Companies Claim Right to Interfere with eBay Auctions for Charging Too Little

by Greg Beck

I predicted here that companies would soon rely on the Supreme Court’s decision in Leegin Creative Leather Products v. PSKS to justify interfering with competition from less expensive products sold online. It did not take long for that prediction to come true. Although interference with eBay sales is nothing new (see here and here), companies in two recently filed federal cases explicitly invoke Leegin as a justification for terminating the eBay auctions of competitors that charge lower prices online. These cases not only show Leegin’s likely effect on Internet sales, but are also, unfortunately, fairly typical examples of the sort of anticompetitive actions companies take to fight lower-priced competition online.

In the first case, Merle Norman Cosmetics v. LaBarbera, No. 07-60811 (S.D. Fla.), Merle Norman Cosmetics filed suit against eBay seller Joyce LaBarbera for selling its makeup on eBay at a discount. The company had previously terminated a variety of eBay auctions by claiming that the sale of its makeup violated an unspecified FDA regulation. In this case, however, the company concedes that the eBay seller could rightfully resell the makeup on eBay if, as she claims, she purchased the makeup at a flea market. Merle Norman, however, suspects that the eBay seller is in fact buying the makeup from a salon that, pursuant to its contract with Merle Norman, has agreed not to sell anything on the Internet. Merle Norman says it demands these contracts so that purchasers can only buy the makeup at Merle Norman stores, with the guidance of "beauty consultants" who are "specially trained in proper hygienic practices." Of course, the contracts also help ensure that the products won't be available outside the stores at reduced prices.

Although Merle Norman does not claim that the eBay seller ever contracted with the company, it contends that the seller’s act of purchasing the makeup from a salon that had entered such an agreement  and then selling "at discount prices" on the Internet constituted unfair competition, interference with its contracts, and civil conspiracy (see complaint). In other words, the eBay seller, according to the company, is guilty of breaching somebody else’s contracts and unfairly competing by selling to consumers on the Internet at prices that are too low. In its brief in the district court, Merle Norman relies on Leegin, which had been decided just a few days earlier, in support of its right to “require dealers to charge certain resale prices to promote interbrand competition.” The company claims that “the law is well settled that manufacturers like [Merle Norman] have the right to control the manner of distribution of their products.” Although the district court denied the pro se defendant's motion for a preliminary injunction, the case is now on track for trial.

The second case is Colon v. Innovate! Technology, Inc., No. 07-21349 (S.D. Fla.).  Innovate! Technology (“ITI”) is a company that makes high-performance car parts. According to its brief in the district court (warning, large file), the company “sells its products only via authorized distributors and retailers” that “comply with ITI’s policy of Minimum Advertised Pricing.” The company views sales by unauthorized sellers (i.e., those who sell too cheaply) to be not only a violation of its minimum-price policy, but, surprisingly, as an infringement of its intellectual property rights. ITI’s eBay “About Me” page explains that the sale of its products by anyone but an authorized dealer constitutes patent and trademark infringement. Moreover, the company claims the right to prohibit all use of its copyrighted “technical data, photos, graphics, software, product literature, catalogues, product specifications, installation guides, user guides, promotional material and other types of information” without its permission. In other words, the company claims it is copyright infringement to read its user guides and manuals, browse its catalogs, or look at its pictures without its “express written permission.” Presumably, the company feels that selling its products at a reduced price, with the manuals included, also constitutes a prohibited “use.”

Osvaldo Izquierdo Colon is an eBay seller who purchases ITI’s car parts from an authorized wholesaler and resells them on eBay at a discount. When ITI found out about Colon’s sales, it invoked eBay’s VeRO program (an implementation of the Digital Millennium Copyright Act) to terminate Colon’s auctions. According to its notice of claimed infringement, ITI claimed a good faith belief that by selling its products on eBay without its permission, Colon was violating the company’s intellectual property rights. Pursuant to eBay’s policies, ITI’s claim of infringement led to automatic termination of Colon’s auctions and also put him at risk of losing his eBay account (and thus his livelihood) altogether. Colon attempted to contest the company’s claims with eBay, but after ITI once again terminated his auctions, he filed suit in federal district court for a declaratory judgment of non-infringement.

ITI responded with a motion to dismiss that, although mostly procedural, also cites Leegin for the principle that “manufacturers have the right to sell [their] products at the retail level at a minimum price.” The company invokes the same fears that led the Supreme Court in Leegin to buy into the argument that higher prices are good for consumers, arguing that, without its price-protection scheme, "ITI's authorized retailers could not compete with those unauthorized dealers selling well below [the Manufacturer's Suggested Retail Price] and ITI would go out of business." Of course, even assuming that ITI does have a right to impose minimum prices, it wouldn't explain why Colon’s sales of its products are unlawful, much less intellectual property infringement. But with Leegin in place, ITI seems to feel comfortable that its minimum-price policies will survive legal scrutiny.

Even with Leegin, the companies’ claims in these cases are pretty questionable. Leegin’s existence, however, has given companies pursuing these sorts of claims a new potential justification for interfering with online auctions and suing competitors that undercut their prices. These cases may be the first, but they will not be the last.

Comments

[Rick Sparks]

It amuses me when capitalists try to eradicate capitalism. Oh, the irony...

[Tiffany]

Your blog brings a lot of excellent information to public attention, but I think this post is slightly misleading. Although the companies may be motivated in part by pricing issues, neither of the cases described here is based on price restraints. In particular, the Merle Norman case, while its mention of the Leegin case in support of distribution restraints is ominous, is based on a blanket prohibition against internet sales by its vendors. Companies may, in fact, be TARGETING these sellers because they're charging too little, but neither is claiming the right to control the price at which an eBay seller sells.

[John C]

You have to wonder why ITI and Merle Norman's lawyers didn't read this ruling carefully before trying to use it in their cases.....

Reading the Leegin brief, it seems that it might apply to both of the cases mentioned above.... but not in the way either Merle Norman or ITI would hope....

Both LeBarbara and Colon could use Leegin as a defense of their own case, as they neither had a contract with the manufacturer nor bought the goods from the manufacturer.... Leegin Section IV B, "The text of the Consumer Goods Pricing Act did not codify the per se illegality for vertical price restraints. It rescinded statutory provisions that made them per se legal"

Specifically, the Majority Opinion mentions Congress repealing the McGuire Act -- which required adherence to pricing structures by everyone regardless of contract with the manufacturer.....

In this case, the companies might be doing exactly what the Court said Congress didn't allow anymore.

[Greg]

Tiffany, thanks for your comment. You are correct that Merle Norman claims the power to prohibit all sales on the Internet, regardless of price. However, it justifies this position by saying that store owners will have a difficult time competing with lower prices on the Internet. The company would have no need to clamp down on Internet sales that are priced the same as in-store products, because as its brief explains, "[Internet] buyers have little incentive to purchase products at or above prices they can obtain in Merle Norman studios."

As I mentioned in the post, the company also claims that it wants customers to purchase in the store to ensure that they have access to its trained "beauty consultants." This is exactly the situation that the Court in Leegin hypothesized to be procompetitive: eliminating cheaper prices on the Internet so that customers will have to subsidize greater levels of service in the store. I seriously question, however, whether customers will appreciate the requirement that they pay extra for this service.

As for ITI, it explicitly takes the position that selling below its minimum-price is a violation of its rights.

[Some Guy]

I know some of the main guys at Innovate -- Patrick (business) and Klaus (technical / development) and they are 2 of the nicest guys you could know.

Anyway, on the one hand I understand how hard it is for a small company to sell products and make any money. I've done it and it's damn hard.

But on the other hand, it's well-known and understood that with the internet, for better or worse, information spreads very very quickly. If the product is available for cheaper somewhere, that is to say somewhere reputable, eventually people will share this info and sales will gravitate there.

On the other hand, if a company tries to strong-arm a discount supplier (even if it's not an authorized dealer), the community will hear about it, and often will rebel or reject the product's company out of spite (in this case that would be Innovate.)

Hard to say what will happen here. I see both sides of the issue. The unpalatable but sometimes necessary step is for a company to ONLY sell directly to the consumer. Pros & cons there too.

Guess we'll have to see how this shakes out.

[Some Guy]

I know some of the main guys at Innovate -- Patrick (business) and Klaus (technical / development) and they are 2 of the nicest guys you could know.

Anyway, on the one hand I understand how hard it is for a small company to sell products and make any money. I've done it and it's damn hard.

But on the other hand, it's well-known and understood that with the internet, for better or worse, information spreads very very quickly. If the product is available for cheaper somewhere, that is to say somewhere reputable, eventually people will share this info and sales will gravitate there.

On the other hand, if a company tries to strong-arm a discount supplier (even if it's not an authorized dealer), the community will hear about it, and often will rebel or reject the product's company out of spite (in this case that would be Innovate.)

Hard to say what will happen here. I see both sides of the issue. The unpalatable but sometimes necessary step is for a company to ONLY sell directly to the consumer. Pros & cons there too.

Guess we'll have to see how this shakes out.

[tunequest]

Does the First Sale doctrine apply in either of these cases? Doesn't that allow people to do whatever they wish with a purchase once that purchase has been made? Assuming there's no binding contract between the two parties, of course?

[Bob]

IANAL, but I doubt that this strategy is going to last for too long - it seems patently frivolous. Random people on eBay aren't in privity with the initial manufacturers or distributors. Of course, this probably isn't going to stop companies from issuing take down notices on the "suspicion" that there "might" be a problem, but this seems like the kind of case that a first year law student would laugh out of court. Consumers are under no contractual obligation to respect prices, and so any such takedowns are ridiculous. I'd wonder if anyone whose auctions are taken down could file a suit against the person who filed the takedown claim for tortious interference.

[r3dn3ck]

I used to be a customer of Innovate Motorsports. No longer. This sort of MAP (minimum advertised price) BS is nothing short of legally sanctioned collusion between manufacturers and sellers. If I get your product at a low enough price that I can sell it for less than you, then it would seem to be your problem not mine right? Or more directly, would you be ok with every dairy farmer in the country being able to one day decide that they want 20 bucks a gallon and if you don't sell it for that they can have an injunction slapped on you? This is the core of everything that's wrong with capitalism.. which is strange cuz I like capitalism otherwise.

Innovate will certainly lose at least 1 customer from their mindless attempt to misuse intellectual property law. They just did.

[r3dn3ck]

I used to be a customer of Innovate Motorsports. No longer. This sort of MAP (minimum advertised price) BS is nothing short of legally sanctioned collusion between manufacturers and sellers. If I get your product at a low enough price that I can sell it for less than you, then it would seem to be your problem not mine right? Or more directly, would you be ok with every dairy farmer in the country being able to one day decide that they want 20 bucks a gallon and if you don't sell it for that they can have an injunction slapped on you? This is the core of everything that's wrong with capitalism.. which is strange cuz I like capitalism otherwise.

Innovate will certainly lose at least 1 customer from their mindless attempt to misuse intellectual property law. They just did.

[Steve Taylor]

How do Innovate actually "lose" anything if someone sells at less than the RRP ? Presumably it was sold on to whoever is selling it at a profit to Innovate ? The difference in price is the middleman's margin, and if he's crazy enough to cut it to the bone, well good luck to him.

Steve

[Mort]

So, if it is "not a good practice" to sell the products BELOW a certain $$ amount, how are these people buying these products at a lower $$ amount and how are they able to still mark up the price and make a living, AND STILL BE UNDER THE MSRP?
If it is possible to buy the products at a discounted price, then SOMEONE ELSE IS VIOLATING THE AGREEMENT...
What a bunch of MORONS...

[Brian]

I ran a software company until 2006 and had to use eBay's VeRO program a number of times.

I have no problem with eBay auctions of our product and I don't seek to control the street price.

What the article above fails to acknowledge is that many eBay sellers will rip-off the manufacturers marketing materials entirely in their eBay postings in order to make them look like a legitimate reseller. That's a clear violation of my IP and it has nothing to do with the price they are charging.

If you want to sell my product on eBay, either sign up with me as a reseller, or invest your own money in writing marketing copy, creating product graphics, logo design and images. If a seller thinks they can just steal these copyrighted materials from my website and post them in their auction with no repercussions, then they are both crooks and fools and they deserve to lose their eBay accounts.

It seems to me the Innovate! case mentioned above is a clear example of this, and they are well within their rights to take action against the eBay seller on those grounds.

[Steve Taylor]

Any way you look at it Brian, YOU, as the manufacturer have still made your money. Why whinge ? What you are seeing is capitalism working at its best.

Steve

[Richard]

I hope you stay on top of and continue to blog about this issue. How the courts interpret Leegin and the use there of is something I would like to continue to hear about.

[Richard]

I hope you stay on top of and continue to blog about this issue. How the courts interpret Leegin and the use there of is something I would like to continue to hear about.

[Kenny]

This is so riduculous on so many levels I dont even know where to start.

If a company sells its product to distributers... the company has agreed to sell at that price. Whatever happens after that...the original company probably wont see any of the money. The price changes from that original sale should be at the buyers discretion...I can understand this can help protect smaller businesses but really...this is crazy. Markup, greed, supply and demand should be the only factors, not the childish tantrum of the original company.

This is parallel to price-fixing and should be fought at all levels. How is Joe Public meant to sell anything if this becomes widespread?

Electrical goods for example are mutually exclusive. If I sell it, its not possible for me to still have it (as opposed to music or film) so theres no copyright issue. If we own something like that, that is (in my eyes) a licence to own it. If we are allowed to own it, should we not be allowed to sell it? Any money we make or lose again comes back to supply and demand.

This would force a reserve one very single auction.

I hate stuff like this :(

[Greg]

The fundamental idea that a manufacturer of any item with limited distribution has is to gain and keep dealers that work with them on an ongoing basis. They also seek to have the dealers well trained in the nature and features of the product and the way to use it properly. They also want after service for the goods if there is a problem to be done by the selling dealers as a way to satisfy the buyers. This applies to any type of product that is sold by limited distribution. Merle Norman are certainly like this, it seems. Many audio companies that make high end audio goods are like this and some makers of motorcycle accessories are like this. The prevailing argument against this in many sites is seen in some of the comments above: Let the price decide... or capitalism at its' best as one person writes.

Maybe, would be my reply.

Many specialty goods with limited distribution would be gone from the market if they allowed anyone to sell to the bidders in ebay against the normal dealer network they have in place. Manufacturers need dealers to help display the goods, showing them to as many folks as possible in a way that enhances the value of the product. The cost of doing business this way is higher than copying (ripping them off) photos and specifications directly off the makers web site as so many seem to do in ebay. If the normal dealers stop working with the makers then the maker is out of business. Ebay itself is not enough business to sustain a specialty maker of goods and many folks never shop in there at all. If the pricing in ebay forces the lowest common price down so far that no dealer will accept the products due to losing money with them then the maker loses dealers and loses business, possibly to the point of the destruction of the business.

Do you want diversity of products with cool features and innovative design? Do you hope to have someone there to support you if you have a problem? The lowest possible price on ebay does not make that possible for many specialty makers. If the item is so generic it doesn't matter then ebay is the answer. For limited distribution of innovative or specialty goods it will not work for most of them.

I am not arguing this as a philosophical point: I am saying it as the way markets have worked since the changes being made by ebay or similar internet avenues of sales have been impinging on the normal dealer networks established by specialty makers of goods. If the normal dealers stop working with the maker, the makers company dies. You will have to decide in your own life if this is good or bad. I for one like many specialty items that are not available on ebay and like the service and help I get with the products that I buy that way. I also shop in ebay at times and buy commodity type goods in there since they are so generic it doesn't matter to me about after service.

This is an evolving market with the tensions between internet sellers and established dealers getting higher as time passes. The many folks who 'know the price of everything and the value of nothing' seem to feel that the price should be low always. This is not true in every instance, I believe.

If you feel that price is the only denominator then what do you say to someone who asks you to discount your salary or services by 20-40% as a normal way to do business with you in any daily transaction of any sort. Is your time and work so generic it is not worth the price you ask of it and the lowest possible bid price from strangers should set your remuneration every day? Many of you seem to argue that is what should happen to the specialty makers of goods and their dealers.

I thought I would add this in here. I doubt anyone will support these ideas. Look around you in your life though and imagine everything being treated like an ebay auction. Would you really like that in all ways? I wouldn't.

[Paul Jones]

On its face, this seems kind of wonky, but in the real world, this is how it often plays out. Say that I am seller of a unique Widget, and I feel that my best method of selling is through resellers. I work up a resale agreement that provides discounts for resellers that sell larger quantities of my product. For those purchasing 100 - 199 of my products I give a 2% discount. For those buying 200 - 299 I give a 3% discount and so on. By offering a discount, I am banking that the economies of scale will allow me to sell a greater quantity of Widgets at a lower price and still make a profit.

If I have resellers in overlapping markets, I might find fewer resellers because the larger resellers have a potential to sell significantly more and thus be able to sell at a lower price because of their discount. Because my Widget is an impulse item the sells more, when more people see it, I want as many resellers selling my product as possible, so I set an agreement that prices should have a fixed suggested retail price. This reduces price competition and allows smaller resellers to buy at lower risk, since there isn't price competition with bigger buyers who get a discount. However, this allows the larger buyers to profit more on the sale of the Widget.

Lets say large buyer A wants even more profit, so he works a side deal with someone to buy from him at his cost so he can increase his discount level. This might seem like no big deal, but the the secondary buyer isn't under agreement for the set price, so he lists his products on eBay as a price below contracted retail. Suddenly small buyer B sees a drop in sales of Widgets because a good portion of his market is Internet buyers. Small buyer B reduces his purchase level while big buyer A increases his. This keeps happening until most of the small buyers are weeded out. While I may be selling just as many Widgets as I was before, the largest discounted sellers are raking in the profits, while my most profitable sales have dried up. Even worse, if the smaller companies start buying from the big ones on the side and my profits dry up as more and more of my sales shift to the largest discounted buyers when my profit model was based on a more even distribution of large and small buyers.

In many cases the prices don't have a minimum set in order to insure the largest profit, it is done to ensure that the consumer has the product available at the greatest number of resellers, thus giving the consumer a choice of where he or she buys a Widget. I'm not saying this is true in every case, but in the cases where it is true, it is unfair, and the producer of the product should have the right to protect his business and enforce his contracts. In cases where you might have 10,000 resellers, tracking down the culprits can be difficult, under these conditions, shutting down those that are selling without agreement is the only way to go.

Just my $0.02

[Ash]

How is Joe Public meant to sell anything if this becomes widespread?

There's a strong view among corporatists that Joe isn't meant to sell anything. Selling things is a corporation's function. It's Joe's function to be employed by a corporation, and buy the products of corporations.

[Sean]

This is a classic example of companies that do not know how to handle the internet so they use tyranical actions to combat it. Get with the program! Figure out how to interact and profit from the net or just die quietly.

You can't tell people what to do no matter how much money you have.

Ebay has to protect people's rights or they are out the door too. Looks to me like ebay wants the net to be like it was ten years ago but it is not. The problem is no one is thinking outside the box. I personally don't see why people pay billions for websites when they could poof out in a nano second. In my opinion eBay AND Yahoo as well as others are on the way out unless they can bring more value.

Your never going to get rich in a free society by bullying people.

[terumo]

the problem is because cosmetic companies and such put a minimun sale price for the retailers on all their products and also, they restrict the retailers to sell it online.

[Robert Krawitz]

Kenny,

When I want support, I buy from someone who can give support. Usually when I buy electronic equipment (for example), I neither want nor need this kind of technical support and I'm more than happy to buy used equipment, gray market, or whatever to save myself the money (both of my laptops were bought used, and I've bought and installed plenty of parts, both fixes and upgrades).

I'd rather make that choice myself rather than have the manufacturer make it for me, thank you. Enforcing higher prices doesn't increase competition. If competition eventually eats into my salary, that's my problem and it's not for everyone else to bail me out by paying more than the market-clearing price.

Also, maybe people prefer to buy on the net simply because it's more convenient.

Greg,

It doesn't matter if you have 10,000 resellers, and tracking down the one who's violating his agreement is difficult. Shutting down third (and possibly fourth, fifth, or sixth) parties who aren't party to your agreements -- unless those folks are intentionally trying to interfere with your contract, which you have to prove -- is just wrong. Maybe it means that you're trying to price your product too high for the demand.

[Howard]

Paul Jones -

Your arguments make sense - from the point of view of a manufacturer. Obviously they want to protect their margins, but that will inevitably cost the consumer. Why do I care how much profit they can squeeze out of a particular product? And why would I care about how many different stores I can find that product in? Unless it is only being sold by a single retailer that abuses their position by selling it for a ridiculous premium, I don't care. All I care about is where I can purchase that product for the lowest price, with a reasonable level of service. The argument that keeping prices artificially high is beneficial to the consumer is, in a word, bullshit.

[DJ]

eBay sellers, tabberone, have had some success representing themselves (pro se) against such illegal VeRO takedowns, and chronicle much of it on their site, http://www.tabberone.com , including advice to sellers who receive such notifications from manufacturers. I suspect that "First Sale" and "Fair Use" applies to much of these issues.
I've been on both sides of the issue. I can't say I'm against a retailer or manufacturer/distributor using every legal means to maximize their business. Price control can be achieved; i.e. the latest video game consoles, Palm PDAs, iPods... you don't see very much price variance among those items. But if an electronics store goes out of business and you buy the stock at liquidation, I can't see any legal means for you to be prevented from selling it at any price you wanted... even at a loss.