Law 552-Antitrust
Fall 2009
Instructor: Dwight Drake
Antitrust
Law 552
Case Study 7
Team 7: A. Kvarnstrom, M. Srour, J. Emans, J. Goldberg, F. Gui, N. Istiani
MassApparal, Inc. (“Mass”) is a large Los Angeles-based manufacturer of logo caps and jackets. It is one of four cap and jacket manufactures that has a license from major league baseball (MLB) to sell caps and jackets bearing the logos of all major league teams. It pays a 10% royalty on all MLB merchandise for the right to use the team logos. MLB business accounts for approximately 25% of Mass’s total sales. Mass distributes its MLB merchandise through select local retail stores in the southwestern United States. Every Mass MLB retailer contract (1) specifies the location from which the designated retailer can inventory and sell MLB merchandise, (2) provides that the retailer may only sell MLB merchandise to end consumers and not resellers, (3) requires the retailer to train all its staff on MLB merchandise and adopt a comprehensive plan to advertise MLB merchandise in its market, (4) prohibits the retailer from selling MLB merchandise for more than 110% of the suggested retail prices published by Mass, and (5) requires the retailer to use its “best efforts” to not sell MLB merchandise below the published suggested retail prices at anytime during the regular baseball season (April through October). Mass’s suggested retail prices are “supra-keystone” – two and one-half times the retailer’s cost (cost/price ratio of 40%). This retail pricing is not uncommon for specialized logo merchandise.
Sports Unlimited (SU) is a large sports apparel retailer that has a MLB contract with Mass. SU’s contract with Mass specifies that SU’s flagship store in San Diego is the only SU store that can inventory and sale MLB merchandise. SU also has smaller satellite stores in Las Vegas, Tucson, Palm Springs and SaltLake. MLB merchandise accounts for about 12% of all SU’s sales. SU is Mass’s second largest MLB retailer.
Recently, Mass has received written complaints from its MLB retailers in Las Vegas and Salt Lake, claiming that (1) SU has huge MLB displays in all its satellite stores advertising “the largest selection” of MLB merchandise at the “lowest prices” on its website and stating that the merchandise will be delivered to the customer's door within two days from SU’s flagship San Diego store, (2) SU has sold discontinued or dated MLB merchandise to unauthorized “ma and pa” retailers in the satellite markets, some of whom heavily discount the merchandise at all times and others of whom charge “insanely” high prices for “Hot-team” merchandise, and (3) SU is always discounting its huge inventories of “not-hot” MLB merchandise at prices far below suggested retail. Mass has contacted select other retailers to confirm their displeasure with SU’s activities.
Mass’s sales rep cautiously approached SU about the complaints. SU blew the rep off, stating:
“Those other pansies just can’t handle a little competition; they want all the sales in their markets without having to do any advertising. All our sales come out of our San Diegostore; you can’t stop us from advertising and selling wherever we want. We must be able to cut prices to dump our lousy excess inventories of your stuff, so that we can keep buying more stuff from you. Besides, you can’t control our prices. As for the “ma and pa” crap, how can we possibly know what is going to happen to the stuff once it leaves our store? Many sports nuts buy multiple caps and jackets; if fact, we encourage large ticket orders.”
Your team represents Mass. Mass would consider terminating SU to save its “marketing discipline” if the “discipline” is legal under antitrust and can be enforced. It believes that SU’s advertising in other markets, while not technically in violation of specific contract language, is far outside the “spirit of deal”. To remedy any ambiguity, it would like to change the contract language to prohibit any such advertising in other geographic markets. Mass knows that other retailers who have MLB contracts with Mass would love to ignore their Mass covenants, to sell “hot-MLB” merchandise for top dollar (sometimes as much as twice suggested retail), to discount heavily slower-moving MLB stuff at all times, to dump excess inventories to unauthorized retailers in other markets, and to sell MLB merchandise through any outlet to which they have access. Advise Mass.