Page images

decision is in accord with true and basic purposes of the Robinson-Patman Act. This may be a landmark decision for the independent retail druggist in his struggle to compete with the economic power of the chains. Sincerely,

Executive Secretary.


Washington, D.C., April 19, 1963.

Executive Secretary, the National Association of Retail Druggists,
Chicago, Ill.

DEAR WILLARD: The Federal Trade Commission has just rendered a decision which importantly relates to the future ability of retail druggists to engage in advertising.

The Commission, in Fred Meyer, Inc., has held that manufacturers who give advertising allowances to their direct buying retail chain store customers must also make "proportionally equal" allowances available to their wholesaler customers, presumably for dedistribution to the wholesalers' independent retail customers.

As you know, some drug manufacturers that sell directly to chains and also through wholesalers have provided advertising allowances only to the chain drugstores and certain other large retail drug outlets. Although the RobinsonPatman Act provides for nondiscriminatory advertising allowances to the independent drug retailers and to wholesalers on behalf of such retailers basing their refusal on the technical language of the Robinson-Patman Act.

Section 2(d) of the Robinson-Patman Act provides that "proportionally equal" advertising allowances shall be made available to competing customers. In 1960 the Federal Trade Commission had issued an advertising allowance guide which attempted to show businessmen how to comply with certain provisions of the Robinson-Patman Act. In that guide the Commission defined "customer" as "someone who buys directly from the seller or his agent or broker." This interpretation permitted manufacturers to claim that since the small retailers who did not buy directly from them were not their "customers" and therefore, although they made advertising allowances available to the larger direct buying retail chains, they did not have to give the smaller retailers "proportionally equal" allowances. Wholesalers claimed that they were entitled to "proportionally equal" allowances because under this interpertation they were "customers" of the manufacturers. In one case a U.S. Federal district court sustained a wholesaler in these views. (Krug v. International Telephone & Telegraph Corp.) However, in the Federal Trade Commission's Atalanta decision the Commission appeared to indicate that it was of the view that although wholesalers are "customers" they are not in competition with the retail chains, and since the Robinson-Patman Act requires that "proportionally equal" allowances be made available only to competing customers, the manufacturers need not give wholesalers "proportionally equal" allowances.

In its March 29, 1963, decision in the Meyer case, the Federal Trade Commission reversed its earlier views and decided that wholesalers are customers of the manufacturers whose customers (the small independent retailers) are in competition with the large chain retailers. Commissioner Elman, in a minority opinion, holds that "proportionally equal" advertising allowances should be made directly available to independent retailers that buy from wholesalers. The new Commission view of who is competing customer of a manufacturer for purposes of section 2(d) of the Robinson-Patman Act is based primarily on its analysis of the economic realities of competition, and its recognition of the congressional purpose of protecting the small independent businessman from being disadvantaged by secret advertising allowances given by manufacturers to retail chains. The Commission's majority opinion contains the example of “a geographical market served by, say, two direct-buying 'chains', and one wholesaler with 100 retailer-customers ***"

The Commission then stated that if it were to adopt the view that wholesalers are not customers of the manufacturer in competition with the chain retailers it “would mean, of course, that the protection of section 2(d) is accorded to those who presumably have the market power to take care of themselves (competing 'chains'), but denied to those who, as the instant record clearly shows, need its protection very badly indeed.

"We are not persuaded that Congress either intended or effected any such result when it passed section 2(d). In the first place, such a construction goes squarely against the well-known purposes of the act itself, namely, to give the 'independent' food sellers an even break in their competition with the 'chains.' To hold that suppliers are free to give direct-buying retailers promotional allowances of unlimited quantity while denying all such payments to wholesalers whose retail-customers compete with the favored ‘chains' is to provide the latter with a competitive advantage that could very well cause the ultimate destruction of the independents."

The Commission plainly stated that it was reversing any of its prior decisions which indicated a contrary view:

"We cannot accept an interpretation that flies so squarely in the face of not only the plain purposes of the statute, but of the very terms of the provision in question. It seems to us that these two wholesalers, insofar as they resell to independent retailers sitting alongside respondents' 13 Portland supermarkets, are 'competing' with respondents in the 'distribution' of the goods in question in every meaningful sense of those two terms. Accordingly we feel constrained to reject the contrary conclusions reached by this Commission in Liggett & Myers Tobacco Co., Inc., 56 FTC 221, 250-252, and to accept, instead, the views expressed in the dissenting opinion of Commissioner Kern in that case, 56 FTC, at 253, et seq., and of the court in Krug v. International Telephone & Telegraph Corp., 142 F. Supp. 230, 236 (D. N.J. 1956). In that case it was held squarely that a 'violation of section 2(d) may occur when a manufacturer gives a retailer an allowance not given to a wholesaler whose customers compete with such retailer'."

The Commission further stated that apart "from the question of Congress' intent in the matter" it saw nothing in the language of section 2(d) of the Robinson-Patman Act that would preclude a finding that wholesalers who resell to the independent retailer are customers of manufacturers in competition with the retail chains. In this respect the Commission stated that:

"We think that, insofar as *** wholesalers resell to retailers who, in turn resell to customers in competition with respondents, the wholesalers are competing with respondents in the 'distribution' of the goods in question. It is true, of course, that only the retailer-customers of these two wholesalers compete with respondents (a chain store) in the direct resale of the goods to consumers. But the statute speaks of competition in the 'distribution' of the products, not merely of competition in their 'resale.' These wholesalers, through their numerous retailer-customers, are seeking exactly the same consumer dollars that respondents are after. Every time an independent retailer loses a sale to respondents, the wholesaler who supplied that independent retailer suffers a loss of volume by just that much. And if all of the independent retailers in Portland should close their doors, these wholesalers would necessarily be finished in that market.

"By the same token, these 100-plus independent Portland retailers depend entirely on those two wholesalers for such competitive equality, vis-a-vis the direct-buying chains, as the independent retailers are able to secure. Any competitive disadvantage experienced by the wholesaler himself in buying goods in competition with the chains is necessarily passed on to its retailer-customers. If it pays more for a given product than respondents pay, the price it charges the independent retailer will naturally reflect that higher price. (One of these wholesalers, Wadhams & Co., actually sells on a cost-plus basis; i.e., it charges its retailer-customers the price it pays for the goods, plus a fixed percentage of that amount to cover its other costs and its profit margin.) And if the wholesaler is denied promotional allowances received by respondents, it obviously cannot pass them on to its retailer-customers or use them for the benefit of those customers. In such a market context as this, we think it ignores economic reality to say that these two wholesalers are not 'competing' with respondents in the 'distribution' of these products."

The Commission thus held that manufacturers must make advertising allowances available "to all of its other customers competing with respondents in the sale and distribution of such suppliers' products, including other customers who resell to purchasers who compete with respondent in the resale of such supplier's products."

Commissioner Elman in a minority opinion stated that the retailers that buy from wholesalers should be given the advertising allowances because they are "most directly injured" by the discriminatory advertising allowance, and that the majority opinion in failing to take cognizance of this "is based upon an

unduly literal and restrictive interpretation of the Robinson-Patman Act." Commisisoner Elman contrasts section 2(d) of the Robinson-Patnam Act which applies to promotional allowances with section 2(e) of the act which applies to merchandising services or facilities. In its earlier Elizabeth Arden decision, Commissioner Elman says, the Commission required that services and facilities be made available directly to the retailers who purchased from the wholesalers. Since the effect upon the independent retailer is the same whether they are deprived of money allowances, or services or facilities designed to promote the manufacturers' products, "why," he asks, "shouldn't the Commission also provide that allowances be given directly to the independent retailers?"

It should be recognized that the Commission's Meyer decision does not involve the situation of a manufacturer that distributes only through chain and other large retailers. Presumably, according to the Commission's Meyer decision, in such a single distribution system wholesalers would not be customers of the manufacturers and there would be no compulsion therefore to give them advertising allowances.

It is, therefore, clear that the Federal Trade Commission has ruled that wholesalers who purchase from manufacturers may demand advertising allowances from such manufacturers which are "proportionally equal" to those which are made available to direct buying chainstores. Thus wholesalers are now eligible to receive such allowances and it should be noted that all manufacturers, according to the Commission's decision, must inform their wholesaler customers of every advertising and promotional allowance which they are making available, or planning to make available, to their direct buying retail customers and that the manufacturers are under a duty to make such allowances available to wholesalers in a form which will permit practical use of the allowance.

This decision, unless reversed by an appellate court, is likely to have a major impact upon manufacturer-wholesaler-retailer relations. I personally believe that the decision is sound in that it is in accordance with my understanding of the basic objectives of the Robinson-Patman Act. I am sure that workable solutions to these problems will result from an amicable and cooperative approach to them by manufacturers, wholesalers and retailers.

Very truly yours,

EARL W. KINTNER, NARD Special Antitrust Counsel.

The CHAIRMAN. Thank you, Judge Kintner. That is a very fine statement, a very helpful statement, and a statement of a sound lawyer. Mr. KINTNER. Thank you, sir.

The CHAIRMAN. You do not recognize the advisory opinion as a landmark decision of the FTC?

Mr. KINTNER. No, sir. I think that they just got a little off into the woods, so to speak, and this happens.

It has happened to me when I was sitting on the Commission. We get to arguing about a little point, and the point becomes magnified, and we get differences, and we come out with something which is perhaps not as statesmanlike as we would like it. Sometimes the staff does that. In this instance I happen to think that the staff was probably more right than the Commission.

The CHAIRMAN. Your view is that the advisory opinion was a little overzealous?

Mr. KINTNER. Well, it went further than it need have gone under the circumstances, and there is somewhat unfortunate language there which undoubtedly has caused difficulty, but in my opinion the dust is largely settled.

The CHAIRMAN. You made the statement that "Small retailers can continue to advertise jointly with assurance of legal safety."

That is your opinion as a good lawyer and, I repeat, a sound lawyer, but the Department of Justice view plus the Commission's advisory opinion, has certainly clouded the issue. We want to be helpful and constructive and to pinpoint direction as much as possible. We are

certainly going to take your counsel and that of others and try to come up with a consensus that can be presented to the small business community.

Mr. KINTNER. I am sure that Mr. Philip Jehle, who is Washington representative of the NARD, and well known to all the Members of the Congress in the House and the Senate, will undoubtedly have some suggestions later on to submit on behalf of NARD.

The CHAIRMAN. Do you have any questions, Mr. Dingell?
Mr. DINGELL. Yes; Mr. Chairman, I do.

Mr. Kintner, I arrived late, but I made it a point to read your statement. As you recall, when you had the pleasure of appearing before another committee of which I am a member, I have always had a very high regard for you, both as an individual and as a very competent lawyer, but some of the things that you have said today cause me a great deal of concern.

You know I am very sympathetic to this problem of arriving at a solution to this thing which will permit group advertising. But I think that we have to approach this thing constructively, and I noticed that here there appears to be a twofold approach on the part of small business and their representatives.

One is that on the one hand they say, "Well, the FTC was wrong in what it did. It made an erroneous interpretation of law."

On the other hand they say, "Well, we have to have some statutory relief."

Now I am sure you will agree with me on this, that the law says that where an agency makes a mistake in its interpretation of the law, that it is possible to have this matter tested by a court decision. So what I am saying is that if you folks feel as keenly as you appear to that this matter is one in which there has been an erroneous interpretation, it is a very simple matter to have this thing tested by an appropriate court proceeding.

Now am I correct in my understanding that you feel that the FTC was erroneous in its interpretation?

Mr. KINTNER. No; not wholly. I would agree with the statements made by Chairman Dixon that price-fixing agreements are per se illegal under the antitrust laws.

Mr. DINGELL. I don't think there is any question about that.

Mr. KINTNER. And to the extent that the Iowa plan presented certain facts that had the appearance of price fixing, and from which one could, in examining the plan, reasonably infer that price fixing exists, I would agree with Chairman Dixon and the staff of the Trade Commission and Judge Loevinger that this constitutes an illegal device under the facts of that situation.

However, I feel that there are many other situations under which cooperative advertising might properly be used, without running afoul of the antitrust laws or causing either the Trade Commission or the Department of Justice to feel that it would be in the public interest to prosecute those engaged in such advertising programs.

Mr. DINGELL. Of course you understand as Chairman Dixon said this morning, that this situation is one in which he simply issued an advisory opinion to the individuals who sought it, and that no publicity or publication was given to this by the Federal Trade Commission, and that this whole storm has risen because of questions raised in the press and by individuals and associations-am I correct on this?

Mr. KINTNER. That is correct. I believe that the first release of this opinion was made by Members of the Congress, and the NARD subsequently again was somewhat in the position of being forced to release the information which it had received, and I don't think that the release was at all improper in this instance, by any of the parties that released it, because there was a great deal of interest throughout the country in this problem, and there had been for many months comment in the trade press about the views of the Department of Justice and the Antitrust Division being sought. There was a great deal of uncertainty.

Mr. DINGELL. Let me ask this question. Do you allege in your own behalf or on behalf of any person that you represent or group that you represent, that there was any impropriety in the action of the Federal Trade Commission in this matter?

Mr. KINTNER. In issuing an advisory opinion? Certainly not.

Mr. DINGELL. In issuing the advisory opinion or in the context that they placed in that advisory opinion?

Mr. KINTNER. No, sir. I would not have used, I don't think, although it is easy to second guess, I don't think I would have used all the broad language, had I been voting on this opinion, that the majority used.

But the main thrust I think was accurate. I am in the unfortunate situation of agreeing in large part with Commissioner Elman, with the majority opinion of the Trade Commission and with Judge Loevinger's letter, which I think is a magnificent piece of work.

The CHAIRMAN. Judge, you are in agreement with everybody. Mr. KINTNER. I have some slight disagreement in that context with some of the broad language of the Trade Commission's majority opinion, which I think was unfortunate.

Mr. DINGELL. Is it your feeling that there is a possibility of yourself and the National Association of Retail Druggists conducting further negotiations with the Federal Trade Commission, which would resolve this issue?

Mr. KINTNER. I have already advised the National Association of Retail Druggists to continue with joint advertising programs, and we have every intention, as those programs are submitted to our Office for clearance, of passing on them.

Mr. DINGELL. Is it your intention then to provoke test litigation on this matter?

Mr. KINTNER. No, sir; I don't think we are likely to provoke test litigation. I don't see the necessity of it.

I have the very strong feeling from my discussions since this advisory opinion was issued at the Trade Commission, that neither the Trade Commission nor the Department of Justice is apt to challenge properly conceived joint advertising programs by groups of independent retail druggists.

Mr. DINGELL. New let me ask you a little bit about the philosophy of this. Is it your assumption that there can be any agreements with regard to price in connection with joint advertising?

Mr. KINTER. Here again you have to get into a definite factual situation.

Mr. DINGELL. I recognize that.

Mr. KINTNER. Now in the Iowa plan as we submitted it, and there have been other plans or variations of that plan offered to other

« PreviousContinue »