Thursday, May 31, 2012

NCAA’s Licensing Pacts Could Have Amounted to Illegal Conspiracy

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

A computer software company, the National Collegiate Athletic Association (NCAA), and the NCAA’s licensing arm could have participated in a price fixing conspiracy or group boycott that violated federal antitrust law by not compensating current and former student-athletes for the use of their names, images, and likenesses in products such as video games and by preventing former student-athletes from participating in the collegiate licensing market, the federal district court for the Northern District of California has ruled separately in two related putative class action suits. The defendants’ motions to dismiss each of the suits were denied.

An argument by the software company that its alleged participation in unlawful conspiracy was based solely on the assertion that it agreed not to compensate the former student-athletes—a charge it claimed was "conclusively refuted by the actual terms of the licensing agreements"—was rejected by the court. The actual terms of the licensing agreements did not refute the plaintiffs' allegations, the court found.

Use of Names, Images Without Payment

Student-athletes were required each year, in accordance with NCAA bylaws, to sign an NCAA form consenting to use of their names, images, and likenesses without payment before they could take part in intercollegiate athletics events, the court explained. However, the NCAA and its licensing body allegedly interpreted these forms as existing in perpetuity, allowing them to enter licensing agreements to distribute products containing names, images, and likenesses without payment to those student-athletes even after they had ended their collegiate careers.

The software company's agreement, in the licensing pacts, to not encourage or participate in any activity that would cause an athlete to violate NCAA rules could amount to a "meeting of the minds" with the other defendants not to compensate former student-athletes, when viewed in the context of the NCAA's interpretation of the licensing consent form, in the court’s view.

Evidentiary arguments related to the existence of the form (or a precursor to it) when the plaintiff in one suit attended school in the 1950s, to his signing of such a form or its precursor, and to his proof of allegations involving the agreements between the computer software company and the other defendants were inappropriate on a motion to dismiss, the court held. Materially identical allegations of the defendants’ commercial efforts had already been found sufficient to show an agreement in the other case, the court noted.

Statute of Limitations

The statute of limitations did not bar the claims asserted in one of the suits, the court also held. Though one of the anticompetitive schemes alleged by the former college basketball star who was the named plaintiff in one of the suits—the restraint of competition among schools for his athletic services by "preventing him from negotiating for a share in post-graduation licensing revenue"—took place in the 1950s, it could not be separated from the other type of wrongdoing asserted, which took place later and involved the NCAA’s entry into agreements with third parties to use his image without compensating him. The allegations simply concerned different actions that were taken in furtherance of the overall, multifaceted conspiracy.

An argument that the two alleged schemes should be divided because each involved different actors lacked merit, the court said. The NCAA was a primary part of each scheme, and there was no requirement that all involved in the conspiracy had to have participated in each part of it. The harms alleged were not easily divisible either, the court added.

The former student-athlete sufficiently alleged that the continuing violation doctrine applied, based on the NCAA's continued practice of entering into agreements that allowed the use of his image without compensating him. The complaining athlete pointed to an agreement between the NCAA and a company to offer “classic” college basketball games online, which was among the allegations brought to light in the other suit—a lawsuit that had acted to toll his claims sufficiently to render them timely. The agreement supported an inference that his image as a former college basketball player was included in that agreement.

The decisions are In re: NCAA Student-Athlete Name & Likeness Licensing, 2012-1 Trade Cases ¶77,903, and Russell v. National Collegiate Athletic Association, 2012-1 Trade Cases ¶77,904.

Wednesday, May 30, 2012

DHL’s Price Fixing Claims Against United Survive Motion to Dismiss

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

The federal district court in Brooklyn, New York, has denied a request from United Air Lines to dismiss price fixing claims brought against the carrier by DHL—a major shipper of air cargo.

The court rejected United’s contentions that the claims were discharged in bankruptcy or barred by the statute of limitations. In addition, DHL’s claims were found to have been adequately alleged to survive a motion to dismiss.

Discharge of Claims in Bankruptcy

DHL’s antitrust claims were not discharged in bankruptcy, even though the action was filed after a bankruptcy court confirmed United’s plan of reorganization in proceedings pursuant to Chapter 11 of the Bankruptcy Code.

Generally, a claim that arose before the confirmation of the debtor’s reorganization plan was dismissed as having been discharged in bankruptcy. However, discharge of the shipper’s antitrust claim would not have satisfied due process unless United provided sufficient information to apprise the shipper of the nature of the claim to be discharged.

Accepting the allegations in the complaint as true, United was aware of its involvement in the conspiracy to fix surcharges and, thus, of the antitrust claim against it, while the shipper was completely unaware of the antitrust conspiracy and could not have learned of its antitrust claim through the exercise of reasonable diligence until after the confirmation of the reorganization plan.

If United had no obligation to notify DHL of a potential antitrust claim because there was no such claim, then United would prevail on the merits and would not be liable just as it would not be liable if DHL’s antitrust claim had been discharged. The court also rejected United’s contention that DHL was required to seek relief from the bankruptcy court that issued the confirmation order.

Statute of Limitations

DHL’s claims were not time-barred because the filing of a price fixing class action, in which DHL had been a putative class member, tolled the statute of limitations until United was dropped from the class action. DHL’s action against United was brought within four years of the class plaintiffs’ filing of an amended complaint that did not name United as a defendant.

The court disagreed with United’s assertion that tolling from the class action ended with a non-monetary settlement between United and the class plaintiffs. Until the filing of the amended complaint dropping United as a defendant there could be no certainty that the settlement had been consummated.

Absent class members were entitled to rely on the class action to press their claims against United until they had a definitive indication that such claims would not go forward, the court reasoned. The first such indication was the omission of United from the amended complaint. Tolling continued until the absent class members could have reasonably determined from a review of the docket that United was no longer a defendant in the case.

Plausible Allegations

DHL plausibly alleged that United participated in the conspiracy to fix surcharges on air cargo shipments for fuel and security costs, the court ruled. The shipper alleged United’s active role in developing, advocating, and following the fuel surcharge practices collectively developed by the airlines. Moreover, the claim was not implausible simply because United had thus far avoided any criminal or civil liability relating to the alleged conspiracy.

Although the coordination of fuel surcharges began through meetings of International Air Transport Association members, including United, any limited antitrust immunity granted by the U.S. Department of Transportation for IATA conduct did not immunize the subsequent decision by the airlines to coordinate their fuel surcharges. Similarly, any immunity arising out of United’s alliance with German carrier Lufthansa did not extend to the challenged conduct, the court held.

The decision is DPWN Holdings (USA), Inc. v. United Air Lines, Inc., 2012-1 Trade Cases ¶77,897.

Tuesday, May 29, 2012

Bank’s Mishandling of Lending Program Might Have Violated Minnesota Consumer Fraud Act

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

Institutional investors stated Minnesota consumer protection claims against Wells Fargo Bank, N.A. for allegedly misrepresenting its securities lending program, according to the federal district court in St. Paul, Minnesota.

Wells Fargo held participants’ securities in custodial accounts and made temporary loans of those securities to brokers, and marketed that the program would return a profit for participants. The investors alleged that Wells Fargo failed to properly monitor and manage the program, failed to disclose material information about the status of the program, and failed to put the interests of investors ahead of the interests of the bank.

To state a Minnesota Consumer Fraud Act (CFA) claim, the investors needed to show they were consumers and that the suit benefitted the public.

The investors stated CFA claims against Wells Fargo, according to the court. Any person injured by a violation of the CFA may bring a civil action and recover damages. That the investors were sophisticated investors did not preclude them from bringing the claims. More than 100 investors were harmed by Wells Fargo’s marketing. Failure to seek injunctive relief does not preclude a plaintiff from satisfying the public benefit requirement.

The investors also sufficiently stated Minnesota Unfair Trade Practices Act (UTPA) and Deceptive Trade Practices Act (DTPA) against Wells Fargo, according to the court. The investors sufficiently alleged that Wells Fargo misrepresented the true quality of the program, the representations were ongoing, and that the misrepresentations occurred in connection with the sale of merchandise under the UTPA. The investors also showed a continuing wrong under the DTPA.

The decision is Blue Cross and Blue Shield of Minnesota v. Wells Fargo Bank, N.A., CCH State Unfair Trade Practices Law ¶32,462.

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

Friday, May 25, 2012

Franchisor Is Subject to Collective Arbitration with Franchisees, Despite Contract Provision Requiring Individual Arbitrations

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

Despite the inclusion of a provision that arbitration must be conducted “on an individual, not a class-wide, basis” in its franchise agreements, a franchisor of pharmacies and 28 of its franchisees clearly and unmistakably agreed to submit questions of arbitrability to an arbitrator by incorporating the American Arbitration Association’s (AAA’s) Rules into their arbitration agreements, a federal district court in St. Louis has decided.

Thus, the court denied the franchisor’s motion to stay a collective arbitration claim filed by the franchisees and for an order compelling the franchisees to proceed with individual, bi-lateral arbitrations.

An arbitration clause in the parties’ agreements stated that all controversies, disputes, or claims "shall be heard by one arbitrator in accordance with the then current Commercial Arbitration Rules" of the American Arbitration Association (AAA). The clause thus incorporated the AAA’s Rules, the court held. The current version of AAA Rule 7(a) provides arbitrators with the authority to determine their own jurisdiction, and so the parties agreed to submit arbitrability questions to the arbitrator.

The franchisor argued that the arbitration clause also provided that the AAA Rules will apply “except as otherwise provided in this Agreement,” and pointed out that the clause expressly stated that arbitration must be conducted “on an individual, not a class-wide, basis.”

The franchisor contended that as a result of this language, the Rules did not vest in the arbitrator the power to interpret the requirement that the respondents arbitrate on an individual basis. However, there was no exception bearing on the applicability of Section 7(a) of the AAA Rules and, therefore, on the question of whether the parties agreed to submit questions of arbitrability to the arbitrator, the court ruled.

The franchisor’s argument that an arbitrator was without power to determine whether a collective arbitration may be allowed—because the arbitration clause stated that arbitration must be conducted “on an individual, not a class-wide, basis”—was unpersuasive. Whether this provision could be construed to prohibit or permit joinder or collective arbitration was a matter of contract interpretation. It was for the arbitrator to determine whether the clause was properly construed to prohibit or permit collective arbitration, in the court’s view.

The franchisor cited a recent Eighth Circuit case, Green v. Supershuttle Int’l, Inc. (Business Franchise Guide 2010-2011 New Developments Transfer Binder ¶14,673), in which the court enforced a franchisor’s class action waivers. However, Green was distinguishable from this case on several grounds, the court determined. Here, the franchisees sought to enforce the parties’ agreement to have questions of arbitrability resolved by an arbitrator, they did not challenge the class action waiver in the agreements based on state law or otherwise, and they have not filed a class-wide arbitration.

Unlike the plaintiffs’ argument in Green, the franchisees’ argument, that the issue of whether the agreement permitted joint or collective arbitration is for an arbitrator, has not been squarely rejected by the U.S. Supreme Court as a matter of law.

The decision is Medicine Shoppe Int’l, Inc. v. Edlucy, Inc., CCH Business Franchise Guide ¶14,822.

Wednesday, May 23, 2012

South Africa Sets Out Requirements for Franchise Agreements, Disclosure Documents

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

South Africa has adopted franchise regulations that became effective April 1, 2011. The regulations set out detailed requirements that must be contained in franchise agreements and in disclosure documents, which must be provided to a prospective franchisee at least 14 days prior to the signing of a franchise agreement.

Among the numerous requirements, “a franchise agreement must contain provisions which prevent: (i) unreasonable or overevaluation of fees, prices or other direct or indirect consideration; (ii) conduct which is unnecessary or unreasonable in relation to the risks to be incurred by one party; and (iii) conduct that is not reasonably necessary for the protection of the business interests of the franchisor, franchisee or franchise system.”

Numerous items of specific information are required, such as the obligations of each party, the duration of terms and renewal, and the particulars of the initial training and assistance to be provided the franchisee, among many others.

The disclosure document must contain the number of outlets franchised by the franchisor; the growth of the franchisor’s turnover, net profit, and the number of outlets franchised in the prior year; a statement on the franchisor’s financial position; and written projections of potential sales, income, or profits.

The regulations appear at CCH Business Franchise Guide ¶7246.

Tuesday, May 22, 2012

POM Wonderful’s Disease Treatment, Prevention Claims Held Deceptive

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

POM Wonderful LLC, its principals, and an affiliate violated the FTC Act by making deceptive claims in some advertisements that their POM Wonderful 100% Pomegranate Juice and POMx supplements (POM products) would treat, prevent, or reduce the risk of heart disease, prostate cancer, and erectile dysfunction, an FTC administrative law judge (ALJ) has decided.

The ALJ explained in a 345-page initial decision that not all of the advertisements challenged by the FTC could reasonably be interpreted by consumers as making claims that the products could treat, prevent, or reduce the risk of certain diseases.

According to the initial decision, the evidence demonstrated that reasonable consumers would interpret the POM respondents’ advertisements as claiming that drinking eight ounces of POM Juice daily, taking one POMx pill daily, and/or taking one teaspoon of POMx Liquid daily treats, prevents, or reduces the risk of heart disease, prostate cancer, and/or erectile dysfunction, and/or is clinically proven to do so.

Expert testimony demonstrated that there was insufficient competent and reliable scientific evidence to support claims that POM products treat, prevent, or reduce the risk of heart disease, prostate cancer, or erectile dysfunction, or are clinically proven to do so.

Under an order issued with the initial decision, the POM respondents would be barred from making any representation about the “health benefits, performance, or efficacy” of POM products or any other food, drug, or dietary supplement unless the representation is not misleading and the POM respondents possess “competent and reliable scientific evidence . . . to substantiate that the representation is true.” They would also be barred from making unsubstantiated representations that any such product “is effective in the diagnosis, cure, mitigation, treatment, or prevention of any disease.”

The order also would bar the POM respondents from misrepresenting “the existence, contents, validity, results, conclusions, or interpretations of any test, study, or research.”

The ALJ rejected a proposed remedy that would have prohibited the POM respondents from making any disease claims unless the claim had received prior approval from the Food and Drug Administration (FDA). In addition, the ALJ ruled that the POM respondents were not required to conduct double-blind, randomized, placebo-controlled clinical trials to substantiate implied claims for their products.

POM Wonderful Response

The FTC failed in its efforts to “create a new, stricter industry standard, similar to that required for pharmaceuticals, for marketing the health benefits inherent in safe food and natural food-based products,” said Craig Cooper, Chief Legal Officer for POM Wonderful LLC, in response to the decision.

“While we are still analyzing the ruling, it is clear that we will be able to continue to promote the health benefits of our safe, food products without having our advertisements, marketing or public relations efforts preapproved by the FDA and without having to rely on double-blind, randomized, placebo-controlled studies, the standard required for pharmaceuticals,” he added. “We consider this not only to be a huge win for us, but for the natural food products industry.”

The initial decision is In the Matter of POM Wonderful, LLC, dated May 17 and released May 21. Text of the decision is available here on the FTC website.

Monday, May 21, 2012

Claims Against Apple, Publishers for "E-book" Pricing Survive Motion to Dismiss

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

Purchasers of electronic books plausibly alleged that Apple, Inc. and five of the six largest U.S. publishing companies took part in a per se unreasonable conspiracy to raise prices for “e-books,” the federal district court in New York City has ruled.

It was reasonable to infer that the defending publishers had agreed among themselves to adopt a joint strategy to force an increase in the price of e-books.

The allegations of parallel conduct—including the publishers’ rapid and simultaneous switch from a wholesale or retail distribution model with e-book retailers to an agency model of distribution—raised a suggestion of preceding agreement, the court explained.

Each defending publisher’s decision to sign its particular agency agreement with Apple and to demand that online marketplace Amazon accept the agency model would have contravened the defendant’s self interest in the absence of similar behavior of its rivals. The complaining purchasers claimed that the agency agreements emerged from a horizontal agreement among the defending retailers in order to raise prices.

While allegedly coordinating a series of substantively-identical vertical agreements with the publishers, Apple purportedly made clear to its vertical partners that it was offering each of them "the first" deal. While allegedly coordinating a series of substantively-identical vertical agreements with the publishers, Apple purportedly made clear to its vertical partners that it was offering each of them a similar deal..

Although the purchasers did not claim that Apple had an interest in higher retail prices, they plausibly alleged that Apple had an interest in limiting retail competition. The agency agreements included clauses that granted Apple "most favored nation" pricing guarantees--to eliminate price competition among e-book retailers.

Even though the defendants' motive for joining the conspiracy might have been different, the complaining purchasers plausibly alleged that each of the defendants shared the twin purposes of raising the price of e-books and eliminating retail competition.

The court rejected the assertion that a hub-and-spoke conspiracy was not plausibly alleged because Apple Inc. (the alleged hub) was not a dominant firm. A hub was generally a dominant purchaser or supplier, but it did not have to be.

The court also rejected Apple's contention that its agency agreements with the publishers should be found lawful under a rule of reason analysis because they were simply agreements by a principal to set the price charged by its agent.

Regardless of the nature of the specific terms of the vertical agency agreements when examined in isolation, complaining e-book purchasers plausibly alleged a horizontal agreement among the publishers, furthered by Apple, to raise the prices of the e-books and eliminate retail competition in per se violation of the Sherman Act.

The decision is In Re: Electronic Books Antitrust Litigation, 2012-1 Trade Cases ¶77,889.

Friday, May 18, 2012

Rejection of Lanham Act Juice Blend Labeling Challenge Upheld; California Law Claims Revived

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

Pom Wonderful, a seller of pomegranate juice and juice blends, was precluded from asserting Lanham Act false advertising claims based on Coca Cola's naming and labeling of “Pomegranate Blueberry Flavored Blend of 5 Juices,” the U.S. Court of Appeals in San Francisco ruled yesterday. The product contained about 99.4% apple and grape juices, 0.3% pomegranate juice, 0.2% blueberry juice, and 0.1% raspberry juice, according to the court.

A ruling that Pom Wonderful failed to assert an injury in fact under the California Unfair Competition Law (UCL) and False Advertising Law (FAL) was vacated and remanded for further proceedings. Not considered on Pom’s appeal from the decision of the federal district court in Los Angeles (CCH Advertising Law Guide ¶63,889) was a ruling that Pom can pursue Lanham Act claims that consumers were confused by Coca Cola's intentionally misleading marketing and advertising (apart from naming and labeling) of the pomegranate-blueberry flavored blend.

Food Labeling Regulation

Pom’s challenge to the name “Pomegranate Blueberry Flavored Blend of 5 Juices” would create a conflict with Food and Drug Administration regulations and would undermine the FDA’s apparent determination that so naming the product is not misleading, the court determined. As to labeling, Pom apparently wanted to force Coca-Cola to alter the size of the words on its label so that the words “Pomegranate Blueberry” would no longer appear in larger, more conspicuous type on Coca-Cola’s label than did the words “Flavored Blend of 5 Juices.”

Congress and the FDA had considered and spoken to what content a label must bear, and the relative sizes in which the label must bear it, so as not to deceive. Despite speaking extensively to how prominently required words or statements must appear, the FDA had not required that all words in a juice blend’s name appear on the label in the same size or that words hew to some other standard. Coca-Cola’s label presumptively complied with the relevant FDA regulations and thus accorded with the judgments the FDA had so far made, the court held.

California Law

In rejecting the claims under California law, the district court had interpreted statutory “lost money or property” language to require a plaintiff to show that it is entitled to restitution from the defendant—even if the plaintiff seeks only injunctive relief. That was error in light of California Supreme Court rulings making it clear that standing under UCL Section 17204 of the Unfair Competition Law and FAL Section 17535 did not depend on eligibility for restitution, the court concluded.

The May 17 decision in Pom Wonderful LLC v. Coca-Cola Co., No. 10-55861, will be reported at CCH Advertising Law Guide ¶64,708 and CCH 2012-1 Trade Cases ¶77,892.

Wednesday, May 16, 2012

Mississippi’s LCD Price Fixing Claims Remanded to State Court

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

An action brought by the State of Mississippi against companies that manufacture liquid crystal display (LCD) panels for conspiring to fix prices in violation of the Mississippi state law was remanded to state court by the federal district court in Jackson.

The companies removed the case to federal court pursuant to the Class Action Fairness Act of 2005 (CAFA); however, remand was appropriate because the action was neither a class action nor a mass action subject to removal.

Class Action Fairness Act

To establish jurisdiction under CAFA, the companies needed to show that the parties were minimally diverse and that the action was a class action or a mass action not subject to CAFA exceptions. CAFA’s diversity requirement was met, the court ruled, because Mississippi’s consumers and local governments—the real parties in interest—but no defendant was a citizen of Mississippi. The court rejected the state’s argument that it was the real party in interest, and, therefore, there was no minimal diversity because the state was not a “citizen” for purposes of diversity jurisdiction.

Because the claims were not brought pursuant to the Federal Rule of Civil Procedure 23 or a similar state statute, the suit was not a CAFA class action, the court ruled. Mississippi had no comparable class action statute. Nor did the Mississippi Consumer Protection Act and Mississippi Antitrust Act impose class action-like requirements.

Rejected was the defending companies’ contention that legislative history supported its position that a lawsuit that resembled a purported class action should be considered a class action for the purpose of applying CAFA. Because CAFA unambiguously defined class action, it was unnecessary to consider the legislative history offered by the defendants, which was questionable in any event.

Mass Action

Although the suit was a mass action, a statutory exception for actions brought on behalf of the general public required remand. A suit brought by the Mississippi Attorney General (AG) could be defined as a mass action under CAFA, as the real parties in interest numbered at least 100 persons seeking monetary relief and the AG proposed to try the claims jointly on the grounds that they involved common questions of law or fact. However, a general public exception applied that excluded actions asserted on behalf of the general public, and not on behalf of individuals or a purported class, pursuant to state statutes.

Based on the sheer number of LCD panel products bought by consumers, the case was clearly brought on behalf of the general public and fell within the state’s quasi-sovereign interest. Also, the claims were brought under state statutes that specifically authorized these kinds of suits. Therefore, the claims fell under the general public exception, in the court’s view.


The manufacturers could not show that the Sherman Act completely preempted the Mississippi antitrust claims. Where plaintiffs have artfully avoided any suggestion of federal issues, removal is allowed where the state law is subject to complete preemption. However, the court rejected the manufacturers’ contention that the artful pleading doctrine applied because the Sherman Act applied to the claims, which were interstate and international in nature.

The decision is State of Mississippi v. AU Optronics Corp., 2012-1 Trade Cases ¶77,883.

Tuesday, May 15, 2012

Former Executives Convicted for Participating in Municipal Bond Conspiracy

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

Three former executives of General Electric Co. (GE) affiliates were convicted by a federal jury in New York City on May 11 for their participation in conspiracies related to bidding for contracts for the investment of municipal bond proceeds and other municipal finance contracts. The trial against the three began on April 16.

An initial 12-count indictment was filed in July 2010, charging the former executives with participating in wire fraud schemes and separate fraud conspiracies at various time periods from as early as 1999 until 2006. A seven-count superseding indictment followed in May 2011.

The three former financial services executives participated in separate fraud conspiracies with various financial institutions and insurance companies and their representatives, according to the Justice Department. These institutions and companies, or “providers,” offered a type of contract, known as an investment agreement, to state, county and local governments and agencies throughout the United States.

The public entities were seeking to invest money from a variety of sources, primarily the proceeds of municipal bonds that they had issued to raise money for, among other things, public projects. One of the three defendants also participated in the conspiracies while employed at Financial Security Assurance Capital Management Services LLC.

According to evidence presented at trial, the conspirators corrupted the bidding process for dozens of investment agreements to increase the number and profitability of investment agreements awarded to the provider companies where they were employed.

The three defendants deprived the municipalities of competitive interest rates for the investment of tax-exempt bond proceeds that were to be used by municipalities for various public works projects, such as for building or repairing schools, hospitals and roads. Evidence at trial established that they cost municipalities around the country millions of dollars.

According to the Department of Justice, a total of eighteen individuals have been charged as a result of the ongoing municipal bonds investigation. Including these convictions, a total of 15 individuals have been convicted and three await trial. Additionally, one company has pleaded guilty.

“The defendants corrupted the competitive bidding process and defrauded municipalities across the country for years,” said Deputy Assistant Attorney General Scott D. Hammond of the Department of Justice Antitrust Division, in response to the verdict. “Through corruption and fraud, they cheated cities and towns out of money for important public works projects. Today’s convictions reflect our determination to preserve fairness and competition in the financial services market.”

The case is United States v. Dominick P. Carollo, No. 10 CR 654 (SD N.Y.). A news release appears here on the Antitrust Division website.

Wednesday, May 09, 2012

Day Care Center’s Antitrust Claims Against State, County Officials Rejected

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

A defunct Ohio day care center, which was unable to obtain a renewal license in light of its alleged failure to provide a safe environment for children, did not allege an antitrust injury to support Sherman Act, Sec. 1 claims against officials at the Ohio Department of Job and Family Services, the U.S. Court of Appeals in Cincinnati has decided.

The day care center alleged that the state agency implemented an improper process of responding to license renewal applications as a means to control the day care market and drive disfavored businesses out of the market. However, it provided no facts, beyond mere conclusory statements, to support the allegation that the state agency’s procedures harmed competition. The day care center failed to state a claim to relief that was plausible on its face. Dismissal of claims against employees of the state agency was affirmed.

Local Government Antitrust Act

The appellate court also upheld dismissal of the center’s antitrust claim against employees of a county agency. The Local Government Antitrust Act shielded the county defendants from antitrust liability for the agency’s decision to discontinue providing public assistance for the center’s child care services. The county employees were acting in their official capacity when negotiating funding contracts with the day care center. The negotiation of the funding contracts fell within the “general responsibilities and objectives” of the county defendants’ positions, the court explained.

Although the day care center contended that the county officials undertook this general responsibility with an improper motive, the defendants’ motives were irrelevant, according to the court.

The decision is Wee Care Child Center, Inc. v. Lumpkin, 2012-1 Trade Cases ¶77,881.

Tuesday, May 08, 2012

Myspace Joins Social Networking Sites Whose Privacy Claims Have Been Challenged by the FTC

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

Today, Myspace joined other popular social networking websites—such as Facebook, Google Buzz, and Twitter—in pledging to refrain from making false consumer privacy claims in light of a Federal Trade Commission challenge.

The operator of has agreed to settle FTC charges that it violated Section 5(a) of the FTC Act by misleading users about what information third-party advertisers received about them. The FTC complaint alleged that Myspace made numerous promises to its users regarding the extent to which it shared consumers’ personal information with third-party advertisers.

Myspace's privacy policy allegedly promised it would not share users personally identifiable information, or use such information in a way that was inconsistent with the purpose for which it was submitted, without first giving notice to users and receiving their permission to do so. The privacy policy also promised that the information used to customize ads would not individually identify users to third parties and would not share non-anonymized browsing activity.

According to the FTC complaint, from January 2009 through June 2010, and again from October 2010 through October 2011, when Myspace displayed advertisements on its website from certain unaffiliated third-party advertisers, Myspace and/or its affiliate provided those advertisers with the Friend ID of the user who was viewing the page.

Myspace assigns a persistent unique numerical identifier, called a “Friend ID,” to each user profile created on Myspace. The Friend ID can be used to access information about the user, including location, gender, age, display name, and, in many cases, the user’s full name, according to the agency. With this information, a third-party advertiser could take simple steps to get detailed information about individual users.

In addition, Myspace allegedly certified that it complied with the U.S.-European Union Safe Harbor Framework, which provides a method for U.S. companies to transfer personal data lawfully from the European Union to the United States. As part of its self-certification, Myspace purportedly claimed that it complied with the Safe Harbor Principles, including the requirements that consumers be given notice of how their information will be used and the choice to opt out. The FTC alleged that these statements were false. The agency challenged similar claims by Facebook and Google Buzz last year.

Proposed Consent Order

A proposed consent order contains provisions designed to prevent Myspace from engaging in future practices similar to those alleged in the complaint, according to the FTC. Myspace would be prohibited from misrepresenting the privacy and confidentiality of any “covered information,” as well as the company’s compliance with any privacy, security, or other compliance program. Myspace also would be required to establish and maintain a comprehensive privacy program and to obtain biennial assessments of its privacy program by independent, third-party auditors for 20 years.

The complaint and proposed settlement, In the Matter of Myspace LLC, FTC File No. 102 3058, appear here on the FTC website.

Monday, May 07, 2012

Sentence for Executive’s Bid Rigging, Price Fixing Upheld

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

The U.S. Court of Appeals in St. Louis has upheld a 48-month prison sentence imposed on a former ready-mix concrete executive who pleaded guilty to participating in separate bid rigging and price fixing conspiracies with three different companies in northern Iowa.

The prison sentence was not substantively unreasonable, even though it was well above the U.S. Sentencing Guidelines range of 21 to 27 months. A fine of nearly $830,000 also was upheld.

The appellate court concluded that the district court considered appropriate factors in varying from the guidelines and adequately explained its prison sentence and fine.

The district court gave two permissible reasons for varying from the guidelines: (1) a policy disagreement with the antitrust guidelines and (2) the defendant’s lack of remorse. The district court believed that, while the antitrust guidelines and the fraud guidelines attacked a similar societal harm, the antitrust guidelines were too lenient. The district court gave cogent reasons for its policy disagreement by comparing the guidelines for antitrust offenses to the guidelines for fraud, and then using the alternate calculation under the fraud guidelines.

The district court also tied its policy disagreement to the specific facts involved in the defendant’s case, the appellate court explained. According to the district court, the primary reason that the U.S. Sentencing Commission gave for increasing the levels of antitrust violations less drastically than levels of fraud cases depending on the relative amount of loss or volume of commerce involved was that, with respect to antitrust violations, the level of markup may tend to decline with the volume of commerce involved. However, the defendant’s prices for concrete did not decrease as the volume of sales increased.

The appellate court rejected at the outset the defendant’s contention that the district court abused its discretion by not accepting his initial binding plea agreement under Rule 11(c)(1)(C) of the Federal Rules of Criminal Procedure. The binding agreement, if accepted by the district court, called for the defendant to serve a sentence of 19 months and pay a fine of $100,000. However, the district court never rejected the earlier agreement. It merely deferred the decision until after reviewing the presentence report.

The defendant chose to change his plea agreement after the district court said that there was “a less than 10 percent chance” that it would accept the plea.

The new plea agreement did not preserve the defendant’s right to challenge the district court’s nonacceptance of the binding pleas agreement, and the defendant did not claim that his decision to enter the nonbinding plea agreement was unknowing or involuntary. Nor did the defendant challenge the factual basis for the plea.

The defendant’s decision to enter a nonbinding plea agreement under Rule 11 (c)(1)(b) waived the right to complain on appeal about the district court’s nonacceptance of the earlier binding plea agreement entered into with the Justice Department.

A dissent argued that the district court lacked authority to set aside the guidelines sentencing range for antitrust offenses in favor or the alternate calculation using the guidelines for offenders convicted of fraud.

The decision is U.S. v. VandeBrake, 2012-1 Trade Cases ¶77,880.

Thursday, May 03, 2012

FCC Penalizes Google for “Impeding” Wi-Fi Investigation

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

Although the Federal Communications Commission has decided not to take action against Google, Inc. for possible violations of the Communications Act in connection with Google’s collection of data from Wi-Fi networks, the FCC on April 13, 2012 proposed a $25,000 forfeiture penalty against Google for “willfully and repeatedly” violating FCC orders to produce certain information and documents that the FCC required for its investigation. Google has agreed to pay the penalty.

"Street View" Project 

Between May 2007 and May 2010, as part of its “Street View” project, Google collected data from Wi-Fi networks throughout the United States and around the world. The purpose of Google’s Wi-Fi data collection initiative was to capture information about Wi-Fi networks that could be used to help establish users’ locations and provide location-based services.

Google also collected “payload” data—the content of Internet communications—that was not needed for its location database project. This payload data included e-mail and text messages, passwords, Internet usage history, and other highly sensitive personal information.

At first, Google denied collecting payload data. After the commencement of investigations by European data protection authorities, Google publicly acknowledged that it had been “collecting samples of payload data from open (non-password-protected) WiFi networks” but stated that it likely collected only fragmented data.

Google explained that the collection of payload data was caused by code that was “mistakenly” included in its Wi-Fi data collection software. On October 22, 2010, Google acknowledged for the first time that “in some instances entire emails and URLs were captured, as well as passwords.”

Upon learning that Google had collected payload data, the FCC began examining whether Google’s conduct violated provisions of the Communications Act of 1934. In November 2010, the FCC’s Enforcement Bureau launched an official investigation into whether Google’s data collection practices violated Sec. 705(a) of the Act, which prohibits the interception of radio communications.

According to the FCC, Google “deliberately impeded and delayed” the Enforcement Bureau’s investigation for several months by failing to respond to requests for material information and to provide certifications and verifications of its responses. In a Notice of Apparent Liability for Forfeiture, the FCC stated that Google apparently willfully and repeatedly violated orders to produce information and documents required for the investigation. Based its review, the FCC found that Google was apparently liable for a forfeiture penalty of $25,000 for its noncompliance with the FCC’s information and document requests.

Closing of Investigation

At the same time, the FCC decided not to take enforcement action under Sec. 705(a) against the company for its collection of payload data and to close the investigation. There was not clear precedent for applying Sec. 705(a) to the Wi-Fi communications collected by Google, the FCC said.

Moreover, because a Google engineer permissibly asserted his constitutional right not to testify, significant factual questions bearing on the application of Sec. 705(a) to the Street View project could not be answered on the record of the FCC’s investigation.

More information is available here on the FCC’s website.
Google’s Response

Although Google agreed to pay the forfeiture, it contended that delays by the FCC slowed down the investigation, rather than Google.

“As the FCC said in their report, we provided all the materials necessary for them to conduct their investigation,” a Google spokesperson said. “We agree with the FCC's conclusion that we did not break the law, but believe that we did cooperate in their investigation, and we made that clear in our response.”

Wednesday, May 02, 2012

Conspiracy Allegations Adequately Alleged Against High-Tech Firms

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

Software engineers adequately alleged claims against Google, Pixar, and other high-tech companies headquartered in the San Francisco-Silicon Valley area of California for conspiring to fix and suppress employee compensation and to restrict employee mobility through bilateral “Do Not Cold Call” agreements, the federal district court in San Jose, California, has ruled.

The suit follows Department of Justice Antitrust Division civil actions against the firms, which were resolved by consent decrees ( 2011-1 Trade Cases ¶77,477, 2011-1 Trade Cases ¶77,483).

The complaining employees detailed the actors, effect, victims, location, and timing of the six bilateral agreements between the defending employers. They alleged that the employers had the means, the motive, and the opportunity to implement a conspiracy to restrain competition for employees. The defendants’ senior executives allegedly negotiated, executed, monitored, and policed the agreements.

Opportunity to Conspire

The court also noted that overlapping board membership provided an opportunity to conspire and an opportunity for transfer of the requisite knowledge and intent regarding the bilateral agreements. The fact that the identical agreements were reached in secrecy among seven defendants in a span of two years suggested that the agreements resulted from collusion, and not from coincidence.

Antitrust Injury

In addition, the employees plausibly alleged an antitrust injury resulting from the conspiracy, according to the court. Under Ninth Circuit precedent, where an employee is the direct and intended object of an employer’s anticompetitive conduct, that employee has standing to sue for antitrust injury. Thus, the defending employers’ motion to dismiss for failure to plead antitrust injury was denied.

Federal Enclave Doctrine

A California Cartwright Act claim was not dismissed based on the federal enclave doctrine. One of the defendants, Lucasfilm, has been located on the Presidio—a federal enclave ceded to the U.S. government by the State of California in 1897—since July 2005. Lucasfilm argued that the Cartwright Act claim failed because, under the federal enclave doctrine, the Act did not apply to conduct on the Presidio.

The doctrine applied to a claim when the locus in which the claim arose was the federal enclave itself, the court explained. The doctrine did not apply simply because some of the alleged events occurred on the federal enclave, as the defendants contended. The court noted that the federal enclave defense would be more appropriately addressed when class certification was considered, because the doctrine might extinguish the Cartwright Act claims of a putative subclass of plaintiffs.

The decision is In Re: High-Tech Employee Antitrust Litigation, 2012-1 Trade Cases ¶77,866.

Tuesday, May 01, 2012

Pharmacies Denied Temporary Relief Blocking Integration of Express Scripts, Medco

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

In a suit to block the combination of two pharmaceutical benefit management (PBM) companies—Express Scripts, Inc. and Medco Health Solutions, Inc., retail pharmacies and pharmacy trade associations were not entitled to a preliminary injunction holding separate the PBMs, the federal district court in Pittsburgh has decided.

The plaintiffs failed to establish the likelihood of immediate, irreparable harm that could be alleviated by the issuance of the preliminary injunction order holding separate Medco from Express Scripts.

Shortly after the complaint was filed on March 29, 2012, by the National Association of Chain Drug Stores, the National Community Pharmacists Association, and nine retail pharmacy companies, the PBMs consummated their merger in light of FTC approval of the transaction.

The plaintiffs alleged that the merger “would create an immediate and irreversible harm to competition by destroying two significant competitors in the relevant markets.” They argued that, unless a preliminary injunction holding the PBMs separate were issued, Express Scripts would displace Medco’s management and operations personnel, assume Medco’s administrative functions, and learn Medco’s confidential and trade secret information. However, all of the plaintiffs’ fears already had been realized, according to the court.

At the time that the merger was closed, Express Scripts terminated virtually all of Medco’s senior management, as well as its sales leadership and senior supply chain management team. Medco’s confidential and trade secret information already had been provided to Express Scripts. Thus, any hold-separate order would have been ineffective as a means to protect the plaintiffs from the asserted harm.

Furthermore, the plaintiffs did not demonstrate how, if they ultimately were successful in their cause of action, a brief delay in the divestiture of Medco would cause them any additional immediate and irreparable harm.

The April 25, 2012, decision in National Assn. of Chain Drug Stores v. Express Scripts, Inc., Civil Action No. 12-395, appears at 2012-1 Trade Cases ¶ 77,864.