Not playing nicely: abuse of dominance in the toy industry

On 16 June the UK High Court handed down an entertaining judgment in a dispute between MGA Entertainment, one of the world’s largest toy manufacturers, and Cabo Concepts, a UK-based start-up. MGA makes the bestselling ‘LOL Surprise’ range of collectible dolls. Cabo tried to launch a rival range of ‘Worldeez’ dolls in 2017, but the launch was unsuccessful and the product was discontinued in 2018.

From a competition law perspective, the case is noteworthy for several reasons:

1. Although the Court described the toy industry as a whole as “vigorously competitive”, it found MGA to be dominant on the basis of a very narrowly defined relevant product market: collectible toys with a “surprise unwrapping element” that are aimed at 6-9 year-old girls.  Even ‘fashion’ dolls (such as Barbie) were considered not to be part of the same market for competition law purposes.
    
2. The Court held that MGA had abused its dominant position by undertaking an “overall exclusionary campaign” to prevent Worldeez’ market entry. In particular, MGA (i) threatened major toy retailers that their supplies of LOL Surprise would be cut off if they stocked the rival Worldeez product; (ii) threatened to sue Cabo and toy retailers for infringing MGA’s IP rights (but without identifying any specific IP rights alleged to have been infringed); and (iii) made vague and unjustified claims that Worldeez was a “knock off” of LOL Surprise.  MGA’s strategy was “highly effective”: the anchor product of the Worldeez range, the Worldeez globe, was “completely excluded from the stores of the three main toy retailers in the UK”.
    
3. MGA claimed that its conduct was a legitimate and proportionate response to an attack on its commercial position, in circumstances where it “genuinely believed” the Worldeez globe was a copy of LOL Surprise. The Court dismissed this argument as “hopeless”. MGA had never brought proceedings against Cabo for the tort of passing off.  “Ultimately”, the Court held, “if MGA had a genuine belief that the Worldeez globe interfered with its rights on any proper legal basis, its remedy was to bring proceedings on that basis”. A dominant firm cannot “circumvent the proper legal procedures (with the inherent uncertainty of litigation) by taking retaliatory anti-competitive action against a product on the basis of a claimed belief that that product’s similarity to its own product was unfair or objectionable”.
4. The agreements between MGA and toy retailers which prevented the latter from selling Worldeez products were found to be restrictive of competition ‘by object’ (i.e. inherently anticompetitive). Perhaps surprisingly, however, the Court held that the agreements could still benefit from the Vertical Agreements Block Exemption (VABE).  The case is a helpful reminder of how the VABE market share thresholds should be applied in cases where parties’ market shares are in flux.
    
5. Although MGA had abused a dominant position, the Court found that Cabo would not have traded profitably even if MGA had not engaged in the abusive conduct. Cabo had therefore not suffered any loss as a result of MGA’s actions and was not entitled to damages. The Court took account of a wide range of evidence in reaching this conclusion, including the strength of Cabo’s marketing campaign, the extent of retailer support for Worldeez, Cabo’s financial projections and operational abilities, the working capital available to Cabo, and toy expert evidence on Cabo’s likely commercial success. It will be interesting to see whether Cabo seeks to appeal this aspect of the judgment.