Yelp! Not Liable for Unfavorable Business Reviews, Ratings on Website

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

Businesses that received unfavorable reviews and “star ratings” on Yelp.com were barred by the Communications Decency Act from asserting civil extortion and California Unfair Competition Law claims based on Yelp!’s alleged manipulation of reviews, the federal district court in San Francisco has ruled.

The court dismissed with prejudice a third amended consolidated class action complaint alleging that Yelp! unlawfully manipulated reviews in order to induce businesses to pay for advertising in exchange for better ratings and higher ranking of favorable reviews.

Content Creation

Section 230(c) (1) of the Communications Decency Act (CDA) shields an interactive service provider from liability for publishing third-party content. The businesses argued that Yelp! did not qualify for CDA immunity because it participated in creating unlawful content on its site.

They alleged that approximately 200 employees and others acting on behalf of or paid by Yelp! authored negative reviews of businesses that refused to purchase advertising from Yelp!. Such allegations, however, were speculative, failing to “raise more than a mere possibility” that Yelp! had authored or manipulated reviews of the businesses, the court found.

Manipulation of User Reviews

The court also held that the CDA protected Yelp! from liability in connection with its alleged manipulation of user-generated reviews.

Decisions regarding whether to publish, exclude, promote, or rank user reviews were part of the “traditional editorial function” recognized under Sec. 230(c)(1). Therefore, the businesses’ allegations of extortion based on Yelp!’s alleged manipulation of their review pages—by removing certain reviews and publishing others or changing their order of appearance—fell within the conduct immunized by the CDA.

“Star Ratings”

CDA immunity also extended to Yelp!’s aggregate “star ratings” appearing at the top of each business’s review page, the court determined. The ratings did not constitute editorial content created by Yelp!, as the businesses contended. The ratings were based on the aggregation of user-generated data. Decisions regarding which reviews to include in calculating aggregate star ratings were within Yelp!’s editorial discretion, according to the court.

Moreover, Sec. 230(c) (1) of the CDA did not prevent a service provider from making editorial decisions in bad faith or with nefarious motives. This conclusion was supported by Sec. 230(c) (2), the so-called “good Samaritan” provision, in which Congress inserted a “good faith” requirement to qualify for content-blocking immunity.

“Although the Court is sympathetic to Plaintiffs’ complaint, the sweep of Sec. 230(c)(1) as a matter of text and legislative purpose is broad,” the court noted. Therefore, even if Yelp! had made an extortionate threat by manipulating user reviews, it nevertheless would be immune from suit under Sec. 230(c)(1), the court said.

The October 26 decision in Levitt v. Yelp! Inc., appears at CCH Guide to Computer Law ¶50,290 and CCH Advertising Law Guide ¶64,491.

Arbitrable Claims Must Be Arbitrated, Even If Brought With Nonarbitrable Ones: Supreme Court

This posting was written by John W. Arden.

The Federal Arbitration Act (FAA) requires the arbitration of pendent arbitrable claims brought in a court action that includes nonarbitrable claims, even when the result would be the inefficient maintenance of separate proceedings in different forums, the U.S. Supreme Court held on November 7.

Thus, a Florida state court erred in refusing to compel arbitration of claims because two of the four claims brought in an action were nonarbitrable, including a claim brought under the Florida Deceptive and Unfair Trade Practices Act (FDUTPA).

Courts must examine a complaint with care to assess whether any individual claim must be arbitrated, the Supreme Court advised in a per curiam opinion.

Investment Losses

In this instance, 19 individuals and entities that purchased interests in one of three limited partnerships brought an action against the partnerships, an investment company, and an auditing firm after the partnerships lost millions of dollars investing with notorious financier Bernie Madoff.

Only the claims against the auditing firm (KPMG) were at issue in this case. The individuals alleged four causes of action: negligent misrepresentation, violation of the Florida Deceptive and Unfair Trade Practices Act, professional malpractice, and aiding and abetting a breach of fiduciary duty.

The individuals and entities alleged that KPMG failed to use proper auditing standards with respect to the financial statements of the partnerships, leading to “substantial misrepresentations” about the funds and resulting in investment losses.

Motion to Compel Arbitration

KPMG moved to compel arbitration based on a clause in its auditing service agreement with the partnerships and investment company. That clause stated that any dispute or claim involving any person or entity for whose benefit auditing services were provided was to be resolved by mediation or arbitration.

The Florida circuit court denied the motion to compel arbitration and the court of appeals affirmed the ruling, noting that none of the individuals or entities bringing suit expressly assented to the auditing agreement or the arbitration provision. The arbitration clause could be enforced only if the claims were derivative—that is, arising from the auditing performed under the auditing services agreement.

The appellate court held that the negligent misrepresentation claims and the FDUTPA claims were “direct” rather than derivative, and therefore were not abitrable. However, the court failed to address the abitrability of the remaining two claims—professional malpractice and aiding and abetting a breach of fiduciary duty.

Policy in Favor of Arbitration

According to the Supreme Court, the Federal Arbitration Act reflected an “emphatic federal policy in favor of arbitral dispute resolution.” Mitsubishi Motors Corp. v. Soler-Chrysler Plymouth, Inc., 473 U.S. 614 (1985), CCH Business Franchise Guide ¶8387. This policy requires courts to enforce the bargain of the parties to arbitrate.

“What is at issue is the Court of Appeal’s apparent refusal to compel arbitration on any of the four claims based solely on a finding that two of them, the claim of negligent misrepresentation and the alleged violation of the FDUTPA, were nonarbitrable,” the court stated.

The Supreme Court has held that the FAA “leaves no place for the exercise of discretion by a district court, but instead mandates that district courts shall direct the parties to proceed to arbitration on issues as to which an arbitration agreement has been signed.” Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213 (1985).

When a complaint contains both arbtirable and nonarbitrable claims, the FAA requires a court to compel arbitration of the arbitrable claims, even when such a ruling would cause the inefficient maintenance of separate proceedings in different forums.

“To implement this holding, courts must examine a complaint with care to assess whether any individual claim must be arbitrable. The failure to do so is subject to immediate review.”

The judgment of the Florida appellate court was vacated and the case was remanded for examination of whether either of the remaining two claims required arbitration.

The decision is KPMG LLP v. Cocchi, No. 10-1521, November 7, 2011. Text of the opinion will appear in CCH Business Franchise Guide and CCH State Unfair Trade Practices Law.

Justice Department Requires Health Insurance Divestiture in Montana

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

The Department of Justice Antitrust Division announced on November 8 that it will require New West Health Services Inc. to sell the majority of its commercial health-insurance business to a third-party buyer and to provide additional relief in order to alleviate agency concerns that a proposed six-year exclusive agreement between five of New West’s six hospital owners and Blue Cross and Blue Shield of Montana, Inc. (Blue Cross) would substantially reduce health-insurance competition in the state.

Elimination of Competitor

According to the government's complaint, filed in the federal district court in Billings, Montana at the same time as the proposed settlement, the original planned transaction would have effectively eliminated New West—the third-largest health insurer in Montana—as a competitor in that market, resulting in higher prices and lower quality services.

New West is one of only two significant competitors to Blue Cross in the sale of commercial health insurance in the Billings, Bozeman, Helena, and Missoula areas of the state, the Antitrust Division stated.

The complaint alleged that the proposed transaction likely would have caused New West to exit the markets for commercial health insurance because, once the five hospital owners stopped purchasing health insurance from New West, they likely would have significantly reduced their support for New West and its efforts to win commercial health-insurance customers.

These anticompetitive effects would have been exacerbated by a provision in the parties’ agreement that requires Blue Cross to give the hospital owners two seats on Blue Cross’ board of directors if the hospitals do not compete with Blue Cross in the sale of commercial health insurance, the agency contended.

Proposed Acquirer

Under the proposed settlement, New West must promptly divest its remaining commercial health-insurance business to an acquirer with the "intent and capability to be an effective competitor." The Justice Department has tentatively approved PacificSource Health Plans, a non-profit health insurer based in Springfield, Ore., as the acquirer, and the hospital owners must first attempt to sell the assets to PacificSource before selling to another purchaser.

The proposed settlement further prevents the agreement from harming competition by providing the approved new entrant with the necessary assets to compete in the commercial health-insurance markets in Montana, and it also contains provisions to prevent Blue Cross from interfering with the acquirer’s ability to compete effectively.

The hospital owners would be required to enter three-year contracts with the acquirer to provide health-care services on terms that are substantially similar to their existing contractual terms with New West. At the acquirer’s option, New West and the five hospital owners must also use their best efforts to assign the health-care provider contracts not under their control to the acquirer or to lease New West’s provider network to the acquirer for up to three years.

These requirements were important, in the government's view, because to compete effectively, health insurers need a network of health-care providers at competitive rates.

Notification of Exclusive Contracts

Finally, Blue Cross would have to notify the department and the state of Montana before it used exclusive contracts with health-insurance brokers, or exclusive or most-favored-nation provisions in its agreements with health-care providers.

“This settlement ensures that Montana residents will continue to benefit from competitive choices for commercial health insurance,” said Sharis A. Pozen, Acting Assistant Attorney General in charge of the Department of Justice Antitrust Division. “We are committed to preserving competition in the health-insurance industry because competition spurs insurers to lower prices, enhance services and increase quality.”

If approved by the court, the proposed settlement would resolve the lawsuit and the Justice Department’s competitive concerns.

The Justice Department worked closely with the Montana Attorney General’s office in its investigation of the agreement between Blue Cross and New West’s owners. “This is another example of close cooperation between the department’s Antitrust Division and state antitrust officials resulting in an outcome that protects competition and benefits consumers,” Acting Assistant Attorney General Pozen added.

The text of the proposed final judgment in United States v. Blue Cross Blue Shield of Montana, Inc., Case 1:11-cv-00123-RFC, will appear at CCH Trade Regulation Reports ¶51,000.

A press release, the complaint, and the proposed final judgment in the case appear on the website of the U.S. Department of Justice Antitrust Division.

Federal Courts Differ Over Arbitrability of California Consumer Claims

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

Two federal district courts in California have reached opposite conclusions on the question of whether claims for injunctive relief under California false advertising and consumer protection statutes are subject to arbitration.

Nelson v. AT&T Mobility LLC

The federal district court in San Francisco held that the Federal Arbitration Act preempted California Supreme Court decisions barring arbitration of claims for injunctive relief under the state’s consumer statutes, in Nelson v. AT&T Mobility LLC, No. C10-4802 THE, (ND Cal. Aug. 18, 2011).

An AT&T wireless customer asserted class action claims under the California Unfair Competition Law (UCL) and Consumers Legal Remedies Act (CLRA) seeking injunctive relief to bar AT&T from continuing to engage in business practices including alleged overbilling by improperly calculating surcharges on monthly bills.

The court held that the U.S. Supreme Court’s April 27, 2011 decision in AT&T v. Concepcion (CCH Advertising Law Guide ¶64,265) compelled arbitration of Nelson’s claims.

Ferguson v. Corinthian Colleges

The federal district court in Santa Ana expressly declined to follow the Nelson decision in Ferguson v. Corinthian Colleges, Nos. SACV 11-0127 DOC (AJWx) and SACV 11-0259 (AJWx), (CD Cal. Oct. 6, 2011).

Students asserted class action claims under the UCL, CLRA, and the California False Advertising Law (FAL) alleging that Corinthian used fraudulent misrepresentations to entice prospective students to enroll. Through Corinthian’s various websites, the students claimed they were deceived about federal financial aid, the true cost of attending the programs, the value of Corinthian’s accreditations, and the employment prospects and career placement services that students could expect.

The court denied Corinthian’s Motion to Compel Individual Arbitration, holding that the statutory purpose of the injunctive relief provisions of the UCL, FAL, and CLRA and the public interest concerns in this case likely could not be met through arbitration. The court found no apparent conflict with the Federal Arbitration Act and noted that Concepcion did not take a position on the arbitrability of public injunction actions.

These conflicting decisions highlight the unresolved tension between state consumer protection law and the policies favoring arbitration of disputes embodied in the Federal Arbitration Act.

The opinions in Nelson v. AT&T Mobility LLC and Ferguson v. Corinthian Colleges will be reported in CCH Advertising Law Guide.

Senate Bill Restoring Per Se Rule for Resale Price Maintenance Passes Judiciary Committee

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

The Senate Judiciary Committee has approved legislation that would restore the rule of per se illegality for minimum resale price maintenance (RPM). The committee ordered reported the proposed “Discount Pricing Consumer Protection Act” (S. 75) without amendment on November 3.

The measure would reinstate a rule that was overturned by a five-to-four decision of the U.S. Supreme Court in Leegin Creative Leather Products, Inc. v. PSKS, Inc. (2007-1 Trade Cases ¶75,753).

Under Leegin, RPM agreements are judged under the rule of reason, which requires a fact finder to consider all of the circumstances to distinguish “between restraints with anticompetitive effect that are harmful to the consumer and restraints stimulating competition that are in the consumer's best interest.”

The Leegin decision overturned a nearly 100-year-old precedent, Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U. S. 373, which made it per se illegal under Sec. 1 of the Sherman Act for a manufacturer and its distributor to agree on the minimum price the distributor can charge for the manufacturer's goods.

The bill was introduced by Senator Herb Kohl (D-WI), chairman of the Senate Antitrust, Competition Policy and Consumer Rights panel, in January. It is co-sponsored by Senators Dianne Feinstein (D-CA), Charles Schumer (D-NY), Richard Durbin (D-IL), Sheldon Whitehouse (D-RI), Amy Klobuchar (D-MN), Al Franken (D-MN), Ron Wyden (D-OR), and Richard Blumenthal (D-CT).

It is identical to legislation introduced in the last two Congresses. In the 111th Congress, the measure was approved by the Senate Judiciary Committee.

The proposal would amend Sec. 1 of the Sherman Act by adding after the first sentence the following:

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

The provision would take effect 90 days after the date of enactment.

“Allowing manufacturers to set minimum retail prices threatens the very existence of discounting and discount stores, and causes higher prices for consumers,” Senator Kohl said in a November 3 statement, announcing the committee’s action. “This legislation will ensure that stores can sell products at a discounted rate, helping consumers to save more of their hard earned money.”

Sprint, Cellular South Allege Injuries from Proposed AT&T/T-Mobile Combination

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

A private antitrust suit, seeking to enjoin AT&T Inc.’s proposed acquisition of T-Mobile USA, Inc., is still alive after the federal district court on Wednesday refused to dismiss on the ground that complaining competitors lacked “antitrust standing” to challenge the transaction.

The court found that, under many theories, Sprint Nextel Corporation and Cellular South, Inc., failed to allege antitrust injury. However, the complaining competitors adequately alleged antitrust injury with regard to the proposed acquisition’s effects on the market for mobile wireless devices. In addition, the motion to dismiss was denied insofar as it attacked Cellular South’s antitrust injury as a purchaser in the market for Global System for Mobile Communications (GSM) roaming.

The private actions followed the Justice Department’s filing of a complaint on August 31 to challenge the proposed acquisition—valued at approximately $39 billion. Sprint—the third largest national provider of mobile wireless services, with 50 million wireless customers—filed suit on September 6. On September 19, regional carrier Cellular South, Inc., and its wholly owned subsidiary Corr Wireless Communications, L.L.C., filed their complaint. They serve more than 887,000 customers located in Mississippi, Tennessee, Alabama Florida, and other surrounding states.

AT&T is the second largest national carrier, with 95 million customers. T-Mobile is the fourth largest national carrier, with 34 million customers.

In order to assess antitrust injury at the pleadings stage, the court had to make two distinct inquiries: (1) does plaintiff’s complaint allege a threatened injury-in-fact? And (2) does the threatened injury result from an anticompetitive aspect of defendant’s proposed conduct, i.e., that which would make the transaction illegal under the antitrust laws? The complaining competitors sought relief under § 16 of the Clayton Act, 15 U.S.C. § 26. The court explained that the antitrust standing inquiry under § 16 was “less demanding” than the standard under § 4 because § 16 “provides for injunctive relief, not treble damages.”

The court ruled that both Sprint and Cellular South adequately alleged a threatened antitrust injury with regard to the proposed acquisition’s effects on their access to mobile wireless devices. The complaining competitors alleged a merger-to-monopsony in support of this allegation.

The firms competed horizontally as sellers of wireless services and a broad array of wireless devices, including basic mobile phones, smartphones, tablets, and other products that access their voice and data networks, and as purchasers of wireless devices. Sprint and Cellular South alleged that post-merger, increased market concentration would enable the largest carriers (AT&T and Verizon) to coerce exclusionary handset deals. AT&T’s buying power post-merger could enable it to dictate terms to device manufacturers and otherwise impair the complaining competitors’ access to these necessary inputs. The threatened injury-in-fact was substantiated by the fact that AT&T and Verizon wielded their purchasing power in the past, the court noted.

Moreover, Cellular South alleged that the proposed acquisition threatens its access not only to handsets that are particularly desirable, but also, more fundamentally, to whole “ecosystems” of devices and network infrastructure—and customers. Cellular South claimed that AT&T and Verizon had exercised their purchasing power in the markets for devices and network equipment to propagate “their own separate ‘ecosystems’ of compatible infrastructure . . . that cannot be utilized by other competitors,” and that the proposed acquisition would increase the big carriers’ "incentive and power to exclude competitors from those ecosystems."

Cellular South also adequately alleged an antitrust injury in the market for GSM roaming based on the reduction in the number of potential roaming partners and resulting higher roaming prices, the court held. Cellular South alleged a vertical effect from the merger in that it would pay more to procure necessary inputs. Cellular South’s Corr Wireless subsidiary used GSM transmission technology and had been a roaming customer of T-Mobile and currently is a roaming customer of AT&T. Even if Corr Wireless represented only a small part of Cellular South’s business, Cellular South’s allegations suggested that its threatened loss from the merger was plausible, in the court’s view.

The court determined that Sprint and Cellular South lacked standing to challenge the proposed merger on the ground that it would lead to higher retail wireless rates. The possibility that a post-merger AT&T could raise market prices did not, without more, threaten injury-in-fact to Sprint and Cellular South. Raising market price or limiting output, while causing harm to consumers, would actually benefit competitors, the court explained.

Sprint also was found to lack standing to allege injury in the market for wireless spectrum. The court rejected Sprint’s contentions that AT&T’s acquisition of additional spectrum holdings from T-Mobile would “improperly shift the costs of spectrum development to Sprint and other carriers” and “further weaken their ability to compete on the merits by increasing their costs and delaying their access to new equipment.”

The November 2, 2011, decision in Sprint Nextel Corporation v. AT&T Inc., Civil Action No. 11-1600 (ESH), will appear at CCH 2011-2 Trade Cases ¶77,664.

Manitoba Seeks Public Comment on Proposed Franchise Rules

This posting was written by John W. Arden.

The Province of Manitoba is seeking public comment on proposed regulations under the Manitoba Franchises Act, which was passed June 17, 2010 and will come into force on a date determined after the regulation is finalized.

The Act requires franchisors to make presale disclosures to prospective franchisees using a prescribed disclosure document, imposes a duty of good faith and fair dealing on parties to franchise agreements, and provides franchisees with the right to associate and a right of rescission.

As with franchise legislation enacted by Prince Edward Island and New Brunswick, the Manitoba statute is based on the Uniform Franchises Act (CCH Business Franchise Guide ¶7021), a model law that was adopted by the Uniform Law Conference of Canada.

As proposed, the regulation would establish specific requirements of the disclosure document, prescribe delivery methods, provide an exemption from the financial statement disclosure requirement for mature franchisors, and furnish a small investment exemption.

The Province has published a consultation paper, providing background to the law and regulations and describing the important provisions of the proposed regulation.

The “key features” of the proposal include:

Contents of disclosure document. The contents of the required disclosure document would closely follow those of Ontario, Prince Edward Island, and New Brunswick in order to facilitate use of documents prepared for other jurisdictions.

Wraparound documents. The proposal would allow use of a disclosure document prepared for another jurisdiction if the franchisor includes supplementary information required by Manitoba in a “wraparound document.”
Risk warnings. The rules would require the disclosure document to include warnings advising the franchisee to seek information about the franchisor and to obtain legal and financial advice.

Financial statements. The franchisor would be required to include its most recent financial statements in the disclosure document. A mature franchisor with a good record of compliance might qualify for an exemption from this requirement.

Electronic and courier delivery. The disclosure document and subsequent material changes may be delivered by a prepaid courier or by electronic means. A notice of rescission must be delivered by prepaid courier.

Delivery of disclosure document in parts. Although normal practice would be to deliver the entire contents of the disclosure document together, a franchisor would be permitted to deliver the disclosure document in parts.

Restriction on refundable deposits. A franchisor is permitted to request and receive from a franchisee a refundable deposit not exceeding 20 percent of the initial franchise fee to a maximum of $100,000.

Small investment exemption. A franchisor may receive an exemption from the disclosure document requirement where the franchisee’s total annual investment does not exceed $5,000.

Text of the consultation paper, proposed franchise regulation, and the Manitoba Law Commission’s Franchise Law Report 2008 appears here on the Province of Manitoba website.

Written comments on the proposed regulation may be submitted through December 15, 2011. They should be sent to Franchises Consultation, Manitoba Entrepreneurship, Training and Trade, Small Business Branch, 250-240 Graham Avenue, Winnipeg MB R3C 0J7, telephone: 204-945-7721; Fax: 204-983-3852; e-mail: Franchises@gov.mb.ca.

Further details will appear in CCH Business Franchise Guide.

Customers Could Seek Costs of Mitigating Harm from Data Security Breach

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

Customers of supermarket chain operator Hannaford could pursue claims for breach of implied contract and negligence under Maine law against Hannaford for failing to prevent a data security breach, the U.S. Court of Appeals in Boston has held.

The customers stated valid claims for damages based on the costs of replacing their credit and debit cards and of purchasing credit insurance after a breach resulted in the theft of an estimated 4.2 million debit and credit card numbers, expiration dates, PINs, and other personal information.

Mitigation Damages

The damages sought by the customers amounted to “mitigation damages,” the court said. These damages were reasonably foreseeable, and recovery for them had not been barred by Maine for policy reasons.

Under Maine common law, a plaintiff may recover for costs and harms incurred during a reasonable effort to mitigate its damages resulting from a defendant’s negligence, regardless of whether the harm is nonphysical. To recover mitigation damages, plaintiffs needed only show that the efforts to mitigate were reasonable and that those efforts constituted a legal injury, such as actual money lost, rather than time or effort expended.

The case involved a large-scale, sophisticated, apparently global criminal operation conducted over three months and the deliberate taking of credit and debit card information. There had been actual misuse of customer data by the thieves, the court noted. The data had been used to run up thousands of improper charges to customers’ accounts; the customers were subject to a real risk of financial loss, making their mitigation efforts reasonable.

By the time Hannaford had notified customers of the breach, over 1,800 fraudulent charges had been identified, and the customers could have reasonably expected that many more fraudulent charges would follow. The customers’ claims for identity theft insurance and replacement card fees involved actual financial losses from credit and debit card misuse. Such damages were recoverable in Maine under both tort law and contract law, according to the court.

The customers could not, however, recover damages for their claims for loss of reward points, loss of reward point earning opportunities, and fees for pre-authorization arrangements. These injuries were too attenuated from the data breach because they were incurred as a result of third parties’ unpredictable responses to the cancellation of the customers’ credit or debit cards, the court said.

Breach of Implied Contract

With regard to the customers’ claims for breach of an implied contract, the court determined that a jury could find that, in a grocery transaction in which a customer uses a debit or credit card, there was an implied contract that Hannaford would not use the credit card data for other people’s purchases, would not sell the data to others, and would take reasonable measures to protect the information.

A customer using a credit card in a commercial transaction intended to provide that data to the merchant only and did not expect the merchant to allow unauthorized third parties to access the data, the court said.

Breach of a Fiduciary Duty

The customers failed, however, to assert a claim for breach of a fiduciary duty. First, the customers did not have a “confidential relationship” with Hannaford that would give rise to a fiduciary duty, according to the court. The “trust and confidence” allegedly placed by the customers in Hannaford was not the type of trust and confidence contemplated by Maine’s common law. Such claims typically involved family relationships, joint ventures or partnerships, and lender/borrower relations in which one party had taken advantage of another for purposes of acquiring or using the other’s property or assets. No such relationship existed in this case.

Second, the grocery purchase relationship between the parties was not characterized by a disparity in bargaining positions. Hannaford did not have a monopoly on the sale of groceries and did not require the use of credit or debit cards.

Third, the customers failed to allege that Hannaford abused a position of trust, the court said. There was no suggestion in the complaint that Hannaford provided anything but a fair exchange in groceries in return for the customers’ payments or that Hannaford somehow took advantage of the system of allowing customers to use credit and debit cards.

Unfair Trade Practices

Hannaford’s failure to disclose the breach did not give rise to a cause of action under Maine’s Unfair Trade Practices Act, the court decided. The private remedies provision of the Act required that the plaintiff suffer a loss of money or property as a result of the defendant’s unlawful act. Maine’s highest court had interpreted the Act as only allowing private actions for “substantial” injuries. The private remedies provision was to be read narrowly, particularly when common-law actions for negligence and breach of implied contract were available.

The decision in Anderson v. Hannaford Brothers Co., appears at CCH Privacy Law in Marketing ¶60,687.

Remaining Funds in Visa Check/MasterMoney Class Action Awarded to Non-Profits

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

The American Antitrust Institute will receive half of the remaining settlement fund in a tying arrangement class action against the Visa and MasterCard payment card networks under a cy pres distribution, the federal district court in Brooklyn, New York, has decided.

Following distribution of approximately $2.6 billion from the settlement fund in the class action brought on behalf of millions of merchants against the two networks, approximately $1.5 million to $1.6 million was remaining in the fund.

The lead counsel for the plaintiffs had initially asked the court that the entire remainder be donated to the American Antitrust Institute—a non-profit organization dedicated to education, research, and advocacy concerning antitrust law. Ultimately, it was decided that the American Antitrust Institute would share the money with two other charitable organizations.

After determining that a cy pres award was a more appropriate manner for disposing of the remaining settlement funds than an additional distribution to class members, the court took up the issue of who would be granted the remaining funds. The cy pres donation amounted to roughly 0.057 percent to 0.061 percent of the total amount distributed to class members.

Distribution to Three Organizations

The funds were to be distributed as follows: 50 percent to the American Antitrust Institute; 25 percent to Consumers Union, a non-profit advocacy organization; and 25 percent to U.S. PIRG, a network of state public interest groups working on behalf of the American public on issues such as product safety, public health and health care reform, higher education, political corruption and voting rights.

The court denied a request from the Jewelers Vigilance Committee—a not-for-profit trade association for the U.S. precious metal, gem, and jewelry trade—for consideration as a recipient of the cy pres funds. The group was not an appropriate recipient. Its members who were members of the class had already benefited from the settlement.

Moreover, distribution to such narrowly-tailored interests would have had the effect of inequitably concentrating its benefit on a subset of the class as opposed to the class as a whole, in the court’s view.

The October 24, 2011 decision, In re Visa Check/MasterMoney Antitrust Litigation, appears at 2011-2 Trade Cases ¶ 77,654.

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

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

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

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

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

Apps Access User Information

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

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

Injury in Fact

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

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

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

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

In their complaint, the users alleged three injuries:

(1) Misappropriation or misuse of personal information;

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

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

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

Injury Traceable to Defendants

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

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

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

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

Contact Lens Solution False Ad Claims Preempted by Food, Drug, and Cosmetic Act

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

Class action claims that a contact lens solution manufacturer used misleading advertising in violation of the California Unfair Competition Law (UCL) and False Advertising Law (FAL) were preempted by the Medical Devices Amendments of 1976 (MDA), an amendment to the Food, Drug, and Cosmetic Act (FDCA), according to the U.S. Court of Appeals of San Francisco.

The manufacturer advertised its contact lens disinfectant and cleaner as effective when in fact it caused many users to suffer infections, and the purchaser argued that the manufacturer knew its product was a poor disinfectant compared to other products. The solution was eventually recalled by the Food and Drug Administration.

Standing

A district court found that the purchaser lacked standing to bring the UCL and FAL claims because the purchaser and the class members never suffered an injury, were not forced to throw away unused solution by the recall, and did not lose money.

To have standing to bring a UCL claim, the purchaser needed to show an injury in fact and lost money as a result of the unfair competition.

Because class members paid money for a product based on advertising found to be false, the court held that they had standing to bring the claim. Class members would not have been willing to pay as much as they did for contact solution had they not been deceived by the advertising.

Preemption

While the trial court erred in its finding of standing, the claims were nonetheless dismissed as federally preempted. The claims were preempted by the Medical Devices Amendments of 1976 (MDA) to the Food, Drug, and Cosmetic Act (FDCA) because the UCL and FAL would impose a requirement that differed from the federal law.

State laws are preempted where a federal requirement was imposed on a device under the FDCA and the challenged state rule would impose a requirement that differed from, or added additional obligations to, the federal requirement. The application of California laws to this case would have imposed additional requirements separate from the federal requirements.

The decision is Degelmann v. Advanced Medical Optics Inc., CCH State Unfair Trade Practices Law ¶32,337.

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

Apple Fails to State Antitrust Claims Against Samsung for Standards Setting Abuse

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

The federal district court in San Jose, California held on October 18 that Apple, Inc. failed to allege sufficient facts to support its claims that rival Samsung Electronics Ltd. violated Section 2 of the Sherman Act by abusing a private standard setting process for mobile wireless technology.

The court dismissed Apple’s claims under Section 1 of the Sherman Act as incompatible with its allegations supporting its section 2 claims. Apple’s California Unfair Competition Law claim predicated on Samsung’s Sherman Act violations also was dismissed.

Global Patent War

The ruling was the first blow to Apple in the U.S. in its global war with Samsung regarding several utility and design patents related to both parties' mobile device technologies. Cases are pending in at least ten countries. The Federal Court in Sydney, Australia issued an October 13 temporary ban on the sale of Samsung's Galaxy 10.1 tablets. In August, a court in Dusseldorf, Germany temporarily halted sales of Galaxy 10.1 tablets, while a court in The Hague banned sales of the South Korean company’s Galaxy S, S II smart phones.

According to the district court, Apple failed to allege sufficient facts to meet Fed.R.Civ.Pro. 9(b)’s heightened pleading standard in support of its Sherman Act monopolization claim. Apple contended that Samsung fraudulently induced the European Telecommunications Standards Institute (ETSI), a standard setting organization (SSO) for mobile wireless carrier technology, to adopt a standard incorporating a Samsung patent as essential technology.

Specifically, Samsung allegedly failed to disclose intellectual property rights in its patent and breached a promise to license its essential technology on fair, reasonable, and non-discriminatory (FRAN) terms to ESTI members.

Anticompetitive Conduct

In order to establish anticompetitive conduct for failure to disclose intellectual property rights, a plaintiff must show that there was an alternative technology that the SSO was considering during the standard setting process and that the SSO would have adopted an alternative standard had it known of the patent holder's intellectual property rights.

The court found that Apple failed to allege sufficient facts to support a plausible inference that if Samsung had disclosed its intellectual property rights to the ETSI, a viable alternative technology performing the same functionality would have been incorporated into the UMTS standard, or that the relevant functionality would not have been incorporated into the standard at all.

False Declarations

Apple's allegations that Samsung submitted false FRAND declarations were not sufficient to put Samsung on notice of the particular misconduct that created the basis of the alleged fraud, in the court’s view. Apple did not set forth facts establishing when the alleged false FRAND declarations were made, by whom they were made, or with regard to which patents were they made. The court granted Apple leave to amend its Sherman Act sec. 2 claims.

The court dismissed Apple’s restraint of trade claim under Section 1 of the Sherman Act without leave to amend. To state a violation under Section 1, a plaintiff must show a unity of common purpose or a common design and understanding, or a meeting of minds in an unlawful arrangement.

Unilateral Conduct

Apple’s allegation that Samsung unilaterally subverted ETSI’s collaborative standard-setting process in order to restrain trade was not reconcilable with its allegation that Samsung contracted with, combined with, or conspired with ETSI or is members to restrain trade, according to the court. Apple necessarily failed to allege a concerted action between Samsung and ETSI necessary to state a claim under Section 1, the court held.

The decision in Apple Inc. v. Samsung Electronics Co. Ltd., 11-CV-01846-LHK, will appear in CCH Trade Regulation Reporter and CCH Guide to Computer Law.

Further details regarding CCH Trade Regulation Reporter appear here. Details regarding CCH Guide to Computer Law appear here.

Cement Firms Could Have Conspired to Fix Prices, Allocate Customers and Markets

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

Four vertically-integrated cement companies could have illegally conspired to fix prices and allocate customers and markets for ready-mix concrete in Florida through a course of parallel conduct alleged by direct and indirect purchasers, according to the federal district court in Miami.

The allegations of parallel conduct coinciding with the arrival of an executive at one of the cement producers nudged the claims of the purchasers across the line from conceivable to plausible.

The plaintiffs asserted that the executive made statements shortly after becoming head of one of the defending companies that implied an agreement had been made between the companies to raise the price of ready-mix concrete and to refrain from competing with each other’s customers.

Uniform Price Increases

The plaintiffs documented that the four companies all increased their ready-mix concrete by a uniform amount and eliminated their fuel surcharge in the face of declining demand, and offered specific examples where the companies refrained from competing for each other’s customers, even pointing to one case where a defendant retaliated against a co-conspirator for offering a low bid to one of its customers.

The plaintiffs also related an incident in which an independent trucking company refused to help an independent concrete producer carry mobile-mix concrete out of fear the defending producers would refuse to work with it. In addition, a letter from a division manager at one of the companies to the Department of Justice—expressing concerns about antitrust violations, and a purported corporate cover-up that included retaliation against the manager—lent further support for the existence of a conspiracy.

Taken together, it was plausible to infer a conspiracy among the four producers to fix the price of ready-mix concrete in the areas where they sold it, in the court’s view.

The allegations were, however, insufficient to permit a plausible inference that the conspiracy began before the executive joined the defending company, that the conspiracy involved the cement market, or that six other cement producers were directly involved, the court held.

The decision is In re: Florida Cement and Concrete Antitrust Litigation, 2011-2 Trade Cases ¶77,642.

U.S. Conditionally Approves Acquisition of Sara Lee Bread Products

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

A proposed acquisition that would combine the largest and third largest bakers and sellers of sliced fresh bread in the United States has been approved by the Department of Justice Antitrust Division, subject to a series of divestitures intended to preserve competition in eight markets.

Grupo Bimbo S.A.B. de C.V., parent company of Bimbo Bakeries USA, can proceed with its acquisition of Sara Lee Corporation’s North American Fresh Bakery business under the terms of a proposed consent decree. The transaction was expected to close on November 5, according to Bimbo Bakeries.

The Justice Department alleged in a complaint filed on October 21 in the federal district court in Washington, D.C. that the transaction, without the divestitures, would have substantially increased concentration in various geographic markets for the sale of fresh bread and eliminate substantial head-to-head competition between Bimbo Bakeries and Sara Lee for sliced fresh bread sold in retail stores.

Specifically, the government alleged anticompetitive effects in eight relevant geographic markets for the sale of sliced bread: Los Angeles, Sacramento, San Diego, and San Francisco in California; Kansas City, Kansas; Omaha, Nebraska; Oklahoma City, Oklahoma; and the Harrisburg/Scranton area in Pennsylvania.

Under the proposed consent decree, which is subject to court approval, the companies must divest the rights to sell Sara Lee’s EarthGrains brand and brands in the Sara Lee family (Sara Lee, Sara Lee Classic, Sara Lee Soft & Smooth, Sara Lee Hearty & Delicious and Sara Lee Delightful) in California; Sara Lee’s EarthGrains brand and Bimbo’s Mrs Baird’s brand in the Kansas City area; Sara Lee’s EarthGrains brand in the Oklahoma City area; Sara Lee’s EarthGrains and Healthy Choice brands in the Omaha area; and Sara Lee’s Holsum and Milano brands in the Harrisburg/Scranton area.

In addition, the parties would be required to divest the associated manufacturing, distribution, and marketing assets necessary to compete effectively in the sale of those brands in those areas. The divestitures are intended to remedy the Justice Department’s antitrust concerns.

The complaint and proposed consent decree in U.S. v. Grupo Bimbo, S.A.B. de C.V., BBU, Inc., and Sara Lee Corp., No. 1:11cv01857, appears here on the Department of Justice Antitrust Division website.

Further details will be reported in CCH Trade Regulation Reporter.

ABA Forum on Franchising “Continues to Be Strong”

This posting was written by John W. Arden.

The American Bar Association Forum on Franchising “continues to be strong, gain membership, and surpass expectations for attendance at annual Forums,” said Forum Chair Joseph J. Fittante during an October 21 “State of the Forum” address at the group's annual meeting.

Attendance at the annual meeting was up nearly 4 percent over last year, drawing 773 to the Marriott Waterfront Hotel in Baltimore. In 2010, 746 attended the annual meeting at the Hotel Del Coronado near San Diego. Last year’s turnout was a huge rebound from the 650 attending the 2009 annual meeting in Toronto.

A highlight of the last year was a survey of membership, which revealed one theme—members’ desire for more opportunities to be involved, said Fittante, a shareholder of Larkin Hoffman Daly & Lindgren in Minneapolis.

The Forum website has more information on opportunities to write for the quarterly Franchise Law Journal and the quarterly Franchise Lawyer newsletter. There are also opportunities to join Forum sub-groups, including the International Franchise and Distribution Division, the Corporate Counsel Division, the Litigation and Alternative Dispute Resolution Division, the Solo and Small Firm Network, the Membership Committee, the Program Committee, the Publications Committee, the Technology Committee, and the Diversity Committee.

Governing Committee Election

During the annual business meeting of the three-day forum, the group elected four new members of the governing committee by adopting—by voice vote—the report and recommendation of the nominating committee.

The new members of the governing committee are Deborah Coldwell of Hayes & Boone in Dallas/Fort Worth; Natalma McKnew of Smith Moore Leatherwood in Greenville, South Carolina; Karen Satterlee of Hilton Worldwide in McLean, Virginia; and Will K. Woods of Baker Botts LLP in Dallas.

Forum Awards

This year, the group did not present its Lewis G. Rudnick Award for substantial contributions to the development of the Forum and to franchise law as a discipline. The “lifetime achievement award” was given to John R.F. Baer in 2009 and to Rupert Barkoff and Andrew Selden in 2010.

The Young Leader Award was presented to Nicole Zellweger for her speaking, writing, and involvement in the Newcomer’s Network and Women’s Caucus. The Chair’s Explorer Award was given to Christian Thompson. The latter award is designed for newcomers to the Forum who have demonstrated an interest in pursuing a career in franchise law.

Highlights of the annual meeting included a plenary session on “Speed Reading People: Techniques to Improve Communications and Enhance Outcomes” and the Annual Franchise and Distribution Development session, presented by Lee J. Plave and Stuart Hershman.

Program co-chairs were Michael K. Lindsay and Karen Satterlee.

The 2012 annual meeting is scheduled for October 3-5 at the JW Marriott in Los Angeles. Further information regarding the Forum on Franchising appears here on the ABA website.

Attorney, Wife Liable for RICO Fraudulent Insurance Claims

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

Two insurance companies succeeded—and three failed—in their RICO claims against an attorney who had participated in a scheme to defraud the insurers by submitting false claims for automobile insurance, the federal district court in San Juan, Puerto Rico, has ruled. Because the attorney’s RICO violations enriched both him and his spouse, their conjugal partnership was jointly liable for nearly a million dollars in damages that the attorney had caused.

Insurance Fraud Paradigm

Aetna Casualty Surety Co. v. P & B Autobody (43 F.3d 1546), a 1994 decision by the U.S. Court of Appeals for the First Circuit, provided a paradigm for analyzing RICO claims involving insurance fraud, the court observed. In accordance with Aetna, the insurers had to prove that: (1) each was an enterprise; (2) their business activities affected interstate or foreign commerce; (3) the defendant associated with each of them; (4) the defendant participated in the operation or management of each enterprise; and (5) the defendant’s participation in each enterprise was effected through a pattern of racketeering activity.

Enterprise, Interstate Commerce

The insurers were legitimate corporations authorized to engage in the business of insurance in Puerto Rico. Therefore, each insurer constituted a distinct enterprise. Moreover, to the extent that the insurers provided coverage to policyholders in the continental United States, their activities affected interstate commerce. The first and second Aetna criteria were therefore met, according to the court.

Association, Participation

As a policyholder or claimant under the plaintiffs’ insurance policies, the attorney associated with each of the insurers, the court reasoned. In addition, he participated in the conduct of the enterprises’ affairs by filing false claims that were paid by the insurers. RICO made it unlawful for any person who was employed by or associated with an interstate enterprise to “conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity.” In Reves v. Ernst & Young (CCH RICO Business Disputes Guide ¶8227), the U.S. Supreme Court construed the words “conduct or participate” to mean a defendant’s participation in the “operation or management” of the enterprise.

In this case, the attorney argued that he could not have participated in the operation or management of the insurance company enterprises because insurance company employees had not been involved in the scheme. Although some courts in the Second Circuit have adopted this “more restrictive” approach to the operation and management requirement (where participation required employee involvement in the fraudulent scheme), the attorney failed to fully develop his argument with respect to this approach. Alleging that insurance company insiders were not involved in the attorney’s fraud was insufficient to distinguish the holding in the Aetna case, which included insurance company employees as defendants. In light of the First Circuit’s liberal application of the RICO Act, and considering the role that insurance company employees had played in the Aetna scheme, the attorney’s argument was unavailing, the court concluded.

Accordingly, the third and fourth Aetna criteria were met, as well.

Pattern of Racketeering

The attorney contended that the insurers had to prove that two or more predicate acts were committed in connection with each enterprise. In the absence of any attempt to rebut this contention, and in light of the fact that case law appeared to be silent on the issue, the attorney’s “straightforward” interpretation of the fifth criterion was adopted. The undisputed facts showed that the attorney had committed a single act of racketeering in connection with each of three insurers. Accordingly, a pattern of racketeering was absent as to those insurers and their RICO claims failed. The claims asserted by the remaining two insurers, however, were successful. The attorney had committed multiple acts of racketeering in connection with each of them. Moreover, the acts were sufficiently related (they shared the same purpose, results, victims, and methods of commission) and they posed a threat of continued criminal activity, in the court’s view. The two insurers thus met all five Aetna criteria and prevailed on their RICO claims against the attorney.

Damages

The successful insurance companies were awarded a total of $955,703 in treble damages. The facts showed that the insurers had sustained losses of $112,500 and 206,068, respectively. After trebling, those damages increased to $337,500 and $618,203, respectively.

The September 30, 2011 case in Puerto Rico American Ins. Co. v. Burgos can be found at CCH RICO Business Disputes Guide ¶12,117.

“Clinically Proven” Help-Baby-Sleep Labeling Could Be Deceptive

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

Johnson & Johnson’s labeling of its baby bath products as “clinically proven” to help babies sleep better could be deceptive and misleading in violation of the New Jersey Consumer Fraud Act, but a purchaser’s allegations of ascertainable loss were inadequate to establish a cause of action, the federal district court in Trenton has ruled.

The labels did not just make vague or highly subjective claims of simple superiority that could be considered puffery. The incorporation of the words “clinically proven” transformed a statement that might otherwise be considered puffery—the products would help babies sleep—into something that appeared to be both specific and measurable, according to the court.

Ascertainable Loss

In asserting ascertainable loss in a class action complaint, the purchaser alleged that J&J charged a premium of at least $1.00 for the products and that comparable products cost at least twenty-five percent less. However, the purchaser did not allege the price she paid for the products, their price generally, or the price of comparable products. The allegations of ascertainable loss were unsupported conclusory statements insufficient to withstand a motion to dismiss, the court determined.

The purchaser’s claims were dismissed without prejudice because it was conceivable that she could plead ascertainable loss with specificity, the court said.

The opinion in Lieberson v. Johnson & Johnson Consumer Companies, Inc. will be reported at CCH Advertising Law Guide ¶ 64,451.

Projections of Store Openings Could Have Violated North Dakota Franchise Law

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

Pharmacy franchisor Medicine Shoppe International, Inc. could have breached the anti-fraud provisions of the North Dakota Franchise Investment Law (NDFIL) by allegedly making a material misstatement of fact in a Franchise Disclosure Document (FDD) filed by the franchisor with the North Dakota Securities Commissioner in 2009 when it projected the opening 0-1 stores in North Dakota, a federal district court in Fargo, North Dakota, has ruled.

In reality, the franchisor did not intend to offer any franchises in North Dakota of the type and trade name described in the FDD so as to avoid triggering the “most favored nations” clause in the franchise agreements of current franchisees, such as the two plaintiffs.

The plaintiff franchisees argued that they were induced to enter into renewal agreements with the franchisor specifically because they were assured that, by virtue of the “most favored nations” clauses in their renewal agreements, they were assured that if a better deal came along, they would be able to convert to it.

If a factfinder determined that the franchisor employed such a scheme as a way to defraud or commit deceit, it could also find a violation of the statute. Thus, genuine issues of fact existed with regard to whether the franchisor violated the NDFIL, the court held.

Private Right of Action

The franchisor’s contention that there was no private right of action under the NDFIL was rejected. The plain language of the statute stated that a franchisee or subfranchisor could bring an action against “any person who violates any provision of this chapter,” the court observed.

The decision is JMF, Inc. v. Medicine Shoppe Int’l, Inc., CCH Business Franchise Guide ¶14,692.

“Do-Not-Track” Approach to Consumer Privacy Questioned by FTC Commissioner Rosch

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

Federal Trade Commissioner J. Thomas Rosch reiterated his doubts about the viability of a “do-not-track” mechanism to protect consumer privacy in the United States, in a speech delivered at the Loyola Chicago Antitrust Institute Forum last Friday. Commissioner Rosch has called the FTC staff’s recent endorsement of such a mechanism “premature.”

A do-not-track mechanism would purportedly enable consumers to choose whether to block the tracking of their online searching and browsing activities in order to limit targeted advertising. In an FTC staff report issued in December 2010, entitled “Protecting Consumer Privacy in an Era of Rapid Change: A Proposed Framework for Businesses and Policymakers,” the staff recommended the implementation of a do-not-track mechanism.

“Serious Reservations”

Commissioner Rosch concurred in the decision to issue the staff report for comment, but expressed “serious reservations” about the do-not-track proposal advanced in it. At the time the report was released, Commissioner William E. Kovacic also questioned the wisdom of do not track. However, Commissioner Kovacic left the agency earlier this month, leaving Rosch the only member of the Commission skeptical of the staff’s recommendation.

In his remarks in Chicago, Commissioner Rosch explained how the do-not-track approach to privacy protection has “generated attention not only from the Commission and the media, but also from Congress, the online industry, and a host of consumer advocacy groups.”

While there are bills in Congress that address broader privacy concerns without providing for a specific do-not-track mechanism, two pieces of legislation have been proposed this term that instruct the FTC to develop a specific do-not-track mechanism, according to Rosch.

Proposed Federal Legislation

The proposed “Do Not Track Me Online Act” (H.R. 654) would require the FTC to issue rules: (1) establishing standards for “an online opt-out mechanism; (2) requiring mandatory disclosures regarding the collection, use, and sharing of information; and (3) allowing consumers to otherwise prohibit the collection or use of a broad array of information transmitted online.

The proposed “Do-Not-Track Online Act of 2011” (S. 913) would require the FTC to issues rules: (1) establishing a mechanism whereby consumer can simply and easily opt out of having their personal information collected online—including on mobile devices; and (2) prohibiting the collection of personal information from consumers who have opted out.

Online Industry’s Efforts

The Commissioner criticized the online industry’s efforts to implement do not track. He questioned claims that these efforts provide consumers with the choice to eliminate behavioral advertising, tracking, or targeted advertising. Specially, he mentioned the browser-related mechanisms associated with Microsoft’s Internet Explorer 9, Mozilla’s Firefox, and Google’s Chrome and the self-regulatory regime of the Digital Advertising Alliance, which uses cookies to effectuate the choice mechanism.

According to Rosch, there are four overarching shortcomings with the industry’s efforts:

(1) Some of the mechanisms only allow consumers to opt out of behavioral advertising, but not all “tracking,” and there is a failure to alert consumers to this fact.

(2) Consumers may not be fully informed about the benefits or consequences of subscribing to a do-not-track mechanism. Commissioner Rosch expressed concern that “across-the-board_ opting out by consumers might reduce the overall financing that supports free content across the Internet, and accordingly, result in a decrease in innovation.

(3) There was not much evidence that the mechanisms were really working to alert consumers about the existence of tracking and online behavioral advertising. The rates of adoption are very low.

(4) The current proposals involve well-entrenched firms that might favor barriers to consumer tracking in order to create or raise entry barriers to rivals. The firms’ intentions might not be solely to protect consumers against behavioral tracking.

“[W]e cannot be blinded so much by our zeal to protect consumers from behavioral tracking that we lose sight of our competition mission,” Commissioner Rosch said. “There is probably nothing worse than to have firms with an anticompetitive agenda designing consumer protection initiatives.”

The text of Commissioner Rosch’s October 14 remarks, entitled “Do Not Track: Privacy in an Internet Age,” appears here.

Franchisor Not “Employer” of Franchisee’s Employee Under Minimum Wage Law

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

A franchisor of pancake restaurants was not the “employer” of a waitress that was hired by one of its franchisees to work in its franchised restaurant for purposes of the Missouri Minimum Wage Law (MMWL), a Missouri appellate court has decided. Thus, the franchisor was entitled to summary judgment on the waitress’ claim alleging noncompliance with the MMWL. A ruling by a Missouri state trial court was affirmed.

The waitress filed suit seeking damages for the delay during which certain tipped employees were not paid the appropriate minimum wage as a result of reliance upon erroneous pronouncements made by the Missouri Department of Labor and Industrial Relations.

Elements of Employment Relationship

The evidence established that the franchisor had no ability to hire or fire the waitress during the period in question, the court determined. This included the waitress’ admission that a manger of the franchisee did the hiring and firing of employees at the restaurant.

Undisputed evidence also supported the conclusion that the franchisor did not supervise or control the waitress’ work or conditions of employment. In an attempt to refute that evidence, the waitress pointed to the fact that the franchisor took control of the restaurant after the franchisee defaulted and the franchise agreement was terminated. However, the franchisor’s ability to terminate the franchise agreement had no bearing on the ability of the franchisor to supervise and control the waitress’ employment.

The franchisor acted solely as a payroll service provider to the franchisee and it did not determine the waitress’ rate of pay, the court found. The only documents relating to the waitress that the franchisor retained were those related to payroll services. The franchisor did not maintain personal documents, prior employment information, benefit information, personnel files, leave and attendance records, or performance reviews.

Finally, the evidence showed that the premises were controlled by the franchisee and the equipment used at the restaurant belonged to the franchisee.

The decision, Conrad v. Waffle House, Inc., appears at CCH Business Franchise Guide ¶14,695.