Toys R Us May Face Antitrust Action by FTC

WASHINGTON — After an investigation lasting more than two years, the Federal Trade Commission staff has recommended that the agency bring an antitrust action against Toys R Us Inc., according to sources familiar with the matter.

The commission is expected to vote on the proposal at a closed session today, but FTC officials declined to comment on the agenda for the meeting.

Toys R Us, which accounts for more than 20% of retail toy sales in the U.S., said Tuesday that it had not been informed of any imminent FTC decision, but came out swinging anyway.

“We are frankly astounded that the FTC would bring a case against Toys R Us, especially after the commission has acknowledged that our toy-buying practices are well within the law,” said Michael Goldstein, the company’s chief executive. If the agency does bring a case against Toys R Us, he said, “we will have to take our position to the courthouse, where we are confident we will prevail.”

The expected enforcement move was first reported by the trade newsletter FTC: Watch.

At issue is a policy that Paramus, N.J.-based Toys R Us has used to fight its toughest competitors, the big warehouse clubs such as Price Club and Sam’s. Several years ago, the warehouse clubs started to sell hot toys, such as special Barbie dolls and boys’ action figures, at a discount right before Christmas. Toys R Us countered by telling toy manufacturers that they wouldn’t buy the same items that the warehouses were buying.

“The law is crystal clear that Toys R Us has a right to do that,” said Michael Feldberg, an attorney for the company. “The government can’t tell you what to sell or not sell.”

It is unclear what charge the FTC staff may recommend. However, some antitrust experts said it may involve whether the practice used by Toys R Us involves “exclusive dealing” or “threatening to boycott.”

Any such antitrust charge would involve the question of market power. Does Toys R Us so dominate the toy market with its 651 toy stores that its practice would have an impact on competition in the industry?

Attorneys for Toys R Us say no.

“No court has ever held that 20% of any market constitutes market power in the legal sense,” Feldberg said. “Fifty or 60% is what they usually consider” to be true market power, he said.

Other antitrust experts agreed that the FTC’s case could be a stretch because Toys R Us has so much competition in the retail toy market, ranging from the big discounting warehouses to the Wal-Marts and Kmarts.

“What’s the point here?” asked antitrust attorney Joe Sims. The FTC “can’t just show discriminatory behavior. They have to show that there’s a competitive effect,” he said; in essence, that the marketing power of Toys R Us is likely to produce a monopoly by putting its competitors out of business.

Although Toys R Us dominates the retail toy market, giant Wal-Mart Stores Inc. is not far behind, with 15% of toy sales. And Toys R Us has been slipping. After 16 years of growth, its earnings dropped 72% during the fiscal year ended Feb. 2.

Toys R Us stock closed at $29.875 Tuesday, down 87.5 cents, in trading on the New York Stock Exchange.