agents, and that the company was merely asserting its right to sell goods owned by it at the prices it chose."

80

General Electric sold its lamps either directly to customers or else through dealers whom it described as agents: large dealers, so-called B agents, of whom there were about 400; and about 21,000 local electrical retailers, whom it called A agents. These agents entered into contracts with GE, elaborately regulating the manner of handling, selling and paying for GE lamps. The lamps were sent to the agents on consignment, and remained the property of the company, subject to return upon demand. Sales could be made only to designated classes of ultimate consumers and only at prices established by the company. Proceeds from sales were held in trust for the company, for a monthly accounting, the agents being compensated by fixed commissions upon the lamps sold. Expenses of storage, sale and distribution were borne by the agents, as were losses from uncollectible accounts. GE paid insurance and taxes on the lamps, and the freight on its consignments to the agents, and assumed the risk for fire, flood, obsolescence and price decline.

The Court noted that General Electric's distribution plan was devised to allow the company to deal directly with its consumers, avoiding the possibility of price competition among middlemen. But it found that the distributors were genuine agents of the company, and asserted that "there is nothing as a matter of principle or in the authorities which requires us to hold that genuine contracts of agency like those before us, however comprehensive as a mass or whole in their effect, are violations of the Antitrust Act.' In 1949, in another antitrust proceeding, a Federal district court upheld the same agency arrangements even though GE's patents had since expired. This decision points up the fact that the earlier General Electric case rested not on the special antitrust exemption afforded to patents but solely on the legality of the agency relationship between manufacturer and distributor.

83

99 81

The decision in the General Electric case is significant in two respects: It affirms the legality of resale price maintenance by means of a distributor-agency system, even when the agents are otherwise independent dealers; and it indicates how closely a permissible agency system may resemble distribution through outright sales to independent wholesalers and retailers. With regard to the legality of the agency system, it should be noted that the General Electric decision also affirmed the right of a patentee, as a normal incident of his patent privilege, to fix the prices at which the licensee will sell goods manufactured under the patent. Since a manufacturer has as legitimate a proprietary interest in his own goods as a patentee has over the subject matter of the patent, there is no good reason on principle why the manufacturer of the goods should not be able, like the patentee, to control the price at which his property is sold. Indeed, where an agency system is employed no property interest in the goods passes to the agent; whereas a patent licensee may have title to the goods manufactured by him under the license. It is reasonable enough that a producer should have the right to market his own products on any terms he deems fit, so long as he is subject to effective competitive pressure and his pricing decisions are made unilaterally. The General Electric decision simply sanctions a practicable method of giving effect to this right.

" 84

General Electric does not delimit the sales arrangements that the Court is willing to recognize as falling within the category of bona fide "agency," but it does suggest that the term is broadly inclusive. It should, for instance, include an ordinary consignment sale. The GE arrangement verged on outright dealer ownership of the manufacturer's products, for although GE retained technical title to the lamps, the dealers were allotted many of the incidents of ownership. Thus they bore the risk of loss on delinquent accounts-a standard feature of the so-called del credere agency —and on lamps lost, missing or damaged while in their custody. The agents also bore the expenses of storage, transportation, distribution, and sale; again indicia of purchase rather than bailment.

85

It remains to consider the impact of United States v. Masonite Corp. on the General Electric doctrine. In this case the Government sought an injunction under the Sherman Act, alleging a combination in restraint of trade. Masonite

So Id. at 479.

81 Id. at 488.

82 United States v. General Elec. Co., 82 F. Supp. 753, 824-26 (D. N. J. 1949), final judgment, 115 F. Supp. 835 (D. N. J. 1953).

sa United States v. General Elec. Co., 272 U. S. 476,490 (1926) .

84 See Note, 27, Colum. L. Rev. 567 (1927).

85 See note 75 supra.

86 316 U. S. 265 (1942).

was a manufacturer and distributor of hardboard. Partly by threats of patent infringement suits, it persuaded other manufacturers and distributors who had been marketing hardboard under competing patents, to enter into so-called del credere agency relationships with Masonite. Masonite designated each of these competitors its "agent" and "del credere factor" to sell its products. The agents acknowledged the validity of Masonite's patents, and agreed to sell and promote its products through their own sales organizations. Masonite set the selling prices and the terms of sale, and both Masonite and the agents bound themselves to observe them. The Court observed that in the absence of Masonite's patents and the del credere agency agreements, the arrangement would amount to a pricefixing combination and hence a per se violation of the Sherman Act. It conceded that the agreements made the distributors del credere agents of Masonite, and that "there is a proper area for utilization by a patentee of a del credere agent in the sale or disposition of the patented article"-where "distribution is part of the patentee's own business." 88 But Masonite's distributors were also competitors, and the Court held that where a patentee "utilizes the sales organization of another business-a business with which he has no intimate relationship quite different problems are posed since such a regimentation of a marketing system is peculiarly susceptible to the restraints of trade which the Sherman Act condemns. And when it is clear, as it is in this case, that the marketing systems utilized by means of the del credere agency agreements are those of competitors of the patentee, and that the purpose is to fix prices at which the competitors may market the product, the device is, without more, an enlargement of the limited patent privilege and a violation of the Sherman Act."

The court distinguished General Electric on the ground that GE's purpose had been only to secure a patentee's proper reward for his invention, while Masonite sought to destroy competition among competing patentees."

90

The Masonite case imposes no fatal restriction on the use of the agency device as approved in General Electric. The Court not only distinguished General Electric but expressly recognized the legality of the agency device in appropriate situations." Sales agencies might well be, in some situations, the only practicable way for a manufacturer to give effect to his right to market his product on his own terms. This right was accorded recognition by Colgate and it survived Beech-Nut; and there is no reason to believe that the Court in Masonite intended to extinguished it."2

The Masonite opinion emphasizes that the evil of the agency device, as it operated in that case, was the elimination of price competition and competition in innovation among competing producers-a factor totally absent in General Electric. Professor Chafee has suggested that the whole process of marketing goods, from producer through distributor to ultimate consumer, is a unified operation, in the control of which the manufacturer might well have a legitimate

87 Id. at 274.

88 Id. at 279.

80 Ibid.

90 Id. at 280-281.

01 Id. at 279.

It might be asked whether, as a matter of economic policy. the manufacturer should be able to impose price restrictions on otherwise independent dealers through the use of the traditional rules of agency. It may be that the independent merchant should be left free to exercise his own judgment in pricing his wares-such freedom being the essence of retail competition. This reasoning suggests what might be termed a "capital-dependency" test. for determining whether a contract purporting to make an independent retailer into a manufacturer's sales agent should be recognized as a legitimate agency. If the independent distributor bears the financial risk of mistaken judgment in his retailing activities, a wise competitive policy would by this logic permit him to reap the rewards of a sound exercise of judgment, including his decisions relative to pricing policies. On the other hand, if the distributor is heavily dependent financially on the manufacturer, so that a substantial portion of the financial risk of bad judgment is borne by the latter, the manufacturer, under the capital-dependency test, would be allowed to impose his judgment, in regard to resale pricing policies, on the distributor.

From an economic point of view, however, it seems more important to determine the extent of competition on the manufacturing level than to inquire into the capital dependency of the distributor-agents. As long as the manufacturer operates in an atmosphere of "free and open competition" there is little danger of arbitrary pricing or significant dealer coercion. Moreover, in effectively competitive markets the desirability of affording the manufacturer protection for his goodwill, and the independent retailer a safeguard against loss-leader selling should counterbalance whatever element of coercion is involved in the agency relationship.

interest. General Electric's economic control of its goods was of this vertical variety and was implicitly approved by the court. But such control is a far cry from the horizontal pricing agreement between competing producers that was struck down in Masonite and other cases. Such horizontal control inevitably restricts competition and in so doing contravenes the policy of the Sherman Act. There is no reason why agency arrangements lacking such restrictive economic effects should not be permitted.

Thus it is that the agency distribution system remains an alternative device for effectuating resale price maintenance. The broad utilization of this device in General Electric survives Masonite, with the limitation that the system be vertical only and not eliminate horizontal competition. A likely further limitation is that the manufacturer establishing an agency system to be subject to effective price competition, for a producer with substantial market power could, by virtue of his ability to sstablish arbitrary resale prices, cause a restraint of trade.

CONCLUSION

Masonite clearly demonstrates the willingness of the court to disregard legal form in condemning restraints of trade that constitute significant deviations from the Sherman Act policy:

"So far as the Sherman Act is concerned, the result must turn not on the skill with which counsel has manipulated the concepts of 'sale' and 'agency' but on the significance of the business practices in terms of restraint of trade." "

Nor is this subordination of legal form to economic effect confined to an agency context. In the light of recent decisions any resale price maintenance device might be condemned where it is used to achieve the regimentation of competing marketing systems, where it is used to achieve uniformity of price among competing producers, or where the manufacturer is not subject to significant competitive pressure on his pricing policies. As a consequence, a producer with dominant or even substantial market power might be unable, absent fair trade, to maintain resale prices by any means.

On the other hand, unless repeal of the Miller-Tydings and McGuire Acts is taken by the courts to mean congressional condemnation of all forms of resale price maintenance-an unlikely prospect-the refusal to deal and the agency system, and possibly the equitable servitudes doctrine, would remain alternative devices for resale price maintenance. In that eventuality the demise of the fair trade laws with their "free and open competition" proviso would result in a net loss to price competition. Although the judicial emphasis on economic effect may be enough to prevent a producer with substantial market power from employing the alternative devices, no decision has expressly set out the requirement that a manufacturer establishing resale prices via a unilateral refusal to deal or an agency system be subject to effective price competition. Beech-Nut might be construed to prohibit only the manufacturer's solicitation of active assistance by his dealers in policing a price maintenance system; and Masonite might be restricted to situations where there is a patent monopoly or a horizontal price agreement." Consequently, it is possible that the alternative devices are available even to a producer with substantial market power. But fair trade, with effective enforcement of the "free and open competition" proviso, would not be available to such a producer. And it is likely that the existence of "free and open competition" as an explicit condition of fair trade would serve as helpful

3 Chafee, Equitable Servitudes on Chattels, 41 Harv. L. Rev. 945, at 946-47 (1928): "The same development in standardized products which has led to equitable protection against unauthorized imitations of trade names of the physical appearance of articles has also made it desirable to producers that these standardized goods should pass to the ultimate consumers through well regulated channels, and oftentimes that they should be used by the consumers in such a manner as to aid in the maintenance of a complex marketing system. *** Each ambitious seller by expensive advertising and a vast network of dealers creates in the public the habit of expecting a well remembered product of supposedly high uniform quality in a uniform guise at a uniform price for a unifrom quantity. Irregular and unauthorized departures from uniformity in any respect tear this pattern of thought and emotion which has been woven with so much trouble and cost, and tend to reduce the minds of the public to the confusion which preceded the marketing campaign. The same irrational causes which lead a consumer to select a given article may as easily divert him away from it to a competitor. *** [The manufacturer wants] to make the intermediary transfers of title legally immaterial to the extent that they are in fact immaterial to his scheme, and to be able to treat the entire process of marketing his goods from the factory to the consumer as a unified transaction, in which successive sales are merely incidental breaks serving only a limited purpose which does not affect the reputation of his goods." 94 United States v. Masonite Corp. (316 U. S. 265, 280 (1942)).

See United States v. McKesson & Robbins, Inc. (122 F. Supp. 333, 339 (S. D. N. Y. 1954)), criticized in Note, 64 Yale L. J. 426 (1954).

precedent for limiting the alternative devices to situations where the producer is subject to effective price competition.

At any rate, if more price competition is the goal, it appears wiser to insist on vigorous enforcement of the statutory requirement that price fixed commodities be in "free and open competition with goods of the same general class produced or distributed by others"" rather than to advocate outright repeal of the fairtrade laws. It seems wiser-and politically more realistic-to demand extension of the "free and open competition" proviso to other forms of resale price maintenance rather than to urge the repeal of the only laws of which it is now an explicit part.

A recent article by Professor Herman in answer to an article of mine on the subject of fair trade' prompts this reply. Since the record speaks for itself, I do not propose to comment on Professor Herman's techniques of disputation.

FAIR TRADE AND THE CONSUMER

Professor Herman objects to my statement that the case against fair trade rests on highly questionable evidence. He does not consider it meaningful and accurate to say that, so long as there is effective competition among manufacturers, fair trade is not likely to prove injurious to the consumer, but contends on the contrary that since fair-traded products "are frequently sold in markets of few sellers * ** significant factors are already at work tending to reduce the effectiveness of competition."

Competitive conditions and structural characteristics vary, of course, from industry to industry, and only a case-by-case investigation can yield statistically significant results. However, we do have fragmentary evidence which sheds considerable light on the extent of competition among fair traded products and between fair-traded and non-fair-traded products.

First, it is noteworthy that there are 11,842 manufacturers of nationally advertised, brand-name products in 43 industrial classifications listed by the Standard Advertising Register, and as table I indicates, the percentage of fairtrading manufacturers in each of these broad classifications is by no means staggering.

98 McGuire Act, 66 Stat. 632, 15 U. S. C. § 45 (5) (a) (2) (1952); Miller-Tydings Act, 50 Stat. 693 (1937), 15 U. S. C. § 1 (1952). The history of the enforcement of these provisos has been discouraging. See note 6 supra.

1 Associate professor of economics, Michigan State University.

2 Herman, A Note on Fair Trade (65 Yale L. J. 23 (1955)), criticizing Adams, Resale Price Maintenance: Fact and Fancy (64 id. at 967).

3 Herman, supra, note 1, at p. 23.

4 Id. at p. 25.

Hearings before the Antitrust Subcommittee of the House Committee on the Judiciary on Resale Price Maintenance (82d Cong., 2d sess., ser. 12, at 757 (1952)) (hereinafter cited as hearings).

Although table I probably understates the extent of fair trading (because it includes only broad industry categories), there is little evidence to support the contention that "it is nearly always impossible for one manufacturer to establish a system of vertical price fixing unless he can be sure that his competitors will do likewise. ✶ ✶ ✶"6 The recent abandonment of fair trade by some electric-appliance producers and its retention by others is but another refutation of this generalization."

This is the statement of Corwin Edwards, quoted with approval in Herman, supra note 1, at 27. The facts of the market place simply do not substantiate the charge that "horizontal collusion in violation of the law has been an indispensable part of the movement for resale price maintenance." Ibid. In some lines there are more fair traded goods than in others, but in virtually all lines there are manufacturers who do not fair trade. Moreover, in a sharply increasing number of fields the fair trading manufacturer has to meet the price competition of private (or store-controlled) brands some of which are as national and as widely advertised as the manufacturers' brands. In fact, there is evidence that many (if not all) fair trading manufacturers engage in price competition and refrain from a collusive or systematic "matching" of their competitors' prices. See, e. g., Hearings, supra note 4, at pp. 123-126, 737-738, 779-780, 842.

Westinghouse, for example, abandoned fair trade pricing on electric housewares and bed coverings. Wall Street Journal, Sept. 1, 1955, p. 2, cols. 2-4. Simultaneously, however, it announced an increase in suggested retail prices on toasters from $19.95 to $21.95 and on the sandwich grill and waffler from $29.95 to $31.95. The company also announced a projected increase on 10-inch fans from $15.95 to $16.95, on 12-inch fans from $26.95 to $27.95, and on the Riviera model floor-type fan from $39.95 to $12.95. Ibid.