Announced Actions for August 19, 2003

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Commission authorization of the staff to file amicus brief: The Commission has authorized the staff to file an amicus brief, at the request of the court, in Pruitt v. Kaufman & Broad Home Corp., et al., No. 5:03-CV-021 (S.D. Tex.). The question at issue is whether the plaintiff, a private purchaser of a residence from KB Home (formerly knows as Kaufman & Broad, Inc.), has standing as a third-party beneficiary to enforce a consent decree between the FTC and KB Home.

This case concerns a 1979 FTC consent order against KB Home, a California-based builder. Among other things, the order requires KB Home to make timely warranty repairs and to furnish home purchasers with a warranty that is “substantially identical” to the Home Owners Warranty Corporation warranty. In pertinent part, under the consent order, warranties must include mandatory arbitration that is binding upon KB Home but not binding upon home purchasers. In 1991, the U.S. Department of Justice filed a complaint in U.S. District Court alleging that KB Home had violated several provisions of the 1979 order. Ultimately, the court entered a consent decree under which KB Home paid a civil penalty of $595,000 and stipulated to a permanent injunction against further violations of the 1979 order.

The current private action against KB Home involves the purchase of a single-family home in Laredo, Texas. As part of the purchase agreement, the plaintiff got warranty agreements that require mandatory arbitration of any disputes related to construction defects that is binding upon both KB Home and the plaintiff. After many disputes went unresolved, the plaintiff filed suit against KB Home seeking a ruling that the binding arbitration requirements in his warranties are illegal based on KB Home’s violations of the consent order. KB Home subsequently moved to dismiss on the grounds that the plaintiff, as a third party, has no standing to enforce the FTC decree.

In its brief, the staff of the FTC’s Office of General Counsel advised the court that the plaintiff has no standing to enforce either the 1991 consent decree or the 1979 administrative decree. The amicus brief explains that Supreme Court precedent, and subsequent cases interpreting it, have either foreclosed the possibility of third-party enforcement of government consent decrees or have at least limited third party enforcement to circumstances that are not present in this case. The brief also states that “public policy favors restricting private parties from enforcing government consent decrees,” and notes that “Congress has created a comprehensive framework for enforcement of FTC orders. Leaving the matter of enforcement in the government’s hands ‘forecloses the possibility that a multitude of parties with conflicting interests will become entangled in subsequent proceedings . . . and affords those parties affected by the decree sufficient protection . . .’” (quoting United States v. American Soc’y of Composers, Authors and Publishers, 341 F. 2d 1003, 1008 (2nd Cir. 1965)).

The Commission vote authorizing the staff to file the brief, which is available on the FTC’s Web site as a link to this press release, was 4-0-1, with Commissioner Pamela Jones Harbour not participating. (File No. P859907; staff contact is John Daly, Office of the General Counsel, 202-326-2244.)

Application for Commission approval of proposed transaction: FTC has received an application for approval of a proposed transaction in the matter concerning the 2001 acquisition of the Ralston Purina Company (Ralston) by Nestlé Holdings, Inc. (Nestlé). Under the terms of the final order approved by the Commission in this matter, the companies were required to divest certain assets to an up-front buyer, J.W. Childs Equity Partners II. L.P. Through its application, J.W. Childs Equity Partners II, L.P., has now requested that the FTC approve the sale of 90 percent of its interests in The Meow Mix Company to Cypress Group L.L.C.

The Commission is accepting public comments on the proposed transaction until September 17, 2003, after which it will decide whether to approve it. Comments should be sent to: FTC Office of the Secretary, 600 Pennsylvania Ave., NW, Washington, DC 20580. (Docket No. C-4028; staff contact is Catharine M. Moscatelli, 202-326-2749; see press release dated December 11, 2001.)

Commission approval of advisory letter: The Commission has approved the issuance of a staff advisory opinion setting forth the extent to which the Telemarketing Sales Rule (TSR) reaches telemarketing on behalf of insurance companies. The opinion, which is available on the FTC’s Web page as a link to this press release, was developed at the request of Stonebridge Life Insurance Company, and specifically addresses whether the McCarran-Ferguson Act exempts companies telemarketing on behalf of insurance companies from coverage by the TSR.

The staff opinion first provides general information on the jurisdictional limitations of the FTC Act, stating that the TSR is subject to the same limitations. The advisory goes on to note the distinction between “status” exemptions, such as those afforded banks, credit unions, and savings and loans, and “activity” exemptions, such as that for the business of insurance to the extent that it is regulated by state law as set forth in the McCarran-Ferguson Act. The opinion then describes the three-part test used to determine whether a particular activity constitutes the “business of insurance,” and notes that even if an activity meets that three-part test, it also is necessary to determine whether the activity is “regulated by state law,” and whether the state regulation was enacted for the purpose of regulating the “business of insurance.”

Accordingly, the comment states the FTC may assert jurisdiction over the telemarketing of insurance products only if the telemarketing activity fails the three-prong test and/or the state regulation test. Whether the telemarketing is done by third-party callers or the insurance companies themselves is not the issue: “[t]he decisive issues are whether the activity constitutes ‘the business of insurance’ and whether it is regulated by state law.” The advisory concludes that “in order to make a specific determination on the Rule’s applicability to Stonebridge’s telemarketing, the Commission would need additional information, such as the nature of the product offered, the state(s) in which it is sold, and the extent of state regulation in those states. The Commission vote approving issuance of the advisory letter was 4-0-1, with Commissioner Pamela Jones Harbour not participating. (File No. R411001; staff contact is Catherine Harrington-McBride, Bureau of Consumer Protection, 202-326-2452).

Copies of the documents mentioned in this release are available from the FTC’s Web site at http://www.ftc.gov and also from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, DC 20580. Call toll-free: 1-877-FTC-HELP.

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