and other states seek penalties and damages, alleging Toys 'R' Us illegally
worked to cut competition by Sam's Club and other retailers.
Miller said Iowa and 37 other states are joining forces today and filing a complaint in federal court in Brooklyn, New York, alleging that Toys 'R' Us pressured major toy manufacturers into agreeing not to sell its most popular product lines to other retail competitors, especially warehouse clubs such as Sam's Club.
"With sales of about ten billion dollars a year, Toys 'R' Us has enormous market power," Miller said. "We allege they misused that power to force agreements with the toy makers and to stifle price competition by the big buying clubs, which were a strong new source of competition to Toys 'R' Us."
Toys 'R' Us -- the largest toy retailer in the U.S. with some 600 stores -- operates about ten stores in Iowa.
"We allege that Toys 'R' Us muscled four major toy makers to stop selling their most popular toys to the buying club retailers, or to sell the clubs only combination packs with two or more toys," Miller said. "We allege that had two anti-competitive results: toys available to the clubs were more expensive, and consumers found it difficult to compare prices with Toys 'R' Us."
"In a word, we argue that prices thus were artificially high both at Toys 'R' Us and other retail stores," Miller said. "And on top of that, it was hard for consumers to compare prices."
Four toy manufacturers are named in the States' complaint: Mattel, Inc., Hasbro, Inc., Little Tikes Company, Inc., and Tyco Industries Inc. (Tyco has since been acquired by Mattel.)
Details of the States' Complaint
The complaint states that Toys 'R' Us has cultivated a public image as a toy discounter with every-day low prices, but that in the early 1990s warehouse clubs were emerging as a major competitor in toy sales. Toys 'R' Us feared that the clubs would force down prices "and that consumers would draw unfavorable comparisons" with Toys 'R' Us prices on a toy-for-toy basis.
According to the complaint: "Toys 'R' Us top executives undertook a systematic campaign to use its market power to prevent its suppliers from selling certain toy products to warehouse clubs. To achieve this goal, Toys 'R' Us orchestrated understandings with and among its most significant toy suppliers not to sell the clubs individual toys that were sold to Toys 'R' Us."
The manufacturers were forced to agree to various measures that benefited Toys 'R' Us at the expense of the warehouse clubs, the States argue, including providing the clubs only with "club specials" that usually consisted of combination packs of two or more different items. The complaint says items in the club specials could not be readily price compared to products sold by Toys 'R' Us. It says club specials cost more and raised club prices to consumers.
The complaint says Toys 'R' Us "policed the manufacturers' sales, and when necessary enforced its policy by taking product off its shelves or not buying product that manufacturers had sold to clubs."
Miller said the States' action was begun when the Federal Trade Commission last year reported it was investigating similar allegations against Toys 'R' Us. Under federal law, State Attorneys General have power to bring suits to obtain damages suffered by consumers in their states from violations of antitrust laws.
The States' suit seeks treble damages, civil penalties, and injunctions barring any further anti-competitive activity by Toys 'R' Us.
"In our system, consumers depend on competition among retailers," Miller said. "Good service and the lowest possible prices depend on competition, and consumers need to be able to make authentic price comparisons from one store to the next. We allege Toys 'R' Us used its enormous market power to violate these principles."