Trade Regulation Talk

FTC Will Not Seek Review in Lundbeck Case

2012-01-31T21:57:00.003-06:00

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

The FTC will not petition the U.S. Supreme Court for review of a decision of the U.S. Court of Appeals in St. Louis (2011-2 Trade Cases ¶77,570), rejecting a challenge to a 2006 acquisition involving global pharmaceutical company Lundbeck, Inc.

The appellate court affirmed judgment in favor of the drug company (2010-2 Trade Cases ¶77,160), based on the government’s failure to identify a valid relevant product market.

Decision “Profoundly Wrong”

The decision was made not to pursue review, despite a determination that the result in the case “was profoundly wrong, reflecting a serious misunderstanding by the District Court of the dynamics of this market and of the competitive consequences of an acquisition that allowed one company to control the only two pharmaceutical treatments for a life-threatening medical condition and raise prices by nearly 1300 percent,” according to a statement expressing the views of Chairman Jon Leibowitz, Commissioner Edith Ramirez, and Commissioner Julie Brill.

The three commissioners decided that it would be better to “turn our energies to other enforcement priorities.”

Commissioner Rosch’s Views

In a separate statement, Commissioner J. Thomas Rosch outlined the “many reasons for seeking Supreme Court review of the Eighth Circuit’s panel and en banc decisions in the Lundbeck case, which blessed the district court’s decision.”

According to Rosch, the courts erred in determining the product market. The first error of law was that, in holding that the two drugs at issue in the case—Indocin and NeoProfen—did not compete with each other in the same relevant product market, the district and appellate courts interpreted “cross-elasticity of demand” to mean exclusively cross-price elasticity of demand. Second, by erroneously focusing only on cross-price elasticity of demand, the district court allowed an economic expert’s opinion to trump the record facts regarding how the products were being marketed, purchased, and used in the real world.

Rosch also questioned the district court’s failure to consider the parties’ own business documents, as well as a hypothetical market.

The statement on the closing of the investigation of Lundbeck, Inc., Dkt Nos. 10-3458, 10-3459, FTC No. 0810156, appears at CCH Trade Regulation Reporter ¶16,711.

Nationwide Class Certification of California Ad Claims Vacated

2012-01-30T22:03:00.001-06:00

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

Certification of a nationwide class was vacated by the U.S. Court of Appeals in San Francisco in an action under California law asserting that Honda’s advertisements misrepresented the characteristics of a braking system.

California Unfair Competition Law, False Advertising Law, and Consumers Legal Remedies Act could not be applied to the entire nationwide class, and all consumers who purchased or leased an Acura RL automobile could not be presumed to have relied on the advertisements, the court held.

Variances in State Consumer Laws

The law of multiple jurisdictions applied to any nationwide class of purchasers or lessees, according to the court. Variances in state consumer laws overwhelmed common issues and precluded predominance for a single nationwide class.

Reliance on Advertising

Even if the class was restricted only to those who purchased or leased their car in California, common issues of fact would not predominate in the class as currently defined because it almost certainly included members who were not exposed to, and therefore could not have relied on, Honda’s allegedly misleading advertising, the court determined.

Honda’s product brochures and TV commercials fell short of the “extensive and long-term [fraudulent] advertising campaign” at issue in In re Tobacco II Cases (Cal. S. Ct. 2009), CCH Advertising Law Guide ¶63,423.

In the absence of a massive advertising campaign, the relevant class had to be defined in such a way as to include only members who were exposed to advertising that was alleged to be materially misleading, the court concluded.

The decision is Mazza v. American Honda Motor Company, Inc., CCH Advertising Law Guide ¶64,536.

Involvement in Embezzlement Scheme Was Not a Civil RICO Violation

2012-01-27T17:43:00.001-06:00

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

A federal district court erred in finding that two individuals had violated RICO by engaging in a scheme to embezzle millions of dollars from an equipment manufacturer through the fraudulent issuance and receipt of accounts payable checks, the U.S. Court of Appeals in New Orleans has ruled.

Summary judgment in favor of the manufacturer was therefore reversed and the case was remanded for further proceedings.

Operating, Managing Racketeering Enterprise

The manufacturer failed to show that the two defendants had operated or managed the alleged racketeering enterprise in violation of RICO §1962(c). The fraudulent receipt of corporate funds, by itself, was insufficient to show that the individuals had operated the scheme that stole those funds.

Investment in Enterprise

The company also failed to show that it was injured by the investment of racketeering proceeds. More specifically, it failed to proffer any facts to show how the embezzled funds were invested into an enterprise or how the company was injured by that investment. Accordingly, its claim under RICO §1962(a) was defective.

RICO Conspiracy

Finally, the company failed to show that the individuals had engaged in a RICO conspiracy under §1962(d). The district court relied on the U.S. Supreme Court’s holding in Salinas v. United States (RICO Business Disputes Guide ¶9382) to support its finding that the two individuals were liable for participating in the alleged conspiracy.

Although the Salinas court held that a defendant needed only to know of and agree to the overall objective of a RICO offense to be held criminally liable for a RICO conspiracy, the Supreme Court’s subsequent holding in Beck v. Prupis (RICO Business Disputes Guide ¶9869) made it clear that to establish a civil RICO conspiracy, a plaintiff must “allege injury from an act that is independently wrongful under RICO.”

Therefore, to prevail on its civil RICO conspiracy claim against the two defendants, the company had to allege an injury from an act on their part that was independently wrongful under RICO. This it failed to do.

The decision is Davis-Lynch, Inc. v. Moreno, CCH RICO Business Disputes Guide ¶12,162.

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

Former Comcast Subscribers Lacked Standing to Bring California Class Action

2012-01-26T22:34:00.002-06:00

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

Putative class representatives lacked standing to bring California Unfair Competition Law (UCL) and Consumer Legal Remedies Act (CLRA) class action claims against Comcast because they lacked the requisite injury in fact, according to the federal district court in Fresno, California.

The representatives were former subscribers to Comcast’s telephone services who alleged the company adopted deceptive policies and practices relating to post-cancellation billing of consumers who seek to port their telephone number to another service provider, provided unclear and inaccurate billing statements, and used arcane and confusing final billing statements. The class representatives received a refund of funds deducted from the representatives’ accounts via direct payments.

Injury in Fact

To have standing under the UCL, the representatives needed to show an injury in fact stemming from an unfair business practice. The CLRA required the representatives to show a tangible increased cost or burden resulting from an alleged unlawful practice. Because the representatives received refunds, there was no evidence of an injury in fact or economic loss. The representatives’ argument that the refund was inadequate was too speculative to plead a concrete injury.

None of the putative class members suffered an injury in fact, according to the court. Although class members need not submit evidence of personal standing, a class must be defined in a way that anyone within it would have standing. There was no evidence that the refund calculation was incorrect or otherwise resulted in an injury.

Common Issues

Even if the class representatives had standing to pursue the UCL and CLRA claims, the class did not meet the requirements of Federal Rule of Civil Procedure 23. Rule 23(a)(2) requires questions of law or fact common to the class. In Wal-Mart v. Dukes, 131 S.Ct. 2541 (2011), the Supreme Court held that class representatives are required to identify how common points of facts and law will drive or resolve the litigation. The representatives failed to properly articulate common issues, according to the court.

The decision is Gonzales v. Comcast Corporation, CCH State Unfair Trade Practices Law ¶32,387.

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

Class Certification Improperly Denied in Hospital Merger Challenge

2012-01-25T17:13:00.001-06:00

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

A federal district court abused its discretion when it denied certification to a class of direct purchasers of hospital services in an action challenging a hospital merger, the U.S. Court of Appeals in Chicago has ruled.

Because the denial of class certification was erroneous as a matter of both fact and law, the district court's denial of class certification (2010-1 Trade Cases ¶77,001) was vacated and the matter remanded for further proceedings.

Perfect v. Good Evidence

The degree of uniformity that the district court demanded simply was not required for class certification under Rule 23(b) (3) of the Federal Rules of Civil Procedure, the appellate court ruled. The court explained “it is important not to let a quest for perfect evidence become the enemy of good evidence.”

Antitrust Impact on Proposed Class

The central issue under Rule 23(b) (3) was whether the purchasers could show on a class-wide basis the antitrust impact of the merged entity's actions on the proposed class. Common questions clearly predominate in regard to whether the merger violated federal antitrust law, the appellate court decided. The district court incorrectly applied Rule 23(b)(3)'s predominance requirement when it made uniformity of nominal price increases following the merger a condition for class certification. The plaintiffs’ expert, an economist who specialized in the health care industry, could use common evidence and his proposed methodology to estimate the antitrust impact, if any, of the merger on the members of that class.

Admissibility of Economic Analysis

In addition, the district court failed to determine whether the defense expert's report and opinions were admissible under Federal Rule of Evidence 702 before ruling on the motion for class certification. Before the hearing on class certification, the plaintiffs moved to exclude the report of a private consulting economist. The plaintiffs argued that the expert’s “economic analyses are fundamentally defective” and that the expert’s opinion “should be stricken as a whole.”

The district court's refusal to rule on the plaintiffs' Daubert motion was an error, since the expert’s opinions were critical to the district court's decision. The expert’s report and testimony laid the foundation for the merged entity’s entire argument in opposition to class certification, and the district court relied on the expert’s reasoning when making its decision.

The decision is Messner v. Northshore University Healthsystem, 2012-1 Trade ¶77,763.

Pozen Resigns as Acting Chief of Antitrust Division

2012-01-24T16:32:00.000-06:00

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

Less than six months after her appointment as Acting Assistant Attorney General in charge of the Department of Justice Antitrust Division, Sharis A. Pozen has announced her resignation, effective as of April 30, 2012, according to a January 23 announcement.

Pozen came to the Justice Department in February 2009. She served as chief of staff and counsel and as a key deputy to former Assistant Attorney General Christine A. Varney. Upon Varney’s departure from the division, Pozen was named acting antitrust chief on August 4, 2011.

Prior to coming to the Antitrust Division, Pozen was a partner in the Antitrust, Competition and Consumer Protection Group of Hogan & Hartson (now Hogan Lovells). She also worked for five years at the FTC as an attorney advisor, as assistant to the Bureau of Competition Director, and as a staff attorney.

There was no word on who would replace the Acting Assistant Attorney General. However, there is speculation in the media that William J. Baer, head of the antitrust group at the Washington, D.C. office of Arnold & Porter, LLP., might be on the short-list of candidates. Baer has held a number of high-level positions at the Federal Trade Commission, including director of the FTC’s Bureau of Competition.

Under Pozen’s brief leadership, the Antitrust Division challenged the now-abandoned merger of AT&T Inc. and T-Mobile USA Inc. During her tenure as antitrust chief, the Antitrust Division also successfully blocked the proposed acquisition by H&R Block Inc. of TaxACT, a digital do-it-yourself tax-preparation software provider, at the government’s request (2011-2 Trade Cases ¶77,678).

Among the major accomplishments in the criminal area were the Justice Department’s first enforcement actions targeting price fixing and bid rigging in the automotive parts industry. As part of the investigation, Furukawa Electric Co. Ltd., a supplier of automotive wire harnesses and related products, has pleaded guilty and been fined $200 million fine for its involvement in the conspiracy. That investigation, among many others, is ongoing.

Gasoline Franchisor Could Have Violated PMPA’s Notice, Delivery Requirements

2012-01-23T22:57:00.000-06:00

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

A gasoline station franchisor could have violated the Petroleum Marketing Practices Act (PMPA) by terminating its relationship with a franchisee without delivering the notice in the prescribed manner and 90 days prior to termination, a federal district court in Detroit has ruled. Contrary to the franchisor’s claims, the asserted violations of the PMPA were timely under the Act’s statute of limitations.

Method of Delivery

The PMPA required delivery of a notice of termination via certified mail or personal delivery to the franchisee. The franchisor argued that it provided the required notice and satisfied all delivery requirements, pointing to a letter it sent the franchisee.

Although the letter appeared to satisfy the PMPA’s content requirements and displayed the words "via certified U.S. mail, return receipt requested," this did not establish that the letter was actually delivered to the franchisee personally or sent via certified mail, the court determined.

The franchisee claimed that it never received the termination notice, nor did its receiver. For purposes of the franchisor’s motion to dismiss, the court was required to accept the franchisee’s claim as true.

Because the pleadings did not establish that the franchisee received the notice of termination as required by the Act, the claim for violation of the Act’s 90 days’ notice requirement also could not be dismissed.

Statute of Limitations

The two claims were brought within the PMPA’s one-year statute of limitations, the court held. The statute required a franchisee to bring its claim within one year of the later of: (1) the date of termination or (2) the date the franchisor failed to comply with the statute’s requirements.

The notice of termination was allegedly mailed June 20, 2010, and the franchise was terminated September 30, 2010. The franchisee filed its PMPA claims on June 29, 2011.

The decision is Marathon Petroleum Co. v. Future Fuels of America, CCH Business Franchise Guide ¶14,751.

Trade Regulation Talk News App Now Available

2012-01-22T19:41:00.001-06:00

This posting was written by John W. Arden.

A new, free mobile app allows you to receive Trade Regulation Talk postings on your iPhone, iPod touch, and iPad.

To receive information—and a free download—visit the Apple iTunes website or click here. Look for Trade Regulation Talk by Wolters Kluwer.

Commercial Based on Unreliable “Lab Test” Enjoined

2012-01-20T12:14:00.001-06:00

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

Cat litter manufacturer Clorox was preliminarily enjoined by the federal district court in New York City from airing a television commercial making comparative claims about cat litter odor reduction.

Competitor Church & Dwight (C & D) was likely to succeed on the merits of its Lanham Act false advertising suit that the commercial made literally false claims based on an unreliable “lab test,” and was likely to suffer irreparable harm, the court held.

Clorox’s litter used carbon as an odor fighting ingredient while C & D’s litter used baking soda. In Clorox’s test, 11 panelists gave a malodor rating of zero to cat excrement treated with carbon in sealed jars but found that baking soda reduced odor only 32%—the same decrease represented in the demonstration shown in Clorox’s commercial.

Necessary Implication of Falsity

The commercial was literally false because the “jar test” could not reasonably support the necessary implication that Clorox’s litter outperformed C & D’s products in eliminating odor, the court determined. The test was unreliable because its unrealistic conditions said little, if anything, about how carbon performs in cat litter in circumstances highly relevant to a reasonable consumer, and it could not possibly support Clorox's very specific claims with regard to litter, according to the court.

Another reason given by the court for rejecting the test results was the implausible uniformity with which panelists found that cat excrement treated with carbon contained “zero” malodor. When 11 panelists stick their noses into jars of excrement and report 44 times that they smelled nothing unpleasant, the result more likely reflected flaws in their in-house training or objectivity than any reliable result, the court said.

Irreparable Harm

C & D proved a likelihood of irreparable harm. One of the beakers in Clorox's commercial bore the label “baking soda,” and C & D was the only major manufacturer of cat litter that used baking soda as a deodorizing ingredient. Consumers shopping for cat litter overwhelmingly identified baking soda with C & D’s Arm & Hammer cat litter products, according to the court.

The court concluded that the comparisons were at least as direct as those in Time Warner Cable, Inc. v. DIRECTV, Inc. (CCH Advertising Law Guide ¶62,620), where the court found that viewers of a DIRECTV commercial that disparaged “cable” in an area in which Time Warner served as the exclusive cable provider would “undoubtedly understand” that criticism to apply to Time Warner specifically.

The January 4 opinion in Church & Dwight Co. v. Clorox Co. will be reported at CCH Advertising Law Guide ¶64,533.

Termination of Wholesaler’s Rights Did Not Violate North Carolina Wine Distribution Law

2012-01-19T23:42:00.001-06:00

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

A wine importer’s termination of a wholesaler’s right to distribute an imported brand did not violate the North Carolina Wine Distribution Agreements Act absent an “agreement” between the parties, according to the U.S. Court of Appeals in Richmond, Virginia. The parties had neither a “commercial relationship” nor an agreement under the statute.

The wine distribution law protected a wine wholesaler in the absence of an “agreement” only in two limited circumstances: (1) in the context of the transfer of a win wholesaler’s business, and (2) when a winery had been acquired.

Because neither of those two circumstances was present in this case, the importer’s actions did not violate the statute.

The dispute began when an Argentine winery chose a new importer in the United States. The new importer subsequently began supplying the brand to its own network of wholesalers, which did not include the plaintiff wholesaler, which had been distributing the brand in North Carolina.

Noting the liberal construction that should accorded the wine distribution law in order to effectuate the law’s intent to protect wholesalers, the plaintiff wholesaler argued that the law’s protections should extend to this situation. However, accepting the wholesaler’s argument would require the court to read into the statute an exception to the default requirement of an “agreement” that was nowhere to be found, in the court’s view.

When statutory language is clear and unambiguous, North Carolina law requires courts to construe a statute using its plain meaning. In 2010, subsequent to this dispute, the North Carolina General Assembly amended the wine distribution law to grant prospectively the very type of protection that the wholesale sought in this case.

The amendment demonstrated that the General Assembly knew how to protect a wholesaler’s right to the continued distribution of a brand, yet previously chose not to do so.

The unpublished decision is Country Vintner v. E.J. Gallo Winery, CCH Business Franchise Guide ¶14,753.

Federal Question Jurisdiction Exists Over Telephone Consumer Protection Act Suits: Supreme Court

2012-01-18T17:34:00.001-06:00

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

Private suits arising from automatically dialed calls to cellular telephones and other practices barred by the federal Telephone Consumer Protection Act (TCPA) may be brought in federal court under federal question jurisdiction, even though the TCPA provides for suits in state court and does not expressly authorize private suits in federal court, the U.S. Supreme Court ruled today in a unanimous opinion.

Intrusive Nuisance Calls

Congress created the TCPA in 1991, having determined that federal legislation was needed because telemarketers, by operating interstate, were escaping state law prohibitions on intrusive nuisance calls.

The Act permits a private person to seek redress for violations in an appropriate court of a state, if otherwise permitted by the laws or court rules of that state.

In this case, an individual filed a damages action in federal district court, alleging that a financial services firm, seeking to collect a debt, violated the TCPA by repeatedly using an automatic telephone dialing system or prerecorded or artificial voice to call the individual’s cellular phone without his consent.

Federal Question Jurisdiction

Holding that federal jurisdiction exists, the Supreme Court reversed a decision (CCH Advertising Law Guide ¶64,343) of the U.S. Court of Appeals in Atlanta—one of six U.S. Courts of Appeal that had held federal question jurisdiction lacking over private suits under the TCPA.

Private suits for violations of the TCPA meet the test for federal question jurisdiction as arising under the laws of the United States, it was held. The Court found unpersuasive the financial services firm’s contention that the TCPA provision for suits in state court displaced federal jurisdiction.

The firm’s argument that federal courts will be inundated by $500-per-violation TCPA statutory damages claims—or that defendants could use federal court removal to force small claims court plaintiffs to abandon suit—seemed more imaginary than real, the Court added.

The January 18, 2012 opinion in Mims v. Arrow Financial Services, LLC will be reported at CCH Advertising Law Guide ¶64,535.

Premium Cable Subscribers Not Allowed to Bring Tying Claim as Class

2012-01-17T17:08:00.003-06:00

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

Subscribers to a communications company’s premium cable television programming packages who paid the company a monthly rental fee for an accompanying set-top box should not be certified as a class, for purposes of their claims that the company illegally tied and bundled the lease of the cable boxes to the ability to obtain premium cable programming services, the federal district court in Oklahoma City has determined.

Common v. Individualized Issues

While the proposed class satisfied the numerosity, commonality, typicality, and adequacy of representation requirements established by Federal Rule of Civil Procedure 23(a), it could not meet Rule 23(b)(3)’s burdens of showing that common issues would predominate over any individualized issues and that a class action was the superior method for adjudicating the action.

Federal Tying Claim

The subscribers could not prove all of the elements of a federal tying claim on a classwide basis because the determination of the company’s market power was not amenable to such proof, according to the court.

Since subscribers in different geographic areas faced different competitive alternatives to the defending company, such a determination required an evaluation of the actual competitive conditions of markets at a local—not national—level, the court explained.

Damages

Several methods introduced by the plaintiff’s expert for calculating aggregate damages suffered by the subscribers could not be utilized with common evidence, owing to the elasticity of demand and the subsequent need for individualized market data.

Moreover, a benchmark method proffered by the expert, in which he compared rental rates of set-top boxes in the United States to rates in Canada, was inappropriate given the expert’s failure to evaluate the different regulations in the countries and costs of Canadian and American cable providers.

Additionally, in light of the multiple regional analysis required to determine market power and impact, maintaining a class action would not be manageable, the court noted.

The decision is In Re: Cox Enterprises, Inc. Set-Top Cable Television Box Antitrust Litigation, 2012-1 Trade Cases ¶77,756.

County Not a Proper Plaintiff to Pursue Federal Antitrust Claims in Multi-District Suit

2012-01-16T18:41:00.004-06:00

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

A California county lacked standing to pursue a federal antitrust claim seeking injunctive relief against producers of plasma-derivative protein therapies and a trade association that allegedly conspired to restrict out and raise prices, the federal district court in Chicago has ruled.

The federal antitrust claim was dismissed. However, the remaining issues involving state-law claims were held in abeyance, pending a determination on the court’s subject matter jurisdiction and the propriety of keeping the case as part of multi-district litigation, consisting of almost 20 actions brought on behalf of direct and indirect purchasers of plasma-derivative protein therapies.

The county was an indirect purchaser. It operated a medical center through which it administered a county-wide health care system, whose medical center indirectly purchased plasma-derivative protein therapies. The county claimed that it was forced to purchase these therapies either from distributors who had purchased the therapies from manufacturers or from group purchasing organizations (GPOs) that had negotiated contracts with manufacturers on behalf of their members, including the county.

The county alleged a core antitrust injury. It claimed that the defendants conspired to reduce output, thereby forcing the county to pay higher prices. However, it was not a “proper plaintiff” to maintain the antitrust action.

Standing was lacking based on the considerations delineated in the U.S. Supreme Court’s 1983 decision in Associated General Contractors of California, Inc. v. California State Council of Carpenters, 1983-1 Trade Cases ¶65,226, 459 U.S. 519:

(1) The causal connection between the violation and the harm;

(2) The presence of improper motive;

(3) The type of injury and whether it was one Congress sought to redress;

(4) The directness of the injury;

(5) The speculative nature of the damages; and

(6) The risk of duplicate recovery or complex damage apportionment.

Because the county, as an indirect purchaser, sought only injunctive relief, there was no threat of multiple lawsuits or duplicative recoveries. Thus, the standing analysis was limited to the presence of improper motive, the causal connection between the violation and the harm, and the directness of the injury. An improper motive was sufficiently alleged.

In addition, the county alleged a causal connection between the Sherman Act violation and its purported harm based on its alleged payment of higher prices by virtue of the conspiracy to reduce output. However, there were more direct victims of the alleged conspiracy to vindicate the public interest and they were actively pursuing their claims, seeking damages and the same injunctive relief sought by the county.

The court did not consider whether the Associated General Contractors factors applied to each of the various state antitrust claims the county sought to bring, and whether the county failed to state a claim for relief. The questions had to be put off until after the court addressed two issues: whether the court had subject matter jurisdiction, and whether the dismissal of the federal antitrust claim had any effect on whether the particular case should continue as part of the multi-district litigation.

Article III Standing

The court rejected the producers' assertions that the county failed to establish Article III standing to pursue its non-California state-law claims on behalf of indirect purchasers of plasma-derivative therapies. Thus, those claims were not dismissed for lack of Article III standing.

The county’s efforts to certify an indirect purchaser class would proceed later. Although the county did not specifically allege that it suffered a personalized injury due to the defendants’ alleged violations of other states’ laws, the county provided sufficient general allegations of its own individualized injury for its non-California state-law claims. It alleged that it was forced to purchase plasma-derivative protein therapies on the spot market, which required the county to purchase the therapies “from anyone in the nation that had a sufficient supply.”

While the complaint was silent about how and where the alleged spot market transactions took place, the allegation of spot market purchases was sufficient. Ultimately, however, the county would be required to support its standing with more than mere “unadorned speculation” at the summary judgment stage, the court noted.

The January 9, 2012, decision, In Re: Plasma-Derivative Protein Therapies Antitrust Litigation, appears at 2012-1 Trade Cases ¶77,751.

New York Allows International Franchise Expo Exhibiters to Apply for Registration Exemption

2012-01-13T17:06:00.000-06:00

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

The New York Attorney General’s Office has created an unusual franchise registration exemption that can be utilized by franchisors at the upcoming 2012 International Franchise Expo which will take place June 15-17 in New York City.

The exemption does not grant franchisors that are unregistered in the State of New York the ability to sell franchises at the trade show or even to provide copies of its Franchise Disclosure Document (FDD) to prospective franchisees. However, the exemption would permit an unregistered franchisor to promote its franchise opportunities to attendees at the show.

Signage required to be displayed by an exempted franchisor at the show explains that if the franchisor determined to proceed with a franchise program in New York, it would apply to register its FDD with the state as required by law. Only then, could the FDD be provided to prospective franchisees.

The exemption requires a fee of $150 for each day that a franchisor intends to exhibit at the show. The exemption application requires extensive disclosure of a franchisor’s litigation and bankruptcy histories, national and international franchise sales activities, and promotional materials that will be distributed at the show.

In addition, the application includes a prescribed booth sign and a handout insert that must be included in all promotional materials.

The three-day International Franchise Expo, which moves to New York City in 2012 after being held in the nation’s capital for more than 20 years, showcases hundreds of franchisors and attracts thousands of interested attendees.

New York’s Exemption Request Form for unregistered franchisors attending the show will appear in the CCH Business Franchise Guide.

Post-Termination Use of Franchisor’s Trademark Was Counterfeiting

2012-01-12T16:14:00.000-06:00

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

A terminated Indiana real estate brokerage franchisee that continued to use the marks of franchisor Century 21 was liable in a default judgment for trademark infringement, dilution, and counterfeiting under the Lanham Act, the federal district court in Lafayette, Indiana has ruled.

The brokerage firm, terminated for nonpayment of fees in March 2011, also was liable for false advertising and false designation of origin under Lanham Act, common law unfair competition, and breach of the Century 21 franchise agreement.

While the brokerage firm’s trademark infringement and dilution liability was readily established, the court observed that there was a split in authority regarding whether a terminated franchisee’s continued unauthorized use of the franchisor’s mark could constitute trademark counterfeiting.

In the absence of a ruling on the issue from the Seventh Circuit, the court concluded that under a plain reading of the Lanham Act, hold-over franchisees were not excluded from counterfeiting liability.

“Identical” or “Substantially Similar” Mark

It was well settled that an entity that is unrelated to a mark owner engages in counterfeiting if it creates a mark that is “identical” to the owner’s registered mark and provides unauthorized goods or services. There was “no reason why an ex-franchisee should escape liability for counterfeiting simply because that person had access to a franchisor’s original marks under the former relationship and therefore did not need to reproduce an identical or substantially similar mark,” the court reasoned. In fact, the risk of confusion was greater in such cases, in the court’s opinion.

The brokerage firm’s continued unlicensed use of Century 21's trademarks in reference to services that had no connection with, nor approval from, Century 21, constituted the use of counterfeit marks, the court concluded.

Damages

Section 35 of the Lanham Act provides for recovery of treble damages and reasonable attorneys fees in cases of intentional counterfeiting. Because the franchise agreement’s liquidated damages provision already provided for lost royalty and advertising fees, the court doubled rather than tripled Century 21’s actual damages.

The brokerage firm also was enjoined from future infringement and ordered to:

(1) Remove all signs identifying itself as a Century 21 affiliate or broker;

(2) Cease using Century 21's marks on any website or in any domain name;

(3) Request third party websites, including Multiple Listing Services, to remove references associating the brokerage with Century 21; and

(4) Assign its telephone numbers to Century 21.

The decision is Century 21 Real Estate, LLC v. Destiny Real Estate Properties, CCH Trademark Law Guide ¶61,927. It will appear in CCH Business Franchise Guide.

Publisher Could Have Monopolized Market for Bank Rate Websites

2012-01-11T21:08:00.002-06:00

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

A company in the business of aggregating and publishing bank rate tables listing interest rates from financial institutions could have unlawfully monopolized or attempted to monopolize the market for bank rate websites, but had not engaged in a predatory price fixing conspiracy, the federal district court in Newark, New Jersey, has ruled.

A complaining competitor adequately alleged that the company violated federal and New Jersey antitrust law by entering into exclusive dealing arrangements with online media outlets that allegedly prevented competitors from gaining necessary distribution outlets for their data, the court found.

The competitor, however, failed to offer factual allegations that the defending company acted in concert with any other entity to price below some measure of cost. Therefore, a motion to dismiss was granted as to the price fixing claim, but denied as to the other claims.

Monopoly Power

The complaining competitor sufficiently alleged that the defendant possessed monopoly power by claiming: that the defendant had reached a relevant market share of over 95%, that it had entered into agreements with more than 300 partner sites, that the prices it charged to customers had become inelastic, and that independent competitors had been pushed out or acquired as a result of the defendant's scheme.

Predatory Pricing

The allegations of anticompetitive conduct was bolstered by claims that the defendant purposefully predatorily priced its rate listings below cost, and sometimes for free, in order to acquire customers from its rivals and to drive those rivals out of the market, the court noted.
The court rejected arguments that there was no market foreclosure and that a one-year contract with partner websites was not restrictive to the extent condemned by the antitrust laws.

The complaint alleged conduct—such as an agreement with a financial media website allowing the defendant to set rates in exchange for waiving annual license fees—that would impair the opportunities of rivals for whom waiving license fees was not feasible and who were, as a consequence, excluded from doing business with those website partners, in the court’s view.

The decision is BanxCorp. v. Bankrate Inc., 2011-2 Trade Cases ¶77,750.

Online Ad Code Not in Compliance with European Data Protection Laws: Working Party

2012-01-10T18:51:00.002-06:00

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

Self-regulatory standards for online behavioral marketing adopted in April 2011 by two major European industry associations are not adequate to ensure compliance with current European data protection laws, according to the Article 29 Data Protection Working Party.

The Working Party—an independent advisory body consisting of representatives from the data protection authorities of European Union member states—has issued an opinion assessing the Best Practice Recommendation on online behavioral advertising adopted by the European Advertising Standards Alliance (EASA) and the Internet Advertising Bureau Europe (IAB).

Notice of Behavioral Advertising

The EASA/IAB’s proposed framework recommends that websites use a particular icon to provide notice of behavioral advertising practices. The icon would be linked to an informational website at www.youronlinechoices.eu. On this site, users would be able to opt out of behavioral advertising by selecting specific company names from a list of advertising networks.

In the Working Party’s view, this approach does not properly inform website visitors about the use of cookies, as required by the e-Privacy Directive. Average web users would not be able to recognize the icon’s meaning without any additional description, the Working Party said. The icon should be accompanied by other forms of notice, which would include information as to what types of information are being collected and by whom.

Consent to Cookies

In addition, the Working Party noted, the e-Privacy Directive requires that consent be obtained before cookies are placed on users’ computers or information stored on the users’ computers is collected. The EASA/IAB framework, instead of seeking prior consent, was said to provide a way for users to exercise “choice”—which amounted to opting out of further data collection. This “choice” did not meet the requirements of the directive, the Working Party said.

The Working Party also expressed concern that the EASA/IAB self-regulatory code did not contain provisions on the amount of data collected and the period of time the data would be retained.

Tracking Web Surfing

Moreover, the EASA/IAB standards and website created an incorrect impression that it was possible to choose not to be tracked while surfing the web, the Working Party said. This misapprehension could be damaging to users, as well as to the advertising industry, if advertisers are led to believe that by applying the code they meet the requirements of the e-Privacy Directive.

Full text of the Working Party’s Opinion 16/2011 on EASA/IAB Best Practice Recommendation on Online Behavoural Advertising appears at CCH Privacy Law in Marketing ¶60,710 and here on the European Commission’s website.

FTC ALJ Finds Ohio Hospital Acquisition Likely Anticompetitive, Orders Divestiture

2012-01-09T17:45:00.002-06:00

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

An FTC administrative law judge has ordered ProMedica Health System, Inc., a non-profit healthcare system headquartered in Toledo, to divest a recently-acquired hospital.

The ALJ concluded that there was a reasonable probability that ProMedica’s consummated acquisition of rival St. Luke's Hospital will substantially lessen competition in an already highly-concentrated market for the sale of general acute-care
(GAC) inpatient hospital services to commercial health plans in the Toledo area. It violated Sec. 7 of the Clayton Act.

The FTC had alleged that the transaction reduced the number of competitors from four to three in the GAC inpatient hospital services market. The agency also challenged the transaction on the ground that it reduced from three to two the number of providers in the inpatient obstetrical (OB) services market.

The ALJ concluded, however, that the FTC failed to prove a separate relevant product market for the sale of inpatient OB services—procedures relating to pregnancy, labor, and post-delivery care—to commercial health plans or managed care organizations (MCOs) in Ohio’s Lucas County. The hospital did not refute the GAC inpatient hospital services market or the geographic market limited to Lucas County.

Defenses, Efficiency Justifications

Although St. Luke's was struggling financially prior to the acquisition, the hospital could not defend the transaction based on St. Luke's weakened financial condition, the ALJ determined. Moreover, the claimed efficiencies, such as capital avoidance savings and related operating cost savings, resulting from the combination, did not support the merger.

“The hospital did not meet its burden of showing ‘extraordinary’ procompetitive benefits or of demonstrating that the asserted efficiencies offset the likely anticompetitive effects of the increase in market power produced by the joinder,” the ALJ concluded.

Remedy

The ALJ ordered divestiture of St. Luke's to a willing acquirer, since the hospital failed to meet its burden of proving that an alternative remedy would be superior. The hospital contended that the anticompetitive effects could be remedied if it were permitted to retain St. Luke’s, but create a second “firewalled” negotiation team to negotiate and administer MCO contracts exclusively for St. Luke's, independent of Pro Medica's other Lucas County hospitals.

The proposed remedy was patterned after a remedy ordered by the FTC in a challenge to Evanston Northwestern Healthcare Corp.'s acquisition of Highland Park Hospital in Illinois in 2000. The ALJ explained that the conduct remedy in the Evanston matter was based largely on the long period of time between the closing of the transaction and the conclusion of the litigation. Because of a hold-separate agreement, the extensive integration that occurred in Evanston case had not occurred in this case.

The decision is In the Matter of ProMedica Health System, Inc., Docket No. 9346. Text of the decision will appear at CCH Trade Regulation Reporter ¶16,700.

Reward Service Deceived Consumers About Online Data Collection: FTC

2012-01-06T17:29:00.003-06:00

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

The provider of a membership reward service aimed at consumers trying to save money for college has agreed to settle FTC charges that it deceived consumers by using a web-browser toolbar to collect their personal information without making adequate disclosures about the information collected, the Commission announced yesterday.

The service provided by Upromise Inc. allowed member consumers to receive rebates when they buy goods or services from Upromise partner merchants. These rebates were placed into the consumers' college saving accounts.

According to the FTC, Upromise's website offered consumers a "TurboSaver Toolbar" download that would highlight participating merchants in consumers' search results. When downloading the toolbar, consumers saw a message that encouraged them to enable the "Personalized Offers" feature of the Toolbar, which Upromise allegedly claimed would collect information about the websites they visited "to provide college savings opportunities tailored to you."

Collection, Transmission of Personal Information

This feature allegedly collected and transmitted, in clear text, the names of all websites consumers visited and which links they clicked on, as well as information they entered into some webpages, such as search terms, user names, and passwords.

In some cases, the information collected included credit card and financial account numbers, user names and passwords used to access secured websites, security codes and expiration dates, and any Social Security numbers consumers entered into the webpages. The Toolbar transmitted consumers' information without encryption.

Privacy Statement

According to the FTC, the privacy statement associated with the toolbar stated that the toolbar would collect and transmit information about websites consumers visited, and that "infrequently" the collection might "inadvertently" collect a "name, address, email address or similar information," but that any personally identifying information would be removed before the data was transmitted.

Upromise, the FTC alleged, failed to disclose the extent of information collected by the toolbar and deceptively misrepresented that it encrypted data and took reasonable data security measures. The failure to protect consumers’ data from unauthorized access was itself an unfair practice, the FTC said.

Settlement

The proposed settlement order, if made final, will require Upromise Inc. to clearly disclose its data collection practices and to obtain consumers' consent before installing or re-enabling any such toolbar products. Upromise also would have to tell consumers how to uninstall the toolbars already on their computers. The settlement will bar misrepresentations about the extent to which the company maintains the privacy and security of consumers' personal information.

Destruction of Data

Upromise agreed to destroy the data collected through the Personalized Offers feature of the toolbar, to provide clear and prominent disclosures to consumers, and to receive their affirmative consent before installing any similar product. In addition, the agreement requires Upromise to establish a comprehensive information security program and to obtain biennial independent security assessments for the next 20 years.

The Commission vote to issue the administrative complaint and accept the consent agreement package containing the proposed consent order for public comment was 4-0.

The action is In the Matter of Upromise Inc., FTC File. No. 102 3116. The complaint and an agreement containing consent order appear on the FTC website. A news release appears here.

Further information will be reported in the CCH Trade Regulation Reporter.

Settlement of Diamond Resale Price Fixing Claims Upheld

2012-01-05T17:01:00.000-06:00

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

Approval of a proposed $295 million settlement of class action resale price fixing claims against a group of entities related to the world's principal diamond producer was proper, according to an en banc decision of the U.S. Court of Appeals in Philadelphia.

The federal district court approving the settlement did not err in granting certification of nationwide settlement classes consisting of direct purchasers of gem diamonds and indirect purchasers of rough or cut-and-polished diamonds (2008-2 Trade Cases ¶76,304), the appellate court held.

Class Certification

The proposed classes satisfied each of the four requirements enunciated in Federal Rule of Civil Procedure 23(a) as prerequisites to certification—numerosity, commonality, typicality, and adequacy of representation—as well as the predominance and superiority requirements of Rule 23(b)(3).

Predominance was easily shown based on the diamond producer’s alleged conduct and the injury it caused to each and every class member, the appellate court held. The plaintiffs also sufficiently showed that certification under Rule 23(b)(2), which applied to claims seeking injunctive or declaratory relief, was appropriate.

The appellate court rejected an argument advanced by objectors to the settlement that certification of a nationwide settlement class was improper based on differences in state law with respect to indirect purchaser standing.

Rule 23 made clear that a district court had limited authority to examine the merits of individual claims when conducting the certification inquiry. Such an inquiry was "particularly unwarranted in the settlement context" since a district court did not need to envision the form that a trial would take or consider the available evidence and methods proposed for proving the disputed element at trial, the court stated. Thus, the district court did not “inappropriately subordinate” state sovereignty in certifying the class.

Settlement

The proposed settlement was fair, adequate, and reasonable, the appellate court confirmed. It was in the best interests of the settlement classes, and was the product of arm's-length, serious, and informed negotiations between experienced and knowledgeable counsel.

The lower court did not err in approving class counsel's plan of allocation. Rejected was an argument that the previously-noted differences in state law mandated a differential allocation in the percentage of recovery within the indirect purchaser consumer settlement fund.

Dissent

A dissenting opinion contended that the predominance requirement for class certification was not satisfied because the lower court had not ensured that each class member possessed a viable or colorable legal claim.

By allowing indirect purchasers who had no standing to sue under their state's antitrust laws to be part of the settlement class, the appellate majority has created a “come one, come all” environment that “sets the class action ship in [the Ninth] Circuit badly adrift,” the dissent argued.

The decision is Sullivan v. DB Investments, Inc., 2011-2 Trade Cases ¶77,736.

Cordray to Be Installed as Head of Consumer Financial Protection Bureau

2012-01-04T15:07:00.003-06:00

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

President Obama said he will use a recess appointment to install former Ohio attorney general Richard Cordray as head of the Consumer Financial Protection Bureau (CFPB), sidestepping protracted Republican efforts to block the nomination in the Senate. The GOP, however, questioned the legality of the move and indicated that it could be legally challenged.

Speaking at an event in Cleveland, Obama said “when Congress refuses to act and as a result hurts our economy and puts people at risk, I have an obligation as President to do what I can without them.” He added, “I will not stand by while a minority in the Senate puts party ideology ahead of the people they were elected to serve. Not when so much is at stake.”

Nomination Held “Hostage”

If Republicans were to continue to hold Cordray’s nomination “hostage,” the President said, then “more dishonest lenders could take advantage of the most vulnerable among us,” while “the vast majority of financial firms who do the right thing could be undercut by those who don’t.”

Cordray, speaking prior to the announcement, said he would begin work immediately, including expanding the CFPB’s program to non-banks, “an area we haven’t been able to touch up until now.”

“Unprecedented Power Grab”

Meanwhile, House Speaker John Boehner (R, Ohio) called the decision an “extraordinary and entirely unprecedented power grab . . . that defies centuries of practice and the legal advice of his own Justice Department.”

Boehner maintained that the move “goes beyond the President’s authority, and I expect the courts will find the appointment to be illegitimate.”

Senate Minority Leader Mitch McConnell (R, Ky.), said the recess appointment “represents a sharp departure from a long-standing precedent that has limited the President to recess appointments only when the Senate is in a recess of 10 days or longer. Breaking from this precedent lands this appointee in uncertain legal territory, threatens the confirmation process and fundamentally endangers the Congress’s role in providing a check on the excesses of the executive branch.”

White House Press Secretary Jay Carney said the White House counsel believes that Senate pro forma sessions, used to prevent the President from exercising his constitutional authority, “do not interrupt the recess.”

Asked if the White House was prepared for a legal challenge, Carney said he would not speculate on the matter, noting that “the constitutional authority the President has is very clear.”

Idaho Potato Growers Could Have Conspired Through Co-op Supply Program

2012-01-03T23:46:00.006-06:00

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

Idaho potato growers who allegedly founded statewide and national cooperatives that implemented a scheme to increase the price of potatoes through a supply management program could have engaged in an unlawful price fixing conspiracy, the federal district court in Boise has ruled.

A complaining putative class of direct and indirect purchasers failed, however, to sufficiently allege that licensors, marketers, and dehydrators associated with the growers illegally participated in the conspiracy.

Motions by numerous defendants to dismiss the claims against them for failure to state a claim were, therefore, either granted in their entirety or in part. Additionally, the indirect purchasers’ claims were dismissed without prejudice for lack of standing.

Capper-Volstead Immunity

The claims against the potato growers could not be dismissed on the basis that the defendants were exempt from antitrust attack under the Capper-Volstead Act, which provides agricultural cooperatives a limited exemption from antitrust laws.

Questions of fact remained about whether the Capper-Volstead Act applied. Allegations that the defendants entered into agreements with unprotected entities—including non-protected potato groups, non-producer partners, and a dehydration joint venture—could, if proved, preclude application of the exemption. Moreover, acreage reductions, production restrictions, and collusive crop planning were not activities protected by the Capper-Volstead Act, the court explained.

Sufficiency of Allegations

The complaint answered “the basic who-what-where-when Question” with sufficient factual detail to survive outright dismissal, the court decided. It detailed various acts undertaken by the most of the grower defendants in furtherance of the conspiracy, including yearly acreage reduction rules, a bid buy-down program, shipping holidays, flow control activities, and offloading of surplus potatoes to dehydration plants.

These defending growers’ alleged involvement in the scheme surpassed mere participation in a trade association and was sufficiently detailed to form the basis of a federal antitrust claim, the court found. They were alleged to have been directly involved in the meetings and agreements leading to the formation of the cooperatives, which were specifically aimed at stabilizing potato prices and supplies.

As such, the defendants did not merely join an extant trade association and then choose whether or not to follow guidelines, but actually agreed to the conspiracy outlined in the complaint, and then created the trade associations to formalize and implement that agreement, the court said.

Two of the potato growers, however, were not sufficiently alleged to have participated in the conspiracy, the court added. While the complaint asserted that these two growers were founding members of the cooperatives, that claim rested on an unsupported allegation that certain individuals connected with the growers’ organizations attended a meeting and signed on to the purported conspiracy.

Nothing in the pleadings indicated the individuals’ relationship to the defending entities or their ability to act—or even attend the meetings at issue—on behalf of the entities, the court observed.

Companies that licensed the right to place their branded label on certain growers’ potatoes, the marketing agent for several of the growers, and dehydrators that participated in a joint venture further down the supply chain could not be found liable under the Sherman Act for the alleged conspiracy among the growers, in the court’s view. The plaintiffs failed to sufficiently link them to the conspiracy either by direct participation or an agency relationship, the court held.

While the complaint plausibly alleged that the Idaho cooperative viewed the dehydration venture as a key part of its supply-management efforts, the plaintiffs had failed to alleged that the individual dehydrators joined the underlying conspiracy.

Claims Against Canadian Cooperative

Claims against a Canadian potato farmers’ cooperative were barred as well, the court held. The Canadian defendant was not immunized by either the Foreign Sovereign Immunities Act or the Cooperative Marketing Act. The defendant was protected from suit by the act of state doctrine because Canada had effectively granted the cooperative authority, as a member agency, to engage in the acts deemed unlawful by the purchasers.

The decision is In Re: Fresh and Process Potatoes Antitrust Litigation, 2011-2 Trade Cases ¶77,739.

Blogging in Absent Employee’s Name Could Be False Endorsement

2011-12-30T10:27:00.000-06:00

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

A former employee of an interior design firm who had a personal Twitter following of approximately 1,250 people had standing to pursue a Lanham Act false endorsement claim against the firm for its alleged use of her personal Twitter and Facebook accounts to promote its business when the former employee was in the hospital, the federal district court in Chicago has ruled.

The former employee satisfied the prudential standing requirement for a false endorsement claim because she had developed a protected, commercial interest in her name and identity through her use of social media in the Chicago design community, according to the court.

There was undisputed evidence in the record that during the former employee’s hospitalization, design firm employees accessed her personal Facebook account and accepted friend requests at least five times and posted 17 Tweets on her personal Twitter account.

Stored Communications Act

The court said that the firm’s unauthorized access to the former employee’s Twitter and Facebook accounts could constitute violations of the Stored Communications Act (SCA) if the former employee could show that she suffered actual damages as a result of the firm’s unlawful access to her accounts. The SCA claim required further discovery on the issue of damages.

Right to Publicity

The former employee could not pursue an lllinois Right of Publicity Act claim, the court held. The firm’s employees who used the account did not pass themselves off as the plaintiff and thus did not appropriate her identity within the meaning of the Act, the court determined. Before leaving the firm, the former employee had publicly thanked her temporary replacements for their “amazing posts.”

The decision is Maremont v. Susan Fredman Design Group, Ltd., CCH Guide to Computer Law ¶40,312.

Further information regarding CCH Guide to Computer Law appears here.

Franchisor Not Liable to Pay Workers’ Comp to Franchisee’s Employee

2011-12-29T12:25:00.000-06:00

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

A franchisor of sandwich shops was not a "contractor" under the meaning of the Kentucky Workers’ Compensation Act (KWCA) and therefore was not liable for the payment of workers’ compensation benefits for the injured employee of a franchisee, the Kentucky Supreme Court has decided. Thus, a ruling by a Kentucky appellate court (CCH Business Franchise Guide ¶14,453) was reversed.

Although the appellate court correctly determined that an Administrative Law Judge (ALJ) erred in interpreting the KWCA, the appellate court should not have reversed the ALJ’s ruling, which properly analyzed the facts of the case under the statute and came to the correct conclusion that the franchisor was not a "contractor," the supreme court held.

Coverage of Franchise Relationships

The ALJ’s legal error was in concluding that the General Assembly could not have intended the KWCA to encompass the relationship between a franchisor and franchisee simply because the statute failed to mention such a relationship.

Like the appellate court, the Kentucky Supreme Court was not convinced that the KWCA’s failure to mention franchisor-franchisee relationships evinced an intent on the part of the General Assembly to preclude a franchisor from ever being considered a statutory employer of its uninsured franchisee’s employee. Nothing prevented a franchisor that contracted with another for work that was a regular part of the franchisor’s business from being considered a "contractor" simply because the other party to the contract, the purported "subcontractor," was its franchisee.

Franchisor as “Contractor”

The ALJ’s opinion included findings supporting its conclusion that the franchisor was not a "contractor." While the franchisor did retain some rights (such as the right to be named an additional insured and given notice of cancellation of insurance policies), the relationship was clearly much different than that contemplated by the KWCA.

The ALJ found that the franchisor was in the business of franchising, not the business of selling sandwiches. Thus, the franchisee did not perform a regular or recurrent part of the franchisor’s business, and the ALJ’s finding that the franchisor was not a "contractor" was supported by substantial evidence, the supreme court determined.

The decision is Doctors’ Associates v. Uninsured Employers’ Fund, CCH Business Franchise Guide ¶14,736.

Antitrust Division Will Not Challenge Designated Supplier Program for College Apparel

2011-12-28T12:25:00.000-06:00

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

A proposal by the Worker Rights Consortium—a nonprofit corporation aiming to improve working conditions and labor standards—to implement a "designated suppliers program" that would enable colleges and universities to ensure that apparel with their school names and insignia is made in factories providing fair labor conditions will not be challenged by the Department of Justice Antitrust Division.

The Justice Department informed the corporation in a December 16, 2011, business review letter that the proposed conduct was unlikely to lessen competition in the collegiate apparel sector.

Licensing Requirements

According to the proposal, the program would establish licensing terms that will require licensees and any factory that manufactures collegiate apparel to adhere to specified fair labor standards. The terms would include requirements that licensees pay the factories with which they contract a sufficient amount that the factories can pay their employees a living wage and that the licensees ensure that the factories guarantee workers the freedom to engage in collective bargaining.

Effect on Competition

The Justice Department noted that incorporation of the proposed licensing terms was optional, and it was unlikely to have a substantial effect on licensing competition among potentially participating schools. It also was not likely to have a substantial effect on downstream competition for apparel sales. Moreover, the letter said, the factories affected by the proposed licensing terms would probably "constitute only a tiny portion of the labor market, making significant anticompetitive effects in that market unlikely."

In issuing the letter, Sharis A. Pozen, Acting Assistant Attorney General in charge of the Antitrust Division, stated that the program, "can be viewed as precompetitive in that it may facilitate competition in a new area, by providing assurances that apparel was produced under conditions meeting the Designated Suppliers Program standard."

The letter is Worker Rights Consortium, Business Rev. Ltr. No. 11-2, December 16, 2011, CCH Trade Regulation Reporter ¶44,111. A news release on the development appears here.

Release Agreement Barred Michigan Franchise Law Claims

2011-12-27T15:45:00.000-06:00

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

Michigan Franchise Investment Law claims brought by a terminated insurance agency franchisee against its franchisor were barred by a release agreement that waived the franchisee’s right to bring any claims in exchange for the franchisor’s waiver and deferral of certain franchise fees, a federal district court in Detroit has decided.

The franchisee alleged that the franchisor violated the Michigan franchise law by:

(1) Making untrue statements of material fact and omitting material fact; and

(2) Failing to provide a copy of its Uniform Franchise Offering Circular at least ten business days prior to the execution of the parties’ franchise agreements.

However, the release agreement signed by the parties approximately two years after the execution of their franchise agreements provided for a blanket waiver of any and all claims the franchisee held against the franchisor, including claims under the franchise statute.

The franchisee adduced no evidence refuting the conclusion that the release was fairly and knowingly made, according to the court. The release was a short, two-page document, the bulk of which was comprised of the paragraph setting out the terms of the franchisee’s release of his claims.

Although the franchisee asserted that he did not grasp the clear intent of the release and that the franchisor failed to inform him that by signing the release he was waiving his rights to sue the franchisor, given the clear and unambiguous terms of the release, this alleged failure to inform fell short of a misrepresentation of the contract or other fraudulent or overreaching conduct.

The franchisee argued that the release was void under the Michigan Franchise Investment Law provision that a "requirement that a franchisee assent to a release, assignment, novation, waiver, or estoppel which deprives a franchisee of rights and protections provided in this act" is "void and unenforceable if contained in any documents relating to a franchise."

However, the release was not a "document relating to a franchise" within the meaning of that provision because the franchisee was not required to release his franchise law claims as a condition of the franchise agreements, the court determined.

Moreover, the Michigan Franchise Investment Law also stated that this provision did not preclude a franchisee, after entering into a franchise agreement, from settling any and all claims. Under the circumstances in which the release was executed more than two years after the franchise agreement in exchange for the waiver of fees, the release was more akin to a settlement of claims than a "document relating to a franchise."

The decision is NBT Associates, Inc. v. Allegiance Insurance Agency CCI, Inc., DC Mich., CCH Business Franchise Guide ¶14,726.

Senators Concerned with Impact of Google’s Practices on Competition

2011-12-21T16:22:00.001-06:00

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

Allegations regarding Google's search engine practices raise important competition concerns, according to Senators Herb Kohl (D, Wisconsin) and Mike Lee (R, Utah).

In a December 19 letter to FTC Chairman Jon Liebowitz, the senators, who serve as Chairman and Ranking Member of the Senate Judiciary Committee’s antitrust subcommittee, pointed to Google's business practices that they believe “warrant a thorough investigation by the FTC.”

The antitrust subcommittee held a hearing in September to examine the effect of Google's conduct on competition and heard testimony from Google's Executive Chairman Eric Schmidt and others. The letter detailed a number of issues raised at the hearing.

Steering Users to Own Products, Services

The senators questioned whether Google is using its market power in general Internet search “to steer users to its own web products or secondary services and discriminating against other websites with which it competes.”

Google has changed its business model, according to the senators, and “now owns a large and growing array of search-dependant products and services.” With control of vertical search sites, such as Google Maps, Google Travel, and Google Flight Search, many question whether it is possible for the company to be “an unbiased general or ‘horizontal’ search engine.”

Impact on Other Websites

Another issue to be examined is the impact of Google’s practices on websites, such as Yelp! and Nextag and on innovation. At the subcommittee hearing, Yelp! CEO Jeremy Stoppelman and Nextag CEO Jeffrey Katz testified that Google’s practice of favoring its own content harms them directly by depriving their sites of user traffic and advertising revenues. Both CEOs testified that they would not attempt to launch their companies today given Google’s current practices.

The senators also encouraged the FTC to consider Google’s market share of Internet searches done on mobile devices. In light of Google’s ownership of the Android operating system and its proposed acquisition of mobile phone maker Motorola Mobility, some “have raised concerns that Google, as a condition of access to the Android operating system, require phone manufacturers to install Google as the default search engine,” according to the letter.

AT&T Abandons Planned Acquisition of T-Mobile

2011-12-20T16:24:00.005-06:00

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter, and John W. Arden.

Facing an antitrust challenge from the Department of Justice and regulatory hurdles raised by the Federal Communications Commission (FCC), AT&T Inc. on December 19 abandoned its planned acquisition of T-Mobile USA Inc. from Deutsche Telekom AG. AT&T said that it decided to call off the acquisition “after a thorough review of options”

The Justice Department Antitrust Division, seven states, and the Commonwealth of Puerto Rico alleged in a complaint filed in the federal district court in Washington, D.C. that the combination of two of the four largest providers of mobile wireless telecommunications services would violate the antitrust laws. (See “Department of Justice Seeks to Block AT&T’s Acquisition of T-Mobile," Trade Regulation Talk, August 31, 2011.)

The FCC staff had reviewed the transaction and found a number of public interest harms. The staff found that the deal would substantially lessen competition in ways that no conditions would appear to remedy. The staff concluded that removing T-Mobile as a competitor would create the incentives for AT&T and other competitors to raise prices.

Government Response

“Consumers won today,” Sharis Pozen, Acting Assistant Attorney General in charge of the Antitrust Division, said in a written announcement. “Had AT&T acquired T-Mobile, consumers in the wireless marketplace would have faced higher prices and reduced innovation. We sued to protect consumers who rely on competition in this important industry. With the parties’ abandonment, we achieved that result.”

The Federal Communications Commission agreed. “The FCC is committed to ensuring a competitive mobile marketplace that drives innovation and investment, creates jobs and benefits Consumers,” FCC Chairman Julius Genachowski said in a brief statement. “This deal would have done the opposite.”

AT&T Statement

In a December 19 press release, AT&T said that it agreed with Deutsche Telecom AG “to end its bid to acquire T-Mobile USA, which began in March of this year.” However, the actions of the Department of Justice and FCC to block the transaction do not change the realities of the U.S. wireless industry, according to the company. “It is one of the most fiercely competitive industries in the world, with a mounting need for more spectrum that has not diminished and must be addressed immediately. The AT&T and T-Mobile USA combination would have offered an interim solution to this spectrum shortage. In the absence of such steps, customers will be harmed and needed investment will be stifled.”

AT&T Chairman and CEO Randall Stephenson reaffirmed the company’s commitment to "lead the mobile Internet revolution."

“To meet the needs of our customers, we will continue to invest. However, adding capacity to meet these needs will require policymakers to do two things. First, in the near term, they should allow the free markets to work so that additional spectrum is available to meet the needs of the U.S. wireless industry, including expeditiously approving our acquisition of unused Qualcomm spectrum currently pending before the FCC. Second, policymakers should enact legislation to meet our nation’s long-term spectrum needs.”

Other Voices

The American Antitrust Institute congratulated the U.S Department of Justice Antitrust Division and the FCC for “bringing to a swift end AT&T’s adventurous test of U.S. merger controls.” Companies planning highly-concentrating horizontal mergers will have to think twice “no matter how much political clout they think they can bring to the table.” Preventing this merger saved many jobs, according to the AAI. “It is an important victory for antitrust and American consumers.”

Congress Restricts Funds for FTC Report on Food Marketing to Children

2011-12-19T17:04:00.001-06:00

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

Federal legislation to fund the FTC and other agencies for Fiscal Year (FY) 2012, which was approved by Congress on December 17, would restrict the FTC from issuing principles or guidelines governing food marketing.

The “Consolidated Appropriations Act, 2012” states that none of the funds appropriated to the agency may be used "to complete the draft report, entitled ‘Interagency Working Group on Food Marketed to Children: Preliminary Proposed Nutrition Principles to Guide Industry Self-Regulatory Efforts,’ unless the Interagency Working Group on Food Marketed to Children complies with Executive Order 13563."

Cost-Benefit Analysis

The executive order, issued January 18, 2011, requires government agencies, among other things, to conduct a cost-benefit analysis when issuing regulations. Agencies also are expected to invite and consider public comments on proposals.

Food Marketing Guidelines

The restriction on FTC funding was part of the House of Representatives' version of appropriations measure. The House Committee Report did not support the FTC, either as part of the Interagency Working Group on Food Marketed to Children or acting independently, issuing “principles or guidelines governing food marketed to children unless a peer-reviewed scientific study conclusively demonstrates that regulating food marketing directed to children is the most effective way of changing long-term eating behavior and reducing obesity.”

Interagency Working Group

The House Committee Report advised the agency not to rely on any guidance issued by the Interagency Working Group on Food Marketed to Children to engage in enforcement actions under its existing authority.

The Interagency Working Group on Food Marketed to Children—comprised of Centers for Disease Control and Prevention, the FTC, the Food and Drug Administration, and the U.S. Department of Agriculture—was convened in 2009 to develop nutrition standards for foods marketed to children and define the scope of marketing to which those standards.

The Working Group released preliminary proposed voluntary principles to guide industry self-regulation for public comment in April 2011. FTC Bureau of Consumer Protection Director David C. Vladeck testified before a House subcommittee hearing on October 12 regarding the agency’s participation in the working group.

FY 2012 Appropriations

The bill authorizes $311,563,000 in funding for the FTC in FY 2012. This is $20,200,000 above the FY 2011 enacted level and $14,437,000 below the budget request. The figures are based on Senate recommendations. The House version had called for an appropriation of $284,067,000, which would have been $7,296,000 less than fiscal year 2011 and $41,933,000 less than the request.
The spending measure does not include other provisions included in an earlier Senate bill. Proposed increases to the Hart-Scott-Rodino (HSR) Act premerger filing fees are not in the final measure.

Also missing was language in the Senate measure that would have precluded the conveyance of the FTC headquarters building on Pennsylvania Avenue to the National Gallery of Art or other entity unless the government received fair market value for the property.

Store’s Inadequate Data Security Could Be Unfair Practice Under Illinois Law

2011-12-16T13:48:00.001-06:00

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

A customer of Michaels Stores stated an Illinois Consumer Fraud and Deceptive Business Practices Act claim against the craft store for engaging in an unfair business practices relating to the failure to implement adequate security at its PIN pads, according to the federal district court in Chicago.

Michaels’ PIN pads, used by consumers to pay by debit/credit cards, were replaced by a modified PIN pad that captured consumers’ debit and credit information. A properly operating PIN pad encrypts the cardholder’s PIN (personal identification number), temporarily stores the encrypted PIN, and transmits the information to a transaction manager, and a card company or bank for verification. “Skimming” is the unauthorized capture of debit or credit card information by unauthorized persons called “skimmers.”

Michaels reported that—between February 8 and May, 2011—“skimmers” placed approximately 90 fraudulent PIN pads in 80 of its stores in 20 states. At the time, Michaels was not in compliance with VISA’s global mandate for encrypted PIN pad terminals or other security requirements.

Failure to Protect Information, Notify Customers

Several customers filed suit on behalf of all customers whose financial information was stolen from Michaels. They alleged that Michaels failed to adequately protect their financial information and failed to notify the customers of the security breach in violation of the Illinois Consumer Fraud and Deceptive Business Practices Act (CFA), 815 Ill. Comp. Stat. 505/1.

To state a claim under the CFA, the customer must allege that Michaels engaged in a deceptive or unfair practice, intended for the customer to rely on the deception, the deception occurred in the course of conduct involving trade or commerce, the customer suffered actual damages, and the damages were proximately caused by the deception.

Unfair Practices

A business practice is unfair under the CFA if it offends public policy, is immoral, unethical, oppressive, or unscrupulous, or caused substantial injury to consumers.

Because the skimmers substituted legitimate devices with counterfeit devices, the store ignored its obligation to implement procedures and practices preventing criminal conduct. This lack of action constituted a CFA violation, according to the court.

Customers also must allege a purely economic injury in order to state a CFA claim. A customer does not suffer actual damage simply because of the increased risk of future identity theft. Here, the customer sufficiently alleged that they suffered actual injuries when they lost money from unauthorized withdrawals and/or bank fees, the court decided.

Deceptive Practices

The customer, however, failed to show that Michaels engaged in a deceptive practice, according to the court. To state a CFA claim based on deceptive practices, a plaintiff must show there was either a communication containing a deceptive misrepresentation or a deceptive omission. There was no evidence that Michaels made any statements to customers.

The decision is In re: Michaels Stores Pin Pad Litigation, CCH State Unfair Trade Practices Law ¶32,379.

Further information regarding CCH State Unfair Trade Practices Law appers here.

FTC Subpoenas, Civil Investigative Demands Enforced in Monopolization Probe

2011-12-15T17:47:00.000-06:00

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

In an FTC investigation into a consumer products manufacturer’s potentially monopolistic practices in the market for condoms, the agency was entitled to seek information on products other than condoms because the inquiry extended to the manufacturer’s products other than condoms, the U.S. Court of Appeals in Washington, D.C. has ruled.

An order granting enforcement of the Commission’s subpoena and the associated civil investigative demands (CID) (2010-2 Trade Cases ¶77,215) was affirmed.

The manufacturer accounts for approximately 70 percent of the latex condoms sold in the United States. It offers retailers a discount based on the amount of shelf space they devote to its condoms.

Exclusionary Bundling

The Commission’s inquiry lawfully extended to the possibility that the manufacturer was engaging in the exclusionary bundling of rebates to retailers that sold the manufacturer’s condoms, as well as its other products, in order to acquire or maintain a monopoly in the U.S. market for condoms.

Pursuant to a Resolution Authorizing Use of Compulsory Process, the Commission had issued a subpoena seeking, among other things, production of documents related to the manufacturer’s sales and distribution of condoms in the United States and Canada. In addition, the Commission issued a CID seeking information about cost, pricing, production, and sales of the company’s condoms in the United States and Canada.

When the manufacturer turned over to the Commission documents and data sets relating to its condom business with the information on other products redacted, it petitioned the Commission either to limit or to quash the subpoena and the CID. The Commission denied the request, and a federal district court granted the agency’s petition to enforce the subpoena and the CID.

The district court later denied the manufacturer’s motion to stay the enforcement order pending appeal (2011-2 Trade Cases ¶77,720). Earlier this year, the Commission denied review of the manufacturer’s petition to quash, limit, or stay four subpoenas ad testificandum directed to the company’s employees (CCH Trade Regulation Reporter ¶16,682).

Relevance, Burden

The district court did not err in finding the request to be “reasonably relevant” to the Commission’s investigation and not unduly burdensome. The Commission maintained that its Resolution contemplated an investigation into the possibility that the manufacturer was engaged in exclusionary practices in which products other than condoms might play a role, include bundling discounts. However, the manufacturer’s claims rested upon an unduly narrow interpretation of the Resolution. Deferring to the Commission’s own interpretation of its Resolution, the district court correctly interpreted the resolution to include an inquiry that implicated the manufacturer’s products other than condoms.

The court declined to decide whether the Commission’s bundling theory under LePage’s Inc. v. 3M, 324 F.3d 141, ultimately would be successful in the District of Columbia Circuit. According to the court, an inquiry into the bundling of rebates on condoms and other types of products with the purpose of sustaining market power in the market for condoms is arguably within the condemnation of the Sherman Act as the Third Circuit construed it in LePage’s. However, the court said that the LePage’s decision
was not the law of the D.C. Circuit, and had been roundly criticized.

The Commission could lawfully investigate whether the manufacturer’s practices would constitute a violation of the law in the Third Circuit, the court explained.

The December 13 decision in FTC v. Church & Dwight Co. will appear at 2011-2 Trade Cases ¶77,721.

Government Suit to Block AT&T Acquisition of T-Mobile Stayed

2011-12-14T15:50:00.000-06:00

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

The federal district court in Washington, D.C. on December 12 stayed further proceedings in a federal/state enforcement action seeking to block AT&T Corporation’s proposed acquisition of T-Mobile USA Inc. from Deutsche Telekom.

The stay came at the request of the Justice Department and AT&T. The parties must inform the court by January 12, 2012, of the status of the proposed transaction.

The Justice Department, seven states, and the Commonwealth of Puerto Rico allege in the suit that the combination of two of the four largest providers of mobile wireless telecommunications services would violate the antitrust laws. (See “Department of Justice Seeks to Block AT&T’s Acquisition of T-Mobile,” Trade Regulation Talk, August 31, 2011).

AT&T and Deutsche Telekom are “actively considering whether and how to revise our current transaction to achieve the necessary regulatory approvals,” according to a December 12 AT&T statement.

The stay order in U.S. v. AT&T Inc. appears here on the Department of Justice Antitrust Division website.

Washington Franchise Law Covers Out-of-State Franchisees

2011-12-13T14:23:00.000-06:00

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

The “franchisee bill of rights” provision of the Washington Franchise Investment Protection Act (WFIPA)—requiring franchisors and franchisees to deal with each other in good faith and listing several prohibited acts, practices, and unfair methods of competition—applied to the relationship between a California hotel franchisee and a Washington franchisor, according to the U.S. Court of Appeals in San Francisco.

A ruling (CCH Business Franchise Guide ¶14,367) that the WFIPA did not apply to the termination of the franchise—because the franchisee's hotel operation did not occur "in this state"—was reversed.

The provision at issue (Wash. Rev. Code Section 19.100.180), commonly referred to as the “franchisee bill of rights,” did not contain language limiting its application to the relationship between a franchisor and a franchisee “in this state,” the appellate court noted.

In contrast, several other of the WFIPA’s provisions contained an explicit statement that they applied only to actions “in this state.” Those provisions included requirements that the offer or sale of any franchise “in this state” must be registered in the state and that any franchise broker selling or offering a franchise “in this state” must register with the state.

Originally, the term “in this state” was not defined in WFIPA, the court observed. The statute was amended in 1991 to provide a definition of the term, largely in response to a law professor’s article recommending the clarification. However, that professor did not recommend that the legislature add a territorial limitation to the franchisee bill of rights. He recommended only that the legislature define the limitation where it already existed in the WFIPA. The Washington legislature did no more than what the professor recommended, the court determined.

By its terms, the definition of “in this state” provided by the 1991 amendments applied only to the specific provision making it unlawful to offer or sell a franchise “in this state” if it was unregistered or not exempt (Wash. Rev. Code Section 19.100.020).

The district court erred in concluding that the “overall statutory scheme,” as well as the 1991 amendments, evinced a legislative intent to confine the reach of the WFIPA to only those franchises operating “in this state,” the appellate court held.

As a matter of general principle, if a state law did not have limitations on its geographical scope, courts would apply it to a contract governed by that state’s law, even if parts of the contract were performed outside of the state. The fact that the WFIPA’s provisions relating to sales of franchises contained a territorial limitation did not lead to the conclusion that WFIPA’s bill of rights was similarly limited. Rather, the inclusion of explicit territorial limitations in the sale-related provision, and the failure to include such a limitation in the bill of rights, suggested the opposite conclusion.

The dispute was remanded to the federal district court for consideration of the merits of the franchisee’s WFIPA counterclaim and consideration of the availability of a remedy under the Washington “little FTC Act.”

The Ninth Circuit’s December 7 ruling in Red Lion Hotels Franchising, Inc. v. MAK, LLC, will appear in the CCH Business Franchise Guide.

Georgia Hospital Combination Was Immune from FTC Challenge

2011-12-12T18:21:00.003-06:00

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

The effective merger of two Georgia hospitals was immune under the state action doctrine from an FTC challenge, the U.S. Court of Appeals in Atlanta has ruled. Dismissal of the Commission’s complaint for injunctive relief pending the completion of an administrative proceeding (2011-1 Trade Cases ¶77,508) was affirmed.

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

The agency sought injunctive relief to prevent the consummation of the plan prior to the completion of the administrative proceeding.

The appellate court agreed with the Commission that the joint operation of the two Albany, Georgia, hospitals—Phoebe Putney Memorial Hospital and Palmyra Park Hospital—“would substantially lessen competition or tend to create, if not create, a monopoly.” However, the question was whether the anticompetitive conduct was immunized by the state-action doctrine.

The FTC alleged that the acquisition included three stages:

(1) The local hospital authority’s purchase of Palmyra Park Hospital’s assets from HCA using Phoebe Putney’s money,

(2) The hospital authority’s immediate provision of control of the hospital to Phoebe Putney under a management agreement, and

(3) Phoebe Putney’s entry into a lease with the hospital authority to grant the local hospital operator managerial control of Palmyra Park Hospital’s assets for 40 years.

The FTC contended that the private parties used the hospital authority to shield the transaction from antitrust scrutiny.

State Action Immunity

While the doctrine of state action immunity protects the states from liability under the federal antitrust laws, the same protection does not extend automatically to political subdivisions, such as the hospital authority, the appellate court explained.

In order for the hospital authority to enjoy state-action immunity, it had to show that the state generally authorized it to perform the challenged action and clearly articulated a state policy authorizing anticompetitive conduct.

The acquisition of Palmyra Park Hospital, Inc. from hospital operator HCA Inc. and its subsequent operation by Phoebe Putney Health System, Inc., at the behest of the Hospital Authority of Albany–Dougherty County, were “authorized pursuant to a clearly articulated state policy to displace competition, the court held.

Through the Hospital Authorities Law, the Georgia legislature clearly articulated a policy authorizing the displacement of competition. The Georgia legislature granted local hospital authorities the power to acquire hospitals. In granting the power to acquire hospitals, the legislature must have anticipated that such acquisitions would produce anticompetitive effects, the court reasoned. “Foreseeably, acquisitions could consolidate ownership of competing hospitals, eliminating competition between them.”

The appellate court rejected the Commission’s argument that it could dispose of the immunity issue because the plan at issue constituted only private action, since it was formulated by Phoebe Putney Health System and HCA, Inc. and presented by Phoebe Putney Health System to the hospital authority.

FTC Bureau of Competition Director’s Reaction

“The Eleventh Circuit agrees with the Commission that this deal will create a monopoly and eliminate competition,” said FTC Competition Bureau Director Richard Feinstein in response to the decision. “We remain very concerned that it will raise healthcare costs dramatically in Albany, Georgia. We are considering all our options.”

Details of the December 9, 2011, decision in FTC v. Phoebe Putney Health System, Inc., No. 11-12906, will appear in CCH Trade Regulation Reporter.

Banks Failed to Plead Reliance on Payment Processor’s Advertising

2011-12-09T16:29:00.006-06:00

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

In a case arising from a massive data security breach at credit and debit card payment processor Heartland Payment Systems, card-issuing banks had standing to pursue a claim against Heartland under the Florida Deceptive and Unfair Trade Practices Act (FDUTPA) for making false promotional statements about its data security practices, but failed to state claims under consumer protection laws of California, Colorado, Illinois, New Jersey, New York, Texas, and Washington, the federal district court in Houston has ruled.

Heartland allegedly made some detailed, factual promotional statements about its data security practices that could support banks’ claims of negligent misrepresentation under the common law of New Jersey, but the banks’ conclusory allegations of reliance were inadequate, the court held.

Data Security Breach

The card-issuing banks’ claims arose from a breach of Heartland’s computer systems by three hackers—an American and two unknown Russians. They installed programs that allowed them to obtain payment-card numbers and expiration dates for approximately 130 million accounts, as well as cardholder names for some accounts.

Puffery vs. Actionable Misrepresentations

Advertising claims that are vague and highly subjective constitute nonactionable puffery.

Heartland’s slogans—“The Highest Standards” and “The Most Trusted Transactions”—were puffery, the court found. Similarly, statements such as “layers of state-of-the-art security, technology and techniques to safeguard sensitive credit and debit card account information” were nonactionable.

However, Heartland also allegedly made statements that were factually concrete, verifiable, and subject to proof, including “[w]e maintain current updates of network and operating system security releases and virus definitions, and have engaged a third party to regularly test our systems for vulnerability to unauthorized access”; “we encrypt the cardholder numbers that are stored in our databases using triple-DES protocols, which represent the highest commercially available standard for encryption”; and “Exchange has passed an independent verification process validating compliance with VISA requirements for data security.”

Reliance

Although some of Heartland’s alleged statements might be actionable, the banks’ allegations of reliance where wholly conclusory, according to the court. It was unclear, for example, if the card-issuer banks’ reliance was through their joining, remaining in, or withdrawing from the Visa and MasterCard networks, or what relationship Heartland’s statements had to any such actions. The banks’ fraud and negligent misrepresentation claims were dismissed with leave to amend.

Florida Deceptive and Unfair Trade Practices Act

Heartland argued that only consumers, as the word is traditionally used, may assert claims under the FDUTPA.

The Florida legislature amended the FDUTPA in 2001 to authorize suit by a “person”—rather than a “consumer”—who has suffered loss from a violation. The Act’s purpose is “[t]o protect the consuming public and legitimate business enterprises,” the court observed.

It is unclear if the word “consuming” applied only to “public” or also to “legitimate business enterprises,” the court said. The more natural reading, in the court’s view, is that this clause listed two independent groups that the Act seeks to protect: first, “the consuming public,” and second, “legitimate business enterprises.” The question was close, but the legislature’s use of the word “person” in creating a private right of action suggested a broader reach than the word “consumer.”

Consumer Protection Laws of Other States

The banks’ claims under the New Jersey, New York, and Washington statutes were dismissed without leave to amend.

The banks’ relationship with Heartland existed only by virtue of their participation in the Visa and MasterCard networks. This relationship is far different from the direct, downstream relationship between a consumer of a good and its manufacturer or seller, within the scope of the New Jersey Consumer Fraud Act, the court found. Under the New York Deceptive Acts and Practices Law, the banks were not “consumers,” nor was the conduct at issue “consumer oriented.”

The banks failed to allege facts suggesting that their claim affected the public interest, under the Washington Consumer Protection Act, the court added. The only group likely to be injured in the same fashion—incurring expenses for replacement cards and fraudulent transactions—consisted of other issuer banks. This group was both too small and too specialized to constitute a substantial portion of the public.

The claims under the California, Colorado, Illinois, and Texas were dismissed with leave to amend.

The banks’ conclusory allegations of reliance were insufficient to state claims under the California Unfair Competition Law, the Illinois Consumer Fraud Act, and the Texas Deceptive Trade Practices Act, the court held.

Because the banks’ complaint did not include allegations about pricing, they failed to state a violation of the Colorado Consumer Protection Act’s prohibition against “false or misleading statements of fact concerning the price of goods, services, or property or the reasons for, existence of, or amounts of price reductions.”

The December 1 opinion in In re: Heartland Payment Systems, Inc. Customer Data Security Breach Litigation will be reported at CCH Advertising Law Guide ¶64,508.

Further details regarding CCH Advertising Law Guide appear here.

FTC Promotes Competition in Health Care, High Tech, Energy Markets, Chairman Testifies

2011-12-08T21:12:00.003-06:00

This posting was written by John W. Arden.

In testimony before a House subcommittee yesterday, Federal Trade Commission Chairman Jon Leibowitz highlighted the agency’s recent efforts to promote competition and benefit consumers in the pharmaceutical, hospital, high tech, and energy markets.

“As members of this Subcommittee well know, competitive markets are the foundation of our economy, and effective antitrust enforcement is essential for those markets to function well,” Leibowitz told the House Judiciary Subcommittee on Intellectual Property, Competition, and the Internet.

“Vigorous competition promotes economic growth by keeping prices down, expanding output and the variety of choices available to consumers, and promoting innovation.”

Pay-for-Delay Agreements

In the health care industry, the FTC has focused on ending anti-competitive "pay-for-delay" pharmaceutical agreements, blocking anticompetitive mergers, and developing policy guidance regarding new health-care collaborations, said Leibowitz.

One of the Commission’s top competition priorities has been ending anticompetitive "pay-for-delay" agreements—settlements of patent litigation in which a branded drug manufacturer pays a generic drug manufacturer to keep its product off the market for a time. “Settlements like these enable branded manufacturers to buy more protection from competition than the assertion of their patent rights alone would provide.”

For the last 15 years, the agency has taken the position that these pay-for-delay agreements violate the antitrust laws. Some courts have upheld these agreements, causing them to become commonplace.

Health Care Mergers

This year the FTC has brought several merger enforcement actions in the health care markets of hospitals, dialysis centers, pharmaceutical manufacturers, and pharmacies, said Leibowitz. The Commission also continues to review mergers between pharmaceutical manufacturers and is investigating a merger involving pharmacy benefits managers.

“With the costs of prescription drugs increasing faster than other health care costs, the Commission is committed to preventing pharmaceutical and related mergers that may allow companies to exercise market power by raising prices,” the chairman noted.

Technology Industries

The Commission has ongoing investigations into potentially anticompetitive conduct by dominant firms in high-profile, high-tech industries. In 2009, a Commission action against Intel Corporation alleged that the computer chip giant used exclusive dealing agreements that punished companies wanting to utilize or distribute competing products. This blocked competitors from reaching consumers with their products and unlawfully
maintained Intel’s monopoly, he said.

Another probe of the high-tech industry—involving the Google-AdMob merger—culminated in a Commission decision not to file a case. “Taking account of Apple’s anticipated entry into the market, the Commission determined that future competition in mobile advertising was not likely to be harmed by the merger.”

Energy Markets

In view of the importance of gasoline pricing to consumers and businesses, the FTC is conducting an investigation of petroleum industry practices and pricing. Among the issues under investigation are whether producers, refiners, transporters, marketers, or traders have:

(1) Engaged in practices that has lessened or may lessen competition in the production, refining. Transportation, distribution, or wholesale supply of crude oil or petroleum products or

(2) Provided false or misleading information about the wholesale price of crude oil or petroleum products to a federal department or agency.

The Commission monitors daily retail and wholesale prices of gasoline and diesel fuel in 20 wholesale regions and approximately 360 retail areas across the country.

Chairman Leibowitz also summarized the agency’s international initiatives and consumer protection enforcement actions, including those focused on Internet fraud and privacy.

Text of the Chairman’s prepared statement appears here on the FTC website.

U.S. Closes Investigation into Google’s Acquisition of Online Advertising Service Provider

2011-12-07T22:48:00.000-06:00

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

Google Inc.’s proposed acquisition of Admeld Inc., an online display advertising service provider, will not be challenged by the Department of Justice Antitrust Division. The Justice Department has closed its investigation into the transaction.

In a December 2 statement, the Antitrust Division said that the transaction was not likely to substantially lessen competition in the sale of display advertising.

According to the statement, the Antitrust Division’s investigation focused on the potential effect of the proposed transaction on competition in the display advertising industry. Both Google and Admeld provide services and technology to web publishers that facilitate the sale of those publishers’ display advertising space, the Antitrust Division noted.

The government also evaluated whether Google’s acquisition of Admeld would enable Google to extend its market power in the Internet search industry to online display advertising through anticompetitive means.

The division said it will continue to rigorously enforce the antitrust laws to ensure that transactions affecting evolving markets such as display and other forms of online advertising, as well as search, do not inhibit competition or innovation in any way.

Competitor Could Not Join State's Antitrust Challenge to Hospital Acquisition

2011-12-06T15:43:00.000-06:00

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

A private medical center did not have the right to intervene in an enforcement action by the State of Maine, challenging a proposed acquisition of two cardiology practices by the state's largest health system and its affiliated hospital, Maine's Supreme Court has held. Denial of the medical center's motion to intervene was therefore affirmed.

The medical center seeking to intervene asserted that it was the defending hospital's principal competitor and would potentially be driven from the market as a result of the proposed merger. However, the medical center failed to show that the disposition of the action would impair or impede its ability to protect its interests through independent litigation.

Maine law authorized only the state attorney general—not private parties—to institute proceedings in equity to prevent and restrain antitrust violations, the state's high court explained.

Because private parties were not bound by the government litigation, any liability to private parties could be determined separately under Maine's statutory framework. Thus, there was no entitlement in a private party to intervene as of right in a state antitrust enforcement action in Maine without evidence of bad faith or malfeasance on the part of the government such that intervention was necessary to protect the public's interests. The medical center made no such evidentiary showing, the court said.

The private medical center also was properly refused permissive intervention into the matter, in the court's view. Such a joinder would have unduly burdened the proceedings, and the medical center had been given an adequate alternative method to participate in the enforcement action—the submission of oral and written comments to the trial court overseeing the action.

The case, State of Maine v. MaineHealth, appears in the CCH Trade Regulation Reporter at 2011-2 Trade Cases ¶77,702.

Seventh Circuit to Rehear Potash Price Fixing Conspiracy Claim

2011-12-05T23:03:00.004-06:00

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

The U.S. Court of Appeals in Chicago, sitting en banc, will rehear a case brought by purchasers of potash, alleging a global price fixing conspiracy among producers.

A three-judge panel of the court had rejected the claims on the ground that the Foreign Trade Antitrust Improvements Act (FTAIA) applied to bar the suit (2011-2 Trade Cases ¶77,611). The panel’s opinion and judgment were vacated on December 2.

The panel had concluded that the assertion that the defendants “conspired to coordinate potash prices and price increases so as to fix, raise, maintain, and stabilize the price at which potash was sold in the United States at artificially inflated and anticompetitive levels” was wholly conclusory and insufficient to satisfy the pleading standards established by the U.S. Supreme Court in Bell Atlantic Corp. v. Twombly (2007-1 Trade Cases ¶76,785).

The complaint purportedly described anticompetitive conduct aimed at the potash markets in Brazil, China, and India—not the U.S. import market.

The rehearing order is Minn-Chem, Inc.v. Agrium Inc., December 2, 2011.

Twombly-Iqbal Standard “a Mess”

In a posting on the Wolters Kluwer Antitrust Connect blog, Christopher L. Sagers, Professor at Cleveland-Marshall College of Law, wrote that there is a growing consensus that the Twombly-Iqbal standard “is a mess,” having destabilized the our entire system of civil litigation and adopting a pleading system foreign to fundamental procedural principles.

The en banc order in this case is very welcome, wrote Sagers, since the three-judge panel’s opinion exempted from antitrust challenge a conspiracy “that was alleged to have caused billions of dollars in consumer injury, even while acknowledging plaintiffs had adequately alleged a worldwide conspiracy to inflate potash prices, had supported their claims with elaborate plus-factors pleading, and had alleged that contemporaneously with the conspiracy potash prices in the United States increased by six hundred percent.”

The blog posting appears here on the Antitrust Connect blog.

FTC Should Attempt to Block Express Scripts’ Acquisition of Medco: Antitrust Institute

2011-12-02T21:49:00.002-06:00

This posting was written by John W. Arden.

The American Antitrust Institute (AAI) has asked the Federal Trade Commission to seek an injunction against Express Scripts’ acquisition of Medco Health Solutions, which “poses a threat to substantially lessen competition in the provision of pharmacy benefit manager services throughout the United States.”

In a November 30 letter addressed to FTC Chairman Jon Leibowitz, the AAI stated that the combination of two of the three largest national pharmacy benefit management services (PBMs)—and the additional vertical integration that such a combination fosters—would threaten competition and raise prices to large plan sponsors and, ultimately, consumers.

The three largest providers of PBM services control more than 80 percent of the “large plan sponsor market,” and the combined Express Scripts-Medco firm would control approximately 50 percent of that market, according to AAI President Albert A. Foer and Advisory Board Member Dan Gustafson. The third of the “big three” PBMs is CVS Caremark.

This market share is particularly concerning because of the structure of the market and the substantial barriers to entry and expansion, the letter said. The three major PBMs already have significant cost advantages from economies of scale and from vertical integration in mail order and specialty pharmacy distribution.

“When faced with these difficult entry and expansion barriers, the remaining second tier PBMs cannot adequately constrain potential anticompetitive conduct because of their smaller size, geographic limitations, lack of buyer power, and, in some cases, perceived conflicts regarding their corporate affiliation with plan sponsors.”

Large Plan Sponsors

More than 40 of the “Fortune 50” corporations rely on the three largest PBM providers. “Not surprisingly, when one of the big three PBMs loses a large plan sponsor, it almost inevitably [goes] to another one of the big three.”

Smaller competitors typically lack adequate claims-processing capabilities to serve national accounts and have only limited ability to secure discounts and rebates from drug suppliers and to provide lower dispensing fees from pharmacies.

Specialty and Mail Order Distribution

The proposed combination of Express Scripts and Medco is likely to lead to the merged entity’s exercise of enhanced buyer market power in the market for specialty and mail order pharmacy distribution, according to the letter.

“The proposed merger would heighten the risk that these major PBMs would push compensation to many retail pharmacies below what would be competitive levels, ultimately leading to higher prices and lost jobs. An adverse impact on the delivery of pharmaceutical services at the retail level should be sufficient by itself to raise serious concerns about the proposed merger.”

Exclusion of Rivals in Specialty Pharmacy Services

The merged firm would have the ability and incentive to exclude rivals in the provision of specialty pharmacy services, it was alleged. All of the big three PBMs have acquired specialty pharmaceutical companies recently, reducing the number of independent specialty pharmacies and giving the big three power over the downstream specialty pharmacy distribution chain.

Exclusion of Rivals in Mail Order Pharmacy Services

The merger would create the largest mail order pharmacy in the country, accounting for nearly 60 percent of all mail order prescriptions processed, according to the AAI.

“This poses several potential competitive threats. First, further consolidation of the PBM market would exacerbate the competitive disadvantages that smaller, second tier PBMs without vertically integrated mail order operations already face. Second, consolidation of mail order pharmacies threatens to lead to anticompetitive self-dealing. A vertically integrated PBM can channel prescriptions to its own mail order facilities instead of to retail pharmacy competitors, even if the cost of filling the prescription is more than it would be at a local pharmacy.”

Small community pharmacies may also be threatened by this mail order business, the letter maintained.

In light of these competitive threats, the AAI urged the FTC to seek to enjoin the merger.

Text of the letter appears here on the American Antitrust Institute’s website.

User Failed to Allege Injury from LinkedIn’s Disclosure of Information, Browsing Histories

2011-12-01T11:17:00.002-06:00

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

An individual lacked standing to pursue privacy-related claims against online social networking website operator LinkedIn for disclosing his personal information, including personally identifiable browsing histories, to third-party advertising and marketing companies through the use of cookies and web beacons, the federal district court in San Jose has decided.

The individual asserted that LinkedIn’s conduct violated the federal Stored Communications Act and California’s Constitution, Unfair Competition Law, False Advertising Law, Consumer Legal Remedies Act, and common law.

Tracking of Browsing Habits

LinkedIn allegedly assigned each registered user a unique user identification number. Then, LinkedIn’s website linked and transmitted the user ID number to third-party tracking cookies, allowing third parties to track users’ online activity and to aggregate data on their browsing habits. The individual asserted that LinkedIn added social information, such as the name of each user and the other LinkedIn profiles they viewed and interacted with; which enabled the third parties to determine the personal identity of the user.

Emotional Harm

The individual failed to allege that he sustained an injury that would confer Article III standing to sue. He alleged that he suffered embarrassment and humiliation, but it was unclear from the face of the complaint what information was disclosed that would cause the individual emotional harm, the court said. He did not allege that his browsing history was actually linked to his identity by LinkedIn and transmitted to any third parties. The allegation that his sensitive information might be transmitted in the future was too theoretical for purposes of establishing standing.

Economic Harm

The individual asserted that he was economically harmed by LinkedIn’s practices because his browsing history was personal property with market value, and LinkedIn took that property from him without compensating him. This purported injury was too abstract and hypothetical to support Article III standing, in the court’s view.

The individual relied on allegations that the data collection industry generally considered consumer information valuable and that he was not compensated for use of his information, but he did not describe how he was foreclosed from capitalizing on the value of his personal data or how he was deprived of the data’s economic value simply because his unspecified personal information was collected by third parties.

He did not allege that his credit card number, address, or Social Security number were stolen and published or that he was a likely target of identity theft as a result of LinkedIn’s practices, the court noted. Nor did he allege that his personal information was exposed to the public. The complaint was dismissed with leave to amend.

The decision is Low v. LinkedIn Corp., CCH Privacy Law in Marketing ¶60,695.

Illinois Attorney General’s Price Fixing Suit Not a Removable “Class Action”

2011-11-30T16:14:00.004-06:00

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

A suit filed by the Illinois Attorney General against eight manufacturers of liquid crystal display (LCD) panels for alleged price fixing in violation of the Illinois Antitrust Act was not a "disguised" class action subject to removal to federal district court under the Class Action Fairness Act of 2005 (CAFA), according to the U.S. Court of Appeals in Chicago.

The appellate court denied a petition for permission to appeal a district court’s remand order on the ground that the appellate court lacked jurisdiction over an appeal.

Parens Patriae Suit

A class action had to be brought by a "representative person" under Rule 23 of the Federal Rules of Civil Procedure or the state equivalent, the appellate court explained. The state attorney general’s action, which sought relief on behalf of the state as a purchaser LCD panels and as parens patriae for harmed residents, was brought under the Illinois Antitrust Act, which did not impose any of the familiar Rule 23 constraints.

Mass Action?

The appellate court also rejected the defendants’ argument that the case was a mass action because "monetary relief claims of 100 or more persons are proposed to be tried jointly on the ground that the plaintiffs’ claims involve common questions of law or fact."

Only the Illinois Attorney General made a claim for damages, precisely as authorized by the Illinois Antitrust Act. Moreover, a suit is not a mass action if the claims were asserted on behalf of the general public and not on behalf of individual claimants or members of a purported class. Looking to the complaint as a whole, the state was the real party in interest. The court rejected the notion that Illinois resident purchasers were the real parties in interest based on a claim-by-claim analysis.

Developments in Other Circuits

The Seventh Circuit decision follows similar decisions in two other federal circuits. The U.S. Court of Appeals in San Francisco (2011-2 Trade Cases ¶77,615) recently held that parens patriae actions filed by the Attorneys General of Washington and California on behalf of their state citizens, alleging an LCD price fixing conspiracy in violation of state antitrust laws, did not constitute class actions under CAFA.

In West Virginia ex rel. McGraw v. CVS Pharm., Inc., 646 F.3d 169, the U.S. Court of Appeals in Richmond, Virginia, earlier this year, held that an action brought by the West Virginia Attorney General against five pharmacies, alleging that they sold generic drugs to in-state consumers without passing along the cost savings in violation of three state statutes, was not a class action under CAFA. On November 28, the U.S. Supreme Court denied a petition for review of that decision.

The decision in LG Display Co., Ltd. v. Madigan appears at 2011-2 Trade Cases ¶77,686.

Facebook Agrees to Make Changes to Privacy Practices

2011-11-29T12:29:00.002-06:00

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

Social networking website operator Facebook has agreed to settle Federal Trade Commission charges that it deceived consumers by telling them they could keep their information on Facebook private, and then repeatedly allowing the information to be shared and made public, the FTC announced today.

The proposed settlement requires Facebook to take steps to make sure it lives up to its promises in the future, including giving consumers clear and prominent notice and obtaining consumers' express consent before their information is shared beyond the privacy settings they have established.

"Facebook is obligated to keep the promises about privacy that it makes to its hundreds of millions of users," said FTC Chairman Jon Leibowitz. "Facebook's innovation does not have to come at the expense of consumer privacy. The FTC action will ensure it will not."

According to the FTC:

• Facebook changed its website so certain information that users may have designated as private was made public, without warning users of the change or getting their approval.

• Facebook represented that third-party apps that users' installed would have access only to user information that they needed to operate. In fact, the apps could access nearly all of users' personal data, including data the apps didn't need.

• Facebook told users they could restrict sharing of data to limited audiences—for example with "Friends Only." In fact, selecting "Friends Only" did not prevent their information from being shared with third-party apps their friends used.

• Facebook falsely claimed that it certified the security of participating apps, that it would not share users’ personal information with advertisers, and that it complied with the U.S.-EU Safe Harbor Framework for international data transfers.

• Contrary to promises made to users, Facebook continued to allow access to photos and videos posted by users, even after the users had deactivated or deleted their accounts.

The proposed settlement bars Facebook from making further deceptive privacy claims, requires that the company get consumers' approval before it changes the way it shares their data, and requires that Facebook obtain periodic assessments of its privacy and data protection practices by independent, third-party auditors for the next 20 years.

Facebook also would be required to prevent anyone from accessing a user's material later than 30 days after the user has deleted his or her account.

The Commission vote to accept the consent agreement package containing the proposed consent order for public comment was 4-0.

The agreement will be subject to public comment through December 30, 2011, after which the Commission will decide whether to make the proposed consent order final.

More information on the proposed settlement in In the Matter of Facebook, Inc., File No. 092 3184, is available here on the FTC’s website.

Computer Fraud and Abuse Should Be RICO Predicate Act: Department of Justice

2011-11-23T12:41:00.003-06:00

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

In a statement before a House Judiciary subcommittee on November 15, a U.S. Department of Justice official proposed amending the federal RICO statute to make violations of the Computer Fraud and Abuse Act (CFAA) a RICO predicate act.

Richard Downing, Deputy Section Chief for Computer Crime and Intellectual Property, testified before the House Judiciary Subcommittee on Crime, Terrorism and Homeland Security. In his prepared statement, Downing emphasized the importance of addressing more targeted, sophisticated, and serious cyber crime and cyber intrusions.

According to Downing, computer technology has become a key tool of organized crime, which now:

(1) Hacks into public and private computer systems, including systems key to national security and defense;

(2) Hijacks computers for the purpose of stealing identity and financial information;

(3) Extorts lawful businesses with threats to disrupt computers; and

(4) Commits a range of other cyber crimes.

The Obama administration has taken significant steps to ensure that the American people, businesses, and governments build better protections against cyber threats, he said.

“Through this ongoing work, it has become clear that our Nation cannot improve its ability to defend against cyber threats unless certain laws that govern cybersecurity activities are updated, including the Computer Fraud and Abuse Act.”

RICO Predicate Act

Among the changes proposed by the Department of Justice is making CFAA offenses subject to the Racketeering Influenced and Corrupt Organizations Act.
Downing urged Congress to update the RICO statute because RICO could be an effective tool to fight criminal organizations that use the Internet to commit their crimes.

“The Administration’s proposal would simply make clear that malicious activities directed at the confidentiality, integrity and availability of computers should be considered criminal activities under the RICO statute,” the official noted.

Downing’s statements were issued as part of a broader proposal to update the CFAA, including amendments to ramp up sentencing and other penalties, furnish better tools for investigators and prosecutors, and provide enhanced deterrence for malicious activity directed at critical infrastructure.

The full text of Downing’s statements is available here on the Department of Justice website.

FTC Releases Final Version of Business Opportunities Rule

2011-11-22T16:46:00.001-06:00

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

The Federal Trade Commission has approved changes to and released the final version of its business opportunity rule that will be effective on March 1, 2012.

The rule (16 CFR Part 437, "Disclosure Requirements and Prohibitions Concerning Business Opportunities") is intended to ensure that consumers have the information they need when considering buying a work-at-home program or any other business opportunity. The Commission vote approving the final amendments to the Business Opportunity Rule was a unanimous 4-0.

Simplified Disclosures

The changes made to the rule simplify the disclosures that business opportunity sellers must provide to prospective buyers. The simplified disclosures will help prospective purchasers assess the risks of buying a business opportunity, while minimizing compliance burdens on businesses, according to the FTC.

The final rule applies to business opportunities previously covered under the rule, as well as work-at-home offers such as envelope stuffing and craft assembly opportunities. The final rule requires business opportunity sellers to give consumers specific information to help them evaluate a business opportunity.

Sellers must disclose five key items of information in a simple, one-page document:

(1)The seller's identifying information;

(2) Whether the seller makes a claim about the purchaser's likely earnings (and, if the seller checks the "yes" box, the seller must provide information supporting any such claims);

(3) Whether the seller, its affiliates or key personnel have been involved in certain legal actions (and, if yes, a separate list of those actions);

(4) Whether the seller has a cancellation or refund policy (and, if yes, a separate document stating the material terms of such policies); and

(5) A list of persons who bought the business opportunity within the previous three years.

Misrepresentations and omissions are prohibited under the rule, and for sales conducted in languages other than English, all disclosures must be provided in the language in which the sale is conducted.

Furthermore, the rule permits earnings claims to be made by sellers of business opportunities only if the seller:

(1) Has a reasonable basis for its claim at the time the claim is made;

(2) Has in its possession written materials that substantiate its claim at the
time the claim is made;

(3) Makes the written substantiation available upon request to the prospective
purchaser and to the Commission; and

(4) Furnishes to the prospective purchaser an earnings claim statement in a required format.

The announcement of a final business opportunity rule completes the process that started on April 12, 2006, when the Commission published an Initial Notice of Proposed Rulemaking and proposed creating a business opportunity rule separate from the franchise rule.

A press release on the action appears here on the FTC website. Text of the Federal Register notice appears here.

The final version of the rule, along with its extensive Statement of Basis and Purpose, will appear in the CCH Business Franchise Guide.

Officials Immune for Enforcing Town’s Ban on Restaurant Franchises

2011-11-21T17:41:00.000-06:00

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

Several employees of the town of Springdale, Utah, were entitled to qualified immunity for acting to enforce a town ordinance that banned franchised restaurants in connection with a suit brought by a sandwich shop franchisee contesting the constitutionality of the ordinance, according to a federal district court in Salt Lake City, Utah.

“Formula Restaurants”

In order to preserve the unique character of Springdale—a small, historic town just outside Zion’s National Park—the town passed the ordinance banning "formula restaurants" in 2006. The ordinance specifically defined "formula restaurant or delicatessen" as any "business which is required by contractual or other arrangement to provide any of the following: substantially identical named menu items, packaging, food preparation methods, employee uniforms, interior décor, signage, exterior design, or name as any other restaurant or delicatessen in any other location."

The ordinance went on to state that "formula restaurants and formula delicatessens" were "incompatible with the [town’s] general plan …because of the limited amount of private land available within the town’s boundaries; the large size or scale required of such uses; excessive noise, odor or light emissions; their excessive use of limited resources and the undue burden they place on public utilities and services, or because they are of a character hereby found to be in conflict with the town’s general plan."

Nonrenewal of License

After initially issuing a business license to the franchisee for operation of a sandwich shop, the town refused to renew the license upon realizing that the planned shop was to be a franchised Subway restaurant. In addition, the town’s fire marshall refused to perform a fire inspection of the business.
Unable to open for business as a result, the franchisee filed suit against the town, various town employees, and members of the town council for monetary damages and declaratory and injunctive relief. The franchisee subsequently stipulated to the dismissal of the council members, agreeing that they were entitled to legislative immunity.

Immunity

Qualified immunity insulated government officials from personal civil liability as long as their conduct did not violate clearly established statutory or constitutional rights of which a reasonable person would have known, the court noted. Faced with the officials’ contention that qualified immunity applied, the franchisee bore the burden of showing that a reasonable official should have known that his specific conduct violated the franchisee’s rights under clearly established law.

The franchisee correctly contended that state governments could not significantly burden interstate commerce through discriminatory, protectionist legislation. the court remarked. However, the franchisee failed to demonstrate that facially neutral laws prohibiting franchise restaurants had been clearly established as violating that constitutional principle, the court decided.

The franchisee identified a single Eleventh Circuit case on point, Cachia v. Islamorada (CCH Business Franchise Guide ¶13,974), holding that a local regulation banning franchise restaurants should be subject to a heightened level of scrutiny under the Dormant Commerce Clause. With no Supreme Court or Tenth Circuit cases on point, and only one circuit case explicitly suggesting the ordinance could potentially be unconstitutional, the law governing this area was not clearly established, the court held.

The decision is Izzy Poco, LLC v. Springdale, CCH Business Franchise Guide ¶14,715.

Alaska High Court Declines to Follow Current FTC Interpretations

2011-11-18T15:53:00.000-06:00

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

The Alaska legislature’s directive that courts should give great weight to the Federal Trade Commission and federal court interpretations of the Federal Trade Commission Act when interpreting the Alaska Unfair Trade Practices and Consumer Protection Act (CPA) did not require the Alaska Supreme Court to overrule previous decisions under the law, the state high court held.

An electric company alleged that it incurred lost profits and expenses because of a construction company’s (1) inability to timely provide permits, materials, and instructions as required by a contract entered into by the parties and (2) presentation of falsified requests for additional compensation in the amount of $5.7 million.

The electric company brought an action against the construction company, claiming misrepresentation, failure to make disclosures, and violation of CPA. At the close of trial, the court refused to direct a verdict for the electric company and gave a jury instruction based on the existing Alaska standards on unfair and deceptive practices rather than based on current FTC Act interpretations, as requested by the electric company.

In three special verdicts, the jury found that the construction company did not breach any contractual or common law obligations and did not engage in unfair trade practices. Instead, the jury found that the electric company breached contractual obligations to the construction company, breached the implied covenant of good faith and fair dealing, engaged in misrepresentations, and committed unfair trade practices. The jury awarded the construction company damages of more than $98,000, which was trebled under the CPA.

The electric company appealed, arguing that the trial court erred in refusing to grant it a directed verdict and refusing to give a jury instruction based on current interpretations of unfairness and deception promulgated by the FTC and federal courts, as required by a directive of the Alaska legislature.

Legislative Directive

In 1974, the Alaska legislature directed Alaska courts to give due consideration and great weight to the FTC and federal interpretation of the Federal Trade Commission Act in order to provide uniformity in unfair trade laws.

However, in State v. O’Neill Investigations, Inc. (609 P.2d 520, Alaska 1980), the Alaska Supreme Court held that the CPA had a “fixed meaning” derived from agency and judicial interpretation of the Federal Trade Commission Act. Since that case, the federal standards for unfair and deceptive practices have changed, while Alaska courts have continued to follow the standard set forth in O’Neill.

In this case, the state high court ruled that the trial court properly followed the O’Neill standards because incorporating current federal interpretations into the CPA would result in a loss of protection for Alaska consumers and businesses. It concluded that Alaska courts should continue to adhere to the CPA case law precedents for unfairness and deception.

“We decline to abandon our prior case law: We do not adopt the FTC’s 1980 policy statement now codified at 15 U.S.C. §45(n) as the standard for evaluating whether a practice be deemed unfair under the Alaska UTPA. We also decline to depart from our precedent regarding the definition of a deceptive practice. We thus conclude that the trial court did not err in evaluating [the electric company’s] motions or formulating jury instruction 28 according to our prior definitions of deceptive or unfair trade practices.”

The November 4 decision is ASRC Energy Services Power and Communications, LLC v. Golden Valley Electric Association, Inc., CCH State Unfair Trade Practices Law ¶32,352.

Equipment Dealer Was Not Connecticut “Franchise”

2011-11-17T17:11:00.001-06:00

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

The relationship between a terminated dealer of outdoor power equipment and a manufacturer was not a "franchise" under the meaning of the Connecticut Franchise Act (CFA) because the dealer failed to show that more than 50% of its business resulted from the relationship, the U.S. Court of Appeals in Chicago has ruled.

A federal district court’s grant of summary judgment in favor of the manufacturer on the dealer’s CFA claim (Business Franchise Guide ¶14,551) was affirmed.

Association with Franchisor’s Trademark

To qualify as a “franchise” under the CFA, the dealer must be substantially associated with the franchisor’s trademark. To be substantially associated with the franchisor’s trademark, the dealer must show that most, if not all, of its business was derived from association with the franchisor, the court noted.

Based on the "most or all" formulation, federal courts have found that a franchise existed only where at least half of the plaintiff’s business resulted from its relationship with the defendants.

In the district court, resolution of the dealer’s CFA claim hinged on testimony submitted by the dealer’s president. Much of that testimony, in which the president detailed the gross profits and gross sales of the business, was stricken by the court as inadmissible expert testimony on the grounds that the dealer had not disclosed the president as an expert witness.

Gross Profits

Regardless of whether the president’s statements were considered to be expert or lay testimony, they were inadmissible as based on the president’s opinion rather than any objective analysis. Both lay and expert testimony was inadmissible where it consisted of unsupported inferences from raw data, according to the court.

In this instance, the president’s opinion that sales and gross profits from its Sprinkler Hose division should have been disregarded was inadmissible. If the sales and gross profits from the division were included in the overall calculations, the total gross profits of the dealer’s business derived from the parties’ relationship ranged from 34.41% to 41.37%.

Gross Sales

Although the federal district court excluded the president’s opinion on whether the sales of the manufacturer’s products by Home Depot should be included in the total sales figures for the dealer, given the president’s role as the dealer’s president and secretary, he could likely assess the appropriateness of including those sales, according to the appellate court. However, in light of the purpose of the CFA, it made sense only to include only the amount of commissions on Home Depot sales that the dealer would lose as a result of its termination, not the full sales price of those products, in determining the dealer’s gross sales.

If only the commissions the dealer would lose from the Home Depot sales were used in determining the dealer’s gross sales of the manufacturer’s products, the manufacturer’s products still accounted for less than 50% of the dealer’s total sales. In the relevant years, the total gross sales of the dealer’s business that derived from the parties’ relationship ranged from 26% to 35%.

Failure of Business

Finally, the fact that the dealer went out of business shortly after its termination failed to establish, on its own, that the dealer was substantially associated with the manufacturer’s trademark under the CFA, the court determined. No court had relied solely on the fact that a company went out of business to conclude that a franchise relationship existed between two parties, the court observed.

More importantly, the dealer’s claim that the termination caused it to go out of business was inconsistent with the position it took before the federal district court that the loss of the relationship with the manufacturer "was not the death knell” because the dealer could have survived “absent a dire economy."

The decision is Echo, Inc. v. Timberland Machines & Irrigation, Inc., CCH Business Franchise Guide ¶14,714.

Leibowitz Recites FTC Accomplishments, Future Plans at Nomination Hearing

2011-11-16T23:31:00.000-06:00

This posting was written by John W. Arden.

At a hearing on his nomination for a second term as Commissioner yesterday, FTC Chairman Jon Leibowitz recounted some of the achievements of the agency during the last few years and spoke about a “portfolio of issues” that he plans to address during his next term.

Speaking before the Senate Committee on Commerce, Science, and Transportation, Leibowitz said that it has been “a wonderful opportunity” to serve on the FTC for the past seven years, including more than two years as Chairman.

“Just three years shy of our centennial, the FTC is the nation’s premier consumer protection agency,” he said in a prepared statement. “We play a critical role in freeing the marketplace from predatory, fraudulent, and anticompetitive conduct that tilts the playing field against consumers and honest business people.”

According to the Chairman, the “small agency with a big mission” has prioritized the pursuit of unfair and deceptive practices aimed at financially distressed consumers, addressed consumer privacy from both enforcement and policy perspectives, focused on health care competition, and monitored closely petroleum markets.

The growth of the Internet, together with the economic downturn, has fueled a resurgence of “last dollar frauds” aimed at the most vulnerable consumers. These include foreclosure rescue scams, sham debt relief, and bogus job opportunities. The Commission has partnered with state attorneys general and other state agencies to bring more than 400 cases against such schemes.

Consumer privacy has been—and will continue to be—a major focus on Commission enforcement and policy, according to Leibowitz. In the past decade, the FTC has brought more than 100 spam and spyware cases, more than 30 data security cases, and nearly 80 cases for violation of the Do Not Call rule.

Last December, the FTC issued a report setting forth critical self-regulatory principles that seek to promote consumer privacy, while allow industry to innovate on the Internet, he said.

“Of course, protecting privacy in the face of new technologies will remain a challenge. We are aware of this Committee’s concerns about the privacy implications of mobile apps, flash cookies, geolocation, and facial recognition; the value of industry-wide codes of conduct; and the difficulty safeguarding privacy when users of electronic devices every year seem to grow younger as well as more tech-savvy than their parents.”

Health care competition will remain a top priority for the Commission, particularly challenging hospital mergers that are likely to raise prices and “pay for delay” pharmaceutical settlements, he said.

In light of the impact of gasoline prices on American families, the FTC will continue to monitor petroleum markets closely. Recently, the FTC staff issued a study on examining the various factors that increase the price of gasoline, including OPEC’s inherently anticompetitive behavior and the rising demand in China and India.

The agency will continue to issue industry studies such as the periodic reports about the marketing of violent entertainment to children and the marketing of healthy food to children, the Chairman concluded.

Text of Commissioner Leibowitz’s prepared statement appears here on the FTC website.

Consumer Class Claims on Health Care Discount Ads Rejected

2011-11-15T16:53:00.002-06:00

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

Consumers could not pursue deceptive advertising claims against providers of a health care discount program as a class action because the claims were governed by the varying consumer protection laws of different states and factual variations abounded, included varying advertisements in different states, the U.S. Court of Appeals In Cincinnati has ruled.

In 2007, Universal Health Card and Coverdell & Company created a program designed to provide health care discounts to consumers. Membership in the program was touted as giving consumers access to a network of health care providers that had agreed to lower their prices for members.

Universal placed ads in newspapers around the country encouraging customers to visit its website or call its toll-free hotline to learn more about the program and to sign up for a membership. Coverdell was responsible for maintaining the network of health care providers and for reviewing Universal’s advertising materials.

Consumers discovered that health care providers listed in the discount network had never heard of the program, and complained that the newspaper advertisements, designed to look like news stories and dubbed “advertorials,” were deceptive. Two disenchanted consumers sued Universal and Coverdell seeking to represent a nationwide class of all people who had joined the program.

State Consumer Protection Laws

Ohio’s choice of law rules made it clear that the consumer protection laws of the state where each injury took place would govern these claims, the court determined. In view of this and the consumers’ appropriate concession that the consumer protection laws of the affected states varied in material ways, the court found that no common legal issues favored a class-action approach to resolving this dispute.

Varied Ads, Need for Particularized Proof

Advertisements for the program varied to account for the different requirements of each state’s consumer protection laws—a point the consumers acknowledges but could not overcome, according to the court.

In addition, a key part of the consumers’ claim was that the program was worthless because the listed healthcare providers near the consumers did not offer the promised discounts or because there were no listed providers near them in the first place. But to establish the point, the consumers would need to make particularized showings in different parts of the country, the court said.

Even if callers heard identical sales pitches, Internet visitors saw the same website, and purchasers received the same fulfillment kit, these similarities established only that there was some factual overlap, not a predominant factual overlap among the claims and surely not one sufficient to overcome the key defect that the claims had to be resolved under different legal standards.

The court affirmed a decision striking the class allegations and dismissing this lawsuit without prejudice against both Universal and Coverdell.

The November 10 opinion in Pilgrim v. Universal Health Card, LLC will be reported at CCH Advertising Law Guide ¶64,467.

Prior Settlements Did Not Preclude Antitrust Suit Against Bar Review Course Provider

2011-11-14T14:51:00.001-06:00

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

The U.S. Court of Appeals in San Francisco last week reversed the dismissal of an antitrust class action against West Publishing Corporation, its BAR/BRI subsidiary, and Kaplan, Inc., brought on behalf of law students and lawyers purchased bar review courses between August 2006 and March 2011.

Bar to Current Action?

The lower court had erred in concluding that earlier settlements barred the claims in the current action that BAR/BRI engaged in monopolistic behavior and paid Kaplan large sums of money to refrain from entering the bar review market.

The appellate court concluded that a $49 million settlement with consumers who purchased a BAR/BRI course between August 1, 1997, and July 31, 2006, (Rodriguez v. West Publishing Corp., 2009-1 Trade Cases ¶76,614) did not bar the current suit for damages and prospective relief.

The current plaintiffs’ interests in a monetary recovery were not represented by the plaintiffs in the earlier suit. In addition, the earlier settlement did not preclude the current plaintiffs from seeking injunctive relief for alleged conduct that took place before that settlement was entered.

Shared Lawyer, Interests

Although they shared a lawyer and some interests with the earlier class, the earlier settlement did not necessarily address all their potential interests, nor were those similarities sufficient for a finding of virtual representation, in the appellate court’s view.

Another antitrust suit brought in 2007 on behalf of two individual law students who intended to take the bar exam in 2010 (Schall v. West Publishing Corp.) did not bind the plaintiffs in the current action.

The plaintiffs in the current class action were not a party to this earlier action and their interests in a monetary recovery and injunctive relief were not represented in the suit. Thus, they could not be bound by the disposition of that case.

The November 7, 2011, not-for-publication decision in Stetson v. West Publishing Corp., No. 08-55818, appears at 2011-2 Trade Cases ¶77,671.

Yelp! Not Liable for Unfavorable Business Reviews, Ratings on Website

2011-11-11T16:31:00.003-06:00

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

Businesses that received unfavorable reviews and “star ratings” on Yelp.com were barred by the Communications Decency Act from asserting civil extortion and California Unfair Competition Law claims based on Yelp!’s alleged manipulation of reviews, the federal district court in San Francisco has ruled.

The court dismissed with prejudice a third amended consolidated class action complaint alleging that Yelp! unlawfully manipulated reviews in order to induce businesses to pay for advertising in exchange for better ratings and higher ranking of favorable reviews.

Content Creation

Section 230(c) (1) of the Communications Decency Act (CDA) shields an interactive service provider from liability for publishing third-party content. The businesses argued that Yelp! did not qualify for CDA immunity because it participated in creating unlawful content on its site.

They alleged that approximately 200 employees and others acting on behalf of or paid by Yelp! authored negative reviews of businesses that refused to purchase advertising from Yelp!. Such allegations, however, were speculative, failing to “raise more than a mere possibility” that Yelp! had authored or manipulated reviews of the businesses, the court found.

Manipulation of User Reviews

The court also held that the CDA protected Yelp! from liability in connection with its alleged manipulation of user-generated reviews.

Decisions regarding whether to publish, exclude, promote, or rank user reviews were part of the “traditional editorial function” recognized under Sec. 230(c)(1). Therefore, the businesses’ allegations of extortion based on Yelp!’s alleged manipulation of their review pages—by removing certain reviews and publishing others or changing their order of appearance—fell within the conduct immunized by the CDA.

“Star Ratings”

CDA immunity also extended to Yelp!’s aggregate “star ratings” appearing at the top of each business’s review page, the court determined. The ratings did not constitute editorial content created by Yelp!, as the businesses contended. The ratings were based on the aggregation of user-generated data. Decisions regarding which reviews to include in calculating aggregate star ratings were within Yelp!’s editorial discretion, according to the court.

Moreover, Sec. 230(c) (1) of the CDA did not prevent a service provider from making editorial decisions in bad faith or with nefarious motives. This conclusion was supported by Sec. 230(c) (2), the so-called “good Samaritan” provision, in which Congress inserted a “good faith” requirement to qualify for content-blocking immunity.

“Although the Court is sympathetic to Plaintiffs’ complaint, the sweep of Sec. 230(c)(1) as a matter of text and legislative purpose is broad,” the court noted. Therefore, even if Yelp! had made an extortionate threat by manipulating user reviews, it nevertheless would be immune from suit under Sec. 230(c)(1), the court said.

The October 26 decision in Levitt v. Yelp! Inc., appears at CCH Guide to Computer Law ¶50,290 and CCH Advertising Law Guide ¶64,491.

Arbitrable Claims Must Be Arbitrated, Even If Brought With Nonarbitrable Ones: Supreme Court

2011-11-10T19:59:00.008-06:00

This posting was written by John W. Arden.

The Federal Arbitration Act (FAA) requires the arbitration of pendent arbitrable claims brought in a court action that includes nonarbitrable claims, even when the result would be the inefficient maintenance of separate proceedings in different forums, the U.S. Supreme Court held on November 7.

Thus, a Florida state court erred in refusing to compel arbitration of claims because two of the four claims brought in an action were nonarbitrable, including a claim brought under the Florida Deceptive and Unfair Trade Practices Act (FDUTPA).

Courts must examine a complaint with care to assess whether any individual claim must be arbitrated, the Supreme Court advised in a per curiam opinion.

Investment Losses

In this instance, 19 individuals and entities that purchased interests in one of three limited partnerships brought an action against the partnerships, an investment company, and an auditing firm after the partnerships lost millions of dollars investing with notorious financier Bernie Madoff.

Only the claims against the auditing firm (KPMG) were at issue in this case. The individuals alleged four causes of action: negligent misrepresentation, violation of the Florida Deceptive and Unfair Trade Practices Act, professional malpractice, and aiding and abetting a breach of fiduciary duty.

The individuals and entities alleged that KPMG failed to use proper auditing standards with respect to the financial statements of the partnerships, leading to “substantial misrepresentations” about the funds and resulting in investment losses.

Motion to Compel Arbitration

KPMG moved to compel arbitration based on a clause in its auditing service agreement with the partnerships and investment company. That clause stated that any dispute or claim involving any person or entity for whose benefit auditing services were provided was to be resolved by mediation or arbitration.

The Florida circuit court denied the motion to compel arbitration and the court of appeals affirmed the ruling, noting that none of the individuals or entities bringing suit expressly assented to the auditing agreement or the arbitration provision. The arbitration clause could be enforced only if the claims were derivative—that is, arising from the auditing performed under the auditing services agreement.

The appellate court held that the negligent misrepresentation claims and the FDUTPA claims were “direct” rather than derivative, and therefore were not abitrable. However, the court failed to address the abitrability of the remaining two claims—professional malpractice and aiding and abetting a breach of fiduciary duty.

Policy in Favor of Arbitration

According to the Supreme Court, the Federal Arbitration Act reflected an “emphatic federal policy in favor of arbitral dispute resolution.” Mitsubishi Motors Corp. v. Soler-Chrysler Plymouth, Inc., 473 U.S. 614 (1985), CCH Business Franchise Guide ¶8387. This policy requires courts to enforce the bargain of the parties to arbitrate.

“What is at issue is the Court of Appeal’s apparent refusal to compel arbitration on any of the four claims based solely on a finding that two of them, the claim of negligent misrepresentation and the alleged violation of the FDUTPA, were nonarbitrable,” the court stated.

The Supreme Court has held that the FAA “leaves no place for the exercise of discretion by a district court, but instead mandates that district courts shall direct the parties to proceed to arbitration on issues as to which an arbitration agreement has been signed.” Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213 (1985).

When a complaint contains both arbtirable and nonarbitrable claims, the FAA requires a court to compel arbitration of the arbitrable claims, even when such a ruling would cause the inefficient maintenance of separate proceedings in different forums.

“To implement this holding, courts must examine a complaint with care to assess whether any individual claim must be arbitrable. The failure to do so is subject to immediate review.”

The judgment of the Florida appellate court was vacated and the case was remanded for examination of whether either of the remaining two claims required arbitration.

The decision is KPMG LLP v. Cocchi, No. 10-1521, November 7, 2011. Text of the opinion will appear in CCH Business Franchise Guide and CCH State Unfair Trade Practices Law.

Justice Department Requires Health Insurance Divestiture in Montana

2011-11-09T17:48:00.002-06:00

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

The Department of Justice Antitrust Division announced on November 8 that it will require New West Health Services Inc. to sell the majority of its commercial health-insurance business to a third-party buyer and to provide additional relief in order to alleviate agency concerns that a proposed six-year exclusive agreement between five of New West’s six hospital owners and Blue Cross and Blue Shield of Montana, Inc. (Blue Cross) would substantially reduce health-insurance competition in the state.

Elimination of Competitor

According to the government's complaint, filed in the federal district court in Billings, Montana at the same time as the proposed settlement, the original planned transaction would have effectively eliminated New West—the third-largest health insurer in Montana—as a competitor in that market, resulting in higher prices and lower quality services.

New West is one of only two significant competitors to Blue Cross in the sale of commercial health insurance in the Billings, Bozeman, Helena, and Missoula areas of the state, the Antitrust Division stated.

The complaint alleged that the proposed transaction likely would have caused New West to exit the markets for commercial health insurance because, once the five hospital owners stopped purchasing health insurance from New West, they likely would have significantly reduced their support for New West and its efforts to win commercial health-insurance customers.

These anticompetitive effects would have been exacerbated by a provision in the parties’ agreement that requires Blue Cross to give the hospital owners two seats on Blue Cross’ board of directors if the hospitals do not compete with Blue Cross in the sale of commercial health insurance, the agency contended.

Proposed Acquirer

Under the proposed settlement, New West must promptly divest its remaining commercial health-insurance business to an acquirer with the "intent and capability to be an effective competitor." The Justice Department has tentatively approved PacificSource Health Plans, a non-profit health insurer based in Springfield, Ore., as the acquirer, and the hospital owners must first attempt to sell the assets to PacificSource before selling to another purchaser.

The proposed settlement further prevents the agreement from harming competition by providing the approved new entrant with the necessary assets to compete in the commercial health-insurance markets in Montana, and it also contains provisions to prevent Blue Cross from interfering with the acquirer’s ability to compete effectively.

The hospital owners would be required to enter three-year contracts with the acquirer to provide health-care services on terms that are substantially similar to their existing contractual terms with New West. At the acquirer’s option, New West and the five hospital owners must also use their best efforts to assign the health-care provider contracts not under their control to the acquirer or to lease New West’s provider network to the acquirer for up to three years.

These requirements were important, in the government's view, because to compete effectively, health insurers need a network of health-care providers at competitive rates.

Notification of Exclusive Contracts

Finally, Blue Cross would have to notify the department and the state of Montana before it used exclusive contracts with health-insurance brokers, or exclusive or most-favored-nation provisions in its agreements with health-care providers.

“This settlement ensures that Montana residents will continue to benefit from competitive choices for commercial health insurance,” said Sharis A. Pozen, Acting Assistant Attorney General in charge of the Department of Justice Antitrust Division. “We are committed to preserving competition in the health-insurance industry because competition spurs insurers to lower prices, enhance services and increase quality.”

If approved by the court, the proposed settlement would resolve the lawsuit and the Justice Department’s competitive concerns.

The Justice Department worked closely with the Montana Attorney General’s office in its investigation of the agreement between Blue Cross and New West’s owners. “This is another example of close cooperation between the department’s Antitrust Division and state antitrust officials resulting in an outcome that protects competition and benefits consumers,” Acting Assistant Attorney General Pozen added.

The text of the proposed final judgment in United States v. Blue Cross Blue Shield of Montana, Inc., Case 1:11-cv-00123-RFC, will appear at CCH Trade Regulation Reports ¶51,000.

A press release, the complaint, and the proposed final judgment in the case appear on the website of the U.S. Department of Justice Antitrust Division.

Federal Courts Differ Over Arbitrability of California Consumer Claims

2011-11-08T16:10:00.003-06:00

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

Two federal district courts in California have reached opposite conclusions on the question of whether claims for injunctive relief under California false advertising and consumer protection statutes are subject to arbitration.

Nelson v. AT&T Mobility LLC

The federal district court in San Francisco held that the Federal Arbitration Act preempted California Supreme Court decisions barring arbitration of claims for injunctive relief under the state’s consumer statutes, in Nelson v. AT&T Mobility LLC, No. C10-4802 THE, (ND Cal. Aug. 18, 2011).

An AT&T wireless customer asserted class action claims under the California Unfair Competition Law (UCL) and Consumers Legal Remedies Act (CLRA) seeking injunctive relief to bar AT&T from continuing to engage in business practices including alleged overbilling by improperly calculating surcharges on monthly bills.

The court held that the U.S. Supreme Court’s April 27, 2011 decision in AT&T v. Concepcion (CCH Advertising Law Guide ¶64,265) compelled arbitration of Nelson’s claims.

Ferguson v. Corinthian Colleges

The federal district court in Santa Ana expressly declined to follow the Nelson decision in Ferguson v. Corinthian Colleges, Nos. SACV 11-0127 DOC (AJWx) and SACV 11-0259 (AJWx), (CD Cal. Oct. 6, 2011).

Students asserted class action claims under the UCL, CLRA, and the California False Advertising Law (FAL) alleging that Corinthian used fraudulent misrepresentations to entice prospective students to enroll. Through Corinthian’s various websites, the students claimed they were deceived about federal financial aid, the true cost of attending the programs, the value of Corinthian’s accreditations, and the employment prospects and career placement services that students could expect.

The court denied Corinthian’s Motion to Compel Individual Arbitration, holding that the statutory purpose of the injunctive relief provisions of the UCL, FAL, and CLRA and the public interest concerns in this case likely could not be met through arbitration. The court found no apparent conflict with the Federal Arbitration Act and noted that Concepcion did not take a position on the arbitrability of public injunction actions.

These conflicting decisions highlight the unresolved tension between state consumer protection law and the policies favoring arbitration of disputes embodied in the Federal Arbitration Act.

The opinions in Nelson v. AT&T Mobility LLC and Ferguson v. Corinthian Colleges will be reported in CCH Advertising Law Guide.

Senate Bill Restoring Per Se Rule for Resale Price Maintenance Passes Judiciary Committee

2011-11-07T13:36:00.003-06:00

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

The Senate Judiciary Committee has approved legislation that would restore the rule of per se illegality for minimum resale price maintenance (RPM). The committee ordered reported the proposed “Discount Pricing Consumer Protection Act” (S. 75) without amendment on November 3.

The measure would reinstate a rule that was overturned by a five-to-four decision of the U.S. Supreme Court in Leegin Creative Leather Products, Inc. v. PSKS, Inc. (2007-1 Trade Cases ¶75,753).

Under Leegin, RPM agreements are judged under the rule of reason, which requires a fact finder to consider all of the circumstances to distinguish “between restraints with anticompetitive effect that are harmful to the consumer and restraints stimulating competition that are in the consumer's best interest.”

The Leegin decision overturned a nearly 100-year-old precedent, Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U. S. 373, which made it per se illegal under Sec. 1 of the Sherman Act for a manufacturer and its distributor to agree on the minimum price the distributor can charge for the manufacturer's goods.

The bill was introduced by Senator Herb Kohl (D-WI), chairman of the Senate Antitrust, Competition Policy and Consumer Rights panel, in January. It is co-sponsored by Senators Dianne Feinstein (D-CA), Charles Schumer (D-NY), Richard Durbin (D-IL), Sheldon Whitehouse (D-RI), Amy Klobuchar (D-MN), Al Franken (D-MN), Ron Wyden (D-OR), and Richard Blumenthal (D-CT).

It is identical to legislation introduced in the last two Congresses. In the 111th Congress, the measure was approved by the Senate Judiciary Committee.

The proposal would amend Sec. 1 of the Sherman Act by adding after the first sentence the following:

“Any contract, combination, conspiracy or agreement setting a minimum price below which a product or service cannot be sold by a retailer, wholesaler, or distributor shall violate this Act.”

The provision would take effect 90 days after the date of enactment.

“Allowing manufacturers to set minimum retail prices threatens the very existence of discounting and discount stores, and causes higher prices for consumers,” Senator Kohl said in a November 3 statement, announcing the committee’s action. “This legislation will ensure that stores can sell products at a discounted rate, helping consumers to save more of their hard earned money.”

2011-11-04T15:37:00.001-05:00

Sprint, Cellular South Allege Injuries from Proposed AT&T/T-Mobile Combination

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

A private antitrust suit, seeking to enjoin AT&T Inc.’s proposed acquisition of T-Mobile USA, Inc., is still alive after the federal district court on Wednesday refused to dismiss on the ground that complaining competitors lacked “antitrust standing” to challenge the transaction.

The court found that, under many theories, Sprint Nextel Corporation and Cellular South, Inc., failed to allege antitrust injury. However, the complaining competitors adequately alleged antitrust injury with regard to the proposed acquisition’s effects on the market for mobile wireless devices. In addition, the motion to dismiss was denied insofar as it attacked Cellular South’s antitrust injury as a purchaser in the market for Global System for Mobile Communications (GSM) roaming.

The private actions followed the Justice Department’s filing of a complaint on August 31 to challenge the proposed acquisition—valued at approximately $39 billion. Sprint—the third largest national provider of mobile wireless services, with 50 million wireless customers—filed suit on September 6. On September 19, regional carrier Cellular South, Inc., and its wholly owned subsidiary Corr Wireless Communications, L.L.C., filed their complaint. They serve more than 887,000 customers located in Mississippi, Tennessee, Alabama Florida, and other surrounding states.

AT&T is the second largest national carrier, with 95 million customers. T-Mobile is the fourth largest national carrier, with 34 million customers.

In order to assess antitrust injury at the pleadings stage, the court had to make two distinct inquiries: (1) does plaintiff’s complaint allege a threatened injury-in-fact? And (2) does the threatened injury result from an anticompetitive aspect of defendant’s proposed conduct, i.e., that which would make the transaction illegal under the antitrust laws? The complaining competitors sought relief under § 16 of the Clayton Act, 15 U.S.C. § 26. The court explained that the antitrust standing inquiry under § 16 was “less demanding” than the standard under § 4 because § 16 “provides for injunctive relief, not treble damages.”

The court ruled that both Sprint and Cellular South adequately alleged a threatened antitrust injury with regard to the proposed acquisition’s effects on their access to mobile wireless devices. The complaining competitors alleged a merger-to-monopsony in support of this allegation.

The firms competed horizontally as sellers of wireless services and a broad array of wireless devices, including basic mobile phones, smartphones, tablets, and other products that access their voice and data networks, and as purchasers of wireless devices. Sprint and Cellular South alleged that post-merger, increased market concentration would enable the largest carriers (AT&T and Verizon) to coerce exclusionary handset deals. AT&T’s buying power post-merger could enable it to dictate terms to device manufacturers and otherwise impair the complaining competitors’ access to these necessary inputs. The threatened injury-in-fact was substantiated by the fact that AT&T and Verizon wielded their purchasing power in the past, the court noted.

Moreover, Cellular South alleged that the proposed acquisition threatens its access not only to handsets that are particularly desirable, but also, more fundamentally, to whole “ecosystems” of devices and network infrastructure—and customers. Cellular South claimed that AT&T and Verizon had exercised their purchasing power in the markets for devices and network equipment to propagate “their own separate ‘ecosystems’ of compatible infrastructure . . . that cannot be utilized by other competitors,” and that the proposed acquisition would increase the big carriers’ "incentive and power to exclude competitors from those ecosystems."

Cellular South also adequately alleged an antitrust injury in the market for GSM roaming based on the reduction in the number of potential roaming partners and resulting higher roaming prices, the court held. Cellular South alleged a vertical effect from the merger in that it would pay more to procure necessary inputs. Cellular South’s Corr Wireless subsidiary used GSM transmission technology and had been a roaming customer of T-Mobile and currently is a roaming customer of AT&T. Even if Corr Wireless represented only a small part of Cellular South’s business, Cellular South’s allegations suggested that its threatened loss from the merger was plausible, in the court’s view.

The court determined that Sprint and Cellular South lacked standing to challenge the proposed merger on the ground that it would lead to higher retail wireless rates. The possibility that a post-merger AT&T could raise market prices did not, without more, threaten injury-in-fact to Sprint and Cellular South. Raising market price or limiting output, while causing harm to consumers, would actually benefit competitors, the court explained.

Sprint also was found to lack standing to allege injury in the market for wireless spectrum. The court rejected Sprint’s contentions that AT&T’s acquisition of additional spectrum holdings from T-Mobile would “improperly shift the costs of spectrum development to Sprint and other carriers” and “further weaken their ability to compete on the merits by increasing their costs and delaying their access to new equipment.”

The November 2, 2011, decision in Sprint Nextel Corporation v. AT&T Inc., Civil Action No. 11-1600 (ESH), will appear at CCH 2011-2 Trade Cases ¶77,664.

2011-11-03T23:26:00.002-05:00

Manitoba Seeks Public Comment on Proposed Franchise Rules

This posting was written by John W. Arden.

The Province of Manitoba is seeking public comment on proposed regulations under the Manitoba Franchises Act, which was passed June 17, 2010 and will come into force on a date determined after the regulation is finalized.

The Act requires franchisors to make presale disclosures to prospective franchisees using a prescribed disclosure document, imposes a duty of good faith and fair dealing on parties to franchise agreements, and provides franchisees with the right to associate and a right of rescission.

As with franchise legislation enacted by Prince Edward Island and New Brunswick, the Manitoba statute is based on the Uniform Franchises Act (CCH Business Franchise Guide ¶7021), a model law that was adopted by the Uniform Law Conference of Canada.

As proposed, the regulation would establish specific requirements of the disclosure document, prescribe delivery methods, provide an exemption from the financial statement disclosure requirement for mature franchisors, and furnish a small investment exemption.

The Province has published a consultation paper, providing background to the law and regulations and describing the important provisions of the proposed regulation.

The “key features” of the proposal include:

Contents of disclosure document. The contents of the required disclosure document would closely follow those of Ontario, Prince Edward Island, and New Brunswick in order to facilitate use of documents prepared for other jurisdictions.

Wraparound documents. The proposal would allow use of a disclosure document prepared for another jurisdiction if the franchisor includes supplementary information required by Manitoba in a “wraparound document.”
Risk warnings. The rules would require the disclosure document to include warnings advising the franchisee to seek information about the franchisor and to obtain legal and financial advice.

Financial statements. The franchisor would be required to include its most recent financial statements in the disclosure document. A mature franchisor with a good record of compliance might qualify for an exemption from this requirement.

Electronic and courier delivery. The disclosure document and subsequent material changes may be delivered by a prepaid courier or by electronic means. A notice of rescission must be delivered by prepaid courier.

Delivery of disclosure document in parts. Although normal practice would be to deliver the entire contents of the disclosure document together, a franchisor would be permitted to deliver the disclosure document in parts.

Restriction on refundable deposits. A franchisor is permitted to request and receive from a franchisee a refundable deposit not exceeding 20 percent of the initial franchise fee to a maximum of $100,000.

Small investment exemption. A franchisor may receive an exemption from the disclosure document requirement where the franchisee’s total annual investment does not exceed $5,000.

Text of the consultation paper, proposed franchise regulation, and the Manitoba Law Commission’s Franchise Law Report 2008 appears here on the Province of Manitoba website.

Written comments on the proposed regulation may be submitted through December 15, 2011. They should be sent to Franchises Consultation, Manitoba Entrepreneurship, Training and Trade, Small Business Branch, 250-240 Graham Avenue, Winnipeg MB R3C 0J7, telephone: 204-945-7721; Fax: 204-983-3852; e-mail: Franchises@gov.mb.ca.

Further details will appear in CCH Business Franchise Guide.

2011-11-02T17:05:00.002-05:00

Customers Could Seek Costs of Mitigating Harm from Data Security Breach

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

Customers of supermarket chain operator Hannaford could pursue claims for breach of implied contract and negligence under Maine law against Hannaford for failing to prevent a data security breach, the U.S. Court of Appeals in Boston has held.

The customers stated valid claims for damages based on the costs of replacing their credit and debit cards and of purchasing credit insurance after a breach resulted in the theft of an estimated 4.2 million debit and credit card numbers, expiration dates, PINs, and other personal information.

Mitigation Damages

The damages sought by the customers amounted to “mitigation damages,” the court said. These damages were reasonably foreseeable, and recovery for them had not been barred by Maine for policy reasons.

Under Maine common law, a plaintiff may recover for costs and harms incurred during a reasonable effort to mitigate its damages resulting from a defendant’s negligence, regardless of whether the harm is nonphysical. To recover mitigation damages, plaintiffs needed only show that the efforts to mitigate were reasonable and that those efforts constituted a legal injury, such as actual money lost, rather than time or effort expended.

The case involved a large-scale, sophisticated, apparently global criminal operation conducted over three months and the deliberate taking of credit and debit card information. There had been actual misuse of customer data by the thieves, the court noted. The data had been used to run up thousands of improper charges to customers’ accounts; the customers were subject to a real risk of financial loss, making their mitigation efforts reasonable.

By the time Hannaford had notified customers of the breach, over 1,800 fraudulent charges had been identified, and the customers could have reasonably expected that many more fraudulent charges would follow. The customers’ claims for identity theft insurance and replacement card fees involved actual financial losses from credit and debit card misuse. Such damages were recoverable in Maine under both tort law and contract law, according to the court.

The customers could not, however, recover damages for their claims for loss of reward points, loss of reward point earning opportunities, and fees for pre-authorization arrangements. These injuries were too attenuated from the data breach because they were incurred as a result of third parties’ unpredictable responses to the cancellation of the customers’ credit or debit cards, the court said.

Breach of Implied Contract

With regard to the customers’ claims for breach of an implied contract, the court determined that a jury could find that, in a grocery transaction in which a customer uses a debit or credit card, there was an implied contract that Hannaford would not use the credit card data for other people’s purchases, would not sell the data to others, and would take reasonable measures to protect the information.

A customer using a credit card in a commercial transaction intended to provide that data to the merchant only and did not expect the merchant to allow unauthorized third parties to access the data, the court said.

Breach of a Fiduciary Duty

The customers failed, however, to assert a claim for breach of a fiduciary duty. First, the customers did not have a “confidential relationship” with Hannaford that would give rise to a fiduciary duty, according to the court. The “trust and confidence” allegedly placed by the customers in Hannaford was not the type of trust and confidence contemplated by Maine’s common law. Such claims typically involved family relationships, joint ventures or partnerships, and lender/borrower relations in which one party had taken advantage of another for purposes of acquiring or using the other’s property or assets. No such relationship existed in this case.

Second, the grocery purchase relationship between the parties was not characterized by a disparity in bargaining positions. Hannaford did not have a monopoly on the sale of groceries and did not require the use of credit or debit cards.

Third, the customers failed to allege that Hannaford abused a position of trust, the court said. There was no suggestion in the complaint that Hannaford provided anything but a fair exchange in groceries in return for the customers’ payments or that Hannaford somehow took advantage of the system of allowing customers to use credit and debit cards.

Unfair Trade Practices

Hannaford’s failure to disclose the breach did not give rise to a cause of action under Maine’s Unfair Trade Practices Act, the court decided. The private remedies provision of the Act required that the plaintiff suffer a loss of money or property as a result of the defendant’s unlawful act. Maine’s highest court had interpreted the Act as only allowing private actions for “substantial” injuries. The private remedies provision was to be read narrowly, particularly when common-law actions for negligence and breach of implied contract were available.

The decision in Anderson v. Hannaford Brothers Co., appears at CCH Privacy Law in Marketing ¶60,687.

2011-11-01T15:25:00.002-05:00

Remaining Funds in Visa Check/MasterMoney Class Action Awarded to Non-Profits

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

The American Antitrust Institute will receive half of the remaining settlement fund in a tying arrangement class action against the Visa and MasterCard payment card networks under a cy pres distribution, the federal district court in Brooklyn, New York, has decided.

Following distribution of approximately $2.6 billion from the settlement fund in the class action brought on behalf of millions of merchants against the two networks, approximately $1.5 million to $1.6 million was remaining in the fund.

The lead counsel for the plaintiffs had initially asked the court that the entire remainder be donated to the American Antitrust Institute—a non-profit organization dedicated to education, research, and advocacy concerning antitrust law. Ultimately, it was decided that the American Antitrust Institute would share the money with two other charitable organizations.

After determining that a cy pres award was a more appropriate manner for disposing of the remaining settlement funds than an additional distribution to class members, the court took up the issue of who would be granted the remaining funds. The cy pres donation amounted to roughly 0.057 percent to 0.061 percent of the total amount distributed to class members.

Distribution to Three Organizations

The funds were to be distributed as follows: 50 percent to the American Antitrust Institute; 25 percent to Consumers Union, a non-profit advocacy organization; and 25 percent to U.S. PIRG, a network of state public interest groups working on behalf of the American public on issues such as product safety, public health and health care reform, higher education, political corruption and voting rights.

The court denied a request from the Jewelers Vigilance Committee—a not-for-profit trade association for the U.S. precious metal, gem, and jewelry trade—for consideration as a recipient of the cy pres funds. The group was not an appropriate recipient. Its members who were members of the class had already benefited from the settlement.

Moreover, distribution to such narrowly-tailored interests would have had the effect of inequitably concentrating its benefit on a subset of the class as opposed to the class as a whole, in the court’s view.

The October 24, 2011 decision, In re Visa Check/MasterMoney Antitrust Litigation, appears at 2011-2 Trade Cases ¶ 77,654.

2011-10-31T15:30:00.002-05:00

Users Lacked Standing to Assert Privacy Claims Against Apple, Mobile App Developers

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

Users of mobile applications on Apple’s devices could not maintain an action against Apple and mobile app developers for alleged violations of various federal and state privacy laws, because the users failed to allege that they had suffered any injury, the federal district court in San Jose has decided.

Without sufficient allegations of any injury in fact, a federal district court concluded that the users did not have constitutional standing.

Users may download apps for Apple devices only through Apple’s "App Store" application and website. According to the complaint, Apple represented to users that it took precautions to safeguard their personal information against "theft, loss, and misuse, as well as against unauthorized access, disclosure, alteration, and destruction."

Apps Access User Information

However, the devices’ operating system allows apps—without consent of the users—to access, use and track the following information: address book, cell phone numbers, file system, geolocation, International Mobile Subscriber Identity, keyboard cache, photographs, SIM card serial number, and unique device identifier. Developers of apps are able to exploit this access to collect and track personal data without the user’s permission or knowledge.

The users brought suit against Apple and eight mobile app developers for violations of various federal and state laws, including the Computer Fraud and Abuse Act and California’s Computer Crime Law. Apple and the developers argued that the users lacked standing to bring suit, because they did not allege any injury in fact. Apple also argued that its privacy agreements with users barred the users’ claims.

Injury in Fact

To satisfy the constitutional standing requirements of Article III, plaintiffs must show that:

(1) They have suffered an injury in fact that is concrete and particularized and actual or imminent;

(2) The injury is fairly traceable to the challenged action of the defendant; and

(3) It is likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision.

In their complaint, the users alleged three injuries:

(1) Misappropriation or misuse of personal information;

(2) Diminution in value of the personal information, which is an "asset of economic value" due to its scarcity; and

(3) "Lost opportunity costs" in having installed the apps and diminution in value of the Apple devices because their insufficient security made them less valuable in light of the privacy concerns.

The court determined, however, that the users failed to allege any injury to themselves. The users did not identify which devices they used, if any of the developers accessed or tracked their personal information, and what harm, if any, resulted from such activity. As a result, the users failed to identify any concrete harm from Apple’s or the developers’ activities.

Injury Traceable to Defendants

In addition, the users failed to allege any injury that was fairly traceable to Apple or the developers. The users’ only allegation as to Apple was that Apple designed a platform that could potentially be used by the developers for harmful acts. Such conjectural or speculative allegations about the risk of harm are not sufficient for standing, the court concluded.

Lastly, Apple argued that "click-through" agreements with the users governed any potential liability for third-party apps on the users’ devices, and the express terms and conditions of the agreements barred claims against Apple for any alleged injuries.

The users argued that the agreements were unconscionable, providing no meaningful choice for users. While the court declined to determine whether the agreements were an absolute bar to the users’ claims, it noted that there is always a meaningful choice when a challenged term in a contract involves nonessential recreational activities—forgoing the activity.

The decision is In re iPhone Application Litigation, CCH Guide to Computer Law ¶50,268.

2011-10-28T15:45:00.001-05:00

Contact Lens Solution False Ad Claims Preempted by Food, Drug, and Cosmetic Act

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

Class action claims that a contact lens solution manufacturer used misleading advertising in violation of the California Unfair Competition Law (UCL) and False Advertising Law (FAL) were preempted by the Medical Devices Amendments of 1976 (MDA), an amendment to the Food, Drug, and Cosmetic Act (FDCA), according to the U.S. Court of Appeals of San Francisco.

The manufacturer advertised its contact lens disinfectant and cleaner as effective when in fact it caused many users to suffer infections, and the purchaser argued that the manufacturer knew its product was a poor disinfectant compared to other products. The solution was eventually recalled by the Food and Drug Administration.

Standing

A district court found that the purchaser lacked standing to bring the UCL and FAL claims because the purchaser and the class members never suffered an injury, were not forced to throw away unused solution by the recall, and did not lose money.

To have standing to bring a UCL claim, the purchaser needed to show an injury in fact and lost money as a result of the unfair competition.

Because class members paid money for a product based on advertising found to be false, the court held that they had standing to bring the claim. Class members would not have been willing to pay as much as they did for contact solution had they not been deceived by the advertising.

Preemption

While the trial court erred in its finding of standing, the claims were nonetheless dismissed as federally preempted. The claims were preempted by the Medical Devices Amendments of 1976 (MDA) to the Food, Drug, and Cosmetic Act (FDCA) because the UCL and FAL would impose a requirement that differed from the federal law.

State laws are preempted where a federal requirement was imposed on a device under the FDCA and the challenged state rule would impose a requirement that differed from, or added additional obligations to, the federal requirement. The application of California laws to this case would have imposed additional requirements separate from the federal requirements.

The decision is Degelmann v. Advanced Medical Optics Inc., CCH State Unfair Trade Practices Law ¶32,337.

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

2011-10-27T16:06:00.001-05:00

Apple Fails to State Antitrust Claims Against Samsung for Standards Setting Abuse

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

The federal district court in San Jose, California held on October 18 that Apple, Inc. failed to allege sufficient facts to support its claims that rival Samsung Electronics Ltd. violated Section 2 of the Sherman Act by abusing a private standard setting process for mobile wireless technology.

The court dismissed Apple’s claims under Section 1 of the Sherman Act as incompatible with its allegations supporting its section 2 claims. Apple’s California Unfair Competition Law claim predicated on Samsung’s Sherman Act violations also was dismissed.

Global Patent War

The ruling was the first blow to Apple in the U.S. in its global war with Samsung regarding several utility and design patents related to both parties' mobile device technologies. Cases are pending in at least ten countries. The Federal Court in Sydney, Australia issued an October 13 temporary ban on the sale of Samsung's Galaxy 10.1 tablets. In August, a court in Dusseldorf, Germany temporarily halted sales of Galaxy 10.1 tablets, while a court in The Hague banned sales of the South Korean company’s Galaxy S, S II smart phones.

According to the district court, Apple failed to allege sufficient facts to meet Fed.R.Civ.Pro. 9(b)’s heightened pleading standard in support of its Sherman Act monopolization claim. Apple contended that Samsung fraudulently induced the European Telecommunications Standards Institute (ETSI), a standard setting organization (SSO) for mobile wireless carrier technology, to adopt a standard incorporating a Samsung patent as essential technology.

Specifically, Samsung allegedly failed to disclose intellectual property rights in its patent and breached a promise to license its essential technology on fair, reasonable, and non-discriminatory (FRAN) terms to ESTI members.

Anticompetitive Conduct

In order to establish anticompetitive conduct for failure to disclose intellectual property rights, a plaintiff must show that there was an alternative technology that the SSO was considering during the standard setting process and that the SSO would have adopted an alternative standard had it known of the patent holder's intellectual property rights.

The court found that Apple failed to allege sufficient facts to support a plausible inference that if Samsung had disclosed its intellectual property rights to the ETSI, a viable alternative technology performing the same functionality would have been incorporated into the UMTS standard, or that the relevant functionality would not have been incorporated into the standard at all.

False Declarations

Apple's allegations that Samsung submitted false FRAND declarations were not sufficient to put Samsung on notice of the particular misconduct that created the basis of the alleged fraud, in the court’s view. Apple did not set forth facts establishing when the alleged false FRAND declarations were made, by whom they were made, or with regard to which patents were they made. The court granted Apple leave to amend its Sherman Act sec. 2 claims.

The court dismissed Apple’s restraint of trade claim under Section 1 of the Sherman Act without leave to amend. To state a violation under Section 1, a plaintiff must show a unity of common purpose or a common design and understanding, or a meeting of minds in an unlawful arrangement.

Unilateral Conduct

Apple’s allegation that Samsung unilaterally subverted ETSI’s collaborative standard-setting process in order to restrain trade was not reconcilable with its allegation that Samsung contracted with, combined with, or conspired with ETSI or is members to restrain trade, according to the court. Apple necessarily failed to allege a concerted action between Samsung and ETSI necessary to state a claim under Section 1, the court held.

The decision in Apple Inc. v. Samsung Electronics Co. Ltd., 11-CV-01846-LHK, will appear in CCH Trade Regulation Reporter and CCH Guide to Computer Law.

Further details regarding CCH Trade Regulation Reporter appear here. Details regarding CCH Guide to Computer Law appear here.

2011-10-26T17:35:00.000-05:00

Cement Firms Could Have Conspired to Fix Prices, Allocate Customers and Markets

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

Four vertically-integrated cement companies could have illegally conspired to fix prices and allocate customers and markets for ready-mix concrete in Florida through a course of parallel conduct alleged by direct and indirect purchasers, according to the federal district court in Miami.

The allegations of parallel conduct coinciding with the arrival of an executive at one of the cement producers nudged the claims of the purchasers across the line from conceivable to plausible.

The plaintiffs asserted that the executive made statements shortly after becoming head of one of the defending companies that implied an agreement had been made between the companies to raise the price of ready-mix concrete and to refrain from competing with each other’s customers.

Uniform Price Increases

The plaintiffs documented that the four companies all increased their ready-mix concrete by a uniform amount and eliminated their fuel surcharge in the face of declining demand, and offered specific examples where the companies refrained from competing for each other’s customers, even pointing to one case where a defendant retaliated against a co-conspirator for offering a low bid to one of its customers.

The plaintiffs also related an incident in which an independent trucking company refused to help an independent concrete producer carry mobile-mix concrete out of fear the defending producers would refuse to work with it. In addition, a letter from a division manager at one of the companies to the Department of Justice—expressing concerns about antitrust violations, and a purported corporate cover-up that included retaliation against the manager—lent further support for the existence of a conspiracy.

Taken together, it was plausible to infer a conspiracy among the four producers to fix the price of ready-mix concrete in the areas where they sold it, in the court’s view.

The allegations were, however, insufficient to permit a plausible inference that the conspiracy began before the executive joined the defending company, that the conspiracy involved the cement market, or that six other cement producers were directly involved, the court held.

The decision is In re: Florida Cement and Concrete Antitrust Litigation, 2011-2 Trade Cases ¶77,642.

2011-10-25T20:11:00.000-05:00

U.S. Conditionally Approves Acquisition of Sara Lee Bread Products

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

A proposed acquisition that would combine the largest and third largest bakers and sellers of sliced fresh bread in the United States has been approved by the Department of Justice Antitrust Division, subject to a series of divestitures intended to preserve competition in eight markets.

Grupo Bimbo S.A.B. de C.V., parent company of Bimbo Bakeries USA, can proceed with its acquisition of Sara Lee Corporation’s North American Fresh Bakery business under the terms of a proposed consent decree. The transaction was expected to close on November 5, according to Bimbo Bakeries.

The Justice Department alleged in a complaint filed on October 21 in the federal district court in Washington, D.C. that the transaction, without the divestitures, would have substantially increased concentration in various geographic markets for the sale of fresh bread and eliminate substantial head-to-head competition between Bimbo Bakeries and Sara Lee for sliced fresh bread sold in retail stores.

Specifically, the government alleged anticompetitive effects in eight relevant geographic markets for the sale of sliced bread: Los Angeles, Sacramento, San Diego, and San Francisco in California; Kansas City, Kansas; Omaha, Nebraska; Oklahoma City, Oklahoma; and the Harrisburg/Scranton area in Pennsylvania.

Under the proposed consent decree, which is subject to court approval, the companies must divest the rights to sell Sara Lee’s EarthGrains brand and brands in the Sara Lee family (Sara Lee, Sara Lee Classic, Sara Lee Soft & Smooth, Sara Lee Hearty & Delicious and Sara Lee Delightful) in California; Sara Lee’s EarthGrains brand and Bimbo’s Mrs Baird’s brand in the Kansas City area; Sara Lee’s EarthGrains brand in the Oklahoma City area; Sara Lee’s EarthGrains and Healthy Choice brands in the Omaha area; and Sara Lee’s Holsum and Milano brands in the Harrisburg/Scranton area.

In addition, the parties would be required to divest the associated manufacturing, distribution, and marketing assets necessary to compete effectively in the sale of those brands in those areas. The divestitures are intended to remedy the Justice Department’s antitrust concerns.

The complaint and proposed consent decree in U.S. v. Grupo Bimbo, S.A.B. de C.V., BBU, Inc., and Sara Lee Corp., No. 1:11cv01857, appears here on the Department of Justice Antitrust Division website.

Further details will be reported in CCH Trade Regulation Reporter.

2011-10-24T23:00:00.005-05:00

ABA Forum on Franchising “Continues to Be Strong”

This posting was written by John W. Arden.

The American Bar Association Forum on Franchising “continues to be strong, gain membership, and surpass expectations for attendance at annual Forums,” said Forum Chair Joseph J. Fittante during an October 21 “State of the Forum” address at the group's annual meeting.

Attendance at the annual meeting was up nearly 4 percent over last year, drawing 773 to the Marriott Waterfront Hotel in Baltimore. In 2010, 746 attended the annual meeting at the Hotel Del Coronado near San Diego. Last year’s turnout was a huge rebound from the 650 attending the 2009 annual meeting in Toronto.

A highlight of the last year was a survey of membership, which revealed one theme—members’ desire for more opportunities to be involved, said Fittante, a shareholder of Larkin Hoffman Daly & Lindgren in Minneapolis.

The Forum website has more information on opportunities to write for the quarterly Franchise Law Journal and the quarterly Franchise Lawyer newsletter. There are also opportunities to join Forum sub-groups, including the International Franchise and Distribution Division, the Corporate Counsel Division, the Litigation and Alternative Dispute Resolution Division, the Solo and Small Firm Network, the Membership Committee, the Program Committee, the Publications Committee, the Technology Committee, and the Diversity Committee.

Governing Committee Election

During the annual business meeting of the three-day forum, the group elected four new members of the governing committee by adopting—by voice vote—the report and recommendation of the nominating committee.

The new members of the governing committee are Deborah Coldwell of Hayes & Boone in Dallas/Fort Worth; Natalma McKnew of Smith Moore Leatherwood in Greenville, South Carolina; Karen Satterlee of Hilton Worldwide in McLean, Virginia; and Will K. Woods of Baker Botts LLP in Dallas.

Forum Awards

This year, the group did not present its Lewis G. Rudnick Award for substantial contributions to the development of the Forum and to franchise law as a discipline. The “lifetime achievement award” was given to John R.F. Baer in 2009 and to Rupert Barkoff and Andrew Selden in 2010.

The Young Leader Award was presented to Nicole Zellweger for her speaking, writing, and involvement in the Newcomer’s Network and Women’s Caucus. The Chair’s Explorer Award was given to Christian Thompson. The latter award is designed for newcomers to the Forum who have demonstrated an interest in pursuing a career in franchise law.

Highlights of the annual meeting included a plenary session on “Speed Reading People: Techniques to Improve Communications and Enhance Outcomes” and the Annual Franchise and Distribution Development session, presented by Lee J. Plave and Stuart Hershman.

Program co-chairs were Michael K. Lindsay and Karen Satterlee.

The 2012 annual meeting is scheduled for October 3-5 at the JW Marriott in Los Angeles. Further information regarding the Forum on Franchising appears here on the ABA website.

2011-10-21T12:18:00.003-05:00

Attorney, Wife Liable for RICO Fraudulent Insurance Claims

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

Two insurance companies succeeded—and three failed—in their RICO claims against an attorney who had participated in a scheme to defraud the insurers by submitting false claims for automobile insurance, the federal district court in San Juan, Puerto Rico, has ruled. Because the attorney’s RICO violations enriched both him and his spouse, their conjugal partnership was jointly liable for nearly a million dollars in damages that the attorney had caused.

Insurance Fraud Paradigm

Aetna Casualty Surety Co. v. P & B Autobody (43 F.3d 1546), a 1994 decision by the U.S. Court of Appeals for the First Circuit, provided a paradigm for analyzing RICO claims involving insurance fraud, the court observed. In accordance with Aetna, the insurers had to prove that: (1) each was an enterprise; (2) their business activities affected interstate or foreign commerce; (3) the defendant associated with each of them; (4) the defendant participated in the operation or management of each enterprise; and (5) the defendant’s participation in each enterprise was effected through a pattern of racketeering activity.

Enterprise, Interstate Commerce

The insurers were legitimate corporations authorized to engage in the business of insurance in Puerto Rico. Therefore, each insurer constituted a distinct enterprise. Moreover, to the extent that the insurers provided coverage to policyholders in the continental United States, their activities affected interstate commerce. The first and second Aetna criteria were therefore met, according to the court.

Association, Participation

As a policyholder or claimant under the plaintiffs’ insurance policies, the attorney associated with each of the insurers, the court reasoned. In addition, he participated in the conduct of the enterprises’ affairs by filing false claims that were paid by the insurers. RICO made it unlawful for any person who was employed by or associated with an interstate enterprise to “conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity.” In Reves v. Ernst & Young (CCH RICO Business Disputes Guide ¶8227), the U.S. Supreme Court construed the words “conduct or participate” to mean a defendant’s participation in the “operation or management” of the enterprise.

In this case, the attorney argued that he could not have participated in the operation or management of the insurance company enterprises because insurance company employees had not been involved in the scheme. Although some courts in the Second Circuit have adopted this “more restrictive” approach to the operation and management requirement (where participation required employee involvement in the fraudulent scheme), the attorney failed to fully develop his argument with respect to this approach. Alleging that insurance company insiders were not involved in the attorney’s fraud was insufficient to distinguish the holding in the Aetna case, which included insurance company employees as defendants. In light of the First Circuit’s liberal application of the RICO Act, and considering the role that insurance company employees had played in the Aetna scheme, the attorney’s argument was unavailing, the court concluded.

Accordingly, the third and fourth Aetna criteria were met, as well.

Pattern of Racketeering

The attorney contended that the insurers had to prove that two or more predicate acts were committed in connection with each enterprise. In the absence of any attempt to rebut this contention, and in light of the fact that case law appeared to be silent on the issue, the attorney’s “straightforward” interpretation of the fifth criterion was adopted. The undisputed facts showed that the attorney had committed a single act of racketeering in connection with each of three insurers. Accordingly, a pattern of racketeering was absent as to those insurers and their RICO claims failed. The claims asserted by the remaining two insurers, however, were successful. The attorney had committed multiple acts of racketeering in connection with each of them. Moreover, the acts were sufficiently related (they shared the same purpose, results, victims, and methods of commission) and they posed a threat of continued criminal activity, in the court’s view. The two insurers thus met all five Aetna criteria and prevailed on their RICO claims against the attorney.

Damages

The successful insurance companies were awarded a total of $955,703 in treble damages. The facts showed that the insurers had sustained losses of $112,500 and 206,068, respectively. After trebling, those damages increased to $337,500 and $618,203, respectively.

The September 30, 2011 case in Puerto Rico American Ins. Co. v. Burgos can be found at CCH RICO Business Disputes Guide ¶12,117.

2011-10-20T16:27:00.004-05:00

“Clinically Proven” Help-Baby-Sleep Labeling Could Be Deceptive

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

Johnson & Johnson’s labeling of its baby bath products as “clinically proven” to help babies sleep better could be deceptive and misleading in violation of the New Jersey Consumer Fraud Act, but a purchaser’s allegations of ascertainable loss were inadequate to establish a cause of action, the federal district court in Trenton has ruled.

The labels did not just make vague or highly subjective claims of simple superiority that could be considered puffery. The incorporation of the words “clinically proven” transformed a statement that might otherwise be considered puffery—the products would help babies sleep—into something that appeared to be both specific and measurable, according to the court.

Ascertainable Loss

In asserting ascertainable loss in a class action complaint, the purchaser alleged that J&J charged a premium of at least $1.00 for the products and that comparable products cost at least twenty-five percent less. However, the purchaser did not allege the price she paid for the products, their price generally, or the price of comparable products. The allegations of ascertainable loss were unsupported conclusory statements insufficient to withstand a motion to dismiss, the court determined.

The purchaser’s claims were dismissed without prejudice because it was conceivable that she could plead ascertainable loss with specificity, the court said.

The opinion in Lieberson v. Johnson & Johnson Consumer Companies, Inc. will be reported at CCH Advertising Law Guide ¶ 64,451.

2011-10-19T15:27:00.000-05:00

Projections of Store Openings Could Have Violated North Dakota Franchise Law

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

Pharmacy franchisor Medicine Shoppe International, Inc. could have breached the anti-fraud provisions of the North Dakota Franchise Investment Law (NDFIL) by allegedly making a material misstatement of fact in a Franchise Disclosure Document (FDD) filed by the franchisor with the North Dakota Securities Commissioner in 2009 when it projected the opening 0-1 stores in North Dakota, a federal district court in Fargo, North Dakota, has ruled.

In reality, the franchisor did not intend to offer any franchises in North Dakota of the type and trade name described in the FDD so as to avoid triggering the “most favored nations” clause in the franchise agreements of current franchisees, such as the two plaintiffs.

The plaintiff franchisees argued that they were induced to enter into renewal agreements with the franchisor specifically because they were assured that, by virtue of the “most favored nations” clauses in their renewal agreements, they were assured that if a better deal came along, they would be able to convert to it.

If a factfinder determined that the franchisor employed such a scheme as a way to defraud or commit deceit, it could also find a violation of the statute. Thus, genuine issues of fact existed with regard to whether the franchisor violated the NDFIL, the court held.

Private Right of Action

The franchisor’s contention that there was no private right of action under the NDFIL was rejected. The plain language of the statute stated that a franchisee or subfranchisor could bring an action against “any person who violates any provision of this chapter,” the court observed.

The decision is JMF, Inc. v. Medicine Shoppe Int’l, Inc., CCH Business Franchise Guide ¶14,692.

2011-10-18T17:23:00.001-05:00

“Do-Not-Track” Approach to Consumer Privacy Questioned by FTC Commissioner Rosch

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

Federal Trade Commissioner J. Thomas Rosch reiterated his doubts about the viability of a “do-not-track” mechanism to protect consumer privacy in the United States, in a speech delivered at the Loyola Chicago Antitrust Institute Forum last Friday. Commissioner Rosch has called the FTC staff’s recent endorsement of such a mechanism “premature.”

A do-not-track mechanism would purportedly enable consumers to choose whether to block the tracking of their online searching and browsing activities in order to limit targeted advertising. In an FTC staff report issued in December 2010, entitled “Protecting Consumer Privacy in an Era of Rapid Change: A Proposed Framework for Businesses and Policymakers,” the staff recommended the implementation of a do-not-track mechanism.

“Serious Reservations”

Commissioner Rosch concurred in the decision to issue the staff report for comment, but expressed “serious reservations” about the do-not-track proposal advanced in it. At the time the report was released, Commissioner William E. Kovacic also questioned the wisdom of do not track. However, Commissioner Kovacic left the agency earlier this month, leaving Rosch the only member of the Commission skeptical of the staff’s recommendation.

In his remarks in Chicago, Commissioner Rosch explained how the do-not-track approach to privacy protection has “generated attention not only from the Commission and the media, but also from Congress, the online industry, and a host of consumer advocacy groups.”

While there are bills in Congress that address broader privacy concerns without providing for a specific do-not-track mechanism, two pieces of legislation have been proposed this term that instruct the FTC to develop a specific do-not-track mechanism, according to Rosch.

Proposed Federal Legislation

The proposed “Do Not Track Me Online Act” (H.R. 654) would require the FTC to issue rules: (1) establishing standards for “an online opt-out mechanism; (2) requiring mandatory disclosures regarding the collection, use, and sharing of information; and (3) allowing consumers to otherwise prohibit the collection or use of a broad array of information transmitted online.

The proposed “Do-Not-Track Online Act of 2011” (S. 913) would require the FTC to issues rules: (1) establishing a mechanism whereby consumer can simply and easily opt out of having their personal information collected online—including on mobile devices; and (2) prohibiting the collection of personal information from consumers who have opted out.

Online Industry’s Efforts

The Commissioner criticized the online industry’s efforts to implement do not track. He questioned claims that these efforts provide consumers with the choice to eliminate behavioral advertising, tracking, or targeted advertising. Specially, he mentioned the browser-related mechanisms associated with Microsoft’s Internet Explorer 9, Mozilla’s Firefox, and Google’s Chrome and the self-regulatory regime of the Digital Advertising Alliance, which uses cookies to effectuate the choice mechanism.

According to Rosch, there are four overarching shortcomings with the industry’s efforts:

(1) Some of the mechanisms only allow consumers to opt out of behavioral advertising, but not all “tracking,” and there is a failure to alert consumers to this fact.

(2) Consumers may not be fully informed about the benefits or consequences of subscribing to a do-not-track mechanism. Commissioner Rosch expressed concern that “across-the-board_ opting out by consumers might reduce the overall financing that supports free content across the Internet, and accordingly, result in a decrease in innovation.

(3) There was not much evidence that the mechanisms were really working to alert consumers about the existence of tracking and online behavioral advertising. The rates of adoption are very low.

(4) The current proposals involve well-entrenched firms that might favor barriers to consumer tracking in order to create or raise entry barriers to rivals. The firms’ intentions might not be solely to protect consumers against behavioral tracking.

“[W]e cannot be blinded so much by our zeal to protect consumers from behavioral tracking that we lose sight of our competition mission,” Commissioner Rosch said. “There is probably nothing worse than to have firms with an anticompetitive agenda designing consumer protection initiatives.”

The text of Commissioner Rosch’s October 14 remarks, entitled “Do Not Track: Privacy in an Internet Age,” appears here.

2011-10-17T18:17:00.001-05:00

Franchisor Not “Employer” of Franchisee’s Employee Under Minimum Wage Law

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

A franchisor of pancake restaurants was not the “employer” of a waitress that was hired by one of its franchisees to work in its franchised restaurant for purposes of the Missouri Minimum Wage Law (MMWL), a Missouri appellate court has decided. Thus, the franchisor was entitled to summary judgment on the waitress’ claim alleging noncompliance with the MMWL. A ruling by a Missouri state trial court was affirmed.

The waitress filed suit seeking damages for the delay during which certain tipped employees were not paid the appropriate minimum wage as a result of reliance upon erroneous pronouncements made by the Missouri Department of Labor and Industrial Relations.

Elements of Employment Relationship

The evidence established that the franchisor had no ability to hire or fire the waitress during the period in question, the court determined. This included the waitress’ admission that a manger of the franchisee did the hiring and firing of employees at the restaurant.

Undisputed evidence also supported the conclusion that the franchisor did not supervise or control the waitress’ work or conditions of employment. In an attempt to refute that evidence, the waitress pointed to the fact that the franchisor took control of the restaurant after the franchisee defaulted and the franchise agreement was terminated. However, the franchisor’s ability to terminate the franchise agreement had no bearing on the ability of the franchisor to supervise and control the waitress’ employment.

The franchisor acted solely as a payroll service provider to the franchisee and it did not determine the waitress’ rate of pay, the court found. The only documents relating to the waitress that the franchisor retained were those related to payroll services. The franchisor did not maintain personal documents, prior employment information, benefit information, personnel files, leave and attendance records, or performance reviews.

Finally, the evidence showed that the premises were controlled by the franchisee and the equipment used at the restaurant belonged to the franchisee.

The decision, Conrad v. Waffle House, Inc., appears at CCH Business Franchise Guide ¶14,695.

2011-10-13T18:12:00.005-05:00

Placement of “Patent Pending” Tag Supports Competitor’s False Marking Claim

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

The placement of “patent pending” label on the bottom of tote bags, next to the seller’s “Optari” label, could constitute false patent marking, the federal district court in Nashville has ruled.

Optari had submitted a patent application for the straps on the tote, but the patent pending mark was nowhere near the straps, the court said. Optari’s competitor, Lubber, Inc., stated a plausible false marking claim by alleging that Optari placed the patent pending mark on the bottom of the tote in an effort to lead the public into believing that the tote itself was undergoing patent review, the court determined.

The false marking statute (35 U.S.C. Sec. 292(a)) imposes liability against “[w]hoever marks upon, or affixes to, or uses in advertising in connection with any article, the words `patent applied for,’ `patent pending,’ or any word importing that an application for patent has been made, when no application for patent has been made, or if made, is not pending, for the purpose of deceiving the public.”

Leahy-Smith America Invents Act

The above provision was unchanged by recent amendments to false marking statute, the court noted. The Leahy-Smith America Invents Act, Public Law 112-29, signed by the President September 16, 2011, eliminated a provision authorizing any person to bring a qui tam suit for statutory damages of up to $500 per violation. Now, only the United States may sue for statutory damages.

A new private suit provision (35 U.S.C. Sec. 292(b)) authorizes a private party who has suffered a competitive injury as a result of a false marking violation to bring a civil suit in a federal district court for recovery of damages adequate to compensate for the injury. The false marking amendments apply to all cases, without exception, that are pending on or commenced on or after September 16, 2011.

The court granted Lubber’s request to add the patent marking claim to its complaint asserting trademark and unfair competition claims under the Lanham Act, Tennessee Consumer Protection Act, and common law.

Constitutionality

The court rejected Optari’s argument that the false marking statute is unconstitutional.
Some courts had held the former qui tam enforcement provision unconstitutional, for example, Unique Product Solutions Ltd. v. Hygrade Valve, Inc. (ND Ohio 2011) Advertising Law Guide ¶64,196, on motion for reconsideration Advertising Law Guide ¶64,242.

However, following the Unique Product Solutions decision, several other courts had rejected constitutional challenges (citations collected in Champion Laboratories, Inc. v. Parker-Hannifin Corp. (ED Cal. 2011) Advertising Law Guide ¶64,302.

The constitutionality debate is now largely academic in light of the amendments made by the Leahy-Smith America Invents Act, according to the court.

The October 6 opinion in Lubber, Inc. v. Optari LLC will be reported at CCH Advertising Law Guide ¶64,447.

Futher details regarding CCH Advertising Law Guide appear here.

2011-10-12T21:48:00.002-05:00

Antitrust Division Will Continue Probe of US Airways’ Acquisition of Airport Slots

This posting was written by John W. Arden.

The Department of Justice Antitrust Division will continue its ongoing investigation of U.S. Airways’ acquisition of Delta Airlines’ slots at Washington’s Ronald Reagan National Airport to determine the transaction’s impact on competition and traveling consumers, the Department of Justice announced yesterday.

“The division will continue its investigation with a focus on the increase in US Airway’s share and use of the slots at Reagan National and the resulting decrease in Delta’s share and use of slots at this slot-constrained airport, at which passengers pay among the highest fares in the country, “ the Justice Department said.

The Antitrust Division will not continue to investigate US Airway’s acquisition of slots at New York’s LaGuardia Airport, having concluded that the acquisition does not raise competitive concerns.

The Justice Department pointed out that it works closely with the Department of Transportation on airline issues, but has a different function than the DOT. “The role of the Antitrust Division is to protect competition and to ensure that companies do not raise prices to harm consumers in violation of the antitrust laws.”

The division will take appropriate action, if warranted, at the conclusion of its investigation, the announcement stated.