Case Closed: FTC Settles with NAMM

For NAMM, it’s over – almost two years to the day after it started (March 7, 2007).

On March 4, the Federal Trade Commission (FTC) closed the books on its case against the music instrument trade organization. The commission judges voted to accept a complaint and consent order in a 4 to 0 vote. The agreement is subject to public comment and analysis for 30 days, and after that it will be permanently closed – at least for NAMM.

“What I can tell you is this consent does not necessarily resolve any other related cases,” confirmed FTC’s Patrick Roach, deputy assistant director, bureau of competition.

So the investigation as a whole continues to grind on for others who were served with a subpoena regarding the question of illegal trade practices. It was verified through sources at the FTC and off the record within the MI industry that the investigation into other groups and individual manufacturers are still ongoing. This consent agreement is solely with NAMM.

Guilty or Not?
While there is understandable relief at NAMM headquarters, there’s also some frustration regarding the exact wording of the FTC’s statement.

“There’s a lot of confusion around this whole thing, and their release is hard to get through,” says Scott Robertson, NAMM’s director of marketing and communications. “I’ve spent a lot of time talking to reporters with questions. The most important thing is to make sure everybody clearly understands it. A lot of the language out there can be misinterpreted and misread. I keep referring to our statement – that will give you the story.”

Roach, however, says the FTC statement is clear. “In a consent decree, the party who received the complaint has to agree to change behavior,” he says. It’s an option that avoids litigation, and one that is favorable to the FTC. “The basic power being exercised here is the issuing of an order to cease and desist.”

In reference to different language used between the two statements, Robertson says: “We’re disappointed at the way they characterized it. When you read it, watch for the word ‘could.’ There are things we did that could have lead to harm to the consumer, could have lead to higher prices…” An analogy could be the police breaking into your house and finding a gun. You could have killed somebody, and while it seems pretty easy to prove you didn’t, the government decides to just “settle” the case.

“The complaint is thin, so it’s hard to see exactly what was going on,” says former FTC lawyer Deborah Feinstein and partner of the law firm Arnold & Porter, which specializes in anti-trust complaints. “Essentially what they are saying is: the sharing of information could be bad.”

NAMM’s position is that they did not do what the FTC accused it of doing in the original suit.

The FTC’s story is different, however. Their statement reads: “The FTC has issued a consent order settling charges that NAMM violated federal law by enabling and encouraging the exchange of competitively sensitive price information among its members.

“The FTC alleged that NAMM organized meetings at which its members were encouraged to communicate, and did in fact share, information about prices and business strategy. To the detriment of consumers, NAMM’s conduct enhanced the members’ ability to coordinate price increases for musical instruments. In settling the complaint, NAMM has agreed to stop engaging in such conduct.”

In subtle contradiction, NAMM’s statement reads: “NAMM has voluntarily entered into a consent agreement with the FTC regarding our organization’s alleged conduct relating to certain meetings in 2005–2007 during which the FTC alleges industry participants discussed minimum advertised pricing policies, and related topics. Notably, the FTC does not allege that NAMM or any third party entered into a collusive or otherwise anti-competitive agreement or that the alleged conduct resulted in higher prices or other consumer injury.

“This agreement does not require any fundamental changes to NAMM’s core activities nor does the agreement constitute an admission of any wrongdoing. However, under the terms of the agreement, NAMM will enhance various internal policies and procedures relating to the ways we communicate and work with our staff and our members. Rather than pursuing costly and time-consuming litigation on this matter, we are choosing to put it behind us so that NAMM can concentrate on our primary mission of strengthening the global music products industry and increasing active participation in music making.”

Both are Right
It appears that NAMM has agreed to “stop engaging in conduct” that they say they never engaged in, in the first place, while the FTC maintains they have evidence of wrongdoing.

“Both are right,” says Feinstein. “But the FTC would not ask for consent if it didn’t think there was wrongdoing.” And in allowing the party to not have to admit wrongdoing, “it’s sort of a no harm, no foul” situation.

In reviewing the FTC statement case, Feinstein says the FTC almost always enters a cease-and-desist agreement, preferring to just get organizations to stop doing what they think is anti-competitive behavior. But by entering in this agreement, “my guess is that either they didn’t feel they got ill-gotten gains through this behavior or didn’t believe they could prove it.”

The FTC document does seem to contradict itself when it later says: “A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $16,000.”

Roach explains that in a case such as this there are two basic documents: The first one is the complaint, which is issued when the commission believes it has sufficient evidence of wrongdoing. The second document is essentially the final one, can be one of three things. There can be case dismissals (rare); notice that the FTC is starting a lawsuit (more common); or a consent decree like the one NAMM’s lawyers worked out with the government (most common).

“In the consent decree, NAMM agrees to change their behavior in the future without them agreeing there was a violation,” Roach says. “But when this occurs, the FTC is pleased with the outcome. They are pleased that [NAMM] is willing to change their behavior in the future and bring them back in line with sound ways of operating a trade organization.”

NAMM has been increasingly vigilant about protocols, as anybody at the last NAMM show who had anything remotely resembling a meeting on any level knows. All were greeted with a town crier-like reading of their Antitrust Policy. [See Sidebar]

“We’ve been tightening ourselves up to make sure we’re in compliance,” Robertson says. Part of this involves a lawyer who is a specialist into anti-competitive actions sitting in on all NAMM meetings. (“Yes, we have to pay for that.”)

Those still under investigation might be interested to note that the roots of this settlement go back to when the case was first filed. Robertson says their law firm Haynes and Boone had an open communication line with the FTC to start working toward such an agreement immediately.

This agreement, some of the confusing wording, and the fact that other organizations and manufacturers are still under investigation, will no doubt contribute to a continuing concern about what is legal and illegal. As one NAMM member not-so-joked before a meeting after the NAMM anti-trust statement was read, “MAP is legal; you just can’t talk about it.”

So how does one stay out of trouble?

“Whenever competitors are getting a room and start talking about prices, that should generally be off limits,” Feinstein says. As to a couple of retailers in a bar casually talking business and the numbers that are inevitably a part of it, even that is “dangerous. There are just not a lot of good reasons to talk about pricing, and it’s risky. It’s good to be conservative for a while – who wants to take a chance on violating the agreement?”

“What is most important is that this is no longer a thorn in our side,” says Robertson. “And its also it’s important to know that while it was a big deal, it’s really something that just me and [NAMM president] Joe [Lamond] have dealt with directly,” he says. “For the organization as a whole, it’s always been business as usual, supporting the industry.”

#E8C78D

The Leegin Decision and MAP

In June of 2007, in the middle of the FTC’s investigation of the MI industry over MAP pricing, the Supreme Court ruled in a controversial 5 to 4 decision, Leegin v. PSKS, effectively striking down an antitrust rule that held sway since 1911. In that ruling, the court decided that it was suddenly now not necessarily unlawful for manufacturers to dictate minimum retail prices to their retailers. Some thought if it was now legal for a manufacturer to dictate what prices to sell a product at, then that would seem to make practice of establishing a Minimum Advertised Price moot.

What the Leegin case meant was that the long-standing policy against manufacturer’s price fixing was now something that was not per se illegal. “The old rule did not focus on the context of those kind of price restriction,” says FTC’s Patrick Roach, deputy assistant director bureau of competition. “What the Supreme Court said was that these kind of arrangements can be looked at through more common kinds of anti-trust rules. Think of it as a rule of reason – it’s a matter of figuring out the context of agreements. It’s not what one manufacturer is doing with respect to the choice of distribution, but there may be problems when there is a lot of coordination.”

Deborah Feinstein, partner of the law firm Arnold & Porter, which specializes in anti-trust complaints, adds that the key to understanding this is thinking of it in terms of vertical pricing (manufacturer’s down to retailer) versus horizontal pricing (competitors sharing pricing information). If Guitar Maker A tells retailer X to sell the guitar for $139, that is legal in the eyes of the court and the FTC; If Guitar Maker B starts telling Guitar Maker B what it’s telling retailer X to sell a certain guitar for, then that’s illegal.

“The NAMM case was essentially about information sharing, where as this is establishing that it’s not illegal per se for a manufacturer to make pricing demands,” she says.