Senior Citizens Entitled to Triple Restitution for Breach of California Unfair Competition Law

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

A class of senior citizens could receive triple restitution under the California Civil Code for violations of the California Unfair Competition Law (UCL) by a life insurance company that allegedly engaged in deceptive business practices to induce the purchase of high-commission annuity contracts with large surrender penalties, according to a California appellate court.

The senior citizens alleged that they were duped into buying high-commission annuity contracts with large surrender penalties from the National Western Life Insurance Company in violation of the UCL. The class sought restitution of the allegedly improper surrender penalties and enhanced remedies for each cause of action under California Civil Code Sec. 3345.

Enhanced Remedies for Senior Citizens

Section 3345 authorizes trebling either the amount authorized under a statute or the amount the trier of fact imposed in its discretion. It requires that the action (1) be brought by or on behalf of senior citizens or disabled persons seeking redress for unfair methods of competition and (2) be one in which the trier of fact is authorized by a statute to impose a penalty the purpose or effect of which is to punish or deter.

National Western was granted judgment on the pleadings without leave to amend because the trial court found that that the only available remedy under the UCL did not have the purpose or effect of punishment or deterrence as required by Section 3345. Therefore, Section 3345 was not applicable to the UCL action and the case was dismissed, the trial court held.

According to the appellate court, the language of Section 3345 did encompass actions under the UCL brought by or on behalf of senior citizens. Contrary to the trial court’s ruling, UCL restitution awards have a deterrent purpose and effect.

Damages v. Restitution

It was well established that private plaintiffs could not receive damages—much less treble damages—under the UCL.In this case, however, the senior citizens did not seek to justify monetary relief other than restitution under the UCL. Therefore, the court found that Section 3345 applied to unfair competition actions involving a fine, civil penalty, or any other deterrence remedy.

Section 3345 was enacted as a specific remedy in actions concerning deceptive business practices aimed at senior citizens. It was consistent with the goal of the legislature to construe Section 3345 to apply to UCL actions. Therefore, the trial court’s order was vacated and a new order was entered denying National Western’s motion for judgment on the pleadings.

The May 21 decision—Clark v. The Superior Court of Los Angeles (National Western Life Insurance Co.)—will be reported in CCH State Unfair Trade Practices Law.

California Unfair Competition Class Standing Hurdle Removed in Tobacco Ad Case

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

In a class action, the standing requirements of the California Unfair Competition Law (UCL) apply only to class representatives, not to class members, the California Supreme Court has ruled. The court reversed an order decertifying a class of California smokers on the theory that all class members were required to demonstrate standing.

The smokers alleged that tobacco companies violated the UCL by conducting a decades-long campaign of deceptive advertising and misleading statements about the addictive nature of nicotine and the relationship between tobacco use and disease.

The court further held that a class representative is not required to plead or prove with “an unrealistic degree of specificity” reliance on particular advertisements or statements when the unfair practice is a fraudulent advertising campaign.

California Proposition 64

California Proposition 64 mandated that a class representative in a UCL action comply with the civil procedural requirements applicable to California class actions. After Prop 64, a UCL class action is a procedural device that enforces substantive law by aggregating many individual claims into a single claim of a representative plaintiff.

These procedural modifications to the UCL, however, left entirely unchanged the substantive rules governing business and competitive conduct. Nothing a business might lawfully do before Proposition 64 is unlawful now, and nothing earlier forbidden is now permitted, the court explained.

Standing

Proposition 64 did not alter accepted principles of class action procedure that treat the issue of standing as referring only to the class representative and not the absent class members, the court found. Imposing an unprecedented standing requirement on unnamed class members would undermine the guarantee made by Proposition 64’s proponents that the initiative would not undermine the efficacy of the UCL as a means of protecting consumer rights.

Requiring all unnamed members of a class action to individually establish standing would effectively eliminate the class action lawsuit as a vehicle for the vindication of such rights. The UCL remedies provision, left unchanged by Proposition 64, offered additional support for the conclusion that the initiative was not intended to have any effect at all on unnamed members of UCL class actions, the court noted.

Causation of Injury—Reliance

Proposition 64 provided that a private suit under the UCL can be brought only by “a person who has suffered injury in fact and has lost money or property as a result of the unfair competition.” While it was clear that the phrase indicated there must be some connection between the injury and the defendant’s conduct, the parties disagreed about the type of causation the plaintiff must demonstrate.

There is no doubt that reliance is the causal mechanism of fraud, the court said. However, a plaintiff need not demonstrate individualized reliance on specific misrepresentations to satisfy the reliance requirement.

When, as in this case, a plaintiff alleges exposure to a long-term advertising campaign, the plaintiff is not required to plead with an unrealistic degree of specificity that the plaintiff relied on particular advertisements or statements, according to the court. An allegation of reliance is not defeated merely because there was alternative information available to the consumer-plaintiff, even regarding an issue as prominent as whether cigarette smoking causes cancer, the court added.

The class decertification order was reversed and the case was remanded for further proceedings to determine whether the class representatives could establish standing and, if not, whether leave to amend should be granted to add a new class representative.

The May 18 decision in Tobacco II Cases will be reported in CCH Advertising Law Guide and CCH State Unfair Trade Practices Law.

Food Products Maker Held in Contempt for Discriminatory Pricing

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

Michael Foods, Inc., a national food products manufacturer, has been held in contempt of a recent order (2009-1 Trade Cases ¶76,609), enjoining it from discriminating in price for the sale of food in favor of Sodexho, Inc., the world’s largest food service management company, and to the detriment of a complaining wholesale food distributor.

The federal district court in Harrisburg, Pennsylvania, found that Michael Foods required the complaining distributor to accept unlawfully higher prices as a condition of continued sales pending appeal of a judgment against it and ultimately terminated its direct sales to the complaining distributor after the distributor sought relief from the court.

As a remedy, Michael Foods was enjoined from refusing to sell its products to the complaining distributor on the same terms as they were sold to Sodexho, so long as the complaining distributor otherwise met its standards as a customer.

(For details regarding the decision and order, see Trade Regulation Talk, May 18, 2009.)

Disobedience With Court Order

Because the order was valid and known to Michael Foods, the only issue was whether the manufacturer’s conduct constituted disobedience with the order. With respect to pricing pending appeal, Michael Foods was aware that the proper course of action would have been to seek a stay of the injunction, according to the court.

Instead, it chose a path intended to circumvent the court’s order and to continue its unlawful price discrimination by selling its products to the complaining distributor at a higher price than Sodexho.

As for Michael Foods’s termination of direct sales to the complaining distributor, the manufacturer was not in contempt of the order for refusing to deal, but rather for its continued dealings with the complaining distributor in defiance of the order. Michael Foods continued to violate the order through its ongoing sales to the complaining distributor through third parties.

Additional Link in Distribution Chain

Michael Foods attempted to avoid its obligations under the Robinson-Patman Act in defiance of the injunction by inserting an additional link into the distribution chain through its sales to a third party for resale to the complaining distributor, in the court’s view.

Meanwhile, Michael Foods continued to sell products to Sodexho (through its distributor) at the far lower prices. Thus, the court rejected Michael Foods’s argument that the order did not specifically prohibit it from refusing to deal with the complaining distributor, and that the court would have had no power to do so.

The May 26 decision in Feesers, Inc. v. Michael Foods, Inc., will appear at 2009-1 Trade Cases ¶ 76,628.

Amnesty Applicant Not Ordered to Identify Itself, Assist in Private Antitrust Suit

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

The federal district court in San Francisco will not require a company that was granted conditional leniency under the Department of Justice Antitrust Division corporate leniency program to identify itself to, and cooperate with, plaintiffs in a private antitrust action, alleging a conspiracy to fix prices in the thin film transistor-liquid crystal display (TFT-LCD) industry.

The plaintiffs—direct purchasers of TFTLCD panels—sought a motion to compel the amnesty applicant to comply with the Antitrust Criminal Penalty Enhancement and Reform Act of 2004 (ACPERA) or forfeit any rights under the Act.

The ACPERA (CCH Trade Regulation Reporter ¶27,750) limits the liability in a private antitrust action of a successful amnesty applicant that has cooperated with the government’s investigation and prosecution of the underlying conspiracy. The amnesty applicant’s liability might be limited to actual damages, instead of the usual treble damages.

Grant of Conditional Leniency

The Justice Department confirmed that it granted conditional leniency to an applicant, and that the applicant satisfied its obligations under the leniency agreement to fully cooperate with the government in its investigation into the TFT-LCD price fixing conspiracy.

Several corporations and individuals were successfully prosecuted for their roles in the conspiracy. The Justice Department, however, argued that the ACPERA did not authorize the court to grant the plaintiffs’ requested relief.

The court sided with the Justice Department and Samsung, the company identified by the plaintiffs as the amnesty applicant. While the court agreed that an amnesty applicant’s cooperation was most valuable early in the litigation, it concluded that the language of ACPERA suggested that the court’s assessment of an amnesty applicant’s cooperation occurred at the time of imposing judgment or otherwise determining liability and damages. Therefore, the amnesty applicant’s conduct would not be considered until the amnesty applicant sought to limit liability under ACPERA later in the suit.

Sunsetting of Provisions

The decision is probably the first to consider a federal district court’s authority under the ACPERA to compel an amnesty applicant to cooperate with private antitrust plaintiffs. It comes as the provisions in the 2004 law that provide amnesty applicants with an opportunity to avoid treble damages are about to sunset. According to the law, the provisions cease to have effect 5 years after the date of enactment. The law was enacted on June 22, 2004.

The American Bar Association Section of Antitrust Law has called on leaders in the House and Senate Judiciary Committees to extend these provisions. It has also suggested that Congress evaluate the efficacy of the detrebling provisions.

The May 19 decision is In re TFT-LCD (Flat Panel) Antitrust Litigation, 2009-1 Trade Cases ¶76,626.

Franchisee Liability for Lost Future Profits: Another Blow to Sealy?

This posting was written by Bruce S. Schaeffer of Franchise Valuations, Ltd., co-author of CCH Franchise Regulation and Damages.

The Texas Court of Appeals for the Second District—applying Georgia law in a case of first impression for both Georgia and Texas—has held that a "terminated" franchisee was liable for lost future profits over the full remainder of a 25-year term (Progressive Child Care Systems, Inc. v. Kids `R' Kids International, Inc., CCH Business Franchise Guide ¶14,018).

Is this the death knell of Postal Instant Press, Inc. v. Sealy (CCH Business Franchise Guide ¶10,893), which invalidated an award of lost future royalties and advertising fees to a franchisor that had terminated a franchisee for failure to pay royalties? I think not.

For one thing, there was no possibility of the franchisor in the Texas case double-dipping or collecting royalties from the same site twice because the "terminated" franchisee simply stopped paying and kept his child care franchises running at the same sites under a different name—Legacy Learning Center, rather than Kids `R' Kids.

For another, the franchisee simply left the system, falling more under the abandonment justification for such lost future royalties found in other cases. See It's Just Lunch Franchise, LLC v. BLFA Enterprises, LLC, CCH Business Franchise Guide ¶12,620.

In that case, the court held that “under Sealy, a franchisor who has terminated the franchise agreement cannot recover for future profits,” but nevertheless found It’s Just Lunch to be outside Sealy. "The Sealy court expressly refused to consider whether damages for future profits would be available where, as alleged in It's Just Lunch's complaint, the franchisee terminated the agreement."

Attorney "Mal Practice"

There was a recent comment thread on "mal practice" on the ABA Franchise Forum's listserv (from whence comes the strange spelling in two words) concerning the practice of franchise law by the ignorant.

As one would expect from such a diverse crowd, the responses ranged from the learned to the mundane, from the sanctimonious to failed attempts at humor. But the point was well taken—proctologists should not perform brain surgery, and the lawyers who do house closings should not prepare franchise documents.

Proof of how bad an outcome can result from such ignorant representation is found in State of Nebraska ex rel Counsel for Discipline of the Nebraska Supreme Court v. Orr(Neb. S. Ct. January 30, 2009, CCH Business Franchise Guide ¶14,064).

As I have repeatedly said, the same problem—lack of expertise—can be extremely troubling when using generalized knowledge experts (as opposed to franchise valuation experts) to establish damages or value franchises in mediation, arbitration or litigation. See, e.g., Schaeffer and Ogulnick, “Why Valuing Franchise Businesses is Different from Valuing Other Businesses,” Institute of Business Appraisers, Business Appraisal Practice (Spring 2008).

Rescission as Punishment

A Colorado trial court in Quizno's Franchising II v. Zig Zag Restaurant Group (D. Colo. 2008) CCH Business Franchise Guide ¶14,046, used rescission as the measure of damages to punish a franchisor’s vendetta of “in-house pique” against a franchisee who was terminated as the result of one unreliable field test of the amount of meat in a sandwich.

The court held the sandwich shop franchisee was entitled to rescission-type damages in the amount of $349,797 and post-judgment interest at the rate of 24 percent for the franchisor’s wrongful termination.

Under well-settled Colorado law, contract damages are normally based on benefit-of-the-bargain. However, the court ruled that when there is a substantial breach with irreparable injury—and ordinary contract damages are inadequate, difficult, or impossible to assess—then it is appropriate to award rescission-type damages. The object was not just to return the parties to the moment before the breach, but to return them to the moment before the contract was entered into.

The franchisor's argument that it terminated the franchise because the franchisee breached its agreement by materially impairing its goodwill was rejected. To the contrary, the court held that the franchisor breached the agreement by wrongfully terminating the franchisee.

Congressional Subcommittees Hear Testimony on Vertical Price Fixing, Railroad Exemption

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

Subcommittees of the U.S. Senate and House Judiciary Committees held hearings May 19 on bills that would, respectively, reinstate the per se rule for resale price maintenance and repeal the antitrust exemption for railroads.

Restoration of Per Se Rule

The Senate Judiciary Committee's Subcommittee on Antitrust, Competition Policy and Consumer Rights held a hearing entitled "The Discount Pricing Consumer Protection Act: Do We Need to Restore the Ban on Vertical Price Fixing?"

The hearing considered the impact of the U.S. Supreme Court decision in Leegin Creative Leather Products, Inc, v. PSKS, Inc. (2007-1 Trade Cases ¶75,753), which requires that resale price maintenance be scrutinized under a rule of reason standard rather than declared per se illegal under federal antitrust.

Senator Herb Kohl (D-Wis.) said in a prepared statement that manufacturers have begun to set minimum retail prices resulting in higher prices for consumers, as a result of Leegin. Kohl introduced the "Discount Pricing Consumer Protection Act" (S. 148) in January 2009 to overturn the decision.

Among the witnesses was FTC Commissioner Pamela Jones Harbour, who reiterated earlier testimony before a House subcommittee on the same issue. Harbour said that Leegin had the effect of legitimizing minimum resale price fixing, which was "contrary to good economic and legal policy" because it subordinated consumer preferences to the interests of manufacturers and merchants of branded consumer goods.

Jim Wilson, the current Chair of the Section of Antitrust Law of the American Bar Association (ABA), also testified. Wilson said that the "[b]ecause the intention and likely impact of the Discount Pricing Consumer Protection Act would be to effectively overturn the Leegin decision and reestablish a rule of per se illegality, the ABA respectful urges Congress not to enact this legislation."

The rule of reason is the proper standard because minimum resale price maintenance “can stimulate interbrand competition and is not so inevitably pernicious as to warrant per se illegality,” he noted.

Todd Cohen, vice president and deputy counsel, government relations, for eBay, observed that the Leegin decision “is beginning to undermine many of the consumer benefits delivered by innovators using the openness of the Internet. Leegin empowers those who want to curtail the ability of small and mid-size online retailers to communicate and offer lower prices to consumers.” Since the decision was issued, there appears to have been an increase in RPM programs that restrict intrabrand price competition, he said.

“For example, a recent report in the Wall Street Journal details how some businesses limit price competition through continually scanning the eBay platform to identify sellers offering their prices at a lower price,” according to Cohen. “They then use a plethora of tools to identify the seller and enforce their minimum prices.”

Stacy John Haigney, attorney for Burlington Coat Factory, testified that off-price retailers like Burlington would never have gotten off the ground in the 1970s if the Leegin rule had been in effect. During that time, department stores “could not legally coerce their suppliers to impose high-pricing structures through the industry . . . However, post-Leegin, there is no practical way to stop such retailer-imposed price-fixing schemes from being put in place.”

Further details on the hearing—including written testimony and a webcast of proceedings—appear here at the Senate Judiciary Committee website.

Repeal of Railroad Antitrust Exemption

Adversaries and supporters of the proposed "Railroad Antitrust Enforcement Act of 2009" squared off at a Congressional hearing regarding the legislation in Washington D.C. The bill, introduced in both the House of Representatives (H.R. 233) and Senate (S. 146), would repeal railroads' antitrust exemption and provide for numerous means to halt "anticompetitive rail conduct."

Speaking to the House Judiciary Committee's Subcommittee on Courts and Competition Policy, Association of American Railroads officials said that the measure would have harmful impacts on railroad customers—and American consumers in general—by severely distorting the relationship between regulation and antitrust laws.

Union Pacific executive J. Michael Hemmer observed that the bill's potential granting of regulatory authority to the FTC created a glaring conflict with the Surface Transportation Board and that the bill’s proposed retroactive effect could lead to antitrust attacks on the continuing operation of every federally approved transaction in rail history. Hemmer added that the legislation should not be considered in isolation.

"If Congress wants to address rail transportation policies," he said, "it should work with colleagues in other committees of jurisdiction to craft a coherent, national rail policy that integrates regulation with antitrust jurisprudence."

In response, the Consumer Federation of America asserted that the legislation was sorely needed because "rampant consolidation" and a lack of regulatory oversight have "allowed railroads to abuse their monopoly pricing power and overcharge consumers and shippers $3 billion per year."

Shippers without rail-competitive options pay 75 percent to 100 percent more for rail shipments compared with similar movements in competitive markets, the CFA reported. Captive shippers' costs have been rising substantially over the past five years.

Speaking on behalf of the ABA Section of Antitrust Law, M. Howard Morse referred to the group’s frequent opposition to industry-specific exemptions from the antitrust laws. This opposition is based on the belief that “antitrust laws are sufficiently flexible to account for particular market circumstances.”

Accordingly, the Antitrust Section encourages Congress to dismantle the exemption for the railroad industry and to consider additional legislation to eliminate antitrust exemptions in other industries.

Written testimony and a webcast of the hearing appear here on the House Judiciary Committee’s website.

“Unique” Infant Formula Ad Claims Not Enjoined

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

A producer of store brand infant formula (PBM Products) asserting Lanham Act violations was denied a preliminary injunction barring “unique formulation” advertising claims made in a mailer by Mead Johnson, the producer of Enfamil LIPIL formula.

The federal district court in Richmond found that PBM failed to demonstrate a likelihood of success on its claim that Mead’s national advertising campaign falsely stated that only Enfamil LIPIL had two lipids—docosahexaenoic acid (DHA) and arachidonic acid (ARA).

Mead’s advertisements cited studies that compared its current and prior formulas and apparently found that the addition of the lipids resulted in improved eye and brain development for infants. The parties acknowledged that both PBM’s store brand formula and Mead Johnson’s Enfamil LIPIL used the same levels of the lipids and obtained them from the same supplier—the only FDA-approved source.

Studies

Mead claimed, “It may be tempting to try a less expensive store brand, but only Enfamil LIPIL is clinically proven to improve brain and eye development.” The claim was not literally false, in the court’s view, because it was undisputed that the studies demonstrated, concomitant with the presence of the lipids in Mead’s formula, the benefits to vision and brain development claimed in this advertisement.

Because the claim was not literally false, PBM had the burden of demonstrating that it tended to mislead consumers, and nothing in PBM’s pleadings demonstrated this. In addition, a disclaimer clarified the point that the studies only compared the current version of Mead’s formula with its prior version, which did not contain the lipids.

Unique Formulation

PBM also failed to show that it likely would succeed in challenging another Mead claim: “En-Fact: Enfamil LIPIL’s Unique Formulation Is Not Available in Any Store Brand.”

An objective reading of this statement suggested that “unique” referred, not to an isolated component of the formula, but rather to the formula in its entirety, the court said. That is, Enfamil LIPIL contained various ingredients, in addition to the lipids, that provided the consumer with a “unique formulation” unavailable elsewhere. As long as Mead Johnson’s product contained ingredients that other brands did not, the statement could not be considered literally false.

Graphic, Captions

Finally, PBM failed to show a likelihood of success on its claims regarding a “blurry duck” graphic and associated captions. The graphic, which was divided down the middle, contained a picture of a duck. One side of the picture looked blurry, while the other appeared clear. Next to the blurry side were the words “without LIPIL®,” while the caption next to the clear side read “with LIPIL®.”

The question of literal falsity turned on whether the captions clearly conveyed what Mead claimed was the intention of the graphic—that Enfamil LIPIL provided a benefit that Enfamil without the lipids did not. The court acknowledged that a plausible argument existed that the duck graphic might tend to convey the false impression that, in order to obtain formula with the lipids a consumer had to purchase Enfamil LIPIL, when in fact this was not the case. This plausible mistake notwithstanding, Mead did provide the disclaimer clarifying the comparison.

In sum, at this stage of the case, PBM had not satisfied its burden of demonstrating that these statements tended to mislead or confuse the consuming public, the court concluded.

The May 7 opinion in PBM Products LLC v. Mead Johnson Nutrition Co. will be reported at CCH Advertising Law Guide ¶63,417 and at 2009-1 Trade Cases ¶76,619.

Federal Law Regulates Gift Certificates and Cards

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

A new federal law regulates gift certificates, store gift cards, and general-use prepaid cards by putting limits on fees and expiration and imposing disclosure requirements. The measure is included in the Credit Card Accountability Responsibility and Disclosure Act (Credit CARD Act of 2009), Public Law 111-24, signed by President Obama May 22, 2009.

Title IV of the Act—relating to gift certificates, gift cards, and prepaid cards—becomes effective August 22, 2010.

Fees, Disclosures

Dormancy fees, inactivity fees, and service fees are prohibited unless (1) there has been no activity with respect to a certificate or card for the preceding 12 months, (2) disclosure requirements are met, (3) not more than one fee per month is charged, and (4) any additional requirements imposed by Federal Reserve Board regulations are met.

The law requires the Board to issue final regulations by February 22, 2010, after consulting with the Federal Trade Commission. The prohibition of fees does not apply to any gift certificate distributed pursuant to an award, loyalty, or promotional program, as defined by the Board, and for which no money or other value is exchanged.

Issuers or vendors of certificates or cards must inform purchasers of fees before purchase. Certificates and cards must clearly and conspicuously state (a) that a dormancy, inactivity, or service fee may be charged, (b) the amount, (c) how often the fee may be assessed, and (d) that the fee may be assessed for inactivity.

Expiration

The law prohibits sale of certificates or cards subject to an expiration date earlier than five years after the date a gift certificate was issued or the date on which card funds were last loaded to a store gift card or general-use prepaid card. Expiration dates must be clearly and conspicuously stated.

Effect on State Laws

State laws regulating gift certificates and cards are not affected if they afford consumers greater protections than those afforded by the new federal law.

Further details will appear in CCH Advertising Law Guide.

Consumer Class Action Denied in McDonald's French Fries Case

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

Certification of a nationwide class was denied in a consumer protection lawsuit against McDonald's because individual issues predominated, according to the federal district court in Chicago.

The action alleged false advertising about ingredients in McDonald's potato products in violation of the unfair trade practices laws of 50 states and the District of Columbia.

Gluten, Wheat, and Dairy-Free

McDonald's French fries and hash browns are fried in an oil made of 99% vegetable oil and 1% natural beef flavor, which contains wheat and dairy products. A group of McDonald's customers alleged that McDonald's falsely advertised its potato products as gluten, wheat, and dairy-free on its website and in literature at restaurants. The customers argued that, but for McDonald's representations, they would not have purchased the potato products.

In order to obtain class certification, the customers needed to show that: (1) common issues of law and fact predominated, and (2) a class action was superior to other forms of adjudication.

Individual Reliance

The customers failed to show that common issues of law and fact predominated, according to the court. Class treatment was inappropriate because the class was over-inclusive and each class member would have to be interviewed to determine whether they actually relied on McDonald's representations, the court ruled.

When a separate evidentiary hearing is necessary for each member's claim, the benefits of class treatment are outweighed by the challenges presented to the court.

Conflicts Among State Laws

Material conflicts between various state consumer protection laws also weighed against class certification, according to the court. Numerous courts have pointed out the material conflicts among the 50 states' laws, and have denied class certification on that basis. In this case, the court concluded that individual issues of law predominated and class treatment was not appropriate.

The decision is In re: McDonald's French Fries Litigation, ND Ill., CCH State Unfair Trade Practices Law ¶31,813.

High Court to Consider RICO’s "Business or Property" Requirement

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

The U.S. Supreme Court has agreed to consider whether a city government alleging a non-commercial injury that resulted from the non-payment of taxes by non-litigant third parties has met RICO's standing requirement that a plaintiff be directly injured in its "business or property."

The U.S. Court of Appeals in New York City held that the City of New York had standing to bring civil RICO claims against out-of-state cigarette retailers that failed to submit monthly sales reports to the State of New York (CCH RICO Business Disputes Guide ¶11,547). The retailers' conduct allegedly prevented the City from collecting tens, perhaps hundreds, of millions of dollars a year in excise taxes.

Commercial Transaction Requirement?

The retailers had unsuccessfully argued that the City's "lost taxes" did not constitute an injury to the City's business or property because the loss was not incurred in a commercial transaction. The retailers based this argument on dicta that the court expressly rejected. Because lost taxes could indeed constitute an injury to the City's business or property for purposes of RICO, the City adequately satisfied RICO's injury requirement, in the appellate court's view. (See Trade Regulation Talk, September 20, 2008.)

In their petition for review, two defendant Internet retailers presented the question of “[w]hether city government meets the Racketeer Influenced and Corrupt Organizations Act standing requirement that a plaintiff be directly injured in its 'business or property' by alleging non commercial injury resulting from non payment of taxes by non litigant third parties.”

The two retailers argued that (1) there was a distinct split of opinion among the circuits about whether state and federal governments can use RICO to collect taxes and recover similar non-commercial losses and (2) the ruling of the Second Circuit conflicts with the Supreme Court’s precedent requiring a party to suffer direct injury to have RICO standing.

The petition for review is Hemi Group, LLC v. City of New York, Docket No. 08-969, filed January 27, 2009, granted May 4, 2009. Text of the petition is available here on the SCOTUS blog.

Insurance Agent Not Protected “Franchisee” Under Washington Law

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

An insurance agent was not a “franchisee” of an insurance company within the meaning of the Washington Franchise Investment Protection Act because the agent did not pay the company a “franchise fee,” according to the federal district court in Tacoma, Washington.

Thus, the company could not have violated the Franchise Investment Protection Act by committing fraud and breaching the duty of good faith and fair dealing in threatening the agent’s retirement benefits if he did not immediately retire.

The agent filed suit after a representative of the company allegedly improperly threatened his retirement benefits in a meeting to discuss employees’ claims of sexual harassment against the agent. The agent argued that, but for his allegedly forced retirement, he would have worked for an additional seven years.

Franchise Fee

The agent admitted that he did not pay any money to the insurance company for the agency. Instead, he argued that he paid an indirect franchise fee by exclusively selling the company’s insurance and allowing his customers and their information to become trade secrets of the company.

However, case law indicated that indirect franchise fees had been found only in situations when some money had changed hands, such as required purchases of products above the fair market value. Because the agent paid no money to the company—either directly or indirectly—he could not satisfy the Franchise Investment Protection Act’s franchise fee requirement, the court ruled.

Exemption for Insurance

In any event, insurance actions and transactions regulated under the insurance code were expressly exempted from the Franchise Investment Protection Act. Because the action of terminating an insurance agent is generally regulated by the insurance code, the agent’s complaint was specifically exempted from the protections of the Franchise Investment Protection Act.

The decision is Noyes v. State Farm General Insurance Co., CCH Business Franchise Guide ¶14,133.

Good Cause Not Required for Franchise Termination

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

A heating and air conditioning business franchisee failed to demonstrate that a manufacturer was required to have good cause before it terminated the parties’ agreement, the U.S. Court of Appeals in Denver has decided. Thus, a federal district court did not err in granting the manufacturer judgment on the claim as a matter of law.

The dispute arose when the manufacturer discovered that the franchisee had been abusing a rebate program that reduced prices charged to dealers, enabling them to meet the prices offered by competitors.

The manufacturer terminated the franchise, the dealer brought a breach of contract action, and the manufacturer counterclaimed based on the dealer’s abuse of the rebate program.

Termination at Will

As written, the agreement entitled either party to terminate at will on 30 days’ notice, the court noted. However, the franchisee argued that the agreement had been modified by the manufacturer’s statements and conduct so that the manufacturer could not terminate it without good cause.

At best, the evidence presented by the franchisee showed that the manufacturer had consistently provided cause when terminating franchises in the past, the court observed. However, a pattern of terminating with cause was not unequivocally inconsistent with the retention of the power to terminate without cause, according to the court.

Unclean Hands

The court agreed with the franchisor’s contention that the franchisee had unclean hands, based on the phony invoices the franchisee's employees had prepared in preparation for the franchisor’s audit of the rebate program.

Although a jury had found that the franchisee should have been equitably estopped from denying that the parties’ agreement required good cause for termination, the district court properly refused to apply the equitable doctrine for the franchisee’s benefit.

Damages

The district court erred by appointing a special master for an equitable accounting on the fraud claim, the court held. The district court found that having a jury “tediously slog through” the individual invoices that the franchisee had fraudulently submitted to the franchisor would prolong the trial.

Because the jury’s general verdict in favor of the franchisor on the fraud claim did not fix the scope of the franchisor’s liability, a new jury could not calculate the franchisor’s damages without resolving the specifics of that liability. Accordingly, the entire fraud claim—not simply the question of the amount of the franchisor’s damages—was required to be retried, the court held.

The decision is Haynes Trane Service Agency, Inc. v. American Standard, Inc., CCH Business Franchise Guide ¶14,125

Varney Discusses Antitrust Enforcement in Distressed Economy

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

Antitrust chief Christine A. Varney made headlines last week when she announced, in a May 11 speech, the withdrawal of the Antitrust Division’s controversial report on single firm conduct. (See Trade Regulation Talk, May 11, 2009).

However, Varney’s comments on other significant issues—from the role of antitrust enforcement in a distressed economy to the Antitrust Division’s enforcement agenda—were not widely reported.

In a speech to the Center for American Progress, the Assistant Attorney General suggested that “a combination of factors, including ineffective government regulation, ill-considered deregulatory measures, and inadequate antitrust oversight contributed to the current conditions.” In light of the state of the economy, antitrust enforcers can no longer “sit on the sidelines.”

Prior Economic Crises

Varney noted that the federal government’s response to the Great Depression was to pass legislation, such as the National Industrial Recovery Act, that effectively foreclosed competition by setting industry prices and wages, establishing production quotas, and imposing restrictions on entry.

“Competition was relegated to the sidelines, as the welfare of firms took priority over the welfare of consumers,” she said. “It is not surprising that the industrial codes resulted in restricted output, higher prices, and reduced consumer purchasing power.”

By 1937, the Roosevelt Administration got back in the game of antitrust enforcement on a nationwide scale. This newly vigorous enforcement became a cornerstone of the New Deal’s economic agenda.

Lessons Learned

“The lessons learned from this historical example are twofold,” she said. “First, there is no adequate substitute for a competitive market, particularly during times of economic distress. Second, vigorous antitrust enforcement must play a significant role in the Government’s response to economic crises to ensure that markets remain competitive.”

In recent years, firms have been given “room to run with the idea that markets self-police and that enforcement authorities should wait for the markets to self-correct.” However, it is clear that this self-correction has not occurred, the official said. Instead, markets are distorted, firms fail, and American consumers are failing with them.

“I believe that these extreme conditions require a recalibration of economic and legal analysis and theories, and a clearer plan for action,” Varney stated.

Section 2 Enforcement

Varney spoke of her intention to aggressively pursue enforcement of Section 2 of the Sherman Act and explained the reasons for withdrawing the 2008 report, entitled “Competition and Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act.”

“In my view, the greatest weakness of the Section 2 Report is that it raises many hurdles to Government antitrust enforcement,” she said. It raises the concern that the enforcers and courts may fail to distinguish between anticompetitive acts and lawful conduct and their actions may lead to “overdeterrence” of potentially procompetitive conduct, she observed.

“I do not share these concerns. I strongly believe that antitrust enforcers are able to separate the wheat from the chaff in identifying exclusionary and predatory acts. As Judge Posner explained, ‘antitrust doctrine is supple enough to take in stride the competitive issues presented by the new economy.’”

She also noted that the report went too far in evaluating the importance of preserving possible efficiencies and underestimated the importance of redressing exclusionary and predatory acts that harm competition, distort markets, and increase barriers to entry.

Rather than any specific test to govern Section 2 analysis, Varney recommended that the Antitrust Division go “back to basics” in evaluating single-firm conduct within the fundamental principles of antitrust enforcement.

Section 1 Cases

Varney added that “continued criminal and civil enforcement under Section 1 of the Sherman Act will also be an important part of the Antitrust Division’s response to the distressed economy.”

“With the higher levels of concentration and economic instability, markets are increasingly vulnerable to collusion and other fraudulent activity,” the Assistant Attorney General said.

On the civil front, the new antitrust chief will emphasize both merger and non-merger investigations and explore vertical theories in other new areas, such as those arising in high-tech and Internet-based markets.

Besides enforcing antitrust laws, the Division will be asked to contribute expertise to the Obama Administration’s broad reforms over numerous industries. “Indeed part of our efforts will be to foster inter-agency discussions regarding competition-related issues posed by existing and proposed regulations and policies, and to play an active role in competition advocacy.”

Text of the speech (“Vigorous Antitrust Enforcement in This Challenging Era”) appears at CCH Trade Regulation Reporter ¶50,242 and here on the Department of Justice Antitrust Division website.

Food Products Maker Engaged in Price Discrimination

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

Michael Foods, Inc., a national food products manufacturer, engaged in price discrimination in favor of Sodexho, Inc., the world’s largest food service management company, and to the detriment of a complaining wholesale food distributor, the federal district court in Harrisburg, Pennsylvania, has ruled.

The court enjoined Michael Foods from discriminating in price for the sale of food in favor of Sodexho over the complaining wholesale food distributor. In addition, Sodexho was enjoined from inducing or receiving discriminatory pricing from Michael Foods.

The complaining food distributor, Feesers, Inc., initiated the Robinson-Patman Act lawsuit in 2004. The company alleged that Michael Foods offered lower prices on its egg and potato products to Sodexho. It contended that it had lost some of its institutional customers to Sodexho as a result of the price discrimination.

In May 2006, the district court found that Feesers had established the first three elements of the prima facie case of price discrimination, but had failed to offer sufficient evidence to establish competitive injury resulting from the conduct (2006-2 Trade Cases ¶ 75,335).

On appeal, the U.S. Court of Appeals in Philadelphia reversed and remanded the case for trial (2007-2 Trade Cases ¶ 75,822). After a three-week trial, the district court concluded that Michael Foods and Sodexho violated the Robinson-Patman Act.

Competitive Injury

Feesers was entitled to an inference of competitive injury resulting from the price discrimination, and the defendants were unable to rebut the presumption, the
court held.

Sodexho and Feesers were in competition, even though Sodexho only sold food to institutional customers in conjunction with its food management services, while Feesers primarily supplied institutional customers that self-operated their dining services programs. Further, Michael Foods’ discount to Sodexho was sufficiently substantial and sustained to cause competitive injury.

The defendants failed to show an absence of a causal link between the discrimination and lost sales or profits to rebut the presumption of competitive injury, the court concluded. They claimed that the lower price that Sodexho received played no role in a customer’s choice between food service management or self-operating its dining services program.

However, the evidence presented at trial demonstrated that food costs constituted a significant portion of institutional food service budgets, and that lower food costs were an important part of a Sodexho’s strategic plans to win and retain customers, and improve its profit margin.

Meeting Competition Defense

Michael Foods failed to demonstrate a good faith effort to meet competition by other suppliers when it offered lower prices to Sodexho to rebut Feesers’s prima facie case of price discrimination, according to the court.

A seller invoking the meeting competition defense must establish that a price concession was granted in order to meet—and not beat—a lower price offered by a competitor, the court explained. In this case, the discounts were made to win the business of a large and powerful buyer, rather than to meet competition.

Michael Foods did not have enough information about competitive offers from competing manufacturers to craft an offer calculated in good faith to meet, and not beat the competition, in the court’s view.

Its main negotiator testified that the discounts were necessary to meet competition, even though the negotiator did not know of a particular competitor’s offer. The negotiator assumed that competitors offered similar prices because Sodexho was such a large and attractive customer.

Accepting such an assumption, however, would be contrary to the primary purpose of the Robinson-Patman Act, which was to prevent large buyers from utilizing their purchasing power to secure lower prices than their smaller competitors. If the meeting competition defense could be satisfied merely by showing that a particular customer was large and therefore likely to receive lower prices from competitors, then the Act’s purpose would be largely thwarted, according to the court.

The April 27, 2009, decision in Feesers, Inc.v. Michael Foods, Inc. and Sodexho, Inc., appears at 2009-1 Trade Cases ¶ 76,609.

European Commission Fines Intel for Abuse of Dominant Position

This posting was written by John W. Arden.

Computer chip giant Intel was fined €1.06 billion ($1.45 billion) on May 13 for violating European Commission Treaty antitrust rules on the abuse of a dominant position (Article 82) by engaging in illegal anticompetitive practices to exclude competitors from the market of computer chips called x86 central processing units (CPUs).
In addition to imposing the fine, the European Commission ordered Intel to cease the illegal practices that were still ongoing.

“Intel has harmed millions of European consumers by deliberately acting to keep competitors out of the market for computer chips for many years,” said Competition Commissioner Neelie Kroes. “Such serious and sustained violation of the EU’s antitrust rules cannot be tolerated.”

The Commission found that Intel—while maintaining a dominant position in the x86 CPU market—engaged in two forms of illegal practices.

Exclusionary Rebates, Payments

First, Intel gave wholly or partially hidden rebates to computer manufacturers on the condition that they bought all, or nearly all, of their x86 CPUs from Intel. The chip manufacturer also made direct payments to major retailer Media Saturn Holding on the condition that it stock only computers with Intel x86 CPUs.

“Such rebates and payments effectively prevented customers—and ultimately consumers—from choosing alternative products,” the Commission stated.

Halt or Delay Products with Other Chips

Second, Intel made direct payments to computer manufacturers to halt or delay the launch of products containing competitors’ x86 CPUs and to limit the sales channels for these products, according to the Commission.

“By undermining its competitors’ ability to compete on the merits of its products, Intel’s actions undermined competition and innovation,” the Commission said.

“Abusive” Rebates

While some rebates can lead to lower prices for consumers, those offered by a company in a dominant position that are conditioned on a manufacturer buying less of a rival’s products or none at all are abusive according to settled case law of European Community courts, unless they are justified by some specific reasons.

In this case, the Commission did not object to rebates, but to the conditions Intel attached to the rebates, it was explained.

Promotion of Innovation

In a question and answer document released on Wednesday, the Commission said that this decision will promote innovation in the market because Intel’s practices stifled innovative products from reaching customers.

“Such practices deter innovative companies which might otherwise wish to enter and compete in the market. By ordering Intel to end its abusive practices, competition on the x86 CPU market will play out on the merits with the effect that innovation to the benefit of the consumer can flourish.”

The document refers to the “legal underpinning” of the Commission’s case, based on a consistent pattern of jurisprudence, including Case 85/87 Hoffmann-La Roche v. Commission; Case T-203/01 Michelin v. Commission; Case C-95/04 British Airways v. Commission; Joined Cases T-24/93 and others, Compagnie Maritime Belge v. Commission; and Case T-228/7 Irish Sugar.

The European Commission and the Federal Trade Commission kept each other regularly informed on their respective investigation of Intel.

Text of the press release and the questions and answers appear on the European Union website.

Intel’s Reaction

In a May 13 statement, Intel President and CEO Paul Otellini took “strong exception” to the Commission decision.

“We believe the decision is wrong and ignores the reality of a highly competitive microprocessor marketplace—characterized by constant innovation, improved product performance and lower prices,” Otellini said. “There has been absolutely zero harm to consumers. Intel will appeal.”

White Paper Warns About Cyber Crime, Recommends Cyber Security Practices

This posting was written by John W. Arden.

The dangers of cyber crime and the measures that can be taken to protect cyber property are the subjects of a new report issued by Wolters Kluwer Law & Business.

Cyber Crime and Cyber Security: A White Paper for Franchisors, Licensors, and Others explains how malicious and well-organized hackers pose serious threats to firms’ intellectual property, confidential data, and collections of customers’ personal and financial information.

“As they say in the cyber security world, there are only two kinds of computer systems: those that have been hacked and those that will be hacked,” write authors Bruce S. Schaeffer, Henfree Chan, Henry Chan, and Susan Ogulnick.

Vulnerabilities, Liability

Practically any business and any person can be vulnerable. Despite a “hacker safe” notification from McAfee ScanAlert on its website, online retailer Geeeks.com was the victim of a cyber attack that accessed customer credit card numbers and other personal information. Even Deborah Platt Majoras, Chairman of the Federal Trade Commission from 2004 to 2008, was the victim of identity theft.

Cyber attacks can come from internal networks, the Internet, or other private or public systems, according to the authors. Major liability may follow in the form of individual and class litigation, regulatory action, contract disputes, customer loss, damage to reputation, cyber-extortion, and fraud.

Policies, Crisis Management Plans

Companies are advised to have policies in place for data protection, data retention, data destruction, privacy, and disclaimers to customers. If a security breach occurs, a company should be prepared for a regulatory investigation and implement a crisis management plan.

Security monitoring or surveillance is necessary to protect information assets. Access controls should be placed on employees to ensure that user privileges are appropriate to particular job functions.

Best Practices for Employees

While the human factor can be the weakest link in any security program, businesses can adopt “best practices” for use by employees. These include warning employees not to share or write down pass phrases, click on links or attachments from unknown sources, or send sensitive business files to personal e-mail addresses. Employees should be encouraged to report suspicious or malicious activity and to secure their mobile devices when traveling.

The White Paper—which includes an appendix to articles on cyber crime and a glossary of cyber security terms—is available for free download here.

About the Authors

Bruce S. Schaeffer, co-author of CCH Franchise Regulation and Damages and author of the BNA Tax Management Portfolio on Franchising, is an attorney in private practice with out 30 years’ experience and offices in New York City. Mr. Schaeffer holds a Master of Laws (in Taxation) from New York University School of Law and a Juris Doctor degree from Brooklyn Law School. He is the founder and president of Franchise Valuations, Ltd. (www.franchisevaluations.com), which provides expert testimony on damages and valuations in franchise disputes, performs lender due diligence, and resolves succession and estate planning problems for the franchise community.

Henfree Chan, a co-founder of Franchise Technology Risk Management, is a Senior Information Security Professional with 10 years’ experience in the financial services industry.

Henry Chan, a co-founder of Franchise Technology Risk Management, is also found and president of H2 IT Management, Inc., a New York City network consulting firms that specializes in end-to-end Internet and technology solutions.

Susan Ogulnick is Vice President of Research and Operations for Franchise Valuations, Ltd. She has moer than 20 years of experience in the information industry and is a recognized authority in acquiring information about hard-to-value entities.

Rebranding of Nearby Gas Station Did Not Cause Antitrust Injury

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

A Mobil gasoline station in Detroit failed to identify an antitrust injury resulting from an alleged conspiracy between ExxonMobil and Michigan Fuels, Inc.—one of the oil company’s approved distributors—to rebrand a nearby gas station, the U.S. Court of Appeals in Cincinnati has ruled.

Summary judgment in favor of ExxonMobil and the defending distributor (2008-1 Trade Cases ¶76,144) was affirmed.

The complaining gas station entered into a sales agreement with ExxonMobil to purchase the station and entered into a Petroleum Marketing Practices Act (PMPA) motor fuels dealer franchise agreement with McPherson Oil Company, another approved ExxonMobil distributor. About a year later, ExxonMobil approved the rebranding of a nearby gas station as an Exxon-branded station to be supplied under a PMPA agreement with Michigan Fuels.

The owner of the complaining gas station contended that Michigan Fuels’ principal—who was a distant relative—pursued the rebranding of the nearby station to get back at him for selecting McPherson Oil as his distributor. The complaining gas station argued that the rebranding violated an unwritten policy of avoiding locating ExxonMobil stations within one mile of each other.

Antitrust Injury

Any loss of business resulting from the rebranding of the nearby station represented an injury to an individual competitor, the court noted. It did not amount to an antitrust injury. The complaining gas station failed to establish an injury to the market as a whole resulting from the purported conspiracy. Further, an adverse market-wide effect was not shown to have resulted from a restriction on the complaining gas station’s ability to purchase gasoline from another source.

Michigan Antitrust Reform Act

A monopolization claim under the Michigan Antitrust Reform Act was also rejected. ExxonMobil would not have monopolized the stretch of road in Detroit served by the complaining gasoline station by requiring the complaining firm to buy a minimum quantity of branded gasoline from its distributor.

Relevant markets were generally not limited to a single manufacturer’s products, but were composed of products that were reasonably interchangeable—i.e., gasoline rather than ExxonMobil-branded gasoline. Further, the complaining gasoline station offered no evidence that ExxonMobil had the power to exclude competition from the market for gasoline, the court explained.

Michigan Franchise Law

ExxonMobil’s failure to provide the gas station owner with presale disclosures regarding an exclusive territory did not violate the Michigan Franchise Investment Law, since no franchise agreement existed between the two parties, the court explained. The owner’s franchise relationship was with McPherson Oil Co., which was not a party to the action.

Moreover, the relationship between the owner and McPherson Oil was not a “franchise” within the Michigan law because the owner was not required to pay a “franchise fee” for the right to enter into the business. Absent the required payment of a franchise fee, the Franchise Investment Law—and its disclosure requirement—did not apply, the court observed.

The May 4 not-for-publication decision in Partner & Partner, Inc. v. ExxonMobil Oil Corp. appears at 2009-1 Trade Cases ¶76,600.

Antitrust Chief Withdraws 2008 Report on Single Firm Conduct

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

Marking a shift in enforcement policy, Christine A. Varney, Assistant Attorney General in charge of the Department of Justice Antitrust Division, on May 11 withdrew, effective immediately, the Antitrust Division's September 2008 report, entitled “Competition and Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act.”

The report reflected the Justice Department's enforcement policy with respect to single-firm conduct under Sec. 2 of the Sherman Act. The text of the withdrawn report (CCH Trade Regulation Reporter ¶50,231) appears here on the Department of Justice website.

“Withdrawing the Section 2 report is a shift in philosophy and the clearest way to let everyone know that the Antitrust Division will be aggressively pursuing cases where monopolists try to use their dominance in the marketplace to stifle competition and harm consumers,” said Varney. “The Division will return to tried and true case law and Supreme Court precedent in enforcing the antitrust laws.”

The report outlined an approach for analyzing unilateral conduct that was intended to avoid over-enforcement that would deter aggressive, but lawful conduct.

Thomas O. Barnett, the Assistant Attorney General in charge of the Antitrust Division, who signed off on the report, had suggested that the Antitrust Division took a middle ground in its enforcement policy toward dominant firms.

Varney said that the report advocated hesitancy in the face of potential abuses by monopoly firms. She said that implicit in this overly cautious approach is the notion that most unilateral conduct is driven by efficiency and that monopoly markets are generally self-correcting.

“The recent developments in the marketplace should make it clear that we can no longer rely upon the marketplace alone to ensure that competition and consumers will be protected,” Varney added. She announced the withdrawal of the report at a May 11 speech at the Center for American Progress.

The report was issued after a series of joint hearings, involving more than 100 participants, that the Department and the FTC held from June 2006 to May 2007 to explore the antitrust treatment of single-firm conduct.

When the Justice Department's report was released last September, three of the four FTC members—Commissioners Pamela Jones Harbour, Jon Leibowitz, and J. Thomas Rosch—jointly issued a statement saying that if the report were adopted by the courts, the it “would be a blueprint for radically weakened enforcement of Section 2 of the Sherman Act.”

The three commissioners contended that “[t]he Department's premises lead it to adopt law enforcement standards that would make it nearly impossible to prosecute a case under Section 2.” (See Trade Regulation Talk entry, September 8, 2008)

The May 11 news release on the withdrawal of the report appears here on the Department of Justice website.

FTC Testifies on Data Security Bill, Peer-to-Peer File Sharing

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

The Federal Trade Commission strongly supports the goals of H.R. 2221, the proposed "Data Accountability and Trust Act," according to Acting Director of the Bureau of Consumer Protection Eileen Harrington, who testified May 5 before the House Energy and Commerce Committee Subcommittee on Commerce, Trade and Consumer.

If enacted, the new law would require companies to implement reasonable data security policies and procedures and to notify consumers when there has been a data security breach that affects them. The legislation also would give the Commission the authority to obtain civil penalties for violations.

Coverage of Data Stored on Paper

The FTC suggested that the data security legislation be extended to cover data stored on paper, as well as electronic data. It also recommended that certain provisions imposing obligations on information brokers be targeted specifically to address harms consumers may face when brokers sell information about them. These provisions should not displace existing legal protections, according to the agency.

For more information on the proposed "Data Accountability and Trust Act," see the May 7, 2009 entry, of Trade Regulation Talk.

Data Sharing Over P2P Networks

The agency's testimony also focused on the Commission's efforts to promote better security for sensitive consumer information and to prevent the inadvertent sharing of consumers' personal or sensitive data over Peer-to-Peer Internet (P2P) file-sharing networks.

Although P2P technologies hold potential benefits for computer users and businesses, the FTC said, they also can raise the risk that sensitive information will be made available over P2P networks, either through inadvertent sharing or through malware.

Enforcement Efforts

The FTC noted that the agency had brought cases related to P2P file sharing, had helped P2P software developers devise voluntary best practices to help consumers prevent inadvertent file sharing, and had continued to monitor efforts by companies to comply with these practices.

P2P File-Sharing Bill

Finally, Harrington stated that the Commission supports legislation placing restrictions on P2P file-sharing programs.

The proposed "Informed P2P User Act" (H.R. 1319) would prevent the inadvertent disclosure of information on a computer through the use of P2P file sharing software without first providing notice and obtaining consent from the owner or authorized user of the computer. The bill, introduced by Rep. Mary Bono Mack (R-Calif.), would authorize the FTC to enforce the law and to seek civil penalties for violations.

Text of the FTC's testimony is available here.

Privacy Laws Proposed in Congress, Canadian Parliament

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

Federal laws addressing privacy concerns have been introduced recently in both Congress and Canada’s Parliament.

Data Security, Breach Notification

The Congressional proposal would regulate information security standards and breach notification procedures. The proposed “Data Accountability and Trust Act” (H.R. 2221) would require persons engaged in interstate commerce that own or possess data in electronic form containing personal information—or that contract to have a third-party maintain such data—to establish and implement reasonable security policies and procedures to protect that data. The measure would also provide for nationwide notice in the event of a security breach.

The proposed law would be enforced by the Federal Trade Commission and state attorneys general. A private right of action would not be available, and the federal statute would preempt state data security and breach notification laws and regulations.

The bill, introduced April 30, was sponsored by Rep. Bobby Rush (D-Ill.) and co-sponsored by Reps. Cliff Stearns (R-Fla.), Joe Barton (R-Tex.), Jan Schakowsky (D-Ill.), and George Radanovich (R-Calif.). Further information—and text of the bill—appears at the Thomas site of the Library of Congress.

Spam, Phishing

The Canadian legislation is aimed at deterring “the most dangerous forms of spam” and threats posed to privacy and personal security by Internet fraud.

The proposed “Electronic Commerce Protection Act” (ECPA) would prohibit the sending of commercial electronic messages without the prior consent of the recipient and would provide rules regulating the sending of such messages, including a mechanism for withdrawal of consent. It would also prohibit the alternation of e-commerce data transmissions and the unauthorized installation of computer addresses.

Persons injured by violations would have a private right of action for actual and statutory damages. The Canadian Radio-television and Telecommunications Commission and the Competition Bureau would also be authorized to impose administrative monetary penalties of up to $1 million Canadian for individuals and $10 million Canadian for all other offenders.

The proposal (Bill C-27) was introduced in the House of Commons of Canada on April 24. Text of the bill is available here.

Resale Price Fixing Claims Fail After Remand from High Court

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

A leather goods and accessories manufacturer did not engage in unlawful vertical price fixing by terminating a retailer for pricing the manufacturer’s goods below the suggested retail price, the federal district court in Marshall, Texas, has ruled.

The retailer’s suit, which initially succeeded at trial and ultimately led to a U.S. Supreme Court decision removing resale price maintenance from among the types of anticompetitive conduct subject to a per se illegality standard (Leegin Creative Leather Products, Inc. v. PSKS, Inc., 2007-1 Trade Cases ¶75,753) was dismissed.

Relevant Markets

With vertical price fixing no longer deemed per se illegal, the retailer’s claims had to be assessed under the rule of reason, the court explained. However, the retailer failed to surmount the first obstacle in a rule of reason antitrust claim: alleging a valid relevant market.

Neither the “retail market for Brighton women’s accessories” (the manufacturer’s brand) nor the “wholesale sale of brand-name women’s accessories to independent retailers constituted a valid product market. A single brand, no matter how distinctive or unique, could not be its own market, and the retailer’s broader market definition suffered from its own shortcomings.

“Wholesale sale was inappropriate because it did not focus on how any agreement impacted consumers, and inclusion of “brand name in the product market definition was unsupported by any allegations explaining why brand names were important to product interchangeability in the case.

In addition, “women’s accessories grouped together products that were not interchangeable with each other, and “independent retailers improperly limited the relevant market to a subset of retailers without explaining why there was a lack of interchangeability between that subset and other retailers selling exactly the same products, according to the court.

Horizontal Restraint Pleadings

Attempts by the retailer to reattach the per se illegality standard to the claim by asserting a horizontal restraint were inadequate, the court also found. The retailer was barred from claiming that the manufacturer engaged in a per se illegal horizontal price fixing agreement based on the fact that it was also a distributor of its own products.

The retailer failed to raise the theory in the original trial in the case, even though nothing prevented it from doing so. In reversing the trial outcome on the vertical restraint claims, the U.S. Supreme Court had not specifically allowed the retailer to replead allegations it had previously abandoned.

Even if such a claim were permissible, restraints in dual distribution systems—including price fixing agreements—were still analyzed under the rule of reason, rather than held to the per se illegality standard.

“Hub and Spoke” Retailer Cartel

An alternative theory that the manufacturer engaged in per se illegal horizontal price fixing in furtherance of a “hub and spoke retailer cartel also failed as a matter of law, the court determined.

The complaining retailer contended that it would prove that there was a series of agreements between the manufacturer and independent retailers to fix prices of its goods; that the independent retailers formed a cartel with each other and with the manufacturer as a retailer to prevent discounting and price competition; that, in response to pressure from retailers involved in the cartel, the manufacturer enforced its price fixing agreements against discounters to stamp out price competition; and that retailers discussed and came to agreements as to the terms of the price fixing agreements and exceptions.

These allegations were insufficient to plead a hub and spoke conspiracy. No claim was made that retailers agreed to the alleged resale price maintenance among themselves. Without such an allegation, the complaining retailer was missing the requisite wheel in the classic hub and spoke arrangement, the court concluded.

The decision is PSKS, Inc. v. Leegin Creative Leather Products, Inc., 2009-1 Trade Cases ¶76,592.

Focus on Franchising

This posting was written by John W. Arden.

News and notes on franchising and distribution topics:

 The number of state franchise registrations filed by franchisors during the first quarter of 2009 is down by 16 to 22 percent as compared with the first quarter of 2008, according to state franchise regulators. (“Franchise Sales Pull Back During the Recession,” Wall Street Journal, April 28, 2008.) Among the 14 states that require franchisors to register an offering circular prior to selling franchises, three states surveyed by the Journal reported steep declines in the number of filings—Maryland (-16%); California (-20%); and New York (-22%). This does not mean that fewer franchises are being sold; it means only that fewer franchisors are filing for the right to sell franchises in states requiring registration. Bret Lowell, a partner at DLA Piper, indicated that franchisors usually instruct outside counsel to register them in every state—whether or not they have firm plans to sell in all of the states during the upcoming year. In the current economic environment, “they’re being more selective” in the states they choose to maintain registration.

 The International Franchise Association (IFA) will conduct its 42nd annual Legal Symposium on May 17-19, 2009, at the J.W. Marriott Hotel in Washington, D.C. Introduced by IFA President and CEO Matthew R. Shay, the symposium will feature three general sessions and 23 concurrent workshops on a variety of topics. In addition, the symposium will feature a five-part Basics Track to provide a solid foundation in franchise law and a session of roundtable discussions. For further information on the symposium, contact the IFA at (202) 628-8000 or visit the IFA website.

 The Federal Trade Commission will hold a public workshop on June 1 to hear public comment on the proposed changes to the FTC Business Opportunity Rule that were outlined in a revised notice of proposed rulemaking on March 26, 2008. Among the topics open for discussion is the proposed one-page Business Opportunities Disclosure Form that business opportunity sellers would be required to provide to prospective purchasers to help them make informed purchase decisions. The form would include information about earnings claims, litigation, cancellations and refund policies, and references. The workshop will be held from 9 a.m. to 5 p.m. in the FTC’s satellite building conference center at 601 New Jersey Avenue N.W., Washington, D.C. The FTC will accept written comments on topics to be covered in the workshop through June 15, 2009. Further information is available here at the FTC website.

House Subcommittee Holds Hearing on Antitrust Exemption for Newspapers

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

The House Judiciary Committee's Subcommittee on Courts and Competition Policy held a hearing on "A New Age for Newspapers: Diversity of Voices, Competition and the Internet" on April 21.

The subcommittee heard from newspaper industry executives and journalists, as well as from Carl Shapiro, Deputy Assistant Attorney General for Economics at the Department of Justice Antitrust Division.

There were calls for and against antitrust exemptions for newspapers. Brian Tierney, Chief Executive Officer of Philadelphia Media Holdings—the publisher of the Philadelphia Inquirer and Philadelphia Daily News—advocated expedited merger review for newspaper combinations and limited antitrust relief to enable publishers to discuss innovative business models.

Shapiro spoke of the need for continued antitrust enforcement in the newspaper industry to ensure that "American consumers obtain more innovative and high-quality goods and services at lower prices." He said that "vigorous antitrust enforcement will guarantee that this important industry will be as competitive as possible, and that American consumers will have available to them more, rather than fewer, options for getting news and information."

Merger review under the Clayton Act and the Newspaper Preservation Act of 1970 (NPA) was explained. The NPA exempts from antitrust liability certain types of joint newspaper operations for two or more newspapers with separate staffs and independent editorial policies.

Shapiro noted that NPA does not grant an unlimited antitrust exemption and that "there is nothing in the text or the legislative history of the NPA suggesting that Congress intended to immunize the acquisition by one [joint operating agreement] partner of the other partner's newspaper."

Written statements of witnesses appear here on the website of the House Committee on the Judiciary.

Aspiring Monk Could Base RICO Action on Monastery’s Affiliation Claims

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

An individual who sought to become a Benedictine monk could amend his complaint to add federal RICO claims against a monastery and two monks who allegedly misrepresented the monastery's affiliation with the Order of St. Benedict, the federal district court in Buffalo, New York, has ruled.

In doing research on the Internet, the individual discovered the Most Holy Family Monastery in Fillmore, New York. He spoke with the supervising monk, who allegedly represented himself as a member of the Benedictine order.

In September 2005, the individual entered the monastery with the intention of becoming a Benedictine monk. He allegedly made cash contributions of nearly $66,000 and transferred stock valued at $1.2 million to the monastery in reliance on the claim that it was affiliated with the Order of St. Benedict. In the late spring/early summer of 2006, he executed a document specifying that he would receive $750,000 if he left the monastery.

Subsequently, the individual learned that the supervisor was not a Benedictine monk and the monastery was neither founded nor operated by the Order of St. Benedict. He left the monastery on December 31, 2007. Although he demanded that funds he transferred to the monastery be returned, the defendants refused to do so.

RICO Conspiracy Claim

The individual filed an action against the defendants for fraud, negligent misrepresentation, and unjust enrichment. He later filed a motion to amend the complaint to add counts of deceptive trade practices, false advertising, false accounting, and civil RICO. The defendants filed a motion to dismiss the action and to deny amendment of the complaint.

Although the defendants argued that the plaintiff failed to adequately assert a claim for RICO conspiracy, the court found that the plaintiff stated "in specific detail" the acts that the defendants allegedly committed (1) in making false representations to the public through the monastery's website; (2) in the sale and distribution of publications and other media; (3) in the solicitation of donations while representing themselves as members of the order of St. Benedict; and (4) in inviting the plaintiff to join the monastery—and to donate personal property—based on the representation that the monastery was a Benedictine community. These statements were sufficient to allege an agreement between the defendants to commit at least two predicate acts, the court held.

First Amendment

The defendants argued that the First Amendment precluded subject matter jurisdiction in matters that required a court to interpret religious doctrine. The court, however, characterized the defendants' purported affiliation with the recognized Order of St. Benedict as a "neutral" factual issue that did not require the interpretation of religious doctrine. Therefore, the First Amendment was not implicated and the court had subject matter jurisdiction to adjudicate the plaintiff's claim.

Undue Delay

The motion to amend was not precluded by undue delay, according to the court, even though the individual had filed it two months after his complaint. Discovery had not commenced and the proposed amendment would not have resulted in prejudice to the defendants, the court held.

The decision is Hoyle v. Diamond, CCH RICO Business Disputes Guide ¶11,656.