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.