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

[coach sale]

We’re always on the go trying to accomplish so much, aren’s we? Getting groceries, cleaning the house, mowing the lawn - there’s always something. It’s so easy to get caught up in everyday life that we forget how simple it can be to bring cheer to ourselves and others.

[Greg Beck]

Ill be out of the office until Tuesday, April 20. If you need immediate
assistance, please call 202-588-1000.

[Retro Jordan]

Wow，great content and your blog design is just gorgeous. Is this template free or not. If so, would you please share this template? if not, Where can i purchase it? Thanks a bunch!

[Ron A. Dawson, MD]

I enjoyed reading the post about the lawn-bots. I have a situation of my own. I sell a brand of luxury charm jewelry. My contract with the manufacturer allows me to distribute these and sell them at above a minimum price to my customers. If I sell for less than the minimum price, I lose my distributorship.

All distributors of this Jewelry in the US buy at the same price from the manufacturer. However the top ten sellers in the country, based on total non-weighted sales for the prior year, are allowed to sell on the internet using a shopping cart. All other retailers can list the product on their web page, but are not allowed to sell using a shopping cart. In addition, US retailers are not allowed to sell on eBay and are not allowed to ship outside North America (our low dollar value is considered unfair to European retailers selling this jewelry).

Many of the top ten retailers of this jewelry have attained their status through mass discounted eBay sales and via selling at a relative discount over seas against their contracts; they are breaking the rules. Once a retailer is in the top ten, it would be virtually impossible for any other retailer to compete with them by following the rules. So there is no misunderstanding, not having a shopping cart on your website is a scarlet letter and a kiss of death as most internet shoppers will avoid buying from such sellers. In this case, as an aside, not having a shopping cart is a punishment. In order to buy from an authorized retailer that is not allowed to sell with a shopping cart on their web site, one must call or email their orders. As prices are fixed at a minimum, it is a disincentive to the consumer to have to call or email versus using a shopping cart.

In my opinion, the problem in my case of the luxury charm jewelry is the incentive and the lack of enforcement of the contract between the manufacturer and their retailers when it comes to sales not sanctioned by the contract. EBay, serves as a “fence” for retailers who illegally break their contract in order to attain the incentive. EBay, by allowing it’s sellers to hide behind multiple screen names, by assisting it’s sellers to hide behind multiple fake addresses, and by eliminating transparency, it assists in unfair trade or possibly criminal activity. EBay by protecting and hiding it’s sellers (criminals) serves to prevent manufactures from enforcing it’s contracts with it’s retailers.

Some of the arguments that were made (and disputed) above concerning free market and retailers were made by those who do not appear to understand how a majority of business relationships work. One retailer who sells at his cost or below to an eBay seller creates the appearance of increased turnover for the retailer in the eyes of the manufacturer by breaking his contract, but at the same time puts other retailers with the same contract with the manufacturer at a disadvantage as the other retailers cannot compete on price. Retailers that abide by their contracts cannot sell below a certain price without running the risk of losing the distributorship and this is why you will not see retailers meeting EBay prices, not because they are not familiar with supply and demand and wish to be gluttons. The free market does not pertain to the ethical retailer when it comes to competing solely on price, but could work for those on eBay not under the constraints of price minimums.

If allowed, a retailer has no incentive to compete on price with eBay. A retailer will stop selling a product as soon as pricing pressures serve as a disincentive to carrying the product. In the case of the luxury charm jewelry in my example, a person must first have an upscale brick and mortar store (costs for start-up anywhere from $50000 to over a million for the small retailer). The retailer must purchase a minimum buy-in of product from the manufacturer of lets say for argument sake, $20,000 of product which includes both great sellers from the line and slow sellers. The authorized retailer does not have a choice to buy only the great sellers from the line. A retailer will be subject to the costs of business including licenses, insurances, rents, salaries, utilities, taxes and in some cases corporate transparencies. A retailer is a part of the community giving back by occupying business space, paying taxes, hiring workers, donating to charities and providing as in my case an upscale comfortable luxury environment for consumers. The eBay seller most likely provides none of the above as it serves more like a fence than a business. For example, no one can compete on price with organized crime which may steal its product and sell off the back of a truck in a dark alley somewhere.

Once there is a disincentive to the retailer where retailers stop carrying the product, eBay will lose its supply of “illegally” obtained low prices goods and this is because there will be no retailers to supply them. The manufacturer will die without a supply chain for his product.

For anyone who wishes to compare the eBay seller to a parasite, I caution you. A parasite is different and should not be insulted in comparison. A parasite, by definition, in order to preserve its species, should not kill its host.

[Ron A. Dawson, MD]

I must say I really enjoyed the discussion of this forum. I arrived here during my search of how to discover an eBay seller disguising themselves and selling authorized product for less than authorized retailers. I am a year into this discussion and I hope, if seen, my comments can add positively or serve as fodder for continued discussion.

From a retailer’s point of view, so called ‘price fixing’ is a good thing in the case of a luxury product in order to preserve it’s longevity in that role. It is completely different than price fixing a necessity such as medication. The two price fixes serve different purposes. In the case of medication, there is patent protection and the high initial price protects the patent and encourages reinvestment of profit into future inventions and future medication discoveries. The profit is also a reward and incentive for the best and smartest to enter the field and to continue these progresses. The high prices reward consumers in that they guarantee that new and safer drugs continue to appear and consumers will be able to have a better quality of life. In the case of a luxury good, the high prices ensure a high quality product and associated distribution channel to its luxury consumers. In a convoluted way the high priced luxury goods have a role in encouraging society to work harder, and it serves as a carrot for society. The high price rewards a manufacturer for producing a high quality product and marketing it in such a way as to make it desirable, but not attainable for everyone. The minimum retail prices are such that these fixed prices serve to ensure quality, service, and luxury and a continued army of retailers to bring the product to its consumers.

As the luxury product is not a necessity, the high price does not harm society where the converse of a low priced luxury item eliminates both the retailers that sell it and the luxury consumers that desire it. The converse also applies to necessities such as drugs. Providing initial low prices for drugs without allowing a period of time for the manufacturers and inventors to recoup their investment and make a profit, by no longer having a period for it be profitable, will discourage future advances. This is bad for society. Putting a reasonable length of time on a patent both allows for profit and also provides future competition. For the luxury item, a contracted minimum price for the first realer, protects the consumer. Having worked hard, a consumer will want to reward himself with a luxury product. We value with price, and therefore luxury products are typically costly. Not providing a way to set a minimum cost, particularly in the eBay era, will eliminate luxury products and eliminate society’s carrot to work hard. Look at the USSR during the cold war as an example as far as the quality and diversity of their products. If a manufacturer cannot support a price that will allow the appropriate distribution and marketing of it’s product while continuing to reward itself with profit, it’s distributors with enough money to cover delivering a luxury product and profiting from it, and the consumers’ with a high price, then we will no longer have luxury products in this country. Consumers buy Tiffany because they want to pay the extra money that the brand commands. Take away the high price and Tiffany cease to exist. Take away the price on automobiles and we would all be driving government allocated model T’s and Russian Ladas.

Of the posts listed above in this blog, many with very good points, the one posted by Aexia | Thursday, July 19, 2007 at 05:38 PM , hits the nail on the head. Incentives by manufacturers in a fixed price system result in unfair trade. No longer is everyone playing on an equal field, and the resultant competition brought in by the manufacturer results in, cheating. I agree that it is hard for manufacturers to get off the crack these cheaters supply in the form of additional sales. However, just like crack, it may feel good at first, but in the end it will destroy them.

In my opinion, the second problem rests in the contract made between the manufacturer and the first reseller. These contracts should and usually do include specifications for a manufacturer mandated minimal retail price, rules on quality service sales and marketing, internet sales rules and eBay sales rules. The contracts should and usually do provide a buy back clause in the event products do not sell or the retailer ends it’s relationship as a distributor. Having a fair buy back prevents cheap product from entering the market and protects the retail partner and serves to benefit all involved. The overall problem rests in enforcement of these contracts between the manufacturer and the authorized retailer.

If manufacturers eliminate incentives or fairly weight incentives, and if manufacturers enforce their contracts, most of these eBay problems will disappear. Please remember that there is nothing that resembles free trade when a “fence” obtains black or gray market product and sells for less than anyone is legally allowed to sell.

[Online Auctions]

"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."

Abuse goes both ways. People will do things to take advantage of situations if they think they can get away with it. Companies will take it ruthlessly to the end to weed out their competition and monopolize their market.

[Online Auctions]

"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."

Abuse goes both ways. People will do things to take advantage of situations if they think they can get away with it. Companies will take it ruthlessly to the end to weed out their competition and monopolize their market.

[Bill]

As an eBay seller I often question product source. Customer returns, overstockes, etc... all would seem to lend themself to this environment.

I think the real difference might be in the sellers themselves... If you want to sell discounted product X and you have a supplier for the product are you at risk of a lawsuit -versus- the seller that bought product X, and is not trying to sell it to just get it out of the house.

Interesting topic for sure!

[weird ebay auctions]

How is it ebay would do what these big companies say? eBay is a behemoth and can do more or less what it wants in this regard. And isn't selling something for less then your competitor all part of what makes capitalism work? And isn't ebay killing their own business by pulling these auctions and losing revenue?

[Kennysze]

promote free trade

we just can't let these big bad firms have it

end of story

[Preston]

A lot of the theory on here actually happened this year to Robomower Sales. Last year we sold 75+ Robomowers with ease. We were hoping this year we could sell 150+. However, all the dealers have stopped carrying Robomower because there is no profit margin. The internet dealers basically priced themselves out of business. We were able to survive because we were selling Lawnbotts and actually know how to sell our services and knowledge of what these machines are capable of. Now Robomowers can be found on the internet from as low as 1,499 to as high as 1,849+. This has caused many consumers to be very cautious of buying mowers because so many dealers have so many different prices. Everyone who calls in and wants to buy one is terrified we are giving away broken models, or older models, or last year's models. They don't understand discount buying.

The Lawnbott in the same market which has an MAP has exploded off the line this year. We sold about 60+ Lawnbott's last year. This year we were expecting to sell 150+ mowers (in only our second year). The reason we can see is that everywhere you go everyone has the same price, people gain confidence from that. MAP on Specialty items is needed and keep the market alive. If MAP is not in place competitors will whore themselves out to make 2 bucks, while those companies that are re-investing (which is the main goal of capatialism) profits go out of business because there is no money to be made. Because large companies go out of business there is no re-investment (advertisment) and so the parent company sells less, the price competitors die out because no one is buying, and the whole product disappears.

Capitalism is not about lowest price. Capitalism is about profits and re-investing profits to grow your company and market. If we started discount pricing medication, there would be no more medicine discovered because profits would decrease, re-investment would decrease, technology output would decrease, and we would all be back to square one with taking advil for cancer.

You all are referring to manufacture's selling their products which is an impossible thing. It is much more profitable as a manufacture to deal with 10-15 (or even hundreds) of re-sellers than it is to deal with every person that contacts those re-sellers. If Lawnbott had to deal with every telephone call we receive that would keep their staff busy, not to mention the other 5 or so dealers that are all getting constant phone calls. They can keep their staff low (which increases profit), they can sell in bulk rather than individually (which increases profits), and their re-sellers are advertising (which is not costing anything to them, increasing their re-sellers sells who in turn buy more stock, which creates more profits). It makes far more sense to use re-sellers than it does to direct sell.

[Seth]

Eric, if someone comes in to your store for help with stuff he bought from you, help him. If he didn't buy the stuff from you, help costs $100/hour. What's the problem? Likewise, if you support the manufacturer's warrantee, that means you bill the manufacturer for fixing it (or you ship it off to the manufacturer to let them fix it). Car dealers have to support the warrantees for all cars of the brand; they make a profit on each transaction.

[Beth]

Could be an interesting evolution. Online discounters drive authorized retailers off to greener pastures. Manufacturers discover they don't need retailers promoting and supporting their products. Channelling all their distribution costs into setting up direct online sales through their own websites, Ebay and the like, manufacturers can compete with the online discounters directly, offering equal or better deals...straight from the maker. Manufacturers can charge whatever the consumer will bear, as there's no longer any place for would-be sellers to get product cheaper.

The only competition would be another brand/manufacturer. Which, I believe is the intent of free competition laws in the first place.

[Geoff]

It seems to me that the beef should be taken up with the distributors who are sidetracking the authorized retailers. The major camera manufacturers have had to deal with this for years. The way they do it is to refuse to service grey market products. You can either deal with the authorized reseller and get a full warranty or buy yours at a discount thru some other channel and get none. Merle Norman could do something similar by creating validation system into their products (like maybe an attached coupon which is stamped by the reseller at point of sale) which could be linked to added value services (very much like those loyalty club cards everyone has nowadays.) If you choose to get the product cheaper thru an unauthorized channel, then great, you've saved some bux, but you're not entitled to any additional services.

In the case of motorcycle parts, why not have them send in their receipt to receive something that is worthwhile (maybe even the crucial piece that makes the system work.) That way you get to control who they're buying from directly.

Let's get creative people and come up with solutions, not more lawsuits!

[Mackenzie]

Well maybe these companies (and everyone involved in the named cases) need to take an Economics class and learn a bit about supply and demand.