Consumers’ State Antitrust Law Claims Against Korean Air Carriers Preempted

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

Putative class action claims brought by consumers against Korean Airlines and Asiana Airlines for conspiring to fix prices in violation of the California Business and Professions Code and unfair competition laws, as well as similar laws of 19 other states and the District of Columbia, were preempted by the Airline Deregulation Act of 1978, the U.S. Court of Appeals in San Francisco has ruled. Thus, dismissal of the state law claims was upheld.

However, the appellate court vacated the lower court’s decision to deny the consumers leave to amend their complaint to assert federal antitrust claims.

Airline Deregulation Act Preemption Provision

Under the Airline Deregulation Act’s express preemption provision, a “[s]tate . . . may not enact or enforce a law, regulation, or other provision having the force and effect of law related to a price, route, or service of an air carrier that may provide air transportation under this subpart.”

The indirect purchaser plaintiffs unsuccessfully argued that the provision did not apply to foreign air carriers. They pointed to the provision’s use of the term “air carrier” as opposed to “foreign air carrier.” They contended that Congress intended the terms “air carrier” and “foreign air carrier” to refer to different entities and that it consistently employed those terms for distinct uses.

The appellate court held that Congress intended that the preemption provision apply to all air carriers and not only to domestic ones. Congress’s use of the term “air carrier” throughout the Act did not always correspond with that term’s statutory definition and that “air carrier” is sometimes used to refer generally to both domestic and foreign airlines, the court explained.

The legislative history behind the ADA also demonstrated that Congress intended to preserve its authority to regulate the airline industry by prohibiting states from regulating all air carriers, both domestic and foreign. Moreover, because the indirect purchaser plaintiffs alleged a price fixing conspiracy, their claims were plainly related to a price of an air carrier and consequently were preempted.

Sherman Act Claims

The complaining consumers in this appeal were not direct purchasers from the defending airlines. They bought their airline tickets from travel agents and consolidators. Separate claims were brought on behalf of the plaintiffs who purchased directly from Korean Air and Asiana.

Although the indirect purchasers sought to assert both federal and state antitrust law claims, the district court decided that the indirect purchaser plaintiffs could only represent those claims arising under state law. The court assigned responsibility for litigating federal antitrust claims to the direct purchaser plaintiffs in the multi-district litigation (MDL).

The appellate court concluded that the district court erred in denying the indirect purchaser plaintiffs leave to amend based on its determination that other counsel would pursue the federal antitrust claims. The lower court applied an incorrect legal standard in denying the indirect purchaser plaintiffs’ motion to amend their complaint.

“Although a district court overseeing MDL proceedings has the authority to decide which law firm should serve as lead counsel for the purposes of pretrial proceedings, MDL proceedings do not expand the grounds for disposing of individual cases,” according to the appellate court.

Details of April 18, 2011, decision in In re: Korean Air Lines Co., Ltd. Antitrust Litigation, No. 08-56385, will appear in CCH Trade Regulation Reporter.

UFOC Disclaimers Did Not Preclude Franchisee Reliance on Nondisclosure

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

The general language of the exculpatory clauses in a coffee shop franchisor’s Uniform Franchise Offering Circular (UFOC) did not preclude several prospective franchisees from reasonably relying on the franchisor’s nondisclosure of the financial losses of its parent company, a Colorado appellate court has decided.

A Colorado trial court’s judgment—dismissing the franchisees’ claim of fraudulent nondisclosure of the historic losses of the franchisor’s parent—was vacated.

Financial Losses of Parent Company

The losses were unlike the financial performance of the franchisor’s company stores, which the franchisor’s UFOC explained was not predictive of franchise results at a different location and under a different management, according to the appellate court. Rather, ongoing parent company losses could foreshadow its insolvency, which could destroy the value of the franchise, regardless of its location or management.

No clause in the UFOC either referred to information about the parent company’s financial condition or negated reasonable inferences that could be drawn from assumptions about this information.

The trial court made no finding that the franchisees had been discouraged from relying on inferences concerning parent company financial information. The only finding was that franchisees had been told that financial information about the parent would not be provided.

Neither of the disclaimers cited by the trial court disclaimed reliance on undisclosed information. Thus, the trial court’s paraphrasing of the disclaimers as “[franchisees] acknowledged that they were not relying on any other information at the time they entered into their Franchise Agreements” was overbroad, the appellate court held.

FTC Franchise Rule

The Federal Trade Commission franchise rule did not preempt Colorado common law, which allegedly required the franchisor to disclose that the parent company had been, or was, unprofitable. The appellate court rejected the franchisor’s contention that, because the parent company was not a guarantor, the franchise rule prohibited the disclosure of financial information about the parent.

The plain language of Section 436.1(a)(20) of the 1979 franchise rule would not preclude a general comment, such as “The franchisor is the wholly owned subsidiary of _________, which has not shown a profit during its _____ years of operation,” according to the court. The section did not preempt common law alleged to require disclosure of the parent financial information.

The franchise rule sought to protect franchisees from unfair or deceptive practices and, as mentioned in the FTC commentary for the 2007 rule, disclosures did not “create a safe harbor for franchisors engaging in otherwise unlawful conduct.”

Preemption of State Law

The FTC addresses preemption in Section 436.10(b), explaining:

“The FTC does not intend to preempt the franchise practices laws of any state or local government, except to the extent of any inconsistency with part 436. A law is not inconsistent with part 436 if it affords prospective franchisees equal or greater protection, such as registration of disclosure documents or more extensive disclosures.”

Because of the reference to “franchise practices laws,” there could be no preemption of common law claims, the court held. In any event, the reference to “inconsistency” limited the court’s inquiry to direct conflict, not express or field preemption.

There was no inconsistency between the prohibition against disclosing a parent’s financial statements absent a guarantee and merely informing prospective franchisees that the franchisor’s parent has been, or is, unprofitable.

The decision—Colorado Coffee Bean LLC v. Peaberry Coffee Inc.—will appear at CCH Business Franchise Guide ¶14,325.

Cruise Passengers' State Unfair Trade Practices Act Claims Preempted by Admiralty Law

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

Art purchasers could not maintain Washington Consumer Protection Act, Connecticut Unfair Trade Practices Act, and Florida Deceptive and Unfair Trade Practices Act claims against a seller of art at auctions on cruise ships that were governed by admiralty law, according to the federal district court in Seattle.

The purchasers contended that the art dealer made misrepresentations regarding the value and authenticity of works being sold at auctions conducted on cruise ships in international waters. However, claims brought under state unfair trade practices laws were preempted by admiralty law.

The purchaser argued that admiralty jurisdiction was inapplicable because the conduct at issue occurred on both land and sea. However, the location and connection tests for admiralty jurisdiction were satisfied.

Location Test

The location test was satisfied because the tort giving rise to the claims occurred on navigable waters, the court held. The purchasers claimed that the dealer made misrepresentations about the works being sold at auction and that they relied on these misrepresentations to their detriment. The auctions were held, the misrepresentations were allegedly made, and the purchasers contracted to pay for the artworks on cruise ships in international waters. I was immaterial whether the misrepresentations were repeated on land and where the artwork was delivered.

Connection Test

Applying the connection test, the court held (1) that the activity alleged by the purchasers had a substantial relationship to traditional maritime activities and (2) that the tort at issue had a potentially disruptive impact on maritime commerce. The fact that auctions are commonly part of the “cruise ship experience” satisfied the first part of the test. The conduct alleged had a potentially disruptive impact on maritime commerce since public knowledge of fraudulent conduct on cruise ships could harm the industry.

Because the damages provisions o0f the Washington, Connecticut, and Florida unfair trade practices laws provide for the recovery of attorneys fees and trebled damages, they conflicted with established admiralty law and were therefore preempted.

Conduct Occurring Wholly Outside State

The purchasers could not state a Florida Deceptive and Unfair Trade Practices Act (DUTPA) claim because the statute was preempted by the Commerce Clause, the court ruled. The dealer argued that the DUTPA was preempted by the Commerce Clause because the conduct occurred in international waters. The Commerce Clause precludes the application of a state statute to commerce that takes place wholly outside of a state’s borders, whether or not the commerce has effects within the state.

Applying the DUTPA to conduct that occurred in international waters would result in the regulation of commerce wholly outside Florida’s boundaries and would impose inconsistent regulatory schemes on trading partners.

The decision is In re: Park West Galleries, Inc. Litigation, CCH State Unfair Trade Practices Law ¶31,976.