FEDERAL TRADE COMMISSION, Hon. WARREN G. MAGNUSON, Chairman, Committee on Commerce, U.S. Senate, Washington, D.C. DEAR MR. CHAIRMAN: This is in response to your letter of February 27, 1963, requesting a report on S. 774, 88th Congress, 1st session, entitled "A bill to amend the Federal Trade Commission Act, to promote quality and price stabilization, to define and restrain certain unfair methods of distribution and to confirm, define, and equalize the rights of producers and resellers in the distribution of goods identified by distinguishing brands, names, or trademarks, and for other purposes." The Federal Trade Commission is opposed to the enactment of this bill into law. The subject bill defines the "trade and public goodwill" associated with a distinguishing brand, name, or trademark as property of the owner. Under this bill, the owner has the right to protect such property even after the sale or transfer of the products to which the brand or marks relate. When goods usable for the same general purpose are available to the public from sources other than the owner of a distinguishing brand, name, or trademark, the right of any person (wholesaler or retailer) to resell the goods identified by said distinguishing marks can be revoked by the owner of such mark, on written notice, if (among other things) the person reselling the goods has advertised, offered for sale, or sold such goods at prices other than those established currently by the owner of said brand, name, or trademark. In this respect, the instant bill would establish a Federal resale price maintenance law. The Commission opposes resale price maintenance legislation, including specifically S. 774, on several grounds, including the following: 1. The effects of resale price maintenance are prejudicial to the interests of consumers. Where resale prices are fixed by suppliers, the consumer is deprived of the benefits of price competition among distributors, and denied the benefits of the incentive for distributors to lower costs and operate on smaller merchandising margins. Government studies have shown that retail prices on fair trade articles are higher in States which enacted resale price maintenance laws than in nonfair trade States.1 Proponents of resale price maintenance contend that the practice does not prevent retailers from competing in services they give. This, however, begs the question. Potential customers may be indifferent to extra services, whereas they would be satisfied with the original amount of service at a lower price. It is this significant alternative which resale price maintenance stops the retailer from providing.' Since the cost of distribution represents a considerable part of the consumer's dollar, legislation which removes that element of the consumer price from the pressure of competition can restrict the efficient working of a competitive system and increase the cost of living. When merchants are forbidden to compete in prices, the result is money out of the consumer's pocket without necessarily any increase in the quality or quantity of the product. 2. The practice of resale price maintenance may facilitate and make more effective open or tacit horizontal agreements among manufacturers. The same distributors usually handle the products of rival manufacturers; on the other hand the manufacturer is free to enter a resale price agreement with any distributor. Effects identical with those in cases of direct collusion follow if each manufacturer establishes, in contracts with his distributors, retail prices and discounts similar to those which these distributors are bound to observe by their arrangements with other competing manufacturers. Moreover, retail price maintenance may function as an essential complement to agreements among manufacturers, since it would be useless for them to fix prices at the manufacturing level if price competition at the retail level disturbs the whole arrangement.3 Horizontal agreement by distributors in a market to sell a substantial part of their goods at not less than certain prices would be regarded as an illegal interference with competition. Logically, the law should apply to vertical arrange 1 See, for example, hearings before a subcommittee of the Committee on Commerce, U.S. Senate, "Quality Stabilization," 87th Cong., 2d sess., 1962, p. 83 and pp. 394-395. 2 Board of Trade (British White Paper), "A Statement on Resale Price Maintenance," June 1951, p. 5. Committee To Study Combines Legislation (Canada), "Interim Report on Resale Price Maintenance," Ottawa, 1952, p. 68. ments which have the same effect of fixing irreducible retail prices. The uniformity of the price would be identical with that of a rigid horizontal price-fixing conspiracy. 3. In arresting competition in price at the distributor levels for identified goods, the bill can place the small retailer at a competitive disadvantage vis-a-vis the large chain. The small business man in many retailing fields, including food or drug, will be forced to sell the branded products at resale prices fixed by the packers in competition with customers' labels (private brands) selling at lower prices set by his large competitors. If The bill is not optional in actual practice except for the manufacturer. this bill becomes law, numerous small unincorporated retailers may be forced to accept the prices set by the owners of trademarks and brand names, usually large, integrated manufacturers. Of the approximately 2 million retailers in the Nation, about 80 percent are unincorporated and about 80 percent have stores in only 1 location. Also, of the approximately 165,000 merchandise wholesalers, about 91 percent are unincorporated and 75 percent have establishments in only one location.* These small businesses will not have the option to refuse to accept the prices of well-known, heavily advertised brand names, since they cannot exist selling unknown brands. The individual small wholesaler and retailer lacks the countervailing power to bargain with the big brand-name manufacturers. The small businessman may also lack sufficient capital to stay in business over a sustained period of time if his sales drop due to consumers' initial reluctance to try lesser known brands. Consequently, the small merchant will accept the prices set by the manufacturer rather than face the loss of business. The Commission's staff report on the "Economic Inquiry into Food Marketing, Part II," scheduled for submission to Congress next month, reveals that an increasing share of total frozen food sales are marketed under customers' labels. The 10 largest chainstores sell annually over 60 percent of the total private label frozen food products sold in the United States. These chains sell only about 20 percent of the packer label frozen food total, whereas the remaining 80 percent under packer label were sold primarily to small retailers through wholesale distributors. nessman. These statistics indicate that passage of S. 774 may hinder the small busiResale prices will be fixed under this bill on products sold under the manufacturers' brand by the small independents, but the large retail chains with capital to buy similar products under their own brands are left free to sell their private branded products at prices of their own choosing. The bill bars the independent from effective competition with the chain, since the independent cannot lower prices on the price-maintained items to compete with the lower prices of the chain's private brands. 4. When measures of enforcement are involved, resale price maintenance establishes a private system of law. In S. 774, the owner of the trademark or brand name, and not a disinterested third party, court of justice, or public authority, determines when to revoke the right of the wholesaler or retailer to resell the controlled product. Under this bill, a private concern will decide a violation of a Federal law and have the right to bring a civil action against the reseller. Paragraph (10) of the bill provides that if the retailer or wholesaler continues to effect resale of the goods after his right has been revoked, he "shall be liable in a civil action for damages and injunctive relief by the owner of the brand, name, or trademark, to prevent and restrain further violation of * **this subsection." Paragraph (15) appears designed to negate the effects of the Supreme Court's decision in United States v. McKesson & Robbins, Inc., 351 U.S. 305 (1956). At the time of the appeal, McKesson was the largest drug wholesaler in the United States and also manufactured its own line of brand-name drugs. McKesson's manufacturing division had "fair trade” agreements with independent wholesalers most of whom competed with McKesson's own wholesale divisions. The Government challenged McKesson's price-fixing agreements with wholesalers with whom it competed, and McKesson claimed such contracts were exempted from the Sherman Act by the Miller-Tydings Act and the McGuire Act. The Supreme Court held in the McKesson case that if the contracting parties compete with each other, the Miller-Tydings and McGuire Acts do not permit them to fix resale prices. Both acts contain the proscription against price-fixing agreements "between persons, firms, or corporations in competition with each • Congressional Record (statement by Mr. Randall), Aug. 23, 1962, p. 16268. other." The Court reasoned that since McKesson competes "at the same functional level" with independent wholesalers with whom it has price-fixing agreements, the proviso bars these agreements from falling within the statutory exemption. However, paragraph (15) of S. 774 provides that all such rights and remedies "shall be also available to any owner of a brand, name, or trademark who, in the resale of goods identified by such brand, name, or trademark, shall compete at any level of distribution, with any reseller offering such goods***" It would appear that pursuant to the bill, a manufacturer owning a brand and who is integrated forward into the levels of distribution could set prices on the goods for his wholesale or retail competitors. The reseller, in such civil action by the owner, can only use two defenses, one of which is proof that the owner has not used "due diligence" in revoking the right to all other parties "in substantial competition" with the reseller who are “known to plaintiff" (owner) to be violating the same subparagraph of paragraph (8) of the bill, which forms the basis for revocation as respects the defendant. (The phrases "due diligence," "substantial competition," and "known to plaintiff" are involved legal terms, the conflicting interpretations of which can occupy the time of jurists for years to come.) And the other defense is for the reseller to establish that plaintiff has sold goods of like grade and quality to another person similarly situated under terms more favorable or at lower prices than those under which plaintiff sold such goods to the defendant. These are the sole defenses open to the many small wholesalers and retailers with neither a legal staff nor money to engage in lengthy litigation. 5. State laws enacted pursuant to the McGuire Act authorized price maintenance only if the manufacturers who fixed retail prices did not themselves sell their goods in competition with retailers whose prices these manufacturers fixed. This protection is not contained in S. 774, pursuant to which, in paragraph (15) thereof, a producer with retail outlets could prevent any competing retailer from selling the same goods at a lower price. The Commission reaffirms its opposition to resale price maintenance as a manifestation of a restrictive practice on a free economy. Resale price maintenance represents a real restriction on competition by private agreement and it tends to discourage economic efficiency. The Commission shares the concern expressed in the bill's preamble regarding unfair competitive "methods" in the chain of distribution. The practice of "bait merchandising" (nowhere defined in the bill) or any loss-leader device are aggressive weapons to attract customers for a whole range of products by selective price cutting. However, legislation withdrawing from the retailer the right to make any price reduction is a costly way of reaching the loss-leader device. Resale price maintenance makes no distinction between price competition that is unfairly used to eliminate weaker competitors, and price competition in the public interest. The subject bill also provides that an owner of a brand, name, or trademark who avails himself of the provisions of the bill thereby subjects himself to the jurisdiction of the U.S. district court for the district in which the goods are offered for sale, in respect to a complaint for damages caused a purchaser thereof which is based upon misrepresentation by the brand owner as to the size, capacity, quality, condition, model, or age of such goods. This provision is to be operative only as to misrepresentations noted above, and where such owner is not "subject to process" in the courts of the State where the purchaser acquired the goods. While this provision is salutary from the standpoint of the protection of consumers against misrepresentation by a brand owner, it does not suffice to alter the Commission's opposition to the bill as a whole, the major provisions of which the Commission believes will otherwise ultimately cause great hardship to the consumer and to the small businessman. The Commission wants to assist, encourage, and protect small business. The burden of providing competition substantially rests on independent small business enterprises. Small business units need an equal chance to obtain supplies and to continue in business without being injured by the discriminatory prices of large rivals. Small business also needs the chance to survive without being absorbed by large firms. In large measure, therefore, remedies for the pressures on small business are found in vigorous enforcement of the antitrust laws. The Commission is very concerned over predatory pricing in all forms. Congress, through the enactment of the Robinson-Patman Act and the Federal Trade Commission Act, and the Commission, through the enforcement of these acts, have taken action to prohibit and ameliorate adverse competitive effects of such pricing practices as below cost sales and loss leaders. The Supreme Court recently has reaffirmed the constitutionality of section 3 of the Robinson-Patman Act. U.S. v. National Dairy Products Corp., 372 U.S. 29 (1963). The Court in the National Dairy decision concluded that the Robinson-Patman Act prohibition on purposefully anticompetitive sales at unreasonably low prices reaches sales below cost for the purpose of destroying competition. The Commission is of the opinion that S. 774 is contrary to public policy expressed by Congress in the antitrust laws. For the reasons previously stated in this letter, the enactment of the proposed legislation would be contrary to the public interest. By direction of the Commission, Commissioner MacIntyre not participating. PAUL RAND DIXON, Chairman. N.B.-Pursuant to regulations, this report was submitted to the Bureau of the Budget on June 12, 1963, and on August 5, 1963, the Bureau of the Budget advised that there is no objection to the submission of this report from the standpoint of the administration's program. JOSEPH W. SHEA, Secretary. SMALL BUSINESS ADMINISTRATION, Re S. 774 to amend the Federal Trade Commission Act, to promote quality and price stabilization, to define and restrain certain unfair methods of distribution and to confirm, define, and equalize the rights of producers and resellers in the distribution of goods identified by distinguishing brands, names, or trademarks, and for other purposes. Hon. WARREN G. MAGNUSON, Chairman, Committee on Commerce, DEAR MR. CHAIRMAN: Reference is made to your letter of April 1, 1963, requesting the comments of the Small Business Administration on the captioned bill. S. 774 includes provisions which would permit a manufacturer of a name brand product to control, under certain conditions, the prices which wholesalers and retailers may charge their customers for his goods. Since your committee is entirely familiar with the factors underlying this proposal, I see no reason for reviewing them here. It is enough to say that many thousands of small businessmen, especially those engaged in retail trade, are sincerely convinced that such legislation would be helpful in combating the predatory price-cutting practices followed by their large competitors. There is reason to believe that the system of resale price maintenance contemplated by S. 774 would, in some cases at least, ease the competitive pressures on small businesses. Viewed from this aspect, the bill has merit. If no other considerations were involved I would recommend its enactment. But there are other considerations, important considerations. I have been advised by the Department of Justice and the Federal Trade Commission that the sales practices authorized by S. 774 would seriously impede the enforcement of the antitrust laws. One of the dangers, anticipated by both agencies, is that the vertical price fixing proposed by the bill would provide manufacturers with an instrument to facilitate horizontal price fixing among themselves. Since this is a matter which lies in the special competence of the Department and of the Commission, their warnings cannot be safely disregarded. I intend to heed them. It is hardly necessary to say that the welfare of the small business community depends upon strong enforcement of the antitrust laws. Any immediate or momentary advantages which may be gained for small business at the expense of such enforcement will, in the long run, be far outweighed by the resulting damage to free enterprise. On balance, therefore, I do not favor the captioned bill. In stressing the value of the antitrust laws, I am not suggesting that they are beyond improvement. Every effort should be made to determine whether, and in what respects, they can be made more effective instruments in protecting the etitive position of small business. Senator Humphrey has proposed (S. 138) that a study be undertaken for the purpose. In my judgment, this prodeserves careful consideration. he Bureau of the Budget has advised that there is no objection to the submis of this report from the standpoint of the administration's program. ith kind regards, I am, Sincerely, EUGENE P. FOLEY, Administrator. GENERAL COUNSEL OF THE DEPARTMENT OF COMMERCE, WARREN G. MAGNUSON, Erman, Committee on Commerce, EAR MR. CHAIRMAN: This is in further reply to your request for the views his Department with respect to S. 774, a bill to amend the Federal Trade mission Act, to promote quality and price stabilization, to define and restrain in unfair methods of distribution and to confirm, define, and equalize the ts of producers and resellers in the distribution of goods identified by disishing brands, names, or trademarks, and for other purposes. enacted, this bill would add various paragraphs to section 5(a) of the FedTrade Commission Act (which deals with unfair methods of competition). essence of the provisions thus added would be that the owner of a brand, e, or trademark retains his property rights in such brand, name, or tradek; and that, based on those property rights, he may revoke the right of any on to resell goods bearing his brand, etc., who— 1. Uses the goods for bait merchandising; 2. Resells the goods at prices other than those stipulated by the owner of the brand, etc., or 3. Has published misrepresentation of the goods with the intent to deceive purchasers. rovisions would be made whereby a reseller whose right had been revoked d liquidate his inventory provided he committed none of the three acts merated above. As an alternative, he could offer his stock to the owner of brand, name, or trademark at his invoice cost, and if the offer were not pted within 10 days he could sell out his stock in the regular course of his ness and within a reasonable time, without restriction as to price, provided advertisement carries notice that the right of the seller to use the brand, e, or trademark had been revoked except as regards his stock of such goods he time of revocation. person using a brand, name, or trademark after his right to do so had been ked would be deemed to have committed an act of unfair competition, and d be sued by the owner of the brand, etc., in the U.S. court for damages injunctive relief. S. 774 would allow certain exemptions to the provisions he bill, including sales of bulk commodities not in wrappers or containers; es of commodities pursuant to court authority; sales of damaged, deteriorated, secondhand goods; sales by or to governmental agencies; and sales to charie, educational, medical, and religious organizations for their own use. he Department of Commerce recommends against enactment of this legislander the terms of the proposed bill, price competition at the retail level, based local conditions, and on costs of management at the individual store, would llegal for price-maintained items of the same brand. The lessening of price petition would necessitate greater emphasis on nonprice competition, such more extensive advertising and display, and elaboration of customer services. ese added costs could be expected to be reflected in higher prices. Retail firms rketing under a brand-owner controlled pricing system would have substanly less incentive to hold down their costs. The more efficient firms in a ition to pass on some cost savings to consumers would be foreclosed from peting pricewise. foreover, the spread of resale price maintenance would substantially facilitate ce leadership and uniform pricing in the marketing of similar or substitutable ducts by competing manufacturers. Such manufacturers, in order to maxize their profits by volume sales, would endeavor to set the price or price ge high enough to cover the operating costs and a profit to most of their |