Levi Strauss & Co

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IN THE MATTER OF LEVI STRAUSS & CO.

MODIFYING ORDER IN REGARD TO ALLEGED VIOLATION OF SEe. 5 OF THE FEDERAL TRADE COMMISSION ACT Docket 9081. Consent Order, July 1978--Modifing Order, Dee. 20, 1994 This order reopens a 1978 consent order (92 FfC 171), that settled allegations that the respondent had engaged in a number of anticompetitive practices, including fixing the resale prices at which retailers sold its products, and modifies the consent order by adding a provision to clarify that the order does not prohibit conduct by the respondent that is necessary to form and operate wholly-owned retail stores, or retail stores partially-owned by the respondent in lawful joint ventures. The Commission found that the respondent had satisfactorily met its burden of showing that changed conditions of fact required the modification. ORDER REOPENING AND MODIFYING ORDER On August 25, 1994, Levi Strauss & Co. ("LS&CO") filed a Petition To Reopen Proceedings And For Modification of Consent Decree ("Petition ) pursuant to Section 5(b) of the Federal Trade Commission Act, 15 U. c. 45(b) FTC Act ), and Section 2,51 of the Commission s Rules of Practice and Procedure, 16 CFR 2. Rules ), The Petition asks the Commssion to reopen the proceed­ ing in Docket No. 9081 and modify the consent order issued by the Commission on July 12, 1978 Levi Strauss CO. 92 FTC 171 (1978) ("order ). Specifically, LS&CO requests that the Commssion add a paragraph to the order stating that the order shall not be construed to prohibit conduct that is ancillary to and reasonably necessary for the formation and operation of retail stores either wholly-owned and operated or partially owned by LS&CO in a lawful joint venture. LS&CO' s Petition was placed on the public record for thirty days, pursuant to Section 2. 51 of the Rules, and two comments were received.

After reviewing the Petition and other relevant information, the Commission has determined to grant the Petition. LS&CO has shown changed conditions of fact Ihat require reopening and modify­ , LEVI STRAUSS & CO. 1219 1218 Modifying Order ing the order. ' These changed conditions make the continued application of the order without the modification LS&CO now seeks inequitable and harmful to competition.

The Complaint and Order and LS&CO' s Petition The Commission issued its complaint in this matter on May 5 1976, charging LS&COwith illegally fixing the retail prices of its blue jeans and other products, in violation of Section 5 of the FTC Act.' The consent order was issued on July J 2 , 1978 , and prohibits LS&CO from engaging in resale price maintenance ("RPM") and from using various non-price vertical restraints to further or imple­ ment RPM.

LS&CO now requests the Commission to modify the order by adding a paragraph stating that the order shall not be construed to prohibit conduct Ihat is ancillary to and reasonably necessary for the formation and operation of retail stores, either wholly-owned and operated or partially-owned by LS&CO (or its subsidiaries or affiliates) in a lawful joint venture LS&CO plans to establish retail stores that sell only LS&CO products ("OLS stores ). One aspect of this plan includes the formation of a joint venture with an LS&CO customer, Designs, Inc, ("Designs ), that will operate OLS stores in one part of the country .' Because the order restricts LS&CO' s ability to influence prices charged by retailers authorized to seli t.S&CO products, LS&CO believes that "as to the contemplated joint venture I Because LS&CO has demonstrated that changed conditions of fact require reopening and modifying the order, the Commission need not consider whether reopening is warranted under the public interest standard.

2 92 FTC a! 171­75.

3 Paragraph r of the order prohibits LS&CO from, among other things (nixing, establishing, controlling or maintaining, directly or indirectly, the price at which any dealer may advertise, promote offer for sale or sell any product at retail." 92 FTC at 176. "Dealer" is defined as "any person partnership, corporation, or firm authorized by Levi Strauss & Co. to selJ any product, ld. LS&CO is also prohibited from limiting participation in cooperative advertising funds or otherwise disciplining dealers who fail to adhere to RPM. Nor may it require its dealers to report cheaters, or itself conduct any other type of surveillance program to enforce rc::a!c prices . Finally, paragraph I also prohihits LS&CO from restricting the classes of customers to whom its dealers may sell when such restrictions are in furtherance of RPM. ld. at 176- 77. 4 Petition at 5 Memorandum in Support of Request to Reopen the Proceedings and for ModiEcation of Consent Decree at ! (" Petition Memorandum Modifying Order ! 18 F.TC. , . , the literal language of the order may prohibit LS&CO' involvement, making modification necessary before the joint venture is consummated.

In support of its Petition, LS&CO argues that the relief it seeks is required by changed conditions and is in the public interest. When the order was issued, LS&CO, for practical purposes, did not own, or partially own, any retail operations.' Instead, it was engaged almost exclusively in manufacturing and sold its apparel products to independent retailers throughout the United States. Recently, LS&CO concluded that the planned OLS retail stores are important "8 A similarto LS&CO' s "overall marketing and product vision. marketing approach has been adopted by many of LS&CO' competitors who have formed and currently operate "brand-only without theretail stores. LS&CO thus asserts that the order, clarifying language it now seeks, restricts it from competing in the retail market and, consequently, "cause(s) (LS&COJ significant competitive hann not envisioned by the consent order. LS&CO also argues that the order was "never intended to impose a restriction on LS&CO.' s ability to compete at retail " and that the order does not expressly prohibit LS&CO from undertaking any form of vertical integration. 10 LS&CO believes Ihat modifying the order will allow it to engage in the same lawful conduct (without disturbing the main purposes of the order) in which its competitors are free to engage and are in fact engaging, to the benefit of competition and, ultimately, consumers of apparel products.

Id. at 2. L CO believes that the order should not be construed to apply to a fClad outlet wholly-owned by LS&CQ, because LS&CO does not actually "authorize" such an omlet to sell any products. Nevertheless, to avoid any uncertainty concerning application of the order to LS&CO' wholly-owned retail operations, LS&CO requests that the order be modified to authorize the formation and operation of wholly-owned LS&CO retail stores. Jd. at 2, 5-6. The Commission believes that dealer" as used in the order does not apply to retailers that are wholly-owned by LS&CO . in light of Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984) (coordinated activity of parent and wholly-owned subsidiar to be viewed as that of a single enterprise). LS&CO "owned a small retail operation selling closeouts in the east, but had no meaningful presence in the retail market. ld. at 5. 8 Jdatl.

9 Id.

at 1­ 10 ld.

LEVI STRAUSS & CO. 1221 1218 Modifying Order Standards for Opening and Modification Section 5(b) of the FTC Act, 15 U. c. 45(b), provides that the Commission shall reopen an order to consider whether it should be modified if the petitioner "makes a satisfactory showing that changed conditions of law or fact" require such modification. A satisfactory showing sufficient to require such reopening is made when a request to reopen identifies significant changes in circumstances and shows that the changes eliminate the need for the order or make continued a placation of it inequitable or harmful to competition. The burden is on the petitioner to make the requisite satisfactory showing. The language of Section 5(b) plainly anticipates that the petitioner must make a "satisfactory showing" of changed conditions to obtain reopening of the order. The legislative history also makes it clear that the petitioner has Ihe burden of showing, other than by 12 If the conclusory statements, why an order should be modified, Commission detennines that the petitioner has made the required showing, the Commission must reopen the order to consider whether modification is required and, if so, the nature and extent of the mod­ ification. The Commission is not required to reopen the order, how­ ever, if the petitioner fails to meet its burden of making the satisfac­ tory showing required by the statute. The petitioner s burden is not a light one given the public interest in repose and the finality of Com­ mission orders.

LS&CO Has Shown that Changed Conditions of Fact Require Reopening and Modifying the Order The 1976 complaint in this matter describes LS&CO as the larg­ est apparel manufacturer in the world engaged in the manufacture sale and distribution of a "wide variety of wearing apparel for men 11 Louisiana-Pacific Corp. , Docket No. C-2956, Letter to John C. Hart (June 5 , 1986) ("L- Letter ) at 4 Cf. U/Jited States v. Louisiana- Pacific Corp.. 967 F.2d 1372, 1376- 77 (9th Cir. 1992), where the court noted that " (aJ decision to reopen docs not necessarily entail a decision to modify the order. Reopening may occur even where the petition itself does no! plead facts requiring modification. 12 The Commission may properly decline to reopen an order if a request is " merely conclusory or otherwise fails to set forth specific facts demonstrating in detail the nature of the changed conditions and the reasons why these changed conditions require the requested modification of the order. " 5. Rep. No. 96-500, 96th Cong. , 1st Sess. 9- 10 (1979). Sa also Rule 2.51(b), which requires affidavits in support of petitions to reopen and modify. See Federated Department Srnres, Jlle. v. Moilie 425 U.5. 394 (1981) (strong public interest considerations support! repose and finality). , Modifying Order 118 FTC women and children, including but not limited to jeans, slacks, shorts ,,14 At the lime, LS&CO sold itsshirts, jackets and related items. products directly to numerous retail dealers located throughout the United States who in turn resold the products to the general public, Currently, LS&CO is the second largest producer of denim jeans in IS but faces competition from numerous otherIhe United States branded jeans manufacturers, many of which have vertically integrated into retailing through company-owned stores. addition, competition also is provided by a proliferation in private label jeans manufactured for and marketed by large retailers, When the order was issued, LS&CO, like its competitors, had no meaningful retail presence, Since the order was entered, however many ofLS&CO' s competitors have integrated into retailing, in order to showcase their products, market their complete lines, and demon­ strate to their own retailer-customers the benefits of promoting the manufacturer s products. In view of these changed conditions, the order exerts an unintended chilling effect on LS&CO' s ability to par­ ticipate in retailing in response to this development, because LS&CO may not int1uence "directly or indirectly, the price at which any deal­ er may advertise, promote, offer for sale or retail.,,18 The order restriction on int1uence prices charged by retailers products inhibits LS&CO from becoming lawful retail joint ventures, LS&CO has made a satisfactory showing that changed conditions require the Commission to reopen the proceeding, The significant change in circumstances identified by LS&CO in support of its Petition is the fact that since the order was issued brand-only" retail stores have been established by many of LS&CO' s competitors. LS&CO would like to open similar stores in a proposed joint venture with Designs, as part of an overall business strategy responsive to among other things, competition in the marketing of casual apparel and jeans in the United States.

LS&CO believes that establishment of the OLS stores is "vital to It hopes that the OLSLS&CO.'s long- tenn competitive interests.,,19 14 92 FTC at 172.

15 Petition Memorandum at 7 16 Id.

17 Id. at 7­ 18 92 FTC at 176.

19 Declaration of Robert D. Rockey. President of Levi Strauss l'' onh America paragraph 2 LEVI STRAUSS & CO. 1223 1218 Modifying Order stores wil position the Levi' s brand in an environment Ihat emphasizes LS&CO' s image, values and reputation, and provides consumers with the opportunity, in one store, to see a broad assortment of Levi' s products. LS&CO also believes that once the OLS stores demonstrate the viability of dedicating retail space and substantial product assortments to LS&CO products, retailers may be persuaded to dedicate space to "focus areas" and in-store shops developed for the Levi' s brands they carry OLS stores are unlikely adversely to affect competition among apparel retailers in the United Slates. United States retail apparel sales are highly fragmented. More than 250 000 stores caITY apparel products; of these, more than 200 000 stores sell only apparel and accessories, and 50 000 stores are primarily department, chain or general merchandise stores Even the largest retailers account for only a small percentage of apparel and jeans sales." Based on this data, LS&CO' s OLS stores will account for a small fraction of the overall jeans volume and even less of overall casual apparel sales. The record evidence suggests that LS&CO lacks market power in the manufacturing of jeans and other casual wear and that the pro­ posed joint venture will not have market power in apparel retailing. Without market power at either level of distribution, LS&CO' retailing venture would be unlikely to give rise to anticompetitive effects. In the absence of likely anticompetitive effects, the order as modified would permit LS&CO flexibility to adopt new marketing strategies that may increase competition and benefit consumers. A modification of the order to clarify that it does not prohibit LS&CO from entering into otherwise lawful retail joint ventures is consistent with past Commission action involving other orders against per se unlawful conduct. In American Standard, Inc. , 108 FTC 181 (1986), and General Railway Signal Co" 110 FTC 143 24 to permit (1987), the Commission modified a 1964 consent order 20 Petition Memorandum at 13.

21 Petition Memorandum at 10­ 1 J.

22 ld.

23 LS&CO' s annual jeans volume in the United States amounts to approximately 57. 5 million units of a Total of about 300 million jeans units sold. The united States casual apparel industry has annual sales of approximately 2 billion units with LS&CO' s products accountiog for about 97 mi\lion units. /d. at 11- 12.

24 See General Railway Signal Co. 66 l-TC 882 (1964). order reopened and modified to provide for expiration (Aug. 29, !994).

Modifying Order 118 FTC the respondents to engage "in conduct. , , ancilary to and reasonably necessary for the fonnation or operation of a joint venture that is The order against the signalinglawful under the antitrust laws,,,25 companies broadly prohibited agreements with "any other person persons or business entity not a party hereto," Concluding that the order was aimed at collusive agreements, the Commission modified Ihe order so Ihat Ihe respondents could participate in otherwise lawful joint venture activity?6 Like the proposed modifications in General Railway Signal, LS&CO is requesting that the order be modified to permit lawful joint ventures, consistent with the The requested modification also is Commission s previous action in Liquid Air Corporation of North , 94 FTC 390 (1979), and AirAmerica, et al. Docket No, C-2990 , 110 FTC 19 (1987),Liquide S.A Docket No. C-3216 In those matters, the respondents 28 in a joint petition, requested the Commission to modify the respective orders because, in essence they required the respondents to obtain the prior approval of the Commission before undertaking purely internal business activities. The Commission granted the petition on public interest grounds, stat­ ing that the respondents had shown that the orders "impose(d) sub­ stantial costs on the respondents because they require(d) the respon­ dents to obtain the prior approval of the Commission in connection The Commissionwith the respondents, wholly internal activities,,,JO determined that "(s)uch internal activities would raise no competitive 25 108 FTC at 183.

26 Id.

at 181.

27 Lawful joint ventures can generate efficiencies such as economics of scale, sharng risks synergies resulting from pooling complementar resources and facilituting entry into new markets. See, g" Broadcast Music.1nc. v. CBS, 44! U. S. 1, 20-23 (1979); Brunswick Corp. 94 FIC 1174, 1265 (1979), affd in pari and modifed in part sub nom. Yamaha Motor Co. v. FTC, 657 F.2d 971 (8th Cit. 1981), Ceft. denied,456 U.S. 915 (1982). See also Copperweld Corp. 467 U.S. at 768. where the Court stated that "joint ventures, and varous vertical agreements, hold the promise of increasing a firm efficiency and enabling it to compete more effectively. Accordingly, such combinations are judged under a rule of reason, an inquiry into market power and market structure designed to assess the com­ bination s actual effect.

28 At the time, L' Air Liquide was the parent of Liquid Air Corporation. 29 For example, under the orders, L' Air Liquide would have to obtain the prior approval of the Commission for a transaction in which it caused its subsidiary, Liquid Air Corporation, to acquire all or any par of another L' Air Liquide subsidiary. 30 See Order Reopening and Modifying Orders Issued on September 5, 1979, Against Liquid Air Corporation of North America and on July 15, 1987 , Against Air Liquide Societe Anonyme Pour Etude Et L'Exploitalion Des Precedes Georges Claude 111 FTC 135, 137 (1988). LEVI STRAUSS & CO. 1225 1218 Modifying Order questions. . , .,,3\ The Commission, citing Copperweld Corp. , 467 S. 752, concluded that application of the orders' prior approval provisions to respondents wholly internal activities" would not be consistent with the principle that the coordinated activity of a parent and its wholly-owned subsidiaries must be viewed as that of a single enterprise for Federal antitrust law purposes The Commission has recognized the need to avoid applying a consent order aimed at particular unlawful conduct to inhibit conduct that is lawful. For example, in Adolph Coors Company, 112 FTC 191 , 197 (1989), Ihe Commission found that a general prohibition against Coors' hindering, suppressing or eliminating competition between or among distributors was unduly restrictive and overbroad and could have a chilling effect on Coors ' ability to implement certain distributional efficiencies.

In light of the competitive developments in the casual apparel and jeans retail distribution channels, the minimal foreclosure of these channels by implementation of the proposed LS&CO/Designs joint venture, and the fact that LS&CO' s competitors are not restricted by similar orders and indeed opera Ie retail stores exclusively featuring their respective brands, the order should be modified to permit LS&CO to enter into lawful joint ventures in retailing. LS&CO will remain subject to all the requirements of the order in its dealings with independent retailer-customers. Any attempt by LS&CO to influence pricing by its independent dealers (including Designs, when acting in its capacity as an independent dealer) will remain subject to the requirements of the order in this case.

LS&CO has made a satisfactory showing that reopening Ihe proceeding and modifying the order is warranted by changed conditions oUac!. Granting Ihe Petition permits LS&CO to operate in the same manner as its competitors who have moved to a new marketing strategy. The order, as modified, retains the prohibition against fixing the prices at which independent retai1crs resell LS&CO products (as well as its other prohibitions). Accordingly, it is ordered That this matter be and it hereby is re­ opened and that the Commission s order in Docket No. 9081 be and it hereby is modified to include a new ending paragraph, as follows: 31 ld 32 ld Modifying Order 118 FTC Provided, however, that the provisions of this order shall not be construed to prohibit conduct that is ancilary to and reasonably necessary for the formation and operation of retail stores either wholly-owned and operated or partially-owned by respondent, or its subsidiaries or affiliates, in a lawful joint venture, ARMSTRONG CORK COMPANY 1227 Set Aside Order