November 2007

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

Franchisees’ Tying Claims Against Franchisor Failed to Show Market Power
Twelve Wisconsin Quizno's franchisees could not proceed with tying claims against their franchisor because the franchisor was not shown to have market power in a relevant market, the federal district court in Green Bay, Wisconsin, has ruled. The franchisees claimed that Quizno's illegally tied the sale of the "essential goods" required to operate the franchises (the tied product) to the sales of its franchises (the tying product). For the tying arrangement to be actionable, Quizno's had to enjoy substantial market power in the tying product, the court explained. The franchisees alleged that Quizno's enjoyed substantial market power in the "quick service toasted sandwich restaurant franchise" market. However, without including equivalent investment opportunities, the franchisees’ relevant market definition was "patently absurd," the court said. The mere fact that a particular franchise was known for a unique product and a way of doing business did not show market power over investors. Product identification was at the very core of franchising, the court explained. The crucial question was whether the franchisor was in a position to coerce investors not otherwise determined to purchase its franchise. Having chosen to enter into relationships with Quizno's, the franchisees were bound by the terms of their agreements. If Quizno's breached its agreement with them by charging them exorbitant prices for goods and services they were contractually required to purchase, then their remedy lay in contract, not under the antitrust laws. (Westerfield v. Quizno’s Franchise Co., LLC, DC Wis., 2007-2 Trade Cases ¶75,942 and CCH Business Franchise Guide ¶13,734).

NHL Internet Policy Not a Naked Restraint of Trade
The owner of the New York Rangers was not entitled to a preliminary injunction barring the National Hockey League (NHL) from “seizing” the team’s Web site and transferring it to the league-operated technology platform, the federal district court in New York City has ruled. Madison Square Garden, L.P. (MSG), owner of the Rangers, unsuccessfully argued that the NHL had “become an ‘illegal cartel’ in its attempts to prevent off-ice competition between and among the NHL member clubs.” In 2005, the NHL developed a New Media Strategy, under which each team’s Web site was to be migrated onto a common technology platform, serviced by a single content management system. Madison Square Garden filed a complaint for injunctive relief in September 2007, after the NHL informed the team that it would be fined $100,000 each day that it operated its Web site outside of the League platform. MSG attempted to label the New Media Strategy as a naked restraint of trade that would be subject to an abbreviated or “quick look” analysis to determine its lawfulness. However, the court “fail[ed] to perceive the nudity.” The team did not carry its initial burden of showing a prima facie case of an anticompetitive restraint, since it did not demonstrate an actual adverse effect on competition in the relevant market or market power. Even if MSG had carried its initial burden, the league had shown offsetting procompetitive benefits. To overcome this showing, MSG would have to prove either that the challenged restraint was not reasonably necessary to achieve the league’s procompetitive justifications or that those objectives might be achieved in a manner less restrictive of free competition (Madison Square Garden, L.P. v. National Hockey League, SD N.Y., 2007-2 CCH Trade Cases ¶75,929).

FRANCHISE & DISTRIBUTION LAW

Beverage Distributor Was Not a Connecticut “Franchise”
A beverage distributor was unlikely to succeed on the merits of its claim that it had a "franchise" relationship with the manufacturer of Monster brand energy drinks under the meaning of the Connecticut Franchise Act (CFA), a federal district court in Bridgeport, Connecticut, has ruled. The distributor did not engage in the business of offering, selling, or distributing goods under a marketing plan prescribed in substantial part by the manufacturer, and the distributor's business was not substantially associated with the manufacturer's trademark. Thus, the distributor was not entitled to a preliminary injunction restraining the manufacturer from terminating the parties' relationship without "good cause" in violation of the CFA and from using another distribution network to distribute its products within the distributor's territory (B & E Juices, Inc. v. Energy Brands, Inc., DC Conn., CCH Business Franchise Guide ¶13,748).

Product Markup Did Not Constitute Minnesota Franchise Fee
A distributor of giftware and figurines did not pay a "franchise fee" under the meaning of the Minnesota Franchise Act by paying a British giftware manufacturer a 50% markup on its products in exchange for the exclusive rights to sell, distribute, and advertise the products within the United States, a federal district court in Minneapolis has ruled. Thus, the parties' distribution agreement was not governed by the Minnesota Franchise Act, and the distributor was not entitled to a presumption of irreparable injury in connection with its request for a preliminary injunction. The distributor's request for an injunction preventing a company that acquired the manufacturer from violating the distributor's exclusive rights was denied. The manufacturer's corporate parent correctly contended that, as the manufacturer was in the business of selling goods, the 50% markup represented only the manufacturer's profits, not a fee in exchange for a franchise under the meaning of the statute, the court decided. The 50% markup was merely an ordinary business expense for a distributor. The distributor was not required to pay any fees for the right to enter into a business relationship with the manufacturer (Coyne's & Co., Inc. v. Enesco, LLC, DC Minn., CCH Business Franchise Guide ¶13,744).

ADVERTISING LAW

False Ad Claim on Toy Safety Barred, Claim on Toy Capability May Proceed
A Lanham Act claim that a magnetic toy construction set was falsely advertised as suitable for "Ages 3 to 100," when in reality the blocks were highly dangerous to small children, was precluded by the Federal Hazardous Substances Act (FHSA), as amended by the Child Safety Protection Act to require toy labeling, the federal district court in Seattle ruled. However, a Lanham Act claim challenging advertising that "500 designs" could be built with the set was allowed to proceed. A seller of magnetic construction toy sets (Rose Art Industries, Inc.) represented in advertising and packaging that its sets were appropriate for those “Ages 3 to 100” and that a wide variety of structures (“500 designs”) can be built by assembling the magnetic blocks in various ways.

A competing seller of magnetic construction toys (PlastWood SRL) brought a Lanham Act suit against Rose Art, alleging (1) that the “Ages 3 to 100” claim misrepresented that the toy sets, which could cause severe injury if inhaled or ingested, were safe for young children and (2) that the “500 design” claim falsely counted structures that either cannot be built or would collapse under their own weight. The federal district court dispatched the Lanham Act safety claim on the grounds that it was “precluded” by the Child Safety Protection Act, a part of the FHSA, which did not authorize private causes of action. Instead, the FHSA had to be enforced by the Consumer Product Safety Commission (COSC). The complaint’s allegations that Rose Art overstated the qualities and capabilities of its toys, in violation of the Lanham Act, provided RoseArt with fair notice of the nature of the claim. The complaint pleaded sufficient facts to state a claim that is plausible on its face, the court held (PlastWood SRL v. Rose Art Industries, Inc., DC Wash., CCH Advertising Law Guide ¶62,727).

CIVIL RICO

Ex-Employees’ Creation of Competitor Could Be Participation in Enterprise
Former employees of a health benefits manager could have participated in the operation or management of an alleged RICO enterprise by engaging in allegedly tortious conduct by starting a competing business, according to the federal district court in Omaha, Nebraska. In order to participate in the conduct of an enterprise’s affairs, within the meaning of RICO Section 1962(c), a person must participate, to some extent, in controlling the enterprise. The “conduct of affairs” phrase refers to the guidance, management, direction, or other exercise of control over the course of the enterprise’s activities. In this case, the health benefits manager’s allegations relating to the former employees’ conduct described an active involvement in the actions of others and the hands-on operation of the purported enterprise. The employees mailed letters to a group of school districts, notifying them of the creation of a competing consortium in an attempt to take over the manager’s clients. The purported enterprise had the common goals of diverting contracts and promoting its own interests at the expense of the benefits manager. Allegations of predicate acts of mail fraud through the submission of allegedly fraudulent nonrenewal letters could constitute a pattern of racketeering activity. The alleged predicate acts were related, as they had the same purposes—enhancing the business of the consortium at the expense of the benefits manager—that resulted in the consortium succeeding in pilfering the benefits manager’s clients (Meccatech, Inc. v. Kiser, CCH RICO Business Disputes Guide ¶11,375).

STATE UNFAIR TRADE PRACTICES

Oil Companies Must Defend “Artificially High” Gas Price Claims
An Illinois Consumer Fraud and Deceptive Business Practices Act (CFA) claim could proceed against five oil companies that allegedly used their market dominance in concert to artificially inflate the price of gasoline to consumers, even though the Illinois Antitrust Act may have provided relief, the federal district court in Chicago has ruled. The oil companies argued that an Illinois Supreme Court decision had effectively prohibited CFA actions for claims that could be brought under the Illinois Antitrust Act. However, the federal district court disagreed. Because the high court’s decision rested on the fact that the CFA did not supplement the state’s antitrust statute (like the Clayton and Robinson-Patman Acts supplement the Sherman Act in the federal context), the decision meant only that a plaintiff could not sue under the CFA when doing so would be inconsistent with the legislative intent of the Illinois Antitrust Act. The decision was silent on whether plaintiffs could pursue a CFA remedy when the Illinois Antitrust Act also provided relief. The decision, therefore, did not bar the plaintiffs’ CFA claims (Siegel v. Shell Oil Co., ND Ill., CCH State Unfair Trade Practices Law ¶31,497).

PRIVACY

FCC Proposes Permanent Do-Not-Call Registrations
The Federal Communications Commission announced on November 27 that it has adopted a Notice of Proposed Rulemaking, seeking comment on whether to require telemarketers to honor registrations with the National Do-Not-Call Registry beyond the current five-year registration period. Under this proposal, telemarketers would be required to honor a registration indefinitely, until the registration is cancelled by the consumer or the telephone number is removed by the database administrator because it was disconnected or reassigned. Since the National Do-Not-Call Registry was established in June of 2003, more than 145 million telephone numbers have been placed on the Registry. Under the current rules, registered numbers will begin to expire in June 2008 and may be dropped from the Registry, unless consumers take steps to re-register the numbers. The FCC proposed making registrations permanent to alleviate the inconvenience to consumers of having to re-register their preferences not to receive telemarketing calls, and to enhance consumer privacy protections.

The Federal Trade Commission announced on October 23 that it will not remove any telephone numbers from the registry, pending final Congressional or agency action regarding whether to make registration permanent. When the registry was developed, the Commission adopted a five-year re-registration mechanism under the telemarketing sales rule. The list was to be periodically purged of disconnected or reassigned numbers to ensure accuracy. The House of Representatives on December 11 approved a bill (H.R. 3541) to eliminate the expiration of listings on the registry. The Senate Commerce, Science, and Transportation Committee approved identical legislation (S. 2096) in October.

ASPEN ANTITRUST PUBLICATIONS

IP and Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property Law by Herbert Hovenkamp, Mark D. Janis, and Mark A. Lemley. The 2008 Supplement went live in November on the Antitrust & Trade Regulation tab of the CCH Internet Research Network. This comprehensive resource focuses on the intersection of the areas of IP and antitrust, providing a sophisticated discussion of intellectual property from an antitrust perspective. Written by three experts on antitrust and intellectual property law, this treatise provides comprehensive, insightful analysis of the antitrust issues involved in the creation, protection, and transfer of intellectual property interests. This latest supplement includes updates on (1) resale price maintenance and vertically imposed non-price restraints in the wake of the Supreme Court’s decision in Leegin Creative Leather products v. PSKS, Inc., (2) recent Federal Circuit decisions involving Walker Process claims, (3) standard-setting disputes, including new judgments in Rambus and Broadcom v. Qualcomm, (4) the Supreme Court’s decision in KSR International v. Teleflex for determining obviousness, (5) the Supreme Court’s decision in Twombly v. Bell Atlantic, which heightened the pleading standard for antitrust conspiracy, (6) tying cases after Illinois Tool Works, and (7) Congressional changes to trademark dilution law.

HOT TOPICS OF THE MONTH

Google-DoubleClick Acquisition
Google’s proposed acquisition of DoubleClick—which would combine the world’s largest Internet search company with the leading company that places advertising on the Internet—garnered perhaps the greatest amount of attention from the antitrust and trade regulation bar in November and early December.

The acquisition has raised antitrust and privacy concerns in both the United States and Europe and is currently being reviewed by both the Federal Trade Commission and the European Commission.

Serious Concerns under Several Theories
In a White Paper issued November 6, the American Antitrust Institute (AAI) stated that the acquisition “raises serious competitive issues under several different antitrust theories.”

In addition to being the dominant Internet search engine, Google is the leading seller of online advertising in the world, having sold $10.5 billion in advertising in 2006. Although Google claimed that it doesn’t compete with DoubleClick, the AAI noted that both firms have recently introduced products that are direct competitors. DoubleClick’s new Advertising Exchange competes for publishers’ ad space against Google’s AdSense, according to the Institute. In addition, Google is in the process of introducing an ad serving product that competes against DoubleClick’s DART for publishers.

“The most troubling aspect of this merger from a competition point of view is that it short circuits what otherwise was shaping up to be a healthy competition between two market-leading firms in each other’s core markets,” said Richard Brunell, AAI’s direct of legal advocacy and the author of the white paper.

Besides the direct competition between the new products, the merging companies indirectly compete in offering alternative solutions for publishers to monetize their “white space,” according to the AAI. “Google’s contextual-based text ads and DoubleClick’s profiling-based display ads are different techniques for targeting ads to consumers, which many advertisers apparently see as substitutes.”

The AAI writes that “there is a good argument that Google and DoubleClick are horizontal competitors in two relevant markets”—the market for distributing or brokering online advertising space of third-party web sites and the market for publisher “ad serving tools.”

EC Investigation
On November 13, the European Commission announced an investigation into whether the proposed acquisition would significantly impede effective competition within the European Economic Area. The Commission’s initial market investigation indicated that the combination of the firms would raise competitive concerns in the markets for intermediation and ad serving services. The Commission was to have 90 working days (through April 2, 2008) to make a final decision on the merger.

In particular, the Commission will investigate whether, without the transaction, DoubleClick would have grown into an effective competitor of Google’s in the market for online ad intermediation. It will also address whether the combination of the firms could lead to anticompetitive restrictions for competitors operating in these markets.

Senate Hearing
Congress became involved in the matter when the ranking Democratic and Republican members of the Senate Subcommittee on Antitrust, Competition Policy, and Consumer Rights asked the FTC to examine the competition and privacy questions raised by the proposed acquisition.

In a November 19 letter to FTC Chairman Deborah Platt Majoras, Senators Herb Kohl (D-Wis.) and Orrin Hatch (R-Utah) reported the results of a September 27 subcommittee hearing on the issue.

“The implications for the Internet advertising market—and for the Internet as a whole—are profound and potentially far reaching,” the letter said. “A core part of Google’s business is placing contextual advertising—that is, text based ads placed on third party web sites which are relevant to the content or to the likely reader of the web site. Google has a dominant market position with respect to the placing of these contextual ads. DoubleClick has a leading market position in placing another form of Internet advertising—display advertising which also resides on third party web sites.”

Industry experts raised serious concerns that the two firms “could cause significant harm to competition in the Internet advertising marketplace.” Although the Senators had not reached a conclusion regarding harm to competition, they advocated that the FTC approve the acquisition only on a determination that the combination would not cause any lessening of competition in Internet advertising.

In addition to the antitrust considerations, the acquisition may raise broader questions involving Internet privacy, according to the letter. “In order to be effective, Internet advertising tracks the personal preferences of Internet users and ‘serves’ ads most suited to that individual user based on his or her history of visiting certain web sites and running particular searches.”

DoubleClick collects an enormous amount of information on individuals’ web use preferences. Privacy advocates have expressed serious misgivings about this information coming under the control of Google, which can track individuals’ search requests.

Recusal of Chairman Majoras?
More recently, a controversy has arisen concerning whether FTC Chairman Majoras should recuse herself from the review of the acquisition, based on DoubleClick’s representation by the Jones Day law firm, where her husband is a partner in the antitrust practice group.

On December 12, two public interest groups filed a complaint with the FTC, seeking disqualification of Chairman Majoras because of DoubleClick’s retainer of Jones Day “to represent the company before the Federal Trade Commission in the pending merger review.”

The two groups—the Electronic Privacy Information Center and the Center for Digital Democracy—alleged that the Chairman has previously recused herself in antitrust matters where there was “a similar conflict of interest” with Jones Day. They charged that the Chairman is subject to disqualification under the Standards of Ethical Conduct for Employees of the Executive Branch because (1) the matter has a “direct and predictable financial interest” on the Chairman’s spouse, (2) a reasonable person would question the Chairman’s impartiality in the matter, and (3) the Chairman failed to give notice of the law firm’s representation of DoubleClick.

Chairman Majoras issued a statement on December 14, that the relevant laws and rules “neither require nor support recusal” in this case because (1) the law firm of Simpson, Thacher & Bartlett LLP was actually representing DoubleClick before the FTC, (2) no one at the FTC had been aware that Jones Day was advising DoubleClick regarding the EC investigation, (3) the Chairman’s spouse—John M. Majoras—has no financial interest in the matter since he converted from an equity partner to a fixed participation partner on January 1, 2006, and (4) the FTC Ethics Official determined that no impartiality conflict existed.

Commissioner William E, Kovacic also released a statement, indicating that his wife was a member of Jones Day, but that her status as a fixed participation partner did not warrant his recusal from the Google/DoubleClick matter.

Commissioners Pamela Jones Harbour, Jon Leibowitz, and J. Thomas Rosch issued a brief statement agreeing with the analyses in the statements by Commissioners Majoras and Kovacic. “It is evident that these Commissioners have at all times taken affirmative steps to conduct themselves in complete conformity with the ethical standards that apply to their positions.”

Privacy Law in Marketing Is Subject of New CCH Reporter

Information gathered through marketing efforts can be personal, valuable, and subject to a variety of U.S. and international laws 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 CCH 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.”