Supplement Manufacturer May Be Liable for Nutrition Claims Under California Consumer Protection Law

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

A supplement purchaser stated California consumer protection law claims against a supplement manufacturer for allegedly making false and misleading advertising statements, the federal district court in Oakland, California, has held.

The majority of the purchaser’s first amended complaint that the manufacturer falsely advertised its Muscle Milk Ready–To-Drink and Muscle Milk Bars was dismissed (CCH State Unfair Trade Practices Law ¶32,442).

The court found that the manufacturer’s use of the term “healthy” in its advertising was difficult to define and there was no evidence that the products actually contained unhealthy amounts of fat.

Healthy Energy, Good Carbohydrates

In the amended complaint, the purchaser presented statements made on the manufacturer’s products and website and television advertisements, specifically that the products contained healthy energy and good carbohydrates.

The second amended complaint contained allegations that relied on the Food, Drug, and Cosmetic Act and Food and Drug Administration (FDA) regulations. The borrowing from the regulations did not impose any unfair burden on the manufacturer and were allowed.

Statements made by the manufacturer that its products contained “Healthy, Sustained Energy” and “25g PROTEIN for Healthy, Sustained Energy” were actionable, according to the court. Although a healthy product is hard to define, the purchaser provided objective standards, such as the FDA requirements, that could be used as evidence that certain contents in the product were not healthful.

However, the statements “good carbohydrates” and “0g Trans Fat” were not actionable. There was no evidence that added sweeteners and sugar were not good carbohydrates or that the amount of trans fats was not in fact 0 grams.

The purchaser also met the reliance requirements of the consumer protection statutes by alleging that she saw and relied on the alleged misrepresentations on the manufacturer’s website and in its television ads.

The decision is Delacruz v. Cytosport, Inc., CCH State Unfair Trade Practices Law ¶32,500.

Antitrust Division Responds to Critics of Settlement in E-Book Price Fixing Case

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

The Department of Justice Antitrust Division has responded to public comments on a proposed consent decree that would resolve civil allegations against three publishing companies for conspiring to fix the prices of e-books.

According to the Justice Department, the settlement is within the reaches of the public interest and provides effective and appropriate remedies for the antitrust violations alleged in the complaint, with respect to the settling defendants.

On April 11, the Department of Justice Antitrust Division filed a complaint against Apple, Inc. and five of the six largest publishers in the United States for conspiring to fix the sales prices of electronic books or e-books. On the same day, the government filed a proposed consent decree (CCH Trade Regulation Reporter ¶51,006) that, if approved by the court, would resolve allegations against three of the publishers: Hachette Book Group (USA), HarperCollins Publishers L.L.C., and Simon & Schuster Inc.

Public Comments

The Justice Department has posted the 868 comments from individuals, publishers, and booksellers—including Apple—on the Antitrust Division website. In addition, it published in the Federal Register on July 27 the website address at which the public comments may be viewed and downloaded. In June, the federal district court in New York City excused the government from publishing the comments in the Federal Register, in view of the costs associated with such publication.

While publication of the public comments and the U.S. response is required by the Antitrust Procedures and Penalties Act, also known as the Tunney Act, the law was amended in 2004 to permit the Justice Department to make public comments on a consent decree available through means other than the Federal Register.

Opposition to Suit or Settlement

The vast majority of the comments opposed the suit and/or the settlement. According to the Justice Department, most of the opposing comments “came from publishers, authors, agents, and bookstores that acknowledged an interest in higher retail e-book prices.” Comments against the government action came from the American Booksellers Association, The Authors Guild, and e-book retailers Barnes & Noble and Apple.

Approximately 70 of the 868 comments favored the suit and settlement. The Consumer Federation of America, the only consumer group to submit a comment on the decree, was among the supporters.

Goals of Settlement

In responding to the comments, the government explained that the terms of the proposed consent decree are designed to accomplish three things: (1) end the current collusion; (2) restore competition eliminated by that collusion; and (3) ensure compliance. The Justice Department rejected suggestions that the consent decree would impose a business model on the e-book industry by prohibiting agency agreements.

“The limitations placed on the terms of agency contracts entered into by Settling Defendants for a period of two years will break the collusive status quo and allow truly bilateral negotiations between publishers and retailers to produce competitive results,” the Justice Department explained. The government did not object to the use of the agency model, only to the collusive use of agency to eliminate competition.

Restoring Competition

To restore competition to the market, the consent decree would prohibit retail price restrictions and most favored nation pricing clauses for two-year and five-year periods, respectively. While commentors expressed concerns that online retailer Amazon might have the ability to harm competition through sustained low or predatory pricing, the government explained that collusion was not acceptable, even in response to perceived anticompetitive conduct.

The consent decree also contains mechanisms commonly used to ensure compliance with a decree, while minimizing administrative costs. The government took issue with suggestions that the consent decree was either too “regulatory” in nature and therefore overbroad or too vague so that it was unenforceable.

The Justice Department concluded that both opposing and supporting comments had at least one element in common: they agreed that entry of the decree likely will reduce retail prices for e-books, at least in the short term.

The consent decree in U.S. v. Apple, Inc., Case 1:12-cv-02826-UA. The Department of Justice response to the public comments were published at 77 Federal Register 44271, July 27, 2012.

Franchisor Breached Franchise Agreements By Failing to Protect, Enhance Brand in Quebec

A Massachusetts-based donut shop franchisor breached its agreements with 21 franchisees of 32 Quebec donut shops by failing to fulfill its contractual obligation to protect and enhance its brand in Quebec, a Quebec Superior Court has decided.

Thus, the franchisees were entitled to damages of (Can.) $16.4 million, representing the loss of the franchisees’ individual investments plus the sales that the franchisees would have realized during the period of 2000-2005 if the franchisor had met its obligations, minus the actual sales that the franchisees experienced during that period. The total amount would be apportioned among the franchisees as directed.

Closing of Franchises

The franchisor attributed the rapid closings of more than 200 of its shops in Quebec in less than a decade to underperforming franchisees and the "Tim Hortons’ phenomenon," the rapid rise to industry dominance of a competing franchise system. However, the cause was the franchisor’s failure to protect and enhance its brand, the most important obligation that the franchisor had assumed in its contracts, according to the court. The franchisor’s defense, an attempt to paint the franchisees as poor operators, was utterly devoid of substance.

All of the plaintiff franchisees had either closed or been sold for a fraction of their traditional value. Until the turn of the century, any of the franchises could have been sold for roughly 50% of annual sales, the court noted. No such value could be attributed to one of the franchises now, the court found. Thus, the franchisees lost their investments in the franchise system as well as profits.

The losses by the franchisees "followed hard upon the heels of the franchisor’s failures as night followed day," the court found. Lost profits flowing from lost sales in a growing market—caused by a franchisor that failed to protect its brand—and the loss of investments made to participate in such market fell readily into the category of damages that was an "immediate and direct consequence of the debtor’s default," the court quoted. Moreover, the losses were foreseeable at the time the agreements were signed by the parties. An underlying assumption of all franchise agreements was that the brand will support a viable commerce, the court reasoned.

The approach taken by the franchisee’s expert quantified the lost profits that the franchisees sustained at the expense of Tim Hortons, the principal beneficiary of the decline of the franchisor’s system in Quebec. Further, the franchisor should compensate the franchisees at least to the extent of the loss of any opportunity to sell their stores at traditional values due to the collapse of the franchisor’s system in Quebec. This was not a case where the court had to estimate future damages, the court explained.

Franchisor’s Counterclaims

The franchisor’s counterclaims against the franchisees for failing to pay royalties, advertising fund contributions, interest and other sums owing pursuant to the parties’ agreements; for damages for defamatory and prejudicial remarks; and for abuse of proceedings were without merit, the court decided. When contracts are fundamentally breached by one party, the other party cannot be held accountable for a subsequent breach by the prejudiced party.

Moreover, no demand letters for any of these counterclaims were ever sent to the franchisees. They arose, as an afterthought, along with the franchisor’s defense to its own breach of the parties’ agreements, the court commented.

The counterclaims grounded in defamation, abuse of proceedings, or for legal fees were not substantiated at trial. Whatever abuse there may have been in the proceedings arose from the reckless and unproven allegations in the franchisor’s defense, the court determined. The counterclaims could not "survive the damage caused to small business operators whose only breach came while trying desperately to survive in a market their franchisor abandoned."

The decision is Bertico, Inc. v. Dunkin’ Brands Canada, Ltd., CCH Business Franchise Guide ¶7412.

Further information regarding CCH Business Franchise Guide appears here.

Pizza Franchisor Could Be Vicariously Liable for Employee’s Injuries

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

Pizza restaurant franchisor Domino’s control over one of its California franchisees was such that Domino’s could be vicariously liable for the sexual harassment and assault inflicted on one of the franchisee’s employees by another of the franchisee’s employees, according to a California appellate court. Thus, a ruling by a California state trial court, granting summary judgment to Domino’s on the injured employee’s claims, was reversed.


The injured employee claimed that both the franchisee and Domino’s were the employers of the harassing employee and were vicariously liable for his actions under the doctrine of respondeat superior. In granting Domino’s motion for summary judgment, the trial court noted that the franchise agreement between Domino’s and the franchisee provided that the franchisee was responsible for "supervising and paying the persons who work in the Store.

The trial court found that the franchisee was an independent contractor and that the harassing employee was not an employee or agent of Domino’s for purposes of imposing vicarious liability. The employee argued on appeal that the language cited by the trial court was limited or qualified by other provisions of the agreement that vested substantial control in Domino's.

Provisions of the agreement substantially limited franchisee independence in areas that went beyond food preparation standards, the court observed. The franchisee's computer system was not within its exclusive control because Domino's had independent access to its data. Moreover, Domino's determined the franchisee's store hours, advertising, the handling of customer complaints, signage, the e-mail capabilities, the equipment, the furniture, the fixtures, the décor, and the method and manner of payment by customers. Domino's also regulated the pricing of items at the counter and home delivery, and set the standards for liability insurance.

Domino's Manager's Reference Guide (MRG) described the specific employment hiring requirements for personnel involved in product delivery, and it describes the documents that must be included in their personnel files, the court found. The MRG required all employees to submit time cards and daily time reports and specified standards for employee hair, facial hair, dyed hair, jewelry, tattoos, fingernails, nail polish, shoes, socks, jackets, belts, gloves, watches, hats, skirts, visors, body piercings, earrings, necklaces, wedding rings, tongue rings, clear tongue retainers, and undershirts, the court noted.

The MRG also specified the standards a franchisee is expected to maintain as minimum guidelines, including requirements in a variety of areas, such as: bank deposits, safes, mobile phone use, store closing procedures, refuse removal, phone caller identification requirements, security, delivery staffing, holiday closings, stereos, tape decks, wall displays, franchisee web sites, in-store conversations, and literature that is allowed in a store.

These requirements raised reasonable inferences supporting the harassed employee’s claim that the franchisee was not an independent contractor, the court decided. Domino's relied on decisions from other states suggesting the language of the franchise agreement was dispositive on the issue of control. However, California courts concluded that the provisions of the agreement are relevant, but not the exclusive evidence of the relationship. Instead, California courts looked to the totality of the circumstances to determine who actually exercises the ultimate control.

The franchisee owner testified that Domino's provided guidelines about the employees he could hire. They had to "look and act a certain way," and he implemented those policies when he hired applicants. The owner’s testimony, if believed by a trier of fact, supported reasonable inferences that there was a lack of local franchisee management independence.

The decision is Patterson v. Domino’s Pizza, LLC, CCH Business Franchise Guide ¶14,855.

Novell’s Antitrust Claims Against Microsoft Fail

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

Computer software developer Novell, Inc., marketer of the word processing application WordPerfect, failed to present sufficient evidence that software and operating system maker Microsoft Corporation committed any anticompetitive acts that violated Sec. 2 of the Sherman Act in maintaining its monopoly in the operating system market, the federal district court in Salt Lake City, Utah, has ruled.

Novell claimed that Microsoft's withdrawal of support for namespace extension application programming interfaces (API) accessible to independent software vendors forced it to try to write customized file open dialog code in order to maintain compatibility with the Windows 95 operating system. This delayed the market entry of its suite of business productivity applications intended to compete with Microsoft Office and preventied several Novell programs from being accepted in the market as middleware.

Microsoft's Withdrawal of Support

Although Novell raised a genuine issue of fact as to whether the reasons for Microsoft's decision to withdraw support for the namespace extensions were pretextual, Microsoft's conduct was not anticompetitive within the meaning of the Sherman Act, the court found. The act of withdrawing support was not itself unlawful, the court noted, as a monopolist generally had no duty to cooperate with a competitor and neither intentional deception for an anticompetitive purpose nor termination of a previously existing profitable relationship was shown.

There was no evidence to support the premise that Microsoft made the decision deceptively because it knew that Novell was using those APIs in the development of its applications and that, by withdrawing support for the APIs, it knew Novell would fall behind schedule. In addition, the claim that Microsoft purposely destroyed a preexisting business relationship was equally flawed. Even after it withdrew namespace extension API support, it continued to provide assistance to Novell and never terminated their relationship.

Franchise Theory

A "franchise theory" posited by Novell—namely, that its applications were so popular that they would have flourished in the market regardless of the operating system on which they ran—was not only unsupported, but actually contradicted by the record.

Moreover, Novell did not present sufficient evidence from which a jury could find that its products would have been successfully developed as middleware but for Microsoft's actions. For a middleware product to have an impact on competition in the operating systems market, it had to be cross-platformed to various operating systems, had to be ubiquitous on the dominant system, and had to expose a sufficient number of APIs of its own to entice ISVs to write applications to it rather than to the operating system on which it sits, the court explained. Novell satisfied none of these requirements.

There was no basis for inferring that Novell's office productivity applications written for Windows 95 via the namespace extension APIs could have been effectively ported to other systems, the court observed. The namespace extension APIs were platform specific. Regarding ubiquity, WordPerfect's share of the word processing market during the relevant period was at most 36 percent, and that was only when personal computers using the DOS platform were included.

It was entirely speculative to assume that Novell's applications would have increased to a substantially greater number of computers using Microsoft's Windows operating system had not Microsoft withdrawn the namespace extension API support, the court said. An argument by Novell that its exposure of APIs that would result in "something less" than the writing of full-featured personal product applications was sufficient to constitute a threat to Microsoft's monopoly was rejected.

Finally, the absence of any evidence that Microsoft's withdrawal of namespace extension API support was the source of any contemporaneous urgency at Novell showed that the claim was "a lawyers' construct" and was not based on an underlying business reality, the court concluded.

The decision is Novell, Inc. v. Microsoft Corp., 2012-2 Trade Cases ¶77,979.

Criminal Conviction of Franchisee President Was Not Good Cause for Termination

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

A pancake restaurant franchisor violated the New Jersey Franchise Practices Act (NJFPA) by terminating a franchise on the basis of the conviction of the president and majority owner of the franchise for endangering the welfare of a child, the federal district court in Newark, New Jersey, has decided.

The conviction was not "directly related to the business conducted pursuant to the franchise" under the meaning of the NJFPA.

The franchisor was not likely to succeed on the merits of its claims that the franchisee’s continued use of the franchisor’s trademarks was unauthorized because, as long as the parties’ agreement remained valid, the franchisee had a license to use those marks. Thus, the franchisor’s motion for a preliminary injunction barring the franchisee from continuing to use its marks was denied.

The franchisor notified the franchisee that it was terminating their agreement pursuant to a provision which granted the franchisor the right to terminate immediately, without notice, upon the conviction of the franchisee or any of its principal shareholders, "of a felony or any other criminal misconduct which is relevant to the operation of the franchise." However, the franchisee continued to operate the restaurant as if it was a franchise and claimed that the termination violated the NJFPA.

The parties’ agreement stipulated that, in order for a termination to be valid, it must be lawful under the NJFPA, the court noted. Under the statute, immediate termination was warranted only when "the alleged grounds are the conviction of the franchisee in a court of competent jurisdiction of an indictable offense directly related to the business conducted pursuant to the franchise."

There was nothing in the record suggesting that the crime occurred at the restaurant or that any other direct factual nexus existed between the conviction and the business of the franchise, the court observed. The court was unwilling to accept that potential damage to the franchisor’s brand, standing alone, was sufficient to satisfy the "directly related" standard of the NJFPA.

The decision is Int’l House of Pancakes v. Parsippany Pancake, CCH Business Franchise Guide ¶14,856.

McCarran-Ferguson Act Bars Antitrust Claims Brought by Ohio Title Insurance Purchasers

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

The McCarran-Ferguson Act, along with Title XXXIX of the Ohio Revised Code, prevented Ohio title insurance purchasers from maintaining antitrust claims against title insurance companies and the Ohio Title Insurance Rating Bureau for conspiring to charge inflated rates through title insurance rate filings, the U.S. Court of Appeals in Cincinnati has decided. Dismissal of the purchasers’ complaint with prejudice was affirmed.

The McCarran-Ferguson Act provides:

“The business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business.” However, “the Sherman Act … shall be applicable to the business of insurance to the extent that such business is not regulated by State law.”

The federal antitrust claims were barred because title insurance rate-making was “the business of insurance” within the meaning of the McCarran-Ferguson Act, and Ohio law regulated title insurance, the court decided. Title insurance rate-setting had the effect of transferring or spreading at least some policyholder risk, was a foundational piece of the policy relationship between the insurer and the insured, and had no application outside the context of insurance. The court rejected the purchasers' argument that the conduct was outside the business of insurance because risk-spreading was not the “true nature” of title insurance.

Further, cooperation among insurers in rate-making activities was permissible under Title XXXIX of the Ohio Revised Code, which regulates insurance. Thus, the alleged conduct did not violate the Valentine Act.

Filed Rate Doctrine

The court acknowledged that the parties briefed and argued whether the filed rate doctrine eliminated the purchasers’ damages claims and injunctive claims that would interfere with an already-filed rate. However, the appellate court did not consider the issue, which was relied upon by the lower court in dismissing the action. The doctrine also was relied upon by most other courts that had addressed title-insurance rate-setting, including the U.S. Court of Appeals in Philadelphia in two recent decisions: McCray v. Fidelity Nat’l Title Ins. Co., 682 F.3d 229, 2012-1 Trade Cases ¶77,922, and In re New Jersey Title Ins. Litig., 2012-1 Trade Cases ¶77,921.

The filed rate doctrine prevents private parties from recovering antitrust damages based on a rate properly filed with, and approved by, an appropriate regulatory body, according to the court. However, the doctrine did not remove actors from all antitrust scrutiny. By contrast, the McCarran-Ferguson Act barred all federal antitrust actions involving the business of insurance, unless the alleged antitrust violation was an “agreement to boycott, coerce, or intimidate, or [an] act of boycott, coercion, or intimidation.”

Because the McCarran-Ferguson Act and Title XXXIX of the Ohio Revised Code were complete bars to the purchasers’ federal and state antitrust claims, the filed-rate doctrine’s limitation on remedy was irrelevant.

The July 17 decision is Katz v. Fidelity National Title Insurance Co., 2012-1 Trade Cases ¶77,972.

False Ad Claims Based on Letter, E-Mail Proceed

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

Organ Recovery Systems (ORS), a manufacturer of organ preservation solutions, stated a claim of false advertising under the Lanham Act and Illinois consumer protection statutes by asserting injury from an allegedly misleading letter sent by Preservation Solutions, Inc. (PSI) to organ procurement organizations (OPOs), the federal district court in Chicago has ruled.

ORS also stated a claim of false advertising under the Lanham Act and Illinois consumer protection statutes against BTL Solutions for allegedly sending to organ procurement professionals a broadcast e-mail falsely stating that BTL enabled FDA approval of a label change for the room-temperature storage of ORS’s UW solution.

Commercial Advertising or Promotion

PSI contended that “actionable advertising must be anonymous” and ORS alleged only person-to-person statements by PSI. However, PSI’s letter allegedly was received by potential ORS customers throughout the country, the court observed. The fact that the letter was addressed “Dear OPO Administrator” rather than to a named individual or business supported ORS’s suggestion that it was a mass unsolicited communication.

Even if the letter was specifically targeted to OPOs known by PSI, ORS alleged that the letters were a generalized solicitation rather than an individualized communication. For this reason, ORS’s allegations satisfied the “commercial advertising or promotion” element of a Lanham Act false advertising claim, the court determined. ORS’s claims that three OPO employees expressed confusion about the letters could support a finding that ORS was likely to be injured by allegedly misleading statements in the letters.

BTL’s statements could constitute commercial speech, and its e-mail was an anonymous communication to a large group that would satisfy the Lanham Act’s test for commercial advertising or promotion, the court added. Contrary to BTL’s contention that ORS failed to allege a significant connection between the conduct at issue and Illinois, which both the Illinois Uniform Deceptive Trade Practices Act and Consumer Fraud Act required, it was likely that the disputed communications originated in Illinois and that ORS felt harm in Illinois.

Counterclaims

BTL could pursue a Lanham Act false advertising counterclaim against ORS for posting on its website allegedly false statements that it had FDA approval to sell its SPS-1 solution with a label indicating that the solution does not need to be filtered before use, the court also decided. ORS presented documents consistent with its assertion that the FDA had approved the practices at issue.

Even were these documents to be considered on a motion to dismiss, however, neither the counterclaim nor these documents contained sufficient details about FDA practice for the court to say that the letter constituted “approval” for purposes of the false advertising claim, according to the court.

PSI failed to state a claim of “passing off,” under the Lanham Act and Illinois consumer protection statutes, by making conclusory allegations that ORS led customers to believe that ORS-sold solution was PSI’s product, the court concluded.

The decision is Organ Recovery Systems, Inc. v. Preservation Solutions, Inc., CCH Advertising Law Guide ¶64,733.

Further details regarding CCH Advertising Law Guide appear here.

FTC Order Dissolving Merger of Battery Separator Makers Upheld

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

More than four years after Polypore International Inc. acquired rival battery separator manufacturer Microporous Products L.P., the U.S. Court of Appeals in Atlanta has determined that the transaction was anticompetitive.

The appellate court affirmed a December 2010 opinion (2010-2 Trade Cases ¶77,267) of the FTC, which held that the merger of the two producers of battery separators for flooded lead-acid batteries was illegal in three of the four North American markets identified in the agency’s complaint. A Commission order requiring Polypore’s divestiture of Microporous also was upheld.

Decreased Competition, Higher Prices

According to the FTC’s 2008 complaint, the consummated transaction led to decreased competition and higher prices in several North American markets for battery separators, a key component in flooded lead-acid batteries. The four markets identified were: (1) deep-cycle separators for batteries used primarily in golf carts; (2) motive separators for batteries used primarily in forklifts; (3) automotive separators used in car batteries used for starter, lighter, and ignition (SLI) power; and (4) uninterruptible power supply (UPS) separators used in batteries that provide backup power in the event of power outages.

The complaint stated that Polypore’s acquisition of Microporous left only two flooded-lead acid battery separator companies in North America—Polypore and Entek International, LLC—and that Entek operates only in the automotive separator market.

Merger of Competitors

Before the acquisition, Polypore and Microporous were competitors in each relevant market, and Microporous was uniquely situated to compete with Polypore for North American customers due to its location and the breadth of product offerings. Polypore and Microporous were alleged to be direct competitors in the deep-cycle battery separator market, and the acquisition was purportedly a merger to monopoly in that market.

Similarly, the companies were alleged to be direct competitors in the North American motive separator market. Thus, the merger led to a monopoly in that market. Polypore and Entek were direct competitors selling SLI separators, but Microporous was preparing to enter the automotive separator market, it was alleged.

The Commission decided that the transaction reduced competition in three of the relevant markets—SLI, motive, and deep-cycle—but not for the fourth, UPS batteries. On appeal, Polypore contended that the Commission improperly analyzed the transaction’s impact in the those three alleged markets.

Presumption of Illegality

The court rejected Polypore’s argument that the Commission should not have applied a presumption of illegality and should not have treated Microporous as an actual competitor. Polypore had contended that the Commission should have used only the potential competition doctrine, and not the presumption of U.S. v. Philadelphia National Bank (1963 Trade Cases ¶70,812) because the acquired firm had not entered the SLI market at the time of the acquisition.

However, Microporous was already making similar separators and had purchased a new production line that could produce the SLI separators. It had begun discussions with several companies, had produced a sample product, and had even submitted quotes and entered into memoranda of understanding with one large customer.

Polypore considered the acquisition as a way to remove a competitive threat in the market. In order to overcome the Philadelphia National presumption, Polypore would have had to show that the merger to duopoly did not have an anticompetitive effect. It failed to do so. Thus, the Commission correctly found that the merger substantially lessened competition in the SLI market.

Product Market

The Commission also properly found that the two firms’ separator products for deep-cycle batteries were part of the same product market. Polypore argued that the Microporous’s pure rubber separators were recognized as being superior in deep-cycle applications and that customers were willing to pay a premium for that superiority. However, customers were willing to substitute Polypore’s product when they could in order to keep prices lower.

Although there were distinct prices, there were not distinct customers. The products were used for slightly different purposes, but both were used in deep-cycle applications and both were made in the same type of production facilities.

The Commission did not err when it held that Polypore had not shown that Entek was a participant in the motive battery separator market or that it had plans to enter it to counteract any anticompetitive effects of the merger to monopoly in that market. It was not enough that Polypore contended that Entek could easily adjust its production line to manufacture motive battery separators or that Entek produced motive separators in the past and had expressed interest in resuming that role.

Divestiture Order

The court upheld the FTC order of complete divestiture of the acquired assets. It rejected Polypore’s contention that the divestiture order was too extensive because it included an Austrian plant. The company argued that the relief was beyond the authority of the agency, noting that the Commission had specifically limited the relevant markets to North America. The FTC had broad authority in fashioning relief and justified the divestiture of the Austrian plant. The Commission reasoned that the Austrian plant needed to be divested to restore the competition eliminated by the acquisition and provide the acquirer with the ability to compete.

FTC Reaction

“The U.S. Court of Appeals decision affirms that Polypore's acquisition of Microporous was anticompetitive, and it ensures that consumers will benefit from continued vigorous competition in the market for battery components,” said Commissioner Edith Ramirez in a July 12 statement following the issuance of the decision. “Requiring Polypore to divest its former rival Microporous means there will be more opportunities for consumers to buy quality products at a lower cost.”

The decision is Polypore International, Inc. v. Federal Trade Commission, 2012-1 Trade Cases ¶77,970.

Credit Card Issuers to Pay $6 Billion to Settle Swipe Fee Price Fixing Claims

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

Visa, MasterCard, and other major U.S. financial institutions have reached a settlement totaling over $6 billion to resolve allegations that credit card issuers conspired to fix swipe fees, or charges that retailers pay to accept credit cards.


The settlement in the protracted legal dispute was announced by the U.S. District Court for the Eastern District of New York.

Under the terms of the settlement, merchants will be allowed to impose additional fees on consumers using credit cards. Merchants, however, have agreed to limit the level and circumstances in which they impose such fees. The fees will not be allowed if they are prohibited by state law, and consumers must be made aware of any additional fees at the point-of-sale and on the receipt.

In addition, merchants will receive a 10 basis points reduction in credit interchange rates for a period of eight months, which is valued at about $1.2 billion.

“The reforms achieved by this case and in this settlement will help shift the competitive balance from one formerly dominated by the banks which controlled the card networks to the side of merchants and consumers,” said K. Craig Wildfang, co-lead counsel and partner at Robins, Kaplan, Miller & Ciresi LLP, representing class plaintiffs in the case. He added that over time, reforms produced by the settlement “should help reduce card-acceptance costs to merchants, which in turn, will result in lower prices for all consumers.”

Visa chairman and chief executive officer Joseph Saunders said settling the case “is in the best interests of all parties.” MasterCard General Counsel Noah Hanft added, “although we have strong defense to all claims, a settlement avoids years of litigation and uncertainties that are inherent in such cases.”

The Electronic Payments Coalition praised the settlement, saying it was in “stark contrast to that of the Durbin Amendment, which was passed in the dark of night with no review of its consequences and virtually no public debate.” The group said that the agreement “should send a signal to Congress that it is wrong to pick winners and losers in a complex dispute between two industries.”

Meanwhile, the National Association of Convenience Stores said it would reject the settlement because it fails to introduce competition and transparency. The group said the card companies will be able to “continue to dictate the prices banks charge and the rules that constrain the market, including for emerging payment methods, particularly mobile payments.”

The case is In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, No. 05-MD-1720 (JG)(JO), U.S. District Court, Eastern District of New York.

iPad Data Plan Bait and Switch Class Claims Survive

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

AT&T Mobility was denied a request to strike class allegations by purchasers of 3G-enabled iPads claiming common law fraud and California consumer protection law violations by Apple and AT&T Mobility on a “bait and switch” theory with regard to the availability of a flexible unlimited data option, in a case before the federal district court in San Jose.

Flexible, Unlimited Data Plan

Apple’s and AT&T’s advertising, including statements by Apple CEO Steve Jobs, allegedly led the purchasers to believe that they would have the flexibility of switching in and out of an unlimited data plan based upon their monthly needs. Just weeks after the iPad's release, Apple and AT&T announced that they would discontinue providing the unlimited data plan.

The purchasers sought damages and injunctive relief, including an order mandating restoration of the advertised flexible, unlimited data for a reasonable period. AT&T failed to demonstrate lack of commonality and predominance, and that the proposed nationwide class and claims for injunctive relief were improper.

Common Questions

A purchaser who would be a member of the proposed AT&T non-subscriber class, not required to arbitrate claims against AT&T, identified common questions central to his claims that class members bought a 3G-capable iPad because of the unlimited data plan, according to the court. The purchaser alleged that the key misrepresentation—that purchasers of a 3G-capable iPad could later upgrade to the unlimited data plan and switch in and out of the plan—was made on a consistent basis by the defendants to the entire class. If the purchaser could prove his allegations, individualized inquiry might not be required to determine what particular channel a purchaser used to acquire his iPad, the court determined.

There was no evidence that purchasers who never activated their iPad’s for AT&T service were aware that AT&T reserved the right to change its data plans. No bar appeared to pursuing class-wide injunctive relief under the California Unfair Competition Law and False Advertising Law.

Nationwide Class

A nationwide class could not be held improper because there were too many preliminary questions that could not be resolved at this stage of the case, including whether California actually had significant contacts with the claims against AT&T, the strength of the interests those contacts would create, how many states' laws were implicated, and how many were materially different from California law, the court observed.

The opinion in Apple and AT&T iPad Unlimited Data Plan Litigation will be reported at CCH Advertising Law Guide ¶64,730.

Further information about CCH Advertising Law Guide appears here.

Jury Finds Toshiba Conspired to Fix Prices for TFT-LCD Panels

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

A federal jury in San Francisco on July 3 found Toshiba Corporation liable for participating in a global price fixing conspiracy in the market for Thin Film Transistor Liquid Crystal Display (TFT-LCD) panels. An $87 million verdict in favor of direct purchasers of TFT-LCD panels was entered against the company.

The private class action followed a Department of Justice Antitrust Division investigation into the industry. A number of TFT-LCD producers have pleaded guilty to federal antitrust charges, and many have settled the class action claims. The U.S. government has not charged Toshiba with any antitrust violations. TFT-LCD panels are used in a number of products, including but not limited to computer monitors, laptop computers, and televisions.

Toshiba issued a statement on July 4, saying that it “believes that the jury’s verdict is in error as to the finding of wrongdoing on Toshiba’s part.” The company has consistently maintained that there has been “no illegal activity on its part in the LCD business in the United States.” The statement noted that, given credits for settlements by other defendants, Toshiba did not expect to pay any damages as a result of the verdict, even after trebling, which would amount to $261 million.

According to Richard Heimann of Lieff Cabraser Heimann & Bernstein, LLP, co-lead trial counsel for plaintiffs, settlements had been reached with ten other defendant manufacturers for a combined value of $430 million. Toshiba was the only defendant to proceed to trial.

A special verdict asked the jury to unanimously determine whether the plaintiffs proved by a preponderance of the evidence:

• That Toshiba knowingly participated in a conspiracy to fix prices of TFT-LCD panels;

• That the conspiracy involved TFT-LCD panels and/or finished products (notebook computers, computer monitors and televisions containing TFT-LCD panels) imported into the United States;

• That the conspiracy produced substantial intended effects in the United States;

• That the conspiracy involved conduct which had a direct, substantial, and reasonably foreseeable effect on trade or commerce in the United States; and

• That members of the two separate classes of direct purchasers were injured as a result of the conspiracy and the amount of damages suffered as a result of that injury.

The case is In re: TFT-LCD (Flat Panel) Antitrust Litigation, MDL No. 1827.

U.S. Will Not Challenge Nuclear Power Plant Operator Collaboration

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

A proposal by seven nuclear power plant operators to share resources and coordinate best practices and other operational activities will not be challenged by the Department of Justice Antitrust Division.

In the first business review letter issued in more than six months, Joseph Wayland, Acting Assistant Attorney General in charge of the Antitrust Division, said that the Antitrust Division had no present intention to challenge a proposed venture to be named the STARS Alliance LLC.

“To the extent that the proposed cooperative activities increase efficiencies that result in lower costs, increased output or increased safety, the proposed conduct could have a procompetitive effect,” according to the letter.

The Justice Department noted that the cooperative activities STARS proposes to undertake should not have any adverse effect on competition. STARS members would represent 13 of the 69 operating commercial nuclear pressurized water reactors in the United States and 13 of the 104 operating commercial nuclear reactors in the United States.

The STARS members, for the most part, are in separate geographic areas and do not compete against each other for the sale of electricity. In the two instances where members both have reactors in the same electricity transmission organization, the members’ nuclear units are not likely to have an impact on price. The members will be prohibited from sharing competitively-sensitive pricing or marketing information, according to the Justice Department.

The members of the proposed STARS Alliance each operate single nuclear electric generation plants of a similar design – pressurized water reactors – and vintage.

The STARS Alliance participants are: Union Electric Co., with its Callaway plant in Missouri; Arizona Public Service Co., with its Palo Verde plant in Arizona; Luminant Generation Company LLC, with its Comanche Peak plant in Texas; Pacific Gas and Electric Co., with its Diablo Canyon plant in California; Southern California Edison Co., with its San Onofre plant in California; STP Nuclear Operating Co., with its STP plant in Texas; and Wolf Creek Nuclear Operating Co., with its Wolf Creek plant in Kansas.

The July 3 business review letter is STARS Alliance LLC, Business Rev. Ltr. No. 12-1, CCH Trade Regulation Reporter ¶ 44,112.

Apple’s Collection of iPhone Data Could Violate California Law

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

Users of mobile applications (“apps”) on Apple’s “iOS” devices (iPhone, iPad, and iPod Touch, etc., or “iDevices”) could go forward with claims under California’s Consumers Legal Remedies Act and Unfair Competition Law against Apple for violating their privacy rights by unlawfully allowing third-party apps that run on the devices to collect and make use of personal information, for commercial purposes and without users’ knowledge or consent, the federal district court in San Jose, California has ruled.

The court dismissed the users’ claims against Apple and mobile app developers for violations of the Stored Communications Act, the Wiretap Act, the Computer Fraud and Abuse Act, and California’s constitutional right to privacy.

Two Putative Classes

The users’ amended consolidated complaint asserted claims with respect to two putative classes of individuals. The first class, referred to as “the iDevice Class,” contended that Apple-approved apps created by third-party companies (Admob, Inc., Flurry, Inc., AdMarval, Inc., Google, Inc., and Medialets, Inc., collectively, “Mobile Industry Defendants”) unlawfully collected information about the users, including their addresses and current whereabouts, gender, age, zip code, time zone, and information about which functions the users performed on the app. They alleged that Apple violated its express privacy policy by allowing the Mobile Industry Defendants to design apps with the capability to track and collect data about their app use or other personal information.

The second class, referred to as the “Geolocation Class,” consisted of iDevice purchasers who alleged that they “unwittingly, and without notice or consent transmitted location data to Apple servers.” They alleged that, starting in July 2010, Apple began intentionally collecting data on their precise geographic location and storing that information on the iDevice in order to develop a database about the geographic location of cellular towers and wireless networks. They asserted that Apple continued collecting geolocation information about them even after they switched off the location services settings on their iDevices, despite the fact that Apple had represented that they could prevent the collection of such data in that way.

Article III Standing

Both the iDevice Class and the Geolocation Class users alleged sufficient injury to have standing to sue under Article III of the U.S. Constitution, the court decided. In their initial complaint, the users had relied on a theory that collection of personal information itself created a particularized issue for purposes of standing, which the court rejected (CCH Privacy Law in Marketing ¶60,676).

In their amended complaint, the users’ allegations had been significantly developed to allege particularized injury, in the court’s view. The users articulated additional theories of harm beyond their theoretical allegations that personal information has independent economic value. In particular, they alleged actual injury, including diminished and consumed iDevice resources, such as storage, battery life, and bandwidth; increased, unexpected, and unreasonable risk to the security of sensitive personal information; and detrimental reliance on Apple’s representations regarding the privacy protection given to users of iDevice apps.

In addition, the users described the specific iDevices used, the specific defendants that allegedly accessed or tracked their personal information; which apps they downloaded that accessed their personal information; and what harm resulted from the access or tracking of their information. They also identified the types of information collected, such as their home and workplace locations, gender, age, zip code, terms searched, and ID and password for specific app accounts.

The users also identified an additional basis for Article III standing, the court said. The injury required by Article III may exist by virtue of statutes creating legal rights, the violation of which creates standing. The users alleged violations of their statutory rights under the Wiretap Act and the Stored Communications Act. The alleged injuries were fairly traceable to the actions of the defendants. The Geolocation Class asserted that Apple intentionally designed its software to retrieve and transmit geolocation information located on its customers’ iPhones to Apple’s servers.

The iDevice Class alleged that Apple designed its products and App Store to allow individuals to download third-party apps and that Apple represented to users that it took precautions to safeguard their personal information. The app developers were accused of accessing personal information without users’ knowledge or consent. These allegations were sufficient to establish standing, the court concluded.

Stored Communications Act

The users’ claims under the Stored Communications Act (SCA) failed because the SCA was not applicable to the alleged conduct by Apple and the Mobile Industry Defendants, the court determined. Stating an SCA claim requires an allegation that the defendants accessed without authorization a “facility through which electronic communication service is provided.” The users’ mobile devices did not meet the SCA’s definition of “facility.” The users’ iDevices did not provide an electronic communications service simply by virtue of enabling use of electronic communication services.

In addition, the storage of real-time location information and other data on the iDevices did not qualify under the SCA as “electronic storage,” the court said. The iDevices stored location data for up a year; such storage did not constitute the type of temporary, intermediate storage of data incidental to the transmission of the data.

Wiretap Act

The users asserted that Apple’s collection of precise geographic location data from WiFi towers, cell phone towers, and GPS data on users’ devices constituted “interceptions” of data prohibited by the Wiretap Act. However, such data was not “content” covered by the Wiretap Act, the court said. Data automatically generated about a telephone call did not constitute “content” because it contained no information about the substance of the communication. The geolocation data was generated automatically and was not part of the information intentionally communicated by the users.

Computer Fraud and Abuse Act

The court also rejected the users’ Computer Fraud and Abuse Act (CFAA) claims. Apple had the authority to access iDevices and to collect geolocation data as a result of the voluntary installation of software by the users and, therefore, could not have violated the CFAA. In addition, the users failed to allege damage or “impairment” to their devices or an interruption of service.

California Constitutional Right to Privacy

Collection of the users’ data by Apple and the Mobile Industry Defendants did not violate the users’ right to privacy under the California Constitution, the court found. The alleged disclosure of device identifier numbers, personal data, and geolocation information from the users’ iDevices—even if transmitted without their knowledge or consent—was not an egregious breach of social norms, as required to state a claim for invasion of privacy. Rather, it was routine commercial behavior, according to the court.

California Consumer Legal Remedies Act

Apple could be liable for violating California’s Consumer Legal Remedies Act (CLRA), the court determined. The users sufficiently alleged that they sustained harm as a result of the alleged data collection practices. With respect to geolocation data, the users alleged that Apple had stored such data on the users’ iDevices for Apple’s own benefit, at a cost to the users, and the that if Apple had disclosed the true cost of the geolocation features, the value of the iDevices would have been materially less than what the users paid.

In addition, the users contended that because of Apple’s failure to disclose its practices with regard to collection of personal data via apps, the users overpaid for their iDevices. At the pleadings stage, the users sufficiently alleged that they were consumers under the CLRA, and their allegations related to the purchase of goods, the court said.

California Unfair Competition Law

The court also decided that the users could go forward with their claims under the California Unfair Competition Law (UCL). The users had standing under the UCL because they alleged that they paid more for their iDevices than they would have if Apple had disclosed its privacy practices. Apple’s conduct could be illegal under the Consumers Legal Remedies Act and therefore covered by the UCL. In addition, the conduct could be “unfair,” for purposes of the UCL. The users met their burden of pleading fraud with particularity, according to the court.

The decision is In re iPhone Application Litig., CCH Privacy Law in Marketing ¶60,775.

Further details regarding CCH Privacy Law in Marketing appears here.

Direct Purchaser Class Certified in Railroad Fuel Surcharge Case

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

The federal district court in Washington, D.C. has approved a class of direct purchasers to pursue price fixing claims against the largest railroads in the United States.

The complaining customers allege that the railroads conspired to fix the prices of rail freight transportation services through the use of rail fuel surcharges. These surcharges were fees added to customers' bills to compensate the defending railroads for increased fuel costs. According to the plaintiffs, the railroads collectively implemented a uniform rail fuel surcharge program and imposed artificially high surcharges that exceeded their increased fuel costs.

The court granted certification of a class of entities or persons that during the relevant period (July 1, 2003, until December 31, 2008) purchased rate-unregulated rail freight transportation services directly from one or more of the defendants and paid a challenged rail freight fuel surcharge. Eight named plaintiffs were designated as the class representatives.

The court also appointed two firms that had served as interim co-lead class counsel as co-lead class counsel for the class.

According to the court, designation of the firms as co-lead class counsel was in the best interests of the class because both firms:

(1) Had zealously represented the interests of the class in litigating the case while serving as interim co-lead class counsel;

(2) Had extensive relevant experience in complex antitrust litigation and knowledge of the law applicable to the case; and

(3) Were willing to commit the resources necessary to represent the class.

The decision is In Re: Rail Freight Fuel Surcharge Antitrust Litigation, 2012-1 Trade Cases ¶77,945.