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

[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

[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.

[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...

[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

[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.

[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.

[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?

[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.

[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.

[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.

[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.

[Rick Sparks]

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