Babyage.Com, Inc. v. Toys "R" Us, Inc.

• Decision Date: 20 May 2008
• Docket Number: Civil Action No. 06-242.,Civil Action No. 05-6792.
• Citation: 558 F.Supp.2d 575
• Parties: BABYAGE.COM, INC. and the Baby Club of America, Inc., Plaintiffs, v. TOYS "R" US, INC., d/b/a Babies "R" Us, and Babies "R" Us, Inc., Defendants. James L. McDonough et al., individually and on behalf of all others similarly situated, Plaintiffs, v. Toys "R" Us—Delaware, Inc., d/b/a Babies "R" Us, and Babies "R" Us, Inc. et al., Defendants.
• Court: U.S. District Court — Eastern District of Pennsylvania

558 F.Supp.2d 575

BABYAGE.COM, INC. and the Baby Club of America, Inc., Plaintiffs, v. TOYS "R" US, INC., d/b/a Babies "R" Us, and Babies "R" Us, Inc., Defendants.

James L. McDonough et al., individually and on behalf of all others similarly situated, Plaintiffs, v. Toys "R" Us—Delaware, Inc., d/b/a Babies "R" Us, and Babies "R" Us, Inc. et al., Defendants.

Civil Action No. 05-6792.

Civil Action No. 06-242.

United States District Court, E.D. Pennsylvania.

May 20, 2008.

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EXPLANATION AND ORDER

ANITA B. BRODY, District Judge.

I. Background

Babies `R' Us ("BRU") is a large retailer of baby and juvenile products including strollers, high chairs, breast pumps, bedding, car seats, and infant carriers. It carries products manufactured by Britax, Peg Perego, Medela, Maclaren, Kids Line, Regal Lager, and Baby Bjorn (the "manufactures"), among others. Smaller retailers like Baby Age and Baby Club (the "retailers") competed with BRU by undercutting BRU's prices in order to increase their sales volume. This undercutting ceased when the manufacturers began to require the retailers to sell their goods at or above a certain price. The retailers, and various consumers (the "consumers") who allegedly paid more for baby products than they would have absent these pricing policies, complain that BRU orchestrated these arrangements in order to ward off competition.¹

The retailers and the, consumers brought an action against BRU and the manufacturers, alleging that this scheme violates federal antitrust law. They allege that it constitutes a combination in restraint of trade under § 1 of the Sherman Act; monopolization under § 2 of the Sherman Act; attempted monopolization under § 2 of the Sherman Act; and a conspiracy to monopolize under § § 1 and 2 of the Sherman Act.² The consumers further allege that BRU's actions violate the Pennsylvania common law of tortious interference with contractual relations, and unjust enrichment.

BRU and the manufacturers have moved to dismiss the complaints pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted.

II. Federal Rule of Civil Procedure 12(b)(6) — Legal standard

To survive a motion to dismiss for failure to state a claim upon which relief can be granted pursuant to Rule 12(b)(6), a plaintiff must make a "short and plain statement" providing the "grounds" of his "entitlement to relief." Bell Atlantic v. Twombly, ___ U.S. ___, ___, 127 S.Ct. 1955, 1965, 167 L.Ed.2d 929 (2007) (quoting Rule 8(a)(2)). This requires more than a statement that is merely consistent with a valid theory of recovery. Id. The statement must include "enough factual matter (taken as true) to suggest" a right to relief. Id. (parentheses in original) (emphasis added). That is, the statement must have "enough heft to show that the pleader is entitled to relief." Id. at 1966 (internal quotation marks omitted). It must "raise a right to relief above a speculative level." Id. at 1964. I will now apply this standard to each of the claims made by the plaintiffs in this case.

III. Combination in restraint of trade (Sherman § 1)

Plaintiffs must allege enough facts—that is, they must state their claim with enough "heft" — to suggest (1) a market or markets in which competition has been harmed, (2) concerted action involving (a) BRU and each manufacturer, and (b) each manufacturer and various retailers; (3) the anticompetitive nature of the concerted action, and (4) a causal nexus between the concerted action and Plaintiffs' particular injuries. Gordon v. Lewistown Hosp., 423 F.3d 184, 207 (3d Cir. 2005); Twombly, 127 S.Ct. at 1965; Phillips v. Cty. of Allegheny, 515 F.3d 224, 233-234 (3d Cir.2007).

1. Relevant market

Plaintiffs must define their markets with reference to "reasonable interchangeability" and "cross-elasticity of demand." Queen City Pizza v. Domino's Pizza, 124 F.3d 430, 436 (3d Cir.1997).³ And they must not allege a market that "clearly" fails to encompass all "interchangeable substitute products" even when granting Plaintiffs the benefit of "all factual inferences." Id. Plaintiffs allege separate markets of retail sales of "high-end baby and juvenile strollers," "high-end high chairs," "high-end breast pumps," "high-end baby bedding," "high-end car seats," and "high-end infant carriers." BA ¶ 69; McD ¶ 206.⁴

a. Reasonable interchangeability and cross-elasticity of demand

The definition of relevant market given by § 1.11 of the well-known and influential 1992 Department of Justice Guidelines ("Guidelines") incorporates both of these concepts. That definition proceeds inductively: Start with a particular product. The market containing that product is the smallest set of products (including that very product, of course) such that a hypothetical firm selling all of those products with no competition could profitably impose a "small but significant and nontransitory increase in price."

This formulation incorporates reasonable interchangeability. See Philip Areeda & Herbert Hovenkamp, Antitrust Law: An Analysis of Antitrust Principles and their Applications ("Areeda") ¶ 530a. If the hypothetical market-wide monopolist could profitably impose a small price increase on all the in-market products simultaneously, it must be because consumers are captive; they are not venturing outside the market to make purchases when prices in the market go up. This in turn means that those out-of-market products are not reasonably interchangeable with the in-market products; otherwise consumers would be buying them instead of the in-market products to take advantage of the lower price.

It also incorporates cross-elasticity of demand between in-market products. Areeda ¶ 530a. Suppose the hypothetical market-wide monopolist increased the price on only one of the in-market products. Thent he demand for the rest of the in-market products would increase. After all, they are interchangeable with the now-higher-priced product, and they are now cheaper than that product. This shows that in-market products have high cross-elasticity of demand.

Here, Plaintiffs have invoked precisely this formulation with respect to each proffered market. They allege that the manufacturers "would not, by raising prices for their respective relevant high-end baby and juvenile products a small but significant nontransitory amount, lose sufficient sales to make such a price increase unprofitable." BA ¶ 72(e); McD ¶ 209(e).⁵

b. No clear failure to include economic substitutes

As explained above, Plaintiffs have not "clearly" failed to account for all reasonably interchangeable economically substitutable products. Indeed, by invoking the Guidelines market definition, they clearly have accounted for all such substitutes. This is true because the only products falling outside the market under the Guidelines definition are not interchangeable with in-market products and are not economically substitutable for in-market products (because they do not have a high cross-elasticity of demand with in-market products).⁶

Therefore, Plaintiffs have stated enough facts to suggest the existence of several relevant markets in which competition has been harmed. Plaintiffs' allegations are not only consistent with the existence of "high-end baby and juvenile strollers," "high-end high chairs," "high-end breast pumps," "high-end baby bedding," "high-end car seats," and "high-end infant carriers" markets, but they suggest the existence of those markets. They do this by asserting facts about interchangeability and cross-elasticity of demand that explain why the proffered markets are not larger than Plaintiffs allege them to be. Put another way, their allegation that, for each market, a hypothetical monopolist could profitably raise prices on all in-product markets for a short time, constitute enough heft to raise the satisfaction of the relevant-market element beyond a speculative level.

2. Concerted action

Plaintiffs claim that BRU conspired with each manufacturer to cause each manufacturer to form minimum RPM agreements with the manufacture's retail dealers. To link BRU's actions, on the front end, with the RPM policies, on the back end, Plaintiffs must allege two interrelated types of concerted action. First, they must allege concerted action between BRU and each manufacturer. Second, they must allege concerted action between each manufacturer and that manufacture's retailer dealers.

a. Between BRU and each manufacturer

Plaintiffs may allege concerted action by claiming parallel conduct coupled with circumstances that tend to negate the possibility that BRU and each manufacturer acted independently. Phillips, 515 F.3d at 233-234. Accepted "plus factors" include (a) that the parallel conduct at issue was against each manufacturer's independent economic self-interest, Lum v. Bank of Amer., 361 F.3d 217, 230 (3d Cir.2004); (b) that BRU wielded sufficient influence over each manufacturer to create a duress situation, Monsanto v. Spray-Rite, 465 U.S. 752, 767-768, 104 S.Ct. 1464, 79 L.Ed.2d 775 (1984); and (c) that BRU threatened to retaliate against each manufacturer if each manufacturer did not implement minimum resale price maintenance ("RPM") agreement with its retailers, and the manufacturers in turn acquiesced, Albrecht v. Herald, 390 U.S. 145, 149, 88 S.Ct. 869, 19 L.Ed.2d 998 (1968).

Plaintiffs have alleged parallel conduct in the form of imposition of minimum RPM policies. See, e.g., BA ¶¶ 40(a) (Peg Perego); 41(a), (g) (Medela); 42(a) (Britax); 43(a) (Maclaren); 44(a) (Kids Line); 45(q) (Regal Lager & Baby Bjorn)⁷; McD ¶¶ 68 (Peg Perego); 104, 109 (Medela); 135 (Britax); 166-167 (Maclaren); 175 (Kids Line); 190, 196 (Regal Lager & Baby Bjorn). And Plaintiffs have alleged that the minimum RPM policies are contrary to each manufacturer's economic self-interest, because each manufacturer's goal was to increase sales...