A federal judge has refused to dismiss a pair of antitrust suits that accuse retail giant Babies R Us of conspiring with a group of manufacturers of "high-end" baby products to set minimum resale prices in order to squelch competition from Internet retailers.
The first suit was filed by two Internet retailers -- BabyAge and BabyClub -- which claim they were successfully competing with Babies R Us by undercutting its prices, but that their efforts to gain a foothold in the market were thwarted when Babies R Us persuaded the manufacturers to insist on minimum retail prices.
A second suit echoes those allegations on behalf of a proposed class of consumers who claim they have paid inflated prices for high-end baby products, including strollers, high chairs, breast pumps and car seats, that were subject to the minimum retail prices.
Named as defendants in both suits are Toys R Us Inc., the parent company of Babies R Us, and seven manufacturers: Britax Child Safety Inc.; Peg Perego USA Inc.; Medela Inc.; Maclaren USA Inc.; Kids Line; Regal Lager Inc.; and Baby Bjorn AB.
Ordinarily, consumers lack standing to sue manufacturers for antitrust violations because the U.S. Supreme Court held in Illinois Brick v. Illinois that only "direct purchasers" have standing to bring such claims.
But in her 22-page opinion in BabyAge.com Inc. v. Toys R Us Inc., U.S. District Judge Anita B. Brody found that Illinois Brick was no impediment to consumer standing "when the manufacturer was involved in an antitrust conspiracy with the retailer from whom the consumer directly purchased."
Brody also found that the plaintiffs in both cases had alleged a valid theory and had pleaded facts to back up their theories sufficient to survive a motion to dismiss.
Legally the ruling is a significant one because Brody was forced to assess the impact of two recent decisions from the U.S. Supreme Court: Bell Atlantic Corp. v. Twombly and Leegin Creative Leather Products Inc. v. PSKS Inc.
Defense lawyers argued that the pair of 2007 decisions from the high court effectively doomed the cases because the plaintiffs failed to satisfy the Twombly test for pleading antitrust claims and failed to grapple with the justices' discussion in Leegin of the potentially pro-competitive effects of minimum retail prices.
"Plaintiffs cannot survive a motion to dismiss simply by alleging behavior that Leegin describes as common, pro-competitive, and consistent with unilateral conduct," attorneys Margaret M. Zwisler, E. Marcellus Williamson, Alexander Maltas and Jason D. Cruise of Latham & Watkins in Washington, D.C., argued in a brief filed on behalf of all the defendants.
In response, the plaintiffs lawyers, led by Eric L. Cramer and Peter Kohn of Berger & Montague for the Internet retailers, and Eugene A. Spector and William G. Caldes of Spector Roseman & Kodroff for the proposed class of consumers, argued that the defense was misreading both cases.
In Twombly, the plaintiffs teams argued, the justices held that antitrust plaintiffs must allege more than merely "parallel" conduct that suggests the possibility of an illegal agreement if the same facts could also lead to the inference that the actions of each of the defendants were taken unilaterally and for their own economic interests.
The claims against Babies R Us easily satisfy the Twombly test, the plaintiffs argued, by explicitly alleging that a dominant retailer struck illegal agreements with a group of manufacturers to set minimum retail prices in order to deter competition from smaller retailers.
The plaintiffs argue that they have "direct evidence" of the conspiracy in the form of e-mails and memos that show Babies R Us was using its monopoly power to coerce the manufacturers to implement the minimum price policies.
According to the suits, Babies R Us made it clear to the manufacturers that it was not making "empty" threats by canceling all of its orders from one of the retailers when it failed to enforce a no-discounts policy on other retailers.
As a result, the plaintiffs' teams argued, the "dominance and market power" of Babies R Us "were met with trepidation" by each of the manufacturers because none of them could risk losing Babies R Us as a customer.
Both of the suits were amended to include specific allegations based on evidence of memos and e-mails that the plaintiffs obtained in discovery.
Because much of the discovery material was subject to a protective order, the plaintiffs filed the amended versions of the suits under seal. Also filed under seal were briefs from both the plaintiffs and defendants relating to the motions to dismiss.
But when The Legal Intelligencer objected, Brody ordered an unsealing of the amended complaints and all of the briefs relating to the dispositive motions. She also said she intends to unseal other pleadings unless the lawyers can persuade her that they should remain under seal.
Now Brody has ruled that both cases must proceed because the plaintiffs have satisfied both the Twombly and Leegin standards.
To survive a motion to dismiss, Brody said, an antitrust plaintiff can show "concerted conduct" by alleging "parallel conduct coupled with circumstances that tend to negate the possibility that [the defendants] acted independently."
Under Supreme Court and 3rd Circuit law, Brody said, the accepted "plus factors" used to satisfy that test include parallel conduct that was against a manufacturer's independent economic self-interest; proof that a dominant retailer "wielded sufficient influence" over each manufacturer to create a duress situation; and evidence that the dominant retailer threatened to retaliate against the manufacturers if each did not implement minimum resale prices, and that the manufacturers acquiesced.
Brody found that the plaintiffs had alleged all three plus factors.
"By pleading widely recognized plus factors, plaintiffs have alleged grounds suggesting a finding of concerted action between [Babies R Us] and each manufacturer," Brody wrote.
Both suits, Brody noted, allege that the minimum retail price policies were against each of the manufacturers' independent self-interest.
"This tends to suggest -- and is more than merely 'consistent with' -- the absence of unilateral action," Brody wrote.
The suits also allege that Babies R Us had "the retail power to make that threat meaningful," Brody said, by threatening any manufacturer that refused with termination.
"This also tends to suggest the absence of unilateral manufacturer conduct. Simply put, these assertions take the concerted action allegations beyond mere parallel conduct -- which, under Twombly, is insufficient because it is merely 'consistent with' concerted action -- and tend to negate other potential explanations for the striking parallelism," Brody wrote.
"Plaintiffs' overwhelming allegations of facts tending to negate the potential of unilateral conduct constitute enough 'heft' to raise the satisfaction of the concerted-action element of the claim above the speculative level," Brody wrote.
Zwisler, who argued the motion for all of the defendants, declined to comment on the ruling.
