In the United States Court of Appeals For the Seventh Circuit No 98 4107 Toys R Us Inc Petitioner Appellant v Federal Trade Commission Respondent Appellee On Petition for Review from a Decision of the Federal Trade Commission Docket No 9278 Argued May 18 1999 Decided August 1 2000 Before Coffey Kanne and Diane P Wood Circuit Judges Diane P Wood Circuit Judge The antitrust laws which aim to preserve and protect competition in economically sensible markets have long drawn a sharp distinction between contractual restrictions that occur up and down a distribution chain so called vertical restraints and restrictions that come about as a result of agreements among competitors or horizontal restraints Sometimes however it can be hard as a matter of fact to be sure what kind of agreement is at issue This was the problem facing the Federal Trade Commission the Commission when it brought under its antitrust microscope the large toy retailer Toys R Us more properly Toys R Us but to avoid debate we will abbreviate the company s name as TRU in keeping with the parties usage The Commission concluded upon an extensive administrative record that TRU had acted as the coordinator of a horizontal agreement among a number of toy manufacturers The agreements took the form of a network of vertical agreements between TRU and the individual manufacturers in each of which the manufacturer promised to restrict the distribution of its products to low priced warehouse club stores on the condition that other manufacturers would do the same This practice the Commission found violated sec 5 of the Federal Trade Commission Act 15 U S C sec 45 It also found that TRU had entered into a series of vertical agreements that flunked scrutiny under antitrust s rule of reason TRU appealed that decision to us It attacks both the sufficiency of the evidence supporting the Commission s conclusions and the scope of the Commission s remedial order It is hard to prevail on either type of challenge the former is fact intensive and faces the hurdle of the substantial evidence standard of review while the latter calls into question the Commission s exercise of its discretion to remedy an established violation of the law We conclude that while reasonable people could differ on the facts in this voluminous record the Commission s decisions pass muster and we therefore affirm I TRU is a giant in the toy retailing industry The Commission found that it sells approximately 20 of all the toys sold in the United States and that in some metropolitan areas its share of toy sales ranges between 35 and 49 The variety of toys it sells is staggering over the course of a year it offers about 11 000 individual toy items far more than any of its competitors As one might suspect from these figures alone TRU is a critical outlet for toy manufac turers It buys about 30 of the large traditional toy companies total output and it is usually their most important customer According to evidence before the Commission s administrative law judge or ALJ even a company as large as Hasbro felt that it could not find other retailers to replace TRU and Hasbro along with Mattel is one of the two largest toy manufacturers in the country accounting for approximately 12 of the market for traditional toys and 10 of a market that includes video games Similar opinions were offered by Mattel and smaller manufacturers Toys are sold in a number of different kinds of stores At the high end are traditional toy stores and department stores both of which typically sell toys for 40 to 50 above their cost Next are the specialized discount stores a category virtually monopolized by TRU today that sell at an average 30 mark up General discounters like Wal Mart K Mart and Target are next with a 22 mark up and last are the stores that are the focus of this case the warehouse clubs like Costco and Pace The clubs sell toys at a slender mark up of 9 or so The toys customers seek in all these stores are highly differentiated products The little girl who wants Malibu Barbie is not likely to be satisfied with My First Barbie and she certainly does not want Ken or Skipper The boy who has his heart set on a figure of Anakin Skywalker will be disappointed if he receives Jar Jar Binks or a truck or a baseball bat instead Toy retailers naturally want to have available for their customers the season s hottest items because toys are also a very faddish product as those old enough to recall the mania over Cabbage Patch kids or Tickle Me Elmo dolls will attest What happened in this case according to the Commission was fairly simple For a long time TRU had enjoyed a strong position at the low price end for toy sales because its only competition came from traditional toy stores who could not or did not wish to meet its prices or from general discounters like Wal Mart or K Mart which could not offer anything like the variety of items TRU had and whose prices were not too far off TRU s mark The advent of the warehouse clubs changed all that They were a retail innovation of the late 1970s the first one opened in 1976 and by 1992 there were some 600 individual club stores around the country Rather than earning all of their money from their mark up on products the clubs sell only to their members and they charge a modest annual membership fee often about 30 As the word warehouse in the name suggests the clubs emphasize price competition over service amenities Nevertheless the Commission found that the clubs seek to offer name brand merchandise including toys During the late 1980s and early 1990s warehouse clubs selected and purchased from the toy manufacturers full array of products just like everyone else In some instances they bought specialized packs assembled for the club trade but they normally preferred stocking conventional products so that their customers could readily compare the price of an item at the club against the price of the same item at a competing store To the extent this strategy was successful however TRU did not welcome it By 1989 its senior executives were concerned that the clubs were a threat to TRU s low price image and more importantly to its profits A little legwork revealed that as of that year the clubs carried approximately 120 240 items in direct competition with TRU priced as much as 25 to 30 below TRU s own price levels TRU put its President of Merchandising a Mr Goddu to work to see what could be done The response Goddu and other TRU executives formulated to beat
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