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Full text of "Work materials ..."

Y9.A/Al/^'^-^/l 



BOSTON PUBLIC LIBRARY 



3 9999 06317 346 



/ 



NATIONAL RECOVERY ADMINISTRATION 



DIVISION OF REVIEW 



ANTI-TRUST LAWS AND UNFAIR COMPETITION . 



July 20, 1935. 



PRELIMINARY DRAFT 

(NOT FOR RELEASE: FOR USE IN DIVISION ONLY) 



J 



COIIFIDEUTIAL 
mivIORAiroul^i TO SECTION HEADS July 18, 1335 

SUBJECT: WORK MATERIALS NO. 1 

AUTI-TRUST LAWS AND UlIFAIR COMPETITION 

Tliis material, prepared by George J. Feldman and assisted 
"oy Janes E. Held and J. H. Krag, is representative of an initial 
attack upon the su'bject and is not regarded "by I,ir» Eeldman as a 
finished product. It is not an official docuiient and is not 
released for general use. It is distributed to Section Heads 
for appropriate confidential use in connection with the research 
work in their respective fields. 



L . C . Ivlarshall 
Director, Division of Review 



AIITI-THJST LAWS AlO) UNFAIR COMPETITION 



CONTENTS 



Page 

I, Introduction 1 

Historical development of the law 
of unfair competition. 
II. The Anti-Trust Laws 

A. Concept of Interstate Commerce in the 

Anti-Trust Cases 9 

(1) Amusement cases 9 

(2) Labor Cases 10 

(3) Advertising cases 11 

(4) Distribution of Merchandise 13 

B. Trade Associations and Exchanges 14 

(1) Maintenance of Traditional Channels 

of Distribution 14 

(2) Exclusion from the Market: Boycotts 15 

(3) Price Pixing 17 

(4) Price Fixing b;;- Buyers 21 

8001 * -i- 



Page 

(5) Predatory and Destructive Tactics » 21 

(6) Price Discrimination and Custoner 

Classification 22 

(7) Control of Stipply - Regulation of 

Lator Supply 24 

(8) Price and Information Piling 26 

(9) Cooperative Credit Activities 31 

(10) Resale Price Ilaintenance 34 

(11) Tying Clauses Full Line Forcing and 

Exclusive Dealing 37 

(12) Enticing Enrolo^rces 39 

(13) Uniform Cost Accounting 39 

III. Appendix 43 

Unfair Uethods of Competition under the 

Federal Trade Coromission Act 43 

A. Unfair ComiDetitive i.ietliods which affect 

the individual purchaser 43 

(a) Misrepresentation 43 

1. As to weight or quantity 43 

2. As to composition, quality, condi- 
tion or character 44 

3. False claim to endorsement or use 47 

4. As to "business status 47 

5. As to origin of iDroduct 48 

6. As to price reductions 48 

7. As to medicinal or cxirative value of 

the product 49 

8. Misrepresentations in the sale of 

corporate securities 49 

9. As to contracts and offers made 50 

10. Misrepresentations made ty correspond- 
ence schools 50 

(li) Lotteries 50 

(c) Harrassing Tactics 51 

(d) Basing Point Sj'stens 51 

(e) Predatory or Local Destractive - Price 

Cut t ing 51 

B, Unfair Competitive Hethods which affect the 

individual Competitors 51 

(1) False Claim of affiliation with competitor ,, 51 

(2) Appropriation of results of competitor's 

efforts 52 

(3) Interference with com]Detitor's stock 

while in the hands of dealers 52 

(4) Acquiring Competitor's trade secrets 52 

(5) Secret control of ficticious cocpetito;' 52 

(5) Anonymous attacks upon competitors • 52 

(7) Disparagement of and misrepresentation 

concerning competitors 52 

(8) Commercial "bribery and secret commissions 

to dealers 54 

(9) Unfair comijetitive methods in the Motion 

Picture Industry 55 

(10) Destruction of competitor's catalogues 55 



8001 



-IX- 



Pa~e 

(11) Shipping goods to competitor's customers 

\7ithout orders 56 

(12) Threats of litigation 55 

(13) Price discrimination to influence trade 57 

(14) Giving "free goods" and selling belou cost 57 

(15) Interference with competitor's source of 

sixpply 58 

(16) Physical interference with competitor's 

property 58 

(17) Iss-'oance of "Palse" complaints to the 

Federal Trade Commission 58 

(18) Appropriation of competitor's shipments 58 

(19) Inducing "breach of contract 59 

(20) Espionage 59 

(21) iiolestation, harrassing tactics, inter- 
ference with competitors 60 

(22) Trade-marks and trade names - "passing 

off" 61 

(23) Miscellaneous price fixing activities 62 

( 24) Bogus Independent s • . 63 



8001 -ill- 



I 

INTRODUCT I H 



This study is an attenpt to assernlile ujider one cover the nuiierous 
methods of unfair competition and tj'-pes of monopolistic restraints of trade 
condemned by the courts and the Federal Trade CoiTimission as violative of the 
anti-trust laws. Before getting into a routine discussion of the cases a 
brief survey of the development of the law of unfair competition and the law 
governing monopolies may suriply the background and scenery essential to the 
completion of the picture. 

The law, as it touches upon the problems of competition and monopoly, 
has been progressively going through a process of evolution. From earliest 
times the law has exercised some control over trade and industrjr. Indeed, 
one could not find a better example of such control than the system which 
existed in England in Medieval times. Regulations during that period were 
framed not only for workshops under the crafts and guilds but also for the 
market place, where detailed rules of the law mercliant were made to insure 
fair trading. 

It took a few centuries a.nd an industrial revolution to arrive at a 
point in our economic history where it was felt that free competition was 
essential as a regulator of industrial life. But history teaches that 
economic freedom is a relative matter. T7ith the rise of the factory system, 
many economic sins were committed in the name of the "free" or "natural" 
competition to which the early classical economists, such as Adam Smith, 
had given prominence in their writings. The evils of the early factors'- 
system are well Icnown and the law began to cope with them at an earls'- stage. 
Twenty-six years after the pii.blication of Adam Smith's celebrated "WEALTH 
OF IIATIOHS", the first modern factory act was passed in England. The march 
of social legislation ushered in by this act has been practically uninter- 
rupted to this day in countries of modern industrial civilization. The law 
however, did not stop with an act to correct the evils of laissez faire 
competition as it affected industrial workers, it went further and inter- 
vened to elevate the plane of competition in the marketing of goods. 

Thus, the law beg?Ji to distinguish between fair and unfair competition. 
Fair competition is constructive. It should be a rivalry for patronage in 
a market which permits survival onlj of the economically fit business units. 
Large and small, these business units have a right to engage in business and 
to survive solely by virtue of superior production or selling efficiency. 
The law assures no one an absoliite right to compete or an absolute right to 
survive . ITor does the law permit an individxml to mal'e comnetltion the 
death loiell of fair trading . 

The seed from which this philosophjr grew may be found in the decisions 
of the courts under what is known as the common law of unfair competition. 
That body of legal doctrine evolved in the con..rse of the nineteenth century 
and, springing from the old law of fraud, condemns doing business upon a 
fraudulent or deceptive basis. From this point of view, the whole law of 
ujifair competition may be said to revolve around the countless ways in which 
one person may seek to interfere with the good will possessed by a competitor. 
Good will has been a.ptly defined by one writer as that which mslces tomorrow's 



8001 -1- 



"business more than an accident. 

One of the valuable syrabols of good will which the courts protect is 
the trade mark or the trade name. By association it serves to distinguish 
A's goods from B's and gives tangible form to the reputation of the producer 
as one standing for quality and other desirable attributes. B is legally 
responsible when he falsely represents or "passes off" his goods as those of 
A. For example, he may use a trade mark or trade name so similar to A's as 
to confuse the purchasing public, thus depriving A of the business he would 
otherwise get. 

In addition to this piracy of trade marks and trade names, there are 
many other practices whereby B may invade A's right to be protected against 
being deprived of his reasonable expectation of business. In addition to 
false representations B may also be gailtj?" of intimidating or molesting A's 
customers. He may interfere with a competitor's contracts, disparage his 
goods, steal his trade secrets, bribe or entice away his employees and the 
like. This growth is reviewed by the United States Supreme Court in the 
Schechter case: 

"Unfair competition as known to the common law is a limited 
concept. Primarily, and strictly, it relates to the palming 
off of one's goods as those of a rival trader. G-oodyear 
Manufacturing Co. v. qpodyear Rubber Co. . 128 U. S. 598, 604; 
Howe Seale Co. v. Wycoff. Seamans & Benedict 198 U. S. 118.140 ; 
Hanover I-lilling Co. v. Metcalf . 240 U. S. 403, 413. In recent 
years its scope has been extended. It has been held to apply 
to misappropriation as well as misrepresentation, to the selling 
of another's goods as one's own, - to misappropriation of what 
equitably belongs to a competitor. International Wews Service 
V. Associated Press . 248 U. S. 215, 241, 242. Unfairness in 
competition has been predicated of acts which lie outside the 
ordinarj'- course of business and are tainted by fraud, or coercion, 
or conduct otherwise prohibited by law." ( Schechter v. U.S. . 
55 S.Ct. 837-850. 1935 1 

It is at least partially true that the common law and its procedure is 
too rigid and, therefore, incapable of adapting itself to the rapidly chang- 
ing conditions of modern economic life. Although a number of extensions of 
the doctrine of imfair competition were made by judicial decisions under the 
common law, the courts were unable to keep pace with the ingenuity of the 
business pirate, and, as a result, in 1914 we progressed to a new system of 
regulation of competition by an administrative tribunal, namely, the Federal 
Trade Commission. 

This Commission is empowered to prevent the use of unfair methods of 
competition in interstate commerce. It may issue a complaint against the 
offending party whenever it has reason to believe that such a proceeding by 
it would be in the interest of the public. Thus, in some cases where the 
common law formerly afforded no relief, it was thought that the Commission 
would act as a guardian of public rights. However, the meaning of the 
expression "unfair methods of competition" in the Federal Trade Commission 
Act is still a highly controversial matter and the resulting uncertainty 
created the necessity for affirmative guide posts \)j which to chart the 
legal course, and to which industry must be guided if it is not to run afoul 

8001 -2- 



of the laT7. The Conmission failed to provide adequate criteria to gu.ide 
■business conduct. 

Although the Connission has succeeded in attaining sone of the o^bjectives 
aimed at, in a large sense it has, through unfavorahle court decisions and 
other factors he^ond its control, failed to do what its sponsors exoected. 
President Wilson, hacl: in 1914 when the Commission vras established under the 
nevr la-r, undoubtedly expected a new constructive force to develop and occupy 
as important a place in trade and ir.dustrj^ as the Interstate Commerce Com- 
mission T7as occupj'ing in the field of interstate transportation. This did 
not happen. Therefore, the latest stage in the effort to regulate competition 
cane into heing quite naturallj^ and only after it nas found that the mechanism 
-orovided for in the Federal Trade Commission Act iras out of gear rdth modern 
Industrial development. From a historical point of vierr this recent effort, 
represented "by the Mlk codes of fair competition, tras a part of the continuing 
process of seeking correctives for destructive trade practices, thereby at- 
tempting to elevate competition to a higher level. 

¥e are next concerned vrith the maintenance of competitive conditions 
against the encroacliraent of monopoly. This policy had its origin in the 
comiion lau governing restraint of trade and conspiracies to monopolize. 
Originally, the courts confined the phrase "restraint of trade" to situations 
Trhere, for example, A sold his "business to B and agreed not to compete with 
B in a given area and for a given time. Fnile the courts at first were 
hostile to such contracts during the eighteenth and nineteenth centuries, 
they were gradually permitted in England then generally in the United States, 
providing they were reasonable when looked at from the standpoint of the 
TDarties to the contract as well as from that of the public interest . But in 
our OT/n coTontry the development of a system of national control over these 
restrictive agreements did not evolve due to the inability of state courts 
to malce their decisions effective beyond their own state boundaries. A 
striking example of this is the treatment accorded The Diamond Hatch Company, 
which had created a national business by purchasing small comp;anies which 
agreed not to engage in the business for 99 years in all of the forty-eight 
states except two; in 1887 the courts of Hew York held one of these agreements 
to be a reasonable trade restraint, yet in 1889 the I.Iichigan coxirts held 
another of the agreements to be illegal. 

However, by the middle of the nineteenth century the term "restraint of 
trade" had be.gun to be applied to combinations or agreements among competitors 
for the purpose of secaring control of the market and suppressing competition. 
These combinations or agreements assumed various forms such as to fix prices, 
restrict output, and divide territory- and profits. In the United States the 
courts under the common lair have generally held such arrangements illegal 
regardless of the economic or social justifications involved. 

But just as in the case of unfair competition so in the field of monopoly, 
the common law was supplemented bjr legislation. In this country the so-called 
trust movement of the 1870 's and 1880 's produced various schemes for concen- 
tration of control and monopolizing market. The united protests against the 
trusts end. their predatory practices led to the enactment of the Sherman Anti- 
Trust Act of 1890. That act declared illegal every contract, combination or 
conspiracy in restraint of interstate trade or commerce. Under tliat law one 
of the most interesting developments has been the shift from the narrow in- 
terpretations by the cov.rts whereby every contract or combination in restraint 
of trade was considered unlav^ful, to the famous "rule of reason" set forth in 

8001 -3- 



the Standard Oil case of 1911, by which only contracts or conTDinations which 
unreasonably restrain trade are held in violation of the law. 

Just as the highly controversial expression in the Federal Trade Com- 
mission Act "-unfair methods of competition" created uncertainties harmful to 
industrsj-, so also it is becoming increasingly apparent that the flexibility 
of such a standard of judgment as "reasonableness" inevitably leads to un- 
certainty, and this is exactly what occurred under the Sherman Act. The 
Supreme Court has pointed out the factors which operate to render a restraint 
unreasonable, but the result has in most instances failed to provide a stand- 
ard to guide the conduct of business men and trade associations. 

In a general sense it is true, then, that the changed aspects of business 
and industrial activity have been controlled and regulated by new mechanisms 
devised to fit the new circumstances. Slow as the development of the law has 
been on occasion, there has been a steady inevitable evolution in the processes 
used to regulate the relationships of those engaged in commerce and other busi- 
ness pursuits. However, as to the growth of application of Anti-trust laws 
to deal with present d£iy conditions there has been a notable la^ or decided 
drift away from the evolutionary process. 

This lag is best demonstrated by the difference in the development of 
the law of trusts in our own country and under the English system and forcibly 
contracted by examining the decisions in two well known cases: that of 
United States v. T renton Potteries Co. et al and of Attorney General of the 
Commonwealth of Australia v. The Adelaide Steamshin Com-panv. Ltd . 

In the Trenton Potteries Case the Supreme Court in 1927 upheld the 
conviction of twenty individuals and twenty-three corporations under the 
Sherman Act for combining to fix and maintain uniform prices and for combin- 
ing to restrain interstate commerce by limiting sales of pottery to a special 
group Iniown to them as "legitimate Jobbers". In refusing to follow as to 
price fixing the well Imown rule of reason as laid down in prior decisions 
the court said: 

" But it does not follow that agreements to fix or maintain 
prices are reasonable restraints and therefore permitted by the 
statute, merely because the prices themselves are reasonable". 

¥e see the court then adhering to an outmoded and inconsistent view that 
the power to fix prices is an evil in itself regardless of the manner of its 
exercise, for in the same opinion appears the following pronouncement: 

" The aim and result of every price fixing agreement, if 
effective, is the elimination of one form of competition. 
The power to fix prices, whether reasonably exercised or not, 
involves power to control the market and to fix arbitrary and 
unreasonable prices". 

But with the results obtained in the Trenton Potteries Case contrast the 
results reached in the Adelaide Case , decided by the Privj'" Council in England 
as earljr as 1913. Refusing to treat the public interest as a thing apart from 
certain members of the public the court there gave consideration to producers 
and distributors as well as to consumers, and found no detriment to the public 
in permitting forty defendant mining companies and shipping companies to agree 

8001 -4- 



on resale prices for the shippers of coal in large productive areas in 
Australia. Criminal prosecutions under an Australian Anti-Trust Act T7ere 
"being reviewed. In upholding the Higli Court of Australia, which had re- 
versed convictions "by the trial court, Lord Parker said: 

"It T7as strongly urged hy counsel for the CroTm that all 
contracts in restraint of trade or comnerce which are 
unenforceahle at coininon law, and all corahinations in 
restraint of trade or conmerce which if entodied in a 
contract would be enforceable at common law, must be 
detrimental to the public within the meaning of the Act, 
and that those concerned in such contracts or combinations 
must be taken to have intended this detriment. Their 
Lordships cannot accept this proposition 

"It was also strongly urged that in the term 'detriment 
to the public' the public means the consuming public, 
and that the Legislature was not contemplating the interests 
of any persons engaged in the production or distribution of 
articles of consumption. Their Lordships do not take this 
view, but the matter is really of little importance, for in 
considering the interests of the consuiners it is impossible 
to disregard the interests of those who are engaged in such 
pro6.ti.ction and distribution. It can never be in the interest 
of the consumers that any articles of consumption should 
cease to be prod.uced and distributed, as it certainly would 
be unless those engaged, in its production or distribution 
obtained a fair rem'UJieration for the capital employed and 
the laborers expended." 

As brought out in other portions of the opinion of Lord Parker it is 
clear that the new statute on monopolies which was being construed, had in 
1906 added something to the previous doctrines regarding monopolies obtained 
from the Crown. The criterion had come to be the interest of the public in 
a realistic manner that considered all members of the public to be involved 
so that only unreasonable and detrimental combinations would from thenceforth 
be condemned. But in our own country, in construing the Sherman Act, which 
contained language almost identical with the Australian Industries Preserva- 
tion Act, the law had reached the deplorable stage where a combination of 
individuals to stabilize prices is wrong even if there is no harm ensuing to 
the public from siich a practice. And as a corollar;'- to this state of affairs 
we have the equally regretable situation that the courts have permitted mergers 
of large business units in the past to accomplish what individuals were not 
allowed to do by apparently bona fide efforts at cooperation for the common 
good. 

To be sure, the attitn.de of the court in the ATjTjalachian Coals Case in 
1933 may well be a step in the right direction, without the modification of 
the anti-trust laws, to meet new conditions in the interest of producers, 
laborers and consumers. 

In this case, the court viewed the economic conditions of an industry 
as an entity, and recognized that the "interests of the producers are inter- 
linked". It permitted changes to be made which would mitigate the evils 

8001 -5- 



in an industry and foster fair competitive opportunities. On this point 
the court said: 

"The fact that the correction of ahuses may tend to stabilize 
a "business or to produce fairer price levels, does not mean 
that the abuses should go uncorrected or that cooperative 
endeavor to correct them constitutes an unreasonable restraint". 
(288 U. S. 374) 

Thus the Court permitted members of an industry to correct and to attempt 
to eliminate by cooperative efforts evils or abuses existing in the industry, 
but onlj'- where the group attempting to gain such a result must still meet ef- 
fective competition in a fair market, does not seek to monopolize the market, 
and has not the potential power to do so. Advances in price or other results 
flowing from a cooperative agreement are not in and of themselves harmful so 
long as they are caused by the elimination of competitive evils and not from 
artificial factors such as direct price fixing. 

But the case is only one small step forward and in the light of the 
following statements of the Siipreme Court, it is submitted that the construc- 
tion of the anti-trust laws to be obtained from the courts in the future will 
not take the place of Congressional action in modification of the anti-trust 
laws under its undoubted power to dictate policies free from interference: 

"Nothing in theorir or experience indicates that the selection 
of a common selling agency to represent a number of producers 
should be deemed to be more abnormal than the formation of a 
huge corporation bringing various independent units into one 
ownership 

"We recognize, however, that the case has been tried in advance 
of the operation of defendants' plan, and that it has been 
necessar3'' to test that plan with reference to purposes and 
anticipated consequences without the adva-ntage of the demonstra- 
tions of experience." 

Even if the AiPDalachian Coals Case is commendable because it allowed coal 
operators to organize a selling agency to protect themselves from cutthroat 
competitive conditions such as destnictive price cutting, it is not a holding 
that goes to the essence of price stabilization for the public welfare, since 
the decision was moot in the sense that the operation of the plan was not 
approved. Moreover, the industr^r as a whole was not allowed to adopt bene- 
ficial price stabilization. On the contrary, one of the elements of the case 
emphasized by the court was the fact that although the Appalachian Coals Sales 
Agency was formed with the view of having other regions form similar agencies, 
its creation was not made dependent thereon and there was no showing of a 
purpose, understanding, or agreement that in the event such agencies were 
formed, there would be any agreement or understanding between them to divide 
market territories, limit production, or to fix the price of coal. Only 
certain producers in the Appalachian area were allowed to compete effectively 
in a free market to which other coal operators were eligible. 

A quarter of a century of experiment under the Sherman Act demonstrated 
the inadequacy of that law to cope with nep: monopolistic devices. Consequently 
in 1914 supplementary legislation, namely, the Federal Trade Commission Act, 

8001 -6- 



to T7hich we have previously referred, and the Clayton Act were passed. The 
Clayton Act gave the Federal Trade Comnission authority to prevent interlock- 
ing directorates of corporations and to prohibit practices such as unlawful 
price discriminations, so-called "tying contracts" and stoch acquisitions 
where the effect T'ould he to suhstajitially lessen competition or to create a 
monopoly. 

Despite all this legislation, business mergers - which the anti-trust 
laws were popularly supposed to have prevented, - flourished and, in fact, 
were encouraged hy United States Supreme Court decisions. The nunher and 
size of the holding companies sind consolidations springing up in the years 
immediately preceding the stock market crash in the fall of 1929 is still too 
fresh in the minds of everyone. But "brief reversion to the earlier growth 
of consolidated "business units demonstrates that the Anti-Trust laws have 
never consistently accomplished their purpose of preventing large business 
units from doing injur;'- to the public interest. In 1898, only eight years 
after the enactment of the Sherman Act, there were eight large consolidations 
of corporations, including the formation of the American Linseed Company. In 
1899 there were twentjr-six such corporate consolidations includin;^ the Stand- 
ard Oil Company of Hew Jersey. In 1900 there were five such consolidations, 
and in 1901 there were six, including the organization of the United States 
Steel Corporation. 

The existing devices under inadequate state laws incapable of exerting 
a national control had led to the pr.ssage of the Sherman Act of 1890. State 
constitutional provisions against monopolies or combinations in restraint of 
trade had proved ineffective - as in constitutions of Arkansas, Georgia, 
KentuclQT, Tennessee and Texas. State statutes were equally impotent - as 
under the statutes in Maine, Michigan and Texas in 1899 and in Iowa and 
Kentuclcy in 1890. 

But the Anti-Trust laws have not adequatel;'- filled the gap caused b;;- the 
inability of state laws to regulate national business. The effectiveness of 
the Interstate Commerce Act of 1C07 in esta.blishing reasonable railroad rates 
and in prohibiting discrimination are not dujDlicated by like successes under 
the Anti-Trust laws. ¥ith the possible exception of some outstanding achieve- 
ments in enforcement prior to 1911 the prosecutions, injunctions, damage suits 
and confiscation of property under those laws have not been of great importance. 
Up to about 1930, less than 50 individuals were sent to prison, and apparently 
none have gone to prison in recent years; less than $2,000,000 in fines were 
collected in the first fort3'- yea,rs of the anti-trast program of the government 
and during that time 40 cartons of cigarettes were confiscated and released on 
bond. 

In 1895 in the E. C. Knif^ht Case , control of the major sugar refineries 
of the countrjr was allovi^ed to be concentrated in the hands of a single corpora- ' 
tion because manufacturing was not commerce in the eyes of the Supreme Court, 
regardless of the nation wide effect upon commerce in one of the prime neces- 
sities of life. The unsatisfactory helplessness of both state and federal 
governments to deal with business activities transcending state lines has never 
been properly corrected depsite the virtual overri-iling of the ICnight case in 
subsequent decisions. The Trans-Missouri Frei.ght Case of 1897 and the 
Addvston Pi-pe and Steel Co. Case in 1899 denouncin:": combinations to maintain 
railroad rates and combinations of pipe manufacturers to advance prices, did 
not serve to prevent merger and holding companies prior to the market crash of 

8001 -7- 



.- ^>iv^ uncontrolled activities are still pernitted to partially paralyze 
the national efforts at regulation of trade and industry. 

If ne keep well in mind the fact that an enforced "free" conrpetition 
was the nechanisn -onderlying the Anti-Trust laus and that this mechanisn was 
ostensibl" designed to keep the channels of coranerce open while protecting 
the public interest at one and the same time, it will "be perceived that a 
change in that mechanism is now required. "Free competition" as an economic 
policy came to "be inadequate to protect the public interest; the cutthroat 
competition engendered under such a policy called for a new mechanism to 
pilot the industrial ship safely between the Scylla of anarchistic unrestrained 
coiroetition on the one side and the Charj'-bdis of tyrannical unfettered co- 
operation on the other. 

The days of groping "by industries in the darloiess of uncertain legal 
heacon lights to guide them should "become a thing of the past, Tlae new in- 
dustrial development is well worth continuint if progress is to "be maintained. 
If we are to go forward instead of "backward, the public must be tolerant of 
reasonable experimentation in a field where there are so manj'' disputed 
questions of fact a:id rapidly changing forms of industrial organization. In 
the words of lir. Justice Brandeis "If we would guide by the light of reason, 
we must let our minds be bold," 



8001 -S- 



ocpr 



II 

The Anti-Trust Laws 



I, Interstate Cocmerce 

The application of the Anti-Trust LaT7s, "by dei-inition, and of necessity, 
is confined to restraints of interstate con-ierce. The cases drawing the 
line iDetween commerce which is interstate, and hence subject to regulation, 
and commerce which is intrastate, or transactions which do not constitute 
commerce, and hence not subject to regulation, may "be placed within several 
categories. 

(1) Amusement Cases 

In Federal Baseball Cluh v. tfational League of Professional Baseball 
Clubs . 259 U.S. 200 (1922) the plaintiff brought an action for damages under 
the Sherman Act alleging that defendants conspired to destroy the Federal 
League and to monopolize the baseball business. The court held, however, 
that interstate comijierce wa,s not present. It pointed out that although the 
operations of the defendant League necessitated transportation of players 
and equipment among the several states, "The business is giving exhibitions 
of baseball, which are purely state affairs ,, the transport is a mere inci- 
dent, not the essential thing. That to which it is incident, the e:diibition, 
although made for money would not be called trade or commerce in the commonly 
accepted use of those words ... That which in its consummation is not com- 
merce d-oes not become commerce among the states because the transportation 
that we have mentioned talces place". 

Hart V. Keith Vaudeville Exchange . 262 U.S. 271 (1923), involved some- 
what similar facts. Plaintiff sought an injunction and. damages alleging a 
combination ''oj the defendants to exclude actors, managers and personal 
representatives of actors from practically all the vaudeville theatres in 
the United States and Canada, which were controlled by defendants, unless 
they paid defendants' fees. The bill further alleged that defendants' busi- 
ness involved the making of contracts that required performers to travel 
among the states and necessitated- the transportation of scenery and animals. 
The case in the Supreme Cotirt turned upon the issue of jurisdiction in the 
lower court, and was remanded to be decid.ed upon the merits. Subsequently, 
it was held upon the merits that no direct and substantial restraint of 
interstate commerce was involved. 12 F. (2d) 341 (C.C.A. 2nd, 1926), 
certiorari denied, 272 U, S. 703, (1926). 

Binderup v. Pathe Exchange. Inc. . 253 U.S, 291 (1923) was an action for 
damages under Section 7 of the Sherman Act. The defendant distributors of 
motion picture films demurred to a complaint which alleged that the plaintiff, 
an exliibitor, had. been procuring films from some of the distributors but had 
refused to buy from others, who thereupon ind-uced the former distributor to 
cease dealing with him; that all the distribixtors conspired to prevent him 
from carrying on his business; and that they had since refused to furnish him 
with film service, and had cancelled contracts which he held. Upon the ques- 
tion whether the restraint related to interstate commerce, Mr, Justice 
Sutherland stated at page 309: 



8001 -9- 



"The film contracts irere 'betrTeer residents of different 
states and contemplated tlae leasing "b-f one to the other 
of a commodity raanufactured in one state ****** 
and to "be transported to and used in another. The 
■business of the distributors of which the arrangement 
with the exhibitors was an instance, was clearly inter- 
state. It consisted of maiaufacturing the commodity in 
one state, finding customers for it in other states, 
making contracts of lease with them, and transporting 
the commodity' leased from the state of manufacture into 
the states of the leasees ... Does the circumstance that 
in the course of the process the commodity is consigned 
to a local agency of the distributor, to be bj'- that 
agency held until delivered to the leasee in the same 
state put an end to the interstate character of the 
transaction and transform it into one purely intrastate? 
¥e think not. The intermediate delivery to 'the agency 
did not and was not intended to end the movement of the 
coLimodity. It was merely haJted as a convenient step in 
the process of getting it to its final destination . . • 

"Interstate commerce includes the interstate purchase, 
sale, lease, and exchange of commodities, and any con- 
bina.tion or conspiracy which unreasonably restrains such 
purchase, sale, lease or exchange is within the terns of 
the Anti-Trust Act ..." 

(2) Labor Cases 

In Industrial Association of San Francisco v. United States . 268 U. S. 
64 (1925), the United States brought a bill for an injunction to restrain an 
alleged conspiracy and to dissolve certain of the defendant associations. 
The litigation arose out of tlie following facts; Prior to 1921 the San 
Francisco building industry was dominated by the building trades unions, which 
enforced the closed shop and other restrictions offensive to contractors and 
real estate men. After a series of strikes, during which building operations 
in San Francisco practically ceased, the defendant associations were organized. 
One of the defendants, the Builders Exchange of San Francisco, with a m.ember- 
ship of a great majority of building contractors and dealers in building 
materials, put into effect the socalled "American plan". The plan required 
an open shop policy, and was enforced by a permit system. The object was to 
confine sales of certain materials, such as cem.ent, lime, brick, sand, etc., 
to builders who sixpported the plan. These m.aterials were made available to 
builders only if they obtained a permit from the Builders Exchange. All the 
materials were produced in California with the exception of plaster, which 
was imported from other states but "brought to rest" and commingled with 
other goods before being subjected to the permit sj'-sten. The Court held that 
with respect to the plaster there wa,s no interference with interstate commerce, 
since the interstate movement in plaster had closed before the operation of 
the plan became effective. ¥ith respect to materials produced in California, 
the Court held that the interference with interstate commerce was indirect 
and remote, and referred to prior decisions of the Court refusing to enjoin 
strikes on the ground that the direct restraint applied only to manufacture 
and not to comi^erce. At t^age 82 Mr. Justice Sutherland said; 



8001 -10- 



". . . If an executed agreeneut to strike, uith the object and 
effect of closini^ dotm a nine or a factorjr, by preventing the 
employinent of necessary norloaen, the indirect result of nhich 
is that the sale anid shipment of goods and products in inter- 
state comiaerce is prevented or diminished, is not an unlaTTf'al. 
restraint of such commerce, it carjiot consistently te held 
othernise in respect of an agreement and comhination of employers 
or others to frustrate a strike and defeat the strikers "by 
keeping essential domestic "building materials out of their 
hands and the hands of their sympathizers, "because the means 
employed, whether laviful or unlarful, produce a like indirect 
result. The alleged conspiracy and the acts here complained 
of, spent their intended and direct force upon a local situation, 
for "building is as essentially local as mining, manufacturing 
or growing crops, and if, "by a diminution of the commercial 
demand, interstate trade was curtailed either generally or in 
specific instajices, tha.t was a fortuitous consequence so re- 
mote and indirect as plainly to cause it to fall outside the 
reach of the Sherman Act," 

In Coronado Coal Co . v. United liine Workers of America 268 U.S. 295 
(1925) plaintiff "brought an action for damages caused "by an alleged conspiracy 
of the defendants to prevent plaintiff's interstate trade in coal in violation 
of the Sherman Act. The evidence was clear tha.t union miners had destroyed 
valua"ble mining properties of the plaintiff's in the midst of la"bor diffi- 
culties occasioned "by the "breach of a union contract and the determination to 
operate with nonunion la"bor. Hhen the action first came to the S-apreme Court 
the court fo\md evidence showing that certain unions and their officers had 
engaged in the conspiracy and destruction of the property, ""but not enough to 
show an intentional restraint of interstate trade and a violation of the Anti- 
Trust Act." Upon the second trial additional evidence was introduced hj the 
plaintiffs, which the court in the present case fovind sufficient to supply the 
element of intention. The court concluded that the o"bject of the defendant 
was to prevent the shipping of plaintiff's coal to other states, where it 
would compete with coal originating from union mines, a.nd tend to destroy 
maintenance of wages for union la"bor in competing mines. At page 510 Chief 
Justice Taft declared: 

"The mere reduction in the supply of an article to "be shipped 
in interstate commerce "by the illegal or tortious prevention 
of its manufacture or production is ordinarily an indirect 
and remote o"bstruction to that commerce. But when the intent 
of those unlawfully preventing the manufacture or production 
is shown to "be to restrain or control the su-oply entering and 
moving in interstate commerce, or the price of it in inter- 
state markets, their action is a direct violation of the 
Anti-Trast Act." 

(3) Advertising Cases, 

In Blumenstock Bros. Advertising Agency v. Curtis Pu"blishing Co. . 252 U.S. 
436 (1920) the action was to recover tre"ble damages under section 7 of the 
Sherman Act. Plaintiff alleged that the defendant refused to accept advertising 
matter offered "by the plaintiff unless the plaintiff, and other advertising 
agencies, would agree to limit the amount of advertising given "by the plaintiff 
and other agencies to the pu"blishers of other pu"blications, with the intent of 

8001 -11- 



acquiring a nonopoly of the pii'blication of advertising; natter in a restricted 
field. The court drew a distinction between the execution of contracts l)e- 
tueen plaintiff and defendant, and the actual distribution of defendant's 
publications throui^hout the country. At page 442 Justice Da,y said: 

"... In the present case, treating the allegations of the 
conplaint as true, the subject-matter dealt uith iras the mak- 
ing of contracts for the insertion of advertising natter in 
certain periodicals belonging to the defendant. It ms.y be 
conceded that the circulation and distribution of such publi- 
cations throughout the coimtry ^?ould amount to interstate 
connerce, but the circulation of these periodicals did not 
depend upon or have any direct relation to the advertising 
contracts T7hich the plaintiff offered and the defendant refused 
to receive except upon the terms stated in the declaration. 
The advertising contracts d.id not involve aay movement of goods 
or merchand-ise in interstate commerce, or any transmission of 
intelligence in such comraerce, 

"This case is wholly unliire International Textbook Co. v. Pigg, 
217 U.S. 91, 30 S. Ct. 481, wherein there was a continuous 
interstate traffic in textbooks and apparatus for a course of 
study pursued by means of correspondence, and the movements in 
interstate commerce were held to bring the subject-matter with- 
in the domain of federal control, and to exempt it from the 
burden imposed by state legislation," 

In Hsmsey Co . v. Associated Bill Posters . 260 U. S. 501 (1923), competing 
billposters in the United. States and Canada entered into a combination to 
monopolize the business in their respective localities. Membership was re- 
stricted in a single billposter in each cit;^ and members were forbidden to 
compete with each other. Funds were furnished to members for the pujrpose of 
burring oiit competitors; members were prohibited from accepting vrork from an 
advertiser who gave business to a non-member; a schedule of prices was fixed; 
members were forbidden to accept T.'ork from anyone except tv;elve licensed 
solicitors (agents for advertisers), who were prohibited from patronizing 
non-members in the localities represented by miembers; and nantT-facturers were 
prevented, by threats of withdrawal of patronage, from furnishing posters, 
except at prohibitive terms, to independent billposters or to advertisers 
doing business with independents. By these tactics the combination grew in 
power until it attained a virtual monopoly. This was a suit for treble 
damages under the Sherman Act hy plaintiffs, solicitors whose licenses had 
been cancelled by the combination, with a resulting hea.v^r loss of business. 
But the lower court held that the posting by the billposter was a purely 
local service merely incidental to interstate commerce. The Supreme Court, 
however, disagreed, saying at page 511: 

"We cannot accept this view. The alleged combination is 
nation-wide; members of the Association are boiind by agree- 
ment to pursue a certain course of biisiness, designed and 
probably adequate materially to interfere with the free 
flow of commerce among the States and with Canada. As a 
direct result of the defendants' joint acts plaintiffs' 
interstate aind foreign business has been greatly limited 
or destroyed. Ilopl'ins v. United States is not applicable. 

8001 -12- 



There . . . the . . . practices of the Association directly 
affected local "business only." 

« 

(4) DistriMtion of Merchandise. 

In Federal Trade Connission v. Pacific States Pa-per Trade Associati on, 
273 U. S. 52 (1927) local paper trade associations fixed and enforced -unifonn 
prices to he charged oy memhers in intrastate sales. In making sales in 
other states, the salesmen of each menher hahitually quoted prices from the 
same lists which aioplied to local' sales. The court held that it was unneces- 
sary to show a definite agreement to fix prices in interstate trade in order 
to find a violation of the Sherman Act. A paragraph of the Commission's 
order prohihited the execution or performance of agreements fixing prices on 
mill shi-oraents when the paper sold was shipped from outside of the state 
where the wholesaler was located. The court pointed out that such a trans- 
action involved two contracts, the first for sale and delivery hy the whole- 
saler and retailer in the same state, in which the price was fixed "by the 
local association, and the second hetween the wholesaler and manufacturer in 
different states. The Commission's order implied that the sale hy the whole- 
saler to the retailer in the same state was a part of interstate commerce 
where the seller performed his contract oy procuring shipment from a mill in 
another state to the retailer. This finding the court approved, saying at 
page 61: 

"... The election of the seller to have the shipment made from 
a mill outside the State malces the transaction one in commerce 
among the States. And on these facts the sale by johher to re- 
- tailer is a part of that commerce." 

In Local 167 etc . v. United States , 291 U. S. 293 (1934), the United 
States "brought a suit to enjoin a conspiracj'- to restrain and monopolize in- 
terstate commerce in poultry in the New York City area. Practically all the 
poultry came from other States than New York to teminals in iianhattaii and 
Jersey City. Poiiltry was shipped to receivers who were paid a commission "by 
the shippers. The receivers sold to market men who acted as wholesalers and 
sold to the retailers, who supplied the ultimate consumers. The marketmen 
organized a so-called chamber of commerce, allocated retailers among them- 
selves and raised prices hy concerted efforts. The chamber of commerce and 
individual conspirators hired men to obstruct the business of non- conforming 
dealers; in order to force compliance they employed violence and attempted to 
prevent recalcitrant dealers, wholesalers and retailers from obtaining poultry. 
Members of the trucking union which transported the poultry refused to handle 
the business of recalcitrant market men and members of the slaughters' union, 
who were also in the conspiracy, refused to slaughter. Several of the con- 
spirators appealed from a lower court's decision granting the injunction, on 
the ground that they did not intend to restrain, nor did they interfere with 
interstate commerce. The Circuit Court of Appeals refused to accept this con- 
tention, pointing out tliat interstate commerce did not end with delivery of 
the poultry/ to the receivers. Judge Swan remarked that tlie receivers "were 
merely a conduit through which flowed the daily stream of commerce from ship- 
pers to market men". Upon appeal to the Supreme Court the decision was 
affirmed. Justice Bixtler, spealcing for the Court, refused to draw a line at 
which interstate commerce, and the jurisdiction of the Court to prevent a 
restraint upon that commerce, came to an end. At page 297 of 291 U. S. he de- 
clared: 

8001 -^2- 



"The evidence shows that they and other defendants conspired to 
"burden the free movement of live po-oltry into the metropolitan 
area. It may he ass-omed that some time after delivery of carload 
lots hy interstate carriers to the receivers the movement of the 
poultry ceases to be interstate commerce. Public Utilities 
Comm'n v, Landon, 249 U. S. 236, 245. Missouri v. Kansas Gas Co, 
265 U. S. 298, 309, East Ohio Gas Co. v. Tax Comm'n, 283 U. S. 
465, 470-471. But we need not decide when interstate commerce 
ends and that which is intrastate "begins. The control of the 
handling, the sales and the prices at the place of origin "be- 
fore the interstate jo\irney "begins or in the State of destina- 
tion where the interstate movement ends may operate directly to 
restrain and monopolize interstate commerce, 

"And, maintaining that interstate commerce ended with the sales 
"by receivers to marlcetmen, appellants insist that the injimction 
should only prevent acts that restrain commerce up to that point. 
But intrastate acts will "be enjoined whenever necessary or appro- 
priate for the protection of interstate commerce against any 
restraint denounced "by the Act. Bedford Co. v. Stone Cutters 
Ass'n u"bi supra. Gompers v. Bucks Stove & Range Co. , 221 "J. S. 
418, 438. In this case the evidence fully sustains the decree," 

This decision was explained in Schechter Foultr}/ Corporation v. "United 
States . 55 S. Ct. 837, 850 (1935) by I.lr. Justice Hughes, in these words; 

"The intrastate acts of the conspirators were included in the in- 
junction because that wa.s found to be necessary for the protec- 
tion of interstate commerce against the attempted and illegal 
restraint. '• 

In the interstate commerce cases under the Anti-Trust Acts, the courts 
will refuse to act unless they find the existence of (l) commerce, (2) which 
is interstate, and (3) which is subjected to a direct restraint. The Courts 
are more likely to find that a transaction involving the movement of tangi- 
ble goods is interstate commerce than one which involves primarily intangi- 
ble elements. Ordinarily, the courts will decline to accept jurisdiction 
where the restraint takes place before interstate commerce has begun, or 
after it has come to an end. But in the labor cases, where ordinarily the 
strike or other disturbances takes place before the goods have commenced to 
move in interstate commerce, the Supreme Court has applied the criterion of 
intent. If it finds an intent to restrain commerce, the conspiracy or com- 
bination will be held -unlawful. But, as Chief Justice Hughes stated in the 
Schechter case, supra, at page 850, "Where that intent is absent, and the 
objectives are limited to intrastate activities, the fact that there may be 
an indirect effect upon interstate commerce does not subject the parties to 
the federal statute, notwithstanding its broad provisions. " However, the 
court has declared in the Lpcal 167 decision that it will enjoin intrastate 
activities if that becomes necessary to malce the prohibition of a restraint 
upon interstate commerce effective, 

II. Trade Associations and Excha.nges . 

(1) Maintenance of Traditional Channels of Distribution. 

8001 -14- 



In Eastern States Retail LiJinber Sealers Association v. United States , 
234 U. S. 600 (1914) the defendant association issued to its members, re- 
tail lumber dealers, blacklists containing the names of v/holesalers who 
sold directly to consumers. These activities were enjoined as a conspir- 
acy in violation of the Sherman Act, the Court saying at page 608-609, 
611-612, 614: 

"True it is that there is no agreement among the retailers to 
refrain from dealing with listed wholesalers, nor is there any 
penalty annexed for the failure so to do; but he is blind in- 
deed who does not see the purpose in the predetermined and per- 
iodical circulation of this report to put the ban upon whole- 
sale dealers whose names appear in the list of unfair dealers 
trying by methods obnoxious to the retail dealers to supply the 
trade which they regard as their own, 
• ••«•••••••■•••••••••••■•••••••• 

"But it is said that in order to show a combination or conspir- 
acy within the Sherman Act some agreement must be shown under 
which the concerted action is taken. It is elementary, however, 
that conspiracies are seldom capable of proof by direct testi- 
mony, and may be inferred from the things actually done; and 
when, as in this case, by concerted action the names of whole- 
salers who were reported as having made sales to consumers were 
periodically reported to the other members of the association, 
the conspiracy to accomplish that which was the natural conse- 
quence of such action may be readily inferred, 

"The circulation of these reports not only tends to directly 
restrain the freedon of coniaerce b^'' preventing the listed deal- 
ers from entering into competition with retailers, as was held 
by the district court, but it directly tends to prevent other 
retailers who have no personal grievances against him, and with 
whom he might trade, from so doing, they being deterred solely 
because of the influence of the report circulated among the 
members of the associations. 

"A retail dealer has the unquestioned right to stop dealing with 
a wholesaler for reasons sufficient to himself, and may do so 
because he thinlis such dealer is acting unfairly in trying to 
undermine his trade. 'But' , as was said by Mr, Justice Lurton, 
speaking for the court in Granada Lumber Co, v. Mississippi, 
217 U. S, 4-33, 54 L, ed, 826, 30 Sup. Ct. Rep. 535, 'when the 
plaintiffs in error combine and agree that no one of them will 
trade with any producer or wholesaler who shall sell to a con- 
sumer within the trade range of anj of them, quite another case 
is presented. An act harmless when done by one may become a 
public wrong when done by many acting in concert, for it then 
ta!ies the form of a conspiracy, and may be prohibited or pun- 
ished, if the result be hurtful to the public or to the indivi- 
dual against whom the concerted action is directed,'" 

(2) Exclusion from the market: Boycotts, 

In Monta;3ue fe Co , v. Lowry , 193 U. S. 38 (1904) an association of man- 
ufacturers and wholesale dealers in tile operated under rules whereby deal- 
ers agreed not to purchase from manufacturers who were not members of the 

8001 -15- 



association, and not to sell tile to non-members for less than "list" 
prices which were 50'fo higher than prices to members; while the manufac- 
turers a.greed not to sell to non-members at any price. The Court held 
that the association was a combination in restraint of trade under the 
Sherman Act, and said at page 45; 

" The agreement, therefore, restrained trade, for it nar- 
rovred the market for the sale of tile in California from the 
manufacturers and dealers therein in other states, so that 
they could only be sold to the members of the associations, 
and it enhanced prices to the non-member as already stated," 

In Standard Sanitary Manufact\xring Co . v. United States , 226 U. S, 
20 (1912) a license to manufacture enameled iron ware under certain 
patents was granted to 85^ of the manufacturers in the industry, under 
agreements whereby prices were to be fixed by a committee, rebates of 
royalties were to be given to those who observed the agreement, sales 
were to be made only to jobbers within the combination, and the jobbers, 
90Jo of which entered into the agreement, bound themselves to observe re- 
sale prices fixed by the manufacturers. The Court held that this arrange- 
ment exceeded privileges granted by the patent lav;s and was a combination 
in restraint of trade under the Sherman Act, 

Ramsay Co . v. Associated Bill Posters , 260 U. S. 501 (1923) was a suit 
for treble damages -under the Sherman Act. A great many bill posters in the 
United States and Canada entered into an arrangement to control the business. 
Only a single bill poster in each city was permitted to enter the combina- 
tion, and members of the association agreed to suppress competition among 
themselves. The association assisted members in buying out competitors; it 
fixed the schedule of prices to which members were to adhere; the members of 
the association boycotted advertisers who dealt with non-members. Further- 
more, the members agreed to accept business only from twelve licensed soli- 
citors (agents for advertisers), who were forbidden to deal with non-members 
in the localities in which members did business; and manufacturers were pur- 
suied, by threats of boycott, not to furnish posters to independent bill 
posters or to advertisers dealing with independents. The association in time 
became almost a monopoly. Plaintiffs were solicitors who had lost business 
when their licenses had for some reason been cancelled by the association. 
The Court declared at page 511: 

"The purpose of the combination here challenged is to destroy com- 
petition and secure a monopoly by limiting and restricting commerce 
in posters to channels dictated by the confederates, to exclude from 
such trade the undesired, including the plaintiffs, and to enrich the 
members by demanding non-competitive prices. The allegations clear- 
ly show the result has been as designed, the the statiite has "oeen vio- 
lated and plaintiffs' business has suffered." 

In Binderup v. Fathe Exchange, Inc ., supra, plaintiff alleged that defen- 
dant distributors sought to drive him out of business by refusing to sujpply 
him with films. At pages 311-312 the Court said: 

"***** It is difficult to imagine ho?/ interstate trade could be more 
effectively restrained than by suppressing it and that, in effect, 
as far as the exhibitor is concerned, is what the distributors in 

8001 -16- 



comlDination are charged with doing and intending to do. It is douht- 
less true that each of the distributors, acting separately, co-old 
have refused to furnish films to the exhibitor without becoming 
amenable to the provisions of the act, but here it is alleged ths-t 
they combined and conspired together to prevent him from leasing 
from any of them. The illegality consists, not in the separate ac- 
tion of each, but in the conspiracy and combination of all to pre- 
vent any of them from dealing with the exhibitor. ***The alleged 
purjDOse and direct effect of the combination and conspiracy was to 
put an end to these contracts and future business of the same char- 
acter and 'restrict, in that regard, the liberty of a trader to 
engage in business*. Loewe v, Lawlor, 208 U. S. 274, 293, and as 
a necessary corollary, to restrain interstate trade and commerce, in 
violation of the Anti-Trust Act," 

At common law, a trade boycott was lawful if conducted for a "legitimate" 
purpose. The purpose of maintaining the traditional channels of trade distri- 
bution, as in the Retail Lumber case, or of destroying the business of others 
in order to secui'e it for the boycotters, as in the Binderup case, wou.ld prob- 
abljr be considered "legitimate" by most state courts at common law, or even 
under state anti-trust laws. But the Supreme Court has forcefully condemned 
the boycott, except perhaps in certain labor cases, as a violation of the 
Sherman Law, 

(3) Price-Fixing, 

Abundant precedent exists in the Suprerae Court decisions concerning 
agreements to fix prices. The first such agreement which came before the court 
was construed in United States v. Trans-Iviissouri Freight Association , 166 
U. S. 290 (1897). In that case a committee, selected from the members of the 
defendant association, fixed rates to be cliarged by the member railroad com- 
panies. The court held that the Sherman Act made illegal all agreements 
which eliminated price competition by the competitors, and not merely unrea^ 
sonable restraints. It declared at p. 341; 

" The agreement on its face recites that it is entered into 
'for the pujrpose of mutual protection by establishing and maintain- 
ing reasonable rates, rules, and regulations on all freight traffic, 
both through and local,' To that end the association is formed and 
a body created which is to adopt rates, which, when agreed to, are 
to be the governing rates for all the companies, and a violation of 
which subjects the defaulting company to the payment of a penalty, 
and although the parties liave a right to withdraw from the agreement 
on giving thirty days' notice of a desire so to do, yet while in 
force and assuming it to be lived up to, there can be no doubt that 
its direct, immediate, and necessary effect is to put a restraint 
upon trade or commerce as described in the act." 

A later case with virtually identical facts and decision is United 
States V, Joint Traffic Association , 171 U. S. 505 (1898). 

In Addyston Pipe & Steel Co . v. United States , 175 U. S. 211 (1899), an 
association of manufacturers of iron pipe and other products formed a market- 
ing arrangement whereby most of the United States east of the Mississippi was 
divided up among the defendant members. Requests for bids for consumers to 
any member were sent to a committee of the association which fixed a price, 

8001 -17- 



/•" i 



and the contract was then awarded to that rr.era'ber who offered to pay the 
largest bonus into the pool. Certain cities were reserved to partic-ular 
memhers, and when a request for a hid came from any of these cities the 
association determined the price and the honus to he paid hy the hidder to 
whom the city was reserved. At public auctions menhers of the association 
entered hids Higher than that of the prearranged hidder. The Court held that 
the comhination was a conspiracy which violated the Sherman Act. There vras, 
of course, not the slightest douht that the association was able to fix 
prices. 

In Swift & Co . V. United State s, 196 U. S. 375 (1905) a dominant pro- 
portion of independent dealers in fresh meat throughout the United States 
combined not to bid against each other in the live stock markets of the dif- 
ferent states, to bid up prices for a few days in order to induce the cattle 
men to send their stock to the stockyards, to fix prices at which they would 
sell, and to maintain them by restricting shipments of meat. The Court 
found a conspiracy in restraint of trade under the Sherman Act, 

In Thomsen v. Cayser , 243 U. S. 66 (1917) foreign owners of steamship 
lines operating between New York and South Africa formed a combination to end 
rate competition between themselves. They adopted uniform rates from which 
they allowed a lOfo rebate to those who shipped exclusively on the vessels of 
the combination. They also employed "fighting ships" in order to drive compe- 
titors out of the trade. In a suit for damages by a shipper who complained of 
the unreasonable rates, the Supreme Court held the combination an unlawfriJ. 
restraint of trade, and said at page 87: 

" That the combination was intended to prevent the competition 
of the lines which formed it is testified* and it ten not be justi- 
fied by the conjectures offered by counsel; nor can we say that the 
success of the trade required a constraint upon shippers or the em- 
ployment of 'fighting ships' to kill off competing vessels which, 
tempted by the profits of the trade, used the free and unfixed 
courses of the seas, to paraphrase the language of counsel, to 
break in upon defendants' monopoly. And monopoly it was; shippers 
constrained by their necessities, competitors kept off by the 
'fighting ships'". 

In Board of Trade v. United States , 246 U. S. 231 (1918), the Supreme 
Court held that the Sherman Act was not violated by a rule of the Chicago 
Board of Trade which prohibited its members from purchasing during the period 
between the close of its "Call" session and the opening of the session on 
the next business day, any grain "to arrive" at a price other than the clos- 
ing bid at the Call. Justice Brandeis pointed out that the rule helped to 
improve market conditions in several respects, and said at p. 240; 

"As it applies to only a small part of the grain shipped to Chicago, 
and to that only during a part of the business day, and does not 
apply at all to grain shipped to other markets, the rule had no appre- 
ciable effect on general market prices; nor did it materially affect 
the total volume of grain coming to Chicago." 

In Federal Trade Commission v. Pacific States Paper Trade Association , 
273 U. S. 52 (1927) local paper trade associations fixed and enforced uni- 
form prices to be charged by members in intrastate sales. In malcing sales 
in other states, the salesmen of each member habitually quoted prices from 

8001 -18- 



the same lists which applied to local sales. The Court held that It was \u>. 
necessary to show a definite agreement to fix prices in order to find a vio- 
lation of the Sherman Act, and said at p, 62; 

" The fast that there is no established rule that the lists 
shall be followed in talcing orders for interstate shipments or that 
the quoting of lower prices is an infraction for which complaint may 
he made is not controlling in favor of respondents. An understanding , 
express or tacit, that the agreed prices will "be followed is ^ enough 
to constitute a transgression of the law. No provision to compel ad*» 
herence is necessary". 

The issue of price fixing as a violation of the Sherman Act is most 
strikingly presented "by two recent Supreme Court cases, Trenton Potteries Co , 
V. United States , 273 U. S. 392 (1927), and Appalachian Coals, Inc , v. United 
Sta tes . 288 U. S. 344 (1933). In the Trenton Potteries Case an agreement 
between companies manufacturing 82^ of the pottery produced in the United 
States to fix and maintain uniform prices was held to violate the Sherman Act 
whether the prices in themselves were reasonable or unreasonable. The lan- 
guage of Mr, Justice Stone at pp. 396-398 is the most clear-cut and positive 
expression of the judicial attitude toward price fixing agreements; 

"That only those restraints upon interstate commerce which are 
unreasonable are prohibited by the Sherman Law was the rule laid 
down by the opinions of this Court in the Standard Oil and Tobacco 
cases. But it does not follow that agreements to fix or maintain 
prices are reasonable restraints and therefore permitted by the 
statute, merely because the prices themselves are reasonable. 
Reasonableness is not a concept of definite and exchanging content. 
Its meaning necessarily varies in the different fields of the law, 
because it is used as a convenient summary of the dominant considera- 
tions which control in the application of legal doctrines. Our view 
of what is a reasonable restraint of commerce is controlled by the 
recognized purpose of the Sherman Lav? itself. Whether this type 
of restraint is reasonable or not must be judged in part at least in 
the light of its effect on competition, for whatever difference of 
opinion there may be among economists as to the social and economic 
desirability of an unrestrained competitive system, it can not be 
doubted that the Sherman Law and the judicial decisions interpreting 
it are based upon the assumption that the public interest is best 
protected from the evils of monopoly and price control by the maia- 
tenance of competition. 

"The aim and result of every price-fixing agreement, if effective, 
is the elimination of one form of competition. The power to fix 
prices, whether reasonably exercised or not, involves power to con^ 
trol the market and to fix arbitrary and unreasonable prices. The 
reasonable price fixed today may through economic and business changes 
become the unreasonable price of tomorrow. Once established, it may 
be maintained unchanged because of the absence of competition secured 
by the agreement for a price reasonable when fixed. Agreements which 

create such potential power may well be held to be in themselves -un- 
reasonable or unlawful restraints, without the necessity of minute 
inquiry whether a particular price is reasonable or unreasonable as 
fixed and witliout pXacin^ on tHe sovomment in enforcing ihe Sh£>nnaja 

8001 -19- 



Laxi the ■burden of ascertaining from day to day whether it has "be- 
corae -unreasonable through the mere variation of economic conditions. 
Moreover, in the absence of express legislation requiring it, we 
should hesitate to adopt a construction making the difference be- 
tween legal and illegal conduct in the field of business relations 
depend upon so uncertain a test as whether prices are reasonable - 
a determination which can be satisfactorily made only after a com- 
plete survey of our economic organization and a choice between 
rival philosophies," 

In the Appalachian Case competing 'producers of bituminous coal in the 
so-called Appalachian territory formed a corporation to act as their exclu- 
sive selling agent, with authority to determine the prices at which the coal 
mined by the individual member corporations was to be sold. The producers 
controlled 73fo of the commercial production in the immediate region where they 
mined, but only 12^ of the total production east of the Mississippi River, 
The Court refused to enjoin the combination as a violation of the Sherman 
Act, on the ground that the restraint upon competition was, in the circiijn- 
stances of the industry, reasonable. The Court emphasized that the question 
of the application of the statute must be determined by "a close and ob- 
jective scrutiny of particular conditions." It then described the grave 
economic conditions with which the industry was beset, because of over-ex- 
pansion and overcapitalization, diminishing consumption resulting from the 
use of substitute fuels, organized bu^-ing and detrimental marketing prac- 
tices. The Court emphasized the fact that the coal produced by members of 
the combination was sold in competitive markets, and that a vast volu:ie of 
other coal was actually and potentially available. In view of these condi- 
tions it found that the elimination of price competition between members of 
the corporation did not constitute a violation of the anti-trust laws, serf" 
ing, significantly, at p. 373; 

". . . , But the facts found do not establish, and the evidence 
fails to show, that any effect will be produced which in the cir- 
cumstances of this industry will be detrimental to fair competi- 
tion^ ~, ', " (Underscoring supplied) . 

The pronouncement of the Supreme Court in the Appalachian Case is not 
necessarily, or even reasonabljr, in conflict with its language in the Trenton- 
Potteries Case. The Court realized that in upholding the validity of an 
arrangement whereby price competition was eliminated throu-h the instrumen- 
tality of an exclusive sales agent it was departing from a uniform precedent 
of the past. See Continental Wall Paper Co . v. Voight & Sons Co ., 212 U. S. 
227 (1909), The decision was principally motivated, of course, by the dis- 
organized condition of the industry. Upon a close examination of the facts 
the Court decided that the partial elimination of competition exerted only a 
slight, and in the circumstances, a reasonable effect upon consumers. In 
even going thus far the Court cautiously instructed the District Court to re- 
tain jurisdiction of the cause, and gave it authority to "set aside the de- 
cree and take f-urther proceedings if futiire developments justify that course 
in the appropriate enforcement of the Anti-Trust Act." It is ijndoubtedl-' pos- 
sible to contend that the Ap-palachian Case involved an "agreement to fix 
prices" and that consequently the decision is in conflict with the positive 
language of the Trenton Potteries Case . But the agreement is one to fix 
prices only in the sense that the members of the combination eliminated 
price competition between themselves. The existence of other competition 
and sources of supply precluded any possibility of imposing upon consumers 
prices at a level which may be termed "artificial". The effect of the two 

8001 -20 - 



decisions, therefore, is a holding that an agreement to fix pricfes, T7here 
power exists to fix -unreasonaTjle prices , whether or not such power is exer- 
cised, is in violation of the Sherman Act, 

(4) Price Fixing hy Buyers . 

T'he Sherman Act was originally aimed at, and has ordinarily heen 
applied to prevent, restraints of trade accomplished through control of su'oply, 
so that those purchasing from the restraining group are injured. But the 
policy of the Anti-Trust laws requires that sellers have the benefit of com- 
petition among buyers, as well as that buyers have the benefit of competition 
among sellers. At an early period the Supreme Court recognized that certain 
combined activities of buyers resulted in restraint of trade. Thus in Swift 
& Co, V. United States , supra, in addition to the conspiracy among the meat 
packing companies, as sellers to raise prices, there was an agreement among 
the defendants not to bid against each other in the livestock markets of the 
different states, to bid up prices for a few days in order to induce cattle- 
men to send their stock to the stock yards, and thus to acquire the cattle 
upon arrival at a lower price. The decree of the court enjoined the acti- 
vities directed against sellers as well as those directed against buyers. 

Of Wash V. United States . 229 U. S. 373 (1913). 

In Live Poultry Dealers Protective Associatio n v. United States , 4 F, 
(2d) 840 (1924) more than half the wholesale dealers in live poultry in the 
City of New York organized the corporate defendant. The members of the asso- 
ciation appointed a committee of seven who daily negotiated with the receivers 
or commission men, and, in view of the prospective supply and demand, estab- 
lished a price for the day, which governed all purchases made by any member 
of the association. The defendant objected to the petition for an injunction 
on the ground that the agreement was not an unreasonable restraint of trade. 
To this Judge Hand said at p. 842: 

"As to the second point, it is somewhat surprising at this day to 
hear it suggested that a frank agreement to fix prices and prevent 
competition as regards them among one-half the buyers in a given 
market may be defended on the motion that the results are econ- 
omically desirable. We should have supposed that, if one thing were 
definitely settled, it was that the Sherman Act forbade all agree- 
ments preventing competition in price among a group of buyers, other- 
wise competitive, if they are numerous enough to affect the market. , " 

In order that a collective buying agreement constitute a violation of the 
Sherman Act, the effect upon the sellers' market must be both injurious and 
substantial. Thus in United States v. Piowaty & Sons , 251 P. 375 (1917) 
where members of the National Onion Association were charged with a conspir- 
acj'- directed against sellers the court dismissed the charges chiefly on the 
gromd that no shov/ing had been made as to the degree to which the buying 
market was dominated by the defendants, 

(5) Predatory and Destructive Tactics. 

In Story Parcliment Company v. Paterson Parcliment Paper Co . , 282 U. S, 
555 (1931) , the Supreme Court sustained an award of damages against three 
manufacturers of parchment paper which, in order to preserve their existing 

8001 -21- 



( 



( 



monopoly, cut prices and thus drove out a competitor who had just entered 
the field. This case merely recognizes the illegality of predatory price 
cutting which serves to maintain an existing unlawful monopoly. Cf . Thorn- 
sen V. Gayser, supra , 

(6) Price Discrimination and Customer Classification. 

The difficulty with discrimination between customers "by means of dis- 
counts arises from Section 2 of the Clayton Act, which forbids price discrim~ 
ination which substantially injures competitors. Until recently it seemed 
clear that this section interposed no objection to customer classification by 
manufacturers. In Mennen Company v. Federal Trade Commission , 288 Fed. 744 
(C. C, A. 2d, 1923), cert. den. 262 U. S. 759 (1923) an order by the Federal 
Trade Commission compelling a manufacturer to allow the same discount to co- 
operative buying agpncjes established by retailers as was allowed to whole- 
salers, was reversed. The decision of the Circuit Cotirt of Appeals relies 
heavily upon the right of a manufacturer to select his own customers, and rea- 
sons therefrom that he may allow a,ny discount to anj^ customer which he finds 
desirable. Upon an examination of the committee report and debates in Con- 
gress at the time of the passage of the Clayton Act, the court concluded that 
Section 2 of the Clayton Act forbade only such price discrimination as tended 
to suppress competition between the seller and those who competed with hin, 
and was not intended to make unlawful price discrimination which might hinder 
competition between one who purchased at the discriminatory price and those 
who were in competition with him. In National Biscuit Company v. Federal 
Trade Commission . 299 Fed, 733 (C. C. A. 2d, 1924), cert. den. 266 U. S, 613 
(1924) an order of the Federal Trade Commission compelling the Biscuit Com- 
pany to cease its practice of discriminating between chain stores and cooper- 
ative buying agencies of retail stores was likewise reversed. The National 
Biscuit Company employed a strr.ight quantity discount; however, in calculat- 
ing the discount it considered the chain store organization as a unit, but 
refused the combine the total purchases of the cooperative retail buying 
agency. The Circuit Court of Appeals declared that there was no discrimina^ 
tion, since the company granted a straight quantity discount, and the cooper- 
ative activities of the retailers were insufficient to alter the fact that 
the purchases were really made by individual retailers. The court also 
added, however, that if there was a discrimination, the Clayton Act was not 
applicable for the same reason that was found convincing in the Mennen Case , 

The ground upon which these two cases rely has been very substantially 
shaken by a recent decision of the Supreme Court, In Van Camp & Sons Co . v. 
American Can Company . 278 U. S. 245 (1929) petitioner brought a suit to en- 
join violations of Section 2 of the Clayton Act, Defendant company manufac- 
tured and sold tin cans on a straight quantity basis. It gave, however, a 
secret discount, of 20$5 below the announced standard prices, to a competitor 
of complainant. The charge was that this practice resT^Lted in substantially 
lessening competition in the line of interstate commerce in which complain- 
ant and his competitor were engaged. The Court ruled that the words of Sec- 
tion 2 of the Clayton Act "in any line of commerce" make unlawful any dis- 
crimination which substantially lessens competition not only between the 
seller and his competitors but also between the buyer and his competitors. 

The Van Cam p. Case thus enunciates a rule which seems diametrically op- 
posed to the principle upon which the decisions in the Mennen and the Rational 
Biscuit Cases rest. The Supreme Court "diGting-uisVK^d" the Mennen case on the 
strange ground that the daoisioa. shoiild not have relied upon the add of 

8001 -23- 



conmittee reports in determining the meaning of the Clayton Act because the 
statiite was unambiguous. Thus, by denying certiorari the Supreme Court ap- 
proved at least the result of the Mennan and national Biscuit Cases; and yet 
it is clear from the Van Camp Case that the Court refuses to adhere to rea^ 
soning upon which these cases are made to rest. 

It does not necessarily follow that the Van Camp decision is inconsis- 
tent with the Court's denial of certiorari in the two Federal Trade Commis- 
sion cases. But many commentators have seen such a conflict, and have con- 
cluded that the effect of the Van Camp decision is to call in question the 
legality of a sales policy based upon a functional classification. For in- 
stance, it has been said: 

"However, since the decision in the Van Camp case any given sales 
policy, except the quantity discount, which is expressly permitted 
irrespective of its effect on competition, is subject to judicial 
inquirj?- to determine whether or not it substantially lessens compe- 
tition in the competitive field of the wholesalers, retailers, 
chain stores, department stores, mail order houses and the like, 
Neither the business man nor the lawyer can guess on which side 
of the scale any court will cast the weight of its decision. If 
producers are driven to the sanctuary'' of the quantity discovint in 
order to escape this judicial control, then Section 2 of the Clay- 
ton Act is indeed a meddlesome bit of legislation operating in 
a manner never intended by Congress and to an end unsought by that 
hody, 

"A realistic point of view would recognize that some discrimination 
is inevitable in any sales policy, and, submitting the discriminar- 
tion, would emphasize the inquiry as to the effect on competition." 

McAlister. Sales Policies and Price Discrimination Under the Clayton Act 
(1932) 41 Yale L. J. 518, 534. 

A sales policy based upon a quantity discount is clearly beyond the sus- 
picion of illegality, since Section 2 of the Clayton Act expressly exempts 
discriminations based upon differences in quantity. But a different legal 
effect may attach to an agreement to employ a uniform discount. However, 
in United States v. Far Dressers' and Fur Dyers' Ass'n., Inc. , 5 F. (2d) 869 
(S. D. K. Y. 1925) where the rules of the association prohibited the allow- 
ance of discounts, the court declared that the provision was not an unrea^- 
sonable restraint of trade, in the following words; 

"The regulation that no member shall allow any customer any dis- 
counts refers only to unwarranted deductions from prices expressly 
agreed upon when the skins are received for dressing and dyeing, 
and, as is conceded by the government, arrived at in competition. 
This also is a reasonable requirement, to enable members to de- 
termine whether a customer pays his obligations without any unjust 
demands for deductions. 

"This provision does not prevent a member from making proper allowances, 
as, for instance, for damages to furs, or shortages in delivery, or 
other proper claims. The rules themselves provide that a copy of all 
credits and allowances made by members must be filed with the asso- 
ciation. They also provide for the arbitration of disputed claims for 
credits and allowances, and that all claims must be made within five 
8001 -23- 



aays alter delivery. As a matter of fact, claims amounting to 
$4,672,555.63 have teen allowed by members between the years 
1915 and 1923." 
51'. (2d) at page 871. 

The holding, however, is of doubtfu.1 value as a precedent, since the 
court went on to declare that the absence of interstate commerce made the 
Sherman Act inapplicable. Ems the validity of the uniform quantity dis- 
count is far from clear. 

However, it is doubtful whether sjiy court Tv-ovild conclude that Section 
2 of the Clayton Act makes loilawful all discounts not based on a straight 
quantity classification. The courts will undoubtedly recognize tliat a cer~ 
tain degree of discrimination is involved in every discount plan. The fujac- 
tional classification discriminates against department stores, chs,in stores, 
mail order houses, cooperative b-uying pools, and other large btiying agencies, 
and allows the independent retailer to compete effectively with his organ- 
ized or more efficient brethren. The straight quantity discount, on the 
other hand, favors the large buying agencies, and discriminates against 
wholesalers and independent retailers to whom they sell. Clearly, therefore, 
the courts will be forced to admit that a discount plan based upon a ftuic- 
tional classification is not an arbitrary or undesirable business practice. 
And various legal arguments present themselves by which the serious question 
raised b;^ the Van Camp Case may be disposed of. Where a chain store or a 
mail order house protests at the discriminatory discount allowed in favor of 
a wholesaler, it is possible to argue that the chain store, being a retailer, 
is not in the same line of commerce as the wholesaler, and hence the Clayton 
Act is not applicable. In Baron v. Goodyear Tire & Rubber Co ., 256 Fed. 571 
(S. D. ¥.. Y. 1919) an action for damages was based upon an alleged violation 
of Section 2 of the Clayton Act. Plaintiff, a dealer in automobile accessor- 
ies, charged that defendant tire companies discriminated in their prices by 
selling tires at lower prices to manufacturers of automobiles than to the 
accessory dealers. The Court held that this practice did not substantially 
lessen competition "in the same line of commerce" and said at page 574; 

II * * * There is apparently no competition between the manufacturers 
of tires and the dealers, nor is it alleged that any exists. The 
differentiation in price would not, therefore, substantially lessen 
competition." 

Purthermore, the words of the Clayton Act require that the lessening of corn- 
petition be substantial . In the Van Camp Case it appeared that the cost of 
the tin cans represented 33-1/3^0 of the cost of the product which the packing 
companies manufactured. In the ordinary retail business a manufacturer's 
price discrimination lessens competition between wholesalers and other buyers 
only with respect to the particular article to which the discrimination in 
price applies; and such discrimination wotild not be unlawful under the Clayton 
Act unless it appeared that the chain store or other large b-uyer dealt so 
extensively in the article under consideration, and the discrimination was so 
large, that competition was in fact substantially lessened. Finally, the 
Van Camp Case differs from the Federal Trade Commission cases in that the dis- 
count allowed by the American Can Company was secret and its course of con- 
duct was deceptive, 

(7) Control of Supply — Regulation of Labor Supply. 
8001 -24- 



I 



Comparatively few cases involving agreements to control production 
appear in the reports of decisions "by the United States Supreme Court, pro'b« 
ahly hecause such conspiracies were so ohviously illegal that, if they were 
formed, the agreement and execution of the conspiracy v;ere usually effected 
in secret. The first Supreme Court case involving production control was 
Addyston Pipe & Steel Cc. . v. United States, stipra , where, as has already 
"been descrihed, markets were divided up among the defendant memhers and cer~ 
tain cities were reserved to particular members; and the Court found little 
difficulty in concluding that these factors, in conjunction with the rest of 
the arrangement, constituted an illegal conspiracy in restraint of trade. 

Closely associated with agreements to curtail or allocate production are 
the cases dealing with monopolies in the sense of conspiracies to ohtain 
substantially complete control of the supply of a particular product. In 
United States v. Pa tten , 226 U. S. 525 (1913) it was held that a conspiracy 
to r\m a corner in cotton with the purpose of securing sole control of the 
available supply, in such fashion that the defendants would.be enabled to 
enhance prices, was in violation of the Sherman Act, The Court said at 
p. 543: 

"This control and the enhancement of the price were features of 
the conspiracy upon the attainment of which it is conceded its 
success depended. Upon the corner becoming effective, there 
could be no trading in the commodity save at the will of the 
conspirators and at such price as their interests might prompt 
them to exact. And so, the conspiracy was to reach and to bring 
within its dominating influence the entire cotton trade of the 
coTontry, 

"Bearing in mind tliat such was the nature, object, and scope of 
the conspiracy, we regard it as altogether plain that, by its 
necessary operation, it would directly and materially impede, 
and burden the due course of trade and commerce among the states, 
and therefore inflict upon the public the injuries which the 
anti-trust act is designed to prevent." 

The Supreme Court has condemned activities resulting in restriction of 
production although no express agreement for that purpose was involved. 
In American Column & Lumber Co. v. United States , infra, and in United States 
V. American Linseed Oil Co . , infra , which will be discussed in greater detail 
below, the Court held that "recommendations", advice and exhortations by the 
trade associations to its members directed toward restriction of output, 
which had, or probably had, the effect of inducing such restriction, amounted 
to an illegal conspiracy under the Sherman Act. The actions of members of the 
trade associations in those cases were said by the Court to be "concerted 
efforts" and hence -unlawful, 

A case in which the Court made an exception to its uniform rule con- 
demning production control is National Association of Window Class I.ianufac- 
turers v. United States , 253 U. S. 403 (1923). The manirfacturers of hand 
blown window glass entered into an arrangement whereby the available supply 
of highly trained labor, which was inadequate to meet the needs of all the 
manufa.cturers, was allocated to the members of the industry for a limited 
period of about four months in any one year. The Court pointed out that the 
hand blown industry had been almost forced out of existence by the newly 
develOT.ed machine industry, which produced window glass at half the cost of 

8001 -25- 



the handmade, and set the prices at wiilch all window glass was sold. The 
long hours in the handhlown industry and other adverse conditions had driven 
away many laborers, \intil the remainder, which consisted of only 2500 men, 
was insufficient to enahle the factories to run continuously during the working 
season. The arrangement to divide the lator force equally among the factories 
was an answer to these conditions. Mr. Justice Holmes, spealcing for the 
court, said, at pp. 412, 413; 

"The defendants contend with a good deal of force that it is ahsurd 
to speak of their arrangements as possihly having any effect upon com- 
merce among the States, when manufacturers of this kind ohviously are 
not able to do more than struggle to survive a little longer "before 
they disappear * * * It is enough that we see no corahination in un- 
reasonable restraint of trade in the arrangements made to meet the 
short supply of men." 

A case which j t is difficult to classify as control of production, biit 
which supplies an interesting contrast to the Window Glass Case , is Anderson 
V. Shipowners Association , 272 U. S. S59 (1925). The owners of substantially 
all the vessels under American registrj;- engaged in interstate and foreign 
commerce on the Pacific Coast entered into a combination to control the em- 
plojnnent of all seamen on their ships. The association which they formed 
conducted an employment office; every seaman desiring employment was compelled 
to register and await his turn, and could not secure work unless he presented 
a certificate issued by the association. When his turn came, he was assigned 
to a particular vessel, whether or not he wished to work on that vessel or 
for that voyage; and the officers of the vessel likewise had no choice in 
the matter. The association moreover fixed the wages which the seamen were 
to be paid. In an action brought by a seaman who was not registered with the 
association, the Supreme Court held that the combination was in violation of 
the Sherman Act, saying at Pages 354,365: 

"Talcing the allegations of the bill at their face value, as we must 
do in the absence of countervailing facts or explanations, it ap- 
pears tliat ea.ch shipowner and operator in this widespread combina- 
tion has surrendered his freedom of action in the matter of employ- 
ing seamen and agreed to abide by the will of the association. * * * 
These shipowners and operators having thus put themselves into a 
situation of restraint upon their freedom to carry on interstate 
and foreign commerce according to their own choice and discretion, 
it follows, as the case now stands, that the combination is in vio- 
lation of the Anti-Trust Act," 

The Window Glass case may safely be disregarded in view of its extremely 
unique facts. It did not appear in the Anderson ca.se that the scheme for 
regulation of employment was an answer to, or excused by, economic conditions. 
The inference ~may be drawn from these two cases, therefore, that economic 
adversity is a feature which may determine the reasonableness and hence the 
legality of a restriction on production. But the Supreme Court will scrutin- 
ize carefully any such restraint, and will declare it unlawful if it injuri- 
ously affects other parties in the economic process. 

(8) Price and Infonnation Piling. 

The views of the Supreme Court upon the legality of open price plans em- 
ployed by trade associations have been crystallized in four well Icnown 

8001 -26- 



decisions. In American Colurm & L\im'ber Co« v« United States , 257 U. S. 377 
(1921), the Court was asked to pass upon the legality of the activities pur- 
sued 'by an association of hardwood manufacturers. The members thereof, rep- 
resenting one-third of the hardwood output of the country, forrrarded to the 
central office of the association elaborate statistical reports of stock on 
hand, prod\iction, shipments, prices and names ox purchasers. The Secretary 
of the association mailed to each concern reports and sijmmaries of the sta«t- 
istical matter containing the views of each member as to market conditions 
and productio-n for the following few months, and expert analysis of the re- 
ports, together with suggestions as to future prices and production. Fre- 
quent meetings were attended by the members of the association at which mar*- 
ket conditions and production were discussed. The majority of the co\irt, 
speaking through Justice Clarke, said at page 411: 

"convinced, as we are, that the purpose and effect of the activi- 
ties of the 'Open Competition Plan' , here under discussion, were 
to restrict competition and thereby restrain interstate commerce 
in the manufacture and sale of hardwood lumber by concerted action 
in curtailing production and in increasing prices, we agree with 
the District Court that it constituted a combination and conspir- 
acy in restraint of interstate commerce within the meaning of the 
anti-trust act of 1890 (26 Stat. 209) and the decree of that court 
must be affirmed." 

The decision in this case was not unanimous, dissenting opinions being de- 
livered by Justices Holmes and Brandeis. The former contended that a combin- 
ation to distribute loiowledge, notwithstanding its tendency to equalize prices, 
was far from a combination in unreasonable restraint of trade. Justice 
Brandeis, with whom Justice UcKenna concurred, emphasized that there was no 
coercion, monopoly, division of territory or uniform prices; tha.t all infor- 
mation distributed under tlie plan was made public, and all reports and mar- 
ket letters were filed with the Department of Justice and with the Federal 
Trade Commission; that the large lumber dealers before the initiation of 
the plan were enabled to take advantage of the ignorance of the isolated pro- 
ducers; that editorial comment and free discussion were essential to rational 
competition and intelligent conduct of business; that the majority had mis- 
construed the evidence in concluding that there T;as any p-jrpose to curtail 
production, or that such restriction was in fact realized; that "there is 
nothing in the Sherman Law to indicate that Congress intended to condemn 
cooperative action in the exchange of information, merely because prophesy 
resulting from comment on the data collected may lead, for a period, to high 
market prices ***. The illegality of a combination under the Sherman Law 
lies not in its effect upon the price level, but in the coercion thereby 
effected, * * * The evidence in this case, far from establishing an illegal 
restraint of trade, presents, in my opinion, an instance of commendable ef- 
fort by concerns engaged in a chaotic industry to make possible its intelli- 
gent conduct under competitive conditions"; and that the court's condemna- 
tion of these activities was difficult to reconcile with its toleration 
under the Sherman Law of powerful industrial mergers and consolidations. 

In United States v. American Linseed Oil Co .. 262 U. S. 371 (1923) _ 
twelve manufacturers of linseed oil entered into an agreement, with provi- 
sions for a financial forfeiture in case of violation, for the maintenance 
of a bureau which gathered and distributed information among the members as 
to price lists. Members agreed to adhere to schedules of prices and terms 
which they furnished to the bureau and to give notices of departiire therefrom. 

8001 -27- 



They nere required to report all variations of price; name the prospective 
bu^rer; jDOint of shipment; exact price, terns and discounts; rrhether sales 
were made to johher, dealer or consumer; and to report all orders received; 
all such information heing treated as conf identia.1 and concealed from the 
buyers. The information thus collected was reported to the members through 
statistical surveys made by the bureau. Each member was required to fur- 
nish the bioreau, upon request, information \;ithrege,rd to any bu;^'-er and 
might require the bureau to secixre similar data from all members under 
specific conditions. The Biireau made industrious efforts to prevent sales 
at prices belovi? the scheduled lists. Honthly meetings were held, at which 
"matters pertaining to the industry" were discussed, A unanimous Court de~ 
cided tlici.t the scheme was an illegal combination under the Sherman Act, 
but the language of Justice HcReynolds, who spoJce for the Court, reveals 
that the consideration was the power which the combination was enabled to 
exercise over a competitive market; 

"With intimate knowledge of the affairs of other producers and ob- 
ligated as stated, but proclaiming themselves competitors, the 
subscribers went forth to deal with widely separated 8,nd unorgan- 
ized customers necessarily ignorant of the true conditions. Ob- 
viously they were not bona fide competitors; their claim in that 
regard is at war with common experience and hardls' compatible with 
fair dealing. 

"We are not called upon to say just when or how far competitors may 
reveal to each other the details of their affairs. In the absence 
of a purpose to monopolize or the compulsion tliat results from con- 
tract or agreement, the individual certainly may exercise great 
freedom; but concerted action through combination presents a wholly 
different problem and is forbidden when the necessary tendency is 
to destroy the kind of competition to which the public has long 
looked for protection. * * * Their manifest purpose was to defeat 
the Sherman Act without subjecting themselves to its penalties." 

In the Maple Flooring Manufacturers Association v. United States 268 U.S. 
563 (1925), the defendant s-ssociation distributed among its members informa- 
tion as to the average cost of production, which was based upon reports of 
individual costs of raw material and of operation. It also compiled and dis- 
tributed information concerning freight rates from basing points to various 
markets enabling members to quote delivered prices. Members reported informal 
tion as to the quantity and tjTpe of flooring sold, dates of sales and price 
received, average freight rates, commissions, stock on hand and unfilled 
orders, monthly production and new orders; tliis information, which concerned 
only past transactions and did not include names of purchasers or current 
prices, was summarized by the association and reported back to the members, 
without revealing the identity of members in connection with specific infor- 
mation. The reports prepared by the association were given wide publication 
through trade journals, and were communicated to the Department of Commerce, 
Monthly meetings were held by the members of the association at which "prob- 
lems of the industry" were discussed, with no evidence of discussion or 
agreement upon prices. The majority of the Court decided that in these ac- 
tivities no violation of the Sherman Act was involved. The Hardwood and 
Linseed Oil cases were distinguished on the ground that the facts in those 
cases revealed "concerted efforts" of the defendants to curtail production 
and raise prices. But this distinction is by no means convincing, particular- 
ly because the language of the Court approving t]ie activities in the 

8001 -28- 



( 



present case is virt-ually identical in reasoning; and point of view with 
the dissenting opinions in the Hardxrood case: 

"E::cliange of price quotations of market commodities tends to pro- 
duce imifornity of prices in the markets of the world. Knowledge 
of the supplies of availahle merchandise tends to prevent overpro- 
duction and to avoid the economic disturhances produced "by busi- 
ness crises resiilting from overproduction. But the natural ef- 
fect of the aco^uisition of wider and more scientific knowledge of 
"business conditions, on the minds of the individuals engaged in 
comiTierce, and its consequent effect in stabilizing production and 
prices, can hardly he deemed a restraint of commerce or if so it 
cannot, we think, he said to "be an unreasonable restraint, or in 
any respect unlawful. * * * General laiowledge that there is an ac- 
cumulation of surplus of any market commodit3^ would undoubtedly 
tend to diminish production, but the dissemination of that informa- 
tion can not in itself be said to be restraint upon commerce in any 
legal sense. The manufacturer is free to produce, but prudence and 
business foresight based on that l-mowledge influence free choice in 
favor of more limited production. Restraint upon free competition 
begins when improper use is made of tlriat information through any 
concerted action which operates to restrain the freedom of action 
of those who bu;;'' and sell. * * * Persons who unite in gathering and 
disserainating information in trade journals and statistical reports 
on industry; who gather and publish statistics as to the amount of 
production of coranodities in interstate cororaerce, and who rej^ort 
market prices, t.ire not engaged in unlawful conspiracies in restraint 
of trade merely because the ultimate result of their efforts may be 
to stabilize prices or limit production through a better understanding 
of economic lav7S and a more general ability to conform to them, for 
the simple reason that the Sherman Law neither repeals economic laws 
nor prohibits the gathering and dissemination of information. "^ 

The fourth in a series of cases involving open prices filing which came 
before the Supreme Court was Cement Manufact'orers Protective Association v. 
United States , 268 U. S. 583 (1925). In this case the Court approved the 
cooperation of cement manufacturers in gathering and exchanging information 
concerning production and jjrices in so called "specific job" contracts, gen- 
eral statistical information, and information as to transportation costs from 
various points of production. A specific job contract was a contract which 
obligated the manufacturer to deliver in the future to a contractor at a max- 
imum price the cement required to complete a specified construction project, 
but allowing the purchaser the advantage of any declining market price, and 
not obligating him to take the cement if he failed to secure the bid or if 
for any other reason he did not desire deliver"/ under the contract. The de- 
tails of such contracts, including names of contractors and specified construc- 
tion projects involved, were reported by the members of the- association, 
which employed agents to visit jobs, and reported back to the members full 
information regarding the contracts and the use of the cement shipped under 
them. These activities were pursued in order to prevent contractors in a peri- 
od of rising prices from obtaining more cement than they were entitled to 
by entering into contracts with several manufacturers for the same specific 
job, and this puri^ose was considered sufficient by the Court to excuse the 
reporting of detailed information, including names of buyers and sellers, 
and what amounted to espionage by the association. In addition to the 

8001 -29- 



infoiTiation supplied on specific job contracts, the members rendered monthly 
detailed reports concerning delinquent accounts of their customers, and re- 
ports of production, shipments and stock on hamd, which the association con- 
piled and distributed, thus inforrainj^' each member of the available siTOpl;- of 
cement and liy whom it was held. Meetings were held at which minor sub'jects 
were discussed but such dangerous issues as current prices, production, or 
market conditions were carefully avoided. The association also distributed 
to its members freight books listing rates from basing points to all markets, 
Tlie Court found that the freight rate book enabled the manufacturer to calcu- 
late a delivered price on the basis of his own mill price to points in 
neighboring territor;-, and to determine the freight differentiation which he 
must offset in his mill price in order to compete with other manufactiu-ers 
in other territory. The Court refused to condemn the distribution of credit 
information on the ground that no evidence a;ppeared of aiiy unified conduct 
with res'Tect to the persons to whom or conditions on which credit shotild be 
extended, and that the infomation merely informed the individual judgment of 
the manufacturers. The compilation and distribution of the general statisti- 
cal information was approved on reasoning similar to that in the Maple Floor- 
ing case; the Court declared that the tendency to bring about uniforr.iit;- in 
price, apart from any agreement or unders tending for maintaining price, was 
insufficient to constitute a violation of the anti-trust law. The traditional 
theory that uniformity of price is evidence of price manipulation, was rebut- 
ted by the opinions of economists to the effect that uniformity of price was 
a sign of free and active competition, "in the case of a standardized prodxict 
sold v/holesale to fully informed professional buyers," 

In attempting to arrive at sjn estimate of the Supreme Court's attitude 
toward open price filing, one must emphasize that the M aple Floorii\g and 
Cement Cases are far more significant than the two earlier decisions. Certain 
commentators have, in fact, concluded that the latter two cases effectually 
overr-aled the former. Without accepting this contention, it is nevertheless 
true that the distinctions advanced by the Supreme Court itself, and further 
discussed b;' commentators, are rather tenuous in nature. The Court pointed 
out in the Maple Flooring Case that the reports of sales and prices were sole- 
ly concerned with "past and closed transactions", as contrasted with the facts 
in the Hardwood and Linseed Cases . Again, the statistics reported by the 
Maple Flooring Association did not identify bu^/ers and sellers, as was true 
in the Hardwood Case . It is true that such identification was present in the 
Cement Case with' regard to specific job contracts, but was excused in view of 
the Association's cor.imendable pm-oose in preventing fraud by contractors. 
Furthermore, the data collected by the trade associations in the latter two 
cases was not treated as confidential, in contrast to the policy pursued by 
the Linseed combination. The distinction, however, is of questionable sotuid- 
ness, for the publicity afforded by the Hardwood Association was much wider 
than that which the Court found, by inference, in the Cement Case . There was, 
moreover, no evidence in either the Ilaple Plooring or the Cement Case of any 
obligation or understanding on the part of the members of the Association to 
be guided in their business policies by the information supplied throv-gh the 
Association, This distinction, however, is likewise not especially convincing, 
'for the Court found such an vjiderstandi:ig in the Hardwood Case althoti^h there 
was no tuiiformity of prices, and refused to draw the sane inference in the 
Cement Case, where such xinifomity existed. In the Linseed Case the Court was 
perhaps more justified in finding "concerted efforts" ia the fact that the 
combination was composed of a small number of powerful concerns, and that their 
obedience was compelled by means of forfeitures and penalties. And it is 

8001 -scU 



possilsle to isolate the Hardt^ood Case , when it is considered that the Coxirt 
stressed the "comments" and "recommendations" nith regard to production and 
prices tY an official of the Association, In the Ll aple Flooring and Genent 
Cases the Cotirt emphasized that at the periodical meetings "by memhers of the 
Association there rras no evidence that prices xiere discussed. And the 
Supreme Court has distinguished "between reports of "past" sales and "current" 
or "future" transactions. Finally, the Court erqjressed disapproval of the 
industrious efforts of the Bureau in the Linseed Case to secure compliance 
with pul)lished prices. 

It nay he admitted that the attitude of the Supreme Court towards the 
reporting of trade statistics underwent a substantial change "betrreen the form- 
er tuo and the latter two decisions which we have discussed, and that the 
distinctions sought to be established between the cases are in large part 
tenuous and without substantial basis. But it is impossible not to conclude 
that a price filing scheme which is sought to be used as a device for the 
raising of prices will be considered by the Supreme Court as a viola,tion of 
the Sherman Act. 

( 9 ) Cooperative Credit Activities . 

The growth of modern business has created a need for the distribution of 
accurate credit information, Mercantile credit organizations, such as Dun 
and Bradstreet, afforded the first answer to this need. In the activities of 
these companies no problem of the anti-trast laws arises. That problem, how- 
ever, appears when the credit information is distributed by trade associations. 
It seems well established that the mere distribution of credit information 
by a trade association, without evidence of concerted action or agreements to 
act on such information, does not offend the anti-trust laws. In Cement 
Manirfacturers' Protective Association v. United States , 258 U. S, 588 (1925), 
the members of the association rendered monthly reports of all accounts of 
customers two months or more overdue, giving the name and address of the de- 
linquent deaJer, the amount of the overdue account in ledger balance, accounts 
in hands of attorneys for collection, etc, Ttiere were also reports showing 
the general total of delinquent accounts in comparison with those for the last 
twelve months, reports of payments of accounts placed in the hands of at- 
torneys, and a form, seldom used, for answering inquiries as to whether a 
particular name had appeared in the monthly report. The court refused to hold 
that the activities of the association in this respect constituted a violation 
of the anti-trust laws. Justice Stone said at p. 599: 

"Hiere were never any comments concerning names appearing on 
the list of delinquent debtors. The Government neither charged 
nor proved that there was any agreement with respect to the use 
of this information, or with respect to the persons to whom or 
conditions under which credit should be extended. Tiie evidence 
falls short of establishing an.y understanding on the basis of 
which credit was to be extended to customers or that any cooper- 
ation resulted from the distribution of this information, or 
that there were any consequences from it other than such as 
•■'ould naturally ensue from the exercise of the individual judg- 
ment of manufacturers in determining, on the basis of available 
information, whether to extend credit or to require cash or 
secr.rity from any given customer." (italics supplied) 



8001 -31- 



Tlie holding of the court in this resi^ect is thus inconclusive, Tlie 
majority of the court merely said that the distrihution of credit infomation 
was a legal activity, and also that no agreement existed, TJliether the 
presence of such an agreement vovid have rendered the activities of the asso- 
ciation illegal the court did not say. 

The holding of the court in the Cement decision v;as not without iirecedent 
for in that case Justice Stone pointed out that "in Swift & Co . v. United 
States , 196 U.S. 375, 395, this court approved a decree which provided that 
defendants should not be restrained 'from establishing and maintaining rules 
for the giving of credit to dealers where such rules in good f.aith are calcu- 
lated solely to protect the defendants against dishonest or irresponsible 
dealers, »" 

TOiile it seens definitely established, therefore, that the mere dissemi- 
nation of credit information involves no conflict with the Sherman lav?, it is 
not possible to say with the same degree of assurance that an agreement not 
to extend further credit to delinquent debtors is also lawful. The available 
precedent is slight. In United States v. Southern California TTnolesale 
Grocers Association, 7 7 (2d) 944, (S. D. Cal, 1925) the defendant association 
distributed among its members lists of names of retailers who had been report- 
ed as financially irresponsible or who had failed to pay their bills, Tlie 
court upheld the validity of an agreement to refuse further credit to such 
debtors, saying at p, 948: 

"There was the understanding among the members in the association 
that su.ch persons should be accepted as c3-sh customers only. It 
is not shown that such classification so indicated, as the result 
of the name appearing upon such a list, was necessarily obligatory 
upon the wholesalers, Irit the prime purpose of the list was to 
furnish information to the members regarding the responsibility of 
patrons, so that loss might be saved on bad accoun.ts, I do not 
believe that the issuance of these lists, nor the understanding 
connected therewith, established a violation of the Anti-Trust Law, 
anj'- more than did the lists referred to in the decision in the 
case of the Cement I.ianufacturers' Protective Association v, U. S, 
hereinbefore referred to," 

In United States v. Fur Dressers' and Far Dyers' Association , 5 F. (2d) 
869 (S. D, II, Y, 1925) the by-laws ]provided that no discounts should be allowe' 
no deliveries were to be made to buyers named upon a list of overdtie accounts, 
except for cash. Members were required to give a $500 bond for the faithful 
performance of the by-laws, Tlie court emphasized the desirability of these 
rules in viev/ of the former chaotic credit conditions in the industry, and 
sustained the validity of the associa.tion a,ctivities. However, the holding 
is of doubtful value as a precedent, since the court went on to saj'" that the 
?ibsence of interstate commerce made the Sherman Act inaiipli cable. 

Although the invalidity of an agreement to witiiliold credit has yet to be 
established by a strong line of precedent, there is no doubt that an agreement 
to boycott or to refuse entirel;r to deal with a debtor is unlawful. In 
Dorchy v, Kansas , 272 U. S, 306 (1925) a labor union called a strike to comioel 
a company to pay a disputed cle,im which was long overdue, Mr, Justice 
Brandeis said, at p, 311 ; 

8001 -32- 



"The right to carr;^ on "Dusiness — "be it called liberty or 
property — has value. To interfere with this right "jithout 
just cause is ■cuilavrf'ul. The fact that the injury was in- 
flicted "by a strike is sometimes a justification. Btit a 
strike may "be illegal because of its purpose, however order- 
ly the manner in which it is conducted. To collect a stale 
claim due to a fellow menber of the union who was formerly 
employed in the "business is not a permissihle purjDose. In 
the absence of a valid agreement to the contrary, each party 
to a disputed cla.im maj' insist that it be determined only 
"by a court o Compare C-uarant" Trust Go . v. G-reen Cove R. H. . 
139 U. S. 137, 143; Red Cross Line v. Atlantic Pruit Co .. 
264- U, S. 109, To enforce pajnnent by a strike is clearly 
coercion, ..." 

In Brescia Construction Co, v. Stone ilasons Contractors' Associg.tioii, 
195 App. Biv. 647, 137 ToY.S. 77 (1921) a labor boycott was held illegal uiJ.er 
similar circumstances, and the court declared at p. 554 of 195 App, Div,: 

"It seems to us clear that the provisions of the agreement 
between the defendants which obligated^ , . the members of the 
defendant unions not to do any work 'for or imder anj con- 
tractor, builder, coriporation or persons owing money to any 
member of the Stone Ilasons Contractors' Association, for 
work performed or materials furnished, ' are illegal and 
against public policy. ... Aiid in case any debt is claimed 
to be due to any member of the Contractors' Association the 
agreement contem^Dlates that the labor unions will assist in 
collecting by arbitrary and oppressive measures claims thus 
asserted, , , ,In other words, instead of according alleged 
debtors the right to have their disputes determined by the 
legal tribunals established for that purpose, the defendant 
associations have constituted themselves the judges of the 
facts and the law and the agencies for enforcing their 
unauthorized decrees," 

Two recent Supreme Court cases have done much to clarify the law relating 
to cooperative credit activities. In Parai.iount Famous Lasky Cori.-) oration v. 
United States , 282 U. S. 30 (1930) ten corporations which manufactured motion 
picture films and distributed them to exJiibitors throughout the countrj'-, con- 
trolling 60^ of the business, agreed to contract with distributors for future 
exiiibition of films only by a standard form of contract which provided that 
disputes and claims under the contract be submitted to a board of ai'bitration 
whose award was to be accepted as conclusive. Upon failure of the e:\hibitor 
to submit to arbitration or to pay the award, the distributor with whom he 
had contracted, and all others having contracts with that ejdiibitor, were 
required to demand security'' from him on each of their contracts. Those to 
whom he failed to pay security were to suspend service under their contracts 
until he paid it or complied with the award, and after a contract had been 
suspended for ten days the distributor might cancel it, Mr, Justice 
Kc Re'-nolds, spealring for the court, concluded that the agreement constitxited 
an unreasonable restraint of trade within the Slaerman Act, asstiming, apparent- 
ly, that the case was so clear as to maize e:-:tended analysis or explanation 
unnecessary. 



8001 -33- 



In United States v. First National Pictures, Inc ., 282 U. S. 44 (1930) 
distributors of 98fj of the motion picture films produced in the countr;'- com- 
bined in a uniform credit arrangement. Fnenever a theatre changed hands, 
the distributors, through local Film Boards, inquired into the credit and 
business arrangements of the new proprietor, who was asked to assume film 
contracts existing between the former owner and any of the distributors. ITo 
contract for the deliver^'- of pictures could be made by any of the distributors 
with a new proprietor who had not ass"iimed such outstanding contracts unless 
he furnished security. Ihe arrangement was adopted to prevent the evasion of 
film contracts by exhibitors who transferred their theatres. Holding that 
the uniform credit system was in violation of the Sherman Act, the covu-t said 
at p. 54: 

"The obvious purpose of the arrangement is to restrict the liberts^ 
of those who have representatives on the Film Boards and secxire 
their concerted action for the purpose of coercing purchasers of 
theatres bj-- excluding them from the opportunity to deal in a free 
and untrammelled market." 

The effect of these two decisions is to condemn uniform credit or security 
arrangements which operate as boycotts. The conclusion suggested by the 
available precedent is somewhat as follows: The more distribution of credit 
information, with complete freedom of initiative on the part of cooperating 
members, is lawful. An agreement not to extend further credit to delinquent 
debtors is probably lawful, unless under the circumstances of the industry 
the refusal prevents the debtor from obtaining goods and involves an improper 
coercion, Axi agreement to refuse to deal with delinquent debtors or debtors 
who fail to provide security clearly involves a violation of the Slierman Law. 

(lO) Resale Price Maintenance 

In a series of cases decided by the Supreme Court, the law with respect 
to resale price maintenance has become fairly well established. Hie leading 
early case on the subject was Dr. Miles Medical Co. v. Park & Sons Co . 220 
U. S. 373 (1911). Petitioner, a manufacturer of medicines prepared by secret 
formulas, required every wholesaler and retailer through whom its prodiicts 
were distributed to sign agreements to sell at prices specified by the manu- 
facturer. Defendant, a wholesaler dealing in drugs, secured a supply of . 
petitioner's medicines through wholesalers at prices which violated the agree- 
ment exacted by petitioner, and sold the medicines at similar "cut prices". 
Petitioner sought to enjoin the defendant from inducing its distributors to 
violate their contracts and from selling its medicines at less than the estab- 
lished resale prices. The Supreme Court refused the injunction, on the grcxmd 
that the policy pursued by the petitioner was in violation of the Sherman Act. 
Mr, Justice Hughes, spealcing for the Court, said at pp. 408-409: 

"If there be an advantage to the manufacturer in the maintenance 
of fixed retail prices, the question remains whether it is one 
which he is entitled to secure by agreements restricting the 
freedom of trade on the part of dealers who own what they sell. 
As to this, the complainant can fare no better with its plan of 
identical contracts than could the dealers themselves if they 
formed a combination and endeavored to establish the same re- 
strictions, and thus to achieve the same result, by agreement 
with each other. * * * 

8001 -34- 



"But agreements or comlDinations 'between dealers, having for 
their sole purpose the destruction of competition and the 
fixing of prices, are injurious to the public interest and 
void, * * * 

II * * rj^iiQ coinpls.inant having sold its product at prices 
satisfactor:»- to itself, the public is entitled to whatever 
advajitage nojy he derived from competition in the subsequent 
traffic." 

The nest case which cane before the Court involving a resale price main- 
tenance scheme was Bauer v. Q'Domiell , 229 U.S.I (1913). In this cace the 
article the price of which the petitioner so"ught to fix, by means of a notice 
on the pa,cl:ac'?;e wa,s patented; but the Court declared that once the maaiufacturer 
had parted with title to a product manufactured under patents, the privilege 
conferred by the patent laws did not embrace the right to fix the price at 
which the product could be sold. In Boston Store v, ALiericoJi Granatjhone Co. , 
246 U»S«8, (1913) the Granaj^hone Conpmiy manufactured a patented article, and 
reqtiired from distributors contracts to maintain resale prices. It broxight 
a suit to enjoin violations of the contract by defendant, a distribiitor. 
Chief Justice White, spcalring for the Court said at page 25: 

"Appl3''ing the cases thus reviewed there can be no doubt that 
the alleged price-fixing contract disclosed in the certificate 
was contrar;^ to the general law and void. There can be equally 
no doubt that the power to malce it in derogation of the general 
law was not within the monopoly conferred by the patent law, end 
that the attempt to enforce its apparent obligations under the 
gu.ise of a patent infringement was not embraced within the reme- 
dies given for the protection of the rights which the patent law 
conferred." 

United States v. Colgate & Co., 250 U.S. 300 (1919) arose on an indict- 
ment for violation of the Sherman Act, The indictment, as construed Vj the 
District Court, did not allege that defendant had made contracts with its 
distributors, but that it had merely indicated the prices at which it wished 
its products to be sold, and refused to sell to those distributors who did 
not charge such prices until they gave assurpjices of compliance with defend- 
ant's policy. The Supreme Court distinguished the Dr, Miles case on the 
ground that here the manufacturer had made no contracts for price maintenance, 
and said at p, 307: 

"In the absence of any jjurjjose to create or maintain a 
monopoly, the act does not restrict the long- recognized right 
of trader or manufacturer engaged in an entirely private busi- 
ness, freely to exercise his own independent discretion as to 
parties with whom he will deal. And, of course, he may announce 
in advance the circumstances under which he will refuse to 
sell, ** " 

United States v. A. Schrader's Son, In c., 252 U.S. 85 (1920) also involv- 
ed an indictment under the Shermaii Act, which alleged, however, the execution 
of actual contracts for price maintenance. The Court, through Justice 
I.IcReynolds, explained that the C olgate Case was not intended to overrule the 
Dr, I.Iiles Medicine Cas e, and said, at p, 99: 

8001 -35- 



"It seens ^mnecessai-y to dxvell upon the o'ovious difference 
"betueen the sitimtion presented when a manufacturer nerely indi- 
cates his TTishea concerning prices and declines further dealings 
uith all T7ho fai 1 to ohserve them and one vjhere he enters into 
agreements - whether e^qiress or inplicd from a course of dealing 
or other circuiiistaiices - with all cxistoners throughoiit the 
different states, which undertake to tind then to ohserve fixed 
resale prices. In the first, the manufacturer "but exercises 
his independent discretion concerning his customers, and there 
is no contract or conoination which imposes aia;* limitation on 
the purchaser. In the second, the parties are conhined throiigh 
agreements designed to tsJce away dealers' control of their own 
affairs, and there^by destroy'' competition and restrain the free 
and ne.ttiral flow of trade a:jongst the states." 

Federal Trade Commission v. Beechnut Packing Co. , 257 U.S. 441 (1922) was 
the first case to cone "before the Court in which resale price maintenance was 
alleged to he an uiifair method of competition within the Federal Trade Comiiis- 
sion Act, The Beechnut Company did not uake formal contracts with its dis- 
tributors. It announced, hov/ever, that it would refuse to sell to any dealer 
who failed to maintain ^^rices indicated hy the company. It urged dealers to 
report cases of violation, and instructed its salesmen to the same effect. 
The company maintained lists of "undesirahle" dealers, who had "been reported 
as selling "below the indicated prices, and removed the names from the list 
onljr when the dealer gave "satisfactory asstirances" that it wDuld comply with 
the company's wishes. In order to enforce its policy the company employed a 
system of sym"bols or key nun"bers "by which any loackage sold at cut prices could 
be traced back to the offender. The Court found that the activities pursued 
'by the Beeclinut Company amounted to a violation of the Slierman Act, since the 
elaborate methods were equivalent to "agreements express or implied", Mr, 
Justice Daj'-, spealcing for the Court, said at pp. 454^-455: 

"* * * * The facts found show that the Beech-nut system goes 
far beyond the simple refusal to sell goods to persons who 
will not sell at stated prices, which in the Colgate Case 
was held to be within the legal right of the producer, 

"The system here disclosed necessarily constitutes a scheme 
which restrains the natura^l flow of commerce and the free- 
dom of competition in the channels of interstate trade which 
it ha,s been the purpose of all the anti-trust acts to maintain. 
In its -oractical operation it necessarily constrains the trade, 
if they would have the products of the Beech- IJut Company, to 
maintain the prices ' s'oggested' by it. ******" 
"* * * * Hor is the inference overcome by the conclusion 
stated in the Commission's findings that the merchajidising 
conduct of the company does not constitute a contract or 
contracts whereby resale prices are fixed, maintained, or 
enforced. The specific facts found show suppression of the 
freedom of competition by methods in whicli the comiDany se- 
cures the cooperation of its distributors and customers, 
which are quite as effectual as agreements expressed or 
implied intended to accomplish the sane pur^oose. * * * * " 

Tiie Court declared, however, that the order of the Commission forbidding 
any form of price maintenance was too broad. It directed that the conpanj- be 

8001 -36- 



enjoined from its policy of price maintenance (l) ty the practice of report- 
ing the nsnes of recalcitrant dealers; (2) by enrolling dealers on "rjide- 
sirable" lists until assuraaices \7ere given to maintain the designated price; 
(S) by employing salesmen to report such undesirable dealers; (4) by 
utilizing nimbers and sjTnbols in order to detect offenders (5) "by xitilizing 
any other ecuivalent cooperative means of accomplishing the mainteno^nce of 
prices fixed by the company", in United States v. General Electric Co. , 272 
U.S. 476 (1926) the Supreme Court refused to find a violation of the anti- 
trust act in the price maintenance scheme of the General Electric Compsjiy, 
which distributed its patented articles through 21,000 agents. The holding 
of the Court appears at page 488: 

"We are of opinion, therefore, that there is nothing as a 
matter of principle, or in the authorities, which requires 
us to hold that genuine contracts of agency like those be- 
fore us, however comprehensive as a me.ss or whole in their 
effect, are violations of the Aiiti-Trust Act, The owner of 
an article, patented or otherwise, is not violating the 
common law, or the Anti-Trust law, by seeking to dispose of 
his article directly to the consumer and fixing the price by ■ 
which his agents transfer the title from him directly to 
such consimer. ****!! 

The doctrines enunciated by the Supreme Court with respect to resale 
price maintenance have suffered severe criticism. The distinction which the 
Court has drawn between illegal contracts and a course of dealing, which, it 
is asserted, in reality is equivalent to the execution of a contract, has 
been attached as arbitrary and without factiial foundation. And, it is charged, 
the result of the Beechnut Case is to permit a system of price maintenance 
but to forbid the use of modern business methods to mal:e it effective, 
Henderson, Tlie Federal Trade Commission (1924) 299. liore important, it seems 
clear that the rules and distinctions established by the Court have no basis 
in economic realities and ignore the business purposes for which resale price 
maintenance is employed, A discussion of the economic reasons and justifica- 
tions for price maintenance is, it is thought, unnecessarj'- at this point, for 
the Supreme Court will in all probability adhere to its rules and continue to 
ignore business and economic considerations. Some of these considerations 
have been pointed out in dissenting opinions (see opinion of Justice Holmes 
in the Dr. Uiles I.Iedical Case , supra), but these objections have remained 
ineffect-ual. Subsequent to the Beechnut Case , the Court has refused to review 
the decisions of lower courts in several instances. 

(See Butterick Co. v. Federal Trade Commission , 267 U.S. 602 (1925) j 
Hills Bros, v. Federal Trade Commission . 270 U.S. 662 (1926); 
Harriett Hubbard Ayer, Inc. v. Federal Trade Commission , 273 U.S. 759, (1927). 

The unlaiTful restraint upon trade, according to the view of the Court, 
consists in the agreements made between the manufacturer aind distributors. 
TOien a number of manufacturers agree to employ a resale price maintensaxce 
scheme, a further and distinct agreement may be found between the maai-afactu.rers, 
which likewise appears to be an unlawful agreement within the Anti-Trust Laws. 

(11) Tying Clauses. Full Line Forcing and Exclusive Dealing . 

Prior to the passage of the Clayton Act, it was not clear that tying 
clauses were illegal under the Shermaii Act. In Henry v. A. B. Dick Co. , 224 
U.S. 1 (1912), the Supreme Court held that the manufacturer of a patented 

8001 -37- 



article could "license" the p-urchaser to use it on condition that he use 
with it only unpatented supplies made by the same manufacturer. In United 
States V. Winslow , 227 U. S. 202 (1913), the Court upheld as not in viola- 
tion of the Sherman Act the tying contracts of the United Shoe Machinery 
Co, which hound lessees of patented machines to use with them certain un- 
patented machinery made hy a lessor. 

Section 3 of the Clayton Act made illegal all tying clauses which "sub- 
stantially lessen competition". In Motion Picture Patents Co. v. Universal 
Film Co., 243 U. S. 502 (1917), the Court relied partly upon Section 3 of 
the Clayton Act, but in addition erpressly overruled the Dick case, and de- 
clared that the tying clause there in question was illegal under the Sher- 
man Act. In United Shoe Machinery Co. v. United States , 258 U. S. 451 
(1922), the Supreme Court ruled that the same tying clauses considered in 
the Winslow case were in violation of the Clayton Act. The Court pointed 
out that the tying agreements, coupled with the "dominating position" of 
the company in the industry, effectually prevented the lessees from acquir- 
ing machinery manufactured by a competitor. 

Accord ; 

Radio Corp. of America v. Lord , 23 F. (2d) 257 (C.C.A.3rd 1928) certio=- 
rar i denied 278 U. S. 648 (1928). 

Stanley Co. of America, Inc. v. American Telephone & Telegraph Co., Inc . 
4 F, Supp. 80 (D. C. Del. 1933). (Tying contract in lease of motion picture 
producing apparatus.) 

The Federal Trade Commission lias also attempted to suppress the use of 
tying clauses. In Federal Trade Comnission v. Sinclair Refining Co ., 261 
U. S. 463 (1925), the Commission order the Sinclair Company and other large 
distributors of gasoline to desist from the practice of leasing gasoline 
tanks and pumps to retail dealers at nominal rental, on condition that the 
equipment be used only with gasoline supplied ty the lessor. The order was 
reversed, on the ground that there was no violation of the Clayton Act, be- 
cause the lessee was free to use gasoline of competitors in other equipment, 
and that the practice was not an unfair method of competition within Sec- 
tion 5 of the Federal Trade Commission Act. The Court declared that there 
appeared no purpose or power to acquire an tmlawful monopoly, and no evi- 
dence that the effect of the practice would unduly lessen competition. 

The best known case upon the legality of full line forcing is Federal 
Trade Com.Tai-^ sion v. Oratz . 253 U. S. 421 (1920). Respondent sold steel ties 
for use in binding cotton bales onljr on condition that the purchaser would 
also buy the necessary Jute bagging to be used with the ties. The Supreme 
Court reversed the Commission's order to desist on the grovind tliat there was 
no element of deception or fraud, and that the complaint failed to show 
sufficient control by the respondent of the two lines of business to con- 
stitute a monopoly. In Federal Trade Commission v. Paramount Famous-Laslcv 
Corp., Inc . 57 F. (2d) 152 (CCA. 2d, 1932), respondent was ordered to 
cease the practice of "block booking" by which an exhibitor of motion pic- 
tures was forced to take all the films in a "block" or none. The Circuit 
Court reversed on the ground that the respondent controlled only a small 
percentage of the total production, that his competitors were not injured, 
that the exliibitors were not coerced but merely presented v?ith an alternative 
and that the practice did not constitute a t^^dng agreement. 

8001 -38- 



An exclusive dealing contract was held illegal in Standard Fashion Co . 
V. Magrane ~R)uston Co ., 258 U. S. 546 (1922). There a manufacturer of 
dress patterns brought an action to restrain the violation by a retail 
dealer of a contract to deal exclusively in patterns produced by the plain- 
tiff. The Supreme Court ruleu that the contract was in violation of the 
Clayton Act. It emphasized that plaintiff controlled t':70-fifths of the pro- 
duction of patterns" throughout the co\mtry, and hence that the effect of the 
contract not to handle a competitor's patterns was to "substantially lessen 
competition" within Section 5 of the Clayton Act. Cases prior to the pass- 
age of the Clayton Act are W hitwell v. Continental Tobacco Co . , 125 P. 454 
(C. C. A.Sth. I'jCij) at'.d 'iontinental Wallnaper Co. v. Voight & Sons Co . 212 
U. S. 227 (1909). • 

The Federal Trade Commission entered an order in another dress pattern 
case. The order, which was based upon Section 3 of the Clayton Act and Sec- 
tion 5 of the Federal Trade Commission Act was affirmed. Butterick Co. v . 
Federal Trade C onmis sion , 4 F. (2d) 910, (C.C.A.2d 1925). Certiorari denied, 
267 U. S. 6'02 (1925). In B. F. Fearsall Butter Co. v. Federal Trade Commis- 
sion , 292 F. 720 (CCA. 7th, 1923), an order based upon the Clayton Act was 
vacated, on the ground that respondent controlled only one per cent of the 
trade, that many of his competitors employed similar exclusive dealing con- 
tracts and that in return for the exclusive dealing agreement respondent 
granted an exclusive territory to the retailer. In Federal- Trade Coi:imission 
V. Curtis Publishing Co .. 260 U. S. 568 (1922), the Court found tloat the ex- 
clusive dealing agreements there involved were contracts of agency, and not 
of sale, and hence it ruled that Section 3 of the Clayton Act did not apply; 
the Court also declared ttiat the making of such contract was not unfair 
within Section 5 of the Federal Trade Commission Act, 

(12) Enticing Employees . 

In Albert Pick-Barth Co. Inc. v. Mitchell Woodbury Corp ., 57 F. (2d) 
296 (C.CAclst, 1932) an action was brought for damages under Section 7 of 
the Sherman Act as amended by Section 4 of the Clayton Act, The defendants 
had enticed the employees of the plaintiff to leave its employment and to 
join their own organization, bringing with them valuable information and cus- 
tomer lists, to the injury of the plaintiff. The court rules that these 
facts constituted a violation of the anti-trust laws and awarded damages. 

Accord ; 

Cleaves v. Peterboro Basket Co . 54 F. (2d) 101, 
(N.D.H. 1931). 

-"r. 3rican Steel Co. v. American Steel and Wire Co . , 
et_al., 244 F. 300 (D.Mass. 1916) 

{13] 'J-'iiorm Cost Accounting 

At til? oatset a distinction must be drawn between uniformity of methods 
of cost accooiiting and uniformity of elements of cost. With regard to coop- 
erative ac;:;on in the former category no problem of the Anti-Trust laws 
arises, .kz ("Ssfined in one of the leading text writers upon the subject 
"\iniform cobt accounting comprises a set of principles and in some cases of 
accounting methods which when incorporated in the accounting systems of the 
individual members in an industry will result in the obtaining of cost fig- 
ures by the individual members of the industry which will be on a comparable 

8001 -39- 



"basis," 

Uniformity as to methods of accoimting is primarily educational, while 
uniformity as to elements of costs is generally" looked upon as a guise for 
price fixing. To londerstand the legal aspects of this practice, it must he 
emphasized that a plan which is educational, must not be used as an instru-. 
ment to promote or affect an illegal agreement. If the plan comprises ar- 
hitrar;'- and artificial cost elements, it will he illegal because of its price 
fixing character. Thus the individual must follow his own actual cost. 

There are but a few cases bearing upon the legal limits of uniform cost 
accounting. In the Maple Flooring Case, supra , the Supreme Court refused 
to condemn the computation and distribution, among the members of the asso- 
ciation, of information as to the average cost of their products. The Court 
carefully described the methods of calculating costs, and concluded that all 
practicable accuracy was attained. The association had more or less arbi- 
trarily distributed the total cost of all the different grades of flooring 
produced from a certain amount of rough lumber among the several types thus 
produced. Of this Justice Stone said, at 268 U. S. 570; 

"There is no substantial claim made on the part of the Government 
that the preparation of these estimates of cost was not made with 
all practicable accuracy or that they ?rere in any respect not what 
they purported to be, an estimate of the actual cost of commercial 
grades of finished flooring fairly ascertained from the actual 
experience of members of the Association, except that the point is 
made by the Government that the distribution of cost among the 
several types and grades of finished flooring produced from a 
given amount of rough lumber vias necessarilj"- arbitrary and that 
it might be or become a cover for price fixing. Suffice it to 
say that neither the Government nor the defendants seem to have 
found it necessary to prove upon what principle of cost accounting 
this distribution of cost was made and there are no data from which 
any inference can be drawn as to whether or not it conformed to ac- 
cepted practices of cost accounting applied to the manufacture of 
a diversified product from a single type of raw material," 

The Court in approving the dissemination of average costs, carefully 
pointed out that the plan should not be made an arbitrary basis for deter- 
mining cost or price. In this respect it must be emphasized that in order 
to be legal the individual must exercise his own discretion as contrasted 
with an agreement or concerted action upon an arbitrary basis. The language 
of the Court at page 585 is significant; it said that the individual concerns 
must be "left free to base individual initiative on full information of the 
essential elements of their business". 

The court recognized that the use of average costs may become illegal 
when coupled with an agreed margin of profit. In reference to this, the 
co-urt said at page 572: 

"It cannot, we think, be questioned that data as to the average 
cost of flooring circulated among the members of the association, 
when combined with a circulated freight rate which is either ex- 
actly or approximately the freight rate from the point of ship- 
ment, plus an arbitrary percentage of profit, could be made the 

8001 -40- 



basis of fixing prices or for an agreement for price maintenance 
which, if found to exist, would, under the decisions of this 
court, constitute a violation of the Sherman Act. But, as we 
have already said, the record is "barren of evidence that the puhr^- 
lished list of costs and the freight rate hook have heen so used 
by the present association." 

The Federal Trade Commission has entered one cease and desist order 
which dealt with standard cost accounting as in violation of the Anti-Trust 
laws. In Federal Trade Commission v. United T^.Toothetae of America , 6 P. T, 
C. D. 345 (1923) the cost accounting system operated as a price fixing de- 
vice, for the cost elements were arbitrary and were coupled with a recommen- 
dation of a fixed rate of profit of 25^. Because of the absence of judicial 
review this case is not a valuable precedent, though it does indicate the 
policy of the Federal Trade Commission as regards cost accounting plans which 
are used to accomplish illegal ends. 

In conclusion it may be well to mention some of the significant features 
which will serve as a guide to a better understanding of the legal bounds of 
uniform cost accounting. The work of Benjamin S. Kirsh in his book on 
"Trade Associations" has been of valuable assistance and his conclusions as 
to the limitations and the significant features are as follows: 

"1, The cost data must be as accurate as practicable. The fig- 
ures must be based on actual and not on fictitious or arbitrary 
information. They must be fairly ascertained from the actus-l ex- 
perience of the members reporting to the secretary, and must be ac- 
curately reproduced in the reports of the secretary to the member- 
ship. The data should not, therefore, be inflated or colored by 
the inclusion of items not actually present in the elements of cost 
of the reporting members, 

"2, There must be no recommendation, advice, comment or criticism 
with respect to the amount of any item of cost, rate of profit or 
selling price to be set by the individual member. The decision of 
the Supreme Court in the Maple Flooring case apparentl}?- permits 
the discussion of cost data as well as comparative analysis by the 
individual member^ But no agreement or attempt to agree on cost, 
or any specific item thereof, margin, sales price, or production 
policy, is permitted, 

"3, The cost information must be essentially educational and infor- 
mative in character. While the group in the industry may be educated 
in proper methods of cost accounting, it is of the utmost importance 
to bear in mind that the use of the cost-accounting data is a matter 
of individual choice. The member must exercise his own initiative, 
discretion and judgrjent in determing and fixing his own cost, margin 
and selling price. He must at all times be free to follow his own 
will in contrast to pressure from without by the association or any 
of its officers, 

"4, The cost information should be published or made available to 
those who are not within the ranks of the association or to neutral 
publications, so that the appearance of secrecy and the possibility 
of distortion of the information for unlawful purposes by the members 
of the association may be, in a large measure, lessened, 

8001 -41- 



"5. The cost data must "be di'sseniilated in such a manner that the 
information contributed by individual concerns is not identified 
by hame and thus made known to compctitore^ Anonjnnous numbero<i 
reports by individual concerns which are not loiown to the member- 
ship of the association, can serve substantially the same purpose 
as identiriea rcrpo-rta. They perform substantially as well the 
service of disclosing the efficiency of business imits in the 
industry. The general policy of the law, similar to the policy 
expressed in consideration of the general statistical activity 
of the trade association, is to forbid the identification of each 
report to detect those who did not conform to a preconceived, con- 
certed arrangement to violate the anti-trust laws. It may be that 
identification of cost data is not so intimately related to the 
ultimate selling price. But to refrain from such identification 
is a safeguard which it would be wise to follow, as the law stands today. 

"6. There should be no penal provision compelling group action as 
distinguished from free and uncontrolled individual discretion with 
respect to cost, margin or selling price, A member should not be 
subjected to the duress of fines or expulsion for exercising his 
individual judgment in these matters, 

"7, Drastic supervision, which is employed to spy upon the acti- 
vities of a member to discover whether or not he is conforming with 
the group plan, should be avoided, 

"Uniform cost accounting methods will thus be judged with emphasis upon 
their demonstrated value rather than by the possibility that they have trans- 
gressed the technical rules of a forbidding law. Cooperative efforts on the 
part of trade associations seeking a more efficient, improved, and more ser- 
viceable technique will be judged by the law, when pursued within proper 
limits, with a view to enlarging the permissible area of operation. This 
seems a fair prophecy, now that the principle of uniform cost accounting has 
been accepted by the courts, as a oo\md legal, as well as economic, function." 



8001 -^-Sw 



Ill 

AFPENDIX 
JffiMIUISTRATIira DEVELOPIJENT OF UNFAIR CQliPETITION 



From the foregoing discussion it is quite oTDvious that the legitims,te 
and proper area of competition cannot he reduced to sji abstract form. In 
the field of competitive practices the courts have had occasion to review 
only a small portion of 'onfair industrial behavior. Vie?;ed in the histori- 
cal perspective, the development of the law of unfair competition has "been 
very unsatisfactory. Bearing in mind the legal principles deduced from the 
cases here discussed, it Liust be remenbered that there is an abundaiice of 
precedent in the Federal Trade Commission in the form of cease and desist 
orders not reviewed by the courts, stipulations, and trade practice confer- 
ences, which serve as guides to our industrial conduct in the future. 

Aside from those practices outlawed by cease and desist orders, the 
Federal Trade Commission has at least in theory made a valuable contribution 
by supplementing its statutory procedure through its trade practice confer- 
ences in which voluntary codes of ethics have been adopted to guide members 
of the industry in their future dealings. In fact the 1>rade practice con- 
ference is a modern corollary to the early development of the law merchant. 
The progress made from this approach will be of valuable assistance in de- 
termining what the law will be in the future. 

One of the outstanding improvements made in the time-worn procedure of 
the Commission is the process of disposing of bxi unfair competitive practice 
by stipulation of the parties, thereby eliminating the cumbersome adminis- 
trative steps of the cease and desist order. Those stipulations although 
not tinted with judicial approval serve as a barometer of the Federal Trade 
Commission's attitude toward that particular practice. 

In the succeeding outline an exliaustive survey has been made of those 
unfair competitive practices which the Federal Trade Commission has reviewed. 
Its attitude serves to temper the legal conception of unfair competition, and 
is undoubtedly valuable, entirely apart from the available judicial prece- 
dent, 

UITFAIR METHODS OF COMPETITION AFFSCTIlTr 
THE IMSIVISUAL PURCHASER 

I. Hi srep re sentat i on 

1, As to weight or quantity 

(a) Fictitious weights 

Respondent engaged in the sale of sponges by weight "loaded" 
them by adding foreigTi substance, soaking them in solution of 
salts, thereby securing business on a false and fictitious 
basis. Cease and desist orders were issued in the following 
Complaints, Nos. 374, 375, 377, 379, 387, 389-394,-396-398. 

(b) False packaging 

The packing of butter in cartons of a definite size and shape, 
but with contents less than the standard weight, was condemned. 
Complaints Nos. 1041, 1042, 1043 and 1221. 

8001 -43- 



Packing 14 otmces of "butter in a standard one-pound size 
cartoon: 

Federal Trade Commission v. Mountain Grove Croamery Co . , 
6 JP.T.C. D. 425 (1923). 

Federal Trade Comnission v. Baltimore Paint & .Color "orks , 
41 p. (2d) 474 affirmed order of Comnission, in re.go.rd to 
false packaging in the sale of paints. 

2. Corrposition. quality, condition or character of products 

(a) Composition 

(1) The Commission's order condemning the sale of goods chiefly 
made out of cotton as wool, was affirmed in Federal Trade 
Commission v. ffinsted Hosiery Co ., 258 U. S. 483 (1922). 

(2) Sale of yellow pine as "California White Pine"^, Federal 
Trade Commission v. Algoma Lumber Co. , 291 U. S. 67 
(1934) (order affirmed) 

(S) Selling talcing powder as "Crean Baking Powder" where cream 
of tartar, formerly used in its manufacture, has lieen re- 
placed hy a cheaper substitute: 

■Royal Balcing Powder Co . v. Federal Trade Commission , 
281 Fed. 744 (C.C.A. 2d, 1932) (order affirmed). 

(4) Advertising a product composed of comi-ion salt with its im- 
purities as containing sixteen different chemical and 
vegetable ingredients: 

Guarantee Veterinary Co . v. Federal Trade Commission , 
285 Fed. 855 (C.C.A. 2d, 1922) (Order affirmed). 

(5) Representing "Ohio Improved Chester" hogs are a separate 
and distinct breed from a nell known variety called "Chester 
I]hite" ; 

L. 3. Silver Co. v. Federal Trade Commission , 289 Fed. 
985 (C.C.A. 5th, 1923) (Order modified by vacating most 
essential paragraph of order). 

(5) False advertising of product as "naptha" soap: 

Proctor & Garable v. Federal Trade Commission . 11 F. (2d) 
47 (C.C.A. 6th, 1926) (Finding of unfair competition 
sustained). Cert, den. , 273 U. S. 717 (1926). 

(7) iiisbranding paint by terming it "Combination White Lead". 

Louis Leavitt v. Federal Trade Commission , 15 F. (2d) 
1019 (C.C.A. 2d, 1925) (Per curiam) (Order affirmed). 

(8) "Satinsilk" as a brand or label for cotton thread. 

Sea Island Thread Co. v. Federal Trade Commission , 22 F. 
(2d) 1019 (C.C.A. 2d, 1927) (Affirmed without opinion). 

8001 -44- 



{y ) seiilng wood, as "Philippine Mahogany". 

Indiana Quartered Qak Co . v. Federal Trade Commission 
26 P. (2d) 340 (CCA. 2d, 1928) (Order affirmed). 
Cert, den., 278 U. S. 623 (1928). 

(10) Branding imitation leather products as "Duraleather" . 

llasland Daraleather Co . v. Federal Trade Commission , 
34 F. (2d) 733 (CCA. 3d, 1929) (Order modified in an 
immaterial particular), 

(11) Selling and advertising as "Radium" a product possessing 
no radioactive qualities. 

Federal Trade Commission' v, Kay , 35 F. (2d) (C.C.A. 
7th, 1929) (order modified but substantially upheld). 
Cert , den. , 281 U. S. 764 (1930). 

(12) Using "Satinmaid" to describe a cotton fabric. 

K. Fluegelman & Co., Inc. v. Federal Trade Commission , 
37 F. (2d) 59 (C.C.A. 2d, 1930) (order modified to al- 
low use of term provided qualifying terms indicating 
cotton nature of ma,terial are added). 

(13) Selling product not composed solely of genuine shellac 
gum dissolved in alcohol as "Wiite Shellac". 

Federal Trade Commission v. Cassoff , 38 F. (2d) 790, 
(C.C.A. 2d, 1930) (Order modified by permitting 
respondent to ercrploy terms indicating the product was 
not wholly composed of shellac gum, without specif3'"ing 
percentages of other ingredients), 

(14) Selling as "walnut" or "mahogany" furniture made of other 
woods with a thin veneer of walnut or mahogany, 

Eerkey &. C-ay Furniture Co . v. Federal Trade Commission , 
42 F. (2d) 427 (CCA. 5th, 1930) (Order vacated on 
ground evidence showed better grade furniture was ma6.e 
of veneered rather than, solid walnut or mahogany, and 
consequently no deception of retailers or of the public 
was present). 

(15) Using term "Good Grape" in connection with an artificially 
colored and flavored preparation. 

Federal Trade Commission v. Good-Grape Co. , 45 F. (2d) 
70 (CCA. 6th, 1930) (Order modified by permitting use 
of term on condition that artificial nature of prepa- 
ration be indicated). 

Cf. Federal Trade Commission v. Morrissey , 47 F. (2d) 
101 (C.C.A. 7th, 1931) (Order prohibiting use of names 
of fruit in connection with drinks artificially colored 
and flavored; modified to permit use of fruit names 

8001 -45- 



provided they be accompanied "by a statement that they 
resemble the fruits in taste or color but contain no 
natural juice or coloring matter). 

(b) As to quality . 

(1) Label bearing pictorial representation showing mattresses 
with an uncovered and flaring to an exaggerated thiclGiess. 

Qstermoor & Co., Inc. , v. Federal Trade Commission , 
16 P. (2d) 962 (CCA. 2d, 1927) (Order vacated on 
ground representation was simply fanciful, not deceptive, 
and merely constituted the time-honored practice of 
"puffing" one's wares). 

(2) Representation of "obesity cure" as "scientific"; failure 
to state that the preparation could not be taken safely 
except under medical advice. 

Federal Trade Commission v. Raladam Co . , 283 U. S. 643 
(1931) (order vacated, since jurisdiction of Comjiission 
is livaited to unfair trade methods Tvhich affect conipe- 
tition, and there was no evidence that respondent's 
advertisements injured competitors). 

(3) Label of snuff manufacturer containing words "dental snuff" 
and pictorial represento.tion of a tooth. 

FederaJL Trade Commission v. American Snuff Co. , 38 F. 
(2d) 547 (CCA. 3d, 1930) (Order vacated, since pur- 
chasers were not misled by change from a former label, 
and since label merely indicates snui'f is designed to be 
chewed rather than taken nasally). 

( c) As to condition . 

(1) Selling rebuilt tires as new. 

Federal Trade Commission v. H. P. Jones , 1. F. T. C. D. 
360 (1932). 

(2) Marketing rebuilt typewriters as new 

Federal Trade Commission v. Typewriter Emporium , 
1 F, T. C D. 105 (1915). 

(3) Advertising a wealc chemical preparation as "ten times 
stronger as a germicide than undiluted U.S. P. carbolic 
acid" . 

Federal Trade Commission v. Ginse Chemical Co. , 
4 F. T. C D. 155 (1921). 

(4) Re-issue of old files as new releases. 

Fox Film Corp . v. Federal Trade Commission , 
296 Fed. 353 (CCA. 2d, 1924) (Order affirmed) 

8001 -46- 



(d) As to character . 

(l) Continuing trade name without indicating change in the 
character of the product or ingredient. 

Royal Baking Powder Company Vo Federal Trade Coramission , 
281 F. 744 (CCA. 2d, 1922). 

3. False Claim to Endorsement . or use . 

( a) Official endorsements and recommendations . 

(1) FsJ.se statement that product was adopted or purchased "by 
the United States Government. 

C-uaraxitee Vetinary Co . v. Federal Trade Comiaission , 
285 Fed. 853 (CCA. 2d, 1SI2^). 

( h ) Endorsement hy private individuals . 

(l) Puhlishing testimonials of nationally laiown characters 
without disclosing that suhstantial payments are made, 

Ilortham Warren Corp . v. Federal Trade Coramission , 59 F, 
(2d) 196 (CCA. 2d, 1932) (Order vacated on groiuid 
payment for trutliful testimonials deceives no one.) 

4, As to Business status . 

( a) Misrepresenting that respondent is a manufacturer . 

(1) Trade or corporate name including word "i.iills" where re- 
spondent does not own or operate a factory in which its 
products are made. 

Federal Trade Commission v. Pure Silk Hosiery Llills , 
Inc. . 3 F. (2d) 165 (CCA. 7th, 1925). 

(2) Trade name including words "Hilling company"; false repre- 
sentation that respondent was a manufacturer of flour sold 
direct from the mill. 

Federal Trade Commission v. Eoyal Milling , 288 U. S. 
212 (1933) (Order modified to permit use of naiae 
"Milling Company" providing that there -/as an ercplicit 
statement that respondent did not grind the grain). 

(3) By pictorial representations. 

Use of pictures of plonts and factories on letterheads 

and advertising, to indicate respondents ovm them - ordered 

discontinued in Complaints ITos, 193, 491, 1104, 1107, 1720. 

( h ) Liisrepresenting commercial rating (Stipulation Fo. 654 ) . 

(c) Advertising res-oondent has generrg distribution centers . 
when in fact it is untrue (Stipulation llo. 0137). 

8001 -47- 



(d) Re-presentation that respondent employed experts and that its 
"business was world-wide in extent, when the facts were untinie . 
(Complaint ITo. 1850). 

(e) Represent in,?: respondent vjas not engaged in a "business for profit , 

(1) Trade name "inti-Totacco League" implying non-profit or.-^an- 
ization, when in fact it was; — discontinued in Stipula- 
tion Ho. 0130, 

5, As to Origin of product , 

(a) Labeling product made in the United States as "English Tul) 
Soap" . 

Federal Trade Cormission v. Bradley , 31 F. (2d) 569, 
(CCA. 2d, 1929) (Order affirmed). 

6. As to price Reductions . 

(a) Palse representation that usual sale price for product was 
$20, in sale of two for $10. 

Chicago Portrait Co . v. Federal Trade Comraission , 4 P. (2d) 
259 (CCA. 7th 1925). Cert, den., 269 U. S. 556 (1925) 
(Order vacated, on gi-ound there was no evidence that cu-stoners 
were deceived or competition injured). 

Cf. John C Winston Co . v. Federal Trade Commission , 3 F. 
(2d) 961 (CCA. 3d, 1925) (Order affirmed) 
Cert, den . 269 U, S. 555 (1925). 

("b) False representation that "loose leaf extension service" for 
enc;/"clopedia wa,s given free with purchase of "books. 

Consolidated Book PuTjlishers. Inc . v. Federal Trade Commis- 
sion , 53 F. (2d) 942 (C.C.A. 7th, 1931) (Order affirmed). 

( c) 3y means of com'bination sales . 

Selling groceries at a fixed aggregate price, placing the 
price of the staple articles telow retail price and charging 
excessive prices for the other articles. Ordered discontinued 
in Complaints Hos. 349, 352. 

( d) Misrepresenting that there was "no extra charge for credit " 
whereas substantial discounts were given on goods sold for 
cash. (Comjolaints I-Ios. 765 and 766). 

(e) ilisrep resenting that repairs were free , when in fact the charge 
was made xvp by excessive postage and package charges. 

(f) Falsely advertising that the sale was "below cost (Complaint 
no. 121). 

(g) Representing that the price of the product would "be advojiced 
(Stipulations Nos. 521, 483). 

8001 -40- 



(h) Representing that -products are offered at "speical" or "intro- 
ductory" prices. (Complaint No. 2010, Stipulations 733, 591, 
483, 740, 607). 

(i) Fictitious prices . 

Larking enhanced prices on fountain pens, to mislead the 
purchaser as to the value of the product, (Complaints 
Hos. 561, 663-68, 670-673.) 

Similarly as to razor hones, No. 806, as to pocket knives, 
811, as to soaps, 848, as to sheet music, 1174, as to 
piaJios, No. 577. 

7, As to Medicinal or Curative Value of the product . 
(a) By means of advertising . 

(1) That an electrical device was heneficial for certain ail- 
ments and had the endorsement of physicians, when those 
facts were not true. (Complaints 1695, 1703, 1679) 

(2) That soap was medicated for skin treatment (Complaints 
Kos. 896, 1289), 

(3) Antiseptic as cure for disease (Complaint No, 1845), 
(h) By means of false "brands . 

(l) Lahellin^ soap as containing olive oil, peroxide, palm 

oil, Tdtch-hazel, medicines or dnigs (Coroplaint No, 872). 

8, Misrepresentations in the Sale of Corporate Securities . 

(a) i.Iisleading and deceptive statements in advertising, letters, 
mops, concerning the value of oil leases, properties, assets, 
and productivity. Ordered discontinued in Complaints Nos, 795, 
596, 856, 857. 

(h) Misleading reports on drilling operations when no work had 
hegan. Complaints Nos, 595 and 785, 

(c) Withholding material information as to tlifee value of secu-rities. 
Ordered discontinued in Complaints Nos. 861, 865, 371, 

(d) Misleading statements that corporation owned lai-ge refineries, 
when in fact it did not. (Complaint dismissed for failure of 
proof). 

(e) Simulating the name of the Royal Batch Conipany to mislead 
purchasers to telieve that respondent T/as affiliated with it. 
(See Complaint No. 999). 

(f) Misleading announcements and reports in regard to nature and 
volume of "business done, (Ordered discontinued in Complaint 
No, 273). 

8001 -49- 



9, As to Contracts and Offers Made . 

(a) False representations that sale was on "consignment" basis. 
(Complaint Ho. 1206). 

(b) Persuading prospective purchaser to sign what was represented 
to be a "memorandum" when in fact it was a contract to purchase, 
or a promissory note, 

(c) Misrepresentations in puzzle contests, - Stipulation No, 031, 
030, 022. 

(d) Advertising a free-trial offer when in fact the prospective 
purchaser is "required to make a deposit or payment prior to 
trial." (See Complaints No. 1965 and 2010.) 

(e) Misrepresentation that article will be replaced. (Complaint 
No. 1986). 

10, Misrepresentations made b;'" Correspondence Schools . 

(a) Misleading pupils by representing that school would place them; 
-- ordered discontinued in No. 1230 (mechanical drafting course). 

(b) Exaggerated results of the course offered. (Complaints Nos, 
1504, 1486), 

(c) Misrepresenting that former pupils are successful; — Stipula- 
tion No. 485. 

(d) Misrepresentations as to the qualifications of the facultjr, 
and false letters relating to the standing of the school, 
(See Complaint No. 1539). 

(e) Use of "U. S. A." as part of name to deceive students to be- 
lieve that respondent was affiliated with a government depart- 
ment. (Complaint No. 1834). 

II. Lotteries . 

1. The common law and criminal statutes have long considered lotteries 
contrary to public policy, but no case appears in which a lottery ■ 
was enjoined as the suit of a competitor. It is obvious, of course, 
that such a practice would not constitute an injury to any specific 
competitor. 

The Supreme Court has sustained the power of the Federal Trade Comr« 
mission to order the discontinuance of a lottery as an unfair 
practice. 

(a) Practice of determining price of candy by lot . 

Federal Trade Commission v. R. F. Kennel & Brother, Inc. , 
291 U. S. 304 (1934). 

(b) Lottery Clubs . 

Misrepresenting the method of selecting the winner, (Com- 
plaint No. 1059. 
8001 _50- 



(c) Use of a "punch'board " as a lottery scheme for selling mer- 
chandise, (Q-aestioned in Complaints Nos. 1852, 1955, 
1857, 1858). 

III. Harassing Tactics . 

1. Coercing dealers to comply with \inenforceable contracts . 

3y representing accounts had been placed in hands of a collection 
agency, though in fact they had not "been. Order discontinued in 
llo, 1206,- 

2. E::cessive charges over aiid ahove the customary cost-liilling of 
such products, with threat of refusal to deal on failure to paj", 
(stipulation 696), 

IV. Basing Point Systems . 

There is very little authority concerning the legality of Basing 
Point systems; however, certain types have approved in the following 
cases: 

liaple Flooring Manufacturers Association v. United States , 
2S8 U. S. 563 (1925), 

Cement Llanuf acturers Protective Association v. United States , 
268 U. S. 588 (1925), 

United States v. Bolt, I\fut & Rivet Manufacturers Assn. , D, C, 
il, Y, 1931. Consent decree. Note in Harv. L. H. January 1932, 
page 548, 

V. Predatory or local destructive Price Cutting . 

1, Formation of "fighting" coi^Tpany to bid up prices of raw materials 
in order to drive out conpetitor. 

Federal Trade Commission v. United Rendering Co., 3 F. T. C. D. 
284 (1921), 

Cf. Federal Trade Comi'.ission v, American Agricultural Chemical 
Co.. 1 F.T.C.D. 226 (1918). 

2. Locally cutting prices 'belov;- those of competitors. 

Federal Trade Commission v. Fleischmann Co. , 1 F.T.CD. 119 
(1918) (Consent). 



UMFAIR METHODS OF CQIffETITIQH TJIIICH 
DIRBCTLY AFFECT IITOIVIDUAL COIvIPETITORS 

.1. raise claim of affiliation with competitor . 

The respondent in the sale of slides made representations which im- 
plied that he was associated with his coinpetitor. The practice was 

8001 „51- 



discontinued in Stipulation ITo. 462. Representations of a like 
character in connection with the sale of silverware were ordered dis- 
contintied in Stipulation Ho. 801, 

2, Appro'oriating results of competitor's efforts . 

An order to cease and desist was issued in Complaint ITo. 898 in which 
the co'ipetitor duplicated the composition of the product for the 
purpose of obtaining a patent, 

3. Furchasing conpetitor's stock from dealers or exchanging orm goods , 

Coinplaints No. 947 (snap fasteners) and IJo. 1025 (tacking machines 
and staples), 

4, Acquiring competitor's trade secrets . 

By payment of money to conpetitor's employees. 

By means of employing spies, etc., ordered discontinued in Coinplaint 

Ho, 11 (lumber business) and Couplaint No. 923 (in the sale of garment 

pressing machines). 

Appropriation of competitor's customer list and other confidential 

information, which information was unlawfully extracted by former 

employees. Ordered discontinued in Corffolaint ITo. 223 (sale of fire 

extinguishers), 

5. Secret control of fictitious competitor . 

Complaint No. 6 (yeast business) and complaint No. 307 (lightening 
rod, etc); respondents were ordered to discontinue the practice of 
concealing the control of a fictitious independent for the purpose 
of misleading the public into believing that the two corapanies were 
co;.ipeting, 

6. publicity of anon^nnous attacks upon competitors . 

In Complaint No, 868, the respondents were ordered to discontinue the 
practice of publishing anonjiaous, disparaging and derogatory opinions 
as to the wholesomeness of competitors' products (self-rising flour). 

(See also complaint No. 1499 as to baking powder). 

7, D is'paragement of and misrepresentations concerning competitors , 
( a) Common Law , 

(1) Palse statements concerning a competitor' s -character or his 
professional ability, furnished a basis for a common law 
action for defsjnation, 

Mattice v. TJilcox, 147 N, Y. 624 (1895). 
Davey v. Davey, 50 N. Y. &app. ltd (1896). 

(2) A deliberate disparagement of a corjpetitor' s product which 
implied fraud or dishonesty was considered in the same cat- 
egory as defamation of character. 

8001 _52- 



Stektee v. Kemin, 48 liich. 322 (1822). 

Howry; v. 'decJoe et al. , 89 Cal. 606 (1891). 

Stevens Ice Cream Co . v, polar Products Co. . 194 N, Y. 

Supp, 44 (1921). 

(3) An attack ■upon a 'business concern's credit was held action- 
able, 

Hyan v. Brewing Co., 15 W. Y. Supp. 661 (1891). 

Brown v. Holton, 109 Ga. 431 (1899). 

Cf. Stannoul v. Wilcox, 118 Md. 151 (1912) which limits 

this protection to traders. 

( "b ) Federal Trade Commission . 

(1) Court decisions affirming Commission's orders: 

a) False and misleading statements concerning financial 
standing: 

Chamber of ComjTierce v. F ederal Trade Commission , 
13 F. (2d) 675 (C.C.A. 8th, 1926). 

b) Representation that the respondent's competitors did 
not deal fairly and squarely with their customers in 
the sale of sugar. 

Sears Hoebuck v. Federal Trade Commission , 
258 Fed. 307, 309 (C.C.A. 7th 1919). 

c) Statements which are true, mil not be enjoined by the 
Federal Trade Commission as there is a lack of public 
interest which goes to the jurisdiction of the CoLimission. 

John Bene i-. Sons, Inc . v. Federal Trade Commission , 
299 Fed. 468 (C.C.A. 2d, 1924), 

d) The Federal Trade Coranission has not added to the common 
law remedies available in cases of defamation. 

Jolin Bene ?z Sons, Inc , v. Federal Trade Commission , 
supra, 

(2) Federal Trade Commission orders on which there are no court 
decisions, 

a) False and disparaging statements concerning the business 
methods of coiiipetitors. 

Federal Trade Commission v. St. Louis LiF^hting Rod Co, , 
5. F.T.C.B. 327 (1921). 

b) Statement that the competitor was a "pirate" of his 
product: 

Federal Trade Commission v, Keaton Tire & Rubber Co. , 
5 F.T.C.D. 335 (1922). 

-53- 



8, Comiaercial Bri"bery and Secret Commissions to Dealers . 

(a) Common Law Sanctions . 

Although commercial bribery was not an -unfair method of competi- 
tion at comi;ion law, there were nevertheless certain well defined 
rules and principles which indirectly attacked this type of 
practice. 

If the agent accepted a secret commission from, a third person, 
in order to influence his principal's course of conduct or to 
award a contract, the principal could repudiate an executory 
contract. 

Smith V. Lorby, 3 Q.B.D. 552 (1878); 

City of Findlay v. Pentz , 66 Fed. 427 (C.C.A. 6th, 1895), 

If the performance has been rendered aiid the price paid, the 
principal could recover from the donor the amount of the commis- 
sion that had been ^iven to the agent ( Salf ord v. Dover, 
1 Q,,3.D. 168 (1891), and could compel the agent to account for 
the gratuity that he had received. So, too the breach of duty 
would entitle the principal to discharge the agent ( Tinsley v . 
Penniman, 34 S. ¥. 365 (Texas, 1896)). 

(b) Statutory Sanctions . 

The common law remedies were clearly inadequate and seventeen 
states have passed statutes outlawing commercial bribery schemes, 
in some form or another. 

Conn, Rev. Stat. (1918) sec. 6444; 

Iowa Comp. Code (1919) c. 618, sec, 13317; 

LaMarr's Ann, Rev. Stat. (Sup. 1926) 391; 

lid. Ann, Code (Bagby, 1924) Art. 27, p. 260; 

Mich. Comi3, Laws (1929) sees. 17094-99; 

Mass, Gen, Laws (1921) c. 271, sec, 39; 

Miss. Ann, Code (Hemingway 1927) c. 16, sees. 821, 822; 

Ueb. Comp. Stat, (1922) c. 6, Art. 2, sec. 9710; 

I<r. J, Comp, Stat, (1910) p, 1810; 

Nev. Rev. Lawws Ann. (1912) c. 26. sec, 6796; 

H. Y, Cons, Laws, c. 40, Art. 40, Sec, 439; 

ST. C. Cons, Stat. (1910) Art. 41, sec. 4475; 

R. I. Gen, Laws (1923) c, 401, sees. 21,22; 

S, C. Code (1932) sec, 1236; 

Va. Code Ann, (1924) c. 185, sec. 4712; 

Wash, Comp. Stat. (Remington) 1922, c, 10 sees. 2678-9; 

Wis. Stat, (1923) c, 346, see, 4575. 

(c) Efforts of the Federal Trade Commission . 

(l) Giving liquor, cigars, meals, theatre tickets and entertain- 
ment to employees of customers to induce them to influence 
their eiiTployers to piirchase from respondents. 



8001 -54- 



New Jersey As"bestos Coj v. Federal Trade Commission , 
264 Fed. 509 (C.C.A. 2d, 1920) (Order reversed, on gro-und 
method of entertainment was "an incident of "business from 
time immemorial" and did not affect the public interest), 

(2) Giving prir.es to salesmen of distributors, with consent of 
distributors, for "pushing" sales of respondent 's products. 

ginney-Eome Coc v. Federal Trade Commission , 275 Fed. 665 
(C.C.A. "7th, 1921) (Order vacated on ground no unfair con- 
petition could "be present when prises were given with 
knowledge of employer of salesmen), 

(3) Secret commission paid by ship chandler to ship's captain on 
all supplies purchased. 

Win slo w V. Federal Trade Commission , 277 Fed. 206 (C.C.A. 
4th, 1921) (oi'der reversed, on groiand of absence of 
interstate commerce). Cert , den . , 258 U. S. 518 (1922), 

(4) Subsequent to these adverse court decisions, the Commission 
has entered a large number of orders directed against com- 
mercial bribery, e.g. 

Federal Trade Commission v. United Chemical products Corp. , 
4 F.T.C.D. 220 (1922). 

Feder -^l Tra de Cornuission v. Cook Paint & Varnish Co. , 
Annua l ^epor-c (1934) 64. 

(5) In one case a Circuit Court of Appeals denied the Commission's 
petitj.on for enforcement of an order, without prejudice to 
tLs right to enter a new order, on the ground that the order 
should ha,ve enjoined only the giving of secret gratuities, 
and nob those given with the consent of the employer. 

F ederal Trade Comnission v« Advance Faint Co. , (C.C.A. 
7ch, 1925, no opinion) See modified order, 10 F.T.C.D. 
279 (1926), 

9 . Hindering and embarrassing; co m petitors in the Motion Picture Industry 
by showing films in anticipation of competitors' advertised production . 

A cease and desist order was issued in Complaint Ko. 140 against 
the respondents who secured films which competitors had previously 
announced would be shown and exhibited them in advance of the 
dates announced and for a lower price of admission. 

10, Destruction of competitors' catalogues . 

The Chamber of Commerce, in attempting to prevent the sale of 
goods by a mail order house, cooperated with the local theatre in 
accepting catalogues in lieu of admission price and offering prizes 
for the same. This practice was condemned in complaint llo. 841, 



8001 -55- 



11« Shipping goods to coijpetitors' c-gsiomers without orders . 

In Complaint No, 219 (petroleiim products) , respondents were 
ordered to cease and desist from the practice of shipping goods 
to the competitors' customers without orders and attempting to 
induce consignee to accept and purchase them hy guaranteeing the 
res8,le and giving long term credit, 

12, Threats of Litigation . 

This practice may be classed as a form of disparagement, or as a 
particular variety of harassing tactics. 

(a) Comnon Law . 

In Emack v. Kane, 34 Fed. 46 (C.C.IT.C. 111., 1888) an in- 
junction was granted to restrain threats of suit for patent 
infringement, made in bad faith against customers of com~ 
plainant. 

Accord ; 

Cerosa v. Apco Man.uf acturing Co. , 299 Fed. 19 (CCA. 
1st, 1924), 

However, cert?,in state courts have reached a contrarjr 
result, 

F lint V. Hutchinson Smoke Burner Co ., 110 Mo. 492, 19 S, f. 
804 (1892), See generally, Nims, Unfair Competition and 
Trade Marks (3d ed. 1929) 703-713, 

(b) The Federal Trade Commission , in seeking to discourage this 
practice, has made no contribution to the law of unfair com- 
petition, 

Herman Heuser v. Federal Trade Commission , 4 F. (2d) 632 
(CCA, 7th, 1925) (Order vacated, on ground of absence 
of bad faith, especially because respondent had instituted 
two suits for patent infringement, although after the pro- 
ceedings before the Commission had begun). 

Accord: 

Flynn & Enrich Co . v. Federal Trade Commission , 

52 F, (2d) 836 (CCA. 4th, 1931) (Absence of bad faith; 

lack of public interest additional ground of reversal). 

Finding of bad faith since no patent rights existed as 
a basis for infringement threats. 

Federal Trade Commission v. C-artside Iron Rust Soap 
Co.. 1 F.T.C.D, 310 (1919) 

(l) Federal Trade Commission orders with no court decision , 

(a) Unfair use of patent rights by means of consent 

decrees. The practice of obtaining consent decrees 

8001 _56- 



to prevent the use of similar devices in crder to 
ottain a patent monopoly, and threatening suit for 
alleged infringement by the use of collusive con- 
sent decrees was ordered discontinued in Ccuiplaints 
IIos. 126 and 224. 

( D ) Threats to sue competitors' customers for patent 
infrin£;ement on a patent o"btained Tjy fraudulent 
analysis., imitation of cor.rpetitors' product . 
Order to cease and desist such practices under 
Docket #898. 

13, t'rice Discrimination to influence trade . 

The giving of rebates and discounts to selective customers irith a 
purpose of embarrassing cor.ipetitors has been questioned by the 
Federal Trade Commission in the following complaints: No. 33 
(radiators), ITo. 548 (lubricating oils). 

(iTote: Discrimine,tion in price to drive out coinpetitors was 
also condemned under Section 2 of the Clayton Act). 

14. Giving of "free goods" and selling below cost . 

(a) Orders in which there are no court decisions . 

Federal Trade Commission v. Fleischman Co. , 1 F.T.C.D. 119 
(1918) (Giving to bakers more yeast "than required for proper 
sample or demonstration purposes"). 

Accord: 

Federal Trg.de Commission v. National Distilling Co. , 1 
F.T.'CD. 88 (1918) 

(b) Orders in which there are court decisions . 

(1) Giving free loaf of bread rath each one purchased. 

Igard Bailing Co , v. Federal Trade Commission , 264 

Fed. 330 (C.C.A. 2d, 1920) (Order reversed for lack of 

interstate commerce.) 

Sears Roebuck & Co . v. Federal Trade Commission , 
258 Fed. 307 ( C.C.A. 7th, 1919). 

Held: The Federal Trade Commission has no power to 
prevent selling below cost or giving away goods where 
there are no representations which tend to injure or 
to discredit competitors and deceive purchasers as to 
the real character of the transaction, 

(2) Bidding up prices of supplies to destroy competition. 

Federal Trade Commission v. American Agricultural 
Chemical Co. and the Brown Co., 1 F.T.C.D. 226 (1918), 



8001 -57- 



(c) Sti,onlations » 

(l) In Stipulation No. 267 the practice of giving free dinner 
sets and premixuns with the sale of respondent's products 
was ordered discontinued, 

(6) The giving of free premiujns with the purchase of office 
supplies was discontinued in Stipulation ITo. 279, 

(3) The practice of using the words, "free" or "give", in 

the sale of certain products, where the cost is included in 
the purchase price of another article sold in connection 
therewith, has "been ordered discontinued "by the Commission 
in the following stipulations: No. 472, No. 485, No. 468; 
No. 446, No. 619. 

15. Interference with Competitors' Source of Supply . 

(a) By means of excessive purchase prices . This unfair method of 
coupetition has iDeen generally practiced "by large concerns in 
order to stifle small competitors who are unable to purchase at 
an enhanced price, (No, 79, Fertilizer Industry, and No. 159, 
Refining animal fats), 

( "b ) Cooperative actio n by association through hoycotts, threats of 
"boycott, and thre a' cs of withdrawol of patronage , 
TOaere en Association of Wholesalers and Jobbers combined to pre- 
vent certain competitors from obtaining supplies by these means, 
the Federal Trade Commission in Complaint #579 ordered the dis- 
continuance of such practice (Wholesale Grocers Association), 

( c) Individual effort to obstruct coi.ipetitors' purchases . 

Feder al Tr^-'l"^-^ Coinmis sion v. Ra;Tnond Brothers-Clark Co. , 280 
Fed. 5l9, affirmed 263 U, S. 565 (1924) (505.4153). In this 
case the Commission had ordered an individual who attempted to 
induce a manufacturer to refuse to sell to a competitor to dis- 
continue the practice. The court reversed the Commission's order. 

16, Physical interference with competitors' em-oloyees or property . 

The respondent who instructed his drivers to collide with the trucks 
of his competitor in order to hinder and embarrass coinpetitor in his 
business operations was ordered to desist in Stipulation No. 79 
(fertilizer business). 

17, Issuance of false com-plaints to the Federal Trade Commission concern- 
ing coi.rpetitor' s business operations . 

In Conrplaint No. 898 the respondent was ordered to cease and desist 
from fabricating letters and forging signatures for the purpose of 
inducing action by the Federal Trade Commission against his com- 
petitor, 

18. Appropriation of com-petitor' s shipments . 

Respondent was ordered to cease and desist from accepting the ship- 
ments intended for competitors in Complaint No. 276, (Scrap iron and 
steel), 
8001 -58- 



19, In-r.L.cir.f: "broach of contract* 

(a) Under the common laWn 

After Lumley v, Gye . 2 El. & Bl» 216, 118 Engl Rep. 749 
(1853) some dispute arose among the courts as to whether in- 
ducement of breach of contract was in all circumstances a 
legal wrong, A few courts limited the doctrine of that case 
to the enticement of enployees. See, e<,g, , Glencoe Sgjid and 
Gravel Co. v. Hudcon Bro sr Commission Co. , 138 Ivio, 439, 40 S»W, 
93 (1897), One or two other courts refused to allow an action 
for inducing a "breach of contract unless the defendant' s action 
was accompanied by threats, violence or fraud. See Boyson v. 
Thorn. 98' Cal, 578, 33 Pac, 492 (1893), However, the general 
tendency is to grant recovery for any intentional procurement 
of breach of contract, without requiring malevolence, fraud or 
coercionc Savre,. Inducing Breach of Contract (1922) 36 Hary 
L, Rev, 66G (1925). 

B itterman v. Lo uisville & Ilashville R. Co. , 207 U.S. 205 

(l-07)„ 

Tabuler Rivet L Stud Co . v. Exeter Boot & Shoe Co. . 159 

Fed. 824 (C.C.A, 1st, 1908), 

R and W Hat ShoT: v. Scully . 98 Conn, 1, 118 Atl. 55 (1922). 

The motive of trade competition on the part of the defendant 
is no jur-rif ication for inducing the breach, Beekmar^ v, 
M9:S-';ers, 195 Ivless, 203, 80 II. E, 817 (1907). In this respect, 
theryforsj the Eederal Trade Commission has merely contributed 
a new remedy for a practice already considered unfair at coEuuon 
l?w^, 

(b) Action tal::en by the Federal Trade Commission, 

(1) Inducting breach of contract. 

Fede ral Trade Commission v. Stanley Booking Corpa , 
1 F.^^C.D. 212 (1912), 

Utali-Idaiio Sugar Go. v. Federal Trade Commission , 22 F, 
(2d) 122 (C.C.A. 8th, 1927) (Order vacated, on ground 
raising of sugar beets and manufacture of sugar did not 
constitute interstate commerce), 

(2) Enticing emiployees. 

Federal Trade Commission v. Standard Car EquiTPment Co. . 
1 F,T.C.D, 144 (1918), 

20, Es-pionage. 

(a) At common Law. 

In the rare instances in which the question has arisen, the 
courts at comr.ion law have refused to enjoin espionage in trade 
competition, where no violation of trust was involved. 

Park a. Sons Co. v. Hational ITholesale Druggists' Association . 
175 IT. Y, D. 67 IvT.E. 136 (1903) 
8001 -59- 



Rocky Mountain Bell Teleiohone Co. v. Utah Independent 
Tele-phone Co. . 31 Utah 377, 88 Pac, 26 (1906). 

(Id) Under the Federal Trade Commission Act . 

PhilJTD Carey Mfg. Co. v. Federal Trade Commission . 
(CCA^eth) 

29 Fc(2d) 49 (l928) (Order vacated "becaase there was no 
evidence that information acquired by employees of respondent 
who posed as customers of a competitor was unlawfully used to 
suppress competition). 

(1) By means of s-oies . 

Condemned in Federal Trade Commission v. Botsford Lum- 
ber Co. . 1 F.T.C.D. 60 (1919) 

a) To get comDctitor' s customer list . 

Trailing competitor's agent and employees to 
hinder them in the conduct of their business, to 
learn names and addresses of competitor' s cus- 
tomers, (Complaints Nos. 6 (yeast), 11 (lumber), 
307 (Lightning rods), 159 (refining animal fats)). 

b) Securing information as to operations and other 
trade secrets . 

Paying spies to enter competitor's plant or 
offices to secure such information. ITo. 215 
(mineral separation processes), 223 (fire ex- 
tinguishers), 344 (automobile fans). 

c) Obtaining information concerning compet itor's shj-p- 
ments and sources of sup-ply from employees. rTo . 1145. 

( 2) P osing as customers to obtain data intended only for 
cus tcinei s. 

Sending of requests to mail order house to obtain 
specifications, estimates, prices, etc., information 
intended only for bonafide customers. Practice ordered 
discontinued in complaints Nos. 11, 195, 209. 

( 3) SeCTiring estimate s and bids for the purpos e of under- 
bidding competitor . 

Building material. Practice questioned in Complaint 
730, but dismissed without assignment of reasons. 

21. Holestation, Harrassing Tactics. Interference with Compe titors. 

"The rule may now be considered as settled, that injury caused to 
another's business, or legitimate interests, even though not by- 
means in themselves unlawful, is actionable, tmless justified 



■fay legitimate self-interest." pirns . Unfair Competition and Trade 
Marks (3d ed. 1929) 447; see, generally 436-449, 
In American Bank & Trust Co . v. Federal Reserve Bank of Atlanta . 
256 U, S. 350 (1921) the Supreme Court enjoined the Federal Re- 
serve Bank from attempting to force a state hanl^: into the Federal 
Reserve System "by accumulating checks on state tanks until they 
reached a large amount and then presenting them for payment over 
the coiinter. 

In lunshee Vo Standard Oil Co e« 152 Iowa 618, 132 N.R, 371 (l91l) 
the court recognized a right of action against the defendant who 
had entered the "business of supplying oil at retail, not for the 
purpose of profiting from the retail trade, but for the sole pur- 
pose of driving plaintiff out of husiness hecause he refused to 
purchase exclusively from defendant. In Even son v, STjaulding , 150 
Fed, 517 (1907) an injunction was granted to restrain hardware and 
farm implement dealers from employing agents to follow the salesmen 
of plaintiff, to interfere with their efforts to make sales, and to 
dissuade prospective -uurchasers from buying, with the purpose of 
driving plaintiff out of the territory in question. Thus the 
business tactics which the Federal Trade Commission has declared 
unfair were already unfair at common law. 

Various forms of molestation and harassing tactics to interfere 
with and destroy contpetitors: 

U tah-Idaho Sa^'^sJ C o. v. Federal Trade Commission . 22 F. (2d) 122 

(CCA. 8th, 1927) (Order vacated on ground raising of sugar 

beets and manufacture of sxigar do not constitute interstate 

commerce) , 

Cf. Phili-p Carey lifg. CO c v. Federal Trade Commission . 29 F 

(2d) 49 (CCcA, 6th, 1928), 

Bribing employees of customers to adulterate and spoil products 

sold by competitors: 

Federal Trade Commission v. Essex Varnish Co .. 1 F.T.CD. 138 

(1918). 

Fictitious requests for catalogues or estimates: 

Federal Trade Commission v. Botsford Lumber Co .. 1 F,T,CD, 

60 (1918), 

Federal Trade Commission v. Chamber of Commerce of Missoula . 

5 F.T.CD, 451 (1923). 

22, Trade marks and trade names — "-Dassine off" . 

(a) Common Law , 

At common law it was unfair competition to appropriate the 
good-will of a competitor by simulating its trade mark, label, 
or trade name, or the color, design or shape of its products, 
in such fashion as to "pass off" one's goods for those of the 
competitor. 

Herring-Kail-Marvin Safe Co. v. Hall's Safe Co .. 208 
U.S. 554, 580 (1908); 

L. E. Waterman Co. v. Modern Pen Co .. 235 U.S. 88 (1914); 
McLean v. Fleming . 96 U.S. 245 (l377); 

Hamilton-Brown Shoe Co. v. TJolf Brothers & Co .. 240 U.S. 
251 (1916); 
8001 -61- 



Cf. Pillsbury-Washlmrn Flour Mills Co. Ltd . v. Engle, 86 Ped, 
608 (CCA. 7th 1890). 

The common law also afforded relief where the parties were not 
in competition, "but the name used "by the defendant, in an allied 
trade, would lead ptirchasers to "believe that the plaintiff had 
entered the line of "business in which defendant was engaged. 

■Akron-Overland Tire Co. v., ffillys-Overland Co .. 273 Fed, 

674 (CCA. 3d, 192l); 

Peninsular Ch e mical Co. v. Levinson , 247 Fed. 658 

(CCA. 6th, 1917); 

Voif:::ue Co. v. Thompson Hudson Co.. 300 Fed. 509. (CCA. 

6th 1924) „ 
See generally, Kims. Unfair Competition and Trade Marks . 
(3d. ed. 1929), 

("b) Federal Trade Commission . 

In the trade mark and trade name cases, therefore, the remedy 
at common law was adequate; and in this field the Federal Trade 
Commission has developed no new concept of unfairness. Cases 
which reached the coiirts are: 

Juvenile Shoe Co. v. Federal Trade Commission . 289 Fed. 57 

(CCA. 9th 1923) (Order affirmed); 

Federal Trade Commission v. Balme . 23 F. (2d) 615 (CCA. 

2d 1928) (Order affirmed). Cert, den . 277 U. S. 598 

(1928). 

Lighthouse Rug Co. v. Federal Trade Commission . 35 F. (2d) 

163 (C.C.A. 7th, 1929). 

23, Price Fixing Activities . 

(a) Agreements among competitors to maintain price levels. 

( 1 ) Labor "boycotts used to maintain -price structure . 

An association of photographers agreed with a 
photographers' union to maintain a standard scale of 
uniform prices in exchange for the union's promise not 
to permit its memhers to work for manufacturers who did 
not maintain the scale of uniform prices. A cease and 
desist order wo.s issued in Complaints Nos. 82 and 928, 

(2) C oncerted action to enhance and maintain prices "by means 
of meetint-^s and correspondence . 

A cease and desist order was issued against an association 
of paper manufacturers in Complaint No. 17, 

(3) By means of "standard cost finding system" . 

A national organization of printers in an effort to en- 
hance, fix and maintain prices esta'blished a standard 
cost finding system. A complaint issued against the 
United Typothetae of America was dismissed on stipulation 
of the parties, 

8001 _62- 



(4) Censoring trade directory list in an effort to maintain 
Tprice level . 

A cease and desist order was issued against the Salt 
producers Assn. in Complaint Ko. 781, The respondents 
censored the trade directory list for the purpose of 
maintaining prices and they agreed to allow discounts 
only to those dealers listed, 

( 5 ) Method of fired price list . 

An order to cease azid. desist in Complaint No, 1010 was 
issued against memters of a coal distributive associa.tion» 

(6) Reporting plen a 

Members of a cutlery association reporting their prices, 
sales, etCoj vith the object of enhancing prices and 
maintaining them discontinued such practices after Com- 
plaint Wo. 1246 was issued, 

24, Bogus Inde-pendents , 

Federal Trade Commiss ion Vo Armour & Co. & Farmers Coo-perative 
Fertiliser Coo, 1 F.T.CoD. 430 (1919). 

The respondents owned the capital stock of a subsidiary 
corporation engaged in the same business and represented it 
to be an independent farmers' cooperative company. The con- 
cealed operation of the subsidiary company was held an unfair 
method of competition. 

Federal Trade Commission v, Fleischaann Comxiany . 1 P.T.CD, 
lis (1918), 

It was held to be an unfair method of competition to conceal 
the control and affiliation with other yeast companies which 
held themselves out and advertised as independents. 



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