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.

Night Clubs Allege Antitrust Claims Against Online Music Marketplace, Competing Club

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

Antitrust claims against “Beatport”—an online marketplace that catered to consumers and producers of “Electronic Dance Music”—and a related “Beta” nightclub were adequately alleged, the federal district court in Denver has ruled. Thus, a motion to dismiss claims brought by a group of commonly-owned night clubs comprising Denver’s South of Colfax Nightlife district (SOCO) was denied. The claims of the owner of the complaining clubs were, however, dismissed because the owner lacked standing to pursue the claims individually.

Two of the SOCO night clubs were nationally recognized in the Electronic Dance Music scene. They emphasized Electronic Dance Music and live performance by DJs. The clubs alleged that the defendants engaged in anticompetitve conduct to coerce DJs to boycott the SOCO venues and only perform at Beta.

The court refused to dismiss the SOCO clubs’ claim that Beatport and Beta coerced DJs into performing only at Beta by threatening to remove artists on a DJ’s label from Beatport if they performed at the SOCO clubs. Because access and promotion on Beatport were critical to both a DJ’s and a label’s success, many DJs and agents were allegedly compelled to agree to the defendants’ demands. The complaining clubs alleged that the defendants had sufficient market power in the market for Electronic Dance Music downloads to adversely effect competition for live performances of "A-list" DJs.

Standing

The complaining clubs asserted that they possessed standing to bring antitrust claims by virtue of their status as competitors who were foreclosed from the market for live performance of A-list DJs. The two SOCO clubs that emphasized Electronic Dance Music and live DJ performance alleged antitrust injuries of lost past and future profits, decreased ability to compete, and decreased value of real property.

Additional evidence and facts would be needed to prove harm to the other SOCO nightclubs as the case proceeded, the court noted. However, there were sufficient facts to support the clubs’ antitrust standing for purposes of a motion to dismiss. The owner of the SOCO clubs failed to support a claim that he suffered an injury separate from the injury sustained by the SOCO clubs based on an injury to his reputation or devaluation of real property of the clubs, the court ruled.

Attempted Monopolization

The clubs adequately alleged an attempted monopolization claim against Beta, which controlled more than half the market for live performance by A-list DJs in the Denver metropolitan area. There was a dangerous probability that Beta could achieve monopoly power in the market for A-list DJ performances.

The complaining clubs pled a specific intent to monopolize by stating that Beta and its owner engaged in predatory and anticompetitive conduct, including illegal tying, exclusive dealing, reciprocal dealing, monopoly leveraging, market allocation, group boycott and the concerted combination of these actions.

Conspiracy

Conspiracy claims were not dismissed, despite the defendants’ assertions that, as related entities, they were incapable of conspiring. Although some common ownership existed between Beta and Beatport, it was not sufficient to warrant dismissal under Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 1984-2 Trade Cases ¶66,065, which held that wholly owned subsidiaries were incapable of conspiring. Further, a defending part-owner of Beta had an “independent personal stake” in restraint of trade of the club’s competitors.

The March 14 opinion is Christou v. Beatport, LLC, 2012-1 Trade Cases ¶77,829.

Airline Passenger Lacked Standing to Bring Antitrust Challenge Against Ticket Restrictions

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

An airline customer’s claim that an airline’s “No Transfer” policy prevented him from buying a less expensive ticket for a flight by foreclosing the emergence of a secondary market of ticket resellers in violation of federal antitrust law was too speculative to support Article III standing, the U.S. Court of Appeals in Washington, D.C. has ruled.

No reasonable juror could find that the customer was overcharged as a result of the challenged policy.

The customer relied on surveys as well as the testimony of a co-founder of a former reseller of airline tickets. However, that analysis could not be used to conclude that the complaining customer would have benefited from a secondary market, the court ruled. The surveys and testimony failed to present an accurate picture of the prices that would have been negotiated in the secondary market.

The court rejected the customer’s argument that injury-in-fact in antitrust cases should be inferred when the defendant’s wrongdoing prevented more precise proof of the fact of injury. That principle applied only to the showing needed to support a damage award, not to the constitutional requirement that the plaintiff show the fact of injury.

Because the customer lacked standing to challenge the policy in federal court, the lower court should not have assumed jurisdiction to dismiss on the merits of the dispute. Even though the merits of a particular claim might have been clear, the court should not have bypassed jurisdictional issues.

Standing was a check that reinforced the constitutional principle that some disputes were beyond the authority of federal courts to resolve, the appellate court explained. The judgment of the district court was vacated, and the case was remanded with directions that the complaint be dismissed for lack of jurisdiction.

The decision is Dominguez v. UAL Corp., 2012-1 Trade Cases ¶77,773.

Former Comcast Subscribers Lacked Standing to Bring California Class Action

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

Putative class representatives lacked standing to bring California Unfair Competition Law (UCL) and Consumer Legal Remedies Act (CLRA) class action claims against Comcast because they lacked the requisite injury in fact, according to the federal district court in Fresno, California.

The representatives were former subscribers to Comcast’s telephone services who alleged the company adopted deceptive policies and practices relating to post-cancellation billing of consumers who seek to port their telephone number to another service provider, provided unclear and inaccurate billing statements, and used arcane and confusing final billing statements. The class representatives received a refund of funds deducted from the representatives’ accounts via direct payments.

Injury in Fact

To have standing under the UCL, the representatives needed to show an injury in fact stemming from an unfair business practice. The CLRA required the representatives to show a tangible increased cost or burden resulting from an alleged unlawful practice. Because the representatives received refunds, there was no evidence of an injury in fact or economic loss. The representatives’ argument that the refund was inadequate was too speculative to plead a concrete injury.

None of the putative class members suffered an injury in fact, according to the court. Although class members need not submit evidence of personal standing, a class must be defined in a way that anyone within it would have standing. There was no evidence that the refund calculation was incorrect or otherwise resulted in an injury.

Common Issues

Even if the class representatives had standing to pursue the UCL and CLRA claims, the class did not meet the requirements of Federal Rule of Civil Procedure 23. Rule 23(a)(2) requires questions of law or fact common to the class. In Wal-Mart v. Dukes, 131 S.Ct. 2541 (2011), the Supreme Court held that class representatives are required to identify how common points of facts and law will drive or resolve the litigation. The representatives failed to properly articulate common issues, according to the court.

The decision is Gonzales v. Comcast Corporation, CCH State Unfair Trade Practices Law ¶32,387.

Further information about the CCH State Unfair Trade Practices Law appears here.

County Not a Proper Plaintiff to Pursue Federal Antitrust Claims in Multi-District Suit

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

A California county lacked standing to pursue a federal antitrust claim seeking injunctive relief against producers of plasma-derivative protein therapies and a trade association that allegedly conspired to restrict out and raise prices, the federal district court in Chicago has ruled.

The federal antitrust claim was dismissed. However, the remaining issues involving state-law claims were held in abeyance, pending a determination on the court’s subject matter jurisdiction and the propriety of keeping the case as part of multi-district litigation, consisting of almost 20 actions brought on behalf of direct and indirect purchasers of plasma-derivative protein therapies.

The county was an indirect purchaser. It operated a medical center through which it administered a county-wide health care system, whose medical center indirectly purchased plasma-derivative protein therapies. The county claimed that it was forced to purchase these therapies either from distributors who had purchased the therapies from manufacturers or from group purchasing organizations (GPOs) that had negotiated contracts with manufacturers on behalf of their members, including the county.

The county alleged a core antitrust injury. It claimed that the defendants conspired to reduce output, thereby forcing the county to pay higher prices. However, it was not a “proper plaintiff” to maintain the antitrust action.

Standing was lacking based on the considerations delineated in the U.S. Supreme Court’s 1983 decision in Associated General Contractors of California, Inc. v. California State Council of Carpenters, 1983-1 Trade Cases ¶65,226, 459 U.S. 519:

(1) The causal connection between the violation and the harm;

(2) The presence of improper motive;

(3) The type of injury and whether it was one Congress sought to redress;

(4) The directness of the injury;

(5) The speculative nature of the damages; and

(6) The risk of duplicate recovery or complex damage apportionment.

Because the county, as an indirect purchaser, sought only injunctive relief, there was no threat of multiple lawsuits or duplicative recoveries. Thus, the standing analysis was limited to the presence of improper motive, the causal connection between the violation and the harm, and the directness of the injury. An improper motive was sufficiently alleged.

In addition, the county alleged a causal connection between the Sherman Act violation and its purported harm based on its alleged payment of higher prices by virtue of the conspiracy to reduce output. However, there were more direct victims of the alleged conspiracy to vindicate the public interest and they were actively pursuing their claims, seeking damages and the same injunctive relief sought by the county.

The court did not consider whether the Associated General Contractors factors applied to each of the various state antitrust claims the county sought to bring, and whether the county failed to state a claim for relief. The questions had to be put off until after the court addressed two issues: whether the court had subject matter jurisdiction, and whether the dismissal of the federal antitrust claim had any effect on whether the particular case should continue as part of the multi-district litigation.

Article III Standing

The court rejected the producers' assertions that the county failed to establish Article III standing to pursue its non-California state-law claims on behalf of indirect purchasers of plasma-derivative therapies. Thus, those claims were not dismissed for lack of Article III standing.

The county’s efforts to certify an indirect purchaser class would proceed later. Although the county did not specifically allege that it suffered a personalized injury due to the defendants’ alleged violations of other states’ laws, the county provided sufficient general allegations of its own individualized injury for its non-California state-law claims. It alleged that it was forced to purchase plasma-derivative protein therapies on the spot market, which required the county to purchase the therapies “from anyone in the nation that had a sufficient supply.”

While the complaint was silent about how and where the alleged spot market transactions took place, the allegation of spot market purchases was sufficient. Ultimately, however, the county would be required to support its standing with more than mere “unadorned speculation” at the summary judgment stage, the court noted.

The January 9, 2012, decision, In Re: Plasma-Derivative Protein Therapies Antitrust Litigation, appears at 2012-1 Trade Cases ¶77,751.

User Failed to Allege Injury from LinkedIn’s Disclosure of Information, Browsing Histories

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

An individual lacked standing to pursue privacy-related claims against online social networking website operator LinkedIn for disclosing his personal information, including personally identifiable browsing histories, to third-party advertising and marketing companies through the use of cookies and web beacons, the federal district court in San Jose has decided.

The individual asserted that LinkedIn’s conduct violated the federal Stored Communications Act and California’s Constitution, Unfair Competition Law, False Advertising Law, Consumer Legal Remedies Act, and common law.

Tracking of Browsing Habits

LinkedIn allegedly assigned each registered user a unique user identification number. Then, LinkedIn’s website linked and transmitted the user ID number to third-party tracking cookies, allowing third parties to track users’ online activity and to aggregate data on their browsing habits. The individual asserted that LinkedIn added social information, such as the name of each user and the other LinkedIn profiles they viewed and interacted with; which enabled the third parties to determine the personal identity of the user.

Emotional Harm

The individual failed to allege that he sustained an injury that would confer Article III standing to sue. He alleged that he suffered embarrassment and humiliation, but it was unclear from the face of the complaint what information was disclosed that would cause the individual emotional harm, the court said. He did not allege that his browsing history was actually linked to his identity by LinkedIn and transmitted to any third parties. The allegation that his sensitive information might be transmitted in the future was too theoretical for purposes of establishing standing.

Economic Harm

The individual asserted that he was economically harmed by LinkedIn’s practices because his browsing history was personal property with market value, and LinkedIn took that property from him without compensating him. This purported injury was too abstract and hypothetical to support Article III standing, in the court’s view.

The individual relied on allegations that the data collection industry generally considered consumer information valuable and that he was not compensated for use of his information, but he did not describe how he was foreclosed from capitalizing on the value of his personal data or how he was deprived of the data’s economic value simply because his unspecified personal information was collected by third parties.

He did not allege that his credit card number, address, or Social Security number were stolen and published or that he was a likely target of identity theft as a result of LinkedIn’s practices, the court noted. Nor did he allege that his personal information was exposed to the public. The complaint was dismissed with leave to amend.

The decision is Low v. LinkedIn Corp., CCH Privacy Law in Marketing ¶60,695.

Users Lacked Standing to Assert Privacy Claims Against Apple, Mobile App Developers

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

Users of mobile applications on Apple’s devices could not maintain an action against Apple and mobile app developers for alleged violations of various federal and state privacy laws, because the users failed to allege that they had suffered any injury, the federal district court in San Jose has decided.

Without sufficient allegations of any injury in fact, a federal district court concluded that the users did not have constitutional standing.

Users may download apps for Apple devices only through Apple’s "App Store" application and website. According to the complaint, Apple represented to users that it took precautions to safeguard their personal information against "theft, loss, and misuse, as well as against unauthorized access, disclosure, alteration, and destruction."

Apps Access User Information

However, the devices’ operating system allows apps—without consent of the users—to access, use and track the following information: address book, cell phone numbers, file system, geolocation, International Mobile Subscriber Identity, keyboard cache, photographs, SIM card serial number, and unique device identifier. Developers of apps are able to exploit this access to collect and track personal data without the user’s permission or knowledge.

The users brought suit against Apple and eight mobile app developers for violations of various federal and state laws, including the Computer Fraud and Abuse Act and California’s Computer Crime Law. Apple and the developers argued that the users lacked standing to bring suit, because they did not allege any injury in fact. Apple also argued that its privacy agreements with users barred the users’ claims.

Injury in Fact

To satisfy the constitutional standing requirements of Article III, plaintiffs must show that:

(1) They have suffered an injury in fact that is concrete and particularized and actual or imminent;

(2) The injury is fairly traceable to the challenged action of the defendant; and

(3) It is likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision.

In their complaint, the users alleged three injuries:

(1) Misappropriation or misuse of personal information;

(2) Diminution in value of the personal information, which is an "asset of economic value" due to its scarcity; and

(3) "Lost opportunity costs" in having installed the apps and diminution in value of the Apple devices because their insufficient security made them less valuable in light of the privacy concerns.

The court determined, however, that the users failed to allege any injury to themselves. The users did not identify which devices they used, if any of the developers accessed or tracked their personal information, and what harm, if any, resulted from such activity. As a result, the users failed to identify any concrete harm from Apple’s or the developers’ activities.

Injury Traceable to Defendants

In addition, the users failed to allege any injury that was fairly traceable to Apple or the developers. The users’ only allegation as to Apple was that Apple designed a platform that could potentially be used by the developers for harmful acts. Such conjectural or speculative allegations about the risk of harm are not sufficient for standing, the court concluded.

Lastly, Apple argued that "click-through" agreements with the users governed any potential liability for third-party apps on the users’ devices, and the express terms and conditions of the agreements barred claims against Apple for any alleged injuries.

The users argued that the agreements were unconscionable, providing no meaningful choice for users. While the court declined to determine whether the agreements were an absolute bar to the users’ claims, it noted that there is always a meaningful choice when a challenged term in a contract involves nonessential recreational activities—forgoing the activity.

The decision is In re iPhone Application Litigation, CCH Guide to Computer Law ¶50,268.

City, County Could Bring Consumer Protection Act Claim for Discriminatory Lending Practices

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

The City of Memphis and Shelby County, Tennessee have standing to assert Tennessee Consumer Protection Act (CPA) claims against Wells Fargo Bank for allegedly discriminatory lending practices that took place in those jurisdictions, according to the federal district court in Memphis.

Between 2000 and 2009, Wells Fargo allegedly steered mostly African-American borrowers into loans they could not afford, resulting in a disproportionately high number of foreclosures in predominantly African-American neighborhoods in Memphis and Shelby County.

Standing to Sue

Wells Fargo argued that the City and County lacked standing to assert the CPA claims because they did not suffer an injury-in-fact as a result of the allegedly unlawful business practices. In order to have standing to assert the CPA claims, a plaintiff must show an injury fairly traceable to the illegal practices.

CPA claims are liberally construed, and Tennessee courts have held that the CPA applies to mortgage transactions, according to the court.

Governmental agencies may bring claims under the CPA, the court held. The CPA does not require the plaintiff to suffer the unfair act; it requires only that the plaintiff suffer damages as a result of the unfair act.
The alleged injury, lost property values and tax revenue, were fairly traceable to the allegedly discriminatory lending practices of Wells Fargo. Thus, the court found that the municipalities had standing to assert the claims.

The decision is City of Memphis v. Wells Fargo Bank, N.A., CCH State Unfair Trade Practices Law ¶32,271.

Further details regarding CCH State Unfair Trade Practices Law appear here.

Appraisers Have Standing to Sue Software Developer for False Advertising

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

Real estate appraisers had standing to sue the software developer FNC, Inc. under the Lanham Act for falsely advertising that appraisal-report data submitted for FNC's AppraisalPort was accessible only by client lending institutions, when FNC allegedly used the data to build its National Collateral Database, which lending institutions consulted instead of commissioning new appraisals, the U.S. Court of Appeals in New Orleans has ruled.

The case fell just within the outer limits of the zone of interests protected by the Lanham Act, the court held, applying a five-factor test for determining prudential standing.

Nature of Injury

The nature of the injury weighed in favor of standing because the alleged false advertising about AppraisalPort injured the appraisers' interest in generating new business as competitors of the National Collateral Database. Deterioration of competitive position was precisely the kind of injury the Lanham Act was intended to redress, the court said.

Directness of Injury

The relatively indirect relationship between the alleged misconduct and injuries weighed against prudential standing. The appraisers were injured by the allegedly false advertising about AppraisalPort because FNC allegedly made the decision to misappropriate the data it received from the appraisers, the court noted.

Proximity to Injurious Conduct

The proximity of the appraisers to the allegedly injurious conduct weighed in favor of standing. No identifiable class of persons could be more immediate to the misappropriation of work product than the persons to whom the work product rightfully belonged, according to the court.

Speculativeness of Damages

That the damages claim was not speculative weighed in favor of standing, the court determined. The appraisers alleged that they suffered damages in the form of lost business and profits as a result of lenders' use of the National Collateral Database and that FNC earned substantial profits on the database that it would not have been able to earn in the absence of the misrepresentations it made in its advertisements for AppraisalPort.

Risk of Duplicative Damages

Finally, there was little risk that allowing the suit to proceed would subject FNC to a risk of duplicative damages or require a complex process of damages apportionment, according to the court. To the extent there was a risk that difficulties might arise with allocating damages between the members of the alleged class of appraisers, those difficulties were to be addressed in deciding the request for class certification.

Because FNC’s allegedly false advertisements were not, of their own force, injurious to the plaintiffs’ commercial interests, the plaintiffs’ injury was less direct than was typical under Sec. 43(a), the court observed. Critically, however, there was no participant in the market who was more directly injured by FNC’s anti-competitive conduct.

Each additional step in the asserted chain of causation involved a wrongful act by FNC, the court found. FNC’s alleged decision to couple its false advertisements with other forms of anti-competitive conduct did not make the false advertising any less unfair as a method of competition, the court concluded.

The February 24 opinion in Harold H. Huggins Realty, Inc. v. Torres will be reported at CCH Advertising Law Guide ¶64,185.

Name-Brand Retailer Can Pursue False Ad Suit Against Wholesaler of Counterfeit Jeans

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

Famous Horse, operator of the name-brand clothing retailer V.I.M., had standing to assert a Lanham Act claim that wholesalers of counterfeit Rocawear jeans falsely advertised that V.I.M. was a satisfied customer, the U.S. Court of Appeals in New York has ruled.

Standing to Sue

The federal Circuits have split on the issue of standing under Sec. 43(a) of the Lanham Act, the court observed. The Seventh, Ninth, and Tenth Circuits have applied a strong categorical requirement that a commercial plaintiff bringing an unfair competition claim must be in competition with the alleged false advertiser. The Third, Fifth, and Eleventh Circuits applied a more flexible standard.

Famous Horse had standing whether the more flexible reasonable interest test or the stronger categorical requirement was applied. Famous Horse, which sold genuine Rocawear jeans, was clearly in competition with the wholesalers, who sold counterfeit Rocawear jeans, the court found.

The V.I.M. chain of stores, according to Famous Horse, was known for selling genuine name-brand clothing at very low prices. Famous Horse alleged that it was uniquely affected by the wholesalers’ sale of counterfeit Rocawear jeans in two ways: first, its reputation as a discount store was harmed because consumers believed that it sold Rocawear jeans at inflated prices compared to counterfeit jeans supplied by the wholesalers; and second, consumers who learned of counterfeit Rocawear jeans on the market would believe that V.I.M. similarly peddled counterfeit clothes.

Reasonable Interest to Protect

The court held that Famous Horse alleged a reasonable interest to be protected against the wholesalers’ alleged false advertising as well as a reasonable basis for believing that this interest would be damaged by the alleged false advertising.

Proof of actual losses would be difficult, in the court’s view, given that V.I.M. stores operated in a large market that included luxury retailers selling name brands at full price, discounters of various stripes, and numerous counterfeiters selling fake versions of name brands. Famous Horse alleged sufficiently plausible claims, however, to overcome a motion to dismiss.

The opinion in Famous Horse, Inc. v. 5th Avenue Photo Inc. will be reported at CCH Advertising Law Guide ¶64,046.

Hospitals’ Steering of Patients to Equipment Providers Did Not Violate Antitrust Law

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

An Alabama hospital and a corporation that operated several hospitals in the same area, along with their affiliated joint ventures that provided durable medical equipment (DME), did not violate the Sherman Act or Alabama antitrust law by allegedly using their control of hospital services to coerce patients into buying or renting DME (including beds, wheelchairs, and oxygen tanks) from those affiliates.

A motion to dismiss the claims of competing DME providers, who were allegedly excluded as a result of the hospital defendants' steering of patients to their affiliates, was granted.

Standing

As an initial matter, the court decided that the competing DME providers had standing to assert the claims. The plaintiffs' allegations in the case—that the hospitals were channeling patient choice to their captive DME providers—were sufficient to show the necessary injury to competition.

The failure of the plaintiffs to allege an actual increase in prices or an actual deterioration in the quality of DME did not defeat the claim of an antitrust injury. If the allegations were proven true, competition would have been injured because the competing DME vendors no longer had access to the patients who needed DME.

The plaintiffs' damages in the case were not premised on their ability to profit while patients “paid an artificially inflated price.” Though the complaining DME providers' injuries were indirect and speculative, their potential damages were duplicative, and the patients were more direct victims, the DME providers were efficient enforcers of the antitrust law. They were much better positioned than consumers to detect an antitrust violation earlier and did not suffer from the same collective-action problems that individual consumers with relatively small injuries did.

Reciprocal Dealing

The complaining DME competitors failed to offer sufficient factual allegations in support of a coercive reciprocity claim, the court found. While reciprocal dealing arrangements could constitute an illegal restraint of trade when coercive, reciprocal dealing was not by itself illegal.

The plaintiffs made no allegation that the hospital staff's continued employment, pay, benefits, or access to the hospital were in any way conditioned on the staff referring patients to their hospital's DME providers. Nothing in the complaint suggested that the hospitals and their staff otherwise had a buyer-seller or other comparable commercial relationship, the court noted.

Refusal to Deal

The defendants did not engage in an unlawful refusal to deal by failing to provide the competing DME providers access to discharged patients, the court added. While the complaining DME competitors sufficiently alleged agreement between the hospitals and their captive DME providers to state a claim that they were acting in concert, the concerted actions in which they engaged did not state an antitrust claim for which relief could be granted.

The hospitals' unilateral termination of their prior voluntary course of dealing, which had been demonstrated by a DME rotational assignment system, did not suggest a willingness to forsake short-term profits. The hospitals terminated the course of dealing after entering into joint ventures with their respective DME providers, and there was nothing in the plaintiffs' complaint, outside of conclusory allegations, plausibly suggesting that the decision to cease the rotational system and exclude competing DME providers from access to the hospitals was for any purpose other than increasing both the short-term and long-term profits of their DME providers, the court said.

Monopolistic Conduct

The defendants did not engage in monopolization, attempted monopolization, or conspiracy to monopolize the market for the distribution of DME through their Montgomery and Prattville hospitals, the court also ruled. The complaining DME providers failed to allege either that a single entity (a single hospital) or multiple entities acting in concert (the two hospital distributors of DME) engaged in monopolizing activity.

The only allegation of parallel conduct arose from the fact that the hospitals entered into joint ventures with their respective DME providers during the same broadly-defined time period.

In the absence of any allegations of concerned activity between the hospitals' two DME providers, the only theory that could possibly support the claims was one based on shared monopoly, which was not recognized as a viable cause of action, the court explained.

The decision—Precision CPAP, Inc. v. Jackson Hospital—appears at 2010-1 Trade Cases ¶76,939.

Government Contractor May Have RICO Liability for Human Trafficking

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

RICO claims predicated on forced labor and human trafficking could proceed against defense contractor Kellogg, Brown, and Root (KBR), the federal district court in Houston has ruled. The claims were filed by a Nepali man who allegedly was forced to work in Iraq and the family members of twelve Nepali men who were executed in Iraq by a group of terrorists.

Forced Transport, Labor

According to the plaintiffs, a Nepal-based company had recruited workers from Nepal and Sri Lanka to work in a luxury hotel in Amman, Jordan, and in other areas where their lives would not be in danger. When the workers arrived in Jordan, however, their passports were confiscated and another defendant—a Jordanian subcontractor—transported them to Iraq, against their will, to work under the supervision of KBR.

The subcontractor used an unprotected automobile caravan to transport the workers to an air base near Ramadi. The caravan was traveling on the “highly dangerous” Amman-to-Baghdad highway when terrorists stopped the lead cars and took twelve of the workers hostage. The terrorists videotaped hostage statements, sent a copy of the videotape to the Foreign Ministry of Nepal, and then executed the hostages.

The plaintiff, who survived the trip, worked at the air base as a warehouse laborer under the supervision of KBR. After hearing about the deaths of the twelve, the survivor “expressed his desire to return to Nepal,” but KBR told him that he could not leave until he had fulfilled his employment contract. The gravamen of the plaintiffs' complaint was that the defendants had formed a RICO enterprise to procure cheap foreign labor, and thus increase profits, through human trafficking and forced labor.

Jurisdiction

The court found that subject matter jurisdiction existed because the Military Extraterritoriality Jurisdiction Act had extended extraterritorial indictability to parties employed by the U.S. armed forces (including KBR). Nevertheless, the court applied the “conduct test” and the “effects test” to avoid resting jurisdiction on a “relatively murky” area of the law. Although the conduct test was not met, the effects test was.

The effects test asked whether conduct outside of the United States had a substantial adverse effect on U.S. investors or securities markets, the court noted. The plaintiffs alleged that KBR’s acquisition of “cheap labor” through human trafficking had benefited the defendants, disadvantaged their competitors, and adversely affected the U.S. labor market. They also alleged that U.S. taxpayers had funded KBR’s contracts and the racketeering enterprise had passed money through the U.S. banking system.

Because these allegations sufficiently identified “substantial” domestic effects, the court’s adjudication of the plaintiffs’ RICO claims was proper.

Standing

The plaintiffs' alleged injuries—lost wages, out-of-pocket fees, and the loss of alternative employment—were sufficient to establish RICO standing, in the court's view. Although the Fifth Circuit had not addressed the question of whether the family member of a deceased individual had standing to assert RICO claims, the Fourth Circuit’s determination that RICO claims survived the death of an injured party was persuasive.

Enterprise

The absence of a decision-making structure did not prevent the formation of an association-in-fact enterprise composed of KBR and the Jordanian subcontractor, the court determined. The plaintiffs sufficiently alleged that the defendants had worked cooperatively to accomplish an illegal purpose: the acquisition of cheap labor through trafficking and forced labor.

Pattern of Racketeering

Assertions that KBR “regularly” employed workers that were transported into Iraq against their will were sufficient to allege a threat of continued criminal activity. According to the plaintiffs, 92 laborers were brought into Iraq—against their will in 2003 and 2004—to work under the supervision of KBR.

These facts were sufficient to allege that the acquisition of cheap workers, against their will, was part of KBR’s modus operandi. The continuity element of a pattern of racketeering was therefore met, the court concluded.

Predicate Acts

The predicate acts of forced labor and human trafficking were sufficiently pled, according to the court. The fact that the complaint did not explicitly allege physical force was inconsequential because “conduct other than the use, or threatened use, of law or physical force may, under some circumstances, have the same effect as the more traditional forma of coercion—or may even be more coercive”

In this case, the plaintiffs’ complaint made the acts of forced labor and human trafficking plausible, which was all that was necessary to allege RICO predicate acts.

The decision is Adhikari v. Daoud & Partners, CCH RICO Business Disputes Guide ¶11,824

Self-Insured Employer May Sue Medical Device Maker for False Ads, Deception

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

A self-insured employer (Kinetic Co.) had standing to sue a medical device manufacturer (Medtronic, Inc.) under Minnesota false advertising, deceptive practices, and consumer fraud laws, the federal district court in Minneapolis has ruled.

Kinetic filed a class action, seeking to represent third-party payors for medical services, alleging that Medtronic continued to sell implantable cardiac defibrillators after it knew of the risk of potentially catastrophic battery failure. After recalling the product, Medtronic allegedly agreed to provide a free replacement device for a Kinetic employee but declined to reimburse Kinetic for the second implantation surgery.

Employer-Provided Health Care

This nation has adopted a health care regime under which employers provide, either from their own funds, or through insurance, for their employees’ medical needs, the court observed.

The fact that Medtronic never sold its defibrillators to Kinetic or other third-party payors did not defeat standing. Medtronic was wrong to assert that the third-party payors—which ultimately reimbursed the physicians or hospitals which held the device in inventory—were barred from any recovery. Medtronic was not protected by marketing its products through intermediaries, according to the court.

Particularity in Pleading, Public Benefit

Kinetic met the requirement of pleading fraud with particularity, under Rule 9(b) of the Federal Rules of Civil Procedure and satisfied the requirement under Minnesota law that private suits for false advertising and consumer fraud must benefit the public.

The class action complaint alleged that 87,000 defibrillators were implanted after Medtronic knew of potentially lethal defects before it decided to inform consumers. The alleged misrepresentations and failures to disclose were made to the public at large and lulled third-party payors and medical providers into underestimating the true risks of using its products.

When setting their insurance rates and premiums, third-party payors attempt to predict upcoming costs, the court said. But they could not predict or easily account for acts of intentional concealment and fraud, as alleged here.

Medtronic’s decision to deny third-party payors recompense was an effort to pass off the cost and expense it caused to innocent employers or insurers who, as a result, either charged the public more to cover the cost of health care, or absorb the cost themselves, according to the court. Kinetic’s effort to place this cost where it allegedly ought to be borne might well provide a public benefit.

Kinetic Co. failed to state claims under consumer fraud laws of states other than Minnesota. The court granted leave to replead with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure.

The December 4 opinion in Kinetic Co. v. Medtronic, Inc. will be reported at CCH Advertising Law Guide ¶63,682.

Members of Homeowner's Group Could Not Sue Group's Board for RICO Violations

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


In a case of first impression, members of a homeowner association lacked standing to sue the president of the association’s board, the members and managers of a limited liability company (LLC) that controlled the board, the LLC itself, and an associated construction company for violations of the fedearl RICO law, the federal district court in New Orleans has ruled. The defendants allegedly engaged in a racketeering scheme that diverted homeowner assessments for their own use.

A shareholder derivative suit analysis was used to determine whether the members of the homeowner’s association had standing to sue, even though the members paid regular dues and assessments rather than an initial share price, and thus were not classic shareholder-mode claimants. Under the derivative suit analysis, courts asked: (1) whether the racketeering activity was directed against the corporation; (2) whether the alleged injury to shareholders merely derived from, and thus was not distinct from, the injury to the corporation; and (3) whether state law provided that the sole cause of action accrued in the corporation.

In this case, the alleged misconduct was directed at the homeowner association’s funds, not at the homeowners themselves, the court explained. In addition, the homeowners’ injuries were derivative of the association’s injuries and were not distinct from them. Finally, Louisiana law did not provide standing for members of a homeowner's association to sue the association for breaches of fiduciary duty by the association’s officers.

The case, Joffrion v. Tufaro, USDC ED La., appears at CCH RICO Business Disputes Guide ¶11,743.

Antitrust, False Advertising Claims Against Credit Bureaus Dismissed

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

Antitrust and false advertising claims brought by Fair Isaac Corporation against the major U.S. credit bureaus—in connection with their joint development of a new credit score competing with Fair Isaac’s—were dismissed by the federal district court in Minneapolis on July 24.

In 2006, Fair Isaac—the developer of the dominant credit score (FICO)—initiated its action against the credit bureaus—Trans Union, Experian, and Equifax—for violating the antitrust laws and engaging in false advertising while jointly developing the “VantageScore” credit score, with the goal of eliminating FICO scores.

Fair Isaac's claims against Equifax were later dismissed with prejudice consistent with a confidential settlement negotiated between the companies.

Antitrust Injury, Standing

According to the court, Fair Isaac lacked standing to seek damages or pursue injunctive relief under the antitrust laws. In order to have standing to seek damages, Fair Isaac had to establish that it suffered antitrust injury—an injury of the type the antitrust laws were intended to prevent and that flowed from that which made the defendants' acts unlawful.

The credit bureaus successfully argued that Fair Isaac did not have standing to recover damages for lost profits because the alleged lost profits would have resulted from an increase in competition rather than a reduced ability to compete. Fair Isaac would not be harmed if the credit bureaus agreed to artificially set the price of VantageScore higher than the price dictated by market forces, because consumers would reject VantageScore in favor of FICO scores, the court explained.

Elimination of Competitor

Even if the alleged goal of the conspiracy was to "eliminate" Fair Isaac from the credit scoring industry, this did not automatically establish injury of the type the antitrust laws were designed to prevent, according to the court. Fair Isaac maintained a dominant presence in the credit scoring market. The alleged goal of eliminating Fair Isaac would be accomplished, if at all, by persuading consumers that VantageScore credit scores were as good as or better than FICO scores and employing temporary price discounts to entice consumers to switch to VantageScore.

A strategy of persuading the market that one product was equal or superior to another product and that the price of the first product presented a higher value proposition than the second was the very nature of competition. The performance of the products as they competed in the market would determine which product prevailed.

Essence of Competition

Moreover, an alleged price fixing conspiracy would have depended on convincing the market (particularly, certain key lenders) that greater value can be realized by switching from FICO scores to VantageScore credit scores. This was the very essence of competition, in the court's view. Even considering the defendants' alleged "bad acts"—such as the use of “disinformation" and false statements, and the ability to manipulate the price of FICO scores relative to VantageScore credit scores by controlling the aggregated credit data and the sale of credit scores—the complaining company failed to establish antitrust standing, according to the court.

Injunctive Relief

Fair Isaac also lacked antitrust standing to seek injunctive relief, the court held, because the company did not face a sufficiently impending or imminent threat to satisfy the standing requirement under Sec. 16 of the Clayton Act.

Evidence suggesting that Fair Isaac lost some small amount of business to VantageScore was not sufficient. Moreover, while a private party might not be required to wait until it was eliminated as a result of alleged antitrust violations to pursue injunctive relief, Fair Isaac still had to satisfy the legal requirement of immediacy for antitrust standing to seek injunctive relief. Despite Fair Isaac's contention that the defendants had simply halted their plans temporarily during the pendency of the lawsuit, with the intention of resuming their efforts when the lawsuit was over, Fair Isaac could presumably take action at that time to protect itself.

Lastly, Fair Isaac had contended that the success of the conspiracy depended on the participation of all three bureaus, and the complaining company had entered into a "preferred partnership" with one of the three bureaus in connection with a settlement agreement of the claims in the dispute, the court noted.

False Advertising

The court rejected Fair Isaac's false advertising claims brought under Sec. 43(a) of the Lanham Act. Statements concerning the extent to which lenders actually used the defending credit bureaus' in-house credit scores and Vantage-Score credit scores in making lending decisions were not literally false or literally false by necessary implication, according to the court.

Fair Isaac contended that, at the time the statements were made, few if any lenders used the in-house scores or VantageScore. However, the credit bureaus successfully argued that the challenged statements failed to convey the implied message that an appreciable number of lenders used the in-house scores or VantageScore in making lending decisions. Moreover, because the statements were susceptible to more than one reasonable interpretation, they could not be literally false.

In addition, representations that VantageScore was better than other credit scores (or even the best in the industry) because it used better technologies and methodologies amounted to mere puffery.

The credit bureaus allegedly represented that VantageScore "allow[ed] credit grantors to evaluate consumer creditworthiness with significantly greater precision," was "more predictive than what's in the market," was "the most accurate scoring algorithm attainable," and was based on the "most up-to-date information available." These claims were merely vague, subjective representations of product superiority, in the court's view.

The decision is Fair Isaac Corp. v. Experian Information Solutions Inc., 2009-2 Trade Cases ¶76,691.