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McDonough v. Toys "R" US

July 15, 2009

CAROL MCDONOUGH, ET AL., PLAINTIFFS
v.
TOYS "R" US, INC., ET AL., DEFENDANTS



The opinion of the court was delivered by: Anita B. Brody, J.

MEMORANDUM

Over the past decade, the retail chain Babies "R" Us, Inc. ("BRU"), has become a fixture in the lives of new parents across the United States. Although it dominates the retail market for baby products, recently BRU began facing stiff competition from internet retailers offering steep discounts. This case concerns whether BRU responded by conspiring with baby-product manufacturers to restrict competition in violation of federal antitrust law.*fn1 BRU allegedly coerced manufacturers into adopting vertical price restraints-policies designed to prevent retail discounting-that would insulate BRU from price competition. The plaintiffs are consumers who paid allegedly inflated prices at BRU for certain baby products.*fn2 They moved for class certification under Federal Rule of Civil Procedure 23(b)(3).

Two watershed decisions issued after this case was filed are important here. The first was Leegin Creative Leather Products, Inc. v. PSKS, Inc., 127 S.Ct. 2705 (2007), where the Supreme Court declared that vertical price restraints are not per se illegal anymore but instead are evaluated under the rule of reason, overruling Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911). Although finding that "vertical agreements setting minimum resale prices can have procompetitive justifications," Leegin, 127 S.Ct. at 2716, the Court stated that lower courts must "be diligent in eliminating their anticompetitive uses from the market," id. at 2719. Relevant to the case before me, the Supreme Court warned:

A dominant retailer, for example, might request resale price maintenance to forestall innovation in distribution that decreases costs. A manufacturer might consider it has little choice but to accommodate the retailer's demands for vertical price restraints if the manufacturer believes it needs access to the retailer's distribution network.

Id. at 2717. When thus coerced, the Court explained, "the manufacturer does not establish the practice to stimulate services or to promote its brand," id., but instead "supports a dominant, inefficient retailer," id. at 2719. The Court then cited Toys "R" Us, Inc. v. FTC, where the Seventh Circuit upheld findings that Toys "R" Us, Inc.-the parent company of BRU-coerced toy manufacturers into implementing vertical restraints to hinder competition from warehouse clubs like Costco, BJ's, and Sam's Club. 221 F.3d at 930-33.

The second decision was In re Hydrogen Peroxide Antitrust Litig., 552 F.3d 305 (3d Cir. 2008), where the Third Circuit clarified the legal standard for class certification. In that case, the district court failed to resolve significant disputes between expert witnesses and granted certification based on only threshold showings under Rule 23. Although this was common practice at the time, the Third Circuit declared that Rule 23 requires much more rigorous analysis. Now courts must "consider carefully all relevant evidence and make a definitive determination that the requirements of Rule 23 have been met before certifying a class," id. at 320, and "resolve all factual or legal disputes relevant to class certification, even if they overlap with the merits," id. at 307.

In re Hydrogen Peroxide was a private antitrust action similar to this case. The Third Circuit found that class certification may have been improper because the defendants had offered expert testimony and empirical evidence poking holes in the plaintiffs' argument under the predominance requirement of Rule 23(b)(3). The court then remanded the case for another certification decision. In re Hydrogen Peroxide thus teaches that a defendant may successfully challenge class certification by using evidence to undermine the plaintiffs' case under Rule 23, and a district court must consider this when deciding class certification. In the case before me, both sides offered expert testimony and other evidence related mostly to the predominance requirement. Following over two days of hearings and having resolved their disputes and analyzed all relevant evidence, I conclude that the plaintiffs have carried their burden under Rule 23. Therefore, I will grant the motion for class certification.

I. BACKGROUND*fn3

During the early 1990s, small specialty stores dominated the U.S. retail market for baby products. Hoping to capture this market, retail giant Toys "R" Us, Inc., created BRU and opened several stores in 1996.*fn4 Unlike small specialty stores, BRU carries many brands and all types of baby products at one location. BRU gained 76 more stores when it purchased Baby Super Stores in 1997. It opened an online shop in 1998. And from 1998 to 2007, BRU opened about 18 new stores per year. Now BRU has over 260 stores across the country. By contrast, between 1996 and 2002, small specialty stores dwindled from 2,700 to 600. BRU thus became the dominant retailer of baby products.

BRU soon faced stiff competition, however, from a new form of product distribution. "E-commerce," whereby commercial transactions are conducted electronically over the internet, became widespread during the late 1990s and transformed the baby-products industry. Without the operating costs associated with brick-and-mortar stores, internet retailers can offer huge discounts that other retailers cannot match. By consequence, BRU began facing tough price competition from internet retailers.

This case concerns how BRU responded to this competition. The plaintiffs offered evidence that BRU coerced manufacturers of baby products into preventing internet retailers from offering discounts. Specifically, BRU would threaten not to carry products unless their manufacturer agreed to prevent internet retailers from discounting them. Manufacturers were forced to acquiesce because industry-dominant BRU had become their most prized customer.

Manufacturers used various methods to prevent internet discounting. These include implementing various "distribution policies," which are policies governing how retailers may distribute products. One was resale price maintenance, i.e., vertical price restraint. This type of policy specifies a manufacturer-suggested retail price ("MSRP") for a product and prohibits retailers from discounting too far below that price. Another type of policy used was to regulate who could carry a product, e.g., banning internet-only retailers. Whatever method manufacturers used, the result benefitted BRU (with protected high margins) but harmed internet retailers (without ability to discount), manufacturers (with fewer total sales), and consumers (with higher prices).

BRU conspired with numerous manufacturers, including the defendants Britax Child Safety, Inc. ("Britax"); Kids Line, LLC. ("Kidsline"); Maclaren USA, Inc. ("Maclaren"); Medela, Inc. ("Medela"); Peg Perego USA, Inc. ("Peg-Perego"); and BabyBjörn, AB ("BabyBjörn"), which supplied U.S. retailers through the defendant Regal Lager, Inc. ("Regal Lager"). They make assorted products-including baby carriers, car seats, bedding, strollers, and breast pumps-and are considered market leaders. The thirteen consumers who brought this action are Stephanie Bozzo, Amy Grogan, Erin Hall, Julie Lindemann, Carol McDonough, Lawrence McNally, Melissa Nuttall, Sarah Otazo, Evelia Ragsdale, Sara Shuck, Jennifer Sullivan, Darcy Trzupek, and Yossi Zarfati. They complain that BRU conspired with other defendants to restrict competition from internet discounting and then charged consumers higher prices. These conspiracies are examined one by one below.

A. BabyBjörn and Regal Lager

Founded in Sweden in 1961, BabyBjörn has become famous for making baby carriers-devices to carry a child in a pouch secured on one's chest. Various models are available, including the BabyBjörn Baby Carrier, BabyBjörn Carrier XL, BabyBjörn Carrier Brown Leather, and BabyBjörn Carrier Active. From 1991 to 2005, Regal Lager was responsible for supplying BabyBjörn carriers to the U.S. market. It also became BabyBjörn's agent in early 1999. BabyBjörn replaced Regal Lager with another supplier Baby Swede LLC ("BabySwede") in April 2005.

From 1991 to 2000, BabyBjörn carriers were sold mainly by small specialty stores. Regal Lager and BabyBjörn began negotiating with BRU in March 1999. During the negotiations, BRU demanded protection from internet discounting and proposed a distribution policy to accomplish this.*fn5 Regal Lager and BabyBjörn agreed to BRU's demand. Accordingly, Regal Lager implemented the mentioned policy effective February 1, 2000. BRU's first order was placed the very next day. Pursuant to the conspiracy, Regal Lager and BabyBjörn vigorously enforced resale price maintenance against internet retailers, gave BRU preferential treatment, and stopped opening internet accounts. During this period, BRU accounted for most of Regal Lager's business. Its founder Bengt Lager said about BRU: "It's hard to say no when they have over 50% of our business!" (Pl.'s Ex. 20.)

Lindemann, Ragsdale, Hall, Nuttall, Shuck, McNally, Grogan, and Bozzo purchased BabyBjörn carriers from BRU and complain of paying higher prices because competition was unlawfully restricted. In the motion before me, they request certification for a subclass defined to include: "All persons who purchased any baby carrier manufactured by BabyBjörn and distributed by Regal Lager from Babies 'R' Us for the period February 2, 2000 to April 30, 2005." (Pl.'s Statement of Proposed Class Definitions 1 [hereinafter Pl.'s Definitions].)

B. Britax

Britax has become famous for making car seats that are extremely safe and highly rated by Consumer Reports. Nine models are available in various fabrics. The most popular ones are the Marathon and the Roundabout. Britax also makes two models of strollers.

Britax originally had a distribution policy unrelated to retail discounting. Britax then began selling to BRU in October 1998. Although initially retail pricing remained unregulated, matters changed in 1999 when BRU became concerned about internet discounting. BRU demanded that Britax stop internet retailers from discounting its products. Britax agreed and created a new distribution policy after consultation with BRU. Effective July 2000, this policy regulated pricing and prohibited internet-only retailers from selling the Roundabout. Pursuant to the conspiracy, Britax enforced resale price maintenance against internet retailers and assured BRU: "We . are doing what we 'legally' can do to ensure MSRP harmony in the marketplace." (Pl.'s Ex. 32.)

Britax later created another distribution policy to further protect BRU. Effective July 2005, this policy barred internet retailers from discounting any Britax product. Britax admitted that the new policy "has had a positive influence on sales to BRU and will continue to do so if we are able to maintain the policy" because it "allows BRU to directly benefit from consumers no longer finding discounted Britax products on the Internet." (Pl.'s Ex. 120.) Nuttall bought a Britax car seat from BRU in 2002 and complains of paying a higher price because competition was unlawfully restricted. She requests certification for a subclass defined to include: "All persons who purchased any car seat or stroller manufactured by Britax from Babies 'R' Us for the period January 1, 1999 to the present." (Pl.'s Definitions 1.)

C. Kidsline

Founded in 1987, Kidsline has become a leading manufacturer of baby bedding and accessories. This includes quilts, mobiles, hanging decorations, laundry hampers, and other items for children's bedrooms. Kidsline's most popular products are four- and six-piece bedding sets. Each includes a quilt, crib bumper, fitted sheet, and dust ruffle. Six-piece sets also include a window decoration and diaper stacker.

Kidsline began selling to BRU's predecessor Baby Super Stores in 1992 and continued when BRU acquired Baby Super Stores in 1997. BRU became concerned about internet discounting in 1999 and demanded that Kidsline protect BRU. When Kidsline complied, BRU began dictating how Kidsline treated retailers. Pursuant to the conspiracy, Kidsline enforced resale price maintenance against internet retailers, gave BRU preferential treatment, compensated BRU for others' discounting, and stopped opening internet accounts starting in 2001. Furthermore, BRU suggested a distribution policy that Kidsline implemented in October 2004. Kidsline revised the policy in February 2005 after consultation with BRU. Around this time, Kidsline's chief financial officer Charles Ginn told an internet retailer that discounting was prohibited because of BRU and commented: "[D]o you actually think that I'm going to make a decision between a very important customer and an important customer? The very important customer wins every time." (Kiefer Dep. 248:18-22, Nov. 21, 2008.)

Sullivan bought Kidsline sheets from BRU and complains of paying a higher price because competition was unlawfully restricted. She requests certification for a subclass defined to include: "All persons who purchased any four or six-piece bedding sets manufactured by Kids Line from Babies 'R' Us for the period January 1, 1999 to the present." (Pl.'s Definitions 1.)

D. Maclaren

Owen Maclaren, a retired aeronautical engineer, invented a stroller called the "B-1 buggy" in 1965. He enjoyed quick success because, unlike cumbersome prams then available, his buggy conveniently folded like an umbrella. Since then, his company Maclaren has become famous for making compact, lightweight "umbrella" strollers like the original B-1 buggy. Eleven stroller models are now available, but the best-selling are the Quest and Triumph. Maclaren also makes baby carriers, rockers, and other related products.

BRU began selling Maclaren strollers at four stores in October 1999. At that time, BRU demanded that Maclaren stop internet discounting and refused to carry Maclaren strollers nationwide unless retail pricing was regulated. Maclaren complied with BRU's demand. Pursuant to the conspiracy, BRU proposed a distribution policy that Maclaren implemented in March 2000. Maclaren also vigorously enforced resale price maintenance against internet retailers and gave BRU preferential treatment. Around this time, Maclaren admitted losing business to "meet BRU margin requirements" (Pl.'s Ex. 19) and said that Maclaren had "made BRU the most competitive Retailer in the country" (Pl.'s Ex. 84).

Zarfati bought a Maclaren stroller from BRU and complains of paying a higher price because competition was unlawfully restricted. He requests certification for a subclass defined to include: "All persons who purchased any stroller manufactured by Maclaren from Babies 'R' Us for the period October 1, 1999 to the present." (Pl.'s Definitions 2.)

E. Medela

Medela has become famous for making breast pumps and accessories. There are three categories: hospital-grade electric pumps, consumer-grade electronic pumps (intended for one person), and manual pumps. Medela's business initially focused on renting hospital-grade electric pumps. But in 1996, Medela launched a consumer-grade electronic breast pump called the Pump In Style ("PNS") that soon became a major success. Now various models are available-the Original, Traveler, Companion, and Advanced.

Beginning in 1996, Medela had a distribution policy for the PNS Original. But this policy was rarely enforced until October 1999, when Medela began negotiating with BRU. At that time, BRU's president made a suprise visit to Medela's office. During this meeting, Medela agreed to protect BRU from internet discounting, committed to begin enforcing resale price maintenance, and gave BRU the names of internet retailers to monitor. BRU thereafter controlled Medela's decisions about internet accounts and retail pricing.

BRU began selling the PNS Original in July 2000 and quickly became Medela's biggest account. That same year, Medela launched the PNS Traveler and PNS Companion along with distribution policies covering them. But in 2002, growing concerned about BRU's dominance, Medela relaxed these policies and suspended the distribution policy for the PNS Original. Soon after, BRU warned Medela that internet retailers were discounting again. To send a message, BRU canceled all orders on May 6, 2002. In response, Medela called a meeting where BRU withdrew its cancellation and Medela agreed once again to stop internet discounting.

Pursuant to this meeting, Medela terminated 17 internet accounts in July 2002 and admitted: "We discontinued internet sellers to protect BRU's business and margin and therefore accepted considerable legal risk." (Pl.'s Ex. 80.) Furthermore, Medela developed new distribution policies for the PNS Original and PNS Traveler. Effective July 2003, these policies barred retailers unless they conducted more than 50% of their business through brick-and-mortar stores. Medela explained to BRU: "This plan will not effect [sic], but instead benefit BRU.com." (Pl.'s Ex. 42.) Medela launched the PNS Advanced in late 2003 under the same policy.

Bozzo and Trzupek bought PNS breast pumps from BRU and complain of paying higher prices because competition was unlawfully restricted. They request certification for a subclass defined to include: "All persons who purchased any Pump In Style breast pump manufactured by Medela from Babies 'R' Us for the period July 1, 1999 to the present." (Pl.'s Definitions 2.)

F. Peg-Perego

Peg-Perego distinguishes itself by making designer baby products that reflect Italian fashion. Several stroller models are available, including the Olympic, Milano, Aria, Pliko, and Skate. Other significant products are the Prima Pappa high chair and Primo Viaggio car seat.

Peg-Perego began selling to BRU in 1996 and also sold to Baby Super Stores. BRU then became Peg-Perego's biggest account upon acquiring Baby Super Stores in 1997. In 1999, BRU became concerned about internet retailers and demanded that Peg-Perego prevent them from discounting. Peg-Perego agreed and in May 1999 implemented a distribution policy that BRU requested. Later, this policy was revised to require internet retailers to prove that they were not discounting. From that time on, Peg-Perego enforced resale price maintenance against internet retailers to protect BRU.

Bozzo, McDonough, McNally, Otazo, and Shuck bought Peg-Perego strollers and other products from BRU and complain of paying higher prices because competition was unlawfully restricted. They request certification for a subclass defined to include: "All persons who purchased any car seat, high chair, or stroller manufactured by Peg Perego from Babies 'R' Us for the period July 1, 1999 to the present." (Pl.'s Definitions 2.)

II. LEGAL STANDARD

Subsection (a) of Fed. R. Civ. Pro. 23 specifies four prerequisites for a class action. They are called numerosity, commonality, typicality, and adequacy. Subsection (b) specifies additional requirements for each type of class action. For certification under (b)(3), the moving party must show "that the questions of law or fact common to class members predominate over any questions affecting only individual members," and "that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy." Fed. R. Civ. Pro. 23(b)(3). These requirements are called predominance and superiority.

In the recent case In re Hydrogen Peroxide, the Third Circuit clarified the standard of review for assessing motions for class certification. The court said that deciding class certification "requires rigorous consideration of all the evidence and arguments offered by the parties." 553 F.3d at 321. A district court must "consider carefully all relevant evidence and make a definitive determination that the requirements of Rule 23 have been met before certifying a class." Id. at 320. "A party's assurance to the court that it intends or plans to meet the requirements is insufficient." Id. at 318. Furthermore, "the court must resolve all factual or legal disputes relevant to class certification, even if they overlap with the merits." Id. at 307. And "[f]actual determinations necessary to make Rule 23 findings must be made by a preponderance of the evidence." Id. at 320. Finally, "[w]eighing conflicting expert testimony at the certification stage is not only permissible; it may be integral to the rigorous analysis Rule 23 demands." Id. at 323. "[A] district court may find it unnecessary to consider certain expert opinion with respect to a certification requirement, but it may not decline to resolve a genuine legal or factual dispute" relevant to class certification. Id. at 324.

III. DISCUSSION

Below I consider "all the evidence and arguments offered by the parties" relevant to class certification. In re Hydrogen Peroxide, 553 F.3d at 321. Before I may address the Rule 23 requirements, however, certain preliminary matters must be resolved. The first concerns ...


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