April 2008

From the editors of Wolters Kluwer Law & Business, this update describes important developments from CCH and Aspen Publishers antitrust and trade regulation publications.

If you have any comments or suggestions concerning the information provided or the format used, we'd like to hear from you. Please send your comments to john.arden@wolterskluwer.com.

Antitrust

FTC Finding that Rambus Engaged in Monopolization Vacated
The FTC failed to demonstrate that Rambus, Inc.’s actions before a standard setting organization (SSO) amounted to exclusionary conduct “under settled principles of antitrust law,” the U.S. Court of Appeals in Washington, D.C. has decided. Thus, the agency did not prove that the licensor of computer memory technologies unlawfully acquired its monopoly power in the relevant markets for four technologies that had been incorporated into industry standards for dynamic random access memory (DRAM) chips. The court set aside a Commission order finding that Rambus had engaged in monopolistic conduct in violation of the FTC Act (2006-2 Trade Cases ¶75,364), as well as the Commission’s remedy order (2007-1 Trade Cases ¶75,585). The FTC had determined that Rambus, while participating in the standard-setting process in the 1990s, deceptively failed to disclose to the SSO the patent interests it held in four DRAM technologies. According to the agency, Rambus’s deceptive conduct before the SSO significantly contributed to its acquisition of monopoly power. The Commission had determined that if Rambus fully disclosed its intellectual property, then the SSO either would have excluded Rambus’s patented technologies from its DRAM standards or would have demanded reasonable assurances of “reasonable and nondiscriminatory” license fees, the court explained. If Rambus’s more complete disclosure would have caused the SSO to adopt a different standard—then Rambus’s failure to disclose harmed competition. But there was insufficient evidence that the SSO would have standardized other technologies had it known the full scope of Rambus’s intellectual property. The loss of a RAND commitment from Rambus would not have harmed competition. The SSO’s loss of an opportunity to seek favorable licensing terms was not an antitrust harm, in the court’s view (Rambus, Inc. v. Federal Trade Commission, CA-D. of C., 2008-1 Trade Cases ¶76,121).

FTC Order Required ENH to Conduct Separate Payor Negotiations
The FTC has issued an order providing rules for how Evanston Northwestern Healthcare Corporation (ENH)—an operator of hospitals in Chicago’s North Shore suburbs—must negotiate with health insurance companies or managed care organizations. The order comes in light of the Commission’s 2007 determination that ENH’s acquisition of Highland Park Hospital in 2000 violated antitrust laws (2007-2 Trade Cases ¶75,814). Despite the finding that the acquisition was anticompetitive, the FTC did not require divestiture of Highland Park Hospital. Instead, the Commission determined that “in light of unique circumstances” a more appropriate remedy would be to require ENH to establish separate and independent negotiating teams—one for Evanston and Glenbrook Hospitals and another for Highland Park Hospital. Attorneys for the FTC and ENH offered proposed remedial orders. On April 28, the Commission released its final order, saying that it was attempting to “replicate the competitive conditions that existed prior to ENH’s 2000 acquisition of Highland Park as much as possible, short of divestiture.” The Commission’s order also requires ENH to give prior notification to the Commission for any future acquisition of hospitals in the Chicago area. The order terminates in 20 years. The held that payors must be able to negotiate separately with ENH teams for all hospital services, since payors usually make contracting decisions base on the price of the entire set of hospital services. The Commission excluded government payors, such as Medicare and Medicaid, from the scope of the order. The order further called for firewalls to minimize the risk that competitively sensitive information will be shared by the Evanston and Highland Park negotiating teams and required that the teams negotiate with payors in good faith. The Commission will retain jurisdiction over violations or possible violations of the order (In the Matter of Evanston Northwestern Healthcare Corp, FTC Dkt. 9315, 2008-1 Trade Cases ¶76,130).

Class Certification of Buyers of Canadian Cars Reversed, Vacated
Certification of classes seeking injunctive relief under federal antitrust laws and damages under 20 state antitrust and consumer protection laws against automobile manufacturers was improper, a divided U.S. Court of Appeals in Boston has ruled. The putative classes alleged that the manufacturers had conspired to avoid price competitive by keeping motor vehicles intended for sale in Canada out of the U.S. market. A grant of certification to the purchasers seeking injunctive relief under federal law (2006-1 Trade Cases ¶75,289) was reversed, and the claim was dismissed. Certification of the state antitrust claims was vacated and remanded to federal district court for reconsideration and for determination of several issues concerning the existence of federal jurisdiction. The consumers lacked standing to pursue injunctive relief because no live controversy existed, the appeals court held. The consumers did not face a threat of injury both real and immediate, as was required for Article III standing. An exchange rate anomaly—in which the U.S. dollar hit an apex between 1998 and 2003 that had not been seen for the previous 50 years—allegedly precipitated massive arbitrage opportunities for selling Canadian cars in the United States. However, this “perfect storm” had long passed. A subsequent fall in the value of the U.S. dollar eliminated any current threat. The consumers pursuing state law damages claims had not yet established that common evidence could be used to prove the impact of the alleged conspiracy on a classwide basis or that common questions predominated in the litigation. A searching inquiry into the viability of the consumers’ theory of injury was necessary, in the appellate court’s view, because the theory was so novel and complex (In re: New Motor Vehicles Canadian Export Antitrust Litigation, CA-1, 2008-1 Trade Cases ¶76,100)

Japan Airlines to Plead Guilty to Fixing Cargo Shipping Prices
Japan Airlines International Co., Ltd. (JAL) has joined the list of global air carriers—including British Airways Plc, Korean Air Lines, and Quantas Airways Ltd.—that have admitted to participating in a conspiracy to fix rates for international cargo shipments. According to a one-count information, filed in the federal district court in Washington, D.C., JAL engaged in a conspiracy to eliminate competition by fixing the rates for international shipments of cargo to and from the United States and elsewhere between April 2000 and February 2006. During the time period covered by the felony charge, JAL was the largest carrier of cargo between the United States and Japan and earned almost $2 billion from its cargo flights to and from the United States, it was alleged. Last August, British Airways and Korean Air Lines pleaded guilty to similar charges and were each fined $300 million. Earlier this year, Quantas pleaded guilty and was sentenced to pay a $61 million criminal fine for its role in the conspiracy (Japan Airlines International Co. Ltd., U.S. No. 4932, CCH Trade Regulation Reporter ¶45,108).

Franchise and Distribution Law

Good Cause Existed to Terminate Massachusetts Vehicle Dealer Pact
A motor vehicle franchisor had "good cause," under the meaning of the Massachusetts motor vehicle dealer law, to terminate a dealer's temporary dealership agreement on the grounds that the dealer failed to meet the interim construction deadlines and the final facility completion deadline outlined in the agreement, a federal district court in Worcester, Massachusetts, has decided. Both the agreement itself and an associated letter of intent made the dealer's failure to complete the facility a condition precedent to the grant of a non-temporary dealer agreement. The dealer law stated that a court should consider all pertinent circumstances in a determination of good cause for termination, including seven statutorily enumerated (but non-exhaustive) factors, the court noted. One of those factors was the existence and materiality of any breaches, defaults, or violations by the dealer of the terms of the agreement. The dealer contended that the court must give weight to all of the factors set forth in the statute and could not focus solely on the factor concerning the existence of material breaches. However, good cause to terminate a franchise agreement could be found if the dealer failed to comply with a provision of the franchise agreement that was material to the relationship, including (but not limited to) facility requirements. The dealer's failure to meet its various construction and facility completion deadlines clearly constituted good cause to terminate under that provision. The franchisor's failure to offer the dealer a reasonable opportunity to cure its breach of a facility construction deadline in its notice of termination did not violate the dealer law, since the franchisor had notified the dealer that it was in breach of interim deadlines and that the agreement's "time of the essence paragraph" would be strictly enforced. The franchisor had repeatedly offered to extend the deadline and that the dealer did not accept any of those offers (Wagner and Wagner, Inc. v. Land Rover N.A., Inc., DC Mass., CCH Business Franchise Guide ¶13,867).

Advertising Law

“Fruit Juice Snacks” Packaging Could Deceive Reasonable Consumer
Purchasers of Gerber "Fruit Juice Snacks" stated California statutory false advertising and unfair competition claims and could plausibly prove that a reasonable consumer would be deceived by the product's packaging, the U.S. Court of Appeals in San Francisco has ruled. The lower court erred in concluding—without considering any evidence beyond the packaging—that the purchasers failed to state claims. The purchasers, who were parents of small children, brought a class action challenging the use of the words "Fruit Juice" juxtaposed alongside images of fruits such as oranges, peaches, strawberries, and cherries. The purchasers contended that this juxtaposition was deceptive because the product contained no fruit juice from any of the fruits pictured on the packaging and because the only juice contained in the product was white grape juice from concentrate. Claims under the California false advertising and unfair competition statutes were governed by a "reasonable consumer" test, the appellate court observed. Under that standard, the purchasers had to show that members of the public were likely to be deceived. The lower court based its decision solely on its own review of an example of the packaging. While the primary evidence in a false advertising case is the advertising itself, California courts had recognized that whether a business practice was deceptive would usually be a question of fact not appropriate for decision without consideration and weighing of evidence from both sides, according to the appellate court. (Williams v. Gerber Products Co., CA-9, CCH Advertising Law Guide ¶62,925).

False Ad Suit Not Barred by USDA Label Approval
Advertising by Tyson Foods that its chicken was "Raised Without Antibiotics that impact antibiotic resistance in humans" could violate the Lanham Act's false advertising prohibition, even though the U.S. Department of Agriculture approved Tyson's use of the phrase on labels, the federal district court in Baltimore has ruled. Competitors Sanderson Farms and Perdue Farms sued Tyson for nationally advertising its chicken as "Raised Without Antibiotics" by means of television commercials, radio spots, print ads, billboards, posters, and other media. In addition, Tyson advertised several forms of the qualified claim that its chicken was "Raised Without Antibiotics that impact antibiotic resistance in humans." The competitors alleged that Tyson's chicken feed contained "ionophores"—molecules that kill microorganisms—and that ionophores are antibiotics. The Food Safety and Inspection Service (FSIS) of the USDA originally approved Tyson's use of a "Raised Without Antibiotics" label. FSIS subsequently revoked that approval and specifically stated that ionophores are antibiotics. FSIS informed Tyson that it could no longer use a product label claiming that its chicken was "Raised Without Antibiotics." Subsequently, the label was qualified to read "Raised Without Antibiotics that impact antibiotic resistance in humans." The competitors clearly stated a claim upon which relief could be granted by asserting that the unqualified advertising claim "Raised Without Antibiotics" was literally false, the court held. Without current USDA approval for its label, Tyson could not rely on the USDA's former, briefly held position as a defense. The competitors also could pursue their suit on the ground that Tyson's use of the qualifying phrase—“that impact antibiotic resistance in humans"—was ineffective at curing the literal falsity of the root claim—“Raised Without Antibiotics," the court determined. The competitors submitted a 600-participant survey to show that Tyson's qualifying language had no demonstrable consumer impact. The survey buttressed the allegation that Tyson's qualified claim meant something different to the consumer public, when viewed as part Tyson's advertisements, than it meant to the experts and scientists at the USDA during the label approval process.(Sanderson Farms, Inc v. Tyson Foods, Inc., D Md., CCH Advertising Law Guide ¶62,901).

Civil RICO

Purchasers Assert RICO Injury from Overvaluation of Homes
Home purchasers’ evidence could support the conclusion that a real estate developer's activities proximately caused the injuries that purchasers claimed in connection with the mortgage financing of overvalued homes, the federal district court in Harrisburg, Pennsylvania, has ruled. In addition, the court held that the evidence could be found to prove that a mortgage lender's alleged conspiracy with the developer and his companies proximately caused the purchasers' alleged injuries. In support of allegations that the developer used the mails and wires in furtherance of a scheme or artifice to defraud, the purchasers presented evidence of a consistent disparity between their actual payments and the developer's advertisements representing that homes could be purchased for $1,000 down and $635 a month. The developer's corporate network brokered all of the purchasers' mortgage transactions and allegedly sold homes in excess of market value by arranging for inflated appraisals. As a result, the purchasers received loans greater than otherwise permitted under the applicable guidelines of a mortgage lender, according to the court. A finding of an enterprise separate from the scheme to defraud could be based on evidence that the developer—through controlled corporations—purchased land, constructed homes, and sold finished products throughout the 1990's, the court determined. One corporation operated as realtor for the homes produced by its sister corporations. Another acted as broker for home buyers' mortgages, arranging appraisals and obtaining financing for many buyers. Several of the developer's entities engaged in business transactions that were incident to the construction of residential real estate but unrelated to the loan advertisements and alleged acts of mail and wire fraud. Thus, a reasonable jury could conclude that (1) the mail and wire fraud scheme was organized to maximize the profit of a distinct business venture engaged in the development and sale of real estate and that the developer and his companies engaged in a RICO enterprise and proximately caused injury with respect to all of the sales transactions, (2) the lender conspired to inflate property values by providing financing opportunities that ordinarily would have been inaccessible to the purchasers, and (3) the lender had improperly removed the appraiser from the list, facilitating his role in the conspiracy (Lester v. Percudani, MD Pa., CCH RICO Business Disputes Guide ¶11,461).

State Unfair Trade Practices

Attorney Ads Not Subject to Heightened Scrutiny under Colorado Law
Attorney advertising was not subject to a heightened standard of scrutiny under the Colorado Consumer Protection Act (CPA), the federal district court in Denver has ruled. Neither case law nor the Colorado rules of professional conduct supported a special standard for attorney advertising. In fact, the Colorado Supreme Court’s decision in Crowe v. Tull (CCH State Unfair Trade Practices Law ¶31,147) stated precisely the opposite: “[the] potential for consumer targeting demonstrates the need for the same protections against deceptive legal advertising as exists for other purveyors of goods and services.” Moreover, rules governing attorney ethics had no bearing on the question of whether an advertisement was misleading for purposes of the CPA, the court stated. This was one of the major points of Crowe, which explained that “[w]hile safeguarding the public against consumer fraud may at times be an ancillary consequence of the disciplinary system, its rules and remedies are not tailored to that specific purpose.” If the ethics rules warranted a heightened CPA standard for attorney advertising, the Crowe court would have said so when it considered the effect of the ethics rules at issue, the court observed. In this instance, the plaintiffs (clients of the defendant attorney) had not—and could not have—alleged that the representations at issue were factually unsubstantiated. Claims that the attorney would “work hard to get clients every dollar (clients) deserve” were statements of intent or opinion, not statements of verifiable fact, the court concluded. Accordingly, the plaintiffs’ motion for reconsideration of the summary rejection of their CPA claim was denied (Pappas v. Frank Azari & Associates, P.C., DC Colo., CCH State Unfair Trade Practices Law ¶31,563)

Privacy Law

Ad Program Using Vehicle Registration Info Did Not Violate Federal Law
A company that contracted with the Florida Department of Highway Safety and Motor Vehicles (DMV) to mail notices to Florida vehicle owners, reminding them to renew vehicle registrations, did not violate the federal Driver’s Privacy Protection Act (DPPA) by using information in vehicle owner’s registration files to sell targeted advertising that was placed in the envelopes along with the renewals, the federal district court in Jacksonville has decided. The DDPA generally prohibits any state DMV from disclosing personal information in motor vehicle records to any person or entity. However, the DPPA permitted disclosure of such information for use by any government agency in carrying out its functions, or any entity acting on behalf of a federal, state, or local agency in carrying out its functions. This exception would include use of the information by the Florida DMV itself. Florida law contemplated that a function of state agencies may be to enter into agreements with vendors who place advertising in government publications in exchange for bearing the cost of production or publication or for compensation. One of the DMV’s acknowledged functions was mailing our registration notices, and Florida law specifically allowed the DMV to contract with private vendors to financially support this function with advertising included in the renewal mailings. Unlike the conduct of the Florida DMV that was found violative of the DPPA in the case of Collier v. Dickinson (CCH Privacy Law in Marketing ¶60,109), the advertising program in this case did not involve disclosure of registrants’ personal information to the advertisers. That information remained in the control of the DMV and the contractor. The contractor acted “on behalf of” the DMV, for purposes of the exception, in the court’s view. The contractor had agreed to completely redesign, repackage, and administer the mailing of the renewal reminders—actions that the contractor could not have taken except while acting “on behalf of” the DMV. Allowing advertisers to use the DMV envelope to send their ads did not constitute “making available” personal information in violation of the DPPA, since the term “making available” meant that the information was made available for viewing (In re Imagitas, Inc. Driver’s Privacy Protection Act Litigation, DC Fla., CCH Privacy Law in Marketing ¶60,202).

Hot Topics of the Month

FTC Privacy Principles for Online Behavioral Advertising
Widespread adoption of the FTC’s proposed privacy principles regarding online behavioral advertising might not significantly impact consumers’ feelings about marketers’ use of their online activity to tailor advertisements, according to a recent survey of more than 2,500 adults.

Adult consumers were asked how comfortable they were with websites’ use of information about their online activity “to tailor advertisements or contents” to their hobbies and interests. Only 41% of the respondents answered that they were either “very comfortable” (7%) or “somewhat comfortable” (34%) Fifty-nine percent of the respondents answered that they were either “not very comfortable” (34%) or “not comfortable at all” (25%).

In the report on the survey, Dr. Alan F. Westin observed that online advertisers have maintained that Internet users would appreciate receiving customized ads and content, thus reducing the annoying user-irrelevant offers.

“However, our results suggest that this potential outcome did not seem to influence a majority of online users to overcome their underlying concerns about tracking and profiling,” Dr. Weston wrote.

Effect of Privacy Safeguards
In order to determine whether website operators can help users feel more comfortable by implementing privacy safeguards, the survey sponsors drew on the FTC staff’s proposed privacy principles, which were issued on December 20, 2007.

The relevant principles follow:

1. Transparency and consumer control. Websites that collect data for behavioral advertising should provide a statement informing users of such collection of data and allow consumers to choose whether to have their information collected.

2. Reasonable security, and limited data retention, for consumer data. Companies collecting data should provide reasonable security for such data and retain the data for only as long as is necessary to serve a legitimate business or law enforcement need.

3. Affirmative express consent for material changes to existing privacy promises. A company must keep any promises it makes on handling and protection of consumer data. Before a company can change its policy and use data in a materially different manner, it should obtain affirmative express consent from affected consumers.

4. Affirmative express consent to using sensitive data for behavioral advertising. Companies should only collect sensitive data for behavioral advertising if they obtain affirmative express consent from the consumer to receive such advertising.

Further information regarding the principles appears at the FTC website: http://www.ftc.gov/opa/2007/12/principles.shtm

The same respondents to the first question were asked: “If a web site adopted and followed all of these policies, how comfortable would you then be with companies using information about your online activities to serve customized ads or content to you?”

With these new conditions, 55% of the respondents answered that they were “very comfortable” (9%) or “somewhat comfortable” (46%). Forty-five percent answered that they were “not very comfortable” (26%) or “not comfortable at all” (19%).

Thus, there was a 14 percentage point shift among comfortable consumers (from 41% to 55%) when the FTC-recommended privacy and security policies were applied.

Consumers Still Not “Very Comfortable”
“However, it should be noted that the adoption and installation of the four privacy safeguards did not significantly increase the percentage of adult Net users who said that would be “very comfortable” with profiling and customization. This set of users increased only 2%, from 7% to 9% . . . “

Dr. Westin suggested that the increase in comfortable consumers to only 55% might reflect a skepticism that websites would really follow the privacy and security safeguards and a concern that there would be no user remedies or protective regulation to control websites that did not follow the safeguards.

Nevertheless, the survey strongly indicated that the current profiling of users and customization of advertising, without the adoption of privacy and security policies, would not satisfy a strong majority of the online user community, the report concluded.

The study is “How Online Users Feel About Behavioral Marketing and How Adoption of Privacy and Security Policies Could Affect Their Feelings,” results of a Harris Interactive/Westin Survey (The Harris Poll #40, April 10, 2008), sponsored by Privacy Consulting Group, Alan F. Westin and Robert R. Belair.

Further information about this study appears at the Harris Interactive website: http://www.harrisinteractive.com/harris_poll/index.asp?PID=894

New Products

Privacy Law in Marketing Is Subject of CCH Reporter
Information gathered through marketing efforts can be personal, valuable, and subject to a variety of U.S. and international laws and regulations governing its collection, protection, and use. That’s why Wolters Kluwer Law & Business has launched a new publication (in print and online) to help untangle the complex web of legal regulation from around the world. CCH Privacy Law in Marketing brings together treatise-style explanations by D. Reed Freeman, Jr. and J. Trevor Hughes with the full text of privacy laws and regulations from the U.S. and 35 foreign jurisdictions (provided in English translation).

Topics include telemarketing, e-mail marketing, marketing to wireless devices, cookies and web beacons, information security, identity theft, "phishing," children’s privacy, fax marketing, online privacy policies, use of Social Security numbers, and international privacy law. Monthly reports include new and amended laws and regulations, court decisions and other new developments, a list of pending legislation, and an informative newsletter. For further information about Privacy Law in Marketing, call the CCH customer service department (1-800-248-3248) or visit the CCH Online Store (http://onlinestore.cch.com) and search the keyword “privacy.”