Legal Briefs #11 - Chewy Does It, Why Can't I?!

Transcript:

Ron: Welcome to another episode of MAPP Trap’s Legal Briefs Podcast where we explore specific strategies and tactics used by brands to protect their pricing, distribution, and intellectual property. As usual, joining us by telephone is Jeremy Richardson from Smith, Gambrell. He's an expert on consumer products.

But we also have a special guest today; we have with us Todd Dittman. Todd is the executive director of Indie Pet, a nonprofit trade association whose mission is to empower independent and neighborhood pet retailers to work together as peers for the well-being of pets and pet owners, as they maintain a strong, sustainable and growing place at the heart of the pet industry. Todd's role is to implement the Board of Directors Strategic Plan and run the operating committees who were initiating the plan.

Todd, you have some specific questions that were posed by your members and maybe we can tackle one of them today.

Todd: Thanks, Ron. Really appreciate you having me on the podcast. It's a great way to really address some of the issues that our independent retailers have. Before we even had a strategic plan for me to manage, we did a survey of all the independent retailers that we could grab at Super Zoo a couple of years ago. We found that one of the biggest issues out there for them, not only for them, but also for the brands and the independent sector, is that of MAP pricing and MAP pricing violations. 

And so, the reality of it is, you know, our members see their major competitors at Amazon and Chewy discounting and going below MAP pricing. My members want to know why can't I?

Ron: OK, Amazon and Chewy are discounting why can't I?  You know, that's a great question and pet stores aren't the only ones that ask that. I mean, they're certainly the only ones that asked that about Chewy, but other industries have larger retailers online who seem to get away with more violations than the more specialty-oriented segment of online sellers. But I think Jeremy really can answer this best, Jeremy?

Jeremy: Yeah, sure. Thanks, Ron and Todd. So nice to meet you. Welcome to the podcast. Yeah, it is a great question. It is an issue that comes up quite often. And sadly, for the retailer’s perspective, the answer really is there's not a lot you can do about it or there isn't anything actually you can do about it. 

Brand owners can enforce their MAP policies unevenly. They can give, well, it's hard to say preferential treatment, but they can allow violations to go on for some retailers not enforce the MAP policy, but as to other retailers, enforce the first, second and third. It really is up to the brand and that's because of what courts call the Business Judgment Rule. Courts are not going to impose their own judgment for the company’s decision-making process, and courts understand that it really is the business owners and operators that are best able to make decisions for their companies. Is it fair? I don't know, but certainly there's no legal recourse to address that.

Ron: This brings up a question that we hear from retailers all the time. OK, so you've got a MAP policy. But I bought the product, don't I own it? Can’t I sell it, do whatever I want with that product?

Jeremy: I think generally, broadly speaking the answer is yes. But there are some exceptions to that. We've talked about trademark infringement and the first sale doctrine, and material differences. So, you know you, as a retailer, have to continue to sell a brand's products in the way that reflects the brand’s image appropriately. But the answer is, you as the retailer, you set the price, you can choose to abide by the MAP Policy or not. And then it's up to the brand owner. If you don't abide by the MAP policy, it's up to the brand owner to decide whether to enforce it or not. And by enforcing it, that could include stopping all sales to you in the future.

Todd: Thanks for that, Jeremy. Indie Pet is trying to address the idea of bringing a light to these violations. Once we're able to do that, what can a retailer do once they see that maybe they're a part of it or they are victim of it, or one of their suppliers is.

Jeremy: Well, I like to think, or I hope that the retailers and the brand owners will act in partnership and act in a mutual best interest and come up with creative ways to address these issues. Often, we see this discounting is occurring on the mass side, at least at a greater level than on the independent store side. 

So, independent stores could work with brand owners to come up with different packaging that is specific to a distribution channel, specific to the independent stores. And by different packaging, not just markings, not just color, but size. Instead of the 50-pound bag of dog food that goes to the mass market retailer, have that brand owner make smaller packaging: 4 pounds, 6 pounds, 8 pounds, something else that is not going to the mass market and there is a point of distinction and you can't compete with those different sized packages. 

Perhaps even come up with a different brand name. Brand owner often do things, I'm not sure the word is right, cannibalize, but you know, do things to differentiate their market, use a separate mark for different distribution channels. And even though the product inside the bag is really the same, the branding, the image, the packaging is different.

Ron: You know that's a great solution. Not all brands can afford to do that and not all brands are going to be willing to do that, but this is the classic uneven playing field scenario. That specialty I mean it owner, it really is universal this uneven playing field, but that's not to say that the retailers are victims with no recourse in this whole equation. You know, manufacturers need retailers. Obviously, it's a symbiotic relationship. So, there are certain things that smaller retailers can do. 

Everybody's driven by the need to make money, and so the larger guys are getting bigger discounts, which gives them more margin to play with. And then the specialty companies, they want the same discounts but it's not practical. They're not buying the same amount of product. So, buying groups is one option that other industries have adopted. I'm sure there are some in the pet industry and that gives smaller retailers some leverage and some better margins and perhaps brands won't sell to Chewy and Amazon if they know they can make just as much money from the indie pet retailer population. 

Also, retailers can do a better job of vetting brands, right? They can ask certain questions. Do you have a MAP Policy? Do you enforce that MAP? Do you sell to Chewy and Amazon? Do you enforce it against Chewy and Amazon? Literally ask do you cut them off? They can find out how many online sellers the brand has. Do they have an authorized reseller program? And so, a bunch of boxes can be checked before that retailer engages with the brand. Another option is that of course they can just buy less. Buy less product so that you're sitting on less inventory. 

There may be some things I think, Jeremy, you may be able to weigh in on this. I know that some of the larger retailers have claw back provisions and they have leverage, so they'll go to a brand and they'll say all right, I will buy it for X and I will attempt to honor your MAP. But if I can't because market forces drive the price down and I have to lower my price because of that, you at the end of the day, are going to give me a rebate. Now a smaller retailers wouldn't necessarily have that kind of leverage to do it, because the brand or distributor would say go away. But is there something on that same level they might be able to try?

Jeremy: Again, depending upon the retailer’s negotiation power, you know we talk about this as markdown dollars in the retail world at least in certain segments of the world. And it's basically a margin guarantee. So, if the retailer is forced for various reasons to discount to, to sell below whatever the MSRP is, the retailer may demand marketing dollars from the manufacturer. It’s pretty common, especially among the more powerful retailers. 

Other options for the retailer may be if there are other brands that are really violating MAP and making it difficult for us to make margin, we have an put option to take our inventory and send it back to you. If I were the brand, I'd be really careful about selling large supplies for many, many months. If so that agreement is in place, but something else just to be creative, that the retailer could do to so protect itself.

Ron: Could that be based on expiration dates or warranties?

Jeremy: Yeah, so that's actually a really interesting point here. We're talking about food, which has a certain shelf life, and we want to be very careful that, as a retailer, we're not stuck with a lot of inventory after the expiration date. So there again, and I would be careful about how much as a retailer I purchased from a brand owner. And from the brand owner’s perspective, I'd be careful how many months of inventory I’m delivering to a retailer at one time because if I'm going to have to refund that retailer, I don't want to sell them or deliver them a year supply of product for something that has a six-month shelf-life.

Ron: Todd, does that answer your questions at all? I know it's not necessarily bright eyed and rainbows, but I think maybe there are some good options.

Todd: So, it sounds like what you're saying is, you know, to build your network of your supply chain. And really trust them and the best way to do that is to contact your Trade Association executive director to help you out. 

Ron: That is a great idea. OK, well, thank you very much Todd. Excellent meeting you. Glad to hear some of the questions from you and from your retailers. I know that we're going to do at least another podcast with you soon. And Jeremy again, thank you for your expertise and your knowledge. And thank you to listeners for listening to another episode of Legal Briefs. And as usual, if you have any recommendations or questions, feel free to e-mail us at legalbriefs@mapptrap.com. For more information about how MAPP Trap can help you with your online brand protection needs. Visit www.mapptrap.com.