Monday, October 31, 2011





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

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

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

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

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

Apps Access User Information

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

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

Injury in Fact

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

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

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

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

In their complaint, the users alleged three injuries:

(1) Misappropriation or misuse of personal information;

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

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

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

Injury Traceable to Defendants

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

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

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

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

Friday, October 28, 2011





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

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

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

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

Standing

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

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

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

Preemption

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

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

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

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

Thursday, October 27, 2011





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

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

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

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

Global Patent War

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

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

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

Anticompetitive Conduct

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

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

False Declarations

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

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

Unilateral Conduct

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

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

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

Wednesday, October 26, 2011





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

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

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

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

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

Uniform Price Increases

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

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

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

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

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

Tuesday, October 25, 2011





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

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

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

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

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

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

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

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

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

Further details will be reported in CCH Trade Regulation Reporter.

Monday, October 24, 2011





ABA Forum on Franchising “Continues to Be Strong”

This posting was written by John W. Arden.

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

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

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

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

Governing Committee Election

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

The new members of the governing committee are Deborah Coldwell of Hayes & Boone in Dallas/Fort Worth; Natalma McKnew of Smith Moore Leatherwood in Greenville, South Carolina; Karen Satterlee of Hilton Worldwide in McLean, Virginia; and Will K. Woods of Baker Botts LLP in Dallas.

Forum Awards

This year, the group did not present its Lewis G. Rudnick Award for substantial contributions to the development of the Forum and to franchise law as a discipline. The “lifetime achievement award” was given to John R.F. Baer in 2009 and to Rupert Barkoff and Andrew Selden in 2010.

The Young Leader Award was presented to Nicole Zellweger for her speaking, writing, and involvement in the Newcomer’s Network and Women’s Caucus. The Chair’s Explorer Award was given to Christian Thompson. The latter award is designed for newcomers to the Forum who have demonstrated an interest in pursuing a career in franchise law.

Highlights of the annual meeting included a plenary session on “Speed Reading People: Techniques to Improve Communications and Enhance Outcomes” and the Annual Franchise and Distribution Development session, presented by Lee J. Plave and Stuart Hershman.

Program co-chairs were Michael K. Lindsay and Karen Satterlee.

The 2012 annual meeting is scheduled for October 3-5 at the JW Marriott in Los Angeles. Further information regarding the Forum on Franchising appears here on the ABA website.

Friday, October 21, 2011





Attorney, Wife Liable for RICO Fraudulent Insurance Claims

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

Two insurance companies succeeded—and three failed—in their RICO claims against an attorney who had participated in a scheme to defraud the insurers by submitting false claims for automobile insurance, the federal district court in San Juan, Puerto Rico, has ruled. Because the attorney’s RICO violations enriched both him and his spouse, their conjugal partnership was jointly liable for nearly a million dollars in damages that the attorney had caused.

Insurance Fraud Paradigm

Aetna Casualty Surety Co. v. P & B Autobody (43 F.3d 1546), a 1994 decision by the U.S. Court of Appeals for the First Circuit, provided a paradigm for analyzing RICO claims involving insurance fraud, the court observed. In accordance with Aetna, the insurers had to prove that: (1) each was an enterprise; (2) their business activities affected interstate or foreign commerce; (3) the defendant associated with each of them; (4) the defendant participated in the operation or management of each enterprise; and (5) the defendant’s participation in each enterprise was effected through a pattern of racketeering activity.

Enterprise, Interstate Commerce

The insurers were legitimate corporations authorized to engage in the business of insurance in Puerto Rico. Therefore, each insurer constituted a distinct enterprise. Moreover, to the extent that the insurers provided coverage to policyholders in the continental United States, their activities affected interstate commerce. The first and second Aetna criteria were therefore met, according to the court.

Association, Participation

As a policyholder or claimant under the plaintiffs’ insurance policies, the attorney associated with each of the insurers, the court reasoned. In addition, he participated in the conduct of the enterprises’ affairs by filing false claims that were paid by the insurers. RICO made it unlawful for any person who was employed by or associated with an interstate enterprise to “conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity.” In Reves v. Ernst & Young (CCH RICO Business Disputes Guide ¶8227), the U.S. Supreme Court construed the words “conduct or participate” to mean a defendant’s participation in the “operation or management” of the enterprise.

In this case, the attorney argued that he could not have participated in the operation or management of the insurance company enterprises because insurance company employees had not been involved in the scheme. Although some courts in the Second Circuit have adopted this “more restrictive” approach to the operation and management requirement (where participation required employee involvement in the fraudulent scheme), the attorney failed to fully develop his argument with respect to this approach. Alleging that insurance company insiders were not involved in the attorney’s fraud was insufficient to distinguish the holding in the Aetna case, which included insurance company employees as defendants. In light of the First Circuit’s liberal application of the RICO Act, and considering the role that insurance company employees had played in the Aetna scheme, the attorney’s argument was unavailing, the court concluded.

Accordingly, the third and fourth Aetna criteria were met, as well.

Pattern of Racketeering

The attorney contended that the insurers had to prove that two or more predicate acts were committed in connection with each enterprise. In the absence of any attempt to rebut this contention, and in light of the fact that case law appeared to be silent on the issue, the attorney’s “straightforward” interpretation of the fifth criterion was adopted. The undisputed facts showed that the attorney had committed a single act of racketeering in connection with each of three insurers. Accordingly, a pattern of racketeering was absent as to those insurers and their RICO claims failed. The claims asserted by the remaining two insurers, however, were successful. The attorney had committed multiple acts of racketeering in connection with each of them. Moreover, the acts were sufficiently related (they shared the same purpose, results, victims, and methods of commission) and they posed a threat of continued criminal activity, in the court’s view. The two insurers thus met all five Aetna criteria and prevailed on their RICO claims against the attorney.

Damages

The successful insurance companies were awarded a total of $955,703 in treble damages. The facts showed that the insurers had sustained losses of $112,500 and 206,068, respectively. After trebling, those damages increased to $337,500 and $618,203, respectively.

The September 30, 2011 case in Puerto Rico American Ins. Co. v. Burgos can be found at CCH RICO Business Disputes Guide ¶12,117.

Thursday, October 20, 2011





“Clinically Proven” Help-Baby-Sleep Labeling Could Be Deceptive

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

Johnson & Johnson’s labeling of its baby bath products as “clinically proven” to help babies sleep better could be deceptive and misleading in violation of the New Jersey Consumer Fraud Act, but a purchaser’s allegations of ascertainable loss were inadequate to establish a cause of action, the federal district court in Trenton has ruled.

The labels did not just make vague or highly subjective claims of simple superiority that could be considered puffery. The incorporation of the words “clinically proven” transformed a statement that might otherwise be considered puffery—the products would help babies sleep—into something that appeared to be both specific and measurable, according to the court.

Ascertainable Loss

In asserting ascertainable loss in a class action complaint, the purchaser alleged that J&J charged a premium of at least $1.00 for the products and that comparable products cost at least twenty-five percent less. However, the purchaser did not allege the price she paid for the products, their price generally, or the price of comparable products. The allegations of ascertainable loss were unsupported conclusory statements insufficient to withstand a motion to dismiss, the court determined.

The purchaser’s claims were dismissed without prejudice because it was conceivable that she could plead ascertainable loss with specificity, the court said.

The opinion in Lieberson v. Johnson & Johnson Consumer Companies, Inc. will be reported at CCH Advertising Law Guide ¶ 64,451.

Wednesday, October 19, 2011





Projections of Store Openings Could Have Violated North Dakota Franchise Law

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

Pharmacy franchisor Medicine Shoppe International, Inc. could have breached the anti-fraud provisions of the North Dakota Franchise Investment Law (NDFIL) by allegedly making a material misstatement of fact in a Franchise Disclosure Document (FDD) filed by the franchisor with the North Dakota Securities Commissioner in 2009 when it projected the opening 0-1 stores in North Dakota, a federal district court in Fargo, North Dakota, has ruled.

In reality, the franchisor did not intend to offer any franchises in North Dakota of the type and trade name described in the FDD so as to avoid triggering the “most favored nations” clause in the franchise agreements of current franchisees, such as the two plaintiffs.

The plaintiff franchisees argued that they were induced to enter into renewal agreements with the franchisor specifically because they were assured that, by virtue of the “most favored nations” clauses in their renewal agreements, they were assured that if a better deal came along, they would be able to convert to it.

If a factfinder determined that the franchisor employed such a scheme as a way to defraud or commit deceit, it could also find a violation of the statute. Thus, genuine issues of fact existed with regard to whether the franchisor violated the NDFIL, the court held.

Private Right of Action

The franchisor’s contention that there was no private right of action under the NDFIL was rejected. The plain language of the statute stated that a franchisee or subfranchisor could bring an action against “any person who violates any provision of this chapter,” the court observed.

The decision is JMF, Inc. v. Medicine Shoppe Int’l, Inc., CCH Business Franchise Guide ¶14,692.

Tuesday, October 18, 2011





“Do-Not-Track” Approach to Consumer Privacy Questioned by FTC Commissioner Rosch

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

Federal Trade Commissioner J. Thomas Rosch reiterated his doubts about the viability of a “do-not-track” mechanism to protect consumer privacy in the United States, in a speech delivered at the Loyola Chicago Antitrust Institute Forum last Friday. Commissioner Rosch has called the FTC staff’s recent endorsement of such a mechanism “premature.”

A do-not-track mechanism would purportedly enable consumers to choose whether to block the tracking of their online searching and browsing activities in order to limit targeted advertising. In an FTC staff report issued in December 2010, entitled “Protecting Consumer Privacy in an Era of Rapid Change: A Proposed Framework for Businesses and Policymakers,” the staff recommended the implementation of a do-not-track mechanism.

“Serious Reservations”

Commissioner Rosch concurred in the decision to issue the staff report for comment, but expressed “serious reservations” about the do-not-track proposal advanced in it. At the time the report was released, Commissioner William E. Kovacic also questioned the wisdom of do not track. However, Commissioner Kovacic left the agency earlier this month, leaving Rosch the only member of the Commission skeptical of the staff’s recommendation.

In his remarks in Chicago, Commissioner Rosch explained how the do-not-track approach to privacy protection has “generated attention not only from the Commission and the media, but also from Congress, the online industry, and a host of consumer advocacy groups.”

While there are bills in Congress that address broader privacy concerns without providing for a specific do-not-track mechanism, two pieces of legislation have been proposed this term that instruct the FTC to develop a specific do-not-track mechanism, according to Rosch.

Proposed Federal Legislation

The proposed “Do Not Track Me Online Act” (H.R. 654) would require the FTC to issue rules: (1) establishing standards for “an online opt-out mechanism; (2) requiring mandatory disclosures regarding the collection, use, and sharing of information; and (3) allowing consumers to otherwise prohibit the collection or use of a broad array of information transmitted online.

The proposed “Do-Not-Track Online Act of 2011” (S. 913) would require the FTC to issues rules: (1) establishing a mechanism whereby consumer can simply and easily opt out of having their personal information collected online—including on mobile devices; and (2) prohibiting the collection of personal information from consumers who have opted out.

Online Industry’s Efforts

The Commissioner criticized the online industry’s efforts to implement do not track. He questioned claims that these efforts provide consumers with the choice to eliminate behavioral advertising, tracking, or targeted advertising. Specially, he mentioned the browser-related mechanisms associated with Microsoft’s Internet Explorer 9, Mozilla’s Firefox, and Google’s Chrome and the self-regulatory regime of the Digital Advertising Alliance, which uses cookies to effectuate the choice mechanism.

According to Rosch, there are four overarching shortcomings with the industry’s efforts:

(1) Some of the mechanisms only allow consumers to opt out of behavioral advertising, but not all “tracking,” and there is a failure to alert consumers to this fact.

(2) Consumers may not be fully informed about the benefits or consequences of subscribing to a do-not-track mechanism. Commissioner Rosch expressed concern that “across-the-board_ opting out by consumers might reduce the overall financing that supports free content across the Internet, and accordingly, result in a decrease in innovation.

(3) There was not much evidence that the mechanisms were really working to alert consumers about the existence of tracking and online behavioral advertising. The rates of adoption are very low.

(4) The current proposals involve well-entrenched firms that might favor barriers to consumer tracking in order to create or raise entry barriers to rivals. The firms’ intentions might not be solely to protect consumers against behavioral tracking.
“[W]e cannot be blinded so much by our zeal to protect consumers from behavioral tracking that we lose sight of our competition mission,” Commissioner Rosch said. “There is probably nothing worse than to have firms with an anticompetitive agenda designing consumer protection initiatives.”

The text of Commissioner Rosch’s October 14 remarks, entitled “Do Not Track: Privacy in an Internet Age,” appears here.

Monday, October 17, 2011





Franchisor Not “Employer” of Franchisee’s Employee Under Minimum Wage Law

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

A franchisor of pancake restaurants was not the “employer” of a waitress that was hired by one of its franchisees to work in its franchised restaurant for purposes of the Missouri Minimum Wage Law (MMWL), a Missouri appellate court has decided. Thus, the franchisor was entitled to summary judgment on the waitress’ claim alleging noncompliance with the MMWL. A ruling by a Missouri state trial court was affirmed.

The waitress filed suit seeking damages for the delay during which certain tipped employees were not paid the appropriate minimum wage as a result of reliance upon erroneous pronouncements made by the Missouri Department of Labor and Industrial Relations.

Elements of Employment Relationship

The evidence established that the franchisor had no ability to hire or fire the waitress during the period in question, the court determined. This included the waitress’ admission that a manger of the franchisee did the hiring and firing of employees at the restaurant.

Undisputed evidence also supported the conclusion that the franchisor did not supervise or control the waitress’ work or conditions of employment. In an attempt to refute that evidence, the waitress pointed to the fact that the franchisor took control of the restaurant after the franchisee defaulted and the franchise agreement was terminated. However, the franchisor’s ability to terminate the franchise agreement had no bearing on the ability of the franchisor to supervise and control the waitress’ employment.

The franchisor acted solely as a payroll service provider to the franchisee and it did not determine the waitress’ rate of pay, the court found. The only documents relating to the waitress that the franchisor retained were those related to payroll services. The franchisor did not maintain personal documents, prior employment information, benefit information, personnel files, leave and attendance records, or performance reviews.

Finally, the evidence showed that the premises were controlled by the franchisee and the equipment used at the restaurant belonged to the franchisee.

The decision, Conrad v. Waffle House, Inc., appears at CCH Business Franchise Guide ¶14,695.

Thursday, October 13, 2011





Placement of “Patent Pending” Tag Supports Competitor’s False Marking Claim

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

The placement of “patent pending” label on the bottom of tote bags, next to the seller’s “Optari” label, could constitute false patent marking, the federal district court in Nashville has ruled.

Optari had submitted a patent application for the straps on the tote, but the patent pending mark was nowhere near the straps, the court said. Optari’s competitor, Lubber, Inc., stated a plausible false marking claim by alleging that Optari placed the patent pending mark on the bottom of the tote in an effort to lead the public into believing that the tote itself was undergoing patent review, the court determined.

The false marking statute (35 U.S.C. Sec. 292(a)) imposes liability against “[w]hoever marks upon, or affixes to, or uses in advertising in connection with any article, the words `patent applied for,’ `patent pending,’ or any word importing that an application for patent has been made, when no application for patent has been made, or if made, is not pending, for the purpose of deceiving the public.”

Leahy-Smith America Invents Act

The above provision was unchanged by recent amendments to false marking statute, the court noted. The Leahy-Smith America Invents Act, Public Law 112-29, signed by the President September 16, 2011, eliminated a provision authorizing any person to bring a qui tam suit for statutory damages of up to $500 per violation. Now, only the United States may sue for statutory damages.

A new private suit provision (35 U.S.C. Sec. 292(b)) authorizes a private party who has suffered a competitive injury as a result of a false marking violation to bring a civil suit in a federal district court for recovery of damages adequate to compensate for the injury. The false marking amendments apply to all cases, without exception, that are pending on or commenced on or after September 16, 2011.

The court granted Lubber’s request to add the patent marking claim to its complaint asserting trademark and unfair competition claims under the Lanham Act, Tennessee Consumer Protection Act, and common law.

Constitutionality

The court rejected Optari’s argument that the false marking statute is unconstitutional.
Some courts had held the former qui tam enforcement provision unconstitutional, for example, Unique Product Solutions Ltd. v. Hygrade Valve, Inc. (ND Ohio 2011) Advertising Law Guide ¶64,196, on motion for reconsideration Advertising Law Guide ¶64,242.

However, following the Unique Product Solutions decision, several other courts had rejected constitutional challenges (citations collected in Champion Laboratories, Inc. v. Parker-Hannifin Corp. (ED Cal. 2011) Advertising Law Guide ¶64,302.

The constitutionality debate is now largely academic in light of the amendments made by the Leahy-Smith America Invents Act, according to the court.

The October 6 opinion in Lubber, Inc. v. Optari LLC will be reported at CCH Advertising Law Guide ¶64,447.

Futher details regarding CCH Advertising Law Guide appear here.

Wednesday, October 12, 2011





Antitrust Division Will Continue Probe of US Airways’ Acquisition of Airport Slots

This posting was written by John W. Arden.

The Department of Justice Antitrust Division will continue its ongoing investigation of U.S. Airways’ acquisition of Delta Airlines’ slots at Washington’s Ronald Reagan National Airport to determine the transaction’s impact on competition and traveling consumers, the Department of Justice announced yesterday.

“The division will continue its investigation with a focus on the increase in US Airway’s share and use of the slots at Reagan National and the resulting decrease in Delta’s share and use of slots at this slot-constrained airport, at which passengers pay among the highest fares in the country, “ the Justice Department said.

The Antitrust Division will not continue to investigate US Airway’s acquisition of slots at New York’s LaGuardia Airport, having concluded that the acquisition does not raise competitive concerns.

The Justice Department pointed out that it works closely with the Department of Transportation on airline issues, but has a different function than the DOT. “The role of the Antitrust Division is to protect competition and to ensure that companies do not raise prices to harm consumers in violation of the antitrust laws.”

The division will take appropriate action, if warranted, at the conclusion of its investigation, the announcement stated.

Tuesday, October 11, 2011





The Long Arm of U.S. Law Grabs Canadian Executive

This posting was written by Michael Osborne, a partner with Affleck Greene McMurtry LLP of Toronto, Ontario, Canada.

Doing business in the U.S. can be very lucrative. But Canadian (and other foreign) companies and their executives that engage in corrupt practices there can expect to face serious penalties there.

Former Bennett Environmental, Inc. executive Robert Griffiths is a case in point. On September 12, 2011, he was sentenced to serve 50 months in a U.S. jail, after pleading guilty to participating in fraud and money-laundering conspiracies.

Bennett Environmental is an environmental soil remediation company. Beginning in 2001, it won a series of contracts to remediate soils at a major environmental cleanup in the U.S. known as the Federal Creosote site.

An investigation by the U.S. Justice Department’s Antitrust Division revealed that bidders on the project, including Bennett Environmental, had conspired in the bidding process, fraudulently inflated the price of certain subcontracts, and paid kickbacks.

To date, three companies and ten individuals have been charged. Bennett Environmental is one of the three companies: in 2008 it pleaded guilty to one count of conspiracy to defraud the U.S. Environmental Protection Agency and was fined $1 million.

Bennett Environmental’s woes in the U.S. are not over. Its founder, John Bennett, was indicted in 2009 and faces charges of conspiracy, fraud, and money laundering in relation to the Federal Creosote site. Mr. Bennett has recently succeeded in obtaining orders from Ontario courts that Bennett Environmental pay his legal bills.

Controversy over the Federal Creosote contracts has also led to trouble at home. An OSC investigation determined that Bennett Environmental failed to disclose disputes over Federal Creosote contracts in 2003 until about one year later.

In a series of settlements, Mr. Bennett was prohibited by the Ontario Securities Commission from acting as an officer or director of a public company for ten years, and ordered to pay an administrative monetary penalty (“AMP”) of $250,000.

Mr. Griffiths was barred from trading in securities or acting as a director or officer of a public company for 15 years, and ordered to pay an AMP of $150,000. Another Bennett Environmental executive, Rick Sterns, was prohibited from acting as an officer or director for five years and ordered to pay an AMP of $490,000.

Further information regarding the 2008 criminal charges against Bennett Envronmental, Inc. appears in an August 1, 2008 posting on Trade Regulation Talk.

Monday, October 10, 2011





Courts Differ on Whether Publisher’s Purchase, Use of Data Violated Driver’s Privacy Protection Act

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

A class of Missouri residents could go forward with claims under the federal Driver’s Privacy Protection Act (DPPA) against West Publishing Co. for acquiring and disseminating personal information derived from driver’s license records from various states, the federal district court in Jefferson City, Missouri has ruled.

However, a class of Illinois residents could not pursue a DPPA class action against West Publishing for the same conduct, the U.S. Court of Appeals in Chicago has held.

Missouri Action

The federal district court held that the class representative had standing under the DPPA and granted the representative’s motion to certify the class.

According to the district court, the DPPA did not
(1) permit the publisher to obtain driver’s license information from the state when its sole purpose was to resell the information to third parties or

(2) permit the publisher to disclose the entire driver’s license database to a business or individual having only a potential future use for some of the information sold.

The Missouri residents were not required to present evidence of specific misuse of their personal information, according to the court. The publisher obtained, and continued to obtain, large databases of motor vehicle records from several states. The databases contained personal information belonging to millions of licensed drivers.

The DPPA made nondisclosure of personal information the default rule. Under the statute, states were permitted to disclose driver’s license information only to “authorized recipients” who obtained information for one of the permissible uses under the DPPA, and not simply a recipient whom the state had authorized to receive information.

The DPPA did not delegate to the states the decision of who was an “authorized recipient.” The publisher, therefore, was not an “authorized recipient” of the information based on its mere purported purpose of reselling information for permissible uses, in the district court’s view.

Rather than specifically listing prohibited uses for driver’s license information, the statute generally prohibited all but 14 permissible uses. Bulk resale was not included in those permissible uses. Only one DPPA exception made reference to “bulk distribution,” and that provision required that individuals opt in by providing their express consent to such bulk release for marketing and solicitation.

Given the strict linkage between the method of obtaining data and the restrictions on resale, Congress could not have intended to create a “gaping hole” in the statute for resellers by authorizing them to obtain the entire driver’s license database simply by identifying themselves as resellers, in the court’s opinion. Congress could have created a separate exception for resellers, but it did not.

Class Certification

The class consisted of all persons who registered a motor vehicle in or were issued a driver’s license or state identification card by 29 states and the District of Columbia since February 19, 2006, and whose personal information was obtained, disclosed, or sold by the publisher. There was no dispute as to the numerosity requirement for class certification.

The publisher’s business model for obtaining and then selling information was a question of fact common to all class members, the court said. This was true regardless of whether this business model resulted in some individual sales for uses that were authorized by the DPPA.

Class action litigation was the superior method for adjudicating the claims, according to the court. Given the large number of potential plaintiffs and the commonality of their claims, certifying the class would allow a more efficient adjudication of the controversy than would individually litigating the claims.

The decisions are Johnson v. West Publishing Co., CCH Privacy Law in Marketing ¶60,672 and ¶60,673.

Illinois Action

The Seventh Circuit held that the publisher’s acquisition of personal information contained in the motor vehicle records conduct did not violate the DPPA. The DPPA did not prohibit the publisher from reselling the residents’ personal information to third parties with permissible uses for the data under the statute.

The Illinois residents asserted that the publisher acquired the personal information contained in motor vehicle records of millions of drivers from state DMVs for resale. The residents, failed, however to state a DPPA claim.

The DPPA authorized the acquisition and resale of personal information by “authorized recipients” for 14 “permissible uses.” There was no allegation that the ultimate users of the records compiled and sold by the publisher lacked a permissible use for the records. The publisher did not have to have an immediate permissible use of its own in order to be an authorized recipient of the data, the appeals court said.

The decision in Graczyk v. West Publishing Co., will appear in CCH Privacy Law in Marketing.

Further information about CCH Privacy Law in Marketing appears here.

Friday, October 07, 2011





Final Approval Granted to Ameritrade Data Security Breach Settlement

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

A federal district court in San Francisco has granted final approval to a settlement of class action claims against online investment broker Ameritrade, which allegedly failed to prevent a data security breach that exposed more than six million account holders’ private information to spammers and rendered the same information vulnerable to others.

Preliminary approval was granted to the settlement in December 2010 (CCH Privacy Law in Marketing ¶60,574).

Cash Payout, Attorneys’ Fees

Ameritrade agreed to pay a minimum of $2.5 million and a maximum of $6.5 million in claims. Under the settlement, class members are eligible for a cash payout in amounts ranging from $50 to $2,500, depending on the nature of the account affected by the breach and the specific loss incurred. Attorneys’ fees for class counsel were capped at $500,000.

The settlement class was defined as “All persons who are or were accountholders or prospective accountholders of the Company and who provided physical or email addresses to the Company on or before September 14, 2007.”

The weakness of the plaintiffs’ case weighed in favor of granting approval to the settlement, the court said. Federal courts had viewed private class actions involving data breaches with skepticism, particularly where the only alleged injury was the receipt of spam, increased risk of identity theft, or loss of the benefit of the bargain.

Prosecuting the case through trial and the appellate process would involve a large amount of risk and expense. In addition, obtaining and maintaining class action status during the course of litigation would pose considerable risks to the plaintiffs.

The settlement afforded tangible benefits to the plaintiffs that were not available in prior proposed settlements, which had been rejected by the court.

Objections, Opt Outs

Notice of the settlement had been sent to the attorney general’s office of each of the 50 states, and none had objected. Of the approximately six million class members who were mailed the notice of the settlement, only 23 had submitted objections and fewer than 200 chose to opt out.

Objections to the settlement were overruled by the court. There was no evidence that class members had been misled about the terms of the settlement by the claims administrator.

Even though the settlement did not provide for a payout to every conceivable accountholder who might have been affected by the breach in some way, the settlement was a reasonable compromise that balanced the possible recovery against the risks inherent in litigating further.

The decision is In re TD Ameritrade Account Holder Litigation.

Thursday, October 06, 2011





High Court Declines to Review Iowa’s Taxation of Franchisor With No Physical Presence In State

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

A national franchisor of fried chicken restaurants has been denied U.S. Supreme Court review of a decision by the Iowa Supreme Court, rejecting the franchisor’s argument that a physical presence within the State of Iowa was a prerequisite to the state’s imposition of income tax on the franchisor (KFC Corp. v. Iowa Department of Revenue, Business Franchise Guide ¶14,518).

Specifically, the Iowa court held that a physical presence was not required under the dormant Commerce Clause of the U.S. Constitution in order for the Iowa legislature to impose an income tax upon revenue earned by an out-of-state restaurant franchisor arising from the use of the franchisor’s intangibles by franchisees located within the state.

By licensing franchises within Iowa, the franchisor received the benefit of an orderly society within the state and, as a result, was subject to the payment of income taxes that otherwise met the requirements of the dormant Commerce Clause.

Background

The dispute began when the Iowa Department of Revenue issued the franchisor an assessment in the amount of $284,658 for unpaid corporate income taxes, penalties, and interest for 1997, 1998, and 1999. The franchisor, a Delaware corporation with its principal place of business in Kentucky, owned no restaurant properties in Iowa and had no employees in Iowa.

All of the franchisor’s franchisees in Iowa were independent businesses that licensed their use of the franchisor’s trademark and related system.

The franchisor protested the assessment of the income tax, arguing that, in Quill Corp. v. North Dakota (504 U.S. 298, 1992), the U.S. Supreme Court held that a use tax could not be imposed on a foreign corporation that had no physical contact with the taxing state. Further, the Quill Court did not limit its holding to use taxes, the franchisor pointed out.

Opinion Below

This situation differed from Quill, where the only presence in the state except for "title to a few floppy diskettes" resulted from the use of U.S. and common carriers, because this case involved the use of the franchisor’s intangible property in the state to produce royalty income, according to the Iowa court.

Forced to predict whether the U.S. Supreme Court would extend the physical presence requirement imposed by Quill on use taxation to prevent a state from imposing an income tax based on revenue generated from the use of intangibles within the taxing jurisdiction, the Iowa Supreme Court held that it would not.

Physical Presence Test

The use of a physical presence test limited the power of a state to tax out-of-state taxpayers, but it did so in an irrational way, according to the court. In today’s world, physical presence was not a meaningful surrogate for the economic presence sufficient to make a seller the subject of state taxation. Instead, physical presence often reflected more the manner in which a company did business rather than the degree to which the company benefited from the provision of government services in the taxing state.

Extension of the physical presence approach of Quill would be an incentive for entity isolation in which potentially liable taxpayers could create wholly-owned affiliates without physical presence in order to defeat potential tax liability, the court reasoned.
The court doubted that the U.S. Supreme Court would want to extend such form-over-substance activity into the income tax arena where "substance over form has been the traditional battle cry."

Moreover, Iowa’s taxation of the franchisor’s royalty income was most consistent with the prevailing substance-over-form approach embraced in most of the modern cases decided by the Supreme Court under the dormant Commerce Clause, according to the court.

Petition for Review

The franchisor contended that review was warranted because of the acknowledged division among the states over whether a state may impose taxes other than sales or use taxes on an out-of-state business with no physical ties to the state. With the decision below, 16 state appellate courts have divided over whether the physical presence requirement in Quill applied to state income and franchise taxes.

The courts of three states concluded that that a taxing state could not impose an income or franchise tax on an out-of-state business unless it maintained a physical presence in the taxing state, and the courts of the remaining 13 states reached a different conclusion, the franchisor noted. The conflict among the states was “entrenched” and would not be resolved absent review by the Supreme Court.

The franchisor also attacked the merits of the Iowa court’s ruling, arguing that the U.S. Supreme Court has never sustained a state tax in the absence of an in-state physical presence by the taxpayer. Underpinning the Iowa court’s ruling was the idea that the Commerce Clause treated sales and use taxes differently than income and franchise taxes. However, the Supreme Court had never drawn such a distinction, according to the franchisor, and had long held that there be a substantial nexus between a state and an out-of state business before any tax could be levied.

In fact, no decision of the U.S. Supreme Court had ever sustained a state tax imposed on an out-of-state business that had no in-state presence in the taxing state. It was only the Iowa court below, along with 12 other state courts, that had reached a contrary conclusion.

The franchisor further argued that continued state court repudiation of the physical presence requirement adversely affected the entire United States economy and had international implications. The issue at stake was estimated to be worth billions of dollars annually in taxes and would be left to a patchwork of state courts to decide until the High Court “provided a uniform understanding of the scope of the Commerce Clause.”

Until the U.S. Supreme Court reviews the issue, a foreign business with no physical presence in the U.S. could be subject to state taxation, even though the foreign business was exempted from federal income taxes by tax treaties that normally required a physical presence in the country.

The petition in KFC Corp. v. Iowa Dept. of Revenue, Dkt. No. 10-1340, was denied by the Supreme Court on October 3, 2011.

Further details regarding the Iowa Supreme Court decision appear in a January 4, 2011 Trade Regulation Talk posting (“Iowa May Tax Royalties to Out-of-State Franchisor Having No Physical Presence in State”).

Wednesday, October 05, 2011





Global Price Fixing Conspiracy Claim Barred by Foreign Trade Antitrust Improvements Act

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

Federal antitrust claims asserted by direct and indirect purchasers of potash—alleging a global price fixing conspiracy among producers—were beyond the subject matter jurisdiction of a federal court in Illinois, the U.S. Court of Appeals in Chicago has ruled.

The Foreign Trade Antitrust Improvements Act (FTAIA) applied to bar the suit regardless of whether the FTAIA was construed to state a jurisdictional requirement or an element of the plaintiffs’ Sherman Act claim. A federal district court’s refusal to dismiss the suit on jurisdictional or pleading grounds was vacated and remanded.

Import Commerce, Direct Effects

The lower court found that FTAIA’s "import commerce" exception applied because the defendants’ importation of potash and purported conspiracy to fix the price of potash globally created a sufficiently tight nexus between the alleged illegal conduct and the defendants’ import activities.

The lower court’s reasoning essentially conflated the FTAIA’s "import commerce" exception and its "direct effects" exception, the appellate court explained. If foreign anticompetitive conduct were deemed to involve U.S. import commerce even if directed entirely at markets overseas, then the "direct effects" exception would be effectively rendered meaningless.

Reading the FTAIA to mean that a foreign company doing any import business in the United States would violate the Sherman Act whenever it entered a joint-selling arrangement overseas—regardless of its impact on the American market— "would produce the very interference with foreign economic activity that the FTAIA seeks to prevent," according to the appellate court.

The complaint contained no factual allegations to support application of the import commerce exception, the appellate court said. Its specific allegations described anticompetitive conduct aimed at the potash markets in Brazil, China, and India—not the U.S. import market.

The general assertion that the defendants "conspired to coordinate potash prices and price increases so as to fix, raise, maintain, and stabilize the price at which potash was sold in the United States at artificially inflated and anticompetitive levels" was wholly conclusory and insufficient to satisfy the pleading standards established by the U.S. Supreme Court in Bell Atlantic Corp. v. Twombly (2007-1 Trade Cases ¶75,709) and Ashcroft v. Iqbal (2009-2 Trade Cases ¶76,785).

Overseas, Domestic Prices

Moreover, the connection asserted in the complaint between the alleged cartelized prices of potash overseas and the domestic price of potash was too speculative and indirect to state an actionable claim under the FTAIA’s "direct effects" exception, the court stated. The complaint’s general allusion to a link between the prices in the Brazilian, Chinese, and Indian markets and American potash prices was insufficient on its own to permit a plausible inference of direct effects.

The "cryptic" chain-of-events allegation offered by the plaintiffs relied on too many intervening variables to support application of the direct effects exception.

The decision is Minn-Chem, Inc. v. Agrium Inc., 2011-2 Trade Cases ¶77,611.

Tuesday, October 04, 2011





State Parens Patriae Antitrust Suits Not Removable Class Actions

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

Parens patriae actions filed by the Attorneys General of Washington and California on behalf of their state citizens, alleging an international conspiracy to fix the prices of thin-film transistor liquid crystal display (TFT-LCD) panels in violation of state antitrust laws, did not constitute class actions within the meaning of the Class Action Fairness Act of 2005 (CAFA), the U.S. Court of Appeals in San Francisco ruled yesterday.

Removal of the actions to federal court, based on federal jurisdiction under CAFA, was improper because the suits were not “class actions” within the plain meaning of CAFA. Remand to state court was upheld.

“Class Actions”

CAFA defined the term class action as “any civil action filed under rule 23 of the Federal Rules of Civil Procedure or similar State statute or rule of judicial procedure authorizing an action to be brought by 1 or more representative persons as a class action.” Neither lawsuit was filed under Rule 23 of the Federal Rules of Civil Procedure or a similar state statute, it was decided.

The appellate court rejected the defendants’ contention that the states’ parens patriae suits were class actions within the meaning of CAFA because they were representative actions with sufficient “similarity” to a class action under Rule 23. CAFA applied to state actions that were filed under a statute that was both “similar” to Rule 23 and authorized an action “as a class action.”

Defining Attributes

Parens patriae suits were not labeled class actions and lacked the defining attributes of true class actions. They lacked the statutory requirements for numerosity, commonality, typicality, or adequacy of representation, and they did not contain certification procedures, the court explained.

The Ninth Circuit noted that the Fourth Circuit was the only other federal appellate court to have squarely considered the question of whether parens patriae lawsuits are class actions under CAFA.

In West Virginia ex rel. McGraw v. CVS Pharm., Inc., 646 F.3d 169 (CA-4, 2011), the U.S. Court of Appeals in Richmond, Virginia, similarly held that an action brought by the West Virginia Attorney General against five pharmacies, alleging that they sold generic drugs to in-state consumers without passing along the cost savings, in violation of three state statutes, was not a class action under CAFA.

The October 3, 2011, decision in Washington State v. Chimei Innolux Corp. will appear in CCH Trade Regulation Reporter.

Monday, October 03, 2011





Morgan Stanley to Disgorge $4.8 Million over KeySpan Agreement

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

Financial services company Morgan Stanley has agreed to pay $4.8 million to settle Department of Justice Antitrust Division charges that it entered into an agreement with KeySpan Corporation that restrained competition in the New York City electricity capacity market, in violation of the Sherman Act.

The settlement marks the second time the Antitrust Division has sought disgorgement of profits as a remedy under the Sherman Act. In February, the federal district court in New York City approved an antitrust consent decree (2011-1 Trade Cases ¶77,321), resolving allegations against KeySpan over the agreement, which effectively combined the economic interests of the two largest competitors in the New York City electric capacity market.

A complaint against Morgan Stanley and the proposed consent decree were filed in the federal district court in New York City on September 30. The proposed consent decree, if approved by the court, would resolve the Antitrust Division’s complaint.

According to the complaint, KeySpan and Morgan Stanley Capital Group, Inc.—a subsidiary of Morgan Stanley—executed a financial derivative agreement in 2006 ensuring that KeySpan would withhold substantial output from the New York City electricity generating capacity market. Morgan also entered into an offsetting agreement with Astoria Generating Company, KeySpan’s largest competitor in the capacity market, according to the Justice Department.

By transferring a financial interest in Astoria’s capacity to KeySpan, the agreement effectively eliminated KeySpan’s incentive to compete and sell its electricity capacity at lower prices, the government alleged. Meanwhile, Morgan Stanley earned revenues by retaining the spread between the fixed prices of the two derivative agreements.

The anticompetitive effects of the Morgan/KeySpan agreement lasted until March 2008, when regulatory conditions eliminated KeySpan’s ability to affect the market price of electricity capacity, the government contended.

“This settlement with a major financial institution will signal to the financial services community that use of derivatives for anticompetitive ends will not be tolerated,” said Sharis A. Pozen, Acting Assistant Attorney General in charge of the Department of Justice Antitrust Division. “Disgorgement of ill-gotten gains, as was paid here, is an effective Antitrust Division tool to remedy harm to competition.”

The September 30 complaint in United States v. Morgan Stanley is available here on the Department of Justice Antitrust Division website. Further details will appear in CCH Trade Regulation Reporter.