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April 2000 Vol. 15, No. 4   RSS Feed for Undercurrent Issues
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The Ongoing Fight Against Mail Order

the referee calls the match and throws PADI and Performance out of the ring

from the April, 2000 issue of Undercurrent   Subscribe Now

While the American consumer is embracing mail-order and Internet marketing because of convenience and price breaks, the diving industry clings tenaciously to a 1950s marketing model. Most major manufacturers do everything they can to ensure that their gear is sold only through a retail dive store while thwarting any other way of selling gear.

The belief is that health of local dive stores is the lifeblood of the industry. Without stores attracting people for certification, the industry would shrink. For dive stores, training is a loss leader; its justified only by income from equipment sales. Without income from equipment sales, many would not survive. With fewer dive stores, fewer divers would be certified. Fewer certifications mean they would sell less equipment. At least thats the argument. To protect their sales, manufacturers must have stores; stores are small, and they must sell equipment at close to full price. So divers pay more to keep stores open to certify people who buy more gear all at top prices.

One successful mail order marketer, Performance Diver, tried to break the stranglehold years ago, but unsuccessfully. Believing theyd been barred illegally from the marketplace, in 1992 they sued PADI, Rodale, the Scuba Retailers Association, Electronic Instrumentation & Technology, Inc. (ORCA) and others. Eventually PADI and Rodale were the only remaining defendants, then that suit was thrown out of court. Performance appealed, and in February the court rejected that appeal. While the case has never gone to trial, the text of that ruling offers a rare insight into the degree to which the industry protects retailers. Following is an edited version of the ruling with some of our commentary added.

* * * *

This case is about an agreement between PADI, which has retailers as both members and customers, and Rodale, which publishes Scuba Diving magazine. The issue is whether a restriction against carrying mail order advertising is a violation of the antitrust laws.

One successful mail order marketer,
Performance Diver, tried to break the
stranglehold years ago, but unsuccessfully

Nova Designs, Inc. (which does business as Performance Diver) sells scuba equipment and related items through mail order catalogs at prices lower than competing retail stores. PADI provides retail dive shops and diving instructors, who are its members and its customers, supplies and services, diver certification cards, group insurance, and travel programs. It also teaches how to operate dive stores successfully, a service for which the stores pay.

Performance charged PADI with conspiring to deny them access to the market for scuba gear. They claimed that PADI violated the Sherman Antitrust Act, interfered in their business, and engaged in unfair competition. It charged that PADIs retail members conspired to boycott any scuba entity that dealt with Performance and other discount mail order retailers, claiming they refused to buy products from manufacturers who sold to Performance and refusing to carry magazines that sold advertising to Performance. It contended that the retailers refused to deal with PADI unless PADI pressured Rodale not to accept magazine advertising from Performance.

In its motion for summary judgment to toss the case out of court PADI contended that there was no evidence that it participated in any conspiracy. In its opposition, Performance argued that the agreement between PADI and Rodale was unlawful. The court ruled in favor of PADI, saying that Performance had failed to come forward with evidence that PADI closed off market access or of any agreement between PADIs retailer members or between those members and Rodale.

Performance appealed on new grounds, saying a trial was justified because of evidence bearing on market power, injury to competition, and economic sense. The court said, however, that since Performance had failed to raise these issues in district court, it could not do so on appeal. Therefore, the appellate court would only consider whether PADIs conduct was a per se violation of the Sherman Act. If sufficient evidence were submitted, the case would go to trial.

The PADI/Rodale Agreement

In January 1992, PADI entered into an agreement with Rodale providing Rodale access to PADIs membership and customer database to solicit subscriptions for Scuba Diving, their new magazine. That was a coup for Rodale, because the PADI list was unavailable to its competitor, Skin Diver magazine.

In return, PADI would receive free advertising in Rodales magazines. The agreement provided that Rodale will establish its advertiser policies in a manner that acknowledges that scuba equipment requires training for safe use, that Rodale supports the dive industry standard that scuba equipment should be sold only to certified divers who can provide proof of certification at the point of purchase.

PADI argued that a no mail order advertising policy was important for two reasons. First, the database it furnished Rodale included information it received in confidence from its memberretailers, including the identity of its customers, to whom the Rodale magazine would be sent; release of that information could harm PADIs relations with its customermembers, who would object to use of the information to benefit mail order sales.

Second, PADI considered that the use of scuba life support equipment by persons who have not been certified exposes those persons to substantial danger, and mail order sellers cannot determine whether their purchasers are certified. Moreover, Rodale itself had determined, from market research, that most dive shops would not carry magazines that carried mail order advertising for scuba gear.

Despite the agreement, two months later Rodale, interpreting the no-mail-order restriction as limited to scuba life support equipment, announced that it would accept an advertising insert from Performance for non-lifesupport gear. Several retailers complained to PADI, at least one stating that lower mail order prices would force retailers to compete. PADI communicated its concern to Rodale, which in May decided again to reject mail order advertising. In July, however, PADI canceled its agreement with Rodale.

The court said that the shortterm agreement between PADI and Rodale for an exchange of information from its customermembers in return for free advertising and a pledge to carry no mail order advertising did not meet the necessary test under the Sherman Act and hence was not triable. Certainly on the record made by Performance, no jury could find that it had a demonstrable adverse economic effect, much less a pernicious effect on competition or lack of redeeming virtue.

Performance then claimed the PADI-Rodale agreement was an illegal horizontal group boycott involving retailers who are PADIs members and its customers. They argued that because PADI acted on behalf of its customer-members in contracting with Rodale, the agreement is a concerted refusal to deal.

The court said, however, there is no evidence that PADIs customer-members joined in any agreement; membership alone is not proof of an agreement. That some may have pressured PADI to enforce the no-mail-order advertising provision does not afford a basis for inferring an agreement. Furthermore, even treating PADI as a trade association whose actions may have caused some diminution in Performances access to the market, a violation cannot be found unless the association possesses market power or exclusive access to an element essential to effective competition. While many divers may not agree, the court said neither PADI nor its members have been shown to possess market power or control of market access.

The Court affirmed the summary judgment in favor of PADI and refused to return the case to the district court for trial. Its now a dead deal.

Ben Davison

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