Consumer Suit Proceeds Against Donald Trump and Trump University

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

Individuals who paid $35,000 apiece to enroll in Trump University seminars, hoping to “Learn from the Master,” can pursue common law fraud and California consumer protection law claims against Donald Trump and Trump University, the federal district court in San Diego has ruled.

The court separately addressed claims against Trump and the university in two opinions issued the same day.

Fraud

The fraud claims against Trump himself focused on the allegation that he lied about “hand picking” instructors. Trump maintained that the named plaintiffs in the class action complaint did not sustain any damages in reliance on the alleged misrepresentation.

To the extent that the plaintiffs did rely on Trump’s alleged misrepresentations, they may have sustained damages of up to $35,000 apiece, the court determined and declined Trumps motion to dismiss.

In claims against the university, three of four named plaintiffs stated claims of fraud by alleging that they signed up for seminars in reliance on university speakers’ statements that included a misrepresentation about providing exclusive access to a list of properties handpicked by Donald Trump.

False Advertising, Consumer Protection Laws

One plaintiff stated a claim of false advertising under California law by alleging that she purchased a $35,000 seminar based on misleading statements at a $1,500 seminar made for the purpose of inducing her purchase, according to the court.

California Unfair Competition Law (UCL) and Consumers Legal Remedies Act (CLRA) claims based on the fraud allegations survived, although the court dismissed the California statutory claims brought by two of the four named plaintiffs who were not California residents. Claims under the New York deceptive acts and practices statute were rejected because none of the plaintiffs took classes in New York.

Puffery

The court agreed with Trump’s contention that his alleged statement “no course offers the same depth of insight, experience and support as the one bearing my name” constituted mere puffery and thus could not support claims under the UCL or CLRA.

The May 16 opinions in Makaeff v. Trump University LLC will be reported in CCH Advertising Law Guide.

Further information about CCH Advertising Law Guide appears here.

Franchisor May Be Entitled to Recover for Loss of Franchise Property Through Eminent Domain

This posting was written by John W. Arden.

A purported restaurant franchisor might be entitled to compensation for lost goodwill resulting from the loss of franchise property in California through eminent domain, according to a California state appellate court.

Although the franchisor did not qualify as the “owner” of the business displaced by eminent domain, it may have been entitled to compensation as the assignee of the franchisee’s right to compensation.

Inverse Condemnation Action

An inverse condemnation action brought by the franchisor against a California city was remanded with instructions for the trial court to determine the franchisor’s rights as an assignee and to empanel a jury to determine the amount of compensation for lost goodwill.

The property that the franchisor subleased to a franchisee was taken by eminent domain by the City of El Cajon, California for construction of a police facility. Subsequently, the franchisee assigned any claim it had for lost goodwill compensation to the franchisor.

The franchisor sued the city, alleging that it was entitled to compensation both for ownership of the franchised restaurant and as assignee of the franchisee’s right to compensation.

The proceeding was bifurcated, with the trial court first considering whether the franchisor had any right to compensation, either as the owner of the restaurant or as the assignee of the franchisee’s rights. If that issue were decided in the franchisor’s favor, a jury would determine the amount of goodwill owed the franchisor, if any.

“Owner” or Business

Relying on Redevelopment Agency v. International House of Pancakes, 9 Cal. App.4th 1343 (1992), the city argued that a franchisor was not entitled to compensation for lost goodwill. It further argued that the franchisee was the business owner and the franchisee’s assignment was ineffectual because it already waived its right to receive any condemnation award.

The trial court concluded that the franchisee—not the franchisor—was the owner of the business. It was the party that held a business license. Moreover, an assignment of the franchisee’s right to compensation was ineffectual because the franchisee had no interest to assign, the court held.

Franchise Relationship?

On appeal, the franchisor attempted to distinguish the IHOP case by claiming that it was not a franchisor and the operator of the restaurant was not a franchisee. The court disagreed, pointing out that the franchisor granted the operator the right to use its system, trade name, and trademark. The operator was obligated to run the restaurant in compliance with the franchisor’s operations manual and to purchase supplies only from the franchisor or its approved suppliers.

The agreement between the parties stated that the relationship was not a partnership, joint venture, or agency. The fact that the operator did not pay a franchise fee was unavailing.

Moreover, the focus on the franchisor-franchisee relationship in IHOP was misplaced, the court observed. The claimant was not barred from recovering goodwill damages because it was a franchisor; it was barred because it was not the owner of the business.

In this case, there was no indication of ownership by the franchisor. The agreement between the parties required the operator to indemnify the franchisor of all claims or liabilities related to the premises. Like the claimant in IHOP, the franchisor established a method of operation intending to immunize or insulate itself from the risks and liabilities inhere in the ownership of a business. The court asked how an agreement that insulated the franchisor from the obligations of ownership could make the franchisor an owner of the business for the sole purpose of condemnation proceedings.

Thus, the appellate court held that the franchisor was not the owner of the business within the meaning of California Civ. Proc., §1263.510.

Assignment of Right to Compensation

Even though the franchisor could not receive goodwill compensation as the owner of the franchise premises, it might be entitled to recover compensation under the assignment of the franchisee’s right.

The trial court had based its denial of compensation under the assignment on an agreement in which the franchisee waived all rights to interest in any condemnation award or settlement. The trial court interpreted this provision as a waiver of any condemnation recovery from a condemning governmental agency. If the franchisee had no right to recover from the government, then there was no right to assign to the franchisor, it reasoned.

The appellate court held that the waiver clause was intended to benefit the franchisor, rather than the city. A landlord and tenant may apportion a condemnation award any way they see fit, including having the tenant assign rights to the landlord. It appeared more likely that the parties were defining their respective rights between themselves rather than benefitting a nonparty to the agreement, in the court’s view.

To construe the waiver provision as the city suggested would unjustly allow it to avoid paying any compensation for lost goodwill.

On remand, the trial court was directed to determine whether the franchisor had proven the remaining statutory elements for entitlement to compensation as an assignee. If so, the court had to conduct a jury trial on that compensation.

The June 7 decision is Galardi Group Franchise & Leasing LLC v. City of El Cajon. The decision will appear in CCH Business Franchise Guide.

Political Robocalls Held Subject to Identification Requirements of Federal Law

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

The State of Maryland could proceed with a Telephone Consumer Protection Act (TCPA) suit against a corporation that provided various services to candidates for political office, for broadcasting prerecorded voice messages to more than 112,000 telephone numbers belonging to Maryland residents, the federal district court in Baltimore has determined.

The messages allegedly did not identify the caller or disclose on whose behalf the call was being made, as required by the TCPA.

The corporation had been hired to serve as a political consultant by a candidate in the 2010 Maryland gubernatorial election. The message—which was broadcast via an automated dialing system on election day, primarily to registered Democrats residing in Baltimore City and Prince George’s County—stated that the incumbent governor had been “successful” in the election and did not need the recipients’ votes. The message did not indicate that the calls were made on behalf of the opposing candidate.

Political robocalls are not exempt from the TCPA’s identification and disclosure requirements, the court said. Those requirements were not limited to calls made for a commercial purpose; they apply to any calls made with an autodialer.

Liability of Corporation, Owner, Employee

Even though the calls were placed by a third-party telemarketing company, the corporation could be liable under the TCPA as an entity responsible for initiating the calls.

The corporation allegedly went to the telemarketer’s website, uploaded a prerecorded message and a list of phone numbers, and directed the telemarketer to broadcast the message to those numbers. The corporation was in a position to ensure that the content of the message complied with the TCPA, according to the court.

The corporation’s owner and its employee could be individually liable under the TCPA. The statute authorized state attorneys general to bring actions against “any person” who violated the disclosure requirements, the court said. The State contended that the owner and employee personally participated in the violations.

First Amendment

The TCPA did not violate the First Amendment, in the court’s view. The TCPA section at issue imposed technical requirements that applied to all prerecorded phone messages. The requirements were content-neutral and subject to intermediate scrutiny.

The government had a substantial interest in protecting residential privacy. The disclosure requirements allowed call recipients to terminate the call and to contact the caller to prevent future unwanted calls.

The TCPA was narrowly tailored; the statute allowed the continued use of autodialers while protecting the right of the recipient to choose whether or not to receive a message. The corporation had ample alternative channels for communication. The TCPA also promoted the government’s interest in preventing citizens from being misled as to the originators of recorded phone messages, the court said.

The May 25 decision is State of Maryland v. Universal Elections, Inc., CCH Privacy Law in Marketing ¶60,634.

Google’s Privacy Improvements Satisfy Canadian Enforcer

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

Google Inc. has implemented remedial measures to reduce the risk of future privacy violations, such as those that occurred during Google’s collection of WiFi data for its “Street View” service in 2010, according to Canadian Privacy Commissioner Jennifer Stoddart.

Collection of Personal Information

Stoddart initiated an investigation under Canada’s federal private-sector privacy law after Google admitted that it had collected data transmitted over unprotected wireless networks installed in homes and businesses around the globe.

Personal information collected included complete e-mails, usernames and passwords, and home telephone numbers. Stoddart’s investigation concluded that the incident was largely a result of Google’s lack of proper privacy policies and procedures.

New Training, Procedures

The Office of the Privacy Commissioner issued findings and recommendations in October 2010 and asked for a response by February 2011. Stoddart announced on June 6 that the Office is satisfied with the measures that Google has agreed to implement, including the augmentation of privacy and security training provided to all employees; the implementation of a system for tracking projects that collect, use, or store personal information; and the establishment of a process for conducting periodic audits and reviews of privacy practices. Google also told the Office that it had begun to delete the data it collected in Canada.

“Google appears to be well on the way to resolving serious shortcomings in the way in which it addresses privacy issues,” Stoddart said. “However, given the significance of the problems we found during our investigation, we will continue to monitor how Google implements our recommendations.”

More information on the Canadian Privacy Commissioner’s findings can be found here.

Trade Regulation Tidbits

This posting was written by the editorial staff of the CCH Trade Regulation Reporter.

News, updates, and observations:

 House Judiciary Committee Ranking Member John Conyers, Jr. (D, Mich.) and Congressman Ed Markey (D, Mass.), a senior member of the Energy and Commerce Committee and former chairman of the Communications, Technology and the Internet Subcommittee, held a press conference on June 1 to raise antitrust and public interest concerns surrounding the proposed merger of AT&T and T-Mobile wireless telecommunication companies.

"It is time for the Department to exercise its power and look closely at this national, horizontal merger," said Rep. Conyers. “The AT&T–T-Mobile deal is like a telecommunications time machine that would send consumers back to a bygone era of high prices and limited choice," Congressman Markey said. "AT&T and Verizon have divided the nation into Bell East and Bell West. Approving consolidation of the number of nationwide carriers from 4 to 3 and then inevitably to 2 would return consumers to a duopoly in the national wireless market."

 Rep. Ron Paul (R, Texas) recently introduced two bills that would make it easier for dietary supplement marketers to make health claims for their products.

The proposed Freedom of Health Speech Act (H.R. 2045) would require the FTC to prove health claims false before censoring them. Under the measure, the FTC would be prohibited from commencing an investigation into false advertising by an advertiser of dietary supplements unless it possesses before the commencement of such investigation clear and convincing evidence that the advertisement is false and misleading. In a false advertising action against a dietary supplement advertiser, the burden of proof would be on the FTC "to establish by clear and convincing evidence that the advertisement is false, that the advertisement actually caused consumers to be misled into believing to be true that which is false, and that but for the false advertising content the consumer would not have made the purchase at the price paid." With respect to claimed health benefits for a dietary supplement, the FTC would be required to "additionally establish based on expert scientific opinion and published peer-reviewed scientific evidence that the claim is false."

The proposed "Health Freedom Act" (H.R. 2044) would revoke Food and Drug Administration rules prohibiting nutrient-disease relationship claims. It would also prohibit the federal government from prohibiting claims that a dietary supplement mitigates, treats, or prevents a disease or condition, unless the claim has been proven false following a trial on the merits. Both measures were introduced on May 26.

 The FTC on June 6 released the agenda for a public workshop addressing legal and policy issues surrounding the inclusion of patented technology in collaboratively set industry standards. The workshop will be held on June 21 at the FTC’s Conference Center at 601 New Jersey Avenue, NW, Washington, DC. Commissioner Edith Ramirez will provide opening remarks and Bureau of Economics Director Joseph Farrell will offer closing remarks. Industry experts will participate in roundtable discussions of the following key issues: disclosure of patent rights prior to adoption of a standard; disclosure or negotiation of licensing terms for patents prior to adoption of a standard; and licensing strategies following implementation of a standard, including the significance of commitments to license patents on RAND terms.

There will also be a presentation on standard setting organization experiences with ex ante disclosure of licensing terms by Professor Jorge Contreras. Additional information is available here on the FTC website.

Guidance for Online Advertising Under Review by FTC Staff

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

The FTC is seeking public comment through July 11, 2011, on its guidance document published in 2000 that advises businesses how federal advertising law applies to advertising and sales on the Internet. The agency is looking for input on how its "Dot Com Disclosures: Information About Online Advertising" should be modified to reflect the dramatic changes to the online world since 2000. The May 3, 2000, FTC staff paper appears at CCH Trade Regulation Reporter ¶50,175.

The FTC staff has identified the following questions on which it has a particular interest in obtaining the public's views:

(1) What issues have been raised by online technologies or Internet activities or features that have emerged since the business guide was issued (e.g., mobile marketing, including screen size) that should be addressed in a revised guidance document?

(2) What issues raised by new technologies or Internet activities or features on the horizon should be addressed in a revised business guide?

(3) What issues raised by new laws or regulations should be addressed in a revised guidance document?

(4) What research or other information regarding the online marketplace, online advertising techniques, or consumer online behavior should the staff consider in revising "Dot Com Disclosures"?

(5) What research or other information regarding the effectiveness of disclosures --and, in particular, online disclosures --should the staff consider in revising "Dot Com Disclosures"?

(6) What specific types of online disclosures, if any, raise unique issues that should be considered separately from general disclosure requirements?

(7) What guidance in the original "Dot Com Disclosures" document is outdated or unnecessary?

(8) What guidance in "Dot Com Disclosures" should be clarified, expanded, strengthened, or limited?

(9) What issues relating to disclosures have arisen from such multi-party selling arrangements in Internet commerce as (1) established online sellers providing a platform for other firms to market and sell their products online, (2) website operators being compensated for referring consumers to other Internet sites that offer products and services, and (3) other affiliate marketing arrangements?

(10) What additional issues or principles relating to online advertising should be addressed in the business guidance document?

(11) What other changes, if any, should be made to "Dot Com Disclosures"?

Comments can be filed until July 11, 2011, at: https://ftcpublic.commentworks.com/ftc/dotcomdisclosures . Alternatively, comments, noted as "Dot Com Disclosures, P114506," can be submitted in paper form to: Federal Trade Commission, Office of the Secretary, Room H-113 (Annex I), 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580.

U.S. Urges High Court Not to Review Decision Enforcing Subpoenas in Antitrust Investigation

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

The U.S. Supreme Court should not review a decision of the U.S. Court of Appeals in San Francisco (CCH 2011-1 Trade Cases 77,467) enforcing grand jury subpoenas served on law firms in an antitrust investigation, the Department of Justice contended in a May 26 brief filed with the Court. The subpoenas sought non-privileged, pre-existing corporate records of the law firms’ clients.

The law firms had petitioned the Court to review the appellate court's decision, applying a per se rule enforcing a grand jury subpoena notwithstanding a civil protective order, and allowing prosecutors to obtain discovery materials from a parallel civil action, regardless of any countervailing considerations.

The underlying civil suits were filed by private plaintiffs against the law firms' clients—foreign producers of thin-film transistor-liquid crystal display panels (TFT-LCD)—soon after the government's investigation into alleged price fixing in the TFT-LCD industry became public.

The private litigation resulted in the production by the civil defendants of documents originating outside the United States. The Department of Justice served grand jury subpoenas on four law firms, seeking foreign-origin documents and deposition transcriptsfrom the class actions. A federal district court quashed certain subpoenas, and the Justice Department appealed.

“By a chance of litigation, the documents have been moved from outside the grasp of the grand jury to within its grasp,” the appellate court explained. “No authority forbids the government from closing its grip on what lies within the jurisdiction of the grand jury.”

The appellate court noted that the government had not engaged in any bad faith tactics, and the law firms did not claim that the documents were privileged. The per se rule of enforcement of grand jury subpoenas applied.

In response to the law firms' contention that review of the appellate court decision would resolve a split among the federal circuit courts on the issue of grand jury subpoena enforcement, the government argued that “no other court of appeals would have decided this case differently.”

The government conceded that “the circuits have adopted somewhat different positions on when grand jury subpoenas may be used to obtain materials covered by a civil protective order.” However, it noted that the law firms “significantly overstate the difference between the rule applied in the Fourth, Ninth, and Eleventh Circuits (which petitioners characterize as a “per se” approach) and the rule applied by the First and Third Circuits, which apply a rebuttable presumption that a grand jury subpoena should be enforced even when there is a civil protective order.”

The government also suggested that review was unnecessary because the question of how and when grand jury subpoenas can require production of material covered by civil protective orders rarely arises.

In addition, the government took issue with one law firm's argument that the subpoenas were unreasonable or oppressive because they were directed to lawyers. There was no risk posed to the attorney-client relationship, according to the government's brief. The subpoenas sought information that was produced in discovery, not information bearing on the representation of a client.

The petitions are White & Case LLP v. U.S., Dkt. No. 10-1147, filed February 25, 2011, and Nossaman LLP, v. U.S., Dkt. No. 10-1176, filed March 4, 2011

Infant Formula Maker’s Ads About Store Brands Barred

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

Infant formula manufacturer Mead Johnson was properly enjoined from publishing any advertisement containing a false representation about store brand infant formula produced by PBM Products, the U.S. Court of Appeals in Richmond has ruled.

In addition to affirming the permanent injunction (CCH Advertising Law Guide ¶63,672), the court upheld the trial court’s rejection of Mead Johnson’s defamation and Lanham Act counterclaims (CCH Advertising Law Guide ¶63,764).

The injunction expressly barred Mead Johnson from making the following claims:

“It may be tempting to try a less expensive store brand, but only Enfamil LIPIL is clinically proven to improve brain and eye development,” and

“There are plenty of other ways to save on baby expenses without cutting back on nutrition.”

Irreparable Harm, Inadequate Remedy at Law

PBM suffered irreparable harm, the court held. Mead Johnson’s advertising misled customers. PBM’s reputation was, and potentially continued to be, damaged. The entire goal of Mead's 2008 mailer was to deter mothers from considering a switch to store brand formula.

The remedies at law were inadequate, the court determined. While the jury awarded PBM $13.5 million in damages, the damages judgment compensated PBM for harm that flowed directly from the mailer. The injunction prevented Mead Johnson from infecting the marketplace with the same or similar claims in different advertisements in the future.

Balance of Hardships, Public Interest

The balance of hardships favored PBM, and the public interest heavily favored injunctive relief, the court said.

The general public interest in preventing false and misleading advertising was perhaps heightened when, as in this case, the misleading information pertained to issues of public health and infant wellbeing. The injunction was not overbroad because it only reached the specific claims that the district court found to be literally false, according to the court.

PBM’s “Compare to” Ad Claims

Mead Johnson's Lanham Act false advertising counterclaims were properly rejected because they were untimely under the analogous two-year Virginia statute of limitation and the doctrine of laches, and because Mead Johnson failed to establish that PBM's “Compare to” ads were impliedly false.

Defamation

Because false advertising was substantially synonymous with lying, in the court’s view, Mead Johnson could not establish defamation under Virginia law based on a press release issued by the CEO of PBM Products declaring that “Mead Johnson Lies About Baby Formula . . . Again.” Mead Johnson was held to have engaged in false advertising in this case, and it did not dispute that it had distributed false statements about PBM's formulas on prior occasions, the court observed.

The decision is PBM Products, LLC v. Mead Johnson & Co.,CCH Advertising Law Guide ¶64,264.

Further information about CCH Advertising Law Guide appears here.

Attempt to Enforce California Post-Term Covenants Not to Compete Can Be Malicious Prosecution

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

In an unusual action for malicious prosecution, the Court of Appeal of California, First District, in a not-for-publication opinion, has held that U-Haul’s actions in bringing a lawsuit in California to enforce a covenant not to compete violated California Business and Professions Code §16600. This holding basically makes such covenants unenforceable in California.

The fact that U-Haul had brought such actions in the past, which had been dismissed, was sufficient to establish probable cause and malice, allowing the terminated franchisee’s case to go forward for malicious prosecution and as a class action. The mere presence of such unenforceable language in the franchise agreement was considered grounds for pursuing the class action.

The decision is Robinson v. U-Haul Co. of California, CCH Business Franchise Guide ¶14,481.

Franchisor’s “Physical Presence” Not Needed for Income Taxation in Iowa

The essence of the much-discussed recent decision in KFC Corporation v. Iowa Department of Revenue, CCH Business Franchise Guide ¶14,518, is the court’s holding that “a physical presence is not required under the dormant Commerce Clause of the United States Constitution in order for the Iowa legislature to impose an income tax on revenue earned by an out-of-state corporation arising from the use of its intangibles by franchisees located within the State of Iowa.”

The court reasoned, “[B]y licensing franchises within Iowa, KFC has received the benefit of an orderly society within the state and, as a result is subject to the payment of income taxes.”

Colorado Barred from Enforcing Requirement That Mail-Order Sellers Provide Information About Buyers

In a strange procedural case that specifically ignored the issue of standing, the Direct Marketing Association has obtained an injunction from a federal district court in Colorado, barring the state’s taxing authority from enforcing a requirement that mail order sellers provide buyers and the state’s tax authorities with information returns about Colorado purchases subject to the use tax. (The Direct Marketing Association v. Huber, (D. Colo. January 28, 2011), CCH Colorado State Tax Reporter ¶201-018)

“Successful” Beer Law Litigants Awarded $0 in Attorney Fees

Beer distributors who were “successful” in their suit against a brewer and a successor brewer under the New Jersey Malt Alcoholic Beverages Act were nonetheless awarded zero dollars in legal fees by the federal district court in New Jersey. (Warren Distributing Co. v. Inbev USA, LLC, (D. N.J., February 28, 2011), CCH Business Franchise Guide ¶14,564)

The three beer wholesalers were deemed “successful” litigants under the meaning of the Act because a jury determined that the defending brewers did not pay them the fair market value of their distribution rights. However, even a cursory assessment of the litigation indicated that the wholesalers’ success was, at best, “pyrrhic” and, therefore, unworthy of an award of any attorney fees, according to the court.

The court went on to note that, in truth, the wholesalers were not the prevailing party in the litigation because the brewers recovered a significantly larger damages award on their unjust enrichment counterclaim than the wholesalers recovered on their beer law claims.

That fact alone merited a significant reduction in an award of attorney fees to the wholesalers, the court determined. Further, the jury award of $390,007 to the wholesalers was nugatory when compared to the $41 million the wholesalers had requested.

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Additional information on the issues discussed above is available in CCH Franchise Regulation and Damages by Byron E. Fox and Bruce S. Schaeffer.

Focus on Franchising

This posting was written by John W. Arden.

News and notes on franchising and distribution topics:

□ The program for the 34th annual meeting of the ABA Forum on Franchising has been released by the American Bar Association. Entitled “Flying the Flag of Franchising,” the meeting will be held October 19-21, 2011 in Baltimore. The meeting will start with three concurrent intensive programs on Wednesday, October 19: Fundamentals of Franchising, Best Practices for Managing Your Franchise Disclosure and Registration Practice, and Anatomy of a Franchise Litigation Case. Highlights of the regular two-day program are two plenary sessions (the annual presentation on franchise and distribution law developments and a session on techniques to improve communications and enhance outcomes) and 24 workshops. Other events include a newcomers’ networking night, the annual reception/dinner at the B&O Railroad Museum, a community service event, and a tour of Annapolis. The meeting will be held at the Marriott Baltimore Waterfront. The program co-chairs are Michael K. Lindsey and Karen B. Satterlee. Further details regarding the meeting appear here on the ABA website.

□ The International Distribution Institute will present a conference on agency, distribution, and franchising on June 16-18 in Amsterdam. Among the scheduled presentations will be a panel discussion on the ICC international franchising model contract (with John Pratt, John R.F. Baer, Carl Zwisler, Dedier Ferrier, and Guy Gras); appointing an agent/sales representative for the U.S. (John R.F. Baer); establishing a franchising network in the U.S.: a general overview (Carl Zwisler); a panel discussion on applicable law and jurisdiction (John Pratt, Carol Xueref, Thomas J. Tallerico, and Carl Zwisler); and what a franchisor should know before negotiating a franchise agreement in Brazil, China, Japan, and the United States (Carl Zwisler, Luciana Bassani, Paul Jones, Souichirou Kozuka, and John R.F. Baer). Further details are available here.

□ The national Girl Scout organization’s constructive termination of a Wisconsin council as part of a plan to eliminate two thirds of the councils nationally violated the Wisconsin Fair Dealership Law (WFDL), according to the U.S. Court of Appeals in Chicago. The national organization attempted to implement a “realignment plan” due to a decline in membership. In a decision written by Judge Richard Posner, the Court of Appeals held that the council qualified as a dealership within the WFDL. “From a commercial standpoint, the Girl Scouts are not readily distinguished from Dunkin’ Donuts,” the court stated. “The principal or at least the most readily defensible objectives of dealer protection laws is to prevent franchisors from appropriating good will created by their dealers.” These concerns apply to nonprofit enterprises that enter into dealership agreements as defined by the law, the court observed. The complaining council “manages a rolling inventory of Girl Scout-branded cookies, operates camps that are identified as ‘Girl Scout camps,’ and proselytizes for Girl Scouting in the communities that it serves, building up good will both for the local council and the national brand.” Thus, the court declined to read an exemption for nonprofits into the WFDL. Contrary to the national organization’s claim, the realignment of the councils was not “good cause” for termination or change in the competitive circumstances of the council. “There is no evidence that the proposed redrawing of boundaries is ‘essential’ or even helpful to the attainment of the national organization’s expressive goals.” The appeals court directed the federal district court in Milwaukee to enter summary judgment for the council on the WFDL claim. The May 31 decision is Girl Scouts of Manitou Council, Inc. v. Girl Scouts of the United States of America. It will be reported in CCH Business Franchise Guide.

Improperly Defined Relevant Markets Doom Private Merger Challenges

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

Recently, the U.S. Court of Appeals in San Francisco rejected two appeals in private merger challenges based on improper relevant market definitions.

Air Travel

A private suit for a preliminary injunction blocking the merger of United Airlines and Continental Airlines was properly dismissed, the federal appellate court ruled in a May 23 not-for-publication decision.

The plaintiffs—airline travelers and travel agents—failed to define a valid relevant market for purposes of evaluating the competitive effects of the transaction. Denial of the plaintiffs’ motion for preliminary injunction (2010-2 Trade Cases ¶77,187) was affirmed.

Defining and proving the relevant market for antitrust analysis was a “necessary predicate” to the plaintiffs’ success on the merits of their Clayton Act claim, the court explained. The court rejected the plaintiffs’ assertions that the district court erred in rejecting their proposed national market in air travel. The transaction would be more appropriately evaluated using a "city-pair" market. The city-pair market, which was endorsed by the district court, could satisfy the reasonable interchangeability standard.

According to the court, in defining the outer bounds of a relevant antitrust market, “the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it” was considered. To meet this standard, products did not have to be perfectly fungible. However, they had to be sufficiently interchangeable that a potential price increase in one product would be defeated by the threat of a sufficient number of customers switching to the alternate product.

A national market in air travel did not satisfy this standard. A flight from San Francisco to Newark was not interchangeable with a flight from Seattle to Miami, the court noted. No matter how much an airline raised the price of the San Francisco-Newark flight, a passenger would not respond by switching to the Seattle-Miami flight.

The court noted that the Department of Justice endorsed the city-pair market. The Justice Department closed its investigation into the merger after United Airlines and Continental Airlines agreed to transfer takeoff and landing slots and other assets at Newark Liberty Airport to Southwest Airlines (CCH Trade Regulation Reporter ¶50,258).

The Justice Department’s investigation determined that the merger would result in overlap on a limited number of routes where United and Continental offered competing nonstop service. The largest of those routes were between United’s hub airports and Continental’s hub at the Newark airport.

The May 23 decision in Malaney v. UAL Corp., No. 10-17208, appears at 2011-1 Trade Cases ¶77,463.

Pharmaceutical Industry

Just a few days earlier, the same three-judge panel of the Ninth Circuit rejected another private merger challenge. On May 19, dismissal (2010-1 Trade Cases ¶76,988) of a challenge to the 2009 merger of pharmaceutical companies Pfizer Inc. and Wyeth was affirmed. Independent retail pharmacies failed to sufficiently allege a relevant product market to support their challenge, the appellate court ruled.

The failure to allege a product market consisting of reasonably interchangeable goods rendered their complaint “facially unsustainable,” the appellate court explained.

The complaining pharmacies proposed a relevant product market consisting of “the pharmaceutical industry,” including the “manufacture, sale, and innovation of all pharmaceutical products, prescription pharmaceutical products, non-prescription pharmaceutical products, brand name pharmaceutical products and particular pharmaceutical products and therapies specifically noted and identified by Pfizer and Wyeth in their annual reports.”

While the market did not have to be pled with specificity, the complaining pharmacies failed to state any facts indicating that all pharmaceutical products were interchangeable for the same purpose, the court noted.

Pfizer, Inc.’s $68 billion acquisition of Wyeth was approved by the FTC in October 2009. Under the terms of an FTC consent order (CCH Trade Regulation Reporter ¶16,376), the combination was permitted to proceed, subject to divestitures aimed at preserving competition in multiple U.S. markets for animal pharmaceuticals and vaccines.

The May 19 decision in Golden Gate Pharmacy Services, Inc. v. Pfizer, Inc., appears at 2011-1 Trade Cases ¶77,455.

Facebook Users’ Privacy Claims Dismissed

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

The federal district court in San Jose has dismissed claims filed by a putative class of Facebook users who alleged that the social networking website unlawfully transmitted their personal information to third-party advertisers without their consent.

The users’ California Legal Remedies Act (CLRA), Unfair Competition Law (UCL), and unjust enrichment claims were dismissed with prejudice, but the users were granted leave to amend claims alleging that Facebook violated its privacy policy, the federal Wiretap Act and Stored Communications Act (SCA), and the California computer crimes and civil fraud statutes.

The users alleged that, during a four or five month period in early 2010, a redesign of Facebook’s website caused it to transmit to a “referral header” to third-party advertisers when a user clicked on a banner advertisement. The referral header allegedly reported the user ID or username of the user who clicked on an advertisement, as well as information identifying the webpage the user was viewing prior to clicking on the ad.

Federal Wiretap and SCA Claims

The Wiretap Act prohibits electronic communication services providers from divulging the contents of a communication to any person or entity “other than an addressee or intended recipient of such communication.” The SCA provides that an electronic communication service provider “shall not knowingly divulge to any person or entity the contents of a communication while in electronic storage by that service.”

Under both statutes, an electronic communication service provider may divulge the contents of a communication to an addressee or intended recipient of such communication.

The court discerned that the users’ allegations were subject to two interpretations. Under the first view, when a Facebook user clicked on a banner advertisement, that click constituted an electronic communication from the user to Facebook. The contents of the communication were a request for Facebook to send the electronic communication to the advertiser. Under the second interpretation, clicking on an advertisement constituted an electronic communication from the user directly to the advertiser.

According to this interpretation, Facebook served merely as a conduit for transmitting the communication to its intended recipient, the advertiser. Neither scenario would support a violation of the SCA or the Wiretap Act, according to the court.

California Computer Crimes Law

The court also held that the Facebook users failed to state a claim under California’s computer crimes statue. To state a violation under most subsections of Cal. Penal Code §502, a plaintiff must show that the defendant’s actions were taken “without permission.” A defendant may only be subjected to liability for acting “without permission” under §502 if the plaintiff can prove that the defendant “circumvented…technical barriers” that had been put in place to block the defendant’s access to the plaintiff’s website.

The users did not allege that Facebook circumvented technical barriers to gain access to a computer, computer network, or website. To the contrary, they alleged that Facebook caused “nonconsensual transmissions” of their personal information as a consequence of Facebook’s “re-design” of its website.

Facebook could not have acted “without permission” as there were no technical barriers blocking access to its own website. To the extent the users’ §502(c) claims alleged that Facebook acted “without permission,” they were dismissed with prejudice.

The court noted that Cal. Penal Code §502(c)(8) created liability for any person who “knowingly introduces any computer contaminant into any computer, computer system, or computer network.” Unlike the other sections of Cal. Penal Code §502(c), subsection (8) does not require that a defendant act “without permission.” Although the users failed to state a claim under §502(c)(8), they were granted leave to amend their claim.

California CLRA, UCL Claims

To assert an unfair competition claim under the California UCL, a private plaintiff must have “suffered injury in fact and . . . lost money or property as a result of the unfair competition.” A violation of the CLRA can only be alleged by an individual consumer who “purchases or leases any goods or services for personal, family, or household purposes.”

The users did not allege that they lost money as a result of Facebook’s conduct. Nor did they allege that they paid fees for Facebook’s services. The users only alleged that Facebook unlawfully shared their “personally identifiable information” with third-party advertisers.

An alleged loss of personal information did not constitute a loss of “property” that could form the basis for a UCL claim, the court held. With regard to their CLRA claim, the users failed to provide any legal support for their assertion that their personal information constituted a form of “payment” to Facebook for its services.

Breach of Contract Claim

To maintain an action for breach of contract under California law, an aggrieved party is required to show “appreciable and actual damage.” Allegations of nominal damages and speculative harm did not amount to legally cognizable damages. The users’ unsupported conclusory statement that they “suffered injury” as a result of Facebook’s breach of its privacy policy was insufficient.

The court advised the users to allege “specific facts showing appreciable and actual damages in support of their claim.” Because the users alleged the existence of a valid contract with Facebook, they could not maintain a claim for unjust enrichment.

The decision is In re Facebook Privacy Litigation., CCH Guide to Computer Law ¶50,183.

Further information about CCH Guide to Computer Law is available here.

Trade Regulation Tidbits

This posting was written by the editorial staff of the CCH Trade Regulation Reporter.

News, updates, and observations:

 U.S. Senator Herb Kohl (D, Wis.) has announced that he will not seek another term in 2012. Kohl, who is the chairman of the Senate Judiciary Committee’s Antitrust Subcommittee, is currently serving his fourth term in the U.S. Senate, which will expire at the end of the 112th Congress on January 3, 2013. "I have decided that the time has come to give someone else the opportunity to serve," he said in a May 13 statement.

 H&R Block Inc.’s proposed acquisition of 2SS Holdings, Inc., the maker of TaxACT do-it-yourself tax preparation software, has been challenged by the Department of Justice Antitrust Division. Citing a number of internal H&R Block documents, the government’s May 23 complaint—seeking to block the proposed acquisition—contends that the transaction would substantially lessen competition in the growing U.S. digital do-it-yourself tax preparation software market by combining the second and third-largest providers of such products. One H&R Block document cited “Elimination of competitor,” according to the Justice Department. H & R Block believes the transaction is procompetitive. “Contrary to the DOJ’s position, the synergies and enhanced functionalities realized from this merger would create a more competitive landscape for tax preparation,” said William C. Cobb, H&R Block’s president and CEO.

Further information regarding United States v. H&R Block Inc. and 2SS Holdings Inc., Case No. 1:11-cv-00948 (DC D. of C.) appears at CCH Trade Regulation Reporter ¶45,111.

 The on-again, off-again injunction against the National Football League's “lockout” of its players went back off-again on May 16, when the Eighth Circuit reversed a federal district court’s refusal to stay the injunction pending appeal. In a 2-1 decision, the appellate court disagreed with the lower court’s determination that the players—who claimed that the lockout constituted a concerted refusal to deal in violation of Sec. 1 of the Sherman Act—had demonstrated a likelihood of prevailing on the merits of an antitrust claim based specifically upon the lockout. It was the league—not the players—that best demonstrated such a likelihood of success, the appeals court held. The league made a strong showing that the Norris-LaGuardia Act—which restricts the authority of federal courts to issue injunctive relief in labor disputes—applied to the case, in the appellate court’s view. This created serious doubts as to whether the trial court had jurisdiction to enjoin the league’s lockout. The appellate court expressed skepticism toward the reasoning of the trial court that the case did not involve or grow out of a labor dispute, for purposes of the Norris-LaGuardia Act, since the players were no longer part of a union, having decertified it immediately after negotiations for a new collective bargaining agreement broke down. In addition, the players had not established that they would suffer irreparable harm from the lockout that would outweigh any harm suffered by the league and team owners.

The decision is Brady v. National Football League, 2011-1 Trade Cases ¶77,456.

Youth Hockey League’s Exclusive Participation Rule Could Be Anticompetitive

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

A for-profit youth hockey program adequately alleged monopolization and attempted monopolization claims against a local district of USA Hockey, the national governing board for amateur hockey, the federal district court in Minneapolis has ruled.

The complaining youth program challenged the local district's adoption of an "outside league rule," which prohibited players from participating in competing hockey leagues. The local district's motion to dismiss the monopoly claims was denied; however, the court rejected conspiracy claims.

Monopoly

The complaining program pled sufficient facts to state facially plausible monopoly claims that the defendants engaged in anticompetitive behavior under either an actual exclusion or market power test, according to the court.

The complaining program provided numerous affidavits of parents who withdrew their children from its programming as a result of the outside league rule. It also noted decreased enrollment in its leagues, losing up to 40 players as a result of the rule.

While these events might have been attributable to other factors, such as the downturn in the economy, along with the withdrawal of players already registered and who forfeited deposits, these facts alleged detrimental effects sufficient to survive a motion to dismiss, the court ruled.

Attempted Monopolization

Dismissal of the attempted monopolization claim was also denied. In order to state a claim of attempted unlawful monopolization, a plaintiff had to allege (1) a specific intent by the defendant to control prices or destroy competition; (2) predatory or anticompetitive conduct undertaken by the defendant directed to accomplishing the unlawful purpose; and (3) a dangerous probability of success.

Regarding specific intent, the complaining program alleged that the motive behind the rule was to prevent it from “taking” players from the defendants. Although the defending league’s stated purpose for the rule was to avoid scheduling conflicts and to prevent player fatigue, certain organizations that arguably would have caused such issues were exempted from the rule. Finally, the withdrawal of players from the complaining program, citing the rule, adequately alleged a dangerous probability of success.

Conspiracy

Conspiracy claims were not adequately alleged, however. The court found that the defendants should be considered part of a “unilateral actor.” The associations within the district did not compete and were deemed a “single economic actor.” Moreover, Minnesota Hockey, the state arm of the national hockey governing board, and the local district were incapable of conspiring.

The May 12 decision, Minnesota Made Hockey, Inc. v. Minnesota Hockey, Inc., is reported at 2011-1 Trade Cases ¶77,453.

Monopoly Claims Were Adequately Alleged Against Diaper Maker Kimberly-Clark

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

Last week, the federal district court in Harrisburg, Pennsylvania, refused to dismiss monopoly claims against Kimberly-Clark brought by competitor First Quality Baby Products, LLC. First Quality—a manufacturer of “private label” or store-brand diapers and training pants—adequately alleged that Kimberly-Clark used its more than 300 patents to disrupt competitors and to maintain a monopoly in the disposable baby diaper and training pants market.

First Quality claimed that Kimberly-Clark:

(1) Maintained a 35 percent share of the market for disposable baby diapers and a 75 percent share in the training pants market and

(2) Engaged in anticompetitive conduct to maintain its monopoly.

Sham Patent Litigation

Kimberly-Clark allegedly threatened patent lawsuits and then engaged in sham litigation to drain the resources of “private label” or store brand manufacturers, thereby reducing their ability to compete.

According to First Quality, Kimberly-Clark enforced patents that it knew to be invalid, procured through fraud on the Patent and Trademark Office (PTO), or not infringed. Further, Kimberly-Clark allegedly misrepresented the nature of the litigation in order to threaten retail outlets to make it the exclusive supplier of store-brand training pants.

Product Disparagement

First Quality also contended that Kimberly-Clark engaged in product disparagement through false claims and coercively acquired licensing agreements through settlements of secret arbitration proceedings.

Each of these acts in isolation might not itself not rise to the level of anticompetitive conduct, but in the aggregate it represented anticompetitive activity tied to the relevant markets that raised a plausible claim for relief, the court decided.

Conspiracy Claims

The court rejected Kimberly-Clark's contention that it was immune from antitrust liability under the Noerr-Pennington doctrine. The doctrine immunizes from antitrust liability those who petition the government. While prosecuting a patent infringement action was the type of activity protected by Noerr-Pennington, exceptions existed for activities that were mere “sham” and conduct before the PTO that was fraudulent.

Kimberly-Clark's conduct could fall within the exception for fraud on the PTO, also known as Walker Process fraud, according to the court. First Quality alleged that Kimberly-Clark deliberately and intentionally withheld material prior art in connection with the prosecution of a patent-in-suit, and, as a result, the PTO issued a patent that was invalid.

The text of the May 17 decision in Kimberly-Clark Worldwide, Inc v. First Quality Baby Products, LLC, appears at 2011-1 Trade Cases ¶77,452.

Whirlpool Not Enjoined From Advertising “Steam Dryers”

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

LG Electronics U.S.A., Inc. was denied injunctive relief against Whirlpool Corporation in an Illinois Consumer Fraud and Deceptive Business Practices Act (CPA) and Uniform Deceptive Trade Practices Act (DTPA) claim alleging Whirlpool’s advertisements of “steam dryers” were false and misleading.

Both companies manufacture steam dryers but use different methods for creating steam. The case concerned the definition of “steam” and whether the Whirlpool dryer actually created steam.

A jury in the federal district court in Chicago rejected the CPA claim, but found that Whirlpool violated the DTPA by representing its dryers as having characteristics it did not have and creating a likelihood of confusion for consumers. LG sought a nationwide injunction barring Whirlpool from using the word “steam” in describing the dryers, or requiring Whirlpool to make clear how the dryers worked.

Irreparable Harm

LG failed to establish conduct by Whirlpool that was likely to result in damage, according to the court. In its request for injunctive relief, LG argued that the jury’s finding of a violation of the DTPA created a presumption of irreparable harm, such that an injunction should follow, and that the four-factor injunction test was satisfied.

Injunctive relief is awarded upon a finding of a likelihood of harm by the conduct found to have violated the DTPA. However, LG did not have to prove harm to establish a violation of the DTPA, and the jury verdict did not establish that LG faced a likelihood of harm sufficient for an injunction.
The verdict was general and did not specify which practices it found to create a likelihood of confusion for consumers. Further, the jury did not find that Whirlpool’s practice were likely to damage LG.

Injunctive relief was inappropriate in this case because LG could not establish that it was likely to be damaged by Whirlpool’s marketing of its steam dryers, according to the court.

Use of Steam

Contrary to LG’s assertions, the Whirlpool steam dryer did, in fact, use steam. Thus, the advertising neither violated the DTPA nor was likely to harm LG in a manner cognizable under the CPA.

This finding was consistent with the jury verdict because the jury had found Whirlpool engaged in conduct that created a likelihood of confusion. Because Whirlpool’s advertising for its steam dryers did not violate the CPA or DTPA and was not likely to harm LG, injunctive relief was denied.

The May 9 decision in LG Electronics USA, Inc. v. Whirlpool Corp. appears at CCH State Unfair Trade Practices Law ¶32,254.

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

Gasoline Station Franchisor’s Market Withdrawal Did Not Violate PMPA

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

A gasoline station franchisor did not violate the Petroleum Marketing Practices Act (PMPA) in connection with its withdrawal from the Puerto Rico market because its successor did not fail to comply with the PMPA’s requirement to offer franchises to the franchisees of the withdrawing franchisor in "good faith," according to the U.S. Court of Appeals in Boston.

No evidence suggested that the successor devised the franchise agreements it offered to the franchisees in the hope that they would be rejected. The federal district court ruling in favor of the franchisor (CCH Business Franchise Guide ¶14,248) was affirmed.

Unlawful Contract Provisions

Although the lower court found several provisions of the offered agreements to be unlawful under Puerto Rico law, the successor could easily have believed that the agreements would be accepted by franchisees, old and new, the appellate court observed.

The offered agreement was the successor’s standard model for renewing franchises for its own dealers, and it was buying out the original franchisor of the franchisees to expand its business.

Good Faith Requirement

The argument by the franchisees that any term violating a state law in any respect comprised a violation of the PMPA’s good faith requirement was rejected. Such a per se rule would put at risk a vast number of market withdrawals.

Moreover, the offered franchise agreements—comprising interrelated contracts spanning about 100 pages—included hundreds of clauses, of which the lower court invalidated only five in part, the court noted.

The decision is Santiago-Sepulveda v. Esso Standard Oil Co. (Puerto Rico), Inc., CCH Business Franchise Guide ¶14,604.

Further information about CCH Business Franchise Guide appears here.

NCAA Has No Comment for Justice Department Probe of Football Championship Series

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

Earlier this month, U.S. Attorney General Eric Holder confirmed at a Senate Judiciary Committee oversight hearing that the Department of Justice was looking into college football's Bowl Championship Series (BCS) system. In response to questioning from Sen. Orrin Hatch (R-Utah) at the May 4 hearing, the attorney general disclosed that the Justice Department had sent a letter to the National Collegiate Athletic Association (NCAA) seeking feedback on the BCS system.

Yesterday, the NCAA released a letter from Mark Emmert, its president, to the Justice Department, stating that the association could not comment on the BCS. The May 18 letter suggested that questions about the BCS system and to what extent an alternative system could better serve the interests of fans, colleges, universities, and players would be best directed at the BCS and the group of institutions that operate the BCS system.

"Inasmuch as the BCS system does not fall under the purview of the NCAA, it is not appropriate for me to provide views on the system," Emmert said in the letter. The letter went on to say that the NCAA had no plans for an NCAA Football Bowl Subdivision (FBS) football championship, unless the association's membership "decides to discontinue the existing BCS systems and formally proposes creation of a championship for FBS institutions." While Emmert has in the past expressed a willingness to help create a championship, he noted that "without membership impetus for a postseason playoff, the NCAA has no mandate to create and conduct an FBS football championship."

The disclosure of the inquiry into BCS comes after years of calls for an investigation into the legality and fairness of the BCS from Sen. Hatch and other congressional lawmakers. Sen. Hatch has suggested that the BCS violates the Sherman Act. At the May 4 oversight hearing, the senator called the BCS "a mess."

The BCS is described as "a five-game showcase of college football . . . designed to ensure that the two top-rated teams in the country meet in the national championship game, and to create exciting and competitive matchups among eight other highly regarded teams in four other bowl games." Some argue, however, that has not always been the case and have called for a single elimination post-season playoff system.

Under the current BCS system, there are five bowl games are the Tostitos Fiesta Bowl, the Discover Orange Bowl, the Rose Bowl, the Allstate Sugar Bowl, and the BCS National Championship Game that is played at one of the bowl sites.

Justice Department Sues to Block Acquisition of Payment Terminal Seller

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

The Department of Justice Antitrust Division filed a civil antitrust lawsuit in Washington, D.C. on May 12 to block point-of-sale (POS) terminal seller VeriFone Systems Incorporated’s proposed $485 million acquisition of Hypercom Corporation, a competitor.

The Antitrust Division said that the proposed deal would substantially lessen competition in the sale of POS terminals in the United States, resulting in higher prices and reduced innovation, quality, product variety, and service.

POS terminals are used by retailers and other firms to accept electronic payments such as credit cards and debit cards. According to the government, VeriFone and Hypercom together control more than 60 percent of the domestic market for the POS terminals used by the largest retailers, and they are two of only three substantial sellers of other types of POS terminals.

Proposed Divestiture

A proposal by VeriFone and Hypercom to resolve the government’s antitrust concerns with the merger by divesting Hypercom’s U.S. business to Ingenico S.A. did not adequately lessen those concerns, the government said. Ingenico is the largest provider of POS terminals worldwide and the only other significant competitor to VeriFone and Hypercom in the United States, the government noted.

According to the Antitrust Division’s complaint, the planned spinoff would not improve the competitive landscape raised by the VeriFone/Hypercom transaction because the assets are to be sold to another significant competitor in the market in a manner that does not create a new, independent, long-term competitor.

In addition, the structure of the agreements between Ingenico and VeriFone, the only two significant POS sellers in the United States post-merger, enhances VeriFone and Ingenico’s ability to coordinate pricing for all POS terminals.

The complaint is U.S. v. VeriFone Systems Inc., Case: 1:11-cv-00887, May 12, 2010. Text of the complaint appears here. A press release on the action appears here.

Further details will appear at CCH Trade Regulation Reporter ¶45,111.

Constitutional Attack on False Patent Marking Enforcement Rejected

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

The qui tam enforcement provision of the false patent marking statute was constitutional, contrary to a pharmaceutical manufacturer's contention that it violated the Take Care Clause of the U.S. Constitution, the federal district court in Chicago has ruled.

The statute (1) made it unlawful to mark a product with, or use in advertising, a patent number in connection with products that are not patented and (2) authorized private, qui tam enforcement suits for awards of up to $500 for every violation.

Take Care Clause

The manufacturer argued that the false marking statute transferred law enforcement authority to private persons without retaining sufficient control for the Executive Branch to satisfy the provision of Article II of the U.S. Constitution that the President “shall take Care that the Laws be faithfully executed.”

The manufacturer relied on Unique Product Solutions, Ltd. v. Hy-Grade Valve, Inc. (ND Ohio 2011) CCH Advertising Law Guide ¶64,196, ¶64,242, which held the false marking qui tam enforcement provision unconstitutional.

Government Control

Contrary to the ruling in Unique Product Solutions, however, the direct-control test articulated by the U.S. Supreme Court in Morrison v. Olson, 487 U.S. 654 (1988) was not the deciding factor in a civil action for qui tam enforcement of the false marking statute, the court determined.

The fact that the false marking statute is a criminal statute did not make a qui tam suit a “criminal action” requiring direct government control. The better view of the false marking statute was that it is a criminal statute with a parallel civil enforcement mechanism, the court said.

The government maintained sufficient control because the statute requires the district court clerk to apprise the Director of the Patent and Trademark Office of a qui tam false marking action, and the government may request intervention in false marking cases, the court concluded.

Pending Legislation

The battle in the courts over the constitutionality of qui tam false marking enforcement would be mooted if The America Invents Act, Senate Bill 23, is enacted. The measure was passed by the Senate on March 8.

The legislation would strike the qui tam enforcement provision of the false patent marking statute (35 U.S.C. Sec. 292(b)) and replace it with a new Sec. 292(b) providing that “[a]ny person who has suffered a competitive injury as a result of a violation of this section may file a civil action in a district court of the United States for recovery of damages adequate to compensate for the injury.”

Sec. 2(k) of S. 23 also would provide that only the United States may sue for the statutory penalty of $500 per offense authorized by Sec. 292(a) of the false marking law.

The effective date provision of Sec. 2(k) of S. 23 would make the false marking amendments applicable “to all cases, without exception, pending on or after the date of the enactment of this Act.”

The April 28 opinion in Simonian v. Allergan, Inc. will appear at CCH Advertising Law Guide ¶64,274. Further legislative developments in the area of patent marking and other topics of advertising law will be reported in the Guide.

Further information about CCH Advertising Law Guide appears here.

Price Fixing Claims Against Transpacific Air Carriers Dismissed

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

Although a federal district court in San Francisco has determined that a conspiracy to fix the prices of transpacific air passenger travel was plausibly alleged, a motion to dismiss the Sherman Act claims based on the Foreign Trade Antitrust Improvements Act (FTAIA) was granted.

The action was brought on behalf of a class of individuals who purchased air transportation services from one or more of the 26 defending airlines that included at least one flight segment between the United States and Asia/Oceania.

The plaintiffs alleged that, beginning around January 2000, the airlines agreed, and began, to impose air passengers air fare increases, including fuel surcharge increases, that were in substantial lockstep both in their timing and amount. They sought to recover overcharges associated with flights originating in Asia.

Plausible Conspiracy

The plaintiffs specifically alleged that the defending airlines reached various agreements to coordinate pricing. They detailed certain communications between the airlines which supported an inference of conspiracy.

Among other things, the plaintiffs alleged that

(1) The defendants participated in various code-sharing agreements and professional alliances “reinforce and facilitate the conspiracy”;

(2) There was a “pattern of identical or virtually identical pricing by [D]efendants’ closest competitors on routes between the United States and Asia and Oceania”;

(3) The defending airlines charged “identical fuel surcharges for passenger traffic from Hong Kong, including to the United States”; and

(4) The U.S. Department of Justice, the European Commission, and other competition authorities were investigating price fixing of passenger and cargo fares.

Foreign Trade Antitrust Improvements Act

The court ruled that it lacked subject matter jurisdiction over the claims of foreign injury. The FTAIA limited a court’s subject matter jurisdiction over Sherman Act claims involving foreign commerce, according to the court. Under the FTAIA, the Sherman Act does not apply to conduct involving trade or commerce (other than import trade or import commerce) with foreign nations unless the conduct had a direct, substantial, and reasonably foreseeable effect on domestic commerce, and such effect gives rise to the plaintiff's claim.

The challenged conduct did not fall within the “import trade or commerce” or “domestic effects” exception to the FTAIA. The plaintiffs' price fixing claims (1) did not involve import commerce; and (2) did not have domestic effects that give rise to the complaining individuals’ foreign claims.

The term “import” generally denoted a product or service that had been brought into the United States from abroad. It was too great a leap to equate air passenger travel with the importing of people, or to characterize air passengers as a product or service.

Domestic Effect, Harm

Moreover, the complaining individuals' allegations of domestic effect and, indeed, their overall theory of harm, were insufficient, the court decided. While a direct effect on U.S. trade or commerce could be based on the fact that U.S. residents and citizens paid more for air passenger transportation as a result of the alleged conspiracy, the complaining individuals could not establish that the domestic effect actually caused the foreign injury.

The foreign injury was the result not of the domestic effect, but of the global price fixing conspiracy that caused the domestic effect. The domestic effects exception required proximate causation. The plaintiffs contended that “the prices for travel originating in foreign countries and travel originating in the U.S. are inextricably bound up with and dependent on each other”; however, “bound up” was not proximate causation.

The fact that the plaintiffs' foreign injuries were not caused by the domestic effect of the global conspiracy also prevented them from establishing standing. Their claims for foreign injuries were not the type of injury Congress intended to prevent through the Sherman Act, in the court's view.

The airlines, individually and jointly raised a number of other bases for dismissal. The court rejected assertions that the act of state doctrine, state action doctrine, and the implied preclusion doctrine barred the price fixing claims.

The May 9 decision, In Re Transpacific Passenger Air Transportation Antitrust Litigation, will appear at 2011-1 Trade Cases ¶77,446.

Novell Can Proceed with Antitrust Claim Against Microsoft

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

Novell, Inc. did not assign to a third party an antitrust claim based on alleged harm to office-productivity applications resulting from Microsoft Corporation’s alleged anticompetitive conduct, the U.S. Court of Appeals in Richmond, Virginia, has ruled.

The court reversed summary judgment in favor of Microsoft (2010-1 Trade Cases ¶76,983) on Novell’s claim that Microsoft “engage[d] in anticompetitive conduct to thwart the development of products that threatened to weaken the applications barrier to entry” to the operating systems market. Specifically, Novell contended that Microsoft’s conduct had damaged Novell’s WordPerfect word processing applications and its other office productivity applications in violation of Section 2 of the Sherman Act.

Statute of Limitations

Unlike other claims asserted by Novell, this count was not time-barred, because the statute of limitations was tolled during the pendency of the government’s case against Microsoft for antitrust violations in the operating systems market.

A 1996 Asset Purchase Agreement (APA), under which Novell sold its various DOS products to Caldera, Inc. and assigned the rights to any antitrust litigation related to those products, did not assign claims related to office-productivity applications, the court ruled.

The term “DOS Products” was defined in the APA to include Novell’s PC operating systems DR DOS and Novell DOS, among other products. The APA conveyed claims “associated” with an expressly enumerated body of property that did not include Novell’s office productivity applications. The mere existence of a possible conceptual link between the DOS products and those applications did not mean that the agreement divested Novell of the claim based on harm to related to office-productivity applications, the court explained.

Claim Preclusion

The court also rejected Microsoft’s res judicata defense. Nonmutual claim preclusion was generally disfavored, but Microsoft still argued that Novell’s assignment of some of its claims to the third part was sufficient to establish a substantive legal relationship between them that fell within exceptions to that principle.

Microsoft also contended that the claims arose out of the same basic core of operative facts. However, Caldera’s suit addressed a distinct set of harms from those addressed in the present dispute. While both suits implicated Microsoft’s desire to control the operating system market, overlapping motivation for separate harms was insufficient to render those harms identical for purposes of claim preclusion. Moreover, Caldera likely would not have served as an adequate representative of the complaining company’s interests. As a practical matter, only Novell had the incentive to recover for damages to its office productivity applications.

Dissent

A dissent contended that because Novell’s claim was premised on Microsoft’s anticompetitive conduct in the operating systems market, the claim was “associated directly or indirectly with” DR DOS. According to the dissent, “the majority ignore[d] the plain, patently broad language in the APA, choosing instead to craft its own narrow reading of the phrase.”

The decision is Novell Inc. v. Microsoft Corp., 2011-1 Trade Cases ¶77,434.

U.S. Approves Unilever, Alberto-Culver Combination, with Divestitures

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

To resolve U.S. antitrust concerns over its proposed $3.7 billion acquisition of Alberto-Culver Co., Unilever N.V. has agreed to divestures intended to preserve competition for value shampoo, value conditioner, and hairspray sold in retail stores.

The Department of Justice Antitrust Division filed a civil antitrust lawsuit on May 6 in the federal district court in Washington, D.C. to block the proposed transaction between three Unilever entities—Unilever N.V., Unilever PLC, and Conopco, Inc.—and Alberto-Culver.

At the same time, the government filed a proposed consent decree that, if approved by the court, would resolve the competitive concerns alleged in the lawsuit. The acquisition was expected to close on May 10.

Lessening of Competition

The government alleged that the transaction, as originally proposed, would have substantially lessened competition in three product markets—value shampoo, value conditioner, and hairspray sold in retail stores. According to the government’s complaint, the proposed acquisition would have eliminated substantial head-to-head competition between Unilever’s Suave Naturals and Alberto-Culver’s Alberto VO5 brands and would have given Unilever a near monopoly in the sale of value shampoo and conditioner in the United States with shares of approximately 90 percent in these two markets.

In addition, the proposed acquisition would have eliminated substantial head-to-head competition between Unilever and Alberto-Culver in the United States for hairspray sold in retail stores. The transaction would have made Unilever the largest seller of hairspray in the United States by increasing its market share from approximately 24 percent to over 45 percent, the complaint alleged.

The proposed acquisition would have enabled the combined firm to unilaterally raise the prices of shampoo, conditioner, and hairspray products above the per-merger price level.

Divestitures

Under the proposed consent decree, the companies would be required to divest Alberto-Culver’s Alberto VO5 brand and Unilever’s Rave brand, as well as associated assets. The Alberto VO5 brand consists of value shampoo and conditioner, hairspray, mousse, and other hair styling products. The Rave brand consists of hairspray and mousse products, according to the Justice Department.

International Cooperation

The Antitrust Division said that during its investigation it cooperated with the United Kingdom Office of Fair Trading, the Federal Competition Commission in Mexico, and South Africa’s Competition Commission. Both Unilever and Alberto-Culver provided waivers, in a timely way, to facilitate the effective international cooperation in this case, the Justice Department said.

The U.K. Office of Fair Trading announced on March 18 that Unilever had agreed to divest the bar soaps business of Alberto Culver—which includes the Cidal, Wright’s, and Simple brands—to resolve competition concerns that the acquisition would result in a substantial decrease in competition in the category of bar soaps.

Data Security Breach Supported Contract, Negligence Claims

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

An individual could have sustained an injury in fact from the failure of a publisher and developer of online services and applications for use with social networking sites (“RockYou”) to secure and safeguard its users' sensitive personally identifiable information (PII), sufficient to support contract and negligence claims brought under California common law, on behalf of himself and a purported class of similarly situated persons, according to the federal district court in Oakland.

The individual failed, however, to allege actionable injuries in support of his claims that RockYou violated the California Unfair Competition Law, Computer Crimes Law, and Consumer Legal Remedies Act. The statutory claims were dismissed with prejudice.

Collection, Storage of Personal Information

The individual—a registered user who had given RockYou his e-mail address and password in order to sign up to use a photo sharing application—asserted that RockYou collected and stored millions of users' PII in a large-scale commercial database, in “clear” or “plain” text, with no form of encryption, so that the PII was readily accessible to anyone with access to the database.

RockYou allegedly was negligent by failing to store passwords in a “hashed” form or to use any other common and reasonable method of data protection.

In December 2009, RockYou disclosed to users that one or more hackers had illegally breached its database and acknowledged that, at the time of the breach, the hacked database had not been up to date with industry-standard security protocols.

Contract and Negligence Claims

With regard to the contract and negligence claims, the individual sufficiently alleged a general basis for the requisite injury or harm by alleging that the breach of his PII caused him to lose some ascertainable but unidentified value or property right inherent in the PII, the court said.

The claims were not automatically precluded by a provision of RockYou's privacy policy, which stated that RockYou assumed no liability for third-party breaches of its secure servers. The individual asserted that RockYou's servers were not, in fact, secure.

The individual's allegations did not, however, rise to the level of stating a breach of the implied covenant of good faith and fair dealing, the court decided. The alleged misconduct did not involve conscious or deliberate actions by RockYou.

Unfair Competition Law

Although the breach of his PII could constitute a general form of “harm,” the individual failed to allege any loss of money or property as a result of RockYou's conduct, as required for a claim under the California Unfair Competition Law, the court determined.

The individual's contention that his PII constituted “currency” strained the acceptable boundaries of injury under the Act. To the extent that the individual claimed that his PII was “property,” he could not establish that his PII was “lost,” for purposes of the Act. His e-mail login and password did not cease to belong to him or pass beyond his control.

Computer Crimes Law

RockYou’s alleged failure to secure and safeguard its users' sensitive personally identifiable information (PII) would not violate California’s Computer Crimes law, in the court’s view. The statute prohibited any person from knowingly and without permission accessing or providing a means for another to access a computer system or network.

RockYou was not a proper defendant under this provision, the court said. RockYou's alleged failure to utilize reasonable data security methods did not constitute “providing a means” for third-party hackers to illegally access RockYou's database.

Consumer Legal Remedies Act

The individual failed to allege that he was a “consumer” within the meaning of the California Consumer Legal Remedies Act. He did not “purchase or lease” any goods or services from RockYou, as required for CLRA standing. There was no authority supporting the individual's contention that the CLRA covered intangible forms of payment, such as the individual's PII, the court said.

The decision is Claridge v. RockYou. Inc., CCH Privacy Law in Marketing ¶60,620.