TRU restraint case: more to come

Discount Store News, Oct 20, 1997 by Laura Liebeck

PARAMAS, N.J.--The restraint of trade ruling by the Federal Trade Commission on Sept. 30 against Toys "R" Us could eventually have significant impact on the entire retail industry.

Although still years away from a final decision, an FTC administrative law judge has brought into question the common retail practice of exclusive product deals forged between manufacturers and retailers. If the initial decision by the judge holds up through the long appeal process, such exclusives could become part of retail lore.

A number of retail and legal experts have been quoted as saying that they think the decision will lose on appeal.

When the FTC began its investigation of Toys "R" Us for restraint of trade in 1994 Michael Goldstein, now the company's vice chairman and ceo, said: "We have no plans to settle the case. We believe that the FTC is trying to make a trophy out of us."

In the meantime, Toys "R" Us has filed an appeal of the Sept. 30 decision by FTC judge James Timony, who ruled that the retailer used "vertical" agreements with manufacturers to restrict their sales to wholesale clubs and then formed "horizontal" agreements with competing manufacturers to prevent club from obtaining popular toys such as Holiday Barbie.

The FTC brought charges against Toys "R" Us three years ago after receiving complaints from such warehouse club operators as Costco, then known as PriceCostco.

Toys "R" Us has denied threatening any supplier with losing its business if that company sold to competing retail formats. It does, like other retailers, decline to offer certain goods offered by its suppliers and does forge exclusive deals with many of them in an effort to distinguish its merchandise mix from competitors; it is a common retail practice. Many manufacturers have supported TRW's fight with the FTC, including Mattel, which said the toys retailer did not pressure it into selling or not selling products to anyone.

"We are extremely disappointed in the initial decision by the FTC because it's not based on the facts," said Rebecca Caruso, Toys "R" Us' vice president of corporate communications. "Unlike warehouse clubs, which pushed the FTC to bring this case, Toys `R' Us serves all consumers all year long, not a select few for a few weeks a year."

Toys "R" Us filed an appeal of the judge's decision almost immediately after it was handed down. The next step involves a review of the case by five FTC commissioners. The step after that is an appeal to the federal courts.

"We'd like to resolve this as quickly as possible, but for now it's business as usual," Caruso said. "We're focusing on the upcoming holidays."

There is no impact on the company from this decision. Any judgment in this case is on hold until the process concludes. Further, the FTC said it would not seek monetary damages from TRU. What it will do, should the decision hold through the appeals process, is prohibit TRU from making any distribution demands on its suppliers, effectively changing the buyer-seller relationship in retailing today.

Judge Timony's decision would prohibit Toys "R" Us from:

* Attempting or continuing any agreement or understanding with a supplier to restrict the supplier's sales to any toy discounter.

* Urging or pressuring a supplier to restrict its sales to any toy discounter.

* Requiring or encouraging any supplier to furnish information about any other supplier's sales or shipments to any discounter.

* Facilitating agreements among suppliers related to limiting the suppliers' sales to any retailer (by, among other things, transmitting complaints or intentions).

* Announcing that it will discontinue purchasing products from any supplier because the supplier sells to any toy discounter, or refusing to purchase from a supplier because that supplier dealt with any toy discounter. This would be in effect for five years.

To some in and around the retail field, these restrictions are appalling.

"Manufacturers have to be able to protect the integrity of their brands, and a retailer should be able to negotiate for a brand; but that doesn't mean they have the right to them," said Dorothy Lakner, senior vp with Oppenheimer & Co.

"What the FTC wants to do is change the law, and Toys "R" Us is being used as a vehicle," said Toys "R" Us attorney Michael Feldberg, with the New York law firm of Shulte Roth Zabel. He noted that the appeals process could "go all the way," as in to the United States Supreme Court.

For Costco, the issue has been that it has been unable to secure for sale the industry's hottest toys. It's a battle the company has faced with suppliers in other industry's as well.

The FTC decision talks about market share clout, which for TRU has been declining over the past several years, mostly in direct proportion to discounters'--specifically Wal-Mart's--interest in the category. As recently as five years ago, TRW's market share in toys was about 25%; it is now about 20%. A number of trade experts have been quoted in recent years as saying that a company needs a 30% market share to effect the kind of pressure TRU is accused of applying in this case.