Nondisclosure of Affiliate's Rebates to Franchisor Did Not Violate FTC Franchise Rule

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

A franchisor of cleaning service businesses did not violate the FTC Franchise Rule—and therefore, did not fraudulently induce a franchisee to enter into an agreement—by failing to disclose in the Uniform Franchise Offering Circular (UFOC) provided to the prospective franchisee the "rebates" or "kickbacks" paid by an affiliate mailing services company to the franchisor, a federal district court in Baltimore has decided.

It was undisputed that, at the time of the franchisee’s decision to enter into an agreement with the franchisor, the North American Securities Administrators Association’s Uniform Franchise Offering Circular Guidelines—1993 (CCH Business Franchise Guide ¶5750) governed the contents of the UFOC used by the franchisor.

Disclosing Basis of Revenue

The relevant disclosure provision of those Guidelines was Item 8, which in part mandated a franchisor to disclose: "Whether, and if so, the precise basis by which the franchisor or its affiliates will or may derive revenue or other material consideration as a result of required purchases or leases."

The franchisee alleged that the affiliate made payments to the franchisor and that those payments constituted "rebates" or "kickbacks" that should have been disclosed in the UFOC, the court noted.

Assuming that the affiliate made payments to the franchisor, their disclosure was not required by Item 8. Instead, the franchisor was required to disclose whether its affiliate "will or may derive revenue" from required purchases, the court determined.

Required Purchase of Mail Services

The franchisor did, in fact, disclose that franchisees were required to purchase mail advertising services from its affiliate and also disclosed the cost of those services. The obvious implication of that disclosure was that the franchisor’s affiliate would derive revenue from those franchisee purchases, the court reasoned. No further disclosure was necessary.

Such an interpretation was consistent with the court’s finding that the franchisor’s disclosure documents drew a distinction between the affiliate, whom franchisees were required to purchase advertising services, and approved suppliers, from whom franchisees could purchase goods and services.

Amount of Payment Disclosed

What the affiliate did with the money it received from the franchisees for advertising services was immaterial, according to the court. What was material was how much the franchisees would have to pay the affiliate for advertising services. The franchisee here was fully informed of that.

The court’s conclusion was buttressed by the FTC’s Statement of Basis and Purpose—1979 (CCH Business Franchise Guide ¶6300) to the then-current version of its Franchise Rule. In that document, the FTC made a clear distinction between "affiliated persons" and "suppliers," thereby exposing the fallacy of the franchisee’s theory that the affiliate should be treated the same as an unaffiliated supplier.


The February 11 decision in Cleaning Authority, Inc. v. Neubert, will appear in CCH Business Franchise Guide.

Online Retailer Faces Class Action for Allegedly Negligent Rebate Ad

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

An online purchaser established that class certification should have been granted on claims that online retailer Buy.com misleadingly advertised a $30 Connect 3D memory card with a $30 rebate, which Connect 3D failed to pay, a California appellate court has ruled.

The purchaser alleged negligent misrepresentation and violations of the California Unfair Competition Law and the California Consumers Legal Remedies Act (CLRA).

The class was defined in the purchaser's memorandum of points and authorities as all persons in the United States who purchased a Connect 3D product from Buy.com, Inc. that included a rebate offer and whose rebate submissions were approved for payment, excluding anyone who was paid a rebate by Buy.com.

The trial court erred by holding that the class was not ascertainable because of an inconsistency with the class definition in a proposed order, the appellate court held.

While relief under the CLRA was limited to proposed class members who bought products for consumer use, the class could be certified even though some members of the class were not consumers, according to the court.

Nationwide Class, California Law

Even though the proposed class was nationwide, common issues of law predominated, the court found. A California choice-of-law provision in Buy.com’s terms of use agreement was applicable. Buy.com was headquartered in California. The allegedly misleading rebate information on Buy.com’s website originated from California. The due diligence Buy.com allegedly failed to perform would have been performed in California.

Buy.com unsuccessfully contended that the purchaser's claims were vague. The purchaser alleged that every member of the class must have seen and relied on Buy.com's negligent misrepresentations that the rebate was available.

The decision is Kershenbaum v. Buy.com, Inc., CCH Advertising Law Guide ¶64,005.

False Tooth Makers’ Claims Against Monopolist Cleared for Trial, Leading to Settlement

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

Artificial tooth maker Dentsply International, Inc. could have engaged in unlawful monopolization through practices that included tooth swaps with dental product dealers and the offering of loyalty rebates to exclusive dealers, the federal district court in Harrisburg, Pennsylvania, has ruled.

The two dental supply manufacturers asserting the claim, Univac Dental Company and Lactona Corporation, presented sufficient evidence of damages from the tooth swaps and dealer exclusivity policies—which included Dentsply’s maintenance and enforcement of a policy prohibiting the dealers from adding competitors’ artificial teeth to their product lines—to survive summary judgment, the court stated.

At the outset, the court noted that the complaining manufacturers were not entitled to a preclusive finding that Dentsply’s actions injured them based upon an appellate court’s determination—in a government enforcement action, U.S. v. Dentsply Int’l, Inc.—that the tooth maker’s actions harmed all of its competitors, including the corporate predecessor of both Univac and Lactona, Universal Dental Company (2005-1 Trade Cases ¶74,706).

Causation and Damages

Collateral estoppel did not operate to resolve the issues of causation and damages in the case because, in the prior action, the issues—as they related to Univac and Lactona—were not fully litigated. Moreover, the determination of any issues related to them was not essential to that prior judgment. Thus, they were required to prove damages in the present case.

The court rejected Dentsply’s argument that Univac and Lactona would not be able to show that Dentsply’s actions foreclosed a sufficiently significant portion of the market because they were still able to maintain access to dealers through a grandfather exception to the exclusivity policy.

No legal authority required an individual competitor to prove that its own access to the market had been foreclosed in order to make a showing that it was injured or that the challenged practices severely restricted the market’s ambit, the court explained.

Anticompetitive, Injurious Actions

The complaining manufacturers did not fail to meet their burden of showing that Dentsply took action that was both anticompetitive and injurious to them within the statute of limitations period. Although the evidence was not conclusive, it was sufficient to present the issue to a finder of fact, the court said.

A contention that it would be improper to consider evidence of actions directed not only toward Univac and Lactona specifically, but also that infringed competition in the relevant market generally, was without merit.

Evidentiary Matters

In the same opinion, the court also ruled on several evidentiary matters intended to clear the path to trial. It confirmed that a magistrate judge’s refusal to grant preclusive effect to several proposed factual findings was proper. In addition, the court declined to reject several of the magistrate’s recommended findings regarding the effects of Dentsply’s conduct on the basis that they were allegedly inapplicable or misleading. Any potential for one particular finding to mislead the jury could be alleviated by the defendant’s evidence and arguments, in the court’s view.

The fact that several other findings referred to competitors other than Univac and Lactona did not render those findings misleading, inaccurate, or immaterial. A reference to events occurring outside the limitations period applicable to the suit did not warrant another finding’s rejection.

Amount of Damages

In a separate ruling issued on April 27, the court found that expert testimony offered to establish the amount of damages suffered by the complaining manufacturers was sufficiently reliable and fit to the facts to be admitted into evidence. Objections by the defendant to the testimony were more directly related to its probative value than to its admissibility.

he testimony was based upon a proper foundation, the court said, and the expert’s calculation of an estimated amount of damages without regard to causation or any other elements of liability was “perfectly acceptable.”

Settlement

One day after the latter ruling on expert testimony, the parties reportedly reached an agreement to avoid going to trial. On April 29, the presiding judge in the matter, Christopher Conner of the U.S. District Court for the Middle District of Pennsylvania, signed a dismissal order allegedly acknowledging that the matter had been settled.

None of the involved companies has issued a statement divulging the terms of the settlement, but the dismissal order purportedly noted that either side could reinstate the action within 60 days if the settlement does not get consummated.

The March 31 and April 27 rulings in Univac Dental Co. v. Dentsply International, Inc., Civil Action No. 1:07-CV-0493, appears at 2010-1 Trade Cases ¶76,998 and ¶76,999.