Summer, 1998

Retailing On The Internet

www.mayerbrownrowe.com By Richard M. Steuer*

First published in Antitrust, vol. 12, no. 3, at 50 (1998) Copyright 1998 American Bar Association

"Electronic commerce." The words conjure up visions of an endless shopping mall in

cyber-space. Yet conflicting expectations over who may set up shop in this mall, what
merchandise they may carry, and how they may hawk their wares threaten to cast a cloud over
the mounting enthusiasm for cyber-retailing.

Online sales are expected to reach almost $5 billion in 1998 and should continue to
grow, particularly if Congress adopts a sales tax moratorium for the Net. But controversy is
brewing over the rules of competition. Among the latest issues to ponder: May Tupperware
parties be prohibited in Cyberspace?

Normally, of course, the law permits manufacturers to limit the number of retailers
authorized to sell their products in particular territories or to certain classes of customers.1
Manufacturers may control the appearance of stores, the nature of displays, the size of
inventories and the use of their trademarks.2 They ordinarily may also outlaw such sales
practices as mail order and "800 numbers."3

Price naturally is more complex. Manufacturers generally may not agree with retailers on
the specific prices or minimum prices that retailers charge.4 However, under recent authorities
manufacturers generally are permitted to place restrictions on retailers' advertising, including
certain restrictions on price advertising.5 The rules are particularly clear for cooperative
advertising, where the manufacturer is paying at least part of the expense.6 But even where the
retailer is bearing all of the cost, the manufacturer still may be allowed to place certain limits on
price advertising.7

Moreover, since the Supreme Court's 1997 decision in Khan,8 manufacturers are
permitted to agree with retailers on the maximum prices that retailers may charge. This can help
to facilitate brand-wide promotions and combat price gouging.

In addition, most manufacturers are subject to the complex rules of the Robinson-
Patman Act (15 U.S.C. §13) limiting discrimination in the prices they charge to retailers that
compete with one another, and the services provided to those retailers.

These principles have applied for decades, first to retailers along Main Street and then in
the malls. Now, these same rules provide the only available guidance to sort out a growing
number of controversies over how goods are marketed on the Internet.

For example, may a manufacturer forbid retailers from selling on the Net? May a
manufacturer keep Net sales for itself, through its own Web site? May a manufacturer allow its
retailers to sell only some of its products on the Net but not others? May a manufacturer allow
only selected retailers to sell on the Net and exclude others?
 The legal answers to all of these questions are likely to be "Yes," provided that there are
no contracts granting the retailer the right to engage in Internet selling. Past rulings in the courts
generally have permitted manufacturers to restrict retailers' rights to sell by mail order or 800
numbers so long as these restrictions are not part of a price-fixing scheme,9 and under the
same precedents manufacturers should be able to place comparable restrictions on Internet
sales.

The reality may not be as simple as the legal theory, however. For example, Tupperware
reportedly has prohibited its 7,000 sales consultants from selling Tupperware products online
through their own Websites.10 Although the number of these Websites dropped sharply upon the
institution of this policy, holdouts remain. In a situation of this kind, transhipping between
authorized sellers and unauthorized Website operators can become very attractive if there is no
other way to reach shoppers. Tupperware, echoing the arguments advanced by manufacturers
of *51 computers,11 sporting goods 12 and other products,13 contends that its products require live
demonstrations in order to be sold effectively. Under current law, manufacturers in this position
should be able to ban Internet sales entirely if they are convinced that this is the proper
marketing strategy.

In addition to banning retailers from making Internet sales, manufacturers should be able
to reserve to themselves the right to make such sales. Manufacturers already may reserve to
themselves the right to sell to certain categories of purchasers, such as the government or
overseas customers,14 so they should be able to reserve Internet customers to themselves as
well, while outlawing Internet sales by their retailers. Furthermore, manufacturers already may
place different limitations on the retailing of their different products,15 so they also should be able
to limit the number of products that retailers may sell over the Net.

Retailers may not accept this without a fight. If retailers believe that they already have
been afforded the right to resell on the Net they may claim that any restriction of that right
amounts to a material change in their relationship with the manufacturer in breach of either their
dealership agreement (if they have one) or their state's dealership law (if there is one). Since
most of these agreements and all of these laws originated before cyber- retailing was even part
of the vocabulary, it will be difficult to argue that such rights were intended to be granted or
protected. Just as likely, retailers will argue that whatever their dealer agreements provide, and
regardless of whether they even have dealer agreements, retailing is retailing and they should
have the right to sell every product they carry by any means that they have not previously
agreed to exclude.

To head off such arguments, many manufacturers already are including explicit
restrictions on Net sales in their dealer agreements as the agreements come up for renewal.
Such policies also may be included in "Colgate"-type unilateral distribution policies issued by
manufacturers and provided to retailers.16

A more complicated situation arises if a manufacturer wants to authorize certain retailers

to sell on the Net but not other retailers. Manufacturers already may restrict different retailers to
different channels of distribution,17 so they similarly should be allowed to appoint selected
retailers as Internet retailers and exclude others. This distinction may be the subject of
controversy, however, particularly where such a distinction is drawn between two existing
retailers who already are in competition with one another, providing one an advantage over the
other. Also, if dealer agreements grant the retailers the right to sell anywhere and any way they
choose, the manufacturer simply may not have the power to exclude any of them from the Net.

First published in Antitrust, vol. 12, no. 3, at 50 (1998) Copyright 1998 American Bar Association 2
 Pricing

Pricing issues arise on the Net just as anywhere else. May a manufacturer control the
specific prices or minimum prices that retailers charge over the Net? The answer is a clear
"No."18 May a manufacturer restrict the prices that retailers advertise on the Net? The answer
should be "Yes," so long as such restrictions do not turn into fixing the prices at which the
retailers actually sell.19 Manufacturers will carefully need to measure the pricing restrictions they
want to impose against the yardsticks that have been established by the courts in analogous
cases (such as mail order) and determine whether the restrictions they want to adopt will pass
muster in each individual situation.

Discrimination

Discrimination is another tricky area. If a manufacturer has its own Web page and
provides a directory of authorized dealers, may it favor certain retailers over others in such
listings? May it provide "hyperlinks" between its own Web site and the Web sites of only certain
of its retailers? This issue is analogous to the situation that arises with centralized reservations
systems. The answers will depend on a variety of factors, but in no case will this be a simple
decision.

Other Issues

Adding to the legal complexity are relationships between retailers and Internet providers,
and relationships between retailers and other retailers.

Retailers have begun partnering with Internet providers to encourage Internet sales.
AT&T, for example, has distributed catalogs to its subscribers featuring certain retailers and the
special discounts they offer through the Net. Which retailers will be featured in a promotion of
this kind and which, if any, will be excluded, may well become the subject of dispute.

Retailers also have made arrangements for special placement with on-line services and
Web guides, such as Amazon's deals with America Online, Yahoo, and Excite, to become their
bookseller of choice.20 As long as there are sufficient alternative channels of distribution for
other retailers, these types of arrangements should not present a problem, but if one retailer
were to foreclose too many distribution alternatives, such conduct could become vulnerable to
legal challenge.

The Justice Department reportedly has been engaged in an extensive investigation of

exclusive deals made by certain entertainment and information publishers with Microsoft's
Internet Explorer,21 and the government's latest case against Microsoft alleges that Microsoft
has leveraged its market power over operating systems into a variety of adjacent markets
through its "active desktop," including, indirectly, Internet retailing. Exactly where the
government's concern over the freedom of Microsoft to enter into exclusive marketing
arrangements will lead remains to be seen.

On top of all this, retailers have begun suing one another over unfair competitive
practices in cyber-retailing. In one highly publicized case, Barnes & Noble sued Amazon for
false advertising over Amazon's claim that it was the "world's largest bookstore."22 The case was
later settled.

First published in Antitrust, vol. 12, no. 3, at 50 (1998) Copyright 1998 American Bar Association 3
 In other cases, owners of well-known trademarks have sued Web page operators for
"word stuffing"-the practice of inserting invisible references to popular trademarks in the coding
for another firm's Web site, so that consumers searching for the trademark on the Internet will
be referred to the other firm's site by search engines that read the invisible code.23

These cases may be only the tip of the iceberg. As sellers perceive that their rivals are
engaging in unfair tactics on the Net, they will continue to usher cyber-retailing into the
courtroom.

As for consumers, the Federal Trade Commission's Bureau of Consumer Protection is

endeavoring to police the cyber-mall, to make it a safer place for shoppers.24

The law has some catching up to do, but the legal issues surrounding cyber- retailing
echo those of traditional retailing, and the rules should be much the same. At the same time,
most judges have proven to be fast learners and can be expected to provide substantial
guidance as these cyber-skirmishes unfold.

Will the tried and true doctrines hold? Today's technology may be new, but the issues
are familiar ones, and there is every reason to believe that the law will prove malleable enough
to meet the challenge of governing cyber-retailing.

________________________
*
Richard M. Steuer is a Partner in Kaye, Scholer, Fierman, Hays & Handler, LLP, in New York.
1
Electronics Communications Corp. v. Toshiba America Consumer Prods., Inc., 129 F.3d 240
(2d Cir. 1997) (exclusive distributorships); Westman v. Hobart Int'l, Inc., 796 F.2d 1216 (10th
Cir. 1986) (limited distributorships); Packard Motor Car Co. v. Webster Motor Car Co., 243 F.2d
418, 420 (D.C. Cir. 1957).
2
See, e.g., Winn v. Edna Hibel Corp., 858 F.2d 1517, 1520 (11th Cir. 1988); Garment Dist., Inc.
v. Belk Stores Servs., 799 F.2d 905, 910-11 (4th Cir. 1986); Golf City, Inc. v. Wilson Sporting
Goods, Co. Inc., 555 F.2d 426, 430-31 (5th Cir. 1977); Wilson v. I.B.E. Indus. Inc., 510 F.2d
986, 988-89 (5th Cir. 1975); Anaya v. Las Cruces Sun News, 455 F.2d 670, 671-72 (10th Cir.
1972); Carolina Furniture Co. v. Rhodes, Inc., 603 F. Supp. 69, 75 (S.D. Ga. 1984); Bunty v.
Shell Oil Co., 1972 Trade Cas. (CCH) 74,252, at 93,186-88 (D. Nev. 1972); America's Best
Cinema Corp. v. Fort Wayne Newspapers, Inc., 347 F. Supp. 328, 333 (N.D. Ind. 1972); D & M
Distribs. Inc., v. Texaco, Inc., 1970 Trade Cas. (CCH) 73,099, at 88,292 (C.D. Cal. 1970);
Dalmo Sales Co. v. Tysons Corner Reg'l Shopping Ctr., 308 F. Supp. 988, 994 (D.D.C.), aff'd,
429 F.2d 206 (D.C. Cir. 1970).
3
H.L. Hayden Co. of New York, Inc., v. Siemens Med. Sys., 879 F.2d 1005, 1014 (2d Cir.
1989); O.S.C. Corp. v. Apple Computer, Inc., 792 F.2d 1464, 1468 (9th Cir. 1986); Parkway
Gallery Furniture, Inc. v. Kittinger/Pennsylvania House Group, Inc., 878 F.2d 801, 802 (4th Cir.
1989) ("prohibit[ing] dealers from soliciting or selling its furniture by mail or telephones order to
consumers residing outside specified sales areas"); National Marine Elec. Distribs., Inc. v.
Raytheon Co., 778 F.2d 190 (4th Cir. 1985) (prohibiting dealers from engaging in mail order
sales).
4
Business Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717 (1988).

First published in Antitrust, vol. 12, no. 3, at 50 (1998) Copyright 1998 American Bar Association 4
5
See, e.g., Holabird Sports Discounters v. Tennis Tutor, Inc., 993 F.2d 228 (4th Cir. 1993) (not
for publication) (manufacturer unilaterally prohibited dealer advertising for less than suggested
retail price, including call-for-price advertisements); Cranfill v. Scott & Fetzer Co., 773 F. Supp.
943 (E.D. Tex. 1991) (restricting a dealer's ability to place advertisements that included price).
6
Clinique Laboratories, Inc., [1987-1993 Transfer Binder] Trade Reg. Rep. (CCH) 23,330
(1993); Magnavox Co., 55 Fed. Reg. 12,898 (1990); Advertising Checking Bureau, 109 F.T.C.
146 (1987).
7
See note 5 supra. But see U.S. Pioneer Elecs. Corp., [1987-1993 Transfer Binder] Trade Reg.
Rep. (CCH) 23,172 (FTC 1992) (describing Pioneer's practice of agreeing with its dealers on
advertised prices as coming "dangerously" close to resale price maintenance); cf. American
Cyanamid Co., Docket No. C-3739 (FTC 1997) (adopting a consent order prohibiting, inter alia,
American Cyanamid from conditioning the payment of a rebate to a dealer on the resale price at
which the dealer offers the product for sale).
8
State Oil Co. v. Khan, 118 S. Ct. 275 (1997).
9
See note 3 supra.
10
Melanie Warner, Can Tupperware Keep a Lid on the Web? FORTUNE, Jan. 12, 1998, at 144.
11
O.S.C. Corp. v. Apple Computer, Inc., 792 F.2d at 1468.
12
Holabird Sports Discounters v. Tennis Tutor, Inc., 993 F.2d 228 (4th Cir. 1993).
13
See note 3 supra.
14
White Motor Co. v. United States, 372 U.S. 253 (1963).
15
See, e.g., Purdy Mobile Homes, Inc. v. Champion Home Builders Co., 594 F.2d 1313 (9th Cir.
1979); New Amsterdam Cheese Corp. v. Kraftco Corp., 363 F. Supp. 135, 142 (S.D.N.Y. 1973).
16
United States v. Colgate Co., 250 U.S. 300 (1919); accord Monsanto Co. v. Spray-Rite Serv.
Corp., 465 U.S. 752 (1984).
17
E.g., White Motor; O.S.C. Corp.; American Bus. Sys. v. Panasonic Indus. Co., 1989-1 Trade
Cas. (CCH) 68,631 (E.D. La. 1988), aff'd mem., 867 F.2d 1426 (5th Cir. 1989).
18
Business Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717 (1988).
19
See notes 5-7 supra.
20
Mighty Amazon, BUS. WK., July 21, 1997.
21
John R. Wilke & David Bank, Microsoft Allies in "Active Desktop" Are Subpoenaed in Antitrust
Probe, WALL STREET J. (Interactive Ed.), Feb. 5, 1998, at B6.
22
Barnes & Noble, Inc. v. Amazon.com Books, Inc., No. 97 Civ. 9466 (S.D.N.Y. filed May 12,
1997).
23
Playboy Enters. Inc. v. Calvin Designer Label, No. C97-3204 (N.D. Cal. Sept. 8, 1997).

First published in Antitrust, vol. 12, no. 3, at 50 (1998) Copyright 1998 American Bar Association 5
 24
See, e.g., FTC Proposes to Clarify Applicability of Its Regulation to Internet Advertising, 74
Antitrust & Trade Reg. Rep. (BNA) 445 (May 7, 1998); Ilene Knable Gotts & Stacey M. Berg,
Enforcers Get Tough on Fraudulent and Deceptive Practices in Telecommunications Services,
ANTITRUST, Summer 1997, at 39, 40-41.

Richard M. Steuer, is a Litigation partner in the New York office of Mayer, Brown, Rowe
& Maw.
****
For more information about Mayer, Brown, Rowe & Maw’s antitrust group, please visit www.mayerbrownrowe.com/antitrust.

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First published in Antitrust, vol. 12, no. 3, at 50 (1998) Copyright 1998 American Bar Association 6