgia Hospital Merger Case

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

At the request of the FTC, the U.S. Solicitor General has petitioned the U.S. Supreme Court to review a decision of the U.S. Court of Appeals in Atlanta (2011-2 Trade Cases ¶77,722), holding that the proposed combination of the only two hospitals in Albany, Georgia, was immune from antitrust attack under the state action doctrine. The appellate court had upheld dismissal (2011-1 Trade Cases ¶77,508) of the Commission’s complaint for injunctive relief pending the completion of an administrative proceeding.

According to the petition, the case presents the question whether a hospital’s acquisition of its only rival, effectuated by using a substate governmental entity’s general corporate powers, is exempt from antitrust scrutiny under the “state action doctrine.” The appellate court decision conflicts with decisions of the Fifth, Sixth, Ninth, and Tenth Circuits, the agency contends.

In April 2011, the FTC issued an administrative complaint challenging the transaction (CCH Trade Regulation Reporter ¶16,588). The FTC alleged that a local hospital authority’s purchase of Palmyra Park Hospital’s assets from HCA, Inc. and subsequent lease to Phoebe Putney Health
System, Inc. (PPHS)—the operator of Phoebe Putney Memorial Hospital—would substantially lessen competition or tend to create a monopoly in the inpatient general acute-care hospital services market in Georgia’s Dougherty County and surrounding areas.

The agency also sought injunctive relief to prevent the consummation of the plan prior to the completion of the administrative proceeding. Pending conclusion of the court action, the FTC stayed its administrative proceedings (CCH Trade Regulation Reporter ¶16,620).

In its petition for certiorari, the government has asked the Court to consider: (1) whether the Georgia legislature, by vesting the local government entity with general corporate powers to acquire and lease out hospitals and other property, has “clearly articulated and affirmatively expressed” a “state policy to displace competition” in the market for hospital services; and(2) whether such a state policy, even if clearly articulated, would be sufficient to validate the alleged anticompetitive conduct, given that the local government entity neither actively participated in negotiating the terms of the hospital sale nor had any practical means of overseeing the hospital’s operation.

The petition, FTC v. Phoebe Putney Health System, Inc., Dkt. 11-1160, is available here on the FTC website.

Distributors Could Have Paid “Franchise Fee” Under Washington Law

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

A genuine issue of material fact existed as to whether two purchasers of geographically exclusive baked goods distributorships paid a “franchise fee” under the meaning of the Washington Franchise Investment Protection Act to a baked goods manufacturer either through a $30 deduction from commissions the purchasers were paid for their participation in the manufacturer’s Pallet Delivery Program (PDP) or through any suspected fee, according to a federal district court in Spokane, Washington.

The issue had been remanded to the district court by the Eighth Circuit, which held that the district court had erred in an earlier ruling (CCH Business Franchise Guide ¶13,338) in granting summary judgment to the manufacturer after finding that the purchasers had not paid a franchise fee.

The purchasers did not argue that they paid a direct franchise fee to the manufacturer. Instead, they contended that the $30 deduction from the commissions they earned in the PDP, representing a portion of the costs the manufacturer incurred to shrink-wrap, palletize, and deliver the products to consumers’ warehouses, was a charge for the “mandatory purchase of goods or services, “available only from the franchisor,” under the meaning of the Washington Act and that none of the statutory exceptions applied.

Because the PDP was a fee-for-services agreement, it did not fall under the Franchise Investment Protection Act’s fair-market-value exception, the court determined. That statutory exception applied only to supplies, fixtures, and real property. Further, the Washington Supreme Court has not recognized a fair-market-value exception for the mandatory purchase of services.

The manufacturer cited to a law review article and two unpublished federal cases to argue that the deduction from commissions was not a franchise fee because it (1) was an ordinary business expense for services rendered and (2) lacked an unrecoverable capital investment. However, the manufacturer identified no binding precedent upon which the court could find that an ordinary business expense for services was exempted from Franchise Investment Protection’s Act’s definition of “franchise fee,” according to the court.

One of the cited cases did find that a payment of more than $6,000 for training was not a franchise fee but rather an ordinary business expense, but that case was unpublished, over 17 years old, and relied on nonbinding precedent from another Circuit. The other cited case similarly failed to persuade the court.

Although at least one Washington court considered an unrecoverable investment as one factor in determining whether a franchise fee was present, it was not a necessary component of a franchise fee. With no binding or persuasive authority on point, a genuine issue of material fact existed.

The decision in Atchley v. Pepperidge Farm, Inc. will appear at CCH Business Franchise Guide ¶ 14,793.

“Safe for Consumption by Infants” Formula Claim Could Be Misleading

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

Infant formula purchasers alleging that Abbott Laboratories misled consumers about safety in connection with the sale of five million containers of contaminated Similac brand formula stated claims under the New York Deceptive Practices Act, Texas Deceptive Trade Practices Act, and New Hampshire Consumer Protection Act, the federal district court in Central Islip New York has ruled.

Regardless of whether the claims “sounded in fraud” or were premised on specific misrepresentations rather than an “advertising scheme,” they were not subject to the heightened requirements of pleading fraud with particularity under Rule 9(b) of the Federal Rules of Civil Procedure, the court determined. The applicable standard for claims under all three statutes was notice pleading under Rule 8(a).

The purchasers alleged that Abbott misled consumers as to the safety of Similac through the following affirmative statements:

(1) Similac is “safe for the consumption by infants”;

(2) Abbott was “dedicated to the highest standards of manufacturing and marketing—and to complying with all applicable laws and regulations”;

(3) Similac “provid[es] babies with excellent nutrition for growth and development and has been clinically proven to aid brain, bone and immune system development”; and

(4) Abbott is “committed to conducting research to ensure that formula-fed infants receive the highest quality products to meet their nutritional needs.

Puffery v. Affirmative Misrepresentation

Statements that are vague or mere puffery or hyperbole such that a reasonable consumer would not view them as significantly changing the general gist of available information are not material, even if they are misleading. Under this standard, statements (2), (3), and (4) were not actionable, the court decided.

However, the court held that statement (1) about safety supported claims under the statutes based on affirmative misrepresentation. By identifying the alleged misrepresentation as being located on the product packaging and alleging that they relied on this statement in purchasing and paying a premium price for the contaminated formula, the purchasers asserted the requisite causal connection between the deceptive act and their injuries.

Recall

A recall program did not render the claims under the New York and New Hampshire statutes moot, according to the court. Without more specific information about whether the recall program would reasonably compensate the Texas plaintiffs, the question of whether the program constituted a reasonable offer under the Texas statute was not ripe for review.

Ohio Laws

A class action claim failed under the Ohio Uniform Consumer Sales Practices Act because the purchaser did not contend that she could meet the Act’s class action notice requirements, the court ruled. The Act provided that a class action could not be maintained unless the purported violation was either (1) an act or practice declared to be deceptive or unconscionable by a rule adopted by the Attorney General before the consumer transaction on which the action was based or (2) an act or practice determined by an Ohio state court to violate the Act and committed after the decision had been made public.

The purchaser could not pursue a claim under the Ohio Uniform Deceptive Trade Practices Act because consumers lacked standing to sue under the Act, according to the court.

Claims Under Texas Law

Purchasers bringing a claim under the Texas Deceptive Trade Practices Act were ordered to provide written notice to Abbott Laboratories of the claim within 20 days, after which the claim would be abated for 60 days.

The March 5 opinion in Leonard v. Abbott Laboratories, Inc. will be reported at CCH Advertising Law Guide ¶64,612.

School Administrator’s Sentence in E-Rate Antitrust Probe Not Disturbed

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

The U.S. Court of Appeals in Cincinnati has refused to set aside or correct a sentence imposed on an administrator in a Michigan public school district who pleaded guilty to charges arising from the Justice Department's antitrust investigation into fraud and anticompetitive conduct in the federal "E-Rate" program.

The E-Rate program provides funding to schools to improve Internet connectivity. The defendant was charged with using his position as an assistant school superintendant to steer contracts for E-Rate projects to a business under his control.

After pleading guilty to one count each of mail fraud and bank fraud, the defendant was sentenced to concurrent prison terms of 46 months and ordered to pay $1,342,702 in restitution.

The defendant argued that he would not have accepted the plea agreement, which included a 16-level increase under the U.S. Sentencing Guidelines, if his attorney had not given him incorrect advice concerning the proper legal standards for determining restitution and for calculating the amount of loss for purposes of the sentencing guidelines. However, the 16-level increase was appropriate because the amount of loss to the victims was between $1 million and $2.5 million. Thus, the defendant could not establish that his attorney gave him deficient advice concerning the calculation of loss or that rejecting the plea agreement was likely to result in a lesser sentence, according to the court.

Also rejected was the defendant’s argument that his attorney failed to properly advise him concerning the method of calculating the amount of loss for purposes of determining restitution.

The decision is Benit v. United States, 2012-1 Trade Cases ¶77,830.

Night Clubs Allege Antitrust Claims Against Online Music Marketplace, Competing Club

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

Antitrust claims against “Beatport”—an online marketplace that catered to consumers and producers of “Electronic Dance Music”—and a related “Beta” nightclub were adequately alleged, the federal district court in Denver has ruled. Thus, a motion to dismiss claims brought by a group of commonly-owned night clubs comprising Denver’s South of Colfax Nightlife district (SOCO) was denied. The claims of the owner of the complaining clubs were, however, dismissed because the owner lacked standing to pursue the claims individually.

Two of the SOCO night clubs were nationally recognized in the Electronic Dance Music scene. They emphasized Electronic Dance Music and live performance by DJs. The clubs alleged that the defendants engaged in anticompetitve conduct to coerce DJs to boycott the SOCO venues and only perform at Beta.

The court refused to dismiss the SOCO clubs’ claim that Beatport and Beta coerced DJs into performing only at Beta by threatening to remove artists on a DJ’s label from Beatport if they performed at the SOCO clubs. Because access and promotion on Beatport were critical to both a DJ’s and a label’s success, many DJs and agents were allegedly compelled to agree to the defendants’ demands. The complaining clubs alleged that the defendants had sufficient market power in the market for Electronic Dance Music downloads to adversely effect competition for live performances of "A-list" DJs.

Standing

The complaining clubs asserted that they possessed standing to bring antitrust claims by virtue of their status as competitors who were foreclosed from the market for live performance of A-list DJs. The two SOCO clubs that emphasized Electronic Dance Music and live DJ performance alleged antitrust injuries of lost past and future profits, decreased ability to compete, and decreased value of real property.

Additional evidence and facts would be needed to prove harm to the other SOCO nightclubs as the case proceeded, the court noted. However, there were sufficient facts to support the clubs’ antitrust standing for purposes of a motion to dismiss. The owner of the SOCO clubs failed to support a claim that he suffered an injury separate from the injury sustained by the SOCO clubs based on an injury to his reputation or devaluation of real property of the clubs, the court ruled.

Attempted Monopolization

The clubs adequately alleged an attempted monopolization claim against Beta, which controlled more than half the market for live performance by A-list DJs in the Denver metropolitan area. There was a dangerous probability that Beta could achieve monopoly power in the market for A-list DJ performances.

The complaining clubs pled a specific intent to monopolize by stating that Beta and its owner engaged in predatory and anticompetitive conduct, including illegal tying, exclusive dealing, reciprocal dealing, monopoly leveraging, market allocation, group boycott and the concerted combination of these actions.

Conspiracy

Conspiracy claims were not dismissed, despite the defendants’ assertions that, as related entities, they were incapable of conspiring. Although some common ownership existed between Beta and Beatport, it was not sufficient to warrant dismissal under Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 1984-2 Trade Cases ¶66,065, which held that wholly owned subsidiaries were incapable of conspiring. Further, a defending part-owner of Beta had an “independent personal stake” in restraint of trade of the club’s competitors.

The March 14 opinion is Christou v. Beatport, LLC, 2012-1 Trade Cases ¶77,829.

Council of Europe Adopts Internet Governance Strategic Plan

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

The 47-member Council of Europe (COE) announced on March 15 the adoption of a four-year Internet Governance Strategy to promote the universality, integrity, and openness of the Internet while protecting users’ rights.

The COE indicated that the Internet Governance Strategy will complement existing laws protecting free online expression and combating cybercrime. The COE will partner with member and nonmember state governments, the private sector, technical communities, and other interested parties in developing policies and industry guidelines.

The strategy identifies priorities and sets goals for the next four years (2012-2015) to advance the protection and respect for human rights, the rule of law, and democracy on the Internet. The main objectives of the strategy include:

(1) Protecting the Internet’s universality, integrity, and openness;

(2) Maximizing rights and freedoms for Internet users;

(3) Advancing data protection and privacy;

(4) Enhancing the rule of law and effective co-operation against cybercrime;

(5) Maximizing the Internet’s potential to promote democracy and cultural diversity, and

(6) Protecting and empowering children and young people.

The Strategy builds on and complements the COE Committee of Ministers’ 2011 Declaration on Internet Governance Principle and Recommendation (CM/Rec(2011)8).

Antitrust Measures Excised from Senate Surface Transportation Bill

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

Federal legislative proposals that would have repealed the antitrust exemption enjoyed by freight railroads and would have permitted the U.S. Department of Justice to sue Organization of Petroleum Exporting Countries (OPEC) members for price fixing were excised from the Senate Surface Transportation Bill prior to its passage on March 14.

In February, Senator Herb Kohl (D-Wis.) introduced two antitrust amendments to the “Moving Ahead for Progress in the 21st Century America Fast Forward Financing Innovation Act of 2011” or “MAP-21” (S. 1813)—the two-year surface transportation bill. However, a compromise to move the legislation forward excluded the proposals.

One amendment was identical to the proposed “Railroad Antitrust Enforcement Act of 2011” (S. 49). It would have brought railroad mergers and acquisitions under the purview of the Clayton Act and would have eliminate the exemption that prevents FTC scrutiny of railroad common carriers and the antitrust exemption for railroad collective ratemaking.

A second failed amendment tracked the language of S. 394—the proposed “No Oil Producing & Exporting Cartels (NOPEC) Act.” That proposal would have permitted the Justice Department to bring actions against foreign states—such as OPEC members—for collusive practices in setting the price or limiting the production of oil.

Further information on the bill appears here in the March 5, 2012 posting on Trade Regulation Talk.

FTC Commissioners Testify on Fiscal Year 2013 Appropriations Request . . .

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

In testimony before the U.S. House Appropriations Subcommittee on Financial Services and General Government on March 5, the FTC summarized the agency's Fiscal Year (FY) 2013 budget request and described its ongoing work to promote competition and protect American consumers.

The testimony, delivered by FTC Chairman Jon Leibowitz and Commissioner J. Thomas Rosch, outlined steps the agency has taken to carry out its mission. It described FTC consumer protection initiatives as well as recent efforts to ensure that American consumers benefit from competition in the health care, technology, and energy sectors.

The testimony requested $300 million to support 1,186 "full-time equivalent" employees (FTEs) to meet the challenges of FY 2013. This is an overall decrease of $11,563,000 below the FTC’s FY 2012 enacted appropriation, according to the testimony. The FTC anticipates a decrease of $25.5 million related to the replacement of satellite space at 601 New Jersey Avenue due to an expiring lease in August 2012. There are increases for mandatory pay adjustments and technology improvements, among other initiatives.

Commissioner Rosch dissented from the appropriations requested for the FTC, noting that “in these austere times we should do more to perform those [consumer protection or competition] missions with fewer resources.”

. . . Express Concern over GSA Study on Relocating Agency

In a March 8 letter to the leaders of the House Transportation and Infrastructure Committee, the four FTC commissioners expressed concerns with a resolution directing the General Services Administrator to prepare a plan to move the agency out of its headquarters building at 600 Pennsylvania Avenue to Constitution Center, a privately-owned building next to the U.S. Department of Housing and Urban Development.

The commissioners stated that the move would impose well over $100 million in wholly unnecessary costs. In addition, “it is completely infeasible for the FTC to shoehorn its entire Washington, DC operation into the available space at Constitution Center,” according to the commissioners.

The resolution is part of an effort led by House Transportation and Infrastructure Committee Chairman John Mica (Florida) to transfer control of the building at 600 Pennsylvania Avenue, called the Apex Building, to the National Gallery of Art. Rep. Mica introduced the proposed “Federal Trade Commission and National Gallery of Art Facility Consolidation, Savings, and Efficiency Act of 2011” (H.R. 690) in February 2011.

In response to that bill, the then-five commissioners sent a letter to members of the House committee expressing their opposition to the efforts and arguing that the move would impose additional costs on the American taxpayer.

Later in 2011, Congressman Mica included provisions calling for the relocation of the FTC and transfer of the 600 Pennsylvania Avenue property to the National Gallery of Art in legislation proposing a “National Women's History Museum” (H.R. 2844). Rep. Mica contends that relocating the FTC will save taxpayer dollars.

Jury Award for False Advertising, Trademark Infringement, Cybersquatting Upheld

This posting was written by John W. Arden.

An Internet and telephone-based advertising service for skydiving customers (Skyride) was properly held liable for trademark infringement, cybersquatting, and false advertising against a skydiving center (Skydive Arizona, Inc.), justifying a total award of $6.6 million, according to the U.S. Court of Appeals in San Francisco.

The court of appeals upheld jury awards of $2.5 million in actual damages for trademark infringement, $2.5 million in disgorged profits from trademark infringement, $600,000 for cybersquatting, and $1 million in actual damages for false advertising. It overturned the district court’s doubling of actual damages.

Skydive Arizona, Inc. has operated under the SKYDIVE ARIZONA mark sine 1986, becoming one of the most well known skydiving centers in the world. It hosts between more than 145,000 skydives per year, furnishing airplanes and personnel for skydiving events in 30 states outside Arizona. The company has been featured in television programs and advertises on the Internet and in Yellow Pages, magazines, and newspapers.

Skyride essentially acts as a third-party advertising and booking service for skydiving centers, providing national telephone and Internet promotional services to skydiving “drop zones” around the U.S. Customers pay Skyride for certificates that can be redeemed at various drop zones around the country. Upon redemption, Skyride must pay the skydiving facility used by the customer.

Skyride owned and operated numerous websites, describing skydiving opportunities in multiple locations without reference to specific drop zones, in addition to websites referencing Arizona, including PhoenixSkydiving, ScottsdaleSkydiving, TucsonSkydiving, skydivearizona.net, skydivingarizona.com, and skydivingarizona.com.

Skydive Arizona brought an action against Skyride, asserting claims of (1) false designation of origin and unfair competition under Section 43(a) of the Lanham Act; (2) trademark infringement, and (3) cybersquatting. Skydive Arizona alleged that Skyride misrepresented ownership in skydiving facilities in Arizona in order to attract customers and sold skydiving certificates by trading on Skydive Arizona’s goodwill and misleading customers into believing that Skydive Arizona would accept its certificates.

The federal district court in Phoenix entered summary judgment in favor of Skydive Arizona for false advertising. A jury subsequently found in favor of Skydive Arizona on the remaining claims, awarding the $6.6 million in damages. The district court doubled the actual damages for false advertising and trademark infringement, resulting in $5 million for trademark infringement and $2 million for false advertising.

False Advertising

On appeal, Skyride challenged the summary judgment ruling on the false advertising claim, contending that the evidence on materiality was ambiguous. The Ninth Circuit disagreed, finding that a declaration of consumer James Flynn constituted direct evidence that Skyride’s statements were likely to influence consumers’ purchasing decisions. Flynn stated that he purchased Skyride certificates based on false representations that he could redeem them at Skydive Arizona. Skyride’s advertisements were misleading and false and had actually confused a consumer, the court held. Skyride further challenged the award of damages.

Actual Damages

In awarding actual damages for infringement, the jury considered “an array of customer service evidence and three different financial record exhibits.” The district court referred to “voluminous evidence” concerning Skydive Arizona’s stellar business reputation and the hundreds of thousands of dollars it spent in developing and advertising its business. Its failure to provide a specific mathematical formula for the jury to use in calculating actual harm to its goodwill did not undermine the jury’s finding, according to the appeals court..

Disgorgement of Profits

When reviewing an award of lost profits, a court does not ask whether the substance of the evidence was correct or even credible, but only whether the award was based on reasonable inferences and a fair assessment of the evidence. Questions of evidentiary admissibility or credibility must be raised before or during trial, the court held.

In the lost profits analysis, Skydive Arizona’s expert estimated Skyride’s revenues from Arizona by calculating the number of Arizona residents in Skyride’s records, increasing that number to account for files missing residence information, and multiplying that number by an average transaction amount. He added an interest factor of 10 percent as allowed by Arizona law.

On appeal, Skyride alleged that the calculations were clearly erroneous because they did not deduct vendor payments or overhead costs. However, Skyride did not raise these arguments until after trial. The district court held these untimely, and the appellate court agreed.

Damages Enhancement

The Ninth Circuit did reverse the award of double damages for the trademark infringement and false advertising claims. Although the Lanham Act permits a district court to enter damages not exceeding three times the amount, such an enhancement must constitute compensation rather than a penalty.

In this instance, the district court emphasized the purposefully deceitful nature of Skyride’s conduct. “Instead of discussing the appropriate award to compensate Skydive Arizona or to deter SKYRIDE, the district court focused on the need for SKYRIDE to ‘appreciate’ and ‘accept the wrongfulness of their conduct’ ”

Accordingly, the award of twice actual damages was reversed and the jury’s original award was reinstated.

The decision is Skydive Arizona, Inc. v. Quattrocchi, No. 10-16196, March 12, 2012.

FTC Conditionally Approves Acquisition in Disk Drives Market

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

The FTC will allow Western Digital Corporation’s proposed acquisition of Viviti Technologies Ltd., formerly known as Hitachi Global Storage Technologies, to proceed, subject to divesture of selected Hitachi Global Storage Technologies assets related to the manufacture and sale of desktop hard disk drives to Toshiba Corporation.

A proposed consent decree would resolve FTC charges that the proposed acquisition would likely have harmed competition in the market for desktop hard disk drives used in personal computers.

According to the agency, the deal as originally proposed would have left only two companies, Western Digital and Seagate Technology LLC, in control of the entire worldwide market for desktop hard disk drives—key inputs into computers and other electronic devices that are used to store and allow fast access to data.

“Protecting competition in the high-tech marketplace is a high priority for the FTC,” said FTC Bureau of Competition Director Richard Feinstein. “This order will ensure that vigorous competition continues in the worldwide market for desktop hard disk drives and that consumers are not faced with higher prices or reduced innovation as a result of this deal.”

Timing of Filings

In a March 5 statement accompanying the complaint and proposed consent order, the FTC explained the relationship of its analysis of the proposed Western Digital/Hitachi acquisition to an acquisition by Seagate Technology LLC of Samsung Electronics Co. Ltd.'s hard disk drive assets. The FTC reviewed the Western Digital/Hitachi transaction at the same time as it reviewed Seagate Technology/Samsung transaction. The two transactions were announced within weeks of each other.

“Commission staff reviewed both matters at the same time in order to understand the effects on competition resulting from each transaction on its own, as well as the cumulative effect on the relevant markets if both transactions were allowed to be consummated,” according to the FTC. The agency earlier closed its investigation
of the Seagate Technology/Samsung transaction without taking action.

European Commission

In reviewing the two transactions, the European Commission (EC), on the other hand, followed a priority rule and gave priority to the transaction that was notified first. As a result, Seagate’s planned acquisition of Samsung’s hard-disk operations, which was notified to the EC prior to the planned Western Digital/Hitachi combination, was assessed assuming that Western Digital and Hitachi were still separate competitors. The implications of the second deal were not considered.

In November 2011, the EC announced that clearance of the Western Digital/Hitachi combination was conditioned upon the divestment of essential production assets for 3.5-inch hard disk drives, including a production plant, and accompanying measures. The Seagate Technology/Samsung transaction was approved by the EC without conditions.

The case is Matter of Western Digital Corporation, FTC File No. 111 0122, Docket No. C-4350, CCH Trade Regulation Reporter ¶16,738. The proposed consent agreement appears here at 77 Federal Register 14523, March 12, 2012.

Civil RICO Claims Against Adoption Agency Reinstated on Appeal

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

A federal district court improperly dismissed RICO claims that seven couples brought against an adoption agency and its principals, the U.S. Court of Appeals in Cincinnati has ruled.

The defendants allegedly defrauded the couples while they were trying to adopt children from Guatemala. Although the lower court correctly held that the plaintiffs failed to properly allege extortion, it incorrectly held that four well-pled predicate acts of mail and wire fraud over a two-month period were insufficient to establish a pattern of racketeering.

Pattern of Racketeering

In order to establish a pattern of racketeering, plaintiffs had to show that the alleged racketeering acts were “related.” They also had to show that the acts amounted to, or posed a threat of, “continued criminal activity.” Together, these requirements constituted RICO’s “relationship plus continuity” test.

The relationship prong was met in this case, the court explained, because the predicate acts of mail and wire fraud were committed by the same parties (the principals), using similar methods (email correspondence, telephone conversations, and a website presence), in an attempt to ensnare similar victims (couples seeking to adopt Guatemalan children), for a similar purpose (to defraud the victims out of adoption-related fees).

Continuity

To establish continuity, plaintiffs had to show either a “close ended” pattern of racketeering (a series of related predicate acts extending over a substantial period of time) or an “open-ended” pattern (a set of predicate acts that posed a threat of continuing criminal conduct that extended beyond the period in which the predicate acts were performed).

The plaintiffs in this case could not establish a close-ended pattern because the predicate acts at issue were not spread across a “substantial” period of time, the court explained. Significantly, the Sixth Circuit had previously ruled that seventeen months of racketeering activity was insufficient to establish a close-ended pattern. In this case, the predicate acts of racketeering spanned less than two months.

Nevertheless, the plaintiffs’ established the existence of open-ended continuity, in the court’s view. At the time that the defendants had allegedly committed the predicate acts of mail and wire fraud, “there was no indication that their pattern of behavior would not continue indefinitely into the future.”

The defendants argued that a threat of continued criminal activity was absent because the adoption agency had been shut down as the result of a criminal prosecution. Subsequent events, however, were irrelevant to an analysis of open-ended continuity. According to the court, the threat of continuity must be viewed at the time the racketeering activity occurred. Moreover, the absence of a threat of continued criminal activity could not be asserted merely by showing that a “fortuitous interruption” of that activity had occurred.

Because the plaintiffs adequately alleged an open-ended pattern of racketeering activity, the dismissal of their RICO claims was reversed and the matter was remanded for further proceedings.

Intent

Rule 9(b) of the Federal Rules of Civil Procedure required RICO plaintiffs to plead facts that would establish a basis for inferring fraudulent intent, the court observed. Significantly, courts have “uniformly held” that a plaintiff’s general averment of a defendant's knowledge of a material falsity was inadequate to establish scienter “unless the complaint also sets forth specific facts that make it reasonable to believe that defendant knew that a statement was materially false or misleading.”

The plaintiffs in this case alleged, in a general and conclusory fashion, that the defendants knew they were making materially false statements regarding the availability of adoptive children. More specifically, the plaintiffs alleged that the defendants “frequently advertised children on their website who they knew, or should have known, were unavailable for adoption.”

The plaintiffs failed, however, to set forth specific facts that would support of a reasonable inference that: (1) the children were actually unavailable and (2) the defendants knew they were unavailable. These allegations, which were not part of the “four well-pled predicate acts of mail and wire fraud,” were insufficient to establish a basis for inferring intent, the court concluded.

The decision is Heinrich v. Waiting Angels Adoption Services, Inc., CCH RICO Business Disputes Guide ¶12,165.

Identity Theft Tops FTC List of Consumer Complaints in 2011

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

For the 12th year in a row, identity theft complaints topped the FTC’s list of top consumer complaints received by the agency. The FTC released the list of complaints entered into its Consumer Sentinel database over the prior year on February 28.

Of more than 1.8 million complaints filed in 2011, 279,156 (15 percent) were identity theft complaints. Nearly 25 percent of the identity theft complaints concerned tax-related or wage-related fraud.

The next nine complaint categories were: debt collection (10 percent); prizes, sweepstakes, and lotteries (6 percent); shop-at-home and catalog sales (5 percent); banks and lenders (5 percent); Internet services (5 percent); auto related complaints (4 percent); imposter scams (4 percent); telephone and mobile services (4 percent); and advance-fee loans and credit protection/repair (3 percent).

The FTC’s Consumer Sentinel Network report appears here.

Software Acquisition Could Have Amounted to Monopolization

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

A computer software company, Adobe Systems Inc., could have unlawfully monopolized the market for professional graphic illustration software by acquiring a popular software program (FreeHand), effectively removing it from the market by refusing to update it, significantly raising the price of a rival program it owned (Illustrator), and withholding FreeHand’s source code from the open source community, the federal district court in San Jose, California, has ruled. The alleged conduct would not have violated the California Cartwright Act, however.

Therefore, the company’s motion to dismiss putative class action claims asserted by a non-profit group of graphic design professionals and one of its members was granted in part and denied in part.

While each of the alleged manners of anticompetitive conduct may have been lawful on its own, taken together and in context they supported a monopolization claim when read in the light most favorable to the complaining group and its members. Adobe undisputedly possessed monopoly power in the relevant market, the court noted. The company’s ability to maintain its high market share—despite raising prices and ceasing development of FreeHand—undermined its claim that its decision to discontinue the product was "rational and normal business conduct" that increased competition, the court reasoned.

Professional designers allegedly had no choice other than Illustrator if they wanted to buy professional vector design software that was interoperable with the latest operating systems. Moreover, it was reasonable to infer that Adobe’s discontinuation of FreeHand and channeling of that program’s users to Illustrator made it more difficult for potential competitors who did not have a full array of graphics software to enter the market.

The plaintiffs’ allegations that the conduct allowed Adobe to charge supracompetitive prices for Illustrator, decreased innovation in the relevant market, and rendered the artwork they created on FreeHand obsolete were sufficient to assert antitrust injury, the court added.

California Cartwright Act Claim

The non-profit group and individual member could not maintain a California Cartwright Act claim based on the alleged conduct, the court also ruled. The plaintiffs alleged no agreement, conspiracy, or combination between two or more entities, and the Cartwright Act did not address unilateral conduct.

The law did not contain a provision parallel to the Sherman Act’s prohibition against monopolization. The plaintiffs’ contention that a valid Cartwright Act claim could exist despite unilateral conduct "if a single trader pressure[d] customers or dealers into pricing arrangements" was immaterial because no such coercion was alleged, the court said.

Statute of Limitations

An argument by Adobe that the plaintiffs’ Sherman and Clayton Act claims were time-barred was rejected by the court. The causes of action were tolled under the continuing violation doctrine and the "new use" exception, respectively. Though the plaintiffs’ Sherman Act monopolization claim initially accrued upon the date of the acquisition, more than four years prior to the filing of the suit, their allegations supported a reasonable inference that Adobe perpetuated its monopoly power and caused them new injury after the merger through new and independent acts inside of the limitations period, including the aforementioned cessation of FreeHand’s development, the channeling of existing FreeHand customers to Illustrator, and the bundling of Illustrator with other programs it offered.

These acts were not "mere reaffirmations of the merger such as holding or using assets in the same manner as at the time of acquisition" or "continuing indefinitely to receive some benefit as a result of an illegal act performed in the distant past," in the court’s view. Rather, they were more like an online auction provider’s changes to its electronic payment policy after acquiring an online payment service provider, which had been found to constitute overt acts inflicting new and accumulating harm.

In addition, the plaintiffs’ allegations that Adobe’s conduct with respect to the acquired FreeHand and its Illustrator amounted to a use of FreeHand in a different manner from the way it was used at the time of the merger, and that this new use injured them, were sufficient to allow them to avail themselves of the "new use" exception to the Clayton Act’s statute of limitations, the court concluded.

The decision is Free FreeHand Corp. v. Adobe Systems, Inc., 2012-1 Trade Cases ¶77,811.

Senator Kohl Pushes NOPEC Legislation on Senate Floor

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

Speaking on the Senate Floor on February 29, Senator Herb Kohl (D-Wis.) called for support for a measure that would permit the U.S. Department of Justice to bring actions against foreign states—such as members of the Organization of Petroleum Exporting Countries (OPEC)—for collusive practices in settling the price of limiting the production of oil.

Senator Kohl, Chairman of the Judiciary Committee’s Antitrust, Competition, Policy and Consumer Rights Subcommittee, introduced the “No Oil Producing & Exporting Cartels (NOPEC) Act” as an amendment to the Senate Surface Transportation Bill. The full Senate is considering the proposed “Moving Ahead for Progress in the 21st Century America Fast Forward Financing Innovation Act of 2011” or “MAP-21” (S. 1813)—the two-year surface transportation bill.

“[T]his amendment would hold OPEC countries accountable for their actions that contribute to high oil prices,” said Senator Kohl.

The NOPEC amendment has bi-partisan support, according to Kohl. Co-sponsors include Judiciary Committee Chairman Patrick Leahy (D-Ver.) and Senators Chuck Grassley (R-Iowa), Charles Shumer (D-N.Y.), Richard Blumenthal (D-Conn.), Sherrod Brown (D-Ohio), Joe Manchin (D-W.Va.), and Al Franken (D-Minn.).

“Our amendment would allow the Justice Department to crack down on illegal price maintenance by oil cartels,” according to Senator Leahy. “This bill will allow the Federal Government to take legal action against any foreign state, including members of OPEC, for price fixing and artificially limiting the amount of available oil. While OPEC actions remain sheltered from antitrust enforcement, the ability of the governments involved to wreak havoc on the American economy remains unchecked.”

The NOPEC legislation has been considered many times over the last decade. In the current congress, Senator Kohl introduced the bill (S. 394) on February 17, 2011. On April 7, 2011, the Senate Judiciary Committee approved the bill. A similar measure (H.R. 1346) is pending in the House of Representatives.

Railroad Antitrust Exemption

Senator Kohl has introduced another antitrust amendment to MAP-21. Amendment 1591 would repeal the existing antitrust exemptions for freight railroads. This amendment is identical to the proposed “Railroad Antitrust Enforcement Act of 2011” (S. 49), which was introduced in 2011. The measure has passed the Judiciary Committee by overwhelming margins in this Congress as well as in the law two, according to Kohl.

The proposal would bring railroad mergers and acquisitions under the purview of the Clayton Act, allowing the federal government, state attorneys general, and private parties to file suit to enjoin anticompetitive mergers and acquisitions. Railroad mergers and acquisitions are currently reviewed by the Surface Transportation Board (STB). Moreover, the proposal would eliminate the exemption that prevents FTC scrutiny of railroad common carriers and the antitrust exemption for railroad collective ratemaking.

“This bill simply seeks to end the special exemption from antitrust law enjoyed by freight railroads, an exemption which is both wholly unwarranted and raises prices to shippers and consumers every day,” said Senator Kohl. “[B]y clearing out this thicket of outmoded antitrust exemptions, this amendment will cause railroads to be subject to the same laws as the rest of the country.”

Google’s New Privacy Policy Questioned by U.S., Canadian, European Authorities

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

Google’s new comprehensive privacy policy may not adequately protect consumers’ legal rights and interests, government officials and privacy regulators in the United States, Canada, and Europe have told the company in three separate letters.

According to Google, the policy—which took effect yesterday—is intended to streamline and simplify the privacy policies for its various services by consolidating them into a single policy.

The National Association of Attorneys General (NAAG) sent a letter to Google CEO Larry Page on February 22, signed by 36 attorneys general, declaring that Google’s new policy was “troubling” and “appears to invade consumer privacy.”

Canada’s Privacy Commissioner, Jennifer Stoddart, wrote to Google’s Global Public Policy Manager in Ottawa, seeking additional information about the policy, particularly with regard to the collection of information via Android mobile devices.

On February 27, the French data protection authority, CNIL, also wrote to Page, informing him that the European Union’s Article 29 Data Protection Working Party had invited CNIL to investigate on behalf of the EU member states’ data protection authorities.

State Attorneys General Express Concerns

NAAG expressed concern that the new policy allows for greater information sharing between Google’s products and services without providing consumers an “opt-in” option or meaningful “opt-out” options.

“Google’s new privacy policy is troubling for a number of reasons,” the letter said. “On a fundamental level, the policy appears to invade consumer privacy by automatically sharing personal information consumers input into one Google product with all Google products.”

According to NAAG, users of Google’s many products use them in different ways and expect that information they provide for one product, such as YouTube, would not be synthesized with information they provide for another product, such as Gmail or Google Maps. The new policy “forces” consumers to allow information across all of Google’s products to be shared without giving them the proper ability to opt out, the letter said.

The attorneys general requested to meet with Google “as soon as possible to work toward a solution that will best protect the privacy needs of those who use Google’s products.”

Full text of the letter is available here on NAAG’s website.

Canadian Privacy Commissioner Requests Information

According to Commissioner Stoddart, Google’s new consolidated policy lacked specific provisions relating to data retention and disposal, such as specific deadlines for the deletion of personal information following a user’s request.

“We strongly encourage Google to more clearly explain its data retention and disposal policies and practices, particularly those dealing with data deletion in response to a user request, and would request that you let us know how you intend to address this issue,” Stoddart said.

In addition, the new policy’s apparent removal of the separation between its various products—causing linkage of all of a user’s data together when the user logs into his or her account and uses various services—may make some users uncomfortable, according to Stoddart.

“We would strongly encourage you to make it clearer to users that if they are uncomfortable with these new uses of information, they can create separate accounts,” Stoddart said.

With respect to Android users, Stoddart pointed out that users appeared to have very little choice with regard to the ways Google would collect information from Android devices and link that information to other Google services they use.

“We would appreciate receiving comments from Google with respect to such linking of vast quantities of personal information as a condition of service to use the Android phone,” Stoddart said.

Further information on Stoddart’s letter is available here on the Canadian Privacy Commissioner’s website.

French Data Protection Authority Launches Investigation

CNIL stated that its preliminary analysis of the new policy showed that the policy did not meet the requirements of the European Data Protection Directive, particularly with regard to the information provided to data subjects.

“The new privacy policy provides only general information about all the services and types of personal data Google processes,” CNIL said. “As a consequence, it is impossible for averages users who read the new policy to distinguish which purposes, collected data, recipients or access rights are currently relevant to their use of a particular Google service.”

CNIL stated that it would send Google a full questionnaire on the matter before mid-March 2012. CNIL requested that Google “pause” its implementation of the policy until it had completed its analysis.

The text of CNIL’s letter is available here on the European Commission’s website.

FTC Not Compelled to Enforce Consent Order Concerning Google Social Networking Service

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

The federal district court in Washington, D.C. has denied a request from the public interest group Electronic Privacy Information Center (EPIC) for an order compelling the Federal Trade Commission to enforce an October 2011 consent order that the agency signed with Google, Inc. EPIC’s complaint seeking injunctive relief under the Administrative Procedure Act was denied.

Following dismissal of the action, EPIC announced that it had filed an emergency appeal with the Court Appeals for the DC Circuit. EPIC said that it had asked the appellate court to overturn the lower court decision before March 1, when Google intended to “change its terms of service and consolidate user data without consent.”

The FTC’s enforcement decisions were committed to agency discretion and were not subject to judicial review, the court held. EPIC, which was not a party to the consent order, contended that Google’s proposed implementation of new privacy policies would violate portions of the consent order.

EPIC alleged that “[r]ather than keeping personal information about a user of a given Google service separate from information gathered from other Google services,” the new policies “will consolidate user data from across its services and create a single merged profile for each user.”

While EPIC’s concerns might well have been legitimate, the FTC was in the best position to evaluate whether Google’s new policies would in fact violate the Consent Order and, if so, to determine what course of action the agency should pursue. The court rejected EPIC’s argument that the FTC had a “mandatory, nondiscretionary duty” to enforce the consent order.

The court noted that it had been advised by the FTC that the matter was under review. Thus, the agency might ultimately decide to institute an enforcement action.

In denying the requested relief, the court noted that its “decision should not be interpreted as expressing any opinion about the merits of EPIC’s challenge to Google’s new policies.” The court did not reach “the question of whether the new policies would violate the Consent Order or if they would be contrary to any other legal requirements.”

The February 24, 2012, decision in Electronic Privacy Information Center v. FTC, Civil Action No. 12-0206 (ABJ), will appear at 2012-1 Trade Cases ¶77,807.