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FTC's 5/96 Complaint Against Toys "R" Us For Unfair Competition
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UNITED STATES OF AMERICA
BEFORE FEDERAL TRADE COMMISSION
In the Matter of Toys "R" Us, Inc., a corporation
DOCKET NO. 9278
Pursuant to the provisions of the Federal Trade Commission Act, and by virtue of the authority vested in it by said Act, the Federal Trade Commission, having reason to believe that Toys "R" Us, Inc., a corporation (sometimes referred to as "TRU" or "respondent"), has violated the provisions of said Act, and it appearing to the Commission that a proceeding by it in respect thereof would be in the public interest, hereby issues its complaint, stating its charges as follows:
PARAGRAPH ONE: Respondent Toys "R" Us, Inc. ("TRU") is a corporation organized, existing, and doing business under and by virtue of the laws of Delaware, with its principal office and place of business at 461 From Road, Paramus, New Jersey 07652.
PARAGRAPH TWO: TRU is the largest toy retailer in the United States. It has approximately 600 stores located throughout the United States and 300 stores in foreign countries, which sell toys, infant supplies and equipment, juvenile sporting goods and related items ("products"). In 1995 its total sales were approximately $9.4 billion.
PARAGRAPH THREE: TRU's acts and practices, including the acts and practices alleged herein, are in or affect commerce as "commerce" is defined in the Federal Trade Commission Act.
PARAGRAPH FOUR: TRU's importance as a provider of distribution to manufacturers of toys and related products has given it the ability to exercise market power over those manufacturers, and TRU has exercised this power.
PARAGRAPH FIVE: Warehouse clubs ("clubs") charge a membership fee and retail a broad variety of products, including toys and other products sold by TRU. The clubs operate on lower margins than TRU or other national chain discounters. During the late 1980's and early 1990's, club sales were growing at a much faster rate than other retailers. During that period, the toy manufacturers wanted to increase their sales to this relatively new channel of distribution because of the growth potential of the clubs and the manufacturers' desire to have additional outlets for their merchandise. Before TRU engaged in the conduct described in Paragraphs Seven through Nine below, the clubs generally were able to buy popular individual toys from open stock (i.e., any toys sold by the manufacturer without restriction) from most of the major manufacturers, which they generally sold at lower prices than TRU and other retailers. The clubs needed the option to buy the same toys from the manufacturers that TRU and the other major retailers were carrying in order to compete effectively.
PARAGRAPH SIX: TRU has cultivated the image with the public as a toy discounter that has everyday low prices. However, it does not have the lowest retail prices among national toy retailers, and it generally does not lead prices down. In the early 1990's the clubs' low prices were putting competitive pressure on TRU. TRU feared that consumers would draw unfavorable and embarrassing comparisons between the clubs' prices and its prices, and that its image for everyday low prices could be eroded.
PARAGRAPH SEVEN: Beginning at least as early as 1989, TRU used its power to gain agreements or understandings with various suppliers relating to toy sales to the clubs. These agreements or understandings included the following:
(a) The suppliers agreed not to sell to the clubs the same individual toys that TRU carried;
(b) In the event a supplier wanted to sell to the clubs some toys carried by TRU, TRU and the suppliers agreed upon toy products that could be sold to the clubs. These generally were "club specials" consisting of combination packs of two or more different items, or other product that was differentiated from regular open stock items. The items in the club specials could not be readily price- compared to products sold by TRU, the club specials generally cost more to produce, and the club specials raised the clubs' prices to consumers; and
(c) The suppliers agreed to advise TRU in advance of the specific products, including club specials, that the suppliers wanted to sell to the clubs. If after reviewing the products TRU determined that they did not pose a competitive conflict with the products sold by TRU, the supplier could sell the product to the clubs.
PARAGRAPH EIGHT: Some major manufacturers were reluctant to give up their sales of individual toys to the clubs so long as their competitors were selling them to the clubs. To secure the agreements or understandings alleged in Paragraph Seven, TRU facilitated understandings among competing manufacturers to achieve substantial unity of action among them relating to their dealings with the clubs.
PARAGRAPH NINE: TRU sought, received, and negotiated agreements or understandings with manufacturers with respect to the toys they would not sell to the clubs. TRU policed the manufacturers' sales and repeatedly brought any infractions to their attention. When it deemed necessary, TRU enforced its policy by taking product off its shelves or not buying product that manufacturers had sold to the clubs.
PARAGRAPH TEN: By 1994 and continuing to the present, most of the major U.S. toy manufacturers had stopped selling popular individual toys to the club channel of distribution that were carried by TRU.
PARAGRAPH ELEVEN: The purpose and effect of the agreements and understandings described in Paragraphs Seven through Ten was to restrain competition among toy retailers and among toy manufacturers.
PARAGRAPH TWELVE: By engaging in the acts or practices described in Paragraphs Four through Eleven of this complaint, TRU has unreasonably restrained competition in the following ways, among others:
(a) Retail price competition has been restrained, and toy prices to consumers are higher than they would have been absent TRU's conduct;
(b) Competition among toy manufacturers, including competition with respect to their distributional practices and their dealing with TRU's competitors, has been restrained;
(c) The clubs' costs were increased, which impeded the growth of a new method of toy distribution in its incipiency; and
(d) Information that would enable consumers to make informed price comparisons has been suppressed.
PARAGRAPH THIRTEEN: The acts or practices of TRU alleged herein were and are to the prejudice and injury of the public. The acts or practices constitute unfair methods of competition in or affecting commerce in violation of Section 5 of the Federal Trade Commission Act. These acts or practices are continuing and will continue, or amy recur, in the absence of the relief requested.
Notice is hereby given to the respondent Toys "R" Us, Inc. that the sixteenth day of July, 1996, at 10:00 a.m. o'clock is hereby fixed as the time and Federal Trade Commission Offices, Sixth Street and Pennsylvania Avenue, Northwest, Washington, D.C. 20580, Room 532, as the place when and where a hearing will be had before an Administrative Law Judge of the Federal Trade commission, on the charges set forth in this complaint, at which time and place you will have the right under said Act to appear and show cause why an order should not be entered requiring you to cease and desist from the violations of law charged in the complaint.
You are notified that the opportunity is afforded you to file with the Commission an answer to this complaint on or before the thirtieth (30th) day after service of it upon you. An answer in which the allegations of the complaint are contested shall contain a concise statement of the facts constituting each ground of defense; and specific admission, denial, or explanation of each fact alleged in the complaint or, if you are without knowledge thereof, a statement to that effect. Allegations of the complaint not thus answered shall be deemed to have been admitted.
If you elect not to contest the allegations of fact set forth in the complaint, the answer shall consist of a statement that you admit all of the material allegations to be true. Such an answer shall constitute a waiver of hearings as to the facts alleged in the complaint, and together with the complaint will provide a record basis on which the Administrative Law Judge shall file an initial decision containing appropriate findings and conclusions and an appropriate order disposing of the proceeding. In such answer you may, however, reserve the right to submit proposed findings and conclusions and the right to appeal the initial decision to the Commission under Section 3.52 of the Commission's Rules of Practice for Adjudicative Proceedings.
Failure to answer within the time above provided shall be deemed to constitute a waiver of your right to appear and contest the allegations of the complaint and shall authorize the Administrative Law Judge, without further notice to you, to find the facts to be as alleged in the complaint and to enter an initial decision containing such findings, appropriate conclusions and order.
NOTICE OF CONTEMPLATED RELIEF
Should the Commission conclude from the record developed in an adjudicative proceeding in this matter that the respondent is in violation of Section 5 of the Federal Trade Commission Act, as alleged in the complaint, the Commission may order such relief as is supported by the record and is necessary and appropriate including, but not limited to, an order that requires the following in connection with toy products and related products for infants and juveniles ("products"):
1. Respondent shall cease and desist from directly or indirectly continuing, maintaining, entering into, or attempting to enter into any agreement or understanding with any supplier to limit supply or to refuse to sell toys and related products to any toy discounter.
2. Respondent shall not directly or indirectly urge, induce, coerce, or pressure, or attempt to urge, induce, coerce, or pressure, any supplier to limit supply or to refuse to sell toys and related products to any toy discounter.
3. Respondent shall not directly or indirectly require, solicit, request or encourage any supplier to furnish information to respondent relating to any supplier's sales or actual or intended shipments to any toy discounter.
4. Respondent shall not directly or indirectly facilitate or attempt to facilitate agreements or understandings between or among suppliers relating to limiting the sale of toys and related products to any toy discounter(s) by, among other things, transmitting or conveying complaints, intentions, plans, actions, or other similar information from one supplier to another supplier relating to sales to such toy discounter(s).
5. For a period of five years, Respondent shall not (1) announce or communicate that respondent will or may discontinue purchasing or refuse to purchase toys and related products from any supplier because that supplier intends to sell or sells toys to any toy discounter; or (2) refuse to purchase toys and related products from a supplier because, in whole or in part, that supplier offered to sell or sold toys and related products to any toy discounter.
6. Respondent shall mail to each of its suppliers and employees who have purchasing responsibilities a copy of the Commission's complaint and order in this matter, along with a letter from respondent's chief executive officer stating that its suppliers can sell whatever products they wish to any toy discounter, and that respondent will not take any adverse action for selling such products to any toy discounter.
7. Respondent shall take such other measures that are appropriate to correct or remedy, or prevent the recurrence of, the anticompetitive practices engaged in by respondent.
WHEREFORE, THE PREMISES CONSIDERED, the Federal Trade Commission on this twenty-second day of May, 1996, issues its complaint against said respondent.
By the Commission, Commissioner Azcuenaga and Commissioner Starek dissenting.
Donald S. Clark
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