Toysrus.com Sues Amazon for $200 Million

Toysrus.com has sued Amazon.com, the company that has run its online store since early 2000, claiming the e-tail giant violated an exclusivity agreement and seeking US$200 million in damages.

The online wing of Toys ‘R’ Us claims Amazon is in breach of the original agreement between the two companies because it now offers products in the games category for sale on its site through other merchants.

“We expect Amazon.com to respect its contract with us and to support our position, especially since we pay a very high fee to maintain this exclusivity,” said Toys ‘R’ Us counsel David J. Schwartz.

Toys and Games

The toy company said its own review of the Amazon site found 4,000 products that violated the exclusivity clause of the 2000 deal. “This violates the letter and spirit of our agreement,” Schwartz said. “We would be happy to compete with other vendors in these categories, but we are not willing to pay for exclusivity that we are not receiving.”

Board games and outdoor play equipment are among the products available through third-parties on the Amazon site.

The $200 million damages figure is the estimated value placed on the exclusivity arrangement, according to the company.

Toysrus.com general manager Greg Ahearn noted that the legal action will not affect customers or shareholders. “It will be business as usual,” he said.

No Merit

Amazon.com spokesperson Patty Smith told the E-Commerce Times that Amazon believes the suit is without merit and that Amazon has strived to boost the product selection it can offer customers “consistent with contractual obligations.”

“We believe we can have multiple sellers in the toy category, increase selection and offer products that Toysrus.com doesn’t,” Smith said.

Mutual Friends

Amazon and Toysrus.com have been essentially joined at the hip since the toy company turned to Amazon to rescue it from its own dot-com shortcomings. Toysrus.com ran into major fulfillment headaches during the holiday season of 1999, when hundreds of orders did not arrive in time for Christmas. That same year, Amazon found itself with an inventory backlog of toy items.

Arrangements like the Toysrus.com deal, in which Amazon handles order taking, payment processing and fulfillment, have become increasingly important to the e-tailer. It now handles sales for CDnow.com and Borders Books and Music as well. It also has positioned itself as a provider of technology as well as services, recently forming a subsidiary to develop commerce-focused search tools.

Third-party sales benefit Amazon because it does not have to handle inventory. Revenue from such sales, especially those with higher margins than its core books, music and movies category, helped push the company to its first full-year profit in 2003.

Almost Halfway

The 10-year deal with Toysrus.com has been the subject of much discussion in the past. Some analysts have speculated that while the deal has been largely a success for both companies, Toys ‘R’ Us might be eager to rework it, since it was drawn up at the peak of the dot-com era, when online sales were doubling annually.

Meanwhile, some analysts believe the legal action may be intended to halt Amazon’s plans to use its Web services technology to enable even more third-party merchants to list products on the Amazon site.

The suit was filed in New Jersey after attempts at mediation between the two companies reportedly failed. Word of the action came as Amazon shareholders gathered Tuesday for the company’s annual meeting.