Payroll Tax Violations Constituted Good Cause for Termination of Franchises

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

Donut shop franchisees’ failure to comply with payroll tax laws violated their contractual obligation to obey all laws and constituted good cause for termination of three franchises under the meaning of the New Jersey Franchise Practices Act, the federal district court in Newark has ruled.

The franchisees breached the franchise agreements’ “obey all laws” clause by failing to comply with payroll tax laws and did so in a non-curable manner. The payroll violations were not inadvertent or isolated mistakes, but were part of a calculated effort to disguise the true nature of the payments.

Evidence overwhelmingly showed that the franchisees inappropriately failed to treat various payments made on behalf of their employees (for things such as rent, travel, and tuition) as wages, according to the court.

The “obey all laws” clause authorized the franchisor to terminate the agreement without cure if it had “proof” that the franchisee had committed a felony. Nothing in the agreement, however, suggested that the proof must rise to a level to support a criminal conviction, the court noted. Thus, for the purpose of this civil proceeding, it was sufficient for the franchisor to show at trial that it had proof sufficient to establish a criminal conviction by a preponderance of the evidence.

The franchisor presented proof demonstrating by the preponderance of the evidence that the franchisees committed all three elements of tax evasion:

(1) A tax deficiency,

(2) The affirmative act of attempted evasion of payment of taxes, and

(3) Willfulness.

The tax violations clearly fell within the purview of the “obey all laws” clause because compensation of the franchise employees pertained to the operation and maintenance of the franchises, the court determined.

Furthermore, the fact that the franchisor did not prove damages was not relevant. The franchisor did not seek damages, but merely declaratory relief. The franchisees’ attempt to argue that the franchisor had unclean hands in terminating the franchises and in bringing suit was rejected.

The decision in Dunkin’ Donuts Franchised Restaurants LLC v. Strategic Venture Group, Inc. will appear at CCH Business Franchise Guide ¶14,494.

Supplement Marketer's Compliance with FTC Consent Decrees to Be Reconsidered

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

The U.S. Court of Appeals in Philadelphia has ruled that a lower court clearly erred when it denied the Federal Trade Commission's motion to hold a supplement and cosmetics marketer, its sole shareholder, and a consultant in contempt for violation of consent decrees resolving an earlier FTC enforcement action.

The lower court's decision denying the contempt motion (2009-2 Trade Cases ¶76,708) was vacated, and the matter was remanded to the lower court for further proceedings.

Consent Decrees

The FTC contended that the defendants violated consent decrees reached in 2000 with the agency. The consent decrees resolved FTC claims that the defendants made unsubstantiated representations pertaining to a dietary supplement and a cosmetic cream. In relevant part, the consent decrees prohibited the defendants from making unsubstantiated claims and misrepresenting the results or conclusions of any test, study, or research.

It was an abuse of discretion to deny the motion for contempt to the extent the defendants' claims for a calcium supplement were unsupported by competent or reliable scientific evidence, the appellate court held. The defendants did not support claims that the supplement was unique in its ability to increase bone density or that it was superior to prescription osteoporosis medicines.

However, the lower court did not clearly err by finding that representations about the supplement's ability to increase bone density in the hip were in accord with the consent decree. The issue of whether claims that the calcium supplement was more absorbable than other calcium supplements violated the consent decree was remanded so that the district court could address these particular claims more exhaustively.

The district court did not properly consider the FTC's contention that the defendants misrepresented scientific research in violation of the underlying consent decrees. Rather, the district court improperly focused on the product’s overall salutary effects. Although some of the representations were unlikely to survive careful factual scrutiny, the initial resolution of each issue was left to the district court, according to the appellate court.

Substantial Compliance

Although the defense of substantial compliance was available in a contempt proceeding, the district court failed to support its determination that the defendants were entitled to the defense, the appellate court held. In order to avail oneself of the defense, a party had to show that it (1) had taken all reasonable steps to comply with the valid court order, and (2) had violated the order in a manner that was merely “technical” or inadvertent.”

The district court recognized that some violations occurred but concluded that the defendants complied with “the spirit” of the consent decrees. However, the court neither identified the misconduct nor explained why the conduct qualified as a “technical” or inadvertent” violation of the consent decrees.

Absent specific findings addressing this second step of the substantial compliance test, the appellate court was unable to conduct meaningful appellate review. Thus, the district court’s finding that the defendants substantially complied with the consent decrees was vacated.

The October 26 decision in FTC v. Lane Labs-USA, Inc., will appear at 2010-2 Trade Cases ¶77,204.

Tennis Tour’s Demotion of Event Did Not Violate Federal Antitrust Law

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

The Association of Tennis Professionals, a non-profit corporation that operates a worldwide tour of men’s professional tennis tournaments, did not violate federal antitrust law by downgrading an event in Hamburg, Germany, to a lesser status as part of a reorganization of the tour, the U.S. Court of Appeals in Philadelphia has ruled.

The complaining owners of the tournament—the German and Qatar Tennis Federations—failed to establish a valid relevant market definition affected by the alleged conduct. A jury verdict finding against the Federations’ claims was affirmed.

The jury found that the Federations had failed to prove the ATP entered into a contract, combination, or conspiracy with any separate entity under Sec. 1 of the Sherman Act. It further found that the Federations did not establish a relevant product market under Sec. 2.

Relevant Market

The appellate court did not evaluate the jury’s finding regarding concerted action. Because the Federations did not carry their burden of proving a relevant market and this inadequacy was fatal to both claims, the appellate court stated, it did not need to decide whether the trial court’s jury instruction on the single entity defense was given in error.

The federations’ contention that insufficient Sec. 2 market proof did not establish insufficiency for purposes of a Sec. 1 claim as well was rejected by the appellate court. While inquiries into the scope of competition under Sec. 1 and Sec.2 were not necessarily the same, in this case the federations had asserted identical market definitions for both claims and the jury verdict forms posed the same question regarding proof of the relevant market for the purposes of both the Sec. 1 and Sec. 2 claims. Therefore, the jury’s conclusion that the Federations failed to prove a relevant market under Sec. 2 was equally applicable to Sec. 1 analysis, in the court’s view.

Quick-Look Analysis

The appellate court also found unavailing an additional argument by the federations that they did not need to prove a relevant market because the trial court should have told the jury to conduct a quick-look analysis, which did not require detailed market analysis. Quick look analysis was inappropriate for the alleged restraint, the court said.

Though the restraint the federations alleged was purportedly a horizontal one, for sports endeavors such as professional leagues or tennis tours ‘‘horizontal restraints on competition [were] essential if the product [was] to be available at all.’’

Because the contours of the market were not sufficiently well known or defined to permit a court to ascertain—without the aid of extensive market analysis—whether the challenged practice impaired competition, proof of relevant market was required under full-scale rule of reason analysis.

Even where anticompetitive effects were obvious, quick-look condemnation still would have been improper without assessing and rejecting the logic of proffered procompetitive justifications, the appellate court explained.

Justification

Given the justification offered by the ATP, which revolved around making the tour more competitive with other spectator sports and entertainment products though numerous modifications designed to improve the quality and consistency of its top-tier events, any presumption that quick-look analysis would suffice disappeared, the court concluded.

The application of quick-look analysis was a question of law to be determined by the court; the concept of ‘‘quick look’’ had no application to jury inquiry, the court added. Thus, the jury was properly instructed to analyze the alleged restraints under the rule of reason, and their finding that the Federations failed to prove the relevant market defeated the Sec. 1 claim.

The decision is Deutscher Tennis Bund v. ATP Tour, Inc, 2010-1 Trade Cases ¶77,080.

Further information regarding the CCH Trade Regulation Reporter appears here on the CCH Online Store.

Twitter Agrees to Settle FTC Privacy and Security Charges

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

Micro-blogging service Twitter has agreed to settle Federal Trade Commission charges that it “deceived consumers” about its privacy practices and failed to implement reasonable security measures to safeguard user information.

The Commission issued a complaint yesterday, alleging that Twitter violated Section 5 of the FTC Act by engaging in a number of practices that, taken together, failed to provide reasonable and appropriate security to prevent unauthorized access to nonpublic user information and honor the privacy choices exercised by such users. A proposed FTC consent order, resolving the allegations, was released at the same time.

Between January and May 2009, hackers twice exploited Twitter’s lax and ineffective security measures to obtain unauthorized administrative control of the Twitter system, according to the agency. The hackers gained access to nonpublic user information and reset users’ passwords to send unauthorized tweets from users’ accounts, including one from President-elect Barack Obama and another from Fox News.

Under the terms of the proposed FTC consent order, Twitter has agreed to:

· refrain from misrepresenting its efforts to maintain and protect the security, privacy, confidentiality, or integrity of any nonpublic information;

· adopt and maintain comprehensive information security program that is reasonably designed to protect the security, privacy, confidentiality, and integrity of nonpublic consumer information; and

· permit biennial assessments and reports from an independent third-party security professional.

“When a company promises consumers that their personal information is secure, it must live up to that promise,” said FTC Bureau of Consumer Protection Director David Vladeck. “Likewise, a company that allows consumers to designate their information as private must use reasonable security to uphold such designations.”

Twitter Blog Post

A post on Twitter’s corporate blog described the 2009 hacking incidents, occurring at a time when the company had fewer than 50 employees, as small in scale and duration—over the course of a few hours, 45 accounts were accessed in January and in April, 10 accounts were accessed before the hacker was detected and shut down within minutes. The blog post noted that, prior to the FTC settlement, “we’d implemented many of the FTC's suggestions and the agreement formalizes our commitment to those security practices.” No other privacy or security complaints have been brought against Twitter, according to Twitter General Counsel Alexander Macgillivray.

San Francisco-based Twitter was established in 2006 as a social networking website operating at Twitter.com that enables users to send “tweets,” SMS messages of up to 140 characters, to other users who sign up to “follow” them and receive updates via e-mail and mobile text messages. Today, Twitter has around two hundred employees and an estimated 75 million users worldwide.

First Data Security Case Against Social Network

The FTC noted in a press release that its action against Twitter was the first against a social networking service for faulty data security.

The complaint, consent order, and other documents in In the Matter of Twitter, Inc., FTC File No. 092 3093, are available here on the FTC's website. The documents are published at CCH Trade Regulation Reporter ¶16,469.

Further information regarding the CCH Trade Regulation Reporter appear here on the CCH Online Store.

Antitrust Enforcers Reportedly Set to Probe Apple’s License Agreement

This posting was written by John W. Arden.

According to published reports, the Federal Trade Commission and Department of Justice are negotiating to determine which agency will pursue an antitrust inquiry of Apple Computer Inc.’s new license agreement, which requires software developers to use Apple programming tools to create applications for the iPhone and iPad.

Apple’s license agreement would prevent developers from employing other tools—such as Adobe Systems Inc.’s Flash format—used to create web videos, games, and other interactive features.

Antitrust enforcers will address the issue of whether this policy injures competition by forcing developers to choose between designing applications that can run only on the iPhone and iPad and creating applications that are “platform neutral” and can run on operating systems produced by Google, Microsoft, and others.

A story ("An antitrust app") in Monday’s New York Post said that federal antitrust enforcers are “days away from making a decision about which agency will launch the inquiry,” which could lead to a full fledged investigation.

None of the players in the scenario—the FTC, the Department of Justice, or Apple Computer Inc.—has publicly commented on the news reports. However, Apple CEO Steve Jobs posted a piece (“Thoughts on Flash”) on the company website, explaining “why we do not allow Flash on iPhones, iPods and iPads.”

Rather than being “primarily business driven,” the decision was “based on technology issues,” according to Jobs. Contrary to Adobe’s claims, Flash is actually “a closed system,” while Apple has adopted “open standards” like HTML5, CSS and JavaScript, Jobs wrote.

While Adobe contends that Apple mobile devices cannot access “the full web” because 75% of the video on the web is in Flash, Jobs maintained that “almost all this video is also available in a more modern format, H.264, and viewable on iPhones, iPods and iPads.”

Jobs further cited reliability, security, and performance issues, arguing that Flash has a poor security record, causes Macs to crash, and does not perform well on mobile devices. In addition, Jobs criticized Flash for using too much battery power, for not being designed for “touch” screens, and for having “major technical drawbacks.”

The Wall Street Journal (“Apple Attracts Scrutiny From Regulators”) pointed out that the “growing interest in Apple’s activities by antitrust authorities shows the extent to which the Cupertino, Calif., company has become a powerful player in mobile devices like smartphones, which many people see as the next dominant computing platform after personal computers.”

The article compares Apple’s conduct with the tactics by Microsoft Corp. that drew attention from antitrust enforcers in the 1990s.

“Apple is playing right out of Microsoft’s playbook—and it’s one they complained about a lot,” said David Balto, a senior fellow at the Center for American Progress and former attorney for the FTC and Department of Justice.