Wednesday, November 30, 2011

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

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

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

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

Parens Patriae Suit

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

Mass Action?

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

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

Developments in Other Circuits

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

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

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

Tuesday, November 29, 2011

Facebook Agrees to Make Changes to Privacy Practices

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

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

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

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

According to the FTC:

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

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

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

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

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

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

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

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

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

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

Wednesday, November 23, 2011

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

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

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

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

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

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

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

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

(4) Commits a range of other cyber crimes.
The Obama administration has taken significant steps to ensure that the American people, businesses, and governments build better protections against cyber threats, he said.

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

RICO Predicate Act

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

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

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

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

Tuesday, November 22, 2011

FTC Releases Final Version of Business Opportunities Rule

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

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

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

Simplified Disclosures

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

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

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

(1)The seller's identifying information;

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

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

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

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

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

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

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

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

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

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

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

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

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

Monday, November 21, 2011

Officials Immune for Enforcing Town’s Ban on Restaurant Franchises

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

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

“Formula Restaurants”

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

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

Nonrenewal of License

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


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

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

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

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

Friday, November 18, 2011

Alaska High Court Declines to Follow Current FTC Interpretations

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

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

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

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

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

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

Legislative Directive

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

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

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

“We decline to abandon our prior case law: We do not adopt the FTC’s 1980 policy statement now codified at 15 U.S.C. §45(n) as the standard for evaluating whether a practice be deemed unfair under the Alaska UTPA. We also decline to depart from our precedent regarding the definition of a deceptive practice. We thus conclude that the trial court did not err in evaluating [the electric company’s] motions or formulating jury instruction 28 according to our prior definitions of deceptive or unfair trade practices.”
The November 4 decision is ASRC Energy Services Power and Communications, LLC v. Golden Valley Electric Association, Inc., CCH State Unfair Trade Practices Law ¶32,352.

Thursday, November 17, 2011

Equipment Dealer Was Not Connecticut “Franchise”

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

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

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

Association with Franchisor’s Trademark

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

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

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

Gross Profits

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

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

Gross Sales

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

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

Failure of Business

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

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

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

Wednesday, November 16, 2011

Leibowitz Recites FTC Accomplishments, Future Plans at Nomination Hearing

This posting was written by John W. Arden.

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

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

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

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

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

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

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

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

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

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

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

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

Tuesday, November 15, 2011

Consumer Class Claims on Health Care Discount Ads Rejected

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

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

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

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

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

State Consumer Protection Laws

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

Varied Ads, Need for Particularized Proof

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

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

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

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

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

Monday, November 14, 2011

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

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

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

Bar to Current Action?

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

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

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

Shared Lawyer, Interests

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

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

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

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

Friday, November 11, 2011

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

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

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

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

Content Creation

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

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

Manipulation of User Reviews

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

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

“Star Ratings”

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

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

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

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

Thursday, November 10, 2011

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

This posting was written by John W. Arden.

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

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

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

Investment Losses

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

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

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

Motion to Compel Arbitration

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

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

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

Policy in Favor of Arbitration

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

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

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

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

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

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

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

Wednesday, November 09, 2011

Justice Department Requires Health Insurance Divestiture in Montana

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

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

Elimination of Competitor

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

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

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

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

Proposed Acquirer

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

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

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

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

Notification of Exclusive Contracts

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

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

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

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

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

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

Tuesday, November 08, 2011

Federal Courts Differ Over Arbitrability of California Consumer Claims

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

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

Nelson v. AT&T Mobility LLC

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

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

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

Ferguson v. Corinthian Colleges

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

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

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

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

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

Monday, November 07, 2011

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

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

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

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

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

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

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

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

The proposal would amend Sec. 1 of the Sherman Act by adding after the first sentence the following:
“Any contract, combination, conspiracy or agreement setting a minimum price below which a product or service cannot be sold by a retailer, wholesaler, or distributor shall violate this Act.”
The provision would take effect 90 days after the date of enactment.

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

Friday, November 04, 2011

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Thursday, November 03, 2011

Manitoba Seeks Public Comment on Proposed Franchise Rules

This posting was written by John W. Arden.

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

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

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

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

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

The “key features” of the proposal include:

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

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

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

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

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

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

Small investment exemption. A franchisor may receive an exemption from the disclosure document requirement where the franchisee’s total annual investment does not exceed $5,000.
Text of the consultation paper, proposed franchise regulation, and the Manitoba Law Commission’s Franchise Law Report 2008 appears here on the Province of Manitoba website.

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

Further details will appear in CCH Business Franchise Guide.

Wednesday, November 02, 2011

Customers Could Seek Costs of Mitigating Harm from Data Security Breach

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

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

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

Mitigation Damages

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

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

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

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

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

Breach of Implied Contract

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

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

Breach of a Fiduciary Duty

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

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

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

Unfair Trade Practices

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

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

Tuesday, November 01, 2011

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

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

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

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

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

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

Distribution to Three Organizations

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

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

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

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