Putting the “mod” in order modification

Back in 1998, the must-have toy was a Furby, and if you were a parent with a kid of a certain age, you had to find one. In those days, Toys “R” Us was the nation’s largest toy retailer, and the company attracted antitrust attention when it announced that it would stop carrying toys made by any manufacturer that sold the same toys to discount club stores, such as Costco. That policy would have prevented nearby club stores from carrying the same Furby sold at Toys “R” Us (creating problems for that parent hoping to avoid a toddler meltdown). After a long trial, the FTC proved that the toy retailer had illegally conspired with toy manufacturers to prevent them from selling certain toys to club stores. The FTC found that Toys “R” Us had market power in the toy industry as both a buyer and seller of toys, and that it had used its market power to obtain a series of unlawful agreements from toy manufacturers to stop selling the same toys to club stores.

The Commission’s October 1998 order prohibited Toys “R” Us from this illegal conduct, and contained fencing-in provisions to prevent similar conduct not only for toys, but also for all products sold by Toys “R” Us. Some order provisions expired in 2008, but the primary provisions governing the retailer’s relationship with its suppliers were to be effective for the duration of the order—that is, for twenty years.

A lot has changed since 1998, especially in the world of toy retailing. (For instance, it’s been just long enough for Furbies to stage a comeback of sorts.)  Earlier this year, Toys “R” Us asked the Commission to reopen and modify its order based on changes in the market. Although there is a broad public interest in the finality of Commission orders, under appropriate circumstances, the Commission may reconsider the terms of its final orders to ensure that its restrictions are still working to the benefit of consumers and competition. Under the FTC Act, a company subject to an FTC order can petition to have the order reopened and modified based on changes that have, over time, eliminated the need for the order. If the respondent shows that a significant change in law or fact makes the order unnecessary, inequitable, or harmful to competition, the Commission will reopen to determine whether the requested modification is warranted. Also, the Commission may modify an order in other situations if it determines that the public interest requires it.

Changes in Fact that Matter to Competition

The Commission will consider arguments that the facts have changed since an order was entered, but they have to be real changes. Mere assertions that things have changed, or showing changes that don’t relate to the need for the order, will not satisfy the burden. Conditions that existed at the time the order was entered will not justify modification.  
 
Changes in Law

Changes in law can also warrant an order modification. For instance, in 2008, the Commission reopened and modified its order against shoe maker Nine West after the Supreme Court overturned the per se rule barring manufacturer-imposed minimum resale prices, the practice that was at the core of the Commission’s 2000 complaint. Nine West argued that it should be allowed to engage in resale price maintenance agreements to the same degree as its competitors. The Commission decided that the change in approach to price-related vertical restraints justified modifying the order to allow Nine West to engage in RPM agreements because the company demonstrated that its use of RPM would not harm competition, mainly because it lacked market power that would allow it to raise resale prices. However, not all changes in legal standards will lead to order modifications, especially for the myriad practices subject to a rule of reason analysis. For example, the Commission refused to reopen and modify Union Carbide’s order prohibiting exclusive dealing arrangements: “Carbide’s asserted changes in law, at most, reflect a shift in focus among the several factors traditionally considered under a rule of reason analysis as applied to exclusive dealing.” 108 F.T.C. at 186.

Modification in the Public Interest

Even if changed conditions would not require it to reopen an order, the Commission may determine that it is in the public interest to do so. Here too, the party under order must make an initial showing that modification would serve the public interest, for instance, by demonstrating that the order is impeding effective competition. Then the Commission will weigh the reasons to set aside certain order provisions against the continuing need for them. For example, although changed facts were not sufficient to warrant modification of an order requiring the divestiture of supermarkets, the Commission allowed respondents to divest an alternate supermarket in the same market. The Commission found that the alternative divestiture was more likely to restore competition, evidenced by the fact that the trustee was able to find a buyer for the alternative store, but not the store identified in the original order. (In the Matter of Promodes, 116 FTC 377 (1994))  To ensure that divestiture would restore competition in the market, the Commission modified the order in the public interest.

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Back to the toy story. The Commission modified its order because Toys “R” Us no longer has significant market power as a toy retailer. Specifically, Toys “R” Us demonstrated that Walmart had overtaken it as the largest retailer of toys, and that Target is of equal size. Based on that change in market position — a change that was directly related to the need for the order — the Commission deleted the Order provisions that were based on Toys “R” Us having market power. However, it left in place other provisions that require the company not to orchestrate any agreement among its suppliers to limit supply to any retailer, an antitrust violation that does not require proof of market power.

The antitrust laws stay modern and relevant through a flexible approach that focuses on the potential for harm to competition. Similarly, the modification process helps keep Commission orders from doing more harm than good when conditions change, and as the public interest requires.