RIN:131 Chicago's Violin MAFFIA Jim Ryan Letter

February 18, 1998

Jim Ryan
Attorney General
Consumer Protection Division
100 West Randolph Street, 12^th Floor
Chicago, Illinois 60601 Tel.: (1312) 814-3580

Dear General Ryan:

I am writing to you pursuant to the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/3.

I am a maker, dealer and retailer of fine violins, violas, and cellos (hereafter, "stringed instruments") who is extremely concerned about possible illegal kickback scheme which has been pervasive throughout my industry for many years. The kickback scheme, which I discuss more fully below, has had and will continue to have a severe negative impact on competition at the supplier (dealer, retailer, and maker) and consumer (student, musician, parent, and collector) levels of the market place. As one who has, for many years, suffered a competitive disadvantage because of the kickback scheme, I feel now is the time to ask for your guidance and assistance so that free and fair competition can be restored to the marketplace for stringed instruments.

In brief, I am very concerned that certain stringed instrument dealers and retailers pay secret "commissions" to teachers and others for their referral of students, musicians, parents, and collectors. These dealers and retailers rarely, if ever, disclose that the sales price for stringed instruments includes the cost of a secret "commission" which is paid to the referral source. Because of this practice, consumers pay artificially inflated prices for stringed instruments and teachers and others who make referrals steer consumers away from those makers, dealers and retailers, such as myself, who refuse to pay secret "commissions."

A. Background Of the Stringed Instrument Marketplace.

The marketplace for stringed instruments is greatly influenced by a number of factors and forces, many of, which are rarely present in the market place for other types of commodities. Utility, aesthetics, collector's value, and "pedigree" influence the stringed instrument marketplace. However, these factors, singly or in combination, cannot be measured or valued on an objective basis or through objective indicia. In short, there are no generally accepted standards which the consumer may consider or consult when attempting to measure or evaluate any of these factors. Rather, these factors and their relationship to one another are left to the personal subjective assessment and valuation by the consumer be he a student, parent, hobbyist, casual musician, professional musician, or serious collector.

Most, if not all stringed instruments, are utilitarian in the sense that they produce some sound when plucked or bowed. However, what "feels good" in the hands of one person may be difficult to play in the hands of another. In short, the touch, feel, and playability of a particular stringed instrument is assessed differently by each player and is very personal to that player.

Aesthetic appeal involves at least two factors -- visual appearance and sound quality. Again, there is no objective way of measuring what is pleasing to the eye and/or ear as tastes vary from one person to another. Indeed, a consumer's tastes in appearance and sound quality often change over time. Also, in the case of finer instruments there is little correlation between an instrument's appearance and sound quality, assuming the instrument is in good repair and properly set up, or adjusted. Further, in the case of master-made (the finest) instruments, price has only a minimal relationship to sound quality, if any. For example, the huge price differential between a modern master-made instrument and an old master-made instrument is primarily based on their relative rarity, authenticity and their physical condition, and is never justified on the basis of tone quality alone.

A stringed instrument's "pedigree" is important to the marketplace for several reasons. First, the manner in which an instrument is made is critical. Stringed instruments are generally made by (a) mass production; (b) student craftsmen under the direction and supervision of a master instrument-maker; and (c) a master instrument maker. Instruments in the latter category are the most costly. Second, an instrument's rarity is also is a significant factor in the marketplace. Generally, older instruments tend to be more costly and are coveted most by the serious musician, professional musician, and/or collector, for their investment potential. Third, the relative status of the maker is also important. While the identity of the maker of a mass-produced instrument may be of limited interest to the beginning student, such concerns are very important to serious musicians and professional musicians, who also may be collectors of fine instruments. Obviously, a rare instrument made by Antonio Stradivari is far more costly than instruments made by modern master-maskers. Fourth, the degree of certainty with which one may authenticate the maker of a particular instrument ("provenance") is important. Clearly, an instrument, which can be definitely traced to Antonio Stradivari's shop, is more costly than an instrument whose link to Antonio Stradivari is in question.

Unlike many other types of commodities, dealers and retailers can easily manipulate the marketplace for stringed instruments because each instrument is unique in terms of tone, appearance, and maker and because there are no objective standards for evaluating the sound of an instrument. Clearly, tone quality does not dictate the price even though, ultimately, it may be the most important factor for the musician. The beauty of sound of any stringed instrument has no necessary relation to the price of the instrument. For example, fine modern master-made instruments often cost under $30,000 while old master-made instruments fetch prices in excess of $300,000. Surely, this differential cannot be attributed merely to tone, especially because tone quality is highly subjective.

Finally, unlike marketplaces for other commodities, there is a dearth of information available to the consumer of stringed instruments. In short, there are no widely available Consumer Reports, nor a J. .D. Powers Institute for stringed instruments. Therefore, except for those very few individuals who have studied stringed instruments and their crafting, and their marketing, very few consumers possess the in-depth knowledge to make careful selections. Rather, consumers must rely on teachers, dealers, and retailers as well as their own tastes.

B. Teacher/Student Bond And The Conflict Of Interest.

Students and musicians, regardless of their playing ability, (hereafter, "students") often place a very high level of trust and confidence in their stringed instrument teachers. This trust and confidence usually grows over time. More importantly, students often rely heavily on the advise and opinions of their teachers when considering the purchase of an instrument. Typically, in response to an inquiry, the teacher will refer the student, or his or her parents, to a dealer or retailer whom the teacher believes to be "reputable" but who also pays secret "commissions." Often, the student will bring several instruments from that dealer or retailer to his or her teacher for approval. This process may involve several trips to one or more makers, dealers or retailers (usually depending on the student's playing level) before the teacher "recommends" a particular instrument. Far more often than not, the student will purchase the instrument, which his or her teacher has recommended; with the recommendation most often being based upon the amount of the "commission", promised by the dealer or retailer. In this market, the forces of supply and demand are confined to, and dominated by, the prior arrangement for payment of a secret "commission", not by the free market forces of supply and demand, operating on a level playing field.

The teacher will receive a "commission" if the instrument is purchased from a maker, dealer or retailer who pays secret "commissions." The amount of the "commission" may very but is usually based on a percentage of the amount paid for the instrument. I have heard about "commissions" which have ranged as high as 50% of the instrument's purchase price. Most commissions I have heard of range from 20% to 30% of the amount paid by the buyer, and often more than 50% of the net profit.

Many stringed instrument dealers and retailers attempt to "justify" the payment of secret "commissions" because of the time and effort, which a teacher may devote to assisting the student in selecting an "appropriate" stringed instrument. However, inasmuch as the secret "commissions" are based on a percentage of the amount paid, they bear absolutely no relationship to the time or effort, which a teacher expends on the selection process. Thus, a teacher will be paid the same "commission" from a particular dealer or retailer regardless of whether he or she spends fifteen minutes or five hours in the selection process. Further, no "commission" is paid unless and until the referral results in a purchase regardless of the amount of time and effort, which the teacher expends.

C. Market Impact Of Secret "Commissions."

Clearly, the payment of undisclosed "commissions" has a significant negative impact on both the consumer and supplier sectors of the marketplace for stringed instruments.

In most, if not all, cases the student is unaware that his or her teacher has a financial interest in the stringed instrument, which the student purchases. Clearly, the price which a student pays for an instrument must necessarily include the value of the secret "commission" which the maker, dealer or retailer pays to the referring teacher. Therefore, either the price paid was artificially high to accommodate the cost of the "commission" or the maker, dealer or retailer was limited in his or her ability to negotiate a price reduction for the instrument. In short, the payment of secret "commissions" tends to artificially inflate the prices paid for stringed instruments.

Likewise, the student rarely, if ever, knows that his or her teacher has compromised and exploited the student-teacher relationship for undisclosed personal financial gain. Obviously, the teacher has a financial incentive to steer students to those makers, dealers and retailers who sell high priced stringed instruments and who pay secret "commissions." Further, because secret "commissions" are generally based on a percentage of the sale price, the teacher has a financial incentive to "recommend" the most costly instrument a student can afford even though a lesser price instrument may be equally satisfactory. Clearly, the teacher's receipt of secret "commissions" is a fact, which would influence the student's decision-making, when considering the teacher's advice to purchase a particular stringed instrument from a particular source, at a particular and arbitrarily set price.

Finally, dealers and retailers such as myself who refuse to pay secret "commissions" are denied access to a major segment of the marketplace. Indeed, we have little or no opportunity to compete in terms of price, quality, reputation, and service when teachers steer students away from us and to those who pay secret "commissions."

D. Illinois Law.

While I am not a lawyer, it seems to me that the payment of secret "commissions" would violate section 2 of the Illinois Consumer Fraud and Deceptive Business Practices Act (815 ILCS 505/1 et seq.). Section 2 provides that

Unfair methods of competition and unfair or deceptive acts or practices, including but not limited to … the concealment, suppression or omission of any material fact, with intent that others rely upon the concealment, suppression or omission of such fact … in the conduct of any trade or commerce are hereby declared unlawful whether any person has in fact been misled, deceived or damaged thereby.

Strangely, I have found only one case, which directly deals with the issue of whether the payment of undisclosed commissions is illegal in Illinois. I suggest that you review Sullivan's Wholesale Drug Co. v. Faryl's Pharmacy, Inc. 214 Ill.App.3d 1073, 573 N.E.2d 1370, 158 Ill. Dec. 185 (5^th Dist. 1991). In Sullivan's, an appellate court found that a nursing home's undisclosed retention of 15% of the amounts which the nursing home collected on behalf of an independent pharmacy which supplied medications on an exclusive basis to the nursing home's patients would, if proved, constitute an unlawful kickback scheme in violation of the Illinois Consumer Fraud and Deceptive Business Practices Act. It seems to me that this case is strikingly similar to the kickback arrangement between teachers and dealers/retailers of stringed instruments described above.

From my experience, the kickback scheme, which I have described above, is widespread throughout the stringed instrument marketplace. It adversely impacts the consumer (student, parent, casual musician, professional musician, and collector) and the maker, dealer and retailer. Students are forced to pay artificially high prices for stringed instruments, mostly of questionable authenticity and condition, and are steered from those dealers and retailers who refuse to pay secret "commissions." Further, the trust and confidence which students place with their teachers is exploited by those teachers for personal financial gain. Moreover, students are not provided with a valuable piece of information, which probably would influence their buying habits. Finally, those dealers and retailers who refuse to pay secret "commissions" are effectively denied access to a large segment of the marketplace, in effect, they are secretly being boycotted.

The relief which I request is that, pursuant to 815 ILCS 505/3, you or your office initiate an investigation of the entire kickback practice and prosecute those found to be in violation of the Illinois Consumer Fraud and Deceptive Business Practices Act.

In closing, I would be more than happy to confer with you or someone from your office concerning the above. I look forward to hearing from you soon.

Sincerely,

Fritz Reuter
FRITZ REUTER & SONS, INC.
Violin Makers & Dealers

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