Markets Wired

Today, the Federal Trade Commission announced a consent agreement and order that settle charges that Golf Galaxy, a subsidiary of Dick’s Sporting Good’s Inc., violated federal law by illegally agreeing with a potential competitor, Golf Canada, to allocate the market for golf merchandise in the United States and Canada.

Golf Galaxy operates a chain of U.S.-based golf superstores offering a wide range of merchandise and related services, including clubs, equipment, accessories, clothing, lessons, swing analysis, and club fitting. Golf Canada operates a chain of similar stores in Canada. Golf Galaxy worked with the founders of Golf Canada to develop its initial stores.

In June 1998, Golf Canada and Golf Galaxy entered into an agreement under which Golf Galaxy agreed to develop and present an initial training program for Golf Canada employees, provide Golf Canada with blueprints, merchandising plans, sales reports, and other useful business documents, and provide continued consulting services to Golf Canada. In return, Golf Galaxy received shares of Golf Canada, a seat on the company’s board of directors, and cash payments. Golf Canada also agreed to conditions that would bar it from entering the United States market for a certain time period. Adhering to the agreement, with the help of Golf Galaxy, Golf Canada opened 13 retail stores in Canada between 1998 and 2004.

In October 2004, Golf Galaxy sold all its shares of Golf Canada and the companies ended all consulting obligations under the 1998 agreement. They then entered into a new contract that extended the duration of the restraints on competition between the two companies beyond the dates contemplated in the 1998 agreement. Under the 2004 amended agreement, Golf Canada was barred from: 1) operating any retail store in the United States until 2013; and 2) engaging in any businesses outside Canada that competes with, or is similar to, Golf Galaxy until 2010. In addition, for the first time, Golf Galaxy was prohibited from opening a store in Canada until June 2008.

“This case demonstrates that the Commission is vigilant in challenging non-compete provisions that go beyond what can be justified by pro-competitive arrangements,” said David P. Wales, Acting Director of the FTC’s Bureau of Competition. “While the original 1998 non-compete was legitimate, the 2004 agreement extended the geographic market allocation without providing any comparable benefits to consumers.”

According to the FTC, Golf Galaxy’s agreements with Golf Canada led to two distinct sets of restraints on competition. The companies entered into the first set of restraints in 1998 when their consulting relationship was launched, and entered into the second set in 2004, at the same time they ended their collaboration. The 1998 restraints are arguably reasonably necessary to the formation and/or efficient operation of the parties’ collaboration. However, the 2004 restraints provided for a market division that was well beyond the term contemplated in the 1998 agreement. The 2004 restraints are the subject of the Commission’s complaint.

Under the 1998 agreement, Golf Canada was prohibited from competing in the United States until five years after the agreement ended. The consulting arrangement between the companies ended in 2004, and therefore the non-compete provisions should have extended through 2009. However, under the 2004 amended agreement, the non-compete provision was extended until 2013.

Such agreements between competitors to divide markets are treated by the courts as presumptively anticompetitive, or inherently suspect, when they serve no pro-competitive purpose. According to the FTC’s complaint, the restraints imposed under the 2004 agreement were not reasonably necessary for the formation or efficient operation of the collaboration between Golf Galaxy and Golf Canada, and did not induce or facilitate cooperation between the two companies. No further cooperation between the two firms was planned after 2004, and the restraints provided no advantage to U.S. consumers. Instead, according to the Commission, they only provided Golf Galaxy shareholders with protection from competition with Golf Canada. Such agreements, which divide markets with no offsetting pro-competitive purpose, are illegal under the FTC Act.

The proposed consent order is designed to remedy the alleged anticompetitive impact of the respondent’s conduct. It has been signed by Dick’s, the parent company of Golf Galaxy, and bars the company from dividing or allocating the market for the retail sale of golf merchandise. The order also will prevent Golf Galaxy from enforcing any non-compete provision beyond the date provided for in the original 1998 agreement. Specifically, as of October 8, 2009, the provision of the 2004 amended agreement barring Golf Canada from operating any retail store in the United States will no longer be enforceable. Further, 30 days from the date the FTC’s order becomes final, the provision barring Golf Canada from engaging in any business outside Canada that competes with, or is similar to, the business of Golf Galaxy will no longer be enforceable.

The Commission contends that the terms of the order will not interfere with Golf Galaxy’s ability to enter into written agreements that restrain competition in connection with the sale of golf merchandise, provided such agreements are “reasonably related to a lawful consulting arrangement, lawful joint venture agreement, or lawful merger, acquisition or sale agreement,” and “reasonably necessary to achieve such agreement’s pro-competitive benefits.”

The Commission vote to accept the complaint and consent order for public comment was 4-0. The FTC will publish an announcement regarding the agreement in the Federal Register shortly. The complaint, consent order, and an analysis to aid public comment can be found on the Commission’s Web site at http://www.ftc.gov/os/caselist/0710196/index.shtm.

The agreement will be subject to public comment for 30 days, beginning today and continuing through November 7, 2008, after which the Commission will decide whether to make it final. Written comments should be addressed to the FTC, Office of the Secretary, Room H-135, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC is requesting that any comment filed in paper form near the end of the public comment period be sent by courier or overnight service, if possible, because U.S. postal mail in the Washington area and at the Commission is subject to delay due to heightened security precautions.

NOTE: 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 $11,000.

Copies of the documents related to this matter are available from the FTC’s Web site at http://www.ftc.gov and the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC’s Bureau of Competition works with the Bureau of Economics to investigate alleged anticompetitive business practices and, when appropriate, recommends that the Commission take law enforcement action. To inform the Bureau about particular business practices, call 202-326-3300, send an e-mail to antitrust@ftc.gov, or write to the Office of Policy and Coordination, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, DC 20580. To learn more about the Bureau of Competition, read “Competition Counts” at http://www.ftc.gov/competitioncounts.

(FTC File No. 071-0196)
(Golf Galaxy.final)