Wal-Mart v. Santa: Toy Makers Allege Antitrust

Plaintiff, Wal-Mart Stores, Inc.

v.

North Pole Industries, a North Pole corporation, Defendant

Case No. 1225

Trial By Jury Demanded


1.

Plaintiff Wal-Mart Stores, Inc. (Wal-Mart) alleges upon information and belief the following against Defendant North Pole Industries (Santa):


I.

INTRODUCTION


1.

Santa has engaged in a systematic worldwide campaign of illegal, exclusionary conduct to maintain its monopoly power and prices in the market for toys, the gifts of choice at Christmas. By exacting exclusive or near-exclusive agreements from large toy makers (“Original Toy Manufacturers” or “OTMs”) in exchange for payments totaling billions of dollars, and threatening retaliation against any company that did not heed his wishes, Santa robbed his competitors of the opportunity to challenge Santa’s dominance in key segments of the market. This illegal behavior was highly detrimental to consumers, competition, and innovation.


2.

Starting in 2001, the threat from competition became salient with Santa. Santa’s biggest toy competitor, Wal-Mart, had begun developing toys that not only competed with Santa’s offerings, but were in many ways more desirable, being less expensive, in part due to cheap Chinese labor, and the use of lead-based paints, as opposed to the use of more costly “lead-free” paints.


3.

In response, Santa launched an illegal campaign to deprive Wal-Mart of distribution channels and consumers of product choice and lower prices. In order to achieve exclusivity or severe limitations on an OTM’s purchase and offering of Wal-Mart toys, Santa paid hundreds of millions – in some cases billions – of dollars in “rebates.” Although Santa tried to disguise the anticompetitive nature of these payments, they bore no genuine relationship to pro-competitive, volume-based discounts or reasonable efforts to meet specific competitive offers.


4.

At the same time, Santa threatened OTMs with retaliation if they persisted in dealing with Wal-Mart. These threats took a variety of forms, including funding an OTM’s competitors to directly compete against it, ending any current payments that the OTM received from Santa, and ending joint development ventures.


5.

The OTMs, struggling with narrow profit margins and fearing that Santa would retaliate by subsidizing their competitors to undersell them, often conformed to Santa’s demands. For example, in exchange for billions of dollars in rebate payments and other benefits, Family Dollar Stores, Inc. (Family Dollar)agreed not to sell any Wal-Mart products from 2001 to 2006.


6.

When Santa could not prevent OTMs from dealing with Wal-Mart altogether, it generally succeeded in greatly limiting the extent to which the OTMs brought Wal-Mart-based products to market. In 2002, Santa reached an agreement with KB Toys, Inc. (KB) – subsequently extended to 2004 – which, in exchange for hundreds of millions of dollars, capped KB’s sales of Wal-Mart-based toys at 5%, guaranteeing Santa 95%.


7.

Moreover, in the highly profitable video game market, after being offered a $130 million payment from Santa and receiving various threats, Electronic Arts, Inc. (EA) agreed to cancel one planned Wal-Mart-based product entirely and to market another only on an “unbranded” basis.


8.

By these means and others, Santa has distorted competition and harmed consumers, depriving them of the lower prices and increased rates of innovation which competition would have yielded. Absent Santa’s illegal acts, prices would likely have been lower, product innovation more dynamic, and consumer gains greater.


Thomas Robertson II © 2009