CONCLUSION The observations made herein are based entirely on our observations of market behavior for many years and in thousands of situations. As fervent supporters of fair trade, we believe that our experiences possess a certain validity in that we have had opportunities to observe and report the facts in every industry in which fair trade plays a role. Fair trade is not a cure-all for the problems of small business and does not of itself create a perfect distribution of either merchandise or profits. It is, however, a pratcical answer and solution which helps maintain a normal and healthy economic climate where fair trade is practiced. We approve and support the objectives of the Harris bill-to establish a uniform National Fair Trade Act. We have not studied the bill in its technical legal aspects and are not qualified to render an opinion as to its legal sufficiency. We have noted with some concern the legal arguments in criticism of the technical features of the measure, and urge the committee to employ the best talent available to it to insure the bill's soundness. A simple and direct law establishing a National Fair Trade Act is necessary and should not be too difficult for lawyers to draft. We hope and trust that this Congress will be able to enact such a law so as to provide a single and simple remedy to replace the present complexities of varying State laws on this subject. NEW YORK STATE BAR ASSOCIATION, Re H. R. 10527, amending Federal Trade Commission Act to authorize manufacturer of trademarked article to fix its retail price by trade notice, etc. Hon. PETER F. Mack, Jr., Chairman, Subcommittee on Commerce and Finance, Washington, D. O. DEAR MR. MACK: On May 21, and as chairman of the section on antitrust law of the New York State Bar Association, I sent you a telegram which requested further hearings on this bill, to receive public statements against it, and in doing so I indicated that this section opposes its enactment because it proposes legislation inconsistent with the antitrust laws. But you replied by a telegram on May 22 that the hearings on this bill had been closed, and you suggested that I file a statement on this bill for the subcommittee's record on it. This letter is that statement. But I should, first, note that the bylaws of our section provide for its government by an executive committee, which has seven members. They are 4 regular members and 3 ex officio members, who are the chairman, vice chairman, and secretary. I requested the other members of the executive committee to authorize me, as chairman, to record the section's opposition to H. R. 10527; that authority was unanimously granted and, on the basis of it, I have addressed the aforesaid telegram and this letter to you. A In 1953, Attorney General Brownell established a National Committee To Study the Antitrust Laws, which had over 60 members, and they included leading antitrust lawyers and economists throughout the country. (I was privileged to be a member of this Committee, and it included other lawyers who are also members of our executive committee.) The Cochairmen were the Assistant Attorney General of the United States, who was the head of the Antitrust Division in the United States Department of Justice, and a professor of law at Michigan University, who is a distinguished expert in the antitrust law. The Committee made its report in 1955, which is a Government document, and there can be no doubt about its responsible and authoritative character. This report squarely condemned retail price fixing legislation such as that proposed by H. R. 10527, which is patterned on the so-called fair-trade legislation enacted in many States. Moreover, this report expressly recommended a repeal of the related Miller-Tydings amendment to the Sherman Act and the McGuire amendment to the Federal Trade Commission Act. I annex a support ing quotation from such report. It notes that such legislation is not limited to prohibit loss-leader retail pricing offensive to the competitive system, and that it is, instead, effective to prevent economic retail price reductions which pass to the consumer the economies of a competitive distribution. B Moreover, while H. R. 10527 amends the Federal Trade Commission Act, the Commission strongly opposed its enactment at the hearings, and the United States Department of Justice joined it in doing so. They opposed this legislation essentially on the ground that it prevents economic price competition, which the antitrust laws safeguard, for the purpose of reducing retail prices to the lowest level accordingly. In addition, Congress has refused to enact retail price-fixing legislation for the District of Columbia, similar to that proposed by H. R. 10527, after hearings on it. And the Department of Justice then established that retail prices for representative articles in the District of Columbia were much lower than fairtrade prices elsewhere. Further, if H. R. 10527 undertakes to authorize such retail price fixing in all States, it is faced with the constitutional fact that 3 States (Missouri, Texas, and Vermont) have refused to enact analogous State fair-trade legislation, and that such legislation has been declared invalid in over 15 other States. Hence, it may be argued that H. R. 10527 should be amended to provide that it does not apply to retail prices in any State where such a law has been legislatively or judicially rejected, and it may also be argued that this bill should be further amended whereby the Federal Trade Commission is authorized to police the retail prices fixed under it to assure their fair and reasonable character. C The foregoing comments on H. R. 10527 are a record which should give pause for due consideration by Congress. And it indicates the basic reasons why such a law would seriously injure the consuming public. These reasons may, perhaps, be summarized as follows, for emphasis: This retail price-fixing law would destroy the competitive-price system in the retail of articles which the antitrust laws were enacted to preserve. In doing so, it would prevent economic price competition between retailers, which is necessary to secure the lowest retail prices; it would authorize an arbitrary maintenance of retail prices, which artificially enhances them; and it would, thus, seriously aggravate our national problem of a high cost of living in essential articles, which is now a matter of fundamental concern to our people. This appraisal of H. R. 10527 is confirmed by the Federal Trade Commission's official study of resale price maintenance some years ago. And, if it is correct, the enactment of such legislation would, undoubtedly, result in a strong national protest. Respectfully yours, CHARLES WESLEY DUNN, Chairman. 1955 REPORT BY THE ATTORNEY GENERAL'S NATIONAL COMMITTEE TO STUDY THE ANTITRUST LAWS (Pages 153-154) In fact, the statutory recognition of fair trade itself remains highly controversial. On the one hand, protection of fair trade pricing through State and Federal enactments stands vigorously backed by powerful organized retailers' and manufacturers' groups. On the other hand, the Department of Justice and the Federal Trade Commission in numerous past official policy pronouncements have registered adamant opposition to fair trade as incompatible with the Nation's antitrust policy of fostering free competition. The committee acknowledges that fair-trade enactments reflect some legitimate commercial aims. Nationally advertised and branded consumer commodities readily lend themselves to loss-leader and cut-rate merchandising that can impair substantial investments in business goodwill. Such marketing tactics may alienate established distribution channels whose appeal to consumers emphasizes attractions other than price reductions. Fair-trade pricing enables manufacturers and other brand or trademark owners to invoke prompt legal 27308-58- -43 sanctions to check unwelcome promotional selling, thereby protecting quality items from debasement in the consumer's mind. In fact, the objective of preserving valuable investments in trademarks and business goodwill from destructive marketing tactics was the Supreme Court's rationale in the Old Dearborn case that upheld State fair-trade enactments. The committee, however, does not consider fair-trade pricing an appropriate instrumentality for such protection. Since State enactments vest absolute discretion in suppliers for determining the level of a fair-trade price, the legislative price-setting authorization extends far beyond the essential guaranties of lossleader control. An effective fair-trade system, moreover, strikes not only at promotional price cutting, but at all price reductions which pass to the consumer the economies of competitive distribution. In no event can the committee condone another consequence of fair-trade pricing. Apart from manufacturers' interest in preserving trade symbols and commercial goodwill, fair-trade pricing may enable distributors to extinguish price competition. A distributor whose inventory consists largely of fair-traded products can carry on business freed from the pressures and tribulations of price competition. Accordingly, distributors in some segments of the economy advocate fair-trade pricing by suppliers as a legal means for obtaining the benefits of a horizontal price-fixing arrangement that the antitrust law forbids. It is the committee's view that fair trade when used as a device for relieving distributors from the rigors of price competition is at odds with the most elementary principles of a dynamic free-enterprise system. On balance, we regard the Federal statutory exemption of fair-trade pricing as an unwarranted compromise of the basic tenets of national antitrust policy. We rceognize that the legislatures of 45 States have at some time accorded official sanction to fair-trade pricing; that the Congress twice deferred to State enactments by creating Federal fair-trade exemptions from antitrust prohibitions; and that without Federal immunization fair-trade pricing, as a practical matter, cannot survive. Nevertheless, the throttling of price competition in the process of distribution that attends fair-trade pricing is, in our opinion, a deplorable yet inevitable concomitant of Federal exemptive laws. Moreover, whatever may be the underlying legislative intent, any operative fair-trade system facilitates horizontal price-fixing efforts on the manufacturing and each succeeding distributive level. And the prominent existence of a Federal price-fixing exemption not only symbolizes a radical departure from national antitrust policy without commensurate gains, but extends an invitation for further encroachment on the free-market philosophy that the antitrust laws subserve. We therefore recommend congressional repeal both of the Miller-Tydings amendment to the Sherman Act, and the McGuire amendment to the Federal Trade Commission Act, thereby subjecting resale-price maintenance, as other price-fixing practices, to those Federal antitrust controls which safeguard the public by keeping the channels of distribution free. UNIVERSITY OF ILLINOIS COLLEGE OF LAW, Hon. PETER F. MACK, Jr. House of Representatives, DEAR SIR: Thank you for your courteous letter of May 28, 1958, supplying me with information in response to my telegram of May 22, 1958. An analysis of H. R. 10527 published in the New York Times for May 26, 1958, characterizes the bill as "little noticed." Only on that basis could I believe that a bill of such far-reaching implications could have had hearings limited to such a short period as that of April 29 to May 7. To pass a bill which would so regiment our economy, rigidify our price structure, and destroy free and open competition is, in my judgment, monstrous. To do so in a period of inflationary prices and economic stagnation is to do a disservice to labor, consumers, and the public generally. It is my earnest hope that, if the committee is not prepared to act unfavorably on the bill, it will at least give a further opportunity to the public to go into these questions more thoroughly. If the bill should be passed, its effects upon our economy and injuries to the public would not go unnoticed by the voters, even though they might now, as I was until recently, be unaware of the bill. Sincerely yours, KENNETH S. CARLSTON, Professor of Law. STATEMENT OF FRITZ MACHLUP, PROFESSOR OF POLITICAL ECONOMY, THE JOHNS HOPKINS UNIVERSITY I am grateful that I am being given an opportunity to submit a statement regarding H. R. 10527-fair-trade legislation. In an earlier letter I have expressed indignation about the failure of the committee to invite the best-known experts in the field to testify on the proposed legislation. It is not sufficient to give to public hearings on important bills what is supposed to be adequate notice in terms of minimum legal requirements. It has become customary to extend personal invitations to experts in the field to appear before congressional committees. I would have been glad, upon invitation, to testify at the public hearings. CARTELS WITH ENFORCEMENT APPARATUS Great difficulties of supervision and enforcement have long beset cartel agreements in retailing, especially in countries where price fixing is illegal. In the retailing of branded articles the difficulties are reduced if the producer is willing to fix and insist on uniform resale prices and if the law is changed to make resale price maintenance legally permissible and enforcible. This has been done in the United States. Back in 1922 the Supreme Court of the United States declared that retail price fixing by agreement between manufacturer and distributor, then known as the Beechnut system of merchandising, was illegal because it suppressed competition and hence violated the antitrust laws.' But then, under the organized pressure of distributor groups, aided by some manufacturers, the legislatures in 43 of the 48 States and, with respect to interstate commerce, the Congress of the United States, saw fit to permit, by enacting resale-price-maintenance laws, the abolition of price competition among retail dealers of brand-named or trademarked goods. For these laws, which in plain language must be called price-fixing laws, the legislators chose the euphemistic name fair-trade laws. Under these laws a manufacturer or wholesale distributor may fix minimum resale prices, discounts and markups for branded or trademarked goods by a contract with the retailer. Indeed such price agreements are enforcible even against retailers who have not directly agreed: the manufacturer's contract with one distributor applies automatically to all of them.' No matter whether the cost of distribution is high or low-and it can certainly not be equal everywhere the retail price fixed by the manufacturer must be maintained by all retailers under threat of penalties imposed by the courts. Thus, the Government has taken over the enforcement of these retailers' cartel agreements for branded articles.' WHAT IS UNFAIR? A few words ought to be said about the meaning of "fair" and "unfair." Of course, we shall not review the dictionary meaning of "fair," ranging from blonde and beautiful to gentle and advantageous. When the modes or results 1 Beechnut Packing Company v. United States, 257 U. S. 441. 2 In the hearings before the Temporary National Economic Committee. Mr. Wendell Berge, member of the committee and special assistant to the Attorney General, stated that "through a vertical agreement [as legalized by the Fair Trade Act] in an industry you can accomplish what is forbidden [by antitrust laws] if attempted horizontally" TNEC hearings, pt. 5 (Washington, D. C., 1939), p. 1763. The Federal Trade Commission has repeatedly expressed its opposition to this legislation for retail price fixing. See its report on resale price maintenance, transmitted to the House of Representatives, January 30, 1939. In 1951 the Supreme Court declared that the Federal law did not extend to State enforcement of price-fixing agreements against price-cutting retailers who had not signed the agreements. But in 1952 Congress amended the law and legalized State enforcement of the price-fixing schemes. It may be well to explain that if for many years you paid only 39 cents for a 50-cent tube of toothpaste you were not buying at a cut rate. The minimum contract price was list price minus 20 percent minus 1 cent." A cut rate, below 39 cents, would have been in violation of the contract and, thus, of the fair trade law. Machlup. Fritz, The Political Economy of Monopoly, 1952 (Baltimore: The Johns Hopkins Press), pp. 93-94. of economic actions are called fair, the connotation is clearly one of justice, equity, and propriety, but with a rather vague, shiftable, and highly subjective standard. What may be fair from your point of view need not be fair from mine. Where there is widespread agreement, it is probably because a state of affairs has long prevailed and people have become accustomed to it. What continues to be as it has normally been is often regarded as fair, whereas a deviation from the customary is resented by many as unfair. But if a deviation from the expected-the customary, the normal-is regarded as unfair by those who are disappointed, one should ask whether they had any right to expect what they expected. Do I have a right to expect to be able to recover my investment? Do I have a right to expect that nobody will imitate my new ideas? Do I have a right to expect to resell with a profit? If I have been given a promise, I have a right to expect it to be kept, and I may regard its being broken as unfair. If all my competitors have promised me not to cut prices though such promises would be illegal-I may call those unfair who break the promise. But, if they have not promised price maintenance, an expectation on my part that I shall be able to sell at a profit is only a gamble, and I have no right to shout "Unfair" if someone starts chiseling. I shall be just out of luck. There is a difference between being out of luck and being robbed, though many overlook this difference and complain that they are robbed whenever their hopes are frustrated by actions of other people who have a perfect right to do what they do and, indeed, whose actions probably benefit the community as a whole. Of course, it is different if the actions that hurt the complainant are clearly in violation of common rules of ethics-rules, for example, against lying and deceiving or clearly injurious to the public at large. But injury to competitors must not be confused either with injury to competition or with injury to the public. Unfair competition, under the traditions of common law and conservative legal doctrines, does not include such things as competitive price cutting, selling below cost, or imitation of a competitor's ideas, designs, or styles. Unfair competition, under the provisions of statutes enacted since the 1930's, does extend to price cutting, and in some States to selling below cost, in the retail business. Unfair competition, under the codes of ethics of some special business groups, extends to fairly widespread competitive activities which even accommodating legislatures have, thus far, refused to outlaw. Evaluations of any of these practices, from the economic point of view, will pay no special attention to vested interests, but will consider only the effects on the economy as a whole. These evaluations will distinguish competitive actions by which a seller makes his product cheaper, bigger, better, or more appealing to the buyer, from competitive actions by which a seller tries to make his competitors' products more expensive, less serviceable, less available, or less appealing to the buyer. There is good sense in calling competitive actions of the latter, or negative, kind unfair competition-for they are prejudicial to the consumer as well as to the competitors. But competitive actions of the first kind are, probably, beneficial to the public, no matter how much they may hurt some of the competitors. The disappointment of sellers unable to sell at a profit may evoke sympathy, but will not cause ecoonomists to regard the price cutting that causes such disappointment as unfair competition. Competition that prevents sellers from making a fair profit is not, for that reason, unfair. THE RIGHT TO COMPETE Businessmen have always sought protection from damage by competitors, and have often gone to court for relief. But the common law has usually refused to grant such relief and has generally upheld the right to compete.* Fortunately for the economic development of society, the conservative legal doctrines of unfair competition have sturdily resisted most of the businessmen's attempts to suppress competition by calling it "unfair diversions of trade" and “unfair appropriation of intangible trade values" by competitors. By and large, the courts have upheld the right to compete, even where competition meant appropriation by a newcomer of the "fruits of one's labor, investment, and ingenuity." 7 One of the earliest court cases against a competitor was the Schoolmasters' Case of 1410. It was brought by two English schoolmasters who sued a newcomer because his competition had reduced tuition fees. The court denied recovery of the damages. Milton Handler, Unfair Competition, Iowa Law Review, vol. XXI (1936), reprinted in Readings in the Social Control of Industry, edited, E. M. Hoover, Jr., and J. Dean (Philadelphia, Blakiston, 1942), p. 93. |