Manufacturers and retailers of any products that are sold in music instrument stores (or similar online operations) are currently under investigation by the Federal Trade Commission (FTC).
In March, many firms and trade organizations, including the National Association of Music Merchants (NAMM), received subpoenas to turn over records dating back to 1999. One major manufacturer of pro audio equipment received a 27-page subpoena that asked for so much information that even a former FTC lawyer was taken aback by its depth and scope. According to reliable sources, the FTC is zeroing in on information relating to a NAMM-sponsored “town meeting” on Minimum Advertised Pricing (MAP).
There are three ways it could end:
1. The investigation yields nothing, and they quietly close it;
2. They find some wrong doing but it’s not significant and/or intentional, and they come to a consent agreement and policy is changed; or
3. Serious wrongdoing is found, leading to litigation — and if it ends with fault found on the people being investigated, heavy fines could be imposed.
Yet in a twist, a recent Supreme Court Decision could render it insignificant.
Starting in March, the FTC demanded a backlog of data including post-NAMM show reports and even old copies of trade magazines. They were asking industry people to recall conversations at previous trade shows and trade group meetings about pricing information. The FTC suspected that manufacturers of DJ and audio equipment, along with those who sell guitars and brass instruments and everything in between, were unfairly restraining competition. At issue was a 1911 Supreme Court ruling, Dr. Miles Medical Co. v. John D. Park & Sons, that held that agreements which prevent distributors or retailers from selling a manufacturer’s product for less than a specified amount were illegal under the Sherman Antitrust Act of 1890. So, for example, it is illegal for a manufacturer of the new XTZ moving light [mixing board] to sell it to a retailer for $1,500, and demand the retailer to price it for the public at no less than $2,500. The Supreme Court has said you can’t tell someone what to sell a product for, and that has stood for nearly a century.
What has evolved in the last decade, partly because of catalog and then Internet competition, which because of little or no comparative overhead could slash prices to the bone, is MAP. This is where the manufacturer and retailers agree that that XYZ moving light [soundboard] won’t be advertised at less than $2,500, but of course, when the customer interacts with the retailer over the product, the retailer is free to go under that. (MAP polices are widely used in other industries — though a few, including the major record labels, have been sued successfully by the FTC. In a case in 2000, the five largest distributors of recorded music had to cease their MAP policy with record stores.)
Controversial from the beginning, if a retailer ignored this “gentlemen’s agreement” the manufacturer could be expected to cut the retailer off. Some manufacturers have been diligent about policing this, others (usually smaller ones) have found it difficult to stay on top of the issues, and others still simply winked and looked the other way when the policy was violated.
Supreme Court Reverses 1911 Ruling
While industry companies and organizations have been scurrying around trying to comply with the production of the huge amount of information the FTC is demanding, the Supreme Court dropped a bombshell in June in the Leegin Creative Leather Products v. PSKS Inc. case wherein it struck down the 1911 antitrust ruling and declared it’s not necessarily unlawful for manufacturers and distributors to agree on minimum retail prices. Typical of the current court, it was another five to four divided decision.
“The only safe predictions to make about today’s decision are that it will likely raise the price of goods at retail and that it will create considerable legal turbulence as lower courts seek to develop workable principles,” wrote Justice Steven Breyer in his dissenting opinion. “I do not believe that the majority has shown new or changed conditions sufficient to warrant overruling a decision of such long standing.” On the other hand, experts say the decision will benefit industry manufacturers — it’ll likely raise margins and profits.
Meanwhile, if the FTC investigation is concerned with MAP policies because they seem to be a way to skirt the 1911 ruling, what does it mean when that very ruling is annulled? “I’ve been asked that question a lot,” says Mitchell Katz, FTC Public Affairs Specialist. “We need to evaluate it and see what, if any, impact it will have. We take all case law into consideration, and certainly the Supreme Court decision is case law. Of course, we can’t talk about any ongoing investigation, and we tend to not make any announcements until an investigation is closed or completed.”
It’s anyone’s guess what will happen next, though in terms of the sheer labor hours required for industry companies and organizations to retrieve and produce requested information, plus the fact that many had to hire lawyers in preparation of a defense of their practices, even if it’s all dropped tomorrow it’ll still have been a strange and costly trip.
