## Facts

- Toys “R” Us, Inc. (TRU) was a dominant toy retailer, accounting for about 20% of U.S. toy sales and often the most important customer for major toy manufacturers.
- Warehouse clubs (e.g., Costco and Sam’s Club) expanded toy sales using significantly lower retail margins than TRU, which TRU viewed as a threat to its pricing image and profits.
- TRU implemented a “warehouse club policy” conditioning manufacturers’ access to TRU on limits to what those manufacturers would sell to warehouse clubs, including restrictions on new or promoted products and requirements that certain items be offered to TRU first.
- TRU met separately with manufacturers; the FTC found that TRU obtained commitments from multiple manufacturers to restrict supply of popular toys to warehouse clubs and monitored compliance.
- The FTC concluded TRU’s conduct formed a “hub-and-spoke” structure: vertical commitments between TRU and each manufacturer, coupled with an understanding that other manufacturers would similarly restrict club supply.
- The FTC found TRU reinforced collective compliance by relaying complaints about deviations, pressuring deviating manufacturers, and reporting renewed compliance back to other manufacturers.

## Issues

1. Whether substantial evidence supported the FTC’s finding that TRU coordinated a horizontal agreement among manufacturers to restrict warehouse-club supply, constituting an unfair method of competition under § 5 of the FTC Act.
2. Whether TRU’s vertical arrangements with manufacturers restricting sales to warehouse clubs were unlawful under rule-of-reason analysis applied through § 5.
3. Whether the FTC’s cease-and-desist order was within the Commission’s remedial discretion.

## Decision

- The Seventh Circuit affirmed the FTC’s liability findings and remedial order in full.
- The court held substantial evidence supported the FTC’s finding that TRU coordinated a horizontal agreement among manufacturers to restrict sales to warehouse clubs.
- The court agreed the vertical restraints also failed under the rule of reason because they harmed competition and consumers by limiting clubs’ access to popular branded toys and sustaining higher prices and reduced choice.
- The court upheld the FTC’s remedy as appropriately tailored and within the Commission’s broad authority.

## Legal Principles

- § 5 of the FTC Act reaches unfair methods of competition, including conduct that would violate the Sherman Act, such as horizontal group boycotts and unreasonable vertical restraints.
- A hub-and-spoke conspiracy may be inferred where a retailer secures parallel vertical commitments from competing suppliers on the condition or understanding that competitors will act similarly, supporting a finding of coordinated horizontal agreement.
- On judicial review of FTC adjudication, factual findings are upheld if supported by substantial evidence; the Commission’s choice of remedy is reviewed deferentially for abuse of discretion.
- Under rule-of-reason analysis, restrictions imposed by a powerful buyer on supplier distribution may be unlawful when they materially foreclose rivals, reduce consumer choice, and lack a persuasive, proportionate procompetitive justification.

## Conclusion

The court upheld the FTC’s determination that TRU used its buyer power to organize supplier commitments that collectively restricted warehouse clubs’ access to popular toys, constituting an unfair method of competition under § 5, and sustained a cease-and-desist order barring TRU from pressuring suppliers or facilitating coordinated restrictions on club sales.


Toys “R” Us, Inc. v. FTC, 221 F.3d 928 (7th Cir. 2000)