Toys" R" US, Inc. v. RH MacY & Co., Inc.

Citations: 728 F. Supp. 230; 1990 U.S. Dist. LEXIS 85; 1990 WL 1541Docket: 88 Civ. 0241 (TPG)

Court: District Court, S.D. New York; January 8, 1990; Federal District Court

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The case involves Toys "R" Us, Inc. (plaintiff) suing R.H. Macy Co., Inc. (defendant) under Section 1 of the Sherman Act, alleging conspiracy to suppress competition in the children's swimwear market. Specifically, the plaintiff claims that Macy colluded with swimwear manufacturers to prevent sales to its discount chain, Kids "R" Us, thereby engaging in price-fixing and a boycott against the plaintiff. Macy moved for summary judgment, asserting that the Sherman Act claims should be dismissed, and consequently, the state law claims should also be dismissed due to lack of jurisdiction. The court granted Macy's motion entirely.

The plaintiff's allegations are detailed across four counts in the amended complaint. Count I claims Macy's actions constituted a conspiracy to fix or maintain retail prices in children's swimwear. Count II describes these actions as a boycott aimed at eliminating price competition with Kids "R" Us. The plaintiff's argument is based solely on per se violations of the Sherman Act, without resorting to a "rule-of-reason" analysis. Additionally, a third theory presented in opposition to the summary judgment motion suggests Macy instigated vertical price-fixing or, alternatively, created vertical non-price restraints that reduced both intra- and interbrand competition.

The facts, established through extensive discovery, reveal that Kids "R" Us operates over 100 stores and generates significant revenue by offering discounts on children's clothing. Macy, particularly its New Jersey subsidiary, competes in the same market, traditionally marking items at keystone prices but adopting a pricing policy in 1986 to match competitors' prices for children's wear. The case highlights discussions between Kids "R" Us and swimwear manufacturers regarding merchandise for the 1988 season, which are central to the plaintiff’s claims.

Ross expressed hesitance regarding a deal with Little Dippers, particularly in relation to a discount retailer. In early fall 1987, Kids placed a phone order for swimwear with Backflips and sent a written purchase order to Little Dippers. Although the specifics of Little Dippers' response are unclear, it is assumed they accepted the order for the purpose of this motion. Harold Platt, Macy's children's swimwear buyer, learned of Kids' potential transactions with Backflips and Little Dippers and contacted both to discuss their intentions to sell to Kids. Platt emphasized Macy's historical purchasing volume from these companies and warned that selling to Kids could lead to Macy reducing or ceasing orders. He was concerned that if Backflips and Little Dippers sold to Kids at a discount, Macy would have to lower its prices, affecting profitability.

By mid-November 1987, Backflips and Little Dippers informed Kids that they would not sell their primary line of swimwear to them, citing pressures from Macy and other full-price retailers. Yelin initially provided a false excuse, but later confirmed that the refusal was due to Macy's complaints. Despite references to complaints from other retailers, no evidence substantiates that these complaints influenced the decision beyond Macy's. It is assumed that Macy's protest was the primary reason for the refusal to sell to Kids.

Both companies offered lower-quality swimwear to Kids, which Kids initially rejected but later accepted after Yelin sought and obtained Platt's permission. In late November 1987, Macy placed significantly larger orders with both Backflips and Little Dippers for the following year. Despite their friendship, Yelin and Ross independently informed each other of their dealings with Macy, and there is no evidence of a collusive agreement between Backflips and Little Dippers to avoid selling to Kids; both acted independently under Macy's pressure. Additionally, Catalina, another manufacturer, declined to sell to Kids, but there is no evidence that this decision was influenced by Macy. The court finds no evidence of a price-fixing agreement involving any retailer other than Macy.

No evidence indicates that other retailers agreed to the "keystone prices" Macy aimed to protect. Backflips and Little Dippers sold their merchandise to discount retailer Marshall's for the 1988 season, and the primary claim of price fixing relates solely to Macy's own pricing practices. The plaintiff suggests that limited availability of certain swimwear led to fewer retailers carrying it, but fails to provide supporting evidence. The record shows no agreement between Macy and the manufacturers on retail pricing; Macy independently determined its prices without commitments to Backflips or Little Dippers. 

This lawsuit began on January 14, 1988, with extensive discovery in 1988 and early 1989, followed by Macy's summary judgment motion in May 1989, concerning events from the fall of 1987. Summary judgment requires showing no genuine issue of material fact exists and entitlement to judgment as a matter of law. Recent Supreme Court cases, Monsanto Co. v. Spray-Rite Service Corp. and Business Electronics Corp. v. Sharp Electronics Corp., are pivotal to this case, with differing interpretations from both parties. The Monsanto case involved a distributor terminated after complaints about its pricing, leading to a Sherman Act claim. The Supreme Court ruled that such complaints alone do not suffice to establish a price-fixing conspiracy under Sherman Act, emphasizing the need for a clear contractual or conspiratorial agreement.

The Supreme Court established that evidence must demonstrate a conscious commitment to a common scheme aimed at achieving an unlawful objective, rather than merely relying on complaints. In the Monsanto case, sufficient evidence indicated that Monsanto and its distributors conspired to maintain resale prices and suppress price-cutting. Key evidence included communications where Monsanto warned distributors about supply limitations if they did not adhere to suggested prices, along with distributor newsletters promoting price compliance. This showed a clear agreement among distributors and retailers to maintain pricing. Conversely, in the current case, while agreements between Macy and certain distributors to deny merchandise to Kids were suggested, there was no evidence of a collective price-setting agreement among distributors or manufacturers. The Supreme Court's ruling in Business Electronics v. Sharp clarified that an agreement to terminate a dealer due to price competition does not, by itself, constitute a per se violation of the Sherman Act without a price-fixing agreement.

The Fifth Circuit reversed and remanded for a new trial, emphasizing that liability under the Sherman Act requires an express or implied agreement to set resale prices. In both the Fifth Circuit and the Supreme Court cases, the plaintiff sought recovery solely based on a per se violation of the Sherman Act, without a rule-of-reason analysis. The Supreme Court clarified that vertical price restraints are illegal per se only if there is an agreement on prices or price levels. An agreement to terminate a price-cutting dealer does not constitute price-fixing unless further agreements on pricing exist. The Court dismissed the notion of per se illegality for group boycotts against price-cutting dealers, as such cases typically involve horizontal combinations, unlike the vertical combination in Sharp. 

The Sharp ruling precludes the plaintiff from prevailing in the current case, despite factual distinctions such as the parties involved and the nature of trade. Both cases involve vertical combinations, where restraints, if any, are imposed by manufacturers on price-cutting retailers. As per Sharp, there cannot be per se Sherman Act liability for vertical combinations without evidence of a price-setting agreement. Additionally, while the instigator in both cases was a large dealer pressuring manufacturers to terminate a rival, the Supreme Court's policy discussions focused on manufacturers' rights to control distribution, which do not apply to the current case against the dealer. Thus, the policy justifications from Sharp are irrelevant to the actions of the dealer in the present case.

The court determines that the precedent set in Sharp is applicable to the current case, necessitating the dismissal of the plaintiff's Sherman Act claims. Although there was communication between manufacturers Backflips and Little Dippers, the court finds that Macy was the primary initiator of pressure on both companies. Despite the exchange of information between Backflips and Little Dippers regarding their reactions to Macy, there is no evidence of any agreement or conspiracy between them. Consequently, the Sharp ruling invalidates the price-fixing claim in Count I and the boycott claim in Count II of the amended complaint. Additionally, Sharp negates the plaintiff's argument for Macy's per se liability concerning a nonprice vertical restraint based on its speculated impact on competition. As a result, the court grants summary judgment to dismiss the Sherman Act claims, leading to the conclusion that there is no basis to maintain jurisdiction over the state claims, and the entire action is dismissed.