Former FTC Lawyers Speaks Out on the MI Industry Probe

MMR Magazine, Issue Date: June, 2007, Posted on 6/18/2007

June 07A former Federal Trade Commission (FTC) lawyer and current defender against FTC suits has reviewed one of the many subpoenas handed out by the FTC in its investigation into the music products industry and, despite his formidable experience, even he was caught off guard at the depth and sheer volume of information the agency is requesting.

"It's not that common to get a subpoena that broad, one seeking that much information," says attorney David Federbush.

Speaking in general terms, Federbush feels one can conclude that the bigger, deeper, and wider the investigation, the more likely that the FTC believes they are on to something significant. He comments, "An investigation has to be approved by the FTC commission to go forward, and in the case of a full-fledged investigation, there has to have been successive approval from the higher ups to justify the increase of allocations of resources a case like this will take. Attorneys running investigations have to justify the need for those resources to their superiors, and convince them that there is a suspicious problem that merits such an investigation. There wouldn't be a full investigation without the staff making a good case."

Federbush spent 12 years at that FTC where he was an award-winning federal civil prosecutor of unfair and deceptive trade practices. In the 17 years since he left the FTC, he's represented corporations and individuals in a range of civil actions including commercial, consumer, and financial fraud. He's published on unfair and deceptive trade practices and has been cited as an authority in appellate court opinion. Today he does commercial litigation and anti-trust analysis and consulting, representing companies and individuals that are the subject of an FTC investigation or being sued by the commission.

On Mar. 12, certain trade organizations, vendors, and manufacturers received subpoenas from the FTC announcing an investigation into Minimum Advertised Price (MAP) policy. The subpoenas are asking for those companies and organizations to produce records dating from Jan. 1, 1999 to the present regarding MAP policies, cooperative advertising funds, and artist endorsements. The original deadline to supply information was Apr. 11, and the vast majority, if not all, have asked for and received extensions.

Anticompetitive Reaction to Market Changes?

Federbush notes that in asking for information relating to the impact of foreign imports, mass merchants like Target and Best Buy, and Internet dealers, it suggests that one area of interest could be that the FTC thinks the thrust of the market is changing in a way that seems comparable to their case against the five largest distributors of recorded music. That 2000 case ended in the industry being forced to abandon their MAP policies.

"You wonder what they think - do they think prices are higher than they should be? Do they think that traditional pre-existing musical instrument retailers have reacted to the changes in the marketplace in ways that are anticompetitive?"

Federbush noted that when he went online to look at some retailers in this industry and others, he saw several saying, "here's the MAP, but call for more information." One thing he found that was suspicious to him was gpscity.com, an Internet retailer that sells Global Positioning System (GPS)-related products. Next to the product is a "too low to show" link, which clicks through to this:

"Our low price is below the manufacturer's minimum advertised price, so we cannot show it here. To see the price, please add the item to your cart. You can always remove it later."

And you can click on a "Why?" link and it describes in more detail what MAP is, and how they can still show you a price below it online while not being obligated to buy the product, effectively skirting the issue completely.

There doesn't seem to be anything that blatant on a musical instrument site, though he found the "call or email for more information" found on some musical instrument retailers' sites to be potentially problematic. "The seller is essentially telling the consumer that there is a lower price and maybe that is the focus of the FTC's attention. I'm speculating here, but they could be looking at how while retailers aren't supposed to show anything but MAP, they are effectively saying there is a lower price." The FTC's interest could be in how some MAP policies are more anticompetitive than others.

In some online retailing situations, it's hard to know if the manufacturer of the product has a lenient MAP policy and isn't policing it well or even at all, or if the retailer is violating the policy.

Or both.

What's confusing for people in the music retail industry is, why would some MAPs be okay, and not others (they aren't investigating the electronics industry, which would include that GPS site, for example). It turns out that determining what is anticompetitive might seem to be more of an art then a science, and also it's something where the goalpost might be being moved.

Federbush points out that right now before the United States Supreme Court is a case that could reverse a rule that has been in place since 1911 that prevents manufacturers from setting the resale price for their goods. The case, Leegin Creative Leather Products v. PSKS, was argued in March and a decision on that case will be handed down later in the current Supreme Court term. It would likely affect this and other similar cases.

The 1911 case, Dr. Miles Medical Co. v. John D. Park & Sons, held that agreements that prevent distributors or retailers from selling a manufacturer's product for less than a specified amount (aka "resale price maintenance") were per se illegal under the Sherman Antitrust Act of 1890. But times, and ways of looking at what is and is not anticompetitive practice, are changing with the modern marketplace.

It's evolving from whether or not a policy is per se illegal to looking more at what the overall economic effect a manufacturer's policy has. In a number of areas, it seems to be trending away from hard and fast rules and more toward considering the overall economic effect and trying to answer the elusive question of whether something is anticompetitive or pro-competitive, he says.

Protecting their Sources

While lawyers at the FTC don't "specialize" in a specific area exactly, Federbush says it's not an uncommon situation that if one gets involved in a certain area, or a certain industry, he or she might continue to pursue other similar issues or industries and build up an expertise in that arena. (The lead lawyer on this case, William L. Lanning, has a record for successfully prosecuting other industries for their MAP policies, including the 2000 case against the record industry. He was part of an investigation that led to the largest fine handed down in FTC history.)

As to how this case got started, it is now, and will very likely forever remain a mystery. "It could have come from a competitor in the marketplace, some downstream distributor who felt that he or she was being crowded out of the market. It could have come from consumer complaints, or a referral from some congressional representative. There's a lot of ways for it to get started. The FTC gets a lot of referrals.

"But the FTC generally doesn't disclose where the initial complaint came from. In the investigative stage, the source could be compromised. The FTC operates as a law enforcement agency, and they protect their sources."

Federbush says that some of his new clients might not understand how the FTC works, its internal procedures, how investigations turn into a complaint, etc. So at times his first task is to enlighten them about how things work and the possibilities of how things will play out.

As to how best to deal with the FTC ...

"I can only state the obvious: you want to deal with the staff respectfully. You want to be firm if the FTC has misunderstood some facts, but always polite. One thing that may happen once in a while if there is an interpersonal chemistry problem with the FTC and the defense attorney, the defense attorney might try to go over the staff attorney's head wanting to 'set things straight.' Most of the time that is a big mistake, because it's clear at that point the bureau [superiors] already have faith in the case and the attorney handling it. That can have no effect or a negative effect [on the case]."

Like anything else that has the potential to end up in a courtroom, attorneys and their clients have to consider cutting their losses, and even though the company or industry which is being investigated is in the "right."

"Happens all the time," Federbush says. "You always have to make an assessment to determine the likelihood of success, what the cost will be, and so on." In that situation, a consent agreement may be reached with the FTC where the defendant denies all liability, but it's all put behind them without admitting any guilt. But these consent agreements have to be configured carefully. The language must be constructed so no wrongdoing is admitted, otherwise the settlement could be used in a suit against them, or some other agency could use it as a lead to another investigation.

"The most important thing is to have a really great case," Federbush says when asked what's important to ensuring a quick closing of an FTC investigation. "You can talk about procedures and how to handle things, but the most important thing is the merits of the case and how well you prepare those merits."

This article was originally on the Web at http://www.mmrmagazine.com/ME2/dirmod.asp?sid=&nm=&type=Publishing&mod=Publications%3A%3AArticle&mid=8F3A7027421841978F18BE895F87F791&tier=4&id=1FBD4F6448374292BF4382EC1A6A47E6.

The Law Office of David J. Federbush
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