Toys “R” Us Inc. prevailed in a bitter lawsuit against online giant Amazon.com Thursday when a New Jersey judge ordered the two companies to sever their partnership, clearing the way for the toy retailer to establish an independent Internet store.
Toys “R” Us executives hailed the ruling and said they intended to move quickly to create a new and independent Web site.
"We have been preparing for today's decision and expect to provide seamless online access for our customers to the world's greatest toy store at www.toysrus.com," John Sullivan, senior vice president of the toy company, said in a statement.
But Amazon indicated it is considering an appeal. Spokeswoman Patty Smith said the online retailer "strongly disagrees with the judge’s ruling in this case” and is in the process of reviewing a number of options.
The two retailers signed a 10-year strategic partnership in 2000 — at the height of the Internet stock bubble — that made Amazon.com the exclusive online retail outlet for Toys “R” Us toys, games and baby products.
Whether the agreement also made Toys “R” Us the exclusive provider of such products on Amazon.com was at the heart of the lawsuit, filed in 2004, and a counterclaim filed by Amazon.
The deal originally was hailed as a model for future bricks-n-clicks partnerships, and came as some industry watchers expected online retailers to overwhelm traditional bricks-and-mortar merchants. Based on testimony in a trial last year, the arrangement worked well for both sides for the first several years, improving the ability of Toys “R” Us to compete with eToys and Walmart.com while eliminating toy inventory problems that had been plaguing Amazon.
But Toys “R” Us executives grew increasingly unhappy as the prominence of their virtual store was diminished and Amazon.com signed agreements with rival retailers including Target as well as independent sellers known as zShops.
In a 131-page opinion, New Jersey Superior Court Judge Margaret Mary McVeigh ruled that Amazon had breached its agreement, although she did not award any monetary damages, saying Toys “R” Us was unable to prove it had paid a premium for exclusivity on the site.
In her opinion, McVeigh took a rather dim view of the trial testimony of some Amazon executives, including that of the company’s billionaire founder Jeff Bezos, saying she had “no doubt his knowledge and understanding (of the Toys "R" Us agreement) went much deeper than revealed.”
When pushed on the witness stand, “certain information ‘just came back to him’” she said in the ruling, while another of Bezos’ explanations was referred to as “rather childlike.”
McVeigh also rejected Amazon’s efforts to defend itself by asking her to throw out e-mail evidence that may have included hearsay. She said she found it “incomprehensible … that a corporation dealing primarily in Internet commerce finds Internet communications to lack reliability.”
And she repeatedly complained about the ambiguous use of language in memorandums, contract agreements and discussions, concluding that “the language as drafted whether intentional or inartful gave Amazon the words to play the game their way.”
Although the ruling does not include monetary damages, the loss of Toys “R” Us as a partner could have a significant financial impact on Amazon. The toy retailer, which was sold to a private investment consortium last year for $6.6 billion, says it is the nation’s largest online retailer and had been paying Amazon a base fee of $50 million annually plus a percentage of its sales.
And trial testimony indicated that Amazon has invested heavily to fulfill toy orders, especially during the crucial Christmas season. According to the ruling in the case, Amazon.com has 14 fulfillment centers operating 24 hours a day except for Christmas and New