Credit, Debit Card Issuers May Maintain Claims Against Retailer for Data Security Breach

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

Credit and debit card issuers may pursue negligent misrepresentation and state unfair trade practices claims against retailer TJX Companies, Inc. in connection with its well-publicized data security breach affecting millions of customer accounts, the federal district court in Boston has ruled. The court, however, dismissed the card issuers’ breach of contract and negligence claims against TJX.

In 2005, criminals hacked into TJX’s wireless network and downloaded personal and financial information for more than 45 million TJX customer accounts. The stolen information was then used to make fraudulent purchases. The card issuers sought to recover their costs associated with the fraudulent transactions, including replacement of the compromised cards.

Breach of Contract

The court first addressed the card issuers’ breach of contract claims, which were based on their alleged status as intended third-party beneficiaries of the merchant agreement between the retailer and its processing bank. According to the card issuers, TJX breached the merchant agreement by not safeguarding the customer data as mandated by the Visa and MasterCard Operating Regulations, which were incorporated into the merchant agreement.

However, neither the merchant agreement nor the Operating Regulations conferred third-party beneficiary rights on issuing banks, the court held. The merchant agreement expressly disclaimed the existence of any third-party beneficiaries. Likewise, the Visa Operating Regulations expressly stated that they did “not constitute a third-party beneficiary contract” and did not “confer any rights, privileges, or claims of any kind as to any third parties.”

Negligence

The court dismissed the card issuers’ negligence claims because they suffered purely economic losses, which are unrecoverable, absent personal injury or property damage, in tort and strict liability actions under Massachusetts law.

Negligent Misrepresentation

The card issuers’ negligent misrepresentation claim was based on implied representations that the retailer and its processing bank allegedly had made to the issuing banks, indicating that they took adequate security measures in accordance with industry standards to safeguard personal and financial information. The court declined to dismiss the claim, noting that nondisclosure could form the basis of a negligent misrepresentation claim if there was a duty to disclose.

Questions regarding whether the retailer and the processing bank had a duty to disclose the allegedly deficient security practices—and, if so, whether the card issuers’ ostensible reliance on the implied security assurances was justifiable—were factual issues inappropriate for resolution on a motion to dismiss, the court pointed out.

Unfair Trade Practice Claim

The court also permitted the card issuers to pursue an unfair and deceptive practices claim under Chapter 93 of Massachusetts General Laws. TJX asserted that it had an insufficient relationship with the issuing banks to support a Chapter 93A claim. The court, however, allowed the unfair trade practices claim to the extent it was based on TJX’s alleged misrepresentation regarding its security practices.

The October 12 decision is In Re TJX Companies Retail Security Breach Litigation, CCH Guide to Computer Law ¶49,420. It will also appear in CCH Privacy Law in Marketing.

Service Station Operators' Tying, Price Fixing Claims Fail

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

Tying and price fixing claims brought on behalf of a prospective class of approximately 5,000 Marathon and Speedway branded dealers throughout the United States can not proceed against Marathon Oil Corporation and its wholly-owned subsidiary Speedway SuperAmerica LLC, the federal district court in Indianapolis has ruled.

The operator of a Marathon-branded gas station failed to adequately allege the existence of an illegal tie. Moreover, claims that the defendants conspired with banks and financial institutions to fix the processing fee charged to the station operators were not sufficiently stated.

Marathon is the fourth-largest U.S.-based integrated oil and gasoline company and the fifth-largest petroleum refiner in the United States, according to the court. It markets gasoline under both Marathon and Speedway brand names to approximately 5,600 Marathon and Speedway branded, direct-served retail outlets in 17 states and sells petroleum products to independent entities supplying approximately 3,700 jobber-served retail outlets.

Lease and Dealer Supply Agreement Terms

The station operator's claims were based on an alleged requirement in its service station lease and dealer supply agreement with Marathon that it process all credit and debit card transactions through the oil company. The operator contended that, but for this requirement, Marathon and Speedway stations could purchase credit and debit card processing services through a number of other service providers on more favorable terms and conditions.

The lease itself made no mention of any particular credit and debit card processing services lessee-dealers were required to use; it only required that credit and debit card transactions be conducted in a way that conformed to the oil company's dealer handbook, the court held. According to the handbook, only transactions using the oil company's branded cards had to be processed through the oil company's credit and debit card processing services. Transactions not processed in such a manner would be assessed additional fees.

Thus, dealers could still choose to process those transactions elsewhere, albeit for an additional fee. Because the only tying theory alleged by the complaining operator was based on the lease terms, the tying claim had to be dismissed.

Two-Product Requirement

Even if the operator had sufficiently alleged the existence of an explicit tie, the operator-dealer failed to allege two separate and distinct products or services as required to state a tying claim, the court noted.

The operator claimed that it had alleged a tie between two distinct products or services—gasoline station franchises and credit and debit card processing services—because its franchise or distributorship was a tying product separate from the credit and debit card processing services. It was unlikely that a distributorship or distributorship rights could constitute a tying product, in the court's view. The credit and debit card processing services were simply a part of the standardized methods used to carry out the business of the distributorship.

Price Fixing

The operator failed to state sufficient facts to plausibly suggest the existence of a price fixing agreement between the oil company and unnamed banks and financial institutions to fix the price of the credit and debit card processing fees that the oil company charged its dealers, the court ruled. The operator asserted that Marathon received kickbacks under the agreement. However, the operator did not allege any additional facts to support its bare allegation, according to the court.

The operator failed to identify a single entity by name that was believed to have conspired with the defendants. The operator claimed only that the alleged agreement occurred at an unknown point in time within the four years prior to the filing of its complaint.

Simply because unnamed banks and financial institutions contracted with the defendants to provide processing services did not evidence an illegal agreement to fix processing fees. Such a substantial allegation required more than the mere recital of the name of the offense, the court explained.

The September 28 decision is Sheridan v. Marathon Petroleum Co., 2007-2 Trade Cases ¶75,938.

State Law Barring Gift Card Inactivity Fees Not Federally Preempted

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

A Connecticut law barring a gift card seller from charging inactivity fees was not federally preempted, the U.S. Court of Appeals in New York City has held, but the court gave the seller a further opportunity to show that the state's ban on gift card expiration dates was preempted. The state law did not violate the Commerce Clause of the U.S. Constitution, the court ruled.

The seller sued to prevent the Connecticut Attorney General from enforcing the statute. After the state’s enforcement action was filed in state court, the cases were consolidated in federal court.

The cards (“Simon Giftcards”) were sold in shopping malls by a subsidiary of a company that operated malls in 30 states. The cards were issued by Bank of America (BoA) and carried a Visa logo.

The cards were subject to a $2.50 monthly service fee, to be deducted from any balance remaining after six months from the date of purchase. In addition, to comply with Visa regulations, the cards carried a one-year expiration date.

Federal Banking Law, Regulations

The seller contended that applying the state statute would frustrate the purposes of the National Bank Act (NBA) and regulations of the Office of the Comptroller of the Currency (OCC), which authorized national banks to offer “electronic stored value systems.” Although BoA was the issuer of the Simon Giftcard, the seller bore the costs of administering the program and also collected and retained fees associated with the cards, the court noted. BoA, by contrast, was compensated exclusively through Visa interchange fees generated on a per-transaction basis.

The enforcement of the state law barring imposition of inactivity and other fees on consumers of the Simon Giftcard did not interfere with BoA’s ability to exercise its powers under the NBA and OCC regulations, the court determined. Rather, the enforcement of the state law affected only the conduct of card seller, which was neither protected under federal law nor subject to the OCC’s exclusive oversight.

Expiration Dates

The seller, however, did state a claim for preemption insofar as the Connecticut statute prohibited expiration dates. Unlike the various fees associated with Simon Giftcards, the seller alleged that an expiration date was necessary “to implement Visa fraud prevention and card maintenance requirements applicable to all prepaid cards bearing the VISA logo.”

Taking this allegation as true, an outright prohibition on expiration dates could have prevented a Visa member bank (such as BoA) from acting as the issuer of the Simon Giftcard, the court said.

BoA was legally entitled to use the Visa payment network, and, contrary to the Connecticut Attorney General’s suggestion, a Visa issuer benefited directly from having the cards operate on the Visa network due to the interchange fees received each time a gift card transaction was executed.

As a result, Connecticut’s attempt to prohibit expiration dates had to be analyzed separately from the ban on inactivity fees for purposes of federal preemption. The federal district court's dismissal of the seller's complaint was vacated in part and remanded for reconsideration of the preemption claim as to the state's ban on expiration dates.

Constitutionality

In upholding the statute against the seller’s challenge under the Commerce Clause, the court found that gift card seller failed to allege any facts tending to show that the law regulated commerce occurring outside of the state. The Connecticut Attorney General stipulated that the law applied only to sales of gift cards in Connecticut.

Even if the law's expiration date provisions were not federally preempted as applied to Simon Giftcards, the law would not prohibit all Visa products from being sold (or used) in Connecticut, according to the court. The law would prohibit only the sale of gift cards subject to expiration dates, and even then would apply only to sellers who were not national banks.

The fact that the cards were sold over the Internet did not present a risk that the Connecticut law would control sales of the card to anyone other than consumers with Connecticut billing addresses, the court said. That the seller might not be able to sell its gift cards on the same terms to consumers in all states did not, in itself, demonstrate a regulatory conflict sufficient to hold the law unconstitutional.

The October 19 opinion in SPGGC, LLC v. Blumenthal will be reported at CCH Advertising Law Guide ¶62,720.

Senators Urge Rigorous FTC Review of Google/DoubleClick Deal

This posting was written by John W. Arden.

The ranking Democratic and Republican members of the Senate Subcommittee on Antitrust, Competition Policy, and Consumer Rights have asked the Federal Trade Commission to examine the competition and privacy questions raised by Google’s proposed acquisition of DoubleClick.

In a November 19 letter to FTC Chairman Deborah Platt Majoras, Senators Herb Kohl (D-Wis.) and Orrin Hatch (R-Utah) reported the results of a September 27 subcommittee hearing on the proposed transaction, which would combine the world’s largest Internet search company (Google) with the leading company that places advertising on the Internet (DoubleClick).

“The implication for the Internet advertising market—and for the Internet as a whole—are profound and potentially far reaching,” the letter said. “A core part of Google’s business is placing contextual advertising—that is, text based ads placed on third party web sites which are relevant to the content or to the likely reader of the web site. Google has a dominant market position with respect to the placing of these contextual ads. DoubleClick has a leading market position in placing another form of Internet advertising—display advertising which also resides on third party web sites.”

Harm to Competition

Industry experts raised serious concerns that combining the two firms “could cause significant harm to competition in the Internet advertising marketplace.” Although the Senators have not reached a conclusion regarding the harm to competition, they advocated that the FTC approve the merger only on a determination that the merger would not cause any lessening of competition in Internet advertising.

“After our hearing, it is plain that the issues important to this determination are: whether contextual and display advertising are interchangeable and substitutable; the extent to which Google’s services compete with DoubleClick’s ad serving services; whether there are significant barriers to entry impeding new competitors in this market; and the likely effects of this acquisition on the cost of placing Internet advertising,” the Senators wrote.

Privacy Concerns

In addition to the antitrust considerations, the acquisition may raise broader questions involving Internet privacy. “In order to be effective, Internet advertising tracks the personal preferences of Internet users and “serves” ads most suited to that individual user based on his or her history of visiting certain web sites and running particular searches.”

DoubleClick collects an enormous amount of information on individuals’ web use preferences. Privacy advocates have expressed serious misgivings about this information coming under the control of Google, which can track individuals’ search requests.

Leading Positions

The Senators voiced concern that the acquisition would provide the world’s most important Internet enterprise with a leading position in the video content, news, advertising, and other consumer activities.

“Antitrust regulators need to be wary to guard against the creation of a powerful Internet conglomerate able to extend its market power in one market into adjacent markets, to the detriment of competition and consumers,” the letter concluded.

This letter comes on the heels of a November 13 announcement that the European Commission will investigate whether the proposed acquisition would significantly impede effective competition within the European Economic Area. Details about the EC’s announcement appear in a November 13 posting on Trade Regulation Talk.

EC Competition Chief Is Among “50 Women to Watch”

This posting was written by John W. Arden.

Neelie Kroes, EC Commissioner for Competition, has been listed as number three of “The 50 Women to Watch” by the Wall Street Journal.

The European Union’s “Antitrust Chief” was cited for setting an aggressive course in competition enfocement, showing “a particular devotion to stamping out cartels—this year levying heavy fines on makers of beer, elevators, and zippers.” She was a key force behind an EU proposal to open up the region’s “monopoly-ridden energy markets,” according to today’s edition of the Journal.

Microsoft Decision

The September 17 decision of the EU Court of First Instance—holding Microsoft Corp. liable for abusing it dominant market position and imposing a € 497 million fine—“firmly established Mrs. Kroes as the most influential antitrust regulator in the world,” the article said.

The coming year may feature more “fireworks,” the Journal observed, with the Commission investigating Intel Corp., Qualcomm, Inc., and Rambus, Inc.

Sign of the Times

The inclusion of Mrs. Kroes—and the absence of FTC Chairman Deborah Platt Majoras—may be an indication of the recent direction of antitrust enforcement. Besides the accomplishments of Mrs. Kroes, her inclusion in the list may have been prompted by the growing importance of international regulation and the activism of the EC Competition Commission relative to U.S. antitrust enforcers.

Mrs. Kroes is one of only two regulators featured in the list, the other being Sheila Bair, Chairman of the Federal Deposit Insurance Corp. The remainder of the list is composed of corporate officers and directors.

The top spot is held by Angela Braly, President and CEO of WellPoint Inc., the nation’s largest health insurer. Among the other corporate leaders is our boss—Nancy McKinstry, CEO and Chairman of the Executive Board of Wolters Kluwer NV. She checks in at number 41.

Text of the list appears here at the Wall Street Journal web site.

FTC Wants Out of Cigarette Testing

This posting was written by John Scorza, CCH Washington Correspondent.

During a November 13 hearing before the Senate Commerce, Science, and Transportation Committee, the Federal Trade Commission renewed its call to transfer its responsibility to test the tar and nicotine levels of cigarettes to an agency better suited to the task.

Meanwhile, Sen. Frank Lautenberg (D-N.J) advocated legislation that would curtail the ability of tobacco companies to market their products based on tar and nicotine levels.

The FTC testing method, first approved in 1967, uses a machine to uniformly “smoke” different brands of cigarettes. Using this method, some cigarettes appear to deliver lower tar and nicotine than others. The tobacco industry typically describes the cigarettes as “light” and “low-tar,” with the implicit suggestion that they are not as harmful as regular cigarettes. After concerns arose about the FTC’s testing method, the agency discontinued its use in 1987.

Touching on those concerns, Lautenberg and several witnesses noted that smokers often change the way they smoke light and low-tar cigarettes, inhaling deeper and longer to realize a higher dosage of nicotine.

“The Commission has been concerned for some time that the current test method may be misleading to individual consumers who rely on the ratings it produces as indicators of the amount of tar and nicotine they actually will get from their cigarettes,” FTC Commissioner William Kovacic stated.

The FTC in 1999 and 2003 recommended that Congress should transfer the responsibility to test cigarettes to a federal science-based agency. Kovacic did so again. “Although the Commission brings a strong, market-based expertise to its scrutiny of consumer protection matters, it does not have the specialized scientific expertise needed to design and evaluate scientific test methodologies.”

Lautenberg said he hoped the hearing would build legislative momentum to address the problems associated with the FTC’s nicotine cigarette rating system. The New Jersey senator, as he has in the past, called for an end to the rating system and the end of marketing based on the system.

“Big Tobacco should not be able to hide behind the FTC method to justify the claim that ‘light’ and ‘low-tar’ cigarettes are healthier,” Lautenberg said.

Ex-Employees' Creation of Competing Business Could Be Participation in RICO Enterprise

This posting was written by Sonali Oberg, Editor of CCH RICO Business Disputes Guide.

Former employees of a health benefits manager could have participated in the operation or management of an alleged RICO enterprise by engaging in allegedly tortious conduct by starting a competing business, according to the federal district court in Omaha, Nebraska.

Participation in Conduct of Affairs

In order to participate in the conduct of an enterprise’s affairs, within the meaning of RICO Section 1962(c), a person must participate, to some extent, in controlling the enterprise. The “conduct of affairs” connoted more than just some relationship with the enterprise’s activities. The phrase referred to the guidance, management, direction, or other exercise of control over the course of the enterprise’s activities.

The health benefits manager’s allegations relating to the former employees’ conduct described an active involvement in the actions of others and the hands-on operation of the purported enterprise. The employees mailed letters to a group of school districts, notifying them of the creation of a competing consortium in an attempt to take over the manager’s clients. The purported enterprise had the common goals of diverting contracts and promoting its own interests at the expense of the benefits manager.

Predicate Acts

Allegations of predicate acts of mail fraud through the submission of allegedly fraudulent nonrenewal letters could constitute a pattern of racketeering activity. The clients—school districts—received the nonrenewal letters from the competitors rather than their health benefits manager.

The purportedly fraudulent mailings occurred over a four-month period. Open-ended continuity would be found only where related predicate acts occurred over a substantial period of time, and involved a distinct threat of long-term racketeering activity.

It was likely that the mails and wires would continue to be used in furtherance of the scheme to defraud, in the court’s view. The alleged predicate acts were related, as they had the same purposes—enhancing the business of the consortium at the expense of the benefits manager—that resulted in the consortium succeeding in pilfering the benefits manager’s clients.

The October 22 decision is Meccatech, Inc. v. Kiser, CCH RICO Business Disputes Guide ¶11,375.

Oil Companies Must Defend Artifically High Gas Price Claim

This posting was written by Mark Engstrom, Editor of CCH State Unfair Trade Practices Law.

An Illinois Consumer Fraud and Deceptive Business Practices Act (CFA) claim could proceed against five oil companies that allegedly used their market dominance in concert to artificially inflate the price of gasoline to consumers, even though the Illinois Antitrust Act may have provided relief, the federal district court in Chicago has ruled.

The oil companies argued that an Illinois Supreme Court decision had effectively prohibited CFA actions for claims that could be brought under the Illinois Antitrust Act. However, the federal district court disagreed.

Because the high court’s decision rested on the fact that the CFA did not supplement the state’s antitrust statute (like the Clayton and Robinson-Patman Acts supplement the Sherman Act in the federal context), the decision meant only that a plaintiff could not sue under the CFA when doing so would be inconsistent with the legislative intent of the Illinois Antitrust Act. The decision was silent on whether plaintiffs could pursue a CFA remedy when the Illinois Antitrust Act also provided relief. The decision, therefore, did not bar the plaintiffs’ CFA claims.

Sufficiency of Pleading

Allegations that the oil companies controlled the nation’s gas supply, purposefully limited gasoline supply by maintaining low inventory levels, and decreased gasoline production during distribution disruptions and peak usage period, thereby achieving larger profits than they otherwise would have achieved, were sufficient to state a CFA claim under Rule 8 of the Federal Rules of Civil Procedure, the court determined.

Rule 8 required only a short and plain statement of a claim, showing that the pleader was entitled to relief. It did not require proof of an intentional misrepresentation. Based on these allegations, the court could not conclude “beyond doubt” that the plaintiff could prove no set of facts that would entitled him to relief. Indeed, facts consistent with these allegations could establish that the defendants had acted deceptively or unfairly. Several averments of fraud, however, failed to meet the heightened pleading standards of Rule 9(b).

The decision is Siegel v. Shell Oil Co., ND Ill., CCH State Unfair Trade Practices Law ¶31,497.

EC to Investigate Google’s Acquisition of DoubleClick

This posting was written by John W. Arden.

The European Commission will investigate whether Google’s proposed acquisition of DoubleClick would significantly impede effective competition within the European Economic Area, according to a November 13 announcement.

The Commission’s initial market investigation indicated that the proposed merger of the two U.S. firms would raise competitive concerns in the markets for intermediation and ad serving services. The Commission has 90 working days (through April 2, 2008) to make a final decision on the merger. The decision to make an in-depth inquiry does not affect the final result of the investigation.

In particular, the Commission will investigate whether, without the transaction, DoubleClick would have grown into an effective competitor of Google in the market for online ad intermediation.

It will also address whether the merger—which combines the leading providers of online advertising space and intermediation services (Google) and ad service technology (DoubleClick)—could lead to anticompetitive restrictions for competitors operating in these markets, which would harm consumers.

Google operates an Internet search engine that offers search capabilities free of charge and provides online advertising space on its own websites, according to the Commission. It also provides intermediation services to publishers and advertisers for the sale of online advertising space on partner websites through its “AdSense” network.

DoubleClick sells ad serving services, management, and reporting technology worldwide to website publishers and advertisers to ensure that advertisements are posted on relevant websites and to report on the performance of the advertisements.

The merger is currently being reviewed by U.S. Federal Trade Commission. On November 6, the American Antitrust Institute issued a white paper stating that the merger “raises serious competitive issues under several different antitrust theories.” The white paper maintained that “there is a good argument that Google and Double-Click are horizontal competitors in two relevant markets”—the market for distributing or brokering online advertising space of third-party web sites and the market for publisher “ad serving tools.”

Further details on the AAI white paper appear in a November 6 posting on “Trade Regulation Talk.”

Justice Department Opposes Extension of Microsoft Decrees

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

The U.S. Department of Justice opposes an effort by ten states and the District of Columbia to extend the antitrust final judgments against Microsoft Corporation that are set to expire in large part in November 2007.

The Justice Department's friend-of-the-court brief filed with the federal district court in Washington, D.C. on November 9 sets out in detail its earlier position that the standard for an extension had not been met by the states.

California, Connecticut, Iowa, Kansas, Minnesota, Massachusetts, and the District of Columbia asked for an extension of the final judgment obtained by the “non-settling” states (2006-2 Trade Cases ¶75,541), while Florida, Louisiana, Maryland, and New York sought extension of certain provisions of the final judgment in the federal/state action (2006-2 Trade Cases ¶75,418).

The final judgments, which prohibit the computer software company from abusing its monopoly in the PC operating system market, were to expire after five years on November 12, 2007. Last year, they were modified to extend the expiration of certain provisions related to communications protocol licensing an additional two years until November 12, 2009.

The states raised “inadequate and mutually inconsistent arguments to justify extension of the Final Judgments," according to the Justice Department. Their theories "are directly contravened by the states' own past statements and actions."

The Justice Department's three principal arguments against extension were that: (1) given the effectiveness of the final judgments, the states failed to establish any legal basis for extension of the expiring provisions; (2) it was premature to consider an additional extension of a provision in the decree that already been extended until Fall 2009; and (3) neither the previous extension of that provision nor the difficulties in the implementation of that provision justified an extension of the expiring provisions of the final judgments.

DOJ Asks Second Circuit to Reject Visa’s Appeal of Enforcement Order in Antitrust Case

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

The Department of Justice has asked the U.S. Court of Appeals in New York City to reject an effort by Visa U.S.A., Inc. to overturn a district court’s order enforcing a final judgment in an antitrust action against Visa on the ground that the district court lacked the authority to enter the order.

Visa appealed the order of the federal district court in New York City (2007-2 Trade Cases ¶75,930), which required, among other things, that Visa repeal a by-law found to violate the final judgment (2001-2 Trade Cases 73,501). The by-law provided that if one of Visa’s 100 largest issuers moved its debit portfolio from Visa to MasterCard, that issuer had to pay Visa a settlement service fee (SSF).

In June, the district court held that the by-law effectively prevented Visa banks from switching to the MasterCard network. The SSF represented an issuer's proportionate share of Visa's remaining settlement obligation arising from a multi-billion-dollar settlement in an antitrust class action brought by retailers.

In addition to requiring repeal of the offending by-law, the district court granted “narrowly-tailored, conditional termination rights” to debit issuers that entered into certain agreements with Visa after the SSF took effect.

The decision was a victory for MasterCard International Inc. MasterCard—also a party to the final judgment—had moved to enforce the order against Visa back in 2005.

On appeal, Visa asserted that—despite the express terms of the final judgment—the district court's authority to ensure compliance with the final judgment was narrowly circumscribed, extending only to contempt proceedings.

According to the Justice Department, the district court was not required to undertake a contempt proceeding. The government contended in its November 2 appellate brief that “the character and purpose of neither MasterCard's claim nor the district court's remedy sounded in contempt.”

The government took no position on whether Visa's by-law actually had the effect of prohibiting issuers from issuing offline debit cards on MasterCard's network in violation of the final judgment. However, it urged the appellate court to “reject Visa's arguments that the district court is severely limited in its authority to interpret and enforce its Final Judgment, or remedy any violation, as necessary to fulfill its purpose of protecting the public interest in competition.”

The Justice Department’s November 2 appellate brief appears at the Department's web site.

Visa/American Express Settlement

In other news, Visa and five of its member banks have agreed to pay up to $2.25 billion to American Express to settle a lawsuit alleging that MasterCard, Visa, and their member-banks illegally blocked American Express from the bank-issued card business in the United States.

American Express filed the lawsuit in federal district court in New York City in November 2004, after the federal government successfully prosecuted its antitrust case against the payment card networks. MasterCard remains the sole defendant in the American Express case, since individual banks named in the lawsuit—J.P. Morgan Chase, Capital One, U.S. Bancorp, Wells Fargom and Providian—would also be dropped as defendants in light of the settlement. The deal is contingent upon Visa USA member approval. American Express and Visa announced the settlement in November 7 statements.

NHL Internet Policy Not a Naked Restraint of Trade

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

The owner of the New York Rangers was not entitled to a preliminary injunction barring the National Hockey League (NHL) from “seizing” the team’s Web site and transferring it to the league-operated technology platform, the federal district court in New York City has ruled.

Madison Square Garden, L.P. (MSG), owner of the Rangers, unsuccessfully argued that the NHL had “become an ‘illegal cartel’ in its attempts to prevent off-ice competition between and among the NHL member clubs.” MSG failed to demonstrate a likelihood of success on the merits or a sufficiently serious question going to the merits of its antitrust claim, according to the court.

In 2005, the NHL developed a New Media Strategy. Under the plan, each team’s Web site was to be migrated onto a common technology platform, serviced by a single content management system (CMS). Under the plan, the individual teams were responsible for supplying local content and advertising, while the league would retain space for national advertising and league news. The league saw a single CMS as an essential part of the New Media Strategy and believed that the CMS would ensure minimum quality standards and facilitate fan navigation.

MSG filed a complaint for injunctive relief in September 2007, after the NHL informed the team that it would be fined $100,000 each day that it operated its Web site outside of the League platform.

“Quick Look” Analysis

MSG attempted to label the New Media Strategy as a naked restraint of trade that would be subject to an abbreviated or “quick look” analysis to determine its lawfulness. However, the court “fail[ed] to perceive the nudity.”

A "quick look" analysis was appropriate only when the anticompetitive effects of the restraint were obvious, the court explained. A casual observer could not have summarily concluded that the arrangement had an anticompetitive effect on customers.

Rule of Reason

Thus, MSG had the burden of proving an actual adverse effect on competition in the relevant market under a rule of reason analysis. The team failed to carry its initial burden of showing a prima facie case of an anticompetitive restraint, since it did not demonstrate an actual adverse effect either on competition in the relevant market or market power. Rather, MSG focused on the harm the team perceived to itself.

Even if MSG had carried its initial burden, the league had shown offsetting procompetitive benefits. In light of these procompetitive benefits, the burden would have shifted back to MSG to prove either that the challenged restraint was not reasonably necessary to achieve the league’s procompetitive justifications or that those objectives might be achieved in a manner less restrictive of free competition. MSG failed to meet this burden as well, in the court’s view.

Procompetitive Effects

The league offered several procompetitive effects of the common technology platform. The increased online scale and standardized layout would attract national sponsors and advertisers interested in uniform exposure across the NHL.com network. This was a key element of the league’s new growth strategy to enhance the NHL’s “national brand” and to compete better against other sports and entertainment products and their Web sites.

The common technology platform also would enable the sponsors and advertisers to reduce transaction costs by negotiating centrally with the league. The strategy would also assure minimum quality standards across team Web sites; increase the interconnectivity across the NHL.com network; facilitate the sharing of team content; and reduce the costs of operating 30 team Web site operations.

The November 2, 2007, decision in Madison Square Garden, L.P. v. National Hockey League, et al., 07 CV 8455, will appear at 2007-2 CCH Trade Cases ¶75, 929.

Google-DoubleClick Merger Raises Competitive Issues: Antitrust Institute

This posting was written by John W. Arden.

Google’s acquisition of DoubleClick, which is being reviewed by the Federal Trade Commission and the European Commission, “raises serious competitive issues under several different antitrust theories,” the American Antitrust Institute (AAI) stated in a white paper issued on November 6.

In addition to being the dominant Internet search engine, Google is the leading seller of online advertising in the world, having sold $10.5 billion of advertising in 2006. DoubleClick is the leading provider of “ad serving services”—tools for display ads for Internet publishers, advertisers, and ad agencies. Its revenues reached approximately $300 million in 2006.

Direct Competition

Although Google claims that it doesn’t compete with DoubleClick, AAI notes that both firms have recently introduced products that are direct competitors. DoubleClick’s new Advertising Exchange competes for publishers’ ad space against Google’s AdSense, according to the Institute. In addition, Google is in the process of introducing an ad serving product that competes against DoubleClick’s DART for Publishers.

“The most troubling aspect of this merger from a competition point of view is that it short circuits what otherwise was shaping up to be a healthy competition between two market-leading firms in each other’s core markets,” said Richard Brunell, AAI’s director of legal advocacy and the author of the white paper.

Indirect Competition

In addition to the direct competition between the new products, the two merging companies indirectly compete in offering alternative solutions for publishers to monetize their “white space,” according to the AAI. “Google’s contextual-based text ads and DoubleClick’s profiling-based display ads are different techniques for targeting ads to consumers, which many advertisers apparently see as substitutes.”

Vertical Competitive Concerns

The merger’s integration of search, contextual, and display advertising “may have exclusionary effects if advertisers using rival search engines or advertisers tools cannot replicate the benefits of such integration,” in the AAI’s view.

Moreover, the merger raises the question of whether Google might use competitively-sensitive information that DoubleClick obtains from publishers about their advertising programs or from advertisers about their campaigns to gain a competitive advantage for Google’s search or AdSense offerings.”

Any of these possibilities may have the effect of foreclosing online advertising competitors from the market.

Relevant Market

In addition to describing competitive concerns, the paper asks the fundamental question: “Is online advertising a relevant antitrust market?” If online advertising is not a market separate from other forms of advertising (television, radio, print, billboards), the merger would not raise antitrust issues, since online advertising is only a very small part of overall advertising.

“The available evidence suggests that online advertising is sufficiently distinct that a monopolist in the sale of online advertising would be able to increase prices a small but significant amount without losing so many sales to offline sources to make the price increase unprofitable,” the white paper said.

Online advertising offers features—such as targeting, performance-based pricing, and measurability—that other types of advertising cannot match, said the AAI.

Conclusion

The AAI writes that “there is a good argument that Google and Double-Click are horizontal competitors in two relevant markets”—the market for distributing or brokering online advertising space of third-party web sites and the market for publisher “ad serving tools.”

Text of a news release and the white paper appear on the American Antitrust Institute’s website. The AAI is an independent non-profit education, research, and advocacy organization, based in Washington, D.C.

Privacy, Consumer Groups Ask FTC for “Do Not Track List”

This posting was written by William Zale, Editor of CCH Privacy Law in Marketing.

A group of nine privacy organizations have asked the Federal Trade Commission to create a "Do Not Track List" intended to protect consumers from having their online activities unknowingly tracked, stored, and used by marketers and advertising networks.

The organizations—Center for Democracy and Technology, Consumer Action, Consumer Federation of America, Electronic Frontier Foundation, Privacy Activism, Public Information Research, Privacy Journal, Privacy Rights Clearinghouse, and World Privacy Forum—also asked the FTC to provide other consumer privacy protections.

The “Do Not Track List,” which would function much like the national "Do Not Call" list, is recommended as part of a broad effort to correct a perceived "privacy imbalance" that has deprived Americans of the ability to control their own valuable personal information.

The groups offered the recommendations in a letter to the Commission in advance of its two-day town hall, "Ehavioral Advertising: Tracking, Targeting, and Technology," scheduled for November 1-2 in Washington, D.C. (See story below.)

The letter also recommends:

 Adopting a new definition of "personally identifiable information" updated to reflect the realities of today's Internet;

 Providing more robust disclosures to consumers about behavioral tracking;

 Ensuring that information about consumer privacy and choices is available to all individuals, including those who have visual, hearing, or other disabilities;

 Independent auditing of those engaged in behavioral tracking to ensure adherence to privacy standards;

 Furnishing consumers with access to personally-identifiable information collected about them by companies engaged in behavioral tracking;

 Prohibiting advertisers from collecting and using personally identifiable information about health, financial activities, and other sensitive data; and

 Establishing a national "Online Consumer Protection Advisory Committee."

Text of the letter appears at the websites of both the Center for Democracy and Technology and the World Privacy Forum.


FTC Forum Explores Online “Behavioral Advertising”

This posting was written by John Scorza, CCH Washington Correspondent.

The growth of online advertisements that target individual consumers and their online activities has led to growing concerns about consumer privacy.

The Federal Trade Commission convened a forum—"Ehavioral Advertising: Tracking, Targeting, and Technology," November 1-2, in Washington, D.C.—to explore the issues involved in the practice of “behavioral advertising.” Companies that employ “behavioral advertising” track consumers’ online activities and target advertisements to the consumers based on their activities and interests.

Online behavioral marketing is big business, FTC Commissioner Jon Leibowitz said. Companies spent nearly $10 billion on Internet ads in the first half of this year. Within the world of online advertising, the use of targeted ads is prevalent and expected to become even more widely-used in coming years, according to Lydia Parnes, director of the FTC’s Bureau of Competition. At the same time, marketers are seeking to substantially expand the information they collect and analyze to increase the precision of their behavioral ads, Parnes said.

Awareness of Online Tracking

These trends have attracted the attention of the agency. FTC Chairman Deborah Majoras remarked, “There are legitimate concerns about whether consumers are aware that their activities are being tracked online and about whether data, once stored and combined with other data, could somehow find its way into the wrong hands.”

FTC Commissioner Jon Leibowitz is similarly concerned. “I think all of us should be concerned, even troubled, that seemingly-anonymous searching and surfing can be tracked back to specific individuals and that not all information that companies have collected about us is secure from data breaches or release.”

Participants at the FTC forum noted that consumers have various expectations about privacy. And while they may appreciate ads that are of personal interest, it is unlikely they are aware of what information companies are collecting about them and how it is being used and stored.

Absence of Regulation

The practice of behavioral advertising is largely self-regulated by the industry, but a number of participants at the forum criticized the current system. Leibowitz said the privacy policies established by the industry are filled with fine print and legalese, leaving much to be desired. “One thing is clear: The current “don’t ask, don’t tell” mentality in online tracking and profiling needs to end,” Leibowitz said.

Leibowitz and other participants called for greater consumer control and transparency in online privacy policies. The FTC Commissioner suggested that standard privacy policies may be desirable, as well as shorter notices about what information is being collected. Consumers could be given the choice to opt-in to allowing companies to collect information about their online activities, Leibowitz proposed.

“Do-Not Track” List

One proposal discussed by forum participants was the creation of a “do-not-track” list, similar to the agency’s Do-Not-Call registry, which prohibits telemarketers from calling consumers who have registered their telephone numbers with FTC. Leibowitz called the “do-not-track” proposal as a “very promising approach.” Other possible approaches mentioned by participants involved reforms to the self-regulatory online advertising system and better consumer education.

The basic issue comes down to finding the proper balance between the benefits of behavioral advertising and consumer privacy concerns, said Joel Winston, deputy director of the FTC’s Division of Privacy and Identity Protection.

Can disclosures be more effective? Is self-regulation appropriate? Is government involvement required? Winston and other FTC officials indicated that the agency would continue to explore these and related issues.

Senate Bill Would Restore Per Se Treatment of Vertical Price Fixing Agreements

This posting was written by John W. Arden.

A bill to restore the per se illegality rule for vertical agreements to fix minimum prices was introduced in the U.S. Senate on Tuesday, October 30, by Senator Herb Kohl (D-Wis.).

The proposed Discount Pricing Consumer Protection Act (S. 2261) would “correct the Supreme Court’s mistaken interpretation of the Sherman Act in the Leegin decision” and restore the rule that vertical agreements to set minimum prices violate the Sherman Act.

Specifically, the bill would amend Section 1 of the Sherman Act to add, after the first sentence:

“Any contract, combination, conspiracy, or agreement setting a minimum price below which a product or service cannot be sold by a retailer, wholesaler, or distributor shall violate the Act.”

The Statement of Findings and Declaration of Purposes of the bill assert that:

(1) from 1911 until June 2007, the Supreme Court had ruled that the Sherman Act forbid in all circumstances resale price maintenance or vertical price fixing;

(2) the per se rule of illegality forbidding resale price maintenance “promoted price competition and the practice of discounting all to the substantial benefit of consumers,"

(3) economic studies show that the rule against resale price maintenance led to lower prices and promoted consumer welfare,

(4) abandoning the rule will likely lead to higher prices paid by consumers and harm the ability of discount stores to compete, and

(5) the 5-4 decision of the Supreme Court in Leegin “incorrectly interpreted the Sherman Act and improperly disregarded 96 years of antitrust law precedent.”

Cost to Consumers

In introducing the bill, Senator Kohl stated that “allowing manufacturers to set minimum retail prices will threaten the very existence of discounting and discount stores, and lead to higher prices for consumers.”

He related a personal experience of working in the family business—Kohl’s department stores. “On several occasions, we lost lines of merchandise because we tried to sell at prices lower than what the manufacturer and our rival retailers wanted . . . The traditional department stores demanded that the manufacturer not sell to us unless we would agree to maintain a certain price. Because they didn’t want to lose the business of their biggest customers, that jeans manufacturer acquiesced in the demands of the department stores—at least until our lawyers told them that they were violating the rule against vertical price fixing.”

Arguing that the Leegin case would harm consumers, Kohl cited Justice Breyer’s dissenting opinion, which estimated that, if only 10% of manufacturers engaged in vertical price fixing, the amount of commerce affected would be $300 billion, translating to an average of $750 to $1,000 for the average American family of four.

Rule of Reason = Per Se Legality?

In holding that resale price fixing agreements must be judged under the rule of reason, Leegin Creative Leather Products, Inc. v. PSKS, Inc. (2007-1 CCH Trade Cases ¶75,753) applied an onerous and difficult burden for a plaintiff in an antitrust case, the Senator contended.

“Parties complaining about vertical price fixing are likely to be small discount stores with limited resources to engage in lengthy and complicated antitrust litigation,” he said. “These plaintiffs are unlikely to possess the facts necessary to prove a case under the ‘rule of reason.’ In the words of FTC Commissioner Pamela Jones Harbour, applying the rule of reason to vertical price fixing “is a virtual euphemism for per se legality.”

The legislation—co-sponsored by Senator Joseph Biden (D-Del.) and Senator Hilary Rodham Clinton (D-N.Y.)—was referred to the Senate Committee on the Judiciary on October 30. Further information on this bill is available here at the "Thomas" website (http://thomas.loc.gov/)of the Library of Congress

Oregon Consumer Identity Theft Law Takes Effect

Oregon legislation implementing consumer protection measures to prevent identity theft took effect on October 1, 2007.

The Consumer Identity Theft Protection Act (1) provides for consumer notification of breaches of security of computerized data; (2) allows consumers to place and temporarily lift a freeze on their consumer report; (3) restricts the printing or displaying of Social Security Numbers; (4) creates a duty for businesses that own, maintain, or possess data to safeguard personal information; and (5) authorizes the Department of Consumer and Business Services to make rules implementing the Act and to enforce them.

The security freeze provisions allow consumers to freeze—or block access to the credit—for a $10 fee or for free if they are victims of identity theft. Consumers may temporarily lift a freeze for a fee of $10.

The printing or displaying of a Social Security Number is prohibited unless the number is made unreadable, with certain exceptions. A penalty of $1,000 may be assessed for every violation, which is considered a separate offense. In the case of a continuing violation, each day’s continuance is a separate violation, although the maximum penalty for any occurrence may not exceed $500,000.

The law (Senate Bill 583, Chapter 759) appears at CCH Privacy Law Guide ¶33,700. While the law became effective on October 1, its requirements pertaining to the safeguarding of personal information are operative on January 1, 2008.

Further information about this law--and other state identity theft laws--is available in CCH Privacy Law in Marketing.

Distributor Fails to Allege Antitrust Injury from Monopolization

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

An aggregate distributor that was driven out of business lacked antitrust standing to sue its former supplier for monopolization, the U.S. Court of Appeals in New York City has ruled.

According to the complaining distributor, the defending supplier monopolized the market for manufacturing aggregate in the Long Island and the New York metropolitan area by buying out its only significant manufacturing competitor and then refusing to sell aggregate to the complaining firm. The defending supplier expanded vertically into the distribution level and ultimately purchased the complaining distributor's assets “at a sacrifice.” The complaint contended that the defending firm raised prices to customers soon after the sale. Dismissal for failure to allege an antitrust injury (2006-2 Trade Cases ¶75,452) was affirmed.

Anticompetitive Practices

The court outlined the defending supplier's alleged anticompetitive practices as: (1) acquisition of its only major competitor, resulting in a monopoly in the production of aggregate, followed by (2) vertical integration into the distribution level and refusal to deal with the complaining firm, leading to a second monopoly at the distribution level for the supplier. The distributor lacked antitrust standing to assert claims of monopolization at either the manufacturing level or the distribution level, the court ruled.

Power to Raise Prices

At the manufacturing level, the distributor’s injury was not caused by an exercise of the defending suppliers newly acquired power to raise prices for aggregate. Instead, the distributor’s injury was caused by the supplier’s decision to terminate their relationship, something the supplier could have done without monopoly power, in the court's view.

Refusal to Deal

Moreover, the distributor failed to allege any facts that would suggest that the supplier’s refusal to deal following its vertical expansion into distribution was for anticompetitive reasons. The supplier’s expansion into distribution was most likely in pursuit of increased efficiency. Thus, there was an apparent legitimate business reason for its refusal to deal. The supplier would have had no anticompetitive incentive to exclude the distributor because it already enjoyed a monopoly at the production level, the court explained.

The October 23 decision in Port Dock & Stone Corp. v. Oldcastle Northeast, Inc., 06-4908, will appear at 2007-2 Trade Cases ¶75,913.

Letter Writing Campaign Could Constitute Advertising for Lanham Act Claim

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

The “commercial advertising or promotion” element of a Lanham Act false advertising claim could be satisfied by an alleged letter writing and telephone campaign by a computer lock manufacturer and former employees of its competitor aimed at discrediting the competitor and its affiliates, the federal district court in Norfolk, Virginia has ruled.

The customers were told that the competitor and its affiliates were distributing a product that infringed a patent owned by the manufacturer and that, to avoid legal trouble, the customers should begin purchasing their locks from a marketing firm formed by the competitor’s former employees.

The competitor’s pleading did not estimate the number of customers contacted. Nevertheless, it could not be said to a legal certainty that the letter writing and telephone campaign did not constitute commercial advertising or promotion, according to the court.

The competitor allegedly engaged in wholesale lock distribution to computer giants such as Dell, Gateway, and Hewlett Packard. These customers allegedly were contacted during the course of the conspiracy to steal the business of the competitor and its affiliates. Potential misrepresentations to these companies alone might establish commercial advertising, the court said.

Since discovery was critical in determining market composition and the breadth of the alleged scheme, the court denied the defendants’ motions to dismiss.

The September 28 decision in Miz Engineering, LTD v. Avganim appears at CCH Advertising Law Guide ¶62,715.

Distributorships Not Protected “Franchise” or “Dealership”

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide, and John W. Arden.

In decisions issued four days apart, two distributors failed to obtain statutory protection against termination by their manufacturers either as a Connecticut “franchise” or as a Wisconsin “dealership.”

Connecticut “Franchise”

The relationship between a Delaware-based manufacturer of countertop surfaces and a Lewiston, Maine distributor was not a “franchise” within the meaning of the Connecticut Franchise Act because there was no evidence that the manufacturer contemplated that the distributor would establish or maintain a place of business in Connecticut, as required by the Act.

The contractual choice of Delaware law indicated that the parties did not intend to apply Connecticut law or the Connecticut Franchise Act. When the distributor acquired a Connecticut distributor and its Connecticut distribution facility, the parties amended their agreement to include most of Connecticut and Massachusetts within the distributor’s territory. However, no other provisions of the agreement were modified or altered.

If the parties had intended for the distributor to establish a place of business in Connecticut, they could have included that understanding in their agreement, the federal district court in Portland, Maine observed. Deposition testimony failed to indicate that the agreement and the parties contemplated that the distributor would establish or maintain a place of business in Connecticut.

Absent a place of business within the state, neither the Connecticut Franchise Act nor its requirement of good cause for termination was applicable. Thus, the termination without cause, upon 60 days’ notice was justified.

The September 14 decision is New England Surfaces v. E.I. Du Pont De Nemours and Co., U. S. District Court for the District of Maine, CCH Business Franchise Guide ¶13,713.

Wisconsin “Dealership”

A boiler equipment distributor that did not share a “community of interest” with its manufacturer was not a “dealership” within the Wisconsin Fair Dealership Law, according to the federal district court in Green Bay. Thus, the Fair Dealership Law could not be applied to require the manufacturer to have “good cause” for termination of the distributorship.

The distributor had been in business for almost 35 years when it was selected to be the manufacturer’s exclusive distributor in Wisconsin and upper Michigan. Apart from a small stock of parts, the distributor did not actually warehouse boilers or keep any in stock. There was nothing like a showroom for the manufacturer’s products.

In 2005, the first year of the relationship, the distributor sold $128,000 worth of the manufacturer’s products. By 2007, the distributor was on pace to exceed $1 million in sales of the manufacturer’s products. The distributor, however, sold numerous other products and stated that sales of the manufacturer’s products constituted roughly 15% of its total sales in 2007.

Some factors used to determine whether a “dealership” existed were at least partially favorable to the distributor’s claim, the court observed. The distributor stated that it undertook a two-year effort to promote the manufacturer’s products, asserting that it invested its previously-earned goodwill and lent its well-regarded name to the promotion. There was some “inkling of unfairness” involved if the manufacturer was to reap the benefits of the distributor’s good name and then sign on with another distributor. However, it was difficult to see how the distributor’s goodwill investment would be lost as a result of the termination. There was no indication that the distributor’s good name was tarnished by its promotion of the manufacturer’s products.

The relationship was only exclusive with respect to the manufacturer. The distributor felt free to sell numerous other product lines, a practice that was the basis for the parties’ dispute. To the extent that an exclusive relationship could support a finding of a dealership, it was only significant where the dealer sacrificed its ability to sell other competing products in order to sell the manufacturer’s products.

Although the parties disputed to what extent the distributor became identified with the manufacturer’s brand, it was difficult to discern how a company that sold numerous product lines for 35 years would become identified with a single line in less than two years. The fact that the parties’ relationship was relatively brief cut against a finding of a dealership, as did the distributor’s “admittedly modest” investment in advertising the manufacturer’s products.

Ultimately, there was little about the obligations imposed on the distributor to suggest a significant level of interdependence between the parties. The court did not need to speculate about whether the manufacturer had the distributor over a barrel. It didn’t, the court ruled.

The September 18 decision is Heat & Power Products, Inc. v. Camus Hydronics Ltd., U.S. District Court for the Eastern District of Wisconsin, CCH Business Franchise Guide ¶13,714.

Sandpaper Maker's Injury Was Result of Competitive Conduct

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

A company that "largely developed," but was later driven from, the market for do-it-yourself automotive sandpaper lacked standing to sue a competitor for engaging in monopolization by executing exclusive dealing contracts with four of the six largest distributors of such abrasives, according to an en banc decision of the U.S. Court of Appeals in Cincinnati.

The complaining firm held 67% of the market before it lost most of the market to its only competitor, as a result of the defending firm's up-front discounts and longer exclusive agreements. To allow the litigation to continue would have been to "allow one monopolist to sue a competitor for seizing its market position by charging less for its goods," according to the court. Dismissal of the antitrust claims (2006-2 Trade Cases ¶75,365) was affirmed.

The complaining company failed to establish a cognizable antitrust injury, because its injury flowed from the kind of competition that the antitrust laws were designed to foster, according to the court.

Competitive Tactics

Three of the defending firm's tactics were targeted: (1) the up-front payments offered to the four of the six major retailers; (2) the multi-year terms of the exclusive agreements with the retailers; and (3) the exclusive nature of these agreements. The court considered each and rejected the complaining firm's challenges.

The non-predatory discounts furthered the competition-enhancing goals of the antitrust laws, and the retailers insisted on such payments. With respect to the multi-year agreements, the defending firm did nothing more than compete on terms that the market already required, the court found. And while exclusive agreements in some instances might create impermissible barriers for new entrants to a market and might permit a supplier to charge monopoly prices, the complaining firm could not tenably claim that it suffered these anticompetitive effects.

Dissent

A dissent expressing the views of four of the 13 judges nostalgically reflected back on a time "when monopoly was an evil targeted by Congress and guarded against by the antitrust laws of the United States." The dissent concluded that the majority read the antitrust laws too narrowly and "treat[ed] monopoly more as a board game than as an economic harm to the public."

The October 17 decision in NicSand, Inc. v. 3M Company, appears at 2007-2 Trade Cases ¶75,908.

Novell’s Scaled-Back Antitrust Claims Can Proceed Against Microsoft

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

Novell, Inc., the software company that once owned the WordPerfect word-processing and Quattro Pro spreadsheet applications, can proceed with claims that Microsoft Corporation engaged in anticompetitive conduct in the market for personal-computer (PC) operating systems, even though Novell did not directly compete in that market, the U.S. Court of Appeals in Richmond, Virginia, has decided.

However, Novell is unable to pursue allegations based on harm to the office-productivity-applications market. A decision granting in part and denying in part Microsoft's motion to dismiss (2005-1 Trade Cases ¶74,830) was affirmed.

Novell argued that its popular applications, though themselves not competitors or potential competitors to the defending firm's dominant operating system, posed a potential threat to the Microsoft's monopoly in the market for PC operating systems by offering developers of competing operating systems a "bridge" across the applications barrier to entry.

Antitrust Standing

A multi-factor analysis was applied to determine that Novell had antitrust standing. Novell could have suffered an antitrust injury and that injury could be traced to the alleged antitrust violations, the court ruled. It alleged harm of the type the antitrust laws were intended to prevent and that Microsoft specifically targeted its products for destruction as a means to damage competition in the operating-systems market. The directness of the injury weighed in favor of finding antitrust standing. There was little risk that any damages that might be established would need to be allocated or apportioned among any more-directly injured parties.

Statute of Limitations

The statute of limitations barred Novell's claims based on harm to the office-productivity-applications market, according to the court. However, the tolling provision of Sec. 5(i) of the Clayton Act preserved the other claims. Sec. 5(i) of the Clayton Act suspends the running of the statute of limitations during the pendency of a federal antitrust action and for one year thereafter for private suits based in whole or in part on the government action.

Although Novell's claims arose prior to November 1996, when it sold WordPerfect and Quattro, it did not file its complaint until November 2004. The government's complaint was filed in May 1998. Novell convinced the court that its claims based on harm to the PC operating-systems market involved the same conduct at issue in the government's complaint.

However, Novell could not establish that the tolling provision saved its claims related to the office-productivity-applications market. It unsuccessfully argued that tolling was appropriate because the "core elements" of these claims "echo[ed] allegations made throughout the government's complaint" and that the government's complaint referenced other software markets.

The decision is Novell, Inc. v. Microsoft Corp., decided October 15, 2007, 2007-2 Trade Cases ¶75,901.

FTC Opposes Antitrust Exemption for Pharmacies


This posting was written by John Scorza, CCH Washington Correspondent.

A bill that would allow family pharmacies to band together to negotiate the price of prescription drugs with health plans likely would raise prices for consumers, private employers, and the government, a Federal Trade Commission (FTC) official testified at a recent congressional hearing.

Under a bill introduced in the House (H.R. 971), independent pharmacies would be granted an antitrust exemption that would allow them to bargain collectively with health plans to set fees and contract terms. The pharmacies would be treated as bargaining units, akin to employees engaged in negotiations with employers under the National Labor Relations Act. Companion legislation has been introduced in the Senate (S. 885).

License to Engage in Price Fixing, Boycotts?

David Wales, deputy director of the FTC’s Bureau of Competition, clearly stated the Commission’s opposition to the legislation.

“Giving health care providers – whether pharmacies, physicians, or others – a license to engage in price fixing and boycotts in order to extract higher payments from third-party payers would be a costly step backward, not forward, on the path to a better health care system,” Wales said in testimony to the House Judiciary Committee’s Antitrust Task Force on October 18.

Caution in Considering Exemptions

Wales cited the work of the Antitrust Modernization Commission (AMC), which earlier this year urged Congress to exercise caution when considering antitrust exemptions. The AMC concluded that exemptions typically “create economic benefits that flow to small, concentrated interest groups, while the costs of the exemption are widely dispersed, usually passed on to a large population of consumers through higher prices, reduced output, lower quality, and reduced innovation.”

The AMC recommended that such statutory immunities be granted “rarely” and only when proponents have made a “clear case” that exempting otherwise unlawful conduct is “necessary to satisfy a specific societal goal that trumps the benefit of a free market to consumers and the U.S. economy in general,” Wales noted.

The proposed exemption for pharmacies is one of those instances in which an exemption would satisfy an important societal goal, in the FTC’s view. “The bill would immunize price-fixing and boycotts to enforce fee and other contract demands, conduct that would otherwise amount to blatant antitrust violations,” the deputy director observed.

The Commission voted 5-0 to approve the testimony. Text of the written testimony appears on the FTC website.

Freedom of Speech Trumps Baseball Players’ Publicity Rights

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

Even though baseball players established a cause of action for violation of their rights of publicity by a fantasy game provider (CBC), the First Amendment trumped the right of publicity, the U.S. Court of Appeals in St. Louis has ruled. CBC sold fantasy sports products via its website, e-mail, mail, and the telephone. Its fantasy baseball products incorporated the names along with performance and biographical data of actual major league baseball players.

Right of Publicity

The players offered sufficient evidence to make out a cause of action for violation of their rights of publicity under Missouri law. In Missouri, the elements of a right of publicity action included (1) the use of an individual's name as a symbol of his identity, (2) without consent, and (3) with the intent to obtain a commercial advantage.

The parties agreed that CBC's continued use of the players' names and playing information after the expiration of a 2002 licensing agreement was without consent. The symbol-of-identity element was satisfied because there was no doubt that the players' names used by CBC were understood by it and its fantasy baseball subscribers as referring to actual major league baseball players. In addition, because CBC used baseball players' identities in its fantasy baseball products for purposes of profit, their identities were being used for commercial advantage.

First Amendment

Though the dispute was between private parties, the state action necessary for First Amendment protections was present because the right of publicity claim existed only insofar as the courts enforced state-created obligations that were never explicitly assumed by CBC.

Pictures, graphic design, concept art, sounds, music, stories, and narrative present in video games had been held to be speech entitled to First Amendment protection. Similarly, CBC used the “names, nicknames, likenesses, signatures, pictures, playing records, and/or biographical data of each player” in an interactive form in connection with its fantasy baseball products.

The recitation and discussion of factual data concerning the athletic performance of major league baseball players commanded a substantial public interest, and, therefore, was a form of expression due substantial constitutional protection, according to the court.

The right of publicity provides incentives to encourage a person's productive activities and to protect consumers from misleading advertising. But major league baseball players were handsomely rewarded and could earn additional large sums from endorsements and sponsorship arrangements, the court noted.

There was no danger that consumers would be misled, the court found, because the fantasy baseball games depended on the inclusion of all players and thus could not create a false impression that some particular player with “star power” is endorsing CBC's products.

No-Use Agreement

The court, with one judge dissenting, held unenforceable a no-challenge provision of the parties’ 2002 agreement and a no-use provision, which prohibited CBC from using players' names and playing records after the expiration of the agreement.

A warranty of title in the agreement provided that the players association was “the sole and exclusive holder of all right, title and interest” in and to the names and playing statistics of virtually all major league baseball players. Because the players association did not have exclusive “right, title, and interest” in the use of the information, the association breached a material obligation that it undertook in the contract, the court determined. CBC thus was relieved of the obligations that it undertook, and the association could not enforce the no-use and no-challenge provisions.

The October 16, 2007 decision in C.B.C. Distribution and Marketing, Inc. v. Major League Baseball Advanced Media, L.P., will appear at CCH Advertising Law Guide ¶62,693.

Advertising Industry Board Revises Self-Regulatory Procedures

This posting was written by William Zale, Editor of Do's and Don'ts in Advertising.

The Board of Directors of the National Advertising Review Council (NARC) has approved revisions to the policies and procedures that guide the advertising industry’s system of self regulation.

The revisions, effective immediately, include (1) the expansion of the categories of case dispositions reported by the National Advertising Division (NAD) of the Council of Better Business Bureaus, (2) the implementation of a filing fee for competitive challenges brought before the Electronic Retailing Self-Regulation Program, and (3) an increase in the filing fee for appeals before the National Advertising Review Board.

New Reporting Category

Prior to the revisions, NAD decisions have reported that the advertising claims at issue were “substantiated” or should be “modified” or “discontinued.” Changes to the procedures allow the NAD to report that claims at issue are “substantiated in part/discontinued in part.”

“The new reporting category will allow us to more accurately report the final outcome of many NAD cases,” said C. Lee Peeler, NARC president and CEO. “In the majority of cases, the advertiser provides adequate substantiation of at least some of the challenged claims, even though NAD may also recommend that other claims be modified or discontinued.”

Electronic Retailing

The Electronic Retailing Self-Regulation Program (ERSP) was launched in 2004 when the Electronic Retailing Association (ERA) requested that NARC develop an advertising self-regulation program for the direct-response marketing industry. The ERSP examines the truth and accuracy of claims in direct-response marketing. ERSP’s work is funded by the ERA. Under the revised procedures, non-ERA member companies filing a claim will pay a fee of $2,500.

Filing Fees for Appeals

The Board also approved an increase in filing fees for appeals brought before the National Advertising Review Board (NARB), the appellate body for the advertising industry’s system of self regulation. The filing fees for appeals were increased from $1,000 to $1,500 for members of the Council of Better Business Bureaus and from $2,000 to $2,500 for non-members of the Council.

The revised procedures appear in full text in the Do’s and Don’ts in Advertising, a two-volume, monthly reporter of the Council of Better Business Bureaus.

Through a partnership with the CBBB, Do’s and Don’ts in Advertising is being published by Wolters Kluwer Law & Business. Further details regarding the publication are available at the CCH Online Store.

California Clarifies Franchise Registration Rules

This posting was written by John W. Arden.

California has set out the rules for franchise disclosure and registration, as it transitions from acceptance of the Uniform Franchise Offering Circular to the Uniform Franchise Disclosure Document, prescribed by the new Federal Trade Commission franchise disclosure rule.

According to a release posted October 16 on the ABA Forum on Franchising list serve by the California Department of Corporations:

 The Uniform Franchise Offering Circular (UFOC) is valid until June 30, 2008, “regardless of when the registration was approved in California.”

 The FTC has withdrawn permission for franchisors to use the UFOC after June 30, 2008.

 Franchisors must use a franchise disclosure document that complies with the new FTC franchise rule after July 1, 2008.

 The California Corporations Commission began accepting the FTC’s Uniform Franchise Disclosure Document (UFDD) on July 1, 2007.

 A registered franchisor “must file the UFDD as part of its 2007/2008 application process or file and have approved a post-effective amendment application with the UFDD before any franchises can be offered or sold on or after July 1, 2008."

 Thus, “no UFOC may be distributed to prospective franchisees after July 1, 2008 under any circumstances.”

Instructions for the soon-to-be-released UFDD packet—which will include “fillable” franchise forms—will appear on the Corporations Commission’s web site:
http://www.corp.ca.gov/srd/franchise.htm

The release was signed by California Corporations Commissioner Preston DuFauchard and Lead Attorney, Securities Regulation Division, Henry Lew.

Korea Amends Franchise Act to Require Disclosure, Registration, Cause for Nonrenewal

This posting was written by John W. Arden.

Recent amendments to Korea’s Fair Franchise Transactions Act of 2002 require franchisors to register disclosure statements with the Korea Fair Trade Commission, to deliver written disclosure states to all prospective franchisees, and to have just cause to refuse renewal of a franchise, according to a presentation by Brendon Carr at the International Bar Association meeting this week in Singapore.

Disclosure Statement

The “most profound change” of the August 3 amendments is the article mandating that franchisors prepare and register a detailed disclosure statement containing information similar to that prescribed by the U.S. Uniform Franchise Offering Circular, Mr. Carr observed. Previously, Korea did not require registration of a disclosure statement.

Such disclosure statements may be subject to review and approval by the Korean Fair Trade Association. Prior to these amendments, the KFTA had promulgated a suggested Model Disclosure Statement, which was not mandatory but was widely adopted by Korean domestic franchisors.

Delivery to All Prospective Franchisees

In addition to making the disclosure statement mandatory, the amendments affirmatively obligate franchisors to deliver disclosure statements to all prospective franchisees not just to prospective franchisees who make written requests for disclosure statements, as previously required.

A prospective franchisee is defined as any party who conducts discussions or negotiations with a franchisor concerning the execution of a franchise agreement. The law now authorizes franchisees to rescind franchise agreements and demand refunds of franchise fees where disclosure statements contain false or exaggerated information.

Just Cause

The amendments completely overhaul the law’s previous renewal section, allowing franchisors to decline renewal only when there is “just cause,” defined as default in payments, failure to adhere to standards and practices applied to the rest of the franchise system, or default in adherence to “material standards” of the franchise system.

Franchisors intending to refuse renewal must send two default notices over 60 days and provide an opportunity to cure the cited default.

Other Provisions

Besides the disclosure, registration, and nonrenewal requirements, the amendments (1) impose a cooling off period of at least 14 days after the delivery of a disclosure statement; (2) expand the definition of “franchise fees” to include the cost of required fixtures, trade dress elements, and rent paid to the franchisor; and (3) prohibit franchisor competition with the franchisee.

The amendments will become effective on February 4, 2008, with an Enforcement Decree expected to be issued before that date, according to Mr. Carr. Like the original law, the amended version does not address cross-border franchise agreements.

Further details and text of the law in English translation will appear in the CCH Business Franchise Guide.

The paper, “Recent Amendment of the Korean Franchise Act,” was written by Brandon Carr, Foreign Legal Consultant with Hwang Mok Park, P.C. of Seoul, Korea. He is the editor of the Korea Law Blog.