Besides 4 million veterans and dependents drawing compensation and pension there are additional millions of veterans who would be adversely affected because they are in lower-income levels. The total cost of the compensation and pension law is now more than $3.8 billions per year. When millions of veterans find the cost of living increasing, pressures may well develop for increases in compensation or pension payments at least equal to the increase in the cost of living. The Veterans' Administration operates possibly the largest hospital system in the country, and quite possibly in the world. The cost of its operation is now over $1 billion a year. Naturally we are large purchasers of drugs, food, and other supplies. Eventually, should this bill pass, I would anticipate that, despite the exemption of purchases by the Federal Government from its provisions, an increase in these operating costs would result which would be borne by the Federal Government. In addition, as more veterans find themselves unable to pay for their own medical treatment because of increases in the cost of living resulting from this bill, they will turn to the Veterans' Administration in greater numbers, thereby adding to the already susbtantial pressure for an enlargement of the hospital system. The Veterans' Administration also administers other programs, particularly a large loan-guarantee program quite sensitive to price changes. However, I see no purpose in going into each one of these in detail since, if my fears are justified, the increase in the cost of living which would result from passage of S. 774 would have a similar impact upon the individual veteran and the national budget-on the one hand, hardship for the individual and on the other, an increase in the budget request for the Veterans' Administration. I know that you, as well as I, have the interest of our veterans at heart and I am confident that you will never take an action which would work against their interest as I feel this so-called Quality Stabilization Act would do. I thank you gentlemen for this opportunity to appear before this committee and express my opposition to S. 774. Senator HARTKE. The committee will adjourn until tomorrow morning at 10 o'clock. (Whereupon, at 11:48 a.m., the subcommittee adjourned, to reconvene at 10 a.m., Thursday, January 23, 1964.) QUALITY STABILIZATION THURSDAY, JANUARY 23, 1964 U.S. SENATE, COMMITTEE ON COMMERCE, Washington, D.C. The subcommittee met at 10:05 a.m., in room 5110, New Senate Office Building, Hon. Strom Thurmond presiding. Senator THURMOND. The subcommittee will come to order. Mr. Orrick, if it is agreeable, we will just let your statement be put into the record. Mr. ORRICK. Yes, sir. I am very happy to do that, Mr. Chairman. (The statement referred to follows:) STATEMENT OF WILLIAM H. ORRICK, JR., ASSISTANT ATTORNEY GENERAL, ANTITRUST DIVISION, DEPARTMENT OF JUSTICE, ON S. 774 Mr. Chairman, I appreciate the opportunity to appear before this committee to present the views of the Department of Justice concerning S. 774, a bill designated as a "Quality Stabilization Act." The Department of Justice strongly opposes this legislation. It is not in the public interest. It is inconsistent with a free economy. It means higher prices for consumers. The title of this legislation is grossly misleading. The bill has nothing to do with quality. It is instead designed to legalize resale price fixing on a nationwide basis. The bill would amend the Federal Trade Commission Act to permit the owner of a brand, name, or trademark to establish and control resale prices on goods identified by his mark. Thus, manufacturers would be permitted to dictate the prices at which distributors and retailors must resell merchandise that they and not the manufacturer own. This is not the American way. By legislative fiat the bill would utterly destroy intrabrand price competition among distributors and retailers selling branded products. The result of such legislation would be the charging of higher prices to the consuming public. The bill might more aptly be named "The Consumer High Price Act." In our view it is bad legislation. S. 774 IS INCONSISTENT WITH A FREE ECONOMY S. 774 strikes at the heart of our free enterprise system by restricting freedom of contract, limiting the right to transfer private property, restraining individual business initiative, and subverting the principles of free competition. Free and open competition is basic to our capitalistic system. Since the enactment of the Sherman Act in 1890 every administration has supported this principle which is so much a part of the warp and woof of our democracy. For example, President Hoover in his Memoirs contrasted our free economic system with the cartelized systems of Europe. He said that "By maintaining competition, our industries were forced into channels of constantly improving methods and plants and constantly lowering prices with the increased consumption of goods," whereas trade restraints in Europe tended "to stagnate improvements in favor of price and distribution controls." 1 "The Memoirs of Herbert Hoover," vol. 3, 1952, p. 420. President Kennedy said: 2 "The free market is a decentralized regulator of our economic system. The free market is not only a more efficient decisionmaker than the wisest central planning body, but even more important, the free market keeps economic power widely dispersed. It thus is a vital underpinning of our democratic system." Only last Monday President Johnson in his economic message to the Congress reiterated his deep belief in the necessity for competition and issued a mandate to his administration "that antitrust policy must remain keenly alert to illegal price fixing and other practices that impair competition," and "that we must resist new steps to legalize price fixing where competition should prevail." There is no mistaking that S. 774 "would legalize price fixing where competition should prevail" and is therefore antithetical to the economic program of this administration. Like all resale price maintenance schemes it is also antithetical to long established antitrust principles. Put simply, S. 774 legalizes price fixing by and for unregulated private interests. 4 Fifty years ago, in the Dr. Miles Medical case the Supreme Court outlawed resale price maintenance. Relying on common law principles against restraints on alienation, the Court found that resale price maintenance contracts were designed "to prevent competition among those who trade in [the contract commodities]," and held that when a manufacturer has "sold its products at prices satisfactory to itself, the public is entitled to whatever advantage may be derived from competition in the subsequent traffic." This doctrine is as much in the public interest today as it was in 1911. Not only does S. 774 legalize vertical price fixing, it also promotes horizontal price fixing at all levels by drastically restricting the number of persons who may decide at what prices articles shall be sold. 6 5 In the last 20 years, the Department of Justice has prosecuted case after case where State "fair trade" laws have been used to cloak illegal price fixing These cases variously involved agreements among competing manufacturers, among competing wholesalers, among competing retailers, and among manufacturers competing with others at different levels of distribution. Under "quality stabilization," with its nationwide scope, such agreements would tend to be even more prevalent and detection even more difficult. Beyond this, parallel pricing my manufacturers would be facilitated. Approximately one-half of the 150 or so pending Government-instituted antitrust cases directly involve price fixing. To one degree or another all of these practices would either be legalized, facilitated, or encouraged by the so-called quality stabilization bill. Recent examples of how legalized "fair trade" tends to be used for illegal price fixing may be cited. Only last month the Department of Justice brought suit against one of the country's major cosmetic manufacturers, that sells upwards of $65 million annually, charging that it had conspired to fix retail prices in non-"fair trade" States therby forcing consumers to pay higher prices for cosmetics. The Government's suit seeks to enjoin the manufacturer from pressuring retailers into adopting "fair trade" prices." A month earlier the Department of Justice instituted two antitrust suits against a New York druggists' organization which had fixed prices on more than $70 million worth of drugs a year in a two-county area, in order to keep prices at high and noncompetitive levels.10 Using the State "fair trade" law as a basis for its activities, this druggists' association, the complaint alleged,, policed drug stores to check adherence to manufacturers' "fair trade" prices; coerced druggists to maintain "fair trade" prices and informed manu 2 Address, White House Conference of Business Editors and Publishers, Sept. 26, 1962, quoted in 9 N.Y. Law Forum 1-2. 3 "[T]he administration * * * will resist proposals such as the revival of resale price maintenance now before Congress in the so-called quality stabilization bill-that would inhibit price competition and reduce the competitive vitality of our marketing system." Annual Report of the Council of Economic Advisers transmitted to the Congress with the Economic Report of the President, 1964, pp. 117-118. Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911). E.g., United States v. Maryland State Licensed Beverage Assn. Inc., et al. (Cr. 23212, 1955; Civ. 9122, 1956; D. Md.). E.g., United States v. National Wholesale Druggists Assn. (Cr. 618-C, D., N.J. 1942). 10 United States v. Nassau-Suffolk Pharmaceutical Society, Inc. (Civ. 63-C 1207, E.D.N.Y.), and (Civ. 63-C 1206, E.D.N.Y.). facturers of any deviations; harassed druggists who reduced prices; and engaged in other concerted activities to insure that price reductions on "fair trade" items were not available to the public. Similar reprehensible tactics charged against a druggists' association in Hawaii were just recently halted." These are not isolated instances. Similar practices have long been used by fair-trade backers to maintain high prices." S. 774 would encourage the use of such strong-arm behavior against any manufacturer refusing to quality stabilize his prices and any retailer daring to give consumers a break by selling below fixed fair trade or quality stabilization prices. 12 11 Were the Federal Government now to seek for itself price-fixing power of the type authorized by this bill, all elements of our society would be outraged by such an encroachment upon economic freedom. But is it not even less in the public interest for private business concerns lacking public accountability to have this power over the prices and incomès of others? S. 774 MEANS HIGHER PRICES There is absolutely nothing in the bill assuring that consumers will receive better quality, larger quantities, or improved services from either manufacturers or retailers in return for the higher prices they will have to pay. On the contrary, under this legislation it is inevitable that consumers would be denied access to products at prices reflecting competition at all levels of distribution. As the Consumer Advisory Council, commissioned by President Kennedy to protect consumer interests, concluded after its study of S. 774: “* ** so-called quality stabilization (fair trade) bills are inimical to the interests of consumers. They violate the third right of the consumer as stated in the President's consumer message, the 'right to choose to be assured, wherever possible, access to variety of products and services at competitive prices. ***'" That enactment of S. 774 would mean higher prices is clearly evidenced by manufacturer efforts to enforce fair trade prices. Repeatedly, in thousands of cases, the enforcement actions have stemmed from retailer sales below fair trade prices. In other words, retailers were willing, even desirous, of selling at lower prices but brand owners have brought lawsuits to force the retailers to increase their prices. Comparisons of the actual prices charged by the retailers in certain of these cases vis-a-vis the fair trade prices as set out in the court papers and decisions, are shown in table I. These comparisons amply demonstrate the spuriousness of the claim that quality stabilization will not raise prices. On the contrary, the data reveal that on a wide range of everyday consumer products, from Alka-Seltzer to Zerox, large manufacturers have sought to compel retailers, most of whom are relatively small businesses, to deprive consumers of savings ranging up to 40 percent. Savings in a majority of the cases involved were in excess of 15 percent. A recent study of prices in the liquor industry in New York shows the same effect of fair trade pricing. Table II reflects the savings obtainable by purchasers in the District of Columbia, a non-fair-trade jurisdiction, as compared to New York which has a mandatory resale-price-maintenance law. Minimum savings were 14 percent and the average was 26 percent. But the results of these and other impartial surveys reveal only what is obvious: Resale price maintenance means high prices, and slowed economic progress. England has had the experience of nationwide resale-price maintenance. What is the assessment there of its merits? Edward Heath, Minister for Trade and Industry of the British Government, announced just the other day that his Government will seek abolition of resale-price maintenance in England. Pointing to the need to prevent inflation from marring the United Kingdom's industrial growth, Mr. Heath emphasized that resale-price maintenance is incompatible with the objective of keeping down costs and prices.13 11 United States v. Hawaii Retail Druggists Assn. (Civ. 2064, D. Hawaii, 1962). Final judgment, Nov. 19, 1963. 12 Report of the Federal Trade Commission on Resale Price Maintenance (1945), pp. 166-250. 13 The Wall Street Journal, Thursday, Jan. 16, 1964, p. 4: This judgment comports with the similar conclusion of the Organization for European Economic Cooperation that: "The rate of progress of productivity is generally retarded and in some respects may be totally arrested by resale-price maintenance." Gammelgaard, "Resale Price Maintenance," OEEC, 1958, p. 113. |