Supplement’s “Healthy Fats” Labeling Could Be Deceptive

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

A supplement purchaser sufficiently alleged that a supplement manufacturer’s packaging of its protein drinks and bars was misleading in violation of the California Unfair Competition Law (UCL), False Advertising Law (FAL), and Consumer Legal Remedies Act (CLRA), the federal district court in Oakland, California, has held.


The manufacturer’s “Muscle Milk Ready-to-Drink” and “Muscle Milk Bars” were advertised as “an ideal blend of protein, healthy fats, [and] good carbohydrates.” These statements on the label were allegedly false and deceptive because the products actually contained 11 grams of total fat, 8 grams of saturated fat, almost no vitamins or minerals, and some unhealthy ingredients.

A reasonable consumer was likely to believe that the product contained healthy, unsaturated fats rather than saturated fats and was more similar to a nutritional shake, according to the court.

Deceptive Product Labeling

To state California consumer protection law claims based on deceptive product labeling, the purchaser needed to allege that a reasonable consumer was likely to be deceived by the label. The claims on the packaging went beyond claiming the supplement was healthy. Although “healthy” is difficult to define, a reasonable consumer would assume that “healthy fats” and “nutritious snack” referred to unsaturated fats rather than saturated fats. The nutrient label did not negate the finding that the labeling was misleading because the packaging contained affirmative misrepresentations, and manufacturers cannot rely of the small-print nutritional label to contradict and cure that misrepresentation.

The purchaser’s claims that other statements were misleading were denied, as they were not specific enough to meet the heightened pleading standard of Federal Rule of Civil Procedure 9(b).

Loss of Money or Property

In order to state UCL and FAL claims, the purchaser needed to show she lost money or property as a result of the violations. The purchaser alleged that she was denied the benefit of her bargain based on paying more for the supplement than a healthier, less expensive product because of the misrepresentations.

The purchaser also needed to show that she would not have purchased the product but for the misrepresentations on the product’s label. There was sufficient evidence that the purchaser read and relied on the misleading label on the packaging and that she suffered economic harm, according to the court.

The court held that the California Supreme Court would adopt the approach to unfairness under the UCL that the consumer injury must be substantial, the injury must not be outweighed by any countervailing benefits to consumers or competition, and it must be an injury that could not have been avoided. Misleading labels may qualify as unfair business practices if found to be misleading and the injury to the consumer class was substantial.

The decision is Delacruz v. Cytosports, Inc., CCH State Unfair Trade Practices Law ¶32,442.

Grads Could Not Pursue Action Based on Law School’s Post-Graduate Job Claims

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

Nine graduates of New York Law School (NYLS), who allegedly chose to attend the school based on its promotional statements as to hiring of graduates, could not pursue claims for damages under the New York deceptive practices statute and common law, a New York state trial court has held. The graduates sought to recover damages equal to the difference between the allegedly inflated tuition (currently $47,800 per year) and the “true value” of an NYLS degree.

The allegedly misleading information was disseminated for the classes entering 2005-2010. According to the complaint, the NYLS data allegedly omitted facts that would have given prospective students a more accurate picture of NYLS's post-graduation employment prospects.

For example, the graduates alleged that NYLS consistently reported that approximately 90-92 percent of its graduates secured employment within nine months of graduation, but did not report the percentage of graduates employed in part-time or temporary positions.

NYLS's statements in its marketing materials were not misleading in a material way to consumers acting reasonably, the court determined. Documentary evidence in the complaint identified sources of information regarding law school graduates' realistic employment prospects—sources readily available for reasonable consumers of legal education to research and compare various law schools for the purpose of seriously considering whether to enroll.

The students could not have reasonably relied on NYLS's alleged misrepresentations, in the court’s view. They had ample information from additional sources and had the opportunity to discover the then-existing employment prospects at each stage of their legal education.

The graduates’ theory of damages was too speculative, according to the court. This was especially true since a supervening event, the 2008 Great Recession and its aftermath, had wreaked havoc throughout the legal job market and upset the plans of most recent law graduates wherever they attended law school.

The decision is Gomez-Jimenez v. New York Law School, CCH Advertising Law ¶64,652

Condom Maker’s Shelf Agreements with Retailers Not a Barrier to Competition

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

The manufacturer of Trojan condoms did not engage in exclusive dealing, monopolization, attempted monopolization, or a conspiracy to monopolize by entering into "planogram" shelf-space agreements with large chain retailers or by allegedly abusing a "category captain" position granted to it by some retailers, the federal district court in San Francisco has decided.

A complaining niche competitor failed to raise a genuine issue of material fact as to whether the agreements substantially foreclosed competition in the relevant market for male condoms sold to retailers. The competitor’s antitrust claims were therefore dismissed.

Under the planogram agreements, the manufacturer offered the retailers a percentage rebate off its wholesale price in exchange for the retailer’s commitment to devote a certain percentage of the condom shelf space to the manufacturer’s products. "Category captain" described a position to which the manufacturer was appointed by some retailers in order to assist with shelf space allocations and to give advice on how best to present the category.

Market Power

The complaining competitor failed to provide direct or circumstantial evidence that the defendant possessed market power over the relevant market, the court held at the outset. The competitor, whose market share never surpassed one-half of one percent throughout the relevant period, offered no evidence of restricted output or supra-competitive prices.

Although the defending manufacturer clearly held a dominant share—over 75 percent—of the relevant market, the complaining competitor could not demonstrate that there were significant barriers to entry into that market or that existing competitors lacked the capacity to increase their output in the short run. The rebate program at issue in the suit did not constitute a substantial barrier to entry. It was undisputed that just three major players had long dominated the condom market, and that while small players like the plaintiff had entered the market, none had seriously challenged the big three recently.

The market structure indicated that a combination of factors might have prevented the market from self-correcting in the face of anticompetitive conduct, the court stated. Even assuming significant barriers to entry, the competitor failed to produce any evidence, or even argument, as to whether existing competitors lacked the capacity to increase their output in the short run.

Market Foreclosure

The planogram program did not force retailers to give any specified amount of shelf space to the defending manufacturer over its rivals, the court observed. In addition, retailers could terminate their already-short contract agreements at any time, for any reason, with minimal enough notice to substantially negate the risk of foreclosure effects. The terminability of the contracts rendered them presumptively lawful, the court noted. Finally, the rebate program left open existing and potential alternative channels of distribution to the manufacturer’s competitors.

The program was not shown to be coercive in practice any more than in theory, the court explained. A significant number of large retailers did not participate. Even those who did were not clustered at the bottom tier of the rebate structure in the manner that the plaintiffs’ theory of coercive effect suggested they would be. The record contained qualitative evidence that retailers could, and did, reduce or eliminate their participation in the planogram program based on market forces.

Further, evidence indicated that the manufacturer’s share of sales at non-participating retailers was roughly on par with its sales at participating retailers, its shelf share system-wide seldom exceeded its market share, and its two primary competitors apparently avoided any purported anticompetitive effect of the planogram program.

The complaining company’s own competitive misfortunes had myriad causes other than the defending manufacturer’s alleged exclusionary conduct, the court explained. Moreover, even if a coercive effect had been demonstrated, there was still no evidence that competition was foreclosed from a substantial portion of the market.

Exclusionary Conduct?

The Trojan maker’s "planogram" agreements and "category captain" conduct did not amount to sufficiently exclusionary conduct to support claims of unlawful monopolization, attempted monopolization, or monopolization conspiracy, the court declared. The complaining competitor provided no evidence as to how often the manufacturer’s recommendations were adopted or whether they had the intent and/or effect of sabotaging the competitor. Undisputed evidence in the record indicated that it was commonplace in the industry for manufacturers to suggest planogram designs or provide retailers with other information to advocate for their brands, and even the complaining competitor had engaged in certain advocacy tactics in an attempt to influence retailer decisions.

The fact that the defending manufacturer was successful in achieving a degree of cooperation with retailers did not, without more, establish anticompetitive conduct. Without a showing of exclusionary conduct, no reasonable inference could be made of either general or specific intent to monopolize to support either a claim of completed or attempted monopolization, the court reasoned.

Antitrust Injury

The defending manufacturer also would not have caused a cognizable antitrust injury through the alleged conduct, the court added. While the complaining competitor sufficiently alleged harm to itself and to other small manufacturers, it failed to show that its losses were the result of the defending manufacturer’s alleged anticompetitive acts as opposed to other market forces, and further failed to demonstrate harm to competition. It offered no explanation for why other larger rivals in the industry managed to compete with the defendant despite the alleged misconduct.

The decision is Church & Dwight Co., Inc v. Mayer Laboratories, Inc., 2012-1 Trade Cases ¶77,863.

Antitrust Claims Against Cable Provider Pared, But Sent to Trial

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

Cable television programming service provider Comcast Corp. could have violated Sec. 1 or Sec. 2 of the Sherman Act by entering into swap agreements with other cable providers in the Philadelphia area and undertaking a course of action to block new entrants into its service areas, the federal district court in Philadelphia has ruled.

The complaining class of subscribers could not establish that Comcast’s swap agreements were illegal per se or that the company’s attempts to restrict access to installation contractors and to a sports network it owned constituted actionable predatory conduct. However, the class did offer enough evidence to support a claim of horizontal market allocation under the rule of reason and monopolization or attempted monopolization based on targeted price discounts to prospective customers of a new entrant into an area it served, in the court’s view. Comcast’s motion for summary judgment against the claims was granted in part and denied in part.

Per Se Illegality

Comcast’s swap agreements did not amount to a per se violation of the Sherman Act because the class failed to meet its summary judgment burden with respect to whether the swap transactions were naked market division agreements, rather than merely ancillary restraints on trade. The class did not create a genuine issue of material fact concerning whether the cable provider had anticompetitive intent in entering into the swap agreements.

Evidence that the company’s executives had a long-standing desire to "rationalize the cable industry" by consolidating positions in certain markets in exchange for giving up positions in other markets did not support the conclusion that the swap agreements were naked restraints of trade so plainly anticompetitive that no elaborate study of the industry was needed to establish their illegality. The ability of cable companies to provide new and advanced services, achieved through clustering their systems, required proof of facts that were substantially different from the classic horizontal price fixing and group boycott conspiracies generally found to be per se antitrust violations, the court said.

Allocation of Customers/Markets

Comcast was not entitled to summary judgment on the Sec. 1 claim outright on the basis that the counterparties to the swap agreements were never actual or potential competitors. For purposes of the subscribers’ Sec. 1 claim, their certification as a class (2012-2 Trade Cases ¶77,575) hinged on whether they could demonstrate that Comcast conspired with competitors to allocate markets, the court noted. The class offered sufficient evidence to create a jury issue on whether Comcast and the counterparties to the swap agreements were actual competitors.

An argument by the company that it and the counterparties were never competitors in the Philadelphia market—even though each offered cable services to subscribers in that market—because they operated cable systems in non-overlapping franchise areas and did not offer services to the same subscribers, at the same time, anywhere in the region was rejected.

Whether or not the franchise areas were overlapping was immaterial because the relevant geographic area was not limited to the individual franchise area. The class did not need to show that the defendant actually competed with the counterparties in the same franchise area. Based upon the proposed market definitions, it was sufficient that each provided cable television programming services in the Philadelphia direct marketing area.

Monopoly Claims

Comcast did not engage in unlawful monopolization or attempted monopolization by creating a Philadelphia area cluster through the use of the swap agreements to allocate the market between it and two competitors, the court found. The conduct may have been predatory, according to the court, but the class failed to show that the purportedly procompetitive justifications Comcast offered for its conduct were pretextual.

Those justifications included the realization of efficiencies in marketing, infrastructure, management, and operations, along with an ability to introduce new products such as high-speed Internet, telephone, high-definition television, and other video features and services. Evidence that it raised prices did not refute the claim of efficiency. The court rejected arguments by the class that Comcast could have achieved the same level of efficiency of clustering by overbuilding its competitors, rather than acquiring them or swapping for their assets, and that it never studied whether it was achieving its goals.

Comcast’s offering of targeted price discounts to subscribers in one county it dominated in order to convince them not to switch service to a competing cable overbuilder that was moving into the area could have violated Sec. 2 of the Act, the court decided. Because of the price freeze in areas the competitor entered, and increased prices in areas it did not, the rates paid by the company’s customers in overbuilt areas were allegedly 18 to 38 percent below the rates paid by its customers in areas where the overbuilder did not offer service. The implications of the disparate pricing policy were clear: but for the overbuilder’s failure to enter the City of Philadelphia, the defending cable provider’s customers in those areas would have enjoyed significantly lower prices.

That Comcast never offered below-cost prices to potential customers of the overbuilder did not mandate a finding that the discount program was not exclusionary conduct. Because it possessed market power, its decision to target promotional discounts to deter a new entrant could be deemed predatory and an exercise of market power to maintain its monopoly. Given that the company made no argument that the discount program had otherwise legitimate business justifications, the claim had to be submitted to a jury, the court concluded.

The decision is Behrend v. Comcast Corp., 2012-1 Trade Cases ¶77,862.

CFO Violated RICO; Plaintiff Awarded $3.5 Million in Damages

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

The bookkeeper and chief financial officer (CFO) of an industrial machinery supplier violated RICO by participating in a fraudulent scheme to sell overpriced equipment to a flooring company, the federal district court in Abingdon, Virginia, has ruled. More than $3.5 million in damages, after trebling under RICO, were awarded to the flooring company.

Participation in Enterprise

The bookkeeper-CFO participated in the conduct of an association-in-fact enterprise—which consisted of the plaintiff, her husband, the supplier, and a company that appeared to be used for the sole purpose of carrying out the fraudulent scheme—by manipulating the supplier’s books and records, creating false invoices, signing kickback checks, and obstructing access to accurate data and documents, the court explained.

These actions were integral to the operation of the enterprise. Without the manipulation of the supplier’s accounting records, the issuance of false invoices, and the cutting of the kickback checks, the enterprise would have not been able to achieve its goal of defrauding a flooring company.

Pattern of Racketeering

The defendant and her co-conspirators engaged in a pattern of racketeering activity that consisted of mail fraud, wire fraud, commercial bribery, and obstruction of justice, even though those acts were perpetrated in furtherance of a single scheme to defraud a single customer (the flooring company), the court determined. Under RICO, a pattern of racketeering was present if a series of related predicate acts were committed over a substantial period of time.

In this case, the racketeering acts were related because they all were perpetrated to defraud the flooring company. The acts were sufficiently continuous, as well, because they were committed between September 2005 and 2008, which represented a substantial period of time for the purpose of RICO’s continuity requirement.

Punitive Damages; Attorney Fees

The court denied the plaintiff’s request for punitive damages because the plaintiff’s state law claims arose from the same set of facts, and were based on the same duties and injuries, as its RICO claims. A punitive damage award would thus be duplicative. The plaintiff’s request for nearly $713,000 in attorney fees was also denied.

Although the hourly rate charged by the plaintiff’s counsel was reasonable, the overall fee was not, according to the court. Therefore, the plaintiff’s fee request was reduced by 50 percent. The court awarded slightly more than $356,000 in attorney fees.

The decision is VFI Associates, LLC v. Lobo Machinery Corp., CCH RICO Business Disputes Guide ¶12,204.

Further information regarding CCH RICO Business Disputes Guide appears here.

Excluded Radiologist Lacked Antitrust Standing to Sue Hospital, Physician Groups

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

A radiologist who was excluded from two New Jersey hospitals after the hospitals’ operator selected a new exclusive radiology provider lacked antitrust standing to pursue boycott and monopoly claims, the U.S. Court of Appeals in Philadelphia decided earlier this week.

Nearly a decade ago, the radiologist filed his antitrust claims, alleging the hospital operator, its director of radiology, and two radiology physician groups conspired to boycott him in the local radiology market and used illegal tying arrangements to link radiology services to hospital services. He also alleged that exclusive radiology provider contracts were intended to monopolize the outpatient and hospital radiology markets.

The cardiologist failed to establish a nexus between his purported exclusion from the market for radiology jobs and the anticompetitive effects of the alleged conduct, the court ruled.

Because the complaining radiologist obtained a position with a nearby hospital within two weeks of his termination the original radiology group, he could not show that he was excluded entirely from the market.

The radiologist did not demonstrate that the challenged conduct was anticompetitive. He failed to show that the behavior leading to his exclusion—the change of contractor in a long-standing practice of exclusive contracting for radiology services—was the type that might lessen competition among radiology providers for the right to practice in the market.

Finally, the complaining radiologist failed to establish that his termination stemmed directly from conduct that was illegal because of its anticompetitive effects on the price, output, or quality of radiology services available to consumers. There was no indication that the radiologist’s exclusion allowed the defendants to provide substandard radiology services and reduce consumer choice, it was noted.

The April 17 non-precedential decision in Bocobo v. Radiology Consultants of South Jersey, P.A. will appear in CCH Trade Regulation Reporter.

Franchisor’s Airing of Provocative Commericals Did Not Breach Good Faith Duty Owed to Franchisees

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

Fast food franchisor, Hardee’s Food Systems, Inc., did not breach the implied covenant of good faith and fair dealing in its agreement with a franchisee by airing sexually provocative television commercials, a federal district court in St. Louis has ruled.

The franchisee alleged that the franchisor’s airing of two specific “lewd” ads on television during the franchisee’s renewal period abused its discretion its discretion in a manner that denied the franchisee the expected benefit under the agreement. The franchisee argued it received repeated complaints about the ads in its “predominantly agricultural and union oriented community” and sought lost profits and other damages.

Under Missouri law, where a contract left a decision to the discretion of one party, the issue was not whether the party made an erroneous decision, but whether the decision was made in bad faith or was arbitrary or capricious so as to amount to an abuse of discretion, the court explained.

In this instance, there was no evidence from which a jury could find that the challenged conduct of Hardee’s was arbitrary and capricious, opportunistic, or evaded the spirit of the franchise agreement to deny the franchisee the expected benefit thereof, the court held.

Instead, the evidence showed that Hardee’s made a strategic marketing decision and approved the ads at issue in what it believed was in the best interests of the Hardee’s brand, which is what the agreement contemplated that Hardee’s would do.

The decision is Hardee’s Food Systems, Inc. v. Hallbeck, CCH Business Franchise Guide ¶ 14,809.

NASAA Issues Revised Proposal for Model Franchise Exemptions

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

The Franchise and Business Opportunity Project Group of the North American Securities Administrators Association (NASAA) re-released for comment yesterday proposed changes to NASAA’s Model Franchise Exemptions. The proposal includes model language for states to use to promulgate exemptions from registration and disclosure provisions under current state laws.

In response to a previous solicitation for comment, NASAA received a total of six public comments regarding various provisions in the Model Exemptions.

After considering the comments, the Franchise Project Group concluded that, in general, the Model Exemptions strike the right balance between the desirability of reducing compliance burdens on franchisors and the need for prospective franchisees to review Franchise Disclosure Documents in appropriate cases in order to make informed investment decisions. The Franchise Project Group decided—in light of several comments—to propose revisions to specific Model Exemptions.

Revised Exemptions include the Fractional Franchise Exemption, the Experienced Franchisor Exemption, the Sophisticated Purchaser Exemption, and the Discretionary Exemption.

A new release, including a link to download the Revised Proposed Model Franchise Exemptions, appears here.

Comments will be accepted through May 16, 2012. They should be sent by email or in writing to:

Dale Cantone
Chair, Franchise and Business Opportunity Project Group
Office of the Maryland Attorney General
Division of Securities
200 St. Paul Place
20th Floor Baltimore, MD 21202-2020
Email: dcantone@oag.state.md.us

or

Joseph Opron
Counsel
NASAA
750 First Street, NE
Suite 1140
Washington, DC 20002

Email: jjo@nasaa.org

KEVLAR Maker’s Supply Agreements Did Not Foreclose Fiber Market

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

The manufacturer of "KEVLAR"-branded aramid fiber, a high-strength fiber used in ballistics applications and protective apparel, did not engage in unlawful monopolization or attempted monopolization of the para-aramid fiber market in the United States by procuring exclusive long-term supply agreements with certain high-volume customers, the federal district court in Richmond, Virginia, has held. Summary judgment against federal antitrust claims asserted by a Korean competitor was therefore granted.

The defending manufacturer, E.I. Du Pont de Nemours & Co. (DuPont), did not possess the requisite monopoly power over the para-aramid fiber market in the United States to have engaged in monopolization, the court held. The highest market share DuPont held during the relevant period was only 59 percent, and that share—which had already been in decline for decades—only further fell over the time span relevant to the suit. Thus, DuPont clearly lacked the power to control prices and exclude competition.

Even if the complaining competitor—Kolon Industries, Inc.—had been able to establish that DuPont had the requisite market power, it still failed to demonstrate illegal maintenance of such power over the relevant market, the court added. The alleged exclusive agreements were not shown to have substantially foreclosed competition in the market.

Kolon did not even attempt to quantify foreclosure of the relevant market or to show how much of the market was closed off by the supply agreements. Its evidence of the degree of foreclosure in three particular segments within the relevant markets was scant at best, but more importantly did nothing to reveal the amount of foreclosure in the market as a whole—which consisted of numerous segments of varying size, and extended well beyond the few segments addressed by the competitor.

In actuality, the degree of foreclosure—if it existed at all—was de minimus, the court determined. The agreements at issue resulted in no more than two percent of the market being foreclosed. Further, examination of the agreements themselves revealed even a two percent estimate to be greatly exaggerated, as many or most of the agreements could not be classified as the sort of exclusive or multi-year pacts at the heart of Kolon’s theory of the suit.

Given DuPont’s moderate market share during the relevant time period, the alleged anticompetitive agreements accounted for an even smaller fraction of the total revenue from para-aramid sales in the United States, the court said.

Kolon put forth no evidence demonstrating that other competitors had been shut out of the market and all the evidence in the record was to the contrary. Customers had no difficulty comparison shopping or switching sellers, and many did business with Kolon during the relevant time period, the court observed.

Attempted Monopolization

Kolon’s failure to show market foreclosure was fatal to its attempted monopolization claim, as well. Kolon failed to establish that the alleged anticompetitive acts, coupled with a presumed alleged intent to monopolize, "presented a reasonable probability that monopolization would sooner or later occur," the court concluded.

The decision is Kolon Industries, Inc. v. E.I. Du Pont de Nemours & Company, 2012-1 Trade Cases ¶77,857.

FTC Drops Suit After Healthcare System Abandons Enjoined Takeover

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

The FTC announced on April 13 that it has dismissed a complaint it filed against a Rockford, Illinois, healthcare system—OSF Healthcare System—seeking to block OSF's proposed acquisition of rival health care provider Rockford Health System, in light of OSF's decision to abandon the transaction.

OSF arrived at its decision to scrap the deal after the federal district court in Rockford recently granted the agency's motion to preliminarily enjoin it, pending an FTC trial (2012-1 Trade Cases ¶77,850).

The FTC issued the complaint in November 2011, alleging that OSF's proposed acquisition of Rockford Health System would reduce competition in two markets in the Rockford area: (1) general acute-care inpatient services, and (2) primary care physician services. That complaint can be found at CCH Trade Regulation Reporter ¶16,666.

In granting preliminary injunctive relief on April 5, the federal court found that the Commission had made a strong prima facie showing that the combination would have adverse competitive effects. The court rejected arguments by the companies that various competitive considerations and constraints would preclude them from being able to raise prices to supracompetitive levels following the merger, and it further noted and that the companies failed to present sufficient proof of extraordinary efficiencies that would rebut the FTC's case.

"The Federal Trade Commission is gratified by OSF Healthcare's decision to abandon its attempt to acquire rival hospital services provider Rockford Health System," said Chairman Jon Leibowitz.

"As we said in November when we filed our complaint, health care consumers and employers in Rockford would have paid a price had the deal been allowed to proceed. The FTC remains vigilant, and will not hesitate to challenge deals in the health care sector that are likely to decrease competition and lead to higher prices or fewer services."

Further information regarding In re OSF Healthcare System appears here on the FTC website. The order dismissing the FTC complaint will appear at CCH Trade Regulation Reporter ¶16,763.

FTC Rescinds Consumer Financial Protection Rules

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

Today, the Federal Trade Commission (FTC) rescinded nine regulations because the agency's rulemaking authority with respect to them has been  transferred to the Consumer Financial Protection Bureau (CFPB). These rules were republished by the CFPB, effective December 30, 2011. The FTC still has authority to bring law enforcement actions to enforce these rules.

The 2010 Dodd-Frank Act transferred to the CFPB most of the FTC’s rulemaking authority under the Fair Credit Reporting Act, as well as rulemaking authority under Sec. 43 of the Federal Deposit Insurance Act and portions of the Fair Credit Reporting Act. The Dodd-Frank Act also transferred rulemaking authority for two regulations recently issued by the FTC for services related to mortgage loans under Sec. 626 of the 2009 Omnibus Appropriations Act.

Fair Credit Reporting Act

In light of the transfer of rulemaking powers, the FTC rescinded under the Fair Credit Reporting Act:

• identity theft definitions (16 CFR 603, now at 12 CFR 1022.3);
• free annual file disclosures rule (16 CFR 610, now at 12 CFR 1022.130);
• prohibition against circumventing treatment as a nationwide consumer reporting agency (16 CFR 611, now at 12 CFR 1022.140);
• duration of active duty alerts (16 CFR 613, now at 12 CFR 1022.121); and
• appropriate proof of identity (16 CFR 614, now at 12 CFR 1022.123).

Under the Under the Fair Credit Reporting Act, the FTC continues to have rulemaking authority for its “Identity Theft Red Flag Rules” (16 CFR 681) and its rules governing “Disposal of Consumer Report Information and Records” (16 CFR 682). The FTC also retains rulemaking authority under Fair Credit Reporting Act with respect to motor vehicle dealers.

Mortgage Rules

The FTC also rescinded two rules on mortgage loan practices: the Mortgage Acts and Practices-Advertising or “MAP-Ad” Rule (16 CFR 321) and the Mortgage Assistance Relief Services or MARS Rule (16 CFR 322).

The MARS rule, which prohibited mortgage relief companies from making false or misleading claims among other things, was issued in November 2010. On at least two occasions-once in 2011 and once in 2012--the FTC has filed court actions for violations of the MARS rule. The MARS rule has been recodified as Mortgage Assistance Relief Services (Regulation O, 12 CFR1015).

The MAP-Ad rule took effect in August 2011. It prohibited misrepresentations regarding terms of mortgage credit products in commercial advertising. To date, the FTC has not brought an action alleging a violation of this rule. The MAP-Ad rule was republished by the CFPB at 12 CFR 1014.

Federal Deposit Insurance Corporation Improvement, Federal Debt Collection Practices Acts

In addition, FTC rules governing disclosure requirements for depository institutions lacking federal deposit insurance under the Federal Deposit Insurance Corporation Improvement Act (16 CFR 320, now 12 CFR 1009) and procedures for state application for exemption from the provisions of the Federal Debt Collection Practices Act (16 CFR 901, now 12 CFR 1006) were rescinded.

Maryland Legislation Would Bar Employers from Requesting Employees’ or Applicants’ Social Media Account Passwords

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

Maryland employers would be prohibited from asking employees or applicants to hand over the passwords for their Facebook accounts or other personal social media accounts, if a bill that has passed both houses of the Maryland legislature (Senate Bill 433 and House Bill 964) is signed by the governor. The two bills were reconciled and passed on April 6, 2012. If the law is approved, Maryland would be the first state to prohibit this practice.

The proposed law provides that employers may not take, or threaten to take, disciplinary actions against an employee for refusing to disclose social media account password and related information. Employers also may not refuse to hire an applicant as a result of the applicant’s refusal to disclose that information.

The bill also contains language prohibiting employees from uploading unauthorized employer proprietary information or financial data to their personal websites or other Internet sites. Employers would be allowed to conduct investigations for the purpose of ensuring compliance with applicable securities or financial laws or regulations, based on the receipt of information about the use of a personal website by an employee for business purposes or the uploading of employer proprietary information.

The proposed law would take effect on October 1, 2012.

Publishers, Apple Conspire to Fix Prices of E-Books: State Attorneys General

This posting was written by John W. Arden.

Publishers Penguin, Simon & Schuster, and MacMillan have conspired with Apple, Inc. to fix the sales prices of electronic books, according to an antitrust lawsuit filed by 16 state attorneys general in the federal district court in Austin.

The publishers and Apple were charged with a horizontal conspiracy to raise e-book retail prices in violation of Sec. 1 of the Sherman Act and the antitrust laws of the 16 states. The complaint, filed today, seeks injunctive relief, an award of trebled damages, civil fines, and attorneys’ fess and costs.

The lawsuit was based on a two-year investigation into allegations that the defendants conspired to raise e-book prices. The investigation—led by the Texas Attorney General’s office and coordinated by the Connecticut Attorney General and the U.S. Department of Justice—revealed that Penguin, Simon & Schuster, and MacMillan conspired with other publishers and Apple to artificially raise prices by imposing a distribution model in which the publishers set prices for bestsellers at $12.99 and $14.99, according to the Texas Attorney General.

The complaint charges that when Apple entered the e-book market, the publishers and Apple agreed to adopt an agency distribution model—rather than the traditional wholesale distribution model—to allow them to fix prices. Because the publishers agreed to charge the same prices, retail price competition was eliminated and customers paid more than $100 million in overcharges.

Prior to filing suit, the states reached an agreement in principle with publishers Harper Collins and Hachette on issues of injunctive relief and consumer restitution.

Text of a news release on the lawsuit appears here on the Texas Attorney General’s website. The 56-page complaint in State of Texas v. Penguin Group (USA) Inc. appears here.

Magazine Wholesaler Plausibly Alleged Boycott

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

The federal district court in New York City should not have rejected allegations that a magazine wholesaler was driven out of business as a result of an antitrust conspiracy, the U.S. Court of Appeals in New York City has decided. The appellate court vacated the lower court’s judgment granting a motion to dismiss the wholesaler’s Sherman Act Sec. 1 claim for failure to state a claim and denying leave to file an amended complaint.

According to the appellate court, the lower court misapplied the plausibility standards set by 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 lower court should not have dismissed plausible allegations of a boycott, merely because it found a different version of events more plausible. By finding the plaintiff’s view of the events implausible, or less plausible than the possibility that the defendants acted unilaterally, the lower court improperly made factual findings, it was held.

Prior to being forced into bankruptcy liquidation, Anderson News was the second largest magazine wholesaler in the United States. After ceasing operations in 2009, Anderson brought an antitrust action against five national magazine publishers and their four distribution representatives, as well as two smaller wholesalers. Anderson alleged that, along with the country’s largest magazine wholesaler—Source Interlink Distribution, LLC—it was the target of a boycott.

Anderson contended that the boycott to eliminate the nation’s two largest magazine wholesalers followed a move by Anderson to impose a surcharge on publishers for each magazine copy it distributed, regardless of whether the copy was sold by a retailer. The surcharge was an attempt to recover costs associated with retrieving unsold magazine copies from retailers and disposing of them. Shortly after Anderson announced the surcharge, Source announced that it too would impose a similar surcharge.

The defendants, in an effort to get Anderson to drop the surcharge, allegedly invited the wholesaler to join in the elimination of Source, but Anderson declined. According to Anderson, thereafter, the defendants met or communicated with each other and agreed to reject Anderson’s proposed surcharge, to refuse any other accommodation, and to stop supplying Anderson with magazines.

Anderson’s allegations of conspiracy were plausible, in the appellate court’s view. The appellate court explained what differentiated the complaint filed by Anderson from the complaint at issue in Twombly.

Anderson alleged an actual agreement to eliminate Anderson and/or Source as wholesalers in the market and to divide the market between two smaller wholesalers. According to the appellate court, “the facts alleged in the [proposed amended complaint] are sufficient to suggest that the cessation of shipments to Anderson resulted … from a lattice-work of horizontal and vertical agreements to boycott Anderson.”

The appellate court went on to say that it had “difficulties with some of the court’s analytical constructs, including its application of Twombly’s plausibility test.” The lower court’s plausibility inquiry was “misdirected” when it ruled that Anderson did not state a plausible Sherman Act, Sec. 1 claim, simply because unilateral parallel conduct by the defendants was completely plausible.

According to the appellate court, “although an innocuous interpretation of the defendants’ conduct may be plausible, that does not mean that the plaintiff’s allegation that that conduct was culpable is not also plausible.” Moreover, on a Rule 12(b)(6) motion it was “not the province of the court to dismiss the complaint on the basis of the court’s choice among plausible alternatives.”

The appellate court also rejected the lower court’s determinations that Anderson’s conspiracy claim was implausible because the defendants had “a variety of reactions” to Anderson’s announcement of the surcharge or because Anderson’s surcharge was a nonnegotiable demand on the publishers. There was nothing implausible about coconspirators’ starting out in disagreement as to how to deal conspiratorially with their common problem.

Moreover, the presentation of a common economic offer might lend itself to independent, parallel responses, but it did not provide antitrust immunity to the publishers if they decided to get together to boycott the offeror.

The decision is Anderson News, LLC v. American Media, Inc., 2012-1 Trade Cases ¶77,843.

Wayland to Serve as Acting Antitrust Chief Pending Confirmation of Baer

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

With Senate confirmation of William Baer unlikely to happen any time soon, the Department of Justice has announced that Joseph Wayland will serve as the Acting Assistant Attorney General in charge of the Justice Department Antitrust Division after the departure of Sharis A. Pozen at the end of April.

Wayland is the Deputy Assistant Attorney General for Civil Enforcement at the Antitrust Division. He joined the Antitrust Division in September 2010 and has worked on a number of high-profile cases. He was the lead trial counsel in the Justice Department’s successful challenge to AT&T Inc.’s proposed acquisition of T-Mobile USA, Inc. He also headed up the trial team that stopped H&R Block, Inc.’s proposed acquisition of 2SS Holdings—the maker of “TaxACT” tax preparation software.

Prior to joining the Antitrust Division, Wayland was in private practice, as a partner with Simpson, Thacher. He joined the firm in 1988.

Leibowitz, Pozen Discuss Year’s Highlights at ABA Spring Antitrust Meeting

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

FTC Chairman Jon Leibowitz and Sharis A. Pozen, Acting Assistant Attorney General in charge of the Department of Justice Antitrust Division, discussed the active enforcement agendas at their agencies at the American Bar Association Section of Antitrust Law Spring Meeting on March 30 in Washington, D.C.


Acting Assistant Attorney General Pozen said that the Antitrust Division had an “amazing” year. With respect to criminal enforcement, she noted the recent conviction of AU Optronics Corporation of Taiwan, its U.S. subsidiary, and its former president and former executive vice president for conspiring to fix prices of thin-film transistor-liquid crystal display (TFT-LCD) panels.

On the civil enforcement side, Pozen mentioned two recent successes in the merger enforcement area. She called AT&T’s decision to abandon its proposed acquisition of T-Mobile USA Inc. in the face of a Justice Department challenge a “tremendous victory” and an example of federal/state cooperation. Pozen also noted a federal district decision enjoining H&R Block, Inc.’s proposed acquisition of 2SS Holdings, Inc.—the maker of “TaxACT” tax preparation software (2011-2 Trade Cases ¶77,678). She commended the decision, saying it read like a treatise. Other recommended reading, according to Pozen, is the competitive impact statement, explaining the consent decree resolving the government’s monopolization allegations against United Regional Health Care System of Wichita Falls (2011-2 Trade Cases ¶77,619).

The FTC continued to focus on the health care sector over the past year, the FTC chairman pointed out in his remarks. Leibowitz noted three hospital merger cases in litigation. First, he mentioned the Commission opinion requiring ProMedica Health System to divest rival St. Luke's Hospital in Toledo, Ohio. Second, he said that the FTC was waiting for a federal district court to rule on its request for a preliminary injunction to block OSF Healthcare System’s proposed acquisition of Rockford Health System, which would combine two of the three major hospital systems in Rockford, Illinois. Finally, the FTC chairman highlighted the U.S. Solicitor General’s Supreme Court petition questioning 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 an FTC antitrust attack under the state action doctrine.

Looking ahead, Pozen, who is resigning effective April 30, said that she hoped for a smooth transition to her successor. William Baer—the head of the antitrust group at the Washington, D.C. office of Arnold & Porter, LLP, and a former director of the FTC Bureau of Competition—was nominated to serve as the Assistant Attorney General in charge of the Antitrust Division on February 6. The nomination is pending in the Senate Judiciary Committee.

FTC Chairman Leibowitz said that top enforcement priorities going forward would focus on technology and health care issues, as well as “last dollar fraud,” such as deceptive foreclosure rescue and bogus credit repair schemes. In the technology area, Leibowitz said the FTC was involved in a number of open investigations that he could not discuss. The chairman also noted in his remarks that, with the recent Senate confirmation of Maureen Ohlhausen, the Commission would be operating with a full five-member team.

First Amendment Did Not Bar Publicity Rights Claims Against Video Game Maker

This posting was written by Thomas A. Long, Editor of Wolters Kluwer IP Law Daily.

The First Amendment did not bar claims by retired National Football League players alleging that video game developer Electronic Arts Inc. (“EA”) violated their rights of publicity under California law by using their likenesses in the EA video game, Madden NFL, without their authorization, the federal district court in San Francisco has ruled. The court also denied EA’s motion to strike the complaint pursuant to California’s Anti-SLAPP (“Anti-Strategic Lawsuit Against Public Participation”) law.

Background

The Madden NFL game featured highly realistic simulations of actual NFL stadiums, uniforms, and current team rosters, including active players’ likenesses and biographical information, which were covered by various licenses that did not cover the retired players.

Recent versions of the game allowed players to select “historical” NFL teams, with rosters that did not include the retired players’ names, but featured game “avatars” that closely resembled the retired players, in terms of height, weight, skin tone, position, years in the league, and athletic ability. For purposes of its motions to dismiss and strike, EA accepted the retired players’ allegations that it used protectable elements of their likenesses in Madden NFL.

Three retired players—Michael Davis, Vince Ferragamo, and Billy Joe Dupree—filed a putative class action lawsuit on behalf of themselves and approximately 6,000 other former NFL players whose likenesses allegedly appeared in certain editions of Madden NFL. They asserted violations of California’s statutory right of publicity under Civil Code Sec. 3344 and violations of California’s common law right of publicity.

First Amendment

EA contended that the game, as an expressive work, was protected by the First Amendment to the extent that it contained significant transformative elements, such that the value of the game did not derive primarily from the fame of the players.

However, according to the court, the “transformative use” test focuses on the reproduction of the celebrities’ likenesses, rather than on the larger work. In the Madden NFL game, the retired players’ likenesses appeared in their conventional role as football players. EA failed to articulate any expressive significance inherent in this depiction.

The game’s literal projection of the retired players’ likenesses into avatar figures was insufficient to confer constitutional protection, in the court’s view. The fact that the likenesses could be controlled or manipulated by game players did not change the analysis; the avatars were still realistic depictions of the retired players.

The court also rejected EA’s argument that its use of the players’ likenesses in Madden NFL was protected because it concerned a matter of public interest. Although the reporting and discussion of factual information about professional sports implicated the public interest, the alleged use of the retired players’ likenesses went well beyond simply reporting or publishing statements of historical fact.

There was very little in the game that resembled traditional reporting. The game play of Madden NFL did not report, or even re-create, recent or historical games. Each game was within the players’ control; the only historical aspect of the game was the retired players’ likenesses, the court said.

EA’s use of the retired players’ likenesses was not exempt from liability under the California publicity rights statute’s provision of immunity for the use of a name or likeness in connection with “public affairs.” Game play did not report on or relate “real life” occurrences, other than a minimal amount of statistical information about each player. The game was entirely fictional, the court said. Accordingly, the court denied the motion to dismiss the claims.

Anti-SLAPP Law

California’s Anti-SLAPP law provides for dismissal of any claims for relief that are primarily based on defendants’ activities in furtherance of their right to free speech relating to an issue of public concern. Once a defendant makes a prima facie showing that free speech protections are implicated, the burden shifts to the plaintiff to demonstrate a “reasonable probability” of prevailing on the underlying claims by stating and substantiating a legally sufficient claim.

Although video games were expressive works entitled to First Amendment protection, EA had conceded for purposes of its motions that Madden NFL used the retired players’ likenesses without authorization. EA had not otherwise attacked the adequacy of the allegations against it. Therefore, the court said, the retired players had satisfied their burden of stating and substantiating a legally sufficient claim. The motion to strike was denied.

The March 29 decision in Davis v. Electronic Arts, Inc. will be reported in CCH Advertising Law Guide.

FTC Approves Merger of Pharmacy Benefits Managers Express Scripts and Medco

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

The FTC announced yesterday that it had closed its investigation into the proposed combination of two of the country’s three largest pharmacy benefit managers (PBMs) without taking action to challenge the transaction. On the same day, Express Scripts, Inc. announced that it had completed its acquisition of Medco Health Solutions.

Three of the four commissioners concluded that a violation of Sec. 7 of the Clayton Act neither had occurred nor was likely to occur as a result of Express Scripts’ acquisition of Medco. “While this transaction appears to result in a significant increase in industry concentration, nearly every other consideration weighs against an enforcement action to block the transaction.”

The transaction was not likely to produce unilateral or coordinated anticompetitive effects in the market for the provision of full-service PBM services to health care benefit plan sponsors, including public and private employers and unions, according to the Commission.

In addition to Express Scripts and Medco, competitors in the market included CVS Caremark—the nation’s second-largest PBM—as well as PBMs owned by large national health plans and some smaller standalone PBMs.

After analyzing the market, the Commission concluded that Express Scripts and Medco were not such close competitors that the elimination of one of these firms would allow the merged entity to unilaterally impose anticompetitive price increases. Medco and CVS Caremark focused on serving the nation’s largest employers, while Express Scripts’ customer base was more heavily skewed towards health plans and mid-size plan sponsors. Changes in the industry also meant that smaller PBMs and those owned by health plans were growing competitors for employer business.

Coordinated interaction among competitors in the market also was unlikely following the merger. The PBM industry was not necessarily conducive to coordination, it was noted.

The Commission also considered the concerns of retail and specialty pharmacies and concluded that there was little risk of the merged company exercising monopsony power. According to the Commission, there was no reason to believe that the merger would lead to lower reimbursement rates to retail pharmacies. Even if the transaction enabled the merged firm to reduce the reimbursement it offers to network pharmacies, there was no evidence that this would result in reduced output or curtailment of pharmacy services generally.

Moreover, evidence did not support concerns that the merged entity would exercise market power to demand more exclusive distribution arrangements from manufacturers of specialty drugs used to treat complex and rare conditions.

Dissent

Calling the transaction a “game changer,” Commissioner Julie Brill issued a dissent from the Commission’s decision to close the investigation. While Commissioner Brill expressed “some discomfort about unilateral effects” from the merger, she reserved her sharpest criticism of the transaction for the likelihood of coordinated effects. Pointing to statements of the parties, Commissioner Brill said: “[I]t is not difficult to conceive how the post-merger duopoly could pull its competitive punches when it comes to bidding for one another’s customers.” The commissioner called on the agency to conduct an analysis of the industry in three years to determine the transaction’s impact on prices to employers.

Reaction

Separately, Senator Herb Kohl (Wisconsin) issued a statement on April 2, saying that he expected the FTC “to carefully monitor the market to ensure that consumers are not harmed by loss of community pharmacies.” Kohl, Chairman of the Senate Judiciary Committee’s Subcommittee on Antitrust, Competition Policy, and Consumer Rights, had sent a letter to FTC Chairman Jon Leibowitz on February 2, expressing his concerns about the proposed transaction.

Class Action on Sam’s Club’s Service Agreement for “As Is” Product Is Certified

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

A federal district court in Camden, New Jersey certified a class action of Sam’s Club members that brought suit against Wal-Mart under the New Jersey Consumer Fraud Act (CFA) for allegedly failing to disclose that its service agreement for “as-is” products actually excluded “as-is” products from coverage.

Sam’s Club, a membership-only retail warehouse club owned by Wal-Mart, offered its members the option of purchasing service plans. The service plans expressly excluded products sold as-is. However, employees offered the service plans on every product sold despite the “as-is” products exclusion from those plans. Members sought certification of a class of Sam’s Club members that purchased “as-is” products as well as service plans after January 26, 2004.

Class Definition

The proposed definition of the class enumerated by the members’ attorney at oral argument was readily ascertainable, according to the court. The class identified a particular group, specified a particular time frame and location, and enumerated a particular way that the retailer’s conduct purportedly caused the class members harm.

The class included all consumers who, from January 26, 2004 to the present, purchased from Sam's Clubs in the State of New Jersey, a Sam's Club Service Plan to cover “as-is” products. Excluded from the class are consumers whose “as-is” product was covered by a full manufacturer's warranty, was a last-one item, consumers who obtained service on their product, and consumers who have previously been reimbursed for the cost of the service plan.

Federal Rule of 23(a) required the purported class representative to show numerosity, commonality, typicality, and adequacy of representation.

The class was potentially as large as 3,500 members, which would satisfy the numerosity requirement. As with the absent class members, the class representative was sold a service plan to cover an as-is product without being informed that the service plan excluded as-is products. Finally, the class representative’s attorney was experienced with class actions and the class members and representative suffered harm from the same alleged course of conduct.

Predominance of Common Questions

Federal Rule of 23(b)(3) states that a class action may be maintained only if questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action was the superior method of adjudication. The predominance requirement tests whether the proposed class is sufficiently cohesive to warrant adjudication by representation.

All three elements of the CFA claim could be proven by common proof since the harm alleged arose from the same company-wide conduct, according to the court.

The decision is Hayes v. Wal-Mart, D N.J., CCH State Unfair Trade Practices Law ¶32,423.