For p.m. releaseFebruary 14, 1961

AUTOMOTIVE PARTS DISTRIBUTIONT H E FEDERAL TRADE COMMISSION

Statement by Earl W. KintnerChairman, Federal Trade Commission

Before Meeting of theAutomotive Service Industry Association

Los Angeles, CaliforniaFebruary 14, 1961

I.

Your industry is a vital and dynamic part of our

American economy. Over a period of many years the automotive

parts industry has received constant attention from the

Federal Trade Commission. A discussion of the Commission's

work in general, and as it affects your business in

particular, may be helpful to you in making better business

decisions.

In 1960 the Federal Trade Commission demonstrated that

it could be the vigorous and effective law enforcement agency

originally contemplated at the time of its creation almost

one-half a century ago. The year just ended, by every

statistical measurement, was the high water mark in the

Commission's history.

During the year, 560 formal complaint proceedings were

initiated and 410 cease and desist orders were issued. The

^previous record year of 1959 was exceeded by 50% in formal

complaints issued and by 36% in orders entered. •

The largest gain was in actions to halt antitrust

violations. Here the 202 formal complaints more than

doubled the previous record number of 99 in 1959 and more

than tripled the 66 complaints issued in 1958.

Statistics, of course, do not tell the whole story.

The figures I have mentioned relate only to formal litigation.

Perhaps of greater significance is the fact that, in addition

to compulsory processes, the Commission energetically

employed investigations, economic inquiries, programs of

business and consumer education and an expanding range of

consultative services to business. In using all of the tools

in our arsenal, our sole objective was to encourage honest

competition in American business.

I am confident that the progress of our work has meaning

to you. Yours is an industry of central importance. Any

governmental agency charged with the duty of eliminating

unfair methods of competition throughout the entire range

of our half-trillion dollar economy must necessarily devote

a large proportion of its total effort to safeguarding free

and fair competition within your industry. The record of

the Federal Trade Commission over the past 5 years demonstrates

this fact. During that period, the Commission has issued

some 60 complaints and more than 40 orders to cease and desist

involving automobile parts alone.

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You should be familiar with the breadth of the

Commission's jurisdiction over anti-competitive trade

practices. The Commission administers a variety of antitrust

statutes: principally, Section 2 of the Clayton Act, more

commonly known as the Robinson-Patman Act, which bars price

and service discriminations; Section 3 of the Clayton Act

which prohibits certain forms of exclusive dealing arrangements;

Section 7 of the Clayton Act, which bars unlawful mergers;

and Section 5 of the Federal Trade Commission Act which

broadly condemns unfair methods of competition and unfair

and deceptive acts and practices in commerce.

At one time or another, members of your industry have

been cited for violations of every one of these statutes.

A number of your members are, today, involved in enforcement

proceedings of the Commission.

II.

The Robinson-Patman Act should be of fundamental concern

to you. Many automotive parts cases have been included in

our Robinson-Patman enforcement proceedings. You would do well

to study the past application of this statute to your industry

and to review some of the current problem areas.

Each of you—whether a manufacturer, a warehouse

distributor or a wholesaler—forms an important link in the

chain of distribution for automotive parts. You should be aware

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of the Commission's recent efforts to obtain compliance with

the provisions of the Robinson-Patman Act within your,

industry. The names of cases like Moog, Niehoff, Edelmann,

Whitaker, Thompson Products, American Motor Specialities,

and Automotive Supply of Altoona are no strangers to the

pages of your trade publications.

In the past several years, our principal objective has

been no less than total compliance with the trade regulation

laws. Passed in 1936, the Robinson-Patman Act, for a complex

of reasons, had never, until recently, had a full test of

its impact. When I assumed the Chairmanship of the Commission

I was convinced that the time for such a test had come.

Although our antitrust laws state our national economic

policies in favor of competition, the opinion has been

advanced by some that the Robinson-Patman Act is anti-

competitive in effect, but it is my judgment that, as

interpreted by the Federal Trade Commission and the courts,

and fairly and reasonably administered, this Act protects

competition as it was indeed designed to do. It is generally

agreed that two of the Act's primary objectives were and

are, (1) to prevent unscrupulous buyers from abusing their

economic power by exacting from suppliers unwarranted price

reductions and other discriminatory concessions, and (2)

to prevent unscrupulous suppliers from attempting to gain

an unfair advantage over their competitors by discriminating

among customers.

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Section 2 contains six subdivisions. Section 2(a) is

directed at injurious price differentials on commodities of

like grade and quality, which cannot be justified under the

provisos therein, including cost justification, or defended

as a good faith meeting of the equally low price of a

competitor, as spelled out in Section 2(b). Section 2(c) deals

with brokerage payments. Section 2(d) deals with payments or

allowances by the seller to the buyer for services, and

requires them to be made available on proportionally equal

terms to all competing customers. Section 2(e) requires that

services furnished to a buyer by the seller be made available

to all competing buyers on proportionally equal terms. And

Section 2(f) bars the knowing inducement or receipt of an

unlawful discrimination in price.

Of primary concern to your industry are the price

discrimination prohibitions of Section 2(a) which have been

enforced in a line of proceedings against automotive parts

sellers, and the reciprocal prohibitions of Section 2(f) which,

in another series of cases, have been the basis of attacks

against buyer abuses in your industry. Let me review for you

some of these developments.

Past Cases1/

In the celebrated Spark Plug cases, the Commission

1/ Champion Spark Plug Co., 50 F.T.C. 30 (1953); General MotorsC*orp., 50 F.T.C. 54 (.1953); Electric Auto-Lite Co., 50 F.T.C. 73TT9T3).

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charged the three major spark plug manufacturers—Champion,

Genera}. Motors, and Electric Auto-Lite—with violation of

the Robinson-Patman Act in two major areas: original

equipment, and replacement equipment. The Commission's

complaint charged that the practice of selling original

equipment spark plugs to automobile manufacturers at or near

cost while selling replacement plugs at much higher prices

through replacement distribution channels caused injury to

smaller plug manufacturers who could not meet the original

equipment price and thereby lost replacement business which

was critically tied to the original equipment market. The

Commission's complaint also alleged secondary line injury in

a variety of competitive situations in which the spark plug

companies allegedly discriminated between competing distribution

outlets.

The cases were litigated over a 14-year period. The

charge of discrimination with respect to original equipment

sales was dismissed: no substantial evidence of injury was

disclosed on the record. However, as to the secondary line

price discrimination charges, the Commission found violation

in a number of instances which foreshadowed later cases in

this industry and reflect problems which are still pervasive

today.

The Commission found that the spark plug companies had

discriminated in price among direct and indirect customers.

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The Commission order barred discrimination in whatever form

it appeared.

Following the Spark Plug cases, the next major development,

one which is unfinished to this day, came in the famed

Automotive Parts cases. This series of cases, beginning in

1949, involved alleged price discriminations in violation of2/

Section 2(a) by a number of automotive parts sellers, and

knowing receipt of price discrimination, in violation of

Section 2(f) on the part of a number of so-called buying

groups. Among the buyers attacked were American Motor

Specialties, Borden-Aicklen Supply Co., and D & N Auto Parts Co.,

all of whom were proceeded against at the outset of the

Commission's campaign and a number of groups which have been

proceeded against more recently. These cases were fought out

over a number of years before both the Commission and the courts.

Several of these cases were not finally settled until

Supreme Court review had been completed. While most are now

finally decided, some buyer cases are still in litigation.

Up to this time, however, the courts have fully endorsed and

yapproved the Commission's decisions. Important questions

2/ Among these sellers were Standard Motor Products, Inc., MoogIndustries, Inc., C.E. Niehoff & Co., P. Sorensen ManufacturingCo., P & D Manufacturing Co., Inc., E. Edelmann & Co., WhitakerCable Corporation, Federal-Mogul Corporation, Sealed PowerCorporation, Eis-Automotive Corporation, Airtex Products, Inc.,Neapco Products, Inc., Guaranteed Parts, Inc., and American BallBearing Co.3/ Standard Motor Products, Inc. v. Federal Trade Commission,2"65 F.2d 674 (2d Cir. 1959), cert, denied 361 U.S. 826 (195a; ;

(cont'd)-7-

of statutory interpretation have been resolved. Broadly

speaking, in these cases the Commission's complaints attacked

pricing systems which placed a premium on aggregating volume

purchases over a period of time and thus gave to the large

volume purchaser an unjustified and detrimental advantage

over his competitor. I am sure you all recall, perhaps

wistfully, this type of pricing schedule which was previously

so prevalent in your industry. Recent Commission actions

indicate that vestiges remain, although I would quickly add

that this pricing method is now used only by the most

audacious or foolhardy among you.

These cases were vigorously defended by the respondents

on grounds that the pricing systems were established to meet

competition or that they caused no adverse competitive effect,

or that they were cost justified. In every instance the

defenses were ultimately rejected. The Commission held that

in an industry as fiercely competitive as this, where profit

margins are narrow and sometimes almost non-existent, a price

differential of as little as 2% might in some circumstances

mean the difference between the business survival or failure.

3/ (cont'd from p. 7)V. Sorenson Mfg. Co. v. Federal Trade Commission, 246 F.2d 687(D.C. Cir. 1957); P & D Mfg. Co. v. Federal Trade Commission,245 F.2d 281 (7th Cir. 1957), cert, denied 355 U.S. 884 (1957);C. E. Niehoff & Co. v. Federal Trade Commission, 241 F.2d 37 j(7th Cir. 1957), modified 355 U.S. 411 (1958); E. Edelmann & Co. iv. Federal Trade Commission, 239 F.2d 152 (7th Cir. 1956), cefT. \denied 355 U.S. 941 (1958); Whitaker Cable Corp. v. Federal jTrade Commission, 239 F.2d 253 (7th Cir. 1956), cert, denied |353 U.S. 928 (1957); Moog Industries, Inc. v. Federal TradeCommission, 238 F.2d ~%3 («tn Cir. lytjb) , aff'd 3i>£> U.S. 4J.1 (1958)

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The Commission further held that the "meeting competition"

defense of the statute was not available to justify a general

pricing system but only prices met in individual competitive

circumstances.

As the Commission was proceeding at flank speed against

automotive parts manufacturers, it was also proceeding

against buyers charged with knowing receipt of unlawful

discriminations. The original buyer cases were the other

side of the price discrimination coin uncovered in the seller

cases. In many cases, the discriminations involved in the

seller cases were made to so-called "buying groups" which,

the Commission's investigation disclosed, had been established

for purposes of qualifying for the most favorable discount

bracket on the seller's cumulative volume discount schedule.

The Commission's complaints against these groups charged

that they were composed of jobbers who established a joint

buying office for the sole purpose of receiving discriminatory

discounts from the automotive supplier.4/

In the Automatic Canteen case, the Court held that the

Commission, as a part of its burden in a 2(f) case, must show

that the buyers knew they were receiving a price discrimination,

knew of the probable competitive effects of the price advantage

received, and knew that the price was not within one of the

seller's defenses under the statute such as the cost

justification or meeting competition defenses. Under the

4/ Automatic Canteen Co. v. Federal Trade Commission, 346 U.S.Fl (1953).

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"burden of convenience" rule established in that case, the

burden is placed on Commission's counsel to come forward

with evidence that the buyer is not a mere unsuspecting

recipient of an unlawful discrimination.

A number of companion cases to Automatic Canteen were

dismissed by the Commission before trial. However, in the

pending cases against the automotive buying groups, counsel

for the Commission successfully resisted determined motions

to dismiss by the respondents and the cases subsequently

went to hearing. These cases have now been fully litigated

before the Commission and orders to cease and desist have

been entered. The Commission has held that the burden of

proof allocated in Automatic Canteen is not necessarily

a heavy one, that trade experience in a particular situation

can afford a sufficient degree of knowledge on the part of

the buyer to provide a basis for proceeding and that the trade

experience of the buyers in these cases was such that they

could be held to have knowledge that the price advantages

they received from the sellers were not cost justified nor

within any of the sellers* other defenses afforded to sellers

by the statute. In one of these cases, American Motor5/

Specialties, Inc., the Commission's order to cease and desist

has been affirmed and enforced by the United States Court

5/ American Motor Specialties, Inc. v. Federal Trade Commission,*~ F.2d 225 (2d Cir. I960;, cert, denied 364 U.S. 884 (1960).

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of Appeals for the Second Circuit, and a petition for

certiorari was denied by the Supreme Court. In the other

two, appeals are now pending in the Court of Appeals for the

Fifth Circuit. ~

As a consequence of these decisions, the Commission has

issued complaints against a number of other buying groups

alleging similar practices in violation of subsection 2(f).7/

Orders to cease and desist have been entered in some of these ~!/—others are still pending.

But the buying group cases do not comprise the only type

of buyer cases initiated under subsection 2(f) in this

industry. Of considerable interest, for example, is the

complaint recently issued by the Federal Trade Commission under

2(f) against Automotive Supply Co., Docket 7142 (August 28,

1959), a large automotive wholesaler in Altoona, Pennsylvania.

6/ Borden-Aicklen Supply Co., Docket 576S, D & N Auto Parts,Docket 5767.

7/ Warehouse Distributors, Inc., Docket 6837 (order to ceaseand desist August 14, 1958); Midv/est Warehouse Distributors,Inc., Docket 6888 (order to cease and desist September 24,1959); Albright's, Docket 6890 (order to cease and desistMarch 27, 1959); Hunt-Marquardt. Inc., Docket 6765 (order tocease and desist December 23, 1958); Southern CaliforniaJobbers, Docket 6889 (November 10, TJ~

8/ Automotive Jobbers, Inc., Docket 7590 (complaint issuedSeptember 21, 1959); Ark-La-Tex Warehouse Distributors, Inc.,Docket 7592 (complaint issued September 22, 1959); SouthwesternWarehouse Distributors, Inc., Docket 7686 (complaint issuedDecember 9, 1959); AutomotTye Southwest, Inc., Docket 7686(complaint issued December 10, 1959); National Parts Warehouse,Pocket 8038 (complaint issued July 12, 1960).

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There the complaint charged as illegal practices of

Automotive Supply and two affiliated organizations—a Central

Warehouse Company and an affiliated company located at Tucson,

Arizona—with illegal practices relating to the purchase, resale

and distribution, at the wholesale level of tires and tubes and2/

like items, household appliances, home and garden supplies,

and automotive parts, equipment and accessories. The respondent

had set up its Central Warehouse Company in 1946, according

to the complaint, but since that time it ". . . served little

purpose other than as a conduit or bookkeeping device through

which respondent purchases certain of its products and

supplies for sale and distribution at the wholesale level

through respondent's principal place of business and branches

in the State of Pennsylvania and West Virginia . . . ."

A principal charge of the complaint was that this jobber,

through its wholly owned and controlled warehouse, knowingly

induced and received warehouse distributor prices. The

respondent also knowingly induced and received functional

discounts for re-distribution through its own outlets, accord-

ing to the complaint. A cease and desist order has now been

entered which prohibits this jobber from knowingly inducing

or receiving warehouse distributor prices.

9/ A companion action under 2(a) was brought against thesupplier. Firestone Tire and Rubber Co., Docket 7141(complaint issued May 12, 1959).

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Current Proceedings In the Automotive Parts Industry

On a wide front, the Commission continues to challenge

illegal pricing practices both of automotive parts sellers

and buyers. You may find helpful the following review of

some of these current developments.

The Commission's most recent decision has come in the

case of American Ball Bearing Corp., Docket 7565, in which

an order was issued several weeks ago requiring the company

to cease charging different prices to purchasers competing

with one another in the resale of its products. The Commission

adopted the hearing examiner's initial decision finding that

the respondent had classified its purchasers into three

categories—jobbers, distributors, and warehouse distributors

—and charged them different prices: jobbers 10% more than

distributors and 20% more than warehouse distributors. The

examiner's decision had found that "many purchasers, classified

by the respondents as warehouse distributors and distributors,

failed to perform the functions necessary to qualify under

respondents' definitions for the respective discounts granted

purchasers in those classifications." As a result, individual

jobbers often were placed at a competitive disadvantage with

other distributors classified in a higher function by

respondent but, in fact, occupying no different competitive

status. The Commission rejected respondents' contention that

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competition could not adversely be affected unless a price

advantage to a buyer is reflected in the buyer's own

resale price.

Similarly of interest to you may be the recent consent

order issued in Gojer, Inc., Docket 7851, which, while not an

automotive parts case, has, I believe, real significance for

your industry. In that case, a manufacturer of soap and

cleaning products was charged by the Commission with

discriminating in sales to customers within the same functional

classification. The Commission charged that jobbers who owned

their own warehouse facilities were classified as a "warehouse

group," and obtained higher discounts than competitors in a

straight "jobber" classification. The theory of the Commission's

complaint, reflecting numerous court and Commission decisions,

was that the two customer classes were in actual competition

with one another, were thus functional equivalents, and were

accordingly entitled to equal treatment by their sellers.

Another recent case of some interest is the 2(f)

proceeding against Southern California Jobbers, Docket 6889,

which was one of the allegedly favored group buyers in the

American Ball Bearing case. The Commission found that the fact

that the group operated a warehouse did not alter the situation,

other than to assist the members to get warehouse distributor

rebates to which they were not entitled and which were not

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received by non-member competitors. To this extent the case

would go beyond the earlier buying group cases where no

substantial distributive facilities were operated by the10/

group.

Another recent case involved the Heckethorn Manufacturing

and Supply Co., (Docket 7499) a manufacturer of automotive

shock absorbers, seat covers and other products. The

Commission's complaint alleged that Heckethorn discriminated

in price between competing customers of its products. A consent

order entered early last year requires the company to charge

the same net prices to customers who compete with each other

in resale of its products. At the same time, the Commission

dismissed because of insufficient evidence, a charge that the

price differentials might result in a substantial lessening

of competition or tendency to create a monopoly in the seller's

line of commerce.

In addition to these recent decided cases, a number of

Automotive Parts cases are currently pending before the

Commission. Of course, it would be inappropriate for me to

comment on the merits of these proceedings, but a brief

listing of them, I think, will fairly describe the scope of

the Commission's current activity in your industry.

10/ An appeal from this decision of the Commission is nowpending before the Court of Appeals for the Ninth Circuit.

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For example, in Purolator Products, Inc., Docket 7850,

the Commission has charged the respondent with discriminating

in price among competing customers in the sale of its

automotive replacement filters. The complaint charges that

Purolator grants some warehouse distributors "re-distribution

allowances" on sales to dealers and users, but withholds these

allowances from other competing warehouse distributors and

from competing jobbers. It further alleges that all warehouse

distributors are given a warehouse discount which is not

made available to their competitors.

In Dayco Corp., Docket 7604, the Commission has charged

that the former Dayton Rubber Company discriminated in price

between direct wholesale customers and indirect wholesale

customers, charging the indirect customers up to 25% more than

its direct customers. Dayco is defending on the ground, among

others, that the alleged practices were discontinued several

years ago.

In a case against Borg Warner and its wholly owned

subsidiary, Borg Warner Service Parts Co., Docket 7667, the

Commission has charged discrimination in sales to competing

customers, including buying groups and warehouse distributors

generally. The respondents are defending on the grounds that

the price differentials are cost justified, do not create any

cognizable injury to competition, and are bona fide functional

discounts.

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In a recent complaint issued against Westinghouse

Electric Corp., Docket 8053, the Commission has charged

discrimination in the sale of the company's automotive

miniature and sealed beam lamps. The Commission complaint

charges that Westinghouse has discriminated among franchised

distributors, granted more favorable terms to volume purchasers,

and has also granted favorable discounts to automobile

manufacturers purchasing on a negotiated basis. Westinghouse

has denied that any of its price differentials create an

adverse competitive effect.

A pending complaint against Perfection Gear Co., Docket

7861, challenges price advantages granted to warehouse

distributors who, it is alleged, are simply group buying

jobbers not performing the normal functions of a warehouse

distributor and thus not meriting higher discounts. The

company defends on grounds that it is not within its personal

knowledge that its warehouse distributor customers do not

normally function as such and further that the practices

complained of have been abandoned. A similar abandonment

defense is raised in a case against Inland Rubber Corporation

(Docket 8052) in which the Commission charges discrimination

in sales, among others, to buying groups classified as

warehouse distributors.

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A functional discount defense is also currently being

raided in a 2(f) proceeding against National Parts Warehouse

(Docket 8039) and its member jobbers, alleged to be a buying

group receiving discounts not made available to individual

jobber competitors in violation of subsection 2(f). The

respondents there assert that National Parts Warehouse is not

a buying organization for the respondent jobbers but is

operated as a bona fide warehouse distributor and the respondent

jobbers are merely partners in a legitimate business enterprise

in which they have no right in management, direction or control.

The respondents also claim that the warehouse organization has

at all times bought goods for its own account, operates a

60,000 square feet warehouse and sells to hundreds of jobbers

other than the named respondents.

These are typical cases currently before the; Commission

in your industry. A number of them raise old questions, others

new issues which should more clearly define the types of

distribution practices prohibited under the Act and give plainer

definition to those pricing practices which are lawful under

the Act.

III.

During the past year the Commission issued Guides covering

Sections 2(d) and 2(e) of the Robinson-Patman Act amendments.

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These Guides set out in layman's language certain basic rules

of thumb concerning the requirements of the Act when any

interstate seller offers promotional allowances or merchandising

services or facilities to his customers. Within the past

month I was afforded the opportunity of making specific

suggestions to the National Food Brokers Association during

its annual meeting concerning how food brokers could comply with

the brokerage provision of the Robinson-Patman Act. The 2(c)

suggestions or Guides represented my personal views and were

neither approved nor disapproved by the Commission.

There remain only Section 2(a) and its complement,

Section 2(f), where no guidelines or suggestions concerning

compliance with the law have been furnished to the American

businessman, except for opinions in adjudicated cases.

Proceedings instituted by the Federal Trade Commission

under Section 2 of the amended Clayton Act, against both

sellers and buyers of automotive parts, have established some

basic principles in clarification of the statute. I am hopeful

that the Commission will continue the Guides Program and that

further guides may later be issued to assist those in your

industry and others who seek in good faith to comply with the

law against price discrimination. In the meantime, each of

you should review your pricing practices and develop a

successful compliance plan.

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It may be of some assistance to you to study and

understand the concepts which follow. These seem to me

essential as a beginning in the development of careful

compliance planning.

1. Any person who sells products of like grade and

quality in interstate commerce to at least two purchasers

at different net prices has discriminated in price within

the meaning of the statutory term "to discriminate in price."

(a) The Act does not prohibit one uniform price to all

purchasers. A seller may sell at the same price to wholesalers

and retailers without any legal liability under Section 2(a).

(b) A seller's purchasers are not necessarily limited

to persons buying direct from the manufacturing seller.

A jobber obtaining a manufacturer's products through a

warehousing distributor may be considered to be a "purchaser11

from the manufacturer where the latter has exercised such a

degree of control over the transactions between the distributor

and the jobber that the sales are actually sales by the

manufacturer. For example, the following factors have been

considered in determining if such a jobber is a purchaser of

t he manuf acturer:

(1) Whether the manufacturer's salesmen contact the jobber

and solicit orders for the manufacturer's products.

(2) Whether the products are shipped directly from

the manufacturer to the jobber, invoiced to the jobber, and

payment remitted by the latter to the manufacturer.

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(3) The extent to which the manufacturer sets, controls

or suggests the prices at which the distributor may sell

to the jobber.

(4) Whether the contracts entered into between the

distributor and the jobber provide that the manufacturer may

require approval before the distributor is permitted to sell

any specific jobber account.

If such control is exercised, the manufacturer may be

in violation of Section 2(a) when the jobber, buying through

the distributor, pays a higher price than competing jobbers

purchasing directly from the manufacturer.

2. While sales at different net prices may constitute

discriminations in price, such sales may be illegal under

Section 2(a) only where the price differences may result in

adverse competitive effects. A seller, in defense, may

affirmatively show (a) the price differentials do not exceed

cost differences resulting from different methods or quantities

in which the commodities are sold, or (b) a lower price was

made in good faith to meet an equally low price of a competitor.

No magic formula permits safe prediction that any given

price differential between competing purchasers will or will

not be likely to result in competitive injury. The answer to

this question depends upon the specific facts in particular

cases.

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3. Where a manufacturer is unable to justify price

differences between his purchasers in accordance with

the affirmative defenses provided by the statute, he may

be reasonably certain that such price differences will not

be illegal price discriminations if he classifies his

purchasers on a functional basis and sells to all purchasers

within each functional group at the same net price.

The test to be used in classifying purchasers into

functional groups should be based upon how or in what

manner each purchaser resells or disposes of the

manufacturer's products. If this test is applied, the

above rule merely recognizes that ordinarily manufacturers

buying automotive parts for use as original equipment do not

compete with warehouse distributors or jobbers reselling

replacement parts. Similarly, distributors reselling

only to independent jobbers do not usually compete with

the jobbers reselling solely to dealers. Lacking any

competitive relationship among such purchasers, a seller

may legally discriminate in price among the manufacturer,

warehouse distributor and jobber provided the

distributor pays a lower price than the jobber.

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Any plan for compliance with Section 2(a) would not

be complete without considering that, under certain cir-

cumstances, a seller can justify a discriminatory price

under the good faith defense regardless of the competitive

injury such a discriminatory price might cause.

Since the good faith defense furnishes an absolute or

lawful excuse for an otherwise unlawful, injurious price

discrimination, Commission and court interpretations have

strict limitations upon its availability. Among the more

basic limitations are the following:

(1) The defense is valid only when a lower price is given

to meet individual competitive situations, as a defensive

measure. It cannot be used for the purpose of gaining, instead

of retaining, a customer.

Example: Supplier A decides to improve his market

position in one trading area and lowers his prices to several

large volume purchasers in the area and not to their competitors,

Such a practice would constitute aggressive action on the part

of the seller without any attempt to retain a specific

customer who has been offered a lower price by a competitor

of the supplier.

(2) The seller may only meet, not undercut, the price

of a competitor.

Example: Suppliers A and B sell to Jobber C at $1.00

and 95£, respectively. Supplier A lowers his price to 90£.

A cannot justify the 90£ price under the good faith defense.

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(3) The equally low price of a competitor means the

price for the same quantity.

Example: In selling to some of Supplier A's customers,

Supplier B sells a smaller quantity at the same price as A's

price for a larger quantity. The price for the smaller

quantity cannot be defended under 2(b) by Supplier B.

(4) The defense cannot be applied where a seller lowers

his price to enable his customers to meet their (the customers)11/

competition.

Example: Supplier A cannot lower his price to Jobber B

to permit B to meet Jobber C's competition in selling

Supplier D's products.

(5) Whenever a seller intends to justify a lower

price to specific customers, and relies upon the 2(b) defense,

he should attempt to obtain verified written statements or

invoices which reflect the exact price of the particular

competitor whose price the seller is meeting.

IV.

In addition to its formal proceedings illustrated by

the cases I have discussed, the Commission uses a range of

techniques other than the issuance of complaints looking to

11/ This issue is now pending in the United States Court ofAppeals for the Fifth Circuit in the Commission's caseinvolving Sun Oil Company, Docket 6934.

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an order to cease and desist in its efforts to secure

compliance with all the laws it enforces. One of the

techniques used in appropriate cases is the tender of an

opportunity to enter into a stipulation to concerns that have

exhibited a cooperative attitude during the course of inquiries

and have acted promptly to correct deficiencies. The Commission

has just achieved a signal gain in its efforts to protect

consumers and honest businessmen from deceptive practices in

the sale of automotive parts by employing this technique.

Recently the Commission became aware that many rebuilt

clutches and other rebuilt automotive products containing

previously used parts were being placed on the market without

disclosure that the parts had been rebuilt or that previously

used components were used in the parts. On November 19, 1959,

the Commission approved a stipulation with Borg-Warner

Corporation whereby that corporation agreed to disclose in

a clear and conspicuous manner that its rebuilt automotive

products have been rebuilt. In the course of inquiry into

this specific matter, the Commission learned that numerous

other automotive parts suppliers were selling rebuilt parts

without disclosing the fact of rebuilding. After investigation,

12 other suppliers were offered the opportunity to enter into

stipulations. These stipulations were accepted by the

Commission in September. Others have followed. Each of

these stipulations contains the following prohibition:

-25-

Offering for sale, selling or delivering toothers for sale or resale to the public anyproduct containing parts which have beenpreviously used without a clear and conspicuousdisclosure of such prior use made on the productwith sufficient permanency to remain thereonafter installation, as well as in advertisingand on the container in which the product ispacked.

Note that this inhibition requires a proper disclosure be

made in advertising, labeling and on the parts themselves.

It is this last requirement that has caused the stipulating

companies the greatest concern, it being asserted that to cut

the disclosure into the metal by die stamping would not be

practical on all parts. After preliminary testing and

informal conferences with technicians, the Commission's

Bureau of Consultation expressed its opinion that there would

be more practical and less expensive methods of marking

available to stipulating parties.

While it is expected that stipulation negotiations will

be continued with other automotive parts rebuilders, it is

apparent that the total number of stipulating companies will

comprise only a small segment of the automotive parts

rebuilding trade. It is estimated that there are some 2,000

rebuilders of automotive parts. However, the Bureau of

Consultation expects that the announcement of these stipulations

will convince members of the industry that the Commission

means to take effective steps to protect the many car owners

-26-

who pay for new parts but actually receive rebuilt parts.

The stipulations already approved by the Commission furnish

the impetus for the correction of this deceptive practice

on a broad front by voluntary industry action. The Bureau of

Consultation has already opened discussion with responsible

members of the industry and with trade associations representing

automotive parts rebuilders. Every opportunity for meaningful

voluntary compliance will be extended. If this effort is

successful this deceptive practice can be eliminated with far

more speed and at far less cost than would be the case if the

Commission had proceeded only by the issuance of formal

complaints.

V.

The Commission has been coupling a campaign for public

awareness of the prevalence of this practice with its

encouragement of industry efforts to make voluntary corrections.

The Commission has never condemned the use of rebuilt parts

nor has it ever condemned the utility of rebuilt products.

Its sole concern has been to insure that the consumer is not

deceived about the condition of the parts that he buys.

The Commission's techniques for insuring compliance with

the law are complementary. When voluntary correction offers

the best opportunity for protection of the public at the least

cost to the taxpayer, every effort should be made to encourage

-27-

voluntary action. However, the Commission should never lose

sight of the fact that honest businessmen who wish to comply

with the law are placed at a serious disadvantage if an

unscrupulous few reject every prompting of business conscience

and every consideration of public interest by continuing the

use of a deceptive practice in the face of numerous warnings.

Therefore, the Commission always must be ready to employ its

compulsory process against this tiny minority who scorn the

public interest. Only in this manner can the Commission remove

the temptation to honest businessmen prompted by the consider-

ation that "X is doing it and getting away with it and taking

all the business." It can be expected that the Commission will

issue complaints against automotive parts rebuilders if

adequate disclosure to the public can be secured in no other way.

I realize that I have discussed only a small part of the

Federal Trade Commission's program which may be of interest

to members of this Association. I wish that there were time to

discuss all the ramifications of the Commission's activities

with you. However, I will have accomplished my purpose if I

have suggested to you the wisdom of compliance with the trade

regulation laws and have assisted you in doing so. In this

connection, I applaud the efforts of your Association's counsel,

Mr. Harold Halfpenny, to heighten awareness of the law's

requirements in the industry and to encourage careful good

faith compliance with the law.

-28-

Voluntary compliance with the nation's antitrust and

trade regulation laws is the wisest course a businessman can

follow. Self-interest dictates this course, because it avoids

the costs and penalties and the tarnished public image that

results from flagrant violation. And the public interest also

dictates this course. Free businessmen mock our free enterprise

system and invite needless and harmful additional governmental

regulation whenever they fail to compete freely and fairly.

###

THE SECTION

Chairman

Chairman-Elect

Vice-Chairman

Secretary

Ex Officio:

For term ending

For term ending

FEDERAL TRADECOMMISSION

LIBRARYClass HD971Q

Book. .K5

c . 2

ESS LAW

Annex, San

Angeles 13,

. J.

HAN, SECRE-lairman, 110

. Y.

Y.

4, D. C.

io 3 , III.

N. Y.OPO 16—1863-2

For term ending 1964: DAVID K. K A U A I M E , ^3U uia >_ouniry na., mmeuia, N. Y.J O H N T. MAGINNIS, Esperson Bldg., Houston 2, Texas.

J O H N A . M O R R I S O N , Bryant Bldg., Kansas City 6, M o .

For term ending 1965: WAITER E. CRAIG, First Nat'l Bank Bldg., Phoenix, Ariz.ORVEL SEBRING, 2107 Fidelity-Philadelphia Trust Bldg.,

Philadelphia 9, Pa.J O H N S. T E N N A N T , 71 Broadway, N e w York 6, N. Y.

Section Delegate toHouse of Delegates: WILLARD P. SCOTT, 110 E. 42nd St., N e w York 17, N . Y.

Director of SectionServices FARRINGTON B. KINNE, American Bar Center, 1155 E. 60th

St., Chicago 37, III.

The Section was organized in 1938, and now has a membership of over 12,000. As aservice to its members it publishes T H E B U S I N E S S L A W Y E R , a quarterly law journaldevoted to practical problems of special interest to lawyers concerned with corporation,banking and business law.

Any member of the American Bar Association may become a member of the Section (andthus entitled to receive T H E B U S I N E S S L A W Y E R ) by sending his application and annualdues of $5 ($4 of which is for a subscription to T H E B U S I N E S S L A W Y E R for one year)to Director of Section Services, Section of Corporation, Banking and Business L a w , 1155East 60th Street, Chicago 37, Illinois. Since membership in the American Bar Associationis a prerequisite to membership in the Section, an attorney who is not an A . B . A . memberwill be sent A . B . A . application form upon receipt of a request for Section membership.

Any person who is not eligible to become a member of the American Bar Associationand any institution may obtain for $6 an annual subscription to T H E B U S I N E S SLAWYER.

Manuscripts submitted for publication in T H E B U S I N E S S L A W Y E R should bedirected to the Vice-Chairman of the Section. Subject to exceptions noted from time to timein particular issues, general permission to republish all or any part of an article appearingin T H E B U S I N E S S L A W Y E R is granted provided that the issue of T H E B U S I N E S SL A W Y E R in which the article appears and the fact that the article is reprinted from itwith permission are indicated.

T H E B U S I N E S S L A W Y E R , January, 1902, Volume X V I I , Number 2.

Published quarterly by the Section of Corporation, Banking and Business L a w of theAmerican Bar Association, 1155 East 60th Street, Chicago 37, Illinois. Price per copy toMembers and non-members, $1.50; per year to Members, $4 (included in $5 dues); tonon-members (see above), $6. Second-class postage paid at Chicago, Illinois and at addi-tional offices.

© 1961 by the Section of Corporation, Banking and Business L a w of the American BarAssociation.

January 1962 271

Basically, all transactions in stock dividends should be measurableby this declared purpose. T h u s , public corporations should continue,with the proper safeguards, to have little difficulty. If control w a spresent to begin with a n d is effectively relinquished, the preferredstock should not be Section 3 0 6 stock.

T o illustrate, there are the cases of Marjorie N . D e a n 6 8 a n dElmer IV. Hartsell.59 In the former, several elderly stockholdersdesiring to transfer control of the corporation to a younger group ,exchanged all their c o m m o n stock for preferred in a tax-free recapi-talization. In the latter case, the sole stockholder of the corporationissued preferred stock to himself a n d then sold all the c o m m o n stock.This transaction permitted the buyer to pay for the corporation outof its o w n earnings. In both cases, the taxpayers had divested t h e m -selves of ownership a n d control. T h e issuance of preferred stock w a sto enable t h e m to retain an income , in the Dean case, or to receive apurchase price, as in the Hartzell case. It w o u l d appear that theseexamples w o u l d c o m e well within the ambit of the subsection.

In addition to the exception to Section 3 0 6 treatment based u p o nthe absence of control, there is the m o r e specific possibility of theshareholder m a k i n g a prior or simultaneous disposition or redemptionof the old stock. In other w o r d s , a shareholder m a y dispose of som u c h of his Section 3 0 6 stock as he has disposed of his underlyingstock, without being subject to ordinary income treatment.60

In conclusion, it might be said that for the title of Section 306there could be inscribed the classic " A b a n d o n all hope , ye that enter",but as D a n t e found in his tour of the Inferno, there are those w h onever reach the pit a n d also those w h o proceed from the abyss again"to see the stars".

58. 10 T . C . 19 (1948).59. 40 B T A 492 (1939).60. I R C Sec. 306 (b) (4) ( B ) ; Re* . S 306-2 (b) (3).

272 The Business Lawyer

AUTOMOTIVE PARTS DISTRIBUTION AND THEFEDERAL TRADE COMMISSION

ByEARL W . KINTNER*

Washington, D . C.

I.

Over a period of m a n y years the automotive parts industry hasreceived constant attention from the Federal Trade Commission.A discussion of the Commission's work in general, and as it affectsyour business in particular, m a y be helpful to you in making betterbusiness decisions.

In 1960 the Federal Trade Commission demonstrated that it couldbe the vigorous and effective law enforcement agency originally con-templated at the time of its creation almost one-half a century ago.T h e year just ended, by every statistical measurement, was the highwater mark in the Commission's history.

During the year, 560 formal complaint proceedings were initiatedand 410 cease and desist orders were issued. T h e previous recordyear of 1959 was exceeded by 50% in formal complaints issued andby 36% in orders entered.

T h e largest gain was in actions to halt antitrust violations. Herethe 202 formal complaints more than doubled the previous recordnumber of 99 in 1959 and more than tripled the 66 complaints issuedin 1958.

Statistics, of course, do not tell the whole story. T h e figures I havementioned relate only to formal litigation. Perhaps of greater sig-nificance is the fact that, in addition to compulsory processes, theCommission energetically employed investigations, economic inquiries,programs of business and consumer education, and an expanding rangeof consultative services to business. In using all of the tools in ourarsenal, our sole objective was to encourage honest competition inAmerican business.

I a m confident that the progress of our work has meaning to you.Yours is an industry of central importance. A n y governmental agencycharged with the duty of eliminating unfair methods of competitionthroughout the entire range of our half-trillion dollar economy mustnecessarily devote a large proportion of its total effort to safeguardingfree and fair competition within your industry. T h e record of theFederal Trade Commission over the past 5 years demonstrates thisfact. During that period, the Commission has issued some 60 c o m -

*Formerly Chairman, Federal Trade Commission; an address at meetingof the Automotive Service Industry Association, Los Angeles, California,February 14, 1961.

January 1962 273

plaints and more than 40 orders to cease and desist involving auto-mobile parts alone.

Y o u should be familiar with the breadth of the Commission's juris-diction over anti-competitive trade practices. The Commission ad-ministers a variety of antitrust statutes: principally, Section 2 of theClayton Act, more commonly known as the Robinson-Patman Act,which bars price and service discriminations; Section 3 of the ClaytonAct which prohibits certain forms of exclusive dealing arrangements;Section 7 of the Clayton Act, which bars unlawful mergers; andSection 5 of the Federal Trade Commission Act which broadly con-demns unfair methods of competition and unfair and deceptive actsand practices in commerce.

At one time or another, members of your industry have been citedfor violations of every one of these statutes. A number of your m e m -bers are, today, involved in enforcement proceedings of the C o m -mission.

II.The Robinson-Patman Act should be of fundamental concern to

you. M a n y automotive parts cases have been included in our Robin-son-Patman enforcement proceedings. Y o u would do well to studythe past application of this statute to your industry and to review someof the current problem areas.

Each of you—whether a manufacturer, a warehouse distributor ora wholesaler—forms an important link in the chain of distribution forautomotive parts. Y o u should be aware of the Commission's recentefforts to obtain compliance with the provisions of the Robinson-Patman Act within your industry. The names of cases like Moog,Niehoff, Edelmann, Whitaker, Thompson Products, American MotorSpecialties, and Automotive Supply of Altoona are no strangers tothe pages of your trade publications.

In the past several years, our principal objective has been no lessthan total compliance with the trade regulation laws. Passed in 1936,the Robinson-Patman Act, for a complex of reasons, had never, untilrecently, had a full test of its impact. W h e n I assumed the Chairman-ship of the Commission I was convinced that the time for such atest had come.

Although our antitrust laws state our national economic policiesin favor of competition, the opinion has been advanced by some thatthe Robinson-Patman Act is anti-competitive in effect, but it is m yjudgment that, as interpreted by the Federal Trade Commission andthe courts, and fairly and reasonably administered, this act protectscompetition as it was indeed designed to do. It is generally agreedthat two of the Act's primary objectives were and are, (1) to preventunscrupulous buyers from abusing their economic power by exacting

274 The Business Lawyer

from suppliers unwarranted price reductions and other discriminatoryconcessions, and (2) to prevent unscrupulous suppliers from attempt-ing to gain an unfair advantage over their competitors by dis-criminating among customers.

Section 2 contains six subdivisions. Section 2(a) is directed atinjurious price differentials on commodities of like grade and quality,which cannot be justified under the provisos therein, including costjustification, or defended as a good faith meeting of the equally lowprice of a competitor, as spelled out in Section 2(b). Section 2(c)deals with brokerage payments. Section 2(d) deals with paymentsor allowances by the seller to the buyer for services, and requiresthem to be made available on proportionally equal terms to all com-peting customers. Section 2(e) requires that services furnished to abuyer by the seller be made available to all competing buyers onproportionally equal terms. A n d Section 2(f) bars the knowinginducement or receipt of an unlawful discrimination in price.

Of primary concern to your industry are the price discriminationprohibitions of Section 2(a) which have been enforced in a lineof proceedings against automotive parts sellers, and the reciprocalprohibitions of Section 2(f) which, in another series of cases, havebeen the basis of attacks against buyer abuses in your industry. Letm e review for you some of these developments.

P A S T C A S E S

In the celebrated Spark Plug cases,1 the Commission charged thethree major spark plug manufacturers—Champion, General Motors,and Electric Auto-Lite—with violation of the Robinson-Patman Actin two major areas: original equipment, and replacement equipment.The Commission's complaint charged that the practice of sellingoriginal equipment spark plugs to automobile manufacturers at ornear cost while selling replacement plugs at much higher pricesthrough replacement distribution channels caused injury to smallerplug manufacturers w h o could not meet the original equipment priceand thereby lost replacement business which was critically tied tothe original equipment market. The Commission's complaint alsoalleged secondary line injury in a variety of competitive situationsin which the spark plug companies allegedly discriminated betweencompeting distribution outlets.

The cases were litigated over a 14-year period. The charge ofdiscrimination with respect to original equipment sales was dis-missed: no substantial evidence of injury was disclosed on the rec-ord. However, as to the secondary line price discrimination charges,the Commission found violation in a number of instances which fore-

1. Champion Spark Plug Co., SO F. T . C 30 (19S3) ; General Motors Corp.,SO F . T . C 54 (19S3); Electric Auto-Lite Co., SO F. T . C . 73 (1953).

January 1962 275

shadowed later cases in this industry and reflect problems which arestill pervasive today.

T h e Commission found that the spark plug companies had dis-criminated in price among direct and indirect customers. The C o m -mission order barred discrimination in whatever form it appeared.

Following the Spark Plug cases, the next major development, onewhich is unfinished to this day, came in the famed Automotive Partscases. This series of cases, beginning in 1949, involved alleged pricediscriminations in violation of Section 2(a) by a number of automo-tive parts sellers,2 and knowing receipt of price discrimination, inviolation of Section 2(f) on the part of a number of so-called buy-ing groups. A m o n g the buyers attacked were American MotorSpecialties, Borden-Aicklen Supply C o . , and D & N Auto Parts C o . ,all of w h o m were proceeded against at the outset of the C o m m i s -sion's campaign and a number of groups which have been proceededagainst more recently. These cases were fought out over a numberof years before both the Commission and the courts.

Several of these cases were not finally settled until Supreme Courtreview had been completed. While most are n o w finally decided, somebuyer cases are still in litigation. U p to this time, however, the courtshave fully endorsed and approved the Commission's decisions.3 I m -portant questions of statutory interpretation have been resolved.Broadly speaking, in these cases the Commission's complaints attackedpricing systems which placed a premium on aggregating volume pur-chases over a period of time and thus gave to the large volume pur-chaser an unjustified and detrimental advantage over his competitor.I a m sure you all recall, perhaps wistfully, this type of pricing sched-ule which was previously so prevalent in your industry. Recent C o m -mission actions indicate that vestiges remain, although I would quicklyadd that this pricing method is n o w used only by the most audaciousor foolhardy among you.

These cases were vigorously defended by the respondents ongrounds that the pricing systems were established to meet competition

2. Among these sellers were Standard Motor Products, Inc., Moog Indus-tries, Inc., C . E . Niehoff & Co., P . Sorensen Manufacturing Co., P & D Manu-facturing Co., Inc., E . Edelmann & Co., Whitaker Cable Corporation, Federal-Mogul Corporation, Sealed Power Corporation, Eis-Automotive Corporation,Airtex Products, Inc., Neapco Products, Inc., Guaranteed Parts, Inc., andAmerican Ball Bearing Co.

3. Standard Motor Products, Inc. v. Federal Trade Commission, 265 F. 2d674 (2d Cir. 1959), cert, denied 361 U . S. 826 (1959) ; P . Sorensen Mfg. Co.v. Federal Trade Commission, 246 F. 2d 687 (D. C . Cir. 1957) ; P & D Mfg.Co. v. Federal Trade Commission, 245 F. 2d 281 (7th Cir. 1957), cert, denied355 U . S. 884 (1957); C . E . Niehoff & Co. v. Federal Trade Commission, 241F. 2d 37 (7th Cir. 1957), modified 355 U . S. 411 (1958) ; E . Edelmann & Co.v. Federal Trade Commission, 239 F. 2d 152 (7th Cir. 1956), cert, denied 355U . S. 941 (1958) ; Whitaker Cable Corp. v. Federal Trade Commission, 239 F.2d 253 (7th Cir. 1956), cert, denied 353 U . S. 928 (1957) : Moog Industries,Inc. v. Federal Trade Commission, 238 F. 2d 43 (8th Cir. 1956), aff'd 355 U . S.411 (1958).

276 The Butiness Lawyer

or that they caused no adverse competitive effect, or that they werecost justified. In every instance the defenses were ultimately rejected.The Commission held that in an industry as fiercely competitive asthis, where profit margins are narrow and sometimes almost non-existent, a price differential of as little as 2% might in some circum-stances mean the difference between the business survival or failure.The Commission further held that the "meeting competition" defenseof the statute was not available to justify a general pricing systembut only prices met in individual competitive circumstances.

A s the Commission was proceeding at flank speed against auto-motive parts manufacturers, it was also proceeding against buyerscharged with knowing receipt of unlawful discriminations. Theoriginal buyer cases were the other side of the price discriminationcoin uncovered in the seller cases. In m a n y cases, the discriminationsinvolved in the seller cases were made to so-called "buying groups"which, the Commission's investigation disclosed, had been establishedfor purposes of qualifying for the most favorable discount bracket onthe seller's cumulative volume discount schedule. T h e Commission'scomplaints against these groups charged that they were composed ofjobbers w h o established a joint buying office for the sole purpose ofreceiving discriminatory discounts from the automotive supplier.

In the Automatic Canteen case,4 the Court held that the C o m m i s -sion, as a part of its burden in a 2(f) case, must show that the buyersknew they were receiving a price discrimination, knew of the probablecompetitive effects of the price advantage received, and knew thatthe price was not within one of the seller's defenses under the statutesuch as the cost justification or meeting competition defenses. Underthe "burden of convenience" rule established in that case, the burdenis placed on Commission's counsel to come forward with evidencethat the buyer is not a mere unsuspecting recipient of an unlawfuldiscrimination.

A number of companion cases to Automatic Canteen were dis-missed by the Commission before trial. However , in the pendingcases against the automotive buying groups, counsel for the C o m m i s -sion successfully resisted determined motions to dismiss by therespondents and the cases subsequently went to hearing. Thesecases have n o w been fully litigated before the Commission and ordersto cease and desist have been entered. The Commission has heldthat the burden of proof allocated in Automatic Canteen is not neces-sarily a heavy one, that trade experience in a particular situationcan afford a sufficient degree of knowledge on the part of the buyerto provide a basis for proceeding and that the trade experience ofthe buyers in these cases was such that they could be held to haveknowledge that the price advantages they received from the sellers

4. Automatic Canteen Co. v. Federal Trade Commission, 346 U . S. 61 (19S3).

January 1962 277

were not cost justified nor within any of the sellers' other defensesafforded to sellers by the statute. In one of these cases, AmericanMotor Specialties, Inc.* the Commission's order to cease and desisthas been affirmed and enforced by the United States Court of Appealsfor the Second Circuit, and a petition for certiorari was denied by theSupreme Court. In the other two, appeals are n o w pending in theCourt of Appeals for the Fifth Circuit.6

A s a consequence of these decisions, the Commission has issuedcomplaints against a number of other buying groups alleging similarpractices in violation of subsection 2(f). Orders to cease and desisthave been entered in some of these7—others are still pending.8

But the buying group cases do not comprise the only type ofbuyer cases initiated under subsection 2(f) in this industry. Ofconsiderable interest, for example, is the complaint recently issued bythe Federal Trade Commission under 2(f) against AutomotiveSupply Co., Docket 7142 (August 28, 1959), a large automotivewholesaler in Altoona, Pennsylvania.

There the complaint charged as illegal practices of AutomotiveSupply and two affiliated organizations—a Central Warehouse C o m -pany and an affiliated company located at Tucson, Arizona—withillegal practices relating to the purchase, resale and distribution, atthe wholesale level of tires and tubes and like items, household ap-pliances, h o m e and garden supples,'-* and automotive parts, equipmentand accessories. T h e respondent had set up its Central WarehouseC o m p a n y in 1946, according to the complaint, but since that time it" . . . served little purpose other than as a conduit or bookkeepingdevice through which respondent purchases certain of its productsand supplies for sale and distribution at the wholesale level throughrespondent's principal place of business and branches in the State ofPennsylvania and West Virginia. . . ."

5. American Motor Specialties, Inc. v. Federal Trade Commission, 298 F . 2d225 (2d Cir. 1960), cert, denied 364 U . S. 884 (1960).

6. Borden-Aicklen Supply Co., Docket 5766, D . & N . Auto Parts, Docket5767.

7. Warehouse Distributors, Inc., Docket 6837 (order to cease and desistAugust 14, 1958) ; Midwest Warehouse Distributors, Inc., Docket 6888 (orderto cease and desist September 24, 1959) ; Albright's, Docket 6890 (order tocease and desist March 27, 1959) ; Hunt-Marquardt, Inc., Docket 6765 (orderto cease and desist December 23, 1958) ; Southern California Jobbers, Docket6889 (November 10, 1960).

8. Automotive Jobbers, Inc., Docket 7590 (complaint issued September 21,1959) ; Ark-La-Tex Warehouse Distributors, Inc., Docket 7592 (complaintissued September 22, 1959) ; Southwestern Warehouse Distributors, Inc.,Docket 7686 (complaint issued December 9, 1959) ; Automotive Southwest,Inc., Docket 7686 (complaint issued December 10, 1959) ; National PartsWarehouse, Docket 8038 (complaint issued July 12, 1960).

9. A companion action under 2(a) was brought against the supplier. Fire-stone Tire and Rubber Co. , Docket 7141 (complaint issued M a y 12, 1959).

278 The Business Lawyer

A principal charge of the complaint was that this jobber, throughits wholly owned and controlled warehouse, knowingly induced andreceived warehouse distributor prices. The respondent also k n o w -ingly induced and received functional discounts for re-distributionthrough its own outlets, according to the complaint. A cease anddesist order has n o w been entered which prohibits this jobber fromknowingly inducing or receiving warehouse distributor prices.

C U R R E N T PROCEEDINGS IN T H E A U T O M O T I V E P A R T S INDUSTRY

O n a wide front, the Commission continues to challenge illegalpricing practices both of automotive parts sellers and buyers. Y o um a y find helpful the following review of some of these current devel-opments.

T h e Commission's most recent decision has come in the case ofAmerican Ball Bearing Corp., Docket 7565, in which an order wasissued several weeks ago requiring the company to cease chargingdifferent prices to purchasers competing with one another in theresale of its products. T h e Commission adopted the hearing exam-iner's initial decision finding that the respondent had classified itspurchasers into three categories—jobbers, distributors, and warehousedistributors—and charged them different prices: jobbers 10% morethan distributors and 2 0 % more than warehouse distributors. T h eexaminer's decision had found that " m a n y purchasers, classified bythe respondents as warehouse distributors and distributors, failed toperform the functions necessary to qualify under respondents' defini-tions for the respective discounts granted purchasers in those classifi-cations." A s a result, individual jobbers often were placed at acompetitive disadvantage with other distributors classified in a higherfunction by respondent but, in fact, occupying no different competitivestatus. The Commission rejected respondents' contention that c o m -petition could not adversely be affected unless a price advantage toa buyer is reflected in the buyer's o w n resale price.

Similarly of interest to you m a y be the recent consent order issuedin Gojer, Inc., Docket 7851, which, while not an automotive partscase, has, I believe, real significance for your industry. In thatcase, a manufacturer of soap and cleaning products was charged bythe Commission with discriminating in sales to customers withinthe same functional classification. The Commission charged thatjobbers w h o owned their o w n warehouse facilities were classifiedas a "warehouse group," and obtained higher discounts than c o m -petitors in a straight "jobber" classification. The theory of theCommission's complaint, reflecting numerous court and Commissiondecisions, was that the two customer classes were in actual c o m -petition with one another, were thus functional equivalents, and wereaccordingly entitled to equal treatment by their sellers.

January 1962 279

Another recent case of some interest is the 2(f) proceeding againstSouthern California Jobbers, Docket 6889, which was one of theallegedly favored group buyers in the American Ball Bearing case.The Commission found that the fact that the group operated a ware-house did not alter the situation, other than to assist the membersto get warehouse distributor rebates to which they were not entitledand which were not received by non-member competitors. T o thisextent the case would go beyond the earlier buying group caseswhere no substantial distributive facilities were operated by thegroup.10

Another recent case involved the Heckethorn Manufacturing andSupply Co., (Docket 7499) a manufacturer of automotive shockabsorbers, seat covers and other products. T h e Commission's com-plaint alleged that Heckethorn discriminated in price between c o m -peting customers of its products. A consent order entered earlylast year requires the company to charge the same net prices tocustomers w h o compete with each other in resale of its products.At the same time, the Commission dismissed because of insufficientevidence, a charge that the price differentials might result in asubstantial lessening of competition or tendency to create a monopolyin the seller's line of commerce.

In addition to these recent decided cases, a number of AutomotiveParts cases are currently pending before the Commission. Of course,it would be inappropriate for m e to comment on the merits of theseproceedings, but a brief listing of them, I think, will fairly describethe scope of the Commission's current activity in your industry.

For example, in Purolator Products, Inc., Docket 7850, the C o m -mission has charged the respondent with discriminating in priceamong competing customers in the sale of its automotive replace-ment filters. T h e complaint charges that Purolator grants somewarehouse distributors "re-distribution allowances" on sales todealers and users, but withholds these allowances from other com-peting warehouse distributors and from competing jobbers. It furtheralleges that all warehouse distributors are given a warehouse dis-count which is not m a d e available to their competitors.

In Dayco Corp., Docket 7604. the Commission has charged thatthe former Dayton Rubber C o m p a n y discriminated in price betweendirect wholesale customers and indirect wholesale customers, charg-ing the indirect customers up to 25% more than its direct customers.Dayco is defending on the ground, a m o n g others, that the allegedpractices were discontinued several years ago.

In a case against Borg Warner and its wholly owned subsidiary,Borg Warner Service Parts Co., Docket 7667, the Commission has

10. An appeal from this decision of the Commission is now pending beforethe Court of Appeals for the Ninth Circuit.

280 The BU$IM$S lawyer

charged discrimination in sales to competing customers, includingbuying groups and warehouse distributors generally. The respond-ents are defending on the grounds that the price differentials arecost justified, do not create any cognizable injury to competition,and are bona fide functional discounts.

In a recent complaint issued against Westinghouse Electric Corp.,Docket 8053, the Commission has charged discrimination in the saleof the company's automotive miniature and sealed beam lamps. T h eCommission complaint charges that Westinghouse has discriminatedamong franchised distributors, granted more favorable terms tovolume purchasers, and has also granted favorable discounts to auto-mobile manufacturers purchasing on a negotiated basis. Westing-house has denied that any of its price differentials create an adversecompetitive effect.

A pending complaint against Perfection Gear Co., Docket 7861,challenges price advantages granted to warehouse distributors w h o ,it is alleged, are simply group buying jobbers not performing thenormal functions of a warehouse distributor and thus not meritinghigher discounts. The company defends on grounds that it is notwithin its personal knowledge that its warehouse distributor custo-mers do not normally function as such and further that the practicescomplained of have been abandoned. A similar abandonment defenseis raised in a case against Inland Rubber Corporation (Docket 8052)in which the Commission charges discrimination in sales, amongothers, to buying groups classified as warehouse distributors.

A functional discount defense is also currently being raised in a2(f) proceeding against National Parts Warehouse (Docket 8039)and its member jobbers, alleged to be a buying group receiving dis-counts not made available to individual jobber competitors in violationof subsection 2(f). T h e respondents there assert that National PartsWarehouse is not a buying organization for the respondent jobbersbut is operated as a bona fide warehouse distributor and the respond-ent jobbers are merely partners in a legitimate business enterprisein which they have no right in management, direction or control.The respondents also claim that the warehouse organization has atall times bought goods for its o w n account, operates a 60,000 squarefeet warehouse and sells to hundreds of jobbers other than the namedrespondents.

These are typical cases currently before the Commission in yourindustry. A number of them raise old questions, others new issueswhich should more clearly define the types of distribution practicesprohibited under the act and give plainer definition to those pricingpractices which are lawful under the act.

January 1962 281

III.

During the past year the Commission issued Guides covering Sec-tions 2(d) and 2(e) of the Robinson-Patman Act amendments.These Guides set out in layman's language certain basic rules ofthumb concerning the requirements of the act when any interstateseller offers promotional allowances or merchandising services orfacilities to his customers. Within the past month I was afforded theopportunity of making specific suggestions to the National FoodBrokers Association during its annual meeting concerning h o w foodbrokers could comply with the brokerage provision of the Robinson-Patman Act. T h e 2(c) suggestions or Guides represented m y per-sonal views and were neither approved nor disapproved by the C o m -mission.

There remain only Section 2(a) and its complement, Section 2(f),where no guidelines or suggestions concerning compliance with thelaw have been furnished to the American businessman, except foropinions in adjudicated cases.

Proceedings instituted by the Federal Trade Commission underSection 2 of the amended Clayton Act, against both sellers and buyersof automotive parts, have established some basic principles in clarifi-cation of the statute. I a m hopeful that the Commission will continuethe Guides Program and that further guides m a y later be issued toassist those in your industry and others w h o seek in good faith tocomply with the law against price discrimination. In the meantime,each of you should review your pricing practices and develop a suc-cessful compliance plan.

It m a y be of some assistance to you to study and understand theconcepts which follow. These seem to m e essential as a beginningin the development of careful compliance planning.

1. A n y person w h o sells products of like grade and quality ininterstate commerce to at least two purchasers at different net priceshas discriminated in price within the meaning of the statutory term"to discriminate in price."

(a) T h e act does not prohibit one uniform price to all purchasers.A seller m a y sell at the same price to wholesalers and retailers with-out any legal liability under Section 2(a).

(b) A seller's purchasers are not necessarily limited to personsbuying direct from the manufacturing seller. A jobber obtaining amanufacturer's products through a warehousing distributor m a y beconsidered to be a "purchaser" from the manufacturer where the latterhas exercised such a degree of control over the transactions betweenthe distributor and the jobber that the sales are actually sales by themanufacturer. For example, the following factors have been con-

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sidered in determining if such a jobber is a purchaser of the manu-facturer :

(1) Whether the manufacturer's salesmen contact the jobber andsolicit orders for the manufacturer's products.

(2) Whether the products are shipped directly from the manu-facturer to the jobber, invoiced to the jobber, and payment remittedby the latter to the manufacturer.

(3) The extent to which the manufacturer sets, controls or sug-gests the prices at which the distributor may sell to the jobber.

(4) Whether the contracts entered into between the distributorand the jobber provide that the manufacturer may require approvalbefore the distributor is permitted to sell any specific jobber account.

If such control is exercised, the manufacturer may be in violationof Section 2(a) when the jobber, buying through the distributor,pays a higher price than competing jobbers purchasing directlyfrom the manufacturer.

2. While sales at different net prices may constitute discrimina-tions in price, such sales may be illegal under Section 2(a) onlywhere the price differences may result in adverse competitive effects.A seller, in defense, may affirmatively show (a) the price differen-tials do not exceed cost differences resulting from different methodsor quantities in which the commodities are sold, or (b) a lowerprice was made in good faith to meet an equally low price of acompetitor.

N o magic formula permits safe prediction that any given pricedifferential between competing purchasers will or will not be likelyto result in competitive injury. The answer to this question dependsupon the specific facts in particular cases.

3. Where a manufacturer is unable to justify price differencesbetween his purchasers in accordance with the affirmative defensesprovided by the statute, he may be reasonably certain that such pricedifferences will not be illegal price discriminations if he classifies hispurchasers on a functional basis and sells to all purchasers withineach functional group at the same net price.

The test to be used in classifying purchasers into functional groupsshould be based upon h o w or in what manner each purchaser resellsor disposes of the manufacturer's products. If this test is applied, theabove rule merely recognizes that ordinarily manufacturers buyingautomotive parts for use as original equipment do not compete withwarehouse distributors or jobbers reselling replacement parts. Simi-larly, distributors reselling only to independent jobbers do not usually

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compete with the jobbers reselling solely to dealers. Lacking anycompetitive relationship among such purchasers, a seller may legallydiscriminate in price among the manufacturer, warehouse distributorand jobber provided the distributor pays a lower price than the jobber.

A n y plan for compliance with Section 2(a) would not be completewithout considering that, under certain circumstances, a seller can jus-tify a discriminatory price under the good faith defense regardless ofthe competitive injury such a discriminatory price might cause.

Since the good faith defense furnishes an absolute or lawful excusefor an otherwise unlawful, injurious price discrimination, Commissionand court interpretations have strict limitations upon its availability.A m o n g the more basic limitations are the following:

(1) The defense is valid only when a lower price is given to meetindividual competitive situations, as a defensive measure. It cannot beused for the purpose of gaming, instead of retaining, a customer.

Example: Supplier A decides to improve his market position inone trading area and lowers his prices to several large volume pur-chasers in the area and not to their competitors. Such a practicewould constitute aggressive action on the part of the seller withoutany attempt to retain a specific customer w h o has been offered alower price by a competitor of the supplier.

(2) The seller may only meet, not undercut, the price of a com-petitor.

i-xample: Suppliers A and B sell to Jobber C at $1.00 and 95^,respectively. Supplier A lowers his price to yOf. A cannot justifythe yUf price under the good taith defense.

(3) The equally low price of a competitor means the price for thesame quantity.

Example: In selling to some of Supplier A ' s customers, Supplier Bsells a smaller quantity at the same price as A ' s price for a largerquantity, i he price for the smaller quantity cannot be defended under2(b) by Supplier B .

(4) The defense cannot be applied where a seller lowers his priceto enable his customers to meet their (the customers) competition.11

Example: Supplier A cannot lower his price to Jobber B to permitB to meet Jobber C's competition in selling Supplier D ' s products.

(5) Whenever a seller intends to justify a lower price to specificcustomers, and relies upon the 2{h) defense, he should attempt to

11. This issue is now pending in the United States Court of Appeals for theFifth Circuit in the Commission s case involving Sun Oil Company, Docket 6934.

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obtain verified written statements or invoices which reflect the exactprice of the particular competitor whose price the seller is meeting.

IV.In addition to its formal proceedings illustrated by the cases I have

discussed, the Commission uses a range of techniques other than theissuance of complaints looking to an order to cease and desist in itsefforts to secure compliance with all the laws it enforces. O n e of thetechniques used in appropriate cases is the tender of an opportunityto enter into a stipulation to concerns that have exhibited a cooperativeattitude during the course of inquiries and have acted promptly tocorrect deficiencies. T h e Commission has just achieved a signal gainin its efforts to protect consumers and honest businessmen from de-ceptive practices in the sale of automotive parts by employing thistechnique.

Recently the Commission became aware that m a n y rebuilt clutchesand other rebuilt automotive products containing previously usedparts were being placed on the market without disclosure that theparts had been rebuilt or that previously used components were usedin the parts. O n November 19, 1959, the Commission approved astipulation with Borg-Warner Corporation whereby that corporationagreed to disclose in a clear and conspicuous manner that its rebuiltautomotive products have been rebuilt. In the course of inquiry intothis specific matter, the Commission learned that numerous otherautomotive parts suppliers were selling rebuilt parts without disclos-ing the fact of rebuilding. After investigation, 12 other supplierswere offered the opportunity to enter into stipulations. These stipu-lations were accepted by the Commission in September. Others havefollowed. Each of these stipulations contains the following prohibi-tion:

Offering for sale, selling or delivering to others for sale or resale to thepublic any product containing parts which have been previously used with-out a clear and conspicuous disclosure of such prior use m a d e on theproduct with sufficient permanency to remain thereon after installation, aswell as in advertising and on the container in which the product is packed.

Note that this inhibition requires a proper disclosure be m a d e inadvertising, labeling and on the parts themselves. It is this last re-quirement that has caused the stipulating companies the greatestconcern, it being asserted that to cut the disclosure into the metal bydie stamping would not be practical on all parts. After preliminarytesting and informal conferences with technicians, the Commission'sBureau of Consultation expressed its opinion that there would bemore practical and less expensive methods of marking available tostipulating parties.

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While it is expected that stipulation negotiations will be continuedwith other automotive parts rebuilders, it is apparent that the totalnumber of stipulating companies will comprise only a small segment ofthe automotive parts rebuilding trade. It is estimated that there aresome 2,000 rebuilders of automotive parts. However , the Bureau ofConsultation expects that the announcement of these stipulations willconvince members of the industry that the Commission means to takeeffective steps to protect the m a n y car owners w h o pay for new partsbut actually receive rebuilt parts. T h e stipulations already approvedby the Commission furnish the impetus for the correction of this de-ceptive practice on a broad front by voluntary industry action. TheBureau of Consultation has already opened discussion with responsiblemembers of the industry and with trade associations representingautomotive parts rebuilders. Every opportunity for meaningful vol-untary compliance will be extended. If this effort is successful thisdeceptive practice can be eliminated with far more speed and at farless cost than would be the case if the Commission had proceeded onlyby the issuance of formal complaints.

V.

T h e Commission has been coupling a campaign for public aware-ness of the prevalence of this practice with its encouragement ofindustry efforts to make voluntary corrections. The Commission hasnever condemned the use of rebuilt parts nor has it ever condemnedthe utility of rebuilt products. Its sole concern has been to insure thatthe consumer is not deceived about the condition of the parts thathe buys.

T h e Commission's techniques for insuring compliance with the laware complementary. W h e n voluntary correction offers the best op-portunity for protection of the public at the least cost to the taxpayer,every effort should be m a d e to encourage voluntary action. However ,the Commission should never lose sight of the fact that honest busi-nessmen w h o wish to comply with the law are placed at a seriousdisadvantage if an unscrupulous few reject every prompting ofbusiness conscience and every consideration of public interest by con-tinuing the use of a deceptive practice in the face of numerous warn-ings. Therefore, the Commission always must be ready to employ itscompulsory process against this tiny minority w h o scorn the publicinterest. Only in this manner can the Commission remove the tempta-tion to honest businessmen prompted by the consideration that " X isdoing it and getting away with it and taking all the business." It canbe expected that the Commission will issue complaints against auto-

286 The Business lawyer

motive parts rebuilders if adequate disclosure to the public can besecured in no other way .

I realize that I have discussed only a small part of the Federal TradeCommission's program which m a y be of interest to members of thisAssociation. I wish that there were time to discuss all the ramifica-tions of the Commission's activities with you. However , I will haveaccomplished m y purpose if 1 have suggested to you the wisdom ofcompliance with the trade regulation laws and have assisted you indoing so. In this connection, I applaud the efforts of your Associa-tion's counsel, M r . Harold Halfpenny, to heighten awareness of thelaw's requirements in the industry and to encourage careful goodfaith compliance with the law.

Voluntary compliance with the nation's antitrust and trade regula-tion laws is the wisest course a businessman can follow. Self-interestdictates this course, because it avoids the costs and penalties and thetarnished public image that results from flagrant violation. A n d thepublic interest also dictates this course. Free businessmen mock ourfree enterprise system and invite needless and harmful additionalgovernmental regulation whenever they fail to compete freely andfairly.