As posted by: Wall Street JournalPHOENIX -- A group of major discounters, including eBay Inc. and Costco Wholesale Corp., is expected Thursday to call for new laws blocking manufacturers from setting minimum prices on everything from flat-screen TVs to power drills. That move could ratchet up a battle between retailers and a little-known but powerful industry that's taken off in just the past year.
Tiny firms like NetEnforcers Inc. -- with only 56 staffers jammed into a dim, spare cubicle farm here in Arizona -- wield economic power far beyond their size. These companies scour hundreds of thousands of Web sites daily, looking for retailers offering bargains below the "minimum advertised price," or MAP, set by manufacturers on an array of consumer goods.
Overall holiday retail sales are tanking, but amid the gloom there was one bright spot as sales over the Internet spiked. (Dec. 5)
When NetEnforcers finds goods like cameras, handbags or ovens for sale at too-low prices, as it claims to do 5,000 to 10,000 times a day, it alerts its clients, including Sony Corp., Black & Decker Corp., Cisco Systems Inc., JVC Kenwood Holdings Inc. and Samsung Inc.
For discounters, the consequences of not respecting MAP are usually speedy and decisive. If the seller is an authorized dealer of the product in question (which means it is bound to honor a MAP agreement), it gets a notice from the manufacturer or NetEnforcers and typically brings its price into line within hours, the company says.
In October, for instance, NetEnforcers found that discounter Buy.com Inc. and AceToolonline.com Inc. a seller of power tools, were offering goods at below the MAP. Both sites said they raised their prices to MAP levels.
If the seller isn't an authorized dealer -- for instance, a discounter that acquired the goods via a distributor -- NetEnforcers says other tactics are used to try to force a lowball price off the Internet. In these cases, they can allege that the discounter's use of the product's name or image constitutes trademark or copyright infringement, in an effort to force the seller to stop listing the discount.
Manufacturers have been racing to enforce minimum-pricing policies since last year, when the Supreme Court ruled them to be legal, and not a violation of antitrust law. EBay and a group of other retailers and antitrust advocates are meeting Thursday in Washington to craft a strategy to overturn that ruling.
Manufacturers say minimum-pricing requirements are good because they protect a brand's image from being tarnished by discounting, while helping retailers make enough profit to pay for customer service. Consumer advocates argue that minimum-pricing deals hurt shoppers by keeping prices high and diminishing consumer choice.
The FTC is investigating musical-instrument and audio-gear makers for possible MAP-related antitrust violations. And online retailers BabyAge.com Inc. and HomeCenter.com have sued seven manufacturers with MAP or similar price-maintenance policies, alleging antitrust violations.
Discounting, of course, remains a fixture on the retail landscape -- particularly in this year's holiday shopping season, due to the weak economy. MAP agreements don't cover all products and sometimes manufacturers grant exceptions. Typically the agreements apply to high-end goods, electronics and new product lines that manufacturers don't want to see tarnished by immediate discounting.
MAP's proliferation has boosted business for NetEnforcers, a unit of Intersections Inc., of Chantilly, Va., and similar companies. Stuart Bennett, NetEnforcers' head of sales, says the Supreme Court ruling helped him land 40 new clients the past year, bringing the total to about 140.
Rival firms include MAPtrackers Inc., Cyveillance Inc. and Brand Protection Agency.
Klipsch Audio Technologies Inc., an Indianapolis audio-equipment maker, says in the past it prevented discounting by unauthorized dealers by suing them and terminating contracts with authorized dealer that provided the discounters without Klipsch's consent. Over the past three years, Klipsch broke off its relationship with nearly 20 authorized dealers following lawsuits like these.
But Mike Klipsch, the company's president, says he now uses NetEnforcers because it is a less expensive way to go.
Mr. Klipsch says so far this year NetEnforcers succeeded in eliminating 1,420 instances of sellers' listing below MAP online.
"It's one thing to establish a MAP policy," Mr. Klipsch says, "but when you go after the bad guys with a company like NetEnforcers you're showing your retail partners a zero-tolerance policy for any price violations."
NetEnforcers says that this year through Oct. 13, it helped shut down 1.2 million seller pages on eBay, due to either MAP violations or trademark and copyright-infringement claims. NetEnforcers says the majority of violations it sees are on eBay, the immense auction and online-retailing marketplace.
'Aggressive Policing'
Tod Cohen, eBay's vice-president of global government relations, says "manufacturers and agencies like NetEnforcers are increasingly getting more aggressive policing the prices of our sellers." They routinely use trademark-violation claims when asking eBay to take down sellers' pages, "but it's a bit unfairly enforced," he says. "They take down the Web sites only of the unauthorized resellers that are selling at discounts," but don't bother other unauthorized sellers if they're selling at MAP. This suggests manufacturers are mainly interested in keeping prices up, not preventing trademark violations. Mr. Cohen says.
Nichola Sharpe, an eBay spokeswoman, declined to comment on NetEnforcers' numbers. She said eBay pages taken down at the request of NetEnforcers' clients would have been removed under eBay's "verified rights owner," or VERO, program. That program was established partly to prevent the sale of counterfeit goods, and to crack down on unauthorized resellers: A manufacturer owning trademarks and copyright on a product for sale on eBay can request a listing's removal.
But Ms. Sharpe said eBay believes some manufacturers are "trying to abuse the VERO program" by using it to force legitimate discounters to stop selling at low prices.
"We are very much looking more closely at the issue," Ms. Sharpe said. "We feel that consumers will ultimately suffer, and we feel that they do deserve the best and most competitive price they can get."
NetEnforcers acknowledges that it uses the VERO program to remove violators of minimum-pricing terms, arguing that it's an appropriate under the Digital Millennium Copyright Act, a 1998 law designed to help copyright-holders control access to digital copies of their works.
NetEnforcers would discuss violation totals at only two other sites with significant numbers of below-MAP deals or unauthorized dealers -- iOffer.com and Craigslist.com. It said the two sites totaled 51,280 individual pricing violations this year through Oct. 13.
iOffer, based in San Francisco, says it wastes little time removing listings when notified. The removals are generally made "within 12 to 24 hours following receipt of take-down notices," says Chief Executive Ryan Boyce.
Jim Buckmaster, Craigslist's chief executive, says the site has implemented its own protections against intellectual-property violations and also "removes postings ... when they come to our attention."
Joseph Loomis, the 32-year-old founder and chief executive of NetEnforcers, says clients pay it $1,500 to $100,000 per month, depending on the number of products being monitored. Mr. Loomis says sometimes the company must make purchases from Web sites, and track the serial numbers of the products, so the manufacturer can figure out which warehouse or retailer the products originated from to determine how the goods reached an unauthorized dealer.
Mr. Loomis, a former Naval intelligence agent, says the idea for NetEnforcers was conceived about six years ago while he was working as an electrical engineer for a car-stereo manufacturer. Annoyed by a growing number of unauthorized dealers discounting its products, company executives asked Mr. Loomis to devise a way to catch them.
He developed software to track the company's authorized dealers and prices. From there, he devised companion software to identify online sales that were discounted.
This put the stereo discounting to an end, Mr. Loomis says. In 2003, he launched NetEnforcers using similar software.
Staffers Scour
Every business day, about 20 NetEnforcer staffers scour the Web from cubicles in Phoenix and another site in Gainesville, Fla. Using computers pre-loaded with information on the products and prices clients want checked, the staffers, dubbed "enforcers," type in names and model numbers, one product at a time.
In Phoenix one October afternoon, Web pages listing clients' products at below MAP were popping up often on enforcers' screens. Sites containing apparent violations would get forwarded to Danielle DiDio, a customer-service representative, whose job it is to notify the manufacturers. The manufacturers or NetEnforcers then contact the retailer to ask it to raise its prices.
By day's end, NetEnforcers had spotted a Panasonic home-theater projector listed by Buy.com at $43,208.99, well below the MAP price of $49,000. It also found discrepancies in two Black & Decker products listed by AceToolonline: a table saw with a MAP price of $169 listed at $162.24, and a heavy-duty battery pack for $129, $20 below MAP.
Jeff Wisot, vice president of marketing for Buy.com, which is an authorized Panasonic dealer, says his company quickly increased the price to MAP. He called the discounted price "an oversight and nothing deliberate on our part." He said the company "can't afford to be deauthorized as a dealer" and could also lose manufacturers' support for advertising if it violates MAP.
AceToolonline also says it raised its prices to match MAP. The online retailer's president, Maria Polidoro, said her company was punished by Black & Decker for the violations. She says AceTool must forfeit some advertising funds from Black & Decker. As another part of the penalty, Black & Decker will also stop routing customers from its own Web site to AceToolonline for 30 days, Ms. Polidoro says.
"I am for having MAP; it makes it easier to sell my products at a profit. I just wish that the competition also followed MAP," she says.
A Black & Decker spokesman said the company sets MAPs on certain of its high-end brands.
NetEnforcers also found a 47-inch LG Electronics Co. television advertised by Circuit City Stores Inc. at $1,529, as compared to LG's MAP price of $1,699. Bill Cimino, a Circuit City spokesman, declined to comment on NetEnforcers' finding, saying the retailer "makes its own pricing decisions."
Some retailers try to circumvent pricing restrictions by listing a product at the MAP price but telling shoppers to click an additional button -- or to add the product to their shopping cart -- to see a discount price.
Indeed, Circuit City's online price for the TV moved up to the $1,699 MAP level soon after NetEnforcers noticed the lower price. But more recently, the item had a "see price in cart" notice next to it. Clicking on that opened another window displaying a discounted price of $1,439.99.
Circuit City declined to comment on the use of the "see price in cart" button.
In July, Samsung sued Broadway Photo LLC alleging copyright and trademark infringement on grounds that the company wasn't an authorized dealer. The suit, in U.S. District Court in Manhattan, seeks an injunction to stop Broadway Photo from selling Samsung products.
Broadway Photo declined to comment for this article. The company denied any wrongdoing in its courtroom reply, but agreed it wasn't authorized to sell Samsung.
NetEnforcers collected evidence for the Korean manufacturer, say people familiar with the matter. These people say the company traced Samsung sales to 16 Web sites with names like bananaboatcamera.com and infinitycamera.com that, according to the allegations in the lawsuit, are operated by Brooklyn-based Broadway Photo.
Asim Kahn, a lawyer for Samsung's U.S. unit, declined to comment on the case. Samsung's lawsuit states that sales of its products by Broadway Photo "reduces the prices that Samsung can obtain" for that merchandise.
