Supreme Court Strikes Down Vermont Prescriber Data Privacy Law . . .

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

A Vermont statute regulating the collection and use of data identifying health care providers’ prescribing patterns impermissibly restricted data mining companies’ free speech rights in violation of the First Amendment, the U.S. Supreme Court has determined.

The challenged statute banned the sale, transmission, or use of prescriber-identifiable data (“PI data”) for marketing or promoting a prescription drug unless the prescriber gave consent.

Freedom of Speech

The statute imposed content- and speaker-based burdens on protected expression, so it was subject to heightened judicial scrutiny, the Court said. The creation and dissemination of information were speech for First Amendment purposes.

The law forbade the sale of PI data subject to exceptions based in large part on the content of a purchaser’s speech. It then barred pharmacies from disclosing the information when recipient speakers would use that information for marketing. Finally, it prohibited pharmaceutical manufacturers from using the information for marketing.

The statute disfavored marketing—speech with a particular content. It also disfavored speech by particular speakers, according to the Court.

Specifically, it restricted the practice of “detailing” by data mining companies, which prepared reports helping pharmaceutical manufacturers to refine their marketing tactics. The law allowed PI data to be purchased, acquired, and used for other types of speech and by other speakers. Therefore, the statute went beyond mere content discrimination, to actual viewpoint discrimination.

Whether a special commercial speech inquiry or a stricter form of judicial scrutiny were applied, the statute did not advance a substantial government interest and was not narrowly tailored to serve that interest, in the Court’s view.

Vermont contended that the statute was intended to:

(1) Protect medical privacy, including physician confidentiality, avoidance of harassment, and the integrity of the doctor-patient relationship, and

(2) Achieve the policy objectives of improving public health and reducing healthcare costs.

Assuming that physicians had an interest in keeping their prescription decisions confidential, the statute was not drawn to serve that interest, the Court said. Pharmacies were permitted to share prescriber-identifying information with anyone for any reason except for marketing. Vermont might have addressed physician confidentiality through “a more coherent policy,” but it did not.

Vermont’s goals of lowering the costs of medical services and promoting public health may have been proper, but the statute did not advance them in a permissible way, the Court stated. Vermont sought to achieve those objectives through the indirect means of restraining certain speech by certain speakers. Vermont did not contend that the statute would prevent false or misleading speech. The fear that people would make bad decisions if given truthful information cannot justify content-based burdens on speech, the Court concluded.

The opinion was delivered by Justice Kennedy and was joined by Chief Justice Roberts and Justices Scalia, Thomas, Alito, and Sotomayor.

The Court affirmed a decision of the U.S. Court of Appeals in New York City (CCH Privacy Law in Marketing ¶60,646). The U.S. Court of Appeals in Boston had upheld the validity of similar laws in Maine (IMS Health Inc. v. Mills, CCH Privacy Law in Marketing ¶60,527) and New Hampshire (IMS Health Inc. v. Ayotte, CCH Privacy Law in Marketing ¶60,270), rejecting constitutional challenges in both cases.

Dissenting Opinion

In a dissenting opinion joined by Justices Ginsburg and Kagan, Justice Breyer argued that the statute’s effect on expression was inextricably related to a lawful governmental effort to regulate a commercial enterprise. In Breyer’s view, heightened First Amendment scrutiny of such an effort was not required. In any event, Breyer said, the statute met the First Amendment standard previously applied by the Court when the government sought to regulate commercial speech.

The decision is Sorrell v. IMS Health Inc, CCH Privacy Law in Marketing ¶60,646.


. . . Agrees to Review Telephone Consumer Protection Act Jurisdictional Question

The U.S. Supreme Court has granted an individual’s petition for certiorari requesting review of whether Congress divested the federal district courts of their federal-question jurisdiction under 28 U.S.C. Sec. 1331 over private actions brought under the Telephone Consumer Protection Act.

At issue is a decision of the U.S. Court of Appeals in Atlanta (CCH Privacy Law in Marketing ¶60,637) holding that the individual’s TCPA claims against a debt collection agency could be pursued only in state court.

Six U.S. Courts of Appeals (the Second, Third, Fourth, Fifth, Ninth, and Eleventh Circuits) have held that federal courts lack federal-question jurisdiction over private TCPA actions. The Sixth and Seventh Circuits have taken the contrary position, with the Seventh Circuit reasoning in Brill v. Countrywide Home Loans, Inc., 427 F.3d 446 (2005) that federal courts retained jurisdiction because the TCPA's provision authorizing private actions in state court did not declare state jurisdiction to be exclusive.

The petition for review is Mims v. Arrow Financial Services, LLC, Dkt. 10-1195, filed March 30, 2011, granted June 27, 2011.

Further information regarding CCH Privacy Law in Marketing appears here.

Federal Arbitration Act Preempts California Law of Contractual Unconscionability: Supreme Court

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

In a dispute over a consumer contract with an arbitration clause that included a class action waiver, the Federal Arbitration Act preempted a California rule of law that barred the waiver as unconscionable, the U.S. Supreme Court held today in a 5-4 decision.

The court reversed and remanded a decision of the U.S. Court of Appeals in San Francisco (CCH Advertising Law Guide ¶64,059) declining to compel individual arbitration of a consumer’s claim for $30.22 in a dispute over a wireless telephone service provider's practice of charging sales tax on cell phones advertised as “free.” The appeals court had held that the class action waiver in the wireless service agreement was unconscionable under the law of California.

In Discover Bank v. Superior Court, the California Supreme Court held that the doctrine of unconscionability barred the enforcement of class action waivers in arbitration clauses when the contracting party with superior bargaining power is alleged to have deliberately cheated large numbers of consumers out of individually small sums of money.

Federal Arbitration Act

Section 2 of the Federal Arbitration Act provides that a written contractual provision to arbitrate a controversy arising out of the contract is enforceable “save upon such grounds as exist at law or in equity for the revocation of any contract.”

While acknowledging that unconscionability is a generally applicable doctrine of contract law, Justice Scalia, writing for the majority, concluded that Section 2 of the Federal Arbitration Act preempted California’s Discover Bank rule.

Individual v. Class Arbitration

A switch from individual to class arbitration would make the process slower, more costly, less informal, and greatly increase the risks to defendants, according to the Court. When damages allegedly owed to tens of thousands of potential claimants are aggregated and decided at once, the risk of an error will often become unacceptable, the Court announced.

The arbitration agreement provided that the wireless provider would pay claimants a minimum of $7,500, and twice their attorney’s fees, if they obtained an arbitration award greater than the provider’s last settlement offer, the Court added.

Dissent

Justice Breyer, in a dissent joined by Justices Ginsburg, Sotomayor, and Kagan, questioned whether a rational lawyer would have signed on to represent a client for the possibility of fees stemming from a $30.22 claim. The Federal Arbitration Act’s basic objective was to assure that courts treat arbitration agreements like all other contracts. Recognition of the federalist ideal, embodied in specific language in the statute, should lead the Court to uphold California’s law, not to strike it down, according to the dissent.

The April 27 decision in AT&T Mobility LLC v. Concepcion will be reported in CCH Advertising Law Guide.

Supreme Court Opens New Term by Declining Review of Four Antitrust Decisions

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter, and John W. Arden.

On the opening day of its 2010-2009 term, the U.S. Supreme Court denied review of four antitrust decisions involving price discrimination, price fixing, and conspiracy to restrain trade.

Price Discrimination

Left standing by the court was a decision of the U.S. Court of Appeals in Philadelphia (2010-1 Trade Cases ¶76,865), rejecting a food distributor’s price discrimination claims against food manufacturer Michael Foods, Inc. and favored food service management company Sodexo, Inc.

The appellate court had ruled that the complaining regional food distributor and Sodexo—the world's largest food service management company—were not "competing purchasers" for purposes of the Robinson-Patman Act.

The food distributor asked the Supreme Court specifically whether, in order to establish competitive injury under the Robinson-Patman Act, a plaintiff had to prove that the favored and disfavored purchasers bought discriminatorily priced products at the exact same moment at which they or their customers competed to resell those products.

The petition is Feesers, Inc. v. Michael Foods, Inc., Docket No. 09-1499, cert. filed June 2, 2010, review denied October 4, 2010.

Price Fixing

The Court refused to review a decision of the U.S. Court of Appeals in Philadelphia (2010-1 Trade Cases ¶76,893) rejecting a terminated motor vehicle dealer’s price fixing claims against auto maker Mercedes-Benz. The decision affirmed summary judgment in favor of the automobile manufacturer on the dealer’s antitrust counterclaims.

The dealer questioned (1) whether the lower courts’ rulings were contrary to antitrust summary judgment precedent and (2) whether requiring a damage expert to independently verify antitrust liability was contrary to antitrust law and rules regarding the admission of expert testimony.

The petition is Coast Automotive Group, Ltd. v. Mercedes Benz, U.S.A, Dkt. 09-1509, cert. filed June 8, 2010, review denied October 4, 2010.

Filed Rate Doctrine

Home purchasers were denied review of a decision of the U.S. Court of Appeals in New Orleans (2010-1 Trade Cases ¶76,968), barring price fixing claims against title insurers under the federal “filed rate” doctrine.

The home purchasers—alleging a conspiracy to fix the price of title insurance—questioned (1) whether the federal "filed rate" doctrine bars Texas state antitrust and state unfair practices claims where Texas law expressly forbids these practices and (2) whether a federal court of appeals should have addressed or certified to the Texas Supreme Court the key unresolved questions of whether the plaintiffs’ Texas state law claims are barred by Texas law.

The petition is Winn v. Alamo Title Insurance Co., Dkt. 10-19, cert. filed June 28, 2010, review denied October 4, 2010.

Preemption

The Court will not review a California appellate court decision (2010-1 Trade Cases ¶77,065), holding that California Cartwright Act claims against Federal Communications Commission (FCC) licensees were preempted by the Federal Communications Act.

The state appellate court upheld dismissal of allegations that the FCC licensees hoarded or warehoused licenses and made misrepresentations to the FCC in order to retain licenses.

Complaining licensees asked (1) whether any or all state-law claims for damages, arising out of fraud, tortious interference with contractual relations and unfair competition, which are in some way associated with an FCC-issued license, are state “regulation” of rates and market entry; (2) whether preemption is limited to only those claims that directly affect the regulation of rates and market entry; and (3) whether the Federal Communications Act’s savings clause for actions arising under antitrust law applies to claims under both state and federal antitrust law.

The peitition is Havens v. Mobex Network Services, LLC, Dkt. 09-1518, cert. filed June 10, 2010, review denied October 4, 2010.

High Court Allows Antitrust Claims over Exclusive Licensing to Proceed Against NFL

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

An arrangement among the 32 separately-owned member teams of the National Football League (NFL) to license their intellectual property collectively through their jointly-owned licensing affiliate—National Football League Properties (NFLP)—constituted concerted activity under Section 1 of the Sherman Act, a unanimous U.S. Supreme Court has decided.

The High Court today reversed a decision of the U.S. Court of Appeals in Chicago (2008-2 Trade Cases ¶76,259) holding that the NFL and its members did not engage in an illegal antitrust conspiracy by granting an exclusive trademark license to Reebok International for purposes of producing and selling trademarked headwear for all 32 teams.

Prior to granting an exclusive 10-year license to Reebok, the NFL had granted nonexclusive licenses to a number of vendors, including American Needle, Inc., permitting the companies to manufacture and sell apparel bearing team insignias.

After the NFL declined to renew American Needle’s nonexclusive license, the vendor brought antitrust claims challenging the exclusive licensing arrangement.

American Needle argued before the Court that under Nat'l Collegiate Athletic Assn. v. Bd. of Regents (1984-2 Trade Cases ¶66,139), agreements among sports teams about whether and how they will participate in the marketplace are subject to scrutiny under the Sherman Act, Section 1. The NFL asked the Court to establish a uniform rule recognizing the single-entity nature of the NFL as a highly integrated joint venture.

Functional Analysis

In an opinion authored by Justice John Paul Stevens, the Court explained that the issue of concerted action did not turn simply on whether the parties involved were legally distinct entities. The focus was on substance rather than legal form.

Under a ‘’functional analysis,’’ the key was whether the conduct joined together separate decisionmakers. If the agreement joins together separate decisionmakers, then the entities are capable of conspiring under Section 1, and the court must decide whether the restraint of trade is an unreasonable and therefore illegal one, the Court explained.

Applying this analysis, the Court concluded that the NFL teams did not possess the unitary decision-making quality or the single aggregation of economic power characteristic of independent action. Each of the teams was a substantial, independently owned, and independently managed business.

While the NFL teams might have been similar in some sense to a single enterprise that owned several pieces of intellectual property and licensed them jointly, they were not similar in the relevant functional sense. The teams' interests in licensing team trademarks were not necessarily aligned.

The Court also addressed the fact the NFLP was a separate corporation with its own management and that most of the revenues generated by NFLP were shared by the teams on an equal basis. It decided that that the NFLP’s actions also were subject to Section 1, at least with regards to its marketing of property owned by the separate teams, for the same reasons the teams’ conduct was covered by Section 1.

Rule of Reason Analysis

On remand, the challenged agreement was to be reviewed under a flexible rule of reason analysis, the Court ruled. While the interests of the teams in promoting NFL football did not justify treating them as a single entity for purposes of Section 1 of the Sherman Act when it came to the marketing of the teams’ individually owned intellectual property, it could justify a variety of collective decisions made by the teams.

Rule of reason analysis would enable the NFL to offer justifications for its collective decisions. “Football teams that need to cooperate are not trapped by antitrust law,” the Court noted.

Government Position

The Court did not pass upon the position taken by the federal antitrust agencies in their 2009 friend-of-the-court brief. In its brief, the government suggested that it was taking a middle ground between the parties' arguments.

The government contended that ‘’single-entity treatment for the teams and the league was appropriate if the teams and the league have effectively merged the relevant aspect of their operations, thereby eliminating actual and potential competition among the teams and between the teams and the league in that operational sphere . . . and the challenged restraint [does] not significantly affect actual or potential competition among the teams or between the teams and the league outside their merged operations.”

The May 24 decision in American Needle Inc. v. National Football League, No. 08-661, appears at 2010-1 Trade Cases ¶77,019.

High Court Rules Class Arbitration in Price Fixing Case Was Improper

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

International shipping companies should not be forced to defend in class arbitration customers' price fixing claims where their arbitration clause was “silent” on the class arbitration issue, the U.S. Supreme Court ruled today in a five-to-three decision.

Finding that the arbitration panel erred in imposing class arbitration, the Court said: “instead of identifying and applying a rule of decision derived from the [Federal Arbitration Act] or either maritime or New York law, the arbitration panel imposed its own policy choice and thus exceeded its powers.”

Class Arbitration

A putative class action was brought against the shipping companies after a Department of Justice criminal investigation revealed an illegal price fixing conspiracy in 2003. After it was determined that the parties were required to arbitrate their antitrust dispute, the customers sought class arbitration of their claims. The arbitration panel granted the request but stayed the proceeding to allow the parties to seek judicial review.

The federal district court in New York City vacated the arbitration panel's clause-construction award (2006-2 Trade Cases ¶75,353); however, the federal appellate court subsequently reversed the district court and upheld the award. The federal appellate court held that class arbitration was permissible, even though the arbitration clauses in the underlying maritime agreements did not specifically provide for it (2008-2 Trade Cases ¶76,355).

“[P]arties may specify with whom they choose to arbitrate their disputes,” explained Justice Samuel Anthony Alito, writing for the majority, explained, in reversing the appellate court. The High Court cautioned courts and arbitrators “to give effect to the intent of the parties.”

Agreement Required

It followed that a party may not be compelled under the FAA to submit to class arbitration unless there was a contractual basis for concluding that the party had agreed to do so. In this matter, the parties had stipulated that there was “no agreement” on that issue, the Court noted.

Moreover, an agreement to authorize class arbitration could not be inferred based on the parties' “agreement to arbitrate" because class-action arbitration changed the nature of arbitration, according to the Court.

Dissent

The dissenting opinion, authored by Justice Ruth Bader Ginsburg, argued that the majority was improperly addressing an issue not ripe for judicial review. The dissent contended that,
even if the matter was ripe for judicial review, the Court should have rejected it on the merits. The Court should have affirmed the Second Circuit judgment confirming the arbitrators’ clause-construction decision.

Text of the April 27 decision in Stolt-Nielsen S.A. v. Animalfeeds International Corp., 2010-1 Trade Cases ¶76,982, is posted here on the U.S. Supreme Court website.

Current Gasoline Franchisees May Not Claim Constructive Termination, Nonrenewal: High Court

This posting was written by John W. Arden.

Gasoline station franchisees may not maintain actions for constructive termination or constructive nonrenewal under the federal Petroleum Marketing Practices Act (PMPA) after accepting renewal agreements from a franchisor and continuing to operate their franchises, the U.S. Supreme Court ruled in a unanimous decision on March 2.

The high court held that (1) franchisees cannot recover for constructive termination under the PMPA if the franchisor’s allegedly wrongful conduct did not compel the franchisees to abandon their franchises and (2) franchisees that sign a renewal agreement and continue to operate their franchises may not maintain a claim for constructive nonrenwal under the PMPA.

Petroleum Marketing Practices Act

The PMPA (15 U.S.C. §2801—§2807, CCH Business Franchise Guide ¶6940) establishes federal minimum standards for the termination and nonrenewal of gasoline franchises, authorizing franchisors to end a franchise relationship only for enumerated causes and with advance written notice. To enforce these requirements, franchisees may bring suit in federal court for equitable relief, compensatory and punitive damages, attorney’s fees, and costs.

For many years the franchisor (Shell Oil Company) provided its Massachusetts franchisees with a rent subsidy that reduced the monthly rent of franchise premises for every gallon of gasoline sold. The subsidy was renewed annually by written notice, and franchisor representatives made oral representations that the subsidy or something like it “would always exist.”

Discontinuation of Rent Subsidy

In 1998, the franchisor assigned its rights and obligations to a joint venture (Motiva), which ended the volume-based rent subsidy and offered franchisees renewal agreements that contained a new formula for calculating rent. These actions generally resulted in an increase of rent.

Sixty-three franchisees filed suit against Shell and the joint venture in July 2001, alleging that the discontinuation of the rent subsidy constituted a breach of contract under state law and a “constructive termination” within the PMPA. They further claimed that the joint venture’s offer of new franchise agreements calculating rent in a different way amounted to a “constructive nonrenewal.”

After trial of these claims in the federal district court in Boston, a jury found against the franchisor and the joint venture on all claims. Both defendants had unsuccessfully moved for judgment as a matter of law on the PMPA claims, arguing that they could not be held liable for constructive termination or nonrenewal because none of the franchisees abandoned their franchises.

On appeal, the First Circuit affirmed in part and reversed in part, holding that a franchisee is not required to abandon its franchise to recover for constructive termination. A simple breach of contract can amount to constructive termination, the court held, if the breach resulted in “such a material change that it effectively ended the lease . . . ” On the other hand, the First Circuit agreed with the defendants that a franchisee continuing to operate under a renewal agreement cannot maintain a claim for lawful nonrenewal under the PMPA. (Marcoux v. Shell Oil Products Co, LLC, CCH Business Franchise Guide ¶13,890).

Supreme Court Petitions

Subsequently, both the franchisees and the franchisor filed petitions for review by the U.S. Supreme Court. (Mac's Shell Service, Inc. v. Shell Oil Products Co., Docket No. 08-240, and Shell Oil Products Co. v. Mac's Shell Service, Inc., Docket No. 08-372) The Supreme Court granted their petitions on June 15, 2009.

Petitioning franchisees contended that there was a split among the circuits on “whether a franchisor can lawfully present its franchisees with the Hobson’s choice of accepting unlawful contract terms or risking their livelihoods on a chance that a court will grant a preliminary injunction.”

They cited a 1986 Ninth Circuit decision—Pro Sales, Inc. v. Texaco, U.S.A., CCH Business Franchise Guide ¶8604—that recognized the “Catch-22” situation and rejected such a requirement.

Supreme Court Rulings

On review, the Supreme Court concluded that “a necessary element of any constructive termination claim under the Act is that the franchisor’s conduct forced an end to the franchisee’s use of the franchisor’s trademark, purchase of the franchisor’s fuel, or occupation of the franchisor’s service station.”

The PMPA uses the word “terminate,” which ordinarily means “put an end to,” the court said. Thus, when given its ordinary meaning, the Act is violated only if a franchise is put to an end.

“Requiring franchisees to abandon their franchises before claiming constructive termination is also consistent with the general understanding of the doctrine of constructive termination,” Justice Alito wrote. In order for an employee to recover for constructive discharge, he or she generally must quit the job. A tenant claiming constructive eviction must actually move out.

Contentions that this interpretation of the PMPA fails to give franchisees protection from unfair and coercive acts by their franchisors “ignores the fact that franchisees still have state-law remedies available to them,” the Court explained.

On the constructive nonrenewal claim, the Court held that a franchisee choosing to accept a renewal agreement cannot be allowed to thereafter claim wrongful nonrenewal. The plain text of the PMPA says that there is a violation of the statute when the franchisor “fails to renew” a franchise for reasons not provided by the statute. Thus, the threshold requirement of a wrongful nonrenewal action is that there is a nonrenewal.

Continuation or Extension of Relationship

The Act speaks of a franchisor’s failure to reinstate, continue, or extend the franchise relationship, the Court stated. In a situation like this one, the franchises had been continued and extended.

Finally, the Court noted that the PMPA authorizes franchisors to respond to market demands by proposing different contractual terms at the expiration of a franchise agreement. The statute allows franchisors to refuse to renew franchise relationships when the franchisees refuse to agree to changes proposed “in good faith and in the normal course of business.”

Allowing franchisees to sign renewal agreements and then pursue wrongful nonrenewal claims would undermine this procedure and frustrate the franchisors’ ability to propose new terms.

The 20-page opinion in Mac’s Shell Service, Inc. v. Shell Oil Products Co. LLC is available here on the U.S. Supreme Court website. It will appear in CCH Business Franchise Guide.

High Court Further Delineates RICO’s Causation Requirement

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

The City of New York was not directly injured by an out-of-state vendor’s failure to file Jenkins Act reports with the tobacco tax administrator of New York State, the U.S. Supreme Court has ruled. Absent a showing that the vendor proximately caused the City’s injury (loss of excise tax revenue), the City had no RICO claims against the vendor.

In a plurality (4-3) opinion written by Chief Justice Roberts, the court concluded that proximate cause was absent because “multiple steps” separated the alleged fraud from the asserted injury.

The decision of the Second Circuit (CCH RICO Business Disputes Guide ¶11,547), which found a direct connection between the vendor’s conduct and the City’s loss, was therefore reversed. The case was remanded for further proceedings.

Jenkins Act

The federal Jenkins Act required cigarette vendors to file monthly reports with out-of-state tobacco tax administrators if consumers from the state had purchased cigarettes from the vendor. In each report, the vendors were required to identify: (1) the name and address of every state resident who had purchased cigarettes from the vendor and (2) the brands and quantities of cigarettes that each resident had purchased.

According to the City of New York, the vendor’s failure to report Jenkins Act information to the State of New York prevented the City from acquiring the information it needed to collect “tens if not hundreds of millions of dollars a year” in tobacco tax revenue from City residents who had failed to pay the tax.

Proximate Cause

In Holmes v. Securities Investor Protection Corp. (RICO Business Disputes Guide ¶7968), the Court “reiterated” that “the general tendency of the law, with regard to damages at least, is not to go beyond the first step” of the causation chain. The Court’s decisions confirmed that this general tendency applied “with full force” to proximate cause inquiries under RICO.

Because the City’s theory of causation required the Court to move “well beyond” the first step, its theory did not meet RICO’s direct relationship requirement.

More specifically, the conduct directly responsible for the City’s harm was the resident cigarette purchasers’ failure to pay municipal tobacco taxes, and the conduct constituting the alleged fraud was the vendor’s failure to file Jenkins Act reports. Therefore, the Court reasoned, the conduct that directly caused the City’s injury was distinct from the conduct that the City identified as fraudulent. The relationship between fraud and injury was too attenuated.

Link Between Fraud and Injury

The City’s claim suffered from the same defect that plagued the plaintiff’s claim in Anza v. Ideal Steel Supply Corp. (RICO Business Disputes Guide ¶11,076). In Anza, the Court determined that a steel company’s alleged fraud (the failure to charge and remit sales tax to the State of New York) did not proximately cause a competitor’s injury (the inability to compete based on price) because the link between the two was “attenuated.”

In fact, the disconnect in this case between the vendor’s alleged fraud and the City’s asserted injury was even sharper than it was in Anza. In this case, the City’s theory of liability rested on separate actions (failing to file Jenkins Act reports and failing to pay cigarette taxes) that were carried out by separate parties (the vendor and the vendor’s customers who resided in New York City). In Anza, the steel company’s theory of liability rested on separate actions that were carried out by the same party (the defendant steel company).

Put simply, the vendor had an obligation to file the Jenkins Act reports with New York State, not with New York City, and the City’s harm was directly caused by the cigarette purchasers, not by the vendor.

Incentive to Sue

One consideration that the Court has used to analyze RICO’s “direct relationship” requirement was “whether better situated plaintiffs would have an incentive to sue.” In this case, the State of New York was better situated than the City to seek recovery from the vendor. Further, the State had an incentive to sue because it imposed a tax on cigarettes ($2.75 per pack) that was nearly double the City’s tax ($1.50 per pack).

Foreseeability

Foreseeability was not used to evaluate proximate cause. Significantly, proximate cause did not turn on foreseeability in Anza, and no party asked the court to revisit that decision. The Court’s precedents were clear: the focus of a proximate cause inquiry in the context of RICO was the directness of the relationship between the conduct and the harm. Foreseeability was not part of the inquiry.

Systematic Scheme

The City could not escape the attenuated relationship that existed between the alleged fraud and the alleged injury by arguing that the vendor had engaged in a “systematic scheme” to defraud the City of tax revenue and by asserting that this scheme had “embraced all those indirectly harmed” by the vendor’s conduct.

If the City could do that, the Court’s proximate cause precedent for RICO actions would become a “mere pleading rule.” Because the only fraudulent conduct alleged was a Jenkins Act violation, the City had to show that the vendor’s failure to file Jenkins Acts reports with the State of New York had led directly to the City’s injuries. This it could not do.

Dissent

The dissenting Justices concluded that the vendor’s failure to provide Jenkins Act reports to the State of New York had proximately caused New York City to lose tobacco tax revenue. In addition to characterizing the State as a “conduit” that was “roughly analogous to a postal employee,” the dissenting Justices incorporated intent and foreseeability into their proximate cause analysis.

According to the dissent, finding common-law cases that denied liability for a wrongdoer’s intended consequences was difficult, particularly where, as here, the consequences were foreseeable.

The dissenting Justices also opined that the concept of directness in tort law was used to “expand liability (for direct consequences) beyond what was foreseeable, not to eliminate liability for what was foreseeable.”

Finally, the Justices noted that Congress had modeled RICO §1964(c) on the civil action provision of the federal antitrust laws. They found no antitrust analogy, however, that suggested a lack of causation given the circumstances of this case.

The January 25 decision, Hemi Group LLC v. City of New York, is available here on the U.S. Supreme Court web site. It will appear in the February edition of CCH RICO Business Disputes Guide.

Justices Needle Counsel in Oral Argument of NFL Licensing Antitrust Case

This posting was written by John W. Arden.

While NFL teams prepared to do battle in league divisional playoff games, lawyers clashed in the U.S. Supreme Court last Wednesday on whether the NFL and its 32 teams engaged in an illegal antitrust conspiracy by granting an exclusive trademark license to apparel manufacturer Reebok International.

On January 13, the Supreme Court heard arguments on behalf of the league, a complaining apparel manufacturer (American Needle, Inc.), and the Solicitor General.

Under review was a decision by the U.S. Court of Appeals in Chicago, rejecting American Needle’s Sherman Act Section 1 claim on the ground that the league and teams were acting as a single entity when collectively licensing their intellectual property through a jointly-owned licensing affiliate (American Needle, Inc. v. National Football League, 2008-2 Trade Cases ¶76,259).

In its petition for review, American Needle asked:

(1) Whether the league and its teams were a single entity exempt from rule of reason claims under Section 1 of the Sherman Act “simply because they cooperate in the joint production of NFL football games, without regard to their competing economic interests, their ability to control their own economic decisions, or their ability to compete with each other and the league” and

(2) Whether the league’s license agreement with Reebok—under which the teams agreed to refrain from competing with each other in the licensing and sale of apparel—was subject to a rule of reason claim.

The league and its teams also asked the Supreme Court to review the decision, on the grounds that the federal circuit courts were divided on the question and in order to secure a uniform rule recognizing the single-entity nature of the NFL as a highly integrated joint venture.

The FTC and Department of Justice Antitrust Division had filed an amicus brief, urging the Court to deny review.

American Needle’s Argument

Opening the argument was Glen D. Nager, representing American Needle, who stated that “there is a longstanding consensus, judicial and legislative, that agreements among sports teams about whether and how they will participate in the marketplace is subject to scrutiny under the Sherman Act, Section 1.”

He referred to NCAA v. Board of Regents of the University of Oklahoma (1984-2 Trade Cases ¶66,139) as most directly on point. “In that case, the Court held that a policy of the NCAA that restricted the ability of member institutions of the NCAA to sell TV rights violated Section 1. Just as with the NFL, the decisions of the NCAA were ultimately controlled by the vote of its members, and for that reason, the Court held that the NCAA was a horizontal restraint.”

Some of the justices questioned Nager about what kind of joint action by the league—such as scheduling games or prohibiting teams from playing outside the league—would not be subject to scrutiny under the rule of reason.

Justice Breyer went farther, arguing that there might not be competition between the teams in the market for licensed apparel, since fans of a particular team were not likely to purchase items identified with a rival team.

Finally, Justice Scalia asked whether the only issue was whether the lower court was wrong to dismiss the suit on the ground of unitary operation by the league. When Nager answered in the affirmative, Justice Scalia asked “Well, why am I worrying about this other stuff?” Nager replied “Because Counsel has an obligation to respond to questions.”

On the issue of unitary operation, Nager answered that the exclusive license constituted concerted activity because it was “between separately owned and controlled businesses.”

Solicitor General’s Perspective

Malcolm Stewart argued on behalf of the United States as amicus curiae, supporting neither party’s theory.

He focused on “a rather mundane aspect of the NFL commissioner’s powers”—that is, the power to incur expenses to carry on the ordinary business of the league. This might include renting office space, hiring employees, and procuring supplies. If the commissioner decides from which company to procure supplies, “our view is that that’s the conduct of a single entity,” he observed.

It was the delegation of authority to the commissioner that would be subject to a Section 1 challenge, rather than the commissioner’s decision to grant a license to a single licensee or multiple licensees, Stewart indicated. It would be “highly unlikely that such a challenge would prevail.” Chief Justice Roberts wondered why that would be so.

NFL’s Position

Gregg H. Levy, arguing on behalf of the NFL, stated that the formation of a sports league—like the formation of any joint venture—may be subject to scrutiny under Sherman Act Sction 1. However, in this case, there was no challenge to venture formation.

“There is no dispute that the NFL, including its licensing arm, NFL Properties, is a lawful venture. If venture formation is not an issue, then decisions by the venture about the ventures’s product are unilateral venture decisions, unilateral venture actions. They are not concerted actions of the—of the venuture’s members.”

Justice Kennedy then asked a series of questions regarding whether the sales of NFL apparel was considered at the time the league was formed and even whether that was a relevant inquiry.

Levy said that the decision to use licenses of league intellectual property as a promotional tool goes back to the 1960s. Upon questioning by Justice Sotomayor, he said that there was some exploitation of intellectual property by franchises prior to the creation of NFL Properties in 1963.

Levy explained that the purpose of licensing was to promote the game and that NFL teams were not independent sources of economic power in generating the game. However, Justice Scalia observed that the purpose of the licensing could be to make money.

“But—but don’t tell me that . . . absent this agreement, there would not be an independent, individual incentive for each of the teams to sell as many of its own . . . shirts or helmets as possible.”

According to Levy, the purpose of the licensing is “to promote the attractiveness of the game product, to get more people interested in watching the games on television, to get more people interested in buying tickets to the game.”

Justice Scalia disagreed and said that could be a triable issue.

Justice Sotomayor later summarized:

“I’m very swayed by your arguments, but I can see a counterargument that promoting T-shirts is only to make money. It doesn’t really promote the game. It promotes the making of money. And once you fix prices for making money, that is a Sherman Act violation.”

Text of the 65-page transcript in American Needle, Inc. v. National Football League appears here on the U.S. Supreme Court website.

High Court Hears Arguments on Class Arbitration in Price Fixing Case

This posting was written by John W. Arden.

The U.S. Supreme Court today heard arguments on whether the Federal Arbitration Act (FAA) permits the imposition of class arbitration when the parties’ agreement is silent on the issue.

The Court is reviewing a decision of the U.S. Court of Appeals in New York City (2008-2 Trade Cases ¶76,355), holding that purchasers of shipping services could proceed with class arbitration of their price fixing claims against four major maritime shipping companies.

The federal appellate court held that class arbitration was permissible, even though arbitration clauses in the underlying maritime agreements did not specifically provide for it.

In their petition for certiorari, the maritime shipping companies argued that Supreme Court review was appropriate in light of a split among the circuits and because the case was free of threshold issues that previously thwarted review of the question.

The companies contended that “the Second Circuit’s decision that class arbitration may be imposed on parties whose arbitration contract does not provide for it cannot be reconciled with [the Supreme] Court’s FAA precedents.” Stolt-Nielsen SA v. Animalfeeds International Corp., Docket No. 08-1198, cert. granted June 15, 2009.

Authority of Arbitrators

Arguing for the shipping companies, Seth P. Waxman pointed out that—unlike courts—arbitrators derive their authority “solely from the consent of the parties to a particular agreement.”

When an agreement reveals no intent to add participants, arbitrators who nevertheless extend the process to hundreds of parties to other contracts “violate the basic principle reflected in the FAA that their authority is created and circumscribed by an agreement,” according to Mr. Waxman.

In a discussion with Justice Breyer, the petitioners' lawyer stated that there were two questions before the Court (1) whether there was a meeting of the minds between the parties on the issue of class arbitration and (2) if there was no meeting of the minds, and the contract was truly silent, whether ordering class arbitration would be permissible under the FAA.

Mr. Waxman answered his own questions—that no meeting of the minds was objectively revealed and therefore the arbitrator exceeded his authority under the FAA in requiring class arbitration. There was no express provision one way or the other, and maritime law governing the contract looks to the custom and practice in the industry, which is to not allow class arbitration.

Contract Interpretation

Speaking on behalf of the purchasers of shipping services, Cornelia T.L. Pillard maintained that the arbitrators only did what they were asked to do—interpret the contract. “They did not impose their own policy judgment,” she said. They relied on the broad language of the agreement and on the fact that “many other arbitrators had read similar language to permit class arbitration.”

By agreeing to arbitrate “any disputes,” the parties gave the arbitrators the authority to use class arbitration, among other procedures, that was appropriate to a particular case, she said.

There was an extensive discussion—between Justice Scalia and Ms. Pillard—about whether the arbitrators in the case agreed to permit class arbitration or simply did not agree to prohibit it. Ms. Pillard maintained that once the arbitrators had “affirmative general authorization” to choose any appropriate procedures, the shippers would have had to show the parties’ intent to preclude class arbitration.

Chief Justice Roberts pointed out that there is a difference “between allowing something and a background rule that requires it if you don’t say anything about it.” Later, he summed up, “So we have to decide, when . . . the contract says nothing about class actions, whether the background rule should be you can go ahead—or the background rule should be, you can’t go ahead.”

Justice Ginsburg opined that if the purchasers win this case and obtain class arbitration, that the shippers would insert “express no-class-action terms” in all their future contracts.

Ms. Pillard agreed, but said “at least it was incumbent on them to do that here if this was something they were so concerned about. . . . “

The 71-page transcript of the oral argument appears here on the U.S. Supreme Court website.

On Opening Day of Term, High Court Denies Review of Three Trade Regulation Cases

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter, and John W. Arden.

The U.S. Supreme Court opened its 2009-2010 term yesterday by denying review of three trade regulation decisions—concerning resale price fixing, Lanham Act false advertising, and arbitration of an in-term restrictive covenant in a trademark license.

Resale Price Maintenance

Left standing by the Court was a decision by the U.S. Court of Appeals in Richmond, Virginia (2009-1 Trade Cases ¶76,547), holding that two pesticide manufacturers did not conspire with their distributors to set minimum resale prices of certain termiticide products.

In their petition for review, complaining providers of pest control services asked: (1) whether resale price agreements, through which retailer agents raised consumer prices, is controlled by Leegin Creative Leather Products, Inc. v. PSKS, Inc. (2007-1 Trade Cases ¶75,753), 551 U.S. 877 (2007) or United States v. General Electric Co., 272 U.S. 476 (1926); and (2) whether it was established that the manufacturer's resale price agreements with retailers violated §1 of the Sherman Act under Leegin.

The petition is Valuepest.com of Charlotte, Inc. v. Bayer Corp., Docket 08-1584, cert. filed June 22, 2009.

Lanham Act False Advertising

The Supreme Court declined to review a decision by the U.S. Court of Appeals for the Federal Circuit (2009-1 Trade Cases ¶76,553, CCH Advertising Law Guide ¶63,320), reversing a jury award of more than $8 million against a Japanese basketball manufacturer for falsely advertising its product design as “innovative.”

On appeal, the manufacturer contended that Lanham Act claims based on advertisements that falsely claim authorship of an idea were barred by the U.S. Supreme Court’s decision in Dastar Corp. v. Twentieth Century Fox Film Corp., 539 U.S. 23 (2003).

In its petition, the manufacturer had asked whether Dastar established an authorship limitation on false advertising claims brought under Section 43(a)(1)(B) of the Lanham Act. The petition is Baden Sports, Inc. v. Molten USA, Inc., Docket 08-1477, cert. filed May 28, 2009.

Restrictive Covenant

The Court denied a petition for review of a decision of the U.S. Court of Appeals in San Francisco (2009-1 Trade Cases ¶76,482, CCH Business Franchise Guide ¶14,055), which held on remand from the U.S. Supreme Court that an arbitrator manifestly disregarded California law by enforcing an in-term restrictive covenant in a trademark license.

On October 6, 2008, the Supreme Court vacated an earlier decision of the appeals court (2008-1 Trade Cases ¶76,129, CCH Business Franchise Guide ¶13,703) in light of the Court’s decision in Hall Street Associates, LLC. v. Mattel, Inc., 128 S.Ct. 1396 (2008).

In a petition for review, a party to the trademark license asked whether a decision vacating an arbitration award on the non-statutory ground of "manifest disregard" was inconsistent with U.S. Supreme Court precedent and whether an arbitrator's good faith but erroneous interpretation of state law constituted a basis for vacating an arbitration award under the Federal Arbitration Act.

The petition for review is Improv West Associates v. Comedy Club, Inc., Docket 08-1525, cert filed June 8, 2009.

Punitive Damages Award Left Standing in Tobacco Advertising Fraud Case

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

The U.S. Supreme Court has left undisturbed a $79.5 million punitive damages award in an Oregon wrongful death suit against Philip Morris for deceit.

After granting review of the case in June 2008 and hearing oral argument in December, the Court on March 31 issued a one-sentence decision that review had been “improvidently granted.”

The suit was brought by a smoker’s widow, who claimed that Philip Morris committed fraud by using its advertising power in a 40-year publicity campaign to undercut published concerns about the dangers of smoking. A jury found Philip Morris liable for its deceit in knowingly and falsely leading the decedent to believe that smoking was safe, awarding $821,000 in compensatory damages and $79.5 million in punitive damages.

Prior Decision Vacating Punitive Damages Award

In a 2007 decision in the case (CCH Advertising Law Guide ¶62,420), the Court vacated the punitive damages award on the ground that the Due Process Clause of the U.S. Constitution prohibited an award of punitive damages based in part on harm to nonparties. The trial court refused the company's proposed instruction that the jury could not seek to punish Philip Morris for injury to other persons not before the court.

The Court remanded the case to the Oregon Supreme Court to determine whether a new trial was required or whether the amount of the punitive damages award should be changed.

Reinstatement by Oregon Supreme Court

The Oregon Supreme Court, in January 2008, reinstated the punitive damages award in full (CCH Advertising Law Guide ¶62,859). The court held that Philip Morris had failed to preserve for review any claim that the jury instructions actually given were erroneous.

Before the constitutional standard could be addressed, state law standards for instructing the jury on punitive damages had to be considered, the court determined. Philip Morris' proposed instruction was incorrect because it would have told the jury that (1) Oregon statutory factors for justifying a punitive damages award were discretionary (instead of mandatory) and (2) one factor to be considered was the motivation to make illicit profits (rather than the profitability of the misconduct). Thus, even if Philip Morris' instruction articulated the correct due process standard, it misstated Oregon law, and the trial court did not err by refusing to give it, the court concluded.

The Oregon Supreme Court’s 2008 decision is left standing by the U.S. Supreme Court’s March 31 decision.

The amount of Philip Morris’s liability reportedly has grown to over $150 million, by application of the interest on the damages award.

Further details on the decision in Philip Morris USA, Inc. v. Williams, No. 05-1256, March 31, 2009, will be reported in CCH Advertising Law Guide.