Wednesday, April 22, 2009

News America Whistleblower Files for Bankruptcy; Moves for a Stay

Robert Emmel, a former News America Marketing employee and a key witness in litigation against News America, filed for Chapter 7 bankruptcy protection today, likely in response to News America's attempts to recover damages and $1.5 million in attorneys fees from him in a breach of contract action related to disclosure of confidential News America information.

As discussed in an earlier post, News America won summary judgment against Mr. Emmel in federal district court on a breach of contract claim based on Mr. Emmel's disclosure of confidential information (though News America lost on several other claims). Mr. Emmel admitted that he sent News America documents to the Counsel for the Senate Judiciary Committee because he believed that News America was engaged in unlawful activity. Mr. Emmel has filed an appeal of the summary judgment ruling to the Eleventh Circuit Court of Appeals.

Yesterday, Mr. Emmel filed a motion to stay the district court's order, which would enjoin Mr. Emmel from disclosing any confidential News America information and would require him to return all News America documents that are in his possession. In support of his motion to stay the ruling, Mr. Emmel argues that a well-established public policy exception favors non-enforcement of non-disclosure provisions in the context of disclosures of potential unlawful activity to government officials. According to one Georgia case cited by Mr. Emmel, "[r]eporting criminal behavior is expected and even demanded of the ordinary citizen, who should not be discouraged from reporting what he knows to the authorities and from lending his aid to secure evidence of a crime. Indeed, in Georgia it is the duty of one having such information to report it to those in authority."

As I have previously argued on this blog, whistleblowers should be provided positive incentives for reporting wrongful activity, not punished for doing so. While corporations like News America have legitimate concerns about avoiding the disclosure of trade secrets and other confidential business information, those concerns do not apply to disclosures to governmental authorities.

Mr. Emmel's case provides an example of the disincentives of becoming a whistleblower. The lawsuit against him has led to him filing bankruptcy, and he has devoted substantial time and energy to the litigation against him, as well as to testifying in litigation against News America. While some whistleblower laws, such as the qui tam statute, allow whistleblowers to reap financial rewards for their efforts, none of those laws appear to apply to Mr. Emmel, who should be commended for his efforts.

Related posts: News America Whistleblower Appeals; Court Grants Summary Judgment Against Whistleblower; All News America Marketing Posts

Tuesday, April 21, 2009

Kellogg Settles FTC Complaint Over False Advertising

The FTC announced yesterday that it has settled a dispute with Kellogg's over an advertising campaign that falsely claimed that Frosted Mini-Wheats were "clinically shown to improve kids' attentiveness by nearly 20%."

Kellogg's made the claims in a national advertising campaign, but the study it relied on found that children who ate the cereal averaged an increase of less than 11 percent in attentiveness compared to children who ate no breakfast at all. Only one in nine children showed an increase in attentiveness of 20% or more.

The settlement agreement prohibits Kellogg's from making similar claims in the future about any breakfast food or snack food unless there is reliable evidence that supports the claims.

Just like Kellogg's experience with Frosted Mini-Wheats, many consumer product companies that compete in mature markets are aggressive with advertising claims, which is often the principal means of product differentiation. In the consumer products industry, an aggressive advertising claim that lacks credible substantiation will typically be challenged by a competitor that risks losing market share because of the claim. A competitor can petition the FTC to investigate a company's claim (which is likely what happened in Kellogg's case), can file its own lawsuit against the company under the Lanham Act, or can challenge the claim within the National Advertising Division of the Council of Better Business Bureaus, an industry self regulating body that renders decisions on the legitimacy of advertising claims.

Credible claims substantiation is important for any advertiser, particularly consumer products companies that compete in mature markets and face intense scrutiny of claims by competitors. While the FTC consent concerning Kellogg's Frosted Mini-Wheats claim will likely not materially affect the success of the brand, Kellogg's marketers probably did a disservice to the brand by employing the aggressive claim: the FTC enforcement action is embarrassing, the advertising campaign will have to be stopped in mid-stream (which will be confusing to consumers), and Kellogg's costs will increase as the organization eliminates the claim from its packaging.

Related post: Litigation Forces Changes to Food Marketing

Wednesday, April 15, 2009

Richard Feinstein Accepts Position as the Federal Trade Commission’s Bureau of Competition Director

The Federal Trade Commission recently announced that Richard Feinstein, a partner at Boies, Schiller and Flexner LLP, has accepted the position as Director of the Bureau of Competition at the Federal Trade Commission. The FTC has two primary internal organizations: (1) the Bureau of Competition, which enforces antitrust laws and (2) the Bureau of Consumer Protection, which enforces consumer protection laws. As Director of the Bureau of Competition, Mr. Feinstein will oversee the antitrust enforcement arm of the FTC and help dictate federal antitrust enforcement policy. This will be Mr. Feinstein’s third “tour of duty” as an antitrust enforcer with the government. He started his career within the Department of Justice’s Antitrust Division and served as Assistant Director of the FTC’s Health Care Shop from 1998 – 2001.

Mr. Feinstein is an excellent choice for the Bureau of Competition Director. While at Boies, Schiller & Flexner, the founding partners of Kotchen & Low worked closely with Mr. Feinstein, and Daniel Kotchen reported to Mr. Feinstein at the FTC from 1998 – 2001. Mr. Feinstein is smart, experienced, fair, funny, and a terrific manager. Under Mr. Feinstein’s leadership, antitrust enforcement will be fair and balanced and morale within the FTC’s Bureau of Competition will be high. The one downside of his appointment is that FTC insiders and others who interact with him will have to suffer through Mr. Feinstein’s ardent and vocal support of any team from Pittsburgh: the Steelers, Penguins, Pirates, and Pitt Panthers.

Tuesday, April 14, 2009

News America Whistleblower Appeals

Robert Emmel, a whistleblower who formerly worked for News America Marketing, is appealing an order granting summary judgment against him for breach of contract based on his disclosures to government authorities.

Mr. Emmel filed a notice of appeal yesterday, seeking reversal of the court's order finding that he breached an agreement not to disclose confidential information about News America, and permanently enjoining him from disclosing such confidential information to third parties. Given that appeals typically take over nine months to resolve in the Eleventh Circuit, the appeal is unlikely to be resolved before the Valassis and Insignia trials, so the appeal is unlikely to affect those cases.

In the Floorgraphics case, the plaintiff subpoenaed Mr. Emmel, and he provided strong testimony in their favor, previously reported on this blog here and here. For example, Emmel testified that News America's former CEO, Paul Carlucci, told employees that if there were "bed wetting liberals" who were uncomfortable with News America's tactics, he could arrange for those individuals to be fired. He also testified, as BNET recently reported, that News America charged manufacturers for placements of floor and shelf ads in hundreds of supermarkets that did not receive ads.

Valassis and Insignia will try to use to Mr. Emmel's testimony in their own cases. While the injunction against him may prevent Mr. Emmel from voluntarily testifying in person (absent a court order allowing him to do so), testimony from Mr. Emmel is likely to be introduced at least through transcripts or deposition videos.

Posts related to News America.

Monday, April 13, 2009

Motions to Dismiss Antitrust Cases Against Chocolate Manufacturers Denied; Interlocutory Appeal Certified

Motions to dismiss were denied in the pending antitrust lawsuits against Chocolate manufacturers for allegedly conspiring to fix prices, as the court found that the Plaintiffs’ complaints alleged sufficient facts to plausibly suggest that the defendants had entered into an anti-competitive agreement.

Twombly Standard - The current standard governing motions to dismiss in antitrust cases was announced by the Supreme Court in 2007 in Bell Atlantic v. Twombly, 550 U.S. 544 (2007). The Twombly decision made it more difficult to survive a motion to dismiss, requiring that plaintiffs allege sufficient facts that, if true, demonstrate a plausible right to relief. This replaced the prior standard, which required that a complaint was not to be dismissed “unless it appear[ed] beyond doubt that the plaintiff c[ould] prove no set of facts in support of his claim which would entitle him to relief.” Conley v. Gibson, 355 U.S. 41, 46-47 (1957).

Plaintiffs’ Allegations - Judge Conner held that Plaintiffs’ allegations met the Twombly standard. Plaintiffs alleged a series of three parallel price increases, and “[t]he complaints depict a prototypical market susceptible to conspiratorial price-fixing.” For example, plaintiffs alleged “formidable entry barriers” in the form of high fixed costs, extensive marketing expenditures for launching new products and building brand loyalty, and a steep curve in acquiring technical expertise. Plaintiffs further alleged that costs remained stable because of futures contracts and placid supply markets, and demand was declining because of consumer trends favoring healthier snack options. In addition, Plaintiffs made more specific allegations regarding Defendants’ conspiratorial conduct in Canada, which the Court found “enhances the plausibility of the alleged U.S. price-fixing conspiracy.”

Interlocutory Appeal - Judge Conner found, however, that there is substantial grounds for difference of opinion as to whether the In re Chocolate allegations meet the requirements of the new test from Twombly. He found that Twombly “communicates ‘multiple linguistic signals’ about the standard of review.” While Twombly superceded Conley and required plausibility, the opinion also expressly rejected a requirement of heightened fact pleading of specifics. Thus, a narrow reading of Twombly “construes it as a formalistic change designed to give voice to a pleading standard that was already commonplace in many courts.” Because of the potential for disagreement, Judge Conner granted a motion to certify an interlocutory appeal of the following question to the Third Circuit:

Does Twombly, as a matter of law, authorize a court in a [15 U.S.C.] § 1 case to
draw an inference of conspiracy from the collective effect of repeated parallel
price increases, averments of anticompetitive activity in closely related
foreign markets, transnational management of corporate subsidiaries, opportunity
for collusion, and descriptions of anti-competitive conduct that are
economically sensible in light of mature market characteristics?

Analysis - I agree with Judge Conner’s decision that the In re Chocolate allegations satisfy the standard under Twombly, and believe that the Twombly decision should be narrowly construed. In antitrust cases, the allegations of conspiracy are often circumstantial, as the conspirators tend to be relatively diligent about covering up direct evidence of the conspiracy. The allegations here provide compelling evidence of a conspiracy, even if the evidence is circumstantial. The absence of specific allegations of an actual agreement reached among the defendants should not bar cases from proceeding to discovery when, as here, the factual circumstances suggest that the defendants conspired.

Related posts: Defendants Seek Dismissal of Price-Fixing Class Actions; Study Shows That Commodity Price Rises Don't Justify Chocolate Price Rises; Chocolate Price Fixing Cases Consolidated; Retail Grocery Chains File Suit Against Chocolate Makers; Investigation of Chocolate Makers Goes Global; Chocolate Makers Allegedly Fixed Prices.

Saturday, April 11, 2009

Litigation Forces Changes to Food Marketing

A recent Wall Street Journal article observed that consumer packaged goods manufacturers' marketing practices have been affected by recent litigation trends:

"As Americans have grown more health-conscious, the country has seen a surge in litigation against food companies for allegedly selling unhealthy products and for misrepresenting their products' nutritional value.

In the wake of litigation -- or the threat of it -- some food distributors in recent years have adopted a host of health-promoting steps, like reducing their use of trans fats, limiting marketing of sugary, high-calorie products to children, and toning down boasts about their products' nutritional value."

The lawsuits have not always been successful. For example, a lawsuit alleging that Aquafina's falsely created the impression that the water comes from a mountain spring was dismissed last year. And lawsuits seeking large damages for allegedly causing obesity have been generally unsuccessful, partly because of the difficulty of proving causation.

Recent lawsuits include claims against Coca-Cola for alleged misrepresentations about the nutritional value of VitaminWater, and for allegedly making unsubstantiated claims about calorie-burning properties of Enviga green tea, and a case against Gerber for putting images of a variety of fruits on its Fruit Juice Snacks, even though the fruits were not included in the product.

While plaintiffs' lawyers characterize their lawsuits as a mission about truth in advertising, defense attorneys complaint about the paternalistic approach of the lawsuits, and argue that regulation by the Food and Drug Administration should preempt such lawsuits.

The WSJ Law Blog summarized the article here, and the Consumer Law & Policy blog here.

Friday, April 3, 2009

Additional Details of News America’s Alleged Conduct Emerge

Floorgraphics Trial Transcript Excerpts. A few excerpts from the Floorgraphics trial transcript were posted today by Jim Edwards of BNET. The excerpts include testimony by a Floorgraphics executive that former News America CEO Paul Carlucci threatened to "destroy" Floorgraphics if it competed with News America, and a statement by Robert Emmel that, on an internal News America conference call, Paul Carlucci stated that "if there were individuals that were concerned about doing the right thing, bed wetting liberals in particular . . . , then he could arrange for those individuals to be out-placed from the company."

News America's Gift Card Deal with Safeway. Edwards also posted a story earlier about a lawsuit News America brought against two former employees in the Smart Source Direct ("SSD") division of News America. The former employees, much like Robert Emmel, were accused of breaching nondisclosure obligations to the company. Among the confidential information allegedly disclosed by the employees was that News America "gave up business from Ahold in order to obtain other business from Safeway." (Complaint ¶ 52). Sources indicate that, specifically, the allegation was that News America gave up an agreement with Ahold to distribute third-party gift cards through Ahold stores, relinquishing the Ahold opportunity to Safeway's Blackhawk Marketing Division, which is one of the leading companies in the third-party gift card market (along with InComm). Allegedly in return, Safeway awarded its in-store floor and shelf advertising program to News America rather than Floorgraphics. According to BNET, the case against the two former employees settled.

Update on Valassis and Insignia. Valassis' Michigan state court lawsuit against News America, which had previously been scheduled to begin in March, has been rescheduled for May 27, 2009 because of a conflict in the Judge's schedule. Valassis also has upcoming trials against News America scheduled in California for August 2009, and in federal court in Michigan, which is likely to take place sometime this year, but was delayed after the previous Judge recused himself in February.

In the Insignia lawsuit against News America, motions for summary judgment are scheduled for a hearing on May 11, 2009. Trial would likely occur several months after the hearing.

Related posts about: News America; Insignia; Valassis.


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