September 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.

HOT TOPIC OF THE MONTH

Among the observations in the report were that:

• Enforcement of Section 2 has been, and should continue to be, a key component of antitrust enforcement;
• Monopoly power will be presumed when a firm has maintained a market share of more than two-thirds for a significant period and its market position would not likely be eroded in the near future;
• Vague or overly-inclusive prohibitions against single-firm conduct are particularly likely to undermine economic growth and harm consumers;
• Section 2 prohibitions based on clear and objective criteria are likely to increase economic growth and benefit consumers;
• The “historic hostility” of the law to the practice of tying is unjustified and the qualified rule of per se illegality should be abandoned;
• Antitrust liability for mere unilateral, unconditional refusals to deal with rivals should not play a meaningful role in Section 2 enforcement;
• Exclusive dealing arrangements foreclosing less than 30 percent of existing customers or effective distribution should not be illegal; and
• Remedies for Section 2 violations should “re-establish the opportunity for competition without unnecessarily chilling competitive practices or undermining incentives to invest and innovate.”
  

Response by FTC, Commissioners
Only hours after the release of the 213-page report, the FTC issued a statement that it “does not endorse” it. A joint statement by Commissioners Harbour, Leibowitz, and Rosch was highly critical of the DOJ’s findings, citing two “overarching concerns.” The first concern is that the report “is chiefly concerned with firms that enjoy monopoly or near-monopoly power, and prescribes a legal regime that places these firms’ interests ahead of those of consumers.” The second concern is that the report “seriously overstates the level of legal, economic, and academic consensus regarding Section 2” and that “the testimony gathered during the hearings was not representative of the views of all Section 2 stakeholders.” The Commissioners expressed misgivings that “voices representing the interests of consumers were not adequately heard” and that the report relied too heavily on economic theory in the application of antitrust law. The report consistently adopted standards for the finding of a violation that are tougher, sometimes much tougher, than existing standards under Section 2 case law, according to the three Commissioners.

In a separate statement, FTC Chairman William E. Kovacic said that the Justice Department’s report would have benefited from a fuller examination of the history of modern doctrine and policy. He had hoped that “a DOJ/FTC report on the unilateral conduct deliberations would devote considerable effort to put modern developments in context –to examine how the U.S. antitrust system developed as it did, and to assess what that history means for the future of the U.S. and global competition policy.”

Other Reactions
The presidential campaign of Senator Barack Obama (D-Ill.) said that the Justice Department’s stance in the report reflected the need for a more aggressive approach to antitrust enforcement in the next administration, according to an article in the New York Times. “Four more years of the Bush approach to antitrust will only lead to higher prices for American consumers and a less competitive environment for smaller business to thrive,” said Jason Furman, economic policy director for the Obama campaign.

Antitrust professor and author Herbert Hovenkamp commented on the “growing rift” between the FTC and the Department of Justice. “It’s warfare, and the level of rhetoric is pretty high.”

ANTITRUST LAW

FTC Proceedings Move Forward in Whole Foods Merger Case
The administrative trial to determine the legality of the consummated merger of Whole Foods Market, Inc. and Wild Oats Markets, Inc. could begin as early as February 16, 2009, according to a September 10 Federal Trade Commission scheduling order. The order followed the Commission’s decision to deny a Whole Foods motion to disqualify a Commissioner as a presiding official and the Commission’s filing of an amended complaint. The agency lifted a stay of the administrative challenge to the combination after a July 29 decision of the U.S. Court of Appeals in Washington, D.C. (2008-2 Trade Cases ¶76,233) reversed a denial of the FTC’s request for a preliminary injunction blocking the merger of specialty supermarkets. The agency also appointed Commissioner J. Thomas Rosch to serve as a presiding official. Whole Foods filed a motion seeking the appointment of an independent administrative law judge to preside over the trial, arguing that the statements made by the Commission in seeking the preliminary injunction created bias and prejudgment requiring the Commission to disqualify itself or any individual Commissioner from acting as the presiding officer. On September 5, the Commission denied that motion, noting that it had not yet named Commissioner Rosch as the presiding officer for all purposes nor had it concluded that the Commission itself would retain jurisdiction during the initial proceedings (CCH Trade Regulation Reporter ¶16,181). On September 8, the Commission issued an order permitting amendment of the administrative complaint to reflect events that had transpired since the original complaint against the merger was issued in June 2007 (CCH Trade Regulation Reporter ¶16,182). The amendments note the consummation of the merger, set out the procedural history in the federal district and appellate courts, amend the relevant geographic markets, and remove While Oats Markets as a respondent.

Major League Baseball’s Licensing Practices Not Anticompetitive
The exclusive licensing agent for Major League Baseball (MLB) did not place unreasonable restraints on trade through its organization and intellectual property licensing activities, the U.S. Court of Appeals in New York City ruled on September 12. The court affirmed the grant of summary judgment in favor of the licensor on antitrust counterclaims brought by a plush bear manufacturer that the licensor had sued for failing to acquire trademark licenses (2006-2 Trade Cases ¶75,325). In concluding that the complaining manufacturer had failed to produce evidence of adverse competitive effects or sufficient market power to inhibit competition market-wide, the lower court properly analyzed the licensor’s operation under the rule of reason, the appellate court determined. The agent’s role in licensing MLB intellectual property, including club and league trademarks, was not a naked restraint of trade. The agent facilitated the efficient protection and quality control of MLB intellectual property and increased the number of licenses granted. No evidence was presented of an unlawful agreement on price. The clubs’ agreement to share equally in the profits of the licensing did not, as the manufacturer contended, constitute per se illegal price fixing. The appellate court distinguished the U.S. Supreme Court decision in National Collegiate Athletic Assn. v. Board of Regents of the University of Oklahoma (1984-2 Trade Cases ¶66,139), which found that the NCAA’s plan to set a maximum number of games that could be broadcast unreasonably restrained competition. Aside from the revenue sharing, none of the factors relied on by the Court to reach that conclusion were present. Ample precedent existed in which courts had declined to apply the per se rule to sports leagues where cooperation among competitors could have legitimate purposes as well as anticompetitive effects (Major League Baseball Properties, Inc. v. Salvino, CA-2, 2008-2 Trade Cases ¶76,303).

TV Station Divestiture Required to Satisfy Acquisition Concerns
The Department of Justice Antitrust Division filed a complaint and proposed consent decree in the federal district court in Washington, D.C. that would require Raycom Media, Inc., an owner/operator or 46 television stations in 18 states, to divest the local CBS affiliate in Richmond, Virginia. Earlier in the year, Raycom agreed to divest the station (WTVR-TV) to obtain regulatory approval of its acquisition of three broadcast television stations, including the Richmond NBC affiliate, from Lincoln Financial Media Company. FCC limitations on television station ownership required Raycom to sell one of its two Richmond stations. An agreement between the parties provided for the divestiture of the station within 90 days of closing the transaction. If Raycom failed to divest within 90 days, the Justice Department would file suit seeking divestiture. The transaction closed, but Raycom had not sold the Richmond station. The Justice Department suit alleged that, without the divestiture, Raycom would own two of the four local broadcast stations in the Richmond market, which likely would have led to higher prices for those seeking to advertise on local broadcast television. Combined, the two stations earned more than 50 percent of the broadcast television spot advertising revenue in the Richmond market. Under the proposed consent decree, the Antitrust Division has the right to approve the purchaser of the station in order to ensure that the sale will restore competition in the market that existed prior to Raycom’s acquisition of the station. (U.S. v. Raycom Media, Inc., U.S. No. 4968, CCH Trade Regulation Reporter ¶50,962).

FRANCHISE AND DISTRIBUTION LAW

Franchise Transferees Could Be Rejected for Lack of English Proficiency
A restaurant franchisor did not breach a franchise agreement by withholding its consent to a franchise transfer to two prospective transferees who failed to pass the franchisor’s English language proficiency test, according to the federal district court in Los Angeles. The franchisor required the franchisee and the prospective transferees—who were of Middle Eastern origin—to execute a rider on the franchise sales contract, expressly requiring the transferees to pass the language proficiency exam, which tested whether, in the franchisor’s view, “an individual has a sufficient command of the English language to serve customers and conduct business” with the franchisor, suppliers, and other parties. After both prospective transferees failed the exam, the franchisor informed the franchisee that it could not approve the sale. The franchisee subsequently closed his franchise and brought suit against the franchisor. The franchisee argued that the requirement that transferees pass the proficiency exam was arbitrary and unreasonable. However, there was substantial evidence that franchisees must be proficient in both written and spoken English to complete required training, understand and comply with corporate operating instructions, communicate with suppliers, and interact with customers. The franchisee had agreed in the franchise agreement to follow all of the franchisor’s system requirements, one of which—set out in the company manual—was the English language proficiency requirement. The franchisee and the prospective transferees expressly agreed to the proficiency requirement in the rider to the contract for sale (De Walshe v. Togo’s Eateries, Inc., DC Cal., CCH Business Franchise Guide ¶13,956).

Franchise Agreement’s Arbitration Clause Fails; No Meeting of Minds
There was no meeting of the minds between a franchisor of window covering businesses and a franchisee concerning the arbitration provision in their franchise agreement because of an advisement in the franchisor’s Uniform Franchise Offering Circular (UFOC) that the provision may not be enforceable under California law. Thus, a California appeals court upheld a trial court denial of arbitration of the franchisee’s claims for rescission and damages. In reaching its conclusion, the trial court relied on Laxmi Investments, LLC v. Golf USA (CCH Business Franchise Guide ¶11,706). In Laxmi, the Ninth Circuit refused to enforce a clause requiring that arbitration between an Oklahoma franchisor and a California franchisee be held in Oklahoma, since the UFOC advised the franchisee that the clause might not be enforceable under California law. The appeals court held that the parties had never clearly agreed to the Oklahoma forum. In this case, the window covering franchisor’s UFOC included a California appendix that stated that a provision requiring arbitration in Dallas County, Texas “may not be enforceable under California law.” The franchisor contended that the trial court erred in relying on Laxmi without analyzing the later case of Bradley v. Harris Research, Inc. (CCH Business Franchise Guide ¶12,221). However, the trial court did consider Bradley and properly found it distinguishable, the appellate court ruled. In Bradley, the Ninth Circuit held that the Federal Arbitration Act preempted that portion of the California Franchise Relations Act that rendered unenforceable contract provisions requiring venue in a forum outside of the state. In Laxmi, the Ninth Circuit concluded that, even if the statutory provision was preempted, the parties did not agree to the out-of-state forum. The Bradley court did not consider a UFOC advisement that the arbitration provision might be unenforceable under California law because the UFOC was not made part of the record. Accordingly, Bradley did not overrule the reasoning in Laxmi, and the trial court correctly relied on Laxmi to hold the arbitration provision unenforceable (Winter v. Window Fashions Professional, Inc., Cal. Ct. App., CCH Business Franchise Guide ¶13,965).

ADVERTISING LAW

Comparative Ads Presumed to Cause Injury to New Entrant
In light of unrefuted allegations that Oregon Cutting Systems Group—an established manufacturer of chainsaw components—engaged in deliberate, literally false, and material advertising that directly compared its chain to that of newly established competitor Trilink Saw Chain, a presumption arose under the Lanham Act that the advertising deceived Trilink’s customers and caused it financial injury, the federal district court in Atlanta has ruled. Oregon Cutting Systems was denied summary judgment on the Lanham Act claims because it failed to rebut the presumption of injury. While a showing of false and deceptive advertising is sufficient to warrant injunctive relief, parties seeking monetary relief have often been required to establish actual harm to their businesses, the court observed. Since marketplace damages are difficult and expensive to prove, many courts—including the 11th Circuit—“routinely presume that literally false advertising actually deceives consumers.” In the context of a preliminary injunction, the 11th Circuit will presume irreparable harm from a false comparative statement. The district court concluded that a presumption of causation and harm should apply to claims for actual damages when a defendant disseminates a willfully deceptive comparative ad. In this case, Trilink alleged—and Oregon Cutting Systems did not dispute—that Oregon engaged in deliberate, literally false, material advertising that directly compared the parties’ chains. Thus, Trilink was entitled to a presumption that the advertising deceived its customers, causing it financial injury. Trilink was entitled to pursue an accounting of profits without having to prove that the advertisements benefited Oregon Cutting Systems. As long as Trilink could provide evidence of Oregon Cutting System’s gross sales, it would be eligible for a discretionary award of profits (Trilink Chain, LLC v. Blount, Inc., ND Ga., CCH Advertising Law Guide ¶63,101).

NFL’s Use of Announcer’s Voice Violated Right of Publicity
The National Football League’s use of an announcer’s voice in a film about the making of the Madden NFL computer game violated the Pennsylvania right of publicity statute, but a trial was needed to decide the announcer’s false endorsement claim under the Lanham Act, according to a September 9 decision by the U.S. Court of Appeals in Philadelphia. Pennsylvania’s right-of-publicity statute prohibits unauthorized use of a name or likeness. The court held that the Copyright Act did not expressly preempt the right of publicity claim because (1) the right of publicity claim required an element of proof not needed for copyright infringement—a showing that the announcer’s voice had “commercial value” and (2) a voice is not copyrightable. The right of publicity claim was not impliedly preempted as being in conflict with federal law because a release signed by the announcer, authorizing the NFL to use his voice, preserved his right of publicity by excluding endorsements. Apart from the copyright preemption issue, the court said that there was no dispute that the NFL violated the Pennsylvania law, as held by the district court (CCH Advertising Law Guide ¶62,549 and ¶62,559), based on findings that the announcer’s voice had commercial value, that the film was a commercial advertising vehicle, and that the use of the announcer’s recordings was outside the terms of his consent in signing a contractual release. On the Lanham Act claim of false endorsement, a trial was necessary to resolve issues of fact as to whether consumers were likely to have been confused by the NFL’s use of the announcer’s voice in the film, the appellate court determined. A grant of summary judgment in favor of the announcer on this claim (CCH Advertising Law Guide ¶62,549) was vacated and remanded for trial (Facenda v. N.F.L. Films, Inc., CA-3., CCH Advertising Law Guide ¶63,094).

CIVIL RICO LAW

Delinqunt Cigarette Retailers May Be Liable for NYC’s “Lost Taxes”
The City of New York had standing to bring civil RICO claims against out-of-state cigarette retailers that failed to submit monthly sales reports to the State of New York, the U.S. Court of the Appeals in New York City has ruled. The retailers’ conduct allegedly prevented the city from collecting tens, perhaps hundreds, of millions of dollars a year in excise taxes. The retailers were obligated by the federal Jenkins Act of 1949 to file monthly sales reports with the tobacco tax administrators of the states where they had shipped cigarettes. The reports include information such as the name and address of each out-of-state consumer who purchased cigarettes during the prior month and the quantity of the purchases. The City of New York alleged that the retailers had engaged in a pattern of racketeering activity by committing a “predicate act” of mail or wire fraud each time they used the mails or wires to sell cigarettes to city residents without complying with the reporting requirements of the Jenkins Act. It was “settled law” in the Second Circuit that a Jenkins Act violation could form the basis of a wire or mail fraud conviction. The City identified RICO persons—employees and/or officers of retailers—who allegedly directed the enterprise to (1) conceal cigarette sales from state tax authorities by not filing Jenkins Act reports and (2) use misrepresentations to sell cigarettes via the mails to residents of New York City. These allegations sufficiently alleged a fraudulent scheme or artifice that was furthered by the use of the mails or wires. The retailers unsuccessfully argued that the City’s “lost taxes” did not constitute an injury to the City’s business or property because the loss was not incurred in a commercial transaction. Finally, the City’s allegations that it had been injured through lost revenue by the retailers’ RICO violations met the statute’s causation requirement. The fact that the State of New York also may have been injured by the schemes did not render the injury any less direct to the City (City of New York v. Smokes-Spirits.com, CA-2, CCH RICO Business Disputes Guide ¶11,547).

STATE UNFAIR TRADE PRACTICES LAW

Selling Returned Item as “New” Could Violate Texas Law
Although a consumer failed to state a Texas Deceptive Trade Practices-Consumer Protection Act claim for a retailer’s misleading statements about its reason for reducing the price of a grinder and for “bait advertising,” the consumer successfully stated claims for the retailer’s nondisclosure of material information and for representing that the grinder was new when it had been returned, the federal district court in Dallas has held. The consumer alleged that the retailer violated the Deceptive Trade Practices-Consumer Protection Act (DTPA) by reducing the price of the grinder without informing the consumer that the grinder had been previously purchased, returned, and refurbished. The consumer also alleged that the retailer knew or should have known that the grinder had not been reassembled properly. When the consumer used the grinder, the grinding wheel came off and ripped into his leg, causing a severe injury. Under the DTPA, a deceptive act occurs if a defendant fails to disclose material information to a consumer. There must be an intent to induce the customer into a transaction he would not otherwise have entered, and the defendant’s actions must be the producing cause of an injury. In this instance, there was sufficient evidence indicating that the grinder had been previously purchased and that the product was defective when sold. The consumer sufficiently alleged fact issues as to whether the retailer knew of the defect, whether the retailer intended to induce the consumer into the transaction, and whether the conduct was a producing cause of his injuries. Furthermore, allegations that the retailer passed off the grinder as new stated a claim, since it is a violation of the DTPA to represent that merchandise is original or new if it has been reconditioned, reclaimed, or used (Jackson v. Wal-Mart Associates, Inc., ND Tex., CCH State Unfair Trade Practices Law ¶31,657).

PRIVACY LAW IN MARKETING

Virginia’s SSN Protection Law Violated Advocate’s Free Speech Rights
Virginia's law regulating the use of Social Security Numbers (SSNs) was unconstitutional as applied to a website operated by a privacy-rights advocate, who opposed the posting of land records online without the redaction of the SSNs contained in the records, according to the federal district court in Richmond. On her website, the advocate posted examples of public records that were available online and that contained SSNs. She stated that her reason for doing so was to demonstrate to members of the public that their own personal information could be available online. The Virginia SSN law (CCH Privacy Law in Marketing ¶34,660) provided that a person shall not “[i]ntentionally communicate another individual's social security number to the general public." The advocate sought declaratory and injunctive relief against enforcement of the law, as amended, asserting that her activities subjected her to fines, investigative demands, and injunctions Although the advocate's website was not part of the traditional news media, it undertook a government watchdog role that was protected by the First Amendment, in the court's view. Her site was "analytically indistinguishable from a newspaper." The records on her site were obtained largely from a government source—the circuits courts—and were part of official court records that were open to public inspection. The state had made them available online to anyone who paid a nominal access fee. It would not be difficult to conclude that protection of SSNs from public disclosure should qualify as a state interest of the highest order. The state's assertion of this interest was undercut, however, by the its own conduct in making the SSNs publicly available through unredacted release on the Internet, which it had done for several years. There was no compelling reason for making land records available online; counsel for the attorney general stated that it was done at the request of the real estate industry. The burden of redacting private information from state records could not be placed on those who would publish truthful information that is in records the state had made available to the public, according to the court. Given the significant public interest issues presented by the spreading of SSNs on the Internet, the court required further briefing on the propriety and scope of an injunction beyond the advocate's specific website (Ostergren v. Mcdonnell, ED Va., CCH Privacy Law in Marketing ¶60,243).

ASPEN ANTITRUST & TRADE REGULATION PUBLICATIONS

Antitrust Law: An Analysis of Antitrust Principles and Their Application by Phillip E. Areeda and Herbert Hovenkamp
The August 2008 Supplement is now available on the Antitrust and Trade Regulation tab of the CCH Internet Research Network. This multi-volume treatise offers comprehensive coverage of all areas of antitrust law, including relevant economic and policy concerns and incisive analysis of all pertinent issues.

This latest supplement includes updates on: (1) the Supreme Court's decision in Billings v. Credit Suisse on implied antitrust immunity for conduct regulated by the SEC; (2) the Supreme Court's decision in Leegin vs. PSKS overruling the per se rule against resale price maintenance, including the impact on liquor price posting provisions, proof of vertical agreement, and proof of agreements pertaining to price; (3) the Eighth Circuit's Goss decision, declining to enjoin a foreign jurisdiction’s "clawback" provision designed to deprive American plaintiffs of treble damages awards against foreign defendants; (4) the Third Circuit's Broadcom decision, in which the court concluded that the plaintiff had stated an antitrust claim in alleging that the defendant's deception of a standard setting organization, surreptitious patenting, and subsequent insistence on patent royalties for use of its technology may have violated the Sherman Act; (5) the Federal Circuit's Dippin Dots decision, holding that fraudulent statements to the Patent and Trademark Office concerning prior sales sufficient to invalidate a patent did not satisfy the conduct component of a Walker Process violation; (6) the Ninth Circuit's Linkline decision, approving a price squeeze claim under Section 2 of the Sherman Act; and (7) the FTC's Evanston Hospital case, condemning a merger several years after it occurred but declining to issue an injunction.

Distribution Law: Antitrust Principles and Practice by Theodore L. Banks
The September 2008 Supplement recently went live on the Antitrust and Trade Regulation tab of the CCH Internet Research Network. This treatise offers insightful analysis and expert practical advice on the intersection of distribution arrangements and antitrust law, including challenging questions about pricing, vertical restraints, exclusivity, tying, and refusals to deal.

This latest supplement includes updates on: (1) market definition analysis and pleading requirements; (2) developments in the area of bundled discounts; (3) standing required to challenge distribution systems as restrictive; (4) recent FTC enforcement actions against resale price maintenance programs; (5) trends in state attorney generals actions; (6) challenges to exclusionary exclusive dealing provisions; (7) applicable standards for obtaining an injunction; and (8) developments in tying law.