Bill to Extend ACPERA’s Detrebling Provisions Passes House

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

Legislation to delay the sunsetting of provisions of the Antitrust Criminal Penalty Enhancement and Reform Act of 2004 (ACPERA) passed the U.S. House of Representatives on June 9.

The proposed legislation—“Antitrust Criminal Penalty Enhancement and Reform Act of 2004 Extension Act” (H.R. 2675)—would extend for one year provisions of ACPERA that protect successful amnesty applicants under the Department of Justice Antitrust Division corporate leniency program from treble damages in private suits.

Portions of ACPERA are currently scheduled to sunset on June 22, 2009. According to the law, limitations on recovery against an amnesty applicant cease to have effect five years after the law’s June 22, 2004 date of enactment. Unless the extension is enacted, antitrust amnesty agreements entered into after the expiration date would not shield successful applicants from treble damages.

H.R. 2657 was introduced on June 3 by Representative Hank Johnson (D-Georgia) and referred to the Judiciary Committee, which took no action. On June 9, Johnson moved to suspend the rules and pass the bill. The motion was agreed to on a voice vote, and the bill was received in the Senate today.

In making his motion, Johnson argued that ACPERA promotes “the detection and prosecution of illegal cartel behavior by giving participants in a price-fixing cartel powerful incentives to report the cartel to the Justice Department and cooperate in the prosecution of the cartel.”

Before ACPERA, the Justice Department could offer leniency to the co-conspirator that helps prosecute a cartel, but the co-conspirator would remain fully liable for treble damages in private litigation.

“In the first half of this year, ACPERA has aided the Antitrust Division in securing jail sentences in 85 percent of its individual prosecutions and over $900 million in criminal fines,” Johnson stated.

Earlier, extension of ACPERA’s sunsetting provisions was advocated by the Antitrust Section of the American Bar Association.

In a May 8 letter, the Antitrust Section called on leaders in the House and Senate Judiciary Committees to extend these provisions for five years. Antitrust Section Chair James A. Wilson further suggested that Congress use the five-year extension to evaluate the efficacy of the detrebling provisions.

“While the Section is inclined to believe that the detrebling provision has made an important contribution to the overall effectiveness of the government’s leniency program, with no discernable ill effect on the deterrent and remedial objectives of enforcement,” Wilson wrote, “it also recognizes that legitimate questions have been raised by those who hold a differing view and we note that there has been insufficient time under the ACPERA regime to permit a full evaluation of the benefits and costs of the provision.”

Text of the letter appears here on the ABA website.

High Court Delineates Structure of RICO Association-in-Fact Enterprise

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

An association-in-fact enterprise in a federal RICO claim must have an ascertainable structure beyond that inherent in a pattern of racketeering activity, the U.S. Supreme Court ruled in a 7-2 decision on June 8.

In a criminal RICO case against a loosely-organized group of individuals who had participated in numerous bank thefts over an eight-year period, the Court concluded that a trial court did not err by instructing a jury that an enterprise existed when a group of individuals, without structural hierarchy, associated solely for the purpose of carrying out a pattern of racketeering acts.

Structure

An association-in-fact enterprise must have at least three structural features: (1) purpose; (2) relationships among those associated with the enterprise; and (3) longevity that was sufficient to permit its members to pursue the enterprise’s purpose.

The term “structure,” however, did not need to appear in the jury instructions, the Court held. As long as the substance of the relevant point was adequately expressed, the language of a jury instruction was subject to the “considerable discretion” of the trial judge.

Informing the jury that it had to find an “ascertainable” structure would be “redundant and potentially misleading,” at least in a criminal context, where the jury had to determine beyond a reasonable doubt that the elements of the crime were present.

Finally, qualifying the meaning of “ascertainable structure” with the phrase “beyond that inherent in the alleged pattern of racketeering activity” was appropriate, as long as the qualifying phrase was interpreted to mean that the existence of the enterprise was a separate element that must be proved.

Enterprise Element

As the Court explained in United States v. Turkette (RICO Business Disputes Guide ¶6100), the existence of an enterprise was an element of RICO that was distinct from the pattern of racketeering element; proof of one did not necessarily establish the other.

Nevertheless, the Court cautioned that it would be a mistake to interpret the qualifying phrase to mean that the existence of an enterprise could never be inferred from evidence showing that persons associated with the enterprise had engaged in a pattern of racketeering activity. In Turkette, for example, the Court recognized that the evidence used to prove a pattern of racketeering and the evidence used to prove an enterprise “may in particular cases coalesce.”

Attributes

The petitioner—an individual who had participated in the bank thefts—unsuccessfully argued that an association-in-fact enterprise must have some additional structural attributes, such as a structural hierarchy, role differentiation, a unique modus operandi, a chain of command, professionalism and sophistication of organization, diversity and complexity of crimes, membership dues, rules and regulations, uncharged or additional crimes aside from predicate acts, an internal discipline mechanism, regular meetings regarding enterprise affairs, an enterprise name, and induction or initiation ceremonies or rituals.

These attributes, however, could not be fairly inferred from the language of RICO, according to the Court.

Nothing in the RICO statute supported the structural requirements asserted by the petitioner, the Court determined, and nothing exempted the enterprise whose associates had engaged in spurts of activity punctuated by periods of inactivity.

Jury Instructions

The jury instructions in this case were “correct and adequate,” in the Court’s view. The instructions explicitly informed the jurors that they could not convict the individual defendants under RICO unless they found that the government had proven the existence of an enterprise. The instructions also made it clear that the enterprise was a separate element from the pattern of racketeering activity.

The instructions adequately stated that the enterprise had to have the structural attributes that could be inferred from the statutory language. More specifically, the trial judge told the jury that the government was required to prove that there was an ongoing organization with some sort of framework—formal or informal—for carrying out its objectives, and that the various members and associates of the association had functioned as a continuing unit to achieve a common purpose.

Telling the jury that the existence of an association-in-fact enterprise was often more readily proven by determining what the enterprise does, rather than by performing abstract analysis of its structure, was appropriate. The instruction properly conveyed the point made in Turkette—that proof of a pattern of racketeering activity may be sufficient in a particular case to permit a jury to infer the existence of an association-in-fact enterprise.

Dissent

Dissenters Justice Stevens and Justice Breyer would have limited the term “enterprise” to “business-like entities” because nothing in the text or legislative history of the RICO statute indicated that Congress had intended to reach an “ad hoc association of thieves” whose purpose and activities were limited to sporadic acts of theft.

According to the dissenting justices, the RICO statute and the Court’s earlier decisions indicated that Congress had used the term “enterprise” in the sense of a business organization. Although the dissenters agreed with the majority that the word “structure” was not “talismanic,” they nevertheless would have stipulated that jury instructions must convey the requirement that the alleged enterprise had an existence apart from the alleged pattern of predicate acts.

The majority permitted juries to infer the existence of an enterprise “in every case involving a pattern of racketeering activity undertaken by two or more associates.” By allowing the government to prove both elements with the same evidence, the majority rendered the enterprise requirement “essentially meaningless” in associated-in-fact cases, the dissent maintained.

In the dissenters' view, proof of the separate existence of an association-in-fact enterprise would “generally require evidence of rules, routines, or processes through which the entity maintains its continuing operations and seeks to conceal its illegal acts.”

The decision, authored by Justice Alito, is Boyle v. United States, Docket No. 07-1309, issued June 8, 2009. The opinion will appear in CCH RICO Business Disputes Guide.

Bankruptcy Court Allows Chrysler to Terminate 789 Franchises

This posting was written by John W. Arden.

A bankruptcy court ruled yesterday that auto maker Chrysler LLC could immediately terminate 789 Chrysler, Dodge, and Jeep franchises in accordance with its plan to cut costs and quickly emerge from bankruptcy, according to an Associated Press report.

In an oral ruling late Tuesday afternoon, Judge Arthur J. Gonzalez of the U.S. Bankruptcy Court for the Southern District of New York allowed Chrysler to terminate approximately one-quarter of its dealership base.

More than 25 attorneys, representing hundreds of franchisees across the country, had argued that termination of the franchises was unnecessary and would not result in substantial savings.

A written decision on the ruling is forthcoming

Further information regarding the Chapter 11 bankruptcy case—In re Chrysler LLC, Case No. 09 B 50002 (AJG)—appears on the court website.

Biopharmaceutical Firm Drops Attempted Acquisition of Competitor

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

CSL Limited and Talecris Biotherapeutics Holdings Corporation announced on June 9 their decision to abandon a proposed combination in light of an FTC challenge to the transaction.

The FTC moved to block CSL’s proposed $3.1 billion acquisition of Talecris on the ground that the transaction would substantially reduce competition in the U.S. markets for four plasma-derivative protein therapies: Immune globulin (Ig), Albumin, Rho-D, and Alpha-1.

In addition to issuing an administrative complaint, the Commission sought a preliminary injunction in the federal district court in Washington, D.C., to stop the transaction pending completion of the administrative trial.

FTC Bureau of Competition Director Richard Feinstein called the decision to drop the deal “a tremendous victory for the patients who rely on these lifesustaining treatments.” He added that Commission staff “was fully prepared to demonstrate the anticompetitive harm that would have resulted from this acquisition.”

Dr. Brian McNamee, CEO and Managing Director of CSL, said that, while the company disagreed with the FTC case and matters included in their complaint, “CSL’s Board of Directors did not believe that entering into a protracted litigation process with the FTC, with its inherent risks, substantial costs, and lengthy distraction of CSL management and staff from planning and running our businesses, would be in the best interests of our takeholders.”

Under the merger agreement, CSL is required pay Talecris a $75 million break fee.

The FTC news release on the development appears here on the Commission’s website. CSL Limited’s announcement appears here on the company website.

Bill Requires Bankrupt Auto Makers to Reimburse Dealers from Federal Funds

This posting was written by John W. Arden.

A bill to require bankrupt automobile manufacturers that receive funds from the federal government to use such funds to fully reimburse dealers for inventory of vehicles and parts has been proposed in House Bill No. 1256.

The measure—proposed as the Auto Dealers Assistance Amendment (#1270)—would require manufacturers to use any funding received from the U.S. Treasury while in bankruptcy to:

(1) Fully reimburse dealers rejected in bankruptcy for the cost of all parts and inventory in the dealer’s possession on the date of the bankruptcy and all other obligations owed under franchise and dealership agreements, and

(2) Provide dealers rejected in bankruptcy with at least 180 days to shut down their businesses and sell off their inventories through a “wind down period.”

The amendment further specifies that a bankruptcy court may not allow a bankrupt dealer to obtain access to debtor-in-possession funding unless the credit agreements expressly provide for reimbursement and wind-down as provided by the measure.

U.S. Senator Bob Corker (R-Tenn.) introduced the amendment on June 4.

“We continue to receive assurances from Chrysler and GM that their dealers across Tennessee and across the country will be treated fairly,” said Corker. “We understand that a bankruptcy is inherently painful and our efforts aren’t to interfere.

“We filed this amendment to apply pressure on the automakers to keep their word to rejected dealerships and fully reimburse them for their inventories of vehicles and parts,” he continued. “We hope Chrysler and GM will take these appropriate actions and make this amendment unnecessary.”

A statement by Senator Corker and text of the amendment appear on the Senator’s website.

Expedia Marked Up “Service Fees,” Held Liable for $184 Million

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

In a nationwide class action, travel booking website Expedia was liable for $184 million in damages, based on its breach of contract in charging service fees in excess of the actual costs of making hotel reservations, the Washington Superior Court in King County has ruled. Additional proceedings are needed to resolve disputed questions of fact on a separate claim under the Washington Consumer Protection Act.

Expedia breached its “terms of use” for both online and telephone reservations, which provided that “service fee goes to covering costs.” The court cited employee e-mails as evidence that service fees were marked up to increase profits.

Voluntary Payment Defense

As a defense to the breach of contract claims, Expedia contended that the payments at issue were voluntary. Under the voluntary payment doctrine, money voluntarily paid by a party under a claim of right with full knowledge of the facts by the person making the payment cannot be later recovered on the ground that the claim was illegal, or that there was no liability to pay in first place. The court held the doctrine inapplicable because the admitted, undisclosed inclusion of a profit component in the fees did not equate with full knowledge.

The court found that an award of $184,470,451—the full amount of the services fees collected based on the breach of contract—was warranted.

Consumer Protection Law

On the consumer protection claim, the class of consumers challenged Expedia’s bundling of tax and service fees from May 17, 2002 through June 11, 2008 and its failure to disclose the true nature or separate amounts of its fees and taxes. The consumers contended that these practices had the tendency or capacity to mislead and constituted an unfair and deceptive practice under the Washington statute.

Expedia maintained that hotel wholesale rate disclosure would affect its bottom line and that consumers “know” that the service fees include markup and can choose whether the pay the price or not.

The parties’ contentions implicate the “reasonableness” standard applicable under the statute, the court said. The unresolved questions of fact precluded summary judgment on the consumer protection claim.

Unresolved issues of fact also existed as to whether Expedia’s allegedly deceptive practice caused the injury asserted and whether the asserted public interest would outweigh Expedia’s legitimate business concerns.

The May 28 opinion in Expedia Hotel Taxes and Fees Litigation appears at CCH Advertising Law Guide ¶63,421.

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.