Thursday, February 28, 2008

Majoras to Leave FTC in March, Reportedly to Join Private Sector

This posting was written by John W. Arden.

Federal Trade Commission Chairman Deborah Platt Majoras will resign in late March, after three-and-a-half years with the agency, it was announced by the FTC on February 28.

According to a report in today’s Wall Street Journal, Majoras plans to join Proctor & Gamble as vice president and general counsel. Commissioner William Kovacic is her likely successor, according to the Journal.

Majoras became FTC Chairman on August 16, 2004. Previously, she served as Principal Deputy Attorney General in the Department of Justice Antitrust Division and was a partner in the Washington, D.C. office of Jones Day.

The announcement appears here on the FTC website.

NASAA Seeks Comment on Proposed Franchise Disclosure/Registration Guidelines

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

The North American Securities Administrators Association (NASAA) released for internal and public comment proposed updated franchise registration and disclosure guidelines on February 26, 2008.

NASAA’s proposed 2008 Franchise Registration and Disclosure Guidelines would allow states that register franchise offerings to accept, as of July 1, 2008, franchise disclosure documents prepared under the FTC’s amended Franchise Rule with certain additional requirements, including a “state risk factor” cover page.

2007: Amended FTC Franchise Rule

Currently, franchise registration states require franchisors to prepare disclosure documents pursuant to the Uniform Franchise Offering Circular (UFOC) Guidelines. The amended FTC franchise rule, issued January 23, 2007, adopted disclosure requirements that closely tracked the UFOC Guidelines. The new FTC rule came into effect on July 1, 2007, but allowed use of disclosures based on the 1979 rule through July 1, 2008. After July 1, 2008, filers will no longer be able to use the UFOC Guidelines to prepare franchise disclosure documents.

2007-2008: Interim Guidelines

In light of the similarities between the new FTC rule and the UFOC Guidelines, NASAA announced its intention in 2007 to adopt the rule as a successor to the UFOC Guidelines, with minimal additional requirements, the most significant being a "state risk factor" cover page. NASAA adopted Interim Guidelines for the filing of a UFOC on June 22, 2007. The interim guidelines recommended that, as of July 1, 2007, registration states permit franchisors to file disclosure documents prepared in accordance with the new franchise rule.

2008: Franchise Registration and Disclosure Guidelines

The proposed 2008 Guidelines contain the same basic disclosure requirements set out in the Interim Guidelines and add a provision for electronic disclosure. In addition, they feature new filing instructions and uniform registration forms, that were not included as part of the Interim Guidelines. Instructions for preparation immediately follow each form. Specifically, the forms included are: (1) Uniform Franchise Registration Application; (2) Franchisor’s Costs and Sources of Funds; (3) Uniform Franchise Consent to Service of Process; (4) Franchise Seller Disclosure Form; (5) Franchise Disclosure Document; (6) Application Fee; (7) Guarantee of Performance; (8) Consent of Accountant; and (9) Advertising and Promotional Materials.

Request for Comment

The public comment period on the proposed 2008 Guidelines will remain open until March 27, 2008. Written comments should be sent to Dale Cantone, Chair of the Franchise and Business Opportunity Project Group on or before that date. In order to facilitate consideration of comments, NASAA additionally requested that copies be submitted to each member of the Project Group and the NASAA Legal Department.

The proposed Guidelines will appear in the CCH Business Franchise Guide and can be viewed, along with further details on those to whom comments should be directed, here on the NASAA web site.

Wednesday, February 27, 2008

Microsoft Fined €899 Million for Failing to Comply with EC Interoperability Order

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

The European Commission (EC) imposed a record € 899 million (approximately $1.3 billion) fine on Microsoft Corporation for failing to comply with its obligations under a March 2004 EC decision, according to a February 27 press release.

The 2004 decision, which was upheld by the European Court of First Instance in September 2007, found that the computer software company had abused its dominant position by deliberately restricting interoperability between Microsoft Windows PCs and non-Microsoft work group servers.

Microsoft was ordered to disclose to competitors, within 120 days, the interfaces required for their products to be able to “talk” with the Windows OS on reasonable terms. At that time, Microsoft was also ordered to pay a €497 million (approximately $600 million) fine.

According to the EC’s February 27 announcement, the royalties that Microsoft charged for access to the interoperability information prior to October 22, 2007, were unreasonable. Therefore, Microsoft failed to comply with the March 2004 Decision for three years.

On October 22, 2007, Microsoft began providing a license that gave access to the interoperability information for a flat fee of €10,000 and an optional worldwide patent license for a reduced royalty of 0.4 % of licensees’ product revenues. Prior to that date, Microsoft had demanded much higher royalty rates for a patent license or for a license giving access to the secret interoperability information.

The EC issued a statement of objections on March 1, 2007, setting out its concerns regarding Microsoft's unreasonable pricing. Soon thereafter, Microsoft reduced its royalty rates with regards to sales in Europe. It was not until October, that Microsoft changed worldwide rates.

The current penalty does not cover a period of non-compliance addressed by a penalty payment decision in July 2006. At that time, the EC fined Microsoft €280.5 million for its failure to comply with the 2004 decision through June 20, 2006. Thus, the current decision covers a period from June 21, 2006, through October 21, 2007.

A Microsoft spokesperson has been reported as saying that the fines represent past issues and the computer software company is now is now in full compliance. In addition, Microsoft announced just last week that a change to its “technology and business practices to increase the openness of its products and drive greater interoperability, opportunity and choice for developers, partners, customers and competitors.” At that time, the European Commission (EC) issued a statement that it would continue its ongoing interoperability investigation into the computer software company. The EC said in a February 21 announcement that it “would welcome any move towards genuine interoperability.”

A release on the March 2004 EC decision appears here on Europa, the portal site of the European Union.

Tuesday, February 26, 2008

U.S., Nevada Condition Combination of Health Insurers on Divestitures

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

In order for UnitedHealth Group Inc. to proceed with its acquisition of Sierra Health Services Inc., United would be required to divest assets relating to its Medicare Advantage line of business in the Las Vegas area, under the terms of a proposed U.S. consent decree.

The consent decree, if approved by the federal district court in Washington, D.C., would settle Department of Justice Antitrust Division allegations that the transaction, as originally proposed, likely would substantially lessen competition in the sale of Medicare Advantage plans in the Las Vegas area. The complaint and proposed consent decree were filed with the court on February 25.

United and Sierra were the first and second largest sellers of Medicare Advantage plans in the Las Vegas area, according to the Justice Department. The transaction could have created a combined company controlling 94 percent of the Medicare Advantage health insurance market in the Las Vegas area and resulted in higher prices, fewer choices, and a reduction in the quality of Medicare Advantage plans for senior citizens, it was alleged.

The Justice Department announced that it had tentatively approved Humana Inc. as the acquirer and that United must first attempt to sell the assets to Humana before selling to another purchaser. Under the terms of the proposed settlement, current enrollees of United's Medicare Advantage plans will continue to have substantially the same access to providers, including doctors, hospitals, and other medical services, after the divestiture as before, according to the Justice Department.

Settlement with the State of Nevada

United and Sierra also agreed to settle a challenge to their transaction filed by the State of Nevada in the federal district court for Las Vegas. The state cooperated with the U.S. Justice Department in the investigation, and the state settlement requires the same injunctive relief. The state also required United to contribute $15 million to Nevada organizations and agencies to demonstrate that it will be a good corporate citizen, and that it is dedicated to improving the quality of and access to health care in Nevada, Nevada Attorney General Catherine Cortez Masto announced on February 25. Additionally, United agreed to reimburse the state attorney general $875,000 for attorneys fees and costs.

The Justice Department complaint and proposed consent decree in U.S. v. UnitedHealth Group, Inc. and Sierra Health Services, Inc. will appear in the CCH Trade Regulation Reporter. Further details regarding the State of Nevada settlement appear here on the website of the Nevada Attorney General.

Monday, February 25, 2008

$8 Million Damage Award Upheld for Falsely Advertising Product as “Innovative”

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

A jury award of over $8 million against Japanese basketball manufacturer Molten for falsely advertising its product design as “innovative” was upheld by the federal district court in Seattle.

The clear weight of the evidence showed that Molten's advertising of its “dual cushion technology” basketballs as “innovative” deceived customers, influenced consumer purchases, and injured the complaining competitor Baden Sports, the court determined. The jury was properly instructed on the elements of the false advertising claim, and the amount of the award was not grossly excessive or against the clear weight of the evidence, according to the court.

Innovation v. Inventorship

The claim that Molten falsely advertised its product as “innovative” was not barred by Dastar Corp. v. Twentieth Century Fox Film Corp., 539 U.S. 23 (2003), in which the U.S. Supreme Court held that a Lanham Act false advertising claim cannot be based on inventorship or ownership of a product.

Although some testimony indicated that witnesses believed that Molten’s advertising was false because the complaining competitor Baden actually created the patented design, other testimony made it clear that the witnesses believed the advertising to be false because Molten’s product was not “new.” The fact that witnesses used Baden’s prior design as evidence to show that Molten’s product was not innovative or new did not mean that Baden was actually basing its false advertising claim on an allegation that “Molten didn’t make it, we did,” the court reasoned.


Molten waived the issue of whether its advertising was mere “puffery” in presenting its motion to dismiss Baden’s claims, and the puffery issue could not be presented to the jury, according to the court.

Molten first raised the issue of puffery in a reply brief on its motion to dismiss. Because Baden did not have a chance to respond, the court declined to consider the Molten’s puffery argument on the motion to dismiss.

The only other time Molten raised the issue was in connection with proposed preliminary jury instructions. Whether Molten’s advertising of its “dual cushion technology” basketballs as “innovative” was mere puffery was a question of law—not a fact question to be decided by the jury, the court said.

The January 28, 2008 decision in Baden Sports, Inc. v. Kabushiki Kaisha Molten, will be reported in CCH Trade Regulation Reports and CCH Advertising Law Guide.

Thursday, February 21, 2008

Franchisor Officer Could Be Liable for Misrepresentation Under Florida Franchise Law

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

A franchisee of an electric vehicle sales and rental business adequately stated a claim for violation of the Florida Franchise Act against an officer of the franchisor for intentionally misrepresenting the prospects of success for the franchise, a Florida appellate court has determined.

Thus, dismissal of the claim for lack of specific allegations that the officer personally participated in the conduct constituting the violation was reversed and the action was remanded for further proceedings.

The franchisee alleged that the officer participated in the development of spreadsheets to provide to the prospective franchisee and had actual knowledge of the spreadsheet’s contents and omissions, the appellate court held.

The complaint asserted that the spreadsheets were based on “conjecture and speculation” without any substantive research, which resulted in documents containing “unsubstantiated and misleading” representations. It alleged that the officer, along with other defendants, authorized the delivery of the misleading documents to the prospective franchisee.

Further, the complaint asserted that the officer misrepresented the known total investment required for the franchise, leading to the prospective franchisee’s payment of a $50,000 franchise fee and the investment of money into the franchise.

There were ample allegations in the complaint that, if true, would support a judgment for damages against the officer, according to the court.

The decision is KC Leisure, Inc. v. Haber, Florida Court of Appeals, Fifth District, filed January 25, 2008 (CCH Business Franchise Guide ¶13,806).

Wednesday, February 20, 2008

Oral Guarantees to Prospective Franchisees May Have Violated New York Franchise Law

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

A franchisor of package delivery drivers could have violated the antifraud provision of the New York Franchises Law by making oral misrepresentations to ten prospective franchisees regarding the terms of their franchise agreements, a federal district court in New York City has decided.

The franchisees alleged that representatives of the franchisor orally guaranteed them commission rates above those set out in the franchisor’s offering prospectus and other documents.

Parol Evidence Rule

The franchisor asserted that the franchisees’ claims regarding the oral guarantees were barred from consideration by the parol evidence rule and by the doctrine of waiver. Evidence of the parties’ oral negotiations—after which the parties had signed an unambiguous agreement filed with the state— would ordinarily be barred as proof of fraud on the part of the franchisor, the court observed.

However, the franchisees disputed that the agreement they signed was the franchisor’s registered offering prospectus. They further alleged that the franchisor had refused to allow them to read the agreement prior to signing and had failed to provide them with a copy of the agreement. The franchisor was able to produce signature pages of its offering prospectus for only six of the ten plaintiff franchisees.

The facts raised doubts about the completeness of the written contract terms, and the franchisor’s subsequent withdrawal of its New York franchise registration called into question whether the terms of the agreement continued to bind the franchisees, the court found.

Unequal Bargaining Power

The franchisor’s procedural failings were of particular concern, given the unequal bargaining power between the parties. The franchisees were not sophisticated business negotiators and many had severely limited knowledge of English at the time they entered the agreements. The franchise law’s goal of protecting potential franchisees from fraud or deceptive practices by made this a particularly relevant concern in evaluating the franchisor’s liability.

Questions surrounding the franchisor’s withdrawal of its registration and the franchisees’ clear disadvantage in the bargaining process were factors that compelled consideration of the franchisees’ evidence of oral agreements with respect to the franchisor’s allege fraud, the court held.


The franchisor’s contention that the franchisees waived any rights under the alleged oral agreements by continuing to work for lower commission rates was rejected. The franchisees’ subsequent behavior had no bearing on the admissibility of their oral agreements, which were relevant solely as evidence of the franchisor’s alleged fraud in the offering and sales of the franchises.

The decision is Vysovsky v. Glassman, CCH Business Franchise Guide ¶13,799.

Tuesday, February 19, 2008

Antitrust Regulators Approve Thomson’s Acquisition of Reuters

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

The Department of Justice and the European Commission (EC) have approved the combination of financial information providers Thomson Corporation and Reuters Group PLC subject to the parties’ agreement to sell financial data and related assets aimed at preserving competition. The Canadian Competition Bureau also signed off on the transaction, saying that its competition concerns were alleviated by remedies negotiated with the U.S. and European authorities.

According to the parties, all regulatory approvals needed to close the transaction have been obtained. The companies expect the transaction to close in April.

Justice Department’s Required Divestitures

The Justice Department will require Thomson to sell financial data and related assets in three markets for financial data in order to proceed with its proposed $17 billion acquisition of Reuters, under the terms of a proposed consent decree.

The consent decree, if approved by the federal district court in Washington, D.C., would resolve concerns that the transaction, as originally proposed, likely would have resulted in higher prices to purchasers of three important types of financial data used by investment managers, investment bankers, corporate managers, and other institutional customers in making investment decisions and providing advice to their firms and clients.

To preserve competition, Thomson must, within 60 days, sell copies of three financial datasets—fundamentals data, earnings estimates data, and aftermarket research reports—and must license related intellectual property to a firm or firms that will use the data in order to offer products and services in competition with the combined firm.

EC Requirements

The remedies contained in the proposed consent decree with respect to three financial data markets were consistent with those obtained as a result of an antitrust investigation by the EC, according to the Justice Department. The EC, based on market conditions in Europe, required divestiture of a copy of Reuters’ Economics database to meet EC concerns in a fourth category.

Thomson’s Reaction

In a February 19 statement, Thomson said that “in order to obtain clearance, it has agreed to sell a copy of the Thomson Fundamentals (Worldscope) database, and Reuters has agreed to sell a copy of the Reuters Estimates, Reuters Aftermarket Research and Reuters Economics (EcoWin) databases.” Thomson also said that it and Reuters “retain full ownership of the relevant databases, and these undertakings do not affect Thomson’s and Reuters ongoing business or capabilities in these areas.”

The complaint and proposed consent decree is U.S. v. Thomson Corp. and Reuters Group PLC, Civil Action No. 08-00262, February 19, 2008. The Justice Department announcement appears here on the Antitrust Division’s website.

Friday, February 15, 2008

Nexus Determines When Out-of-State Franchisors Pay Taxes on Royalties, Franchisee Revenues

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

“Tax nexus” is a term of art in the field of state and local taxation that applies to the determination of whether or not an out-of-state entity (for example, a franchisor) must file and pay taxes with respect to revenues which are generated within a particular jurisdiction where they have no facilities—although they do have franchisees.

The issue is often confusing but, in fact, there are two separate issues: income tax nexus and sales tax nexus. For both, the ultimate question is what level of “presence” is necessary to establish taxability or nexus? What is a sufficient connection with a state to allow it to fairly impose a levy on operations connected with its territory?

Income Tax Nexus

Since the well-known decision in Geoffrey v. South Carolina (Business Franchise Guide ¶10,319, 437 S.E.2d 13 (S.C. 1993), cert. denied, 510 U.S. 992 (1993)) 15 years ago, it has been fairly well-settled law (though nonetheless frequently contested) that “economic presence” is all that is required to yield income tax nexus.

In that case, the taxpayer was a Delaware Corporation in which Toys R Us incorporated its intangibles, including Geoffrey, its trademark giraffe.

The corporation collected royalties from Toys R Us South Carolina operations (where they were deducted for South Carolina income taxes) and reported them in Delaware where there was no income tax, effectively escaping South Carolina’s income taxes completely. It didn’t stand up. South Carolina’s high court said that the presence of the trademark and the royalty source in South Carolina was enough to constitute “economic presence” and render Geoffrey liable for South Carolina income taxes.

Geoffrey went on to fight the same fight in North Carolina a few years ago with the same result —they lost and were assessed interest and penalties too. Last week, another Geoffrey decision was reported in Louisiana, where the corporation made the same claim and lost again and was again assessed interest and penalties. (Bridges v. Geoffrey, Inc., Louisiana Court of Appeal, First Circuit, Number 2007 CA 1063, February 8, 2008.)

Sales Tax Nexus

However, since the 1992 U.S. Supreme Court decision in Quill v. North Dakota (504 U.S. 298), there has been some legitimate question as to whether or not a “physical presence” is required to make an out-of-state vendor liable to collect and pay over sales taxes. (A full listing of the rules in the various states can be found in Byron E. Fox and Bruce S. Schaeffer, CCH Franchise Regulation and Damages, Chapter 6A.)

Proposed Federal Legislation

Within the past few weeks, a bill was introduced in the Senate (a similar bill was introduced last year in the House of Representatives) to restrict tax nexus to situations where the taxpayer actually maintains “physical presence” in the taxing jurisdiction for more than 15 days in a tax year. Under the proposed legislation, taxpayers would not be subjected to either income or sales tax obligations, absent such “physical presence.” It is unlikely that there is a state or local jurisdiction in the country that will not protest this bill and its enormous potential for revenue loss.

Additional information on state and local tax "nexus" problems for franchisors is available in CCH Franchise Regulation and Damages by Byron E. Fox and Bruce S. Schaeffer.

Thursday, February 14, 2008

Identity Theft Is Top Consumer Complaint of 2007

This posting was written by John W. Arden.

For the eighth consecutive year, identity theft tops the list of consumer complaints to the Federal Trade Commission, according to an annual report issued February 13. The 258,427 identity theft complaints accounted for 32 percent of the 813,889 total complaints lodged during the 2007 calendar year.

Even though the number of identity theft complaints rose by nearly 2,400 over 2006, its share of all complaints decreased by four percent, owing to an increase in total complaints of almost 140,000 (a 20 percent increase).

Credit card fraud was the most common form of identity theft reported (23 percent), followed by utilities fraud (18 percent), employment fraud (14 percent), and bank fraud (13 percent).

The number of identity theft complaints far-and-away outdistanced complaints in other categories in the top five. Categories two through five were: shop-at-home/catalog sales (8 percent), Internet services (five percent), foreign money offers (four percent), and prizes/sweepstakes and lotteries (four percent).

According to the Commission, consumers reported fraud losses totaling more than 1.2 billion (compared to 1.1 billion in 2006), with the medium monetary loss per person being $349.

Complaints by State, Metropolitan Areas

The 92-page report breaks out complaint data on a state-by-state basis and also contains data about 50 metropolitan areas reporting the highest per capita incidence of fraud and the 50 metropolitan areas reporting the highest incidence of identity theft.

The states with the most fraud complaints per 100,000 people are Colorado, Washington, Missouri, Arizona, and Alaska. The states with the most identity theft victims per 100,000 people are Arizona, California, Nevada, Texas, and Florida.

The metropolitan areas of more than 100,000 with the most consumer fraud complaints were (1) Albany-Lebanon, Oregon; (2) Greeley, Colorado; (3) Napa, California; (4) Punta Gorda, Florida; and (5) Allegan, Michigan. The metropolitan areas of more than 100,000 with the most identity theft complaints were (1) Napa, California; (2) Madera, California; (3) Greeley, Colorado; (4) Brownsville-Harlingen, Texas; and (5) McAllen-Edinberg-Mission, Texas.

The top 20 complaint categories were:

1. Identity Theft........................258,427 complaints........32%
2. Shop-at-Home/Catalog Sales..........62,811 complaints.........8%
3. Internet Services...................42,266 complaints...............5%
4. Foreign Money Offers................32,868 complaints......... 4%
5. Prizes/Sweepstakes and Lotteries....32,162 complaints.........4%
6. Computer Equipment and Software.....27,036 complaints.......3%
7. Internet Auctions...................24,376 complaints...........3%
8. Health Care Claims.................16,097 complaints..........2%
9. Travel, Vacations, and Timeshares...14,903 complaints.........2%
10. Advance-Fee Loans, Credit Pro./Repair..14,342 complaints...2%
11. Investments.......................13,705 complaints........2%
12. Magazines and Buyers Clubs........12,970 compliants...........2%
13. Bus. Opps/Work-at-Home Plans...11,362 complaints........1%
14. Real Estate (Not Timeshares)........9,475 complaints...........1%
15. Office Supplies and Services........9,211 complaints...........1%
16. Telephone Services..................8,155 complaints........1%
17. Employ. Ag./Overseas Work......5,932 complaints........1%
18. Debt Man./Credit Counseling.......3,442 complaints.......1%
19. Multi-Level Mktg./Pyramids/Chain Lets....3,092 complaints...1%
20. Charitable Solicitations.............1,843 complaints.....1%

The FTC report (“Consumer Fraud and Identity Theft Complaint Data, January—December 2007”) appears here on the FTC website.

Wednesday, February 13, 2008

Focus on Franchising

This posting was written by John W. Arden.

News and notes on franchising and distribution law:

 Due to the efforts of Chicago lawyers John R.F. Baer of Sonnenschein, Nath, and Rosenthal and Joe Sheyka of DLA Piper, the Illinois State Bar Association has decided to form a Standing Committee on Franchising and Distribution Law. The group’s Board of Governors approved the proposal for a standing committee on January 25 and will appoint a 10-member committee “at an early date,” according to Baer. A petition to create the standing committee stated that every other major state with franchising legislation “has a state bar committee that actively represents this area of practice and coordinates legislative developments with the state authorities responsible for franchising.”

 Extensive amendments to the Australian Franchising Code of Conduct (CCH Business Franchise Guide ¶7001A) will come into effect on March 1, 2008. In anticipation of that event, the Australian Competition & Consumer Commission on February 8 issued a new fact sheet “to help franchisees and franchisors understand their rights and responsibilities” relating to the amendments.

In brief, the fact sheet highlights: (1) new disclosure rules, including the requirement that a franchisor provide a prospective franchisee with a disclosure document, a copy of the franchise agreement, and a copy of the Franchising Code at least 14 days prior to the execution of the franchise agreement or payment of fees; (2) a requirement that the franchisor must disclose materially relevant facts in writing within 14 days of becoming aware of the facts; (3) a mandate that the franchisor must create a disclosure document within four months of the end of each financial year; (4) conditions under which a long-form disclosure document must be used; (5) a requirement of providing names and contact details of past franchisees in long-form disclosure documents; and (6) a requirement of providing in a long-form disclosure document the history of the franchise site and territory.

The Franchising Code now applies to overseas franchisors who grant only one franchise or master franchise within Australia. Text of the new fact sheet appears here on the Australian Competition & Consumer Commission web site.

 The Wall Street Journal released its 2008 Franchise High Performers list on February 12. The list of 25 high performing franchise brands included franchise concepts ranging from flooring and carpeting business and a chain of pet hospitals to a property damage assessment business. According to the Journal, the list demonstrates that the “fast-food industry’s power-grip on the franchising industry is slowly loosening, as industries serving the consumer and residential markets are expanding rapidly and performing well financially.” In fact, there are now 230 lines of business that franchise, according to FRANdata, an Arlington, Virginia research firm that assisted with the survey. Despite this finding, the list did include eight restaurant franchise systems (Bojangles, Culver’s, Denny’s, Friendly’s, Jimmy John’s, The Melting Pot, Nathan’s Famous, and Ponderosa Steakhouse). The list identified “brands that are well established, exhibit overall financial health, and have a proven record of franchising success.” The list and further information about the franchisors appears in the Wall Street Journal Online.

Monday, February 11, 2008

Antitrust Division Recommends Review of Regulations for Futures Exchanges

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

The Department of Justice Antitrust Division filed comments with the U.S. Department of the Treasury on January 31, recommending that the Treasury Department conduct a careful review to determine whether the current regulatory structure for interest rate futures transactions could be improved to make entry by new exchanges easier. The Antitrust Division contended that certain regulatory policies governing financial futures might have inhibited competition among financial futures exchanges.

The Justice Department suggested that a change in the regulatory regime that eliminates exchange control exercised by futures exchanges over the clearing function could facilitate the emergence of greater competition between exchanges in the development and trading of financial futures contracts.

Under the current regulatory regime, an exchange controls where a financial futures contract is cleared (“open interest”) and whether the clearinghouse may treat contracts as fungible or eligible for margin offset (“margin offsets”). This control has made it difficult for exchanges to enter and compete in the trading of financial futures contracts, according to the Antitrust Division. Equity and options exchanges do not control open interest, fungibility, or margin offsets in the clearing process, it was noted.

The Justice Department comments in response to the Treasury Department's request for comments on the Regulatory Structure Associated with Financial Institutions, appears at:

Commodity Futures Trading Commission

“As the regulator of the futures markets, the CFTC is confident that the U.S. futures exchanges and clearinghouses are functioning well, especially during these turbulent economic times,” Walter Lukken, Acting Chairman of the Commodity Futures Trading Commission (CFTC), said in a February 8 statement, responding to the Antitrust Division's comments.

“The CFTC continues to examine the industry's clearing structure as part of our broader mission,” he added. “While recent Department of Justice comments on clearing deserve thoughtful analysis, we believe that the various clearing models that have developed in the U.S. meet the standards established by the Commodity Exchange Act.”

Friday, February 08, 2008

Computer Buyers Fail to Allege Antitrust Injury in Price Fixing Action Against DRAM Makers

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

In a closely watched case, a federal district court in San Francisco has dismissed a substantial number of state law antitrust claims brought on behalf of computer purchasers who allegedly paid artificially inflated prices for a type of semiconductor chip called dynamic random access memory (DRAM), which was a component of the computers. The consumers—indirect purchasers of DRAM—alleged violations of the California Cartwright Act, as well as violations of 22 states' antitrust and unfair competition laws.

Acknowledging that the ruling has a “potentially devastating effect” on the case, the court granted the defending DRAM manufacturers’ motion to dismiss certain claims for relief, based on violations of the antitrust laws of 15 states—Arizona, California, Iowa, Kansas, Maine, Michigan, Mississippi, Nebraska, Nevada, New Mexico, North Carolina, North Dakota, South Dakota, West Virginia, and Wisconsin—for lack of antitrust standing.

Market Participation Requirement

The consumers failed to adequately allege market participation the allegedly-restrained market for purposes of satisfying antitrust injury requirements under the U.S. Supreme Court’s decision in Assoc. Gen. Contractors of Cal. v. Cal. State Council of Carpenters (1983) 1983-1 Trade Cases ¶65,226, 459 U.S. 519.

The complaining consumers failed to allege that they were either consumers or participants in the market for DRAM. Rather, they alleged that they were consumers in secondary markets (e.g., computer markets) incidental to the market for DRAM itself.

The consumers argued that the DRAM and computer markets were “inextricably linked” and that allegations of “inextricably linked” markets were sufficient to allege market participation. According to the consumers, 90 percent of the DRAM sold during the relevant period was used for computers; DRAM “has no free-standing use”; increases in the price of DRAM “lead to quick, corresponding price increases at the OEM and retail levels for [c]omputers”; and the demand for DRAM was ultimately determined by computer end-buyers, among other things. However, the consumers’ allegations of “inextricably linked” markets could not sufficiently allege that the plaintiffs were participating in the same market as the allegedly restrained DRAM market.

Nebraska and New York Consumer Protection Claims

Because the Assoc. Gen. Contractors analysis applied to standing under the Nebraska and New York state consumer protection where the plaintiffs' consumer protection claims were based on antitrust violations, the consumers’ Nebraska and New York state consumer protection claims were rejected. According to the court, the defendants failed to support their argument that claims under the North Carolina consumer protection law should be dismissed on the same ground.

The court noted that it was not considering the standing of the plaintiffs who purchased free-standing DRAM modules. It did, however, allow the plaintiffs to add an individual named plaintiff, who allegedly purchased DRAM modules, rather than DRAM as a component in computers.

The court rejected the defending manufacturers’ argument that they would be prejudiced by the addition of the named plaintiff after the close of discovery. If briefing on class certification had been complete, then prejudice to defendants would be great. However, no undue prejudice would result from allowing the added plaintiff to proceed as named plaintiff, the court reasoned.

The parties were ordered to submit a stipulated proposed order on a briefing schedule and hearing date in connection with the motion for class certification no later than February 13, 2008.

The January 29, 2008, decision in Dynamic Random Access Memory (DRAM) Antitrust Litigation, No. 02-1486, will appear at 2008-1 Trade Cases ¶76,031.

Thursday, February 07, 2008

Do-Not-Call Registry Bills Cleared for Presidential Approval

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

Congress on February 6 passed two bills that would make permanent the federal “do-not-call” registry for residential telephone subscribers who do not wish to receive telemarketing calls. Both bills would amend the “Do-Not-Call Implementation Act” (Public Law 108-10; 117 Stat. 557; 15 U.S.C. Section 6101 note), which was enacted in 2003.

The proposed “Do-Not-Call Improvement Act of 2007” (H.R. 3541) would eliminate the automatic removal of telephone numbers listed on the registry. Currently, the statute provides that individuals’ numbers must be deleted from the registry after five years, so that people have to sign up again every five years. Without the amendment, registrations would begin to expire in June 2008, although the Federal Trade Commission stated last October that it would wait for Congressional action before purging the list. H.R. 3541 passed the House on December 11, 2007 and passed the Senate without amendment by Unanimous Consent on February 6, 2008.

The other measure—the proposed “Do-Not-Call Registry Fee Extension Act of 2007 (S. 781)—would extend the authority of the FTC to collect fee to administer the registry to fiscal years after fiscal year 2007. That bill passed the Senate on December 17, 2007 and agreed to on a voice vote by the House on February 6, 2008.

The Congressional action drew a positive response from FTC Chairman Deborah Platt Majoras.

“Congress has taken important steps reaffirming the continued success of the extremely popular Do Not Call program,” said Majoras. “The Commission is committed to protecting consumers from unwanted telemarketer calls, and the legislation announced today will enable us to continue to do it efficiently."

Wednesday, February 06, 2008

Privacy Laws Proposed in California, New Jersey

This posting was written by Thomas Long, Editor of CCH Privacy Law in Marketing, and John W. Arden.

Bills that would impose further notice requirements for security breaches and restrict the collection and use of personal information of adolescents have been introduced in California and New Jersey, respectively.

Security Breach Notifications

California Senate Bill 364 would amend the California security breach notification law to require that notifications be written in plain language and include certain standard information.

The proposal, which passed the California Senate on January 30, would require that security breach notifications sent to California residents include (1) the toll free numbers and addresses of the major credit reporting agencies; (2) the name and contact information of the reporting agency, person, or business; (3) a list of the types of information, such as name or Social Security Number, that were or may have been the subject of a breach; (4) the date of the breach, if known, and the date of discovery of the breach, if known; (5) the date of the notification and whether the notification was delayed pursuant to current law for law enforcement purposes; (6) a general description of the breach incident; (7) the estimated number of persons affected by the breach; and (8) whether substitute notice was used.

The bill would also require electronic submission of breach notifications to the state’s Office of Information Security and Privacy Protection (formerly the Office of Privacy Protection).

The California Disclosure of Security Breach Law (California Civil Code Sec. 1798.82) appears at CCH Privacy Law in Marketing ¶30,500.California is one of 38 states with a specific data security breach law.

Adolescent Online Privacy Law

New Jersey Assembly Bill 108 would regulate the disclosure of personal information collected from adolescents by the operator of a website or online service. The proposed “Adolescents’ Online Privacy Protection Act” would apply to personal information of children over the age of 13 and under the age of 18. The measure is modeled on the federal Children’s Online Privacy Protection Act (CCH Privacy Law in Marketing ¶25,300), which applies only to children under the age of 13.

The bill would make it an unlawful practice under New Jersey’s Consumer Fraud Act to collect, use, or disclose an adolescent’s personal information in a manner that violates regulations to be adopted by the state Division of Consumer Affairs in the Department of Law and Public Safety.

Website operators would be required to obtain verifiable parental consent for the use and disclosure of personal information from adolescents and to provide for parental access to the personal information stored about the adolescent.

The proposal was introduced in the New Jersey Assembly on January 8.

Tuesday, February 05, 2008

Social Networking Site Operator Resolves COPPA Allegations

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

The operators of a social networking web site for kids and “tweens” have agreed to settle FTC charges that their data-collection practices violated the Children’s Online Privacy Protection Act (COPPA) and the Commission’s implementing rule.

COPPA prohibits unfair or deceptive acts or practices in connection with the collection, use, or disclosure of personally identifiable information from and about children under 13 on the Internet.

According to a complaint filed by the Department of Justice on behalf of the FTC, the defendants—Industrious Kid, Inc. and its owner—promoted the web site as a “free, secure, social networking and blogging destination specifically designed for kids ages 8 to 14.”

In addition, the web site was promoted as “purposely designed to ensure the greatest level of safety and satisfaction for young members” and as “safer than other social networking sites.”

Lack of Parental Notice, Consent

According to the FTC, collected and maintained personal information from children under the age of 13 without first notifying parents and obtaining their consent. The agency’s complaint alleged that collected and maintained personal information from more than 10,500 children under the age of 13.

The complaint charged that the defendants failed to: obtain verifiable parental consent before any collection of personal information from children; provide sufficient notice of what information they collected online from children, the site’s information use and disclosure practices, and other require content; and provide sufficient notice of the types of personal information they had collected from children prior to obtaining verifiable parental consent.

Right to Review, Delete Personal Information

The e-mail notice also failed to inform parents of their right to review or have their children’s personal information deleted, according to the agency. Imbee’s privacy policy suffered from similar shortcomings, the agency claimed.

Under the terms of the proposed consent decree, the defendants would be required to pay a $130,000 civil penalty and to delete all personal information they collected and maintained in violation of the law. The consent decree also would prohibit future violations of the rule.

The January 31 proposed consent decree is U.S. v. Industrious Kid, Inc., FTC File No. 072-3082, CCH Trade Regulation Reporter ¶16,105.

Monday, February 04, 2008

Bulk of Washington Beer, Wine Regulations Survive Antitrust Challenge

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

A Washington State regulation for alcoholic beverages, which required that wholesalers post their prices and adhere to those prices for at least 30 days (“post-and-hold” pricing system), was a per se violation of the Sherman Act, which was not saved by operation of the state’s powers under the Twenty-First Amendment to the U.S. Constitution, the U.S. Court of Appeals in San Francisco has ruled. However, the bulk of the state's beer and wine regulations were considered unilateral restraints imposed by the state and not subject to Sherman Act preemption.

Costco Wholesale Corporation, operator of an international chain of membership warehouses, filed suit against the Washington State Liquor Control Board and others, arguing that the “regulations restrict many of [Costco’s] efficient and competitive practices as to wine and beer suppliers and create or facilitate agreement among distributors and among wineries and brewers (manufacturers) in restraint of competition.”

The federal district court in Seattle had held that Costco was entitled to summary judgment on its antitrust claims (2006-1 Trade Cases ¶75,250). It concluded that a majority of the regulations violated the antitrust laws and could not be upheld as a valid exercise of the state's powers under the Twenty-First Amendment. The appellate court affirmed in part and reversed in part the lower court's ruling.

“Post-and-Hold” Pricing System

The appellate court upheld a determination that Washington's post-and-hold pricing system was a hybrid restraint subject to condemnation under the antitrust laws. The pricing system could facilitate horizontal collusion among market participants. Although each wholesaler was only required to adhere to its own posted price and was not compelled to follow others’ pricing decisions, the logical result of the restraints was a less competitive market. The adherence requirement effectively removes a market uncertainty by making pricing behavior transparent and discouraging variance, the court explained.

While the state’s interest in temperance was a valid and important interest under the Twenty-First Amendment, the state failed to demonstrate that its restraints were effective in promoting temperance. Thus, the state’s interests did not outweigh the federal interest in promoting competition under the Sherman Act.

Ban on Retailer-to-Retailer Sales

Washington State’s ban on sales of beer and wine by retailers to other retailers was a unilateral restraint of trade imposed by the state that was not subject to preemption by the Sherman Act, according to the court. It was not a hybrid restraint, as the complaining warehouse club chain operator argued. The ban neither licensed nor commanded a private restraint.

Ban on Central Warehousing Systems

Regulations that disallowed a central warehousing system for alcohol distribution amounted to a unilateral restraint imposed by the state, it was held. Under the central warehousing system, a grocery chain or large retailer like Costco bought goods in large lots from manufacturers and suppliers, which were delivered to a central warehouse for later delivery to individual retail stores. It was not a hybrid restraint subject to condemnation. The state simply displaced entirely a method of storing goods, in the court's view.

Other Unilateral Restraints

In the absence of the invalid post-and-hold requirement, a ban on volume discounts, delivered pricing, and credit sales (as well as regulations requiring uniform pricing and a 10-percent mark-up) would all be considered unilateral restraints imposed by the state and not subject to Sherman Act preemption, the court also ruled. Any anticompetitive effect arising out of these restraints was the result of the sovereign’s command. There was no “meeting of the minds” to determine how much discounts would be, whether territorial variations in price would be allowed, or whether credit might be extended over a certain period of time.

Moreover, Washington’s 10% mark-up did not grant to private parties a means to control pricing decisions of other firms. Instead, the Washington statute merely required a mechanical calculation, requiring that a wholesaler mark its prices at least 10% higher than its costs for the product. Similarly, that the uniform price requirement allowed manufacturers and distributors the discretion to set their own price, which they then had to apply uniformly, did not render the uniform price rule a hybrid restraint in the absence of the post-and-hold requirement.

Horizontal Price Collusion

The grant of discretion did not facilitate horizontal price collusion. Because the legislature would have enacted these regulations even it had been aware of the invalidity of the post-and-hold system, these valid provisions could be severed from the invalid provision under the regulation’s severability provision.

The January 29, 2008, decision in Costco Wholesale Corp. v. Maleng, No. 06-35538, will appear at 2008-1 Trade Cases ¶75,621.

Friday, February 01, 2008

Microsoft Antitrust Final Judgments Extended to November 2009

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

The federal district court in Washington, D.C. has extended until November 12, 2009 the terms of the antitrust final judgments against Microsoft Corporation that had been set to expire in large part in November 2007.

Ten states and the District of Columbia (a majority of the states who were parties to the decree) sought to extend all of the provisions of the final judgments until November 12, 2012, five years beyond their original expiration date.

Microsoft opposed the states’ efforts, arguing that the states had not met their burden for modification of the decrees. The U.S. Department of Justice supported the computer software maker’s position in a friend-of-the-court brief.

The decrees (2006-2 Trade Cases ¶75,418, 2006-2 Trade Cases ¶75,541) prohibit the computer software company from abusing its monopoly in the PC operating system market.

Changed Circumstances

The court concluded that modification was necessary because of a change in circumstances, basing its decision on the extreme and unforeseen delay in the availability of complete technical documentation relating to the “Communications Protocols” that Microsoft was required to make available to licensees under Section III.E of the final judgments. The court explained that the mandatory disclosure of the communications protocols relied upon by Microsoft’s PC operating system to interoperate with its server operating systems was intended to advance the communication between non-Microsoft server operating systems and Windows.

The states met their burden of establishing that the delay in the availability of the communications protocols constituted changed circumstances, which have prevented the final judgments from achieving their principal objectives, according to the court.

“More than five years after the Communications Protocols and related technical documentation were required to be available to licensees under § III.E, the documentation envisioned by that Section is still not available to licensees in a complete, useable, and certifiably accurate form,” the court explained.

Microsoft argued that it had never been found to be out of compliance with the “expiring provisions” of the final judgments. The court noted, however, that “the compliance and enforcement road” had not necessarily been “smooth.” In any event, the court refused to accept this compliance as grounds for denying the moving states’ motions or “relieving Microsoft of the burden of “operating under the shadow of a judicial decree.’”

Appropriate Legal Standard

The court did not resolve the “thorny” issue of the appropriate legal standard to apply to the motions to extend. The moving states argued that the court had broad discretion to modify the decree in order to accomplish its intended result, while Microsoft argued that modification of a consent decree required a significant change in circumstances. The court concluded that the moving states met their burden under either test.

The January 29, 2008, decision in State of New York v. Microsoft Corp., Civil Action No. 1998-1233, will appear at 2008-1 Trade Cases ¶76,020.