Friday, September 28, 2012

Nissan May Be Liable Under State Consumer Laws for Concealing Faulty Transmission

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

Nissan purchasers stated claims under the consumer protection statutes of New Jersey, California, Illinois, Ohio, and Pennsylvania against Nissan Motor Co. for allegedly concealing a defectively designed transmission in certain vehicle models, the federal district court in Camden, New Jersey, has held.

Certain Nissan vehicles contain transmissions that rely on a complex system that enables a smooth shift to the appropriate gear. The problems at issue allegedly result from the improper design and function of the transmission valve body, which caused delayed shift patterns, excessive heat buildup, slippage, harshness, premature internal part wear, metal debris, and catastrophic transmission failure. The purchasers alleged that the transmission failed well in advance of their expected useful life and posed significant safety risks due to an unpredictable acceleration response and sudden total transmission failure.

Federal Rule of Civil Procedure 9(b) requires a plaintiff to state the circumstances of the alleged fraud with sufficient particularity to place the defendant on notice of the precise misconduct with which it is charged.

Each purchaser’s claims met the heightened pleading standard of Rule 9(b), pleading the date, time, and place of the alleged fraud. The claims also sufficiently stated that Nissan knew and withheld material information from consumers, Nissan possessed exclusive knowledge about the problem, the information was material, and the purchasers relied on the materiality of the non-disclosed information.

The purchasers presented sufficient evidence to state New Jersey, California, Illinois, Ohio, and Pennsylvania consumer protection law claims, according to the court. Each state law was brought by a resident of that state. Although the laws require different evidence, the evidence was sufficient to state a claim under each law.

The decision is Nelson v. Nissan North America, Inc., CCH State Unfair Trade Practices ¶32,539.

Further information regarding CCH State Unfair Trade Practices appears here.

Wednesday, September 26, 2012

FTC, EC Approve Universal’s Acquisition of EMI Recorded Music

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

The FTC announced on September 21 that it had closed its investigation of the proposed acquisition by Vivendi, S.A., parent company of Universal Music Group, of EMI Recorded Music without taking any action. Universal is the largest recorded music company in the world. EMI is the fourth largest.

On the same day, the European Commission (EC) also approved the transaction; however, approval was conditioned upon the divestiture of EMI's Parlophone label and numerous other music assets on a worldwide level. The EC focused its investigation on the markets for digital music and had concerns that the transaction, as originally proposed, would have allowed Universal to significantly worsen the licensing terms it offers to digital platforms that sell music to consumers. Universal’s commitments resolved the EC concerns.

The proposed merger would bring together two of the four so-called global "major" record companies, leaving only three majors, the EC said in a statement. The EC was concerned that, following the merger, Universal would enjoy excessive market power vis-à-vis its direct customers, who sell physical and digital recorded music at retail level. In particular, the EC focussed its investigation on the markets where record companies license their music to digital retailers such as Apple and Spotify.

The EC found that the proposed transaction could have increased Universal's size in a way that would likely have enabled it to impose higher prices and more onerous licensing terms on digital music providers. This could have negatively affected the possibilities for innovative providers to expand or launch new music offerings and would ultimately have reduced consumers' choice for digital music, as well as cultural diversity in Europe.

Neither the FTC nor any commissioner commented publicly on the matter; however, FTC Bureau of Competition Director Richard Feinstein issued a related statement. “After a thorough investigation into the likely competitive effects of the merger, Commission staff did not find sufficient evidence that the acquisition would substantially lessen competition in the market for the commercial distribution of recorded music,” Feinstein concluded.

The statement noted that, while "the Commission did not conclude that a remedy was needed to protect competition in the United States … the remedy obtained by the European Commission to address the different market conditions in Europe will reduce concentration in the market in the United States as well."

Tuesday, September 25, 2012

AU Optronics Fined $500 Million for Fixing Prices of TFT-LCD Panels

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

The federal district court in San Francisco on September 20 imposed a record-tying $500 million fine on AU Optronics Corporation (AUO), a Taiwan-based liquid crystal display (LCD) producer, for its participation in a five-year conspiracy to fix the prices of thin-film transistor LCD panels.

The company and its U.S. subsidiary also were placed on probation for three years and ordered to implement antitrust compliance programs. Two high-level executives, Hsuan Bin Chen and Hui Hsiung, were sentenced to three-year prison terms and each fined $200,000.

The sentencing follows a jury’s conviction in March 2012 of AU Optronics Corporation, AU Optronics Corporation America, Hsuan Bin Chen, and Hui Hsiung. After the eight-week trial in the matter, the jury also found two lower-level AU Optronics Corporation employees not guilty. A mistrial was declared against a former senior manager within AU Optronics Corporation’s Desktop Display Business Group. The government is preparing for a retrial of that mid-level executive.

Although the Antitrust Division had sought stiffer penalties on the convicted companies and executives than those imposed, the sentences are still significant. The fine against AUO is matched only by a 1999 fine against F. Hoffmann-La Roche, Ltd. for participating in a conspiracy in the vitamins industry. The government had sought a $1 billion fine against AUO and maximum 10-year prison terms for the convicted executives. The Probation Office had recommended a $500 million fine for AUO.

Speaking at Fordham’s 39th Annual International Antitrust Law & Policy Conference in New York City on September 21, Joseph Wayland, Acting Assistant Attorney General in charge of the Department of Justice Antitrust Division, would not comment on the sentences other than to say that the $500 million fine was “substantial” and was something that corporations need to think seriously about. He cautioned that the matter could be appealed.

AUO issued a statement on September 21, noting “regrets on the judgment” and its intention “to lodge an appeal.” The company went on to say that there were “important, yet unresolved, legal questions surrounding this matter.”

Further information regarding United States v. Au Optronics Corp. appears here on the Justice Department Antitrust Division website.

Thursday, September 20, 2012

Tax Preparation Franchise Agreements Not Intended to Last Forever

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

Under Missouri law, the language in two H & R Block tax preparation business franchise agreements did not unequivocally express the parties’ intent for the contracts to last forever, requiring reversal of a ruling by a district court interpreting the agreements to continue in perpetuity and to require cause for termination, the U.S. Court of Appeals in St. Louis has decided. The dispute was remanded for further proceedings.

Specifically, the two agreements contained the following identical duration provision: "The initial term of this Agreement shall begin on the date hereof and, unless sooner terminated by Block [for cause] as provided in paragraph 6, shall end five years after such date, and shall automatically renew itself for successive five-year terms thereafter (the renewal terms); provided, that Franchisee may terminate this Agreement effective at the end of the initial term or any renewal term upon at least 120 days written notice to Block prior to the end of the initial term or renewal term, as the case may be."

Right to Renewal

After giving the franchisee notice of its intention not to renew the agreements, Block filed suit seeking a declaratory judgment that it could terminate the agreements and sought damages and injunctive relief. The district court granted summary judgment in favor of the franchisee, concluding the franchise agreements were enforceable under Missouri law and that Block did not have a right not of nonrenewal.

The district court found that the agreements contained an unequivocal expression of the parties’ intent to enter into a perpetually enforceable contract and certified the issue for interlocutory appeal.

Intent to Create Perpetual Contract?

The franchisee was arguably correct that the practical effect of each agreement would be to create a perpetual contract, the court observed. However, the dispositive issue in this case was not whether the parties created a contract which had the effect of perpetual duration; it was whether the contracts’ language unequivocally expressed the parties’ intent that the agreements be perpetually enforceable. To meet this standard, the duration provision must unequivocally express an intent of the parties to create a perpetual, never-ending franchise agreement.

In order to find an intent that a contract be enforced perpetually, the Missouri Supreme Court set the bar high: there must be an unequivocal expression that the contract last forever. The parties agreed that the only Missouri case where this high hurdle was met analyzed a contract with the word "perpetually" in the agreement, the court noted.

In the absence of any express language of the parties’ intent as to duration, the appellate court disagreed with the district court that an eternally enforceable obligation was otherwise clearly implied. Simply put, no term in the contracts clearly demonstrated that the parties intended for their relationship to continue in perpetuity and the district court erred in reading such an intent into the contracts, the court held.

The decision is H & R Block Tax Services, LLC v. Franklin, CCH Business Franchise Guide ¶14,983.

Tuesday, September 18, 2012

Energy Shot Producer’s Distribution of Recall Notice Could Be False Advertising

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

The producer of a two-ounce energy shot drink known as "5-Hour ENERGY" could have engaged in false advertising in violation of Sec. 43(a) of the Lanham Act by distributing a letter, entitled "Legal Notice," to retailers notifying them of a court-ordered recall of a competing "6 Hour" energy shot product, the U.S. Court of Appeals in Cincinnati has decided. Summary judgment in the producer’s favor was reversed as the false advertising claim, although it was affirmed as to a competitor’s monopolization and attempted monopolization claims.

False Advertising

The complaining company, which marketed one of several "6 Hour" energy shots not subject to the recall, offered sufficient evidence to create a genuine dispute as to whether the notice was misleading and tended to deceived its intended audience, the court held. The language of the recall notice "teeter[ed] on the cusp between ambiguity and literal falsity" both descriptively and grammatically. A statement in the contested letters that the 5-Hour maker "won a decision against a "6 Hour" energy shot" was not literally true, as the 5-Hour maker had actually won a decision against a particular "6 Hour" competitor’s use of an overall product image, the court explained.

Moreover, confusion could ensue from the recall notice’s uses of the prefatory words "a" and "any" to refer to a 6 Hour energy shot—incorrectly suggesting that any shot bearing the name 6 Hour was subject to recall. Also problematic was a subsequent use of "the," which implied that there was only one specific product at issue, though the statement as a whole failed to specify exactly what product.

A lower court’s exclusion, on hearsay grounds, of documentary and testimonial evidence from the complaining company, distributors, and brokers showing confusion as to whether 6 Hour POWER had been recalled was erroneous, the appellate court said. Phone calls from retailers to distributors were not relied on to show the content of the conversations, but to show that the conversations occurred and the state of mind of the declarants. That so many people called the complaining company immediately after receiving the notice at the very least raised a genuine issue of material fact as to whether a significant portion of the recipients were misled, in the appellate court’s view.

The defendant’s characterization of the calls as "non-actionable customer inquiries" could be rejected by a jury, in light of testimony that many distributors had called to stop buying the complaining company’s product after the notice was issued, that sales growth for the product dropped significantly, and that the company lost an estimated $3.4 million in sales as a result of the recall notice. All of the calls evidenced a belief that 6 Hour POWER had been recalled; had the called lacked such a mistaken belief, the calls would not have occurred, the court reasoned.

Monopoly, Attempt

The producer of "5-Hour ENERGY" did not engage in monopolization or attempted monopolization in violation of Sec. 2 of the Sherman Act through its actions against the competitor, the court also ruled. The producer allegedly undertook a broad anticompetitive scheme that included: (1) asserting a fraudulently obtained supplemental trademark registration for its product; (2) false advertising in connection with its distribution of the Legal Notice letter to retailers; (3) offering incentives to retailers for superior product placement, (4) requesting that retailers sell its product at the exclusion of other energy shot products, and (5) registering certain Internet domain names similar to the names of a competitor’s product.

Because the complaining competitor specified damages resulting only from the recall notice, only the anticompetitive effects of the recall notice could lead to antitrust liability. However, there could be no harm to competition from the recall notice, even if the notice amounted to false advertising. The complaining competitor was able to—and did—counter that information by sending notices that its product, 6 Hour POWER, had not been recalled.

The decision is Innovation Ventures, LLC, v. N.V.E., Inc., 2012-2 Trade Cases ¶78,053.

Monday, September 17, 2012

Casket Buyers Can Seek Fees, Costs from Non-Settling Defendants in Antitrust Suit

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

Eleven consumers can proceed with an antitrust action against the largest U.S.casket manufacturer, Batesville Casket Company, and funeral home chain Service Corporation International, but they can not represent a class of casket purchasers, the U.S. Court of Appeals in New Orleans has ruled.
The consumers who had purchased Batesville caskets alleged that the casket maker and the nation’s largest funeral home chains conspired to prevent independent casket discounters from selling Batesville caskets directly to consumers at discounted prices.

Dismissal of the consumers’ claims seeking attorney fees and costs for lack of subject matter jurisdiction was reversed; however, the appellate court affirmed the lower court’s dismissal of claims for injunctive relief and denial of class certification.

The complaining consumers who had settled with one of the original defendants—funeral home chain Stewart Enterprises, Inc.—for an amount greater than the maximum amount of compensatory damages being sought still had standing to seek costs and reasonable attorney fees from the remaining defendants, the appellate court held. The consumers were not seeking compensatory damages beyond those agreed to in the settlement and did not recover the attorney fees and costs available to them under Sec. 4 of the Clayton Act. The Clayton Act provides a successful plaintiff a mandatory award of costs and attorney fees.

The plaintiffs had a right to sue for the statutorily mandated costs and reasonable attorney fees even if the settlement with one defendant meant that no additional compensatory damages actually would be recovered. Actual recovery of compensatory damages was not required. A ruling to the contrary would discourage plaintiffs from making early settlements with some but not all defendants because a settlement could later
operate to preclude full recovery of fees and costs pursuant to the Clayton Act, according to the court.

The consumers lacked standing to seek injunctive relief, the court also ruled. Any harm would have been reparable by a monetary award, and the chance of one of the consumers purchasing another one of the defending manufacturer’s caskets or his or her family purchasing one of the caskets upon the consumer’s death did not create a real or immediate potential future injury. The fact that death is inevitable is not sufficient to establish a real and immediate threat of future harm.

The court also concluded that the Funeral Consumers Alliance, Inc.—a nonprofit consumer rights organization that claims 400,000 individuals as members—lacked Article III standing to pursue injunctive relief. The organization did not allege that there was a real and immediate threat that any of its members would purchase an allegedly overpriced Batesville casket from one of the funeral homes that was alleged to be part of the conspiracy.

Class Certification

The district court did not err by denying certification of a nationwide class of consumers, according to the appellate court. The plaintiffs failed to meet Federal Rule of Civil Procedure 23(b)(3) predominance and superiority requirements. Rule 23(b)(3) requires a party seeking class certification to demonstrate both (1) that questions common to the class members predominate over questions affecting only individual members, and (2) that class resolution is superior to alternative methods for adjudication of the controversy.

The lower court was acting within its discretion when it adopted a magistrate judge’s recommendation, concluding that individualized issues affecting each of the roughly one million purported class members nationwide would predominate over common ones, given the lack of a national market or a nationwide conspiracy. The appellate court rejected the consumers’ argument that the district court “ignored” the evidence of national market and nationwide conspiracy presented by their expert.

Partial Dissent

A dissenting opinion agreed with the denial of class certification and dismissal of injunctive relief claims; however, it contended that subject matter jurisdiction was lacking over the consumers’ claims for costs and attorney fees. The case was moot because the consumers no longer had a “personal stake in the outcome.” The dissenting judge would not have allowed the consumers’ attorneys to seek “a trial merely for their own self-interested ‘byproducts’ of litigation.”

The September 13, 2012, decision in Funeral Consumers Alliance, Inc. v. Service Corporation International will appear at 2012-2 Trade Cases ¶ 78,048.

Friday, September 14, 2012

Retail Group Vows to Block $7.25 Billion Swipe Fee Settlement

This posting was written by Sarah Borchersen-Keto, CCH Washington Correspondent.

The National Retail Federation said it would block a proposed $7.25 billion settlement involving Visa Inc., MasterCard Inc., and major banks for their role in allegedly fixing swipe fees, or the charges paid by merchants for accepting credit cards.

“NRF will take any and all steps necessary to oppose the settlement as it is currently proposed and will work toward real reform of the swipe fee system,” said NRF President and CEO Matthew Shay.

The group, which is not a party to the lawsuit, is currently exploring what form of legal action it might take. NRF noted that U.S. District Court Judge John Gleeson has not yet fully outlined how outside groups will be able to intervene, or if the case qualifies as a class action.

NRF argues that if the case actually went to trial and the verdict favored retailers, the judgment could total hundreds of billions of dollars, compared to the settlement total of $7.25 billion. Also, the proposed settlement does nothing to block future increases in swipe fees, the group claims.

NRF said it is particularly concerned by a provision that bars all merchants – even those that currently do not exist – from ever again suing Visa and MasterCard over swipe fees.

Last month the Retail Industry Leaders Association urged class plaintiffs to reject the proposed settlement, citing concerns that it would limit their future legal options and preserve the Visa/MasterCard duopoly. Other groups expressing concern with the settlement include the National Association of Convenience Stores and the National Grocers Association.

As the world’s largest retail trade association and the voice of retail worldwide, NRF represents retailers of all types and sizes, including chain restaurants and industry partners, from the United States and more than 45 countries abroad.

Further details regarding In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation appears in a July 16, 2012 posting on Trade Regulation Talk.

Thursday, September 13, 2012

Hotel Franchisee’s Post-Termination Use of Marks Was Infringement

This posting was written by Peter Reap. Editor of CCH Business Franchise Guide.
Jagaji, Inc., a terminated hotel franchisee, committed trademark infringement in violation of the Lanham Act by continuing to display franchisor Choice Hotels International, Inc.’s trademarks without authorization following the franchisor’s termination of the parties’ relationship, the federal district court in Columbus, Ohio, has determined.

Because the same analysis applied when determining liability on federal trademark infringement, federal unfair competition, and Ohio law claims for common law infringement, unfair competition, and deceptive trade practices, Choice was also entitled to summary judgment on its remaining claims which were all based upon the unauthorized use and display of its trademarks.


On or about July 31, 2000, Choice entered into a franchise agreement with Jagaji which permitted Jagaji to open and operate an ECONO LODGE hotel franchise in Marietta, Ohio. On or about November 17, 2008, after previously sending notices of default, Choice sent Jagaji a Notice of Termination, stating Choice’s termination of the franchise relationship and the parties’ agreement, effective immediately. The Notice of Termination referred to Jagaji’s previous failure to respond to customer complaints as the basis for termination of the franchise relationship; however, it also sought payment of remaining outstanding debts from Jagaji and lost profits under the agreement, for a combined total demand of $50,040.42.

The Notice of Termination instructed Jagaji immediately to cease use of any and all marks owned by Choice and informed Jagaji that its continued use of the ECONO LODGE family of marks would constitute trademark infringement. Sometime in November 2008, Choice removed Jagaji from its Econo Lodge reservation system.

After receiving the Notice of Termination, Jagaji continued to use the ECONO LODGE family of marks in, around, and in publicity for, Jagaji’s hotel. The franchisee’s principal, Bhogi Patel “believed [Jagaji] could be reinstated once all questions were answered.”

In 2009, Jagaji received three successive form letters from Choice regarding certification procedures of its hotel general manager. Bhogi Patel claimed that these letters gave him the understanding that Choice still considered Jagaji to be a franchisee, that the relationship had not been terminated, and that there was a possibility of Jagaji being reinstated into the franchisor’s reservation system.

On November 17, 2009, Choice sent another letter to Jagaji by certified mail regarding Jagaji’s continued unauthorized use of the ECONO LODGE family of marks. In this letter, Choice stated that it considered Jagaji’s continued unauthorized use of the ECONO LODGE family of marks to be trademark infringement, and once again demanded that Jagaji immediately cease its use of the ECONO LODGE family of marks.

Jagaji asserted that, as of November 30, 2009, it had discontinued its use of the ECONO LODGE marks and changed the name of its hotel to the “Marietta Inn.” Jagaji admitted, however, that even after that date it continued to display ECONO LODGE signage on the hotel.

Choice filed its complaint against Jagaji on October 26, 2010, seeking both injunctive and monetary relief.

Federal Trademark Infringement

After review of the parties’ pleadings and exhibits, there was no genuine issue of material fact over Jagaji’s liability for trademark infringement, the court held. Jagaji admitted that it continued to display the ECONO LODGE marks on the hotel’s property after Choice unequivocally denied Jagaji the authority to do so. As a matter of law, therefore, Choice established Jagaji’s liability for trademark infringement under the Lanham Act, according to the court.

Jagaji admitted receiving the franchisor’s notices of default in 2008, as well as the Notice of Termination in November 2008, the court noted. Jagaji was then removed from Choice’s Econo Lodge reservation system. Jagaji argued that because it received three form letters from Choice regarding management certification in 2009, it still reasonably believed Choice considered Jagaji to be a franchisee, and that the relationship had not been terminated. At oral argument, however, counsel for Jagaji acknowledged that Choice never rescinded the Notice of Termination.

Any remaining belief Jagaji held that it was still a franchisee authorized to use Choice’s trademarks was dispelled upon Jagaji’s receipt of Choice’s November 17, 2009, letter expressly forbidding Jagaji from any further use of the ECONO LODGE Marks. Choice Hotels’ position in that letter was crystal clear: Jagaji was no longer a franchisee of Choice, and was no longer authorized to use Choice Hotels’ registered trademarks, the court observed. Jagaji was ordered to cease its use of Choice Hotels’ marks within a reasonable time frame, but it admittedly failed to do so.

Jagaji contended that the parties could have legitimate disagreements about the alleged breaches of the franchise agreement by Jagaji, and/or the intent or effect of the notices of default and termination sent by Choice. However, those allegedly disputed issues, did not serve to create a genuine dispute of the material facts establishing Jagaji’s unauthorized use of the ECONO LODGE Marks after receiving the letter of November 17, 2009, the court decided.

Likelihood of Confusion

The Sixth Circuit held, in a similar context involving a restaurant chain franchise agreement, that “proof of continued, unauthorized use of an original trademark by one whose license to use the trademark had been terminated is sufficient to establish ‘likelihood of confusion.’” U.S. Structures, Inc. v. J.P. Structures, Inc., 130 F.3d 1185 (6th Cir. 1997).

There was no dispute that Jagaji continued to use the ECONO LODGE Marks after its license was terminated, and so there could be no genuine issue of fact as to whether Jagaji’s unauthorized use was likely to cause confusion in the marketplace, the court reasoned.

Jagaji also claimed that material issues of fact existed as to whether it took reasonable action to discontinue use of the ECONO LODGE trademark once Choice made its position clear. While the court appreciated Mr. Patel’s testimony that, once he received the November 17, 2009 letter from Choice, Jagaji took some measures to stop using Choice’s marks and to mitigate any confusion of its hotel with one of Choice’s franchisees, those factual issues would bear on the measure of Choice’s damages from the infringement, not liability.

Because likelihood of confusion was established, and the November 17, 2009, letter left no genuine dispute as to whether Jagaji’s use of the trademark was without the registered owner’s consent, Choice met its burden to establish a Lanham Act violation, the court ruled. Having determined liability, the next step would be to determine the appropriate injunctive relief to prevent any further infringement and monetary relief to compensate Choice for any applicable damages. Thus, a request by Choice for a hearing on those issues was granted.

The September 10 decision is Choice Hotels International, Inc. v. Jagaji, Inc.  It was published in the September 11 issue of Wolters Kluwer IP Law Daily.

Further information regarding IP Law Daily is available here.

Wednesday, September 12, 2012

George Mason Professor to Be Nominated as FTC Commissioner

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

George Mason University (GMU) Law Professor Joshua D. Wright has been picked to replace FTC Commissioner J. Thomas Rosch—a fellow Republican—when his term expires later this month. The White House announced the intended nomination on September 10.

In addition to serving as a professor at GMU School of Law and holding a courtesy appointment in the Department of Economics, Wright is the Research Director and a Member of the Board of Directors of the think tank International Center for Law & Economics. He has written extensively on antitrust law and economics and is a regular contributor to Truth on the Market blog.

Wright previously served as the inaugural Scholar in Residence at the FTC Bureau of Competition, from January 2007 to July 2008. Before joining GMU, Wright taught at the Pepperdine University School of Public Policy and clerked for Judge James V. Selna of the U.S. District Court for the Central District of California.

He received a B.A. in Economics at the University of California, San Diego and a J.D. and a Ph.D. in Economics from the University of California, Los Angeles (UCLA), where he was Managing Editor of the UCLA Law Review.

Friday, September 07, 2012

Dismissal of Antitrust Claims Against Printer Maker Upheld

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

The U.S. Court of Appeals in Cincinnati has upheld dismissal of antitrust claims against Lexmark International, Inc., a major producer of laser printers and toner cartridges for its printers. Static Control Components, Inc., a company that made components for toner cartridges, lacked standing to pursue those claims. However, the appellate court ruled that Lanham Act false advertising and claims under the North Carolina Unfair Deceptive Trade Practices Act should not have been dismissed on standing grounds.

Lexmark developed toner cartridges containing microchips that communicate with printers to ensure that Lexmark printers only work with its cartridges. In addition, Lexmark acquired and repaired its used toner cartridges for resale. Static Control replicated the cartridge microchips and sold the microchips to remanufacturers. Remanufacturers refilled Lexmark cartridges and sold them to Lexmark printer owners at a lower cost.

Lexmark offered its larger customers a “Prebate” program in which it sold new toner cartridges at an upfront discount if the customer agreed to a single-use license and to return cartridges to Lexmark rather than a remanufacturer. The price of Lexmark's toner cartridges allegedly increased following the implementation of the program because of reduced competition from remanufacturers.

Standing to Assert Antitrust Claims

Static Control lacked standing to assert antitrust claims based on the “Prebate” program. The program targeted only the market for remanufactured cartridges, the court explained. Static Control was neither a competitor nor a consumer in the market for replacement toner cartridges. The implementation of the Prebate program decreased the number of remanufactured cartridges for Lexmark printers, which in turn decreased Static Control's sales; however, the intended targets of the Prebate program were the end users and the remanufacturers, not Static Control.

Moreover, Static Control’s alleged injury was not inextricably intertwined with the injuries in the market for replacement toner cartridges. The court also noted that the number of potentially more direct victims counseled against a finding of standing.

Antitrust Injury

Static Control also failed to plausibly allege any antitrust injury stemming from Lexmark’s decision to use the “lock-out” microchips in its cartridges and Lexmark’s exclusive distribution agreement with its own microchip supplier. Static Control failed to allege how the existence of a microchip requirement alone caused it any injury. It was possible that, without the microchips, Static Control would have been able to sell more component parts for remanufactured cartridges, but Static Control did not make this allegation. Moreover, Static Control did not allege how the removal of one of its direct competitors from the components and microchips market following an exclusive distributorship agreement with a single customer caused any damage to the seller' position within those markets or profits. The firm did not allege that Lexmark was a former customer or that absent the exclusive agreement the printer marker would have purchased from it.

There was no cognizable antitrust injury resulting from Lexmark’s continuous redesigns of its microchips, the court also ruled. Static Control contended that Lexmark engaged in the redesigns “to exclude competitors from the relevant markets, restrict output, and increase end-user prices.”

If Lexmark were able to maintain a monopoly on remanufactured toner cartridges by making cartridge parts wholly unavailable, then Static Control might have standing to pursue an antitrust violation. However, the firm did not sufficiently allege such behavior, the court noted. Static Control did not allege how the redesign decreased competition in the markets in which it competed, the market for microchips or parts.

Noerr-Pennington Immunity

Lexmark was immune under the Noerr-Pennington doctrine from an antitrust claim based on Lexmark's filing of an unsuccessful copyright action. Static Control did not offer any allegations upon which one could plausibly conclude that the copyright action was “objectively meritless.” Although a federal appellate court ultimately concluded that Lexmark did not have a valid copyright claim, this was not determinative of whether the suit was reasonable, according to the court.

False Advertising, State Law Claims

Static Control did, however, have standing to pursue a Lanham Act false advertising claim, even though it was not a competitor of Lexmark. The court refused to impose a standing requirement, found in other federal circuits, that a Lanham Act false advertising plaintiff be a competitor of the defendant. Static Control alleged a cognizable interest in its business reputation and sales to remanufacturers and sufficiently alleged that these interests were harmed by Lexmark's statements to the remanufacturers that it infringed Lexmark's intellectual property.

Dismissal of the federal antitrust claims for lack of standing did not require dismissal of North Carolina Unfair Deceptive Trade Practices Act claims, the appellate court ruled. Generally, federal case law was persuasive and instructive in construing North Carolina’s own antitrust statutes. However, North Carolina would be more flexible in its standing analysis, in the court’s view. North Carolina would not apply the factors enunciated in U.S. Supreme Court’s 1983 decision in Associated Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 1983-1 Trade Cases ¶65,226, to deny Static Control’s standing to pursue state law unfair competition claims.

The decision is Static Control Components, Inc. v. Lexmark International, Inc., CCH Trade Regulation Reporter ¶78,027.

Thursday, September 06, 2012

Federal Video Privacy Law Could Cover Internet Streaming

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

Viewers of Internet video streaming website could go forward with purported class-action claims that Hulu violated the Video Privacy Protection Act (VPPA) by disclosing their video viewing selections and personal information to third-party ad networks and data-tracking companies, the federal district court in San Francisco has determined. A motion by Hulu to dismiss the lawsuit for failure to state a claim was denied.

According to the court, the VPPA could cover Hulu’s business model and data practices, and the site’s viewers could have standing to sue as “consumers” under the statute. In an earlier decision (CCH Privacy Law in Marketing ¶60,779), the court had ruled that the viewers’ allegations satisfied the requirements of Article III standing by stating an injury-in-fact.

Video Privacy Protection Act

The VPPA protects from disclosure certain personal information of individuals who rent, purchase, or otherwise receive video materials. Consumers whose “personally identifiable information” was knowingly disclosed by a “video tape service provider” to third-parties may bring a private cause of action. “Personally identifiable information” includes information that identifies a person as having requested or obtained specific video materials or services. Potential remedies include actual damages (but not less than liquidated damages of $2,500), punitive damages, attorney’s fees and litigation costs, and preliminary and equitable relief that the court determines is appropriate.

Video Tape Service Provider

The VPPA defines “video tape service provider” as “any person, engaged in the business, in or affecting interstate or foreign commerce, of rental, sale, or delivery of prerecorded video cassette tapes or similar audio visual materials.” Although Hulu did not deal in prerecorded video cassette tapes, Hulu could be considered a “video tape service provider,” for purposes of the VPPA, the court said. Contrary to Hulu’s contention, the phrase “similar audiovisual materials” included digital content delivery.

Disclosures “Incident to the Ordinary Course of Business”

Disclosures of personal information are not prohibited if they are “incident to the ordinary course of business” of the video tape service provider. The VPPA defines “ordinary course of business” as “debt collection activities, order fulfillment, request processing, and the transfer of ownership.” The plaintiffs alleged that Hulu’s disclosures—done for purposes including unauthorized tracking—did not fall within this “ordinary course of business” exception.

Hulu contended that disclosure of viewers’ data to online market research, ad network, and web analytics companies all involved Hulu’s use of third-party vendors providing services like internal research, advertising, and analytics that Hulu could do on its own and thus permissibly could outsource in the “ordinary course of business.” The factual issue could not be resolved on the pleadings, the court said, so the claim survived Hulu’s motion to dismiss.


The viewers could qualify as “consumers,” for purposes of the VPPA, according to the court. The VPPA defined “consumers” as “any renter, purchaser, or subscriber of goods or services from a video tape service provider.”

Hulu contended that the viewers were not “subscribers” because they did not rent or purchase content or otherwise pay Hulu for services or products. However, the viewers did more than visit Hulu’s website. The website’s “resurrection” of cookies previously deleted from the viewers’ computers allegedly allowed their data to be tracked “regardless of whether they were registered and logged in.” Hulu allegedly disclosed the viewers’ “Hulu profile identifiers” to third parties and linked the identifiers to their “individual Hulu profile pages that included name, location preference information designated by the user as private, and Hulu username.”

Moreover, while the terms “renter” and “buyer” necessarily implied payment of money, the term “subscriber” did not, the court said. Hulu cited no authority to the contrary. If Congress wanted to limit the VPPA’s definition of “subscriber” to “paid subscriber,” it would have said so, the court reasoned.

The decision is In re Hulu Privacy Litigation, CCH Privacy Law in Marketing ¶60,789

Tuesday, September 04, 2012

Artist May Pursue State, Not Federal, Copyright-Based RICO Claims

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

An artist could not pursue federal RICO claims against a sports art company and its owner, who allegedly (1) reproduced one of the artist’s drawings without permission; (2) deleted the artist’s numbering system and original signature; and (3) sold at least 349 unauthorized copies of the work, the federal district court in Atlanta has ruled. The artist could, however, pursue racketeering claims under Georgia’s RICO statute.


The company did not constitute a RICO enterprise because it was not distinct from its owner, in the court’s view. Although a corporation and its owner were generally distinct from the corporation itself (Cedric Kushner Promotions, Ltd. v. King,CCH RICO Business Disputes Guide ¶10,085), the artist attempted to pierce the corporate veil of the sports art company, and thus contradicted his assertion that the company was distinct from its owner. Because the plaintiff failed to distinguish between the company and its owner, his RICO claim could not proceed.


The artist failed to allege acts involving open-ended or closed-ended continuity. The alleged racketeering activity involved a single scheme with a discrete goal, which precluded closed-ended activity. Open-ended continuity was absent because the plaintiff failed to allege that the defendants had regularly conducted business by impermissibly selling copyrighted works. In addition, evidence failed to show that:

(1) The defendants’ scheme involved more than one victim (the plaintiff) or more than one copyrighted work or

(2) The defendants had engaged in other similar schemes.
The plaintiff argued that a threat of future racketeering activity existed because the defendants’ acts “could have continued indefinitely.” Continued criminal activity was almost always theoretically possible, but the type of speculation that the artist advocated would undermine: (1) the purpose of limiting RICO claims to “non-sporadic racketeering activity” and (2) the purpose of requiring a heightened pleading standard for RICO claims. Because the artist failed to sufficiently plead a pattern of racketeering activity, his federal RICO claim was dismissed.

State RICO Claim

The artist’s Georgia RICO claim survived the defendants’ motion to dismiss, despite the artist’s failure to adequately plead open-ended or closed-ended continuity, because the Georgia RICO statute did not include a continuity requirement. Instead, Georgia RICO required that the alleged predicate acts share “the same or similar intents, results, accomplices, victims, or methods of commission.” The predicate acts alleged by the artist were very similar in each of these respects. In addition, the predicate activity included criminal copyright infringement, which qualified as a predicate act under Georgia RICO because criminal copyright infringement was a predicate act under the federal RICO statute.

The decision is Burchett v. Lagi, CCH RICO Business Disputes Guide ¶12,250.