U.S. FTC modifies 1998 order against Toys “R” Us based on market changes brought about by e-commerce

By Gabriele Accardo

On 15 April 2014 the U.S. Federal Trade Commission approved a petition submitted by Toys “R” Us (“TRU”) to reopen and modify an order issued in 1998, which required TRU to refrain from certain actions in connection with its suppliers.

TRU claimed that the growth of Walmart and Target and the emergence of online retailers such as Amazon.com reshaped competition among purchasers and sellers of toys, so that such a change in the circumstances justified the modification of the 1998 order.

Yet, TRU did not seek to modify or set aside the final order’s core prohibition on facilitating or attempting to facilitate unlawful collusion, but “merely” to engage in procompetitive (or neutral) vertical conduct that could allow it to compete more effectively.

In fact, in 1996, the FTC took issue with TRU’s series of agreements with major toy manufacturers which sought to prevent the toy manufacturers from selling to club stores the same products they sold to TRU. The FTC complaint also alleged that TRU facilitated agreements among the toy manufacturers to the same end. Ultimately, the FTC found that TRU had used its significant market power to orchestrate a “hub and spoke” conspiracy among its suppliers to restrict the supply of toys to certain warehouse clubs that would otherwise have competed against TRU. This was affirmed by the Seventh Circuit, Toys ‘R’ Us, Inc. v. FTC, 221 F.3d 928 (7th Cir. 2000). The horizontal agreement among the toy manufacturers amounted to a violation of Section 1 of the Sherman Act both on a per se and a rule of reason analysis, whereas the vertical agreements between TRU and its suppliers further violated Section 1 of the Sherman Act on a rule of reason analysis.

The FTC concluded that TRU has met its burden in showing that changed conditions of fact justify modifying the order in the ways requested in the petition.

In particular, while the finding that the vertical agreements were anticompetitive was based on a rule of reason analysis that found that TRU had market power as a buyer and distributor of toys, the FTC held that TRU’s petition has demonstrated that it no longer has market power as a buyer of toys. In fact, Walmart and Target have overtaken TRU in competitive strength and market share across product categories. In 2013, Walmart was the market leader. In addition, Target operates twice as many locations as TRU, while Walmart has four times as many. Interestingly, the FTC also took into account the fact that online sales, as a proportion of total toy sales, have almost tripled between 2002 and 2012.

Accordingly, the FTC modified the 1998 final order to set aside the provisions in Section II that restricted TRU’s ability to enter into certain conditional supply relationships. In particular, Section II addressed the violation concerning the vertical agreements TRU entered into to prevent its suppliers from selling toys to club stores, and contained broad fencing-in relief, notably:

  • Paragraph II.A. required TRU to cease and desist from “continuing, maintaining, entering into, and 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”;
  • Paragraph II.B. required TRU to cease and desist from “urging, inducing, coercing, or pressuring, or attempting to urge, induce, coerce, or pressure, any supplier to limit supply or to refuse to sell toys and related products to any toy discounter”;
  • Paragraph II.C. required TRU to cease and desist from “requiring, soliciting, requesting or encouraging any supplier to furnish information to respondent relating to any supplier’s sales or actual or intended shipments to any toy discounter”.

The order’s core prohibition, i.e. the prohibition against facilitating, or attempting to facilitate, unlawful collusion, remains in force.