Thursday, June 28, 2007

Supreme Court Overturns Dr. Miles, Per Se Scrutiny of Vertical Price Restraints

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

The U.S. Supreme Court, in a five-to-four decision, overturned a 96-year-old precedent applying the per se rule to vertical price fixing—Dr. Miles Medical Co. v. John D. Park & Sons Co. (220 U.S. 373 (1911))—and held that vertical agreements between a manufacturer and its distributor to set minimum resale prices were to be judged under rule of reason analysis.

A decision of the U.S. Court of Appeals in New Orleans (2006-1 Trade Cases ¶75,166) applying the per se rule to uphold an award of $3,975,000 to a Texas retailer that was terminated by the manufacturer of Brighton leather goods and fashion accessories for discounting was reversed, and the case was remanded.

Factual Background

The manufacturer, which sold its Brighton brand primarily through small boutiques and specialty stores, announced a retail pricing policy in 1997, under which it refused to sell to retailers that discounted Brighton goods below suggested prices. A year after instituting the pricing policy, the manufacturer introduced a marketing strategy known as the "Heart Store Program." Under that program, the manufacturer offered incentives to retailers in exchange for their pledge, among other things, to sell at the manufacturer's suggested prices.

The complaining retailer heavily promoted the Brighton line, and Brighton eventually became the store's most important brand, accounting for 40 to 50 percent of its profits. The manufacturer terminated the complaining retailer in 2002, however, when it discovered the retailer had been marking down Brighton's entire line by 20 percent

At trial, the retailer argued that the "Heart Store Program," among other things, demonstrated an agreement to fix resale prices. Relying on the per se rule established by Dr. Miles, the court excluded the manufacturer's expert testimony describing the procompetitive effects of its pricing policy. A jury returned a verdict in favor of the retailer.

On appeal, the manufacturer did not dispute that it had entered into vertical price fixing agreements with its retailers. Rather, it contended that the rule of reason should have applied to those agreements.

Rule of Reason Analysis

In a decision by Justice Anthony M. Kennedy, the Court held that vertical agreements between a manufacturer and its distributor to set minimum resale prices, such as the one at issue, were to be judged under rule of reason analysis because they could have procompetitive or anticompetitive effects.

Minimum resale price maintenance could stimulate interbrand competition—the competition among manufacturers selling different brands of the same type of product. On the other hand, it could lead to collusion among manufacturers or retailers or to a stifling of competition or innovation by dominant manufacturers or retailers.

Nevertheless, it could not be said that resale price maintenance was the type of conduct subject to the per se rule, i.e., conduct that always or almost always tended to restrict competition and decrease output.

The Court rejected the retailer's argument that the administrative convenience of the per se rule or the threat of higher prices resulting from vertical price restraints justified subjecting vertical price agreements to per se scrutiny. Rather, the economic dangers of resale price maintenance were to be taken into account in the rule of reason inquiry.

Careful Scrutiny

However, the Court provided some instruction on how to proceed. According to the Court, resale price maintenance should be subject to careful scrutiny if many competing manufacturers adopted the practice or if there were evidence retailers were the impetus for the restraint.

In addition, whether a dominant manufacturer or retailer could abuse resale price maintenance for anticompetitive purposes might be dependent upon the existence of market power. If a retailer lacked market power, manufacturers likely could sell their goods through rival retailers, the Court observed. If a manufacturer lacked market power, there was less likelihood it could use the practice to keep competitors away from distribution outlets, the Court explained.

Doctrine of Stare Decisis

The Court also decided that the doctrine of stare decisis did not compel continued adherence to the per se rule against vertical price restraints. The Court based its decision on the trend in the case law and suggested that it made little sense to condemn maintaining suggested retail prices though vertical price agreements as per se illegal when a manufacturer could accomplish the same goal through nonprice conduct that would be reviewed under rule of reason analysis.

"It is a flawed antitrust doctrine that serves the interests of lawyers—by creating legal distinctions that operate as traps for the unwary—more than the interests of consumers—by requiring manufacturers to choose second-best options to achieve sound business objectives," the Court explained.

Per Se Analysis Still Viable

The Court stated that "the rule of reason is the accepted standard for testing whether a practice restrains trade in violation of Sec. 1 of the Sherman Act." However, it reaffirmed the viability of the per se rule, noting that horizontal agreements among competitors to fix prices remain unlawful per se.


According to a dissenting opinion by Justice Stephen G. Breyer, the majority did not “show new or changed conditions sufficient to warrant overruling a decision of such long standing.” The dissent also predicted that the effect of the decision was likely to “raise the price of goods at retail and create considerable legal turbulence as lower courts seek to develop workable principles.”

The text of the June 28, 2007, decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc., No. 06-480, will appear at 2007-1 Trade Cases ¶75,753.

Wednesday, June 27, 2007

NASAA OKs State Registration of Franchise Disclosures Prepared Under New FTC Rule

Starting on July 1, franchisors may register franchise disclosure documents prepared pursuant to the new FTC franchise rule in all states requiring registration.

An interim statement of policy adopted on June 22 by the North American Securities Administrators Association (NASAA) approved the new FTC disclosure format, with the addition of a new state cover page.

Previously, the 13 states with franchise registration laws required franchisors to prepare disclosure documents pursuant to the Uniform Franchise Offering Circular (UFOC) Guidelines, a format issued by NASAA.

The new FTC franchise disclosure rule, issued January 23, 2007, adopted disclosure requirements that closely track the UFOC Guidelines. The new FTC rule comes into effect on July 1, 2007, but allows the use of the 1979 rule through July 1, 2008.

“The new FTC format is not yet required, of course,” said Dale E. Cantone, Maryland franchise administrator and Chair of the NASAA Franchise Project Group. “States will continue to accept and process franchise disclosures that follow the UFOC Guidelines until July 1, 2008.”

Tips for Using New Format

The NASAA Franchise Project Group issued the following tips for franchisors that choose to file disclosure documents using the new FTC rule format instead of the UFOC Guidelines:

 In the cover letter accompanying the filing, clearly indicate the type of disclosure format being used.

 Do not mix and match formats.

 Be sure to use the new state cover page prescribed under the NASAA statement of policy.

 Check the FTC’s Frequently Asked Questions on the new franchise rule at

 Continue to file with each state franchise agency the same application forms required under the current UFOC Guidelines (and any state specific forms) and the same filing instructions.

 Continue to include with your disclosure document state-specific provisions required under applicable state laws (by addenda if appropriate).

 If filing an amendment or renewal, do not forego a redlined copy showing changes from a previously-filed document and please check it for accuracy. (Examiners are reporting a surprising number of problems with redlined copies.)

The June 22 interim statement of policy will soon be posted on the NASAA web site ( In the meantime, it appears on the Maryland Attorney General's website.

Extensive materials on the new FTC disclosure rule, including full text and expert commentary, appear in the CCH Business Franchise Guide.

Tuesday, June 26, 2007

Burger King Franchisee Lacked Standing to Bring False Ad Suit Against McDonald's

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

A Burger King franchisee lacked standing to sue McDonald's Corporation for violating Sec. 43(a) of the Lanham Act in its advertising and marketing campaigns for promotional games, such as “Monopoly Games at McDonald’s,” “The Deluxe Monopoly Game,” “Who Wants to be a Millionaire,” and “Hatch, Match and Win,” the U.S. Court of Appeals in Atlanta has ruled.

Dismissal of the complaining franchisee's claims for lack of standing (2006-2 Trade Cases ¶75,401) was affirmed.

At the outset, the appellate court took up an issue of first impression for the Eleventh Circuit—whether Congress intended to abrogate the prudential standing doctrine in passing Sec. 43(a) of the Lanham Act.

Joining the Third and Fifth Circuits, which had already addressed the question, the Eleventh Circuit panel held that Congress did not abrogate prudential limitations on standing of plaintiffs to bring suit under Sec. 43(a). Standing to assert false advertising claims under the Lanham Act was limited to parties that had their competitive or commercial interests affected by the challenged conduct.

Test for Standing

The appeals court applied the five-factor test set forth by the Third Circuit: (1) whether the injury is of a type that Congress sought to redress; (2) the directness or indirectness of the asserted injury; (3) the proximity or remoteness of the party to the alleged injurious conduct; (4) the speculativeness of the damage claim; and (5) the risk of duplicative damages or complexity in apportioning damages.

The first and third factors weighed in favor of prudential standing, while the second, fourth, and fifth factors weighed against prudential standing, the court ruled.

While the type of injury alleged weighed in favor of granting standing, the directness of the injury weighed against granting standing. The causal chain linking McDonald’s alleged misrepresentations about the availability of high-value prizes in its promotional games to a decrease in Burger King’s sales was tenuous.

With respect to the third factor, no “identifiable class” of persons was more proximate to the claimed injury than the complaining fast food franchisee and the putative class it sought to represent.

As for the fourth factor, the court found that it was too speculative to conclude that a percentage of the increase in McDonald’s sales and the decrease in Burger King’s sales during the games was directly attributable to McDonald’s alleged misrepresentations about the chances of winning high-value prizes.

Lastly, the risk of duplicative damages or the complexity of apportioning damages weighed against granting standing. If the complaining franchisee had standing to bring the instant claim, then every fast food competitor of McDonald’s asserting that its sales had fallen during the relevant time period would also have standing to bring such a claim. The impact on the federal courts would be substantial, and apportioning damages among these competitors would be a highly complex endeavor.

Categorical Approach

The court rejected the complaining franchisee's argument that it had standing based on its status as a competitor of McDonald's. A so-called “categorical approach” was adopted by the Seventh, Ninth, and Tenth Circuits, under which “actual” or “direct” competition was the “exclusive requirement” for determining prudential standing.

However, the Third Circuit test provided the appropriate flexibility for determining standing under Sec. 43(a) of the Lanham Act, the court held.

The June 22, 2007, decision in Phoenix of Broward, Inc. v. McDonald's Corp. No. 06-14726, will appear at 2007-1 Trade Cases ¶75,751 and in CCH Advertising Law Guide.

Monday, June 25, 2007

Despite Veto Threat, Senate Passes Energy Bill with Price Gouging, “NOPEC” Provisions

This posting was written by John Scorza, CCH Washington Correspondent, and Jeffrey May, editor of CCH Trade Regulation Reporter.

President George W. Bush has threatened to veto an energy bill approved by the Senate on June 21 that would prohibit price gouging and subject oil cartels to U.S. antitrust laws.

The bill (H.R. 6)—approved by the Senate by a 65-27 vote—would also require auto makers to improve the fuel efficiency of American automobiles over the next decade.

The Senate must now negotiate with the House of Representatives on a final version of an energy bill.

Price Gouging

As amended by the Senate, the legislation would prohibit price-gouging during periods of energy emergencies, which would be declared by the president. The FTC would be given additional authority to investigate claims of manipulation of the oil markets.

In May, the House passed a somewhat similar measure (H.R. 1252), which also drew a veto threat from the White House.

Actions Against Foreign States

The Senate energy bill would allow the Justice Department to bring antitrust actions against foreign states—such as members of the Organization of Petroleum Exporting Countries (OPEC)—for collusive practices in setting the price or limiting the production of oil. As with the price gouging proposal, the House passed a similar measure (H.R. 2264) in May, and it too drew a veto threat.

“Objectionable Provisions”

The Bush Administration finds the price gouging and OPEC provisions among the “several objectionable provisions that make this bill unacceptable in its current form.” In a June 12 statement, the administration said that the federal government has all the legal tools necessary to address price gouging.

The administration warned that the legislation could result in price controls. “Gasoline price controls are an old—and failed—policy choice that will exacerbate shortages and increase fuel hoarding after natural disasters, denying fuel to people when they need it most.”

Regarding the “NOPEC” provision, the administration stated it would “strongly oppose any amendment that (1) intends to subject to the jurisdiction of U.S. courts the actions of foreign countries related to energy production, distribution, or pricing and (2) purports to eliminate sovereign immunity and the ‘act of state’ doctrine as defenses in such cases.”

The provision targeting OPEC would spur retaliation against U.S. firms operating abroad and discourage foreign investment in the U.S. economy, according to the administration.

Thursday, June 21, 2007

Why Valuing Franchise Businesses Is Different from Valuing Other Businesses

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

The issue of what a franchise business is worth has become ubiquitous. It comes up in areas like estate and succession planning, annual valuations for ESOPs (or buy/sell purposes), or establishment and justification of an asking price for potential buyers. And it comes up in more contentious areas like the damages aspects of franchise litigation and arbitration or in divorces. Basically, the issue arises whenever there is a dispute about money.

Acceptable Methods of Valuation

There are really only three recognized methods for determining the value of a business—franchise or otherwise. The Financial Accounting Standards Board (FASB) has said, "Although many valuation methods are used in practice, all such methods can be classified as variations of one of the three approaches . . ."

In fact, under the Uniform Standards of Professional Appraisal Practice, a valuation specialist is required to consider all three approaches ("cost," "income," "market," in accounting nomenclature; "book value," "capitalization of earnings," and "comparable sales" in legal terminology). If one or more is not used, the valuation specialist must explain why.

Will Any Valuation Do?

In the June/July 2006 issue of Franchise Times, there was a column about franchise valuations by Dennis Monroe, Esq., entitled, "Know Your Worth --All Company Valuations are Not Created Equal." In it, the author, describing his search for expertise, wrote:

"There are a number of valuation firms in the country. I wanted to speak with someone who is known for valuing businesses of all kinds and for various purposes, not just someone who values franchise businesses, because they can be formulaic in their approach."

Generalist v. Franchise Expert

I'm all for avoiding a formulaic approach, but I must take issue with Mr. Monroe's implication that a generalist is better than a franchise expert. Franchise businesses are not the same for valuation purposes as other businesses. As a matter of fact, this was recently proven, empirically (with more data and graphs than one can easily digest) in two scholarly publications:

 Nevin Sanli and Barry Kurtz, "Appraisal of Franchises Requires the Use of Unique Valuation Procedures," Franchise Law Journal, Vol. 26, Number 2, Fall 2006, p. 67; and

 E. Hachemi Aliouche and Udo Schlentrich, "Does Franchising Create Value? An Analysis of the Financial Performance of US Public Restaurant Firms" from the William Rosenburg International Center of Franchising at the University of New Hampshire.

Franchise Valuations Are Not the Same

There are at least half a dozen good and sufficient reasons why the valuation of a franchise business is different from valuing other businesses and should be done by an expert in franchising:

(1) Contract Right, Not Outright Ownership. --First and foremost, ownership of a franchise is not the same as outright ownership. The full bundle of rights attributable to owning something outright is absent in a franchise agreement and all rights to own and/or alienate the property are determined by the contract. The asset is merely a contract right. That is not the case with a family farm.

(2) Management Analysis. --Although any sensible valuation of a business takes into account the strengths and weaknesses of management, in the franchise context this is a two-tier analysis. The valuation must focus on the management skills of both the franchisor and the franchisee. Again, that is not the case with a business owned outright.

(3) Franchisor/Franchisee Relationship. --In no other business context is the value of the enterprise so dependent on one relationship. In any other context, such complete dependency with one other entity would be considered an inordinate business risk, like a dependency on a single customer. But in the franchise situation it is more often a strength than a weakness.

(4) Regulation. --No other business (other than the securities industry) is as highly regulated in as many areas and separate jurisdictions as franchising. This alone makes it wholly unlike any other form of business.

(5) System-wide Goodwill. --In no other type of business would a tainted hamburger or scallions sold in an eatery in Washington or New Jersey so heavily impact or affect other businesses in states across the country (for example, Jack in the Box, Taco Bell, etc.). Also, franchisors, almost uniquely, have the ability to exploit their intangible assets by licensing in other venues and for other purposes. This is an attribute to consider in the valuation of a franchisor, unlike most other businesses.

(6) Restrictions on Transferability. --Usually a franchise is not freely alienable. Customarily there are conditions in franchise agreements that impact the valuation, such as the risk of non-renewal, the risk of non-approval of a proposed transferee, and the presence of rights of first refusal (ROFRs) in the franchisor. The U.S. Tax Court has characterized ROFRs as difficult to value but probably causing a 10% to 15% discount from the total enterprise value. This too is not an ordinary aspect in the valuation of a business.

Accordingly, just as one would not want proctologists doing brain surgery, one should also avoid using valuation experts who specialize in dental practices, gas stations or real estate to do franchise valuations.

Additional information on valuation of franchises and dealerships is available in CCH Franchise Regulation and Damages by Byron E. Fox and Bruce S. Schaeffer.

Wednesday, June 20, 2007

Rhode Island Enacts Generally Applicable Dealership Law

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

The Rhode Island Fair Dealership Act, a generally applicable relationship/termination statute, became law without the Governor’s signature on June 14.

Notice Requirement

The statue, which was effective immediately, requires the grantor of a dealership (1) to provide at least 90 days’ prior written notice of termination, cancellation, nonrenewal, or substantial change in the competitive circumstances of a dealership and (2) to provide a dealer with at least 60 days in which to rectify a claimed deficiency.

The notice requirement does not apply to some situations—including terminations based on the dealer’s insolvency. A shortened 10-day notice period applies to cases of payment defaults.

“Good Cause”

Although the measure (House Bill No. 5275) does not explicitly require “good cause” for termination, it defines “good cause” as a failure to comply with essential and reasonable requirements imposed by the grantor or bad faith in carrying out the terms of the dealership.


The new law defines “dealership’ to mean a contract or agreement, either expressed or implied, oral or written, by which a person is granted the right to sell or distribute goods or services or use a trade name, trademark, service mark, logotype, advertising or other commercial symbol, in which there is a community of interest in the business of offering, selling, or distributing goods or services at wholesale, retail, by lease, agreement, or otherwise.

Civil Action

The law requires the repurchase of dealership inventories under certain circumstances and provides a private civil action for injunctive relief, damages, and attorneys’ fees.

It specifically excludes its application to certain classes of dealerships, including liquor, fuel, and motor vehicle dealerships; insurance agency relationships; and door-to-door sales dealerships.

Full text of Chapter 07-036 will appear in the CCH Business Franchise Guide.

Tuesday, June 19, 2007

Two Spyware Bills Clear House of Representatives

This posting was written by Stephen K. Cooper, CCH Washington Correspondent.

In an attempt to block unwanted computer software from stealing the personal information of users, the U.S. House of Representatives has passed two pieces of legislation intended to combat the use of spyware.


On May 22, the House passed the The Internet Spyware (I-SPY) Prevention Act of 2007 (H.R. 1525), which would enhance criminal sanctions for using spyware to commit a crime, such as identity theft. The I-SPY Act would make it a criminal offense, carrying a prison term of up to five years, to cause a computer program or code to be copied onto a computer in furtherance of a federal crime.

H.R. 1525 "targets the worst forms of spyware without unduly burdening technological innovation," said Rep. Zoe Lofgren (D-Cal.), the bill's sponsor. The measure seeks to "eliminate criminal behavior without criminalizing technology," Rep. Lofgren added.

Specifically, the I-SPY Act would prohibit causing a computer program or code to be copied onto the protected computer and intentionally using that program or code (1) in furtherance of another federal criminal offense, (2) to obtain or transmit personal information with intent to defraud or injure a person or cause damage to a protected computer, or (3) to impair the security protection of the computer.

The measure further would authorize the U.S. Department of Justice to spend $10 million per year for the next four years to prosecute purpetrators of spyware, fraudulent phishing, and pharming schemes.


On June 6, the House passed the proposed Securely Protect Yourself Against Cyber Trespass (SPY) Act (H.R. 964). The proposal would protect computer users from unknowingly transmitting personal information through spyware.

Sponsored by Rep. Edolphus Towns (D-N.Y.) and Rep. Mary Bono (R-Cal.), the legislation would require that Internet users be warned about spyware and that users provide affirmative consent when software programs attempt installation on their computers. Consumers would be given the ability to easily disable any spyware programs on their computers.

Rep. Bono remarked that federal legislation is necessary because online companies currently fact a patchwork of state anti-spyware statutes. "There needs to be legal uniformity," she said. Rep. Joe Barton (R-Tex.) believes that the legislation would help consumers know if their personal information is being shared.

"My computer and my personal information are my properly," he said. "This legislation will ensure I have control over both."

Monday, June 18, 2007

Antitrust Suit Could Not Target Investment Banks’ IPO Conduct: U.S. Supreme Court

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

The securities laws impliedly precluded the application of the antitrust laws to an alleged conspiracy among 10 leading investment banks, which acted as underwriters, forming syndicates that helped execute the initial public offerings (IPOs) of several hundred technology-related companies during the tech-stock boom of the late 1990s and 2000, the U.S. Supreme Court ruled on June 18.

The High Court reversed a decision of the U.S. Court of Appeals in New York City (2005-2 Trade Cases ¶74,943) that rejected the implied immunity defense in its entirety and vacated a dismissal on immunity grounds.

As a result, a group of 60 investors cannot proceed with two antitrust class-action lawsuits challenging the IPO conduct of the investment banks between March 1997 and December 2000.

Incompatibility of Securities, Antitrust Laws

The antitrust suit was likely to prove practically incompatible with the Securities and Exchange Commission's administration of the nation’s securities laws, the Court ruled. The securities laws were “clearly incompatible” with the application of the antitrust laws in this context.

Four factors for determining whether a sufficient incompatibility between securities law and antitrust law warranted preclusion were present: (1) the challenged conduct—the underwriters efforts jointly to promote and to sell newly issued securities—fell squarely within the heartland of securities regulations; (2) there was clear and adequate Securities and Exchange Commission (SEC) authority to regulate virtually every aspect of the practices in which underwriters engage; (3) there was active and ongoing agency regulation of underwriter conduct; and (4) there was a serious conflict between the antitrust and regulatory regimes.

The conflict was present, even though the complaint was read as attacking underwriter practices (i.e., laddering, tying, collecting excessive commissions in the form of later sales of the issued shares) that were purportedly disapproved by the SEC.

A serious conflict between the application of the antitrust laws and the proper enforcement of the securities law was indicated by (1) the substantial risk of injury to the efficient functioning of securities markets that could result from an antitrust action in this context and (2) the diminished need for antitrust enforcement to address anticompetitive conduct.

The Court appeared concerned that permitting an antitrust suit in this situation would allow the plaintiffs “to dress what is essentially a securities complaint in antitrust clothing.”

Solicitor General’s Proposed Disposition

The Court rejected the Solicitor General’s suggestion that the case be remanded to the district court to determine whether the challenged conduct could be separated from conduct that was permitted by the SEC regulatory scheme. The Solicitor General’s proposed disposition did not “convincingly address” the Court's concerns with allowing antitrust courts to review syndicate practices important in the marketing of new issues.

Moreover, fears that the Court “might read the law as totally precluding application of the antitrust law to underwriting syndicate behavior, even were underwriters, say, overtly to divide markets” were unwarranted. The Court noted parenthetically that market divisions appeared to fall well outside the heartland of activities related to the underwriting process.

Concurring, Dissenting Opinions

Justice Stephen G. Breyer delivered the opinion of the Court, which was joined by six other Justices. Justice Anthony M. Kennedy took no part in the matter. Justice John Paul Stevens concurred with the judgment in a separate opinion, and Justice Clarence Thomas dissented.

Justice Stevens, in his concurring opinion, said that, rather than finding an implicit grant of immunity, he would have held “that the defendants’ alleged conduct does not violate the antitrust laws.” According to Justice Stevens, in all but the rarest of cases, agreements among underwriters on how best to market IPOs cannot be conspiracies in restraint of trade.

Moreover, as he did in his recent dissenting opinion in Bell Atlantic Corp. v. Trembly (2007-1 Trade Cases ¶75,709), Justice Stevens questioned the majority's decision to allow “the burdens of antitrust litigation” to “play any role in the analysis of the question of law presented.”

Justice Thomas "disagree[d] with that basic premise" that the securities statutes were silent in respect to antitrust and that the Court had to decide whether the securities laws implicitly preclude application of the antitrust laws.

“Both the Securities Act and the Securities Exchange Act contain broad saving clauses that preserve rights and remedies existing outside of the securities laws,” according to Justice Thomas. The majority quickly disposed of this argument saying: “Justice Thomas is wrong to regard §§77p(a) and 78bb(a) as saving clauses so broad as to preserve all antitrust actions.”

The opinion is Credit Suisse Securities (USA) LLC v. Billing, 05-1157, June 18, 2007. It will appear at 2007-1 Trade Cases ¶75,738.

Friday, June 15, 2007

Medical Spa Franchisor Negligently Misrepresented Efficacy of Hair Removal Process

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

A franchisor of medical spa and hair removal services, the franchisor’s founder and original principal, a doctor employed as a trainer by the franchisor, and a group of investors that purchased the franchisor made negligent misrepresentations to a franchise area developer and franchisee concerning the efficacy of the franchisor’s laser hair removal process, according to an arbitration award.

The arbitrator found that (1) all of the franchisor defendants failed to exercise reasonable care in obtaining reliable evidence about the validity of information they provided and allowed to be provided to the franchisee and (2) the franchisee justifiably relied on the provided information.

Therefore, the franchisee was awarded $391,400 for the cost of additional hair removal treatments provided to customers as a result of the ineffectiveness of previous treatments.

The franchisee also claimed that the franchisor defendants committed fraud and civil conspiracy, breached the parties’ contract and its implied covenant of good faith and fair dealing, and violated the Connecticut Franchise Act, the Virginia Franchise Act, and the “little FTC Acts” of Connecticut, Tennessee, Massachusetts, and North Carolina. All of those claims were rejected by the arbitrator.

Negligent Misrepresentation

The franchisee testified that the franchisor stated—both before and after the execution of the agreements—that its laser technology was faster and better than that of competing businesses and that the franchisor’s process would permanently remove 93%-97% of unwanted hair on the human body in five treatments. This efficacy information, along with the business concept and associated written materials, alleged caused the franchisee to enter into the area development and franchise agreements.

According to an expert witness for the franchisee, a claim of permanent removal of 93%-97% of a person’s unwanted hair in an average of five treatments was both incorrect and misleading. That level of removal would require more than five treatments. In view of individual variations in hair growth, a general guarantee of 93%-97% would be impossible. The expert also testified that the franchisor’s claim that hair removal would be permanent was not supported by medical science. Lasers have not been shown to remove hair permanently, the expert said.

Testimony about the franchisor’s statements, written material, and instructions regarding the efficacy of the hair removal method led to a conclusion that the information constituted negligent misrepresentation, the arbitrator ruled. Because the faulty information was central to the franchisor’s business concept, the franchisee justifiably relied upon it and it was the proximate cause of the franchisee’s damages.

The weight of the evidence led to a conclusion that the controlling owners and officers of the franchisor were guilty of negligent misrepresentation by failing to exercise reasonable care in obtaining reliable evidence about the validity of the efficacy information.

After concerns were raised regarding the accuracy of the efficacy information, the defendants committed negligent misrepresentation by failing to exercise reasonable care in clearly communicating to the franchisee that the claim was faulty and should no longer be used in sales efforts.


The franchisee was entitled to an award of damages in the amount of $368,600 for the cost of additional hair removal treatments it provided to customers as a result of the ineffectiveness of previous treatments, according to the arbitrator. The addition of 10 percent interest brought the award to $391,400.

The franchisee might have been entitled to recover all or part of its claimed business loss of $929,800 if it could have proven that its franchise was worth little or nothing. However, the franchisee’s expert witness was not persuasive in his analysis that the franchise had little or no worth when the franchisee de-identified its business with the franchisor and began operating under a new name, the arbitrator commented.

The arbitration award is In the Matter of the Arbitration between Kempton Joseph Coady, et al and Sona Int'l Corp., et al; American Arbitration Association, Case Number 30 114 Y 01399 05; April 9, 2007; Arbitrator John T. Marshall; Atlanta, Georgia.

Thursday, June 14, 2007

Legal Advisors Did Not Form a RICO Enterprise to Defraud Middle Eastern Prince

This posting was written by Sonali Oberg, editor of CCH RICO Business Disputes Guide.

The legal advisors of a Middle Eastern prince could not have constituted an “enterprise” for purposes of a federal RICO claim, absent a showing that they—and other specified entities—functioned as a unit in committing predicate acts of racketeering, according to the federal district court in New York City.

Prince Jefri, the youngest brother of the ruling Sultan of Brunei, contracted to pay two English barristers £1 million per year each to serve as his “principal legal advisors, strategists, and confidantes.” He also appointed them as directors of several of his corporate entities.

The prince later claimed that the advisors associated to defraud him by (1) selling several properties he owned to an entity they owned or controlled, (2) falsifying employment documents to overstate compensation due to one of them, (3) executing below-market leases of properties that belonged to the prince, (4) failing to return confidential documents relating to the prince’s companies following their termination, and (5) threatening to disclose privileged information if the prince did not drop his lawsuit.

Notably, the prince asserted that the advisors—with other individuals and entities—comprised a RICO enterprise that committed predicate acts of mail fraud, wire fraud, and bank fraud.


A RICO enterprise is “a group of persons associated together for a common purpose of engaging in a course of conduct,” the existence of which is proved “by evidence of an ongoing organization, formal or informal, and by evidence that the various associates function as a continuing unit.”

When a complaint alleges an “association-in-fact” enterprise, courts in the Second Circuit look to the hierarchy, organization, and activities of the association to determine whether its members functioned as a unit, Judge Lewis A. Kaplan observed.

In this case, the complaint failed to allege a RICO enterprise, since it simply grouped together all of the individuals and entities involved in the racketeering acts and called them an “enterprise.” It did not allege that the individuals and entities operated according to any structure or hierarchy.

Besides the two barristers (who were husband and wife), the participants were not alleged to have acted for the benefit of any other participant, the court found. “They appear to have no relationship to one another, and their actions and involvement in [the barristers’] schemes appear to have been isolated and independent,” the court stated.

Ongoing Organization?

There was no indication that the alleged association was an “ongoing organization” as opposed to an ad hoc collection of entities and individuals who each happened to have been involved in a scheme against the prince.

An alleged “hub-and-spoke” structure—in which the barristers were the “hub” and the other entities of the enterprise were the “spokes”—was insufficient to satisfy the enterprise element of a RICO claim.

The court was not persuaded that the group of entities was “anything other than a laundry list of the individuals and entities” connected to the barristers and “somehow involved in one of their alleged schemes.”

Thus, the complaint alleged little more than “garden variety fraud and breach of duty claims” and the prince failed to state a RICO claims, court concluded.

The case is Cedar Swamp Holdings, Inc. v. Zaman U.S. District Court for the Southern District of New York, 06 Civ. 13626 (LAK), May 17, 2007. It will appear in in CCH RICO Business Disputes Guide.

Wednesday, June 13, 2007

Bristol-Myers Squibb to Pay $1 Million Fine to Resolve Antitrust Investigation

Bristol-Myers Squibb Company pleaded guilty on June 11 to two counts of making false statements to the Federal Trade Commission in order to resolve an investigation by the U.S. Department of Justice Antitrust Division into the proposed settlement of patent litigation with Canadian drug maker Apotox Inc. over blood thinner Plavix. Bristol-Myers Squibb will pay a fine of $1 million.

Representations by Former Executive

In the federal district court in Washington, D.C., the company acknowledged that a former senior executive made oral representations to cause Apotox to conclude that Bristol-Myers Squibb would not launch an authorized generic if the parties reached a final revised settlement agreement.

The oral representations included (1) a statement that the former senior executive expected to oppose the launch of an authorized generic in the future and (2) an implied suggestion that Pete Dolan, the company’s former CEO, shared the former senior executive’s views.

Nondisclosure of Representations

Failure to disclose this information to the FTC in connection with the agency’s review of the proposed settlement agreement between the firms “operated as incomplete and therefore false statements,” according Bristol-Myers Squibb.

The company acknowledged its responsibility for the conduct of the former senior officer, but stated its belief that there was no “side agreement” with Apotex to refrain from launching an authorized generic version of Plavix.

According to the Associated Press, Bristol-Myers Squibb “pushed out” Dolan in September 2006 and said that its general counsel would leave the company.

Impact on FTC, New York State Investigations

The company stated that it could not predict the impact that its plea would have on investigations into the proposed Plavix patent settlement by the FTC and New York State Attorney General.

Bristol-Myers Squibb announced the details of the plea in a news release issued on Monday.

Tuesday, June 12, 2007

Antitrust Division Clears Combination of Financial Futures Exchanges

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

The Department of Justice Antitrust Division announced on June 11 that it closed its investigation into the proposed acquisition of CBOT Holdings Inc. by Chicago Mercantile Exchange Holdings Inc. (CME), after concluding that the transaction was not likely to reduce competition substantially.

The Antitrust Division cleared the transaction without conditions. An investigation into a 2003 agreement under which CME provides clearing services to CBOT was also closed. The Antitrust Division examined the impact that the deal would have on the U.S. futures markets.

According to the Antitrust Division's statement, although the two exchanges account for most financial futures (and in particular, interest rate futures) traded on exchanges in the United States:

 their products are not close substitutes and seldom compete head to head, but rather provide market participants with the means to mitigate different risks; and

 they are, absent the merger, unlikely to introduce new products that compete directly with the other’s entrenched products, in part due to the difficulty of overcoming an incumbent exchange’s liquidity advantage in an established futures contract.

“In connection with its investigation, the Division relied on the Commodities Futures Trading Commission (CFTC) as a resource concerning the nature and regulation of futures markets,” it was explained.

“The information the CFTC provided was invaluable in helping the Division understand current regulatory policy, and the Division looks forward to working with the CFTC on an on-going basis to ensure competition in futures markets.”

The June 11 statement appears on the website of the Department of Justice Antitrust Division.

Monday, June 11, 2007

Compliance with FTC Process Did Not Warrant Removal of State Suit: U.S. Supreme Court

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

A unanimous U.S. Supreme Court has ruled that cigarette maker Philip Morris was not entitled to remove to federal court a state-court action challenging the company's alleged deceptive and misleading advertising for “light” cigarettes under the Arkansas Deceptive Trade Practices Act.

Philip Morris' compliance with the FTC's testing procedures for tar and nicotine in cigarettes did not permit the tobacco company to remove the case to federal court pursuant to the federal officer removal statute.

A decision of the U.S. Court of Appeals in St. Louis (2005-2 Trade Cases ¶74,901) finding removal proper was reversed, and the case was remanded.

Federal Officer Removal Statute

The federal officer removal statute permits a defendant to remove to federal court a state-court action brought against the “United States or any agency thereof or any officer (or any person acting under that officer) of the United States or of any agency thereof, sued in an official or individual capacity for any act under color of such office” (28 U.S.C. §1442(a)(1)).

However, Philip Morris' compliance with federal laws, rules, and regulations (even if the regulation was highly detailed and even if the conduct was highly supervised) did not by itself fall within the scope of the statutory phrase “acting under" a federal "official,” according to the Court.

Regulator/Regulated Relationship

Despite the FTC's detailed advertising rules, testing specifications, and reporting requirements, the relationship between the FTC and the tobacco company was nothing more than the usual regulator/regulated relationship, in the Court's view. This relationship could not be construed as bringing the tobacco company within the terms of the statute.

Rejected was the tobacco company's argument that its relationship was akin to the relationship between a government contractor and the government. A government contractor might fall within the terms of the federal officer removal statute when the relationship between the contractor and the government was an unusually close one involving detailed regulation, monitoring, or supervision; however, the assistance that private contractors provided federal officers went beyond simple compliance with the law and helped officers fulfill other basic governmental tasks.

Delegated Authority?

The Court also rejected Philip Morris' argument that its conduct went beyond compliance because the FTC delegated authority for testing cigarettes for tar and nicotine to an industry-financed testing laboratory.

There was no evidence of any delegation of legal authority from the FTC to the industry association to undertake testing on the government agency’s behalf. Nor was there evidence of any contract, any payment, any employer/employee relationship, or any principal/agent arrangement, according to the high court.

The opinion is Watson v. Philip Morris Companies, Inc, No. 05-1284, decided June 11, 2007. It will appear in CCH Trade Regulation Reporter, CCH State Unfair Trade Practices Law, and CCH Advertising Law Guide.

Thursday, June 07, 2007

Posting Suicide Note on Website Likely Did Not Justify Franchise Terminations

This posting was written by Cheryl Montan, editor of CCH Guide to Computer Law.

A group of Quiznos franchisees were likely to succeed on their claim that Quiznos wrongfully terminated their franchises in retaliation for their affiliation with a group that posted a former franchisee’s suicide letter on a website, the federal district court in Denver has ruled. Thus, the court issued a preliminary injunction barring the terminations pending trial on the merits of the franchisees’ claims.

The franchisees were board members of a franchisee advocacy group with an acrimonious history with the company. The group operated a blog for franchisees to vent their frustrations and exchange ideas.

Quiznos unilaterally terminated the franchises immediately after learning that the advocacy group posted on its website the suicide note of former franchise owner who fatally shot himself in the bathroom of one of the company's stores. The franchisee’s note attributed his suicide to Quiznos and to litigation with the company over his franchise.

Reason for Termination, Opportunity to Cure

The franchisees contended that Quiznos terminated the franchises without providing specific reasons or an opportunity to cure in violation of the franchise agreement. One store owner also alleged a violation of Minnesota franchise law. Quiznos countered that the terminations were permissible under a provision in the franchise agreement giving it the right to immediately terminate a franchisee, without opportunity to cure, for committing fraud or for engaging in conduct that, in the “sole judgment” of the company, materially impaired the goodwill associated with the QUIZNOS mark.

Effect of Posting on Mark

However, there was no indication that in deciding to terminate the franchises, Quiznos had evaluated or even considered the impact of the website posting on the QUIZNOS mark, the court observed.

Although the suicide note was available on a public website, Quiznos presented no evidence that any consumers had seen the note and, as a result, thought ill of the company or declined to purchase its products. Without such evidence, the franchise owners were likely to succeed on their claim that Quiznos exceeded its contractual authority in terminating their franchises, the court concluded.

The decision is Bray v. QFA Royalties LLC, Civil Action No. 06-cv-02528-JLK-BNB, filed May 3, 2007. Full text will appear in the CCH Business Franchise Guide and CCH Guide to Computer Law.

Wednesday, June 06, 2007

FTC Moves to Block Whole Foods Market's Acquisition of Wild Oats

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

The Federal Trade Commission (FTC) announced its intention to file a complaint in the federal district court in Washington, D.C. by June 6 to block the proposed combination of the nation's largest “premium natural and organic supermarket chains”—Whole Foods Market and Wild Oats Markets.

According to the agency, the transaction would reduce direct competition and lead to the exercise of unilateral market power, resulting in higher prices and reduced quality, service and choice for consumers. In addition, the FTC contends that entry would not be timely, likely, or sufficient to replace the competition lost in the relevant geographic markets.

In February, Whole Foods and Wild Oats announced a merger agreement under which Whole Foods Market would acquire Wild Oats Markets’ outstanding common stock in a cash tender offer. At that time, Whole Foods had 191 stores in the United States, Canada, and the United Kingdom. Wild Oats Markets currently operates 110 stores in 24 states and British Columbia, Canada.

Market Definition

Like many merger challenges before it, this case will be won or lost on the relevant market definition. The companies describe themselves as “natural and organic foods retailers.” But the FTC might have a difficult time convincing a federal district court judge that the relevant market for evaluating the competitive effects of this transaction is limited to premium natural and organic supermarkets.

According to the FTC, premium natural and organic supermarkets, such as Whole Foods and Wild Oats, are differentiated from conventional retail supermarkets in several critical respects: (1) the breadth and quality of their perishables; (2) the wide array of natural and organic products and services and amenities they offer, and (3) the customer's shopping experience “where environment can matter as much as price.”

Challenges to Retail Food Mergers

While it has been a few years since the FTC challenged a merger in the food retail industry, the agency was faced with a series of such transactions earlier in the decade. Most of the transactions involved combinations of traditional supermarket chains. In those cases, the market was usually defined to include all supermarkets.

Those transactions might be more analogous to the recently proposed merger agreement between Pathmark Stores and A&P than to the Whole Foods/Wild Oats transaction. However, the FTC has broadened the market based on what outlets customers consider to be substitutes for purchasing grocery items.

In 2002, when the FTC challenged Wal-Mart's acquisition of the largest supermarket chain in Puerto Rico, Supermercados Amigo, Inc., the relevant market was defined to include supercenters—mass merchandise outlets containing full-service supermarkets—and warehouse club stores, such as Wal-Mart's Sam's Club.

The agency pointed out at the time, however, that “the determination that club stores are included in the relevant product market in this proceeding does not, of course, determine what the relevant product market will be in future supermarket investigations by the Commission.” Wal-Mart entered into a consent order agreeing to divest four Amigo supermarkets, in regions where Wal-Mart owned or planed to open at least one supercenter or club store.

By limiting the market to natural and organic supermarkets in its challenge to the Whole Foods/Wild Oats transaction, the FTC will have to show that consumers won't turn to supercenters, warehouse clubs, or even traditional supermarkets if the combined entity raises prices.

Reaction of Whole Foods

Whole Foods issued a statement on June 5, expressing its disappointment with the FTC's decision and its intention “to vigorously challenge the FTC in court.” The company questioned the agency's decision to limit the relevant antitrust product market to natural and organic food stores and to exclude other supermarkets.

“The Company believes that the FTC's position is without basis and contrary to its position in past merger reviews, where its definition of supermarkets has included conventional supermarkets as well as Whole Foods Market and Wild Oats,” said John Mackey, Chairman and Chief Executive Officer of Whole Foods Market.

Statement of Wild Oats

Wild Oats also issued a statement on June 5. “While we disagree with the FTC's position and believe it is without legal and factual merit, we are confident that, once presented with the facts, the Court will agree that this merger is pro-competitive and the FTC's application for an injunction will be denied, thus allowing us to proceed forward with the merger,” said Greg Mays, Chairman and CEO of Wild Oats Markets.

Mays added that Wild Oats intended “to cooperate with Whole Foods in all respects and to vigorously challenge the FTC in Court.”

Tuesday, June 05, 2007

FTC Fails To Preliminarily Enjoin Merger of Petroleum Refiners

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

The Federal Trade Commission failed to show that it could prove—in an administrative proceeding before an Administrative Law Judge—that a proposed merger between petroleum refiners Western Refining, Inc. and Giant Industries, Inc. would reduce the bulk supply of gasoline in parts of New Mexico, the federal district court in Albuquerque has ruled. The Commission's request for a preliminary injunction to block the transaction was denied.

Geographic Market

The geographic market proposed by the FTC—13 counties in northern New Mexico—was inadequate, in the court's view. It did not match the geographic markets defined by either the Commission's economic or industry expert, and no other witness explained why the borders of any of these respective markets were appropriate.

Neither Western, nor Giant, nor any other firm the FTC identified as a market participant, operated refineries within the FTC's proposed market. Furthermore, gasoline was both trucked into the FTC's relevant market from supply sources outside the proposed market and trucked out from within the market area. The FTC excluded from its relevant market significant suppliers who currently served, or could potentially serve, northern New Mexico.

Relevant Product Market

The FTC also failed to provide evidence that Western and Giant were in competition in the relevant product market, the court noted. Though they did compete for bulk petroleum supply, evidence indicated that Western was Giant's supplier and that Giant and its subsidiary were both customers of Western. Western did not participate in the wholesale and retail gasoline markets in which Giant operated. The proposed merger would not have dramatically increased concentration in the relevant market.

By acquiring Giant's New Mexico refining, terminaling, and marketing assets, Western would “not be eliminating an important restraint on its ability to raise prices and increase margins,” the court observed. Other firms could replace any competitive void left by Giant's elimination. Thus, there was no significant increase in the likelihood that Western had achieved, or would be able to exercise, market power, either in coordination with other firms or unilaterally. The defendants rebutted any presumption of anticompetitive effects by showing the ease of entry into the market, the court added.

The FTC did not attempt to prove anticompetitive coordinated effects, the court found. As for unilateral effects, evidence indicated that other suppliers would respond sternly to any unilateral attempt to divert output or increase prices. The amount of gasoline that the FTC alleged would be diverted from Albuquerque as a result of the transaction—900 barrels a day—was small and would have little or no significant impact on price. There was “an ample supply of gasoline available to the northern New Mexico market,” from many different suppliers, the court explained. Moreover, major customers like Chevron and Shell would discipline any unilateral attempt to reduce output.

Analysis of Unilateral Effects

The Commission's theoretical analysis of unilateral effects was not based on reasonable assumptions, in the court's view. The testimony of the FTC's industry expert was problematic in that he was not an economist, an economic expert, or a refinery expert. He did not evaluate trucking as a supply response, instead looking only at the limited trucking data that the Commission gave him.

Further, the court decided, the agency's econometric analysis was flawed in many respects, failing to account accurately or at all for market participants' past or likely future behavior.

Likelihood of Success

Consequent to these myriad shortcomings, it was plain that the FTC had not demonstrated a likelihood of succeeding on the merits of its Clayton Act case against the refiners in an administrative proceeding. Therefore, a granting of preliminary injunctive relief would not have been appropriate. Injunctive relief was not necessary to protect the public's interest, the court added.

The May 31 decision is FTC v. Foster, Western Refining, Inc., and Giant Industries, Inc., No.CIV 07-352JB/ACT, 2007-1 Trade Cases ¶75,725.

Monday, June 04, 2007

Drug Store Chains Agree to Divest 23 Stores to Ensure $3.5 Billion Acquisition

In order to clear the way for Rite Aid Corporation’s proposed $3.5 billion acquisition of the Brooks and Eckerd pharmacies from Canada’s Jean Coutu Group (PJC), Rite Aid and PJC entered a consent agreement and order with the Federal Trade Commission, requiring the sale of 23 pharmacies to Commission-approved purchasers.

The stores will be sold to Kenney Drugs; Medicine Shoppe International, Inc.; Walgreen Co.; Big Y; and Weis Markets.

“The consent order with the Commission requires the companies to sell pharmacies where competition would be adversely affected by the proposed transaction,” said Jeffrey Schmidt, Director of the FTC Bureau of Competition. “Its strong terms will ensure that consumers continue to have a choice in where they shop for prescription drugs.”

The June 1 FTC complaint alleged that the proposed acquisition would be anticompetitive and would violate Section 5 of the FTC Act and Section 7 of the Clayton Act in the relevant product market (retail sale of pharmacy services to cash customers in local markets).

Highly Concentrated Markets

In all 23 local markets identified in the FTC complaint, Rite Aid and Eckerd/Brooks are two of a small number of pharmacies offering cash services and at least half of the pharmacies in those markets. Customers in these markets viewed Rite Aid and Eckerd/Brooks pharmacies as their first and second choices based on location, service, and convenience, the complaint alleged.

Absent the divestitures required by the consent order, the proposed acquisition would allow Rite Aid to unilaterally exercise market power, according to the complaint. Such market power would raise the likelihood that prices paid by cash customers for pharmacy services would increase and the quality and selection of services would decrease, the Commission charged.

The Commission‘s analysis to aid public comment on the consent agreement and order contains detailed information on each of the approved purchasers and their ability to maintain competition in the relevant markets after the divestiture. A list of specific pharmacies being divested appears in Schedule A, attached to the consent order.

Divestitures Subject to Approval

All divestitures are subject to approval by the Commission. If the Commission determines during or after the public comment period that the buyers are not acceptable, any divestitures would have to be rescinded and other Commission-approved purchasers would have to be found.

The FTC approved the consent agreement and order by a 5-0 vote. The order is subject to public comment for 30 days. Comments should be sent to Federal Trade Commission, Office of the Secretary, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580.

The complaint is In the Matter of Rite Aid Corp. and The Jean Coutu Group (PJC), Inc., Docket No. C-4191, June 1, 2007. The news release, decision, and order appear here on the FTC web site.

Friday, June 01, 2007

Use of Announcer's Voice Violated Right of Publicity, Lanham Act

This posting was written by Bill Zale, editor of CCH Advertising Law Guide.

The National Football League's unauthorized use of a renowned announcer's voice in a film promoting a computer game (Madden NFL 06) violated a Pennsylvania statute prohibiting unauthorized use of name or likeness and the Lanham Act, the federal district court in Pennsylvania has ruled.

A release signed by the late John Facenda, which granted the NFL the right to use his narration recorded in film sequences, was not a defense because it did not give the NFL the right to use Facenda’s tapes for product endorsement, the court determined.

The commercial value of Facenda’s voice was not disputed, the film was a commercial advertising vehicle, and the use of the announcer's recordings was outside the terms of his consent.

Recovery under the Pennsylvania statute was not precluded on the theory that the use was incidental. Although the use of the announcer's voice was brief, it added some commercial value to the film, according to the court.

Lanham Act Claim

Use of Facenda's voice was alleged to be a false designation of origin under the federal Lanham Act. Although evidence of actual confusion was lacking, a showing of actual confusion or deception was only one factor to be considered in Lanham Act celebrity endorsement cases, according to the court.

Evidence of actual confusion would have been particularly hard to obtain because of the evanescent nature of a program shown just a few times on television.

This weakness was outweighed by evidence regarding the announcer's high level of recognition among the NFL's target audience, the relatedness of his fame to Madden NFL 06, the identity of the likeness (use of actual voice recordings slightly altered to sound computerized), the NFL's intent to benefit from the association in viewers' minds between the announcer and authentic NFL football, and the fact that the film was shown only on the NFL cable television station—where the announcer was likely to be most recognizable.

Thus, Fascenda was entitled to recover under the Lanham Act, as well, the court held.

The decision is Facenda v. N.F.L. Films, Inc., Case No. 06-3128, May 3, 2007 (CCH Advertising Law Guide ¶62,549).