Babies "R" Us Price Fixing: Did Retailer Gouge Parents?

Before she gave birth to her first daughter back in October 2003, physicians and fellow mommies alike gave Darcy Trzupek the same advice: If you need a breast pump, get the Medela. "I didn't want to mess around with something that was going to break," says Trzupek, 41, a stay-at-home mom from Chicago. Especially when a hungry, wailing baby is involved.

So Trzupek, an experienced coupon clipper and Web-browsing bargain hunter, searched far and wide for a deal on the Medela. But she says she noticed something odd: the pump was listed at $300 everywhere she looked. For five months, she held out for a discount. Nothing. Finally, a week before going into labor, Trzupek gave in and shelled out $300 for the pump at Babies "R" Us (BRU), the retail outlet that parent company Toys "R" Us started more than a decade ago. Result: satiated baby, smaller wallet. (See seven new iPhone apps for moms.)

But was that breast pump part of a widespread price-fixing conspiracy that protected the profits of Babies "R" Us, the country's dominant big-box baby retailer? According to a federal judge, it appears that could be the case. On July 15, the U.S. District Court in Philadelphia granted class-action status to a complaint that Babies "R" Us coerced manufacturers of high-end strollers, car seats, high chairs, strap carriers and breast pumps into preventing Internet retailers from discounting their products.

No Discounts — or Else!
The dirty deal, according to the suit, was simple. From 2001 to 2006, Babies "R" Us told companies like Medela that they had to enforce resale-price maintenance — i.e., tell the Web retailers, who can more easily discount products since they avoid brick-and-mortar costs, to sell your products at X, or you'll cut off the supply. If they resisted, Babies "R" Us threatened to cut off the manufacturers, according to the suit, and refuse to sell their products in Babies "R" Us stores. Since Babies "R" Us sold 30% to 50% of these companies' products, Medela, which is based in Switzerland, and other brands like BabyBjörn, the Swedish strapmaker, and Maclaren, the strollermaker based in the U.K., had no real choice but to go along.

"I want to let Babies 'R' Us and other retailers know that consumers aren't going to put up with unfair trade restraints," says Trzupek, who joined the plaintiff class in 2006, when the suit was originally filed. The plaintiffs are pursuing an unspecified amount in damages; attorney Beth Fegan says the price agreements affected more than $500 million worth of baby products. (See the top 10 iPhone apps for dads.)

Breast-Pump Bullies?
While Judge Anita Brody's July 15 opinion wasn't a final ruling on the case, Babies "R" Us is portrayed as a tough negotiator intent on protecting its top marketplace position. The other companies named in the suit — Medela; Maclaren; BabyBjörn; Regal Lager, the agent supplying BabyBjörn's products to the U.S. market; Peg Perego, the Italy-based maker of strollers, car seats and high chairs; and Britax, which sells car seats and strollers — come across as weak accomplices in the scheme, which Brody distinctly labels a "conspiracy." For example, Brody writes that effective Feb. 1, 2000, "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!' "

According to the opinion, an executive from BabyAge, an Internet retailer, testified that "Peg Perego's sales representative admitted that Babies 'R' Us threatened to charge Peg Perego for each new sale that BabyAge made unless Peg Perego made BabyAge stop discounting." In spring 2002, Babies "R" Us was unhappy that Internet retailers were discounting Medela breast pumps. So "to send a message," according to the opinion, Babies "R" Us canceled all Medela orders on May 2, 2002. Backed into a corner, Medela terminated 17 Internet accounts two months later. The reason, according to an internal Medela document: "We discontinued Internet sellers to protect BRU's business and margin, and therefore accepted considerable legal risk."

Tough Tactics, but Still Legal?
That risk, however, became somewhat less considerable two years ago. In 2007 the Supreme Court overturned a nearly century-old ruling that used to make these types of pricing deals inherently illegal. Now such practices must be evaluated under "the rule of reason." For the plaintiffs to win, anticompetitive effects of the minimum-pricing agreement between the manufacturer and retailer must outweigh the pro-competitive effects. That's not an easy case to make. If a manufacturer's sales increased as a result of its deal with Babies "R" Us, the company can argue that it will produce a better product because of increased profits. Thus, the consumer ultimately benefits. Babies "R" Us can argue that its higher sales can pay for in-store services — i.e., stroller demonstrations, gift registries — that would not otherwise be possible absent the minimum-pricing agreements with its Internet competitors. Again, the consumer would benefit. (See which businesses are bucking the recession.)

But in the class-certification hearing, an economist provided a regression analysis showing that the overall sales of the manufacturers actually decreased because of the agreements. Britax, for example, admitted that sales fell 5% in the two months after Internet discounting was prohibited. As for Babies "R" Us' argument that preventing competitor discounts allowed it to increase sales and thus fund services valued by consumers, Brody's opinion notes that the plaintiffs "offered evidence that manufacturers had to pay for many services directly. Each manufacturer paid fees reimbursing BRU for advertisements and promotions." Further, the opinion notes that the defense's expert economist "indicated that BRU would maintain gift registries irrespective of resale price maintenance." In other words, Babies "R" Us wasn't responsible for pro-competitive benefits reaped from price deals. The judge's conclusion: "The defendants' argument may be rejected once again."

Babies "R" Us and Peg Perego declined to comment on the case. Maclaren offered a statement that it "strongly denies the allegations and shall continue to vigorously defend this action." The attorneys for Britax, Medela and BabyBjörn did not return requests for comment. Barring a settlement, plaintiff lawyer Fegan expects the case to go to trial in 2010. "These cases are very hard to win," says Lino Graglia, an antitrust expert who teaches at the University of Texas School of Law. "But if this is an instance of a powerful retailer trying to protect itself instead of trying to provide a service to the consumer, it has to be seen as a potential winner." So all you moms who splurged on that $300 breast pump a few years ago: start looking for the receipt.

Babies "R" Us Price Fixing: Did Retailer Gouge Parents?