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BOSTON PUBLIC LIBRARY 



RESTRICTION OF RETAIL PRICE CUTTING 
WITH EMPHASIS ON THE DRUG INDUSTRY 

By 

Mark Merrell 

and 
E. T. Grether Summer S. Kittalle 



WORK MATERIALS NO. 57 



TRADE PRACTICE STUDIES SECTION 
March, 1936 






3 9999 06317 389 

OFFICE OF NATIONAL RECOVERY ADMINISTRATION 

i 

DIVISION OF REVIEW 



OFFICE OF NATIONAL RECOVERY ADM INI STRATI 01! ' 
DIVISION OF REVIEW 



RESTRICTION OF RETAII P r ICE CUTTING 
■7ITH BHPHASIS ON THE DRUG INDUSTRY 

By 
Mark Merrell 

and 
E. T. Grether Sumner S. Kittelle 



> 



Acknowledgement is rap.de to Mr. George Feldman for his report on the 
legal aspects of resale price maintenance; to Mr. harry S. Kant or and 
kiss Anne Golden for their preparation of the summary, the general 
discussion of state fair trade laws, the appendix on techniques for 
the study of prices in newsoaoer advertising, and for detailed 
suggestions at all stages of the work; to I r. 'iroe Alderson for 
com ient and criticism; and to kiss Anna Vina for her efficient co- 
ordination of the secretarial and clerical details involved in the 
preparation o^ the reoort. 



TRADE PRACTICE STUDIES SECTION 
I arch, 1936 



9726 



FOESUOHD 

This study of restrictive price control devices in retail trades 
was oreorred by Mark lierrell of the Trade Practice Studies Section, 
Corwin D. Edwards in charge. 



This re ort presents orincipally a history of the inception and 
development of the resale price maintenance movement in the drug in- 
dustry. The industry forces at work are jortrayed/ in detail. The 
effects of the restricting devices .are presented, 'insofar as evident, 
there having been inadequate tine for a field and' questionnaire sur- 
vey. However, the forms to be usee, in such a survey have been developed 
and are presented in an appendix, together with a technique for collect- 
ing retail prices. The experience in California, which state has had 
permissive restrictive price control since 1951, is dea.lt with in 
greater detail, on the oasis of surveys which one of the authors had 
instigated prior to the beginning of this report. 



Sources of information were correspondence, documents and trans- 
cripts of hearings in NBA files; correspondence and conversations with 
trade leaders; articles in trade journals; reports of court decisions; 
and, for so le of the purely historical matter, the personal knowledge 
of members of the Loss Limitation Unit gained through contact with 
the drug industry before and daring i'RA. 



At the back of the report will be found a briei 
the studies undertaken by the Division of Review. 



statement of 



L= C Marshall 
Director, Division of Review 



March 3, 19S6 



/ 



972S 






TABLE OP COITTE1TTS 



Faze 



Summary. 

Introduction: Issues in the Re rulation of Hetail Prices ... 






PAST OITE 



I1TTEZPLAY Of EITEE2STS I' TIC DRUG 
IIBDUSTRY 3SPQHE a:,d dupjiig :i. P. A. 



Ch apter One Before If. P. Ac 7 

I. Introduction 7 

II. Developments in the Drug Industry from 

1911 to 1933 8 

III. The Original Drug Manufacturing Codes 12 

A. The Original Pharmaceutical Code 2.o 

P. The Original Cosmetic raid Toiletry Codes 12 

1. Proposed Code of the Associated Manufac- 

turers of Toilet Articles 13 

2. The Proposed Code of the Perfumery and 

Cosmetic Institute 14 

C. The Original Package iiodicine Code ' H5 

D. The Proposed Drug Institute Code 18 

IV. The Proposed Wholos-le Drue Code 19 

A. National Wholesale Druarists' Association 

Proposals 19 

lc An Informal Code 19 

2. The Original national Wholesale Druggists ' 

Association Code Piled with IT. P.. A. . . . • 23 

B. The Federal Wholesale Druggists' Association 

Code 24 

C. Other Wholesale Drua; Codes 27 

V. Summary * 29 



9726 

-ii~ 



Page 

Chapter T\?o : Duri:y : 2~o R. A 3Q 

I. Attempts at Drag Code Consolidation 3Q 

II. The Pharmaceutical and Biological Code 32 

III. The Perfume, Cosnetic pad Other Toilet Preparations 

Code 32 

IV. The Package Medicine Code 34 

V. The Wholesale Drug Code 37 

VI. Summary '41 

****** 

PART two 

LOSS LIMITATION PROVISION 01' TIE: RETAIL DRUG- CODE 

Chapter Ore: Introduction 42 

I. The Code's Place in the Entire Pricu Stabilisation 

Picture 42 

II. Fundamental Pricing Structure of the Drug Industry. ... '' 42 

Chapter Tvo : Alignment 01' i ,o siny Threes 45 

I. Proponents of Price Stabilization 45 

II. Opponents of Price Stabilization 46 

Chap ter Three: H istori cal Pevol o pnent of the Los s Limitation 

Provision to the Amendme nt of M ' rch 1934 . .... 50 

I. Trade Activities in Summer of 1~ : 33 50 

II. Presentation of Code: Public Hearing; Subsequent 

Drafts 50 

III. Reaction of Individuals; Mass Pressure 55 

IV. The Loss Limitation Provision as Approved by the 

President 58 

V. Objections of Tro.de to Approved Provision 60 

VI. Efforts for a New Loss Limitation Provision; 

Attitude of 1I.R.A. 61 

VII. The March Amendment to the Loss Limitation Provision 

and Its Interpretation 65 

9726 -iii- 



t 



Page 

Chapter Four : Histo;.-ical_ Develo Tvnt of the Loss Limitatio n 
Provision irom ti\<:; Larch A i^ndae-nt to the Ex- 
piration of the Code 69 

I. Administrative Problem Raised by "Last Proviso" of 

March Amendment 69 

II. Order 60-54 and the Minimum Price Lists 71 

III. Proposed Solutions of the Problem 72 

IV. The Amendment of September 21 , 1934 74 

V. Tlie Public Hearing of June 7 and 0, 1934 75 

VI. The Movement lor a. Mark-up 76 

VII. Interpretation of the September Amendment 77 

Chapter Five: Issues Scon by Ooposin.. Forces. 80 

I . Fo reward 80 

II. Issues Seen by the Proponents of Price Stabilization. 80 

A. -Issues Upon Price Stabilization in General 80 

1. Bad Business Conditions in the Trade 80 

2. Price Demoralization as the Cause of Bad 

Business Conditions 83 

3. Incidental Bad Effects of Price Demoraliza- 

tion 83 

4. Causes of Price Demoralization 85 

5. Failure of Previously Tried Remedies . 86 

6. Right of the Drag Trade to Special 

Consideration 87 

7. Predicted Effects of Price Control 88 

B. Issues with Respect to the Manufacturer's 

Wholesale List Price Provision 89 

1. The Soundness of the Manufacturer's 

Wholesale List Price Per Dozen as 

a Code Price 89 

2. The Effects of the March Amendment after 

60 days of operation 93 

III. Issues S^en as the Opponents of Price Stabilization.. 96 

A. Issues with Respect to P r ice Stabilization in 

General 96 

B. Issues with Respect to the Manufacturer's 

Wholesale List Price per dozen as a Code 

Minimum 100 



972G 



-IV- 



Pa-e 

Chapter Six: AcJEiiiistrative Problems and Inherent Difficulties 
in the Loss Limitation Provision 

I . Manipulation of Prices by Manufacturers 107 

II. Clearance Sales HO 

III. Premiums, Prize Contests and Outright Gifts 112 

IV. Discontinued Lines of Merchandise 117 

V. Complete Final Liquidations 118 

VI. Determination of the Code Price in Unused Cases 120 

VII . Manufacturers ' Price Change s 121 

VIII. Retailers 1 Price Advertising 122 

IX. Federal and State Taxes 122 

X. Difficulties Inherant in Code Authority Administration. . . 123 

XI. Compliance and Litigation 124 

A. Foreword. I 24 

B. Outstanding Litigation Cases 127 

1 . The Standard Drug Co . , Richmond , Va 127 

2. We is star d Bros., Newark, IT. J 1< 

3. The Johnson Wholesale Perfume Conroany 

(Allen Cut Rate Stores), Massachusetts, 

Rhode I sland and Connecticut 

4. The Thrifty Drug Company, Los Angeles, California. 



-6C 



130 



5. Court Cases of the Few York City Code Authority.. 131 

Chapter Seven : Effects of the Loss Limitation Frovision 133 

I . Foreword 133 

II. Study of 12 Drug Items in 108 

Manhattan Drug Stores 134 

III. Study of 50 Items in 30 Stores in 

Four Cities 150 

IV. Miscellaneous Data; Material from N.R.A. Files 154 

Chaoter Sight : Description of Loss Li m itation 

Provisions in Other Retail Codes . 161 

I. The Retail Tobacco Code.,, 161 

II . The Retail Bookseller ' s Code 165 



Q70f, 



i 



K 



C h r.pt er EiAt (Cont'd ) 

Pa-;e 

III . The Retail Food and Grocery Code 169 

IV. The Retail Trade Code 172 

* * * * * * 

?A3T THREE A 174 

STATE RESALE PRICE UAIKTEEAIJCS LAWS 

Chapter One : The Fair Trade Law s I? 4 

I . Contracts 174 

II. Types of Resale Price Maintenance Contract 179 

III . Administration of the Fair Tra.de Laws 181 

IV. The Oregon Fair Trade Lav of 1933 181 

V. The Fitch Plan 182 / 

Chapter Two : Other Legislation on Resale Price 

I . Hew Jersey, 

II . Connecticut, 

III. Idaho 

****** 



i 



Chapter One: The Legal History of Resale Price Maintenance 
in California . 



133 
184 

184 



p.iRT ~::r ? e jj 

HE EXPERIENCE IV. THE STATS OF CALIFORNIA 187 



187 
187 



I. The Period Prior to the 1931 Fair Trade Statute 

II. The 1931 Fair Trade Law and Its Amendment in 1933 190 

III. Review of Cases Arising Under the Law 

Chapter Two : The Prohibition of Discrimination in Pricing 

I . The Act of 1913 

II. The 1933 Below Cost Act. 

III. The Unfair Practices Act of 1935 

9726 vi • 



207 
207 
207 
208 



( 



Pa^ro 

IV. The Politic,"! Forces Behind the Legislative Price — ~~ 

Stabilization Device s 217 

Chapter JThree: Developments in the C-rocery. .Trade 218 

I . The Official Attitude 218 

II. The Experience With and Attitude Toward Contractual 

and Non-contractual Price '. aintenance 219 

A. Retail Experience and Attitudes 219 

3. Experience and Attitudes of ilanufacturers and 

Di s tri but ors 220 

C. Experience and Attitudes of Selected Pirns 221 

Chapter _Pour: Developments Under the Unfair Practices Act 230 

I . The Period Prior to 193 ■ 230 

II. The Peri:,d Following the Pass:, e ox the 193.3 Act 231 

Chapter Eive: Developments _ir the Bru£ .Trade 233 

I. The Period Prior tc 1933 233 

II.. . The 1933 Amend lent 234 

III. Trade Conditions in 1933 235 

IV. The Period of the PEA Code 241 



T r rn' 



She Attitudes Towards and Experience with Resale 

Price Control on the part of embers h 

the Trade 242 

A. Retailers 242 

3 . . • ,n if acturers and "Tho looaler s 248 

.Qfe%"9Ji e . 1 l._Six: The Pressure from Organized Retailers 254 

Chapter Seven: Snf or cement 262 

I . The Procedure of Enforcement 262 

II. The Elf ectiveness of Enforcement 267 

Chapter Eifftit; The _"f feet s. Upon Prices and Kargins 269 

Chapter Nine: 'The Economic Effects of ?.es< le Price Co ntroJL 

Under the California Pair Trade Law 280 



972^ -vi i~ 



I 



p_art it pur 
iiitehplat or forcbs if trbi brut- uroysTHY sihcr km 

and 

i ? posed : bd ;ral statutes p * a 4 e f 

Chapter One: The, Interplay of forces in the Drw, Industry 285 
Sines BRA 

I. The Drive to Pass Pair Trade .-jaws 285 

II. Pressure on Manufacturers to Utilize the Acts 286 



288 



III. The Extent of Contracts Issued 

IV. first State High Court Decisi ui 288 

V. Drug Biscrioutors Attack on anufacturers 290 

A. The Retailers' Revolt 290 

B. The Wholesalers' Revolt 291 

VI . Summary 293 

Chap_ter_Twq_: Propp sed Federal Statutes 294 

I . The Tydings 'Mill 294 

II . The Rat;.ian-Robinson Bill 294 

III. Cther federal Proposals Before Conrress 296 



972fl -viii- 



I 



Pa/ve 

&^-DlA 297 

Legal Aspects Of Resale Price Maintenance 298 

Section One: Su raarjr Sta.te_._ent of Iiroqr tajit jP_ric_e 

! laint enance Decisions by. United States Suorene 

Court 29 g 

I. Restrictive Agreements 301 

II. Restrictive Agreements and Anti-Trust Laws 302 

III. Restrictive Agreements and the 

Law of Restraint of Trade 302 

Section Two : Clas_sifi cation of Ijroo_rtant Resale .Price 

Maijii_e.nar_ce Becis.ions. .Into ^Related .Classes 312 

I. Decisions by Federal Courts 312 

A. Decisions Concerning Patented Articles 312 

3. Decisions Concerning Proprietary Medicines 

and so-called Secret Process C-oods 322 

C. Decisions Concerning Trade - Marlced and 

Copy-righted Articles 328 

D. Decisions Concerning Other Identified 

Products 328 

P. Federal Trade Commission Decisions 330 

II . Decisions by State Courts 340 

III. English Decisions 342 

IV. Canadian Decisions 342 

Federal Trade Commission Drug Industry Cases 343 

Pjro;oos_ed.Drug Manufacturing Codes. 343 

Certain Provisions in the Original Code Filed by 

the Associated Manufacturers 3f Toilet Articles 343 

Certain Provisions in the Original Code Filed "oy 

the Perfumery and Cosmetic Institute 344 

Certain Provisions in the Cri inal Code Filed by 

the Package Medicine Industry 346 

Pi'.ojo __. sed _whol.esn.le Drug Code.s 348 

Certain Provisions of an Informal Wholesale Drug 

Code 348 



-1 x 



Certain Provisions of the Original Code Presented 
by the national Wholesale Dn^lsis 1 Association. 



Certain Provisions of the Original Code Presented 
by the Independent Wholesale Dm. gists' Associa- 
tion 



Proposed Zxecutive Order Establishing Drug In- 
dustry Coordinating Council 



Open Price Provision of the Perfume, Cosmetic 
and Other Toilet Preparations Code as present- 
ed at the Public Hearing on January 17, 1934.. 



Pare 



353 



Certain Provisions of the Original Code Presented 

by the Federal Wholesale Drug.'-'ists 1 Association 354 



355 



Certain Provisions of the Original Code Presented 
by the Allied Wholesale Druggists' Associa- 
tion 355 

Manufacturers "die Adopted Refusal- tc- Sell 

Policies in 192^ 355 



356 



360 



Certain Approved Provisions in the Perfume 
Cosraetic and ' ther Toilet Preparations 
Industry 361 

Certain Approved Provisions in the Package 

lledicine Code 363 

Certain Provisions in the Proposed Wholesale 
Drag Code as drafted for Public hearing', 
March 15 , 1934 366 

Pair Trade Practice Rules as Adopted by the 
Federal Trade Commission - Wholesale Drug 
Conference 367 

Proposed Federal Price Control Legislation 

from 1914 to 193L; 371 

The Connecticut Retail Drug Control Act 373 

Status of Fair Trade Legislation 375 

The Hew Jersey Unfair Competition Lav/ 378 

The Fitch Plan 379 

The Tydings Bill 380 

The Patnian-Robinson Bill 381 

Her/ "J. A. R.D. Model State Fair Act 383 

972« ~x~ 



Page 

Manufacturers (forking Under Fair Trade Lavs 385 

Techniques: 

Price Information Availaole from Newspaper 

Advertisements 388 

Shortcomings of the Method 399 

Analysis of Liargins under Contracts Issued 

under the Fair Trade Lavs 401 

Questionnaire Forms Developed for use 

in collection of Data 406 

Summary Tables for Charts in Part II 426 



-XI- 



f 



-- i - 

SUMMARY OF FINDINGS 

Economists, legislators and business non to day have a vital 
interest in the problem of retail price cutting and current efforts to 
restrict it. Little retailers, by mass action, are securing price 
maintenance in the form of state laws and manufacturers' price policies, 
and are now -forking toward Federal legislation to further their cause. 
All this is happening with little analysis of the economic and social 
considerations involved. 

The focus of this re-oort is on the drug industry "because that 
industz-y has advocated restraint of price cutting more consistently than 
any other group, and ha.s long ^oeen in the van of the price maintenance 
movement. As early as the "beginning of this century, drug manufacturers, 
seeking to curb the growth of crice cutting, attempted to stabilize 
resale prices bv contracts or notices affixed to their products, fthen, 
in 1911, the United Strtes Supreme Court, in the Miles' decision, 
declared such contracts in restraint of trade and void; and in another 
case, declared that notices on goods were not binding on distributors, 
many manufacturers became discouraged, but a few continued their 
efforts to maintain prices by other means. 

The two remaining methods of resale price maintenance were refusal- 
to-sell and consignment selling but both were expensive and ineffec- 
tive; so, while a. few manufacturers experimented with these devices, 
the drug industry appealed to Congress for a law validating resale 
price contracts. Between the 63rd and 73rd Congress, thirty-three 
such bills came up for consideration, but none massed. 

In 1933, Congress passed the national Industrial Recovery Act, 
and the drug industry saw a new chance for Federal price control. 
Manufacturers, wholesalers ana retailers submitted codes, containing 
provisions to stop retail price cutting; bi.it after months of negotia- 
tions, only the retailers achieved pny success in their efforts; and 
the provision they received established a minimum orice lower than they 
had requested. The manufacturers secui ed omen orice filing provisions 
in their codes but no direct price maintenance devices. The whole- 
salers could not devise a satisfactory price clause; and because of 
disputes over the labor sections of their -orooosed code, ended with 
no code at all. 

The loss limitation provision in the Retail Drug Code prohibited 
druggist from selling below the "manufacturer's wholesale list price 
per dozen", a price practically equal to the small dealer's merchandise 
cost. Because it '"as easy to ascertain and fairly stable, this code 
price proved one of the most workable and effective in NRA; but it had 
its share of administrative difficulties and inherent defects. 

Though evidence on the effects of the loss limitation provision is 
meager, it points to the probability that a larger number of prices were 
reduced than were raised. T r p factors account for this phenomenon; 
first, reduction of prices ~oy manufacturers to prevent the code from 
raising their consumer prices; and second, a tendency of competition to 
draw "orices down toward the code minimum on a large number of products 
counterbalancing the price increases on the items previously sold as 

9726 



- 2 - 

loss leaders. The net effect of these price movements upon consumers 
and small retailers cannot be stated, however, since there is no 
evidence of the relative volume of sale of items whose prices fell and 
items whose prices increased. 

When compliance with the loss limitation provision began to 
crumble (largely because of litigation difficulties) in the fall of 
1934, the drug trade turned to the State legislatures for price 
stabilization. This movement derived inspiration from the California 
act permitting manufacturers and distributors to contract for the 
maintenance of resale prices, and requiring all retailers, whether 
parties to contracts or not, to abide by contract prices. This Act 
was the model for other state legislation; and drug groups secured its 
passage in Oregon, Washington, Illinois, Wisconsin, Iowa, Hew York, 
Pennsylvania, New Jersey and Maryland. Druggists in Connecticut 
obtained a statute indent ical with the loss limitation orovision of the 
Retail Drug Code. 

The leadership of the price maintenance effort, by this time, had 
shifted from manufacturers to retailers. Previously, price maintenance 
had been a scheme of manufacturers to achieve retailer goodwill. Grad- 
ually it changed to a militant retailers' movement to force manufacturers 
into satisfactory nrice 'oolicies under threat of losing all goodwill. 

Except for the California, law, state price maintenance laws have 
been in operation for too snort a time to reveal their effects. Data 
from California indicate that retail margins under contracts average 
about 31$, and that contractual prices on loss leaders have advanced 
ahout 254. Prices in small drug stores, on the other hand, seem to have 
decreased slightly. The drug industry has issued more contracts than 
any other. Many retail grocers are ignorant of the law's existence, 
and grocery manufa.cturers have exhibited little desire to maintain 
prices under it. 

In the present session of Congress, retail druggists have commenced 
a new move for Federal -orice maintenance legislation. One proposed 
bill would lift the anti-trust law ban on manufacturers' price con- 
tracts in states with r ;r ice contract laws, thus obviating the necessity 
for manufacturers to establish a domicile in these states. Another 
bill would strike at manufacturers' discriminatory discoimts and place 
the small and large dealer unon a more even competitive basis. 

Because of the extent of the price maintenance problem, the 
present study is little more than an indication of the need for a 
larger work; for which work, it is hoped, the information and pro- 
cedure of this report may provide useful suggestions. 



9726 



IITTHODUCTIOH (*) 

Issues in the gem'-latio". of gotoi! ""rices 

A strong effort tc change the nature and ertent of retail price 
regulation is binder way in this country. A lumber of states have enacted 
lavs permitting resale price maintenance ?.nd loss leader selling during 
the past year. Sinilar legislation is "before legislatures in other states, 
and before Congress. 

Proponents of restraints on price cutting urge that regulation 
is necessary not only for the preservation of snail, individual enter- 
prise, hut also to eliminate practices injurious to the consumer. They 
charge that the monopolistic power of huge distributing corporations is 
oppressing sr.all retailers; that the groat chains and department stores 
are exacting unearned discounts and allowances from their suppliers and 
are using the margin thus gained to destroy small competitors; and that 
manufacturers often build up consumer demand by advertising and then of- 
fer special discounts to price cutters, thereby making small retailers 
distribute the product at a loss. The proponents also charge that pres- 
sure on snail non-cut-rate retailers comes from certain types of rela- 
tively smal] , aggressive cut— rate establishments. 

The""social usefulness of the types of price control already 
established or now under consideration has not ^oeen. precisely evaluated. 
It is not hnomr, with even approximate accuracy whether a. given t^noe of 
price control mill contract the area rd.th.in v hich competition operates, 
or shift the brunt of competition to s new area, or merely change the 
form of the competitive practices; no estimate has been made of whether 
it will result in the overpayment of those engaged in performing dis- 
tributive functions, or whether it will tend to oiirta.il the total output 
of goods. Political pressure and rule-of-thumb judgments have decided 
the course of events. 

The problems involved are complex, but some of the more out- 
standing questions are a r> follows: 

.1. T.'ould the proposed controls eliminate conditions inimical to 
the public interest? 

a. TTould they prevent the growth of monopoly and the unsocial 
use of corporate power? 7/hat shifts have been apparent 
in volume of business on nationally-advertised goods from 
large to small distributive enterprise? TJliat, if any, 
trends appear toward a. monopoly for large distributive 
enterprise -through -the use of private brands? 

b. Would the controls favor the continuance of small enter- 
prise? TTnat shifts in volume of business done by small enter- 
have appeared? Plow have the various forms of existing con- 
trol altered, favorably or unfavorably, the margins of 
small enterprise? Of large enterprise? 

(*) By Harry S. Kant or 

9726 



- 4- - 



TTould tlie proposed controls bring about other conditions inimical 
to the public interest? 

c. TTould the consumer o y higher prices for goods? TThat has 

been the effect of existing controls on consuner trices 
on nationally-advertised brands? On private brands? 

b. T7or.ll the consuner have to pay for unwanted services? 
TThat ^rice differential has been maintained between ser- 
vice and. non-service outlets under free competition and 
how have existing controls altered this differential? 

c. Would price regulation protect inefficient enterprises? 
What political and social reasons for such protection 
exist? That would bo the public cost? TTould. snail re- 
tail enterprise absorb an undue share of the social in- 
cone? 

TThat gains and losses woul 6 the proposed controls bring to 
industry? 

a. "hat have been the effects of existing and. nast nrice 
controls on manufacturers? Has the manufacturer's volume 
of business increased or decreased? Has his margin in- 
creased or decreased? 

b. TThat have been the effects of existing and past controls 
on wholesalers? h"" r e wholesalers' margins and volumes 
increased or decreased-? 

c. What nave been the effects of existing and uast controls 
on. retailers? That a.s been the effect on the relative 
margins and- volumes r>f retail enterprises of different 
sizes, price policies, and service policies? Is there 

a point below which cm established minimum price becomes 
more of a detriment than a benefit to small retail 
enterprise? 

If there is to be an extension of retail price control, in what 
manner and to what extent should prices be controlled.? 

a. Is new legislation necessary to-, secure the desired results? 
Can they be secured by the repeal of existing legislation? 
TTould. previous court decisions outlawing resale price 
maintenance be followed today if the courts had adequate 
evidence about the tactics ased in retail nrice cutting, 
and the effect of these tactics? TThat are the limitations 
on refusal-to— sell and. consignment selling as price main- 
tenance devices? Does the solution lie merely in the 
education of small retail enterprises in sound business 
proced.nre? TTould government-fostered voluntary chains 
achieve the protection of small enterprises through en- 
hancing their power to compete? TTould complete cartel- 
liza-tion result from the growth of voluntary chains and. 
is such an outcome desirable? 






97 26 



- O — 

b. If price control legislation is necessary, should 

all retail prices be regulated? What is the suscep- 
tibility of various commodities to price cutting? 
Upon what commodities v 'ould price regulation be in 
the public interest, and upon what commodities inim- 
ical to the public interest? 

. ' c. Should regulation be in the form of a fixed minimum 
price or a formula for establishing a minimum? What 
was the relative effectiveness of these two types of 
regulation as illustrated, on the one hand, by the 
Retail Drug,, Retail Tobacco pad Retail Booksellers' 
Codes; and on the other, by the Retail Food and Grocery 
and Retail Trade •Codes? how did the two types compare 
in enforceability, difficulty of administration, and 
protection to small enterprise? 

d. -Should regulation be in the form of mandators'- or permis- 
sive legislation? If the legislation is permissive, 
what types of enterprise, and what proportion of each, 
may be expected to take advantage of it? TJliat has been 
the experience in this respect under the California 
Fair Trade Lav;? What are the relative effects on prices, 
volumes, and margins of the two types of law, represented 
v by the California law and the Connecticut Retail Drug 
Act (which follows the provisions of the Reta.il Drug 
Code)? 

What is the relative enforceability of each type? How 
does the constitutionality bear on the last-mentioned 
question? 

5. To what extent is the depression responsible for the present 
movement for -price control? Would recovery correct the 
problems complained of by proponents of the movement? What 
would be the effect of the proposed price controls on in- 
dustry and society during periods of good business condi- 
tions? 

Would these controls, designed to prevent high mortality of 
enterprise during the depression, discougate the birth of 
new merchandising methods in other periods? Would they en- 
courage the entrance of inefficient units during times of 
good business? 

The solution of many of the above questions is impracticable; 
and the present report encompasses on]y a small part of the material 
necessary to answer the questions whether resale price maintenance should 
be permitted, and whether loss leader selling should cease. Some in- 
sight into the gain or loss to parties affected appears by close scrutiny 
of the nature of enterprises in the groups advocating and opposing the 
various forms of price regulation, and from analysis of their public 
statements. The fact that experiments in price regulation have preceded 



9726 



-■ 6.- 

analytical decisions on the propriety of such regulation offers an op- 
portunity for a studj; 1 of the 'effects in actual practice. 

Insofar as the physical limitations of this study have made 
it possible, this report presents the data on the effects of the loss 
limitation provisions of the Retail Drug Code and on the effects of the 
resale orice maintenance legislation in California. Limitations upon 
this study have required it to focus principally upon one industry. 
The drug industry was chosen "because of its susceptibility to price 
cutting, and its long— continued advocacy of retail price maintenance. 
This industry's experiences under 1THA are more readily available for 
study than those of other groups under codes, the loss limitation pro- 
vision of the Retail Drug Code being an interesting example of nation- 
wide mandatory retail orice maintenance. 

Prior to ItHAi the drug industry had been the principal sponsor 
of retail price maintenance bills before Congress and an active group 
in the struggle for price stabilization "by manufacturers. 

Since HEA the drug industry has sponsored retail price main- 
tenance legislation in a number of states and is currently attempting 
to secure Federal legislation on the problem. 

Thus this industry has experienced, perhaps, a wider range 
of retail price cutting and price maintenance problems than most in- 
dustries, and offers a fruitful field for research. 



■ 



?726 



- 7 ~ 
PAST I - INTE RPLAY 07 IHTSIIESTS I I T TEE DRUG INDUSTRY (*) 

CI3APTEH I - BEAKS MA 
I. IKflSDOC-IIOH 



Maneuvers for power in t'he Drug Industry during the I7RA period 
gave the key to what had gone before. Hew business strategies were 
but projections of the old and had the same motivations. Developments 
since the cede collapse seem to fall into the familiar patterns. 
Price maintenance did not make its first appearance in I-JRA codes. 
Various trade elements had demanded it ever since large scale business 
operations appeared. It had taken various forms and its compelling 
forces had shifted about. 

An examination of the drug industry during 1IRA and the price 
provisions which appeared in the original drafts of the codes may 
clarify the movements and attitudes toward price stabilization. Al- 
though none of the price provisions appearing in the original proposed 
dru_, codes were a^oroved by the Administration, they are of interest 
and should be carefully examined as they are indicative of the temper 
of the trade groups at the tine. The fight to convince the Adminis- 
tration of the necessity for such provisions, the compromises offered 
by the trade, and the subsequent clauses approved by the Administration 
all shed light on what can be expected in any future attempt the in- 
dustry may make to obtain price stabilization by legislative means. The 
Administration's experience with the industry under the approved, 
compromised price provisions probably indicates possibilities under 
other types of price devices that may be established in the future. 

This part of the report intends to describe first the major de- 
velopments in the field of price maintenance from the Miles' decision 
in 1911 'to the passage of the National Industrial Recovery Act. A 
discussion, of the original proposed codes for the manufacturing and 
wholesale branches of the drug industry follows. The proposed retail 
drug code receives only brief treatment here since Part II of this 
report covers it in detail. 

After the discussion of the proposed codes comes an investigation 
of changes in the drafts durii\; preliminary negotiations, and a dis- 
cussion of the approved codes. Again the retail drug code receives 
only cursory reference because of its treatment in Part II. 

Considerable material presented in this Part is written from 
first-hand knowledge acquired by certain members of the Unit through 
administering the several drug codes and from previous experience in 
the industry. 



(*) By Mark Merrell 



9726 



~ S - 
II. DEVELOP? PITTS' I'.l THT, DRUG INDUSTRY '-!%ROM 1911 TO -1933 



Prom 1911, when the United Stater- Supreme Court handed down the 
Miles' decision prohibiting manufacturers from issuing resale price 
contracts, to the passage of 1TRA, there was a growing pressure on 
Congress and the state legislatures for various types of price main- 
tenance laws. After the World War the advertising of trade-marked 
products was greater in the drug and toiletry field than in any other 
group of over-the-counter merchandise. The resultant growth of power- 
ful consumer demand for branded drug' products greatly influenced not 
only the extent of the price-cutting problem and the extension of 
these products into- new distribution channels but also the character 
of the trade groups demanding legislative relief. 

Before the advent of this great consumer demand, manufacturers 
were dependent to a large degree <=>n the support of wholesalers and re- 
tailers for the sale of their product. They confined their sales 
primarily to drug channels and prior to the Miles' decision and for a 
few years after, -were- sincere in their efforts to obtain stablized 
prices. The horizontal competition between' manufacturers •■' products 
was not very great and each had a semi-monopoly on his goods. The ■ 
sale of private brand substitute products by distributors was not 
large enough to cause worry. It was during this period before the 
war and the advent of great national advertising that any attempt on 
the part of a manufacturer to stabilize his resale price wis considered. 
a scheme to : ouge the public by reaping undeserved profits and courts 
considered restraints on price-fixing in the interest of public wel- 
fare. It was good business from the points of view of both profit and 
distributor's good-will for the manufacturer to control the resale 
price and to confine his distribution to the so-called legitimate 
drug channels. 

The Miles' decision' was a great blow to this large group of drug 
manufacturers who had- endeavored to' maintain! their resale price. 
Many dropped any idea of price maintenance. Some, however, endeavored 
to obtain stabilized prices by other means remaining after this sweep- 
ing decision. A great deal of confusion existed as to just what was 
legally possible. This confusion was somewhat clarified by the Col- 
gate decision handed down in June 1919 upholding the right of the 
manufacturer to refuse to sell to price cutters. The Eeech Hot case, 
in June 1922 clarified the -situation still more by. prohibiting con- 
tracts and agreements and certain other techniques employed in connec- 
tion with refusal- to-sell>.' '.'. Suo sequent decisions have not further re- 
stricted the technique available to the manufacturers using refusal- 
to-sell for price stabilization. Whereas a great many manufacturers 
were maintaining resale prices prior to the Miles' decision, this 
number dwindled to the point where at NRA's inception only a few 
manufacturers were voluntarily making an effort to stabilize their 
resale prices. During these intervening years, the Federal Trade 
Commission conducted investigations and held formal hearings on the 
activities of fifteen drug manufacturers.* In addition to the formal 



(*) See list of Federal Trade Commission hearings on page 343 in 
Appendix to this Report 

9726 



hearings held, the Federal Trr.de Commission caused a number of stipu- 
lations to be signed by manufacturers in place of issuing' a formal 
complaint. Unquestionable, this pressure from the Federal Trade Commis- 
sion held c'.ovm the number of drug manufacturers who uivocrted price 
maintenance. 

In 1914, the Stevens' Sill and the Petz' bill were introduced into 
Congress. These bills were designee to nullify the Miles' decision and 
give manufacturers the permissive right to contract for resale prices. 
Since that time ,°t least one bill with that intent has been introduced 
in each Congress up to the 73rd Congress (1233).* The two bills intro- 
duced in 1914 had a gre?t deal of support from the manufacturing 
branches of the arug industry but Dy the time the Capper-Kelly bill 
was introduced into Congress in 1931, the number of manufacturers 
supporting this measure had dwindled. Among the small group of manu- 
facturers vao spoke in favor of the Caaper-I'elly measiue were some who, 
as judged by subsequent developments , appeared less from sustained con- 
viction than from desire to make a gesture to win support of the trade. 

In the latter part of 1935, Sir William C-win-Jones vent to Canada,, 
at the request of certain drng interests, to establish there an organi- 
zation similar to the Proprietary Articles Trade Association which he 
had successfully operated for' about thirty years in England.** This 
Association, by means of boycott in England, had been b'le to stabil- 
ize prices in the drug ind\istry. Although the English' law allowed con- 
tracts for resale price, very few resale price cases ever went to 
court, as the blacklist methop. established by the Proprietary Articles 
Trade Association was more successful. The Proprietary Articles Trade 
Association was a vertical association, issuing a list of drug prod- 
ucts sold \>j member manufacturers. If " '"istributor cut the price be- 
low the price est'-blisned 't the Association he was denied the right to 
purchase -.ny of the products Listed, Sir Will-Iran Gwin-Jones estab- 
lished a similar system in Cana; . hut, after his death, when one or 
two adverse court decisions. w- re rendered, the C nadian movement col- 
lapsed. 

Early in 1926, Sir William appeared before drug .groups in the 
United States, Although it was clear that a similar price mainten?nce 
system would not be legal in this country, his visit inspired certain 
members of the N a tional Wholesale Druggists Association to start a 
drive to nersuade manufacturers to adopt a selective distribution 
policy. There was much enthusiasm over this movement; a committee of 
four wholesalers called on practically every large drug manufacturer, 
requesting that the manufacturer adopt a selective distribution (re- 
fi\sal-to-sell) policy. The wholesalers , in turn, promised support to 

(*) See Appendix Page 380 for an analysis of Federal Price Main- 
tenance Legislation which was considered by Congress between 
the Miles' Decision, 1911 up to the uassage of the Ifetional 
Industrial hecovpry Act, June, 1933 

(**) See "Retail Price Maintenance in Great Britain" by E . T. 
Grether, University of California Press 



9726 



- 10 - 

such a manufacturer through wholesalers' salesmen. Many wholesale com- 
panies tabulated the sales of the manufacturers who adopted this policy, 
paid -their salesmen extra commissions and gave them other incentives 
for pushing this merchandise. This development marked the first con- 
certed pressure oy distribution groups in this country since the Miles' 
decision to force manufacturers to '.opt = price maintenance policy. 
According to Drug Trade Hews some sixty-four manufacturers adopted a 
refusal-to-sell policy- hut the number was "-small in contrast to the many 
who had price maintenance policies prior to the Miles' decision.* The 
movement subsided within a year or so because of the fear of the Federal 
Trade Coi mission and the indifference of the manufacturers. 

The growth of national advertising after the world war, up to its 
peak in 1929 caused great expansion of the sale of products in the drug 
and toiletry field. With the flush of expanding volume Manufacturers 
lost interest in confining the sale of their products to drug channels. 
As a result, many other types of re toilers became competitors of the 
drug store. Furthermore, the average drug product with large consumer 
demand became an ideal loss leader a? it was of small unit value and 
its su posed value was well known to consumers; a cut price made an 
attractive bargain which Drought traffic to the stores. Enticed by 
large profits, many new companies entered the field. This naturally 
incited competition between manufacturers, and the number of tooth 
pastes, the number of face powders, and various types of medicines in- 
creased. In this atmosphere of expanding business the chain drug stores 
grew by leaps and bounds* In order to establish themselves in the 
market they became the aggressive price centers, 

.The advent of prohibition also had its effect. Under prohibition 
the retail and wholesale drug outlets were the only types of distribu- 
tors who could handle medicinal liquors. A new type of retail druggist 
appeared whose main interest was the selling of liquor. The wholesale 
druggist was limited in his selling of liquor to 15$ of his total 
volume of business. In certain instances oecause of this, distillers 
with large stocks entered the wholesale drug business and, in order to 
build up a sufficient volume of drugs to sell their liquor supplies, 
began cutting prices to the retail trade on drug' products. They entered 
new markets beyond the natural trading area in which they were located. 
For example, a wholesale drug house in Chicago sold by mail in St. Louis 
and delivered the goods, offering a 10G cut in price below that offered 
by the St. Louis companies* During this period the so.le of private ' 
brand substitute products ilso , reatly expanded. One of the basic 
reasons for this growth was the price-cutting of standard drug products. 
The chain operator introduced his own line in order to recoup - the losses 
he encountered .on the standard lines. The small retailer also sold 
private brand merchandise as substitute products to pet away from sell- 
ing standard products in competition with cut-price stores. 

In the years just preceding the depression a new type of drug 
merchant appeared who usiially handled-' a limited 1 number of drug and 



(**) • See; Drug Trade Hews, August 30,. and Spetember IS, 1926 issues, 
See page 355,- Appendix for a list of these manufacturers 



?726 



- 11 - 

toiletry products.. Me rented a store in the shopping center "but usual - 
ly in the middle of the bloc 1 : where rents were cheap". He stayed away 
from expensive fixtures found in the average store 'end had some plain 
shelving "built in. From this featured simplicity- these stores "became 
known as "pine "board" stores 'ana 'ber-'n at once on their chosen careers 
of undercutting the chains and department stores. During the depres- 
sion, while the number of other retail drug outlets diminished, the 
pine hoard type increased. Tae pine hoard, through lower operating 
expenses and greater flexibility of management, was able to beat the 
larger chains at their own game. The larger chain stores by this time 
were well established in their communities and in place of introduc- 
ing new low prices they adopted the policy of meeting competition. 

Early in 1933 a second movement was started by members of the 
National Wholesale Druggists' Association which encouraged manufactur- 
ers to adopt a selective distribution policy. This time some of the 
large corporate chains joined the wholesale druggists in this pressure. 
This was important because the average manufacturer could not afford 
to alienate the chain groups* Previously, some manufacturers thought 
it wise to make a gesture to wholesalers by appearing to adopt a price 
maintenance policy but the threat i nf losing the support of the large 
chains was serious to all. As a result many more manufacturers than 
appeared in the 1925 list came out publicly announcing that they would 
use their legal right to" refuse to sell wholesalers and retailers who 
did not adhere to their suggested minimum prices. This second refusal- 
to-sell movement was quite effective. 

The drug co'des which were initially filed with the SRA sought to 
put a stop to 'the 'competitive abuses that .-had arisen in the industry 
during the rrevious two dec- \ s. host of t.\e trouble seemed centered 
around price-cutting in the wholesale and retail branches of the in- 
dustry. Therefore, price plans Were evolved to stabilize resale prices, 



3726 



- 12 - 

III. THE ORIGIN AL D^ UG MAITFACT-TRniG CQDBS 

Three manufacturing, drug codes Fere filed. The Package Medicine 
and the Cosmetic snd Toilet Preparations Codes "both contained provisions 
affecting prices "but the Pharmaceutical code had none. With the exception 
of. a clause in the proposed Package Medicine code prohibiting sales "below 
manufacturing cost, all of these priae provisions were drafted to fix the 
resale price for distributors. 

A. T HE ORIGINAL PHARMACEUTICAL CODE 

The pharmaceutical manufacturers, whose products were primarily sold 
on doctor's prescription, were not suffering from the use of tneir mer- 
chandise as loss leaders, and, therefore, felt no urge to. ask for a pro- 
vision in their code to peg resale prices.: Pharmacists respect the pro- 
fessional standing of ethical pharmaceutical houses who contribute to the 
professional, not the commercial, strength of the drug store. The pharma- 
ceutical manufacturers regretted to see the druggists suffer from cut price 
competition, but the problem was not close to them. Many cut-rate stores 
had no prescription departments and those having them seldom featured cut 
prices on prescriptions. Furthermore, the consumer purchasing a prescription 
had little basis for comparing prices. Even the so-called "Specialties" of 
the pharmaceutical manufacturers were not readily susceptible to use as loss 
leaders. These specialties were pre-packaged medicines, but they were in- 
tended for sale in r>n unidentified form on doctor's prescription and not for 
direct sale to the public under their brand names. As a group the manufactu- 
ring pharmaceutical industry had stayed clear of supporting the Drug Insti- 
tute. This was a vertical trade association formed a few months before NRA. 
It had a membership classification for every branch of the industry and was 
designed as a meeting place where the whole drug industry could sit down 
and work out price stabilization and otner problems. 

B . THE ORIGINAL COSMETIC AND TOILETRY CODES 

In the cosmetic and toiletry branch of the drug manufacturing in- 
dustry, the Associated Manufacturers of Toilet Articles was the largest 
trade association. Its membership of large and small companies was 
scattered over the entire country and represented practically every type 
of business policy. 

As an association, the Associated Manufacturers of Toilet Articles 
decided a year or so before the advent of NRA that something should be 
done about competitive practices such as the giving of PMs (sales commissions 
to retail clerks*}, the use of demonstrators, and various kindred types of 
secret and open price concessions that had appeared during the growth in the 
industry in the previous decade. To this end the Association voted to ask 
the Federal Trade Commission to conduct a trade practice conference on the 
subject. The request crystallized a long fight in the association and 

(*) FMs are sales commissions paid directly or indirectly by manufacturers 
or proprietors to retail sales clerks. The origin of the initials is un- 
known. Some say it means "push money" while others say "post-mortem" . The 
origin of the latter refers to dead stocks at the end of the year which the 
owner moved off his shelves by giving commissions to his clerks. 

9726 



-lo- 
calised five of its largest members to resign. The conference -was never 
held tut when the NRA. was passed, the five dissenting members formed a 
new association, the Perfumery and Cosmetic Institute, and presented' a 
code to the Administration along with the one prepared by the Associated 
Manufacturers of Toilet Articles. The members of the Perfumery and Cos- 
metic Institute were against any strict rules for prohibiting FMs and 
against curbing the use of demonstrators, probably because the prominence 
of their products in the trade insured a favored position in the depart- 
ment and chain stores. They had no trouble establishing their demonstra- 
tors in the larger stores; other stores whose volume of sales or adver-' 
tising possibilities did not warrant the use of demonstrators found the 
FM policy acceptable. In open competition members Of the Perfumery and 
Cosmetic Institute had tne advantage over their smaller competitors. 
The original codes of these two associations reflected this controversy. 

1 . The Proposed Code of the Associated Manufacturs of Toilet Articles 

Article VII of the original code drnftei by the Associated Manu- 
facturers of Toilet Articles contained a pledge that every demonstrator 
was supposed to sign. (*) The demonstrator in this pledge agreed not 
to "make disparaging or uncomplimentary remarks" about competing mer- 
chnndise. Furthermore, she would not attempt to substitute the pro- 
ducts made by the company paying her salary for other products which 
a customer might request. The pledge ended with the statement that the 
employment of a demonstrator who indulged in such practices would be 
"considered an unfair trade practice." The article went on to say 
"that it is an unfair trade practice for a manufacturer to continue to 
employ a demonstrator who has been found guilty of violating this pledge." 

Demonstrators were used cniefly in toiletry departments of depart- 
ment stores and their use established a price advantage to the depart- 
ment stores over other types of outlets where demonstrators were not 
employed. Department store policies varied in their use of demonstrators 
but, nevertheless, most of them would have resented the use of such a 
pledge. 

The last sentence in the Article stated: "Bribes, gratuities, 
gifts, PMs and all forms of special commissions paid by manufacturers 
directly or indirectly to influence retail employees to promote the sale 
of particular merchandise, shall be considered an unfair trade practice." 
This prohibited FMs and similar price concessions used by both large 
and small manufacturers where the retail sales in a store did not 
warrant the wages of a demonstrator or where the retail store already 
had all the demonstrators it could use.. With the. struggle by manu- 
facturers to obtain special sales support in. large retail outlets and 
with the managers of the stores playing both ends against the middle, 
many competitive abuses had arisen in the industry. Those ranged from 
a manufacturer's paying PMs to another's demonstrator, to several manu- 
facturers' paying full wages to a retailer for the employment of the 
same demonstrator. The purchaser never knew when a manufacturer was 
paying a PM on a sale and seldom was a demonstrator identified as being 
in the manufacturer's employ. It can be seen from this that a customer 

(*) See page 343 of Appendix to this Report. 
9726 



- 14^ | ... 

often "bought merchandise which he believed wrs being recommended "by the 
management wher.ers the sale' was actually motivated by the hidden com- 
mission "to the clerk.. 

The next Article in the Co'de made it an unfair trade practice for a 
manufacturer to discriminate in price among members of the same ciass of 
distributors except on a basisof Quantity and distance. (*) Certain 
sales practices were lifted out of the definition of price discrimina- 
tion in this Article by stating that the wages of demonstrators, the 
manufacturer's share of cooperative advertising, and the payment for 
window displays would not be "considered a form of price discrimination". 
Apparently,, although a number of trade abuses had arisen around coopera- 
tive advertising and the payment for window displays, this Association 
did not desire to curb such practices under its Code. Undoubtedly, the 
small manufacturer would have an equal chance in obtaining cooperative 
advertising and windovndi splays for his products with his larger com- 
petitors. At least this 'type of "dealer cooperation was in the open and 
subject tc ■check. 

Article IX gave the manufacturer the permissive right to make con- 
tracts with wholesale and retail distributors about resale- prices.' (**) 
It also permitted wholesalers to pake contracts with retailers for the 
resale of products made by cosmetic manufacturers. This clause was 
based on the principle of the proposed Capper-Kelly Bill which the trade 
stopped pushing in Congress when the NIRA was passed. The manufacturers 
of cosmetics and toilet preparations as a group were more interested in 
this proposed measure -than were either of the other two manufacturing 
branches of the drug industry. 

2 . The Proposed c ode of the Perfumery and Cosmetic Institute 

The original code presented by the Perfumery and Cosmetic Insti- 
tute did not mention any control of the use of FMs. or demonstrators. 
In Article C, Rule 6, appeared a mandatory open price system- which also 
included the permissive right to contract for resale prices found in the 
Associated Manufacturers of Toilet Articles code. (***) This would have 
been done by forcing manufacturers to "publish and .circulate to the pur- 
chasing trade their respective price lists'" which contained also the 
terms of sale and would have acted, if the- manufacturer had so desired, 
as the terms of a resale contract.' The manufacturer woxild have simply 
issued a contract and made reference to bis filed prices . In Rules 7 
and 8 stood certain exemptions to the contract price, of the type found 
in the Capper-Kelly Bill. In the 'last paragraphs of this Rule the 
Perfumery and Cosmetic Institute hot only asked for "the right to cir- 
cularize information" about -distributors who .disobeyed the previous 
provisions profided for under this plan but went a step further and 
said that a retailer "shall be obliged" to furnish the name of the • 
wholesaler from whom he obtained the merchandise. (****) This would 
have resulted in an excellent 'black-list of .both retailers and whole- 



(*) See Fage 343 of Appendix to this Report 

(**) See Page 343 of Appendix to" •'this Report . ,.,, • ;. .- ; 

(***) See Page. 345 of Apiendix : tb- this- Report . h „ 

(****) See Page 545 of Appendix to thi-s- Report for Rule* 7 and 8 

9726 .. ... -;i ;■'.•■•"' 



- 15 - 



salers who were upsetting ihe price stabilization scheme. It is^ inter- 
esting to note that while the AMTA and the FCI were at each other's 
throats regarding the control of certain competitive practices they 
were in entire agreement in wanting the right to use resale, price 
contracts. 

C. THE ORIGINAL PACKAGE MEDIC IKE COPE 

The original Package Medicine Code did not contain a request for 
the permissive right to contract for resale prices. In' its place there 
was an elaborate mandatory price fixing plan that pegged' prices all 
the way along the line. Competition in private brand merchandise a s 
well as highly advertised standard products had always' been much 
keener in packaged medicines than in toiletry products. The Package 
Medicine manufacturer did not want his resale price's maintained unless 
he could be assured that at least the standard advertised products of 
his competitors were going to be under the same rules. After all, con- 
sumers who want to buy Aspirin or Milk of Magnesia may purchase any 
one of several prominently known brands. Competitive prices play an 
important part in the selection. Any one of these' manufacturers was 
likely to find himself at- a competitive disadvantage if he pegged his 
resale prices by means of a' permissive contract while the prices on 
his competitor's merchandise were allowed to go down to a low com- 
petitive level. Therefore, the package medicine manufacturers if they 
were going to have resale price maintenance, wanted this to apply 
equally to their competitors. 

In the toiletry field, especially in the higher priced cosmetics, 
the consumer is influenced more by brand than by price. If a woman 
has decided that A' s face po'wder,. which is a nationally known brand, 
is the' product she wants to use, it is more difficult to persuade' her 
to use another brand than to get her to change her mind about Aspirin 
or Milk of Magnesia. This contrast becomes more emphatic when pri- 
vate brand substitute products are being offered'. A woman may buy B's 
face powder or some other nationally known face powder in place of A' s 
but often she will not purchnse an unknown private brand in place of 
a standard product, even though the price is very attractive. 

The originally proposed code of the package medicine industry 
was a curious document. It endeavored to set up a partially vertical 
code by its definition of the members of the trade, attempted to curb 
the sale of private brands, sought to prevent wholesalers from going 
into the manufacturing business and reached over into the wholesale 
and retail fields to peg resale prices-. 

Although two cosmetic codes had already been filed with NRA, the 
package medicine draft included this branch of the industry in its 
definition. (•*) The Proprietary Association was the dominant group 
sponsoring this code. Many of its members made toilet preparations 
such as tooth pastes, shaving' creams-, mouth washes and hair tonics. 
It was for this reason they believed such products should be included 
in their code. 



(*) See Page 346( Article II) of Appendix to this Report. 
9726 



- 16 ~ 

The elaborate price plan set forth in Article V (*) was based on. 
the standard pricing structure found in the drug industry. (**) This 
price scheme insured a gross margin of 33-1/3$ of the retail selling 
price to the retailer and gave the wholesaler at least a 6$ gross margin 
on his selling price to the retailer. It tied down the wholesaler to a 
limit of 2$ cash discount with certain exception's on special Occasions 
where he could give more but with- the restriction that this could not 
exceed one-third.of the margin he received. . Retailers were prohibited 
from selling below the full consumer published price less ,21$ (**■-) with 
the exception of the ten cent size which could not be cut at all. This 
full price maintenance proposal for the benefit of the five and ten cent 
stores had previously been a point at issue between manufacturers and 
certain retail groups. Many manufacturers refused to sell this size to 
drug stores lest they cut the price to prevent this business from going 
to the fixed price variety store-. In order to get the five and ten cent 
stores to handle their products, manufacturers had to assure them that 
the price would not be cut. The fixing of the ten cent price in the 
manufacturing code would have added fuel to the fire. 

There were a number of other clauses in this article that attempted 
to plug the loopholes in the scheme. The only provision. affecting the 
price to be received by a manufacturer for his goods was one stating 
that he could not sell "below his own cost-, of production or manufacture". 
This clause might have affected some manufacturers of private brands 
who competed with other manufacturers' low prices on products such as 
aspirin and mouth washes, but hardly would have touched the makers of 
nationally advertised products, whose margins of gross profit were 
usually large. One provision in the Article touched the private- 
brand- substitute-product situation by stating that distributors "are 
working contrary to the interests of the trade as a whole if they 
attempt to substitute or divert sales" on such products made by manu- 
facturers- who adhere to the price plan mentioned above. 

This attempt- to curb the competition of private brand substitute 
products was more fully covered in Article VI. (****) Paragraph (d) of 
this Article established a far reaching proposal preventing wholesalers 
from making competitive products. It said that it was "an undesirable 
and uneconomical practice for the wholesaler to carry on the manufacture 
or distribution of products in competition with nationally advertised 
products." The record failed to disclose the feeling of the wholesale 
druggists on this matter. However, it was apparent that the package 
medicine people were feeling the competition of the wholesalers' own 
branded products. 

(*) See Page 346of Appendix to this 'Report. 

(**) See Fart II, Chapter I, Section' II of this Report for an explana- 
tion of the pricing structure of the drug industry, Page 351 

(***) This 21$ clause appeared in some of the revised^preliminary 
drafts of the Retail Drug Code; see Fage 366 

(****) See Page 346 of Appendix to this Report , 



9726 



- 17 - 

In paragraphs (c), (f) and (g) of Article VI are found restrictions 
on imitating another manuf acturer ' s products," a. prohibition against re- 
packaging a product, and an attempt to control counterfeiting by forcing 
purchasers to buy "from the manufacturer .or his recognized distributors ." (*) 
The large spread of profits in the drug business had invited a number of 
undercover companies to make imitations of standard products and even in 
some instances to make complete counterfeits.: The chaotic price condition 
in the retail trade made it comparatively easy for such products to re^ch 
the market . . • ' . ■ 1 

In paragraphs (h) and 0) of Article VI (**) the sale of private 
brand products was completely ■ outlawed when ; these products were offered 
a-i substitute products for advertised brands. The code sponsors felt 
that "where a manufacturer, through enterprise, advertising or reputa- 
tion, h a s built a trade for an article, he is- entitled to profit there- 
from and any interference with the normal demand of trade or of con- 
sumers is unfair." They then described the "switching" of goods "other 
than those requested" as being an interference which. was a "reprehens- 
ible and unfair practice" . Not only was switching barred but the dis- 
tributors were not allowed to make "disparaging statements regarding 
the products or prices of a manufacturer" . The provision ended with 
this challenging statement, "when a product is asked for by name, it 
shall be sold". From these code prohibitions • on the sale of private 
brand substitute products it was evident that the sponsoring committee 
of the proprietary medicine industry wanted to put such competition in a 
straight- jacket. They had much to gain in such an effort-. Sale of pri- 
vate brands had greatly increased during the depression and the manufactu- 
rers keenly felt this growth. Large advertising outlays had lost some of 
their effectiveness and there was grave doubt .-^s to whether the return of 
good times would dispel the consumers' willingness to accept substitute 
products. From the restrictions they put in their eode, it seemed evi- 
dent that the sponsoring group wanted to correct overnight a situation 
they themselves had helped create by their rush for volume to keep paje 
with their advertising expenditures. 

In paragraph (j) of Article VI appeared a provision intended to 
standardize the use of various price concessions. (***) This restriction 
was similar to those set forth in the open price provision of the Per- 
fumery and Cosmetic Institute Code but did not go as far. It would have 
bound the members to a uniform system of price concessions, tending to 
clarify some of the various ramifications of the vertical price scheme 
set forth elsewhere in the code. 

In Article VII a committee was set up to administer the code, with 
the Drug Institute as a compliance clearing- house. It is curious to note 
that the package medicine was the only manufacturing code, so far con- 
sidered, which mentioned using the Drug Institute as an enforcement 
agency. ... 

( *) See Page 346 of Appendix to this Report. 
(**) See Page 346 f Appendix to this Report. 
(***) See Page 546 f Appendix to this Report. 

9726 



~ 18 - 



D. THE PROPOSED DRUG INSTITUTE CODS 

The Drug Institute sponsored a vertical code for the whole industry. (*) 
It purported to contain all of the best provisions from the codes that had 
been filed for the different branches of this industry. Article V,~PRICESj 
of this document was practically identical with Rule 6, the price filing 
provision, in the code submitted by the Perfumery and Cosmetic Insti- 
tute, the only difference being that the former was reworded to fit this 
vertical instrument and contained two additional sections setting up 
the method for filing prices. There was no elaborate price stabiliza- 
tion scheme in the Drug Institute code such as that set forth in the 
package medicine code. . 

In Article VI, Unfair Practices, Sections 7 and 8, a mild attempt 
was made to regulate the sale of private brand substitute products. It 
is difficult to determine the full significance of these two Sections 
because their language was vague. They read as follows: 

"It shall be an unfair trade practice 

"Section 7. To prevent, by uninvited persuasion, disparaging 
innuendo, or by concealment, a customer or prospective customer 
from purchasing a particular product which he has requested — . 

"The uninvited dissuading or the attempt to dissuade a customer 
or prospective customer from purchasing an article of a particu- 
lar brand, trademark or type, which such customer has requested, 
and persuading or attempting to persuade such customer to pur- 
-• chase an article calculated and designed to serve the same pur- 
pose, but '.of a different brand, trademark, or type tnan the 
article requested, unless the vendor has not available for sale 
the article so requested, and unless such fact is so disclosed 
to such customer or prospective customer. 

"Section 8. To prevent the substitution of a product for one 
' which the customer believes he is purchasing — 

"The sale and/or delivery to a person of an article of a differ- 
ent type, brand, or trademark from that which the customer or 

■ prospective customer believes he is purchasing, unless such 
fact be disclosed at the time, of sale or offer for sale by the 
vendor to the customer or prospective customer." 

It is evident that the above two- sections were a milder substitute 
for the drastic clauses requested in the original package medicine code. 
The record did not disclose whether or not these sections met with the 
approval of the package medicine code committee. 

Before discussing the manufacturing drug codes as NRA approved 
them we snail examine- the wholesale drug codes as they were originally 
presented. 



(*) See "The code for the Drug Industry" in the August 7, 1933 issue of 
Drug Trade News. 

9726 



- 19 ~ 

IV. -TIIE PROPOSES ".iRO LESALE DRUG- CODS 

* 

A. NATIONAL ',/HO JJSAlE DffJC-C-ISTS' A SSOCIATION PROPOSALS 



The National Wholesale Druggists Association had a member shin of 
over two hundred companies, most of which had been established for a 
number of years. The./ are known as service wholesalers because they 
stock a complete line of drug oroducts, -extend credit, and as a rule 
maintain traveling salesmen. The federal Wholesale Druggists' Associa- 
tion had only about twenty-five members, most of. them established' with- 
in the nast twenty-five to forty years. These- corn-pan ies were coopera- 
tives or mutual s, As a rule, they carried a smaller stock, extended 
less credit, if any at all, and maintained fewer traveling salesmen 
than did the service wholesalers. They gave patronage dividends to 
their members or- stockholders and thus afforded the druggist who could 
finance the plan a decided price advantage over his competitor who had 
to rely on the service wholesalers' credit facilities! The service and 
cooperative wholesalers had been fighting each other for years. 

1. An Informal Code 

An informal- wholesale code was presented to the NBA. (*) The 
record does not disclose whether this proposed code had the endorsement 
of a sponsoring committee, or was merely prepared by an individual. 
Regardless o> the authorship, it illustrates the type of business 
maneuvers which - T ere current in Is-he early days of NPA and should be 
examined briefly before looking at the authorized drafts which were 
filed. The title of this document is "Tentative Memorandum as a Basis 
of Discussion in re; 'Code for '.wholesale Drug Industry' - under the 
National Industrial Recovery Act. "It is followed by a preamble 
describing the National • './hole sale Druggists Association as being 
"fully qualified and equipped to*fulfill all the needs and requirements 
of the medical profession and-. approximately 60,000 retail druggists in 
the interest of public health". (**) 

Turning to Section 6., we find a threat of boycott of manufacturers 
who did not adhere to certain policies. (***) It first stated that no 
wholesaler "shall purchase or j. distribute a product of any manufacturer 
whose policy shall not conform" to certain principles. In the 
enumerated principles are listed some to which certain manufacturers 
would have been likely to object. It is difficult to believe, for 



(*) This document was probably va trial balloon submitted in- 
formally to see how the NRJf reacted to its terms. It was 
sent to Deputy Administrator Whiteside on July 27, 1933, 
See Appendix, Page348for this correspondence and certain pro- 
visions pertinent to this discussion. The complete document 
can be found in the Deputy's files. 

(**) See Page ( of Annendix to .this Report. 

i (***) g ee p a g e a of appendix to this Report. 

9726 



~ 20 - 

instance, that manufacturers would relish "the prepaying freight to 
all points within the United States" nor would they care to have the 
wholesalers dictate a "15$ trade discount" and a n 2 c i cash or prompt 
payment discount" as being the minimum they could give on their goods. 

The manufacturer might not object to putting the "retail price to 
the public" on his package but would be ant to resist issuing "two 
separate and distinct price lists" to the wholesale and retail trades 
respectively, especially when such orice lists "must be open and fair 
to all" in the specific selling terms which they were to set forth. 
These selling terms included all tyoes of -orice concessions found in 
the trade. In exchange for the manufacturer bringing all his operations 
out in the open and equalizing his terms to members of the same class, 
the manufacturer would receive notice of every retailer or wholesaler 
who violated his policies. This list was to be his blacklist. The 
wholesalers would aid him in cutting off the offending retailers. 

The next section established a rigid limitation on the cut prices 
a wholesaler could give to a retailer. (*) This was done by limiting 
discounts -oroportionately to the total amount of each item purchased 
by the retailer at one time. If a retailer bought $2.00 worth of a 
product in one -ourchase the wholesaler could give ifo discount. If the 
amount was between $2.00 and $7.99 he could give a discount "not to ex- 
ceed 25$ of the discount allowed to the wholesale druggist by the 
manufacturer." If the retailer bought $8.00 worth or over of a product, 
the wholesaler could give a discount "not to exceed 33$" of that 
allowed by the manufacturer, "but in no instance" was the amount -left 
for the wholesaler "to show le^s than 8$ gross profit" to the whole- 
saler. This scheme was not as complicated as it sounds and could 
easily have fitted into the "service" wholesaler's method of billing 
orders because of the basic pricing structure of the industry. (**) 
The plan was partially predicated on the idea that it cost a wholesaler 
practically the same amount to fill an order for an expensive product 
as it did for a cheap one. On the higher priced article he could have 
given away more since the percentage of handling cost per dollar sale 
would have been less. Furthermore, the plan -ould have encouraged a 
retailer to purchase products in larger quantities to earn a better 
discount. Even before the depression, the small druggists were buying 
from hand-to-mouth, in many cases as low as 1/12 of a dozen of a fast 
selling product. This was especially true in large cities where daily 
orders and same-day deliveries were one of the "service" wholesaler's 
best weapons to hold its trade. Another part of this plan provided 
that discounts would be allowed on monthly purchases. Those amounted to 
lfo on purchases from $300 to $500, 2°l on $501 to $1,000., and 3$ ever $1,000,, 
This again would have been an incentive for the retailer to confine his 
purchases to a smaller number of suppliers. 

Very few cooperative wholesalers, could supply the complete drug 



(*) See page 350of Appendix to this Report, 

(**) See Part II, Chapter I of this Study. Page 351.: 

9726 



- 21 - 

needs of a drug store. Refusal-to-sell policies of manufacturers 
were partially responsible for this but the main reason was that the 
cooperatives, by their nature, wanted to hold their inventories to 
products which had a decent turnover. The many thousands of items for 
which the retailer had only an occasion?! Call, had to ue bought from 
the "service" wholesaler who, as a rule, orided himself on being able 
to offer a complete service. Any discount plan based on monthly 
purchases would have deflected business to the "service" type of 
wholesaler , since every druggist had to deal with one of them and the 
total purchases of most - druggists -'ere so small that an even split of 
business might have kept them out of the jest discount bracket. But 
regardless of the Potential advantages of such a price plan to the 
"service" wholesaler, it appears ' that' the cooperative wholesalers' 
method of opera t iori could not have been adjusted to work under such 
a rigid scheme and the cooperative would have lost its trade eventually 
to the "service" wholesaler. Although not all of the wholesale 
mutual s and cooperatives operated in the same way, they did have the 
same purpose of sharing profits with their members. Most of these 
profit sharing dividends were given to the retailers at the end of 
a week or a month. Receiving a check from one's wholesaler was a 
tangible indication of the saving the retailer had made on his pur- 
chases. Even if the retailer 'received. as low net prices from the 
service wholesaler, at the end of the month when he paid his bill the 
cooperative's plan of giving him these savings in the f ora. of a check 
by weekly or monthly payments led him to believe he was saving more 
under their "system. Added to this, the cooperative member had a 
proprietary interest in his own company. Cooperative profit sharing 
was based on the gross profit on each item. It had no relationship to 
the amount of a particular item purchased on one order, which was the 
approach set forth in this provision. For example, a member might have 
purchased one dollar's worth of - product on which the cooperative 
wholesaler received a 25fj discount ?rom the manufacturer. If the 
cooperative wholesaler's overhead -was 10fo, this retailer would have 
received a 15$ (25$ less 10 1 '.) cut on this purchase, and the product 
would have cost him .85^, (Si. 00 less .15$), This purchase, under the 
code provision, would have given the retail member a discount of only 
l c l. The balance of the discount due him would then have been given 
as a dividend on stock o^nuc 1 at the end of the year or by some other 
method of distri jution. An~ r such procedure, however, would have 
destroyed the psychological effect on the retail member of receiving a 
share in the profits as he r ;ent along, from week to week. In such a 
situation, unquestionably, the service wholesalers would have tended to 
regain their lost ground. 

This proposed rigid, price plan ended with the limitation that all dis- 
counts set forth in the provision were to be considered cash discounts 
and that the Board of Governors of this association "ould file, as a 
public record, a list of "not less than 10,000" medicinal, toiletry 
and sundry proprietary items "for the benefit of retail druggists and 
retail dealers" with the stipulation that no product would be included 
in this standard discount list if the manufacturer's "sales' policy 
was adverse to the granting of such discounts". This not only gave 
power to the association to list the products of manufacturers whose 
policies would pass muster but was to serve as a weapon to force 
recalciltrant manufacturers into line, since obviously the service 

9726 



- 22 - 

wholesaler was interested in selling only such products as appeared on 
the list. 

Under Section 9 a wholesale druggist could net give any free goods or 
other price concessions not specifically authorized "by the manufact- 
urer. (*) The provision went on to say that where a manufacturer 
instructed the wholesaler to jive cne free with a dozen or some 
other type of price concession, the wholesaler was compelled to pass 
on such benefits to his retail customer. If the wholesaler did mt 
do this such violation would be "deemed unfair competition and punish- 
able by a fine of not less than ($ ) for each specific 

offense if upon majority vote of the Board of Governors of this 
Association, the offender should be found guilty of such practice". 
This notion that the Board of Governors should pass judgment on the' 
violators of this provision and impose a fine when the majority of 
its members decided the offender was guilty was an extreme examole of 
"industry governing itself". 

The next section set up a potential boycott against manufacturers 
who gave inside discounts to large retailers. (**). It stated that 
the wholesale druggist "shall not be. Obligated nor required to purchase 
any product from any manufacturer on which the manuf acturer establishes 
a price differential "of less than 15';," between wholesale and retail 
druggists. The next paragraph of this ^revision stated that it was un- 
fair for a manufacturer to give "retail chain store systems, department 
stores, mail order houses, syndicate stores, and any and all other 

organized systems of distribution any prices, terms, conditions, 

special inducements, or advantages .and special allowances for window or 
store display or advertising" without giving these same "advantages to 
any and all other independent retail dru, gists" who would like to take 
advantage of such offers under the same terms. This idea was amplified 
in section 15***by stating that wholesale druggists were " committed to 
a policy of purchasing, featuring, and supporting the products of only 
those manufacturers whose sales policy would insure the inde- 
pendent retail druggist against loss caused by predatory price- 
cutting practices" of stores featuring" standard and nationally advertised" 
drug products "at cut prices on a basis of cost or net cost." The provision 
also set forth that the average cost of distribution by the retailer was 
27/j "after diligent investigation and research over a period of years". 
This clause was a direct bid for the good-will of the independent retail 
druggists. It bound the wholesalers to a policy of supporting only manu- 
facturers who insured the independents a profit. It did not set forth just 
how manufacturers could protect these independent- druggists to the extent 
of insuring them an average gross profit of 27%. 

It should.be emphasized again that the code we have just discussed 
was not officially filed with KEA. It illustrates, the conceptions of trade 



(*) See Pa^e Sbl of Appendix to this Report. 
(**) See Page 3^jp of Appendix to this Seport. 
(***) See Page 353 of Appendix- to this Report 



3726 



possibilities under 1JEA that were held "by certain trade groups in the early- 
days of code formulation. \'e shall now take up the wholesale codes that 
were officially presented to the administration. 

2 . The origin al National Wholesale Druggists" Association Code 

Piled with UFA 

The National Wholesale. Druggists' Association and the Drug 
Institute presented to the Administration codes for the wholesale drug 
trade which, as far as this discussion is concerned, were identical. 
Article V, Section 1 of this code* established the "cost-sold" formula 
for the fixing prices at whole':':,.!-:. A wholesaler could not sell a product 
below the*cost»-Sold" figure which had been previously calculated and 
circulated in the trade by the Drug Institute after "consultation with 
the Statistical Division of the Itational Wholesale Druggists Association 
and the Federal Wholesale Druggists Association on the basis of their own 
research and the economic, statistical end accounting reports submitted 
to them froia time to time by members of the code." Certain rules were 
specified for determining the "cost-sold" price which included all 
overhead charges used to determine costs "in accordance with good account- 
ing practice". Ho mention was mace of an average cost to be used or how 
such an average was to be weighted to be fair to cooperatives and the 
short line wholesalers whose operating costs were lower than the "service" 
wholesalers. The nearest approach to a concept of en average cost was 
the specification that "in calculating the 'cost-sold' of any merchandise, 
the cost to the entire wholesale drug industry shall be approximately 
determined" . 

This draft further provided that all discounts were to be cash 
discounts and allowed only if paid within the customary discount period 
provided, of course, that such discounts did not bring the price of a 
product below the "cost-sold" figure. The administrative difficulties 
of such a price plan would have been great, for the amount of research 
necessary to determine the "cost-sold" on many thousands of products 
would have been too vast for a competent job to be done. This plan was 
better for the "service" wholesalers than the previous sliding discount 
scheme, because it not only would have crippled their cooperative com- 
petitors but would have given them more profit in the process. The 
cooperative wholesaler would have encountered practically the same dis- 
advantages in this plan as he would have in the other suggested clause. 

The "cost-sold" clause had its counterpart in the proposed retail 
drug code,** The retailers' plan, however, while simpler in operation 
gave the retailer a relatively better break as it took the St. Louis 
Drug Survey^ s figure of approximately 38p' as the "cost-sold" percentage 
and used the manufacturer's wholesale list price per dozen as the cost 
and then added 5 ! ,i for good measure. The retailers' system not only 
took care of the average operating expense as did the wholesalers' but 

(*) See Page 353 of Appendix to this Report 

(**) See Part II, Chapter III of this Report. [Page 3fi6 



9726 



- 24 - 

gave them 5,> profit. In Section 2, Article V, we find the requests for 
the permissive right to contract for resale prices.* This provision would 
have tied in with a similar provision found in the proposed Perfume, 
Cosmetic & Other Toilet Preparations Code and the Drug Institute Code. 
The proposed Retail Drug Code also asked for this clause**. In Article 
VI, Sections 7 and 3 appeared the identical clau.se on substitution and 
switching found in the vertical Drug Institute Code on which we have 
commented. In Article VII of this draft the. Drug Institute was established 
along with the national wholesale Drug gists' Association and the'^oleral 
Wholesale Druggists' Association as a compliance agency. 

B. TEE FEDERAL WHOLESALE DRUG0-I3TS' ASSOCIATION CODE 

The first wholesale drug code submitted to the Administration was 
that drafted bv the Federal Wholesale Druggists' Association. The follow- 
ing paragraphs from the statment filed with this code are of interest 

"The cooperative wholesale drug companies, operating their 
cooperative wholesale warehouses, serving their stockholder 
and member customers, submit this brieft historical statement 
of the economic reasons for creation of this cooperative 
wholesale plan of serving the individual retail merchants in 
the drug industry. 

"Thirty-five or forty years ago saw the beginning of the 
'cut-rate' retail drug store. The 'cut-rate' druggist 
realized the advantage over his comoetitors if he could 
purchase at least his big selling items direct from the 
manufacturers thus eliminating the profit made by the 
wholesaler. This he eventually did and as the fight grew 
warmer, prices were cut lower, and it soon developed that 
the wholesale margin was the entire profit made by the 
'cut-rate' druggist. Most of his competitiors with a 
small volume of business and less working capitol could 
not buy in quantities sufficiently large to justify the 
manufacturers selling to tbom. Something had to be 
done. There was no hope of remedying conditions except 
from their own ingenuity. It was determined to do col- 
lectively what they could net do alone — to buy the big 
selling items in large quantities direct from the manu- 
facturer, thus securing the lowest price, and divide the 
purchases into such proportions as each required, thereby 
placing themselves in a position to sell goods at the 
same prices as their 'cut-rate' competitors, sold them. 
This netted them a small profit where an actual loss had 
previously been sustained. Subsequently, chain stores 
came into the picture. They were operating their own ware- 
houses and buying direct from manufacturers ait whole-salers ' 



(*) Ss© page 353 of Appendix to this Report 

(**) See Part II, Chapter III of this Report Page 353 



9726 



-25— 

discount and terms, obtaining merchandise at from 10f 3 to 25 C A 
less than the retailers' cost. This compelled retailers to 
form mutual and cooperative wholesale companies and 
duplicate the chain store warehouse plan. Thur, the jtounda- 
tion was laid for the development of the large cooperative 
wholesale drug companies. Many of them now do an annual 
business of more than one million dollars and some have 
passed the six million mark. 



"All customers of the cooperative wholesale drug companies 
are financially interested in the company from which they 
secure their supplies .either by investment in the stock of 
such companies or by a cash deposit in the working capital 
of such companies. 

"The Federal Wholesale Druggists' Association is in full ac- 
cord with any and all plans that will effect an improvement 
of the profits of the independent retail druggists of the 
natior and will heartily support such plans. This associa- 
tion came into being to save the independent retail drug- 
gist fromdestruction. It will continue to serve this pur- 
pose particularly at the present time when the independent 
dr^uggist needs help as never before." 

This statement also contained the names of the twenty-five members 
scattered throughout the United States and Canada and gave the following 
figures which illustrated the sc^pe of the cooperative movement in the 
drug business: 

These represent a combined capital of $5,706,643.00 
pedng an annual business of 45,323,157.00 

Having a surplus of a; --proximately 1,540,120.00 

Carrying an inventory a/proximating 5,585,025.00 

Employing approximately, men and women 1,500 

Their Stockholders and members, independent re- 
tail druggists, numbering approximately 11,561 
These stockholders end members employ in their 

retail drug business, men and women 46,244 

And do an annual business in their retail drug 
stores ->f approximately 358,391,000.00 

The code* drafted on June 28,1933 contained a set of rules applying 
to all three branches of the drug industry. In the "Hules «n Behalf of 
Manufacturers" were t^o of interest to the discussion. The first stated 
that the distribution of drug products should be confined to the essential 
channels of drug distribution and the second rule prohibited, a manufac- 
turer from selling merchandise "below cost of production and distribution, 
plus the interest on capital invested and a reasonable profit". As has 

(*) See Page 354 of Appendix t© this Heport. 



9726 



- "2S - - 

been stated before, this type of price provision would have had very little 
effect on the drug manufacturing business. In the next -roup of "Pules 
on Behalf of Cooperative and ifutual Wholesale Druggists" we find this 
interesting • iropo sal : 

"Rule, 1. Prop..-.'...; tor::, of new retail drug stores should be 
required to have sui'ficient capital to rut in their stock 
of merchandise because there' are now too many rt.te.il units 
in the industry and wholesalers should not finance new stores 
except where the potential' patronage' wai-ra htr it."' 

Obviously, this ride .?a r . aimed at wholesale drag companies faho 
encouraged retailers tc start with little capital by using what credit 
facilities the wholesaler could give them. This practice was quite an 
effective weapon of the service wholesalers to check the growth of coop- 
erative membership. Cooperatives extended practically no credit and, there- 
fore, had little, opportunity for obtaining opening orders from new drug 
stores . 

Rule d prohibited selling below the full cost of doing business, but 
this provision was based on each individual's cost and, therefore, entirely 
different f rom t he "cost-sold" formula found in the ilational Wholesale 
Druggists* Association code. This method of an elastic code minimum in 
place of a fixed code minimum would have given the cooperatives a .great 
advantage over the service wholesaler as their cost of doing business was 
decidedly less. In (the i: B:ales m behalf of Retail Druggists" a provision 
appeared similar to the. "cost-sold" plan of the original Retail Drug Code.* 

However, this request was more modest as it asked only that the 
minimum price "be ba.sed on manufacturer's list price plus average cost of 
do in; business in a retail .r ■ store ( : J3,. of gross sales which is 4p less 
than the St. Louis survey)." It is to be remembered that the Retail Drug 
provision asked' that 28p. be added to the manufacturer's list price and 
then an additional 5p to . iv.; 1. he retailer a. profit.. Thus, the retailer's 
request was approximately l1; greater than that suggested here.** The next 
provision in the Retail;. , P \ s s a forth that the sale of medicinal 
preparation.' - or drr; products../; confined to "legitimate drug outlets" 
The definition of a "legit- i i - tlet 1 ' was then given as being a "retail 
establishment under the supervision of a registered pharmacist" . This 
provision tied in with the onn nenticned above which stated that 
manufacturers should confine neir sales to "the essential channels of drug 
distribution". The j etail membership of r/holesaler cooperatives was/made 
up entirely of drug m.v e-s thai imployeci pharmacists. The growth of other 
types of retail outlets handll i ; drug products was quite a threat to the 
independent pharmacists id, n; irally, when a group of these pharmacists 



(*) See Pari n, Chapter III of this Report Page 36fi. 

(**) In Codes that -we have so far examined there seems to be 
quite a discrepancy in the average retailer's cost of 
doing business. In fche FIDA draft it was given as '?,.■. 
In the PITTA draft i L id 22<-l and in the retailer's 
clause , approxima ; I . ! . . ., i s sugge sted. 



9726 



-27- 

got together and formed a cooperative they would admit to membership no 
store without a prescription department. Por many years the service whole- 
saler had a policy of confining sties to the so-called legitimate drug 
stores. However, when manufacturers, under the influence of large ad- 
vertising expenditure's and the resultant growth of consumer demand, looked 
around to find a wider market they encoura.ged the service wholesaler to 
sell to these newer types of outlets who were partially entering the retail 
drug business. The retail drug state associations had endeavored to pro- 
tect themselves from this growth of pseudo drug stores by bringing pressure 
on legislature to pass laws confining the sale of drug products to stores 
employing a registered pharmacist. An extreme example of the retail 
grocers reaching over into the drug field was found in the development 
that occurred among retailer members of a voluntary chain located in an*-" 1 
around Houston, Texas,. in the fell and winter of 1932. In a comparatively 
few months, 400 out of a possible 450 outlets had put in a supply of private 
brand household drug products. In 150 of these, a 3300 assortment was ' 
placed in s tock. These stocks included such products as aspirin, mouth wash, 
milk of magnesia, bathing alcohol, and a few toiletry products. Previous 
to this development the large food markets in Houston had, for a year or 
so, practically complete drug departments. This sale of drugs by grocers 
increased to the extent where one drug manufacturer estimated that ?5fo 
of his sales in Houston were made through grocery stores. 

Q. OTHER WHOL ESAIS MUG: COSES 

The Independent Wholesale Druggists of America was a newly formed trade 
association with members located m-inckoally around Hew York City.* Most 
of them carried limited stocks and as a rule cut prices drastically. Article 
VI of their proposed code restricted wholesalers from selling below "net 
invoice cost after all discounts, (including cash discount) had been deducted 
or open market price, whichever is lower" : j1us 5,.:. It further stipulated 
that all discounts allowed by wholesale druggists should be cash discounts 
and allowed only if the retail' r aaid within the customary discount period. 
Members of this association claimed that their overhead was lower than the 
service or cooperative wholesalers. This price restriction was lower than 
that in the other two .wholesale codes we have examined. In fact, this 
provision would have listed P bottom on prices below the competitive cut- 
price level amd, therefore, would have been no aid in curbing wholesale 
cut prices. 

The Allied wholesale Druggists' Association was als* a new trade 
association formed f»r code purposed. Its membership was of small cut-price 
wholesalers located chiefly in Hew fork City. Sales to many of these 
wholesalers had been cut off by manufacturers who adopted the refusal-to- 
sell policy early in 1933. This association presented a code to tho HPA 
and the following paragraphs, nuoted from the preamble of this document 
indicate that the members of this association desired the NBA to do some- 
thing about this refusal-tc-sell movement: 



(*) See Page 354 of Appendix to this Report 



972fi 



- 28 - 

"Nationally advertised products are obviously an essen- 
tial part of the inventory of a wholesale druggist. 
Deprived of them or any of them, a wholesaler is under 
a most severe handicap and is forced to offer in- 
ducements to his customers in an effort to retain 
their patronage. 

"Certain manufacturers of nrtionall:/ advertised products 
have restricted the distribution of their products to 
certain specially selected wholesalers and have ar- 
bitrarily refused to sell to others, forcing many whole- 
salers out of business and causing others to set up 
retaliatory tactics in order to survive. [These tactics 
have assumed many forms but were in substance, price- 
cutting. A vicious economic system was thus created which 
has vjidorrnined the entire industry affecting 
manufacturers, wholesalers, and' retailers, increasing 
hours of employment and decreasing wa^es. 

"In order to maintain minimum wages and maximum hours 
of labor, wholesalers must be in a ■oosition to. fairly 
compete with one another; distribution of nationally 
advertised products must be unrestricted and available 
to all wholesalers who are willing to abicfcby the 
sales policy of our manufacturers. 

"It is our belief that this form of discrimination has 
been engendered hj powerful minority interests with 
monopolistic ambitions. We do feel, however, that a 
statement in the drug code to the effect tha.t arbitrary 
discrimination by manufacturers of nationally advertised 
products in the selection of their distributors shall be 
deemed to be an unfair trade practice, will go far to 
the elimination of this abuse." 

u 

In the body of the Code* they declared that "it is an unfair trade 
practice for a manufacturer to use any arbitrary discrimination in the 
selection of its distributors." In the next Section they endeavored to 
prohibit e. manuf acturer from enforcing any refusal-tc-sell policy and to 
force him to sell to every body. This code contained another clause 
which prohibited the sale of merchandise by a wholesaler "below the cost 
of purchase and- distribution ~olus the interest on capitol invested and 
a reasonable profit". Such a restriction, if enforced, would have been 
an advantage to this group as the overhead of its members wo.s probably 
.as low as could be fonnd in the country. 



(*) See Page 354)f Appendix to this Report. 



9736 



SUMMARY 



This brieT examination of the original drug codes filed with u3A 
illustrates clearly that the predominant elements in the manufacturing, 
wholesaling, and retailing bra ichos of this industry wonted the Govern- 
ment to approve codes which would stabilize resale prides and curt other 
competitive practices attendant on the price cutting condition found in 
the trade in 1933. 

In the manufacturing division', the pharmaceutical group was silent 
on this problem in its proposed code, However, they represented r„ com- 
paratively small part of the manufacturing drug business. 

The period from 1911 to 1935 (following the Miles' decision) saw 
continuous, pressure in various elements of the industry on Congress to 
nullify the effects of this decision. Along with this effort were vari- 
ous attempts to use refusal- to* sell policies as practically the only 
legal method a manufacturer could adopt as long as the Miles' decision 
was in effect* 

The principle of the Capper-Kelly bill then before Congress of 
giving the permissive right to contract for resrle prices was found in 
the two porpoised codes of the Perfume, Cosmetic and Other Toilet Prepara- 
tions' group," in the Drug Institute's vertical code, in the Wholesale 
Drug Code filed by the service wholesalers, and in the Retail Drug pro- 
posal. While the retail members of cooperative wholesalers were in favor 
of resale contracts, the Federal Wholesale Druggists' Association appar- 
ently anticipated difficulties in resale contracts with their method of 
doing business as their draft did not contain this proposal. Obviously, 
the Independent and the Allied Wholesale Druggists'' Association, since 
they were cut-price wholesalers and sola chiefly to cut-price retailers, 
opposed the Capoer-Kelly idea. Host of the proposed drug codes con- 
tained provisions affecting other branches of the industry. 

The Drug Institute endeavored to draft a vertical code arrangement 
but it cannot be said that this was responsible for the many provisions 
that attempted to govern other branches of the industry. By its nature, 
resale price maintenance, to be effective, must be integrated through- 
out an industry. Whole the members of the Package Medicine Industry 
asked for resale price maintenance they wanted it only if it could be 
mandatory not only for all manufacturers but for distributors as well. 
They had no interest in obtaining merely the permissive right to contract. 
From the other clauses in their code designed to eliminate all competition 
from private brand substitute products it seems evident that they suf- 
fered a great deal from this type of competition. 



9726 



■ - 30 - 

CHAPTE?. II - DUEDTG I3RA 

I. ATTEMPTS AT DRUG CODE C 0I7S0LIDATI0II 

Price stabilization provisions T7hich finally emerged approved in 

the various codes usually differed completely from the proposals origi- 
nally presented to the Administration. This was especially true of the 
proposals just examined. Elimination of these original proposals or 
their evolution into the resultant approved druses with their subsequent 
amendments illustrates the shifting of business forces under the LIRA 
experiment. ■ Before taking up each proposal discussed in the previous 
chapter to determine what happened to it, we shall describe efforts 
ma.de by IffiA and trade committees to consolidate the codes or to integrate 
theia in some fashion for the industry as a whole. 

As has been said, the Drug Institute was formed early in 1933 as 
a drug industry clearing house where price stabilization and other indus- 
try problems could be discussed and possibly corrected. Its membership 
was made up of individual persons from all branches of the industry. 
Companies or corporations as such, were not permitted to join. The 
Appalachian Cools Decision encouraged such vertical trade associations, 
and it was believed that possibly some constructive work could be done 
with refusal-tc— sell policies by open discussion and individual example 
in such PT. all-industry forum as the Drag Institute was'' intended to be. 
Details of price stabilization plans were being formulated by the Insti- 
tute when the ITIPA was passed. The Institute immediately jumped into the 
typical activity of the period and endeavored to draft a vertical code 
for the whole industry with appropriate subordinate codes for each 
branch. Fron the start, I1RA refused to consider any vertical arrange- 
ment of cedes for the Drug Industry. This position was taken not so 
much on the assumption that the industry might use it as a vehicle for 
setting up some sort of a. "drug trust" as because the UFA early adopted 
the policy of establishing horizontal functional codes for the .distribu- 
tive trades. 

Some officials of IIPA suggested that a drug industry coordina.ting 
council be established as an advisory planning body to assist the Ad- 
ministration and the separate code authorities in administering the codes 
and to act as a general clearing house for the overlapping code prob- 
lems of the industry. This Council was to be composed of representa- 
tives of every code authority, but in no way were the functions of 
these bodies to be subordinated to the council except where certain 
routine matters were given it "oy vote of each individual code authority. 
A meeting was held on December 14, 1933 "oy IiEA.X*Httitb.,: representatives 
of the various drug code committees and the retail drug code author- 
ity. (**) Many code oroblems in tthe industry were discussed at this 
meeting and the various code committees were informed that their pro- 



(*) See transcript of this meeting in Code Record Section, ERA. 

(**) Only the Retail Drug Code was approved by this date. The other 
drug codes had not ever ^oeen presented at public hearing. 



9726 



- 31 - 

posed price control plans would not be approved. At the time of this 
meeting HRA had already disapproved the price provisions suggested by 
the retail druggists, hut the manufacturers and wholesalers were still 
hopeful of IIRA's acceptance of their price control plans. Very, little 
was accomplished with the suggestion for the coordinating council. 
However, the plan did not corrroletely die at this tine and all the 
"branches of the industry with the exception of the Pharmaceutical 
group subsequently requested a provision in their codes to provide 
for the appointment of representatives to serve on such a council when 
it was established. (*) 

Because the three drug manufacturing groups overlap ^ed, to a con- 
siderable degree, ERA endeavored from the start to consolidate their 
codes. It soon appeared that trade practice abuses differed among 
them and that it would be difficult to harmonize their trade practice 
provisions. Therefore, the suggestion for one master manufacturing 
code was set aside in favor of a basic wage and hour code with separate 
trade practice schedules and sub-code authorities. The code committees 
for the Package Medicine and Perfume and Toilet Preparations groups in- 
dicated that thejr would approve some sort of joint code, but the Pharma- 
ceutical code committee refused even to attend a -oroposed meeting of 
the three code committees to discuss the suggestion. With this branch 
refusing to enter into such an arrangement it was deemed unwise to try 
to merge the other two. 



(*) See page 35fiof Appendix 1 for copy, of proposed Exe'oitive QrA&e es- 
tablishing Drug Industry Coordinating Council 



9726 



- 52 - 
II. TH E PHARMACEUTICAL AMD BIOLOGICAL CODE 

The Pharmaceutical code was finally set for public hearing on 
Lay 1, 1934, without any tra.de practice provisions. The long 
delay was due to basic differences of opinion between 33RA and 
the code committee about certain labor and administrative pro- 
visions. This argument continued into the post-hearing period 
so that the code was not approved until October 25, 1934. At 
various points during the negotiations for this code, the Code 
Committee gave some thought to trade practice provisions but 
the NRA did not insist that they be included in the code and the 
approved draft contained none. In this draft, however, appeared 
a provision (*) instructing the code authority to make a study and 
report to the NBA within four months after the code authority was 
approved on the needs of the industry for the establishment of 
fair trade practice rules in the code. j:'o official recommendation 
was ever made ''oy the code authority to IIRA on this problem. 



III. THE PErrUhJi, COSMETIC Aim OTH ER TOILET PREPARATION'S COD E 

The public hearing on January 17, 1S34 for the Perfume and 
Cosmetic Industry was held on a. code presented by the Associated 
Manufacturers of Toilet Articles. (**) Lany drafts of this code 
were made from the time it was originally filed until it was in 
shape to go to public hearing. Some of the provisions that 
appeared in the original Perfume and Cosmetic Industry proposal 
were incorporated. The open price provision appearing in the 
public hearing draft was modeled after a similar provision that 
appeared in the original Perfume L Cosmetic Industry code. However, 
the new provision had been enlarged to include the posting of all 
direct and indirect price concessions. The principle of using the 
open price plan as the basis for permissive contracts for resale 
price remained. The NBA 1 s refusal to approve the right to contract 
for resale prices in the retail drug code should have clearly 
indicated that the same policy would hold in this code. (***) The 
Code Committee wanted to convince IIRA that it was wrong and insisted 
that the clause stay in the code at least through the public 
he -ring stage. (****) 



(*) See Article VI, Section 2 (h) of this approved code, #529 

(**) Sep page 360 Appendix of this Report for Price provisions 
in this Code. 

(***) See Part II to this Report, pages 566 e t seq. 

(****) In order not to delay hearings, NBA officials sometimes al- 
lowed certain clauses to remain in the hearing draft of a 
code even though definite NBA policy ^-ould prevent their 
final approval. This action often helped the Code Committee 
to convince its constituents that it had put up a good fight 
for their demands and tnereby obtained for IIRA the necessary 
consent of the Committee to the calling of a public hearing. 
Furthermore, the inclusion of these clauses in the hearing 
draft usually brought out in open discussion the controver- 
sial issues within the industry. 

9726 



- 33 - 

In the code approved on March 23, 1934, the permissive right 
to contract for resale prices did not/appear in the open price 
system. (*) In other respects this open price clause remained 
practically throughout the life of the Code as it had been drafted 
for hearing. 

The various price discrimination clauses and restrictions on 
cooperative advertising are so interwoven into the open price 
system that an examination should he made of the approved provisions 
to judge the full significance of the attempt made in this code to 
eliminate competitive abuses. (**.) 

The fight over the elimination of PMs between the American 
Manufacturers of Toilet Articles and the Perfume and Cosmetic 
Industry continued up to the approval of the Code. The hearing 
draft contained a direct prohibition of PMs but in the approved 
code this provision was stayed for a period of sir. months in which 
time the Code Authority was to report on the need for the prohibi- 
tion. (***) This stay was never removed as the condition for its 
removal was never approved by IIRA. 

In the hearing draft, the American Manufacturers of Toilet 
Articles had their way in requesting that a demonstrator be clearly 
identified to the public as being in the employ of a manufacturer. (****) 
Some of the manufacturers who did not employ demonstrators wanted 
them prohibited but the majority of the larger manufacturers, both 
members of the American Manufacturers of Toilet Articles and the 
Perfume and Cosmetic Institute, were decidedly against their elimin- 
ation. In the approved code the provision appeared (*****) unchanged 
except for an additional restriction which stated "that the demon- 
strator shall be available at all times for the salesof merchandise." 
This referred to certain department stores who accepted more 
demonstrators than their toiletry departments could accommodate and 
used the excess as stock clerics or possibly bookkeepers. The 
approved retail drug code also contained a similar clause requesting 
that demonstrators be identified to the public. (******) 

The approved perfume and cosmetic code was a compromise not 
only between the two opposing interests in the industry but between 
the industry as a whole and HRA. .'.Thereas NRA refused to grant them 
the permissive right to contract for resale prices it did approve, 
at least in principle, practically all other provisions for vhich 



(*) See Page 361 of Appendix for this provision. 

(**) See page 361 of Appendix to this Report. 

(***) See page 361 of Appendix to this Report. 

(****) The AHTA dropped this idea of having demonstrators sign 

pledges. 

(*****) " See pa g e .3Blof Appendix to this Report. 

(******) See Section 4(c) of Schedule (A) of Retail Trade Code. 



S726 • 



- 54 - 



they asked. The inter-industry fight in this industry over', trade 
practice problems created more interest in this code than: was 
seen, in either of the other manuf ac taring f "roaps. Interest con- 
tinued after the code was finally approved and as a result and 
effective code authority was elected. 



IV. ■■■ THE PACKAGE ilEDICIIIE CODS 

After' the effort to consolidate the three manufacturing codes 
had failed, the Package kedicine Code Com.ittee still insisted 
that their definition snould include cosmetics and toilet preparations. 
It was not until e^rly in January, 1934.' when; their code was approved 
for public hearing that 11BA succeeded in convincing the Code Com- 
mittee that their code could not cover another "branch of the industry. 
In the final approved definition, however, ±*RA lifted out of the 
cosmetic and toilet prepar ations code, deitrifices and mouth washes 
and placed then under the Package i.edicine Code. (*) 

The Package Lledicine Code Committee was committed to the 
f-laborate price-firing scheme (**) which their original draft con- 
t tined and it took until January, 1354 to get the Committee to 
"agree that , the plan. should not go in the hearing draft of the code 
. ar, .a. mandatory provision. The issue was finally settled "by including 
the provision as a suggestion from the Code Committee to-' the Admini- 
stration, preceded "by the following instruction: 

"Article VII - Prices t 

"In the general interest of the industry and of the entire 
trade, including wholesale and retail distributors, so that 
there will he free and unimpeded distribution of its products 
not to the end or extent; that there he established 'a monopoly 
therein, not to the end or extent that consumers "ill be im- 
posed upon, or manufacturers of other products be dealt with 
unfairly, but ..to the extent of f reelv supplying' the consumer 
demand created by the member — the Code Authority, subject 
to the approval and with. the advice of the Administrator, 
may arrange for a conference of all interested parties deal- 
ing in package medicines, including wholesalers, or the Code 
Authority governing them, and retailers, or the Code Au- 
thority governing -them, for 'the purpose of defining and 
establishing price standards which shall be fair and 
reasonable in relation to the nature and extent of the 



(*) See Definition of Package kedicine. Code, page 3't3 Appendix 

■to this Report* This switch was made because most of the large 
manufacturers of dentrifices and mouth washes were members of 
the Package- Medicine Trade Association. This definition 
- should be examined as it illustrates the type of definition 
found in the three manufacturing drug codes in regard to 
covering four distinct sources for products. 

(**) See Page 363 of Chapter I of this Part of the Report. 

9726 



- 35 - 

distributing services and functions rendered by each 
buying and selling class. Such price standards are to 
include all elements, such as, policies, terras, maximum 
or minimum discounts, and allowances. 

"With the advice and consent of the Administrator after such 
price standards have been obtained as fair and just to all 
interested parties, the code authority, as well as the code 
authority for each branch of the trade, shall formally an- 
nounce such price standards on the products of thp industry. 

"TThen the code authority, as well as the code authorities 
for wholesalers and retailers dealing in package medicines, 
announces the price standards established on the products 
of the industry, it slia.ll be an unfair trade practice for 
such products to be sold other than as provided for in the 
price standards. 

"As an aid in arriving at just, fair and proper price stan- 
dards, the industry recommends for consideration the follow- 
ing principles: " 

The principles then enumerated were practically identical with 
the provisions set forth in Article V, Prices , of the original 
draft filed". (*) The Code Committee had but faint hope that 1TRA 
would approve the price standard principle for the industry, let 
alone the suggestion set forth in the hearing draft of the code 
as a guide for determining such standards. However, the package 
medicine industry, as a whole, had voted on this price plan and 
instructed the committee to demand its approval and the plan had 
to go into this draft in orcier to obtain the Committee's assent« 
to the hearing. 

The provision prohibiting imitations of products and restriction 
of purchases through legitimate channels so as to curb counterfeiting 
was omitted from the hearing draft. However, the restriction on 
repackaging a product remained. All provisions restricting and 
eliminating sale of private brand substitute merchandise were elimin- 
ated. 

The public hearing on the Package Medicine and Perfume, Cos- 
metic and Other Toilet Preparations Codes was held on January 17, 1934. 
The definitions of both Codes were attacked because they went so 
far as to induce retailers who sold private brand drug and toiletry 
products or who made them in their prescription depart'ients; and a 
modification of these definitions was required. The definition in 
the proposed pharmaceutical code was likewise modified in the ap- 
proved draft. The Perfume, Cosmetic and Other Toilet Preparations 
Code Committee accepted the modification without argument, (**), 



(*) See page 3*46, Appendix to this Report, and also Chapter I 
of this Part for a discussion of this price plan. 

(**) See Article II, Section 1(b) of the Pharmaceutical and Bio- 
logical Industry Code, #529. Also see Article II, Section 1(d) 
of the Perfume, Cosmetic and Other Toilet Preparations Code, #361. 



9726 



— 56 ■* 



but the Package "Medicine Code Coihmittee tool: a decided stand against 
it. Final approval of the latter code was delayed about four '-eeks 
bee- use iL'A officials would not send the code up for approval so 
long as it covered retailers and the Package Medicine Committee would 
not assent to a clause talcing retailers out of the definition. 
Finally, to e-pedite the code, the HRA official in charge sent the 
code up for approval without this clause; but 'Then the Administrator 
approved the Code, on May 15, 1034, he included the clause a.s a 
condition in his order of approval* (*) The Package Medicine Code 
Committee's objection to this clause seemed lodged in the notion 
that, if all retailers who marketed their o'-n brands of package 
medicines were under the Package Medicine Code there would be some 
control over substitution;, s itching and other' practices from which 
the nationally advertised products suffered. Although the final 
drift of their code contained no provision bearing on the sale of 
private, brands, they perhaps felt that some future amendment might 
affect the situation. 

In post-hearing negotiations, NRA suggested that the Package 
Medicine Committee adopt an open price plan similar to the one 
approved, in the Perfume, Cosmetic -and Other Toilet Preparations 
Code to replace the Committee's suggested price standards. They 
finally followed tnis suggestion, but the open price system upon 
which they agreed was not as comprehensive as the one in the 
Perfume Sn Cosmetic Code. (**) The rest of the trade practice pro- 
visions in the p proved Package Medicine Code had only a minor 
effect on price stabilization. 



(*) See page 365, Appendix to this Report. 
(**) See Page 360, ApP en dix t-6 this' Report. 

9726 



- 37 - 



V. IHL WHOLESALE DRUG CODE 



The Wholesale Drug Code Committee refused to assent to ITRA' s re- 
quest that the code contain a basic forty-hour week such as was approved 
in the General Wholesale Code. ITRA, likewise, refused to approve a 
forty-five hour week and at the sane tirae would not impose the forty- 
hour limitation on the trade without its consent. Therefore, after ex- p 
tended negotiations, no code ^as ever approved for the trade and, fur- 
thermore, the wholesale druggists succeeded in staying out from under 
the terms of the General' wholesale Code -hose definition technically 
included them. This controversy illuminates certain aspects of the USA 
administrative experience, hut is not germane to this study. Vie shall 
touch only on the various orice provisions appearing in the many drafts 
of the proposed code. (*) 

One of the main reasons why ITRA was unsuccessful in obtaining the 
assent of the Code Committee to the forty-hour week was the lack of a 
satisfactory m-ice provision for which the trade, in exchange, might 
have "been willing to make labor concessions. If the wholesale drag trade 
had been more closely united instead of being s;olit fundamentally be- 
tween the "service", "cooperative" and "cut-price" types of wholesalers, 
the result might have been different. As it was, it seemed impossible 
to draft a "selling below cost" or loss limitation provision beneficial 
to all three groups. 

NBA began rather early to eliminate the possible selling below cost 
provisions, kany shifts of policy and model cost provisions were draft- 
ed, but almost always they appeared to be unworkable or of no use to the 
trade involved. The "cost- sold" idea which appeared in the original 
draft submitted by the kational wholesale Druggists' Association was 
early discarded. (**) 

In the draft of the code at the first hearing on karch 15, 1934,(***) 
there appeared a selling-below-cost provision based on the costs of the 
individual wholesaler. This provision was to go into effect after the 
code authority had received from the Adnini strati on approval of a cost- 
acco-onting system to be used by the individual wholesaler in determining 
his cost. (****) This draft also contained a provision giving the whole- 
sale drug code authority the permissive right to arrange a conference of 



(*) Por a more thorough account of the negotiations of this code, see 
the Code History of the Wholesale Drug Code. 

(**) See page 355of Appendix to this Report and Chapter I of this Part. 

(***) There ^ere two public hearings on the Wholesale Drag Code. Both 
drafts were different. The first hearing had to be set aside as 
the 1TT7DA v»ho sponsored the code had ine/quitahle restrictions on 
membership and refiised to amend their by-laws to meet the ITRA re- 
quirement. The second hearing on June 25, 1334, was held on the 
code sponsored by the code committee which had been elected by 
vote of the entire trade. 

(****)See page Sfifiof Appendix to this Report. 
S726 



- 38 - 

interested parties for the purpose of establishing price differentials. 
Upon ".IRA's approval of these price differentials it would then become 
an unfair practice for a who 1 coaler to handle the products of a manufac- 
turer who refused to adhere to tne particular differentials applicable 
to his products. (*) This clause was identical with that approved in 
the General Wholesale Code on January 12, 1934i ('**■) There were no 
other clauses in the March 15 draft of the Wholesale Drug Code directly 
bearing on price stabilization. In the June 35th hearing- draft of the 
code both selling-below-cost and price differential provisions were 
rittoa. The two separate Code Co imittees sponsoring the Wholesale 
Drug Code were lukewarm about both of these provisions. Tne nrice dif- 
ierential provision was included in the March 15 draft, principally be- 
cause it had alreauy been approved in tne General Wholesale Code and 
not because the wholesale druggists especially liked it. 3y the time 
of the June 25th hearing, NRA had adopted a definite policy of not ap- 
proving the type of selling-below-cost provision thai appeared in the 
March 15th draft of the code, here a ain tne Cede Committee did not 
put up much of a fight because the National Wholesale Druggists 1 fac- 
tion thought such a provision ineffective ana the Federal Wholesale 
Druggists' faction was afraid of all selling- belov/-cost clauses. 

In the final prop sea draft of the Wholesale Dru£ Code aated 
August 28, 1934 (***) there appeared only one provision n f interest to 
this discussion. We have already examined tne preamble arm. trade -prac- 
tice provisions in the code originally presented by the Allied 'Thole- 
sale Druggists 1 Association, (****) illustrating the desire of this 
Association to have the government curb the refusai-to-sell policies 
of manufacturers. At both hearings on the Wholesale Drug Code, members 
of the allied group presented testimony accusing members of the NWDA 
of collusion with manufacturers to cut off wholesale and retail dis- 
tributors. (*****) it was well known in tne drug industry that the FTC 
was conducting an investigation of tne F.VDA, the Drug Institute, and 
certain chain store groups in relation to the refusal-to-sell movement 

f 1S35. Certain members of the Code Committee desired a clause in the 
code relating to this subject, and as a result, trie- following appeared 
in the draft of August 23, 193-1: 

(0 See page 366Appendix to this Report. 

(**) Several conferences were held under the terms of this provision 
in the General Fnolesale Code, but no set of price differentials 
was ever approved as a result. 

(***) See copy in Deputy's files of Wholesale Drug Code. 

(****) See page 330 Chapter I this Part of the Report. 

(*****) See transcripts of the '.larch 15 and June 25 (1934) hearings for 
tiie Wholesale Drug Trade in Code Record, Members of the NWDA 
emphatically denied any such efforts on their part to persuade 
manufacturers tc cut off distributors. 



972fi 



- 39 - 

"Rule 11. No member of the Trade, in concert with another 
member or members thereof, shall, by threat, express or implied, 
of refusal to deal, or by other unlawful conduct, induce or 
attempt to induce or require 'any manufacturer of proprietary 
medicines, cosmetics, toilet' "preparations, drugs", medicinal 
oils, ' chemicals, pharmaceutical" or /biological products, or 
druggists sundries to refrain cr to agree to refrain from sel- 
ling any of said articles to any other member or members of 
the Trade; provided that nothing in this section shall be con- 
strued to suspend any of the provisions of the anti- trust 
laws of the United States." 

While the NRA was endeavoring to work out some reconciliation 
with the Wholesale Drug Committee so that it Yrould accept a maximum 
forty-hour week provision th Q Committee members from the N.W.D.A. were 
negotiating with the Federal Trade Commission for a Fair Trade Confer- 
ence. A conference war. set by the Federal Trade Commission for 
December 6, 1934 ana because of lac': of liaison between the two agencies, 
N.R.A. was not informed of these negotiations. xhis was the first Fair 
Trade Conference scheduled by the Commission after the advent of 
N.I.R.A. and as a result some publicity was given in the press (* ) to 
the effect that the Wholesale Drug Trade had succeeded in sidestepping 
the regimentation of the NRA and would receive from the "ederal Trade 
Commission all the fair trade rules it needed. 

The Conference rules ware approved jne week after the con- 
ference was held. (**) ""nly three of these rules were redrafted before 
final approval and these changes v/ere slight. (***) 

Twenty-one Sroup I Rules and nine "roup II Rules were approved 
by the Commission. (****) Crroup I Rules approved by the Commission 
"express unfair methods of competition while i"-roup II condemn trade 
abuses and unethical and wasteful practices. (*****) 



(*) See New York Herald Tribune and Washington Post of Nov. .22, 1934. 

(**) According to Drug Trade News of December 34, 1' ? .34, "Veteran 
observers of Federal Trade Commission operation here cannot 
recall an instance where the Commission worked so expeditiously 
in approving a set of trau^ practice rules. Ordinarily, months 
and sometimes a year or more elapse before the Commission ap- 
proves rules following their adoption at a conference." 

(**») Ibid 

(****) See Page 367 Appendix to this Report. 

(*****) From June 30, 1933 Federal Trade Commission report "Trade 
Practice Conferences." 



9726 



- 40 - 

Of the twenty-one rules in G-roup One, the following two 
pertaining to selling 'below cost are of interest to this discussion: 

"Rule' 3 — Selling Below Cost — The selling of goods 
below cost, with the intent and with the effect of injuring 
a competitor and where the effect aay be to substantially 
lessen competition or tend to create a monopoly or to un- 
reasonably restrain trace, is an unfair trad" practice. 

"Rule 1<2 — The practice of certain wholesale druggists of 
shipping and selling certain classes of merchandise in to 
the marketing territories of competitors below cost, where 
the effect may be to greatly injure competitors, to sub- 
stantially lessen competition, or tend to create a monopoly, 
is an unfair trace practice." 

Negotiations for the Wholesale Drug Code came practically 
to a standstill after the Federal Trade Commission rules were aporoved. 
The National Industrial Recovery Roarcl inherited the problem of 
imposing a code on this trade, but they, like the Administrator, did 

not do so. 



!724 



~ 41 - 
SUMMARY 



Hone of the provisions originally requested in the manufacturing 
and wholesaling drug codes designed to stabilize resale prices or to 
prevent selling below cost was approved by ERA. In the approved 
Hctail Drug Code appeared the Loss Limitation Provision substituted 
by ERA for the many price plans the retailers had requested. It will 
be seen that many of the retailers' stabilization suggestions were 
identical or complementary to provisions in the manufacturers' and 
wholesalers' codes. 

The Retail Drug Code was approved long before the other drug 
codes went to public hearing, yet their code committees insisted that 
the principles at least of their -orice plans be incorporated in the 
hearing drafts of their codes. In order to make progress with these 
codes ERA officials permitted them to be heard while they still con- 
tained tabooed price provisions. 

The ¥holesale Drug Trade was successful in staying out from under 
a code and, while negotiations were still supposed to be continuing, 
obtained Pair Trade Conference Rules from the Pedoral Trade Commission. 
The negotiations for this code reached the noint where the only 
possibility of a code lay in ERA' s imposing labor provisions on the 
Trade. The Administrator refused to act in the matter as did also the 
National Industrial Recovery Board. 



9726 



- 42 r 

•PART II 
TEE LOSS LIMITATION PROVISION OP THE RETAIL DRUG CODE 1/ 

CHAPTER I. INTRODUCTION 

I . The Cod e' s Place in the Entire Pr ice Stabi lization Pictur e 

The previous part of this report has traced the -"Trice stabiliza- 
tion efforts of the drug industry, through illegal resale price contracts, 
unsuccessful attempts to legalize then, and successive waves of selective 
distribution. In June, 1933, while the retail druggists were pushing 
a Federal resale price contract bill, Congress passed the National 
Industrial Recovery Act and the President announced that one of its ob- 
jects was to curb the unfair practices of the predatory 10$ in each 
industry and bring prosperity to the honest 90$?, 

The small druggists felt that the President's sneech was directed 
particularly to them. They felt that they represented 90$ of their trade 
and that the cut-rate druggists were the predatory 10$ to whom the 
President referred. * 

NRA, to the ' small druggists, meant primarily a new chance for price 
stabilization by Federal means; and while. they favored the principles of 
re~ employment and increased purchasing power, these things seemed in- 
cidental. They temporarily laid aside their other price control efforts 
and concentrated en drafting a code. . •■ 

I I . Fundament al Pri cing Structu re 'of the Dru H Industry 

Prerequisite to ar. understanding of the loss limitation provision 
of the retail dru & code is a knowledge of the fundamental pricing 
structure of thn drug industry. The basis of this structure is a price 
knjwn as the "manufacturer's wholesale list price per dozen", quoted by 
practically every producer of identified package medicine and cosmetic 
product s**as his indication of the product's value in dozen lots at 
wholesale, and as a base for the calculation of all discounts. 



1/ Prepared by Sumner S. Kittclle 

* That tiie Small druggists felt that the President's speech es- 
pecially applicable to them, is illustrated by several hundred 
druggists' telegrams in NRA files in the following terms: "As 
a member of the 90$ pledging support to your program, I re- 
spectfully urge you to sign the Retail Drug Code." Also: 
"Understand the unfair 10$ at present delaying the signing of 
Retail Drug Code. Is this in keeping with the spirit of NRA?...* 

** The price structure of pharmaceutical manufacturers differed from 
that described herein. Sec Chapter VI of this part - Adminis- 
trative Problems - Page 120 



9726 



- 4-1 



Ordinarily , the manufacturer's wholesale price per dozen is 33-l/3$ 
below the manufacturer »s consumers price, printed on the package or 
featured in advertisements as an indication of value to the consumer. 
Also, the manuf acturer ' s wholesale price per dozen is, on the majority 
of products, the cost to the small retailer buying from th# wholesaler 
in dozen or less than dozen lots. 

As far as the manufacturer is concerned, his wholesale list price 
per dozen is not his own selling price, for he rarely sells in lots as 
small as one dozen. However, when he sells large quantities to whole- 
salers or "big retailers, he "bills the goods at the manufacturer's 
wholesale list price per dozen and then deducts his quantity and cash 
discounts, amounting usually to 15$ and 2$. Likewise, if the whole- 
saler sells to retailers at a. cut price, he bills the goads at the 
manufacturer's wholesale list price per dozen less discounts, thus 
maintaining this list price as the basis for all price computations in 
the industry. 

As an example of how the pricing structure would work if there 
were no price cutting and no extra discounts allowed either by manu- 
facturers or wholesalers, a hair tonic with a consumer price of $1,00 
printed on the package would have a manufacturer's wholesale list priee 
per dozen of 56-2/3$* ($1.00 less 33~l/3$). Small druggists would buy 
it from their wholesalers at this price, and -holesalers and large 
retailers would buy it in quantity from the manufacturer at a reduction 
of 15$ and 2$ or at about 55% : ^ , If there were no price cutting at 
retail, large retailers and small alike would sell the tonic for $1,00, 
the former making a. gross profit af 44 -5$ (mark-up of 30$) and the 
latter making a gross profit of 33-l/3$ (mark-up of 50$), 

Price cutting at retail changes this situation. Large retailers 
buying at 55yjf can sell at or "below the manufacturer's wholesale list 
price and still make a gross profit. If the small retailer meets 
their prices, he makes no gross profit and may take a loss on the cost 
of his goods. If he fails to meet their prices, he may lose his trade. 
Pressure of price cutting on small rotailers caused them to demand cut 
prices from their wholesalers, and these, coerced by competition among 
themselves, acceded to the demand and allowed discounts from 5$ to 
10$ below the manufacturer's wholesale list price per dozen. Some re- 
tailers formed or joined cooperative or mutual wholesale houses for 
the purpose of enjoying the advantages of mass buying. This movement 
in the drug trade, however, has never been as widespread as in the 
grocery trade, principally because small druggists owe so much money 
to their service wholesalers that they are obliged to continue buy- 
ing from them. Such mutual and cooperative wholesalers as exist, 
usually do not handle a complete stock of products. 

Deviations by manufacturers from the normal discounts also compli- 
cate the price situation in the industry. Secret discounts and rebates 
to chains and large retailers, and indirect price concessions such as 
payment for advertising and window display tend to increase the dif- 
ferential between the cost of the goods to the small and the larger 
dealer. Manufacturers' offers, through the wholesaler, of discounts 



9726 



and free goods in dozen lots, tend to decrease this differential. But 
regardless of these deviations from the usual pricing structure and 
regardless of how manufacturers' and wholesalers' price concessions 
may change, the lias is of calculation remains the manufacturer's 
wholesale list price per dozen. 






9726 



- 45 - 

CHAPTER II. ALIGklEirr OF OPPOSING FORCES 

1. Proponents of Price Stabilization 

From the prasentatio.n of the original code to ERA. in August 1953, 
and throughout the code period, the principal "backers of price stabiliza- 
tion were the associations representing the small, independent druggists 
who did not initiate price cutting and who disliked "being forced to meet 
cut-rate competition. These druggists, numbering about 50,000, took ser- 
iously the -professional aspects of their "business, especially their pre»* 
scription departments.* 

Three national trs.de associations represented the small druggists: 
The national Association of Retail Druggists (KARD), the American Phar- 
maceutical Association, (APHA), and -*jfce Drug Institute of America, Inc.** 
The HARD had a total membership of about 55,000 druggists., principally 
derived from its affiliated State Pharmaceutical Associations and local 
retail drug associations in cities. This association had always been 
militantly in favor of -rice stabilization, fighting and lobbying for 
it in state legislatures and in. Congress. In its official application 
for a code in 1935, it submitted the following figures:*** 

Annual Volume of Business 
Tcrtal for trade *, $1,300,000,000 - lO&fo 
Members of Association ,.,734,482,758 - 60-10/29,1. 
ilon-members ' 515,517,241 - 39-19/29^ 

The American Pharmaceutical Association was -affiliated with the 
same State Pharmaceutical Associations as the I'Tational Association of 
Retail Druggists but was not affiliated- direct!.-'- with the local retail 
drug associations. The affiliated memberships of the 'American Pharma- 
ceutical Association and the National Association of Retail Druggists 
thus' overlapped greatly, being about 35,000, In addition to its affil- 
iated membership,' the American .Pharmaceutical Association had a direct ■ 
membership of about 3,000. This association emphasised the professional 
rather than the commercial side of the drug store and had a high, ethical 
standing. t It admitted pharmacists to membership whether they owned stores 
or were merely employees; and it also admitted professors of pharmacy 
and scientists. Inasmuch as the success of the professional side, of phar- 
macy depended considerably upon the success of the commercial side, the 
A.Ph.A. saw very nearly eye to e^e with the N.A.R.D. on the issue of 
price stabilization. 



(*) Throughout this part the term "small druggist" designates the 

type described above. The term "independent druggist" is some- 
what misleading inasmuch as many of the cut-rate tyoe were ind- 
" \ ependent ' i.s» r .flot chains. 

(**) The following descriptive data on all trade associations comes 
from the History of the Retail Drug Code, pp. 13 to 16. 

(***) Volume A, Retail Drug Code; Code Record Section files. '• 



9726 



- 46 - 

The Drug Institute of America, Inc., was organized in 1933, shortly 
"before the passage of the N. I.R.A. ; and its principal object was to pro- 
mote price stabilization for the entire industry. With this in view, it 
admitted to membership manufacturers, wholesalers and retailers, the 
membership of the last-named class being about 30,000 and including both 
chains end small druggists. Its membership was entirely direct, it hav- 
ing no affiliation with local or state associations, and its members 
joined as individuals and not as corporations or firms. Powerful during 
the code period, the Drug Institute declined rapidly after the Schechter 
decision and is now out of existence. 

At the original public hearing on the retail drug code in August 
1933, one of the most significant speakers on behalf of price stabili- 
zation was I.Ir. George Li. Gales, president of the Liggett Drug Company, 
From the time of their inception, chains had been the opponents of small 
druggists, but students of the retail drug trade had noticed a trend to- 
ward a new spirit of cooperation between chain and small druggist in the 
latter's fight for price protection. 

Chains had established their places in the economic field through 
aggressive price cutting, but the process involved price wars and the re- 
sulting competition became cut-throat. Once established, the chains sew 
possibilities of more profitable operation under price stabilization, aid 
commenced to view with approbation the efforts of small druggists in this 
behalf. A new type of outlet entering the market during or just prior 
to the depression hastened this tendency. This type was an independent 
store, or small local chain of low overhead, high volume, and a policy 
of extremely low-cut prices. These outlets could beat the established 
chain at its own price-cutting game.* 

Shortly after the original public hearing, lir. Gales became pres- 
ident of the National Association of Chain Drug Stores and, as such, 
tool: a seat on the National Retail Drug Code Author it}?-. From that time, 
the most of the important national chains were openly behind the program 
of price stabilization. The National Association of Chain Drug Stores 
arose from a merger of two pre-existing organizations, the Affiliated 
Chain Stores Association and the Associated Chain Stores Association, 
and admitted to membership any firm operating a chain of four or more 
stores. Its members included the largest and best-known drug chain sys- 
tems in the country. 

II. Q-.yoonents of Price Stabilization 

The opponents of price stabilization throughout the code period 
were of two classes: The cut-rate drug or cosmetic stores, and the de- 
partment stores. The first type consisted of medium-sized or large in- 
dependent drug stores; small drug chains, usually local in extent; and 
so-called cosmetic shops, either 'chain or independent. Some of the. drug 
stores had sizeable prescription departments, doing a good volume of 
business^ of .ers odd not emphasize their prescription business, and still 
others had no prescription departments. 



'(*) For a further discussion of this subject, see Part I of this Report 
Page 12 et. seq, 

9726 



- 47 - 

The cosmetic shops did not fill -orescrintions , though where state and 
local law --emitted, the - "' ma" have handled jacka e medicines as well as 
co^ia^oics. 

Some representatives of the small druggists at the public hearings 
applied the tarn "pine board" indiscriminately to all of their cut-rate 
opponents, and this tern was sometimes misleading. Strictly applied, 
the term "mine board" refers to a type of store, developed in California, 
with ckeau shelving and counters, usually made of pine instead of a more 
expensive wood. These stores cut d^wn their overhead by occupying cheap- 
er down-town locations, usually in the middle of the block and freouently 
at distress rentals made mossible by the degression. Often they were 
mere "holes in the wall", filled to the bursting noint with goods, oper- 
ated on a cash and carry basis, and with no prescription sorvice. A 
large niimbor of "pine boards" were at the time of the code, and no doubt 
still are, in existence; but it was a nit'take to classify all cut-rate 
drug establishments by this title, since many of them had locations and 
fixtures as fine as any drug store, and some had large prescription de- 
partments. The common denominctor of the cut-raters was not cheapness 
of location or fixtures, nor lack of -orescriution service, but rather 
a molicy of extremely deeu-orice cutting on nationally-advertised mer- 
chandise and the handlin- of a ra.ther complete line of private brand, 
substitute orpducts. There was nothing new about the basic policy of 
the cut-rate store. It featured a number of standard items at low pri- 
ces to draw trade, and attempted to sell the customers private brand 
merchandise in lieu of or in addition to the standard brand. This was 
the oolicy that established the chain drug store's place in the community, 
but there were differences between the chain and the cut-rater in the 
method of carrying out the policy. The chains had sufficient funds to 
use newspaper and radio advertising, and considered such publicity neces- 
sary to the continuance of their goodwill. The cut-raters, having less 
capital, needed another mode of attracting notice, and they found it in 
the medium of prices cut so extravagantly low that they advertised them- 
selves by word of mouth, A few handbills judiciously distributed at 
nominal cost sometimes supplemented the prices posted in the store window.* 

Possibly anotherfaetor on the side of the cut-rate store in its 
battle with the chain was the former's small size. The chain was an or- 
ganisation with hired store managers who were often not permitted to 
change prices without direction from the head office. The cut-rate store 
manager was the owner, usually a shrewd merchant with a knack for shift- 
ing prices effectively, and not restricted from doing so by any higher 
authority-. Furthermore, though the volume of business of the cut-rater 
was large enough to enable him to buy directly from manufacturers at low 
prices, his stocks were not so large that he was limited to this one 
source of supply* Being an independent, he could personally watch for 
bargains, especially in distress goods, on quantities too small to int- 
erest the chain. 



(*) The author thanks Kr. Wroe Alderson, consultant on this 
study, for the following terse statement of the distinc- 
tion between the policies of chains and cut-raters: 
"Cut -orices are what the chains advertise, but cut-prices 
are what the cut-ra':ers advertise with", 

9726 



- 48 - 

During the code period, there was no national association of cut- 
rate drug stores, and only two associations appeared at the hearings. One 
of these was the rational Independent Pharmacists, -Inc. , having a member** 
ship, by its own figures*, of about 75 stores in JJew York City with an 
annual volume of business between $7,500,000 and $12,000,000, According 
to thin association's attorney, very few of these stores dealt in cigars 
or cigarettes, and few had soda fountains or luncheonettes. Their aver- 
age prescription business was from $50 to $100 per day per store and they 
sole 1 , for cash and went aggressively after tr-ade. The attorney stated the t 
this association war, affiliated with similar groups throughout the country 
but naied r.one of them. 

During the spring of 1935, ERA sent a government representative to 
sit as administration member on the local retail drug code authority in 
LTew Yoi"h City. This man, seeking knowledge of conditions in the trade, 
befrieiiaeo. and had many conversations -with members of the national Inde- 
pendent Pharmacists, Inc. In his final revert to the Deputy Administra,- 
tor** rendered after the Schechter decision, he stated: "I have person- 
ally visited meny of these stores and. fotind a great many of them to be 
of the highest type, With large prescription departments, finest of fix- 
tures and handling nothing but drug and cosmetic items." 

Another cut-rate association represented at the public hearings 
was The Associated Retail Druggists of America. The size of this group 
was difficult to determine. T.ie snokes -.an for it was i.ir. Maurice Singer 
of Cleveland, Ohio, and at the first hearing in August, 1933, he gave the 
title of his association as set forth above.*** At t.^e second hearing in 
June, 1934, however, he called it the "Association of Retail Druggists, 
Cleveland, Ohio".**** At the first hearing Mr. Singer stated that his 
association contained stores in t'-elve or more large midwestern cities, 
some of the stores bein~: independent and some small chains, and oil doing 
a large volume of business. At the second he.- ring, he further described 
his gnou^ as containing 200 to 300 stores. 



(*) See testimony of Miss Frances Kneitel, attorney for this 
group, transcript of hearing August 26, 1933, pages 338 
to 342; and transcript of herring of June 7, 1934, pa. -es ,204—235 

(**) Reriort of Walter P. Spreckels, Administration Member, to 
A.S. Donaldson, Depute -Administrator, Jxily 29, 1935; 
"Adiinistration members" folder, Deputy's files. 

(***) Transcript of hearing, August 26, 1933; pages 356 to 365 

(****)Transcript of hearing, June 7, 1934, pages 124 to 135 



9726 



- 49 - 

' • » * 
: tlii r\.w.\l av.tivrte drug and cocraetic stores, the 
d|pnptr!\9i|V stares eonsistently opposed price stabilization throughout the 
C<|d# periodt T he association representing this group was the National 
Betail'Dry Goods Association, having, according to its representative, (*) 
a membership of 4,555 department stores and specialty shops, most of 
them celling drugs and cosmetics. This association's opposition to price 
£«htr6l;by-the Government extended beyond the Retail Drag Code. It sent 
its representative to register its objections at practically every hear- 
ing on any code involving price devices. It appeared before the congress** 
ional committee considering the Capper-Kelly bill and objected to that 
measure while it was pending. 

In addition to the above-named trade association, two individual 
firms, ■.important, enough to warrant mentioning, appeared to object to 
price stabilization at both public hearings on the Retail Drug Code. 
One of these firms was R.H. Macy & Company, a large department store in 
New York City. . This firm achieved renown through its policy of selling 
exclusively for cash and its allegations that it endeavor to undersell 
all competitors by 6$. Its drug and cosmetic department was cut-rate in 
its tactics and, prior to the code, greatly disturbed the small druggists 
of New York. This firm employed an economist and also a Washington attor- 
ney, one or both of whom appeared at all hearings on price control to 
submit the company's objections.- During the code period, Macy freauently 
threa.tened*to violate the loss limitation provision, and expressed con- 
sistent objections to it, but actually remained in compliance. Another 
individual firm represented at the hearings was the Katz Drug Company of 
Kansas City. According to its representative, it had, in June 1934, 
eight stores, five in Kansas City, Missouri one in Kansas City, Kansas, 
one in St. Joseph, Missouri, and one in Iowa. (**) Druggists of Kansas 
City questioned Katz's right to call its establishments drug stores be- 
cause of the great variety of merchandise handled. Late in 1934, or 
early in 1935, Katz built a new "Super Service" drug store in Kansas 
City, carrying so great a variety of articles that druggists of the city 
promptly classified it as a department store. (***) Katz consistently op- 
posed all price control measures in the codes, and even succeeded in ob- 
taining an injunction preventing the enforcement of the price provisions 
of the Cigar Code. Though it disliked the loss limitation provision of 
the Retail Drug Code, its Washington attorney assured NRA that Katz wnuld 
comply; and available records show no outright violations by this firm. 



(*) See testimony of Irving 0. Fox, transcript of hearing of June 
7, 1934; pages 247-261 

(**) See testimony of Paul Stinson, transcript of hearing of June 
7, 1934; pages 261-266 

(***) To the layman, the dividing line between drug store and depart- 
ment store seems somewhat obscure. Drug stores, apparently, can 
sell electric irons, flashlights, cameras and toys, but not awn- 
ings, clothing and refrigerators without becoming, in the minds 
of other druggists, department stores. 



9726 



- 50 - • - ;:or w^f* aef 

CHAPTER -ill .••.... . ...... _„.,.. 






historic;,! jv:v:'lop:!z:^ b'f ^-!i!o ! ss Mii^ATMHW^;^ ^j 
•provision: to tie A].:.:-;.ii"T cp march, 1934^6*$ ^?iS£TOf|l 

i : T ,- 



I. Tra.de Activities fa smimer of 'Ja3vi£) r, ,? * s ■■ ♦ .» j -•]?••, • . f 

The national Association of Retail DrpV;is"ts ^an^i:' t'haotoa^^ti^^&t^l 
tute of America, Inc., commenced formulating a code soon -af teV tftiev '-V;-*i 
passage of the national Industrial Recovery* Act". _ER4'.rec^ji^,,ind4£ate 
that a number of State Pharmaceutical Assod-a-tions'-wij^e^,^ %§)?#*3^i,t£.#A 
codes also but, the principal effort lay in the drafting o£i& •^c^0Hk% 
code by the national bodies. Thou h the Dru'r Institute had particlpat'ecL 
prominently in the draftin,, of the"' .ropo'sVilcot^ 

name of the- Eatfcna.1 Association of Retail Druggist's'* P i$i%g^m*%W 
Pharmaceutical Association ^joined in the presentation, not a*s "'sponsor-,* j 

but as an' as sen tin,-' grouD. •■ ;;.- ■'-; 

••''•' , > t * .» a . . 

' „ ■••*--o XJ .;: .->♦ i»#i#4*A*s-Rl ;0IJ '-* 

II • Presonoacion o f Coi e; Public Hearing; -Sub s-e ouerht- ;Sr'a»Cfo& j '•« '.- { > £gt«i 

•■* * : - ■- -' - ; . ; ; 1 . -i .••■,.- - - ) J 

ERA received the proposed code on AUT-*srt ' l\y Vl3^^ 
a public hearing for- Auust 2b. Shortly before the hearing ^he^Iat ipijaitL 
Association pf Retail Druggists withdrew the original draft .^id; subisMys 
tuted a new one, (**) and- at the hearing all arguments' ajwT' + lJejl''tiiirrany;»ae:r ; ai 
oasod upon- the new, substituted draft, readiiig i'n ~suh-startfcfe:<; /rj&$.i§t&'io , wst 
in its pries control- -provision: -(***'). ■ "' -' u ' ■-' ■ •&xtri -vo-D a,;-; . V p ;.[og.-!;f,-»3 

■•- 9vi:T-3ir re -• y-- ai2 

(a) Retailers, shall not receive or accept any secret r"e*- 
-bates, unearned' discounts or similar concessions' - 
from manufacturers. Payments by manuf an'turers^to -««bi 

. retailers for window display shall be in cash and ■ 
not. contin ;ent...on Jthe& apount Qfi SWP4S| $&¥£$$' til * 

(b) • - Tra.cda r ; allowances or -premiums to consuaorsi-aro p-rfciS- 

hibited unless the consumers pay for them at the code 



i 



• minimum J.rice. P/ft cti-u— - ists can se3aL : to doctprs 
• ' at a, "afferent" -£ : 'ice . e " J I 'J* H , 

_";«/ ».'•'•" *■«*«#£ jftfegtfilftfi 

(c) Uc- trading stamps or other schemes or' 3ubterfu""geV*to 
evade the code minimum Prices are' pej*ita:ft!t'ed. Special 
sales cannot be held 'unless" prioi r ap'^r^vfel <, '6"f''A;he.*^ 
"•Enforcement •Board»--.is-.obtai-ned. ^ , .." . 

<■■'■ o ''•'.' •- .' B* mj>M- ( '*-• i Ml | 

(d) Combination sales are- hot prohibited ,-a^ tfoe,-.t£>jt&lfl(k 
price covers the code minimum prices of« : thtn-G-on»'tii> 

tuent items. . ' ' ■ 

(*) See official application for code;., Vgljime A, Retail l^ufoQodei CoAf 
Record Section, ERA • ' ,- • :'":,»* J* U^UM '-?* 

(**) The s Johsors, apparently withdrew every? &©»y of the &&(*$$£', .dj-af't-' in 
•.. ERA' s ( . posse's pi on.', The' author has net b ■ n able to' find the rfesorr* for 
the substitution, nor to obtain- copies of the f ir s}a draft. '■• k I 

(***)This draft appears at pa e 2S : j transcript of hearing " " a 

■ - , '^ , - - j -i rosier.*.* 

■.-.:•_ n -- ■) ■ - : .i 
9726 ■' ^^ri 



- 51 - 

(e) ITo manufacturer or wholesaler can sell to anyone, 
including hospitals, at a price less than he sells 
to retailer, if such goods are to "be resold. 

: (f) Ho' retailer can sell or offer to sell below "cost 

sold" plus 5fi net profit. "Cost sold" is defined as 
the "standard wholesale cost" fixed. by the manufac- 
turer^.) plus the average drugstore overhead as de- 
termined by the St. Louis drug store survey of the 
Department of Commerce (about 23 .0 . 

(s) A grower, producer or dealer who sells goods identi- 
fied by a special brand, name or trade mark. of which 
he is the owner, is permitted to specify the resale 
' price of such goods by agreement with his idstribu- 

tors. The prices stipulated must be uniform to all 
distributors, who are in like circumstances; and such 
contracts are to be free from the anti-trust laws. 

Clauses (f) and (g) were the most important to the sponsors; the 
intent of the others was merely to plug up possible loopholes and to 
bring about incidental benefits. Items (e) and (g) and part of item (a) 
would have controlled manufacturers and wholesalers thou/ii this code 
was supposed-- to govern retailers only. lor this reason, Mr. Donald 
Richberg, then General Counsel of ERA, arose at the start of the hearing 
and attacked the legality of the draft . (**.) Later, however, Mr. wroe 
Alderson, then Industrial Adviser to the drug trace, commented that the 
attempt to 'control manufacturers was a significant sympton, since elimi- 
nation of bad retail price conditions' necessitated some control over, or 
cooperation by manufacturers' and wholesalers .(***) 

The ublic hearing lasted two days and urin; the inter" ening 
evening the sponsors revisec. the code to accord with Mr. Rici.berg's 
views and to modify their demands for price protection. This revision, 
read into the record on August 25, changed the wording of the resale 
price Contract clause so as to permit retailers to enter into contracts 
with manufacturers, instead .of manufacturers with retailers. To render 
such a clause as this workable, there would have been need for a similar 
clause in the codes covering drug manufacturers^ ****)?his revised draft 
of the code abandoned the "cost sold plus 5 ■" clause and included in its 

(*) The ghra.se "standard wholesale cost fixed by the manufacturer" 

evidently means the manufacturer's wholesale list price t>er dozen. 

(**) Mr. Richberg' s attack appears on pa es 49 to 58 of the transcript 

«f August 25, 1933. Mr. Richberg also attacked these clauses on the 
ground that ITTA'S legal right to approve price-fixing clauses was 
doubtful . 

(***) Mr. Alderson 's comment appears in the Pinal Report of the Industrial 
Adviser (undated), addressed to A.D. Whiteside, Deputy Administrator. 
A copy is in folder marked "157 Retail-Code Doc"; Deputy's files. 

(****) See Part I for discussion of efforts to secure su.ch a clause in one 
of these codes, Page 12 et . seq. — 

9725 



~ 52 - 

place a clause substantially as follows: 

Retail druggists are orohibited from offering or selling 
merchandise at less than the manufacturer's published or de- 
clared retail (consumer's) price less 21f6. If, however, a 
manufacturer of a particiilar product does not -orovide the 
usual retail margin of 33-1/3$, the minimum code trice is to be 
the manufacturer's wholesale list price per dozen plus a per- 
centage mark-up to be determined later. Taxes are to be added and 
not absorbed. (*) 

This clause (commonly known as the "21$ clause") meant that the 
minimum price of a $1.00 hair tonic would be $79r£. But if the man- 
ufacturer's wholesale list price per dozen of the hair tonic was 
less than 33-1/3$ below the retail price (i.e., greater than 66~2/3<#) , 
the minimum code price would be the manufacturer's wholesale list 
price per dozen plus a mark-up to be determined later. This clause re- 
presented a much lower degree of nrice protection than the original 
"cost sold plus 5$ clause. Under the "cost sold" clause, a $1.00 hair 
tonic would have had a minimum price of $1.00 (manufacturer's whole- 
sale list price cer dozen of 66~2/3rf; plus 28$ of the selling price 
for overhead, or about 28rf; plus 5$ of the selling price for net profit, 
or about 5- 4 ; total about 99-2/3rf). 

The report of Deputy Administrator A. D. Whiteside to General 
Johnson on "Outstanding Impressions Drawn f rom t he General Retail and 
Retail Drug Trade Hearings" (**) shows the attitude at least of the 
administrative officers of HRA toward the druggists' proposals. Mr. 
Whiteside stated that while the retailers adiitted the depression was 
the principal cause of their operating losses, they still insisted on 
a loss limitation provision, and that they could not abide by code 
labor provisions without price protection. He stated that the loss 
limitation idea was so popular with retailers that, irrespective of 
economic implications, a denial of the retailers' request might have 
serious results at the crucial point of lIRA's inception, and the de- 
cision in the matter might have a decided bearing on NRA's success. 
Mr. Whiteside pointed out that the mere setting of uniform wages and 
hours would not, in retailing, result in curbing price cutting to 
the same degree as in manufacturing. He added that, under price sta- 
bilization the aggregate cost of goods to the consumer should not go 
up because of the small number of loss leader items. 

On September 8, 1933, after numerous conferences (***) the spon- 
sors revised the price control provisions of the code again, com- 
promising still further their desire for a high degree of price pro- 
tection. 



(*) This second draft appears in full at page 404, et seq. , of 

the transcript of August 26, 1930. Note that each day of the 
hearing had its own volume of the transcript, but page numbers 
ran continuously through both volumes 

(**) Dated September 14, 1933. Located in files on Retail Trade Code; 
also in History of Retail Trade Code, Beginning at page 30 

(***) There is no record of the actual proceedings at informal 
conferences 

9726 



— 53 — 

The two inroortant price clauses in this draft were substantially as 
follows: 

Drug merchandise cannot he sold at less than the man- 
ufacturer's wholesale list -price per dozen as of the date of 
sale or 3 months prior' thereto, whichever is lower, less 
such discounts as are available to all, plus 15$. Druggists 
cannot hold more than one seasonal clearance , sale per quarter 
and must report it in advance to the code authority. Per- 
ishable and damaged .goods can be sold below the minimum price 
if advertised, marked and sold as perishable or damaged. Bona 
fide discontinued lines, goods sold on complete final liqui- 
dation of a business, and foods sold for charitable purposes 
can be sold below the minimum. Before selling anything below 
the minimum, the druggist must first offer it back to the man- 
ufacturer at 10$ below the price naid for the goods by the 
druggist. 

Retailers may enter into resale nrice contracts with man- 
ufacturers but only on commodities the manufacture of which 
. is subject to an ERA code, and the contracts must be approved 
by the code authority, the Administrator of ERA, and the Pres- 
ident under Section 4(a) of ERA. Clearance sales are permitted 
if the manufacturer is first given an opportunity to re-pur- 
chase the goods. 

The first clause mentioned above would have made the minimum 
price- of a $1.00 hair tonic about 77 J; (manufacturer's wholesale list 
price per dozen of 66~2/3<£ plus 15$) less whatever discounts were 
"available to all". These discounts might have totaled as much as 
25$ on a few products, while on most there would have been no dis- 
count "available to all", but only a discount available to buyers of 
large quantities. 

The resale -price contracts clause in. this draft was so hedged with 
restrictions that it would hardly have been practical. (*) Negotia- 
tions between ERA and the trade continued throughout September. ERA's 
administrative staff was not averse to granting some price protection 
in the code, provided it did not go so far as to injure the public, 
and the -Industrial Adviser shared this view to the extent of recom- 
mending price protection in order to keep small druggists coo-Derat- 
ing with ERA. (**) Other "interests in ERA, on the other hand, notably 
the Consumers' Advisory Board, were oppsed to any price control clauses , . 
at all. (***) The representatives of the small druggists, naturally, 
wanted as much price- projection S.& they could secure. .The atter.pt to 'co'inpro- 
mise these diverse views accounts for the frequent changes in the pro- 
posed code. 



(*) Cory of draft of September 8 is in Volume A, Retail Drug Code, 
Code Record Section, ERA 

(**) See interim report of. Wroe Alderson to A. D. Whiteside, Septem- 
ber 9, 1933; Volume A, Retail Drug Code; Code Record Section 
filed 

(***) See report of William Loucks to A.D.Whiteside .September 14,1933, 
Volume A, Retail Drug Code, Code Record Section files 

9726 



- 54 ~ 

The druggists started with a bold proposal and gradually reduced their 
demands* . 

In the next draft, on September 15, 1933, the druggists regained 
some ground on their minimum price clause, but at the expense of giv- 
ing up their resale contract clause altogether. The minimum price 
clause in this draft provided in substance as follows: 

(a) On standard brands (well-known nationally advertised 
products), the code minimum price is the manufacturer's 
retail list price (full consumer's price) less 21%. 

(b) On off-brands (not highly advertised or well-knoin) , the 
code minimum price is the lowest wholesale net price 
quoted to all retailers within 30 days preceding the 
date of sale, plus'10$» 

(c) Clearance sales must be bona fide and can be held 
only at the end of a "well recognized season". (Other 
conditions under which goods could be sold below the 
code -orice remained the same as in the preceding draft. 
The retailer was required to give the manufacturer an 
opportunity to repurchase the goods before cutting the 
price) . 

The re-gained ground here was the re-acauisition of the "21$ 
clause", but the gain was limited to standard brands. The provision 
concerning off-brands would have produced a fluctuating price very dif- 
ficult of determination. (*) Two more preliminary drafts appear in 
the records, bearing the dates September 19 and September 21, respective- 
ly, but contain no substantial changes in the price provisions. (**) 
The last draft on record containing price provisions in line with those 
developed during the negotiations since the hearing was a draft, trans- 
mitted by Deputy Administrator Whiteside to the Administrator for ap- 
proval on October 1, 1953. It contained the "21$ clause", but limited 
its application to trade marked, trade named, or advertised goods, 
readily identifiable by the consumer. On other goods the minimum price 
was the individual store's cost of the goods plus a mark-up of either 
10$ regardless of the source of the goods, or 10$ on goods purchased 
directly from manufacturers, and 7$ on goods bought from wholesalers. 
***) The Deputy, in his letter of transmittal to the Administrator, 
****) urged the immediate approval of this draft, saying that the 
trade, except for a few price cutters, was aggressively in favor of loss 



*) Copy of the draft of September 15 appears in Volume A, Re- 
tail Drug Code, Code Record Section, NRA 

**) Copies of these drafts are in Volume A, Retail Drug Code, 
Code Record Section, KRA 

***) Parts of this draft are missing from the files and the 

record does not show which of the above alternatives was 
included in it. 

****) Copy of this letter and copy of parts of the code as trans- 
mitted are in folder marked "157~Retail-Co.de Doc", 
Deputy's files' 

9726 



~ 55 ~ 



limitation and would smother ERA in an avalanche of criticism if it 
were denied. He ■ warned of the serious political significance of such 
an avalanche. The Deputy further stated that labor leaders were in 
favor of the loss limitation -provision and that the opposition of the 
Consumers' Advisory Board was based on an academic viewpoint. 

The Deputy Administrator sent this draft to the Administrator in 
alternate forms: one, as a separate code,, and the other as ' a part of 
the general retail code,, The Deputy from the .beginning had /shown a 
desire to consolidate all retail codes and the retail drug trade had 
consistently opposed him on the ground that its problems were' wholly 
dissimilar to those of hardware and dry goods stores. Apparently, in 
transmitting the code in alternate forms, the Deputy was leaving the 
decision to the Administrator. 

Before looking at the differences between the code as transmitted 
for approval and the code as approved by the President, it is well to 
go back and examine the reaction of individuals in the field while the 
trade's representatives were in Washington negotiating with 11EA. 

Ill Reaction of Individuals; Mass Pressure 

A flood of telegrams and letters to the President and NBA from 
druggists and- local drug associations commenced in July 1933, prior 
to the presaitation of the proposed retail drug code. (*) The im- 
mediate cause of this correspondence was the President's Re-Employ- 
ment Agreement, setting hours and wages, but containing no trade prac- 
tice provisions. Druggists wrote and wired by the hundreds to the effect 
that they could not continue operating under the "blanket Code" with 
no curb on "unfair cut-rate competition". Prom' two cities in partic- 
ular came a batch of telegrams to the President couched in identical 
language, (**) from apparently every small druggist in these places. 
Many of these sent the same telegram twice, once under their own names 
as druggists, and again under the names of their stores. After the 
presentation of the code and during the negotiations prior to its ap- 
proval, the druggists were especially vociferous. A summary of mail ■ 
received after publication of the proposed code in the newspapers (***) 
showed a total of 779 pieces of correspondence, with 719 in favor of the 



(*) All of the corresoondence mentioned in this Subsection is in 
the Deputy's files, scattered throughout a large number of 
folders, all bearing the legend "157-Retail". 

(**) There were two forms of wording of these wires. One read 
"Cut-rate situation on tobacco, drugs deplorable here. 
Cannot give whole-hearted support unless relief comes". The 
other read, "Starvation wages, long hours will continue un- 
less local cut-rate drug company allows living profit". 

(***) Copy of the summary is in folder marked "157 Retail (a)," 
Deputy's files. The summary does not give the date of 
publication of the proposed code, but this was probably 
about the time of the public hearing, August 25, 1933. The 
summary shows the mail received from that date until 
September 25, 1933* 

9726 



- 56 - 

code as. published, 51 opposed to the pr.ice maintenance provisions, 4 
onoosed to the hours provisions, and 5 miscellaneous objections. A 
count of correspondence received between September 25, 1933' (=0 and 
the approval of the code revealed 484 letters and telegrams (with, the 
latter predominating) ashing the President or NRA to a'rorove the 
price protection- provisions requested by the sponsors. A large num- 
ber cf the telegrams were identical in wording though emanating from 
different parts of the country. Two examples aopear In a footnote to 
the Chanter 1 of this part, showing that the small druggists felt 
themselves to be the "honest 90^"and the cut-raters the "predatory 10$" 
in their trade. Other examples of uniform wording of telegrams were: 
"Urging you not eliminate orice protection clause retail drug code"; 
"Independent drug- cists cannot possibly x>^y higher wages and shorter 
hours unless 2l : o provision retained in drug code....."; and "The 
vicious 10$ mark-up (**) over invoice cost will close the doors of 
75;'o of retail druggists of nation. I petition you for release in 
form of right contract in retail drug code". 

There is little doubt that much of t he flood of correspondence 
was loosed at the instance of the drug .associations and was. not 
the spontaneous expression of the druggists individually. Uniformity 
of wording, of telegrams bears out this conclusion,, An interesting 
example appears in the consistent misspelling of the same word in all 
of the telegrams from one city. One druggist was naive enough to 
write a letter of confirmation of his telegram to the President, stating 
that the wire had been comoosed in response to a hurry call from the 
secretary of his state pharmaceutical association,, (***) An inter- 
esting item among the mass of correspondence was a series of 28 iden- 
tical mimeographed letters to General Johnson signed by individual con- 
sumers, -and three consumers' petitions containing 52, 41 and 18 names., 
respectively. The tenor of these documents was that, while the writer 
was not connected in any way with the drug trade, he or she appreciated 
the value of the neighborhood druggist and realized his need of orice 
protection. 5TRA acknowledged all of these letters, and in one case, 
the addressee replied that he had never written General Johnson in his 
life. 

Among the miscellaneous correspondence received during the pre- 
approval period of tne code were 139 letters from individual druggists 
urging a separate drug code rather than the inclusion of druggists under 
the general retail code. A large number of these were also uniform in 
wording. There were also three items from persons outside the retail 
drug trade. One of these, a telegram from the Utah Poultry' Producers 
Cooperative Association, opposed, in behalf of the farmers, any resale 
price maintenance clauses in either the retail drug or general retail 
codes. - • 

(*) l.iade.in connection with the present study 

(**) Referring, no doubt, to the attempts of i_iA to place drug- 
gists on the same ba.sis as. general retailers under a "cost 
plus l>o" provision 
(***) In view of the wholesale use of- this t:H?e of lobbying by 
the druggists themselves,- it is amusing to note that a 
number of their letters and telegrams warned MEA to beware 
of the lobbying activities of Large interests. 

9726 



- 57 - 

Another, from the secretary of the National Wholesale Druggists Asso- 
ciation, urged the approval of price protection in the retail drug code 
so that small retailers and wholesalers could stay in "business and 
employ help-. The third, f rom t he president of the Proprietary As- 
sociation of America, an organization of package medicine manufacturers, 
urged the approval of the "21$ clause" in the retail drug code. (*) 



(*) This association presented a code of its own to cover the 
manufacture of package medicines, containing an elaborate 
"orice maintenance plan. The nlan -provided, among other 
things, that retailers should not sell p^ck&ge medicines 
below the top consumer -orice less 21$. This plan was never 
anproved. See Part I, Intemlay of Interests in the Drug 
Industry, for a discussion of this code. Page 15 et.seq. 



9726 



- 58 - 

IV The Loss Limitation Provision as Arroroved by the president 

On October 21, 1933:, the President aporoved the Retail Trade 
Code covering both the general retail and retial drug trad.es. Attached 
to it was a schedule of additional provisions, applicable specially to 
the retail drug trade. A loss limitation provision appeared in the 
main body of the code applicable to both retailers and druggists, 
reading as follows: 

"Article VIII, Section 1 - Loss Limitation Provision. In 
order to prevent unfair competition against local merchants, 
the use of the so-called "loss leader" is hereby declared 
to be an unfair trade practice. These "loss leaders" are 
articles often sold belovr cost by the r.erchant for the pur- 
pose of attracting trade. This practice results, of course, 
either in efforts by the merchant to make up the loss by 
charging more than a reasonable profit for other articles, 
or else in driving the small merchant with little capital 
out of legitimate business. It works back against the 
producer of raw materials on farns and in industry and against 
the labor so employed. 

1. This declaration against the iise of "loss leaders" by 
the storekeeper does not prohibit him from selling an article 
without any profit to himself. But the selling price of 
articles to the consumer should include an allowance for 
actual wages of store labor, to be fixed and published 

from time to time by the Trade Author ity hereinafter estab- 
lished. 

2. Such an allowance for labor need not be included in 
the selling ;orice of any article of food, or be applied 
by storekee-oers doing business only in communities of 
less than 2,500 oopulation (according to the 1930 Census) 
which are not part of a larger trade area. 

Provided, however, that any retailer may sell e.ny article 
of merchandise at a price as low as the price set by any 
competitor in his trade area on merchandise which is iden- 
tical or essentially the same, if such competitor' s ririce 
is set in conformity with the foregoing provision. A re- 
tailer who thus reduces a -orice to meet a competitor's 
price as above defined shall not be deemed to have 
violated the provisions of this section if such retailer 
immediately notifies the nearest representative retail 
trade organization of such action pnd. all facts oertinont 
thereto. " 

"Article VIII, Section 2 - Exceptions to Loss Limitation 

provision. 

(a) Notwithstanding the provisions of the preceding Section, 

any retailer may sell- at less than the orices specified above, 

merchandise sold as bona fide clearance, if advertised, marked 

and sold as such; highly perishable merchandise, which must 



r ;726 



- 59 - 

be promptly sold in order to forestall lose.; imperfect or 
actually damaged • >erc"hand.ise, or bona fide discontinued lines 

of merchandise, if advertised, narked and sold as such; mer- 
chandise sold upon the complete final liquidation of an3^ 
"business; merchandise sold in quantity on contract to "oublic 
carriers, departments of government, hospitals, schools and 
colleges, clubs, hotels, and other institutions, not for re- 
sole and not for redistribution to individuals; merchandise 
sold or donated for charitable purposes or to unemployment 
relief . agencies; and drugs or drug sundries sold to physi- 
cians, nurses, dentists, veterinarians, or hospitals. 

(b) Nothing in the provisions of the preceding Section shall 
be construed to prevent bona fide farmers' associations en- 
gaged in purchasing supplies and/or equipment for their mem- 
bership from making patronage refunds to their membership. 

(c) Tlhere a bona, fide premium or certificate representing a 
shore in a premium is given array with any article the base 
upon which the minimum price of the article is calculated 
shall include the cost of the premium or share thereof. 

A nine-page explanatory bulletin on the code, iss '.ec 1 by ERA 
on October 23, 1933, '(*) interpreted the loss limitation pr vision to 
mean that no retailer could sell merchandise below his actual net 
delivered cost, less discounts,' or his current replacement cost, 
whichever mas lower. Until ITRk fixed a markup to cover labor costs, 
the code minimum nrice remained at bare merchandise cost. Inasmuch 
as individual costs differed small retailers with high costs could 
meet prices set by large retailers with low costs provided the latters' 
prices mere not in violation of the code, and provid.ed the small man 
notified the code authority of his action. 

TThy the retail druggists, against their will, were placed 
under the general retail code, and why their suggestions for price 
protection were ignored in spite of the Deputy's recommendation that 
they be approved, does not apmear from the available files. Hot until 
April 5, 1934, did ItRA fix a labor mark-up for this loss limitation 
provision (**) and b~ r that time the druggists had a new loss limitation 
provision of their own. The mark-up established was 10^ 



(*) Cony is. in folder marked "157 Retail - Code Documents"'; 

Deputj'-'s files 
(**) Administrative Order 60-26 



5726 



~ 60 - 

V. Objections of Trade to Approved Provision 

The sponsors of the code were far from satisfied with the ap- 
proved loss limitation provision, George 1,1, Gples, president of the 
Liggett Drug Company wrote Deputy Administrator Whiteside* that he was 
keenly disappointed at the rejection of the druggists' loss limitation 
suggestions and the approval of cost plus a labor mark-up. The Assist- 
ant Deputy Administrator must have foreseen trouble with the officials 
of the National Association of Retail Druggists, for his telegram ask- 
ing this association to appoint two members of the code authority 
pleaded with it not to refuse or it inight ''endanger what 'has "been accom- 
plished and what I know you still hope for 11 ,,** The answer from the 
secretary of the H-AaEoD,,*** stated, "Under protest we nevertheless are 
willing to cooperate with your department and John Ac G-oode and myself wil 
will he in Washington Friday morning to act as terroorary representatives 
of i\foAoS»Do on Retail Drug Council, 



.-■»•- 



Repercussions of this initial dissatisfaction continued at 
intervals throughout the life of the cooe, In January, 1934 N.R A. 
issued a press release mentioning that the retail drug code was the 
result of an agreement hetween the trade and IToRoAo 

The secretary of N»AR»D« wrote the Assistant Deouty Administrator that 
the press statement was false, and that he, for one, had. not agreed to 
any part of the code and at first intended not to have anything to do 
with it He closed his letter by saying, "The Drug Code, in my opinion, 
is a disgrace for any government to try to put over or any group of men 
who are supposed to have any intelligence at alio....*"**** 

On October 4, 1934, this same trade association revived the 
matter by publishing in its journal an editorial***** stating that the 
trade never had a chance to assent to the approved code. The occasion 
for the editorial was a statement by the President of the United States 
on September 30, 1934 that each industry had been allowed to write its 
ideas into its code, and the editorial urged each druggist to write the 
President, correcting him A number of such letters came, though by that 
time, FoR«Ae had long since granted the druggists their own loss limi- 
tation provision and the conditions surrounding the approval of the 
original code were a dead issue****** 

(*) Letter of 10/24/33; folder marked "157-Retail -A-L"; 

Deputy' s files 
(**) Telegram from C.7. Smith of IT.E.Ao to John Dar gavel, secretary 

of the association, 10/24/33; Deputy's files 
(***) Telegram from Dargavel to C.W. ' Smith, 10/25/33; Deputy's 

files. 
(****) Letter from John Dargavel to C.W. Smith of ItRA. 

January 15, 1934; Deputy's files. 
(*****) Copy is in folder marked "Protests"; Deputy's files 
(^*****) Copies of these letters are in the folder marked 
"General Correspondence"; Deputy's file. 



9726 



- 61 - 

The objections of the small druggists to the approved loss 
limitation provision centered around its low degree of price protection. 
In principle, it pegged prices at the merchandise cost of the dealer 
with the largest buying power in each trade area. In the drug trade, 
since. the large dealer's cost was 15$ or more "below that of the small 
dealer, the latter took a considerable loss when meeting the prices /jf 
the former, The'provision purported to eliminate loss leader selling 
but it did so only in the narrowest sense, by preventing the large price 
cutter from selling below his own invoice cost. 

Some hope for relief lay in the promise of a labor mark-up. 
Small druggists realized, however, that the addition of a percentage 
covering perhaps part of the price-cutter's labor costs, might still 
not raise the .code price to the cost of the goods to the small man, and 
in any event would not give him a sufficient return on his own lab^r 
costs. As the drug code authorities attempted to administer the loss 
limitation provision, they discovered another defect in it. The clause 
was unenforceable. There was no fixed, definite minimum price on each 
product, but the code price fluctuated from trade area to trade" area 
and from day to day according to the success 'of individual price cutters 
in obtaining goods' at a low cost. Even had the price-cutters' merchan- 
dise costs been readily ascertainable, the constant fluctuation of the 
code price would have caused administrative difficulty; but to add to 
the problem, . the merchandise cost of a given store was a matter usually 

.known only to. that store, and divulged reluctantly if at all. A code 
authority suspecting a given price of being below the code minimum had 

,no means of checking except by examining the store's invoices. If the 
store refused to disclose these documents, there was nothing to compel 
them to do so. 

VI. Efforts for a Hew Loss Limitation Provision: Attitude 
of ERA 

From their initial dissatisfaction "with the approved loss 
Limitation provision, drug association: leaders turned to a search for 
ways to improve it. At first they felt that ERA could, if it would, 
erect a satisfactory structure upon the approved provision by revising 
the definition of "cost" and adding a substantial labor mark-up. There- 
fore, in November, 1933, the National Retail Drug Code Authority pre- 
sented ERA two briefs*. One of these urged that ERA withdraw with 
respect to drug products, its statement that "cost" meant individual in- 
voice or replacement cost-, and issue instead an interpretation that 
"cost" meant the manufacturer's wholesale list price per dozen on 
products possessing such a price, and on other products the "normal 
wholesale price actually prevailing in the immediate market". The second 
brief urged the approval of a 15$ labor mark-up stating that the normal 
wage cost of a drug store, exclusive of a proprietor's salary, was 18^; 

but that 15. ■ .raid be satisfactory. 

(*) Both dated 11/15/33; "Mr Whiteside's folder"; 
Deputy' s file ' 



9726 



- 62 - 

■■0 

The early attitude of NBA toward these proposals appears from 
two documents. ■ One of them, a pencilled memorandum, on a printed form 
""headed "From- the Desk of Hugh S, Johnson", was, attached to the second 
brief mentioned above, and states, "Whiteside; This* is too much', hut 
we must act at once on .the differential - H.J." The second document was 
a memorandum from Deputy White side to General Johnson*, returned to 
7fiiite<side with Johnson' s pencilled comments in the margin. The memorandum 
stated that the National Retail Drug Code Authority had asked for a lUfo 
mark-up. General Johnson's comment; "No". 

The memorandum stated that Whiteside had suggested to the drug°;Lst that 
they start with a small mark-up and work up if necessary. C . . ,1J. N 
Genera!**Johnson; :"I agree". The memorandum further stated that the 
druggists definition of cost seemed absolutely incorrect. 

i While the. Code Authority Was "busy, in Washington working for a 
new definition of- "cos't" druggists in- the field were active. A mass 
meeting in Kansas City forwarded 'a resolutions, to NBA asking for the old 
"21 'b clause"; . the establishment 'of the 'manufacturer's wholesale list 
price per dozen as "cost"; a mark-up equal, to the labor cost. of the 
average druggist; the right to make resale price contracts' with manu-r . '. 
facturers; a nrohibition upon premiums, and permission' to manufacturers 
to put serial numbers on their e;oods.*** Druggists'' in Hew ..York- City 
also held a mass meeting with an .'attendance of 2,000 and forwarded re- 
solutions to NRA. asking, much thd same things.as the Kansas City meeting.**** 
The -12-th District local code authority. in Texas forwarded returns from 
a questionnaire ■, submitted to" 172 drug stores in Fort Worth and vicinity. 
Of 147 replies,. 11.9, voted for •' &• 50,4 mark-up. and a re-definition of cost 
as fhd- manufacturer '.s wholesale lis-t price per' dozen; 23 voted for the 
same "re-o.ef inition of cost, but- with a 55?$ mark-up; 4 did not vote, and 
one***** voted against any form of. price control.****** One cosmetic 
j'aanuf acturer openly joined the fight, sending ERA a copy of his printed 
circular tp: retailers assuring them of his backing in their efforts for 
increased price 'protection.******* : .The number of letters and telegrams 
from independent druggists during the early stages, however, was • small. 
Hot until -February, 1934, when NRA had agreed to consider an amendment 

to the loss limitation provision was -the mass .-pressure unleashed. 

(*) The figure ,15$ was -encircled in pencil on the brief to which 

this was attached 
(**) • - Dated November' 13, 1933 "Mr Whiteside' s -Folder", 

Deputy ''s files ■■-...■■,■ 
(***) Resolutions dated about- November 30, 1933;' Deputy' s files. 
.-.,: The right of manufacturers to put serial' numbers on thei,r 
goods to effectuate "the -policing of refusal-to-sell policies 
had previously been denied by the courts in the Beechnut case. 
(****) : Resolutions dated -November 1.0, .1933; Deputy's files 
(*****)." Leonard Bros, department, s-tore, an establishment consistent - 
*■■■■ ly. opposed to price maintenance, and especially active in 
:\ '..'.opposing the" loss limitation provision of the Retail Food 
and Grocery Code. 
(******) Copies of the questionnaires with letter of transmittal 

dated December 11, 1933 are in folder marked "157 Retail- 
Code Documents"; Deputy's files, 
(*******) See letter from Carl Weeks, Armand Company : 
November, 1933; Deputy's files 

9726 



r- 63 . - - 

The effort for a re-def i-nition of cost under the existing 
loss' limitation provision gradually changed' into 'an effort to ame'nd the 
code so as to give-' the drug tifad-e an entirely new provision o"f its own. 
Possibly 1>he reason for this chsftige of tactics was that the general 
retail trade seemed satisfied with the invoice cost type of code price, 
and so long as this trade and the drug trade used the same provision, it 
could not be interpreted as t*he druggists -wished. 

She first suggestion' for a new 'clause appearing in the records' 
examined:" was "that no one should 'sell drug products below the "lowest 

price published .or openly quoted. in dozen lots by any wholesaler 

to retailers in -the particular trading area, free goods and other 
premiums andrgifts to be considered pro rata in arriving at such 
price. ..*." Deputy Whiteside in a memorandum to General Johnson 
recommended approval of this proposal for a 90-day trial period, urging 
that the small druggist should be helped quickly to overcome the buy- 
ing advantages of large stores.* General Johnson evidently changed 
his former attitude and NRA. published the" proposed clause in a Notice 
of Opportunity to File Ob-jections. ** Inasmuch as the clause was pro- 
posed, as an amendment to the code, it was irregular to handle it on 
a mere notice instead of by public hearing, and this irregularity re-" 
suited in criticism from .the price-cutting interests. The files do not 
contain any correspondence ' objecting to the purposed clause but it is 
known that a number of price-cutters, did object.*** The files do not 
contain, however, a document probably representative of the price- 
cutters' attitude, This-is a press release from the office of the 
Washington attorney for the Katz Drug Company of Kansas City, stating 
that the proposed amendment would greatly increase prices in large 
drug stores, department stores and chains, and that the Katz Drug 
Company would attack it in court if it were approved. The release 
criticized Deputy Whiteside as the "number 1 price -fixer" of NRA and' 
stated that the amendment would psevent the consumer from obtaining 
any saving from Katz' car-loading buying. It ended by objecting to 
the lack of a hearing, saying that the public would not know how many 
persons had objected and that the provision was invented in secrecy 
and could not stand the full light of day,**** 

The small druggists responded rather strongly to the Notice 
of Opportunity to File Objections. On February 28, 1934, NRA received 

349 telegrams asking prompt action on a code price based on the 

(*) Memorandum dated 2/l/34; "157 Retail - Code Documents"; 

Deputy's files 
(**) Notice of Opportunity to File Objections, Administrative 

Orcer 60-18, 2/20/34; Code Record Section files, 
(***) At the public hearing of June 7, 1934 (discussed herein- 
after), several of the price-cutters specifically men- 
tioned having filed objections in response to the Notice, 
See transcript of hearing. 
(****) A carbon copy of the press release is in the folder marked 
"Memoranda"; Deputy's files, Katz' Washington attorney 
informed the author during the course of this study that 
several newspapers had published the release. 



9726 



- 64 w 

manuf aet_r*r ' s wholesale list price per d»zen plus a 10$ labor mark-up.* 
The telegrams came from 29 regional drug associations, 70-odd individuals 
in the mid-west, and the "balance scattered pver the rest of the c#v_f!ry, 

country.** 

Soon after the NRA had issued The Notice of Opportunity to 
File Objections, the Code Authority "became convinced that the proposed 
clause weuld not work. The "lowest price published or openly qv.« f --'"' 
quo ted...... "by any wholesaler" would have fluctuated from day to day, 

and there would have been a possibility that wholesalers friendly to 
eut-price retailers would have quoted unusually low dozen-lot prices 
without the intent or ability to supply all retailers in the area at 
such figures. Unending legal squabbles over the meaning of. .the provision 
might have- followed. 

The Cede Authority tentatively suggested a substitute based 
^n the "prevailing wholesale price" in each area. This too had the ob- 
jection of being difficult of determination, subject to fluctuation, 
and productive, of a different code price in each trading area. Finally, 
in Mareh, 1934, NBA agreed to consider something akin to what the druggists 
had always wanted - a loss limitation provision based upon a uniform 
ascertainable 'price, practically equal to the cost of goods to small 

druggists. m 

Inasmuch as the proposal under consideration had nothing to 
do with the manufacturer's wholesale list price per dozen 
and contained no provision for a mark-up, it is difficult 
to view these telegrams except as objections coupled with 
a substitute suggestion, 
(**) For the summary of this correspondence, see memorandum from 
C, Sterry Long to A.D. Fniteside, March 1, 1234; "157- 
Retail - Memorandum"; Deputy's files. 



9726 



- 65 ~ 

VII. The Mar ch Amen dment to the Lo ss Limitation Prov ision , 
and Its Interpretation 



On March 5, 1934, Deputy Administrator Harwood wrote Division 
Administrator Fniteside recommending an amendment to prohibit druggists 
from selling "below the manufacturer's wholesale list price i er dozen, 
Mr. Harwood mentioned the question of a 10$ labor mark-up, out suggest- 
ed that this "be postponed so that prices to the consumer would 'not rise 
too fast.* The record does not show why Mr, Harwood' s recommendation 
was changed in the approved draft of the amendment, "but doubtless it 
was because some officials foresaw the result of. handing too much power.- 
to manufacturers. Although the manufacturer's wholesale list price per 
dozen had for years been a stable price, fairly close to the srn3.11 
drug-gust' s merchandise cost, there was a chance that its establishment 
as a. code price wotild induce manufacturers to manipulate their price 
policies Gf as to insure a margin to the small druggist selling at the 
code price. Such manipulation would have violated the principle of the 
provision that the minimum price should be the cost of the goods to the 
small druggist, and to prevent such a violation, i!RA at the last minute 
threw into, the clause a proviso requiring the t eduction from the manu- 
facturer's wholesale list price per dozen of discounts, free deals, 
and rebates available- to all purchasers of. aozen lots.** 

The Amendment was approved on March 29., 1934, without a prior 
public hearing and without further Notice to File Objections (though 
it differed substantially from the clause previously published) . The 
approval was contrary to the recomraendatioas of the Consumers' Ad- 
visory Board, Research and planning Dividion, Industrial Advisory 
Board ', and Labor Advisory Board. The Assistant deputy Administrator, 
in transmitting the proposed amend ;ent to General Johnson, wrote that 
it would eliminate loss leader selling and probably reduce prices to 
the consumer over a wide range of products, thus more than counter- 
acting its tendency to raise prices on the few loss leader .'terns. The 
Assistant Deputy took issue with the advisory boards on the definition 
of 'Efficiency", saying that mere heavy buying power and lcrs "leader 
selling were not efficiency but "chiseling practice" , and that the 
price cutters rendered little public health service. General Johnson, 
in his le : tter to the President explaining why he had approved the amend- 
ment, stated that the previous loss limitation provision had, uroven un- 
enforceable in the drug trade, and the amendment', while not altering 
the' basic principle of the former provision, made.it enforceable. 

As a proved the amendment re-ad as follows:. 

■"Inasr.iucli: as the vast preponderance of drug store products are 
distributed through small drug retailers who are unable to 



(*) This memorandum is in folder marked "157 Re-tail -I Memoranda? ; ^i 
Deputy's files » 

(**) Chapter VI of this part shows how the possibility of price manip- 
ulation by manufacturers-. became an actuality when, in the Septem- 
ber- amendment, this safeguarding proviso was removed. See page 
107 et. seq. . ■■. , .. ' 



g ■ j. j\..;-. o .■ c.:r:i ! ;.lti f basis but who perform services which, are 
essential to the welfare of those in their communities, and whereas 
such service:; can- ot adequately be performed through the facilities 
provided by their competitors,, and whereas in some cases sales are 
made to consumers by such competitors at prices below the lowest cost 
of purchase n027.1c.lly obtainable for such merchandise by small drug 
retailers, ;v. whereas in most instances such sales prices are not a 
true indie ,tion of the general level of prices of such competitors 
and no general benefit to those in the community accompanies the same, 
but such prices ere in fact in the nature of bait -offers of merchan- 
dise to attract trade, it is hereby declared an unfair trade practice 
and is prohibited by this code for any drug retailer to sell any drugs, 
medicines, cosuetics, toilet preparations or drug sundries at a price 
below tho manufacturer's wholesale list price -per dozen, provided, 
however, 'civ. t in the case of biologicals or other of the above-mention- 
ed products which are not customarily sold in dozen or greater lots 
the Code Authority may fix a comparable unit quantity, and provided 
further that my discount, free deal, or rebate which is made available 
to all purchasers o" dozen lots or comparable quantities, shall be 
considered as part of the manufacturer's wholesale list price." 

Prom th< frets alleged in the preamble, the avowed purpose of .' j 
this ameni . as to peg minimum prices at, but no higher than, the 
snail dealer's Merchandise cost. The use of the manuf acturer ' s 
wholesale li t nice per dozen to accompolish this purpose involved 
the presunption that the small dealer regularly purchased in dozen 
lots or smaller quantities. Trade association representatives had 
frequently assured 1TEA that this was so. However, the dozen-lot cost 
of drug products in some instances was leas than the manufacturer's 
wholesale list /'rice per dozen by the amount of dozen lot discounts 
or free goods offered by the manufacturer or the wholesaler or both. 
The amendment(*) in its "last proviso" (**) required the deduction of 
certain discounts in the determination of the code price; and a 
question imr.ediately arose as to what discounts it meant to cover. 

To answer this question required several conferences among NEA 
officials; and a formal interpretation. One faction at the conferences 
argued that the "last proviso" should cover both manufacturer's and 
wholesaler's discounts, otherwise, the code price would not precisely 
euusl the dozen- lot cost of the small dealer. The other faction 
argued that such e^act equality between code price and small dealer's 
cost was unnecessary; that wholesalers' discounts were negligible in 
amount, and that to include them would produce a different price in 
each trade area and seriously hamper enforcement of the code. General 
Johnson decided in favor of the latter view, and on April 6, 1934, 
UEA issued an interpretation that the "last proviso" referred only to 

|rF Hereof or in this report, the amendment now under discussion 

will be referred to as either the "March amendment" or the "March 

provision". 
(('**) Herr af ter in this report the proviso in the March amendment con- 

cerc.in- the deduction of dozen-lot discounts and deals will be 

ref.trred to as the "last proviso". 

/ 



- S7 - 

Manufacture r f s pr.'.ce ccnce.j.~ica. I-lie interpretation, containing also 
certain other explanations of the amendment, read in substance, as 
follows :(*) 

1. The amendment does not apply to all items sold in ding stores, 
"but only to drugs, medicines, cosmetics, toilet preperations and 
drug sundries as defined in the code. Drug sundries being doubt- 
ful of meaning are interpreted as "articles or appliances used in 
the promotion of public health and sanitation". 

2. Certain commodities with no manufacturer's wholesale list price 
per dozen, such as unbranded products, and goods put up under the 
retailer*s om brand (private brand goods), are not subject to 
the amendment and the retailer may sell them at any price he 
plea.ses. 

3. The "comparable units" section of the amendment means the lowest 
number of the article quoted or listed and made available to all 
members of the trade, but never more than one dozen. 

4. The code minimum price set forth in the amendment applies regard- 
less of "h a t the retailer has paid for the goods. 

5. Free deals are to be considered in computing the code minimum 
price only during the time that they qre offered by the manufac- 
turer. 

6. The old retail trade loss limitation provision (Article VIII, 
Section 1) no longer applies to drugs, medicines, cosmetics, 
toilet pr.parations and drug sundries. 

7. The only discounts, free deals or rebates to be considered in 
computing the code price are those offered by manufacturers; and, 
furthermore, they must be offered either to the entire retail 
drug trade, or to all druggists in an area where the manufacturer 
is conducting a sectional promotion. 

The net result of the liarch amendment plus the above interpreta- 
tion was the fixing of a uniform and fairly stable code price, not 
dependent upon such violently fluctuating and unascertainable factors 
as individual invoice cost, but nevertheless approximately equal to 
the small druggist's merchandise cost. As stated previously, the only 
factor preventing exact equality between the code price and the small 
man's cost was the wholesalers' dozen-lot discounts. Inasmuch as KRA 
had not made any study of the economic desirability of placing the 
minimum price at the small dealer's cost, slight deviations from a 
mathematical application of the principle should have caused no concern. 

T*) The interpretation appeared as Administrative Order 50-27 and is 
in Code Eeoord Section files. The account here given is a sum- 
mary and not the actual wording of the provisions. 

9726 



- n8 - 

The wholesaler himself rarely received more than _.15$ plus 2$ from the 
manufacturer, consequently, his discount to the ratailer was limited. 
Furthermore, preservation of his o- n business reauired the wholesaler 
to restrict his large discounts to a few fast-selling items. Mutual 
and cooperative wholesalers, "by their very nature, gave discounts or 
patronage dividends to their members on all items, but these firms 
handled, usually, an incomplete line of merchandise'. 



9726 



- 69 - 



chapter iv. historical development of the loss limitation 
provision pro:: the march amendment to the 
expiration cp codps 

I . Administrative Problem Railed by "Last Proviso" of Parch Amen dm -nt 

Though the March amendment aroduced a, uniform and fairly rtablc 

code uric^ much more sati praetor" to th^, small druagists than the ov<-~ 

vious Ion? limitation provision, it had one .jreat weakness in its "last 

proviso" . 

Pver3 r druggist knew or could quickly ascertain the manufacturer 1 s 
wholesale list price }er dozen on a given drug or cosmetic product by 
consulting the Druggists Circular Red Book Price List* or the American 
Druggist Price Book.** The editor of the latter publication estimated 
in 1934 that more than 40,000 druggists had copier,*** ano this circula- 
tion added to that of the Red Book probahjv included every druggist in 
the country. However, the ee.s. of ascertaining the manufacturer's 
wholesale list price per dozen did not help the druggists in determining 
the code price, for the latter depended upon the deduction from the for- 
mer of all manufacturers' current dozen-lot free deals and discounts. 

Po sousce of information existed to inform druggists of the current 
deals of all manufacturers except perhaps the wholesal r, and ever he 
was often confused and unable to keep track of the constant 'luctuations 
on the 40,000 items he stocked. A few manufacturers of fere* 'ixed 
do^en-lot d~als as part of their permanent -'rice policies**** and these 
were easy to handle but the vast majority ran their deals seasonally and 
not in accordance rrith any definite plan. The traditional mode of think- 
ing of the small dru:-:~ists increased their difficulty in ascertaining 
the code price. To them the unadulterated manufacturer'? wholesale list 
price p^r dozen was their invoice cost, a,nd anv free snoods or discounts 
were- mere pleasant gratuities. Because the code price included these 
deal? and discounts, the small druggist was confused by it, er.z sought 
information from his wholesaler. But NRA could not expect wholesalers 
to assume the sxpense of acting as price information jureaus nor place 
the burden on the retailer to check by telephone all doubtful trices. 
To ace to the oroblem some of the larger retailors a.nd department stores 
objected that — con't. 

(*) Published by the Druggists Circular, Pew "fork Cit :r and revised in 
iiay and November each year. HereinaJter referred to a? the "Red 
look". 

(**) Fublishec tr r the American Drag ist, ."e^ Per: Git r and revised an- 
nuallv. In addition, when new products appeared their prices were 
jublished in the American Druggist, a monthly magazine of the same 
publish! ' house. Hereinafter referrec to as the "Blue took". 

(***) Letter fro ■ Id "". Futclii s, sditor to As°ietant Deuutv Adminis- 
trator hark Merre.ll, 3/17/34; folder marked "Frices" Denut^'s File. 

(****) Por example, the Arnlanc' Company, Des oir % lea has for years 
given three extra packages free with the purchase of n. dozen. 



9726 



- 70 

since th^y never bought in dozen lots and had little contact with 
wholesalers, they had no p-urce of inf ormation on th<; code price.* 
A method of circulating accurate and current code price information 
to the trade had t" be devised. 



(*) The 7ashiifl;t^n attornev for 2. H. : 'acv * Company, v ™ York City- 
made frecm^nt verbal repr a ssnt8*ions to WIA on this r>oint after 
the approval o r the "arch amendment. 



9726 



~ 71 - 
I I . Order 60-54 and the Minimum Price Lists 

On Ar>ril 19, 1934 NBA issued Admini strati ve Order 60-54 (*) re- 
quiring the National Retail Drug Code Authority to issue a list of 
minimum code nrices and permitting local retail drug code authorities 
to do likewise if they wished. The list was to he lerima facie evi- 
dence of the correct price so that anyone who violated it had the 
■burden of proving the list wrong". On unlisted items, any retailer 
could cut his -orice to meet that of a competitor provided he noti- 
fied, his local code authority. This last-named t>Prt of the order 
meant virtually that the loss limitation provision covered only such, 
products as the code authority could assemble in a list and this is 
an important point in' view of the small number of items in the lists 
actually issued. 

During April, the Nat o'nal Retail Drug Code Authority compiled 
a list of about 800 items, obtaining their -orice information directly 
from manufacturers. The task proved difficult and when the list 
finally appeared it contained many errors and soon became wholly ob- 
solete because of changes in manufacturers' discounts. The National 
Code Authority issued a second list in May, covering about 1,000 
items. (**) Eroericnce gained with the first list made for greater 
initial accuracy in the sec-nd, but it too gradually became obsolete. 
The ezpens.e of making and distributing the two lists was so great, 
that the National Code Authority never issued another, but bent its 
efforts toward persuading NBA to eliminate the "last proviso" from 
the March amendment so that the flat manufacturer's wholesale list 
price per dozen would become the code price. 

Some of the larger local code authorities had also issued price 
lists under Order 60-54, and a few of them tried to keep their lists 
up to date as late as the summer of 1934. However, most of them 
were even less able to stand the expense than the National Code Au- 
thority. Abandonment of the task of issuing price lists brought 
the full burden of acting as -orice information bureaus on the local 
code authorities. Their attitude toward this burden is indicated by 
a letter from one of them(***) stating that unless manufacturers' 
dozen-lot deals were prohibited or else eliminated from the comouta- 
tion of the code -orice, the work of the local code authority would 
degenerate into a "constant scrutiny of price lists and the. issuance 

of puerile price changes of interest only to cut-raters". The 

writer added that the small druggist was naying code assessments to 
keep the cut-raters informed as to the keenness of the w ipon used 
to cut the small man's throat. 

( *) Copies are in Code Record Section files. Hereinafter , this 
order will be called by its number - 60-54. 

( **) Both lists are in "Prices" folder; Deputy's files. 

(***) Letter to NBA from Northern California Retail Druggists Asso- 
ciation, July 23, 1934; "trade' practices" folder; Deputy's 
files. 



9726 






III. proposed Solutions of the Pr oblem 

• The Code Authority 's to osed solution of the problem was to eli- 
minate the "last proviso" from the Parch ar.1endx.1ent and nrlie the flat 
manufacturer's wholesale list -rice the. code minimum. II.H.A. , however, 
wag not willing to assent to this -ro^osition without erecting some 
safeguard for the consuner. Chough ".".&. had not seriously investi- 
gated tne economic inrrli cat ions of retail -rice control, it had estab- 
lished fixedly in its own thinking a principle for the retail drug 
code. This - riaci.-le wis that any fixing of -.rices at a level high- 
er than the small dealer's merchandise cost was uneconomic. The prin- 
ciple bee: me established somev/hat subconsciously, more as a compromico 
among diverse interests than as a result of economic analysis. Among 
these interests were: the trade, wanting all the price protection it 
could secure; the Consumers' Advisory Board, convinced that any form 
of price fixing would raise consumer trices anc perpetuate inefficient 
distribution units; and the Legal Division, afraid that courts would 
invalidate cede price provisions as thej had done private price-fix- 
ing, probably the development of the small dealer's cost theory wis 
a natural evolution from the earlier -principle that loss leader selling 
was an evil, for loss leader selling involved selling below. -cost . The' 
first loss limitation rovirion rohibited sales beloi"' the large dc: 1- 
er'p invoice cost, but -roved no protection to the small man; so, the' 
small man's merchandise cost became the point, in 'J.R.A.'s mind, at 
which loss leader selling began.* The resistance of opposing interes-ts 
was too strong to permit adding a marh-up to cover the small man's over- 
head expense; hence the compromise was struck at the small dealer's mer- 
chandise cost, and there it remained.** When the Code Authority pro- 
posed the elimination of the "1-st aroviso" from the March amendment, 
J.R.A. foresaw that manufacturers might, by giving substantial discounts 
and free poods to small dealers, make their manufacturer' s wholesale 
list prices per dozen fictitious and considerably higher than tiie .small 
dealer's cost.*** The possibility wa.s not merely theoretical , for there 
were compelling reasons why ra nui octurers would want to manipulate their 
-or ices. One doing so woiilu incur much good will imon^, the small drug- 
gists who "(juld thereby receive a gross profit when selling at the code 
price. At the tvublic hearing on June 7, 1934**** the Code Authority 



(*) Compare 'J.a.A.'s principle that price fixing must not rise -°oove 
the small dealer's merchandise cost, with the principle behind 
the State Fair Trade .Laws permitting manufacturers to set their 
minimum prices at any point they please. Fart III of this re- 
port. Page 174 

(**)See infra for discussion of ineffectual attempts of the trade 
to obtain a mark-up. 

(***)There was r loophole even under the "last proviso" enabling 

manufacturers to accomplish this result by offering discounts or 
free goods on lots of 13 units instead of a dozen because the 
"Last proviso" applied only to dozen-lot deals. However, no 
instances of this subterfuge ever came to h.R.A.'s notice. 

(****)Discussed infra in this Section; paragraph E 



- 73 - 

proposed an amendment to replace the llarch amendment, eliminating the 
"last -proviso" and setting up a safeguard against price manipulation 
"by manufacturers .' The safeguard errrowered I 1 .?. .4. to order the deduc- 
tion of dozen-lot deals on any product where these deals made the 
manufacturer's wholesale list price unreasonably greater than the small 
dealer's cost.* H.R.A. gave little consideration to this proposal 
at the tine though of all the subsequently-considered pirns it was 
most nearly like the one finally approved. 

After the hearing, administrative officials felt that they could 
best answer the objections of the Consumers' Advisor;- Board and Re- 
search and planning Division by establishing "a "price control committee, 
composed of representatives of these two bodies and of the Code Autho- 
rity, to investigate manufacturers' price manipulations. The committee's 
functions were to be advisory, and the Administrator was to have po- 
wer to suspend the loss limitation provision as to an offending pro- 
duct and establish in its stead- such other regulations as . e deemed 
advisable.** Both the Consumers' Board and the Research .nd Planning 
Division objected to the plan. The Consumers' Board wrote that the 
Committee would have an impossible task; and the Research and planning 
Division feared that the scheme would involve H.R.A. in permanent price 
control. Both seemed to dislike the name "Price Control Committee."*** 
Inasmuch as the principal advantage expected from this plan was the 
support of these two advisory boards, the sponsors turned to something- 
else. The next suggestion was that N.E.A. leave the Parch amendment 
and its "last -nroviso" intact, and iss\ie new regulations for its ad- 
ministration in place of Order 60-.'j4. Under the proposed new regula- 
tions, the National 'Retail Drug Code Authority would have recommended 
certain commercial price lists as guides' to the code price.**** Inas- 
much as the prices in these lists were higher than the code price oy 
the amount of manufacturers ' dozen-lot deals, local code authorities 
would have had ~ ower to determine for each product, as the question 
arose, the amount of deduction under the "last proviso." From a prac- 
tical viewpoint, this was little better than Order 60-54. The burden 
on the local' code authorities to distribute price information would 
have been greater than before, though the National Code Authority would 
have been freed of this task. From a legal viewpoint, the proposed re- 
gulations were bad, ana received prompt objection from the Legal Di- 
vision on the ground that they were confusing, unnecessary and inef- 
fective and gave too much power to the local code authorities. The 
legal division also objected to the Government placing any measure of 



(*) See testimony of John Go ode, page 388 transcript of hearing, 
June 7 and 8., 1934. 

(**) A copy of this plan is in "memoranda" folder; De uty's file. 

(***) See Consumer Board Report to Mark Llerrell, 7/20/34; and Re- 
search and Planning Report of 6/23/34; "memoranda" folder, 
Deputy's files. 

(****) The Code Authority's intent was to recommend the B'->d Book 
and Blue Boo]", mentioned supra. 



9726 



- 74 - 

approval seu commercially-published price lists'. At this time, the 
Legal Division reviewed -Order 60-54 mid found it defective in that it 
permitted, for the purpose of meeting competition, violations of the 
code price on items not in the Code Authority's list. Only by code 
amendment and not by mere administrative order' could P.P. A. so sub- 
stantially change the operation of a code provision. The "e-gal Di- 
vision observed that if the Parch amendment was so indefi; : :c that a 
retailer could not readily determine the code price, the whole provi- 
sion might fail in court.* This report of the Legal Division made it 
imperative that II. P. A. not only rescind Order 60-54 but also elimi- 
nate the "last proviso" from the March amendment. But the question 
of how to prevent price manipulations by manufacturers was still un- 
solved. 

IV. The Amendment of September 21, 1954 . 

The final proposal of the Code Authority and the administrative 
officials of P.P. A. was an amendment eliminating the "last proviso" and 
empowering the Administrator to suspend or modify the operation of the 
loss limitation provision whereever he found a manufacturer manipula- 
ting his prices in a manner -ire judicial to the consumer or small en- 
terpriser. This plan was simple compared to former ones and all ad- 
visory boards, except the Consumers' Board, approved it on the ground 
that it did not change the principle of the Parch amendment but merely 
made it more effective. Regardless of objections to the provision, so 
long as it remained in the Code it was P.P.A.'s duty to malce it work- 
able, and upon this ground, boards that had objected to the March amend- 
ment were consistently able to approve the new one. The Consumers' 
Advisory Board did not voice a strong disapproval but merely reitera- 
ted its stand against the principle of setting minimum trices at the 
manufacturer's wholesale list price per dozen.** The Administrator 
approved this proposal as an amendment to the code on September 21, 

1954, stating in his letter to the President, *** " at a public 

hearing called to determine the effects of this amendment (the March 
amendment) upon the trade after sixty days of operation, i f was found 
that enforcement of this provision, while good, had been hampered some- 
what by the last proviso which permitted certain deductions on account 
of manufacturers' discouits and allowances to dozen-lot purchasers. 
These allowances have only a negligible effect on the resultant price, 
yet cause considerable confusion in its determination. " 

"This amendment (the September amendment) does not alter the prin- 
ciple set forth in the previous provision nor does it appreciably alter 
the bp.sis on which that principle was applied, except insofar as that 



(*) The Report of Legal Adviser Hays to P.L. Houston, September 
10, 1954 - Deputy's files. 

(**) For all Board reports, see docket on Amendment Ho. 6, Code 
Record Section files. 

(***) Letter is included in printed issue of Amendment Ho. 6, Retail 
Trade Code. 



9726. 



-..75 - 

basis had proven confusing in practice." 

The September amendment, as approved, reads as' follows :-* 

"It is hereby declared an unfair trade practice** for any drug; 
retailer to sell any drugs, medicines, cosmetic?, toilet preparations 
or drug sundries at a "rice below the manufacturers' wholesale list 
price per dozen; provided, however, that in the case of biologicals 
or other of the above-mentioned products, which arc not customarily 
•sold in dozen or greater lots, the Code Authority may fix a comparable 
unit quantity. 

"The Administrator, at the recommendation of the National Retail 
Drug Code Authority or otherwise, after such notice and lit ring as he 
may deem necessary, may suspend or modify the operation o," this clause 
at any time when it appears that such operation does not tend to ef- 
fectuate the purpose of Title I of the Act. The Administrator shall 
suspend or modify the operation of this clause in any particular case 
where a manufacturer is found to be manipulating his prices because 
of this provision in such a manner as to maintain an unwarrantedly 
higher ;^rice to the ultimate consumer or to oppress small enterprises, 
or to otherwise defeat the purposes of the Act." 

In the above form, the loss limitation provision remained until 
the expiration of the code on May 28, 1935. Inasmuch. as Order 60-54 
was no longer necessary, N.R.A. rescinded it on September 25, 1934.*** 

V. The Public Hearing of June 7 rnd 8 , 1934. 

Having examined, historically, the factors directly leading to 
the approval of the September amendment, it is advisable to go bach 
and examine some of the collateral historical happenings during the 
period from April 1954 to the expiration of the Code. One of these 
incidents was the holding of a public hearing on June 7 and 8, 1934. 

Immediately after the approval of the March amendment, U.S.A. re- 
viewed its legal position and decided that amends were necessary for 
the failure to hold a -nublic hearing. Several of the cut-rate re- 
presentatives had objected to the procedure of issuing a mere Notice 
of Opportunity to File Objections, and the validity of their complaint 
gained strength from the substantial changes in the clause between 
the Notice and the final approval. Consequently, M..R.A. scheduled a 



(*) Hereinafter, this amendment' will always be referred to as the 
" Se" • tembe r amendment . " 
(**) Mote that the long preamble of the March amendment is omitted, 

it having no legal value. Mote also that the words "and is pro- 
hibited by this code" are omitted at the point where the as- 
terisk appears. This latter omission was purely an oversight, 
but caused some worry among lawyers for fear courts might re- 
gard the provision as purely advisory and not mandatory. How- 
ever, no court rendered a decision on the point. 
(***) See Administrative Order 60-200; Code Record' Section files. 



9726 



- 76 - 

public hearing, ostensibly to determine the effects of the March amend- 
ment, after 60 days of operation, "but also for the purpose of insuring 
that amendment's legality. The announced purpose of the hearing, how- 
ever, frightened some of the code sponsors who read into it a possibi- 
lity that H.R.A. might rescind their new loss limitation provision if 
the hearing adduced enough evidence against it. John Dargavel, sec- 
retary of the national Retail Druggists' Association, wired, asking 
the Deputy Administrator to sidetrack the hearing unless H.E.A. saw 
some actual bad effects from the loss limitation provision in 60 days.* 
George M. Gales, president of the national Association of Chain Drug 
Stores, also wrote the Deputy, deploring the uncertainty the hearing 
would create.** On April 11, 1934 the Deputy wrote the A ss i s tant Ad- 
ministrator suggesting that it would be a mistake to hold the hearing 
on June 7, since not enough time would have elapsed to show the ef- 
fects of the March amendment.*** 

In spite of these objections, the hearing convened on June 7, 
and lasted two days. The witnesses presented little factual material 
on the effects of the March amendment but much argument on whether its 
basic principle-was sound and whether or not the druggists should re- 
vert to the "cost plus 10$" provision of the General fietail Trade. 
Much of the argument was identical with that introduced at the origi- 
nal code hearing in August, 1933. The representatives of the Oode 
Authority gave a good part of their time to arguing for the elimination 
of the "last proviso" of the March amendment. The legal division con- 
sidered this hearing sufficient to warrant the approval of the Septem- 
ber amendment without further hearing, though this amendment was not 
up for discussion. Thus both the March and September amendments lacked 
the benefit of a regular hearing called specifically to consider them 
prior to their approval. 

VI . The Movement for a Mark-up . 

As mentioned before,**** prior to the approval of the March amend- 
ment , the question of a mark-up arose. The Deputy Administrator in 
recommending a code price based on the manufacturer's wholesale list 
price per dozen, suggested postponing the approval of a -percentage 
mark-up so that consumer prices would not rise too fast. The Code Au- 
thority realized that a code price at the level of the small dealer's 
merchandise cost would not permit small dealers to pay their overhead 
in areas of severe price competition. However, P.R.A. was afraid to 



(.*) Telegram Dargavel to Harwood, April 10, 1934; "157-Retail M-Z"; 
Deputy's files . 

(**) Letter Gales to Harwood, April 13, 1934; " 157-Retail-A-L" De- 
puty's files. 

(***) Memorandum Harwood to Colonel Lea, April 11, 1934; "157-Re- 
. tail-M-Z; Deputy's files. 

(****) Chapter III. of this part, supra, page 114 



- 77 - 

grant too much price protection all at once and the Code A shority, 
glad to receive even part of what it ashed for, did not press the point 
too strongly. 

On April 13, 1934, George M, Gales, Code Authority member and pre- 
sident of the national Association of Chain Drug Stores, wrote the 
Deputy Administrator asking if it were then advisable to request a 
mark-up covering labor costs.* The Deputy replied that such a request 
might he all right in 60 da^s.** This correspondence was perhaps the 
"beginning of a long fight, and in this, for once, the individual small 
druggists in the field were more active than their Code Authority. As 
opposition developed within and without IT.H.A. to the manufacturer's 
wholesale list "rice as a code price, the Deputy's Office affixed it- 
self to the principle that price protection in the drug trade must not 
exceed the small dealer's merchandise cost. The Code Authority members 
had achieved this limit in the March amendment and confirmed it in 
the September amendment and could have no more. This they realised, 
and, since their minds were occupied witfe other major problems such 
as the "last proviso" and, later, compliance, they made no formal de- 
mands for a labor-markup » However, they did frequently mention it in- 
formally and the National Association of Retail Druggists at its con- 
vention in 1934 went on record in favor of a mark-up.*** 

Letters to W.R.A. from small druggists were plentiful during the 
code period and most of them expressed dissatisfaction explainable 
only by the fact that the loss limitation provision contained.no mark- 
up above their merchandise cost. Fifty-seven letters specifically 
asked for mark-ups ranging from 5fo to 25$ according to the writer's 
notion of what he needed; and in one congressional district, the lo- 
cal pharmaceutical association passed a resolution urging .1.1 druggists 
to violate the cmde until N.R.A. granted their request. The number 
of letters on this subject did not rim into the hundreds as did letters 
received by II.R.A. in 1933 but perhaps they were more significant 
since they came in a continual flow rather than in batches and not, 
so far as appears as a. result of any trade association pressure.**** 

VII. Interpretation of the September Amendment 

Chapter 111. of this Part describes an interpretation of the 
March amendment. When 1'T.R.A. approved the September amendment, this 
interpretation needed revision, and though work on it commenced prompt- 
ly it was not completed until April 1935. The cause of the delay was 
an attempt of the administrative officials to include a series of clauses 
on the effect of Federal and State taxes on the code price. These 



(*) Gales to Harwood, 2/13/34; "157-Re tail-A-I" ; Deputy's files. 

(**) Harwood to Gales, 4/14/34; "157-Retail~A-L" ; Deputy's files. 

(***) See Resolution, "Code Authority" folder; Deputy's file. 

(****) All of the letters mentioned above are in the folders marked 

"General Correspondence" or "Trade practices"; Deputy's files. 



27,36 



~ 78 - 

clauses required many conference .with the Legal Division "before they 
were in shape, and considerable time thereafter in an unsuccessful 
attempt tq convince the Review Division* of their propriety. Finally 
the Deputy Administrator abandoned the tax interpretati ms** and sent 
the remainder, a group of explanations, on their wa.3 r towar approval. 
As approved on April 5, 1935, they read as follows:-*** 



QJJESTIC: 7 #1: 



Does the interpretation issued by the Division Ad- 
ministrator on -"pril 6, 1934 and released to the 
public on April V, 1934 apply to this loss limita- 
tion provision? 



IlTTERFRETATIOi" 



QUESTION #2: 
IHTERPRETATIOU: 



It does not. The interpretation of April 6, 1934 
applies to the former loss limitation provision 
which has 'been amended. That interpretation should 
henceforth be disregarded. 

Does this loss limitation rovision apply to all 
items sold by drug retailers? 

It does not. It applies only to drugs, medicines, 
cosmetics, toilet preparations, and drug sundries. 
These -are defined in the Code. . 



QUESTION. #3: 



&?. 



Does this loss limitation provision apply to drugs, 
medicines, cosmetics ,. toilet preparations and drug 
sundries sold by stores other than drug stores? 



I1ITERFRETATI01T: 



question §4 



INTERPRETATION: 



It does. It does not matter who sells any of the 
above named items. He cannot sell them below the 
price determined by this loss limitation provision. 

Where certain commodities are not avail-hie to the 

trade generally, and hence bear no manufacturer's 
wholesale list price per dozen or comparable unit 
quantity, does this loss limitation provision apply? 

It does not. Items of this type, such as, but with- 
out limitation, private brand items put up by the 
producer for a special retailer under such retailer's 
own name, mark or brand, nay be sold at any price 
such retailer may care to set. 



QUESTION #5: 



Do the provisions of Article VIII, Section 1 of the 



(*) A body of lawyers who gave all formal orders a final checking 
as to form and substance and whose approval was almost prere- 
quisite to official approval of the order. 

(**) Full discussion of the abandoned tax interpretations is in Chap- 
ter VI of this Part, page '122. 

(***) Administrative Order I T o. 60-397; Code Record Section files. 



- 79 - 



IK TEEPEE TAT I Oil 



Code of Fair Competition for the Eetp.il Trn.de apply- 
to the retail sale of drugs, medicines, cosmetics, 
toilet preparations and drug sundries? 

No, Article, VIII, Section 1 has "been superseded by 
this loss limitation provision as far as the sale 
of the aliove -mentioned items is concerned. 



QUESTION #6 



If a retailer is a"ble to purchase at less than the 
manufacturers' wholesale list price per dozen, or 
if he is able to obtain goods absolutely free, can 
he sell below the manufacturers' wholesale list price 
per dozen? 



INTERPRETATION 



QUESTION #7: 



He cannot sell drugs, medicines, cosmetics, toilet 
preparations, or drug sundries below the manufacturers' 
wholesale list price per dozen regardless of what he 
has paid for the goods, and regardless of whether he 
has gotten them free. 

When the price for a unit or combination of units 
under this loss limitation provision figures out with 
g, fractional cent, what price shall prevail? 



INTERPRETATION 



The minimum selling price shall be figured by drop- 
ping the fraction and adding one cent, regardless 
of whether the fraction is more or less than one-half 
cent . 



Where the minimum selling -rice of a combination of 
these items is to be determined, fractions shall be 
left intact until the total price of the combination 
has been determined, and then, if a fraction remains, 
it should be dropped and one -cent added. 



- 80 - 

CHAPTER V. ISSUES SEEN BY OPPOSING FORCES 

I FOREWORD 

During the preliminary negotiations for a. code in the Pall of 1933, 
and the subsequent negotiations in 1934, the proponents and opponents of 
price stabilization arrived at certain conceptions of what economic and 
factual issuer, mi ; ,ht control ITRA's decision upon their respective de- 
mands. Scan arrived at t'neso issue: through a. bona fide analysis of 
social and economic considerations; others arrived at them through 
emotional hunches. 

ITRA held two important hearings on the retail drug code, and, at 
these forums both proponents and opponents had their greatest opportunity 
to present their views. The following compilation of issues seen by 
proponents and opponents has its source principally in the transcripts 
of hearings, since records of informal conversations are scarce. In 
each case, the issui • i h ars as a brostcl principle with an analysis of 
why it seemed an issue to those advanci... it, and is followed by a 
brief di est of the evidence and arguments advanced. 

In presenting the issues hereinbelow, the author has tried to ar- 
range them in an orderly fashion, separating, the proponents' issues from 
those of the opponents, and re-arran in the points on each side to 
form a logical whole. Actually, at the hearings, the presentation was 
quite disorganized. w'ithout reference to their views, speakers were 
mi:;ed upon the >ro .ram, and many had no orderly arrangement of joints 
within their own briefs. Moreover some sneakers were given to 
emotional aopeals a.nd sweeping assertions, unsumorted by evidence 
and difficult to classify. 

I I . Issies Seen by the Proponents of Price Stabilizatio n 

The issues seen by the proponents of price stabilization were di- 
visable into two parts: first, issues upon price stabilization as a 
broad principle without reference to specific clauses, and second, price 
stabilization through the medium of the manufacturer's wholesale list 
price per dozen. The testimony at the hearing in August 1933 was 
devoted principally to the first point; the testimony at the hearin^ in 
June 1934 to the second. 

A. Issues "pon Price Stabilization in General 
1. Bad Business Conditions in the Trade. 

Knowing that 1'RA's principal objective v/as the promotion of re- 
covery from the depression the proponents dwelt at length upon th p bad 
business conditions in the retail dr\v- trade. To show that sales volume 
was declining, one witnefes presented returns from questionnaires sent to 
6,500 dru L , stores in New York State in 1930, 1931 and 1933, showing that 
sales volume of the stores reporting had declined 13.95"' in 1930 (pre- 
sumably over the previous year), 16. 4f> in 1931 a nd 22! ■ in 1933. (*_) 

(*) The witness was Leon iionell, Chairman, Committee on Pharmaceutical 
Economics, new York State Phar. Assn., a group affiliated with HARD and 
APhA. His testimony appears on Pa_cs .306 to 211, transcript of Au fo . 25-26, 
1933, Mr. Monell's association had conducted the questionnaire survey 
mentioned, and t he returns had boon: 596 stores in 1930, 404 in 1931, and 
406 in 1932. 



- SI - 

The witness also stated that a survey by the University of Buffalo 
of 40 selected 'drug stores in Buffalo 3hovred a sales decline of 20$ in 
1933. The witness' added that the majority of stores in Hew York State 
had had a steady sales decline since January 1, 1933. This same witness 
testified that dru b store rent was still high in snite of the depression, 
and in sr>ite of declining sales. He quoted again from his questionnaire 
survey to show that rent er-iense was 7.1$ of sales in ITew York State in 
1931, and 8.4$ in 1932- 

Two witnesses stated that drug rtores were operating without a 
profit. One of them (*) made the statement without aimlif ication, but 
the other (**) backed it with returns from a questionnaire survey in ".'est 
Virginia showing that '54$ of the stores reporting had a net loss in 1932, 
and that in over half of these instances the loss was more then 2 1 $> of 
sales. Dollar losses ranged from $500 to $4,000 with the majority over 
$1,000. Only 46$ of the stores reporting had a net gain in 1932, and of 
these 62$ had a net gain of less than 5$ of sales. Dollar gains ranged 
from $300 to 33,000, but the majority were under $1,000. (***) 

Five witness sought to show that the credit of the si.v 1 druggist 
was. strained or totally lost, so that he was forced to buy for cash on a 
hand-to-mouth basis. One of these witnesses (****) stated that 3,000 
(*****) sra all drug stores in California had lose their reserves and had 
strained their credit. 

Another (******) estimated that 40$ of the druggists of the entire 
country were on a C.O.D. basis. The third witness (*******) stated that 
90'/; of Che dru stores in Alabama had been able to obtain credit from 
wholesalers in 1S2S, but that this figure had declined to 50$ in 1933; 
and that the corresponding decline for the city of Birmingham was from 
95p to 25/0 of the stores. 



(*) George II. Gales, president of the Liggett Drug Company, pages 157 to 
164, transcript of August 25-26, 1933. 

(**) J. L. Hayman, sec, ,7 '.va. Pharm. Assn. andpres., Conference of 

Pharmaceutical Secretaries. The former association was affiliated 
with both HARD and APliA; the latter was a division of APhA. His 
testimony aroears at Tjages-201 to 105, transcript of August 35-25, 
1933. 

(***)The dates of the survey was August 19 to 24, 1933. 17$ of the drug 
stores in W.Va. replied to the questionnaire. 

(****) Roy S. Warnack, sec, Calif. Pharm. Assn. affiliated with both 

HARD and APhA Testimony appears at na^es 180 to 197, transcript of 
August 25-26, 1933. 

(*****) In 1S33 there were on ]_ y 3,030 independent dru^. sto. s in the 

State of California, according to the 1933 Census of American Bus- 
iness, Retail Distribution, Department of Commerce. This fact makes 
the witness 1 statement rather broad. 

(******) Dr. R. L. Swain of the American Pharmaceutical Assn., pages 
20-27, transcript of August 25-26, 1933. 

(*******) ii. G. Hubbard, pres., Birmingham Retail Druggists Assn. , affil- 
iated with HARD. Testimony at :>a to es 344 to 348, transcript of Aug. 
25-26, 1933. 

9726 



- 82 - 

This witness quoted HcKesson-Peter-~: T ept Co., Louisville wholesale 
druggists, to the effect that this firm had 25 druggists on their C.O.D. 
list in 1931 and 44 in 1933; that 28, > of their druggist customers had 
past due accounts in 1931, out 43$ had then in 1953; and that 73$ of their 
dzmggist customers discounted their current purchases in 1931, but only 
58$ did so in 1933. This witness also read a letter from Geo. H. Gould 
& Son, Louisville wholesale druggists, to the effect that 2$ of their 
dnnggist customers were on C.O.D. in 1928-29., 15' • in 1930 and 29$ in 
1933; and that in 1930, 76$ of their druggist customers discounted their 
bills, but in 1933, only 55S did so. The fourth witness (*) quoted 
Smith, Kline and French, Philadelphia wholesale druggists, to the effect 
that 600 dru tj stores in that city were on a C.O.D. basis in 1933,' and 
200 of these were "cash only - no checks accepted". .The fifth witness 
(**) said that GO- of the druggists in Kansas City, Ho., were on C.O.D. 
in 1933. 

To further illustrate the bad business situation, one witness (***) 
testified that only 30 > of the dru,, stores in Alabama and only 10$ of 
those in Birmingham were solvent in 1933; and that there was a decline 
in the number od dru^ stores from 1928 to 1933 from 850 to 775 in 
Alabama, and from 228 to 180 in Birmingham. Another witness attempted 
to connect the subject of bankruptcies with one of the basic principles 
of 17RA by arguing that a ruined retail dealer was a loss of buying . 
power in his coinmunity. (***) 



(*) J. 3. Pilchard, sec, Pennsylvania Pharm. Assn. affiliated with 

HARD and APhA. Testimony on pa_;es 321 to 320, transcript of August 
25-36, 1933. Note that at this hearing, ilr. Pilchard gave no 
testimony on his own behalf, but read into the record a letter 
from Louis Milner, chairman, Committee on Surveys, Philadelphia. 
Association of Retail Druggists, affiliated with HARD.* The Census 
of American Business, Dent, of Conmerce, shows 1.-30? drug stores 
in Philadelphia in 1933. 

(**) George C. E y, representing the Greater Kansas City Retail Druggists" ( 
Assn., affiliated with 1'ARD. Testimony at pages'397 to 403, tran- 
script of August 25-26, 1933. 

(***) IT. G. Hubbard, pa c ,es 244-243, August 1933 transcript. 

(****) W. Bruce Philip, Washington counsel for HARD, president of 

APhA, and owner of a small dru_. store in Oakland, ■ Calif . Testimony 
at pages 421 to 436 and 446 to 454, transcript of August 25-26, 1933. 



9726 



2. Price Demoralization as the Cause of Bad 
! lusiness Conditions 

Had the proponents presented no further testimony they might have 
made no case for price protection. I'M could well have concluded that 
the druggists' plight was no worse than that of other trades in the 
depression, and the the cure was to raise wages and shorten working 
hours and wait for industry as a whole to pull out of the slump. But 
the proponents advanced two arguments to counteract such a conclusion, 
one bein„ that the financial condition of druggists was so weak that 
they could not bear the harden of raising wages and shortening hours 
without some orices protection, (*) and the other being that price 
demoralization was responsible equally with the depression for the bad 
business situation in their trade. (**) 

One witness, to illustrate the extent of price demoralization 
throughout ' the country and within cities, -resented data showing -ore- 
code prices on Id items in a. number of cities; and -ore-code prices 
on the same items within a city. In each case there was a total lack 
of uniformity. The witness argued that the consumer was confused, not 
knowing what was the best price unless he shopped extensively. (***) 

3. Incidental Bad Effects of Price 
Demoralization 

To strengthen their point that, in their trade, irice demoralization 
was a greater cause of evil than the depression, the proponents exhibited 
a nu.iber of additional effects of tiie former. 

Six witnesses testified that price demoralization had caused a 
drop in employment and salaries in the trade. Five of them (****) made 
this statement without elaboration, but the sixth (*****) backed it with 
the results of a. questionnaire survey conducted in Hew York State showing 
that salary expense was 14.3$ of sales in 1931, and only 13.3$ in 193.?. 
According to this witness, both the number of employees and the amount 
of salaries ha., decreased. 



(*) Five witnesses stressed this point. Four of them, mentioned before, 
spoke at the August 1933 hearing, their testimony appearing at the 
following nages of the transcript :, R.L. Swain, -n~i 20-27; George M. 
Gales, pp 157-164.; Roy S. tfarnack, -ro 188-197, and Ge-' :e 0. Egy, 
pp 397-403. The fifth was Hoy H. Sterne, counsel for he Liggett 
Dru^ Co., speaking at pages 5 to 26 transcript of hearing of June 
7-8, 1934. 

(**) Only four witnesses expressly presented their point, but others 

included it in their testimony by inference. The four were: H. L. 
Swain, pages 20-27, August transcript; George Li. Gales, pages 137- 
164, Aug. transcript; J. L. Eayrnan, pages 201-205, Aug. transcript, 
and Samuel C. Henry, sec. Kat'l Assn. of Retail Druggists, pages 
211-213, Aug. transcript. 

(***)Wheeler Sammons, Managing Director, Drug Institute of America, Inc., 
pp. 150-204 & 499-527, transcript of June 7-8, 1934. 

(****) H. L. Swain, pp 20-27, au . transcript; Samuel C. Henry, pp 211-213, 
■Aug. transcript; Geor 6 e Li. Gales, pp. 157-164, Au . transcript; Hoy M. 
Sterne, pp. 5-25 June transcript, and ".'. Bruce Philip, ^j 36-70, 
June transcript. 

(*****) Leon Monell, pp 206-211, August transcript. 

97P6 



.- 84 - 

Two witnesses mentioned that substitution and counterfeiting were 
evils attendant upon price demoralization. (*) Counterfeiting of trado- 
marked articles, of course, was against the law, tut sometimes difficult 
to detect. There seemed little question of the und^sirability of this 
practice, and if the proponents could convince ERA that price demoraliza- 
tion increased it, and that price stabilization might decrease it, they 
would have added weight to their side of the scales. The question of 
substitution was not so simple, however, since the practice took several 
possible forms. Its worst form involved wrapping up and delivering to 
the customer a substitute for the trade-marked product ashed for, but 
in its lesser form it involved merely dissuading the customer from his 
original desires and selling him soia thin else. If the sales talk 
involved false dis iars sment Df the roduct ordered, it was unfair and 
perhaps illegal, but if it involved only legitimate selling tactics, 
there was little room for objection. Small druggists tended to label 
all forms of substitution as evil, principally because the practice, 
whether used fairly or unfairly, was the jrice cutters' customary 
method of selling his jrivate bra/ids. Though the proponents presented 
no figures showin an incre; se of counterfeiting and substitution under 
price demoralization, there was some logic behind their statements. A 
ti.ic of lew prices on nationally advertised L oods might conceivably pro- 
duce an increase in the number of substitutes, both counterfeits and 
private brands, because the retailer could buy them cheap and make a 
good margin of profit even at a low selling price. One speaker 
introduced a note of atriotism by stating that most private brand 
toothbrushes v. r< ; do in Japan, and continued substitution of them 
might ruin the toothbrush manufact rers of the United States. (**) 

Leaving th< questio . of substitution and counterfeiting, another 
harmful effect of price demoralization, according to a. witness, (***) 
was that chains and large outlets sometimes cut orices purposely to 
destroy an independent so they could raise prices again without fear 
of competition. 

Three witnesses (****) argued that price demoralization tended 
to deprive tlw oublic of its ability to purchase freely the articles 
cut in price. Vvo of these witnesses (*****) quoted from the dissenting 



(*) George I.i. Jales, pp. 157-164, August transcript; and George T7. 

Duncan, representing the IT. H. Phrrm. Assn., and a druggist him- 
self for 41 years; also speaking for Rodney A. Griffin, ores., Hew 
England Rexall Drug .1st p. Assn., and representing the State Pharm. 
Assn. of Maine & Vermont; Transcript of August 25-26, 1933, pages 
350 to 35b. 

(**) W. Bruce Philip, pp. 421-436 & 446-454, August Transcript. 

(***)W. Bruce Philip, t>p 421-436 & 446-454, August Transcript. 

(****) Samuel C. Henry"," pp. 211-213; George TV. Duncan pp. 350-355; and 
'?. Bruce Phili; , »p 421-436 & 44G-454 - all in August transcript. 

(*****) Samuel C. Henry and 17. Bruce Philip 



9726 



- 85 - 

opinion of Justice Holmes in the Miles Medical Co. case (*); and one of 
them (**) cited the report of the Federal Trade Co; mission to Congress 
on the Chain Store Investigation to the effect that unfair price cutting 
did more harm than good to consumers in th r - long run by impairing or 
destroying the manufacture and distribution of desirable articles. One 
witness illustrated the shortening of the life of a price-cut product 
by stating that Peruna had oiice been a fast-seller, but it was deeply 
cut in price. Soon it v;as no longer used much as a loss leader because 
it had become a dead item. (***) There was logic in this reasoning. 

The choice of an article as a price leader depended usually upon its 
popularity with the public and upon the fact that all dru,; "ores handled 
it, enabling the consumer to compare prices. As other cut-, ters met or 
beat the price of the original cutter, however, the comparison became 
less obvious, and finally as prices continued to sin. 1 : and small druggists 
found the item unprofitable, they ceased to handle it or at least ceased 
to feature it. At this point the product's usefulness as a loss leader 
ceased. Consumers had come to regard the cat orice as the regular price 
rather than as a bargain, and the price cutters, finding no value in 
further cutting, but unable because of competition to raise the nricc, 
discontinued handling or featuring th« item. The manufacturer lost his 
volume in that area, and the public lost its opportunity to obtain that 
product freely. 

4. Causes of Price Demoralization 

The proponents advanced several possible causes of price demoraliza- 
tion, the most obvious, of course, being loss leader selling. (****) 

Five witnesses specifically mentioned loss leader selling, some 



(*) The quotation from Justice Holmes was: "...I cannot believe that in 
the long run the niblic will profit by this course, ■permitting knaves 
to cut reasonable prices for ulterior methods of their own, and thus 
to impair if not to destroy the production and sale of articles which 
it is assumed to be desirable that the people should be able to 
get n 

(**) Samuel C. Henry 

(***)W. Bruce Philip, pp. 36-70, transcript of June 7-8, 1'. 

(****)"Loss leader selling" is difficult to define. A "le; -or", roughly 
speaking, is an item .sold at a bargain price calculated to draw cus- 
tomers into the store. A "loss leader" would seem merely to add the 
element of a loss, but the definition of a "loss" involves many 
factors. It may mean a loss based upon the actual cost of the item 
plus the cost of selling it, or it may mean a loss merely on the 
cost of the item. If one follows the theory that there is no loss 
if the store as a whole is making a profit, there is further com- 
plication. The small drug : .ist used the term "loss leader" without 
attempting to distinguish its various meanings, but this in itself is 
significant, for it indicates that to him any item of a competitor 
was a loss leader if it were so^d below a profitable price to the 
small druggist. 

9726 



~ tin - 



merely statin,; without elaboration that it was the primrry cause of 
price demon ligation, and others going into some description of how 
loss leader selling operated. (*) The theme of this testimony was that 
prices were cut lov or branded items and the losses recouped by charging 
exorbitant rates for a 1. r ;e number of other products, the purpose being 
to impress the customer that everything in the store was cheap. One of 
the witnesses objected to the use by department stores of whole depart- 
ments as loss leaders, saying, that the department store could recoup the 
loss in its other lines, but the single-line merchant whose products 
were thus cut lv d no means of recovery. (**) This same witness quoted 
the" Federal Trad? Commission Report of January 15, 193.3, as authority 
that losses on loss leaders were recouped by exorbitant profits on un- 
known anc private Jrand O oocs. 

Two witnesses indicated that the d< oression had accentuated price 
demoralization. Retailers, in a frantic effort to stop declining sales, 
had resorted to hi vy Trice cutting, and competition soon forced the 
praccicc out of control. (***) Three witnesses (****) testified that 
the e trance of "pi >ards" into the drug field had caused an increase 
in the severity of price cutting. Another witness (*****) stated that 
some volume seeking ma.nufacturers actually incited price cutting at 
reti il to increase the sales of their products in certain areas. 

5. Failure of Previously-Tried 

Remedies 

To show that they had not been inactive in trying to help them- 
selves out of their price-cutting difficulties, the proponents testified 
concerning the failure of remedies previously attempted. One witness 
(******) stated th t the efforts of manufacturers to stabilize prices 
by refusal-to-sell ?.nd consignment selling were expensive and inadequate. 
This witness alsc stated that Congress h< d power to stabilize prices by 
legislation, but would not act without definite information upon the 
economic effects of its action. This same witness later testified 
(*******) that snail druggists were eng In.: in cooperative buying, but 



(*) The five witnesses were as follows:- At the August hearing: N. G. 

Hubbard, pp. 344-248; 3". Bruce Phili >, pp. 421-436 <3 446-454; and G 
Gcor u :e M. Gales, n. 157-164. At the June hearing: 3.oy M. Sterne, 
pp. 5-36; George M. Gales, tto. 71-39, and John Goode, op. 138-149 
& 388-393. 

(**) W. 3iuce Philip, pp. 421-436 & 446-454, August Transcript. 

(***) George M. Gales, pp. 157-164, August transcript, and -y^. 71-89, 
June transcript; and Roy !.[. Sterne, pp. 5-36, June transcript. 

('****) George U. Gales, tp. 157-164; llo-r S. warnack, pp. 168-197", J. B. 
Pilchard, 331-535, ■ 11 in August transcript. 

(*****) John Goode, pp. 138-149, June transcript. 

(******) w> Bruce Philip, po. 431-456 & 446-454, August transcript. 

(*******) At the June hearing. '3. Bruce Philip, v-^. 36-70. 



9736 



- 87 - 

that the movement was not as effective as it should have "been because 
small druggists owed their wholesalers too much money. Furthermore, he 
stated, cooperative buying placed the v/holesaler's operating expenses 

and problems on the shoulders of the retailers; and, since it was effect- 
ive only on 500 out of the 10,000 items stocked by a dru, store, the 
dru 00 ist had to rely on the service vholes'ler for 9,500 items. If 
cooperative buying oecame too orevalent, the service wholesaler might 
raise the price on these 9,500 products. 

6. Right of the Dru^ Trade to 
Special Consideration 

Not only because it was logical for each trade to try to convince 
KHA that its problems were different from those of other trades, but also 
because the small druggists had a sincere professional -ride, the pro- 
ponents, stressed the importance of the retail dru 6 trade to the public 
health of the nation. Eight witnesses, at both hearings, covered this 
point. 

One witness (*) stated that pharmacists compounded 250 million pre- 
scriptions each year, and that 200 million persons were ill annually in 
this country. He stated that more than 87 r - of all the drugs and medicines 
sold in the country were handled by drug stores. He point out that 
Federal a.nd State governments recognized the importance oi *he druggist 
and controlled his activities through 'educational and registration re- 
quirements for pharmacists, and narcotic and pure food and dru^ laws. 
This witness alleged that the income 'from prescriptions, medicines and 
drugs was not enough to maintain a drug store and that the druggist had 
to sell other articles of merchandise to help carry the load. He alleged 
that the volume of Jusiness in the retail drug trade was 2 billion 
dollars per year, 54. 8, J of this amount being in drugs, medicines and 
prescriptions, and 45.2$o in merchandise and commodities. He maintained 
that the selling of general merchandise permitted a reduction in the 
cost of prescription service to the public. He concluded by urging that 
the drug store, as a unit, professional and commercial, needed economic 
security in the interest of public health. 

Other witnesses ar ued that the country needed its 60,000 drug 
stores, and that they should be kept in business even at the expense of 
higher prices. They stated that large price cutters, not stressing 
health service themselves, caused the public to distrust small druggists 
and to believe them profiteers. They added that cut prices tended to 
increase the number of sub-standard drugs on the market. (**) 

One witness admitted that theoretical economic efficiency would 
require the Government t o lot the smal l diww^ist no bankrupt if he co uld 
(*) E. L. Swain, pp. 20-27, August transcript; pp. 406,-414, June 

transcript. 
(**) Witnesses presenting these views were: T.F. Schuler, represent- 
in, the Greater Kansas City Retail Druggists' Assn. (affiliated 
with HARD*), pp. 329-551, August transcript; "u. Bruco Philip, pp. 
421-436 & 446-454, August transcript, and ^. 36-' .. June trans- 
cript; Geo. W. Duncan, pp. 350-355, Aug. transcript; P.oy S. ViTar- 
nack, pp. 188-197, Aug. transcript; Roy ii. Sterne, pp. 5-26, June 
transcript; Dr. S.F. Kelly, Sec. of A.P.H.A. pp. 25-36, Juno 
transcript; (John Goode, yp. 133-149, June transcript; ana Dr. R. 
L. Swain, pp. 406-414, June transcript. 
9726 



- 88 - 

not maintain himself in open competition; but this witness argued that 
the same view of efficiency would applaud sweatshop wages as an excellent 
way to keep down costs of manufacture and distribution. The witness 
pointed out that since I~RA was opposed to the latter tyne of efficiency, 
it should also oppose the former. (*) 

7. Predicted Effects of Price Control 

At the first hearing in August 1935, the proponents sought to clinch 
their case by visualizing for KRA 1 s benefit the possible effect of price 
stabilization. They predicted chat price stabilization would stop 
counterfeiting of trade marked articles 1 ; end the "evil" of substitution 2 ; 
increase wages and employment 3 ; stop the sale of substandard drugs and 
aid the public health"*; make quality and service, rather than price, the 
important elements of competition^; insure the distribution of mcrchan- 
ise°, thereby benefitting the manufacturer 9 ; being prosperity to 
legitimate business, causing stocks to pay dividends 1 '*'; increase sales 
and profits and decrease banknrotcies in the retail drug trade 11 ; restore 
the public's faith in the small drug. ist 12 ; and accomplish the greatest 
t^ood for the greatest number of drug stores 13 . 



1. C-eorge I/I. Gales, pp. 157-164 

2. Roy S. Uarnack, ~o. 188-197 

3. Geo. M Gales, pp. 157-164; Sa.muel C. Henry, pp. 211-213, and Leon 
Monell, pp. 206-211. 

4. Roy S. Warnack, pp. 188-197 

5. Samuel C. Henry, pp. 311-213; J. B. Pilchard, pp. 321-326; and 
W. Bruce Philro, r>p. 421-435 & 445-454. 

6. \1. Bruce Phili-o, rro. 421-435 <?: 446-454, and Roy 3. TJamack, m. 188- 
197. 

7. W. Bruce Philip, pp. 4?.l-4r-:6 & 446-454 

8. Yf. Bruce Philin, --.p. 421-436 & 446-454. 

9. Samuel C. Henry, y,. 211-213, and I.".. Bruce Philip, m. 421-436 & 
446-454 

10. Geo. i.I. Gales, pp. 157-164 

11. Leon Monell, pp. 206-211; w'. Bruce Philip, pp. 421-436 & 446-454, 
and J. 3. Pilchard, op. 321-326. 

12. Roy S. Warnack, pp. 188-197 

13. Geo. C. Egy, yro. 397-403. 



(*) W. Bruce Philip, pp. 36-70, June transcript 



9736 



- 8Q . - 

B. Issues with Respect to the Manufacturer ' s Wholesale List 
Frice 'Pro-vision. 

At the hearing in June 1934, the proponents assembled for the pur- 
pose of arguing upon two propositions: first, that their nev loss lim- 
itation provision (the Varch amendment) was theoretically sound, and 
second, that its practical effects during 60 days of operation nad been 
beneficial.* A great deal of the testimony was identical with that 
presented at the hearing in August, .1933. This is not repeated, and the 
following paragraphs deal only with the new arguments relating strictly 
to the manufacturer's wholesale list price type of loss limitation provi- 
sion. 

1. The Soundness of the Manufacturer's Wholesale List 
Price per Dozen as a Code Frice. -■•:■,: 

One witness** quoted at length from the report of the MRA Committee 
on Distribution and Consumer Service Trade to the effect th; t no rule 
for preventing sales below cost could benefit the large majority of re- 
tailers unless the base price approximated the invoice or current market 
cost of the efficient smaller operator; and that the need for efficient 
small business establishments was fully recognized. Another witness*** 
stated that "cost" for the purpose of prohibiting sales below cost, 
should be the cost of the average dealer, since cost to the lar<?e dealer 
was too low,., and individual cost too ■ confusing. 

Five witnesses****testif ied that the manufacturer's wholesale list ■ 
price per dozen was the invoice cost of the large majority- of dealers 
because these dealers purchased their goods regularly in dozen or less 
than dozen lots. One of these***** .stated that it was impossible for a 
small druggist with limited capital to purchase all his items in greater 
than dozen lots, since the average stock of a drug store was worth only 
$5,000 and contained 10,000 items. He added that only on 100 to 150 
items was there enough movement to permit purchases of 2 or 3 dozen at 



* Testimony of the proponents upon the effects of the March amendment 
is presented herewithout regard to its weight or soundness to show 
the issues seen by the proponents - i.e., what sort of evidence upon 
the effects of the amendment did they think was important? Later, in 
Chapter VII of this Fart, some of this testimony again appears, but 
for a different purpose, namely, to show the actual effects of the loss 
limitation provision. In Chapter VII the evidence is sifted for pro- 
bable truth, soundness and relevancy. 

** Dr. E. F. Kelly, pp. 26-36 

*** Geo. M. Gales, pp. 71-89 

**** Roy M. Sterne, pp. 5-26; Dr. E. 7. Kelly, p. 26-36; W. Bruce Fhillip, 
pp. 36-70; Samuel A. Weiss, exec. -sec, Hew York City Local retail 
drug code authority, pp. 363-387; and Geo. L. Secoro 1 , Fres., Chicago 
local retail drug' code authority, pp. 393-406. 

***** W. Bruce Fhilip. 
9726 



- 90 r 

a time. Another of the witnesses* presented statistical data** con- 
cerning retail drug stores in New York City, showing that 78$ of them 
"bought less than 35$ of their needs directly from manufacturers, and 
48$ bought less than 20$ of their needs thus. 68$ of the store.? "bought 
more than 70$ of their needs from service wholesalers, and 42$ bought 
more than 80$ of their needs from this source. The purpose of these 
figures was to show how few druggists were able to buy large enough 
quantities to deal directly with manufacturers and obtain discounts. 
The survey also showed that only 17-Vo of the' stores bought anything 
from mutual wholesalers, and of these, 78$ bought less than 30$ of their 
needs from mutuals, and 60$ bought less than 15% from this source, show- 
ing that few druggists obtained the special discounts or dividends paid 
by mutual wholesalers. The survey also showed that, of the stores buying 
from manufacturers directly, 2,130 bought in dozen lots, 1660 bought in 
greater than dozen lots, and 956 bought in less than dozen lots. Of the 
stores buying from wholesalers, 1,214 bought in dozen lots, 342 bought 
in lots greater than one dozen, and 3,440 bought in lots smaller than one 
dozen.*** To show that the majority of drug stores were relatively small, 
this witness also produced data from the same survey showing that of 
2,350 stores reporting their volume of business, 11$ had a volume less 
than $5,000 per year, 31$ had a volume between $5,000 and $10,000, and 
40$ had a volume between $10,000 and $20,000. 



< 



Having introduced evidence that a large number of -druggists bought 
in dozen lots or smaller quantities, the proponents sought to show that 
the price actually paid by druggists buying in these quantities was sub- 
stantially equal to the code minimum price under the March amendment. 
The question, of course, was how much discount did druggists receive from 
wholesalers when buying in dozen and less than dozen lots. One witness**** 
testified that prices to the retailer on less than dozen lots had ad- 
vanced since the approval of the March amendment because more whole- 
salers were quoting the net manufacturer's wholesale list price. An- 
other witness***** stated that wholesalers' discounts in the majority of 
cases were of no material importance when considered in relation to 
total purchases. He added that wholesalers were cutting down these 
discounts. A third witness****** stated that the druggist might re- 
ceive 10$ from the wholesaler, but only on a few items, and that the 

(*) Samuel A. Weiss, pp. 363-387. 

(**) Questionnaire survey conducted by local retail drug code 
authority of New York City. 

(***) These figures are difficult to understand without knowledge 

of the question used to secure them. This question was: "What 
is the size of your typical purchase on leading items: From 
the manufacturer'' From the wholesaler? " 

(****) Samuel A. Weiss, pp. 362-287. 

(*****) Geo. ,L. Secord, pp. 393-406 

(******) wheeler Sammons, pp. 150-204 & 388-392. 

1726 



- 91 ~ 

average wholesalers' discount was 7%\ Of this, he stated, the druggist 
was in a financial position to secure only half, because he could not 
always pay cash; so the average discount taken was 3~A. The witness 
then pointed out that NRA' s policy had permitted retailers to retain 
the benefits o>f cash discounts*, and these normally were two percent. 
Subtracting 2t from Zif%> left 1^% as the average trade discount re- 
ceived by druggists from wholesalers.** 

Having argued that the code price was very little above the small 
dealer's merchandise cost, the proponents discussed the amount of the 
differential between the cost of goods to the small and large dealer. 
One reason why this became an issue was that the presiding off iceirratt 
the hearing was new to the entire loss limitation problem, having - 
recently been transferred from another division of NRA. He considered 
it important to find out just how far the large dealers had to sell 
above their own costs under the March amendment; and he seemed impressed 
by statements of some of the cut-rate witnesses***' that they received 
discounts as high as 30%. The proponents hastened to produce evidence 
on the point. One witness**** stated that the manufacturer generally 
allowed no discount on 2 dozen lots, the usual minimum quantity for a 
discount being a gross. This witness also testified that the average 
discount for a gross was 12%. The president of the Liggett Drug Com- 
pany***** stated that the average discount received by his company was 
10% and 5%. JTwo manufacturers at the hearing testified upon this point. 
One****** stated that not more than 10$ or 15 % of all the manufacturers 
of package medicines gave more than 15% and 2t> discounts. 

(*) In the old loss limitation provision, Article VIII of the Re- 
tail Trade Code, "cost" was defined as net invoice cost, less 
all discounts except discounts for prompt payment . Thus NRA 
sanctioned this much difference between actual cost and the 
code price. 

(**) The fallacy in the above reasoning lies in the subtraction of 
the 2^ cash discount after dividing the normal discount in 
half. In other words, if the normal discount of 7%" contained 
a cash discount of 2%, the net trade discount must have been 
5*. If the druggist received 5% trade discount and 2$ cash 
discount upon only half the goods he bought, his discount on 
total purchases would have been 2k^ trade and 1% cash discount. 
Leaving out of consideration the cash discount would have left 
the trade discount 2^%\ The witness' figure of l-§^, thus, was 
in error, even assuming his initial data correct. 

(***) See issues of opponents, infra. 
(****) Dr> E> F# Kelly, pp. 26-36. 
(*****) Geo. M. Gales, pp, 71-89. 

(******) Frank A. Blair, president of the Centaur Co ., manufacturers of 
a package medicine; also president of the Proprietary Associa- 
tion of America, an association of package medicine manufact- 
urers. 

9726 



. op _ 

The other" 1 merely stated that his own quantity discount was 15^. 

Throughout their arguments, the proponents took pains to state 
that the March amendment was not "price fixing". The witnesses on both 
sides realized the stigma attached to this term by years of court de- 
cisions, and the opponents used the term frequently in their arguments. 
The proponents, naturally, sought to counteract the effects of its use, 
by insisting that "price" stabilization" or "fair competition", rather 
than "price fixing", were the nroper words to use.** 

One witness*** added two additional points to the argument upon the 
theoretical soundness of the March amendment, saying that the fixing of 
a code minimum still left plenty of room for price competition above 
that level. This witness also stressed the basic simplicity of the 
provision and relative ease of proving violations. 



(*) Earl A. Means, Vice President of Bristol-Myers Co., manufacturers 
of several package medicines and toilet preparations. 

(**) Witnesses stressing this point were: Geo. M . Gales, pp. 71-89; 
John Goode, pp t 138-149, and Geo. L. Secord, pp. 393-406. 



(***) Roy M. Sterne, pp. 5-26. 



97?6 



- 93 - 

2, The Effects of the i. arch. -Amendment after 60 days of Operation 

inieh of the testimony on the effects of the ilarch nnendmer.t Fas 
mere ooinion, though there was some effort to Esther statistical infor- 
mation. The lack of oetter evidence "as no reflection on the speakers 
since 50 days was too short ..■ time for the trade to make a full adjust- 
ment to the new code prices, and too short a time for rn adequate sur- 
vey. 

One of the points stressed was th;. t compliance with the March amend- 
ment had been food. NRA was interested in this, since it die 1 not wish 
to retain a code provision that was too difficult to police. One wit- 
ness* estimated that 99;,o of the drug volome of business was in com- 
pliance, and another* stated that "a prominent and reliable drug corn- 
pan;'- official" v 7hose work brought him in contact with all sections of 
the country believed prices ''ore 99.1$ observed. A third witness* pro- 
duced the results of a questionnaire sent by the National Retail Drug 
Code Authority to its local bodies. 130 of the locrl code authorities 
had replied, the compilation of their returns being as follows: 

No. of violations reported 1,491 

Range per local code authority 210 to 

No. of hearings held. 1, 258 

No. of complaints adjusted 1, 245 

No. pending as of iiay 15, 1934 235 

The witness stated that of the complaints pending, 195 were con- 
centrated in 5 sities; Los Angeles, Newark, 7ort Worth, Birmingham, and 
Freejort, 111.; "nd that all the complaints in Los Angeles, numbering 
97, were violations of one store. 4e stated that, in 7 cities, from 2 
to 5 complaints were pending; in 15 cities, one complaint was pending; 
and in 103 places no complaints were pending. 

Another witness* submitted the following statistics for Hew York 
City covering the period from April 8 (effective date of the Liarch 
amendment) to May 15, 1934: 

No. of complaints reported 3, 247 

Rejected 120 

Valid ' 3,127 

No. adjusted by code authority 2,745 

Ho. sent to NRA office for adjustment 382 

No. reported against chains 43 

No. reported against department stores 213 

No. reported, against drug stores 1 , 827 

(And, since there were 4,500 drug stores in the city, this was one 
complaint for every three stores.) 

( *) J. Bruce Kreraer, representing the Drug Institute of America, Inc., 

pp. 118-123. 
(**) Roy M. Sterne, pp. 5-25. 
(***) Wheeler Sammons, pp. 150-204 & 383-392. 
(****) Samuel A. ~eiss, pp. 362-387. 

9726 



- 94 - 



No. reported against cosmetic shops .994 

(And. since there were 257 cosmetic shops in the area, this 
wa,s almost 4 per store.) 

"Jo. reported against miscellaneous outlets 38 

Total No. of stores, violatin : 706 

No. violating only once 439 

No. violating only twice 176 

No. violating 3 times ' 48 

No. violating 4 times 21 

No. violating 5 times 3 

No. viola.ting from 6 to 10 tines 19 

The witness added that, though 70S stores had violated between 
April 8th and May 15th, the number violating between May 16, and 31, 
1934, was only 73. 

Perhaps the most import; nt isine in the minds of the proponents 
was whether the inarch amendment had caused o^ices to the consumer to go 
up or down. Because of the short time between the effective date of 
the amendment and the public hearing, little factual data "as available, 
hut the witnesses presentee considerable opinion evidence to the effect 
that the consumer was paying les! n or his drug rnd cosmetic items than 
before. Pive witnesses* swowe on this point. To substantiate their 
vie^s, the proponents argued that the lowering of consumer prices was 
a logical effect of the code price for t"o reasons: r ir^t, because 
manufacturers i hose products .•■ r. sev rely cut in price would 
lower thei"- aanuf cturer ' s wholesale list prices to prevent their re- 
tail prices from risin~ too fast; -<nc secor^, because only a few items 
h; : been sold at cut price", prior to the amendment, while many were 



Pour witnesscs**tertif ied concerning nrice reductions by manu- 
facturers. One of these stated that, since the approval of the March 
amendment, 15 prominent drug maiauf acturers had reduced their whole- 
sale list prices per dozen. After the hearing, in October 1934, this 
witness**lubmitted a letter to NBA with a list of practically all manu- 
facturers' price reductions and increases. ' A total of 30 manufacturers 
had lowered their prices on 61 items; a total of 6 manufacturers had 
raised their prices .on 20 items. Another of these "itnesses* stated 
that, of the 1,000 items on the National Retail Drug Code Authority' s 
minimum price list, there were 60 manufacturers' price changes be- 
tween November 1933 and fey 1934. On 34 the price was lower. On 4 
the -orice was raised, but not cuite enough to cover the Pederal excise 

(*) Hoy M. Sterne,- pp.. 5-23; Dr. I. P. Kelly., pp. 26-35; " r . 3ruce Philip, 
too. 36-70; John. Goo.de,, pp... 13^-149, and Samuel A. "eiss, pp. 362-387. 

(**) Geo. H. Gales, pp. 71-89; John Goode, pp. 138-149; 'heeler Sammons, 
pp. 150-204 & 388-392; and Geo. L. Second, pp. 393-406. 

(***) The witness was Geo. M. Gales, pp. 71-89. His letter, date 10/30/34 
is in the folder marked "Prices II", Deputy's files. He stated that 
the list was compiled. by tor. L. S. purfor of the Liggett Drug Co., and 
contained all products that "amounted to anything". There were a few 
obsolete or slow-selling items not on the list, but ilr. Durfor's im- 
pression of these was that more went down than up in price. 
9725' 



- 95 - 



tax; and the consequent absorption of this tax toy ths manufacturer 
resulted in a slight price reduction. On 12 items the manufacturer 
had raised the price tout only enough to cover the tax; so the net 
effect was no change in price. On 3 products the apparent increase 
in price was actually not an increase for some other reason, not ex- 
plained. On only 7 products did the manufacturer effectively raise 
the price, out the average increase was only 11.6$ as opposed to an 
average decrease, on those decreased, of 15$. 

Two witnesses argued the proposition that the code price attracted 
more prices down than up. One stated that the minimum price tended to 
become the maximum. ( *) Another (**) presented a lengthy analysis 
of the whole 'orotolem from the consumer's viewpoint. He stated that 
the small druggist under laissez-faire was oppressed toy three factors: 
(a) Loss of gross profit on goods sold toe low his cost; (to) Shifting 
of his volume of tousines - to cut-raters, and (c) Demoralization and 
uncertainty caused toy unfavorable price trends. According to witness, 
the consumer had no interest in volume shifts or the small druggist's 
loss of morale, and was interested in sales below cost only insofar 
as they enabled him to buy cheaply. However, to stop the small drug- 
gist's loss of gross profit required raising prices only upon a rela- 
tively few items used as loss leaders, and this action would also 
solve the other two problems - shift of volume to cut-raters, and loss 

c of_ morale . The witness stated that prices would have to be raised only 
in stores of more than $1000,000 annual volume of business, since 
smaller stores did Dot- meet deep price- cuts. These stores, he said, 
did only 18$ of the country's volume of drug store business, but the 
entire 18$ would not rise in price because only in a dozen cities 
had there been extreme price cutting; hence only about 10$ of the drug 
store volume was affected. Of this 10$, he *ent on, only about l/3 
was in drugs and toiletries, and only about one-half of that was in 

."fast-selling item?; so only 1-2/3$ of the national volume of drug store 
business would rise in price. Furthermore, since the lowest price cut 
was only 10$ below the manufacturer's wholesale list price per dozen, 
the increase would be negligible; and to offset it, the consumer could 
expect lower prices on many items. 

This witness then pointed to the short-lived New Jersey Retail 
Drug Code where the minimum price' was the manufacturer's wholesale 
list price per dozen plus 15$. (***) Under this, he said, 115 drug 
stores reported that of all products changed in price, 44.1$ were 
raised and 55.9$ were lowered. 



(*) Geo. II. Gales, pp. 71-83 

(**) Wheeler Salomons, pp. 150-204 & 388-392 

(***) The State of New Jersey, having its own recovery administration, 
approved a state code with a code price exceeding that of the 
national code by 15$, tout it remained in effect only a short 
time. 



9726 



- 96 - 

The witness argued that the 'national code might not produce so -'- 
many price decreases because few druggists could afford to sell as low 
as the manuf acturer ' s wholesale list price per dozen; and he drew the 
conclusion that s higher minimum price meant a greater number of price 
decreases in proportion to the increases. (*) 

Redaction of prices "to the consumer was the proponents' principal 
theme, but tfc ueti, rlso certain incidental effects. Three witness- 
es(**) stated that the Ilarch amendment load increased the small druggist's 
sense of security and confidence. One of the witnesses(***) presented 
the results of a questionnaire circulated in Hew York City, shoving that 
.1,827 druggists felt the March amendment had helped their business; 381 
said it had not. helped their business; 11 said their business had not 
changed, and 10,3 did nojr reply. One ¥itness(****) stated that the March 
amendment had permitted small druggists to enter into price competition, 
where prior to the amendment they had been afraid to do so be cause of the 
danger getting beyond their depth. Another witness(** ***) introduced a 
tabulation of questionnaires from Few York City showing that 1,478 druggists ( 
had a greater sale ? 'volume ir. April andjlay 1934 'than in. April -and'^ay, 
1933; 731 druggists had less volume, 174 had the same, and 139 did not 
reply. 

III. Issues Seen by the Opponents of Price Stabilization . 

The i ieen by the opponents, like those of the proponents, were 
divisible into two parts: first, issues with respect to price stabiliza- 
tion as a >rir.ciple, and second, issuss with respect to the manu- 
facturer's "hol.s le list price per dozen tyoe oj loss limitation provision. 

A. Issues with Respect f .o trice Stabilizacion in General. 

Witnesses for. the opponents c ■ ed, in broad language, that any 
form of price control would tend i;o eliminate competition among- retailers, 
promote monopoly son;- manufacturers; lead to inefficiency' in the distri- 
bution system, destrpy the initiative of business, and lead more and more 

toward Governme nt ccr-.rol of industry. ( ******) 

(*) This raight be true .up to a certain point, but the point would be 

difficult to determine. 
(**) ILoy k, Sterne^ pp.5--2S; Samuel .... Weiss', pp. 362-387; and Geo. L. 

S cord, op. 392-406= 
(***) Samuel A. Weiss. 
(****) Dr. E. F, Kelly, vv. 26-36. 
( *****) baauel" A . IV iss, op. 36'; -367. 

(******) The following witnesses testified upon these broad points; Myron 
Helvin Cohen, Washington Attorney for A. H. Macy A Co., iTe- York 
City, an Katz Drug, Co., Kansas City, pp. 283-293 of August tran- 
script; :iauric3 Singer, representing the issociatec' Pv t,al Drug- 
gists of America, pp. 356-365 of August transcript, (note that 
Ilr. Singer's testimony in the August transcript was almost word 
for word identical with that of Mr. Cohen); q. Forrest vfclker, 
economist for A.E. Macy & Co., Hew York, pp. 260-270 of August 
transcri it; and pp.0S9?M.7ro£ June^inanscript; Irving C. Fox rep- 
res, at lag the national Retail Dry Goods Assn., pp. 274-278 of .. .. . 
August transcript (note that the recorder, through error, listed 
iir. For. in the August transcript as C. 7. Smith. Mr. C. W. Smith 
was an Assistant Deputy Administrator in ERA.) . 



- 97 - 

One witness (*) stated that there were too many drug stores in 
existence, and that it was too easy for inefficient units to enter 
the trade anc" to remain in it. He argued that the efficient merchant 
needed no orice protection. This "itness added that 85^b of the lead- 
ing economists of the country haci. condemned price-f ixing(**) ; and that 
the Federal Trade Commission, in its report to Congress on the Chain 
Store Investigation had stated that price maintenance legislation was 
not called for. Another witness (***) alleged that the American Fed- 
eration of Labor had always opposed price fixing. 

Four witnesses(****) testified that price-fixing provisions in 
the code would raise the cost of living and go\ige the consumers, ©ne 
of these witnesses (*****) testified that retail prices would he unable 
to decrease with reductions in manufacturing and raw material costs. 
The other three of these- witnesses connected their argument with one 
of ISA's basic principles by stating that price fixing would cause a 
sudden rise of consumer prices ahead of purchasing power, thus imped- 
ing recovery. 

One witness( ******) sought to strike at the roots of the small 
druggists' arguments. He alleged that price-fixing in the code would 
not accomplish its objective of stopping predatory price cutting; and 
would merely tend to diminish the volume of drug products sold, to the 
detriment of the entire industry, including the small druggists. 

One witness( *******) urged that price-fixing would cause the cash 
and carry store to suffer because it could not undersell the store 
offering credit and delivery service, and if both sold at the same 
price the customer would choose the latter. 

Another witness (********) contended that, if a price-fixing 
scheme were approved, it should include a differential for cash and 
carry stores, permitting; them to sell from 12$ to 15$ below the mini- 
mum price otherwise applicable. The witness claimed that his clients 
had studied the cost of delivery service and found that it cost 10^ 
or more to make a delivery in Kansas City, and that the average delivered 
order was less than 50^, making the cost of delivery 2C4. '. 



(*) Q. Forrest Walker, -pp. 260-270 of August transcript, and pp. 

89—117 of June Transcript. 
(**) He cited a survey conducted in 1931 covering all members of 

the American Economic Association. 
(***) Irving C. Fox, (listed as C. W. Smith), pp. 274-278 of August 

transcript. 
(****) Q,. Forrest Walker, pp. 260-270; Myron Melvin Cohen, pp. 283- 

293; Maurice Singer, -pp. 356-365; and Frances Kneitel, 

Attorney for the National Independent Pharmacists, Inc., of 

He York, pp. 338-342 (all page numbers given are in August 

trans cript . ) 
(*****) q # Forrest Walker 

(******) q > Forrest Walker, pp. 260-270, August transcript. 
(*******) Q. Forrest Walker, pp. 89-117, June transcript. 
£********) p rul stinson, attorney for Katz Drug Co., Kansas City, and 

Fred Meyer, Inc., Portland, Oregon, pp. 261-393 June transcript 

9726 



He -added that costs of credit and collection were from 3$ to 5$; and 
that consumers who air 1 , not want these services should not have to pay" 
for them. A third witness (*) urged that' a cash and carry differential 
v/as absolutely essential. 

Four witnesses for the opponents presented considerable testimony 
rebutting the proponents' claim that the drug trade needed special 
consideration because of its public health aspects and because it was 
in bad financial condition. One witness (**) testified that drug stores 
suffer- d worse from the depression than other retail outlets. He cited 
a report of the University of Illinois, entitled "Business Mortality of 
Illinois Retail Stores, 1925-30", rnd a report of the University of 
Buffalo, entitled "Mortality in Retail Trade", to show that the drug 
trade had a greater longevity than other retail trades. (***) This witness 
.also stated that the modern drug store was a general merchandise store 
and should be able to overcome lower profits on drugs by higher profits 
in other lines, notably soda fountain products. He added that there 
was no evidence that drug products in a well-managed store bore a star- 
vation mark-flip. (****) Another witness (*****) testified that the credit 



(*) Frances Kneitel, pp. 204-235 6 415-433, June transcript. 

(**) q,. Forrest Walker, pp. 89-117, June transcript. 

(***) One of the proponents, Samuel A. Feins, pn. 362-387, June 

transcript, disputed Mr. Walker's statements on this subject, 
stating that the sample covered by the University of Buffalo's 
report was too small. Weiss introduced a statement of the 
Bureau of Business Standards, Inc., Chicago, to the effect 
that the life expectancy of hardware stores was better than 
that of drug stores, and that the expectancy of drug and 
grocery stores was about equal. 

(****) One of the proponents, Samuel A. Weiss, also disputed the 
statement", that drug stores could make up their profits on 
o her lines than drugs. He quoted from a survey of New 
York Drug Stores, the following figures; 75$ of stores with 
fountains did less than 20$ of their total business in fountain 
products, and 45$ less than 10$ in these products. 90$ of 
the stores did less than 6$ in these items, 37$ of the stores 
did less than 10$ of their business in candy, rnd 85$ did less 
than 6$ in this product. 

(*****) Frank Milne, representing' the Miller Drug Stores of Ohio and 
Pennsylvania, a ffircill chain of cut-rate stores; pp. 619-634 
June transcript 



9726 



- 9? - 

status of suirurban drug stores was not nearly as "bad as the proponents 
had painted it; and added that the so-called ethical drug stores were 
actually no more ethical than the cut-raters. Ke stated that the push- 
ing of substitute products was a practice not confined to cut-raters, 
but practiced by all stores that had any substitute products to push. 
One witness (*) stated that drugs "ere no more necessary to health than 
food, vet no drastic price protection appeared in the Retail Food and 
Grocery Code. Another witness (*) stated that the cut-raters saved 
noney for the iniQlic, and that consumers did not need and did not want 
to jay for the type of service some drug stores offered. 

So;:e of the opponents thought it important to show the existence 
of a wide difference between consumer prices and manufacturing costs of 
products in the drug industry. Two witnesses (**) objected that price 
fixing would permit the manufacturer to set exorbitant consumer prices, 
as much as 2,000^ in excesr of manufacturing cost. Another witness(***) 
stated that the raark-up of drug manufacturers was 50(X?> and higher, and 
that the manufacturers with the longest margins were the ones most in 
favor of price maintenance. 

Individual witnesses for the opponents raised a number of miscel- 
laneous issues. One witness (****) stated that "destructive price cut- 
ting", as the anti-trust laws defined the term, could never exist in 
the retail drug trade, becar.se there conld be no restraint of trade and 
no monopoly.- For example, he stated, if a large store cut the nrice 
on a toothpaste, there were still 40 other brands of toothpaste on the 
market, and the store could secure no monopoly nor even severaly res- 
train trade in the commodity. This witness also pointed out that, to 
be destructive, price cutting must actually destroy trade, a fact re- 
quiring definite proof. Another r 'itness (*****) stated that, in his 
opinion, it was good advertising to sell goods below cost to attract 
customers to the store. Two witnesses (******) stated, "it is a well- 
known fact that no store can invariably mahe a profit on each separate 
article that it sells, and every merchant considers his business as 
a whole and sekks to make a profit on the entire turnover rather than 
a separate profit on each article. Another witness (*******) stated 
that, though less than l/3 of all the drug stores did over $30,000 
worth of business per year, this one-third did 2/5 of the total drug 

(*) The witness was Paul Stinson, pp. 261-393, June transcript. 
The approved loss limitation provision in the Retail Food 
and Grocery Code was individual invoice or replacement cost, 
whichever was lower, plus a 6)o labor mark-up. This was 
comparable to the loss limitation provision of the Retail 
Trade Code, covering druggists prior to the March amendment. 
L'aurice Singer, pp. 124-135 & 528-539, June transcript. 

(**) i'yron Melvin Cohen, pp. 282-293, and Mauri' ce' Singer, _pp. 124- 
365, both in August transcript. 

(***) Paul Stinson, pp. 261-393, June transcript. 

(****) Q,. Forrest Walker, pp. 89-117, June hearing. 

(*****) B. L. Klein, cut-rate druggist, Cleveland;pp. 135-136, June 
hearing. 

(******) Myron Melvin Cohen, pp. 283- 293, August transcript , and Maurice 
Singer, up. 356-365, August transcript. 

(******* )Francis Kneitel, pp. 204-235 & 415-433, June transcript. 

9726 



- 100 - 

drug business of the country. This witness also alleged that the small 
cut-rater needed price appeal as a weapon to compete with the large 
chain's advertising advantages. 

B. Issues with he spec t to the Lanufacturer' s Wholesale 
List Price per Dozen as a Code Linimum. 

At the public hearing on June 7th arid 3th, 1034, the opponents 
vigorous!;- attacked the principle of the Larch amendment , and contend- 
ed that its effects daring GO days of operation had been detrimental. 
Three -.'itnesses attached the (*) Manufacturer's wholesale list price 
per dozen on the ground that it was a fictitious figure used merely 
as a base for the granting of discounts, and not representative of any- 
one's cost. They termed it a "vicious principle of price fixing.'\ One of 
these witnesses (**) stated that the Larch amendment failed to con- 
sider varying costs of handling slow and fast-moving items, and foiled 
to consider sales volume as a factor in the determination of cost. 
Furthermore, she stated, the manufacturer's wholesale list price per 
dozen was not even the cost of small druggists, since wholesalers' dis- 
counts were from 10$ to 20$ in dozens, or even in less than dozens, 
taking into account free goods, rebates, and cash and trade discounts. 
She added that the small druggist in hew York City received a dis- 
count of lO'j plus 2$ from the wholesaler. Another of these witnesses 
(***), to show that the manufacturer's wholesale list price was not 
the small druggist's cost, produced a list of products sold by the 
McKesson- Faxon Wholesale Drug Co. of Kansas City, showing the manufac- 
turer's wholesale list price per dozen and McKesson' s price in lots 
from 1/12 of a dozen up. The list covered 113 items and the range of 
discounts was from 10$ to 15$. This witness also testified that by 
careful buying in fairly small quantities a druggist could obtain a 
30,o discount, and by buying $50 worth at a time, could obtain 33-1/3$. 
This witness alleged that almost 50$ of the total drag sales in Port- 
land, Oregon, were made by chains, department stores, and buying pools 
receiving large discounts from the manufacturer's wholesale list price 
per dozen, hence the proponents were wrong in stating that the vast 
majority of druggists bought at the manufacturer's wholesale list 
price. 



(*) The witnesses were: Q,. Forrest Walker, pp. 89-117; 
Frances Kneitel, pp. 204-235 & 415-433; and 
Paul Stinson, pp. 26.1-393. 



(**) hiss kneitel. 

(***) Paul Stinson, pp. 261-393. 



3726 



-ini- 
Three witnesses stated (*) that the March amendment gave too much 
po^er to the manufacturers to manipulate the code price to suit their 
own interests. Five witnesses testified that large stores, buying in 
quantity, received big discounts from the manufacturer's wholesale 
list price per dozen. The presiding officer at the hearing was greatly 
interested in this testimony, since he wished to know how far about 
their own merchandise costs the March amendment required large stores 
to sell. One witness (**) stated that he received an average discount 
from the manufacturer's wholesale list price of 20$, and estimated that 
his cost of doing business averaged 14$. He said that he carried a 
line of 10,0<"><~i or more items, but did not stock heavily on slow-moving 
items. He added that the whole basis of the cut-rater's policy was to 
keep down costs by rapid turnover. A second witness (***) simply stated, 
without elaboration, that he received large discounts by buying in 
quantity directly from manufacturers. A third witness (****) stated 
that members of her association received from 10$ to 20$ discount by 
buying directly from manufacturers, and had an overhead ranging from 
12$ to 14$. She stated that the March amendment, by requiring her mem- 
bers to sell at the code price, sanctioned profiteering, A fourth 
witness (*****) stated that his client had an overhead, expense of 15$ 
and received discounts from the manufacturer's wholesale list pricein 
excess of 15$. The fifth witness (******) submitted a list of 38 pro- 
ducts showing his own regular discounts on quantity purchases and al- 
leging that he obtained them through normal trade channels and not 
through bankruptcy sales or other irregular means. He stated that they 
were manufacturers' deals available to anyone who bought the same quan- 
tity at the same time as the witness. Every discount on the list was 



(*) Francis Kneitel, pp. 204-233 & 415-433; Paul Stinson, 

pp. 261-393; and Samuel H. Miller, cut-rate druggist and 
vice-chairman of the Local Retail Drug Code Authority 
of the 20th Congressional District of Ohio; pp. 599-614. 
Mr. Miller classed himself as the only cut-rater that was 
a member of a local drug code authority. 

(**) Maurice Singer, pp. 124-135 & 528-539. 

(***) B. L. Klein, pp. 135-136. 

(****) Frances Kneitel, National Independent Pharmacists, Inc., 
New York City, pp. 204-235 & 415-433, 

(*****) Paul Stinson, speaking for Fred Meyer, Inc., Portland, 
Oregon, pp. 261-393. ' 

(******) Mr. Donn (initials not given), owner of the Fthical 
Pharmacy, a cut-rate drug store, New York City, 
pp. 433-471. 



9726 



- 102 - 
above 20fj and a, few over 30-o. (*) 

In- addition: to the witnesses upon this point, one written 
"brief (**) filed in the transcript stated that the code minimum price 
under the Larch amendment was 'ro' 1 . 15fo to 2Qja above the cost of goods 
to -large buyers,. 

Three witnesses 'urged that the Larch amendment was unenforceable 
and that, compliance under it was -bad. One (***) stated that large 
stores' prices were easy to cheel:, but those of .small stores './ere not, 
and no local retail drug code authority uas equipped to police thousands 
of stores' prices ujion thousands of items. This TT itness stated that 
SOfo to 90;o of the stores in ITew York City vrere violating the code price 
on sone item. His. client, he stated, had shopped two days and found 
76 stores in violation of 194 items. Furthermore , he pointed out, the 
code price was subject to constant fluctuation as manufacturers changed 
their base prices or dozen-lot discounts and deals, and the trade was 
entitled to prompt notice of such changes. He alleged that the local 
code authorities were not performing this function satisfactorily, and 
that the code authority price lists were had. Another witness (****) 



(*) This testimony produced some controversy at the hearing. i."r 
Earl deans, vice-president of the Bristol-; 3 r ers Co., a 
manufacturer, arose on the side of the proponents, at the 
call of the presiding officer, to state that dr. Bonn's 
large discounts were loss leaders of wholesalers, plus 
manufacturers' free goods. Ho explained that wholesalers, 
as well as retailers, used loss leaders to attract, trade, 
and intimated that if ITdA corrected Loss leader selling 
throughout all branches of the industry, dr. Bonn's dis- 
counts would disappear. Another witness then arose on 
the side of the opponents, L'r. Li. Weissbard-, owning 3 cut- 
rate stores in Newark, IT. J., and denied dr. 'deans state- 
ments. Weissbard said that dr. Bonn's disco-ants were not 
wholesalers' loss leaders, but discounts of manufactur- 
ers, dr. deans testimony appears on pages 433-477, and 
dr. Weissbard' s on pages 466-471, of the June transcript. 

(**) Brief of Texas Lerchants Assn.,. and Leonard Bros., by 

Charles P. 'Swindler, Attorney. Page -32, Supplement do . 1 
to transcript of June hearing. 

(***) The witness was Q. Forrest .Walker ,, economist of H. H. 
Lacy d- Co., New Yord, pp. 83-117. His reference to 
the failure of Code Authorities to give notice of 
price changes applied principally to the difficulties 
under the "last proviso", largely eliminated by the 
approval of the September amendment. See Chapter IV of 
this part, page 169 et. seq. 

(****) Paul Stinson, speaking for the Katz Brug Co., Kansas City, 
pp. 261-293 



9726 #5< 



- 103 - 

testified that the Larch amendment was unenforceable because oi 
possibility of keeping track of the code price on thousands of items. 
Ke presented 32 letters sent to local ret3.il drug code authorities bjr 
his client complaining of violations under the Retail Drug and Retail 
food and Grocery codes in his client's territory. These letters con- 
tained 52 complaints under the drug code. The third witness (*) on 
this point testified that snail uotown druggists sold belo^ the code 
price with impunity while the dovmto'Tn stores stood in fear of investi- 
gation by the local code authority. He stated that in the parts of 
Ohio and Pennsylvania where he. operated, there was no compliance with 
the code price; and that, though he tried to comply at first, he was 
forced to rive it up as a bad job. This witness stated, in connection 
vith the policing of code prices by code authorities, that the local 
drug code authority for the 20th district of Ohio had been hand-picked 
by the drag trade associations without any election, and that he believed 
the same thing happened elsewhere. (**) Another witness (***) objected 
that the national Retail Dray Code Authority was not an elected body, and 
that one of its members was not even a member of the trade. She also 
objected to the representation of the Dray Institute of America on the 
Code Authority. (****) 

As in the case of the proponents, one of the most important issues 
to the opponents r/as the question of consumer price trends xuider the 
i.iarch amendment. One witness (*****) stated, without elaboration, that 
consumer nrices had advanced. T'.to others (******) argued that the lack 
of mairoik.cturers' price advances was misleading and did not mean that 
prices would not advance after the hearing. They argued that nanufac- 
ttirers would naturally not raise the prices 2jrior to a hearing on the 



t & ) Frank kilne, pp. 619-634. 

(**) HRA regulations provided 1'^r an open election of each local 
code authority except in unusual cases, such as lie":.' York 
City, where local trade associations appointed the represen- 
t at ive s . 

(***) Frances Eneitel, vv- 204-235 & 415-433. 

(****) The code established the National Retail Drug Code Authority 
with two representatives from the IT.A.R.D. and one each from 
the A. Ph. A. , and the Drug Institute of America, Inc., and 
such other representation from any national trade associa- 
tion as might be approved by the Administrator. In November 

i; , h.^1233., the Administrator approved a representative of the 
national Association of Chain Drug Stores, The code pro- 
vided for no omen election of these members, and since the 
cut-raters had no national trade association, they received 
no seat on the Code Authority. 

(*****) Maurice Singer, pp. 124-135 & 523-539. 

(******) Irving C. Fox, pp. 217-261; and Paul Stinson, pp. 261-393 



S726 



- 104 - 
effects of a provision favorable to their interests. 

One vitness (*) testified that in his or;n store he raised 300 or 
400 items to the code --rice under the I larch an id ent. He admitted 
that he lowered some also. Another witness (**) testified that one 
of his clients had raised 129 itens to the code price, the average in- 
crease being 20.51)5, and that another client, by picking 7 stems at 
random found his average increase was 12.-. This witness also pointed 
to an article in Drug Trade Hews shoving that Hook's Drug Stores in 
Indianapolis had an average price increase on recount of the ! arch Amend- 
ment of 24-£$, the survey covering 15 items. 

Tour witnesses for the opponents warned IIBA to scrutinize eare- 
fully the motives behind the alliance of the chain drug store with the 
small independent. One witness (***) stater?, that uneconomic operation 
and topheavy managerial expense had driven the chains into the alliance. 
Three witnesses (****) alleged that the Larch amendments would tend 
toward a monopoly on the part of the chains because with standard brrnds 
kept high in price, the chains could take over the market with their pri- 
vate brands. They added that small druggists could not handle private 
brands, and in any event had not the advertising facilities of the 
chain for pushing them. One witness (*****) quoted from the federal 
Trade Commission's report on Chain Store Private Drands to show that 
sales of these products '-'ere increasing. In 1929, private brand sales 
rare 16.8<j of total sales in 7 chains ( a total of 46 companies), while 
in 1930, this percentage had increased to 28.9$. Dor 13 chains ( a total 
of 77 companies), the percentage ".was 22.2$ on 1928 and 26.6$ in 1930. 
The witness added that his omn firm had increased ■ the number of its pri- 
vate brand'.sd-rug items since the approval of the Larch amendment, and 
that other large stores ''ere doing liLe-'ise. 

One issue looming large in the 'minds of the opponents was whether 
the manufacturers had had anythin , to do with the retail druggists 1 
movement for price protection under HRA. There was doubtless good 
psychology in making an issue of such a point, since years of court 

(*) 3. L. Klein, pp. 135-138 

(**) Paul Stinson, pp. 251-393. 

(***) Laurice Singer, pp. 124-135 £ 523-539 ■ 

(****) j,. Forrest Walker, pp. 89-117; 

Prances Kneitel, pp. 204-235 c 415-433; and 
Paul Stinson, pp. 261-393. 

(*****) Q,. Forrest Walker, pp. 89-117. 



972£ 



- 105 - 

decisions - fixed the idea in the public mind that manufacturers' 
efforts at price maintenance were largely efforts to gouge the consumer. 
Three witnesses testified that manufacturers had had a heavy hand in 
the efforts to establish the karck a.. eminent. One (*) charred that the 
whole effort was a ruse of manufacturers to obtain resale price mainte- 
nance refused them Ion;; ago by Congress. Another witness (**) alleged 
that an agent of his client had attended meetings prior to the June 
hearing where manufacturers and jobbers Were urged not to change their 
prices or discounts until the uncertainty concerning the iiarch amend- 
ment was settled. , 

A third witness (***) alleged that manufacturers desiring to con- 
trol the retailer and mulct the public, had dominated the retail drug 
trade association. (****) 

Seeding, as they had done at the August hearing, to attack price 
maintenance at its foundation, its opponents sought to shorn that the 
iiarch amendment would not accomplish its purpose of protecting small 
druggists. One witness (*****) urged that the amendment wovild harm the 
small retailer by encouraging price cutting. He stated that prior to 
the amendment retailers sold relatively few items at cut prices because 
of the heavy losses involved, but that under the amendment, more and 
more items would fall to the code nrice. Another witness (******), to 
show that "-E lall druggist would tend to lose sales under the march amend- 
ment, stated that the IJew Jersey Retail Drug Code, with its 15$ mark-up 
above the manufacturer's wholesale list price per dozen, had caused the 
public to stop buying drag products. A third witness (*******) urged 
that the existence of the minimum code price was causing manufacturers 
and wholesalers to take away from small druggists the special discounts 
previously allowed; so that the snail man was paying more for his goods 
than before. (*******•#) 



(*) Irving C. To:;, pp. 247-261. 

(**) Paul Stinson, speaking for Katz Drug Co. , Kansas 
City, -pp. 261-393. 

(***) Q,. Forrest tfalker, pp. 39-117. 

(****) John Dargavel, secretary of the IT.A.E..D. , speaking after 

Lr. yalker, stated that he resented the claim of conspiracy 
between retailers and manufacturers. See pp. 642-643. June 
transcript. 

(*****) Ct. Forrest -.Talker, pp. 39-117. 

(******) p rrncis Kneitel, pp. 204-235 & 415-433. 

(*******) p,...-, stins0rij pp> 261-3S3. 

(********) This argument was some-hat inconsistent with previous 

arguments of the opponents that wholesalers' and manufac- 
turers' discounts to small druggists made the merchandise 
cost of these dealers lower than the code -nrice. 



9726 



- 156 ~ ' 

Perhaps realizing that they could not hope for complete abandon- 
ment of all price fixing clauses in the code, the opponents argued 
strongly for the re-establishment of the old "invoice cost plus a la- 
bor mark-up" provision. One witness (*) stated that this clause was 
better than the March amendment because it allowed the meeting of compet- 
itive prices below the code minimum, end was self-enforcing in that the 
store wishing to meet an offending price had to report it to the code 
authority. Another witness (**) suggested that a "cost plus 10^" clause 
would permit the small dealer more readily to sell above the code mini- 
mum since it would not be fixed or widely-known base price. The manu- 
facturer's wholesale list price per dozen, he urged, was so well-known 
and so inflexible that it tended to become the maximum as well as the 
minimum price. Six other witnesses (***) stated, without much elabora- 
tion, that, in spite of their opposition to pries fixing, they would not 
oppose a clause based on invoice cost plus a mark-up. Two of them spe- 
cifically mentioned 10f' as the proper mark-up; three mentioned no parti- 
cular mark-up; and one contended that o'o would be sufficient to cover 
labor costs upon some fast moving items because of their rapid turnover. 



(*) Q. Forrest Walker, pp. 89-117. 

(**) Irving C. Fox, pp. 247-261. 

(***) Frances Kneitel, pp. 204-235 & 415-433; 
Paul Stinson, pp. 261-393; 
i.Ir. Donn, pp. 433-477; 
II. TIeissbard, pp. 466-471; 
Samuel H. Lliller, pp. 599-614; and 
Pram: kilne, pp. 619-634. 



9726 



- 107 - 
ADLmnSTRATIVl PROBLEMS ad ihhehbnt difficulties 

IN THE LOSS LIMITATION PROVISION 

CHAPTER VI 

I. Manipul- tion of Prices "b y lianufac turers 

The September amendment omitted the "last proviso 11 of the March 
loss limitation provision and added a paragraph, ccamonly called the 
"second paragraph" , empowering the Administrator to ju^per-d or modify 
the provision in instances of prijje manipulation by manufacturers. 

The principle of loss limitation in the retai] drug trade was to 
peg minimum prices at the cost of the goods to the snail dealer; and 
NRA chose the manufacturer's wholesale list price per dozen as the code 
price "because members of the Code Authority had insisted that this was 
the closest practical approach to the small dealer's cost. The small 
druggists naturally wanted a code price higher than the mere cost of 
their goods, as stated previously, and NRA received, during the existence 
of the Retail Drug Code many letters and t elegrams from small- druggists 
and associations of small druggists asking for mark-ups ranging from 
10$ to 37$. 

The Deputy was definitely opposed to all suggestions for a mark-up; 
the Consumers' Advisory Board and Research and Planning Division opposed 
it consistently, end one or two members of the National Industrial Re- 
covery Board Questioned whether the provision was truly designed for 
loss limitation or for arbitrary r-rice-f ixing. The National Retail Drug 
Code Author! ty, while wanting more price protection for small druggists, 
realized the danger of asking for too much at one time. They felt it far 
better to keep what they had than to reach for more and lose all. 

NRA's opposition to a. mark-up extended also to attempts by manu- 
facturers to grant an indirect mark-up by discounts, free deals or re- 
bates to small-lot ourchasers. The fear that manufacturers might make 
•such attempts motivated NRA to include the- "last proviso" in the Karch 
amendment, requirin; the deduction of dozen-lot discounts, free deals 
and rebates in the computation of the code price. So long as this pro- 
viso remained in the code, only the existence of wholesalers ' discounts 
kept the code price from exactly equalling the cost of the goods to the 
small dealer. 

When NRA deleted the "last proviso" on September 21, 1934, there 
was real danger that the manufacturer's wholesale list price per dozen 
might become less than the small dealer's cost, not only by the amount 
of wholesales' discounts, but by the amount of manufacturers' discounts 
also. Wholesalers' discounts were limited by the amount wholesalers 
received from manufacturers; but there was hardly any limit on what 
manufacturers could, give away. 

The second paragraph of the September amendment was designed to 
check over-gencrou.s manufacturers and keep the code price reasonably 
equal to the small dealer's cost. NRA had hoped, through this para- 
graph to suspend or modify the loss limitation provision, promptly 



9726 



m 



- 108 ~ 

after its approval, as to all prod-acts having dozen- lot discounts or 
free deals. One official recommended that offending products be re- 
moved entirely from the operation of the clause and left open to price- 
cutting. Such a procedure, he felt, would be less confusing than re- 
quiring the deduction of the objectionable discounts in the computation 
of code prices.* 

The National P.etail Drug Code Authority, especially members re- 
presenting the National Association of Retail Druggists took a different 
position. The National Association of Retail Druggists militantly want- 
ed all the price protection it could secure for the small druggist, and 
fought hard for the indirect mark-up afforded by dozen-lot free deals, 
discounts and rebates. 

The misunderstanding between NRA and the Code Authority emerged at 
a meeting of the latter on October 5, 1934.** The Code Authority argued 
that NRA had known of the free deals and discounts available to small 
druggists and, having decided that their effect was negligible, had 
approved an amendment ignoring these deals in the computation of the 
code price. Consequently, NRA had placed its seal of approval on all 
manufacturer's deals existing as of September 21, 1934, and had power 
to curb only such manipulations as occurred after that date. 

There was technical reasonableness in the Code Authority's stand. 
The second paragraph of the loss limitation provision stated that the 
Administrator should act when a manufacturer was manipulating his 
prices "because of" the provision. Therefore, in spite of the fact 
that existing deals ranged between one free with a dozen and three free 
with a dozen, giving small druggists a mark-up of 8^ to 25^, NRA agreed 
to leave these deals f.lone. In return, the code authority agreed to 
search diligently for instances of manipulation occurring after Sept- 
ember 21 and the Legal Division of NRA devised an orderly procedure 
whereby the Code Authority was to send a mild letter to each offending 
manufacturer pointing out the objection to his policy and asking his 
future intentions. If the manufacturer failed to correct his prices, 
the Code Authority was to send a stronger letter; and if he still main- 
tained his objectionable price structure, the Code Authority was to 
refer the case to NRA. NRA planned to take prompt action against one 
or two manufacturers as an example to the others. 

Unfortunately, the Code Authority's desire to preserve the bene- 
fits of free deals for the small druggist interfered with its duty to 
investigate manipulated prices. To the date of expiration of the Code, 
the code authority never, of its own initiative, discovered a single 
case of manipulation. NRA discovered a few and cut-rate druggists 
throughout the country reported a few. Tnere were doubtless many more 
cases in existence but NRA had no facilities for discovering them. 



(*) This recommendation is contained in a memorandum from Mark Merrell 
to Deputy Harry C. Carr, 10/9/34; folder marked "Memoranda"; 
Deputy' s files . 

(**) See Minutes of meeting, folder marked "Meetings"; Deputy's files. 
9726 



■ - 109 - 

By the beginning" of 1935, NRA was anxious to get quick action on the 
three rrost flagrant cases of manipulation, and was willing to table all- - 
others temporarily, but the code authority did not want to turn the 
cases over to NRA for fear its action might displease the small drug- 
gists who enjoyed an indirect mark-up on these tnree products. The code 
authority requested a chance to see the manufacturers personally and 
tried to dissuade them from their manipulations. They succeeded in 
bringing 'one into line but the other manufacturers continued their 
methods. 

In the spring of 1935 the number of free deals and discounts on 
small quantities increased. The weekly drug trade papers began pub- 
lishing long lists of current deals for the benefit of small druggists. 
By that time NRA had taken the flagrant cases into its ore hands but 
was frustrated in its attempts to dispose of them quickly by a ruling 
of the legal division requiring a complicated, formal procedure, and a 
hearing in each case. 

NRA feared that the increasing number of free deals and discounts 
might jeopardize the drug trade's chance to retain its loss limitation 
provision if Congress extended NRA and the codes after June 16, 1935. 
The deals were rendering the manufacturer's wholesale list price on 
some products wholly fictitious. One of the most flagrant examples 
was a manufacturer who allowed the small druggist buying one dozen, 
another full dozen free. The little dealer selling this item at the 
code price received a mark-up of 100*3. Another bad example involved 
the 10' sizes of some drug and cosmetic products. Although 10^ was 
the highest possible selling price on these, it was also the minimum 
code price. The manufacturers had raised their wholesale list prices 
from 90^ to $1.20 and, by means of special discounts, had permitted the 
Small - drugcci'&t to ^x^- tfia products', foi? atfbufc -87$* per clbs!en \hvh ugh- whole- 
salers. The code authority, however, could not realize what a power- 
ful weapon such cases were in the hands of their opponents nor how 
difficult it would have been to uphold a provision based on an arbi- 
trary and shifting base, unrelated to anyone's cost. 

Meanwhile, the existence of manufacturers' dozen-lot deals was 
causing trouble in courts. In preparing one case for trial in the fed- 
eral courts, NRA discovered that 9 out of the 15 items sold below the 
code price bore dozen lot deals. Realizing the danger of placing such 
a condition before the court, the officials eliminated these nine and 
brought the case only upon the remaining six items. Thus the loss lim- 
itation provision became practically unenforceable upon all products 
with fictitious manufacturer's wholesale list prices. In one case, the 
question of deals actually came before a court in New York City and the 
magistrate ruled that the code minimum price, in his opinion, was the 
net cost of the goods in dozen lots. In this case, the manufacturer had 
given one item free with a dozen and the court held that the code price 
per unit was the manufacturer's wholesale list price per dozen divided 
by thirteen instead of by twelve. The respondent, not having sold be- 
low that price, went free. 

In April 1935, NRA decided that the number of deals offered the 
trade was so large and increasing so rapidly that the original plan of 

9726 



. ~ 110 - 

handling therr. individually ras impractical. It therefore decided to 
inoua a biantot order to correct them all at once; and drafted such an 
order, in tentative, form, for submission to the core authority. _' j 
The order ^astTe signed to eliminate eacn product from the loss limitation 
provision automatically as soon as the manufacturer offered an objection- 
able deal and to reinstate the product automatically when the manu- 
facturer rescinded the deal. This time the code authority was more 
friendly to the idea and agreed to consider it. They objected, however, 
that no druggist could keep track of v/hetner a given product was in or 
out of grace; and suggested that, though the suspension of products 
should be automatic, the reinstatement should be done by separate NRA 
action in each case. The code authority also agreed that the order 
should apply to deals on quantities of less than two dozen, instead of 
one dozen, in order that all deals available to small druggists might 
be covered . 

The order was drafted' and redrafted several times during May, 193U 
considerable difficulty arising in making it legally accurate. Before 
it could be approved, however, the Supreme Court's decision in the 
Schechter case brought an end to all code work.* 

II . ' Clearance Sales 

Article VIII, Section 2(a) of the Retail Trade Code permitted deal- 
ers to sell at less than the code price merchandise sold as a "bona 
fide" clearance, if advertised, marked and sold as such.** The provision 
was inherently difficult of administration and formed a convenient loop- 
hole for tne price-cutter. The need for such a provision appeared first 
at the public hearing of August, 1935*** from the testimony of the cut- 
rate group, who stated that no merchant, unless he were a, prophet, could 
escape errors in judgment in the operation of his business; and that the 
merchant's welfare depended on his right to clear his shelves of over- 
stocked or slow-moving goods. Some of the proponents of the loss limi- 
tation provision believed '.that clearance sales were unnecessary in the 
drug business because of the steady, foreseeable demand for its stan- 
dard goods; but most of those who held this belief were small merchants, 
thinking in terms of hand-to-mouth operations. Few of them could compre- 
hend the problems of carload, or even gross-lot, buying. 

The trouble with clearance sales lay in their abuse. It was easy 
for the cut-rater to overstock with the intention of cutting prices; or 
simply to cut prices, mark the goods as clearance merchandise, and defy 
the authorities to disprove his assertions that he was acting in good 
faith. The problem was not susceptible of a clear-cut solution, since any 

(*) From s concise exposition of the problem of manipulation, see the 
memorandum from Assistant Deputy Mark Merrell to Division Admin- 
istrator Harry C. Carr, 4/5/35; folder marked "Orders";- Deputy's 
files. For cot>ies of the proposed stay order, see documents head- 
ed by a memorandum from Mark Merrell to legal adviser, G. 3. G-oldin, 
5/13/35, same folder. 

(**) This clause appears in full in Chapter III of this Part page 58 

(***) See testimony of Q. F. Walker, pp. 260-270; M.M. Cohen 283-293; 

and M. Singer, pp 356-365. 
9726 



- Ill - 

restrictions practical enough to stop abuses inevitably reacted to the 
hardship of the merchant. The true test of a valid clearance sale was 
the good, faith of the dealer conducting it, and the ways in which a 
sale might he conducted in good faith were too numerous and varied to 
admit of a universal definition. Each case, therefore, had to rest on 
its own merits. Where a law imposes a burden on one party to prove the 
mental state of another, it raises a difficult task. The code being a 
criminal law, the burden of proof of violation was on the Government, 
yet neither NRA nor the code authorities had any right under the law to 
examine the invoices, books, and papers of stores suspected of con- 
ducting illegal clearance sales. Without such objective information, 
the Government could not establish the subjective fact of good or bad 
faith. 

An amendment requiring merchants to submit in advance to some 
administrative body full information concerning projected clearance 
sales might have prevented abuses; and such a regulation would have 
caused no hardship if the machinery set up was able to render prompt 
decisions. Such machinery existed in the nation-wide organization of 
local code authorities, but these bodies, consisting largely of compet- 
itors antagonistic to the price-cutters, were not proper repositories 
of the power. The NRA field offices could have supplies disinterested 
judges, but these offices lacked facilities for covering every city 
and town in the country. 

In August , 1934 the Deputy drafted a proposed amendment attempting 
to define valid clearance sales, but the legal division promptly dis- 
approved it.* On October 23, 1934, NRA held a public hearing on another 
proposed amendment requiring dealers to submit to their local code au- 
thorities, within 48 hours after the beginning of a clearance sale, full 
facts concerning the amount of goods on hand, the date they were pur- 
chased, and such other matters as the National Retail Drug Code Au- 
thority might, from time to time, prescribe. Only four speakers at 
this hearing discussed the proposed amendment in any substantial detail.** 
Only one of these*** was on the side of- the proponents, and he, sur- 
prisingly, objected strongly to the amendment on the ground that it did 
not define a "bona fide clearance", nor designate who had power to rule 
upon the validity of a given sale. He also objected that a cut-rater 
could do much damage during the 48-hour leeway period. This witness 



(*) See memorandum from N.T. Raymond, legal adviser to Mark Merrell, 
Assistant Deputy, 8/31/34; folder narked "Amendments"; Deputy's 
files. 

(**) Other speakers concentrated on other amendments and questions up 
for discussion at this hearing. 

(***) Samuel A. Weiss, executive-secretary, Hew York City local retail 
drug code authority, pp. 26-34, transcript of hearing on Retail 
Drug Code, O.tober 23, 1934. 



9726 



- 112 - 

recommended that NRA out lav all clearance sales except those upon 
damaged goods or manufacturers' discontinued lines. The other three 
speakers were on the side of the opponents, and two of them,* like- 
wise to NRA' s surprise, favored the proposed amendment. Questioning 
by NBA brought out the reason why the witness for the proponents ob- 
jected to his own code' authority's amendment, and why two witnesses on 
the other side favored it. Both of the cut-rate witnesses testified 
that in New York the local code authority had interpreted the term 
"bona fide clearance" to mean only discontinued lines of merchandise. 
The aforementioned witness for the proponents, who was secretary of the 
New York code authority, denied this, but when asked what he consid- 
ered a "bona fide clearance", replied with a definition so strict that 
it actually covered little more than discontinued lines, furthermore, 
he stated, his local code authority had to be "pretty ironclad to pre- 
vent subterfuges". It seemed probable that the New York code authority 
had overstepped its authority in restricting clearance sales, and this 
witness' objection to the proposed amendment was based on the realiza- 
tion that the amendment would disclose his code authority's lack of 
power. 

The amendment received no further consideration after the hearing; 
and NRA instructed each local code authority to handle its own clear- 
ance sale cases. The only rules laid down were that the local code 
authority, wherever it suspected illegality in a clearance sale, was 
to notify the dealer involved and request him to submit facts bearing 
in his good faith. If he acceded to the .request and the code authority 
decided that the sale was not bona fide, it was to submit all the facts 
to the NRA Regional Compliance Council for removal of the merchant's 
Blue Eagle, and for reference to a court. If the dealer refused to 
submit facts, the code authority was to try to get them itself.** A 
refusal to submit facts, would, naturally, be evidence of bad faith. 
This process was tedious and- akin to closing the stable after the' 
horse was gone; but NRA hoped that one or two Blue Eagle removals, or 
penalties' inflicted by a court, might dissuade the cut-rate element 
from future abuses of the clearance privilege. It turned out that 
NRA was unduly optimistic, for no clearance sale case over reached a 
Compliance Council. 

III. Premiums, Prize Contests and Outright G-ifts 

Article VIII, Section 2(c) of the Retail Trade Code provided that 
where a premium or certificate representing a share in a premium was 
given with any article, the base on which the minimum price of the 



( *) Frances Kneitel, attorney for the National . Independent Pharmacists, 
Inc., New York City, pp. 54-67 of the transcript; and M. Weissbard, 
cut-rate druggist, Newark, IT-. J. , pp. 67-71. The Third, Irving C. 
Fox of the National Retail Dry 3-oods Association spoke mainly in 
general terms in favor of clearance sale privileges. 

(**) See letter to Dr. E. F. Kelly from Mark Merrell, 2/28/35; 
"Explanations" folder, Deputy's filies. 



-i 113 - 

article was calculated should include the cost of the premium or share 
thereof.* This rule was definite-, hut .sometimes difficult to apply. 
Authors of the code designed the premium clause originally to apply to 
the "cost plus lCw' provision but it continued to apply. to drugs and 
cosmetics after these products came under the manufacturer's whole- 
sale list price clause. Simplified examples will best describe the 
premium clause's operation. 

If a retailer sold a suit of clothes costing him $15 net, the 
lowest price he could charge was $15 plus 10%, or $16.50. Clothing 
was subject to the Retail Trade loss limitation provision (cost plus 
10^) • If he offered to give with e.^ch suit a pair of suspender-, cost- 
ing him bO<t the lowest price he could charge for the suit and suspend- 
ers was $17. If a retailer sold a jar of face cream with a manufact- 
urer's wholesale list price of $12. per dozen, the lowest price he 
could charge per jar was $1, for face cream was subject to the drug 
loss limitation provision. If he gave away with each jar a mirror 
costing him 10 ■£ then the minimum price of face cream and mirror had to 
be $1.10. 

In the above examples the premium was a piece of general mer- 
chandise,, subject to the Retail Trade loss limitation provision and not 
a drug or cosmetic product. Suppose a dealer sold the same jar of face 
cream and offered to give away with it a box of cleansing tissues with 
a manufacturer's wholesale list price of $2 per dozen, or 16/2-3<# per 
box. Suppose, also, that these tissues cost the retailer only lOrf net 
per box. The premium clause taken alone would have required that only 
10 rf be add ; ed to cover the cost of the tissues, but this would have 
violated the principle that no drug product should be sold below the 
manufacturer's wholesale list price per dozen. Therefore, II RA took 
the view that the cleansing tissue was not a gift, but the subject of 
a sale, since the customer could not get it without buying face cream. 
The drug loss limitation provision prohibited sales of cleansing tissues 
below the manufacturer's wholesale list price per dozen; so, in the ex- 
ample given, the lowest price the dealer could have charged for face 
cream and cleansing tissue was $1.17 ($1.00 for the cream and 16-2/3^ 
for the tissues). Similarly, if a retailer gave the cleansing tissues 
with the purchase of the suit of clothes mentioned previously, the 
minimum price of both would have been the cost of the suit ($15.) plus 
10 o ($1.50) plus the manufacturer's wholesale list price of the cleans- 
ing tissue (16-2/3/) a total of $16.67. 

Even from the simplified examples set forth above, the reader can 
see how picayune on its face the procedure of handling premiums appear- 
ed. There was necessarily a lot of quibbling over a few pennies; and 
at one time IIRA was the butt of a newspaper columist's jibes because of 
a ruling on a prize doll contest.** Nevertheless, the effectiveness of 
the loss limitation provision depended upon some control over premiums, 
and no one suggested a better clause for the purpose than the one in 



(*) This clause appears in full in Chapter III of this Part page 104. 

(**) Raymond Clapper's column; Washington tost. The exact date is for- 
gotten but the article appeared early in 1935 to the best memory of 
the author. For details of the doll contest see letter from Mark 
Merrell to E.T. Clark 1/2/35; folder marked "Explanations"; Deputy's 

9726 files. 



- 114 - 

the code. Without that clause, a cut-rate dealer could have evaded 
the spirit of the loss limitation provision by giving away premiums 
with every article sold at the code price. Rutnless price competition 
would have given way to equally rutnless competition in premiums, 
frustrating NRA' s attempt to protect the small druggist. A few pennies 
difference in price may have seemed unimportant to the layman, but it 
was a serious thing to the druggist. 

Straight premiums, unconnected with prize contests, were compara- 
tively easy to handle. Trading stamps were a common variation of the 
premium, and the retailer using them had no difficulty in computing the 
amount to add to the code prices of articles with which he gave the 
stamps. Suppose the retailer gave a stamp with each 25<£ purchase and 
that 100 stamps entitled the customer to a watch costing the retailer 
50c*. The value of each coupon was \$ and, to comply with the code, the 
retailer had to refrain from selling any article at less than its code 
price plus \<k. 

The most complicated and the most humorous instance of a straight 
premium problem involved the Owl Drug Company, a California drug chain. 
In May, 1935, NRA received a telegram from the Thrifty Drug Company, 
a prominent cut-rate firm of Los Angeles, complaining that an Owl 
competitor had emp]oyed a medium and was offering free psychic read- 
ings with each 50^ purchase. Thrifty demanded permission to meet this 
intolerable competition. It turned out that Thrifty was right; one 
of tne Owl Drug stores had hired a spiritualist and put her in a booth 
in the store where she told the fortune of all who purchased 50^ or a 
dollar's worth of merchandise. Some of the articles sold in the store 
were priced at the code minimum; and if the store sold a customer one 
of these items and gave him a psychic reading too it violated the code. 

When the local code authority complained of the practice, the Owl 
store made each customer pay one cent extra for his psychic reading. 
Later, Owl abandoned the scheme, the furore raised by it being more than 
it was worth.* 

Two clauses regulated the holding of contests, one an amendment to 
the code and the other the premium clause already mentioned. The amend- 
ment prohibited lotteries or other schemes involving the laws of chance. 
It permitted retailers, however, to hold prize contests, provided the 
winner was chosen by competent and disinterested judges solely on the 
basis of merit. In addition, the rules of the contest had to be clear- 
ly defined and stricly adhered to and employees of the store excluded 



(*) The record of this incident appears in the folder marked "Comp- 
laints", Deputy's files, clipped to a letter from George M. Gales, 
President of Liggett Drug Co. to Mark Merrell , Assistant Deputy, 
dated 5/24/35. 



9726 



- 115 - 

from the competition. (*) 

The only trouble with this amendment was that the average retailer 
thought it contained all the roles he needed in conducting a prize con- 
test. He forgot that Article VIII, Section 2 (c) required the cost of 
premiums to be added to the prices of the articles sold, or else he 
failed to realize that contest awards were premiums. This trouble would 
not have arisen had the prize contest amendment contained a short sen- 
tence referring the reader to the premium clause for further restrictions 
on the holding of contests. (**) The premium aspect of a prize contest 
lay in the requirement of retailers that customers make a purchase in 
order to obtain an entry blank. Pew stores gave away entry blanks ab- 
solutely free, and any gift made contingent on the purchase of something 
else, was a premium under the code. 

Though prize contests differed widely in their details, only three 
basic types appeared during the code period. These might be termed the 
slogan or essay type, the voting type, and the auction type. The slogan 
or essay type, as its name implies, involved the writing of slogans or 
essays, usually' on the merits of the store or some product. The best 
slogan or essay, in the opinion of the judges, won the prize. In. the 
voting type, the store allowed a certain number of votes per amount 
spent, and the person holding the greatest number at the close of the 
contest won the prize. In some cases, the customer's votes inured to 
his own benefit, turning the affair into an individual buying battle. 
In other cases, customers were required to cast their votes for the 
most popular man or woman, boy or girl, or church in the town; and the 
prize went to the successful candidate. (***) In the auction type of 
contest, the store gave with each purchase a certain number of certifi- 
cates entitled "bucks", and on a certain day held an auction of assorted 



(*) Amendment Ho. 5 to the He tail Trade Code, approved 9/21/34; Code 
Record files. 



(**) See the following letters in the folder marked "Explanations"; 

Deputy's files. In each of these cases the Assistant Deputy had 
to explain that, though a given ■orize contest complied with 
Amendment No. 5, it violated the premium clause, Article VIII, 
Section 2 (c) :- 

Mark Merrell to Charleston, S. C. , NRA Office, 11/1/34 
" " to Dr. E. P. Kelly, 11/27/34 ' 

" " to Edw. V. Sheely, Memphis, Tenn. , Code Auth. H/l/34 
11 " to Sam Weiss, 1I.Y.C, Code Auth. 4/4/35 
" " to Jacksonville, Ela. , KEA office, 2/25/35 
" " to Philadelphia, Penn. NBA office 4/0/35 
" " to E. T. Clark, United Drug Co. , 1/2/35 



(***) Por cases involving votes, see the following letters in the folder 

marked "Explanation"; Deputy's files 

Hark Merrell to Charleston, NBA office, 11/1/34 

to Edw. V. Sheeley, ll/l/34 

to Sam Weiss, 4/4/35 

to Jacksonville, 1TRA office, 2/25/35 

to Philadelphia NBA office, 4/8/35 

to E. T. Clark, 1/2/35 
9726 



II 


II 


11 


II 


II 


II 


11 


II 


II 


II 



- IIS - 

prize merchandise. Customers bid on goods in the usual way, hut paid 
for them with ""bucks" instead of money. (*) 

1JRA had to handle the computation of costs in prize contests a 
little differently than in premium cases. The application of the code 
to straight premiums resulted in the customer paying a.t least the cost 
of everything he received, but the same rule, if applied strictly tc 
prize contests, would have forced a storekeeper .to charge a hundred 
and one dollars for a dollar bottle of hair tonic simply because the 
purchaser might win a hundred doll-is in an essay contest. Consequently, 
NBA compromised and ruled that not the prize, but the chance to win it 
was the true premiunio Hence, where the. cost of the prizes to the re- 
tailer totaled $100, and he issued 10,000 votes, the cost of each vote 
was one cent. In order not to violate the code, the retailer had to add 
one cent per vote to the code minimum price of each article sold. 
Usually the retailer could not foretell how many entry blanks, votes 
or "bucks" he would issue; so NBA allowed him to estimate this figure. 

Difficulties arose when merchants claimed their premium merchan- 
dise had cost then nothing, and USA scrutinized such claims closely. 
If the merchant had really obtained the articles free, and if they were 
articles of general merchandise, he could use them a.s premiums without 
restriction; but if the goods were drug or cosmetic products, he had to 
charge the manufacturer's wholesale list price for them, since that 
code minimum applied regardless of cost. Sometimes close analysis 
showed that free goods had a hidden cost. In one case, manufacturers 
had given the goods to the dealer on condition that he advertise them 
in handbills. There the cost of the goods to the merchant was the 
cost of the handbill advertising. (**) 

Outright gifts raised an interesting "problem related to premiums. 
One retailer to the annoyance of his competitors, offered absolutely 
free to, the first 500 women entering his store on a certain da.te, a 
box of cleansing tissues. (***) 



(*) For a case involving "acution bucks" see a memo from Assistant 
Deputy Herrel.l to Legal Adviser Goldin, ll/S/34; folder marked 
"Katz Drug Co." Deputy's files. • 

(**) See sheaf of correspondence headed by a letter from Assistant 

Deputy Merrell to' Samuel TTeiss, 4/4/35; folder marked "Explana- 
tions" ; Deputy's files. For- a detailed exposition of the rulings 
of Assistaiit Deputy on the rhole question of premiums and jjrize 
contests, see a memorandum from Assistant. Deputy Merrell to 
Cleveland NBA office, 12/2/34, same folder. 

(***) See a sheaf of correspondence headed by a letter from Assistant 
Deputy Merrell to Chicago ERA office, 9/26/34, folder marked 
"Explanations" ; Deputy's files. 



9726 



- 117 - 

Wherever the store attached no strings to such an offer, other 
than that the customer come and ask for the goods, 1TRA uniformly rule's 
the practice to he outside the jurisdiction of the code. This ruling 
aoplied whether the gifts were of general merchandise or drug products, 
for the loss limitation provisions applicable to each of these classes 
of merchandise applied only to sales, and made no mention of gifts. 
ERA regarded a man's right to give away his property as something out- 
side the scope of a commercial law. This view left an opening for what 
might have harmed the small dealer more than loss leader selling. But 
loss leader giving never gained much headway, probably because of its 
expense. 

IV DISCONTINUED LIMES OF MERCHANDISE 

Article VIII, Section 2 (a) of the Code, in addition to permitting 
clearence sales, allowed dealers to sell bona fide discontinued lines 
of merchandise below the code price, if advertised, marked and sold as 
discontinued. 

In November, 1934, the Code Authority reported that a druggist in 
Massachusetts was selling a certain brand of shaving cream below the 
code price and marking it a discontinued line; and that the manufacturer 
had telegraphed that the cream ras still in production, and asked the Code 
Authority to stop the druggist from marking it discontinued. 

In this case, MA ruled that the term "discontinued line", meant a 
line discontinued by the manufacturer, and not a line discontinued 
merely by the retailer. The druggist did not object to the ruling and 
the case was closed. (*) 

In January, 1935, the Oklahoma City NBA. office wrote Washington 
that a druggist was advertising a. certain rouge as a discontinued line, 
and that the resident attorney for the manufacturer had objected to 
the advertising on the ground that production of the rouge was not 
discontinued. IffiA might have issued the same ruling as in the retail 
trade and the retail drug trade over the meaning of the term "discon- 
tinued line". The national Retail Drug Code Authority contended that, 
in the drug industry, a "discontinued line" meant but one thing, namely, 
that the manufacturer had stopped producing the item. Had the discon- 
tinued line provision of the code applied to the drug trade alone, 1IRA 
might have accepted this meaning; but the provision was shared by the 
drug trade and the general retail trade. In the general retail trade, 
the term "discontinued line" meant either that the producer had discon- 
tinued the line or that the retailers no longer expected to stock it. 
The result was that the general retail trade's definition being the 
broader, prevailed; and, notwithstanding manufacturers' objections, 

(*) See sheaf of correspondence attaohed to a telegram from the 

J. B. Williams Company to the national Retail Drug Code Author- 
ity, 11/26/34; folder marked "Explanations 11 ; Deputy's files. 



9726 



i 118 - 

drug stores could advertise products still in production as discon- 
tinuedi (*) 

In neither of the two cases mentioned was there a question of the 
retailer's right to sell the item below the code price; for if he in- 
tended in good faith never to restock the goods he had a right to hold 
a clearance sale whether or not the manufacturer had discontinued the 
line. 

Occasionally, a question arose as to whether a manufacturer had 
actually discontinued producing a certain item. In the drug industry, 
some cosmetic manufacturers customarily changed their package design 
each year without changing the product itself, and then cut-rate drug- 
gists asked IIRA if they could sell the old package "below the code price. 
The package style of cosmetic products tended to he as important to the 
consumer as the body style of automobiles , and customers would not pay 
the same price for the old style as for the new. Cut-rate druggists 
complained that unless they could sell their stock of ■ last year's pack- 
ages "below the code price, they could not get rid of it. 

NRA ruled in these instances that whether or not a. line was dis- 
continued depended on how appreciable a change' the manufacturer had made 
in the package, and how. widely he hod advertised this change to the pub- 
lic. If the change were so great and so well advertised that the aver- 
age customer would notice it, not by a side-by-side comparison of the 
two styles, but by observation of the new package alone, then the line 
was discontinued. If, however, the change wt-re slight and attracted no 
notice, the line was not discontinued. 

V COMPLETE FINAL LIQUIDATIONS 

Article VIII, Section 2 (a) of the code, in addition to its other 
provisions, permitted a dealer to cut below the -code, price on "merchan- 
dise sold upon the complete final liquidation of any business". Be- 
cause of the words "any business", the clause technically embraced mer- 
chandise bought by a merchant at a bankruptcy sale of some store other 
than his own. The purpose of the clause was merely to allow a merchant 
to liquidate his own business but it exceeded its scope. So far as the 
records show, no price cutter ever utilized this loophole, and the pre- 
sumption is that none ever discovered it. < 

Two cases of complete final liquidation came before IIRA for a ruling. 
In one, a druggist intended to liquidate his store and immediately open 
another across the street. Whether this was a. complete final liquida- 
tion under the code was doubtful, but there was at least room for valid 
clearance sales of some items. The merchant had a right to move his shop, 
and on such an occasion the clearing of dead stocks might have been nec- 
cessary. Therefore, IIRA referred the case to its field office for a 

(*) The documents on the rouge case are in a sheaf of correspondence 
headed by a letter from Assistant Deputy Merrell to the- Oklahoma 
City IIRA office, 5/6/35; folder marked "Interpretations"; Deputy's 
files. 



9726 



- 119 - 

closer examination of the facts. (*) In the other case, a druggist 
owned two stores and intended to close one of them. He wished permission 
to sell all the stock of the liquidating store below the code price. 
1TRA ruled that this was not a complete final liquidation of the "busi- 
ness as required "by the code, but a liquidation of only part of the 
business. Hence, the druggist could not sell the whole stock below the 
code price, but might have held clearence sales of parts of the stock 
if such sales were necessary to the effective liquidation of the store. (**) 



(*) This case is in a sheaf of correspondence headed by a letter from 
the Buffalo NBA office to John Swooe, 10/2S/34; folder marked 
"Explanations"; Deputy's files. 

(**) The papers in this case arc in a sheaf headed by a, letter from 

Assistant Deputy t.!errell -to Dr. E. E. Kelly, national detail Drug 
, .'Code Authority, 1/15/35: folder marked "Rulings"; Deputy's files. 

9726 



- 120- 

VI . Set or : inat io a of th? Code Price in Unusual Cases 

Pharmacexvt.ical manufacturers differed in their pricing practices iron 
manufacturers of package medicines aid cosnetics in that they usually 
quoted a "trade list price" with discounts instead of a manufacturer's 
wholesale list price per dozen. Their trade list price, if compar'able to 
anything, was like the top retail price of the cosmetic and packtxgg r.ed- 
icine manufacturers. Pharmaceutical manufacturers allowed the wholesaler 
certain discounts from the trade list price and expected the wholesaler, 
in turn, to pass on certain parts of these discounts to the retailer. One 
company a?. lowed 40;i discount from its trade list to anyone who purchased 
$300 worth in a. year, and 25^ discount on smaller quantities bought through 
the wholesaler. Viosterol, a pharmaceutical product usually sold to snail 
dealers at 15J- off the trade list price, regardless of the quantity hought. 

.Applying the nrincrole of the drug losr. limitation provision and dis— 
regarding its wording, the code price on these phi rmaceutical products 
should have been the trade list price less the discount available in doz- 
en lots, for this '?s the cost to the snail druggist. The code price on 
the products of the company mentioned above would have been the trade 
list price less 25jo; and the code price of viosterol would have ben the 
trade list less 15y. However, the loss limitation provision did not men- 
tion any trade list iorice, but only the inanuf acturer ' s wholesale list 
price per dozen. 

Under the March amendment, KRA night have treated the trade list 
nrice as the manufacturer's wholesale list -orice for code purposes, for 
the "last proviso" of this amendment required the deduction of do sen- 
lot discounts, and the resulting code price would have equalled the 
small dealer's cost. Under the September amendment, however, discounts 
were not deductible in determining the code price; and. if USA had. treated 
the trade list orice on pharmaceuticals a,s the manufacturer's wholesale 
list price, the code nrice would, have been higher than the small drugg- 
ist's cost. 17RA. was unable to formulate a. ruling on this problem up to 
the expiration date of the code; but present analysis indicates that, 
since pharmaceutical products had no manufacturer's wholesale list orice, 
iffiA should have ruled them out of the loss limitation provision alto- 
gether. 

The fact that most pharmaceutical products were sold on doctor's 
prescription, and hence were not subject to -rice cutting prevented 
this problem from being serious, 'many pharmaceutical manufacturers also 
made specialties to be sold directly to the public or to be prescribed, as 
a complete remedy without other ingredients. These "ere more adaptable 
to price cutting than straight pharmaceutical products, but most of these 
manufacturers priced their specialties in the same manner as cosmetics 
and package medicines. The specialties had manufacturer's wholesale list 
prices per dozen, ana they raised no problem.* 



(*) 3?or an ertoosition of the problem of pharmaceutical prices, see' 
a letter from Sam Weiss,- New York City Code Authority to Sr. 
I. P. Kelly, National Retail Drug Code Authority 1 ,- 10/29/34; 
folder marked "Local Retail Drug Code Authorities"; Deputy's 
files. 



3725 






-121- 

One manufacturer of a" package medicine quoted no wholesale list 
price pel' dozen, and did not surest any resale price to wholesalers, 
thus raising a unique problem in the determination of the code price. 
This manufacturer sold only in gross lot's and $120 per gross was the 
only price he would quote. Wholesalers sold this article to retailers 
usually at .{.il2.CC ier uozen, and hence the Red Rock Price List showed 
$12.00 as the ' manufacturer' s wholesale list price per dczeru Actually, 
since the manufacturer quoted only one price of 5?120. per gross, the 
Code Authority eventually had to ride that the code minimum was the 
gross price divided by 12, or $10, per dozen. This was below the cost 
of these goods to the small dealer. 

VII. _ Lianufact uiu rs' ?ri ue Chan ges 

Local code authorities encountered difficulty in their work of 
notifying the trade of manufacturers' price, changes, in a number of 
cases, from the manufacturers' failure to give publicity to the changes. 
Drug manufacturers had power to fix the minimum price under the Retail 
Drug Code yet they were under no obligation to report price changes to 
the retail drug code authorities^ (*) 

The Codes of Pair Competition for the Package. Medici en Industry 
.end the perfume, .Cosmetic and Other Toilet Preparations Industry to- 
gether covfercd all drug manufacture rs except those making pha.macentical 
products, and these codes each had a provision requiring the manufact- 
urers to file their prices with their own code authorities. However, 
these code authorities could not issue a manufacturer's price to any one 
except a di s tri but o r .of the class eligible t i buy at that price, and the 
retail drug code authorities could not qualify. In the spring of 1935. 
the package medicine and cosmetic manufacturers decided to amend their 
codes to make open prices available to any interested person; (**) but 
the codes expired before these amendments materialized. 



»(*) om; sheaf of correspondence headed by letter from Assistant Deputy 
Merrell to Sam W e iss, New York City Code Authority, ll/l0/34, 
folder marked "Local 'He tail Drug Code Authorities," Deputy's' '. -. 
file. - x ' Vv;.... -. • i ; . 

(**) See Code Record files on these two manufacturing codes. 



- 122 -* 



Viii. eetaiiers' price advertising 

The loss limitation -lrovision did not prohibit advertising 
but only selling at a price below the code minimum. Therefore, acceptable 
proof of a price violation required that witnesses purche.se the suspected 
piroducteand make affidavits covering the facts of the sale. Evidence of 
violations thus was more troublesome and expensive to secure than it would 
have been had an advertisement been sufficient proof. However, if the 
Code Code Authority had requested an amendment to correct this aondition 
it would have required a public hearing, ' and the whole loss limitation 
provision might have been opened to attack by its opponents. 

IX. FEDERAL A1ID STATE TAXES 

As stated in Section IV of this Chapter, ERA issued an interp- 
retation of the September amendment on April 5, 1935, but omitted there- 
from all reference to the effect of taxes on the code price. The tax 
question was vexatious, since, if a cut-ra.ter absorbed a tax in selling 
to the miblic, he achieved a substantial price advantage over small 
druggists. Taxes affecting the code price were of two types, the 
Federal manufacturers' excise tax, and state or city sales taxes. The 
vast majority of maufacturers absorbed the Federal excise tax, so that 
it was part of their manufacturer's wholesale list jrice perdozen, but 
a few sold on the basis of list orice plus tax. State and city sales 
tax laws often, contained clauses stating that the tax was upon consumers 
and not upon retailers, and that the retailer should not absorb it. Small 
retailers, not wanting any additional expense on their own shoulders, 
were willing to pass the tax onto the consumer by selling at the code 
minimum price plus the tax, but cut-raters, thwarted the small druggiste* 
desires by selling at the flat code minimum and absorbing the tax. 

Months of negotiations bety/een The deputy's Office and the Legal 
Division, resulted in the latter approving two interpretations «n Federal 
taxes and two on state and city taxes. On their way to the Division Ad- 
ministrator for signature, however, they were disapproved by the Review 
Division.* , 

One oi' the Federal 1!cy. interpretations provided that if a manufacturer 
absorbed the tax, if became part of his wholesale list Trice per dozen, 
and not deductible in computing the code minimum price. The Review 
Division did not object to this, but its disapproval of the others render- 
ed this one valueless. The other Federal tax interpretation stated that 
if the manufacturer did not absorb the tax, and sold his product on the 
basis of his list price alas the tax, the retailer had to include the tax 



(*) A body of lawyers who gave all formal orders a final checking 
as to form and substance. For full documentation on the matter 
herein, see docket on Order 60-397. Code Record files. 



3726 



- l«do - 



in the code price. The review Division contended that the wording of the 
loss limitation provision did not suppoyt this rule, raid that the rule 
conflicted with the principle that the manufacturer's wholesale list 
price was the code price regardless of the cost of the goods. The Re- 
view Division's view placed the code price helow the small dealer's 
cost wherever the manufacturer failed to ahs^rb his excise tax:. 

The two interpretations on state and city sales taxes provided that, 
if the tax law did not require the retailer to pass the tax on on the 
con sum. -.r, he could absorb it and sell at the manufacturer's' wholesale 
list price without adding the tax.. But, if the tax law ordered the 
retailer to pass the tax on to the consumer, the retailer could not 
sell an item below the code price plus the tax without violating either 
the code or the tax law; and, since ISA could not presume that the dealer 
would Violate the law, it would presume he was violating the code. The 
Review Division disapproved both of these interpretations on the ground 
that NRA had no jurisdiction tt enforce state «r city sales tax laws. 

As a result of the Review Division's action, ::hc administrative 
Officials deleted the tax. matters from the list of interpretations and 
requested approval of the remainder, as stated in Chapter IV of this Fart. 

X. DIFFICULTIES IBK3RENI II" COLE AUTHORITY ADMINISTRATION 

Administration of the code by trade groups, in the form of 
code authorities, was responsible for some of ITRA's difficulties in hand- 
ling the prrblems of the loss limitation provision'. The national Retail 
Drug .Code Authority performed well its function of advising LIRA on the 
problems and desires of the trade, but, through lack of a legal adviser, 
was unable to take from NRA much of the burden of answering questions 
from trade members concerning the code. In its work of coordinating and 
supervising the< local code authorities, the Notional Code Authority en- 
countered difficulty because of .the large number and wide geographical 
dispersion of the locals and the lack rf intermediate coordinating bodies 
such as state code authorities. The Rational Cqde Authority had little 
to do with compliance cases, except to assign a representative t* sit in 
at Blue Eagle removal hearings in "Washington, and the decentralization 
of these hearings into nine regional, areas, in December, 1934, eliminated 
the necessity of most of this \7ork. r 

The members of the Rational Retail Drug Code Authority were: 
John Goodo, Chairman, and John Dargavcl, both representing the NABD; Dr 
B. p. Kelly, secretary, representing the APhA; George M Gales, representing 
the Rational Association of Chain Drug Stores; and Wheeler Sammens, rep- 
resenting the Drug Institute of America. Local retail drug Code author- 
ities held the job of securing comoliancc with the code in the field, and 
for this purpose the code established them on e. basis of congressional 
districts and metropolitan areas throughout the entire country. With 
almost phenomenal spped, after the approval of the code in October, 1333 
the Rational Code Authority set up 539 local bodies, but almost .as 
phenomenally, the number of them in active existence declined until 
November 1934, a survey for budget purposes revealed that all but 15G h?'.d 
disbanded. Probably the remaining groups covered all the areas where 
price competition was heavy cnoughtto raise a problem of .policing. 

3726 



-124- 

• Both the National Retail Drug Code Authority and, with a fevz excep- 
tions, its local code authorities ' 'ere composed of representatives of small 
druggists and chains, with "no -cut-rate members. Host of the members of the 
National body had a sufficiently broad, viewpoint to be impartial in their 
dealings with price cutters, but many of the local bodies found it diffi- 
cult to overcome their inherent hatred of all cutraters, and their impar- 
tiality in handling cases suffered r.g a result, Furthermore, the members 
of local code authorities usually lacked the legal training necessary to 
the adequate- handling of compliance cases. Some of them were zealous in 
their desire to keep their areas in strict compliance, and they demanded 
of NBA instant prosecution for any cut-rater who sold even one item below 
the cade price; but they failed in a number of instances to collect ade- 
quate evidence for a. conviction, and became impatient when MA sent the 
cases bach for more data. 

.3 

In order that no one might raise the charge of oorsecution, NPA de- 
manded that each code_ authority attempt amicable adjustments of all cases, 
and refer to NHA for prosecution only cases of flagrant and wilful viola- 
tors. In addition, officials handling the Retail Drug Code asked that 
each case referred to ERA, under the loss limitation isrovision contain evi- 
dence of at least half a dozen violations spread over a neriod of about 
two weeks, so that the record would rebut the defense that the low price 
was a mere mistake. Some of the lecal code authority officials felt this 
rule to be foolish red tape, and one of them, wrote that a law was either 
a law or it was not a law; and that if he murdered someone he didn't 
have to do it six times over a course of two weeks to be hanged for it.* 

Because of this impatience and lack of legal understanding, local 
code authorities lost cases that they should have ^on, and delayed many 
that should have taken little time to -complete. Furthermore, by their 
attitude of prejudice against price cutters, some local bodies antagonized 
these stores and lost the chance of securing compliance by friendly 
agreement. A number 'of price cutters in several cities raised the cry 
of persecution, charging that local code authorities ignored violations 
of small uptown druggists and concentrated on those of their old enemies.** 
Such bad feeling was not conducive to the best administration of the loss 
limitation provision, and raised a serious question whether efficiency 
and justice sanctioned the administration of price control devices by 
trade groups. 

XI COMPLIANCE A1DD LITIGATION 

A. FOPBVOPJ) 

Compliance was a major problem under the Drug Code, prin-. 
cipally because of a few flagrant violators of the loss limitation 
provision who contended the code was unconstitutional. The vast majority 



(*) See correspondence with E. G-. iiorrison, Sec, local retail drug 

code authority, Santa Paula, Calif.; folder marked "E. G. Iiorrison. 11 
Deputy 1 s files. 

(**) See "Issues seen by Opponents," Chapter V of this Part; 102. 



-125- 

6f the trade, including a number of former price cutters, were willing 
to abide, and j;pve slight trouble. The few who openly flouted the 
code were ' big firms doing large volumes of business and able to hire 
attorneys to represent their views. 

Litigation was a slow process and, even when the courts acted they 
often decided against ERA; hence the loss limitation prevision was on 
its way toward a breakdown from lack of enforcement when the Schachter 
ision reached . 

In December, 1934, when the slowness of litigation was just becom- 
ing s i \ rent, the National Retail Drug Code Authority suggested that 
NRA aaent the codes covering drug manufacturers so as to prohibit those 
manufacturers from selling roods to any drug retailer whose Blue Eagle 

been removed for violation of the Retail Drug Code. Sucha a legal- 
ized boycott, the Code Authority believed, would render court enforcement 
of the loss limitation ■ore-vision unnecessary. N.R.A. referred the 
matter, to the manufacturers' code authorities, and the code authority 
for the cosm; lie Industry assented, but ashed in return that the druggists 

. nd their code to prohibit any drug store from buying goods of a. manu- 
facturer whose Blue Eagle bad been removed for violation of the Cosmetic 
Code. This the national Retail Drug Code Authority agreed to do. 

The Paeltags ivlcdicine code authority was not so quid: to agree tt 
""the boycott 'lar., but the Retail Drug Cede Authority finally persuaded 
them to do so. The schechter decision intervened before any of these 
amendments was approved.* 

In addition to the obvious cause of compliance trouble, namely, the 
lacd: of quick court action favorable to ERA, there were several minor 
contributing car.se s. In February, 1935, the National Retail Drug Code 

writy wrote NRA urging that the obsolete Code Eagle, labelled plainly 
with the year 1934, be replaced with a 1935 insignia. The Coue Authority 
alleged that the outc.ated .-. le was not an effective instrument of com- 
pliance, was not taken seriously by either merchant or (consumer, and 
was no loss to the dealer when removed.** ERA. did not follow the 
su t gestii n. 

In December 1934, Edd decentralized its compliance machinery. 
Previously, thou ;h td re was a field office in erch sto.te, all cases 
of Blue Eagle removal came to Washington. Though this arrangement 
formed a bottleneck, it had the advantage of giving the Deputy Admin- 
istrator of each cede an opportunity to review his cr.ses prior to hearing 



(*) For correspondence on this scheme, see the following letters in the 
Deputy's files j 



Prom 


To_ 


Date 


Folder 


'.'■ t .Pet; il Era' 


E.C.C.rr 


2/7/35 


Insig. & 


Code Authority 


ERA 




' Labels 


Ditto 


Ditto 


l/ll/35 


Code Auth. 


V/heeler Sai.a ions 


Ditto 


l/ls/35 


Insig. dhabels 


II.J.Phama.Assn 


LerrellERA 


1/30/55 


Gen. Corres 



(**) See letter from Code Authority to Division Administrator Harry C Carr 
3/7/55* folder marked "Insignia and labels", Deputy files- 



-126- 

and to aid the prosecuting attorney throughout the procedings. After 
December, 1354, compliance cases for Slue Eagle removal went to nine 
Regional Compliance Councils, scattered strategically throughout the 
country, each one covering s number of states. Though this ''broke the 
bottle-neck, it left the Deputy Administrator with no control over 
compliance cases under his code. 

Cases involving labor provision and standard trade practice pro- 
visions were susceptible of effective handling by the decentralized 
machinery; but cases involving wholly new legal principles need uniform- 
ity of interpretation and presentation, achievable only by centralized 
handling. Without this uniformity these new principles had no fair 
chance to establish themselves as permanent parts of the law. To 
achieve partial uniformity of handling, the Compliance Division of URA. 
allowed the Deputy to review digests of cases on t he drug loss limit- 
ation: provision before the cases were brought to hearing. The Deputy 
could submit suggestions to the Regional Attorney, and thus correct 
major errors; but he could not be sure that the attorney thoroughly 
understood the workings of the loss limitation provision. The loss of 
personal contact between attorney and Deputy may have lessened the 
effectiveness of the attorneys' work.* 

A statistical agency employed by the national Retail Drug Code 
Authority suggested another possible cause of compliance trouble, namely, 
the numerous public statements of high KRA officials and the numerous 
URA policy orders issued against price fixing. The statistical agency 
alleged that these statements and policy orders made the loss limit- 
ation provision seem to be on trial, and made cut-raters feel that they 
would not be prosecuted for violating it. The statistical agency 
backed up its allegations with figures showing increases in the number 
of violations in certain areas during periods immediately following 
the issuance of j statement or policy against price fixing.** 

...ven if there had been no practical difficulties in securing compli- 
ance and even if the Supreme Court had decided differently at least one 
person in NRA fe.- red a possible breakdown of the loss limitation pre- 
vision of the Retail D r ug Code on Legal grounds. This person was the 
Legal Adviser on the code, who, after careful study, wrote the Assistant 



(*) See memorandum from Division Administrator Harry C. Carr to D. M. 
Uelson, Code Administrator Director, l/l8/5§; folder marked "Memo- 
randa , " De mt y ' s files. 

(**) See letter from Merchandising Facts, Inc., Hew York City, to 

George M dales, member of the National Retail Drug Code Authority, 
1/7/35. This letter is attached to a memorandum from the Assist- 
ant Deputy Administrator to the Deputy stating -that Mr. Gales 
had intended to use this letter in speaking at the 1TRA General 
Price Hearing of January 9, 1935, but at the last minute did not 
e.o so. Folder marked "Hearings"; Deputy's files. 



9726 



-127- 

Dcputy AuLiiuistra'tor in February 1035, that for s«rne time he had 
doubted the validity of the loss limitation clause for seven reasons: 
First because it made the manufacturer's wholesale list price per 
ciozen the fixed minimum; second, because the mantif acturer' s wholesale 
list rice was not a -:.-acise standard determinable by the application 
of strict rules; third, because it was not a standard used generally 
throughout the whole irado; Fourth, because it apparently bore no 
definite relation to cost and hence became somewhat arbitrary; fifth 
because it did not awply in general to all or nearly all drug items 
because there were a "large number which had nn manufactvirpr 's wholesale 
list price per dosen; sixth, because it might vary from time to time 
and there were no definite channels through which a retailei might be 
informed of this with reasonable promptitude; and seventh, because the 
standard, in eneral, was too" indefinite, uncertain and elusive".* 

B. OUTSTAiiDllTG LTTIC-ATIOU CA5L.S 

The following brief digests of outstanding litigation cases 
show the difficulties encountered in attempting to enforce the loss 
limitation ore-vision in the courts. Questions of state and Federal 
jurisdiction, Questions ••of inter and intrastate Commerce, and 1iff iculties 
of holding competitors in line J ring litigation a.vpear- in these cases. 

"l. TEE STA1IDAKD DhUG- CO., RICHMOND, VA. 

The Standard Drug Co., operating three cut-rate drug stores, in 
Richmond-, V P . t announced in July, 1934, that it would sell below the 
code' mini mom price of the Retail Drug Code, and comply only with the 
labor provisions^ The local code authority endeavored to adjust the 
matter, but without success. 

The hRA Compliance Council in Washington held a hearing nn September 
4, 1934; heard the evidence and voted to remove the respondent Is Blue 
Eagle and to refer the case to the Litigation Division. The Eagle removal 
was a gesture, for the Standard Drug Co., was not displaying a Blue Eagle 
and did not even send a representative to the hearing. The NRA litigation 
Division seeing no evidence of interstate commerce in the case, **ref erred 
it to the Virginia Sti te KBA Director to bring uroceedings under the 
Virginia State Recovery Act; and on October 10, 1934, the Commonwealth 
Attorney file... a ill in the- law and Equity Coufct of Richmond requesting 
an injunction. The parties argued the case before Judge Pollard, who 
ruled on November 15, 1934, that the Virginia Recovery Act, the National 
Industrial Recovery Act, the Retail Drug Code and the loss limitation 
provision were all constitutional. 6n the same day, however, a decision 
of the Virginia Supreme Court on the State' milk control law cast d<aibt 
on "the correctness of Judge Pollard's ruling, and he refused Oo grant an 



(*) See_ memorandum from Or. B. Goldin to ivi arlc Merrell, 2/19/35; folder 
marked "Memoranda"; Deputy's files, 

(**) The Standard. Drug Co. advertised that it would not fill mail orders 



-128- 

injunction* Judge Pollard had based his decision on the opinion of the 
United States Supreme Court in the New York milk case and the Virginia 
Supreme Court had said that decision did not apply in Virginia. The 
refusal to issue the injunction enabled the Standard Trug Co. to cut 
prices without restraint; so on December 10, 1934, a delegation from 
the Richmond code authority visited 1JRA and asked for a blanket exempt- 
ion permitting all the druggists in Richmond to sell beneath the code 
price to meet this competition. ERA was unwilling to grant such an 
exemption because of the precedent it would set and persuaded the Rich- 
mond delegation to withdraw their petition temporarily. There was still 
hope for an injunction, for the Richmond Code authority said that Judge 
Pollard would grant one if the loser in the milk case petitioned the 
Supreme Court of Virginia for a rehearing. On December 15th, the loser 
filed his petition, but Judge Pollard then stated that he would issue 
the injunction only if the Supreme Court granted the rehearing. The 
Richmond druggists became discouraged again, but NRA onc-e more persuaded 
them to withhold their petition for exemption. Meanwhile the Federal 
Trade Commission sent an investigator to Richmond, but he found no . 
evidence of interstate commerce; so the Commission dropped the matter. 

About the last of January, .1935, the Virginia Supreme Court granted 
a rehearing in the milk case; and on February 5, 1935, Judge Pollar 
issued the long-awaited injunction; he suspended'the injunction until 
February 25th to give Standard a chance to appeal. Since it was obvious 
that Standard would appeal, and that the Supreme Court would further 
stay the injunction, the Richmond, code authority resubmitted its request 
for an exemption on Februaryllth, demanding that ERA grant it by noon 
of the following" day, or accept the resignation of every member of the 
local code authority. ERA still felt such an exemption undesirable; 30 
it denied the petition, and the code authority resigned. The Richmond 
druggists, especially the chain stores, immediately cut their prices 
to meet or beat those of Standard; and a price war ensued. 

The ERA- Litigation Division then decided to 'proceed against Standard 
in the Federal Court, and on March 22, 1935, filed a bill in equity before 
Judge Way, sitting at Norfolk. Standard moved to dismiss the'.bill, but 
the court denied the motion. However, the court refused to hear the 
case 'until the United States Supreme Court had rendered its decision 
in the Schecter case»1| 

2. WEI SSBARD* BROS., NEWARK, H.J'. 

Weissbard Bros., a cut-rate firm of three stores in Newark, N.J., 
commenced cutting regularly below the code price in- December, 1934. 
Jit that time, Hew Jersey had a state ERA law' and- its own state retail 
drug code authority.' This code authority promptly prevailed upon the 
state's attorney to file a. feill in equity in a state court asking for an 



(*)■ References for this history of the Standard Drug Co. Case:-Litigation 
Division files; Compliance Division files; memorandum firm Division 

Administrator Carr to L. C Marshall, 3/22/35. folder marked "Memoranda" 

Deputy's files. See also folders marked "Standard Drug Co". Deputy's 

files. 



9726 



—129- 

injunction. Meanwhile, Weissbard, anticipating that the code authority 
might try to interfere with his cut-price selling, filed a "bill before 
Judge Fake in the Federal District Court, asking for an injunction 
to require the code authority and the U. S. District Attorney to let 
Weissbard' s business alone. The state code authority requested ERA 
on December 17, 1934, to remove Weissbard' s Blue Saglej but KM refused 
because the case was already under the jurisdiction of a Federal Court. 
However, NBA promised to ask the U. S. District Attorney to file a 
cross-bill in Judge Fake's court asking for an injunction against 
Weissbard; and, in order to prevent other Newark stores from violating 
the code, ERA sent telegrams to the larger ones pointing out that court 
action against Weissbard was preceeding as fast as possible, and telling 
them that if they met Weissbard' s competition,- ERA. would take action 
against them also. The U.S. District Attorney thought it unwise to take 
offensive action in Judge Fake's court, and believed it would be better 
to concentrate the attack in the state court. Yfoen Weissbard' s case 
against the Government came up for hearing on December 24th, the District 
Attorney had it postponed until January 7, 1935. 

Before this hearing occurred, and before any action could be 
obtained from the state court, the acting governor of New Jersey issued 
a proclamation repealing the state ERA act. This move made further 
suit in the state court useless, and left ERA no choice but to shift 
its attack to the Federal tribunal. When the case of Weissbard against 
the -code authority came up for hearing on January 7, the District Attorney 
postponed it until January 14th, and then postponed again until January 
28th. His reason for both postponements was that ERA. was holding certain 
Price Hearings on January 9th and might, as a result, cancel prico fixing 
from all codes. ERA finally convinced the Department of Justice that 
it should not delay code cases because of uncertainty of ERA policy. 
On January 28th, Judge Fake waived the oral argument and asked the parties 
to file briefs. Meanwhile, some of the druggists in Newark had begun 
to meet Weissbard' s prices. George M. Gales, President of the Liggett 
Drug Co., and a member of the National Retail Drug Code Authority 
used his influence on the chains and temporarily eased the situation; 
and ERA helped by removing the Eagle of one firm, Wolf Bros., on March 
5, 1935. 

While Judge Fake was reserving decision in Weissbard' s case against 
the Government, the District attorney, on March 5, 1935, filed a criminal 
case against Weissbard in the same court. Weissbard filed a plan of not 
guilty, but later withdrew it and, on April 9th, filed a demurrer and a 
motion to quash the case. Judge Fake, en April 16th, sustained the 
demurrer and dismissed the suit on the ground that the NIRA was un- 
constitutional, and that the transactions in the case did not affect 
interstate commerce. The. drug stores in Newark started to meet Weissbard' s 
prices immediately, and Mr. Gales, because the Liggett stores had to join 
the rest to save their business, resigned from the National Retail Drug Code 
Authority. (*) 

(*) References for this history of the Weissbard Bros, case; Litigation 
Division files; and memorandum from Division Administrator Carr to 
L. C. Marshall, 3/22/35, folder marked "Memoranda", Deputy's files. 
See also folders marked "Weissbard", Deputy's Files 

9726 



-130- 



3. THE J0HUS0II WHOLESALE PERFUME COLiFAlIY (ALLEU CUT IL1TZ .STORES,) 
IoASSACHUSETTS, RHODE ISLAHD AlID COE". "ECTICUT . 

The Johnson TJholesale Perfume Co., Inc., Hew Haven, Connec- 
ticut operated a chain of cosmetic and drug shops throughout Mass- 
achusetts; Rfiiode Island and Connecticut under the name "Allen Cut Hate 
Stores" . The first complaint of price cutting against this firm came 
from a competitior on April 9, 1934. - After much negotiation, the case 
went to the Retiona] HRA office in Boston, and! on February 12th, the 
Compliance Council voted to remove JohnsonSs Blue Eagle and to refer 
the case to the Litigation Division.. The case liad elements of inter- 
state commerce in that thejohnson TJholesale Perfume Co. transported 
merchandise in its own trucksfron its own warehouse to its retail stores, 
across state lines; and there was some evidence that the merchandise 
was shipped in its original packages. On March 23, 1935, the Litigation 
Division filed a bill in equity in the Rhode Island Federal District 
Court, but took no further action in that suit. On March - 14, 1935, it 
filed a bill in equity in the Connecticut Federal District Court, and 
the respondent appeared end filed a motion to dismiss. On May 11th the 
parties argued before the court upon this motion and the court reserved 
decision, but the ruling of the Supreme Court in the Schecter case put 
an end to this suit. While the case was sending, the Allen Cut Rate 
Stores were vigorously cutting prices below the code minimum throughout 
Hew England to the discomfort of those druggists who sought to follow 
the code. Another Hew England Chain of cosmetic shops, the Carroll Co, 
petitioned IIRA for an exemption from the loss limitation provision so 
it could not meet the Allen Stores prices, but HRA, in accordance with 
its policy, denied this request.* 

4. THE' THRIFTY DRUG COuPAHY, LOS AUGELSS. 

The Thrifty Drug Company, a firm owning about 5 cut-rates 
drug stores in Los Angeles, commenced cutting prices below the loss 
limitation provision of the code in the spring of 1934. ' The local 
code authority for Los Angeles gathered evidence of 79 price (Juts and 
submitted it to the U. S. District Attorney, and the case went to the 
Federal Grand Jury. About that time, Thrifty retained the law firm of 
McAdoo and Heblett. Shortly, thereafter the District Attorney dropped 
the case.** California druggists attached great significance to this 
incident, but the District attorney's explanation was that he dropped 
the case because the evidence was insufficient. HRA then called a Com- 
pliance Council hearing and, on June 5, 1954, ordered Thrifty to surrend- 
er its Slue Eagle. On June 27, 19 3 4, the State HRA Director for 
California, called a hearing, and reported to the Compliance Division in 
Washington th t Thrifty had been complying satisfactorijr with the code 
since June 1st. On the State Dir<-"7>or's recommendation, General Johnson 
On June 6, 1934, ordered the restoration of Thrifty 's Eagle provided the 



(*) For further details of the Johnson Perfume Co. Case, see Litigation 
Division files; Compliance Division files, and folder marked with 
name of this respondent in the Deputy 1 s files. 

(**) See letter from Harold W. Webster, member of the Los Angeles local 
Drug code authority to Mrs Gretchen /Cunningham, HRA Division of 
Research and Planning, 5/22/34; folder marked" Thrifty Drug Co." 
Deputy files. ; 

9726 



-131- 

firm would sign a certificate of compliance. Thrifty complied with the 
order and received its insignia. The State Director took this action 
against the wishes of the local and national code authorities, and with- 
out the knowledge of the Deputy Administrator. It so enraged the 
California druggists that they called a Mass meeting for the purpose of 
turning in all of their Blue Eagles to ERA. The trade association leaders, 
however, assumed control of the situation and the druggists contented 
themselves with passing a. resolution asking the removal of the State 
Director. Following the meeting, the California situation "became quieter, 
hut the local code authority complained of frequent clearance sales on 
Thrifty' s part; and ERA had evidence that Thrifty and the code authority 
were in almost constant disagreement over minor points where the issue 
made a few cents difference in the permissible selling price. ERA 
received frequent telegrams from both parties asking for rulings on these 
points. (*) But if there was evidence that Thrifty annoyed the code 
authority T»y too frequent clearance sales and by sailing as close to the 
code minimum as possible, there was also evidence that the code authority 
annoyed Thrifty by being overzealous in its attention to this firm's 
prices. (**) 

The Thrifty case culminated in the local code authority bringing 
suit in a state court under the California ERA Act in 1935. The matter 
was handled entirely in California; hence the Washington record does not 
shsw the details, except that the code authority lost the suit, one of the 
grounds of the decision being that it had failed to prove that a sale below 
code price by a drug clerk was an act authorized by the firm. Since the 
case was criminal in nature, the respondent's guilt could not rest upon an 
unauthorized act of his agent. 

5. COURT CASES OF THE NEW YORK CITY CODE AUTHORITY. 

New York State had its own ERA Act, called the Shackno Act, and 
under it the New York city local code authority brought a number of court 
cases. So well did this code authority handle these cases, that ERA did 
not interfere except to require that the code authority obtain permission 
from the State ERA Director prior to filing each case. (***) Though the 
New York Code Authority filed many suits, it obtained final court judgment 
in only two, because of the crowded condition of the court calendar. Most 
of the actions were criminal and were first brought before a magistrate who 

(*) These telegrams are in the folders marked "Thrifty Drug Co.", 
"Explanations", and "Rulings"; Deputy's files. 

(**) Thrifty' s attorney visited the Assistant Deputy Administrator at 

the latter' s office in the spring of 1935, and explained Thrifty' s 
side of the case. He asserted that Thrifty fully intended to 
comply with the code, and that local code authority was more 
harsh than the facts warranted. 

(***) One of the results of the independence of their endeavor, however, 
was that the Deputy demanded no regular reports from them but 
kept track of what they were doing only in a general way through 
telephone conversations and informal letters. This was a suf- 
ficient control at the time but prevents this report from contain- 
ing more specific information about the cases. 

9726 



-132- 



heard evidence and determined whether to dismiss the case or refer it 
to the Court of Special Sessions. The code authority obtained many- 
rulings from magistrates favorable to its cause and in some cases, the 
respondent thereupon signed an agreement to comnly in the future, with- 
out going to trial. Of the two cases on which the code authority ob- 
tained final judgment, one did not concern the loss limitation provision, 
but involved substitution of ingredients in a doctor's prescription. 
The respondent was fined $500. The second was an equity case, and the 
court issued an injunction restraining the respondent from further sales 
below code prices. 

In the spring of 1935, the Jlew York courts declared the 
Schackno Act unconstitutional, but the legislature had anticipated that 
decision and had passed a new law, the Joseph Act, ready for the governor's 
signature* The new law did not become effective immediately, however, 
because it required the secretary of state to approve or disapprove, each 
individual code; and he did not approve the drug code prior to the Schecter 
decision. > 



C 



3726 



-133- 

CKAPTER 711 • rPLTHCTS 0? TES LOSS LIIIITATI01T PROVISION 

I. l-'OREttORD 

Little evidence is available upon the effects of the loss limitation 
provision of the Retail Drug Code. Lack of time and personnel, and other 
considerations prevented the execution of plans for questionnaire surveys 
and field interviews contemplated at the "beginning of this study. 

Sections II, III, and IV of this Chapter embrace data from several 
existing studies, and such meager data as exists in NRA files. The re- 
'suit is a very inconclusive treatment of the effects of the loss limi- 
tation provision, but it serves to present at least some evidence upon 
the more obvious points of inquiry, such as the effect upon consumer 
prices, retailers 1 margins, dispersion of prices, and private brands. 

Throughout the following discussion, practically the only avail- 
able statistical data pertains to prices. There are not figures on the 
volume of the various items or stores studied, and this lack necessarily 
renders some of the conclusions subject to modification, or even 
reversal, on the basis of a more complete survey. For example, price 
data seems to indicate that more prices went down than went up under the 
code minimum provision. While the evidence establishes this fact quite 
strongly, it may be going too far to reason that, as a result, the con- 
sumer benefitted. If volume data should show that the items lowered in 
price were heavily used by consumers and those raised in price were little 
used, the consumer undoubtedly benefitted. If both types of items were 
heavily used, the relative use ond. the relative price movement of each 
would need evaluation to determine the net effect on the consumer's 
purse. If, on the other hand, the items raised in price were mostly 
popular items and those reduced were little used, the consumer must 
have suffered. Similarly, the absence of volume data prohibits any 
attempt to state definitely whether the excess of price reductions over 
orice increases harmed the small druggist. 



9725 



-134- 

II. STUDY OF 12 DRUG ITEMS I1T IOC LiAHHATTAH DRUG STORES 



In an unpublished manuscript entitled "Price Uniformity 
Within Markets As Measured by Retail Prices of Twelve Leading Drug 
Items," dated Mexch 3, 1055, Mr.. Richard Glenn G-ettell, graduate student 
of the University of California, analyzes •orices in 100 Manhattan drug- 
stores durin two periods: March 1934, prior to the approval of thfc 
March amendment, ant!. November 1334, after the approval of the September 
"amendment. (*) He directs his analysis " toward the effect of the loss 
limitation provision on the level of prices and on price uniformity (or 
rather the lack of it). (**) 

The twelve items under study bear the following designations 
throughout the remainder of this Section: 

Liquid Oral Antiseptic Ho. 1 Toothpaste Ho. 1 

Liquid \ . al Antiseptic Ho. 2 Toothpaste Ho. 2 

Sanitary Napkins Mo. 1 Tooth Powder Ho. 1 

Sanitary Mapkins Ho. 2 Laxative Pills IJo. 1 |, 

Razor Blades Mo. 1 Aspirin Tablets Ho. 1 

Razor Blades Ho. 2 (box jf 12) 

Liquid Laxative Ho. 1 
The following charts show the number of stores offering each 
item at or below each riven price, pre- code- and during code. The first 
three' charts c -vcr, individual items, and the last covers the aggregate 
price for the 12 items. T7e have been forced to omit the individual 
charts for nine of the twelve items because of lack of time and space, 
but the others are amply illustrative of the points considered. Each 
chart shows the code minimum "orice and, where t .ere was one, the manu- 
factnrer's suggested minimum resale price, used in conjunction with his 
refusal-to-sell p-.licy, (***) Retailers cutting below the su, gested price 
faced the nossibilit/ of being "cut off" bv the manufacturer. 



( : ' : ) Throughout this section, these two periods are called, respectively: 
"pre-code" -and "during code," or "pre-code period" and "code period." 
Tor 41 of the 108 stores, the "cod* period" was December instead of 
November , 1934. Mr. C-ettell ootained his factual data from surveys 
of Merchandising Facts, Inc., r ew "lork Cit -. 

(**) Mr. Gettell's full report covers als; the variations between in- 
dividual retailers' methods of adjusting price? to the loss limita- 
tion provision. Time and space do not permit the inclusion of this 
material here. 

(***) ~e have made some char, es, purely as to form, in Mr. -ettell's 

original charts, by amplifying the descriptions of tne ordinate and 
abscissa, adding a legend, enlarging upon the title, and changing 
his phrase "p;st-code" to "6.urin c code." In substance, however, 
the charts remain sis he drey/ then. Tables of basic data from which 
the charts were drawn are in the Appendix, Pa ; es . 405 _ 43Q 



972" 



?5 



LIQUID ORAL ANTISEPTIC NO. I 



RETAIL PRICES IN 108 IDENTICAL RETAIL DRUG STORES BEFORE AND 
DURING THE "LOSS LIMITATION" PROVISION, MANHATTAN,- NEW YORK 



PRICE PER 

BOTTLE 

(CENTS) 

100 



90 



80 



70 



60 



50 



40 



30 



20 



10 



,I J 



P RE-CODE 



zoc 
\ 



'J. 



, J 



PRICE PER 
BOTTLE 
(.CENTS) 

P 100 ■ MANUFACTUR 

PUBLISHED R 
PRICE (PRE 



, J 



/ 



\ 



DURING CODE 



-J* 



90 



80 



MANUFACTURE 

PUBLISHED RE! 
PRICE {OURING 



70 



60 



SUGGESTED Ml 
PRICE 



50- 



40 



30 



20 



10 



MINIMUM PRIC 



10 20 30 40 50 60 70 

NUMBER OF STORES 

SOURCE- UNPUBLISHED M.S. BY R.G. GETTELL, UNI VERSITY OF CALI FORNIA. 
MARCH 3, 1935, ADJUSTED BY N R. A. 

SERIES I 
A 



80 



90 



100 



110 



N.R A. 

DIVISION OF REVIEW 

STATISTICS SECTION 

N0.463 



I?6 



LIQUID ORAL ANTISEPTIC NO. 2 

RETAIL PRICES IN 108 IDENTICAL RETAIL DRUG STORES BEFORE AND 
DURING THE "LOSS LIMITATION" PROVISION, MANHATTAN, NEW YORK 



PRICE PER 
BOTTLE 

(.cents; 

100 



90 



80 



70 



66 



50 



40 



30 



20 



10 



PR E-CODE 



S 



K 



DURING CODE 



10 20 30 40 50 60 70^ 

NUMBER OF STORES 

SOURCE: UNPUBLISHED M.S. BY R.G. GETTELL , UNIVERSITY OF CALIFORNIA. 
MARCH 3, 1935 ADJUSTED BY N.R.A. 

r ■— SERIES I E> 



PRICE PER 
BOTTLE 
(CENTS) 

100 MANUFACTURERS 

PUBLISHED RESALE PRICE 



90 



80 



-MANUFACTURERS 
SUGC-ESTEO PRICE 



70 



-CODE MINIMUM PRICE 



60 



50 



40 



30 



20 



10 



80 



90 



100 



_J 
110 



N.R.A. 

DIVISION OF REVIEW 
STATISTICS SECTION 
NO. 464 



137 



RAZOR BLADES NO. 2 

RETAIL PRICES IN 108 IDENTICAL RETAIL DRUG STORES BEFORE AND 
DURING THE "LOSS LIMITATION" PROVISION, MANHATTAN, NEW YORK 



PRICE PER 
PACKAGE 
(CENTS) 



40 



PRICE PER 
PACKAGE 

(CENTS) 



30 






[ 



20 



10 



PRE-CODE 



i 



\ 



? 



DURING CODE 



40 



_MANUFACTURERS 



PUBLISHED RESALE PRICE 



30 



MINIMUM PRICE 



20 



10 



10 



20 



30 



40 50 60 
NUMBER OF STORES 



70 



80 



90 



100 



110 



o-r?^ 



SOURCE UNPUBLISHED MS BY R. G. GETTELL, UNIVERSITY OF CALIFORNIA, 
MARCH 3, 1935, ADJUSTED BY NRA 

SERIES I 
D 



NRA 

DIVISION OF REVIEW 

STATISTICS SECTION 

NO, 466 



I?8 



AGGREGATE OF THE TWELVE ITEMS 

RETAIL PRICES IN 108 IDENTICAL RETAIL DRUG STORES BEFORE AND 
DURING THE "LOSS LIMITATION" PROVISION, MANHATTAN, NEW YORK 



DOLLARS 
6.00 



5.80 



5.60 



5.40 



5.20 



5.00 



4.80 



4.60 



4.40 



4.20 



4.00 



3.80 



3.60 



3.40 



3.20 



3.00 



2.80 















' 






- 




































1 
f 






















I 

If 
■ 1 






















1/ 










PRE- CODE 




jS—^ 


/ 










y** 


^J-" 


„s* 


r 










^ 


—^- / * 














f"~ 


s 








3E 










DUF 


ING CO 


J 
/ 




























































































































Qv — 




















_^*~w 



















DOLLARS 
6.00 



5.80 



5.60 



5.40 



5.20 



- 5.00 



4.80 



4.60 



4.40 



4.20 



4.00 



3.80 



3.60 



3.40 



3.20 



3.00 



2.80 



10 20 30 



40 50 60 70 

NUMBER OF STORES 



80 90 100 110 



9726 



SOURCE: UNPUBLISHED M.S. BY RG GETTELL, UNIVERSITY OF CALIFORNIA, 
MARCH 3,1935, ADJUSTED BY N. R A 

SERIES I 
X 



N.R.A. 
DIVISION OF REVIEW 

STATISTICS SECTION 

NO'. 461 



* 



-139- 

These charts shot; that upon the items studied, price uniformity 
among; the 108 stores did not exist, either pre-code or during the code; 
but that the loss limitation provision reduced the range of price quo- 
tations and narrowed the price extremes substantially. The following 
table brings out this > r int a"je clearly by shO'--ir.'j the price, range 
among the 1^8 stores pr;-code and during the code, and the price range 
for the middle 100 stores during there same periods. The middle 100 
group omits the four stores with the highest and tiie four with the low- 
est quotations, in order to eliminate possible freaks. 

TABLE I - EXTEIIT OF PRICE SPREAD - 108 I1ABHATTM DRUG STORES 

12 Leading Drug Items 



Item 













Price 


! Spread - 




Price Spread 
Pre- Code Di 


103 Stores 
iri ng Code 


Middle 


100 


Stores 




Pre-Code 


During Code 




$.50 




$.19 




$.32 




$.15 




.50 




.28 




,25 




.22 




.10 




,05 




.08 




.04 




.11 




.06 




.06 




, n 4 




.11 




.06 




.04 




.06 




.19 




.14 




.14 




.08 




.16 




.16 




.09 




.05 




.11 




,05 




.09 




.04 




.14 




.17 




.11 




.14 




.12 




.10 




.06 




.05 


1 


















.04 




.05 




.03 




.05 


1 


.36 




. 33 




.32 




.22 



Liquid Oral Anti- 
septic Ho. 1... .. 

Liquid Oral Anti- 
septic No, 2 

Sanitary Napkins 
Ho. 1 

Sanitary Napkins 
No. 2 

Razor Blades No. 1. 

Razor Blades No, 2, 

Toothpaste Ho, 1. , 

Toothpaste Ho. 2.. 

Tooth Ponder Ho, 1. 

Laxative Pills Ho, 1 

Aspirin Tablets Ho, 
(box of 12) 

Liquid Laxative Ho, 1 

Aggregate 1.70 1,49 1,06 1.01 



For source see page 134 of this report. 

This table shows the narrowing of extremes in -orice since the es- 
tablishment of the code minimum price. Also, the difference between 
the data for the 108 stores and that for the middle 100,- shows that the 
few exceptionally high and low prices tended to come into line. For 
example, on Liquid Oral Antiseptic Ho, 1, the 50^ pre-code range de- 
clines to 32^ (a decline of 36;J) by the elimination of the four high- 
est and four lowest prices, but during the code, this procedure reduces 
the range on this product from 19^ to only 15^ ( a decline of only 31)1), 
Where the range increased, as on Tooth Powder Ho. 1 and Aspirin Tablets 
Ho, 1, it -'as because of the addition of new low prices and not new 
high ones. On those two products, the code ninimun was lower than the 
lowest pre-code price and probably attracted prices down to it. 



9726 



-140- 

The aggregate jhart shows somewhat the sane narrowing of extremes 
as tiie individual curves, but the elimination of the four highest and 
four lowest prices make the price ranges pre-code and during code very 
nearly equal, though the latter range is on a lower level than the former. 
The parallelism of the two curves hears this out c From these charts it 
seems that the code minimum largely accomplished its purpose of eliminat- 
ing very low prices. At the same time, however, competition "brought 
many higher prices dov;n to the code minimum. The following table shows 
this fact: 

TABLE II 

EFFECT OF MINIMUM PRICE PROVISIONS 

108 Manhattan Drug Stores 



Item 



Selling 
Below the Minimum 



Selling at the Minimum 



Pro-Code During Code Pre-Code During Code 
(Violations) ' ' ' 



Liquid Oral Anti- 
septic ho. 1 

Liquid Oral Anti- 
septic Ho, 2 

Sanitary Napkins 
ho. !,,,.....•••. 

Sanitary Napkins* 
No. 2...., 

Razor Blades No," 1 

Razor Blades No." 2 

Too'thpaste To. 1.. 

Tooth paste No. 2. 

Tooth Powder No. 1 

Laxative Pills 
No. 1 

Aspirin Tablets No, 
1 (box of 12).... 

Liquid Laxative No, 
1 „ 

Total 









7 





14 


5 


2? ' 


4 


" 





10 " 


2 


18 


1 


2 


1 


o • 


1 


10 


1 








27 ' 


2 



111 



17 



1 

2 

10 

1 

3 
" 3 

9 
" 3 



1 

1 

34 



38 

16 

59 

36 
25 
29 
29 
17 
47 

15 

17 

39 

367 



For source see page 134 of this report. 

This table, shows that before the code four items, Liquid Oral 
Antiseptic No. 1, Razor' Blades No. 1, Tooth Powder No. 1, and Aspirin 
Tablets No. 1, never sold below the manufacturer's wholesale list price 
per dozen (later the code minimum). The charts for these items show 
that the antiseptic, the blades and the aspirin each had a manufacturer's 
suggested minimum price before the code and that about 72^ of the stores 
sold the antiseptic and about 90^j sold the blades at exactly that price. 



9726 



-141- 

The Great majority of stores sold the aspirin at its top price of 15^, 
probably because of concJi.ier acceptance of that price. Consumer accep- 
tance seems the principal reason for the higher prices on the tooth pow- 
der. I.ir. C-ettel! 1 states that possibly the code minimum on these four 
products was lover then necessary to prevent destructive competition. 
But, stated previously in this Chapter, the code minimum was based, not 
on prevailing pre-code -o~~ices hut upon the manufacturer' s wholesale list 
price per dozen, a price substantially equal to the small druggist's 
merchandise cost. 

Liquid Laxative IJo. 1 and Sanitary ITaphins No. 2 are ;examples of 
items sold below the manufacturer's wholesale list price per dozen prior 
to the code. Twenty-five per cent of the stores sold the laxative below 
this price before 'the code; and two stores during the code. On the 
sanitary napkins, ,5 stores sold below the minimum before the code, and 
4 did so during the code. Mr. Get tell suggests several possible reasons 
for these Iqw prices. Perhaps the items were not as thoroughly adver- 
tised as others, perhaps they were used more often as loss leaders, 
perhaps they suffered more from competition of substitutes, or perhaps 
the code minimum upon them was too high. Upon this latter point we 
must again comment that the code price was based upon an approximation 
of the small dealer's merchandise cost, and a lower minimum might not 
have accomplished the purpose' of protecting small enterprise. In fact 
the loss limitation provision was meant to raise just such low prices as 
these. 

The third and fourth columns of ; the preceding table show that the 
code tended to cause all prices to approach the' minimum. Thus more 
prices tended to go down than up. The following table illustrates this 
point: 



9726 



-142- 

TA3LE III 

HOST FR5QUFNT PRICES, IRE C PUS A ND DURING CODE 

108 Manhattan D rug Stores 

Twelve Leading Drug I tens 





: ; 








Number of Stores 


» Number of 


: 




Price : 


Most Freouent : 


Selling at Most: 


Stores Sell- 


Item : 




Rang 


9 ; 


Prices : 


Frequent Prices: 


ing at other 




1st : 2nd : 3rd : 


1st : 


2nd : 


3rd : 


Than Most Fre- 




• , 














quent Price 


Liquid Oral' : 


Pre : 


$.50-1 


.00; 


$.59: $.69 : 


$.89 : 


76 : 


15 i 


6 : 


11 


Antiseptic : 








: ; 












No. 1 : 


During : 


.50- 


.69: 


.59: ?50 : 


.51 : 


42 : 


'38 : 


11 : 


17 


Liquid Oral : 


Pre : 


.45- 


.95: 


.79: .89 : 


.69 : 


36 : 


29 : 


' 22 : 


21 


Antiseptic : 








89 : 






17 : 






No. 2 : 


During : 


.67- 


.95: 


.79: i69 : 


*67 : 


40 : 


17 : 


16 : 


18 


Sanitary : 


Pre : 


.13- 


.23: 


.19: .20 : 


.15 : 


62 : 


14 : 


10 : 


12 


fepkins ' : 










.17 : 






10 : 




No .1 . : 


Durfn ■ : 


.16- 


.21: 


*17: 


.19 : 


.2-0 : 


59 : 


35 : 


6 : 


10 


Sanitary : 


Pre : 


.12- 


.23. 


.19: 


.15 • 


.20 


50 ■ 


18 


10 


12 


Nankins : 










.17 






18 






No. 2 : 


During : 


.15- 


.21: 


*.16 


.19 ■ 


.17 


36 


29 


27 


16 


Razor : 


pre 


.19- 


.30 


.25 


.23 


.19 


96 


6 


3 


3 


Blades : 




" 


















No. 1 : 


During : 


.19- 


.25 


.25: 


*19 - 


.23 


59 


25 


15 


9 


Razor : 


Pre 


.21- 


.40 


.29 


.25 


.30 


42 


24 


10 


32 


Blades 






















No. 2 


Darin-?; 


.21- 


.35 


* 24 


.25 


.29 


29 


23 


22 


29 


Toothpaste 


Pre 


.29- 


.45 


. 3'9 


.35 


.34 


55 


19 


■ 9 


24 


No. 1 
























During 


.29- 


.45 


.39 


+ .34 


.35 


: 42 


' 29 


17 


20 


Toothpaste 


: Pre 


: .14- 


.25 


• .1-9 


• .20 


: .25 


: 68 


: 18 


: 12 


: 10 


No. 2 












.18 






: 16 






: During 


• .15- 


.20 


■ .19 


• * 16 


■ .20 


: 50 


• 17 


: 16 


9 


JoQth Pow- 


: Pre 


• .36- 


.50 


: .45 


: .49 


: .39 


: 43 


• 24 


: 21 


20 


der No. 1 
























: During 


: .33- 


.50 


: *35 


: .39 


: .45 
: .19 


: 47 


: 32 


: 16 


: 13 


Laxative 


: Pre 


: .13- 


.30 


: .25 


: .23 


: 79 


: 14 


: 8 


: 7 


Pills No. 1 
























: During 


: .19- 


.29 


: .25 


: .23 


: *20 


: 57 


: 17 


: 15 


: 19 


Aspirin Tab- 


: Pre 


: .11- 


.15 


: .15 


. .121 


: .13 


: 97 


: 6 


: 4 


: l 


lets No . 1 






















(tox of 12) 


: During 


: .10- 


.15 


: .15 


: .12 


: * 10 


: 51 


: 31 


: 17 


: 9 


Liquid Lax- 


: Pre 


: .54- 


.90 


: .69 


: .79 


: .59 


: 45 


: 22 


: 14 


: 27 


ative 


• 


















No. 1 


: During 


: .57- 


.95 


: .69 


■ * 31— 


: .79 


: 42 : 39 


: 12 


: 15 



For Source see page 154 of this report 



9726 



-143- 

In six cases, on this table, there was a raanuf acturer 1 s suggested 
minimum price as shown h;/ the underlined fig-ores; and in five of these 
six cases, this vac the most fn querit selling price both before and dur- 
ing the code. In the sixth ca.3( , Aspirin Tablets No. 1, con saner accept- 
ance allowed the top price of 15^ to prevail. In four of these six 
cases, the code minimum price (designated by an asterisk) was the second 
most frequent price during the cede period; and on thf aspirin the code 
minimum stood third, after the manufacturer's suggested irice. On 
Liquid Oral Antiseptic No. 2, the code price sto.od third, two higher 
prices tying for second place. 

On six products there was no manufacturer's suggested price, and 
on four of these the code minimum price was the most frequent price 
during the code period. On the fifth, the code minimum was the second 
most frequent price, and on the sixth, the third most frequent. In 
four cases out of the twelve, the most frequent price during the code was 
less than the most frequent pre-code price, pnd in the other eight cases, 
it was the same. This table indicates a tendency of prices to cluster 
at the manufacturer's suggested price where one .existed, otherwise at 
the code minimum. 

Another point standing out from the preceding table and charts is 
a tendency for prices daring the code to cluster at two or three points 
instead of at a single level as in the pre-code period. Mr. Gettell 
suggests that these several points may have been way stations of prices 
on their way to the code minimum, or permanent levels reached after 
readjustment to the code. Still another interesting point is the 
tendency of prices to cluster at certain penny intervals, ending in 
9 or 5. This was a custom of merchants, but the code seems to have 
disrupted it somewhat. 

The following table, based on average prices, adds strength to the 
conslusion that the loss limitation provision counterbalanced the rising of 
of a few low prices by the lowering of many higher ones: 



9726 



-144- 



TABLE IV 
AVERAGE PRICES, 108 MANHATTAN DRUG STORES 





Twelve 


Leading Drug 


Item? 












Mr 


'.nufacturer 1 s 


Code 




Avera, 


:e Price 


Change 


■Suggested" 
Price 


Minimum 


Item 


Pre- Code 


During Code 


Price 


Liquid Oral Anti- 












septic No. 1 


$.62.8 


$.552 


-12.1 


$.59 


$.50 


Liquid Oral Anti- 












septic No. 2 


.78.4 


.767 


- 2.2 


.79 


.67 


Sanitary Napkins 












No. 1 


.18.6 


.178 


- 4.3 


< _ 


.17 


Sanitary Napkins 












No. 2 


.17.9 


.175 


— P "3 


M 


.16 


Rasor Blades No. 1 


.24.7 


,230 


- 6.9 


.25 


.19 


Razor Blades No. 2 


.27.8 


.265 


- 4.3 


- 


.24 


Toothpaste No. 1 


.36.5 


.353 


■v .8 


.39 


.34 


Toothpaste No. 2 


.19.7 


.133 


- 7.1 


.19 


.16 


Tooth Pouder No. 1 


.44.7 


• o85 


-13.9 


•* 


.35 


Laxative Pills 












No. 1 


.24.0 


.235 


- 1.7 


- 


.20 


Aspirin Tablets 












No. 1 












(box of 12) 


.14.6 


.131 


-10.3 • 


.12 


.10 


Liquid Laxative 












No. 1 


.70.7 


.713 


+ .8 


- 


.67 


Aggregate 


$4.40.5 


$4,183 


- 5.1 


- 


$3.75 



Eor Source cee : Page 134 of this report. 

Mr. Gettell states that from this table it appears that the establish- 
ment of minimum code prices led. to a net gain to the retailer in only two 
cases, and a net loss in ten. (*) He wonders wnether the loss limitation 
provision was not the wholesalers' and consumers' gain and the retailers' 
loss. 



(*) Mr, Gettell has a footnote in his report hearing on the above statement, 
as follows: "It should be pointed out that no volume data is available, 
and. most of the conclusions herein a.re predicated on the impossible 
assumption that each store had an equal volume of trade both before 
and after (during) the code. Actually this assumption, though unreason- 
able, need not nullify the conclusions since it is inconceivable that 
all the price rises have been in large outlets and the declines in 
small ones, and since there is every reason to believe that any volume 
increases in the later period have been fully as much due to increased 
purchasing power as to decreased price." 



9726 



•145- 



The folloT7ing table shows the nuuber of stores raisin™, maintaining 
and lowering their prices on each item, and the total items raised, main- 
tained and lowered. There is also a further breakdown with relation to 
the code minimum price. (*) 

TABLE V 
PE5-CCDE T O DtmiTG-CODE PRICE READJUSTME1 :T 

108 Manhattan Drug Stores 
Twelve Leading Dru^ Iteras 



Item 



L 0, ''ered 



Maintained 



Raised 



To Min- To At Min- To Min- To 

imum or Above imum or Above imum o_r Above 
Total below Minimum Total below Minimum Total below Minimum 



Liquid Oral 














Antiseptic 














!To. 1 


68 


37 




31 


37 


1 


Liquid Oral 














Antiseptic 














Ho. 2 


39 


10 




29 


36 


1 


Sanitary Nao- 














kins No. 1 


53 


42 


SJ 


11 


38 


9 


Sanitary Tap- 














kins Ho. 2 


51 


28 


£/ 


23 


30 


1 a/ 


Razor Blades 














Ho. 1 


45 


24 




21 


60 


1 


Razor Blades 














No. 2 


51 


22 


V 


29 


36 


3 


Toothpaste 














No. 1 


33 


15 


a/ 


18 


40 


5 


Toothpaste 














No. 2 


57 


14 


a/ 


43 


44 


3 


Tooth Powc'er 














Ho. 1 


92 


48 


a/ 


44 


11 





Laxative Fills 














Ho . 1 


33 


a 


.a/ 


24 


54 





Aspirin Tablets 














No. 1 (bx.of 12) 


55 


17 




38 


51 





Liquid Laxative 














No. 1 


37 


25 


a/ 


12 


38 


2 a/ 



36 



35 


33 


5 




28 


29 


IT 


13 


a/ 


4 


29 


27 


11 




16 


59 


3 







3 


33 


21 


6 




15 


35 


35 


10 




25 


41 


7 


1 




6 


11 


5 







5 


54 


21 


7 




14 


51 


2 







2 


36 


33 


14 




19 



Total 
fo of Total 



614 
47 



291 
22 



323 
25 



475 26 

37 2 



449 207 
35 16 



67 

5 



140 
11 



For Source see Page 134 of this report. 

a/ One price belorr the minimum c/ Three prices below the minimum 

b/ Tr/o prices below the minimum d/ Four prices below the minimum 

(*; See next page for note. 



9726 



-146- 



This tahlo shovrs that, out of a total of 1,296 prices, roughly 
one-sixth were raised, slightly more than one-third were maintained, 
and almost one-half were lowered. In accordance v;ith the purpose 

of the loss limitation provision, about 5$ of the prices rose from 
low levels to the code minimum; hut to counteract this, 21$ of the 
prices descended from higher levels to the code minimum. Of the 
prices above the minimum, about 35$ remained unchanged, 25$ went down, 
and 11$ went up. Before the code, 89$ of the prices were above the code 
minimum, but during the code this figure was only 71^. 

The following chart, based on the aggregate price for the twelve 
items, shows the readjustment in each store oh account of the code. 
It is a scatter-diagram with each dot representing a store and showing 
the pre-code price and the price during the code charged by that store. 
The line marked "price maintenance" represents points of no change in 
price from pre-code to code period. Thus all dots to the right of this 
line indicate stores with aggregate price reductions under the code, and 
dots to the left indicate stores with aggregate price increases. The 
encircled dots are the extreme high and low price quotations, and the 
"X" is an aggregate of the most frequent price of each item, (**) 



(*) Preceding this table, in Mr. Gattell's report, is a 
series of 12 charts (one for each item) in the form 
of scatter-diagrams, showing the price charged by each 
store pre-code and during the code for each item. Space 
does not permit the inclusion of these charts here. 
Briefly, they show that more stores lowered the price 
on each item than raised it, but that the action of 
individual stores in adjusting their prices was not uni- 
form. Many stores maintained prices above the code 
minimum, and some even raised them. 

(**) The basic table for this chart is in the Appendix, 
pages 426 - 427. 



9726 



■ 



147 



DISPERSION OF RETAIL PRICE CHANGE 



108 MANHATTAN DRUG STORES 



(AGGREGATE OF THE TWELVE ITEMS) 



AGGREGATE PRICE 
"DURING CODE" 

(DOLLARS) 
6.00 



5.50 



5.00 



4.50 



400 



3.50 



3.00 



2.50 













& 




AREA 
INCR 


F PRICE 
EASE 






7 


® 








• 

• 
• • * 




■ 


• 








• 


• ••/ 
•/ 

y • 


• • 

• 

• • 
• 


• 


AREA OF PRICE 
DECLINE 






/ * 
* / • 


• •• • 

: • 

. .... 


• 
• • 

• 


• 












• 
• 




CODE MINIMUM 


PRICE 




IS» J 


















LEGEND 
» ONE STORE 
© EXTREME PRICE QUOTATIONS 
X MOST COMMON PRICE QUOTATIONS 























AGGREGATE PRICE 
"DURING CODE" 

(DOLLARS) 
6.00 



5.50 



2.50 3 00 3.50 4.00 4.50 

(DOLLARS) 
AGGREGATE PRICE "PRE-CODE" 

SOURCE: UNPUBLISHED MS BY R.G GETTELL, 

UNIVERSITY OF CALIFORNIA, MARCH 3, 1935 
ADJUSTED BY N. R A. 



5.00 



5.00 



4.50 



4.00 



3.50 



3.00 



2.50 



5.50 6.00 



N.R.A 

DIVISION OF REVIEW 

STATISTICS SECTION 

N0.462 



SERIES 

Y 



-149- 

The chart shows that 20 stores raised their aggregate parices ahove 
their pre-code levels, oat that 87 stores reaiiced theirs. One store 
maintained its aggregate pre-code ">rice. The chert also emphasizes the 
non-uniformity of "behavior of individual stores. Though the majority de— 
creased their -orices, not all of the decreases v -ere from high levels. 
Likewise, not ell of the increases were from low levels. 

Breaking down the factual data, on the 106 stores into six districts, 
each representing a rough shopping center,* reveals nrnch the same diverg- 
ences in the "behavior of individual stores. The only apparent difference 
"between districts is in the level of prices, levels in the higher income 
districts "being higher. 

A comparison o^ the prices on the twelve items during the code period 
in fourteen cities (including Nor Tori:)**, indicates roughly a similarity 
"between the markets. Though orices outside Hew York rT ere on a slightly 
higher level, there was the sa-e familiar clustering of prices at inter- 
vals s-ach as the manuf B,clv..er ' s suggestect price, the code minimum :>rice, 
and prices ending in 9 or 5. This similarity "between markets makes it 
probable that price "behavior in Manhattan is not unlike that in other 
cities, and tends to validate the conclusions reached from the study of 
Manhattan stores.*** Mr, Getteli draws the following conclusions, tent a— 
tively, from the data contained in his report.**** ■ 



f*) District I, 9 stores, Upper Iianhattan near entrance to George 

Washington Bridge; II, 23 stores, Upper East Side, 3rd Avenue to 
East Hiver, and 72nd to 93rd streets; III, 19 stores, West- 
Side iiidtown, 6th Avenue to Hudson, 14th to 42nd streets; IV, 16 
stores, Central Pari: West to Hudson, 72nd to 86th streets; V, 13 
stores, Central Park West to Hudson, 86th to 96th streets; VI, 
23 stores, Inwood and Port George, Harlem to Hudson rivers, 187th 
to 220th streets. 

Space does not permit the inclusion here of Mr. Getteli 's charts 
and tables upon the individual districts. 

(**) Chicago, Cleveland, Dallas, Denver, Detroit, Port Worth, Minn— 
eapolis, Hew York, Omaha, Philadel ihia, Pittsburgh, St. Louis, 
St. Paul and San Francisco. 

(***) Mr, Getteli 's report contains 12 tables (one for each item) 
showing the prices in the fourteen cities. Space does not 
permit the inclusion of these tables in this report. 

(****) Only his conclusions upon natters of present moment to this 
study appear here. 



)726 



-149- 

1. Even on identical, "branded, nationally-advertised products there 
was no retail nrice uniformity either in -the cit]' - of New York as a whole 
or in shopping areas within the cit3 r . However, the loss limitation pro- 
vision tended to reduce the range of prices. 

2. Wha.t uniformity existed cannot "be attributed to pressure of supply 
and demand, but to artificial causes and rigidities, such as refusal— to— 
sell activities of manufacturers, the code loss limitation provision, and 
the custom of setting prices ending in 9 or 5, 

3. The code minimum tended to draw prices toward it, and to caii.se more 
pric< s to go down than up. This tendency may have made the loss limita- 
tion provision a boomerang to the small druggist. With the code price 
located little above his merchandise cost, the small druggist could not 
afford a wholesale reduction of prices to, or substantially toward, that 
minimum, unless he obtained sufficient increases in volume to off-set his 
loss of margin, or "as able to change his merchandising methods to his 
advantage.* 



(*) Section IV of this Chapter contains evidence to show that some 
small druggists definitely felt the jinch of lower prices under the loss 
limitation provision, end apparently received no compensating increases 
in volume. 



9726 



•150- 



III.' S'ltlSI MjtfL _I^E^JlFi30,JJQA^- 3H JOSH CIS IBS 

Ai. early ERA stud-r entitled ,: A Survey of the Effect on the 
Retail Drag Trade and on the Consumer of the Loss Limitation Pro- 
vision of the Retail Drug Code", analyzes price data, from 30 stores 
and cost data from 29, located in the cities of Washington, Phila- 
delphia, Hew York and Albany. (*) The figures co ir er two periods: 
immediately orior to the March amendment (designated M t>re-code M ) , 
and during the existence -of the March amendment, between May 20th 
and June 5, 1934 (designated "during the code"), I n addition to the 
statistical survey, this study includes some field interview work 
in seven cities in Virginia, covering 47 stores. (**) Throughout 
the statistical part of the siirvey all prices and costs are reduced 
to indices with the code minimum lorice equal to 100; thus dis- 
counts and mark-ups appear at a glance. 

The survey contains some interesting charts showing the aver- 
age cost of the 50 items to retailers, "broken down by types of store, 
and further broken down into the "ore-code and code periods. Space 
does not permit their inclusion here, but in general they show that 
both before and during the March amendment, for all three types of 
store (independent, chain and department store), cost clustered prin- 
cipally at two points, one being from lfS to 3^ below the code min- 
imum and the other from 12$ to 18$ below it. Chains and department 
stores had more la.rge discounts than independents. The advent of 
the March amendment seems to have decreased slightly the number of 
larger discounts received by all types of store* The survey states 
that there was an increase in merchandise cost on an average of four 
items per store, ranging from zero to 33 percent of the code minimum 
per store; and a decrease on an average of three items per store, rang- 
ing from zero to 14 percent per store. The survey states that cost 
decreases were due to lowering of manufacturers' prices, and in- 
creases were due to a tendency of manufacturers and some wholesalers 
to eliminate special discounts. 



(*) This was a study of the Research and Planning 

Division of ERA, prepared by Miss Anne Golden, July 
7, 1934, and approved by Charles P. Roos. 

(**) The cities were: Alexandria, Fredericksburg, 

Richmond, Petersburg, Charlottesville, Lynchburg 
and Culpepper. 



9726 



-151- 



The survey also -presents the following table: 



AVERAGE PRE-CODE AMU DURPTG-COEE COSTS AND PRICES 





Pre- 


-Code 


During-Code 




Store 


Costs 


Prices 


Costs 


Prices 


1 


95.9 


108.4 


95.6 


108.9 


2 


92.0 


130.8 


96.6 


117.6 


3 


98.4 


132.8 


96.7 


130.1 


4 


91.3 


109.4 


91.1 


110.8 


5 


97.9 


133.5 


92.1 


127.0 


6 


86.9 


99.4 


87.4 


1C5.0 


7 


88.1 


98.5 


88.0 


102.9 


8 


91.9 


120.6 


95.8 


96.5 


9 


92.5 


121.2 


90.8 


112.4 


10 


88.6 


94.2 


83.6 


100.4 


1] 


79.3 


100. 9 


86.0 


102.5 


12 


92.4 


114.4 


92.4 


117.3 


13 


83.9 


110.8 


83.9 


113.6 


14 


Not reported 


117.3 


Not reported 


122.7 


15 


84.8 


100.8 


85.6 


108.7 


16 


92.3 


112.0 


98.7 ' 


117.0 


17 


87.7 


111.7 


871. 


116.2 


18 


92.7 


129.7 


90.9 


127.3 


19 


94.1 


128.6 


92.3 


124.6 


20 


99.0 


109.5 


95.7 


107.6 


21 


■99.9 


125.5 


98.7 


123.1 


22 


92,3 


. 124.4 


92.3 


124.4 


23 


97.9 


135.1 


95.6 


133.6 


24 


96.0 


127.4 


91.2 


117.6 


25 


94.0 


132.6 


92.5 


129.5 


26 


92.4 


113.4 


91.5 


114.8 


27 


88.0 


117.2 


87.6 


117.8 


28 


99.0 


110.8 


99.0 


112.1 


29 


86.7 


135. 2 


86.7 


108.1 


30 


85.2 


101.2 
, 116.9 


85.1 


105.8 


Average 


91.8 


91.6 


115.2 



For source see Page 150 of this report 



9726 



-152- 

This table shows that of the 29 stores reporting costs, six 
showed average increases, six showed no change, and 17 showed de- 
creases. Of the 30 stores reporting prices, 16 showed average 
increases, one showed no change, and IB showed decreases. 

With respect to prices, the survey states that decreases under 
the March amendment ranged from zero items by a pine board store 
to 40 items by an independent in a highly competitive neighborhood 
of Hew York. The number of increases ranged from zero to 20 items 
for a pine board store, and 21 items for an independent situated 
in the heart of a cut-rate neighborhood. The survey states that the 
effect of the March amendment in some instances was a wholesale 
reduction in selling prices by some retailers, but adds that the 
code minimum obviously did not effect retailers not situated near 
cut-rate stores. 

Both nine board and independent, according to the survey, raised 
"orices from below the code minimum to almost exactly the code minimum. 
The pine board raised prices from a pre-code average of 98.5$ of the 
code minimum to 102.94 of the code minimum; and the independent from 
100.8$ of the code minimum to 108,7$ of the code minimum. 

The survey goes on to state that, with but few exceptions, "orice 
increases found a counterbalance in Drice decreases caused either by 
reductions of manufacturers' prices or price reductions by the re- 
tailer. 

The survey states that it is not illogical to assume that many 
manufacturers' price reductions after the aporoval of the March 
amendment were a result of that amendment. Manufacturers of pro- 
ducts formerly cut low in price faced a loss of sales volume if 
their reta.il prices rose to the code minimum. To counteract this, 
they either had to- increase their consumer advertising or reduce 
their trices. Increased advertising might not have counterbalanced 
the low price appeal of private brands or competing standard brands. 

The elimination of the loss leader by the March amendment, ac- 
cording to the survey, brought about t™o distinct trends. One was 
a. broad reduction in prices to the code minimum on many items by nany 
retailers, Independents previously afraid to engage in price com- 
petition, did so without fear, knowing that the March amendment kept the 
practice within bounds. Chains, department stores and some independents 
turned toward private brands as leaders, reducing the prices on these 
to attractive levels. (*) 



(*) Neither the March nor September amend- 
ments established any minimum price on 
private brands. 



9726 



-153- 

An analysis of retailers' advertising of drug and toiletries 
products in Hew York newspapers between January 1st and June 1st, 
1934, showed that prior to the March amendment, 63^> of the products 
advertised were nationally branded, and 37;o were private brands. After 
the March amendment, 41$ were national brands, and 59fo private brands. 
Of 11 Manufacturers reporting on the effect of the March amendment on 
private brands, one foresaw an increase in his own private brand man- 
ufacturing business, two felt that there would be no change in the 
relation between private brands and national brands, two felt that 
there might be a change, but that it would not be important, and the 
rest either did not consider the problem important or were contemplat- 
ing changes in their own policies. 

The survey sees from the operation of the March amendment a 
definite shift of the burden of price competition from the retailers 
and wholesalers to the manufacturer. Previously, the manufacturer was 
able to maintain high prices to small retailers and wholesalers and 
grant large discounts to favored customers, and sit back and let re- 
tail price cutting take care of consumer resistance. The March 
amendment, however, checked retail price cutting, and the manufacturer 
had to giye up some of his own income to maintain consumer goodwill. 

At first glance the above conclusion seems to conflict with Mr. 
Gettell's statement that the depressing of prices toward the code 
minimum may have harmed the little druggist. In other words, it. may 
seem inconsistent to state that the loss limitation provision shifted 
the burden of price cutting from the retailers to the manufacturers, 
and at the same time to state that it increased price cutting to the 
detriment of the retailers. However, there is an explanation that 
may harmonize the two views. 

Prior to the code, price competition at retail had driven the 
prevailing price of perhaps 200 commodities below the later-adopted 
code minimum price. These items were the leaders used by chains 
and price cutters to draw trade. However, on the remainder of the 
10,000 or more products in the druggist's stock, the prevailing price 
remained higher than the code minimum. Price competition shifted 
from retailer to manufacturer, under the loss limitation provision, 
only on those products with previously prevailing prices below the 
code minimum. The manufacturer could not afford a sharp rise in the 
retail price of his product, and accordingly had to assume the burden of 
lowering its code minimum. The price cut had to come from his and not 
from the retailer's margin of profit. However, on products previously 
sold above the code minimum, the manufacturer had no cau.se to change 
his price structure. Retail price competition had moved up to a higher 
level, and had commenced to operate over a wide range of products thereto- 
fore touched by it only lightly. Prices on these products began to de- 
cend to the code minimum, a level below the total operating cost of small 
druggists. Here there was no shift of the burden of price competition 
from retailers to manufacturers, but rather the opening of a new field of 
retail price competition; and, whether' true or not, it would at least not 
be inconsistent to say that the small druggist had suffered from the new 
competition even while benefitting from the shift of the old to manufac- 
turers. However, in the absence of volume data, the actual effect on both 

9726 



-154- 



manufacturer and retailer remains undetermined. 

This survey concludes that, as a result of the March amendment, the 
range of mark-up was lorer, so that tnere. was less of the practice of 
making- users of "non-footballe-d" items pay for the loss leaders; prices 
were more uniform; consumers, at least in Washington, were becoming 
aware that tney could "buy as cheaply from their neighborhood stores as 
from downtown stores; the urge to substitute inferior goods had largely 
disappeared; and prices to tne consumer on many items had gone down so 
as to counterbalance to an unknown degree, the expected rise on others. 

IV. MISCELLANEOUS DATA: MATERIAL FROM NRA FILES 

In addition to the two studies digested above, one other outside 
study contains a table of interest to this discussion and there is a 
small amount of material in NRA files. "Retail Price Behavior", by 
John H. Cover, professor of Statistics, University of Chicago, (*) 
contains as one of its major conclusions the statement that with few 
exceptions ~ notably drugs, toiletries and sundries - prices advanced 
markedly between 1933 and 1934. Drug, toiletry and sundry prices 'went 
down in all cities studied. To support this finding, the study contains 
the following table;. (**) 



(*) Fublished by the University of Cnicago' Press 
(**) The survey covered 70 items in tne drug, ' toiletry and sundry 
classification. 



97?6 



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■ _ -156- 

HSA- files contain an important piece of evidence on the effect 
of the loss limitation provision in the form of a list of practically 
all manufacturers' price reductions fron the approval of the March amend- 
ments to October. 19.j4 * The list shows that 30" manufacturers lowered 
their code minimum prices on a total of 61 items, while only 6 manu- 
facturers raised their code minimum prices- on a total of only 20 items. 
Decreases ranged from 2fo to 45/^ and averaged 14$.' Increases ranged 
from 6/o to 29$ and averaged loc^/ot, A consumer buying one:-'of each product 
on the list would have saved roughly "6. 5$" oVe'r previous' prices. 
Practically all persons whose views are availiable, except the cut-raters, 
attributed the manuf acturers' price reductions to the loss limitation 
provision. The cut-rater group, at the puolic. hearing of June, 1934, 
warned of mandf acture.rs' price increases as, soon as. the. hearing terminat- ■ 
ed,** but these increases, did not materialize. j 

All evidence at hand indicates that prices to the consumer 
on drug and cosmetic products decreased on a large number of items, and 
increased on relatively few under the loss limitation provision. One 
of the reasons assigned for' this phenomenon', aside from' price reductions 
b'r manufacturers, tes the tendency of the code minimum price to attract 
prices to it from both directions. Since, under free competition, re- 
latively few items sold below the manufacturer's wholesale list price 
per dozen whiJLe a large number sold above, that price, the magnetic effect 
of the minimum caused more prices to go do -n than up. 

Witnesses for the proponents at the hearing of June, 19Z4, argued this 
proposition strongly***, and even a witness for the opponents used it as 
a basis for argument.' **** However, the proponents and the aforemen- 
tioned witness for the opponents had different purposes in mind. The 
former employed this argument as their top card in winning NBA' to the 
belief that their loss limitation provision was economically sound, but 
the latter urged that. the. depressing of consumer prices would eventually 
make the loss! limitation provision harmful rather than beneficial to 
small druggists, . 

Mr. Gettell in his report***** saw in the reduction of prices 
to the consumer under - t\\e'. loss limitation provision a serious question 
of whether the small druggist had not* sponsored a boomerang; and he in- 
dicated, that a study of the small druggist's volume under the provi^.on 
was'' needed . to solve the point. This Unit has been unable to nuke such 
a study, but 1IRA files contain evidence bearing on the quotation in the 

form' of letters from small aru r .,rists throughout -the -country 

(*)■' , Submitted to ERA'- on 10/50/34 by Geo. M 9 Gales; folder, 
'"•; .-: marked "Prices II", Deputy's files. Chapter V - Issues 
i. seen by Opposing Forces" - makes mention of this list* 
(**).. See Chapter V of : this Part - Issues 

Seen- by Opposing-Fcrces. Page .8.0 ' t 

(***) See Chapter V of this Part - Issues Seen 

by Opposing Forces. Page 80 .et. 

(****) : Ibid^ See also testimony of ;Q,.' Forrest 

Walker, transcript of June 7th, ;1934, page*s : 

89-117. [.'■•■ ; . 

(*****) Digested in Section II of this Chapter" ; 

Page 134 et.seq. ■ . '.. 



9726 



-157- 

During the existence of the March and September amendments, 
NEA received from small druggists & n d from local associations of small 
druggists 104 letters and telegrams expressing some form of dissatis- 
faction with the loss limitation provision*, a few specifically com- 
plaining that, under the provision, the minimum price tended to become 
the maximum, forcing little dealers to sell at their merchandise cost, 
Fifty-nine of these letters complained that the code minimum price was 
too low, and asked NHA to fix a percen L ,are mark-up, ranging from 10$ to 
27$. A batch of 22 letters was somewh^ : difficult to explain. '. 
Practically all were addressed to the president % snd all asked that 
something be done to protect the small druggists from predatory price 
cutting, but not one of the letters mentioned the loss limitation pro 
vision or the code. It was as if the writer did not know of their 
existence, yet many of the letters came from large cities where code 
activity was great. 

Excerpts from the following two letters are typical: One 
small druggist in Hew York City wrote to his local code authority,**., 
■the Drug Code and the Code Eagle have so far been such a disappointment 
as far as relieving our distressed conditions go that I would feel 
like a hypocrite to give the NHA any further lip service and display an 
Eagle as a sign of satisfaction with existing conditions when.... not 
an iota of relief has been granted us. 

"..... I was able barely (to exist in business prior to the 
code) .... thanks to the fact that most retailers (when standard 
merchandise was cut in price) threw most advertised items out of their 
windows, cut a few nationally known items low as leaders and concentrat- 
ed on own label or agency products that yielded a fair profit 

You could not have found more than 5$ of items (that were nationally 

known and cut in price) in the .... stores in neighborhood. 

The public .... had learned to accept .... non-advertised goods. 

"With the advent of the Code and the grossly unfair "Cost 
Price List' every retailer rushed like mad into filling his windows 
and counters with merchandise ... AT THE CODE PDICES. Even merchandise 
little known to the public and commanding a .... fair price before is 
now .... at code price ... the public is ... returning to demand brand- 
ed profitless merchandise ......" 

In transmitting this letter to UPA, the secretary of the local 
code authority stated that the letter reprr-sentated the opinion of a 
good many druggist in New York City and probably all over the country, 
and touched upon facts that were absolutely true. 

Another typical letter stated, -"... ..when your competitor 
sells at the price you pay for merchandise and still mace a profit of 
from 17$ to 40% .... it means only one thing, the small retailer 

(*) These letters are in the Deputy's files. 

(**) See sheaf of correspondence headed by 

letter of 7/20/S4, from Mark Merrell to 
Samuel A. Weiss; folder marked "Com- 
plaints; , Deputy's files. 

9726 



-158- 
has no chance "* 

These letters of dissatisfaction, standing alone, seem to tear 
out Mr, Gettell's feeling that the decrease in prices toward the code 
minimum may have hurt the small druggist more than he was "benefitted "by 
the prevention of loss leader selling,, However, the letters are 
counterbalanced somewhat by a few letters e;rpressing satisfaction with 
the loss limitation provision, and by the eagerness of druggists to 
spring to the aid of the provision whenever they saw a threat to its 
existence. 

As long as the loss limitation provision remained in quiet 
operation, few druggists wrote NRA to express their gratuitous 
appreciation of it. The files contained only 9 such letters** 

However, whenever it seemed to the druggist that the exist- 
ence of the provision was in danger, the2 r responded more strongly as 
individuals, and' their leaders fought to keep the provision as hard 
as they had fought to obtain it, Sach occasions arose several times 
during this course of MA when some higher official made a public 
statement that NRA was ready to abandon all price fixing. At these 
times, NRA received a total of 20 letters, half from local associations 
of small druggists and half from individual small druggists, all 
earnestly protesting any attempt to remove the loss limitation provi- 
sion from the code. In the spring of 1935, when doubts arose as to 
whether Congress would continue the NRA, drug trade leaders became 
especially active in support of the loss limitation provision. 
Letters from individual small druggists on this occasion were not 
numerous (there were 10 in all), but they responded to a questionnaire 
sent them by nfclie National Retail Drug Code Authority with the followed 
vote:*** 



Question ' ' Yes No 

Should Drug Code be continued? 90.2$ 9,8$ 
Has the Retail Drug Code 

been beneficial? 89.7$ 10.3$ 

Had it increased employment? 65.0$ 55*0$ 
Have wages increase? ' ' ' 71,8$ 28,2$ 

Have unethical practices ' ' 

been diminished? 81,5$ 18,4$. • 

Should some other form of 

control replace NRA, 12.2$ 37.3$ 

Should control of sdes- 

below-cost be continued? 92,7$ 7.3$ 

Are all other trade practice" 

previsions desired? 76 C) r/o 21.2^ 

(*) Jinton A.r£Pysl-tc ;*ta Ewtsitoat* B>/88£34; 
iHGonglaints" folder; Deputy's files, 

(**) All of these letters are in the Deputy's 
files, 

(***) See "meoranda" folder; Deputy's files, 
9726 



-159- 



Source - Unknown number of replies to questionnaire sent out 
"by 80 Local Code Authorities. 

Local retail drug code authorities and local drug associations 
ypre active during this period, sending letters to the National Code 
Authority, to members of Congress and to HBA'i and passing resolutions 
in favor of the continuance of the loss limitation provision. Even a 
few wholesalers and manuf acturers wrote USA or the President urging 
continuance of the Retail Drug Code and especially its price protection 
features. 

The national Retail Drug Code Authority, composed of the 
national leaders of the small druggists , prepared "briefs in defence of 
1IRA, in defense of UEIA' s treatment of the small enterpriser, and in de- 
fence of their loss limitation provision, and appeared at hearings 
on 1IRA before "both the Senate and House of Representatives. TEven^ 
during the quiet periods when no threat loomed against the loss 
limitation provision, these national trade leaders seemed staunch in 
their feeling that the loss limitation provision, though far from a 
perfect protective device, was more beneficial than detrimental to 
the small .druggist. 

In view of the continued faith of die trade leaders, it is 
somewhat difficult to know what weight to give the letters of dis- 
satisfaction from small druggists. 

There is a possibility that they represented a growing feeling in the 
ranks of the trade, not known to the leaders. On the other hand, 
these letters may have been the complaints merely of marginal dealers. 
It would require a more exhaustive sarvey of trade opinion or a 
statistical survey of the effect of the code of busiiB ss volume to 
settle the question. 

In addition to the loss limitation provision's effect on 
prices, its effect on the relative volumes of private brand andi 
national brand merchandise is important, though there is little material 
at hand to evaluate the trend. The early 1TRA report* pointed to the 
possibility that price cutters, relieved of the opportunity to sell 
nationally-known goods as loss leaders, ?/ere turning to private brands. 
Some of the cut-rate witnesses at the June hearing also foresaw this 
possibility and warned that it might result in a monoply for 1h e chains, 
since the small druggist could not afford to carry a complete stock of 
his own products.** 

(*) Digested in Section III of this Chapter, 
Page 150 et, Seq, 

(**) For the arguments of the cut-rate witnesses, 
see Chapter V. of this Part - Issues Seen 
by Opposing Forces. Page 104 et Sea. 



9726 



-160- 

Though there is no evidence one way or another upon the 
question of a monopolar, there is some evidence that chains and price 
cutters', and even a feu small druggists (who turned cut-rate under-' the 
code) directed their sales efforts toward private brands. Two members 
of this Unit interviewed the president of one eastern regional .chair. 
of drag stores, and put to him the following key questions What did 
you do, or interd to do, to preserve your economic status and your repu- . 
tat ion for low "'rices when' the loss limitation provision prevented you 
from cutting' the prices cf standard brands belo 1 " the manufacturer's 
wholesale' list price per dozen? The answer "as that the firm had re- 
moved its p.on. ' s* from its private brands, and had revised its advertising 
policy so that, instead of printing mere price lists of standard brands 
to drar custo -ers Jnto the store, the ..firm commenced to advertise the 
qualitjr and relatively x-cw price of its own brands* Thus the firm was. 
attempting to convi:%c'e the constmier that private brand substitutes were 
just as good or better than standard grands, and cheaper,, It is unfor- 
tunate that time and personnel did not nermit similar interviews, using 
the same .hey qu«stion s .rith other chain and cut-rate executives. 

The early 1~?£. survey covered drug scbore advertising in Hew 
York, and presented fur the f evidence that private brand sales efforts 
were increasing.** Opinion evidence of siajila? has cone to the Unit 
fro;: persons well acencginted with the trade, especially in hew York.*** 



(*) "Push money 11 - commissions to clerks to induce the sale of cer- 
tain articles. 

(**) See Section III supra, page 152. 

(***) in the Appendi", page S"V., is an account of techniques developed 
during the course of this study to obtain price information from 
newspaper advertising. The principal purpose of this account 
is to point the way for future surveys, the actual evidence 
obtained under the limited facilities of this study being too. 
fragmentary to permit the drafting of conclusions. 

The techniques 'cover advertised prices' of t T ' r o chains over a 
period commencing prior to the Larch Amendment and continuing 
after the Schechter 'Decision;' and also a measurement of the 
relative amount-' of advertising space given each class of com- 
modities. This type of survey, if completed, would show 
whether a given price control induced a shift in advertising 
from standard, to private brands; what changes the control 
race in price levels; effects of a price war on price levels; 
initiation of mice cuts in a competitive' situation; conpet- . 
ition between strhdards brands within t store! and' competition 
between standard and privet e brands within a store,, 



9726 



■ 161- 



CHAPTER VIII - DESCRIPTION OF LOSS LIMITATION 

PROVISIONS !":■ OTKEE RETAIL CODL3 

Though oho emphasis in this report is on the retail drug trade, a 
description of the lose limitation provisions in other retail codes has 
value ir. showing other methods used in attacking the problem of nrice 
cutting. The description of each provision, given below, is brief and 
is accompanied by a comparison with the loss limitation provision of 
the Retail Drug Code. 

I. TEE RETAIL TOBACCO C03E . 

The code for the Retail Tobacco Trade contained two separate price 
provisions, one annlicablc to the sale of cigars, and the other to the 
sale of cigarettes. The former, known as the "Ci. s ar Merchandising Plan", 
consisted of a detailed set of related provisions in the codes for 
manufacturers, wholesalers and retailers in the tobacco business. The 
nlan was lengthy and conrolicated, its more important provisions being, 
in substance, £s follows: 

1. Each manufacturer had to file with a Council (set up 
for the purpose) his retail orice and a full schedule 
of his discounts to jobbers, retailers, and chains. 
Such discounts could not exceed certain maximum per- 
centages set forth in the Plan. The manufacturer 
also had to mark his retail price prominently in each 
boy of cigars. 

2. Manufacturers selling direct to consumers had to 
abide by that part of the Plan applicable to re- 
tailers. 3ut manufacturers who sold exclusively and 
directly to consumers were not subject to the Plan. 

3. Jobbers and sub-jobbers also had to file with the 
Council a list of their discounts to retailers, and 
these discounts could not be greater than the manu- 
facturer's discount to the jobber or sub-jobber. 

4. If jobbers or sub-jobbers sold directly to the con- 
sumer, they had to abide by that part of the Plan 
applicable to retailers. 

5. Retailers could not sell ci ars at less than the 
retail -orice filed with the Council by the manufactur- 
er, ana could not give more than one pad of matches for 
each unit sold, or 5 pads per box of 25 cigars, or 

10 pads nor box of 50 cigars. However, when the 
retailer sold 10 to 34 units at a time to a customer 
(provided the units were not cheaper than 5<fi cigars), 
he could give the customer a 5,t discount from the 
retail price; and if he sold 35 or more cigars, he 
could give a discount of Gp. In the last-mentioned 
instance, the manufacturer could file with the Council 
a price ler box involving less than 8p discount; and 

9726 



— loc— 

if he did this, and also mar: red Hi"s "jot- price on the 
box, the retailer had to abide by this price. 

6. If t retailer s^ld to a consumer who was situated in 
a state requiring a tax on cigars (other than a tax 
payable by the manufacturer) , the retailer had to add 
the amount of such tax to the minimum price otherwise 
applicable, ■ unless the tax were paid by the consumer. 
This rule ap-olied even though the seller was outside 
the state (i.e., it applied to mail order sales). 

7. Retailers could Fell below the minimum trices mer- 
chandise sold as a bona fide clearance, or bona, fide 
discontinued lines of merchandise or imperfect or 
actually damaged merchandise or merchandise sold upon 
the oiaplete final liquidation of any business or 
merchandise donated for charitable purposes or to 
unemployment relief agencies. But to do this, the 
retailer hrd to put a strin label inside the ci & ar 
box statin fc the reason for selling below the code 
price* 

8. Retailers could not sell below the code price in- 
directly by givin fc premiums with cigars sold at the 
minimum price. Pads of matches were the exception to 
this rule, but the ivin^ of them was restricted, 

as mentioned above. 

9. li a manufacturer chan ed his retail irice or any of 
his disccunts en file with the Council, the new nrices 
or discounts became effective immediately, but dealers 
with stacks on hand at the time were privileged to 
dispose of these at the previous code minimum price. (*) 

The original basis for the Ci L ,rr Merchandising Plan was the custom 
of ci^ur manufacturers to declare the intended retail nrices of their 
oroducts. Cigars naturally fell into certain categories such as the btf: 
ci b ar, the 10^ cigar. Furthermore, the Bureau of Internal Revenue taxed 
cigars on the manufacturer's intended retail -irice. The cigar manu- 
facturer, during the degression, caught oet^een a rising cost of tobacco 
and a decreasing demand for his nroduct, offered larger and larger dis- 
counts to retailers to nromote the sale of his cigars. Makers of hand- 
made ci,_.ars, exnecially, offered large discrants to induce retailers to 
nromote their goods instead of ma.chi ne-m.?. de cigars with cheaner pro- 
duction costs. The result v;as that manufacturers of hand-made cigars 
had cut wages, and manufacturers of machine-made cigars lr.d cut em- 
ployees. In the retail branch of the trade, the fact that disounts to 
li.r^c ana small retailers v/ere unequal led to price cutting, causing 
the small merchant to clamor for -price maintenance. The manufacturer 
was not in favor of nrice cutting, since it diminished the aonarent 
value of his uroduct in the minds of consumers and made them think it 



(*) See Schedule I, Code of Pair Competition for the Retail Tobacco 
Trade. 

9726 



-163- 

was inferior in quality The Ci..ar Merchandising, Plan was an attempt bo 
solve all of these problems. 

The Plan ran into difficulties of administration after its approval. 
One retailer in Missouri secured an injunction against its enforcement 
in that state, arid from many ilaces throughout the country came con- 
sumer complaints based en the fact that the minimum quantity mrices to 
consumers (i.e., in lots of 10 or more cigars) ''.'ere higher than the 
previously prevailing retail prices, "his caused a decline in the 
consumption of lOp and higher priced cigars. Furthermore, difficulties 
arose in the technical administration of che plan. 7or example, the 
tax provision in some states raised the price of a v4 cigar to Gii, re- 
sulting in immediJ te consumer resistance. Some manufacturers refused 
to comply with the nlan at all. Efforts to revise it resulted in 
disagreement among the three branches of i;he industry, and when a pro- 
posed modification finally emerged from the discussions, the Schechter 
Decision intervened before ITHA could hold a hearing on it. (*) 

The code provision applicable to the sale of cigarettes was simpler 
ana seemed to achieve a much greater degree of compliance throughout the 
country than the Gi_, r Merchandising Plan. Apparently it met with the 
approval of-^practically all members of the trade, and derived aid from 
a favorable decision in the Philadelphia courts. The basis of the pro- 
vision wps the manufacturers' list "orice, a price existing by long cus- 
tom in the trade and amounting to $6.10 per thousand in the case of the 
four popular brands of cigarettes. Cigarette manufacturer- customarily 
allowed their direct customers (wholesalers and a few retailers) a 
discount from the list orice of 10S -dus 2$ more for cash, making the cost 
to these dealers SI. 076 per carton. Smaller retailers buying from 
wholesalers paid an average of $1.11 per carton. Because stores not 
dependent on the sale of tobacco products used cigarettes as loss leaders, 
the price sometimes descended as low as 9^ per carton, and a frequent 
cue orice was $1.00 per carton. Tobacco retailers, therefore, ur^ed 
upon HSA the need for some form of price protection. 

The provision first appearing in the approved code allowed the 
fixin^ of minimum prices only in the event of an emergency. (**) Less 
than one month after the approval of the code, the code authority pre- 
vailed, on NRA to declare the existence of such an emergency and to fix 
the minimum prices of cigarettes, in substance, at the following mark- 
ups above the manufacturer's list price: 

5 1/4$ when the list price was less than &5.00 nor thousand, and 
6 l/2','o when thelist price was over $5.00. On sales of more than one 
package, amounting to a total of 20^ to $1.00, the retailer could 
deduct 5\i from the minimum price, and on sales of more than $1.00, a 
disoount of 8$. This made the minimum prices on popular grands 13^ per 
package, two packages for 25<£, and $1.20 per carton; and on the 10^ 
brands, 10:' ner .ackage, two for 19k, and 95^ ner carton. The emergency 
order remained in effect for 90 days, being amended during that time in 
several particulars, one amendment requiring retailers to add the stamp 

tax to the minimum nrice in states with -:tamn tax laws. , 

(*) Source for above discussion: Preliminary Histroy of the detail 

Tobacco Code, prepared by Oliver P. T T ; dsworth, Assistant Deputy 

Administrator. 
(**) Part II of Article VI of the Code. 

9726 



-164~ ,. 

At the end of the 90 day period, 15L4 extended the emergency order 
for another 9Q d ys; find then a^ain for SO days more. Finally, in th© 
sprin fc of 1935, the tr-ue proposed makin^ the amer^ency order permanent, 
and after a hearing, ITILa did this by a code amendment . 

Though the emergency price provision of the code covered chewing 
tobacco, smolinj. tobacco and snuff, as well as cigarettes, NRA never 
declared on emergency with respect to the former products and did not 
include them in the new amendment. (*) 

Both the Cigar Merchandising Plan and the Minimum cigarette price 
provision in che Retail [Tobacco Code were somewhat similar to the loss 
limitation provision of the Retail Drug Code in their construction. 
Both were based on a manufacturer's list -jrice rather than on the invoice 
cost of the retail dealer. However, the drug provision oegged minimum 
prices, at the manufacturer 1 s wholesale list irice per dozen, a price 
almost equal to the small dealer's merchandise cost, while the minimum 
irice under the Cigar Plan w s the manufacturer's full retail price, con — 
siderably above the small dealer's cost, and the price under the cigarette 
provision, though based on a price comparable to the manuf actueer ' s 
wholesale list, was from 5 l/4 to 6 l/.? per cent above that nrice ( and 
about 13 1 above the average small dealer's cost of 11. 1^' Tor package). 
Thus both of the n obacco Code provisions llowed ? higher degree of 
price protection to the small dealer than the Drug Code provision. The 
Ci ar Plan seemed less enforceable and less effective from a 'oractical 
view >oint th n the Drug provision, while bh< cigarette clav.se, probably 
because of its popularity in the trade nnd cite fact that it covered 
relatively few items, wa.s apparently mor enforceable and effective. 



(*) Source for above discussion: Preliminary History of Retail Tobacco 
Trade. 



9726 



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II. TIZB Z5TAIL liOOKSSLKig.'S CCQ E 

The Retail Booksellers' Code, like the Retail Drug Code, was sup- 
plementary to the Retail Trade Code, having separate provisions and a 
separate code authority. Until NRA approved their supplementary code 
on April 13, 1954, the booksellers operated entirely under the Retail 
Trade Code and under its loss limitation provision based on individual 
invoice cost.* Their trade leaders contended that this provision was no 
protection to snail "booksellers who were troubled with loss leader sell- 
ing by department stores. In fact, they claimed, the department stores 
had cone to regard the Retail Code minimum price as the maximum and 
thus had cut prices even lower than before ERA. Consequently the book- 
sellers urged i\TRA to grant then either a separate code or a supplemen- 
tary code with a higher degree of price protection. 

Proponents of price protection argued that the department stores 
used their entire bpok departments as loss leaders, recouping their 
losses in other parts of their stores; and that the small booksellers, 
having no other items to sell, suffered accordingly. They stated that 
department stores handled only the fast-selling, popular books, leav- 
ing the slow-moving volumes to the small dealers who could not make 
enough profit on these alone. 

The proponents argued that the department stores could not and 
would not handle the book needs of the nation if the small dealers 
went oiit of business, and that the country's cultural life would suffer 
in consequence. This last argument found support from a number of pub- 
lishers. 

An argument that, perhaps, impressed NBA more than any other was 
that price cutting by a few large department stores was causing an 
actual decrease in the volume of distribution of new books. Small 
dealers, fearing price cutting on a book highly advertised in advance 
of its issuance, sometimes refused to handle it or ordered only one 
or two copies. This practice, according to the proponents, reacted 
on the publishers to the extent of deterring them from publishing 
some books where there was danger of them becoming loss leaders. 

To show that the department store was the principal source of 
competition, the proponents introduced the following percentage 
volume figures on the sale of books throughout the country: 

48$ by book stores. 

29$ by department stores. 

7$ by circulating libraries. 

5$ by drug stores. 
11$ by other outlets. 

* lot until April 5, 1934, did ERA add a 10$ labor mark-up to invoice 
cost. 



9726 



. -166- 

3y far the principal problems of the tra.de were concentrated in ■ 
ITew York City where, according to evidence received at the public 
hearing, book sales represented 30$? of the national volume; and on 
some particular books, as much as 50^ of tiie national volume. 

Apparently not daunted by the existence of NRA policy against 
most forms of price control, the small booksellers demanded full re- 
sale price maintenance in the form of a clause prohibiting the sale of 
any book below the publisher's published price. Such a proposal met 
with opposition Doth within and outside of KRA. ■ The Consumers' 
Advisory Board and Research and Planning Division within IDA objected 
strongly to the approval of any full price maintenance clause; and, 
outside HEA, the department stores, represented largely by the National 
Retail Dry Goods Association, fought the -proposal on the ground that it 
was uneconomic and gave publishers too much power to gouge the consumer 
or the dealer. Book clubs and subscription mail order houses admitted 
that the clause was a 'good one for the small bookseller, but did not 
want it to apply to themselves. 

The clause finally approved' was , in substance, as follows:* 

1« With certain exceptions (listed below) no bookseller 
could sell or offer for sale below the publisher's 
published price any book during the first six months 
after its publication, provided that if the book were 
published before July 1st of any year, the period of 
price maintenance extended until January 1st of the 
next year. 

2. After the end of the full price maintenance period 
specified above, no bookseller could sell any book 
below his invoice cost plus 10$, in accordance with 
the Retail Trade Code loss limitation -provision. 

3« Exceptions: 



(a) Books could be sold below the cost price as bona 
fide clearance or if actually discontinued, but 
before a dealer could make such a sale during the 
full price maintenance period, he had to offer 
the books back to his supplier at invoice cost. 
Other exceptions were damaged books and books 
sold on the complete final liquidation of any 
business. 

(b) Books could be sold below the code price to public 
libraries and school and college libraries and sim- 
milar institutions, but the code authority, with 
the approval of the Administrator, had power to 



* Section 3, Retail Booksellers' Code, 



9726 



-167- 
stipulate maximum discounts to such institutions!* ) 

(c) Sales to State government or their subdivisions, 

covered "by state law, were excepted from the code 
price. 

(d) Sales to employees of the bookseller for the em- 
ployees' own use were excepted. 

(e) Dealers could sell "bona fide publishers' remainders 
below the code price-; hut this exception did not 
apply to books manufactured especially for reminder 
s^le. 

(d) Legally appointed receivers or referees could sell 
below the code price to liquidate a business. 

The approved caluse was a compromise, meeting the approval of the 
Consumers' Adviser, Its purpose was to protect prices for the benefit of 
small booksellers during the initial period of consumer demand after the 
publication of the book; and also to protect prices during one Christmas 
season. Surveys of the book industry had revealed that the greatest 
public demand for books materialized in the first four or five months 
after publication, and also at the first Christmas season after publica- 
tion. Testimony at the hearing had also shown that department stores 
used as loss leaders mostly new books, and cut prices on them principally 
during this period of initial demand. As stated before, small booksellers, 
because of this loss leader selling, sometimes refused to handle or hand- 
led, only one or two copies of certain new books during this period. Thus 
the publisher and the consumer lost the benefit of wide distribution of 
the product during its most logical selling period. By completely eliminat- 
ing price cutting during the first six months after publication and during 
the first Christmas season, the franers of the code hoped not only to pro- 
tect small booksellers, but also to protect the publisher's volume of dis- 
tribution and eliminate his fear of publishing popular books. The clause 
permitted price cutting down to cost plus 10$ after the period of initial 
demand was over, but by that time small dealers had been able to sell many 
books, the publisher had gone safely through his best distribution period, 
and the value of the book to department stores as a loss leader had dwindled 
substantially. 

Because opponents of price maintenance had warned that publishers 
might manipulate their prices so as to gouge the consumer, or manipulate 
their discounts so as to reduce the margin of retailers, the approved 
code contained a clause setting up a Price Control Committee consisting 
of a nominee of the Consumers' Advisory Board of USA,, a member of the 
Booksellers' Code Authority, a member of the Publishers' Code Authority, 
and a member of the Authors' Guild of the Authors' League. This commit- 
tee's function was to investigate and report to ERA any instance of price or 
discount manipulation by publishers. If MA found that the publisher had 
unw irrantedly increased his price or decreased his discount, it had power 

(*) The code authority presented a list of such discounts to NSA for approval, 
but a public hearing on the subject produced so much opposition from 
liberries, that the code authority withdrew its request, and no maximum 
ciscounts were ever fixed during the life of the code. 

9726 



-163- 

to suspend the price provisions as to the offending "booh.* Records do 
not show any instance where the committee took action. 

Hie "booksellers' trade, with the exception of department stores 
and others who had on osed price maintenance, were enthusiastic over the 
code price provision. Apparently the opponents complied with it despite 
their objections, for KHA records contain only three instances of viola- 
tion, and all three were minor and quickly adjusted without dispute. 

After the clause had "been in operation for about nine months, the 
code authority sent a questionnaire to 47 publishers asking them if their 
sales volume had increased or decreased under the price provision. Of 31 
replies, only one showed a decrease in volume, and that was only 4$. 
The rest showed increases ranging from .004$ to 180$; .and the code author- 
it^ estimated an increase of about 15$ in the total book volume of the 
country. The department stores lost part of their volume by a shift of 
customers to small booksellers.** 

The ;orice provision in the Booksellers' Code, like that in the 
Retail Tobacco Code, was comparable to the loss limitation provision of 
the Retail Drug Code in that its basis was a fixed price, established 
by the manufacturer. However, the Booksellers' Code established a much 
higher minimum code price in relation to the small dealer's cost than 
did the Drug Code, and it is hardly probable that any prices decreased 
under the Booksellers' Code as they did under the Drug Code. The figures 
shoving that publishers' sales volumes increased under the Booksellers' 
provision are interesting and suggest the desirability of obtaining 
similar figures for drug and' cosmetic products. 



* Section 4, paragraph 2, Booksellers' Code. 

** Source for above discussion: Approved History of 
• the Retail Booksellers' Code. 



9726 



-Ib9~ 



III. The Reta il Food And Grocery Code 

The loss limitation provision of the Retail Food and Grocery Code 
was entirely different from that in the Ftetail Drug Code, having its basis 
in the individual grocer's merchandise cost instead of a fixed price es- 
tablished by the manufacturer. In the approved code, the clause provided, 
in substance, as follows:* 

1. No grocer could sell below cost plus a per- 
centage to cover labor expenses to be es- 
tablished by KRA and the code authority.** 

2. "Cost" meant invoice or replacement cost, 
whichever was lower, after deduction of all 
legitimate trade discounts exclusive of cash 
discounts for prompt payment. 

3. Cost also included transportation charges to 
the point of sale, when paid by the merchant, 
except transportation charges on hauls of less 
than 25 miles.*** 

4. A merchant could meet the price of a competi- 
tor on merchandise identical or essentially 
the same, if the competitor's price conformed 
with the code; but the merchant' who took such 
action had to notify his nearest local code 
authority.**** 



(*) Article VIII of the .detail Food and Grocery Code. 

(**) The labor mark-up was established at 6$, but not until almost 
3 months after the approval of the code. 

(***) This provision was amended twice, putting these charges, 
finally, on a cone basis. 

(****) IJHA later amended this provision so that a merchant could 
meet competition on merchandise which was "the same as to comparable 
competitive factors, such as weight, quantity, quality, pack and/or 
brand or packaging" if the competitor's price conformed with the 
code governing the sale of such product. The requirement of report- 
ing to the local code authority remained the same. 



9726 



? '-170- 



In negotiating for a code, grocers had argued that price cutting in 
their trade was injuring the small dealer in nuch the sane way as in 
other trades. In the grocery trade, howeyer, the original code' effort 
was toward a vertical Master Food Code covering ! manufacturers,' whole- 
salers and retailers and establishing inter— related trade practices gov- 
erning all three classes. The sroposed provisions submitted to the Agri- 
cultural Adjustment Administration* prohibited manufacturers from selling 
"below production cost plus a reasonable distribution charge, and prohib- 
ited wholesalers from, selling below the jrevailing market cost f.o.b.the 
wholesaler's place of 'business, plus a mark-up of 2 p. The provision 
relating to retailers prohibited sales bejow invoice cost on goods bought 
within 50 days of the date of sale, and replacement cost on .goods bought 
previously, with the addition of a 7-°$ nark-up in both cases. Transpor- 
tation charges to the point of sale were a part of cost, ffiiere a retail- 
er bought directly from the manufacturer his total mark-up had to be lOfo 
(7 x g$ retail mark-up plus 2rtfo wholesale mark-up). 

Though the food industry did not receive its single master code, the 
retail grocers achieved, in their approve*, code, at least the fundamentals 
of the loss limitation provision the" r requested. The approved code re- 
duced the requested mark-up to Sfo, and eliminate the provision that in- 
voice cost remained the code price base for only 30 days after the pur- 
chase of the goods. The grocers accepted without too much objection the 
redaction in their mark-up, but throughout the entire code period fought 
to change the definition of cost to accord with their originrl proposal. 
Under the definition in the approved code, a large retailer, buying on 
a rising market could stock heavily and, so long, as his stock lasted, sell 
at a code price equal to his original invoice cost plus 6fo. Under the 
original Master Food Code proposal, such a store, after 30 days, would 
have been forced to raise its price to replacement cost plus the mark-up. 
Such an arrangement would have benefitted small grocers who could not 
afford to buy heavily in anticipation of market price advances. Another 
difference between the approved code and the proposed Master Food Code 
was the failure of the former to require those retailers who bought di- 
rectly from manufacturers to add the wholesale as well as the retail, mark- 
up. The approved Wholesale Food and Grocer - " - Code required wholesalers to 
add a 2fi mark-up to their costs in determining the code minimum price, but 
this clause applied only to those enterprises qualifying under the defini- 
tion of a wholesaler. ERA ruled that grocery chains performing a distri- 
buting function to their several units were both wholesalers and retailers 
and had to add both 2$ and 6 c ,'o to their invoice costs; but this rule could 
not apply to large independents with onk r one store who bought directly 
from manufacturers but did not distribute to other retailers. The result 
was that, whenever a trading area contained such a large independent, the 
code minimum price was 2;o lower than it would have been under the Master 
Food Code proposal. Such an independent enjoyed no actual price advan- 
tage, since other retailers could meet hife prices, but the code minimum 
price descended even further below the small dealer's merchandise cost, 

(*) During the early period of code making, the AAA had jurisdiction 
over the trade practice provisions of all food codes and ERA had 
jurisdiction over their labor provisions. 



9726 



-171- 



The approved "Pod and Grocery Loss Linit^-ion Provision had a number 
of inherent limitations, and its administration was consequently trouble- 
some. In the first place, the code price was not a fined or certain amount 
on each item, hut depended on what the particular dealer had paid for his 
goods. The only way cou " liance officers could determine this fact was to 
examine the invoices of the .dealer , and if he refused to show them there 
was no means to comoel him. :1BA sometimes approached the dealer's supp- 
lier for such information, and though some were willing to divulge it, 
others refused to do so for fear of causing the dealer trouble. There 
was ample opportunity for dealers to manufacture invoices to suit their 
purposes or to use old invoices, contending that they represented the 
stock on hand when in fact that stock had been replaced long before at a 
higher price. 

The clause -oermitting merchants to meet ;->rices of competitors also 
caused trouble; for, though it permitted them in theory to meet only 
prices conforming to the code, there was no way for the merchant desiring 
to meet a price to det rune whether it conformed or not. 

Administrative difficulties with clearance sales, premiums and 
nrizc contests* under this code ''ere similar to those under the Retail 
Drug Code. "Another difficulty arose from the practice of grocery manu— 
f, cturers in giving free goods to retailers. Since, technically, these 
goods cost the retailer nothing he could give them free to the consumer 
if he chose, and this situation formed a loophole for price cutters. 

The office of the deputy administering this code claimed that the 
trade complied voluntarily with the loss limitation provision to a 
substantial extent; and that the large chains tried in good faith to 
abide by it. In srsite of this, however, there were so many stores and 
items involved that many connlaints of violations undiscovered. Seven 
cases under the loss limitation provision of this code went to MBA's 
litigation division for court action; and of these, the Division dropped 
five. Of the remaining two, the Litigation Division obtained a concent 
decree in one and lost the other on demurrer in court.** 



(*) The Food and Grocery Code contained a "clearance sale and 

premium clause similar to the one in the Retail Drug Code. See 
Chapter III of this Part - Page '. jfe 

(**) Source for above discussion: Report of Howard Jaffee, one- 
time Aide to the Deputy Administrator of Retail Food & 
Grocery Code. Mr, Jaffee made a detailed examination of 
the Deputy's files on the code. 



9726 



-172_ 

The loss limitation provision in the Retail Food and Grocery Code 
was -unlike that in the Retail Drug Code in two major respects; first, 
because its code minimum price was a shifting ^figure based on invoice 
cost, rather than on the manufacturer's list price, and second, "because 
its invoice cost basis was lower them the invoice cost of the small dealer. 
Ineffect, since all dealers could ra^et competitors 1 prices, the Food and 
Grocer;" provision established a code minimum price equal to the lowest in- 
voice cost in each trading area, plus 6?o m Thus the clause did not protect 
the small grocer from selling belo 1 ' his merchandise cost and granted him 
much less protection than the Drug Code provision. The Food and Grocery 
provision probably did to some extent stop extremely low price cutting. 
It appears, however, thct there was no means available for establishing 
definite, and non» fluctuating code prices in the grocery trade as in the 
drug, tobacco and booksellers' trades. Grocery manufacturers apparently 
did not sell on the basis of a list price as did manufacturers in these 
other trades, and prices of staple foodstuffs were, inherently subject to 
fluctuation. 

IV. Retail Trade Code 

The loss limitation provision of the Retail Trade Code was funda- 
mentally similar to that in the Food and Grocery Code, the wording in 
the tvro codes being almost identical. Until the druggists obtained app- 
roval of their i.Irrch amendment they had operated under the Retail Trade 
loss limitation provision and, as stated in Chapter III of this Part, 
had found it very unsatisfactory in point of both enforcement and price 
protection to small dealers. The approved clause provided, in substance, 
as follows;* 

1. Retailers could not sell at less than their net 
invoice or replacement cost, whichever was lower, 
after the deduction of all legitimate trade dis- 
counts exclusive of cash discounts, plus a. mark- 
up to be fixed later by ERA.** 

2. A merchant could meet the price of his competitor if the 
competitor's price conformed to the code and the mer- 
chant notified his local code authority. 



(*) Article VIII, Sec. 1 of Retail Trade Code. Sec. 2 of same 
Article provided for clearance sales and other occasions 
for sale of goods below the code minimum. Since Sec. 2 covered 
the retail drug trade and was quoted and discussed in Chapter 
III of this Part, it is- not repeated here. See Page 153 

(**) The mark-up was fixed at lOJo but not until 5/ months after 
the code's approval 



972G 



.. -1.73- 

There is no evidence relating to the effects or effectiveness of 
this provision. The trade seemed to consider it a relatively unimpor- 
tant part of their code in contradistinction to the importance', to the 
respective trades, of the loss limitation provisions in the Retail Drag, 
Retail Tobacco, Retail Book-sellers' ' and Retail Pood and Grocery Codes. 
The clause like that of the Retail Food and Grocery Code, had elements 
of unenforceability, difficulty of ascertainment of code price, and a 
price standard lower than small dealer's merchandise cost. It. may hpve 
acted as a limitation upon extremely low prices but even this res-alt is 
not certain, since there is no revealing record of the degree of compli— 
anc e ; • « 



> 



(*) lack of information prevents a mo're detailed description of this 
lues limitation urovision. However, the efforts of druggists 
to work under it for sov?ral months before they obtained their 
crro. provisions appear from the discussion in Chapter III of this 
Part. The source of information for the above discussion is 
' History of Retail Trade Code and "the e:ueri ! ence of members of- the 
Unit who had an active association with those administering this 
code. ' ' 



> 



% • 



9726 



-174- 

PARI III (A) 
STATE RESALE PRICE tiAIUTESTAlTCE LAWS * 
Chanter I. The Fair Trade Laws 



I» Contracts 

Resale price maintenance "by contract is now legal in ten states. 
During the five months from March to July, 1935, nine states passed 
laws modeled, after the California Act, The chronology of Pair Trade 
Law enactment follows: California, passed 1931, amended May, 1935; 
passed in March, 1935, Hew Jersey, Oregon, Washington; May, 1935, Iowa, 
Maryland, Hew York, Wisconsin; June, 1935, Pennsylvania; July, 1935, 
Illinois. 

The following sixteen states considered resale r ice maintenance 
legislation during 1935, hut the attempts at enactment were unsuccessful: 
Alahama, Arizona l/, Colorado, Connecticut 2/, Indiana, Michigan, Minne- 
sota, Missouri, Montana, Nebraska, Nevada, Oklahoma, South Dakota, 
Tennessee, Utah, and Wyoming 3/. The bills introduced in Missouri a.nd 
Minnesota proposed a resale price maintenance procedure known as the 
Pitch Plan 4/ which differs somewhat from the hills which have "been 
passed. A bill is pending in the- Ohio legislature. 

Sills are to be introduced in the following four legislatures now 
in session; Massachusetts, Mississippi, South Carolina and Virginia. 
The bill that died in the 1935 legislature was reintroduced in the spec- 
ial session of the Minnesota State Legislature. After passing in the 
House it died when the session ended. The Drug Associations of the 
seven following states — Alabama, Colorado, Indiana, Missouri, Oklahoma, 
Tennessee and Utah — declared at their conventions their intent to re- 
introduce Pair Trade bills as soon as their state legislatures convened, 
since such legislation had been defeated in the 1935 legislatures. 

The Druggists' Associations of five other states have resolved to 
introduce fair trade legislation at the first opportunity. This is the 
first time that such bills are to be proposed in the following states — 
Florida, Georgia, Forth Carolina, Texas, and West Virginia. 



1/ Passed by both Houses, vetoed by the Governor. . , 

2/ Connecticut enacted the Retail Control Bill after voting down the 
Pair Trade Bills. 

3/ The Alabama Bill and the amended Tennessee Bill died with the ad- 
journment of the Legislatures. 

4/ See Appendix, page 388 ^or text of the Pitch Control Plan. 

. * Prepared by H. S. Kant or and Anne Golden 

9726 



-175- 



lline of the ten Fair Trade Lavs nor in effect are practically 
identical. The Illinois l/ and Washington 2/ laws differ slightly. 
The Wisconsin law contains all of the provisions of the California 
law, and an additional section, the intent of which is to protect the 
consumer against "unreasonable prices." 

The Fair Trade law" all provide for contracts "between the pro- 
ducer 3/ 'and a reseller of a branded -product, wherein the price at 
which the product is to be sold is definitely fixed. The vendee in 
the first instance nay recontract with subsequent purchasers for re- 
sale, so that the .roducer is given the right to fix the prices which 
the consumer pays for the product. If the price of a product is set 
in such contract, selling it or advertising it for sale at a lower 
price is actionable by anyone injured thereby, whether or not the 
arice-cutter is party to the resale contract. 4/ 

Monopoly or restraint of trade by means of resale -.->rice contracts 
is guarded against in all of the laws now in effect. Such contracts 
may be entered into only on products that are in "fair and open competi- 
tion with other products of the same class made by others." Furthermore, 
horizontal agreements are expressly prohibited. Contracts may not be 
written between producers, between wholesalers or between retailers. 

The Wisconsin lax/ provides for the review of prices set in resale 
contracts, by the Department of .Agriculture and Markets, which has the 
power of cancelling the contract under the following circumstances: 



1/ The Illinois law arovides for 10 day notice to the manufacturer or 
primary vendor, .by vendee before liquidating his stock according 
to the exceptions permitted. These are the same as in the other 
states. 

2/ The Washington Law is an emergency measure expiring July, 1937. 

3/ With the exception of Wisconsin which does not include publisher, 

the Fair Trade Laws define "-oroducer" as grower, baker, maker, manu- 
facturer and publisher. (The Illinois law does not include sxiy def- 
inition of "producer.") 

4/ It is to be noted, however, that proceeding against a price-cutter 
who is not party to a contract is much more difficult, in view of 
the fact that most contracts set a fixed sum as liquidated damage 
for violation of contract. Proof and evaluation of damage may be 
difficult in the court action necessary in case of violation by non- 
parties. This provision may also be more vulnerable to attack on 
constitutional grounds than the provision governing conduct of 
parties to contracts. 



9726 



-176- 



( Subjection 7 (a), Wisconsin 113,25) 

"(7) (a) Upon complaint of any person that any contract 
containing the provisions referred to in Sud section (3) is 
unfair and -unreasonable as to the minimum resale price 
therein stipulated, the Department of Agriculture and Mar- 
kets may in its discretion serve by re; isterod mail upon 
the parties to said contract notice of the time and place 
for a hearing on said complaint, at which hearing said par- 
ties shall show cause why the said contract should not be 
set aside. If upon such hearing, the Department of Agriculture 
and Markets shall find that such contract is unfair and un- 
rcasonaole as to its. minimum resale price provisions, said 
Department may by special order declare such contract to be 
in restraint of trade." 

While the other laws provide only for remedy in case of violation 
of a contract price, the Wisconsin law makes it possible for anyone to 
complain against the "unfairness and unreasonableness" of the price it- 
self, to a body with definite authorization to set the price aside if 
it 'so decides after due consideration. Thus,_ Wisconsin alone gives the 
consumer a direct remedy for high prices, in the event that competition 
fails to operate freely, or brings about price adjustment very slowly. 
Under the other nine laws competition among manufacturers, — those mak- 
ing-branded goods, and this whole class competing with makers of un- 
branded or "private brand" goods — is relied on to safeguard the con- 
sumer. 

All of the Fair Trade Laws permit resale at less than contract 
price for clearance, foreclosure or other conditions of distress. The 
Illinois lav/ alone requires the seller_ to give ten days notice to the 
manufacturer, before selling at the reduced price. It is to be noted 
that purchasers who buy at distress sales and resell under normal busi- 
ness conditions are fully bound by resale prices set in contracts out- 
standing in the state in which they sell. 

i The Pair Trade Laws now in effect provide for exact stipulation 
of price, not for the setting. of a minimum price. The text of the 
Wisconsin statute includes comment on the fairness of the "minimum re- 
sale price therein stipulated." The contracts, however, are permitted 
to set the "price at which" the product is resold, l/ Sale at higher 
prices is not specifically treated in any of the laws, and the extent 



l/Hf. R. if, 72nd Congress, Tst Session /The Capper-Kelly Bill of~193l) 

permitted contracting for resale at "price or prices stipulated." 
The Oregon law of March 9, 1933, repealed in 1935 v/ith the passage 
of the new Fair Trade Law, permitted setting more _than _onc - _mi_niimjm 
price in rosalc price contracts. Such provisions alio?/ setting 
"ordinary" prices and "special" prices en articles under contract. 
It is tc oe noted also that the repealed Oregon lav/ permitted sale 
at more than the stipulated prices. 



372^ 



-177- 

to which prices will "be absolutely uniform en products for which con- 
tracts are written is therefore not absolutely clear. There is the pre- 
sumption, of course, that on popular items conpetiticn will "be so severe 
as to prevent any retailer from securing a price above the contract 
price. A retailer interested in switching a substitute product might 
well use even a slight mark-up over the contract price to facilitate 
the switch. This applies only to retailers who are not parties to the 
controlling contract, and may be possibility "en paper" only. 1_/ 

Difficulties may arise in the interpretation of the Fair Trade 
Laws, Section I of the Lav/ read in part as follows: (The California 
Lav; is used here as example. The others are practically identical 
with it in the section quoted; the Illinois, Washington, and \7isconsin 
laws differ slightly from the other ls.ws in wording): 

1. "Section 1. Kb contract relating to the sale or re- 

3. sale of a commodity which bears, or the label or content 

3. of which bears, the trade-mark, brand or name of the pro- 

4. ducer or owner of such commodity and which is in fair and 

5. open competition with commodities of the same general 

6. class produced by others shall be deemed in violation of 

7. any law of the State of California by reason of any of the 

3. following provisions which may be contained in such contract: 
9. 1. That the buyer will not resell such commodity ex- 

10. cept at the price stipulated by the vendor. 

11. 2. That the vendee or producer require in delivery to 

12. whom he may resell such commodity to agree that he will not, 

13. in turn, resell except at the price stipulated by such vendor 

14. or by such vendee." 

The laws define "producers" but do nojfc define "owner". The latter 
was probably included to cover: complex products, parts of which are 
made for the branding company; products made in their entirely for the 
owner of a brand-name; products made for a company which lias intensively 
advertised its firm-name. 

The problem is, whether or not anyone who has acquired title is 
permitted to write- the contract setting the resale price. This question 
arises because t-:e lav/ does not say "no contract between a p roducer and 
his vendee relating to...." 2/ but says simply "no contract relating to.." 



1/ Some contracting parties may, of course, attempt writing contracts in 
which the stipulated price is called the "minimum resale price." 

2/ The repealed Oregon Lav; did so specify; the new Oregon Law does not. 
The argument that the change evidences intent of the legislature to 
change the preceding status does not hold, because the old lav/ was 
precise and the new one is vague. If fee legislature meant to leave 
the way open for practices not contemplated in the repealed lav;, it 
should have sta-ted that fact "oy defining the new condition. If dis- 
cretionary power were to be granted to those administering the law, 
that fact should be stated, and the extent of the discretion defined. 



9726 



-178- 

It appears ratlier that the Oregon Law was replaced in order 
to remove the difficult conditions circumscribing procedure 
for redress in the old law, and to achieve uniformity with 
the California law, which was currently accepted as the model. 
Even the grammatically peculiar wording of Subsection 2 was 
copied. The old Oregon Law states: "2 That the vendee or 
producer require any dealer to whom he may resell such com- 
modity to agree.... 11 In the new lav/, the words "in delivery", 
are substituted for, "any dealer" exactly as in the California 
law — leaving, "to agree", without any subject. 



The wording appears to allow the initiating of contracts on any product 
which meets the stated requirements. 

If, in place of the words "the vendor" (line 10) the lav; read "a 
vendor" or "the first vendor tc make such stipulation of a resale con- 
tract" the meaning would be absolutely clear. If the words "the vendor" 
are so interpreted, it is clearly possible for anyone holding title to 
write a resale price maintenance contract on the product, provided the 
product itself meets the requirements of the law, and provided no one 
else has yet written a contract on it in the state. Obviously, in no 
case could contracts setting different prices for the same product be 
written in a single Fair Trade state: the price set in the first con- 
tract written would govern. However, if the producer, or the owner of 
the name by which the product is identified, has no desire to set the 
retail price and has therefore not written a resale price maintenance 
contract, it may be possible for any wholesaler in the states who has 
bought some of the product, to get the retail price for the whole state 
by writing a contract with any retailer. 

A producer opposed to resale price maintenance could break such 
an attempt only at considerable expense, namely, by opening retail 
stores in the state. This would involve not only state incorporation 
of fee company, but might include difficulties as to powers granted in 
the company's charter. Furthermore, even protesting, witliout actually 
offering competiting retail sales, would obviously put the producer on 
record as an opponent of resale price maintenance. Undoubtedly, some 
companies which are opposed do not wish tc make a public and unequivo- 
cal statement of their views. 

The foregoing interpretation of the Fair Trade Laws would also 
cover the action of wholesalers in originating resale price mainten- 
ance contracts for out-of-state producers. The producer has the right 
to suggest a resale price, although he cannot enforce it except by re- 
fusal- to-sell. If the wholesaler decides to write the suggested price 
into a contract with a retailer, it becomes the stipulated, enforceable 
price under the Fair Trade Law. This interpretation of the permission 
granted in the Law is very favorable to the wholesaler, because it ob- 
viates, for the producer, the expensive alternative procedures of state 
incorporation and direct contracts with retailers. Since the producer 
wholesaler link is informal, the producer's position in this set-up 
does not have firm legal foundation. 



9726 



-179- 



If the definition of " tlie'^ ve ndor " is any vendor nr the first 
vendor in the state, the preceding remarks hold. If "the vendor" is the 
first vendor of the product in its identified, marketable form, they do 
not. Since the producer is- not a reseller, "he" (3rd word, line 12) re- 
fers to- the producer's (or "vendor's", line 10) vendee. If the phrase 
"in turn" modifies the phrase "resell except at the -orice stipulated", 
a precedent stimulation is implied* This could be contained only in the 
contract betv/een producer and his vendee. The distinction made in -the 
words "vendee or producer" (line 11 ) and the use of the phrase "by such 
vendor or by such vendee" (lines 13 and 14) ap-oear further to identify 
"producer" and "the vendor" of line 10. The presumption therefore is 
that the producer is party to the first contract. The only case in 
which the producer need net be party to it is that in which -the producer 
is not named on the product — that is, he is anonymous as far as the con- 
sumer is concerned. In this case the product lies within the scope of 
the Fair Trade Laws only if the name of the owner is on it. The owner 
is-, then, the first vendor of the product in identified form and under 
the name by which it is publicly known. 

The presence of both producer's and owner's name on the product 
would not "clearly give either one the right to initiate resale price 
maintenance contracts. The act says "name of the producer or owner", 
indicating that one or the other would ordinarily take precedence as 
being the known and established name: the one whose name is intimately 
connected with the product initiates the -resale price maintenance con- 
tract. 

The choice offered in lines 10 - 14 is this: the producer's vendee 
may re-contract with his own vendee, even if the producer does not re- 
quire him to do so; and the producer's vendee may set the next resale 
price if the producer has not already set it. Since ordinarily the pro- 
ducer will set the retail price, the alternative is probably not impor- 
tant. It would give the producer control of dealer's margin but not of 
retail price. This might easily involve difficulties if the producer 
sold through more than one channel of distribution. 

In conclusion, it may be said that the greater probability attaches 
to the interpretation of the Fair Trade Laws as permitting initiation of 
resale price maintenance contracts only by the producer or by the owner 
of the name by which the product is known. Decision rests with the 
courts, l/ 

H • Type_s__of_ _Hesa_le T _ Price Mai ntenance Contract . 

Eesale price maintenance contracts now in use art of three general 
types. These are: (a) a contract between a manufacturer (or other pro- 
ducer) and a retailer covering one or more products of the manufacturer: 
(b) a contract between a wholesaler and a retailer covering one or more 
rf the products of a single manufacturer: (c) a contract between a 
wholesaler and a retailer covering all of the price maintained merchan- 
dise sold by the wholesaler to the retailer, and including the products 
of one or more manufacturers. 



l/ "pending court tests do not involve the ouestion of who may initiate 

a contract 

point. 
9726 



-180- 

The first type affords the direct celling manufacturer control over 
the price paid by the consumer,' and may tend to encourage direct sales 
to retailers. This type of contract involves the. greatest expense for 
the manufacturer. Before he can write individual contracts with re- 
tailers, he must incorporate within the state. This involves additional 
taxes and incorporation fees, besides the added bookkeeping costs. Even 
with the state incorporation of a selling company, there is danger that 
the Federal Court will declare the- price contracts to be in restraint of 
trade. 

The other two types of contract retain for the wholesaler his place 
in the distribution system and may be expected to exercise an influence 
against rapid change from wholesaler selling to direct selling by the 
manufacturer. Type (c), popularly known as the "omnibus contract," may 
give rise to difficulties if the competing products of several manufac- 
turers arc included in a single contract. The Fair Trade Laws require 
that the product which is the subject of contract be in "fair and open 
competition with products in the same general class produced by others." 
Situations may arise in which -an omnibus contract is regarded as tending 
to restrict competition through the inclusion in the same contract of 
competing products made by severs,!' manufacturers. Wholesalers are urg- 
ing manufacturers to use the omnibus contract in order to avoid the ex- 
pense and red tape of incorporating and of writing many separate con- 
tracts with retailers. 1_/ This type of contract, of course, is most im- 
portant to the wholesaler as a means of strengthening his changing posi- 
tion in the distribution system. 

More serious obstacles to price maintenance through ?;holesalers by 
producers outside the state are those of authorization and jurisdiction. 2/ 
If the contract is between -parties of diverse citizenship, it is directly 
in interstate commerce. 3/ Only if the wholesaling firm is agent for the 
producer, ■- - ■" or if the producer incorporates in the state, 
is the first contract within the scope of the state Fair Trade Law, De- 
spite the costs, 'many manufacturers have already incorporated selling com- 
panies in the state of California, in order to have the first contract on 
their products one between parties with California citizenship. While the 
number of state incorporations is much smaller in the states which have 
more recently enacted resale price maintenance legislation,- it appears to 



1/ Drug Trade News, July 8, 1935. Page 20 

2/ States have been neither uniform nor self-consistent in deciding 
what constitutes intrastate commerce. 

3/ Lawyers will perhaps argue whether or not the action under the con- 
tract is performed within one of the states. State court decision 
on the intrastate character of a transaction is subject to review 
by federal court. 



3726 



-181- -™ 



be increasing rapidly. 1/ Manufacturers doing a national or regional 
business have the precedent of California's experience on which to 
decide their course of action. Incorporating in a large number of 
states involves exoense for charters and may subject the company so 
doing to additional tax levies. For these reasons, and because the 
wholesaler can deal more directly with local retailers, manufacturers 
may be tempted to use omnibus contracts with wholesalers, hoping that 
a federal law will be enacted before any litigation arises on the ques- 
tion of interstate contracts. 

III. Administration^ o_f the F air Trade Laws 

In order to avoid prolonged argument on the evaluation of injury, 
all the types of contracts ncv. being rritten provide for the payment 
of liquidated damages for proved viol tion of a contract price. Re- 
tail druggists in a number of localities are planning to maintain funds, 
by contribution, for legal expenses. They eyoect wholesalers and manu- 
facturers to contribute to these funds. 2/ Drug retailers admit freely 
that they are tiie principal beneficiaries of resale nrice maintenance, 
and recognize that manufacturers might be unwilling to proceed against 
violators if the price-cutting continued on any significant scale in 
defiance "-of outstanding contracts, requiring large outlay for policing 
and litigation. 

One association of retail druggists has already established a 
policing committee, which is expected to spend all of its time check- 
ing up on the support of a number of prominent urug manufacturers, and 
more specifically, has secured their 'oromise of contributions toward the 
expenses of the committee. The letter of the association to these manu- 
facturers, mentions the expenses, suggests the contribution, and carries 
the thinly veiled threat of including in their policing functions that 
of seeing that the manufacturers' products "arc not put under the counter 
and forgotten." ZJ Chain stores are also participating in the policing, 
and are contributing to the expenses. 

I V . The ..Orqgon Fair .Trade Law of .1933 

The Oregon Law of 1935 differed from the Fair Trade Laws now in 
effect in two respects. First: The contracts permitted under the laiv 
of 1933 were spocifically stated to be contracts between producer and 
retailer, with optional intermediate contracts. Second: Sale at less 
than the price set in an outstanding contract was actionable by the 
producer only, rather than by an injured party; and it was actionable 
by the producer only on condition that he brought suit at the same time 
against all vendees of the commodity doing business within the county 
in which action was taken. This circumscription of redress made it 



1/ Drug Trade News, Volume 10, Numbers 12, 13, and 14. 

2/ Editorial "Cost of Using Fair Trade Contracts" — Drug Trade News, 
July 8, 1935, page 20. 

j3/ Southern California Retail Druggists Association. Ltd., has or- 
ganized a policing department. Drug Trade News, July 8,1935, 
page fi, col. 3. 

972fi 



•132- 



difficult for an injured manufacturer to proceed. The law did not 
even specify that only price-cutting vendees in the county were sub- 
ject to suit. Its ineffectiveness is readily understandable, 

V- The Pitch Flan 

It should be noted that not all of the acts which failed to pass 
were identical with those now in effect, Minnesota and Missouri voted 
on an act embodying the so-called "Pitch-Plan". This provides for the 
filing of prices with the Secretary of State, instead of contracting 
with resellers, such filing to constitute notice on all resellers. The 
Fitch-Plan differs, further from the Capper-Kelly Bill in that whila any 
injured party may enjoin a violator, only the maker of the product is 
entitled to damages. This plan is more characteristically a manufac- 
turer's plan, (The Pitch Company is prominent in the field of drug manu- 
facturing.) The Fair Trade Laws indicate the retailer's interest more 
clearly by allowing damage suits by any' injured party. The fact that the 
Fitch-Plan differs from those laws, probably served to lessen the support 
for the attempts at its enactment, (in Missouri, producer opposition to 
any form of resale price maintenance helped to defeat the bill.) The re- 
tail group lobbying for the F'lr Trade Laws is endeavoring to secure the 
passage of uniform legislation. 



9726 



-183- 

CHAPTEH. II - 0TK3H LEGISLATION OH RESALE PHICE 
NEW JERSEY 



In 1913, Hew Jersey enacted a statute permitting resale Trice 
maintenance 'by notice under certain conditions.* The statute pro- 
hibited specified practices, if these were cone "for the -ourpose of 
attracting trade for other poods." A manufacturer could therefore 
prevent the use of his product as a price leader by affixing to it 
a notice declaring such conditions as were covered in the law. The 
phrase quoted above was deleted in the amendment of 1915. This 
change made the law a general law permitting resale price maintenance 
by notice. Price cutting of any kind — not merely loss leader sell- 
ing — could be prevented by the manufacturer of a product. 

The law provided that violation of the terms contained in the 
notice was actionable by the manufacturer or other injured party. 
Damages could be awarded to the manufacturer, up to three times the 
loss sustained, at the discretion of the courto Award of damages 
to injured parties other than the manufacturer was not specified in 
the law. 

The Robert H. Ingersoll and Bros. Company brought suit on two 
occasions under this law. In 1915, the Court of Chancery of the 
State of New Jersey** ruled against the Ingersoll Company on the 
ground that the notice was too broad, end that it forbade a sale to 
which the act had no application. Suit was brought under the 1913 
form of the act. While the opinion rendered did not specify wherein 
the notice failed to meet the requirements of the act, it may be noted 
here that the Ingersoll Company's notice included, among others,- the 
following statements: 

1. That violation of an:" of the terms of the notice would 
render the violator liable to law suit for infringement 
of the patents covering the mechanism of the watch; and 

2. That jobbers were not to sell to anyone "designated by 
the manufacturers as objectionable." 

In 1917 the Ingersoll Company again brought suit.*** This time 
the Court of Chancery upheld the use of notice. The Court held: 



* 



See Appendix, Page 237, for the 1913 Law, and 
Amendments of 1915 and 1916. 



** Ingersoll v. Goldstein — 93 St 193 (1915) 

*** Ingersoll v. Hahn 101 At. 1030 (1917); 108 At. 128 (1918) 



9726 



-.184- 



lo That the Iry, in question was not repugnant to the 
Const ittit ion of the United States or to' that of 
the State of Hew Jersey, 

2= That the statute was a proper enactment under the 
police power of the State, ''oronoting good morals 
in business. " 

r 6 u That the statute did not interfere with interstate 

trade; and 

4. That the revised notice was in conformity with the 
terras of the statute™ 

In neither of thesi two cases did the Court rule on the propriety 
of that part of the In ersoll Company's notice which referred to inter- 
mediate sales: The company required all sales by wholesalers and jobbers 
to be made at prices stated in its schedules cov !rin " such transactions. 
'Ihese lists were not part of the notice attached to the package, and 
the enforceability of this requirement was therefore open to question. 
The defendants in both cases were ret; ill rs. 

This law has been practically inoperative. It is likely to at- 
tract a good deal of attention now, • in vie'; of the strong current 
interest in resale price maintenance. It presents what appears to be 
a workable and economical alternative to the contracts .authorized by 
the Fair Trade La . : 



II. COITUlCTIC UT 

Connecticut voted down the proposed Fair Trade Act aid shortly there- 
after passed the net' il Drug Control Act which is the enactment in 
state law, of the fair trade practice provisions of the Retail Drug 
Code. (*) Drug retailers are .gain prohibited thereunder from selling 
any product covered by the former Coce at l^ss than the "manufacturer's 
wholesale list price in dozen lots". This is ordinarily higher than 
the actual net purchase price of the retailer, and is therefore, a Com- 
promise between prohibition of sale below net cost and full resile 
price maintenance. 



Ill IDAHO . 

Another type of legislation ,T hich has a direct connection "dth the 
oroblem of loss leader selling of wiich resole nrice maintenance is 



(*) See Appendix, Pag< 5c , for text of the Connecticut Retail 
Drug Control Act.- 



S726 



•135- 



one aspect, is the act introduced in Idaho* (*) This act proposed to 
prohibit the sale of unrelated lines in drug'stores. TThile this act 
failed, and while the disruption it might cause in existing trade 
practices makes its passage highly unlikely, the solution it offers 
to the vexing' question of loss leader selling across retail trades 
is not fantastic. This type of regulation was actually in effect in 
Cuba prior to the separation from, the United States. It is an attack 
on sales of unrelated products V r a retailer in any given field. 
The Cuban restriction- was nob United to drugs* but included all re- 
tailing; no retailer was permitted to sell any product not covered by 
his franchise. (**) 

The Idaho proposal was impractical but the idea it was based on — 
prohibition of loss leader selling of. unrelated lines — is important. 
Many wholesalers have ma.de attempts at securing such prohibition. 
Retailers find the problem very troublesome, especially in cases in 
which a retailer finds his whole line or r, large part of it used as 
a, loss leader department in a c^ i ti tg department store. 

The Connecticut <l'aw treats loss leader selling on a much broader 
front than the Fair Trace Law:. It is hot limited only to the use of 
branded products as price leaders. Bulk goods and unbranded goods of 
standard quality are often used in exactly the same way as "'ell known 
branded merchandise, although much less commonly in drugs than in 
groceries. (***) Setting a price floor as is done in the Retail Drug Con- 
trol Act, does not completely cut off price competition in distribution. 
The uniformity of price established by a resale price contract may 
actually be a handicap to the manufacturer in distributing his product. (****) 



( y,: ) March 18, 1935. "A bill was passed by the Senate here (Boise, 
Idaho) which prohibits pharmacies, dispensaries, drug stores, 
or apothecaries where drugs, medicines, chemicals or poisons 
are offered for sale to operate a soda fountain or restaurant, or 
sell newspapers, magazines, books, pictures, electrical equipment, 
jewelry, leather goods, plumbing fixtures, automobiles, automobile 
tires, radios, furniture, typewriters, wearing apparel, groceries, 
stationery, hardware, cigars, cigarettes, tobacco, candy, caskets 
for burial, vegetables, refrigerators, slices, or shoe repairing." 
Drug Trade News, March 23, 1935, ITotes under ".Legislation." 

(**) Seligraan and Love "Price Cutting and Price Maintenance" — 
Appendix , Page 302 • 

(***) Ibid. Appendix , prepared ^oy Mr. Reavis Cox, page 303 et seq. 

(****) As for geographic uniformity, prices set in resale price 

maintenance contracts need not be the same for all Fair Trade 
states. Zone prices are no-? used in a number of industries, and 
may be the practice under Fair Trade contracts. 



9726 



•186- 



Resale price maintenance limits price competition on products' which 
are subjects of resale contracts, to the extent that only the maker 
may change the price. This makes it easier for a producer to gauge 
his market, hut it may he expected to result in reduced flexibility 
in the price system. It must be remembered, of course, that the Fair 
Trade laws do not require contracts to be written, but are permissive 
only. Furthermore, the highly adA^ertised branded goods — on which 
resale price maintenance contracts are in greatest demand — are in 
competition with readily available substitutes. 

There is, of course, a large body of state laws on price now in 
effect. Anti-trust laws and laws against secret or discriminatory 
prices and discounts have been passed in many states during the past 
forty years. A number of states have passed legislation aimed at 
chain stores. These have not yet been analyzed from the standpoint 
of ascertaining the present status of price regulation in the states 
and for the country as a whole. The economic significance of each 
type of price regulating statute, the. implications of independent 
state enactment in consideration of the widely varying degrees of 
interrelationship of local and national markets, and the postulates 
and mechanism of a unified price program 'require close thinking on 
a factual base. 



9726 



-18% " 
PAKE III CB) 
Till EXPERIENCE ir THE STATE OF CALIFORNIA 

CHAPTER I 

THE LEGAL HISTORY OF RESALE PP ICE i.AIHIEIIAUCE I:' CALIFORKIA 
^-^.—-j — ■ 

California and C a lifornians have Isng been famous for their willing- 
ness to experiment in numerous directions* The field of price stabiliza- 
tion is no exception to this general temper. In this review only those 
attempts that affect the sale of ordinary consumable goods at retail 
are to be examined; hence legislation in the agricultural field such 
as the prorate act Is excluded. The legislative attempts to introduce 
stability into the price structure of goods sold at retail have assumed 
three general forms: 

(1) the granting (»f the right of contract with respect 
to resale prices 

(2) the prohibition of discrimination in pricing 
(o) the prohibition of sales below cost. 

I. THER PERIOD PRIOR TO THE 1931 FAIR TRADE STATUTE. 

The Gartwright Act of 1007 is the anti-trust law of the State of 
California. It defined a "trust", and provided for criminal penalties 
and civil damages, and puriishment of corporations, person, firms, and 
associations involved in trust agreements. (*) Among the arrangements 
among member of the trade specifically prohibited as of the quality of 
trusts were: 

(1) Creating or carrying out restrictions in trade 

(2) Limiting or reducing the price of merchandise 

(3) Increasing or reducing the price of merchandise 

(4) preventing compeition in manufacturing, transporta- 
tion and Sole of commodities 

(5) Fixing any standard or figure whereby price to the 
public shall be controlled 

(6) Making or entering into or executing or carrying put 
any contracts, obligations or agreements of any kind 
or description binding the parties not to sell an 
article of trade below a common standard figure or in 
any way keeping the price at a fixed or graduated 
fig-are. 



(*) California Statutes 1907, Chapter 530.. 



9726 



-188- 

The avowed panose of the Act 'was to "promote free competition. " 
Obviously, prohibitions of the sort listed above clearly made arrange- 
ments for resale price maintenance unlawful. 

In 1909 the Cartwri,_.ht .-.ct was liberalized by an Amendment as 
follows: 

Sec. 1. Every such trust as is defined Herein is declared 
to be unlawful , against public policy a.nd void, provided 
that no agreement, combination or association shall.be 
deemed to be unlawful or within the.- provisions of this 
act, the object and business of which are to conduct its 
operations at a reasonable profit or to -market at a reason- 
able profit those products which cannot otherwise be so 
marketed; --■rovided farther , that it shall not be deemed 
to be unlawful, or within the provision of this act, for 
persons, firms, or corporations, engaged in the business 
of sellin. or rv nufactturing commodities of a similar or 
like character, to employ, form, organize or own any 
interest in any association, firm, or corporation, having 
as its object or purpose the transportation, marketing 
or delivery of such commodities. 

Sec. 3. A new section is hereby added to said act to be 
numbered section Jg and to read as follows: 

Sec. 2q. It shall be lawful to enter into agreements 
or form associations or combinations, the purpose and 
effect of which shall be to promote, encourage or increase 
competition in :. n; trade or industry, or' which are in 
the furtherance of trade. 

Sec. 3, This shall take effect immediately. (*) 

Twice, within three years following the passage of this Amendment, 
the Supreme oourt of .the Stfte held that, a manufacturer has the right 
to fix the resale price of his products. The first case was Grogan vs . 
Chaffee in 1909. Chaffee, the defendant, was.aretail grocer in Pasadena 
who h d purchased olive oil from Grogan, the plaintiff, under an express 
contract not to sell it below the price fixed by Grogan. Chaffee held 
the contract in restraint of trade and hence refused to abide by its 
terms. In its opinion, the California Supreme Court declared: 

"There is nothin t unreasonable or unlawful in the 
effort by s. manufacturer to maintain a standard 
price for his goods. It is simply e. means of se- 
curing the legitimate benefits of the reputation 

, which his product may hrve attained," (**) 

(*) California Statutes 1909, Chapter 353 

(**) California Heports, Volume 156, f. 611 



9736 



The second case was Ghiradelii V s Huns i eke r in 1912. This case is 
peculiarly significant because it involved a -wholesale intermediary bet- 
ween the manufactarer..anc the retailer. Hunsicker, a retailer, had pur- 
chased Ghiradelii chocolate from a wholesaler. The Ghiradelii Company 
at the time attached a label to its product with the following notice: 



ii 



I&iPORTABT IJQi'Ii 



"The grades contained in this case are sold on the express condi- 
tion made a part' of the consideration of the sale, whether same 
is made by the manufacturer or wholesaler, that the purchaser, if 
he retails them, will maintain our fixed retail price on these 
pods, and if he wholesales them he will do so subject to the 
same condition. The ac.es >tance cf these goods is an agreement 
not to retail them, under any circumstances for less -than the 
established price . 

"Our fixed minimum retail -rice on Ghiradella 'Ground Chocolate 
for the Pacific Coast is 30^ per 1 lb. tin and 80^ per 3 lb. tin. 

(Si ,ned") D. Ghiradelii Company." 

Kunsl'cker, the defendant, had full knowledge of this notice and 
purchased under this agreement, yet sold at prices below those stipula- 
ted. Eunsicker claimed that the Ghiradelii Company could not force him 
to maintain its prices because he did not deal with them directly. The 
Supreme Court, however, held otherwise, stating that a contract made 
expressly for the benefit of a third person may be enforced by him 
under Section 1559 of the Civil Code, -provided the contract is enforce- 
able. The Court held that this particular form of agreement was not 
unenforceable under the common-law or the Sherman Anti-Trust Act; like- 
wise that it die not violate the Cartwri . ,ht Act of the' State since its 
object was ,to enable the manufacturer to conduct his business at a 
reasonable profit. (*•) 

Thus, in intra-state commerce resale rice maintenance was lawful 
in California following the 1909 amendment to the : Cartwright Act. 



(*) 164 California 354 

It is interesting to note the interpretation' of the British 
Courts with respect to the rights of third parties to a con- 
tract in a case somewhat similar. In the case of Sunlop vs 
Self ridge in 1915, it was held that a manufacturer may have 
a right of action against ? contracting wholesaler, but not 
against a sub-purchaser, even though he had contracted with 
the wholesaler. The action would lie with the wholesaler as 
the contracting party. In this case, however, there is the 
difference that the product did not contain the notice of 
the conditions of sale as in the Ghiradelii case, although 
the defendant had contracted with the wholesaler. For further 
details, see 'Grether, L. T., Resale Price Maintenance in 
Great Britain, P. 260. 

9726 



-190- 
II. THE 1931 FAI3 TRALl] LA¥, Aii3 ITS ALiiiDkLIJT III 1933. 

Matters rested on. this basis, in California until the passage of the 
1931 Pair Trade Bill put the legal state of .affairs into explicit form. 
Without doubt one strong reason for the passage of this Act was the 
doubt that had been raised with respect to the constitutionality of the 
1909 Amendment to the Cartwri ;ht Act following the adverse decision by 
the United States Supreme Court in the Colorado case, Cline vs the Frenck 
Dairy Company , hay 51, 1C27. The Colorado Anti-Trust Act provided that 
combinations otherwise unlawful shall be lawful if the purpose is to 
obtain reasonable profits, on products not yielding reasonable profit. 
The United States Supreme Court held this invalid as a violation of the 
14th Amendment to the United States Constitution by denying due process. (*) 

Another leading factor in the situation was the fact that in 1S51 
the United States Kouse of Be ->resentatives passed- the Capper-Kelly re- 
sale price maintenance bill which then failed to reach a vote in the 
Senate. The California Fair Trade Law has often been called "The Junior. 
Capper-Kelly 13111" because it was the intra-state expression of the same 
legislative procedure. Since the California statute and its 1933 Amend- 
ment have" largely set the pattern for nine other states that have since 
passed similar laws and since there is a major movement at present to 
achieve the right of resale price maintenance piece-meal under State Law, 
it. is clear that the California Lav/ deserves careful examination. The 
1931 Act and the 1935 Amendment read as follows: 

"An Act to protect trade mark owners, distributors and the 
public against injurious and uneconomic practices in the dis- 
tribution of articles of standard quality under a distin- 
guished trade-mark, brand or name. 

The People of the State of .California ".o enact as follows: 

Section 1. ho contract relating to the sale of resale of a com- 
modity which bears, or the label or content of which bears, the 
\ trade-mark, brand or name of the producer or owner of such com- 
modity and which is in fair and open competition with commodi- 
ties of the same general class produced by others shall be 
deemed in violation of any law or the State of California by 
reason of any of the following previsions which may be contain- 
in such contract: 

1. That the buyer will not resell such commodity except at the 
price stipulated by the vendor. 

2. That the vendee or producer require in delivery to whom 

he may resell such commodity to agree that he will not, in turn, 
resell except at the price stipulated by such vendor or by su.ch 
vendee. 

Such provisions in any contract shall be deemed to contain 
or imply conditions that such commodity may be resold without 
reference to such agreement in the following cases; 
(l) In closir; out the owner's stock for the purpose of diccon- 

(*) 274 U. S. 445 - ' • 

9726 



-191- 



tinuing delivery of any such commodity. 

(2) When the goods are damaged or deteriorated in quality, and 
notice is given to the public thereof. 

(3) Ey any officer aetin under the laws of any court. 

S ection 2 . This act shall not apply to any contract or agree- 
ment between producers or between wholesalers or between re- 
tailers as to sale or resale prices. 

Section 3 . The followin : terms, as used in the act, are hereby 
defined as follows: 

"producer" means grower, baker, maker., manufacturer or publisher. 
"Commodity" means any subject of commerce. 

Section ~ . If any provision of this Act is declared unconstitutional 
it is the intent of the Legislature that the remaining portions 
thereof shall not be affected but that stick remaining portions 
remain in full force and effect. 

Section J . This Act may be known end cited as the "pair Trade 
Act." 



Approved May 8, 1931 
Effective August 14, 1931 



A.IhlDLZlIT 



An Act to add a new section to the "Pair Trade Act" to be numbered 
1-jr, relating to unfair competition. 

The People of the State of California do enact as follows: 

Section 1 . A new section is hereby added to the "Fair Trade Act" 
to be numbered 1-k and to read as" follows:' 

Section li. Wilfully and khowin ;ly advertising, offering for 
sale or selling any commodity at less than the price stipulated 
in any contract entered into pursuant to the provisions of 
Section 1 of this Act, whether the person, so advertising, offering 
for sale or selling is or is not a party to such contract, is un- 
fair competition and is actionable at the suit of any person 
damaged thereby . 

Approved May 8, 1935 
Effective August 21, 1933 

At this point no attempt will be made to discuss in detail the 
extent to which the 1931 law and the 1933 amendment were employed in the 
state. Likewise, no attempt will be made to discuss the more minute 
problems of interpretation arisin ' under the lav; . Rather for introduc- 
tory purposes, it will be adequate to examine the general nature of the 
law and the causes that have arisen under it and to review briefly its 
general application, In its 1933 form the law was a permissive statute 
allowing producers or owners of branded products to enter into contracts 
with resellers stipulating the prices at which the products, .are to be 

9726 



-192- 



resold. It is interesting to note that the law sto.tcs "that the buyer 
will not resell such commodity except at the price stimulated by the 
vendor" because thf majority ol contracts that have been issued specify 
minimum resale prices, not fixed prices. It should be noted also that 
exceptions to contractual prices arc made to allow (l) the closing out 
of an owner's steel: for the purpose of discontinuing delivery of a 
comuodity, (j) the sale of damaged or deteriorated goods below contrs.ct 
prices, (o) sa.le by an officer of s court of law. Very important is the 
fact that the lav; bolerates only vertical agreements; horizontal agree- 
ments are expressly prohibited. Finally, the application of the law is 
limited to trade~marked commodities "in 'fair and open competition with 
commodities in the same general class;" the presumption is that mono- 
polistic products would be denied the privileges of the statute. (*) 

In the period immediately following the passage of the 1931 Act, 
there were few ; d ' L n ] attempts at resale price maintenance in the 
State. (*) Among the resistances to its use without doubt was the decline 
of sales in the early stapes of the depression and the lack of organized 
pressure from th bail trades upon manufacturers. However, among the 
members of the trade it was felt that the prime reason for the absence 
of a serious, wide effort to operate under the Act was the tremendous 
difficulty of enforcing the lav.' as ■ permissive, contractual arrangement. 
The law made avail, ole no means of dealing with price cutters who re- 
fused to sign contracts and who, normally, had little difficulty in 
obtaining supplies outside the state, if local sources were closed. 

It was the 1933 Amendment which \ v.. the law its vitality and 
provided the pattern for the other states in the country. The effect 
of this amendment is to make price control "run with the goods" for it 
makes violations of contractual prices actionable "at the suit of any 
person damaged thereby," even though the violator has entered into no 
agreement with the producer or owner. Since the law is worded " wilfully 
and lznov/ingly advertising , offering for sale or "selling any commodity at 
less than the price stipulated in ar.y contract," the presumption is 
that the plaintiff must establish that the contractual prices have been 
called to the attention of the violator, hot only did this Amendment put 
vigor into the law, it by th s .. da m provided the prime dement for 
testing in the courts. To date there have been a number of superior 
court cases arising out of action taken under this amendment; one of 
these is now before the Supreme Court of the State and should be decided 
in February. 

III. RhVILl? CF CASUS ARISI . " DSIt r .':.:. LAW 

Up to November 1, ]. r ;S5, bhe writci had information concerning 



(*) The problem of the nature and moaning of fair and open competition 
in relation to its opposite "monopoly" is discussed below. 



(**) For-, details sec the discussion od the developments in the grocery 
ana drug trades below. 



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-195- 

thirty-onc cases that had reached decision or were in the process of 
litigation; in addition, a considerable number have been settled out 
of Court. Complete information is not available at this point over 
all these canes. Insofar as results are known to the writer, they have 
been as follows: One denial of motion for restrains order, one denial 
of motion for preliminary inj-onctiqn, eleven instances where preliminary 
injunctions were granted, four temporary restraining orders issued, 
five permanent injunctions ;r; ited (of .these, three likewise involved 
the awarding of jus meat of J.eJ.OO each). In short, in the cases to 
ITovcmb er I, 1335, there have been only two adverse decisions. 

Lengthy written statements of opinion on the part of the judges are 
not available for the majority of cases. Ah examination of the small 
number of detailed opinions issacd indicates the nature of judicial 

opinion. 



MAX FACTOR & COMPANY vs CLAhETCE G. KUHSMAil 



The two adverse decisions to llovermber 1, 1935 were handed down 
by Judge Emmet H. Wilson in the Superior Court of Los Angeles County. 
The first of these Ma:-: Factor & Company vs. Clarence C-. Kunsman , 
(October 18, 1933) is now a test case before the Supreme Court of the 
State and should be decided by February 1936. Kunsman, operating a 
drug store in Los Angeles, had refused to sign the price maintenance 
contracts of the Max Factor Company and its distributor, Sales Builders, 
Inc. and sold the products of the plaintiffs below the prices stipulated 
in contracts signed by many of its dealers. The plaintiffs alleged that 
Kunsman 1 s tactics were disrupting their system of contracts and causing 
other dealers to threaten the cancellation of their contracts. Hence, 
the plaintiffs, were applying for a temporary injunction to restrain the 
defendant from cutting prices. Judge Emmet H. Wilson, in denying the 
application, developed a line of reasoning which may be summarized as 
follows :(*) "The right of c manufacturer to determine the resale price 
of his product must be exercises if at all by contract. He cannot extend 
his control beyond his own sales, anc he cannot impose conditions which 
will follow into the hands of persons with whom he has no contractual 

relation"(*) "A covenant in relation to personal property binds 

only the one making it and his personal representatives, and does not 
run with the property like covenants relating to land." The it is stated 

that "one of the incidents of property is the right of alienation" , 

and that a statute may prohibit or seriously interfere with this right, 
or interfere with private business only under the police power. The 
argument is summarized as follows: "The sale by defendant of cosmetics, 
to which he has unencumbered title, at a price less than that determined 
upon by a contract between the plaintiffs and some other dealer, can be 



( * ) Opini on Ho . 3G3 , 00G 

(**) Judge Wilson cited at this point Dr. Miles Medical Company vs John 
D. Park & Sons, Garst vs Hall and Lyon Company, Bobbs-Merrill Com- 
v "' ■ pany vs -Straus, Simer" vc Q'Donne-ll . 

9727 



-194- 

no more detrimental to the riiblic safety, morals, -peace, health, or 
welfare than the sale of theatre tickets at a price hgreater than that 
chargedby the- thaatio Management , or than the issuance of trading stamps 
with sales of merchant!:'' se ." 

It necessarily' follows that Section lv of the Fair Trade Act is in 
violation of the Fifth and Fourteenth Amendments to the Constitution of 
California, in that it deprives persons of their property without due 
process of lav/ and without compensation, it abridges the privileges , - 
and immunities of citizens, it deprives them of the full and free use 
of restraint upon the alienation of property and upon contracts, and it 
is an trnlawful interference with private business. It is not a valid 
exercise of the police power and it is not for the protection of the 
peace, health, safety, morals, or welfare of the public." 

PY ROIL SALFS COliPAx'Y, IiTC . vs IHh PFP BOYS, et al 

The second adverse decision handed. dawn by Jud;;e Wilson was in the 
case of the Pyroil Salis Co: '.-any, Inc. y phc Pen Poys, Manny, Moo & 
J ack of California , July 10, 1934. 

The facts of this case are identical with that above and need not 
be reviewed. The plaintiff asked that the defendant be enjoined from 
selling the product at prices less than those stipulated in contracts 
between the plaintiff and other dealers. The unique element in the case 
arose out of the fact that counsel for the plaintiff and a mi c i curiae 
argued that the effect Ox the excision of the United States Sxipreme 
Court in Larch 1934 in the hew York Milk Case, (ifebbia vs hew York, 78 
L. hd. Ad. Ops. j63) is "Such that it it; necessary now to determine 
the constitutional questions in favor of the validity of the statute." 
Judge Wilson held that the conclusion reached in the Max Factor case was 
correct, and that the Hew York Milk case was not pertinent to the question. 
Judge Wilson's reasonin- with respect to the significance of the hebbia 
case cannot be su.a.iarizod more briefly than in his own words: 

"In the Ih.bbia case it wan pointed out that legislation controlling 
the milk industry in the interest of public health was adoited as 
essly as 18S2; that many eubseouent statutes had progressively 
placeel the industry -under a lar e measure of control; that 'save 
the conehict of the railroad.,-, no business has been so thoroughly 
regimented and regulated by the State of hew York as the milk in- 
dustry; ' that during 1932, due to the low mice of milk, the 
families of dairy producers became to impoverished that it was 
necessary to ivo state aid similar to that given to the unemployed; 
that the Production and distribution of milk was a paramount 
industry of the state, the dairy business yielding fully one half 
of the total income from all farm pro; nets, and affectin.^ the 
health and prosperity of the peopl#;# that the prevalence of unfair 
trade practices had lee 1 , to such a ctemcraliz-a.tion of prices as to im- 
thc creelit structure of the state, anc that the milk inelustry was 
affected by factors of instability which called for special methods 
of control. UPon a. re ort of -a.. le; irlativc committee setting forth 
these facts, a statute was passed c£rqa,tin£ the Milk Control Board 
with power to supervise and regulate, the eht-ire mill: industry of the 

9726 



-195" .-,. 

state, to make an investigation as to what prices would protect 
the industry and by official order to fix the minimum and maximum 
wholesale and retail prices to be charged, for milk. The Board was 
to continue until March 31, 193d, at which date it was to be deemed 
to be abolished. 

"The dissimilarities between the instant case and the Febbia case 
are at once obvious. In ITcw York, a legally constituted Board, 
after investigation as to conditions, fixed the prices of one 
product only, while here there is no provision for investigation 
or determination by any board or commission as to what would be 
reasonable or fair price for any comr.ioC.ity, hat the "oower is 
given to the producer or owner of every commodity bearing, a trade- 
mark, brand or na « to establish his own price, provided only 
that the article is in competition with other commodities. In 
Pew York the le islation was temporary, the Board haying been 
abolished on March 31, 1934, by the statute which created it, while 
here the statute is general and without limitation as to time. The 
lie?/ York statute applied .to only one industry which, for the reasons 
stated in the statute ana in the opinion of the Supreme Court, was 
affected with a public interest while our statute is all-reaching 
and all-embracing, applicable to every commodity bearing the trade- 
mark, brand, or name of the ^roeucor, irrespective of public interest. 
In the instant case none of the economic conditions are shown to 
exist or to have existed which ave rise to the "Jew York Milk 
legislation, such as the impoverishment of a large percentage of 
the inhabitants of the state, placing them upon state charity, the 
destruction of one of the chief industries, and the impairment of the 

credit and financial structure of the state. In pew York the 
prices were establish^;, for a commodity produced, sold and consumed 
in the state, a coi-oothty upon which both the prosperity ana the 
health of the people rested, but by. the statute here the manufactu- 
rer of any article may fix the price, no matter where it is produ- 
ced, and regardless of the dependence thereon of the prosperity or 
the health of the people. 

Pile.- 7IXIP''- hCT 1'GV LP., ddOlCJL 

"The effect of the ITebbia case upon price fixing legislation 
cannot be expanded into justification of any anfi all legislation 
either directly fixing prices or authorizing the same. Legisla- 
tive -Trice fixing is neither novel nor radical. The Supreme Court 
said no more in the Uebbi a ^.ase then that when a product is 
affected with a public interest or clothed with a public use, the 
price of the product may be fixed by law, thus extendin, . to the 
milk industry the same regulation that, in a long line of cases, 
beginning with I.Iunn yp I llinois (18 77), 94 U.S. 113, 24 L. Id. 77, 
ana continuing to date, had been iir d upon other businesses 
which, although not public utilities, were clothed with a public 
interest. Meantime the same court ,• Leld that the business of 
selling gasoline ( Till ia ms vs S tandar d Oil Com 'any , (1929), 278. 
U.S. 235, 73 L. hd. .387) and fc] s I - ss of manufacturing and 
selling ice ( F ew York State Ic... Ooi a any vs Lieh.iann (1932), 235 U.S. 
262, 7C L. 3d. 747) were not affected or clothed with a public 

9726 



-196- 

interest to such an extent as 'co justify or to sustain legislative 
regulation ox "'rices of gasoline or a requirement that an ice 
us huf ac t ur er p r o cur c a license. "(*) 

At the one.' of this opinion, Jiid, e 7/ilson stater", that "certain 
individual rights and personal liberties must be surrendered in or-..er 
that civilization may progress. To this end restraints are inroosed by 
law and -sustained by the courts." Then he ar : ued that "indiscriminate 
cut tin . of >rices below cost is economically unsoxnd and is demoraliz- 
ing and ethically unjust to those who ire maintaining good business . 
standards." ilext, he proceeded to draw an interesting simile ootween 
the maintenance of sanitation in matters of health and "sanitary econo**' ' 
mics," stating "the establishment and maintenance of samitary economics 
as well as sanitation in !iatters of health, is within the power of the 
legislature." His basis for throwing out the orescnt case in view of 
this opinion, was that in this case the orices were to be established not 
by the legislature tut by rivate parties. Furthermore since the wording 
of the' statute is "at a nice less than' stipulated in any contract," it 
would-be lossible for a single contract, even if made "with a small 
dealer in an obscure community" to establish the price for all dealers. 
In other words, Amendment 1-| el lows arbritary price fixing outside 
legislative control. 



VaXO PRODUCTS CO. Of CALI.'C .PIA vs SUhhhdf CUT ih.TZ 

BBUG CO. 



The first, and to date, most significant favorable decision was 
that Judge T. I. Fitspati-ick of the Superior Court of San Prancisco in 
the case of Y/eco Products Ccmoany of California vs 5rr.se t Cut Rate 
Drug Company decided, January 2-:,, 1934. 

The facts here are similar to the above. The Sunset Company had not 
signed a contract end had cut prices on Weco tooth brushes and dentri- 
fices which it had obtained throu h indirect channels, unknown to the 
Weco Company. The plaintifi alledged not only that this action caused 
other dealers to cancel and violate contracts, but that it led the pub- 
lic to believe the aroducts were not worth their nationally advertised 
prices, and that continuance would e.o "great and irreparable injury to 
the plaintiff." 

Among the more important elements of th o union of Judge Fifta*- 
patrick in the granting the temporary injunction which was asked there 
should be noted the following:. 

•The California pair Trade Act merely spreads upon the statute boohs 
the common law doctrine' previously ' enunciated in Grogan vs Chaffee and 
P. Ghiradelli vs Huns ichor . There is no problem of inter-state commerce 
involved. "The only ground, therefore, upon which the validity of the 
enactment here considered can be attacked is that its provisions consti- 
tute- an interference with the due process clauses of the State and 



{*) Opinion ho. 372,896 
f J726 



-197- 

Federal constitutions, and therefore an invalid attempt to exorcise 
the so-called police power." The i, it is Pointed out that the purpose 
of Amendment 1§ is to protect the contracts authorized by the Act. 
Judge Fitzpatrick stated that he found "no recorded opinion of either 
the Supreme Court or District Court of Appeals" in bhe State of 
California which toveched upon the precis; question involved." 

In addition to the factor of contract ri hts in relation to 
Amendment ih is th problem of tha protection of the goodwill of a 
business. To quote at length: 

"Quite aoart from the effect of Section ly in protecting 

contract interests is its protection of the cod will of a busi- 
ness, includie/ the rights deriving from distinctive trademarks, 
brands and labels. Plaintiff's comolaint reveals that the value 
of these identifying marks lias b< en established by a course, over 
a period of 7ears, of mannfacturj i£ articles or merit, selling 
them at reasonable 'irices, and extensively advertising them. 
The whole nrocess is ini rlockin , and, as the complaint further 
alleges, the ability to offer :thc >roducts to the public at the 
reasonable prices, nationally advertised, depends upon volume 
production and distribution, per a retailer, or anyone else, to 
destroy the benefits of this system of business by cheapening the 
product in the public mind - especially when this is done for the 
purpose of merchandising inferior products - seems inequitable as 
a matter of fact, and a statutory declaration having bhe effect of 
declaring it unfair competition is within the province of the 
State Legislature. 

"The Legislature of this State did not pioneer in the dis- 
cussed enactment. In Ineers oll ... 3ro . vs Hahne & Co ., supra, the 
Chancery Court in the 'State of New Jersey was called upon to 
determine the validity of an almost identical statute, being 
Chapter 107 of the hew Jersey Laws of 1915, and reading as 
follows: 

'It shall be unlawful for any merchant, firm or corporation 
to appropriate for his or their own use a name, brand, trade-mark, 
reputation or good will of any maker in whose product said merchant, 
firm or corporation deals, or to. discriminate against the same by 
depreciating the value of such products in the public mind, or by 
misrepresentation as to value or cruality, or by price inducement, 
or by unfair discrimination between buyers, or in any other manner 
whatsoever, axcept in case where said goods do net carry any notice 
"prohibiting such nractice, and excepting in case of a receiver's 
sale, or a sale by a concern going out of business. 1 

"The Hew Jersey court, in the two decisions bearing the 
above name, was considering a cause oi action almost exactly like 
that stated in the second count o. jlaintiff's complaint herein. 
Defendant Hahne & Co. was advertisin , selling, and offering for 
sale In ;crsoll watches at ^1.00, althou h the manufacturer had 
complied with the hew Jersey St; tute hy carruing upon its goods 
notices calling attention to the 31.35 retail price and advising, 



9726 



-198- 

in some detail, t] t selling watches for less «aH an unlicensed 
use of the nam< , traO.eme.rk, guarant 1 /, ■ /ood will, and selling 
helps of the manufacturer. 

"•The complainant sou lit a >reliminary injunction, and, in 
88 IT. J. Eq. 222, the bill in equity was held to state a. cause of 
relief, the court saying at page 223: 



'It is a f legislative function to establish public policy, and 
the public policy o"" this state has been, I think, with respect 
to the matter in question, settled by the statute hereinbefore re- 
ferred to . I do not find that statute repugnant to the constitution 
either of the United States or of this State. There was no obli- 
gation upon Hahne & Company to "ourchase the watches in question, 
nor was there any obligation upon the complainant to manufacture 
and sell them. If Hahne d. Company chose to purchase the watches 
in question with the notice attached, of which I must presume it 
had notice at the time of purchase, there is no injury done the 
done the defendant by compelling it to observe the provisions of 
the notice. As Mr. Justice Holmes said in the Dr. Miles Company 
case: 'I think that, at least, it is safe to say that the most 
enlightened judicial policy is to let people manage their own 
business in their own w -, unless the ground for interference 
is very clear . ' 

"An expression mon c .: . to the case at bar could hardly 
be made. Defendants in the instant case are alleged to have had 
notice of the contracts, kn '■■ that plaintiff's rights wore bein, 
invaded by tin ir actions, a, that pli intiff chos not to sell its 
us to retailers except those who would contract to maintain its 
reasonable prices and thus protect its good will. In the decision, 
in the sane cas , - ■ ; in 89 H.J. Da. 332, the Hew Jersey 
court supported issuance of an injunction, after hearing on the 
merits. Its decisions Cover, by citation and sound reasoning, the 
questions at issue in the instant case . The court comments at page 
336 as follows: 

'The proofs before me demons tra bh; b if defendant and 
others are permitted to pursue their iractice of price— cutting 
the business of complainant will be ruined and thereby the volume 
of interstate 'trade be reduced, or a method of distribution will 
have to be ado <ted which will greatly increase the price to the , 
consumer, which will necessarily result in reducing the volume of 
interstate traffic; that in either event competition will be 
effectively reduced. And to what useful purpose? So that retailers 
may make use of the trade name: and good-will established after exten- 
sive advertising, to the extent that the public have associated with 
the article a standard of value, to. fool the public into a belief 
that because a standard priced article can be sold at a cut price 
all other ,oods sold are similarly low priced - in other words, to 
defraud the public. ' n 

Turning to Federal law, Judge' Fitzpatrick states that in the Dr . 
Miles Medical Co. vs J elm D. Par]; case, it was the absence of statute 
that was determinative; and that the Ian uage of the opinion "most 



9826 



-199- 

strongly implies a different decision if the wrongs complained of were 
the subject of statutory prohibition. H Similarly in the case of 3obbs 
Herri 11 vs Strauss "the Oourst rested its:', decision solely mon the 
grounds that the copywright statutes did not provide for such a right 
and that the question was solely one of statutory interpretation." 

Finally, there are a number of Federal decisions "Upholding the 
right of parties to a contract to be free from third party interference, 
The following ca&< s arc listed as particularly comparable to case at 
bar: 

n 



11 



gh~jic vs Chica;o L St . Paul ;iy. Co., 151 U. S. 1, 38 L. 3d. 5o^ 
; Ilashvil K C. dSt. L. \y. Co . "vs McConnell et al..,,82 Fed. 6o 

"- je Co ., iC-9 Fed. 
Fed. 794 (1904); 
fl90G) ." 



".-qi;ic vs oiiiea ,o cj su rau.x Lty . ou ■ , j-.ji u. o. x, e^ 
(1394); Uashvil K C. &St. L. \y. Co . "vs hcCo nrall et al.., 
(1397); Tabular h i vet d 5 'cud Co. vs Factor 3oot -and Shoe C 
824 (1908); Dr. Miles hedical Co. vs Goldthwaitc , 133 Fed. 
Dr. Lliles heaical Co. vs Jr,,.iuS Dru, C o., 149 Fed. 838 (IS 

On tho oasis of his review of State and Federal lav/, Judge Fitz- 
Patrick then concludes; 

"Careful search among the reported decisions of the appelate 
courts _pf this and other states, and of the federal courts, 
reveals no decision declaring a statute of the type here involved 
to be violative of due "process or any other constitutional pro- 
vision, nor to be an unjustified exercise of the so-called state 
police power." 

The legal review culminates in the following economic and social 
thesis: 

"This court can and does take judicial notice of the fact that 
the price-cutting of the type complained of in plaintiff's com- 
plaint not only undermines lawful rights and interest of the plain-* 
tiff, but jeopardizes the very economic existence of hundreds of 
independent retail dealers seeking their livelihood within the 
territorial jurisdiction of this court. In these days of economic 
adjustment and progress, it is particularly important that the 
courts do not fail to regard the salutary principle of constitutional 
law that the legislative body is presumed to be guided by proper 
considerations of public policy and that the will of the people as 
expressed through their duly elected representatives shall not be 
Interfered with unless it very clearly appears that there has been 
a capricious or arbitrary abuse or legislative power, 

"As was said by Mr. Justice Holmes in his prophetic dissent in 
Dr. Miles Medical Co.' vs John D. Park & Sons Co . , sup r a : 

"There is no statute covering the case; there is no body of 
precedent that, by ineluctable logic, requires the conclusion to 
which the court has come. The conclusion is reached by extending 
a certain conception of ;ublic policy to a. new sphere. On such 
matters we are in perilous country. I think that at least it is 
safe to say that the. most enlightened judicial policy is to let 
people manage their own business in their own way, unless the 
ground for interference is very clear. What, then, is the ground 

9726 



-200- 



"upon. which we interfere in .the present case? Of course, it is not 
the interest of the producer-;. Up one, I jutige, cares for that, 
It hardly can be the interest of subordinate vendors, as there 
seoms to be no particular reason for preferring: them to the: origi- 
nator and first vendor of the profuct. Perhaps it may be assumed 
to be the interest of the consiunors and the public. On that point 
I confess the.t I an in a minority as to larger issues than are 
concerned here. I think that we greatly exaggerate the value and 
importance to the >ublic of competition in th^ u'oducticn of an. 
article (here it is on!*/ distribution) as fixing a fair arice. 
What really fixes that is the competition of conflicting desires. 
We, none of us, can have as much as we wait of all the things 
.that we .want.- Therefore, we have to choose. As soon as tho price 
of something that we want .goes' above the point at which we 'are 
willing to give up other things to have that, we cease to buy it 
and buy something else. Of course, I am speaking of things that 
we can L et alon ^ without. There may be necessaries that sooner or 
later mist be dealt with lik short rations in a shipwreck, but 
they are not Dr. Miles' medicines. With regard to things like 
the latter, it seems to me that the point of most orofitable 
returns narks the equilibrium of social desires, and determines 
the fair price in the only scr.se in v.hich I can find meaning in 
those words. The Dr. Miles U dical Couroany knows better than we 
do what will enable it to do the best business. We must assume 
its retail price to be reasonable, for it is so alleged and the 
case is here on demurrer: so I see nothin" to warrant' assumiri" that 
the public will not be allowed to carry out its plan. I cannot 
believe that in the Ion;, run the public will profit by this court 
permitting lenavos to cut reasonable prices for some ulterior pur- 
pose of their own, and thus to impair, if not to destroy, the 
production and sale or .articles which it is assumed to., be desirable 
that the public- should be able to get." 



GSIIDRAL CIGAR CO.. Il.'C . vs a TILE DRUG liARkfT 



- The second favorable decision to be examined in some detail is 
that of the General Cigar Co* Inc. vs The Drug , Market (September 13, 
1934) in the Superior Court of Los Angeles County, Judge Isaac Pacht 
presiding. The plaintiff, it was held, was entitled to a permanent 
induction. 

The opinion of Judge Pacht has three prime aspects; a reliance 
upon (.1) the hew Jersey cs.se of Ingersoll vs Hahne c : Ccmaany(*) 
(2) the Supreme .Court decision in the Hew York I.Iilk (llebbia case,(**) 
and (3) an economic argument which aims to demonstrate that the general 
welfare is sufficiently involved to justify action. under the police power. 



(*) cf Judge Pitzpatrick above 

(**) cf Judge Wilson in .the Pyroil case 

9726 



-201- 

It is unnecessary to review Judge Pacht's use of the Hew Jersey case 
as nothing new is added. However, his judgment with rerrect to the Ilebbia 
case is exceedingly interesting by wry of contrast with that of Judge 
Wilson. For the "due process" • argument Judge Pachf finds" complete 
answer in the language of Justice Roberts in the Ilebbia case," as 
follows: 

"So far as the requirement of due process is con- 
cerned, and in the absence of other constitutional res- 
triction, a Estate is free to adopt whatever economic 
policy may reasonably be deemed to promote public wel- 
fare, and to enforce that policy by legislation.^adaited 
to its purpose. 3fhe courts are without authority either 
to declare such policy, or, when it is declared by the 
legislative arm, to override it. If the laws passed are 
seen to have a reasonable relation to a proper legisla- 
tive purpose, and are neither arbitrary nor discrimina- 
tory, the reouirements of due process are satisfied, and 
judicial determination to that effect renders a court 
■fnnr.tas _of f icio . "whether the free operations of the 
normal laws of competition is a wise and wholesome rule 
for trade and commerce is an economic question which 
this court need not consider or determine.' northern 
Securities en. vs. United States. 193 U.S. 197,337,338, 
48 L. Id 679, 700, 701, 24 S. Ct. 436. And it is equally 
clear that if the legislative policy be to curb unres- 
trained and harmful comoetion by measures which are not 
arbitrary or discriminatory it does not lie with the courts 
to determine that the rule is unwise. With the 
wisdom of the policy adopted, with the adequacy 
or practicability of the law enacted to forward it, 
the courts are Both incompetent and unauthorized to 
deal. The course of decision in this court exhibits 
a firm adherence to these principles. Times without 
number we have said that the legislature is ".rimarily 
the ,jud. e of the necessity of such an enactment, that 
every ->ossible nresumf ion is in favor of its validity , 
and that though the court may hold views inconsistent 
with the wisdom of - the law, it ioay not be annulled un - 
less -oalr>ably in excess of legislative power, (italics 
are Judge Pacht's) . 

"The law-making bodies have in the past endeavored 
to promote free competition by laws aimed at trusts and 
monopolies. The consequent interference with private 
property and freedom of contract has not' availed with 
the courts to set these enactments aside as denying 
due process. Where the public interest was deemed to 
require the fixing of minimum prices, that expedient 
has been sustained. If the law-making body within its 
sphere of government concludes that the conditions or 
practices in an industry make unrestricted competition 
an adequa.te safeguard of the consumer's interests, 
produce waste harmful to the public, threaten ultimately 

9726 • : ' 



"202- 

to cut off the supply, of a coianOdity needed by the public, 
or portend the destruction of the industry. Itself, appro- 
rjriate statutes passed in an honest effort to correct 
the threatened consequences may not' "be set aside "because 
the regulation adopted fixes prices reasonabljr deemed by 
the legislature to "be fair to those engaged in the indus-' 
try anc" to the consuming public. And this is especiallsr 
so rliere, as here, the economic maladjustment is one of 
price',' -.Thick threatens ham to the mroducer at one end of 
the serin sand the consumer at the other, The Constitution 
does not secure to any one liberty to conduct his "business 
in such a fashion as to inflict injury upon the -public at 
large, or upon any substantial group of the people." (Italics 
are Judge P adit's). 

And again at p. 571: 

5?he Constitution does not guarantee the unrestric- 
ted privilege to engage in a business or to conduct it 
as one pleases. Certain kinds of business may be pro- 
hibited; and the right to conduct a. business, or to pur- 
sue a calling may be conditioned, Regulation of a 
business -to prevent <r. T aste of the State's resources nay 
be justified. And 'statutes prescribing the terns upon 
which those conducting certain business may contract, 
or iaposing terns if they do' enter into agreements* are 
within "the state's competency," 

Finally, there is the economic theory which Judge Pacht employs to 
support his belief that the general r-elfare is . sufficiently involved 
to justify recourse to the "use of public po^or. To quote: 

"The California Fair Trade Act was enacted in 
response to a gro-.-ing and pro jqnderating sentiment 
against business practices which, have had a catastro- 
phic effect itpoji large numbers of small and indepen- 
dent retailers.-; It is in evidence before me, and no 
doubt brought to the attention of the : legislature, 
that the underselling" of. branded and trade-marked 
articles" "has- resulted in the bankruptcy of hundreds 
of small independent dealers, lea.viu:' - : in its walce un- 
employment and economic distress. 

"Justice Holmes in Dr. miles i edical Co. vs John 
D. Park , 220 U.S. 373 (55 L. Ed. 502) denounced price- 
cutting as the practice, of knaves who resort to it, 
not for the purpose of benefitting, the consumer (as 
claimed) but for their ov.n selfish- and -ulterior pur- 
poses. The problem has engaged the attention of 
economists, trade associations, .Chambers Pi Commerce, 
jurists, state legislatures and. the United States 
Congress. (See "An Ideal Charter for Trade Associa,- 
tions" - an address delivered ~bj Feiker before American 
Trade Association Executives; "Freedom of Contract" by 
FarnsTTor'th L. Jenkings, tol.' 22 ITo. 6 Cal. Lav Review 
(September 1934); Predatory Price Cutting as Unfair 

S726 



-SOS- 
Trade. 2?' ■•Harvard Law Review, 133 Fisher Flouring 
luills vs. Swaiison , 137 Pac . (Washington) 144; and the 
very lucid and interesting observations of G-iloer H. 
Montague in "Business Competition and the Lav;"). The 
pernicious and destructive effects of price-cutting 
are well set out in a very comprehensive comment on 
"Retail Trade Regulations and Their Constitutionality" 
22 Cal. Lav,' Review, P. 85 where the following pertinent 
observations are madet 

"The part which retailing as the agency of distri- 
bution has played in causing this economic emergency, 
and the part that it must play in bringing about a more 
balanced economic system is closely interwoven with the 
factors of production, labor and capital. These, unhanw 
jeered by any "paternalistic" control, have together spun 
themselves into an economic whirlpool - a circle which 
any one factor alone was afraid to try to break, and 
which was drawing all of the, prices, wages, and profits, 
evic. loner to the vortex of economic chaos. The problem 
is not a simple one and the complicated operation of the 
factors involved is not completely understood. But 
this we "have seen: unbridled competition among pro- . 
ducers and distributors leads to price-cutting; the 
larger distributor, in order to retain his profit 
shifts the loss of the price-cutting upon his employ- 
ees, or if they be farmers, bear it theselves. The 
theory that production will automatically limit itself 
when the entrepreneur cannot make a reasonable profit 
has failed as an effective safety brake, for a glutted 
labor market permitted the cost of production to be 
pressed. down to unbelievable levels with the loss taken 
from the wages which should have gone, to labor . But 
as the farmers and the laborers constitute the major 
portion of the consuming public, buying power decreased 
as their return was diminished, and the competitive 
race among distributors became still keener, forcing 
prices, and, in their wake, wages, still lower. It is 
this vortex that has had to be broken." 

It may be of interest before leaving this case to note that Judge 
Pacht has a broad, elastic, conception of the police power. He holds 
that the limited conception of police power as applying only to matters 
of public health morals or peace was definitely held erroneous long before 
the so-called- Mw, j. peal" legislation came before the Courts for interpre- 
tation. He quotes Justice Lennon in Hillor vs. Board of Public "fforks . 
as follows: 

"In its inception the police power was closely 
concerned with the preservation of the public peace, 
safety, morals, and health without specific regard for 
'general welfare.' The increasing complexity of our civ- 
ilization and institutions later gave rise to cases . . 
wherein the promotion of the public welfare was held 
by the courts to be a legitimate object for the exer- 

9726 



.. --204- 

cise of the police power. As our civic life has develop- 
ed so has the definition of '"rublic welfare' until it 
has been held to embrace regulations' to 'promote the 
economic welfare, public .convenience and general pros- 
perity of the community.' (.Ch icago 33 & RR co . vs. 
Ill ino i n , supra.) 

"[Thus it is apparent that the police power is, not 
a circumscribed prerogative, but is elastic and, in 
keeping with the growth of knowledge and the belief in 
the popular mind of the need for its application, capa- 
able of extension to meet existing conditions of modern 
life and thereby keep pace with the social, economic, 
moral and intellectual evolution of the human race. In 
brief 'there is nothing known to the lav/ that keeps 
more in step with human progress than does the exercise 
of this power.' (S treich vs. Board of Edu c ation supra),, 
and that power 'may be put forth in aid of what, is sanc- 
tioned by usage, or held by the prevailing morality or 
strong and prepondererit opinion to be greatly and immed- 
iately necessary to the public welfare. '( "gobol State 
Bank vs. Haskell 219 U. S. 104, Ann. Cas. 1912A, 487, 32 
ERA (US) 10&2 L. Ed. 112, 31 Sup Ct . Rep.. 186, see 
also Hose's U. S. Notes)"* 

Again at page 484 he says; 

"In short, the police, nower, as such, is not con- 
fined within the narrow circumspection of precedents, 
resting upon past conditions which do not cover and con- 
trol present day conditions obviously calling for re- 
vised regulations to "iromote the health, safety, morals, 
or general welfare of the public. That is to say, as a 
commonwealth develops politically, economically, and 
socially, the police power likewise develops, within 
reason to meet the changed and changing conditions, 'hat 
was at one time regarded as an improper exercise of the 
police power may now, because of changed living .condi- 
tions, be recognized as a legitimate exercise of that 
power. This is so because; 'What was a reasonable exer- 
cise of this power, in the days of our fathers may today 
seem so utterlv unreasonable as to maize it difficult for 
us to 'comprehend the existence of condtions that would 
justify same; what j. " would by our fathers have been re- 
jected as unthinkable is today accepted as a most proper.-;- 
and reasonable exercise thereof.' (Streich vs. Board of 
Education. 34 S.D.' 169, Ann. Cas. 1917 A, 760, ERA, : 
1913 A, 032, 147 1T.Y7. 779)." 

EL7RG01T vs «"JII7S r ;ZIi; 



The last case to be examined is that- of Emerson vs. Vein- 
stein in which a stipulation was entered on September 23, 1935. Judge 
I.E. Harris* threw little new judicial light upon the problem in his 

(*) He' 2"5d989 ~ ' ~ 
9726 



-205- 

opinion. He merely stated thrt in his view the constitutionality of the 
original enactment in 1931 might be sustained by the reasoning in the cases 
prior to this time in California* Likewise, he felt that no monopoly 
question was present in the case; hence, there was no basis for action 
on this score. There was left only the question of the absence of con- 
tract for in the earlier cases the defendants had been bound by contracts. 
However, Judge Harris argued that the Amendment of 1933 may be sustained 
"upon the principle that the passage of such an act would render great 
aid in the enforcement of the original act, if indeed it were not abso- 
lutely necessary to its enforcement. Acts of the sort contained in the 
said amendment are justified upon the nrinciole that they exclude the 
opportunity for evasion which otherwise might be successfully practiced." 

However, in the last throe paragraphs of his opinion Judge Harris 
indulged in a bit of judicial legerdemain which will not assist in 
clarifying rights under the 1933 amendment when he stated: 

"The provision in a contract that a vendee will not sell for 
for less than the stipulated >rico, does not follow the article 
into the hands of a subsequent vendee, and he cannot be prevented, 
at the suit of the manufacturer from selling at less than the 
stipulated p>rice, although he knew that the manufacturer sells 
only subject to such stir>ula.tion, 

Garst vs Hall 55 LRA. var.e 631: 179 Mass. 389 

This case is mentioned in the opinion of Judge Angellotti in 
the Ghiradelli cas.e, and I am mentioning this case not because I 
believe that it in any wry interferes with the conclusion that I 
have come to, but merely for the purpose of preserving the citation; 
as I believe the amendment of 1933, namely. Section If, mentioned 
above, imposes an obligation on the vendee not to sell under a 
price fixing contract made between the manufacturers and his 
vendees. 

I can, however, conceive the possibility of a. case where the 
manufacturer or the original vendor night be stopped from seeking 
injunctive relief against a vendee who merely had notice of the 
contract. But, he that as it may, no such case is made out be- 
fore me; and furthermore, I believe that under the amendment of 
1933, namely, Section one and a half, if it shotild develop that 
the manufacturer were estopped, nevertheless some vendee of his 
might pursue the remedy provided for under Section one and a half. 
It will be recalled that said Section one and a half, namely, the 
amendment of 1933, gives a right of action to any person aggrieved, 
which in my opinion would include not only the manufacturer, but 
the vendees to whom he sold, subject to the contract." 

One cannot but wonder as to the sort of ca.se that Judge Harris 
had in mind in which "the manufacturer or iriginal vendor might be 
estopped from seeking injunctive relief against a vendee who merely had 
notice of contract;" especially since no such ca.se had been made out in 
the present instance. 



9726 



-206- 

So much for a review of the opinion of Judges in leading pases. 
It is' useless for purposes of this paper .to attempt to predict, or to 

speculate too largely about the outcojie of the test case "before the 
Supreme' Court of the State. 3Jhe members of the trade who are partisans 
of amendment one and a half are highly optimistic and predict that the 
fact that the overwhelming majority of Superior Court cases ho.ve been 
favorable is a definite indication of' the attitude of the Justices of 
the Supreme Court. The opponents hold that Section one and a half is an 
unconstitutional delegation of legislative r>ower as well as an in- 
fringement uion Vue process of the. \sn» A few short weeks will resolve 
the issue as far as the highest court of California is concerned.* 



(*) It may not "be too much of a. digression to note that rights similar 
to Section lj obtain in British law only in the sale of patented 
goods. In Great Britain in the sale of patented articles the owners 
may control resale prices when the purchasers and sub-purchasers 
have knowledge of prices and terms even though there is not a 
specific direct contractual relationship. The customary procedure 
is to attach the prices for resale and conditions of the limited 
license agreement to the commodity or upon its container. The 
British courts and legislature have not, to date, "been willing to 
extend these rights to non-patented goods. On the other hand, 
.British law provides a much broader general basis for price main- 
tenance activities because combination among members of the trade 
and secondary boycotts to enforce contractual prices and terms are 
lawful. Gr ether. E.I. op, cite Section 1. 



I 



9726 



-c07- 
CHAPTER II. THE PROHIBITION 0? DISCRILIIiJATIOH IN PRICING- 

I. THE ACT OF 1913 

On August 10, 1913 there "began a sequence of legislation which 
culminated finally in 1935 in the formidable Unfair Practices Act. The 
1913 Statute (*) was entitled "An Act Relating to unfair competition and 
discrimination" and Its prime provision was "It shall he unlawful for any 
person, firm, or corporation, doing business in the State of California 
and engaged in the production, manufacture, distribution or sale of any 
commodity or product of general use or consumption, or the product or 
service of any public utility, with the intent to destroy the competition 
of any regular established dealer in such commodity, product or service, 
or to prevent the competition of any person, firm, private corporation, 
or municipal or other public corporation, who or which, in good faith, 
intends and attempts to become such dealer, to discriminate between dif- 
ferent sections, communities, or cites or portion thereof, or between 
different locations in such sections, communities, cities or portions 
thereof in this State, "by selling or - furnishing such commodity, product 
or service at a lower rate in one section, community or city ..... than 
in another after making allowance for difference, if any, in the grade 
or quality, quantity and in the actual cost of transportation from the 
point of production, if a raw product or commodity, or from the point 
of manufacture, if a manufactured product or commodity".** It was added 
that motion pictures delivered under a lease were not deemed commodities 
under the Act. 

It should be noticed that the date of this Statute, 1913, is prior 
to the period when chain stores became an important, large scale com- 
petitive factor in the distribution of goods at retail. Very likely the 
Statute had its chief significance in the public utility field. 

The Anti-Discrimination Act of 1931. 

In 1951, the 1913 public utility Statute was resurrected and amended, 
now, however, directed primarily at chain store systems. This amended 
Act became known as the Anti-Discrimination Act. The nature of the 
amendments will not be reviewed here because they reappeared, with 
significant modifications in the 1935 Unfair Practices Act. 

II. TIE 1935 3SL0U COST ACT 

In 1953, Assembly Bill 770 passed the legislature amending the 
1913 Act as follows: 

Section la. Every person, partnership, firm, corp oration, 
joint stock company, or other association engaged in 
business within this state, who shall sell any article 
or product at less than the cost thereof to such vendor, 



(*) Act 8731, Ch. 576 

(**) Italics are the writer's. 

9726 



-208- • 

or give away any article cr product, for the purpose of 
injuring competitors and destroying competition, shall 
"be deened guilty of a misdemeanor, and on conviction 
thereof shall be punished "by a fine not exceeding five 
hundred dollars ($500), or by imprisonment not exceed- 
ing six months, or by both said fine and imprisonment. The 
term "cost" as applied to production is hereby defined 
as including the cost of raw materials, labor and all 
necessary overhead expenses of the producer; and as 
applied to distribution "cost" shall mean the cost of 
the article or product to the distributor and vendor 
plus the cost of doing business by said distributor 
and vendor. 

The provisions of this section shall not apply to sales made: 

(1) In closing out in good faith the owner's stock or 
any part thereof for the purpose of discontinuing his 
trade in any such stock or commodity, that is,, as in 
the ^case of the sale of seasonal -goods, or to the bona 
fide sale, of perishable goods to prevent loss to the , 
vendor by spoilage or depreciation; 

(2) I7hen the, goods are damaged or deteriorated in oual- 
ity and notice is given to the public thereof; 

(3) By any officer acting under the orders of any court. 

III. TIE UIiFAIE PRACTICES ACT 0? 1955 . 

The Anti-Dis.criraina.tion line of legislation which had begun in 1913, 
which was modified in 1931, and amplified to include a prohibition of 
sales below cost " for the .)ur,;>osa of injuring competitors and destroying 
competition" reached its climax in the Unfair Practices Act of 1935, 
which brought all of these fragments together and added additional . 
segments. Because of its importance the Act is reproduced here in its 
entirety. 

CALI70RHIA UNFAIR PRACTICE ACT 



An act to amend an act entitled "An Act relating to unfair 
competition and discrimination, mailing certain unfair and. dis- 
criminatory practices unlawful, defining the duties of the Attorney 
General in regard thereto, declaring certain contracts illegal and 
forbidding recovery thereon, providing for actions to enjoin unfair 
competition and discrimination and to recover damages, therefor, 
mailing the violation of the provisions of this 'act a misdemeanor 
and proving penalities," approved June 10, 1913, relating to unfair 
discriminations, and declaring the urgency thereof, to take effect 
immediately. 

The people of the State of California do enact as follows: 

Section 1» The act cited in the title hereof is hereby amended 
to read as follows: 



9726 



-prig- 
Section 1. It shall De unlawful for any person, firm, or 
corporation, doing business in the State of California and. engaged 
in the production, manufacture, distribution or sale of any commo- 
dity, or product, or service or output of a service trade, of 
general use or consumption, or the product or service of any regular 
established dealer in such commodity, product or service, or to 
prevent the competition of any person, firm, private corporation, 
pi- municipal or other public corporation, who or which in good faith, 
intends and attempts to become such dealer, to discriminate between 
different sections, communities or cities or portions thereof, or 
between different locations, in such sections, communities, cities, 
or portions thereof in this State, by selling or furnishing such 
commodity, product or service at a lower rate in one section, 
community or city, or any portion thereof, or in one location in 
such section, community, or city or any portion thereof, than in 
another after making allowance for difference, if any, in the grade 
or quality, quantity and in the actual cost of transportation from 
the point of production, if a raw product or commodity, or from the 
point of manufacture, if a manufactured product or commodity. 
Motion picture films when delivered under a lease to motion picture 
houses shall not be deemed to be a commodity or product of general 
use, or consumption, under this act. This act shall not be constnwi 
to prohibit the meeting in good faith of a competitive rate, or to 
prevent a reasonable classification of service by public utilities 
for the purpose of establishing rates* The inhibition hereof 
against locality discrimination shall embrace any scheme of special 
rebates, collatoral contracts or any device of any nature whereby 
such discrimination is, in substance or fact, effected in violation 
of the spirit and .intent of this act. 

Section 2. Any person who, either as director, officer or 
agent of any firm or corporation or as agent of any person, 
violating the provisions of this act, assists or aids, directly or 
indirectly, in such violation shall be responsible therefor equally 
with the person, firm or corporation for whom or which he acts. 

In the prosecution of any person, as officer, director or 
agent, it shall be sufficient to allege and prove the unlawful in- 
tent of the person, firms or corporation for whom or which he acts. 

Section 3. It shall be unlawful for sxiy person, partnership, 
firm, corporation, . joint stock company, or other association engaged 
in business within this State, to sell, offer for sale or advertise 
for sale any article or product, or service or output of a service 
trade, at less than the cost thereof to such vendor, or give, offer 
to give, or advertise the intent to give vendor, or give, offer to 
give or advertise the intent to give away any article or product, 
or service or output of a service trade for the purpose of injuring 
competitors and destroying competition, and he or it shall also be 
guilty of a misdemeanor, and on conviction thereof shall be subject 
to the penalties set out in section 11 of this act for any such act. 

4 The term "cost" as applied to production is hereby defined as 
including the cost of raw materials, labor end all overhead expenses 



9726 



of the producer; and as applied to distribution "cost" shall mean 
the invoice or replacement cost, whichever is lower, of the article 
or product to the distributor and vendor plus the cost of doing 
business by said distributor and'vendor. 

The "cost of doing business" or' "overhead expense" is defined 
as all costs of doing business incurred in the conduct of such busi- 
ness and must include without limitation the following items of ex- 
pense: labor (including salaries of executives and officers), rent, 
interest on borrowed capital, depreciation, selling cost, maintenance 
of equipment, delivery costs, credit losses,' all types of licenses, 
taxes, insurance and advertising. 

Section 4 C In establishing the cost of a given -article or pro- 
duct tq the distributor and vendor, the invoice cost of said article 
or product purchased at a forced, bankrupt^ closeout sale, or other 
sale outside of the ordinary channels of trade may not be used as a 
basis for justifying a. price lower than one based' upon the replace- 
ment cost as of date of said sale of said article or product re- 
placed through the ordinary channels if trade, unless said article 
or product is kept separate from goods purchased in the ordinary 
channels of trade and unless said article or product is advertised 
and sold as merchandise purchased at a forced,, bankrupt, closeout 
sale, or by means other than through the ordinary channels of trade, 
and said advertising shall state the conditions under which said 
goods were so ourchased, and the quantity of such merchandise to be 
sold or offered for sale. 

Section 5, 'In any injunction proceeding or in the prosecution 
cf any person as officer, director or agent, it shall be sufficient 
to allege .and prove the unlawful intent of the person, firm or cor- 
poration for whom or which he 'acts. VShere a particular trade or in- 
dustry,, of which- the person, firm or corporation complained against 
a member has an established cost survey for the locality and vicinity 
' in which the offense is committed, the said cost survey shall be 
deemed competent evidence to be used in proving the costs of the 
person, firm or corporation complained against within the provisions 
of this act* * 

Section 6 The provisions of sections 3, 4 and 5 shall not 
apply to, any sale made: 

(a) In closing out in good faith the owner's stock or any part there- 
of for the purpose of discontinuing his trade in any such stock or 
.commodity, and in the case of' the sale of seasonal goods or to the 
bona fide sale of perishable goods to prevent loss to the vendor by 
spoilage or depreciation, >rovided notice is given to the public 
thereof; ' 

(b) Uhen the goods are damaged or deteriorated in quality, and 
notice- is given to the public thereof; 

(c) Sy an officer acting under the orders of any courts; 



9726 



•211- 



(d) In an endeavor made in good faith to meet the legal 
prices of a competitor as herein defined selling the same , 
article or product, or service or ; oatpiit of a service trade, 
in the same locality or trade area. 

Any person, firm or corporation who performs work upon, 
renovates, alters cr improves any personal property "belong- 
ing to another person, firm or corporation, shall be con- 
strued, to be a vendor within the meaning of this pet. 

Section 7. The secret payment or allowance of rebates, re- 
funds, commissions, or unearned discounts, whether in the, 
form of money or otherwise, or secretly extending to certain 
purchasers special services or privileges not extended to 
all purchasers purchasing upon like terms and conditions t 
to the injury of a 'competitor and lija&re such payment or al- 
lowance tends to destroy competition, is an unfair trade 
practice and any person, firm, _' partnership, corporation, or 
association resorting to such trade practice shall be deemed 
guilty of a misdemeanor .and- on conviction thereof sha*" be 
subject to the penalties set out in Section 11 of this acts 

Section 8. "- U-oon the third violation of any of the provisions 
of sections 1 and 7, inclusive, of this act by any corporation, 
it shall be the duty of the Attorney General to institute pro- 
per suits for quo warranto -proceedings in any court of com- 
petent jurisdiction for the forfeiture of its charter, rights, 
franchises or privileges ?uid powers. exercised oy such cor- 
poration, and to permanently enjoin it from transacting business 
in this State. If in s ich ction the court shall find that 
such corporation is violating or has violated any of the pro- 
visions of sections 1 to 7, inclusive, of this act, it must 
enjoin said corporation from doing business in this State 
permanently or for such time as the court shall order, or 
must annul the 'charter, or revoke the franchise of such cor- 
poration. 

Section 9. Any contract, express or implied, made by 
any person, firm or corporation in violation of any of 
the provisions of sections 1 to 7, inclusive, of this 
act is declared to be an illegal contract and no recov- 
ery thereon shall be had. 

Section 10. Any person, firm, private corporation or 
municipal or other public corporation, or tra.de association, 
may maintain an action to enjoin a continuance of any act 
or acts in violation of sections 1 to 7, inclusive, of this 
act and, if injured thereby, for the recovery of damages. 
If, in such action, the court shall find that the defen- 
dant is violating or has violated any of the provisions 
of sections 1 to 7, inclusive, of this act, it shall 
enjoin the defendant from a continuance thereof. It shall 
not be necessary that actual damages to the plaintiff be 

9726 



-212- . 

.-•^llc :ed or "droved. In addition to such injunctive re- 
lief, the plaintiff in said action shall be entitled to 
recover from the defendant three times the amount of the 
actual damages', if any,' sustained. 

Any defendant in an action Drought under the pro- 
visions of this section may he required to testify under 
the provisions of sections 2021, 2051 and 2055 of the Code 
of Civil Procedure of this State?, in addition the hooks 
and records -of any such defendant may he "brought into 
court and introduced, by reference, into evidence; provided, 
however, that no information so obtained may be used against 
the defendant as a basis for a misdemeanor prosecution under 
the provisions of sections 1 to 7, inclusive, and 11 of this 
act. 

Section 11. Any person, firm, or corporation, whether as 
principal, agent, officer or director, for himself, or it- 
self, or for another person, or for any firm or corpora- 
tion, or any corporation, who or v 'hich shall violate any 
of the provisions of sections 1 to 7, inclusive, of this 
act, is guilty of a misdemeanor for each single violation 
and upon conviction thereof, shall be punished by a fine 
of not less than one hundred ($100.00) dollars nor more 
than one thousand ($1,000.00) dollars, or by . imprisonment 
not exceeding six months or by both said fine and imprison- 
ment, • -in the discretion of the court. 

Section 12. If any section, sentence, clause or phrase of 
this act is for any reason held to be unconstitutional, • such 
decision shall not affect the validity of the remaining 
portions of the act. The Legislature hereby declares that 
it would have passed this- act, and each section, sen- 
tence, clause or phrase thereof, irrespective of the 
fact that any one or more other sections, sentences, 
clauses or phrases be declared unconstitutional. The 
remedies herein prescribed are cumulative and in addi- • 
tion to the remedies prescribed, to the Public Utilities 
Act for discriminations by public utilities. If any 
conflict shall arise between this act and the Public • 
Utilities Act, the latter shall prevail. 

Section 13. The Legislature declares that the purpose 
of this act is to safeguard the public against the 
creation of perpetuation of monopolies and to foster and 
encourage' competition',- by prohibiting unfair and discrim- 
inatory practices by which fair and honest competition is 
destroyed or prevented. .This Act shall be literally 
construed that its beneficial purposes may be subserved. - 

Section 14. This act shall be known and designated as the 
"Unfair Pr.actices Act.,"'' * 



S726 



-213- 

Section 15. This act is hereby declared to be an urgency 
measure necessary for the immediate preservation of the 
public -peace, health, and safety, within the meaning of 
section 1 of Article IV of the Constitution, and shall 
therefore go into immediate effect. The facts constitut- 
ing the necessity are as follows: 

The sale at less than cost of goods obtained at 
forced, bankrupted, close out, and other sales outside 
of the ordinary channels of trade is destroying healthy 
competition and thereby forestalling recovery. If such 
practices are not immediately stopped many more busi- 
nesses will be forced into bankruptcy, thus increasing 
the prevailing condition of depression. In order to 
prevent such occurrences it is necessary that this act- 
go into effect immediately. 



Approved July 15, 195b. 



Chapter 477 Laws of 1935 
Assembly Bill 1870 



The various at tempts to operate under the 1935 Act and the extent to 
which the earlier Acts were employed will be discussed in- connection 
with the review of conditions in the grocery and drug trades below. 
At this point it need merely be noted: (l) that the 1913 .anti-dis- 
crimination act had no general significance to the wholesale and re- 
tail trades, its prime importance being as the progenitor of the present 
law;- (2) that the 1S-31 ant i-di scrim -'.n-t ion act had some slight applica- 
tion against chain stores, probably was even more effective as a poten- 
tial threat; and (3) that the 1933 sales below cost act likewise was 
used only to a slight .extent , partly because of the presence of the KRA 
codes. All of these points will be illustrated by specific examples in 
iater sections. , In this section the intent is merely to interpret the 
law and to present the more important problems that its apolicat ion 
raises. 

Section I of the Act merely reproduces the former Anti-Discrim- 
ination Act of 1913 .and 1931. Section III and IV, the Below Cost provi- 
sions, are the core of the Act and the most' significant portions of it 
in relation to the problem of this Study. It is stated that it shall be 
"unlawful .... to sell, offer for sale, or advertise any article or pro- 
duct, or service or output of a service trade at less than cost thereof 
to the vendor" or to "give, offer to give, or advertise the intent to 
give away" the above classes of products "for the purpose of injuring 
competitors .and destroying. competition, " Cost is defined as invoice or 
replacement cost, whichever is lower, of the product, plus the cost of 
doing business. The cost of doing business is defined as "all costs of 
doing business incurred in the conduct of such business" and (as if not 
satisfied with this general statement) a considerable number of items of 
expense are enumerated which must be included. This enumeration comprises 
such, minutiae as "all types of licenses", and "credit losses" but does not 
include interest on fixed investment, except insofar as it mi^ht appear 
under "interest on borrowed capital", It is difficult to understand the 

9726 



mis- 



governing principle which would exclude interest on the. owner's invest- 1 
ment, yet specifically includes salaries of executives and officers. 
Invoice cost as the "base upon which "cost of doing "business" is added' 
must he that invoice cost in the ordinary channels of trade, not the 
"purchase price at forced or bankrupt sales, except insofar as the mer- 
chandise is segregated and so designated. Finally, and exceedingly im- 
portant, is the provision in Section V that the established cost survey 
of a trade or industry in a locality "shall be deemed competent evidence 
to be used in proving the costs" in any given instance. In accordance 
with the intent of this provision there was a great deal of discussion 
among various trad.es and there were some attempts to make cost .surveys. 
These cost provisions of the Act suggest the following serious diffi- 
culties of interpretation that must eventually be clarified: 

1. What does constitute the cost of doing business mandatory in 
the Act? The general wording suggests all costs, the specific enumer- 
ation omits "interest on fixed investment and numerous small operating 



2. Since the enumeration of items is essentially that of the 
Census of American Business, was it intended that these costs would be 
employed? 

3. HoS would the costs be computed with respect to individual 
items? If the average expense figure must be applied to all items, then 
clearly a serious .error is made for in an assembly of merchandise the 
various particular costs may be far above or below the average figare c 
Worse still, any attempt to compute particular costs inevitably involves 
a large element of arbitrary allocation which would provide the basis 
for wide differences between firms even under similar conditions. Yet 
this cost problem is simple compared with the problem of adjustment be- 
tween firms where one is a specialist in an item or linej and the other 
uses it merely as a supplementary item or line. It seems that this 
problem is so treacherous and difficult that it is not subject to 
solution except on the basis of arbitrary procedure. This statement 
immediately suggests the dilemma of the cost provision, viz., arbitrary 
procedure might very well be declared contrary to the intent of the 

Act whereas a. forthright attempt at compliance leads into hopeless 
confusion or into dis-economy from the standpoint of cost accounting 
and operating efficiency. It appears that this paradox has forced 
itself upon the leaders of the trades. Apparently, the trades that 
wish to employ the Act have in mind an arbitrary cost figure of a 
stop loss variety. It is possible that this attitude is tempered 
partly by the fear of the consequences that : might arise from an unduly 
rapid increase in price level. More likely, this attitude of mind is 
derived from a knowledge of the difficulties outlined above and is the 
heritage of the, stop loss provisions of the retail code. This inter- 
pretation seems especially valid because in the two trades discussed in this 
study, to date, the code loss limitation provisions have been employed. 
Yet, when the trades proceed on tnis basis it would appear difficult to 
justify the procedure before the courts in view of the wording of the Act. 
It appears that the solution of the matter might arise only out of a court 
interpretation that s->.les below invoice, or below invoice cost, plus an 

9726 



-1?15~ 



accepted minimum stop loss margin, might "be acceptable as evidence -of 
"purpose of injuring competitors and destroying competition" (Section 
5). It appears that this solution might he forced by another stipulation 
in the act: viz., "that the provisions of Sections 3, 4 and 5 shall 
not apply .... in an endeavor 'made in good faith to meet the legal 
prices of a competitor as herein defined selling the sane article or 
product, or service .... in the same locality or trace area." The 
"legal prices" which might, therefore, establish the floor to the 
market might very well be the costs of a non-service lew cost estab- 
lishment which has added the given item as a side line and which might 
justifiably claim that less than the average nark-up should be applied 
to the item. Whatever be the ultimate outcome, two things are clear; 
(l) there will inevitably be much experimental jockeying in the trades 
and in the courts before a conclusion will be reached, (2) it would 
require extraordinary temerity in the ordinary retail trades to attempt 
to enforce a mark-up equal to any average cost of doing business figure 
which night be derived from a cost survey. A large enough number of 
cases are now before the lower courts in California to produce significant 
interpretations in the near future. The phrases "with the intent to des- 
troy competition" (Section 1) "for the purpose of injuring competitors 
and destroying competition" (Section 3), "to the injury of a competi- 
tor ...." and "tends to destroy competition" (Section 7) will remain 
as terminological barriers to large scale activity under the Act unless 
the courts eventually work out a standardized formula of some sort which 
is acceptable as evidence of the intent or motive. However.;, enforce- 
ment is made easier in two significant respects in the 1935 Act for 
(1) the burden of proof is laid upon the defendant, (C) trade associa- 
tions are specifically empowered to maintain an action to enjoin a con- 
tinuance of any act or acts in violation. (Sections 10 and 11). The 
consequence of the latter provision has been a major attempt to organ- 
ize California trades to operate under the Act. The old code organi- 
zations have provided the pattern and the opportunities for trade as- 
sociations executives provide the stimulus for a large scale endeavor. 
If the amount of discussion .and the number of attempts already under 
way are .any criterion it seems safe to predict a large development in 
case a relatively routinized legal procedure eventually develops. 
Another aspect of the Act may become exceedingly significant. It will 
be noticed that under Section 8 it is the duty of the Attorney General 
to institute suits for forfeiture of charter, rights, francises and 
privileges and powers upon a third violation of any of the provisions 
of the Sections of the Act; further, that if the court finds that the de- 
fendant is guilty "it must enjoin said corporation from doing business in 
this State permanently or for such time as the court shall order, or must 
annul the charter or revoke the franchise of such corporation." This 
stipulation is an extraordinarily weighty, potential threat against 
violators, particularly chain stores that might easily accumulate three 
or more violations among their units. It would, be an interesting spec- 
tacle, to say the least, to see a large corporation before the court 
under this prevision. The Act concludes with the statement that it is 
an emergency measure because "the sale at less than cost of goods .... 
is destroying healthy competition and thereby forestalling recovery," 

9726 



-216- 



That is, this particular piece of legislation as was true of the HRA 
codes and of the court cases reviewed at>ove, claims the support of an 
economic thesis. Therefore, it does not seen unreasonable to suggest 
that the merits of the Act be weighed not only in terms of legal pre- 
cedent hut in the light of ec-nomic criteria. 



9726 



_.ri7- 

IV. TEE POLITIC .41 F"?.C~S BEHIHD THE LEGISLATIVE PEICE STABILIZATION 
DEVfCES ' 

The influential political forces "behind the legislative devices 
outlined in the preceding sections have been the various retail asso- 
ciations of the state of California, "ithin the state there are some 
of the most cohesive and powerful retail organizations in the country 
headed by aggressive, able officers, particularly, executive secretaries. 
The smaller independent merchant' have developed a class consciousness 
out of which has arisen effective, direc.-t .political action. This atti- 
tude of mind shows itself in other directions as in the large, long- 
established, powerful cooperative buying and merchandising groups. In 
San Francisco, for instance, there are two voluntary merchandising 
groups in the grocery trade that da-e bad: to the first decade of the 
century. It has been interesting-, to note that after each legislative 
triumph the officers of various retail associations have taken individual 
credit for the enactment. However, the center sf the battle and the 
stress varied between lines. Tne Fair Trade Act was nurtured in the 
Southern and Northern California Retail Druggists Associations (particu- 
larly in the office of the Southern Association) and the center of 
interest and of the legislative battle was in these two groups. This 
state of affairs is as one should expect, for the retail druggists have 
more to gain from resale price maintenance legislation than the majority 
r -f retail trades. . In this instance, some of the chains were also par-, 
tisans • of the legislation, apparently because newer c it-rate types were 
removing much of the chain 1 s '''former advantage gained by price cutting . 
tactics. In the other aspects of the legislation the larg;e scale re- 
tailers, on the whole, wore in. opposition, actively or passively. The 
center of the endeavour in this instance appears to have bee:: in the 
grocery business, with .the close cooperation of other retail groups. 

One can only partially explain legislation in terms of the 
pressures exerted by the partisan groups; of co-significance is the 
passivity or absence of other groups. Among these non-resistant fac- 
tors there should be noted: 

1. The state of economic depression throughout all these years 
which, without doubt, not only tended to increase the vigor of demands 
but to beat down opposition from those who either had nothing better to 
offer or had their own demands to make. It is exceedingly important that 
this legislation in its present form is a by-product of depression; 

what prosperity will do to it, may soon be - known. 

2. The agricultural bloc of the State, the vote of which is 
essential to the passage of legislation, is highly susceptible to the 
influence of small dealers.' It was voting control schemes for agri- 
culture, and had largely accepted the proposition that price cutting in 
retail markets, reacts unfavorably upon primary producers. 

3. The periods of legislative assembly, especially in 1935, were 
crowded- with so many major economic and -social proposals that many did 
not receive large public attention. This was particularly true of the 
Unfair Practices Act. However, it seems clear from the review of, the 
growth by accretion from 1913 to 1931, 1933 and 1935, and the nature 
of the forces that were operating that it would have been passed as an 
emergency measure in any event. Particularly indicative was the chain 
store tax passed by the 1935 legislature which was pushed by the same 
retail interests without, of course, the assistance of the h 

§■726 did achieve large publicity. 



-218--' 

CHAPTER III 

DEV ELOP] lE'TTS in the grocery trade 
I The Official Attitude . 

Officially, the retail grocers were active sponsors of the 
California Fair Trade law. At the annual conventions cf the state as- 
sociation, in meetings cf local associations, in the speeches of secre- 
taries, in the official publications, there are numerous references to 
the Pair Trade law; the California Retail Grocers and Merchants Associa- 
tion took particular -pride in listing the 1931 Pair Trade Act and the 
1933 Amendment among its legislative achievements. Yet the Pair Trade 
law has been employed to an almost negligible extent in this trade, 
whereas the Unfair Practices Act has aroused a major movement. 

Pcur Price Maintenance Procedures 

There have been four general price maintenance procedures in 
recent years under California state lav on the part of grocery manu- 
facturers. 

1. The suggesting of prices with no particular attempt at enforce- 
ment, except perhaps an occasional effort to deal with an especially 
bad situation by education and persuasion or by threat of refusal-to- 
sell. 

2. The formal establishment of "stop prices" which are publicised 
as the official minimum prices on the products listed but without any 
attempt to issue contracts under the Pair Trade law. 

3. Operation under the California Pair Trade Act by the issuance 
of contracts to the trade. 

4. Procedure under the prohibition of sales below cost in the 
Unfair Practices Act of 1955 and its 1933 predecessor. 

The first procedure which involves merely the recommendation of 
prices with usually very little effort at policing has been of little 
practical consequence except insofar as it tends to give retailers a 
general guide in pricing. In the summer of 1934, one hundred retail 
grocers were interviewed in the San Francisco Bay region with respect 
to various aspects of price maintenance. The grocers were unanimous in 
their opinions that only a small proportion of suppliers suggested re- 
sale prices to them. They were' equally of the opinion that attempts, 
at the enforcement of recommended prices were almost entirely absent. 
The interviewer made note of any firms the dealers were able to mention 
as suggesting resale prices. This list included fifty firms. Only one 
firm was mentioned by as many as fifteen dealers. A survey of manu- 
facturers and wholesale distributors in the San Prancisco Bay area in 
the fall of 1934, showed the same results. Forty six of the one hun- 
dred ninety firms interviewed were suppliers in the food field; of the 
forty-six, twentv-nine stated that they made no pretense of suggesting 
resale prices; of the seventeen who made suggestions only five were 
making any attempt to control resale prices and none of these were 

9726 



employing .'Fair Trade Contracts. During January and July, 1935, v 
thirty-nine manufacturers and distributors- of foods were interviewed 
in Los Angeles. * However, in 'this case, some of the firms were select- 
ed "because of their known experience with price maintenance. Of the ■- 
thirty-nine, 22 stated that the/ La jested -prices to dealers and eight 
were making an attempt at enforcement. 

The estaolishing of minimum reaa.le prices of a formal sort 
(called "stop -orices" hy the trade) ha.s been pushed by the officers of 
the State Association; but has not oeco^.e of great consequence. ..Such 
stop price procedure might take Place under the • California. Fair' Trade 
law through the issuance o-f contracts; actually.', one must comb the 
trade' very closely to find any evidence at all- of such usage. It be- 
came the custom of the California Retail Grocers' Advocate to publish 
a list of the brands maintaining a stoo -orice. !5ventu.allv, two lists 
were -published, one, -of brands maintaining a stop p-ice without the 
use of contracts, the other- of firms issuing contracts. On August 12, 
1932, the non-contract list contained 35 items (including different 
sizes) and fourteen ^irms. By S3ptember 15, 1933 this list had 
expanded to 120 items and 42 fins. Gradually, however, this listing 
decreased in numbers until in 1935 it has largely given way to a list 
of minimum prices suggested under the Unfair Practices Act. On 
April 20, 1934, the contract list contained 29 items and six firms. 
However, only one of these firms, a coffee roaster, rasa grocery 
manufacturer, the others were wine and liquor firms. Throughout the 
1934 period of listing, only three regular grocery items appeared; 
viz., two coffees and a nut margarine. In Other '.vords, Fair Trade 
contracts, to date have had significance to the grocery trade in 
California, only in a few instances, and primarily in lines falling 
outside the field of groceries. (*) 

II The experience with and attitude toward contractual and non-con - 
tractual price maintenance . 

Before discussing developments under the Unfair Practices Act it 
is important to examine in detail the experience of retailers and 
manufacturers and distributors with the small amount of formal resale 
price maintenance. 

A. Retail Experience and Attit udes. 

The general run of grocery retailers have not had sufficient 
experience with serious Price maintenance- schemes to make possible any 
significant generalization. However, t^o conclusions may be derived 
from this lack of experience: (l) the majority of retail grocers in 
the summer of 1934 were unaware of the existence of the California 
Fair Trade Law. To be exa.ct, 57 of the 100 retail grocers interviewed 



(*) Since this revie-' is limited to the grocery and drug 

fields, these other attempts will not be discussed. It 
may merely be noted (1) that there is much price- maintenance 
in t"he wine and liquor business, and (2) that a- serious effort 
at" control in the beer business collapsed and had not been 
revived by November 1, 1935, although there were rumors that a 
new endeavor was planned. 

9726 



-220- 

t 

1^ the San Franciso Bay region ""ere completely uninformed concerning 
the Law, This was an interesting contrast to the drug field where 
all 1 dealers "ere thoroughly informed concerning the law, (2) The 
majority of retail grocers had made no ef : 'ort to further resale price 
maintenance. 894 of those interviewed stated that they had given no 
support at all tc the movement, either by donations to the legislative 
fund or by participating with the retail associations. Only 21$ gave 
any evidence of offering to cooperate with manufacturers who attempted 
to control resale orices, through featuring or pushing their products. 
However, as a matter of "business principle., the great majority were 
definitely in favor of resale price maintenance, (9l4 so expressed 
themselves), The majority opinion was that such a program would be 
excellent out that it was impossible of achievement in this field. It 
should oe noted that the above conclusions are derived from interviews 
from a non-selective list of dealers; a selected list of active 
members of one of the grocers' associations would, without doubt, show 
a different, but less representative result. 

. The larger chains and the smaller ones that feature cut prices 
expressed themselves as definitely in opposition to price maintenance. 
-The voluntary chains were in favor of price maintenance. Two Southern 
California chains mentioned the quick action taken by a cereal manu- 
facturer when they inadvertently cut the price of its products. One 
of these chains stated that they had immediately received two telegrams 
and four letters from this firm "asking them just what the idea was" 
and, that they I'exoected the- President to drop in by the next train". 
This firm has the policy of compliance but stated that if they chose 
they could do as they pleased and no individual manufacturer would be 
able to cut then off effectively. 

3» Exper ience an d Attitudes of Man u facturers and Distributors . 

The experience and attitudes of the suppliers of retailers may be 
indicated in -two -ways (l) ay general summaries of interviews (2) by an 
examination of the experience of certain concerns selected because of 
experience with price maintenance. Of the forty-six food suppliers 
interviewed in the San Francisco bay area in the fall of 1934, twenty- 
four expressed themselves in favor of price maintenance. Five were 
definitely in opposition and seventeen were apathetic, having no 
opinion on the natter. Only sixteen stated that they had ever given 
any support -to price maintenance. Seventeen stated that they felt that 
they were injured by or ice cutting in the retail trades; the balance 
thought it was immaterial to their interests. Of the five firms that 
had made some serious effort to maintain resale prices, two felt that 
it was possible to maintain, prices effectively in the grocery field, 
three stated that they had concluded that it was impossible. Three of 
the five stated that retailers showed appreciation of their efforts and 
that they had benefited from the goodwill created. 

• .■■■ In the Los Angeles interviews in January and July of 1935, twenty- 
one of the thirty-nine firms interviewed expressed themselves in 
favor, pf price maintenance, twelve in opposition and six had no opinion. 
Only nine -had taken any action in support of price control. Ten firms 
stated that.. price cutting in the retail trades injured them, two felt 
they were -benefited, .ana the balance stated it was immaterial. One 

* - « - 

J726 •..•'■ 



< 



-221- 

firn in the group was employing Fair Trade contracts; another had done 
so "but had dropped the practice. . Of the nine firms that had attempted 
to control resale prices, six felt such a scheme to he enforceable; 
three that it was very difficult to enforce, if not impossible. Sight 
of the nine agreed that effective enforcement '-'culd re>-',iire broad co- 
operation among the members of the trade. Seven of the firms stated 
that retailers showed sufficient ao^reci~tion of their efforts to al- 
low them to receive some benefit from their attempt at price control; 
two stated just the reverse. 

Much more significent than a general taoulation is the experience 
and attitudes of a number of firms th't are important, often dominant 
trade factors. (*) 

C . E xperience and Attitude s o" Sel ected Firms. 

1. A coffee roaster: 

The coffee business wp.s one of the few in which a num- 
ber of manufacturers attempted to set Up stop prices. This 
particular firm began to operate in this way early in 1932 
but dropped its efforts when, the 3TRA code became effective 
because it felt that the code 6 r j mark-up acconplisned all 
that was necessary. The firm experienced considerajle dif- 
ficulty in enforcing prices, although it felt that since it 
had a Duality line its problem was simpler than that of 
others. 

2. A Coffee roaster: 

This firm is a nioneer in the field of price mainten- 
ance in the western part of the United States and until it 
lost a Supreme Court decision was very aggressive in enforc- 
ing its prices. Early in 1932 it began to operate in 
California on s stop price oasis without issuing contracts 
but also dropped its efforts "hen the code went into effect. 
It definitely favors price maintenance but doubts the con- 
stitutionality of the California law. There were many vio- 
lations of its prices during its stop price period. 

3. A small distributor of coffee, teas and spices. This 
firm definitely opposes price maintenance, and has had no 
experience with it. Its attitude may be expressed in the 
words used by its general manager. "All we are interested 
in is selling goods. What the reta.iler gets is not up to 
us. If he wants to give them away, we don't give a damn." 

4. A coffee roaster with national distribution. 



(*) All information v as obtained on a confidential basis; hence no 
firm names will be employed -except where the information is 
from published sources. 



9726 



-222- 

Tbie Los Angeles district manager of this firm stated 
that price maintenance is frvored "but that the firm has made 
no effort to control resale r>rices, partly "because it doubts 
the constitutionality of the California statute. 

5. A manufacturer of mayonnaise and allied products: 

A number of mayonnaise manufacturers for a brief period 
attempted to stabilize the prices on their nroducts. This 
Particular firm was very aggressive in its attempt, even 
going so far as to buy double page spreads in the Retail 
Grocers' advocate, stating its position a.nd ashing the 
retailers to support its program. (*) However, it was forced 
to relinnuish its efforts and explained its iDOlicy as 
follows: 

"lie do this "ith regret for it has been our constant 
endeavor to insure profits for the retailer, jobber 
and the manufacturer. \/e believed maintaining stop 
nrices would accomplish that result, out competitive 
conditions, market fluctuations, and a survey -hich 
indicated that most retailers did not favor stop prices 
unless enforced by all mayonnrise manufacturers, 
compelled us to abandon the policy 'hich 're were alone 
in maintaining. We are ready to consider re-establish- 
ing of stop prices '-'hen conditions in the industry 
permit," (**) 

This firm stated tha.t sales had increased during the period 
when the leading coast manufacturers maintained prices be- 
cause of soecial dealer attention given to the line. However, 
it was unable to stand out alone when other lines were cut. 

6, A Mayonnaise and Salad Dressing M'.nui'acturer. 

This firms' experience and attitude was stated 
nublicly as follows: 

"The 3est Foods, Inc. have been and still are 
strong advocates of a minimum resale price for 
their merchandise. Our company has held the um- 
brella for the industry for many years past, and 
'"'ere forced to abolish the stop nrice temporarily 
until such time that the manufacturers • ho are , 
naming a so-call.ee 1 minimua resale orice, but not 
enforcing it as we were doing, show themselves 



(*) See The California Retail Grocers' Advocate, June 15, 
1934, pp. 20 • 21 , and July 27, 1934, p, 4. 

(**) The California Retail Grocers' Advocate Aug. 1934, 

Page 15under heading "Durkee Announces Policy Change." 

9726 



-223* 

sincere in their declaration of oolicy. As 
soon as this is evident to us, we shall again 
be glad to establish cur minimum resale price 
and mean what rT e say 1 when " r e declare out selves 
accordingly. 11 (*) 

7, A manufacturer of vegetable oil products (shortening, 
salad oil, nut margarine) 

In the spring of 1934, this firm "began to issue 
Pair Tra.de contracts hut dropped the attempt after a 
trial of three months because of (1) difficulty in 
obtaining dealers' signatures (?) corn-net ition of 
manufacturers who made no attempt at stabilization 
(3) general disturbed trace conditions. The firm said 
that competitors were selling to chains and. super- 
markets Delow cost and it was impossible to maintain 
their prices under the circumstances, 

8, A large manufacturer of canned fruits and vegetables 
selling in the national market: 

This firm does not attempt resale price maintenance 
and does not consider it feasible in its own circumstances 
because of the following conditions: (1) the inter-state 
problem, since it sells in the national market and vould 
find it very difficult to have a variable policy between 
states (2) the complexity of its channels of distribution 
with its wide array of product's (3) the fact that the 
prices of its products are influenced by many variable 
factors such as cro-n conditions, raw material prices and 
freight rates. All the firm does is to attempt some 
persuasion when price cutting gets too rampant in any 
of its territories, 

9, A manufacturer of household bleaching fluid. 

Several years ago this firm attempted to control 
resale prices, allowing jobbers 15-'o and retailers 30^, 
The theory was that these margins would be so attractive 
that the jobbers and retailers '-'ould push the product 
aggressively; the outcome was that a competitor who 
attempted no control stepped ahead of them. Hence, the 
firm nor opposes price maintenance. Some attempt has 
been made to establish resale prices in this field but 
they nave refused to cooperate because their chief 
competitor wished them to come to his level, v 4iich they 
believe would be suicidal for them, since the competitor 
is better known. 

10, A large manufacturer of soaps: 



(*) California Retail G-rocers' Advocate, June 15, 1934, p. 5 , 
9726 



-224- 

Ten yenrs ago this firm "became enthusiastic 
about resale crice control and canvassed the trade on 
the natter. The members of the trade seemed eoually 
enthusiastic so the firm adopted r oolicy guaranteeing 
dealers a gross mangin of 16 2/34 of retail selling 
price on its leading product. Two developments broke the 
system: (l) the large number of violations, especially < on 
the "Dart of small dealers (2) the increase in sales 
volume of a competitive soap on which there was no control. 
The firm still ap-oroves resale price maintenance in prin- 
ciple but holds that enforcement is very difficult and 
requires the cooperation of the other members of the trade. 

11. A wholesale grocer, importer and tobacconist: 

This firm's merchandising policy is unique. It sells 
three lines of private brand canned goods and coffee, and 
maintains resale prices on one of these only. The theory 
is that grocers must have some non-controlled products with 
which to meet competition. On its controlled brands, • 
however, it allows dealers to advertise five items for 
special sales with margins as low as 10$ on cost. The 
regular minimum mark-up is IS 2/3 per cent above cost. The 
firm strongly recommends higher mark-up rates to its 
dealers. Pair trade contracts are not employed. Enforce- 
ment is handled -orinarily ~oy the salesmen of the firm and 
by refusal to sell. This firm's -oolicy is exceedingly 
interesting as an attempt to operate on more than one 
level at the same time. 

12. A large flour milling company. 

At ^resent this firm makes no attempt to control re- 
sale prices. A few ,r ears ago the firm did make such an 
effort with a packaged biscuit flour. The dealers all 
seemed 'enthusiastic that the company was to help them -make 
mo"e money on the item but when it came to actual coopera- 
tion "they generally sold a competitors product at a lower 
.. orice," In addition, the firm was kept very bus;'' trying to 
restrain violators. 

13. . A creamery and butter Association. 

The association attempted to build dealer goodwill 
through. a scheme of price stabilization. It was forced to 
, abandon its policy because "dealers did not give them the 
desired support, but quite contrary, have selected other 
butter brands to substitute and cut for special prices. "(*) 

14. A large dairy products company: 



(*) The California Retail .Grocers' Advocate, July 22, 1932, p. 12 
9726 



-: 25- 

This firm, when the company above, (see 13) dropped 
its scheme published the following statement in the Calif- 
ornia Retail Grocers 1 Advocate: (*) 

"We have had so many inquiries from grocers 
relative to the intent of this Company with regard 
to the continuation of the 'stop price policy' 
announced 1 st winter, that I am taking the liberty 
of addressing yen on this subject as Secretary of the 
State Eetr.il Grocers' Association. 

"The 'stop price policy' of at least one cent over 
cost on Golden State Butl'.er will oe maintained and 
as far as possible extended, so that the dealers of 
Golden State brand dairy products shall make a rea- 
sonable profit from handling them. 

"From a retail merchandising standpoint, we believe 
that dairy products are grouping into two classes, 
namely: 'price brands' and 'profitable brands'. 

"'Price brands,' for which there is no consumer ac- 
ceptance, except that of a price consideration, will 
of necessity be forced into a position- which yields no 
profit to the merchant, nor to the manufacturer, nor 
to the dairy farmer, This is not conducive to the 
reestablishment of normal business activity, but 
definitely tends to prolong depression. Considering 
the rapid turnover of dairy products, we believe it 
worth while for the retail merchant to promote the 
sale of 'profitable brands', and that the grocer who 
can maintain the greatest percentage of sales of 
'profitable brands' over 'price brands' will come 
through with the strongest ousiness and the most 
desirable patronage. 

"Having in mind the welfare of our grocery accounts 
as contributory to our own welfare, we intend to 
contribute all that we can to a program of profit- 
able merchandising of dairy products." 

The policy of this firm is intimately related to 
the fact that it has had s.erious opposition from the retail 
grocers because of direct sales to the home. Hence, it 
has been mailing strenuous o+'forts to court the goodwill of 
the dealers by this price maintenance plan. 

III. Res istances to Resale Price Co ntrol in the G rocery Trade . 

On the basis of the evidence in the preceding sections derived from 



(*) August 5, 1932 p. 23 
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the experience of the trade plus a -priori reasoning it is possible now 
to indicate the prime reasons for the slight amount of resale price 
maintenance in the grocery trade. These reasons are found in a number 
of serious resistances to the bperation o: resale price control plans. 
The resistance must be classified into two groups in order to indicate 
their qualitative differences: (l) those of a potentially ephemeral 
nature (2) those of a permanent quality. The potentially ephemeral 
resistances constitute those that are derived either from current 
attitudes, current knowledge, or temporary conditions subject to change 
in the futxire. However, it need not follow that they will actually be 
modified; conceivably some of them may even become aggravated. The 
resistances of a permanent quality are so deeply imbedded in the 
conditions and characteristics of the trade as to represent more funda- 
mental threats to schemes of price control. 

1. Potentially Ephemeral Resistances 

The resistances that may represent merely temporary barriers may 
be enumerated as follows: 

1. Lack of knowledge of the Fair Trade Law. The majority of 
dealers and many manufacturers and distributors have no 
knowledge or merely a very hazy, vague knowledge of the 
Pair Trade Act. 

2. The contention that the law is unconstitutional. Without 
doubt a considerable number of manufacturers and distributors 
take no active interest in the law because they feel that it 
may soon be declared unconstitutional. 

3. The presence of the I1RA code. During the Period of the code 
a number of firms that had attempted resale price control 
dropped their plans because they deemed the code stop loss 
stipulation adequate. 

4. The Unfair Practices Act. At present without doubt trade 
interest is focussed upon the Unfair Practices Act as a . 
procedure that appears more advantageous, all factors con- 
sidered. 

5. The lack of pressure from dealers. Resale price maintenance 
derives its vitality primarily from the organized, coercive 
influence of the retail interests. This influence has been 
almost negligible in California, to date. 

6. Lack of Cooperation among manufacturers and distributors. 
Effective resale price control can be derived usually only out 
of cooperation among. the suppliers of products in the same class. 
The experience of the trade has been that -my given manufacturer 
assumes a tremendous risk, as "ell as responsibility when he 
ventures alone. To date, members of the trade have not indi- 
cated a sincere willingness to cooperate in establishing uniform 
policies. 

7. Lack of leadership. ! T ext to the pressure from "the retailers, the 
9726 



i 



- '.'1- 

i quality of leadership is the most important factor. The 
grocery trade has demonstrated that it possesses able, 
aggressive leaders; however 9 the attention and energy of 
these leaders have been directed toward other problems such 
as the anti-chain tax, and the Unfair Practices Act. 

8. Unsatisfactory experience', Price maintenance, because of its 
ineffectuality in the past, has left a poor savour in the 
trade, which is a serious handicap. 

9. The inter-state problem. As long as California stood alone, 
many larger firms considered operation under the Fair Trade 
Act unfeasible because of the ease of obtaining sur/oHes out- 
side the state, and because of the nuisance of having variable 
policies between states. 

10. The trade custom of "specials". In the grocery trade there is 
a deeply rooted custom of featuring specials in advertising. 
Well-known advertised brands make the best specials; hence, 
there is great resistance to freezing them at any given point. 

2. Permanent Resistances. 

Among the more permanent resistances there appear: 

1. The inherent nature of many food products. Many food products 
must be sold under conditions of relatively flexible price 
adjustments. These adjustments may be traceable to perishability, 
to the close short run dependence of retail prices upon prices 

in the primary markets, to changes in freight rates or to other 
insistent, immediate facto-.?. The fact that foods bulk so 
highly in the consumer's scheme of things makes price an extra- 
ordinarily important element determining purchase hence there 
is great pressure from consumers upon dealers. Seasonal factors, 
also, frequently enforce snort run price adjustments. For 
those items in which short run price flexibility is essential 
it is exceedingly difficult, if not impossible to operate a 
system of price maintenance. Without doubt a significant 
factor influencing all the above considerations is the fact that 
raw material and factory costs of production constitute a much 
larger proportion of selling price than in the case of some 
commodities, as drugs. 

2. The numbers of dealers, wholesalers and suppliers in the trade. 
There is very intimate relation, other factors being ecual, 
between the relative numbers in a trade and the interest in, 
and feasibility of price maintenance. Both the grocery trade 
and the tobacco trade are made up of a large number of outlets. 
Consequently the problem of policing dealers as well as that of 
obtaining and maintaining cooperation among competitive suppliers 
in the sane commodity class are exceedingly difficult of 
solution. 

3. Closely related to the relative number in the trade is its 
relative complexity. Complexity is a factor of (1) the variety 

9726 



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in the structure of the trade (.?) the variety of products (o) 
the dfe^ree of indirect selling (4) the extent of inter-outlct 
competition. All of these factors complicate the grocery field. 
The structures of the trade in the retail business contains tre- 
mendous variety, including small specialists, general stores, 
■chain stores, eo operative groups, voluntary chains, department 
stores, supre-markets, large institutional buyers, eating places 
and miscellaneous tynes as veil as wide qualitative differences 
within each type. A similar condition exists in the wholesale 
trade, e:ce)t that a general tendency toward direct selling in 
recent years has tended to simplify the channels of distribution. 
The wholesale business, however is extraordinarily complicated by 
variations of type and by contractual relations (*) of -a variable 
quality. The general trend toward direct selling, although it 
has simplified the labyrinth of distribution has not similarly 
simplified the problem of price maintenance insofar as it has 
arisen out of the chain store growth for these organizations, 
usually resist price control. It is needless to over-stress the 
obvious variety of products in the food field. The prime diff- 
iculty from the standpoint of rice maintenance is (l) the lack 
of trade marking and branding for many food commodities of a 
staple quality allowing these non-branded items to be used as 
loss leaders in case the nationally advertised lines become con- 
trolled ( ') the lar e number of irivate brands and the general 
ease of access to unidentified merchandise for private label 
purposes. Consequently, the effect of resale price control arc 
intricate and very likely would frequently show themselves in a 
strengthening of private brand and unbranded items. Also, there 
is the fact that many advertised packaged grocery products are 
excellent loss leader items. This is a condition that to some 
extent le? ds to a demand for price control; likewise, it is a 
resisting influence insofar as the cutters prefer to employ these 
well-known brands. Finally, there is the matter of inter-outlet 
competition. Groceries are sold in many types of outlets under 
diverse conditions. A grocery product that is part of the main 
line of a specialist may be merely a side line to another type 
of dealer. This condition of inter-outlet competition is further 
aggravated by a wide range ■ in -equipment and services'-bet'wean firms 
in the field; sonscquently any attempt at standardization of - 
prices and margins would lead both to definite resistance and to 
the introduction of compensatory influences in other directions. 

4. The private brand threat. Private branding was mentioned above 

but is sufficiently important for separate treatment. The brands 
of chain stores, wholesalers, cooperative and voluntary chains 
and some of the larger dealers are already thoroughly entrenched. 
The constant pressure and threat of these brands makes manu- 
facturers who are selling on an identified, branded basis 



(*) For a detailed review see the writer's discussion "Trends in the 
Wholesale Grocery Trade in San Francisco" in the Harvard Business 
Review, July, 1950. 



9726 



-229- . 

exceedingly wary about any schemes that might give any advantage 
to these actual or potential arch competitors. • The—Situat-ion un- 
fortunately, is not clear cut. It in claimed by many that at 
present, prices are slashed an well-. :nown national brands in 
order to lure customprs into the stores to sell them privately 
branded merchandise. Also, it is hold 'th t ieslers put pressure 
upon private brands because of the absence of -ir fit in the hand- - 
ling of the well-.:rowr brands that are used as leaders. There 
is much evidence to supoort both of the above propositions. 
Conversely, it seems equally true, that with the prices of 
national -.rands stabilized, th nrice cutters and the chain stores, 
super-markets and large scale distributors in general would be 
forced to stress their private brands in order to obtain a 
differential position in the mar:et. It seems to the writer that 
neither of these general propositions nor their application with 
respect to cany given item or line is subject to irecise quantita- 
tive formulation or prediction for the outcome should be highly 
variable between firms. Two considerations stand out: (l) 
stabilized advertised brands provide ideal standards of compari- 
son for those who wish to push private brands (2) many advertised 
brands probably could maintain and improve their position by in- 
■ • creasing advertising and selling expenditure and by the aid of the 
goodwill of many independent merchants. Although it is exceeding- 
ly difficult to be certain of the proper conclusions, the writer 
inclines to the belief that many private brands would expand their 
sales under conditions of resale price control because of the do- 
minance of the economy price element in consumer buying of 
groceries. 

5. The strength of the int rests in opposition. Arrayed against 
resale price maintenance on the whole are the limited and non- 
service outlets, the prici cutters, the chain stores, the super- 
markets and the groom- .- departments attached to department stores. 
The volume of sales of these outlets is so large that manufactur- 
ers v/ill be exceedingly wary about employing a practice which 
might antagonize the. a causing a loss of their business or which 
particularly might lead them to push their own brands or non- 
controlled liner.. A voluntary, permissive scheme or resale 
price maintenance would of necessity gain its power only from 
a sufficiently well organized, coercive demand from the balance 
of the retail trade. 

Vfhat is the conclusion of this problem? Here, as in so many in- 
stances in the field of social science one cannot measure closely or pre- 
dict accurately; rather one must weigh carefully and lean only as far as 
lo fe ic allows. The wei fa ht of the evidence and reasoning, as far as the 
writer is concerned, points to the conclusion that resale price mainten- 
ance as a, permissive scheme cannot have wide application in the food 
field. Here and there, individual suppliers who are particularly powerful 
or have simple, direct relations with their dealers or find cooperation 
with their competitors easy, or are without a serious private brand - 
may operate successfully on this basis. However, voluntary, vertical 
price control does not seem feasible for the bulk of the trade under pres- 
ent conditions. This conclusion is re-enforded by the fact that in Great 
Britain with broad, legal rights, resale price maintenance is relatively 

we ak and ineffectual , in the gr o e ery trade. (*) , , 

(*) cf G-rether, E.T., Hesale Price Maintenance in Great Britain Sect. V. 
9726 



— — - ooo 

-230- 

CHAPTER IV 

DEVELOP; E^'33 UFDEE THE unfair pra ctices act 

I. The -period Prior to 1955 . 

The anti-discrimination act of 1931 and the sales below cost act 
of 1953 which provided the core of the Unfair Practices Act of 1935 
(see above pp 26-59) were invoked only s small number of times in the 
oeriod prior to 1935. In the city of Fresno in the spring of 1933, a 
chain store was convicted of varying prices between stores within the 
city for the purpose of destroying competition. According to the 
evidence offered, one unit of the chain was selling Ivory Snow two 
paclea^es for five cents at the same tine other units were selling it 
at thirteen cents a paclcage. It was alleged that the purpose of this 
variation in prices was to beat the advertising of an independent 
competitor who had offered to sell the same product at two packages 
for twenty-five cents. (*) The ruling of the lover court was affirmed 
on appeal to the Superior Court. 

The 1933 sales below cost act was used more largely as a potential 
threat and in an educational manner than in prosecution on the courts. 
There was considerable publicising of the penalties of the act together 
with a conferences with members of the trade who were deemed to be 
violators. However, a. small number of attempts at prosecution appeared. 
The first case in which ths defendant was held guilty was that of a 
dealer in southern California who had sold butter at five cents a. pound 
in combination with other articles at a time when the average wholesale 
price of butter was twenty-one cents a pound. This verdict was entered 
by a jury of nine women and. three men in a Justice of Peace court. (**) 

In the prosecutions and in the persuasive work amon the members 
of the trade only sales below invoice cost were considered violations 
of the law. In a number of instances, attempts at prosecution failed 
because the "cutters" were unable to produce their invoices. In another 
instance, prosecution failed because of lack of agreement that there 
was "intent to destroy competition" as well as for lac:: of evidence of 
sale below cost. (***) in another instance, an injunction was granted 
against a firm in San Francisco for violation of Code of Fair Competition 
of the Retail Food and >rocery Tr; do and for violation of the sales 
below cost statute. (****) 

(*) See the California Eeta.il grocers' Advocate, Dec. 35, 1931, p. 8; 
March 11, 1933, no 11,13,17; July 8, 1933, p. 5. 

(**) See the California Retail Grocers' Advocate, September 29, 1953, 
p . 7 . 

(***) The Commercial Bulletin, February 1, 1935, p. 1, in a news item 
headed "Dismiss Loss Leader Charge Against Smith." 

(****)See the California Retail Grocers' Advocate, June 15, 1934, pp 7 
and 9. 

9726 



~231~ 

1 1 . The period follovi-. the -ya;-ga e of the 1 955 Act . 

Late in the summer of 1 ?5 it became olcar that the food business 
as well as other lines in Calif or: -,ia were i«ei: . or-,; aized for a large 
scale effort to stabilise dices un i r t irovisions of the Unfair 
Practices Act. This movement is .-till lo i recent bo .ilow any proper 
evaluation; the information that follows should be ta :p.n merely as 
tentative indications of the ere 

Early in the summer already fm rocers in southern California, 
organized the Southern California. Food and Grocery Bureau, patterned 
after the old code authority to police the business. Shortly thereafter, 
a similar movement appeared in northern California. She writer does 
not have adequate details concerning the status of the southern organi- 
sation. In the northern iart of the state two organizations are- now 
in operation: (l) The Pood Trades institute, sponsored by the sta.te 
association (?) The Pood Industry Bureau in Alameda and Contra Costa 
counties and advertised as "succeeding the food and grocery code 
authority." The purposes of these two bodies and others that. appear 
to be springing up are: (l) to interpret the Unfair Practices Act to 
the trade (?.) tc receive complaints of violation (.?) to endeavor to 
settle cases raised in an .amicable fashion through persuasion and (4) 
when necessary 1 " to taUe legal action. The bureaus are supported by 
assessments similar oo those under the code. In fact, operations 
apparently are following the cede model in ^reat detail even to taking 
the code 6y loss limitation prevision as the proper figure for cost 
of doin business. Whether this fi aire is merely tentative and will 
be replaced eventually 'oy others obtained through cost surveys as 
mentioned in the Act remains to be seen. 

It seems that the agencic'; t' t arc springing into existence to 
operate under the Unfair Pr&i Lccs Act intend to rely primarily upon 
persuasive and educational to adjust the difficulties that 
arise, with occasional c ur a s :o demonstrate the coercive power 
of the Act. 

Sufficient time has not ■ lapsed as yet to Imow what the le^al 
outcome will be. A small v. iber of cases have arisen in the courts. 
In an instance in Los Angeles in the Superior Court a market was en- 
joined from selling any of its products below cost plus overhead. (*) 

Another violation, so it" was stated, would call for' prosecution for 
contempt of court and make the firm subject to fine and imprisonment. 
The most significant aspect of this case is that Judge J..T. B. Varne 
Interpreted the law literally and ruled that the defendant must include 
all the costs Of doin^ business enumerated in the Act. 

In northern California, a number of cases have been filed. Por 
instance." a complaint has been filed acainst a market in Oakland. This 



(*) Bulletin' #1', August 28, 1935 of the The Pood Industry Bureau, 

C. Fred. Verle^er, Executive Secretary. Se<= also the California 
Retail Grocers' Advocate, August 30, 1335, p. 5. 



9726 



-232- f '■-.:' 



organization immediately ..bought advertising s^ace co tell its side of" 



the case to the ->ublic It claims that it is paying higher wages' than 
asked under the iikA and £s operating an efficient business making, a 
fair profit. It did not, in it's advertising, attempt to reply to the ' 
specific allegation concerning sales below cost. (*) 



■ 
A second Complaint against another firm was filed late in October 

in Oakland. One of the markets of this firm employed a. full ;,:ia_,e 

advertisement in the .Berkeley Snapping News, November 6, 19^.5 'to state 

its. position. It raised the followi/:. ; specific questions: "What is 

the cost of doi'n^ business on ; particular article, singled out of 

the thousands of' articles that the Luc]:y llarkets handle? Is it the • 

average?. Doe's the "same minimum mark-up a:rily to fresh, meats, to ■ [k 

fresh fruits 'and vegetables, to uelicateseen and to dry groceries? 

Does it ajrrly to bread, milk, cg,.s, butter, flo>.r a.nd other commodities 

which every family eon. uraes daily, as well as to the foods which are 

not necessary to. the average household? 



' Late in the fall complaints were b-eing filed in many parts of - . 
California. Very likely, early in 1936 there should be sufficiently 
significant developments to allow sounder evaluation than at iresent. 
Under the circumsta.nces it seems Bomcwhak futile to speculate concern- 
in^ the legal -lossibilities. It may not be an undue bit -of prediction, 
however, to repeat what was stated in the section where the law was 
interpreted: viz., tint the law may have a large amount of a;n->licatio:i 
if it is interpreted in such a way as to make its effect merely thr.t of 
a loss limitation provision. On this ba.sis, considering the latitude of 
the ;oowers granted, it can be made more effective even than the NBA code. 
However, if the section of the law enumerating operating expenses is 
interpreted too literally, then it seems probable it may. shortly fall 
of its own weight both because of legal difficulties and the question 
of it's wisdom,, economically. 



(*) Sqe the Berkeley Gazette, October 18, 19S3; advertisement by 
Housewives G-rocerteria. 



9726 



x- £33— 
CHAPTER V. DETSLOR-ZNTS DT THS'ERUft TRADE 



1. 



It would "be possible to carry the review of attempts at resale 
price control in the drug trade br ck into the end of the last century 
and'-into the first few ye rs cf this century prior to the passage of the 
Cartwright Act, the anti-trust law of the State of California. Hpwev:r, 
for the purposes of this study only the immediate history is essential. 
In the first section of this study only the immediate history has been 
sketched; the interest at this point is in trade developments. In the 
period after 1909, following the a lending of the Cartwright Act a small 
amount of formal resale price maintenance appeared in the drug tro.de. 
As far as has leen ascertained no detailed account of these individual, 
scattered attempts is available in published form, except in those few 
cases where there was court action. It does not seem like'ly that much 
of value could be found by an intensive combing of this ->eriod. 

The passage of the Fair Trade Law in 1951 not only reflected a re- 
newed interest but aroused an enlarged interest. The great depression 
beginning in 1929 had lengthened into its second yefr and was producing 
its t; r nical repercussions of price cutting in the'retail trades. One 
misinterprets the quality of the demands for resale price control as far 
as retailers are concerned when the problem is approached merely as a 
depression phenomen on for its roots lie earlier and rest more deeply. 
However, the relative intensity" and vigor of the demands and the type of 
economic theorizing which arose to rationalize these demands^ are intimate* 
ly linked with the deep and lengthedad business slump, -The origins of 
the outer]'" for resale price maintenance in the drug trade, are found in 
the conditions of the last quarter of the preceding century when branded 
proprietary drug nroducts end large scale advertising intruded into the 
drug and chemical business. in a large scale f, shion, as well as in the 
normally intense nature of competition in the retail business. But it 
was the dominant price emphasrs of "the depression' and the shift of con- 
sumers towards firms that actually or allegedly sold at cut rates that 
brought the issue to its legislative and trade focus. 

The Pair Trade Law of 1931, although it expressed this increased 
interest produced no significant new developments. The reasons for the 
lack of use of the law apparently were: (l) the inherent quality of 
the statute as a volunt ry, permissive contractual act, (2) the la.ck 
of control over dealers who refuse to sign, (o) the ease of access to 
supplies outside the state, (4) the full depression influences were not 
as yet effective, (5) manufa.cturers on the whole were more interested 
in volume than in stabilizing the retail market, (6) the absence of an 
organized, concerted effort in the retail trade to exert presstire upon 
manufacturers to operate under the Act.* 



(*) Cf. Farnack, R. S. The California Fair Trade Act, pp. G and 9. 



9726 



-234- 

Among the first, perhaps in fact the first firm, to make use of 
the act was the Dr.. Miles 'company of long-established price mainten- 
ance fame. This firm organizaed a California subsidiary under the 
lav;, issued contracts and refused to sell to retailers rho did not 
sign, and claimed to have achieved practically complete coverage of 
the trade. On the wholesale end, it shipped on consignment thus main- 
taining control ove.r its products.* Yet few firms followed this load. 
It soon became clear that under the existing conditions the amount and 
quality ef resale price control woulu be little affected by the 1931 
statute. 

II. . The 1953 Amendment 

However, neither conditions in the trade nor the act remained 
static. It is' useless perhaps to speculate too closely concerning 
cause and effect. The lengthening shadow of the depression may have 
produced the conditions which made the passage of tthe 1933 Amendment 
possible; conversely, this amendment, once on the statute books, gave 
the stimulus to tue large significant movement which appeared. Per- 
haps the most important role of the amendment was the basis it gave 
for organization among the members of the retail trade to insist upon 
action from manufacturers. Retailers knew that they now had a blud- 
geon which could be made effective upon manufacturers who had "been in 
opposition, lukewarm and apathetic, or skeptical, and who had argued 
that the 1931 statute was too ineffective. This is not to say that 
manufacturers were entirely disinterested for a small number of large 
national distributors were attempting to stabilize conditions in the 
retail business. However, the great majority of manufacturers had no 
direct, individual incentive to operate under the act. Without doubt, 
if there had been a keen interest among manufacturers, many more of 
them might have found that the rights , ranted under the 1931 law would 
have allowed a large measure of effective control. This general ab- 
sence of activity and other evidence to be advanced later leads one 
to believe that price maintenance as a large-scale program would not 
have appeared to date if it had depended upon the uninfluenced desires 
of the majority of individual manufacturers. 



(*) cf The California Retail Grocers Advocate, Oct. 30, 1931, p. 2? 



9726 



-235- 

III « ii'c.ae conditions in 1953 

To appreciate fully the occurrences leading to and immediately 
following the 1933 Amendment it is essential to examine conditions in 
the retail drug "business at that time. "Cut-rate" selling had "become 
the dominant note in the Los Angeles and San Francisco metropolitan 
areas. It seems a fair generalization that there was an irregular wave- 
like influence propelled from these centers which finally lost itself 
in rural centers and to some extent in the smaller, independent stores 
even in metropolitan areas. This tendency towards reduced retail 
prices was a reaction "both to the depression and to the growing vigor 
of newer retail types which thrived under depression conditions. In 
the larger metropolitan centers there had arisen in recent years a large 
number of firms that stressed price and eliminated as much merchandis- 
ing service as possible. The price conscious consumers of the depres- 
sion years flocked to these enterprises in increasingly larger numbers, 
willing to dispense with miscellaneous services and 'reputation and con- 
venience in purchase. Unfortunately, however, the advertising and sell- 
ing stress of these firms also produced practices that interfered with 
the efficient performance of limited service merchandising. Advertis- 
ing in the newspapers became filled with improper statements of compara- 
tive value; likewise, there was much offering of "bait" merely for pur- 
poses of luring customers to the stores. That is, healthy price cutting 
became tinged to a degree that it is impossible to measure, with price 
cutting and price offering, of the quality of unfair competition. These 
practices eventually found their haven of complaint in the offices of the 
code authorities. 

It should be made clear that the intent at this point is to des- 
cribe conditions and to interpret a movement and not to evaluate it 
economically. Price reductions are, and should be, essential and nor- 
mal concomitants of periods of business decline. Also, the development 
of uneconomical and unfair pricing practices and of measures to bolster 
and stabilize the Torice structure apnear to be equally "normal" reac- 
tions to a long-continued period of decline. 

The conditions in the trade with respect to prices in 1933 and 
early 1934 may be indicated by a number of special cases and regional 
studies. Unfortunately, an analysis of advertised prices in Los Angeles 
in 1933 is not finished and cannot be included in this report. Among 
the members of the trade in the state it is the opinion that prices 
were lower in Los Angeles in 1933 than in any other part of the State.* 
For the purposes of this report only one small illustration in Los An- 
geles is available as yet. In November, 1933, a Los Angeles retail 
drug firm famous as a price cutter, in three advertisements in the Los 
Angeles Evening Herald advertised seventeen articles below wholesale list, 
These seventeen articles varied from 52.9 percent of the wholesale list 
to 88.6 percent; the arithmetic average was 74.2 percent. That is, this 
particular firm for these items was offering to sell from 47.1 percent 
to 11.4 -oercent below the regular wholesale price; on the average it 
had cut 25,3 percent below wholesal-e. 

(*) Typically, prices are somewhat lower in "normal" times in the Los 
Angeles area than in the San Francisco area. 

9726 



-236- 



An isolated example of a San Francisco firm reflects conditions in 
the same period in the northern city. (See Table 1.) In this instance, 
comparison with the recommended prices of the Northern California He- 
tail Druggists' Association is also possible. It will be notices that 
only eight items re re offered above the regular wholesale' list, only 
six at wholesale and ninety.-two below wholesale. The ari timet ic aver- 
age of the prices of the 105 items was 11.9 percent below the regular 
wholesale list. It will- he noticed also that the advertised prices 
averaged 36.9 percent below the then recommended prices of the Retail 
Druggists' Association. 

Conditions in San Francisco are portrayed more clearly by a gen- 
eral study. (See Table 2.) This study was based upon a collection of 
all prices of drug products advertised in the San Francisco Sxaminer, 
one issue each week, for the first six months of 1933. In order to 
make it possible to make comparisons with contractual prices "•oncer the 
California Fair Trade Law, only those -products were selected which in 
July 1934 were under contract. Table 2 make possible comparisons with 
the stated prices (i.e., the prices from which the firms alleged they 
'■'ere cutting) as well- -as with 1934 contractual prices. It should be 
noted that in this particular study all advertised prices were em- 
ployed, not merely those of selected, price cutters. It will be noticed 
that for the 134 products, the 705 price quotations in 1933 averaged 
75.75 percent of the 1934 contractual prices. The stated prices aver- 
aged 127.79 percent of the 1934 contractual prices. That is, the 1934 
contractual prices stood approximately half-way between the alleged 
prices and the actual prices of the advertisers. It is exceedingly 
interesting to notice, too, that the actual prices were .60.11 percent 
of the stated prices; i.e., on these items advertisers were claiming 
to be cutting prices about 40 percent. 

Table 3 represents a. similar study for the city of Stockton, Cal- 
ifornia for the same period. In this instance tne actual prices were 
not quite as low as in San Francisco; vi^ . , 79.48 percent of 1934 con- 
tractual prices contrasted with 75.75 percent in San Francisco. The 
stated prices also were slightly lower, averaging 124.61 percent of 
1934 contractual prices contrasted with 127.73 in San Francisco. Like- 
rise, the amount of the alleged price reduction is not so large for 
Stockton advertisers claimed to be cutting only 35.56 percent.* 

Although it is a serious error to interpret the origins and long- 
continued demands for resale price maintenance in terms of depression 
influences, it does seem clear that the vitality of the movement in Cal- 
ifornia in .1933 and thereafter is accounted for 'by the serious break in 
advertised .retail prices. It is impossible to give a measure of the 
general price situation because of qualitative factors that were present. 
Particularly important and impossible to portray statistically is the 
extent to which margins were maintained or widened or narrowed on items 
that were not advertised.. I.Iost difficult to demonstrate is the estent 
to which non-standard merchandise was being sold, however, there seems 
little reason to doubt the conclusion that the general impact of the 

( *) Probable the Los Angeles prices will average lower with larger al- 
leged reductions and that smaller reductions and. alleged reductions were 
prevalent in smaller centers. Proof or disproof must wait until the 
studies are completed. 
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-241- 

IV. The Period of t he N.R . A. Code 

The vigorous movement for resale price maintenance matured through- 
out the period of the N.R.A. code. It is entirely reasonable to raise 
the question of the reason for this development since it might be assumed 
that the operation of the code would have removed the basis o f the re- 
sale price control demands. On the contrary, the retail code seems to 
have accentuated, rather than allayed, the demands for resale price con- 
trol as far as the retail trade was concerned. In the first place, re- 
tail druggists were for the most part dissatisfied with the provisions 
of the retail code. They had fought for provisions which would have in- 
cluded a considerable margin in minimum selling prices. (*) Hence, the 
loss limitation provision which fixed the minimum at delivered whole- 
sale price seemed a weak compromise. In the second place, in California, 
and especially in Soutnern California, there was tremendous dissatisfac- 
tion among the majority of retail druggists with the quality of the en- 
forcement of the code provisions. A list of alleged violations charged 
against two firms by the Los Angeles Metropolitan Retail Drug Code Au- 
thority in the spring of 1935 well illustrates the basis of the atti- 
tudes of the groups in the trade: (**) 

"Assertedly advertising 50<^ size Colgates Shaving Cream for 18^ 
but selling the 25^ size instead at the advertised price. 

"Assertedly advertising (but not selling) large Zilaton Tablets 
for 40(# per bottle. 

"Assertedly selling 16 oz. Lacto Dextrin at 67^ though the stop 
price 89 1£. 

"Assertedly selling Kolynos Tooth Faste at 30^, though the stop 
price was 35</. 

"Assertedly selling Ever-Dry Deoderant at 67^, though the stop 
price was 89<£. 

"Assertedly advertising and selling double size Falmolive Shaving 
Cream and double size Coleate Rapid Shaving Cream for 29<# each, 
though the stop price on each was 31<£. 

"Assertedly selling Life Buoy Shaving Cream at 21^, though the 
st»p price was 25<#. 

"Advertising White Vaseline at 4^ and substituting Lepeco Petrol- 
eum Jelly without due notice and/or consent of the customer. 

"Asserted selling a substitute for vaseline, advertised in the 
Los Angeles Evening Herald and Express at 4<# a jar, though the stop 
price on vaseline itself was 7i. 

"Assertedly advertising (but not selling) Mu-Jol, 3SS and Frostilla 
at 34'/, 69^, and 34^, respectively, all below stop prices." 

From the standpoint of the majority of the members of the trade 
alleged violations as in the above list were not adequately curbed; 
from the standpoint of the alleged violators, undue attention was fo- 
cussed upon their affaire to the neglect of the mass of dealers. 

In the third place, the relative brevity of the code period makes 
it impossible to know what the ultimate outcome might have been. It 

(*) For details, see Fart II, Chapters III and IV of this report. 
(**) Taken from the West Coast Druggist, March, 1935, pp. 5 and 6. 

9726 i 






is possible that the trade eventually might have become more contented 
under codo regulations. In the fourth place, the code did provide the 
pattern and occasion for bringing the members of the trade together into 
organized expression; upon this organization it was possible to build 
the larger tenan.cs for resale price control as *ell as for the Unfair 
Practices Act. 

V • T he attitudes towards and experience with resale price control 
on the 'oart of members of the t~ad e . 

A. Retailer s 

In the summer of 1P34, one hundred retail druggist were interviewed 
in the San Francisco Bay Region, fifty in San Francisco, and fifty in 
the East Bay area. In this survey, there was no attempt at selectivity; 
_i.e. the interviewer talked to dealers in each district as he was given 
opportunity. As it happened, practically all the dealers who gave their 
opinions were independent pharmacists; hence, the survey largely ex- 
presses the stated opinions and attitudes of independent druggists in 
the San Francisco Bay region in the summer of 1934. (*) 

There is no room for doubt concerning the opinions and attitudes of 
these dealers. They expressed themselves unanimously in favor of resale 
price maintenance. Likewise they were equally unanimous in their sup- 
port of the California Fair Trade Law. It is exceedingly significant 
by way of contrast tc the grocery field and in relation to the quality 
of the organisation of the trade, that all of these dealers were informed 
of the law. ITinety-two percent stated that they were actively involved 
in supporting the '.ovenent for resale price control. Uinety-f our per- 
cent stated that they pushed the goods of manufacturers who controlled 
prices more than uncontrolled products. The methods most freauently em- 
ployed for pushing controlled items were; window and counter displays, 
personal re con .endr tions and suggestions, and advertising. On the other 
hand, uncontrolled items, it was stated, suffered not only from the 
aggressive attention given those under control, but by removal from dis- 
play (even concealment), and refusal to purchg.se. This group of' dealers 
gave every indication of knowledge of the law and active partisanship in 
furthering its use by manufacturers and wholesalers. Also, the majority 
of the dealers (84 per cent to be exact) appeared fairly well satisfied 
with the quality of enforcement of prices under contract. However, 
there was some dissatisfaction with enforcement and with the width of 
the margins allowed retailers. 

A few of the comments obtained from individual dealers are repro- 
duced below in order to s.dd meat to the bones of the above summary: 

Dealer 1 . kedium class, independent. 

This dealer had two complaints: (1) that margins were often too low 
under contracts; (2) that some manufacturers used Fair. Trade Contracts 
for bally-hoo purposes and did not attempt to enforce them. 

(*) In the grocery section the results of a similar survey among gro- 
cery retailers were given. 

9726 



- 243- 

Dealer 2 . kediuin cla.ss, independent . 

This dealer reiterated the saine views as in the interview above, 
hut added that discontinued pac.:pges 7ere a means of subterfuge and 
caused difficulty. Tor instance, recently a cosmetic manufacturer 
placed its product in a nev; garb; immediately the old package (hut with 
the same product) was cut "by a local department store creating difficul- 
ty for dealers who were attempting to sell the new package at a regular 
price . 

Dealer 5 . kedium class, neighborhood store. 

This dealer was decidedly in favor of price control primarily he- 
cause of the handicaps of the neighborhood pharmacists . lie stated that 
the downtown and department store operators carried only the fastest 
selling items instead of complete stocks, and that neighborhood stores 
cannot afford to sell as cheaply. He stated that margins on items must 
be 33-1/3 per cent for the neighborhood store. 

Dealer 4 . k'edium to upper class, neighborhood store. 

This dealer stated that the majority of professional lir ;s were on 
a controlled basis, but that the difficulty arose with the commercial 
(non-ethical - ) lines that didn't care hot' they acouired their business. 

Dealer 5 . High class, neighborhood store. 

This dealer at the time was holding a prominent official oosition 
in the retail drug trade. He held that enforcement of contracts was 
haphazard and listed sixteen manufacturers who were not living up to 
their contractual rgreements. 

Dealer 6. kedium class, neighborhood store. 

This dealer felt that the high level of intelligence of druggists 
and their fine organization gave them an unusual opportunity for coop- 
eration in controlling prices. He felt that manufacturers were too 
loathe to give adequate' margins because they wished their goods sold at 
the lowest prices. 

Dealer 7. k'edium class, downtown independent dealer. 

This dealer stated that cut-rate stores were extremely difficult 
to control because they were banded together in a national organization 
to assist each other in opposition to price control wherever it occurs. 

Dealer 8 . kedinm class, neighborhood, independent. 

This dealer felt that conditions vie re grea.tly improved -under the 
California kair T'"ade Lav. but that there was still too much lrxity in 
enforcement. He stated that large druggists were able to bu; below the 
market from "pirate" jobbers and "bootleggers". Also, that he was able 
to buy some items for stock from a. local department store at lower prices 
than at wholesale. He showed the interviewer his invoice for a toilet 

9726 



-244- 

soap, — 6 bars for 28(2? — and then pointed to a chain store advertisement 
where it was being offered at 3 "bars for 14(zJ. 

Dealer 9 . A large, well-known price cutting institution. (*) 

This firn sells for cash with limited service and equipment; ac- 
cording to the head of the firm in recent years its operating expenses 
have ranged from 12-J- to 13 "oer cent. In addition to having eliminated 
the "frills" in selling it puts all the pressure possible upon the re- 
source markets to buy as cheaply as -oorsible. Also, it has built a rep- 
utation as a source of sale for distress merchandise; conseauently, it 
is offered a great ceal of merchandise "uy uanufa.cture.rs, wholesalers and 
even other retailers belo 1 "' the regular prices. It also is a heavy buyer 
of bankruot stocks. This dealer feels that ; he serves a distinctive mar- 
ket which the majority of dealers cannot "oro~~>erly obtain and which does 
not compete with them. He argued that many of the firms that were now 
working for res le "orice control were originally price cutters; that 
once having become -established they became "respectable" and changed 
their tactics. As examples, he gave a large local department store and 
a local cnain system. This firm's volume increased, decidedly during the 
depression. The firm has signed no Fair Trade contracts but is able to 
obtain merchandise if it o.oes not cut prices. In those cases where irice 
cutting is impossible it is now pushing private]/'" branded merchandise. 
The head of the business stated that it was possible for them to estab- 
lish their owr. brands if forced to do it. The point of view of the head 
of the firm may e summed up in his own words: "One thousand small 
druggists wrwt me to do business as they do, « but this is an entirely 
different type of institution. 11 

In December, 1934, and January, 1S35, 62 retail druggists were in- 
terviewed in Los Angeles. In this survey, particular stress was laid 
upon an attempt to obtain statements of opinion from firms that were 
known as price cutters in the trade. In Los Angeles, as in San Francis- 
co, all of the dealers recognized the problem, and were informed con- 
cerning the law. Among the 62 firms interviewed, only seven expressed 
themselves in opposition to resale price maintenance; all of these firms 
were in the clase commonly dubbed "pine boaru stores" by the trade, with 
four operating /.ore than one store. If actions speak louder than words 
then six additional firms in this class should be considered in opposi- 
tion, for the; -ere at the time aggressively cutting prices even though 
they stated they preferred control. Without exception, the higher and 
middle cla.es firms favored price maintenance. The sajae attitude that 
was expresee.e '1th respect to the general auestion of resale price 
maintenance showed itself in the question concerning the California. 
Fair Trade Law. porty-one of the firms staled that they were giving 
specific support to price maintenance both through associational endea- 
vor as well as through putting aggressive attention behind controlled 
items (a.s in Sa.n Francisco). This group also "as concentrated outside 
the limited service; nrice cutting institutions. In contrast with San 
Francisco, however, there was general dissatisfaction with the quality 
of enforcement. The dealers who favored resale price maintenance were 
unanimous that only a small number of manuf acturers and distributors at 



(*) This interview was not summarised in the tabulation above, but was 
made at a later date by the writer, persona.il/. 

9726 



- 245 - 

this time were enforcing their prices effectively; the der.lers in the op- 
position, considered that enforcement was largely non-existent. 

So much for the general picture. In addition, it may be well to 
sketch in significant details "by recording a few of the separate inter- 
views : 

Dealer 1. High class, independent. 

This dealer favored price control, hat complained about the small 
margins under some contracts. Tor instance, he had just received a new 
contract rom a dentifrice company in which the new s top price was 38^ 
and the past cost him nearly 36{£. He stated that he would not sign on 
this basis. Also he complained bitterly of secret rebates and discounts 
given to the large chains. He stated that one of the local chains had 
ruined the loci business for severi ] 'hiskeys q-j cutting the prices so 
low that the -nailer dealers refused to handle these brands. This chain, 
for instance, was selling whiskeys at &2..81 a fifth which cost small 
dealers $3.13. 

Dealer 2 . Si .all, medium class independent. 

This dealer spoke 'for price control out said- that conditions were 
so bad at present he would not be surprised If bombs began to be thrown. 
He felt that things would be improved once the constitutionality of the 
Fair Trade Act was decided. He mentioned how the organi zed d emands and 
threat of substitution forced two manufacturers into adeauate enforce- 
ment . 

Dealer 5. Medium class, independent. 

This dealer, :, s is typical of his class favored price control but 
complained that -bout half of the manufacturers who issued contracts 
were doing it merely as a gesture and -ere not making a serious effort 
at enforcement. He laid calex blame upon the fact that manufacturers and 
distributors were "playing into the hands of business racketeers" by 
giving excessive discounts in order to get volume. 

Dealer 4 . Liedium class, independent. 

This dealer was " thourouhly disgusted" with the state of business, 
but didn't see what could be cone to change conditions. He stated that 
contract prices usually mean nothing; e.g., a certain product with a 
minimum resale price of $1.08 can b e purchased, anywhere for :?.84. (it 
was advertised at this figure by one of the chains on January 6, 1935.) 

Dealer 5. Lower class, snail independent. 

This dealer had turned his drug stoi . largely irto a liquor estab- 
lishment because he stated ti j controlled advertised brands of liquor 
gave 25 per cent and the unadvertised brands 33-1/3 per cent at least. 
In his drug business, he sells substitutes at a larger margin whenever 
possible . 



9726 



- 24^ - 
Dealer 6. edium class, independent. 

This dealer was thoroughly pessimistic \ml had gotten to the point 
where he refused to sign Fair Trade contracts because there was no 
follow-up on then anyway. The interviewer was given a copy of a con- 
tract received fro:: a large soap company six months ago which had not 
teen returned to the company; yet they received merchandise as usual . 
Several instances .ere given of purchases made from cut-rate competitors 
at prices belo' their own wholesale cost. 



Sealer 7 . Independent, "pine board". 

This dealer stated that he was selling below the contractual prices 
in a number of i istances and nothing was being done about it . He stated 
that in his locction he would be forced to close his doors immediately 
if he maintained prices. 

Dealer C. Independent, "pine board". 

This dealer was very outspoken and stated that his "nroblem in his 
location was to "meet all co -petition." If he world maintain prices his 
competitors would cut and he would soon be oat of business. For in- 
stance, he has found that whenever he has agreed t o maintain prices, 
his next door ccroetitor would cut below him. He stated that most man- 
ufacturer-, can be "chiseled down on their prices," — that he gets se- 
cret rebates and discounts, free goods and even cash for placing orders. 
For instance, he was offered a product at $1.20 a dozen and when he re- 
fused stating he must buy it to sell at 7^ each, he was able to buy it 
at 6(# by pi cing a small order for other merchandise. On nationally 
advertised oot.s he was meeting all prices evon though his margin was 
5 per cent oi less on these items. On unknown merchandise he was able 
to do much better; e.g. he ras selling an unknown hair dressing at 17^ 
which had cost hi:-: 4^. At times he would purchase a dozen items of a 
well-knovn product and advertise it well below cost - losing, say, $2.00 
on the merchandise, but obtaining "about $500.00 worth of advertising." 
Refusal to sell yi the part of manufacturers did not disturb him; he was 
always able to pic up the merchandise somewhere. 

Dealer 9 . Lledium to lower class, independent. 

This dei ler was unusual for his class because he opposed price con- 
trol because it would lead to an influx of new dealers, and everyone 
wotxld be as badly off a.s now. This dealer makes up much of his merchan- 
dise himself and substitutes it for nationally advertised goods . 

Sealer 1 0. Independent, "pine board". 

This dealer opposes price control along with nationally advertised 
brriids. His business is built primarily on substitutes for well-known 
brands. For instance, instead of a low-margin, nationally advertised 
dentifrice, he sells an im' nown one for 23«5 which costs him 12^. 

Dealer 11 . "Fine board" with a small number of stores. 

This depler stated that every legitimate operator should be free 
9726 



- .247 - . . 

to do as he pleases. He claimed that he gave his customers whatever 
they wished; if the/ wanted nationally advertised goods he would sell 
these to then r.t controlled prices. The latter portion of this state- 
ment obviously was erroneous; so the interviewer made the following 
coltction of prices in two of his stores in relation to the going stop 
prices: 

Stop Price Selling Price 

Product 1 .23 .17 

Product 2 .87 .79 

Product 3 .67 .59 

Product 4 .98 .79 

Product 5 1.50 1.39 

Product 6 1.25 .98 

Product 7 .98 .89 

Product 8 . .98 .89 

Product 9 4.00 3.69 

Product 10 .79 .69 

Product 11 .05 straight 6 for .25 

Product 12 • .98 .89 

Product 13 2.75 2.69 

Product 14.s .35- .34 

As far as the interviewer could discover, very few suppliers were 
making any attempt to force the firm into line. One well-known drug 
manufacturer stated that it had refused to sell hut that its products 
were obtained through unknown channels. In other instances, the dealer 
claimed that the prices were an error and that he would correct them, 
hut the "errors" continued indef initely. In one instance, a manufac- 
turer was told that as soon as the window was changed the error would he 
corrected; hut the window remained the same for weeks. 

Dealer 12. "Pine hoard" with small number of stores. 

This firm aims definitely to substitute for national brands . Well- 
known brands are placed on low shelves bee;: of the counter; substitute 
brands with wider margins are given the prominent positions. Tobaccos, 
particularly, were being used as loss leaders. 

Beyond the summaries and individual statements listed above there 
remain only the older and larger chain systems and department stores. 
It is significant that these chains now publicly take a position favor- 
able to resale price maintenance. The attitude of department stores in 
California appears to vary with the type of store; the upuer and medium 
class stores stating that they have no particular opposition to price 
control in their drug departments; the stores with a lower class clien- 
tele object strenuously to control. However, to the best of the writer's 
knowledge, no department store is an active proponent; the general at- 
titude is more nearly one of indif f erence . 

In summary, it may be stated that the active proponents of resale 
price maintenance in the retail trade are the great numbers of smaller 
independent dealers, particularly those in neighborhood locations and 

9726 



- 248 - 

middle Find uppex- class clienteles abetted somewhat by the older and 
1' ■'.;;:■ c i ;c 'on and department stores; in active opposition are 
those dealers usual l3 r with lower class clienteles selling merchandise 
with limited service or. t he basis of a price appeal. Since neither mar- 
kets nor merchandising practices remain segregated or pure, it is clear 
that our of bhis alignment there was bound to arise a serious clash of 
interests iv. c siness of retailing drugs and drug products. 

B. I .'anufy ctu w: re ; ad phole s .-.Lar s 

This field is too complica.ted and diverse to allow a thorough-going, 
represent tivs survey of the attitudes and e xperiences of the various 
groups in the trade. However, it is possible from the materials col- 
lected by th ■ Titer to illiminate the problem in a three-fold fashion: 
(1) by brief sue -ries of interviews, (2) "oy statements from particular 
firms whose experience is especially significant, (3) by reference to 
published sta< a errts and advertisements,. 

In the fall of 193 , fifty small and medium sized manufacturers of 
products sold through drug stores were interviewed in the San Francisco 
Bay region. Of these fifty smaller operators, forty expressed themselves 
as favorably disposed to resale price maintenance; yet the general at- 
titude was one of a athy. Thirty-five firms felt that they were injured 
by price cutting in the retail trade; the balance stated either that it 
made no differ nee or that it benefited them. All of the forty which 
were favorable t i -ice maintenance stated that they suggested resale 
prices; onl" half of them iade any attempt 't control. Prom the frag- 
ment \ry results of this particular interviewer's field work, it appears 
that small suppliers are neither especially interested nor, practically 
speaking, sufficiently involved in the problem to take a oositive posi- 
tion. 

audi .o:. e positive was the reaction obtained from interviews with 
firms selects, either because of prominence or the fact that they had 
had definite experience with price control. In January and July, 1935, 
twenty-nine firms were interviewed in Los Angeles; three of the group 
were wholesalers, the balence being manufacturers or their sales repre- 
sentatives in California.. Eighteen of the twenty-six manufacturers ex- 
pressed themselves as bein< f vorable toward resale price control; six- 
teen of the eir teen spoke also for the Calif ornia Fair Trade Law. 
Fourteen of tl s s me group of sixteen were at the time employing Fair 
Trade contracts; the other two were planning to use them in the near 
future . Pro erly enough, it was this same grouc that stated that price 
cutting in the "•< tail trade injured them; five of the balance said it 
benefited theu, and the others '.'aid it was a matter of indifference. 
Only fourof the twenty-six manufacturers did not suggest resale prices. 
Sixteen of the pro p ^ere making efforts at enforcement. Of the eigh- 
teen firms that had experience attempting to enforce resale prices 
(two of these had dropped their attempts at the time of the investiga- 
tion); nine stated that prices could be enforced effectively; five felt 
that enforce: e.t could be onl~ r moderately successful; four were dubious 
about the ••role a tter. AH of them contended that effective enforce- 
ment required cooperation with the other members of the trade. Only 
ten expressed themselves in a positive fashion that dealers showed 

9726 



- 249. ~ 

appreciation of efforts to stabilize prices. 

Of the three wholesalers interviewed, t ,-T o were in favor of price 
control, the third refused to venture an opinion. All of them stated 
that enforceusnt wa.s the manufacture s' problem; although two were 
cooperating op refusing deliveries if manufacturers so directed them. 

Equally as much meaning can be distilled from the detailed state- 
ments of a number of selected firms. 

Firm 1 . a very 'orominent eastern manufacturer of highest refutation. 

" This fim has issued contracts and thoroughly endorses price con- 
trol. It was having a great deal of difficulty enforcing its system. 
For instance, it had refused soles for two. years to two local price- 
cutting chains, "out both "ere obtaining suoplies through eastern chan- 
nels. In another instance, they have coded their merchandise and have 
been making purchases from the cutter but have as yet been unable to 
trace the source of supplies. This firm feels that it is impossible 
completely to out off supplies from aggressive cutters. 

Firm 3 . '."ell-known eastern firm of excellent reputation. 

The position of this firm was exactly similar to that of Firm 1 
(above) even to the difficulty of policing its plan. 

F irm 5 . One of the largest houses in the coiintry. 

This fir:' has a national stabilization plan which involves shipping 
on consignment to "holesrlers. It feels that its plan is working sat- 
isfactorily. 

Firm 4 . Large eastern manufacturer. 

Ninety— seven per cent of contracts were signed and returned. In 
cases of viol: tion this company buys up the stocks and then refuses 
sales. The man ; sr stated that-it rcas toe expensive to do a comolete 
job of enforcing, especially because most retailers "were price cutters 
at heart." As an example of the difficulties of policing the manager 
told of one Los Angeles firm which they had cut off, but which obtained 
supplies by arranging a tra.de with a South Carolina, wholesale house 
through 3, traveling dealer. 

Firm 5 . The California representative of an eastern he .se . 

This firm has been very aggressive in enforcing its prices and 
stated that it thought its plan was 100 per cent effective. Tnen the 
interviewer told the nany-o of two violations that he had noticed the 
reply was that when the constitutionality of the amendment was s ettled 
they would take further legal action. 

Firm 6 . A large national concern. 

This firm has been a leader in price maintenance. Without doubt. 

9726 



- 250 - 

it has been doing the best job of enforcement in the state. California 
sales have increased ? r> per cent, it was stated, because of the aoore- 
ciation of dealers. However, the company has in addition been doing a 
tremendous amount of advertising and sales promotional work. 

Firm 7 . A snail, national specialty manufacturer. 

This firm has issued contracts 1; rgely to oacify the trade but has 
made practically no effort at enforcement. 

IT i I'm 3 . A national specialty manufacturer. 

At the time of the interview this firm was considerably "soured" 
on orice mainten, nee, especially because it felt it was paying too much 
for results obtained. It was having great difficulty in enforcing its 
olan. It is interesting that since this interview the comoany has be- 
come more aggressive and has taken court action in a number of cases. 

Firm 9. A national manufacturer cf a specialty oroduct. 

This firm claims to have been the third to issue contracts in the 
state. Its experience has made it definitely opposed to orice mainte- 
nance. Previous to its attemot at control its product which is marked 
to retail at 50^ was generally sold for 29.;* in cut-rate stores; exclu- 
sive stores tried to get the full -orice. At this time the wholesale 
orice was $4.'">l a dozen with one oackage free with each dozen. Then 
the firm issued contracts it cut the wholesale orice from $4.00 to 
$3.20 a dozen and eliminated the free package. It set a minimum resale 
price of 39^. The comoany experienced the following difficulties: 
(l) the trade continued to insist upon the free package; (2) dealers 
resisted signing the contracts; (3) it was impossible to control the 
cut-price chains; (4) there was a heavy decline in sales. 

Film 10. A large national firm. 

For a time this company was not using contracts in California; it 
shortly began to do so. It was attempting to stablize prices by refu- 
sal to sell. The firm was having a great deal of difficulty in whip- 
ping the trade into line. One dealer particularly f/as highly success- 
ful in obtaining supplies indirectly. The firm was annoyed because 
it was receiving telephone calls at all hours of the day and night fror 
retailers who were complaining about price-cutting on its products. 

Detailed accounts of other interviews might be reproduced. In 
addition, reference may be made to uublished statements and advertise- 
ments in The Northern Calif ormina Drug flews . The list below is not 
exhaustive; it aims merely to reflect the public attitudes of a number 
of firms: 

1. Scie nti fic Lab o ratories of America, Inc . 

"with the oersistent effort and support of all the manufacturers 
...we will be able to win our battle against oredatory orice cutting." 
(January 1, 1934, p. 5) 



9726 



• 






- 251 - 

2. Sharp & Dohme . 

"Pair profits, stabilisation of industry, and eliminai ion of ruin- 
ous ;orice cutting is a worthy cause to rally to." ( January 1, 1934, p. 5) 

3 . D. T7eel-s & Compan y . 

"The California Fair Trade Act is one of the fairest pieces of le- 
gislation ever enacted." (January 1, 1934, p. o"> 

4 . Gillette Safety Razor Co., Lt d . 

"Without reservation and in connection with our national policy we 
intend cooperating with the California Fair Trade Act." (January 1, 1S34, 
p. 5.) 

5 . Abbott Laboratories . 

"I honestly feel that the business of Abbott Laboratories in north- 
ern California has increased materially through cur participation with 
the California. Retail Druggists Association in supporting the California 
Pair Trade Act." (January 1, 1934, p. 11. ^ 

6 . Youngs Rubber Corporation . 

"You (i.e. retail association) have it in -'■our nower to dictate 
to every manufacturer in the drug business." (January 1, 1934, p. 11.) 

7 . Bryant and Gattne r . 

"The California Fair Trade Act gives the merchant fair play, fair 
profits and a square deal, destroying the cat-throat chisel r and making 
personality a large factor in retailing." (January 1, 1934, p. 11.) 

8 . American Druggists S Tr ndic--.te 

"The California Fair Trade Act embodies exactly the things that 
we have been preaching for the past thirty years." (January 1, 1934, 
p. 12.) 

9 . Dr. Miles California Co . 

"The California Fair Trao.e Act is a boon, both to manufacturers 
and to retailers ... 7/e cannot but feel that a statute designed to 
prevent trade demoralization cannot be other than consittutional. " 
(January 1, 1934, p. 13.) 

10. A rinand Co . 

"Our experience has been entirely satisfactory." (January 1, 1934, 
p. 13.) 

11. northern Warren Sa le s Company Inc. 

"Any manufacturer who has a world-wide organization such as ours 

9726 



- 252 - 

knows the ideal conditions in the trade in a country like England where 
price stabilisation is perfectly lega. " (January 1, 1934, p. 13.) 

12. Geo. H. Sberha rd Co. (Distributor for the American Safety 
Razor Corporation, American Hard Rubber Cc . , Ingers oil-Water bury Co., 
and Amity Leather Products Co.') 

"Our clients are contributing in every way to make the law effect- 
ive, and are with the retail trade to the limit." (January 1, 1934, 

p. ia ) 

15 . Frcnchi-hyotrs Labo r atory 

"The Fair Trade Act .. should be the salvation for the independent 
druggist." (January 1, 1934, p. 14.^ 

14 . Johnson d- Johnson . 

"Tie an operating to the limit,: to maintain our established resale 
prices and we have had veiy little difficulty in doing so." (January 1, 
1934, p. 14.) 

15 . C astormilk Inc . 

"Tie have joined with you (_i.e_. retail association") in yonr fight 
to stop price cutting and the right to a legitimate profit." (February 
20, 1934~ p. 8.) 

16 . Johnson & Johnso n . 

"At the present time there are 145 dealers whom we do not recog- 
nise nor sell because of their violation of our national price protec- 
tive policy." (Advertisement, April 20, 1934, p. 11.) 

17. E. R. Squibb & Sons 

"Aggressive price-cutting is to be condemned as destructive of 
everv interest ... Me have released a list of certain Squibb products 
with rational minimum retail prices ... To the wholesale list prices 
have been added tne average cost of selling at retail this class of 
products as shown by national surveys. . . . Me hold these minimum retail 
prices to be fair to the retail . druggist and. to the consumer. (Adver- 
tisement, June 1, 1934, p. 2.) 

18. Sir- S. Shoemaker (representing Frostilla Co. and Scott & 
Browne) 

A letter to the Northern California Retail Druggists 1 As^ociation 
in which LIr. Shoemaker states that he has made a six weeks survey of 
conditions in the State and on this ba,sis decided to come under the 
provisions of the Fair Trade Act. (iTov. 15, 1934, p. 7) 

19. Bauer & Black 

"To date the contractual arrangements that my firm enjoys with : 

9726 



retailers under the California Fair Trade Jfcct have resulted in a wider 
distribution of the general Bauer & Black line and specialties, with 
increased emahasis and cooperation on the part of the trade . . . which 
is most gratifying." (Lar.l, 1935, p. 14. "^ 

It is exceedingly difficult to siimmarize the oninions, attitudes, 
and experiences of manufacturers and distributors as indicated in the 
surveys, individual interviews and published' statements presented in 
the preceding pages. However, the following conclusions force them- 
selves out of the evidence: 

1. The experiences and attitudes af manufacturers and distribu- 
tors were exceedingly diverse. 

2. The general attitude was one favorable to resale price con- 
trol but there were several violent oojectors. 

3. There was a great amount of indifference and skepticism espe- 
cially on the part of smaller firms. 

4. .There was considerable agreement as tc the difficulties of 
enforcement, especially because of ease of access to out of state 
sources of suoply. 

5. There was considerable agreement that effective enforcement 
required broad cooperation in the trade . 

6. There war. a ge.ieral feeling of instability because of the le- 
gal uncertainty. 

7. A mraber of firms were issuing contracts merely as a stage 
gesture, and without- anv serious intention of enforcement. 

8. There was considerable difference of opinion concerning the 
amount and quality;- of cooperation received from dealers after -orice 
control went into effect. 



9726 



- 25^: - 

Char) ter • VI . The Pressure from the Organized P.et ailers . 

There can "be no doubt that the movement towards resale -price con- 
trol since 1335 derives its vitality and momentum from the demands and 
methods off the organized retail druggists of the state. The story of 
the tactics 'in the retail trade deserves detailed recounting. The stra- 
tegy of the Organized retailers to bring manufacturers into line inclu- 
ded the following procedures: (I) educational work, (2) -pressure uoon 
firms by individual dealers through contacts with salesmen and "by corres- 
pondence, (o) raining the formal cooperation of allied drug trade groups, 
('4") militant organized refusal of cooperation to manufacturers who made 
no attempts at control, (5^ organized cooperation with manufacturers who 
sincerely attempted to stabilize the market. This general program was 
effective in both larger centers and smaller communities, expressing 
itself through the regular retail associations and the militant so-called 
"Captain Plan" which ranged bovond the Confines of association member- 
ship. 

After the passage of the 1933 Amendment a Fair Trade committee was 
set up in the California Pharmaceutical Association to endeavorto en- 
courage lahuf acturers to operate under the Act.* This committee made 
personal contacts with manufacturers, educating them concerning the sig- 
nificance cf the amendment. In September 1933 the committee sent a 
form letter and a sample suggested contract and a copy of the law to 
several hundred leading manufacturers who used drug stores as outlets. 
This letter was entirely educational in quality and tone,** explain- 
ing the act and amendment, and indicating how manufacturers could 
qualify tnemselves to operate in California. The final paragraph ex- 
tended an offer of cooperation as follows: 

"To those manufacturers who show a willingness to assist in 
our state recovery program toward sanity and stabilization of 
prices and who will operate under our Fair Trade Act, we can offer 
a wholesome cooperation and promotion of their merchandise that 
will result in our mutual welfare." 

Concurrently, druggists were making their individual points of 
view felt. TThen salesmen dropped in for business, the proprietor would 
ask them concerning the attitude of their firms toward the Fair Trade 
Law, and suggest that it would assist orders to issue contracts. Short- 
ly, dealers in their individual contacts became more aggressive and 
began refusing orders; in some instances even refusing a hearing to 
the representatives of firms outside the oale . Likewise, de.lers fre- 
quently wrote letters to manufacturers expressing their opinions in 
unmistal reable metaphor, 

Late in the fall of 1933, the efforts of retail druggists received 
the organizational support of a larger grouping called the California 
Fair Trade Federation. The Federation incorporated within itself 



(*) cf. warnack, U.S., The California Fair Trade Act, pp. 10-18. 
(**) A copy is reproduced in Y/arnack, on. cit. pp. 12-14. 

9726 



- 255 - 

representation of all the major groups involved in the drug industr-' 
except cut-rate institutions (i.e. independent and chain druggists, 
department stores, wholesalers and manufacturers).* The stated pri- 
mar- r purpose of the Federation was "to obtain as quickly as possible 
a validation of tne law by the Supreme Court." It was the Fair Trade 
Federation which -crushed the case of .feco Co . vs. Sunset Cut Hate Drug 
Co . to its successful conclusion. 

In. the next place, there was the aggressive, militant action taken 
by the retail druggists through their associations. The publications 
of the • associations echo a great deal of this spirit, a fe ,T examples 
are given below to illustrate the quality of this organized expression. 
The action of the retail druggists officially took two general forms: 
(l) threats of non-cooperation with manufacturers who made no efforts 
to stabilize prices, (2) specific offers of assistance to those who 
made si .cere efforts to operate under the Fair Trade Act. 

The official attitude was expressed on February 10, 1934 as fol- 
lows: "Don't give any cooperation to manuf .cturers who are not opera- 
ting -under the Fair Trade Act." ... "Go out of your way to five coope- 
ration to those manufacturers who are under the Act."** The militant 
feeling of many dealers was expressed in an editorial "by the executive 
secretary under the heading "Can We 3e Forced to Buy" on March 1, 1934, 
as follows:*** 

"This question is rapidly forcing itself to the front and is 
one which should be squarely faced and answered now. 

"Can we be forced to buy, is there sufficient pressure any- 
where which can compel us to stock certain merchandise and in con- 
•sequence sell certain merchandise? 

"Can the force of advertising overcome the quiet "resistance 
of the retailer who does not desire and who has no intention of 
selling a product which does not show him a net profit? Will the 
public continue to seek an article which they fail to find in place 
after place? Will the cost of advertising rise to the Point where 
it meets the diminishing returns from sales and if this does hap- 
pen, where will the manufacturer be, who, in his mad chase for 
volume, neglects to provide for his distributor? 

"What good to the manufacturer is the high priced ballyhoo 
of the expensive advertising agency? What good to him is that 
descendant of the leather lunged spieler - the radio announcer - 
if it costs more to get a customer than you can profit by him? 
You. might yelp the virtues of your product to the eager public 
over a national hook-tip or croon to them of the crying need of 
your wonderful discovery. Where can the-" - get it, Mr, Manufactu- 
rer, if your distributors have folded uo or if these self-same 
distributors cease being dupes and refuse to sell your bunk? 



(*) of. The northern California Drug -Hews, Dec; 30, 1933,, pp. 4,' 8 & 9. 
(**) The FOrthern California Drug Hews, February 10, 1934, p. 9. 
(***) The Northern California Drug Jews, March 1, 1934, p. 3. 



9726 



- 25 ; t - 

"Jive years ago; two years ago; yes, one year ago, such a 
situation seemed impossible, but today itis actually here - to 
be considered seriously, considered by even the greatest patent 
medicine baron of our time. 

"The retailer is becoming organized. Ke is beginning to 
know his strength, and above everything, he is learning that he 
must use this strength in his own behalf if he does not -oerish, 

"This sentence sounds like one of those general expressions 
which do not mean a thing - like an evasion of the real issue. 
It is not meant that way, it leads up to this plain and flat de- 
claration which admits of no misunderstanding. 

"I7e refuse to handle your merchandise unless you -orotect your 
resale price at a "profit level. ' T7e are offering you in Califor- 
nia a legal means of so doing. ¥e are sick and tired of hearing 
some manufacturers say, 'It costs too much,' 'It is a lot of 
trouble! . It will cost much less to come in than to stay out, and 
it will be much less trouble." 

Similar appeals aopaared in later issues. For instance, on I.Iarch 
10, 1954, (p. 5^ under the heading "Gold Bricks", the trade was told, 
"Yfher- one of these medicinal and commercial gold bricks shows up on 
the market, let's throw it in the ash can, even though it might be ac- 
companied by a Fair Trade contract." The sentence has reference to 
a product with a wholesale price of $4.^ 1 "' a dozen, and a minimum resale 
price of 39^. 

On Jul?/ 17th the Association passed the following resolution: 

"Resolved, that this Association urges and advises its mem- 
bers to completely discontinue the sale of the products of any 
and all companies which cancel Fair Trade contracts." * 

The impact of this resolution will be presented below in the dis- 
cussion of the case of a well-known dentifrice manufacturer. 

In addition to the threat of refusal to cooperate with manufacturers 
who did not meet the demands of retailers there was also a growing at- 
titude that the pharmacists had allowed too much manufacturing to leave 
their own establishments. A lengthy paper by John Culley expressed 
this point of view.** Mr. Culley, in this paper, appeals to pharmacists 
to return to their former professional status. He contends that retail 
drug ;ists "are tired of acting as a manufacturer's distributor without 
pay and many times paying for the privilege." He points out that as a 



(*) Northern California Drug News, Sept. 1, 1935, p. 3. 

(**) Northern California Drug News, Dec. 15, 1935, pp. 4-10. This 

paper was presented to the Northern California Retail Druggists 
Association November 12, 1935. 



9726 



" - 257 - 

result of the increase in trade-marked proprietary products the retail 
druggist "must increase his investment without any ad itional output. 
He is obliged to keep in stock a dozen or more varieties of Trade Liar?': 
brands of proprietary remedies having a. similar fanciful coined name, 
all containing the sane ingredients, claiming as having the same extra- 
vagant medical virtues and all outrageously over-priced, all of which 
is detrimental to the interests of the Fharmacist, the Physician and 
to the Fuhlic." Then it is argued that if it is ethical for manufa.c- 
turers to duplicate and imitate each other's products, it is equally 
so for the pharmacist. The -oharmacist is strongly advised to manufac- 
ture and introduce many of his own products, tnus giving him both a 
manufacturing and retailing nrofit. The uaner concludes with a number 
of examples to illustrate the writer's thesis: 

"For your information and convenience I will quote a few 
cost -orices. on some types of preparations that can be easily and 
quickly made by the retail pharmacist and quote also the cost price 
he will have to pay for a similar product from the lar 'e manufac- 
turer. It is interesting to note that the Hew Jersey' State Phar- 
maceutical Association, by means of a standing Professional Com- 
mittee recognize the facts expressed in this paper and have se- 
lected and placed before their members many formulae for reme- 
dies that are similar to well known but drastically overpriced 
proprietary Tra.de Marked articles. I have attached to this paper 
several formulae with working directions some of which are those 
recommended by the K.J. Ph. A. and will be pleased to furnish them 
to those interested: 



Elixir Amidopyrine 
Elixir. Phenobarbital 



Syr . P o tas s . G-uaiaco 1 
Sulohonate 

Eohedrine Inhalant 

Ephedrine Inhalant Com. 

Ephedrine Solution 3'^ 

Solution Ephedrine and 
E'ohineohrine 

Capsules Ephedrine Sulph. 
3/8 grain each. 

Capsules Ephedrine Sulph. 
3/4 grain 



Cost 


to 


buy 




$5.44 


10O0 


cc 


Cost 


to 


make 




1.25 






Cost 


to 


buy the 








Proprietary 




2.5/1 


■oint 




Cost 


to 


make 


with 








the 


USP che? 


li ca.l 


.35 






Cost 


to 


bwj 




3 . 00 


1000 


cc 


Cost 


to 


make 




.30 






Cost 


to 


buy 




17.00 


10' >0 


cc 


Cost 


to 


make 




.80 






Cost 


to 


buy 




17 . 00 


100' 1 


cc 


Cost 


to 


make 




1.35 






Cost 


to 


buy 




4.80 


pint 




Cost 


to 


make 




1.25 






Cost 


to 


buy 




28 . 00 


100O 


cc 


Cost 


to 


make 




3.80 






Cost 


to 


buy 




2.12 


1 




Cost 


to 


make 




.34 






Cost 


to 


buy 




3.50 


100 




Cost 


to 


make 




.60 







9726 



m 358 - 



The following represent just- a fev of the USP and NFpreparations 
that can be made much cheaper and easier than to buy re dy-nade: 

Brown Mixture 

rhubarb & S oda M ix . 

Elix. Sodium Bromide 

Elix. Potass'. Brom. 

Elix Teroin Hydrate 

Elix. Terpin Hyd. & Codeine 

Elixir Simple 

Syrup Eydr iodic Acid 

Syr. Wild Cherry 

Dobells Solution 

CalajQine Lotion 

Ointment White 
Precipitate 

Ointment Sulphur 

Peh lings Solution 

Cooper A 
Alkaline B 

Benedicts Solution 



Cost 


to 


buy 


.55 


Dint 


Cost 


to 


make 


.31 




Cost 


to 


buy 


.55 


pint 


Cost 


to 


make 


.30 


pint 


Cost 


to 


buy 


. 70 


pint 


Cost 


to 


make 


.27 


p i Q t 


Cost 


to 


buv 


.30 


pint 


Cost 


to 


make 


.30 


Dint 


Cost 


to 


buy 


7.68 


gallon 


Cost 


to 


make 


3.36 




Cost 


to 


buy 


3.50 


gallon 


Cost 


to 


make 


5.36 




Cost 


to 


buy 


5 . 40 


gallon 


Cost 


to 


m ike 


2.10 


gallon 


Cost 


to 


buy 


.78 


pint 


Cost 


to 


make 


.18 




Cost 


to 


buy or 


make 




from Pluidestra 




a ct 






.45 


pint 


Cost 


to 


make 


.20 




Cost 


to 


buy 


1.25 


gallon 


Cost 


to 


make 


.25 




Cost 


to 


buy 


1.50 


gallon 


Cost 


to 


make 


.73 




Cost 


to 


buy 


1.25 


pound 


Cost 


to 


make 


.60 




Cost 


to 


buy 


.67 


pound 


Cost 


to 


make 


.35 




Cost 


to 


buy 


1.00 


pound 


Cost 


tc 


make 


.10 




Cost 


to 


buy 


1.00 


pound 


Cost 


to 


make 


.4-0 




Cost 


to 


buy 


.60 


pint 


Cost 


to 


make 


.25 





"The average saving by making Tinctures fron standard Fluidex- 
tracts is from 25*o to 33^ not taking into donsideration the less 
amount of investment reouired by stocking l/4 aound Tluidextracts 
insterd of runts of tinctures, many of which are seldom used. 

"Other- products that the retail druggist should make rather 
than buy because they are cheaper and incidentally carry his own name: 



Odontalgicum, Toothache Drops. 
Dentifricium, Tooth Powder 
Collodium Saliclicum. Corn Cure 
Nebula Aromaticum. Cold and Catarrh 

Inhalant 
Pulv. Antiseoticus. Douche pbwd. 
Sodium Perborate Aromatic 
Mist Chloral & Potas. Brom Brcmidia 

Type 



N.F. 
N.F. 
N.F. 

N.F". 
N.F. 
N.F. 



VI. 



9726 



- 259- 

"I think with the foregoing examples which are but a t ^ a t 
sample from many I have given enough comparative costs to prove it 
is cheaper to make than it is to buy. " 

Thus it is seen that the retail druggists were aggressively in a 
formal organized way through their associations breathing defiance 
against manufacturers who they felt were getting the chief profits from 
distribution through drug stores; likewise, that there was arising a 
conception of entering into competition with manufacturers in order to 
regain profits, and restore pharmacy to its professional strtus. 

The other side of the picture represents the specific offers of co- 
operation with friendly manufacturers. At the annual meeting of the 
Horthern California Retail Druggists' Association, November 20, 1934, the 
following resolution was oassed: 

"Whereas, many manufacturers now operating under the California 
Fair Trade Act are making sincere efforts to enforce their contracts, 
and 

"Yvhereas, the earnestness and sincerity of these efforts are 
easily demonstrated by the fact that the contract orices of such 
manufacturers are generally maintained; 

"Therefore Be It Resolved, that all druggists of n* rthern Cali- 
fornia be hereby urged and requested to give full and loyal sup-port 
to all such manufacturers by merchandising, displaying and recommend- 
ing their products."* 

Beyond the coooeration extended by individual dealers, the Associa» 
tion stated that organized support was given a week each, to various 
manufacturers. The given week was named for the particular manufacturer 
and 3,000 window displays Wore installed at one time throught the state 
to feature the products of the manufacturer for the week. On August 
15, 1935, it was stated that the following manufacturers had received 
this service: Dr. L'iles California Co., G-illette Razor Co., E.R. Squibb 
& Sons, Agfa-Ansco Corooration, Colgate Falmolive Peet Co., Weco Pro- 
ducts Co., Coty Co., Ever-Dry Sales Co., Paver Co., Scholl Ilanufactu- 
ring Co. It was stated tha,t other weeks were being arranged. "Window 
displays, inside displays, sales cooperation for Fair Tro.de iianufactu- 
rers is the policy of the California druggists."** 

Militant activity was not confined to the larger centers, for small 
town druggists were also up in arms, refusing patronage, returning in- 
ventories to manufacturers and in general sharing in the movement.*** 



(*) Northern California Drug Ne^s, December 1, 1934, p. 12. 

(**) The Northern California Drug News, August 15, 1935, p. 6. 

(***) For a typical expression of opinion on the _iart of suall town 

dealers see the Northern California Drug News, December 1, 1934, 
p. 5. 



97Pfi 



The organizational core of the retailers' militant program was the 
now famous so-called "Captain plan" which has sines spread to other 
part f the country. There has been much discussion cf tl> origin of 
the Plan; as far as California is concerned it seems definitely settled 
tha.t its progenitor was an Oakland, California druggist. The essence 
of the Captain Flan merely was the detailed, organization cf each district 
so that there was an effective quick means of gaining cooperate n among 
druggists, whether members or ncn-members of the Association. A small 
grouo of dealers was assigned to a Captain whose duty it was to get 
them, insofar as possible, to operate as a unit. Through meetings, called 
usually at night after store hours so all might attend, personal dis- 
cussions and informal contacts the druggists developed, often, a col- 
lective attitude, policy and. procedure. Under the Fla.n there wa.s both 
the constructive attitude of cooperation with friendly manufacturers as 
well as the negative one of opposition to those who did not meet the de- 
mands of the dealers. There can be little reason to doubt that the plan 
was an effective element in the vrhole movement for resale price control. 
It appears, however, tha.t it was much more influential nea.r its birth- 
place in northern California than in the Los Angeles area.* 

The amount of strength that was demonstrated by retail druggists 
through the organizational devices discussed in the ore ceding pages may 
best be illustrated by two very famous cases. The first example is that 
of a Tirell-known aspirin manufacturer. This firm was reciuested, by a 
petition of signatures twenty feet in length early in August, 1934 to 
operate under the Act. "men the petition did not seem to receive the 
reception that the dealers expected, the published statements in the 
northern California Drup Hews became increasingly antagonistic in tone. 
It was made clear in these statements that the dealers had the power of 
substitution even in this case. The slogan was IT I'Ic Pair Trade Act - 
ITo Orders." The most torse statement of attitude was the following: 

"This Aspirin is a sort of Hapcleon in the oatent medicine army, 
but then, even the great Frenchman met his Waterloo when the 
rest of Europe got together, decided that the}*" had enough of him 
and cooperated against him."** 

The outcome of the controversy was that the company issued Pair 
Trade contracts early in 1935. 

The second case was publicised nationally and had repercussions 
throughout the entire coantr" r . It is peculiarly well adapted to re- 
flect the state of mind of retail druggists throughout the nation as 
well as in California. In the January 1, 1935 issue of the northern 

(*) For greater detail see Warnack, U.S. op.cit., pa. 17 & 18 and issues 
of the northern Balifornia Drug news throughout the period. In ad- 
dition to these published materials the writer has in his files, 
opinions of a number of dealers, especially in Los Angeles. 

(**) The northern California. Drug news, September 20, 1934, p. 3. See 
also the issues of August 2 r ', 1935, p. 5; September 1, 1934, p 8; 
September 10, 1934, p. 3; December 15, 1934, p. 6; April 15, 1935, p. 5. 



S726 



- 2*1 - 

California Drug Mews there is an editorial lauding a well-known national 
dentrif ice and antiseptic manufacturer for finally issuing Fair Trade 
contracts after months of request, including a formal petition, on the 
part of retailers. The company was praised particularly "because it gua- 
ranteed minimum margins of 18.4 uercent, 26.5 ~oercent and 34.2 percent 
depending upon the quantity purchased. However, on July 13, 1935, dea- 
lers in California received letters from this firm advising them that 
it was necessary to withdraw from operation under the Fair Trr.de Act 
since they were making shipments directly from Chicago and hence were 
involved in inter-state commerce. Immediately, a storm broke loose 
in California which swept into other states before it had spent itself. 
On July 17 the Northern Association nassed a resolution condemning the 
company and urging and advising its members to "discontinue the sale 
of the oroducts of any and all comoanies which cancel Fair Trade con 
tracts." Similar action was taken in the southern association. The 
response of the trade was amazing for an almost universal boycott was 
raised agpinst the firm. For a oeriod it was possible to obtain the 
products of the firm, primarily only from a few cut-rate outlets. An 
interesting aspect of the situation was that a number of large whole- 
sale houses also cooperated by refusing to deliver the items of the 
company. It aooears that the eomoany had a startling decline in sales 
in California. Worse still, the antagonism spread into other states 
and affec J , 3d sales and attitudes nationally. The outcome was that the 
eomoany ct mtulated completely again issuing contracts in California; 
and likewise, so it is stated, giving a check of $25,000 to the Nation- 
al Association of Retail Drug ;ists to be used in its fight for price 
maintenance legislation. 



9726 



- 262- 

Chapter VII. Enforcement 

I . The Proced ure of Enforc em ent 

It is essential to give a brief, separate review of the enforce- 
ment of resale prices even though there have been many references to 
this in the preceding pages. Once a manufacturer or distributer has con- 
cluded that he wishes to operate under the protection of the Pair Trade 
Law, the first step is the issuance of contracts. Literally, it ap- 
pears from the wording of the 1933 Amendment - one signed contract might 
he the basis for action. The customary .procedure is to obtain a rela- 
tively complete coverage of the trade. Warnack, in his review of the 
California Fair Trade Act, of April, 1935 enumerates fDur types of con- 
tracts: 

1. Manufacturer - retailer contracts. 

2. Wholesaler - retailer contracts. 

3. Broker - retailer contracts. 

4. The omnibus contract. 

Warnack concludes that the latter two contracts are of question- 
able legality, and strongly advises the direct manufacturer - retailer 
contracts. For the time "being the matter of details of legality must 
be held in abeyance until the legal status of Amendment 1-1/2 is 
settled; only then may minor related legal details he thoroughly es- 
tablished. 

A great many contracts nave "been issued in the state with consi- 
derable variation between them. Slightly more than three hundred manu- 
facturers and distributors were named on the official Fair Trade List 
of the Northern California Druggists Association at the end of 1935. 
Rather than attempt to work through the details of a large number of 
individual contracts it will be adquatc for the purr>ose of this review 
to reproduce the contract forms recommended by the Northern California 
Retail Druggists Association for (l) the general type cf contract bet- 
ween a producer or distributor and retailer; (2*1 the "omnibus" contract* 
for general wholesale purposes. 

GENERAL TYPE OF CONTRACT 

CONTRACT BETWEEN THE COL-IP ANY AND 

RETAILER UNDER THE CALIFORNIA PAIR TRADE ACT 

THIS AGREEi-ENT entered into as of this da-/ of 



193_, by and between the Company, a California 

corporation with offices at , (hereinafter called 

"Distributor"), and _, of 

California (hereinafter called "Retailer"). 



(*) Taken from the Northern California Drug News, August 15, 1S35. 



9726 



- 2fi3 - 

WITNESSETH: 

Wnereas, Distributor is engaged in the sale and distribution of 
commodities of standard quality which 'bear, or the label or content of 
which "bear, the trademark, brand or n.irae of the producer or owner of 
said commodities, particularly including 

, . ...'..' ' ; and 

* 

Whereas, Retailer is engaged in retail business in the State 
of California, and sells said commodities to consumers thereof; and 

Whereas, Distributor and Retailer mutually desire to avail them- 
selves and the public of the provisions and protection of the "Fair 
Trade Act" of California as enacted in 1931 and enlarged in 1933; 

HOW, THEREFORE, in consideration of the premises, the promises 
herein contained, and for other considerations, the parties hereto 
hereby agree as follows: 

1. Retailer will not, within the State of California, advertise, 
offer for sale, sell or resell any of sa.id commodities except to bona 
fide consumers nor at prices less than the following: 

(IITSEST nnilMOli PRICE schedule) 
Distributor reserves the right to change said price schedule at 
any time "by notifying Retailer thereof and Retailer agrees that all 
such changes upon "being made, shall become the prices stipulated in 
this contract. 

2. Distributor agrees that so long as Retailer faithfully ob- 
serves all the terms of this agreement and maintains a credit standing 
satisfactory' to Distributor, Distributor will sell (or cause author- 
ized persons' to sell) said commodities to Retailer at the current 
standard retailers' discounts, established by Distributor. 

3. Retailer agrees neither to give away any article of value, 
nor to make any concession in connection with the sale of said com- 
modities. 

4. This. agreement may be cancelled on _ days written notice 
given 'by either party hereto to the other. 

5. In the event, (a) of closing out Retailer's stock for the 
purpose of discontinuing delivery of any of said commodities, or (b) 
that said commodities in Retailer's hands are damaged or deteriorated 
in quality, or (-c) that Retailer has on hand any of said commodities 
after this has 'been terminated in accordance with the provisions of 
Paragraph 4 ( or for any other reason), Retailer shall, "before offer- 
ing any of said commodities for sale at prices less than the minimum 
retail prices stipulated ty Distributor, first offer in writing to 
sell such commodities to Distributor at the prices at which Distributor 
is then selling such commodities to retailers generally in the State of 
California, and such offer shall remain open for ten days after receipt 
"by Distributor. 



!726 



- 2R4 - 

6. Retailer shall pay Distributor , as liquidated damages for each 
and every sale at less than the minimum price herein stipulated and for 
each and every other violation of this agreement 'by Retailer, the sum 

of $_ , it being otherwise impossible to fix the measure 

of damages. Wherever Distributor shall institute, and prevail in, any 
proceedings or action in any court against Retailer in connection with 
this agreement, Retailer agrees to pay Distributor a reasonable attor- 
ney's fee. 

7. Both parties agree that this contract shall be effective with- 
in the State of California, and not elsewhere. 

Ill WITNESS WHEREOF, the parties hereto have executed this agree- 
ment, in duplicate, as of the day and year first above written. 



Distrioutor 



Retailer ■ 

"OMNIBUS CONTRACT " 

JO-EN DOE {■ COMPANY 

RETAIL SALES C Oil TRACT 

FOR MERCHANDISE BEARING THE TRADE-MARK, BRAND OR NAME OF THE 
PRODUCER OR OWNER AND DISTRIBUTED BY JOHN DOE & CO. INCORPORATED, IN 
CONFORMITY WITH THE FAIR TRADE ACT OF THE STATE 07 CALIFORNIA AND 
OPERATIVE ON TRANSACTIONS WITHIN THE STATE OF CALIFORNIA ONLY. 

THIS AGREEMENT made and entered into this day of 



193_, by and "between John Doe & Co., Incorporated, a corporation^ 
hereinafter called the Wholesaler, and 



(Write exact individual or firm or corporate name) 

of ,_. , California. 

(Street Address) (City) 

hereinafter called the Retailer. 

WITNESSETH: '. 

Whereas, (a) Wholesaler is engaged in the distribution to retail- 
ers in California of various commodities of standard quality which bear 
the trade-marks, brands or names of their producers or owners; (b) said 
commodities are in fair and open competition with other commodities of 
the same general class produced by others; (c) Wholesaler maintains 
stocks of said commodities within the State of California, for sale and 
distribution therein; and .(d) Retailer is engaged in the retail sale 
and distribution of such commodities within the State of California; and 

Whereas, Wholesaler and Retailer mutually desire to avail them- 

9726 



~ <*->r 



selves 'and the public of the provisions* and protection of the Fair 
Trade Act of California as enacted in 1931 and enlarged in 1933, 

NOW, THEREFORE, in consideration of the premises, the mutual 
promises herein contained, and for other consideration, the parties 
hereto hereby agree as follows: 

1. Whenever the term "commodity" or the term "commodities" is 
used in this agreement, the same shall be construed to -mean any subject 
of 'commerce which bears the trade-mark, brand or name of the producer 
or owner thereof and which is in fair and open competition with com- 
modities of the same general class produced "by others, including, with- 
out limiting the generality of the' foregoing, all commodities bearing 
trade-marks, brands or names of Wholesaler. 

2. Retailer will not, within the State of California, advertise, 
offer for sale, sell or resell any commodities which, "bear., or the 
labels or containers of which bear, the trade-marks, brands or names 
of their respective producers or owners at prices less than those set 
forth in retail price lists which have been, or hereafter may be,- 
furnished to Retailer by Wholesaler - . All such price lists shall ex- 
pressly and ^plainly indicate that the 'commodities and prices listed 
are within the terms of this contract. 

3. Wholesaler reserves the right to change any and all such 
pri.ee lists at any time (and from time to time) and Wholesaler will ' 
make reasonable efforts to notify Retailer promptly of changes. All 
changes in such price lists shall, immediately upon being made, con- ■ 
stitute, the minimum retail prices, referred to in Paragraph 2. Whole- 
saler's latest price lists are (and all changes thereof, as and when 
made, will be) available to Retailer at all of Wholesaler's offices. 
Retailer's ignorance of retail price changes shall not excuse Retailer 
from any breach. of this agreement. 

4. Retailer will not sell said commodities, or any of them, to 
any persons except bona fida retail consumers, nor will Retailer 
assist any third person, firm or corporation in obtaining any of said 
commodities for purposes of resale'. 

5. The giving by Retailer of any article of value in connec- 
tion with. the sale of any of said commodities or the making of any 
concession in connection with the sale of any of said commodities, 
without the prior written authorization of Wholesaler, shall con- 
stitute a breach of this agreement with exactly the same effect as if 
Retailer violated the provisions of Paragraph 2 hereof. 

6. In the event: (a) of closing out retailer's stock for the 
purpose of discontinuing delivery of any of said commodities or (b) 
that said commodities in Retailer's hands are damaged or deteriorated 
in quality, Retailer shall, before offering any of said commodities 
for sale at prices less than the said minimum retail prices, first 
offer to sell such commodities to r .'holesaler at the prices at which 
Wholesaler is then selling such commodities to retailers generally 

in the State of California. In any event, in the case of Retailer's 
sale 'of any of said commodities which are being closed out or a.re 

9726 



- .3^ - 

damaged or deteriorated in quality, Retailer shall give explicit notice 
to all purchasers that such is the case, anc? such notice shall be part 
of all advertising and counter-displays referring to such sales, 

7. The parties, hereto recognize and agree that it is impossible 
to determine the actual damage which will result 'to Wholesaler from 
sales made by Retailer in contravention of 'the terms of this agreement 
and they therefore agree th t Retailer shall pay to Wholesaler, as 

in quidated damages, the sum of Twenty-five Collars ($25) for each sale 
made, by Retailer in violation of 'my provisions of this agreement. If,, 
and as often as, Wholesaler shall institute any proceeding or notion in 
any Court a/' a ins t Retailer for any breach of this agreement, Retailer 
agrees, in addition to all court costs, to pay Wholesaler a reasonable 
attorney's fee. It is further agreed that, in addition to other legal 
rights and remedies, Wholesaler shall be entitled to injunctive relief 
against any and all actual or tnreatened breaches of this agreement, 

8. Loth parties agree that this contrast applies onlir to trans- 
actions within the territorial boundaries of the State of California. 
However, : both parties further agree that neither shall attempt to do 
indirectly, or by means of my subterfuge, anything contrary to the 
letter and spirit of this contract. '' 

9. It is the agreement and intention of the parties hereto that, 
if any provision or ;->art of this agreement shall be held invalid, the 
remainder of this agreement shall nevertheless be aeemed valid and. 
binding upon the parties. No change.s in this "Tinted form of contract 
shall be binding. 

IN WITNESS WHEREOF, the parties hereto have executed this agree- 
ment -.the day arid year first above mentioned, 

THE CALIFORNIA FAIR TRADE ACT 
MODEL CONTRACT 

In view of the discussion in the earlier sections of this report 
where the law was examined and a number of cases reviewed, it is not 
necessary a.t this point to examine the?e contracts in detail. With 
respect to the general type of contract it should perhaps be noted: 

(1) That 'the dealer agrees not to give away the product nor, to 
make miscellaneous hidden concessions as well as to hold the minimum 
prices i- 

(2) That the dealer agrees to offer to re-sell the products to 
the supplier in case of closing out the stock or in case of damaged 
goods before offering them for sale in the market below the minimum 
prices* ■..-,.■• } , 

(3) Liquidated damages are definitely stated in the contract. 

The omnibus form of contract is one employed by a wholesaler to 
cover the products of manufacturers. The form used by one lar^e house 
is so drawn as to include its own branded items as well. Beyond the 
provisions of the general contract, provisidn four should be noted, 

9726 



- 2ft7 ~ 

under which the retailer agrees that he will not sell the commodities 
.,o other except bona fide retail consumers , nor assist any third person 
to obtain the commodities for purposes of resale. 

For the purpose of this section it is adequate merely to note that 
the detailed provisions of the contracts provide the "basis for the type 
of court action which was noted in the earlier legal discussion. That 
is, the ultimate test of enforcement lies with constitutionality of the 
1931 act and its 1933 amendment, and the vigor with which manufacturers 
and distributors exert themselves, legally. Although the legal remedies 
are ultimate determinants, they are slow, cumbersome and. expensive. In- 
evitably, a system of enforcement must rely upon recourse to courts 
only in exceptional instances to determine legal rights or to impress 
the trade with the serious determination of the vendor. It is signifi- 
cant that in Great Britain there is a minimum of recoiirse to the courts; 
the trade prefers its own direct remedies. 

However, enforcement 'by direct action in the trade is complicated 
not only by the legal uncertainty with respect to the existing law but 
by the impossibility of close, formal, public cooperation in enforcement, 
The burden of enforcement is thrown upon individual manufacturers, dis- 
tributors and wholesalers ana cannot ue placed upon a formal central 
body representing all of these interests. Hence, direct enforcement 
is inevitably costly and difficult. It was these difficulties in Great 
Britain that led to the foundation of the proprietary Articles Trade 
Association which represents all the classes of the trade. In the ab- 
sence of the possibility of u roup enforcement individual supplies must 
rely upon: 

(1) General Educational work 

(2) Refusal to sell 

(3) Consignment selling 

(4) The application of legal remedies 

The essence of the entire problem of the supplier finally becomes one 
of his willingness and ability to cut off supplies to violators. 8b- 
taining evidence of violations and receiving complaints are not diffi- 
cult for competitors of offenders and the officers of retail associ- 
ations actively and voluntarily assist on this end. The real diffi- 
culty arises out of the personal and written contacts necessary for the 
educational and persuasive aspects of enforcement, and the policing, 
sleuthing, coding, marking, and the like, essential to the withholding 
of supplies. 

I I . The Effectiven ess of Enforcement 

The relative difficulties of enforcement vary widely between firms 
depending upon the number of dealers, the degree of selective selling, 
whether the manufacturer has personal, direct, freqiient selling con- 
tacts, the relative dependence upon cut-rate institutions, the desir- 
ability of given items for loss-leader purposes, the age, reputation 
and degree of monopoly power exerted by the vendor, and many other 
miscellaneous factors. Enforcement within one state alone is seriously 
complicated by the relative ease of access to supplies otitside the 
State; hence, the relative stability of a given supplier's national 

9726 



- 2fi8 - 

situation is an extremely consequential factor. It is not surprising 
therefore that both the willingness of 'Manufacturers to attempt en- 
forcement as well as the relative effectiveness of the endeavor should 
be highly variable, .as long as enforcement must remain an individual 
matter there seems to be no way /of equalizing its burden nor of reducing 
its expense. 

The drug trade is sufficiently simple and small in numbers to make 
enforcement largely effective if manufacturers eventually decide it 
worth the effort. In this respect it differs vitally from the.. grocery 
trade discussed above. 'The druggists are particularly fortunate be- 
cause drug products may not be sold in other than drug stores; thus the 
problem of inter-outlet competition is not present except in the case 
of department stores.* Tue prime difficulty arises out of the fact 
that so many proprietary drug products make ideal loss leaders. 

Throughout the pages of this study of the drug trade there have 
been numerous references to the actual effectiveness of the enforce- 
ment. To date, it cannot be said that minimum and fixed resale prices' 
have been entirely enforced throughout the state, It appears that on 
the whole, enforcement has been better in the central and northern 
portions of the state than in the °outhern In the San Francisco area 
it lias been claimed that enforcement is 35 per cent effective. Just 
what this statement signifies is not clear. Its demonstration on any 
basis would be impossible considering the numerous expedients of hidden 
price cutting. All the evidence leads to the conclusion tnat there was 
in 1934, and continued through 193b, much laxity of enforcement. In 
the early period, there was much dissimulation and a decided unwilling- 
ness to go to the expense and trouble of vigorous control in so far as 
mild methods pacified the trade. In the later period, many firms were 
in leash waiting for the settlement of the constitutionality of the 
1933 amendment. This aoes not imply that there was no enforcement ,, or 
that the trade was completely demoralized. Contrasted with the first 
six months of 1933 the 1935 state of affairs at least approached stabil- 
ization. The point is that the general scheme to date has not as yet 
become a smoothly operative mechanism; nor. even sufficiently so, to allow 
the leaders in the movement co relax their efforts. The final result 
will be seen only when the legal haze is removed. It seems fair to 
assume that as far as the drug tprade is concerned, the resistances to 
enforcement are not insuperable, at least for a period. 



(*) Without doubt, other classes of dealers would enjoy legislation 
prohibiting druggists from entering their fields. 



9726 



- 269 - 

•■ CHAPTER VIII - THE 'EFXTCTS I'POIT F7.ICBS AND MARGINS 

Although the first provision oi Section 1 of the Fair Trade 
Act states "that the 'buyer wilil not. resell such commodity except at the 
price stipulated by the vendor," the majority of contracts stipulate 
minimum resale prices, not fixed prices* Perhaps, this usage is related 
to the wording of the 1933 Ajr-ondment which reads "at less than the price 
stipulated in any contract." However^ a small proportion of contracts 
do establish fixed prices* 

From the standpoint of the trade, as well as of the public, the 
impact of resale price maintenance upon the prices paid by consumers 
and upon dealer margins represents an ultimate criterion of evaluation. 
The effects upou dealer margins is intimately linked with the general 
impact upon consumer prices because these margins constitute such a 
large proportion of the r.rices paid by the final buyers. 

The price problem, in so far as evidence is available to date, may 
be stated in the iorm of the following questions: 

1. What are effects of resale pi ice- maintenance upon prices in 
the various classes of institutions in the trade? 

2. What are the effects of resale price maintenance upon prices 

in various areas within the state, r-articularly the metropolitan,, subur- 
ban, and rural mar] rets? ... 

3. What -are the effects upon prices in California compared with 
markets outside, the state where the identical items are sold? 

In Section 3 .where trade conditions in 1933 were discussed Tables 
1, 2, and 3 and fc/ie other evidence given throws considerable light upon 
the question of the effects of resale price maintenance upon prices in 
the institutions of a cut-rate, character serving the limited service, 
metropolitan market. Table 1 discloses that in 1933 a prominent San 
Francisco down-town price cutter was offering to sell 106 drug products 
at prices which averaged 11.9 per cent below the regular, published 
wholesale list. Table 2, derived from a computation of advertised 
prices in the ; San; Francisco Ixami ner during the first six months of 
1933, discloses that these advertised prices averaged 75.75 per cent 
of 1934 Fair Trade- prices. Since only the larger, down-town institu- 
tions and chain stores were able to employ newspaper advertising during 
this period, this figure represents, essentially the price offers of 
priGe-cutting iiistitiitions.* 

Table 3 represents a similar study for Stockton, California; in 
this case the advertised -prices were slightly higher, 79.48 per cent 
of the 1934 contractLial prices contrasted with 75.75 per cent in San 
FraiiGisco. The meaning of, these studies is clear. Resale price main- 
tenance, if effectively enforced,, leads to a significant increase in 



(*) Beginning in 1954, there, appeared group advertisements of independ- 
ent dealers featuring items at code and Fair Trade minima, in an 
effort to educate the public to the fact that these items could be 
ptirchased at lowest prices at these stores. 



- 270 - 

prices on those contractual items advertised for sale "by metropolitan 
price-cutting and chain outlets. In the specific San Francisco in- 
stance, the particular items in Table 2 would he raised from the level 
of 75,75 per cent to 100 per cent or approximately 25 per cent, figures 
on contractual prices (33-1/3 per cent in relation to the adveitised 
prices). Presumably, if the Stockton study is indicative., this increase 
should become increasingly. smaller as one moves away from the large 
metropolitan centers. It is likely that the differential would largely 
disappear in rural centers. However, this evidence is inconclusive on 
three scores: (l) it tells us nothing about prices on items not ad- 
vertised in newspapers, especially non-standard and privately branded 
merchandise; (2) there is no. way of knowing the extent to which some 
of these advertised prices were "bait", i.e. , offers to sell without 
adequate stocks to supply buyer's demands; (3) they represent the 
price offers for these items merely of the down-town, larger firms and 
not of the great numbers of small, independent, neighborhood and 
urban and rural druggists. There is a little evidence on the first 
two problems; some data are available on the third question. 

In January, 1935, twenty independent retail druggists in the San 
Francisco Bay region were presented with a list of one hundred drug 
products selected from the Pair Trade list. These druggists were asked 
to state their present selling prices for these items and also their 
selling prices immediately before these items went under contract. Be- 
cause of the fact that quotations in a small number of instances were 
given for two sizes, the final list comprised 105 quotations. The 
aggregate average of the present ( i.e . , January 1935) selling prices 
were 105 per cent of the contractual minimum prices. The aggregate 
average of the former prices to the contractual prices was .114.6 per 
cent. That is, the going prices in these stores were approximately 
five per cent above the contractual minimum, and the prices prior to 
the issuance of contracts were almost 15 per cent above the contractual 
minimum, and most startling, the going prices had fallen about nine per 
cent following the introduction of contractual controls. If this very 
small sample may be taken as representative, then the following con- 
clusions seem propers (l) independent druggists in the main preferred 
to hold their prices rather than to fully meet cut-rate competition; 
(2) the introduction of contractual minima tended to make for a lower- 
ing of prices on these items in independent, small .drug stores. This 
result, if correct, seems entirely capable of explanation. Previous 
to the issuance of contracts the smaller dealers were unwilling to 
grapple closely with down-town cutters by reducing prices to their 
level because they knew there was no bottom to the market as far as 
they were concerned. Their preference, apparently, was to hold prices 
as high as possible, thus of course, losing some volume to their price- 
cutting competitors. Once the fair trade contracts fixed the limit to 
price cutting, then these smaller operators were willing to demon- 
strate that they were selling as cheaply as any one in the market. In 
fact, as pointed out above, numbers of them entered group advertising 
campaigns to educate the market along this line. Thus, Pair Trade 
contractual prices appear to have a lode-stone effect upon prices in 
the smaller independent stores pulling them down toward the contract- 
ual minimum. Judging from British experience, the minimum contractual 
prices will eventually become the going prices. Interestingly enough, 
this conclusion concerning the effect of contractual prices is similar 
to the unexpected result of the loss limitation provision during the 
9726 



- 371 - 

period of the drag code. It -was • anticipated by -she members of the 
trade that the prohibition of sales below wholesale price would tend 
to raise prices. Actually, it appears to ; iave reduced the range of 
variation and to have pulled the general level down slightly.* 

Finally, there is the comparison on contractual prices within 
California with prices on identical items outside the stat •- Table 4 
shows the results of a study of prices on identical products in depart- 
ment stores in Fortland, Oregon and Tacoma, ■Tashington, in relation to 
California contractual prices. These prices were obtained through the 
head office of this firm in Oakland, California through which the Port- 
land and Tacoma invoices were cleared. Since Fair Trade Laws patterned 
after the California statute were not massed in Oregon ** and Washington 
until 1935, this study represents a comparison of California contractual 
prices with non-corftractual .price's 'on the' Pacific Coast. ' The Portland 
prices averaged 101.3 per cent of California contractual prices; i.e . , 
they were 1.3 per cent higher. The prices of the 203 items in Tacoma 
averaged 108.4 per cent of txie California contractual prices; i.e . , they 
were 8.4 per cent higher. The range of variation within each group of 
products also is given in the table; in many instances there was a 
marked divergence het.we.en the. low and high prices.. Two conclusions 
seem proper to this comparison: (l) that the general average in Port- 
land and Tacoma was so close to the California contractual prices to 
lead to the conclusion that, the issuance of. contracts had. not in- 
fluenced this general average in a significant fashion; (2) that par- 
ticular prices were decidedly changed by the issuance of [contracts , 
judging from the range of variation in the two northern cities. The 
likelihood is that the variation in prices in the same commodity class 
in Portland and Tacoma is traceable to local corr>etitive factors which 
were not operative in the case of contractual prices. 

Table 5 portrays the results of a study of the prices of fifty drug 
products in twenty Boston store's 'in comparison with California con- 
tractual prices. Manufacturers' suggested prices, the Boston mode and 
the Boston arithmetic average, and the range of variation are all shown 
in percentage of California contractual lorices. The arith i ';ic average 
of Boston prices v/as 108.4 per cent of California prices; i_._e . , Boston 
prices were 8.4 ^er cent higher. Interestingly enough from a statis- 
tical standpoint the general model average was identical although in- 
dividual model averages varied considerably from the arithmetic mean. 
Manufacturers' suggested prices in Poston were 19.8 per cent higher than 
the contractual prices; the range was from the same price as the con- 
tractual, to 53.3 per cent higher. This Boston study points to con- 
clusions similar to those drawn from the Portland and Tacoma studies, 
for the difference in general average is not marked, but there are wide 
variations with respect to particular items. 

Fino.lly, an attempt v/as made to make a comparison with prices in 
Canada.*** However, the sample contained only 43 identical items and 
hence is not large enough for anything except illustrative use. Inter- 



~t*) See Part 1 1 ,~Chapt eTtll 

(**) Oregon's 1935 statute repealed an earlier, ineffective one. 

.(***)A Canadian price list was furnished the writer by the courtesy of 

F. A. McGregor, Registrar, Combines Investigation Act. 
9726 



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- 273 - 

estingly enough, the arithmetic average of these 43 items was 102.9 
per cent of California -rices; i.e. , 3.9 per cent higher. The: range of 
variation, however, was wick,, from 47.6 per cent to 145.1 per cent. 
The Canadian quotations were all on items protected in Canada. It is 
interesting that, although the average is so close to that of Calif- 
ornia under conditions of protection, there should he such a wide vari- 
ation with respect to individual items. Apparently there are signifi- 
cant. factors tinat make for variation in .individual products "between 
markets "both in the case of protection as well 'as in it's absence. To 
bhe writer the play of the forces determining' individual prices and 
margins has always been one of the most interesting and mystifying 
aspects of price theory and practical price policy, particularly with . 
respect to trade-marked, differentiated products. 

"Table "6 portrays the "minimum 'retail- ^marginsron lSl-fe drug products 
under contract as of July, 1934. 'These 1216 items were all the prod- 
ucts for which the writer was able to obtain wholesale quotations on 
the July 1934 list of contractual items. The list as a whole contained 
only 1571 items; hence, the computation is large enough to 'be entirely- 
representative. It should he noted that this computation is made only 
for the July 1934 prices; the current list is considerably larger and ' 
it is possible that there have been.- some- changes pin ;margins. The last,' 
complete 'list was published October 'l',-, 1935. and. contained 1899 items. 
On this latter list there -appeared 503 new' items i- whereas 183 former: 
listings had been dropped. Since October there has been a considerable 
increase in the number of manufacturers and distributors so that now . 
( i.e . , January 9, 1936) there are slightly more than 300 of them com- 
pared to 253 on October 1, 1935. 

There wash, wide variation in margins allowed dealers .under con- 
tract between firm's, between products in. the same class, and :between 
commodity classes. The aggregate arithmetic average was 31,02 per 
cent. The lowest class average margin was for tobaccos, 18.92 per cent; 
the highest was on sundries, 42.24 per cent. The lowest individual . 
margin was on a shaving supply, 5.1 per cent; the highest on a cod : //, 
liver oil, 81.9 per cent.* The ; range a of- variation shows many items sold 
.far below an average operating margin figure ; on the contrary many 
products are. far above, the' typical dealer's average f igare* ■ Most 
significant is the total, aggregate average of 31.02 per cent. It is 
rather surprising that so high an average should appear with a plan 
but recently introduced, for some manufacturers were loathe to raise 
prices sufficiently from their cut-rate levels to allow wi margins. 
Almost all the- products with narrow margins had been reduce... very low 
in cut-rate' ■•establishments — often below wholesale cost. The general 
average of 31.02 per cent just about approximates the rough figure that 
has been employed by the dealers. Commonly, dealers have maintained 
that they needed about 33-1/3 per cent -of their sales for gross margin 
purposes. In the Northern California Drug Hews , November 15,1935 there 
is published the results of a 1 cost survey, locally. .This survey shows 
a variation "in: total operating expenses- in the various central and 
northern California areas from 2.3.32 ,'p'er Cent -in the .Salinas .district 

to 37.75 per cent in Marin- .-County.;', .The average is given-' as 32.07 per 
cent. The figure for San Francisco; 'and -.the .-East Bay '.area is 32. 77. per • 
centi Thus, in terms of this' survey, the contractual 'minimum margins 
al ready average enough to me et the expen ses of the average dealer, mo re 
* -Readers will note that all margins are figured as percentages of 
contractual prices — not of wholesale prices. 

9726 






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- 376 - 



TABLE VI 



MINIMUM RETAIL MARGINS ON PRODUCTS IN THE DRUG TRADE IN CALIFORNIA 
UNDER THE CALIFORNIA FAIR TRADE LAW. JULY. 1934 

(Margins expressed as percentages of retail prices) 







Range 




Class of Produce Number of Items 


Low 


High 


Arithmetic Averages 


Antiseptics 


62 


10.3 


70.0 


29.07 


Cosmetics 


336 


6.2 


55-0 


32.69 


Cod Liver Oils 


50 


15.5 


81. 9 


31.31 


Cough & cold preparations 


24 


7.3 


.50.0 


34.2 


Dentrifices 


34 


lU.U 


58.8 


27.6 


Deodorants 


Ik 


13.8 


•33.^ 


25.26 


Effervescent 


13 


15.8 


U6.0 


24.91 


Eye Preparations 


6 


16,7 


50.0 


28.66 


Foods, Tonics, etc., 


55 


16.4 


4o.o 


27.9 


Foot Remedies 


51 


24.8 


64.0 


30.44 


Hair Preparations 


ko 


9.5 . 


. .34.5 


24.84 


Hospital Supplies 


37 ; ' ' 


i4.7 


61.0 


36.05 


Household Remedies 


13 ; i 


11.8 


48.7 


33.3 


Laxatives 


24 


20.0 


43.8 


■32.2 


Liniments 


13 


13.8 


33.^ 


26.52 


Mineral Oils 


12 


8.2 


71.9 


34.5 


Miscellaneous 


1+2 


15.7 


^5.9 


30.73 


Nasal Preparations 


6 


20.6 


33.3 


30.6 


Ointments 


' 30 


9.2 


^9.7 


29.06 


Patents 


^3 


18.8 


55.3 


31.7 


Pharmaceuti cal s 


2k 


13.9 


44.9 


28.4 


Pills, Tablets & Capsules 


^3 


13.0 


63.2 


31.2 


Salts 


k 


22.4 


50.0 


41.45 


Shaving Supplies 


52 


5-1 


62.4 


22.6 


Soaps 


18 


17.0 


65.2 


3L9^ 


Sundries , , 


112 


13.1 


58.5 


42.24 


Suppositories 


8 


24.1 


50.0 


21.73 


Tobacco 


kk 


13.0 


26.9 


18. 92 



Total (1) 



1216 



5.1 



81. 9 



31.02 



Total Average is an aggregate average, not an average of the class 
Average . 

The range is the lowest and highest of all the items not of the 
class averages 



Source: Prepared by E. T. Grether. 



9726 



- 277 - 



TABLE VII 



RETAIL MARGINS FOR TWENTY-SIX CLASSES OE ARTICLES IN THE DRUG AND CHEMICAL 
BUSINESS IN GREAT BRITAIN UNDER THE PROPRIETARY ARTICLES TRADE ASSOCIATION 

(Margins expressed as percentages of selling pri es) 



Class of Article 


Numb er 

of 
" Brands 


Average 
Minimum 
Margin* 


Range of 

Minimum 

Margins 


Average 

Maximum 
Mar-in* 


Range of 

Maximum 

Margins 


Antiseptics (includes mouth 
washes and gargles) 

Pace creams (includes cold, 


26 . 
5 


. 32-8 
33.7 


23.6-50.0 
25.0-38.2 

20.0-46.5 
18.7-39.7 
16.7-43.1 
29.0-40.0 
20.0-50.0 
18.0-44.4 
29.5-33.3 
16.7-39.7 
25.0-33.3 
15.2-31.5 
20.0-33.3 
20.0-46.1 
25.0-43.1 
25.0-33.3 
33.3-37.8 
23.1-39.7 
23.1-33.3 
22.5-37.5 

16.7-33.3 
16.7-33.3 
25.0-43.1 
33.3-42.8 
25.0-37.5 
25.0-50.0 


34.6 
35.9 

34.2 * 
27.0 
32.8 
37.8 
32.4 
31.5 
37.8 
28.5 
32.0 
26.4 
35.5 

36.3 . 
37.5 
35.0 
37.1 

' 33.3 
32.0 
Z .3 

30.5 
27.5 
33.7 
41.8 
36.3 
38.6 


25.0-50.0 
25.0-41.5 


vanishing and cleansing 


37 

54 

17 

8 

25 

14 

7 

38 

12 

30 

24 

) 20 

13 

7 

2 

9 

) .8. 

11 

' 19 

e),17 

14 

22 

11 


31.5 
26.0 
'30.5 ' 
35.0 
30.5 
28.0 
32.8 
26.0 
30.0 
23.1 
31.0 
31.5 
33.7 
30.0 ' 
35.0 
30.5 
27.-5 - 
31.5 

' 2*7 ."5 ' 

26.0 
32.4 
. 3.7 ..5 . 
31.0 
34.2 


25.0-52.6 
18.7-43.1 
16.7-46.1 




33.3-40.0 
25.C-50.0 




20.0-47.1 
34.6-39.7 
16.7-43.1 




27.0-34.2 


Pills. ..... .'. .'. . . . . .'. . . •'• •'• •'• . 


16.7-39.7 




32.0-42.8 


Powders, talcum (includes bath 

Shaving -soaps -(oake and powder 
Soaps, toilet (includes bath 
Soaps, medicinal (for human us 


28.0-50.0 
25.0-50.0 
25.0-43.5 
36.7-37.8 
23.6-43.8 
23.6-43.1 
22.5-43.1 

16.7-41.0 
16.7-35.9 
38.5-43.1 




35.0-46.1 
25.0-47.9 




25.C-50.0 


Total 


454 


29 . 5** 


15. 2-50. ©# 


32.4** 


16. 7-52. 6# 



SOURCE: '.Prepared tiy'E." T. Grether. 



* Arithmetic average. 
** Total average is 



# Hot the range of 
of 454 items 



not an average of averages, but an aggregate average 
average margins, but of individual margins in the total 



9726 



- 278 - 









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9726 



- 279 - 

efficient and limited service dealers would be allowed a very nice basis 
for net profit — if they obtained their old volume. Also, since these 
margins were computed from -"the regular published wholesale list, deal- 
ers may receive free deals or extra discounts at times oil some of the 
items. 

It may "be of interest to contrast these margins with those in 
Great Britain where resale price maintenance is old and well -estab- 
lished, having been put up on an associational basis in 189r when The 
Proprietary Articles Trade Association was founded. Table V contains 
the class averages and totals for a random sample of 454 items taken 
from the 1933 published list of The proprietary Articles Trade Asso- 
ciation. In this case it was possible to list both minimum and maximum 
margins because special discounts, etc. were published. The aggregate 
average of minimum margins was 29.5 per cent; for maximum margins it 
was 32.4 per cent. A glance at the table will disclose a wide variation 
in margins between items and classes. 

Table 8 represents a comparison of margins on 111 identical items 
in Great Britain and San Francisco. The aggregate average of minimum 
margins was 26.5 per cent for these 111 items in Great Britain; the . 
aggregate maximum margins , 30.0 per cent. Since this computation was 
for the period before fair trade contracts were effective, it was im- 
possible to contrast these margins with the specific contractual margins 
in. San Francisco. Instead a comparison was made between the British 
margins and those that would have been received by San Prancisco dealers 
if they had sold at the prices recommended by the local association and 
had purchased at the published wholesale prices. Figured on this basis, 
the total average of the San Francisco minimjam margins was 28.5 per cent, 
and of the maximum margins, 34.0 per cent. That is, the San Francisco 
recommended margins averaged from two to four per cent above those in 
Great Britain. On this basis (if proper) the actual average margins 
under contract on July 1, 1934 in. Son Francisco were approximately as 
one should expect. It is usually considered to be true that operating 
expenses in Great Britain are slightly lower than in the United States.* 

Beyond these questions of the average margins for cla~ t. of prod- 
ucts and the aggre. ate margin there remain a number of interesting 
questions' concerning individual margins in relation to the age, reputa- 
tion, and degree of monopoly power exercised by given firms and of 
margins in relation to fast moving items compared with slow moving items, 
and of well-known highly advertised products compared with less well- 
known items, especially private brands. A priori , margins should be 
narrower for products of old, well intrenched firms, and for highly ad- 
vertised and fast moving products than for others. But a priora reason- 
ing is peculiarly treacherous for problems of this sort. 



(*) Tables VII and VIII are reproduced from the writer's study. "Resale 
Price Maintenance in Great Britain." While in Great Britain the writer 
saw' no thorough-going studies of operating expenses in the retail drug 
business. A small study that he had access to showed gross operating 
expenses of about 20-30 per cent. 



9726 



- 280 - 

IX. 'THE EC0N0I/IC EFFECTS OF R23ALE FRICE CONTROL UNDER 

THE CALIFCRNIA FAIR TRADE LAW 

The first economic problem is that of the effects of resale price 
control under the California Fair Trade Law upon the competitive access 
to the market within the State. That is, does resale price control tend 
to improve the access to, and position in, the market of some suppliers 
and retailers at the exrense of others? Tnis question is one that in- 
volves the long run effects of the resale price control, and therefore, 
it is clear that sufficient time has not elapsed to allow a conclusive 
answer, expecially since the market has been under the general influences 
of the business depression. Furthermore, a conclusive answer to this 
question involves access to volume of sales data which are not available. 
Therefore, the comments that follow should be considered of an extremely 
tentative nature. 

It seems that there can be little reason to dispute the assumption 
that effective resale price control would throw a larger proportion of 
the volume of business of nationally advertised proprietaries and of 
staple, standard goods to the smaller, independent dealers. This is 
the faith that lies behind the fervor of these dealers; the general 
evidence justifies the belief to date. In more prosperous times this 
result should be even more marked. Conversely, the competitive position 
of the lower class, lower cost, cut-rate institutions should be weaker 
with respect to the sale of nationally advertised and staple goods. 
This would be a serious blow because their merchandising program is based 
upon the quick turnover of fast selling items at. prices below the market. 
Evidence is still inconclusive, but it aprears that these institutions 
have been losing business on these staple, controlled items. However, 
the final conclusion cannot be foreseen as yet because these institutions 
have four competitive devices which are being employed to strengtnen 
their position: ( l) pushing .'the standard lines that are not controlled; 
(2) featuring lines that are not well known; (3) pushing their own or 
other private brands; (4) using non-drug mercnandise for loss leader 
purposes. The assumption of the organized retail druggists is that 
these devices will not recoup the losses on controlled items; hence, 
there will have been a relative decline in the comoetitive position of 
cut-rate firms. It is impossible to predict the outcome as yet, es- 
pecially because of the absence of normal market conditions. Some of 
the stronger cut-rate houses feel confident that they will be able to 
establish their own private brands if forced to. A number of these 
firms have 'already built a considerable volume under their own labels. 

It seems that the larger, older, well established, "respectable" 
chain systems are in the strongest position to capitalize upon resale 
price control. By selling controlled goods at minimum prices they are 
able to build a reputation for selling these items at lowest prices; 
in addition, they have the reputation, prestige and a large enough- 
number of outlets to do a good job of pushing their own private lines. 
As large institutions they are able to employ mass advertising media and 
are able to establish their own lines much more effectively than individ- 
ual, small dealers. Unfortunately, no dot a have been collected to verify 
or disprove this hypothesis. 

9726 



- 281 - 

The effects upon department stores snould be variable. The stores 
serving an upj:er class and upper middle class clientele should not he 
particularly affected. The lower class stores will have tne same problems 
of the- cut-rate drug stores; that is, they are forced to push non-controlled 
goods and their own brands. In addition, they are in a strong position to 
feature non-drug merchandise for loss leaaer purposes. A Well-established 
department' store- should be able to build its own brands more. effectively 
than the independent specialists. Department stores have, of course, 
demonstrated' this ability in recent years. 

The effects upon wholesalers are difficult to foresee. In so far as 
volume is thrown to smaller dealers they should gain unless the enforce- 
ment of resale price control leads to a larger amount of direct selling. 
From this standpoint, it is decidedly to the interest of wholesalers to 
become the policing agencies of manufacturers under their own and omnibus 
contracts. The problem becomes complicated by wholesale private brand 
merchandise. Wholesalers are in a strong position because many dealers 
are tied closely to them under credit controls. Yet the repercussions 
of a major effort to build private labels cannot be known as yet. 

From the standpoint of the manufacturers of well-known nationally 
advertised goods the problem is essentially one of the extent to which 
private labels -may. be established in competition with them. To date, it 
appears that the larger, better 'known firms have profited by resale price 
control. It seems to the writer that the result is bound to be variable 
between firms depending upon the peculiar circumstances that are present; 
but that on the whole- resale price control should continue to strengthen 
the position of these larger firms' with national reputation. However, 
the private brand threat cf cut rate institutions, wholesalers and 
chain stores is serious.- . 

From the standpoint of the welfare of the great mass of small 
dealers there is an .intrinsic threat to the system of resale price con- 
trol in its attraction to new dealers if it matures into a going 
mechanism. Guaranteed margins and stabilized conditions are ideal 
magnets for new enterprises. Eventually, 'the trade will be forced to 
grapple with this problem unless professional and legal requirements 
alone are sufficient to limit numbers. If no adequate control of num- 
bers in the business is developed (or is inherent in professional re- 
quirements) then the whole plan should eventually topple under its own 
weight. . 

In the second place, there is the economic problem of the effects 
of resale price control upon consumers. This problem resolves itself 
largely into a question of the relative prices of goods in relation to 
the quality of the goods and of the merchandising services given by 
dealers. Much of the agitation for resale price control would disappear 
if consumers thoroughly appreciated differences between the quality of 
merchandising service and the cost of these services. Two identical 
products purchased at different types of merchandising institution's do 
not represent identical purchases because of variable delivery, credit, 
personal selling, professional and convenience services attached to the 
products. The small, independent dealers argue that resale price control 

9726 



- 282 - 

allows them to improve the quality of their services, especially those 
of a professional character. The fact that neighborhood drug stores 
obtain so large a volume indicates that consumers appreciate this com- 
bination of professional service and merchandising convenience which 
they offer. 

Without doubt those consumers who wish to buy standard drug products 
with a minimum of professional attention -and merchandising services are 
harmed by resale price maintenance, except in so far as they are able to 
obtain an equivalent quality under .private labels. Even so, they may not 
obtain an equivalent income of enjoyments, because of the absence of the 
important element of "reputation." All of the price studies above es- 
tablished the basis for the conclusion that that portion of the public 
which has purchased standard goods from cut-rate institutions would 
suffer by control. Beyond this, there is an imponderable (.question of' the 
quality of the other goods which are often purchased by these customers. 

Conversely, it appears that the position of the consumers who are 
attached to the smaller, especially the neighborhood, stores is im- 
proved by resale price control because they will continue to purchase at 
prices no higher than previously, perhaps even lower as contractual 
prices became the going prices. It will be recalled that contractual 
prices stood approximately half-way between full, suggested prices and 
the bottom cut prices of 1933 in San Francisco. 

Whether contractual prices are, and remain, lower than the former 
prices in the great mass of independent stores is partly a matter .of the., 
width of the margins given dealers. Table 6 shows that the 1934 margins 
already averaged 31-03 per cent of contractual prices. Since margins 
were this wide so early in the plan it might be assumed that there would 
be a tendency for them to widen as manufacturers and distributors com- 
peted for the favor of dealers. However, the issue is not so simple 
for manufacturers realize that there is a connection between the price 
level and volume of sales. and will resist both an increase in prices 
and a reduction of their own margins. The' writer's prediction is 
(based upon - British experience) that some margins will widen for a 
brief period and hence the general average will expand slightly; but 
that the long run tendency (if the system matures) will be toward a 
narrowing of margins. 

Whether consumer prices rise, remain constant, or fall is not en- 
tirely a matter of the amount of dealer margins but is also related to 
the distribution of the consumer's price between the various market 
intermediaries. , Much of retail pricing can no longer be analyzed on a 
horizontal plane; allowance must be made for vertical influences. The 
essence of formal resale price control is that these vertical influences 
are specifically brought to bear and become affected by some amount of 
organized bargaining between the groups in the trade. In the absenee of 
formal resale price control, dealers complain that many well-known pro- 
ducts must be sold by them without adequate margins or even below their 
wholesale cost. In case the dealers prefer to hold to their margins 
(as the bulk of the smaller dealers actually do) then there is some 
shift of patronage to cut-rate stores. Under the conditions of resale 

'.'■..■J -. 

9726 



- 283 - 

price control where dealer margins are recognized, their amount becomes 
partly based upon bargaining between the suppliers and dealers. Here, 
obviously is a pricing situation where ordinary competitive pricing 
theory does not provide the basis for an explanation. Likewise, the 
newer theory of monopolistic and imperfect competition is inadequate 
because the forces in this problem are focused vertically, not merely 
horizontally. The point is that in this instance the pricing situation 
focuses not merely the forces of monopolistic 'competition horizontally 
between manufacturers in the same group, and wholesalers and retailers 
in the same markets and on the same level, but also the vertical problem 
of determining upon the distribution of the consumer's dollar between 
the various intermediaries. There is no basis in economic price theory 
to predict the result; it is possible that the outcome may represent a 
compromise in which manufacturers are forced to take smaller margins to 
compensate the guaranteed margins of dealers. If so, two conclusions 
are evident: ( l) the pressure of manufacturers will be toward narrowing 
dealer margins, assuming prices remain the same; (2) consumer prices 
need not be raised to provide the margins for dealers. 

The mere statement of the'probleni throws into relief a fundamental 
theoretical aspect of the whole matter. It will be recalled that the 
privileges of the California Fair Trade Law can be enjoyed only by pro- 
ducers of trade-marked, commodities "in fair and open competition with 
commodities in the same geheral class." This statement in the law sug- 
gests two presumptions: (l) that monopoly and fair and open competition 
are at opposite poles; (2) that the presence of monopoly would deny the 
privileges of the statute. As a matter of fact, "fair and open competi- . 
tion" is possible of precise definition only in terms highly abstract 
and unrealistic. Conversely, an adequate, abstract definition of mono- 
poly becomes equ a lly abstract and unrealistic, except for logical pur- 
poses. In the great majority of pricing situations there are inter- 
mingled in a highly variable and complicated fashion elements of ab- 
stract competition and abstract monopoly; their complex, necessarily 
partaking of both, — is neither. In the retail business, dealers possess 
elements of monopoly in their locations, reputations, goodwill, personal- 
ity, trade connections and in the control of the buying habits of their 
customers, as well as in miscellaneous special merchandising services. 
The manufacturers of trade-marked goods possess monopoly rights and 
powers in their trade marks, formula, reputations and goodwill, person- 
alities and abilities of executives, trade connections, deeply rooted 
trade customs and habits built about them, and in the business strategy 
that these elements make possible. In this report, time and space do 
not allow grappling with the horizontal aspects of these monopoly powers; 
i.e. , their relative weight and influence in relation to competitors in 
the same class and on the same level. But it is highly important that 
the significance vertically be discussed for the relative freedom of a 
given manufacturer of trade-marked goods from the pressure of abstract, 
simple competition ( i.e. , the competition set up in economic logic) has 
significant repercussions upon the distribution of the consumer's dollar 
between the intermediaries, vertically speaking. Manufacturers with 
large monopoly power have demonstrated in the past that they are able to 
obtain and maintain the distribution of their products without rewarding 



-284 ->■■ 

dealers at' all (at '.times) or without compensation proportionate to the 
expense involved'. .Resale .price .maintenance fostered by organized 
dealers replaces the individual dealer by a "bargaining 'group which has • 
demonstrated strength . somewhat equivalent to that of the manufacturer. 
The impact of this 'new 'force "brought .into vertical relations is to 
force either -a re-apportionment of the -consumer's dollar more- favor- 
able to dealers or .an increase, in prices to consumers. Both influences, 
are operative; it would be a highly significant price study that would 
develop a measure of the degree of each. 

In conclusion one impact of the vertical influence of resale 
price control upon horizontal price fixing forces should be. examined. 
The various price studies which compared ■ prices of California contract- 
ual items with prices on the identical. goods outside the state demon- 
strated that the level was not significantly different but that there 
were' wide variations for individual items. This result merely means 
that the arbitrary. margins established by manufacturers with or without 
bargaining with organized dealers, although they approximate the average 
prior situation, quite largely destroy or inhibit the play of the local 
horizontal supply and demand forces bearing upon any given product. 
Thus a general stabilization is at the expense of flexibility in indi- 
vidual pricing in each market. From the standpoint of consumers (except 
those buying from cut-rate stores) the- significance of this condition 
is that in general they are no worse off, but any individual consumer 
in the purchase of any individual article may be harmed or may reap an 
advantage. 



9726 



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PART IV. 

INTERPLAY OF FORCES IN TIE DRUG INDUSTRY SINCE NRA AND FRO - 
POSED FEDERAL STATUTES * 

CHAPTER I ~ THE INTERPLAY OF FORCES IN THE DRUG- INDUSTRY SINCE NRA 
I. The Drive to Pass Fair Trade Laws 

In Part III B, we have described in detail the experience of the 
retail drug and grocery trades under the California Fair Trade Law and 
Unfair Practice Act. This is considered at length "because California 
is the only state whose State Fair Trade Law has teen in effect long 
enough to make possible an appraisal. We shall now look into the 
Interpaly of Forces in the Drug Industry in the other sts.tes where 
Fair Trade Laws have "been recently passed. 

Jlany of the 'Drug Code Committees, inspired "by previous attempts to 
pass a federal lav; permitting contracts for resale prices, asked for 
this right in their Codes. NRA refused to grant these requests. TJhen 
compliance "began to "break under the loss limitation provision of the 
Retail Drug Code, the retail trade leaders decided to go "back to the 
resale contrast plan as "being the next "best thing. This time, however, 
the}' turned away from the federal government to the states for action. 

As previously stated, ** "before the Schechter decision the 
California Fair Trade Law-as amended in 1,933 was introduced into twenty- 
four state legislatures and had "been enacted in seven states. Stimu- 
lated "by the partial' success -of the retail' drug loss limitation pro- 
vision and responsive to the leadership "built up during the adminis- 
tration of the code, the druggists of the country refused to take the 
code collapse without new efforts. 

The retail druggists' were the militant sponsors of the state fair 
trade laws. Other retail trades joined in the movement but were not 
as enthusiastic as the druggists. Except in Few York, very little 
opposition is recorded to the proposed laws. *** 

The retail druggists are better organized than any other retail 
trade to bring pressure on state legislatures. 

Probably the principal -reason for this fact is tart the retail 
druggist -is subject to more state and federal legislation than a.ny 
other retailer. Every state has' some sort of alcohol control law; a 
narcotic act; a pharmacy law; and food and. drug restrictions. The 
operation of the Retail Drug Code and establishment of local code 
authorities had strengthened local state ; drug organizations. 



* Prepared by Mark Merrell 

** See page 174 Part III-A of this Report and page 19C of Fart III-B 

*** For this reason very little could be found bearing on the 
legislative history of the -oassage of. these laws 

9726 



- 286 - 

In the early 1930' s the druggists in California became or- 
ganized under what is known in the trade as the "Captain Plan".* 
Groups of druggists in each Congressional District or even in small 
areas organized under the leadership of a Captain chosen as having 
entree with state legislators and the Congressman for his district. 
Whereas this plan was organized primarily to deal with legislative 
problems, it also operated in other fields. This plan of breaking 
down the state trade groups into small militant units became es- 
tablished in many other states during the drive for state fair trade 
laws. Whenever the State Pharmaceutical Association wanted to bring 
pressure for or against a law they notified the Captains who in turn 
immediately made contact with all the druggists in" their section. 
Durin fc consideration of the state fair trade law, a state fair trade 
law committee was established and after the passage of these measures 
this Committor; usually pressed manufacturers and wholesalers to 
utilize the law by issuing resale price contracts. 

The interplay of forces in the drug industry while under the 
California State Law is presumably representative of what can be ex- 
pected in those other states where the- law has been enacted recently. 
Because the constitutionality of these f air trade laws has not been 
settled and because it is apparently necessary for a manufacturer to 
domicile in the state in order to be ^qualified to conduct intrastate 
business, many manufacturers have held back from issuing resale price 
contracts. 

11 • Pressure on Manufacturers to Utilize the Acts 

Retail Druggists in the fair trade states looking to resale price 
contracts as the one way at the moment to accomplish price stabiliza- 
tion, have brought pressure on manufacturers to issue contracts re- 
gardless of legal questions involved. If a manufacturer should re- 
fuse to issue contracts, he would be, led to believe that the druggists 
of that state would not push the sale of his products. On the other 
hand, if the manufacturer should Kieejt the retailers' request he would 
receive active salesmanship upon his products.** 

An extreme example of this was seen in the action which retail 
druggists in California took against aj prominent manufacturer in the 
summer of 1935. This company cancelled its resale price contracts in 
July, 1935. *** Shortly afterward the retail druggists of California 
in retaliation refused to handle its products. This boycott was not 
confined to California but extended to many sections of the country. 
Officials of the company appeared at the annual convention of the 
National Association of Retail Druggists in Cincinnati in September, 
1935 and offered a $25,000 check to the Association to be used in a 
fund to aid the passage of a federal fair trade la.w. 

* See page 254 Part III-B, Chapter VI of this Study for a discussion 
of the Captain Plan in California 

•i ' i <♦■ 
** See page Part III-B, Chapter YI of this Report "The Pressure 

from Organized Retailers" ,■."'■ <•,.,'-.* 
*** See Part III-B for a fuller discussion of this occurrence 
9726 



- 287 - 

A manufacturer often finds it difficult to become domiciled in the 
ten fair trade states so that he can "be assured that his resale con- 
tracts do not run counter to federal law. 'The recent Armand decision * 
made his problem more difficult since it emphasized the fact that the 
anti-trust laws are still in full effect and that the Miles' decision 
is still operative. The potential financial cost of state, corporation, 
sales and other taxes alone has made manufacturers hesitant to issue 
resale contracts- in all states where they are legal. 

A manufacturer who decides to issue contracts is then confronted 
with the problem of where to peg his prices. The retail groups press for 
a price that would guarantee to the independent druggist a sufficient 
margin to give him a net profit in handling the goods. If the manu- 
facturer's product is subject to the competition of substitute private 
brands it would be suicidal for him to peg the price too high and all^w 
this competition to cut in upon the demand he had created through his 
advertising. On the other hand, if he should peg the price too low he 
could n»t count on the support of the small dealers. The National 
Association of Retail Druggists, speaking through its executive 
secretary ** has demanded that the manufacturer give the dealer the 
usual 33-1/3^ margin of profit. If the manufacturer adhered to this, 
in many instances with competition forcing him to peg the price below 
the full consumer price, it would be necessary for him to cut down 
either his- advertising expense or his net profits. The fight to pass 
state fair trade laws and subsequent pressure on manufacturers to 
issue resale contracts came mainly from independent druggists. Re- 
tailers are receiving support from wholesalers throughout the country, 
chiefly from members of the National Wholesale Druggists Association 
who are issuing wholesaler-retailor contracts known to the trade as 
"omnibus contracts". Many manufacturers have indicated to their 
wholesalers in fair trade states that they would be willing to have the 
wholesalers issue contracts on their products. The wholesaler issues a 
blanket contract to his retail customers with the- understanding that 
individual manufacturer's prices will become a part of this contract as 
they are issued. Technically, this probably makes the contract an intra* 
state matter. However, the question of whether'a wholesaler may issue 
a resale price contract on some foreign manufacturer's products has 
never been decided in a State Supreme Court. 

The National Association of Chain Drug Stores has supported in- 
dependent druggists in both the passage of the state fair trade laws and 
their subsequent administration. This Alliance is a continuation of the 
part chain drug stores played in the retail drug loss limitation pro- 
vision. *** The addition of the chain groups behind the price stabiliza- 
tion movement adds greatly to the pressure exerted on the manufacturers. 
The chains' support of the wholesalers in the 1933 refusal-to-sell 
movement, as we have stated, was most effective. Unquestionably, their 



* See Appendix, page 337, 

** See speech at 1935 Annual Convention - N.A.R.D. Journal, October, 1935. 

*** See Part II, Chapter II of this report 

9726 



- 288 - 

ctand behind $hei: state. ■fair>.fcrade--lav/ 3 has "embarrassed voerfcainF-i- 
manufacturerc. ■"■..-..■ 

Illi The Extent of Cont racts Issued 

The number of resale price contracts in effect is now known. 
However, it is clear that the drug contracts far outnumber those 
issued in other trades. In the January 16, 1936 issun of Drug Trade 
Hews, 156 drug manufacturers are listed who have issued resale con- 
tracts im the various fair trade states. * This list is far from 
being complete as enly large companies have been included. The 
following is a breakdown tf the number of contracts in each state 
appearing in this list. 

Number of resale contracts is- 
s ued as of Ja nuary 6, 1936 



California 




142 


Illinois 




39 


Iowa 




11 


Maryland 




9 


Few Jersey 




40 


New York 




55 


Oregon 




25 


Pennsylvania 




35 


Washington 




54 


Wisconsin 




26 




Total 


427 



SOURCE: Compiled from Drug Trade News, January 16, 1936 

Many of the 427 contracts in this tabulation cover hundreds of prod- 
ucts and, therefore, the total number of items under them cannot be es- 
timated. The above list includes direct manufacturers' contracts and also 
wholesalers' omnibus contracts. 

IV. First State High Court Decision 

The Court of Appeals of Hew York on January 7, 1935 declared Section 
2 of the Fair Trade Act unconstitutional, ** This was the first decision 
from the highest court in a state on the constitutionality of any section 
of the fair trade laws. Section 2 provided that a non-signer of a contract 
must adhere to the prices in the contract. *** The Supreme Court of 
California heard a case involving this provisions in September, 1935, but 
the decision has not yet been given. 



* See page Appendix IV for this list of manufacturers 

** See Doubleday Doran ot al v. R. H. Macy & Company 

*** See page of Part III-B of this Study for a discussion of Section lh 
of the California Act 



9726 



- 289 - 

The National Association of Retail Druggists immediately started 
to redraft a model state fair trade law designed to meet the Macy 
decision in Hew York. The proposed new law rrt»ords' several pro- 
visions of the old law to mal:e the language clearer and includes a 
new provision to replace the invalidated Section 2. * This new pro- 
vision makes any interference with the resale contract actionable 
by anyone damaged. Apparently the proponents expect to be able to 
prove to a court that non-signers who cut under the contract price 
are interfering with the contract. This procedure would apparently 
be more cumbersome than the mandatory nature of the old Section 2 and 
by the same "token far less effective, in making all retailers adhere 
to a stipulated price. 

Even before the teeth were extracted from the I T ew York State Fair 
Trade law by the Macy decision, some manufacturers had already begun 
to use private methods of bolstering the effectiveness of their resale 
contracts.' Several had incorporated with resale price contracts the 
policy of refusal-to-sell by refraining from selling to retailers who 
had not signed. A few further tightened this control by consigning • 
their merchandise to the wholesalers. Because the;/ still held title 
they could dictate thts retailers to' which their goods could be sold. 



See page 392 Appendix for the text of this now proposed State 
Fair Trade Law 



9726 



- 290 - , 

V. DRUG DISTRIBUTORS' ATTACK. PIT MANUFACTURERS ... 

A. The Retailers' Revolt . ■ 

The retail druggists' pressure on manufacturers to issue resale 
contracts and to carry through the contracts with cor.rt procedures 
has been intensified since the Macy decision in New York in January, ■ 
1936. They apparently ..plan to use trade pressures if legislative 
means are not sufficient. 

A mass meeting of some 3,500 retail druggists held on January 14, 
1936 in New Y rk City clearly illustrates the retailers' intention 
of taking price stabilization matters into their own hands if it can- 
not be done otherwise, (*) According to a trade paper, the more con- 
servative officers of New York trade associations were b rushed as ide 
by younger leaders who took over the meeting. .The meeting began with 
the statement of one of the speakers that "The Boston Tea Party, or a 
new revolution to assert the rights of man, starts here tonight.." 
Suggestions were made that New York druggists cut the price one cent • 
on two prominent New York papers which had been unfriendly to the Fair 
Trade law, to demonstrate to them what price demoralization meant. 
Printed signs with the caption "Newspapers at cut prices" were given 
away for the druggists to use and each druggist was requested to buy 
four papers a day and take a loss cf only four cents, but to keep the 
signs prominently displayed all the time. One speaker named five prom- 
inent manufacturers whose products he was not going to handle. From 
a recent article in Business Week it appears that this boycott received 
support throughout the state. (*) 



(*) See Drug Trade News, January 20, 1936. 

(**) From "Business "Week" of February 1, 1936 (Page 12). 

"Pressure on Manufacturers" 

"Meanwhile, many manufacturers who have heretofore 
rendered lip service to the cause of price control, but 
been laggard in their active support (duo in large part 
to their fear lest existing marketing machinery be 
seriously disrupted) are being rapidly converted to the 
great crusade. 

In the drug field, five of them — Squibb, Pond's, 
Phillips, Upjohn, and Parke, Davis — are being subjected 
to considerable pressure from New York state retailers 
who have sworn to keep their products "under the 
counter" until suitable price policies are adopted. 



9726 



- 291 - - 

A representative of the National Association of Chain Drug 
Stores pledged the full cooperation of the chains of the nation with 
the independent retailers in the fight for improvement of prices. (*) 
Since the New York orotest meeting certain drug leaders in Philadel- 
phia have announced' that- stores in that city are taking off their 
shelves products .of manufacturers who "do not show their intention . 
of cooperating in the fight to uphold fair trade prices. " (**) 

B. Whol e saler's Revolt . 

The place of the "Service" 'Wholesale druggists in the drug 

industry has "been threatened "by the growth of "cooperatives", "by the ». 
consolidation of some .fifty-four of their group into the McKesson and 
Robbins Chain (1929), by the increasing number of manufacturers who 
sell direct to retailers and recently by the United Drug Company's 
entry into the wholesale field. (***)■ 

Recently they have shown signs, -that, like the retailers- they 
intend to take matters into their own hands. The following quotation • , 
from a paragraph -in an article of "Business Week" of December 14, 1935, 
touches on recent attitudes ,of the 'Wholesale druggists: 

"Long harassed by the necessity for handling the small 
drop shipment orders with little profit to .themselves, and 
worried now. by. Liggett 's move .(through United Drug) to skim 
the very cream off their business by opening new v/holesalc 
houses in Chicago, Boston,; Dallas, and elsewhere, drug whole- 
salers have adopted strong tactics to- force manufacturers to 
support their demands. for a better buying deal*- And to cement 
their allianco with the retailers, the wholesalers' revolt 
.was, aimed. first at those manufacturers whose perfor- 
mance under the fair trade laws has been something less than . . 
distinctive. " 

The Wholesalers' revolt took the form of flooding certain manu- 
facturers with small drop shipment orders. This same article in 
Business Week" describes the Wholesalers' action in the following 
words: 

"Presumably it was Thanksgiving season, out that fact 
only served to heighten the irony of the plight in which 
sales managers of three big drug manufacturing houses — Lehn & Fink, 
Feonaraint, and American Home Products — foun L themselves late last 



(*) See Drug Trade News, January 20, 1936. 

(**) See Drug Trade News, February 3, 1936. 

( ***) The United Drug Company opened its first wholesale drug house 
in Atlanta in the summer of 1935, These wholesale companies are 
set up as cooperatives and are owned by Rexall agents, whom they 
serve, .. , ,- 

9725 



- 292 * 

month. Just a day or so "before the annual festive occasion 
the mailman plunked down on the deck of each a hatch of 
several thousand orders. Nov/ orders are customarily a 
cause 'for some thanks-giving in themselves, hut these were 
all orders for l/l2 of a dozer, tubes of P.eheco or two small 
bottles of Pctrolagar to be sent to corner druggists throughout 
the country — orders which wholesalers had refused to handle and 
had forwarded to manufacturers ill-prepared for such a flood 
of two-bit business. Important dealer good will was at stales. 

"A few days later, some half dozen other drug manufacturers 

found themselves similarly confronted with thousands 

«f small drop shipment orders. This week, 15 additional manu- 
facturers were slated to feel the effect of the wholesalers' 
revolt. " 

The Wholesale Druggists' boycott tapered off almost as fast as 
it grew "though the trade still continues to talk about who got hit 
and Y/hcn." (*) Temporary though this wholesalers' movement may have 
been, taken as an accompaniment to the occurrences in the retail 
branch of the trade, it has forced, the manufacturers to become aware 
more fully than ever before that the distributors of their products 
are up in arms to obtain what they consider a fair deal. 

It would seem that if manufacturers are to satisfy these warring 
trade groups by giving them better margins of profit, either the 
advertising expenditures of manufacturers or their net profits of the 
past will have to b e curtailed, as the horizontal competition of 
similar products, both nationally advertised and private brand, will 
prevent raising ■ the --.price level very far. The old formula of increased 
advertising expenditures' will have less effect in moving the g.iods off 
the wholesalers' and retailers' shelves while the present temper per-, 
sists. 



(*) See Business Week, January 4, 1936.. 
9726 



- 293 - 
yi.. SUMMARY 

Even "before the Schechter decision, when compliance with the 
loss limitation provision of the Retail Drug Code "began to disintegrate 
in the fall of 1934; druggists commenced fighting for a substitute nrice 
stablization program. They turned back to the old proposed Capper-Telly 
provision and followed California's lead in having this "leasure which 
permitted resple price contracts adopted as a state law. Between the fall 
of 1934 and July, 1935, the California Fair Trade law as amended in 1533 
was introduced in twenty-four legislatures and passed in nine states. 

Following the methods of the California druggists, trade lead- 
ers in the new Fair Trade states began to try forcing manufacturers to 
utilize the laws by issuing resale contracts and by policing those that 
were issued. The manufacturer found himself in a difficult situation', 
first, because of the legal questions involved and the costs of domicil- 
ing in the states, and second, because it was difficult to know where to 
peg the contract price. 

The section of the Fair Trade law which forced the contract 
price on non-signers was declared unconstitutional ~oy the Few York Court 
of Appeal's. A week after this decision the retail druggists of Pew York 
held a mass meeting, indicating that they were taking- nrice stabilization 
methods into their own hands. At the meeting, the retailers announced 
that they would refuse to deal in products of manufacturers who were not 
maintaining their price stabilization policies to the retailers' satis- 
faction. 

Mass pressure from the wholesale druggists in November, 1S35, 
increased the manufacturers' worries. This pressure took the form of a 
flood of small drop shipment orders relayed to the manufacturers by the 
wholesalers. 



9726 



- 294 - 

CHAPTER II - PROPOSED FEDERAL STA TUTES 

I. The Tvdin.Ts Bill 

The present Congress is faced with many nro-oosed measures about 
price discrimination and nrice stabilization. One of these originates in 
the State Fair Trade Law movement, This proposed hill would exempt from 
the Sherman Anti-trust laws resale price contracts issued in interstate 
commerce, where the resale occurs in a state permitting such contracts. 
This proposal replaces the old Capper— Kelly plan, 

•■ The hill vjas introduced in' the Senate by Senator Tydings of 
Maryland on January 6, 1936, A revised bill, introduced a few days later, 
(*) was referred to the Senate Judiciary Committee, The Schechter Decision 
cast some doubt on the feasibility of direct Federal resale price legis- 
lation, since under its terns similar state lavs would probably be needed.. 
The new lav- armlied only in those states which have passed already or 
which may, in the future, pass laws allowing resale price, contracts.. 

The Tydings Bill is a Federal Enabling Act designed to remove 
some of the obstructions that have been found in the operation of the state 
fair trad.e laws. It would eliminate necessity for a manufacturer to 
domicile in each of the ten fair trade states in order to qualify to do 
intrastate business. It also would permit a manufacturer to contract in 
interstate commerce with wholesalers who in turn would issue in intra- 
state commerce ah omnibus contract "ith their retail dealers containing 
the price stipulated by the manufacturer. 

II. The Patman-Robinson Bill 

During the Senate Finance Committee's hearing on the renewal of 
H.R.A. in the n s.st session of Congress, an:-.ounce-- , ent was made in the, press 
of the formation of the American Retail Federation. (**) This association 
was referred t o as a new retail super-lobby. In General Johnson's testi- 
mony before the Senate Finance Committee the next day he caustically re- 
ferred to the new association and to the list of its original members. 

On April 24th the Mouse passed a resolution (****) authorizing 
a special committee to investigate the American Retail Federation, 

(*) See page 389: Apnendi::. for the text of this bill (5-3822) 

(**) See Hew York Times of April 17, l c 35. 

(***) See Hearings of Senate Finance Committee for A"nril 18, 1935. 

(****) See House Resolution #203. 



9?26 



295 

Representative Pat man became chairman of this committee and hearings 
were begun on June 5, 1935. On June 14, 1935 the scope of the investiga- 
tion was brodened by another House resolution, to induce the "buying pra- 
ctices of large organizations. (*) Hearings on the .American Retail Federa- 
tion's part of the investigation were completed on January 11, 1936. (**), 
"but hearings on the Buying Practices of Large Organizations have not 
terminated, as the present report is written. 

A "bill to modify the discrimination clause of the Clayton Act was 
introduced by Representative Patman in the House on June 11, 1935; and 
on June 26, Senator Robinson soponsored the same measure in the Senate. 
This was referred to the House Judiciary Committee and hearings were 
started on July 10, 1935 (***) 

On February 3, 1936, the House Judiciary Committee began hearings 
on a bill of similar nature introduced by Representative Utterback. (****) 
On the same day the Senate Judiciary Committee reported out to the Senate 
an amended Patman-Robinson bill and it was placed on the calendar for 
consideration. (*****) 

The report of the committee states the purpose of this bill is to: 

".amend section 2 of the Clayton Act so as to suppress more 
effectually discriminations between customers of the same 
seller not supported by sound economic differences in fchsir 
business position or in the cost of serving them. Such dis- 
criminations are sometimes effected directly in. prices or terms 
of sale, and sometimes by separate allowances to favored cus- 
tomers for purported services or other considerations which 
are unjustly discriminatory in their result against other 
customers. "(******) 

This measure, as reported out by the Committee, broadens the Clayton- 
Act by prohibiting discrimination between inter and intra-fslake commerce 
and discriminations which injure competitors. (*******) 



(*) See House Resolution #239. 

(**) A report is expected on this phase of the investigation 
shortly. 

(***) This bill has received active support from independent 
retail and wholesale grocers. The retail druggists are 
in favor of the measure but they have not been as active, 
in any degree, as they have in supporting the Tydings 
measure. See Appendix, page 112 

(****) House Resolution' #10486 

(*****) See page 112, Appendix to this report. 

(******) See Senate Report Ho. 1502, 74th Congress, 2nd Session. 

(*******) The Clayton Act required a showing of general injury to 
competitive conditions. 



9726 



- 296 - 



It Units quantity differentials in price by empowering the 
Federal Trade Commission to fix the quantity scale. It stipulates that 
special service allowances are forbidden unless offered to all customers 
on proportionally equal terms. It limits brokerage fees to bona fide 
brokers, And it establishes damages according to the amount of for- 
bidden discrimination or allowance.- 

III. Other Federal. Proposals Before Conrress . 

Mention has been made if the Patman-Eobinson and the Utterback 
proposals. In addition to these on January 16, 1936, Senator Borah in- 
troduced a measure to amend the discrimination clause of the Clayton Act. 
(*) This bill broadens the Clayton Act by forbidding a person "to sell 
goods at unreasonably low prices for the purpose of destroying competi- 
tion or eliminating a competitor," and also make the violation a. criminal 
offense. 

Other Federal bills have been proposed in the- present Congress 
for the expansion of powers and scope of the Federal Trade Commission. 
In this category the Ilye-Xing bill (**) end the Wheeler-Hayburn bill (***) 
are in keeping with statements ma.de by the commission in their last an- 
nual report. These two measures expand the meaning of the words "com- 
petition in commerce." The "heeler bill, for example, adds the words 
"and unfair or deceptive acts and practices in commerce," where it men- 
tions "competition in comnerce." (****) This makes it possible for ver- 
tical conmercial .relationships to be discussed whereas the present Act 
does not permit it. All previous fair trade conferences have been con- 
fined to one level of an industry. (*****) 

The lye-King measure provides that the Federal Trade Commission 
can call conferences on their own initiative. The feature is not includ- 
ed in the T.heel er-Raybum proposal. Both bills, however, broaden the in- 
vestigation powers of the Commission. 



(*) See S.3S70. 

(**) Senate Resolution #3007. 

(***) Senate Resolution #3744 and house Res. #10385. 

(****) See Section 5 of Senate Resolution #3744. 

(*****) In the discussion of codes for the drug industry it has 
been noted that a vertical arrangement was sought but 
ERA refused to consider the proposal. See page 30, Part I 
Chapter II. 



9726 



- 297 - 



A P P E II D I X 



9726 



- 29 P - 
LEGAL ASPECTS OF RESALE PRICE LAIUTEITA.-TCE (*) 



Rrsically the '.-/hole movement to secure resale price maintenance 
through legislation and through such devices as refusal-to-sell and 
consignment selling started when the United States Supreme Court in 
1911 declared resale price contracts between manuf acturers and dealers 
illegal. If the Court had ruled the opposite way, and permitted manufac- 
turers to bind their dealers contractually to maintain resale prices, 
present conditions of price cutting might have "been totally different. 
It is conceivable that the intensive pressure on Congress to aass -orice 
maintenance legislation might never have materialized; retail codes, 
under IJEA, might have contained no minimum price provisions; and state 
fair trade laws might have been non-existent. 

Because the court's decision of 1911 ha.s proved a turning point in 
the history of price maintenance, that and subsequent decisions on the 
same subject, assume considerable importance to this study. It is neces- 
sary to examine the status of the law as the Court has laid it down; 
how the Court arrived at its doctrines, and the legal economic and 
factual foundation of the decisions. 



( * ) Prepared by G eo rge J. Te l dman . 
S726 



• - 299 * 

SECTIOl'T I. 

sui.ii.iARY stat£i.:e;tt or ilzp ohtaiit pr ice 

MAINTEMATCE DECISIONS 3Y U1TITED STATES SUBREME COURT 



"He sale price maintenance" is the term commonly used to describe mer- 
chandising devices whereby the. manufacturer of a. patented, copyrighted, 
trade-marked or branded article seeks to control the article's resale 
price in the hands of distributors. This methoo of marketing is an ad- 
junct of modern advertising. At least it followed closely on the heels 
of the introduction of advertising into the modern industrial scheme, 
and the two appear to have grown together in importance. (*) 

In the early days industry regarded the use of resale, price control 
devices by manufacturers as a matter of right. Their most frequent em- 
ployment wps in connection with the sale of patented articles and pro- 
prietary 'medicines. To make their price maintenance plans effective, 
manufacturers used written contracts or agreements with distributors, 
forbidding the latter to resell the article below a stipulated price. (**) 

Early court cases usually involved a suit by the manufacturer against 
a distributor for the breach of such a contract, or against some third 
person, charged with procuring such a breach. The courts, both state and 
federal, were by no means uniform in their conclusions. A substantial 
majority held these contracts valid. The theory underlying the court 
decisions varied with the type of case. If the price maintenance scheme 
was linked with a license under a patent, the court interpreted the de- 
vice as being within the scope of the patent statute, (***) and held that 
a price maintenance contract was, therefore, a reasonable incident to the 
patentee's exclusive monopoly right, and, consequently, its breach 
was in the nature of an infringement of this right, (****) 7, "he re the price 
maintenance contract referred to a copyrighted article, however, the doc- 
trine of infringement did not apply. In 1906, an inferior Federal court 
declared such a contract valid (*****) on the ground that the monopoly 
rights under the patent and copyright statutes were analagous; but the 
Supreme Court later overruled this, declaring that the latter statute 
did not authorize the fixing of resale prices. (******) 



(*) See "York Material ITo. 16; Resale Price Maintenance Legislation 
in the U.S. by H. S. Kant or, pg. 1 

(**) See digest of. early cases, Section II, page 13 et seq. 

(***) Dr. Miles' Medical Company v. Jayne 149 3P.R. 832 

(****) Button Fastener Ca.se, Section II, page 13 et seq. 

Bement v. national Harrow Co., Section II, page 13 et. seq. 

(*****) , Authors' and Newspaper Association v. G 1 Gorman (1906) 146 Fed. 616 

(******) Bobbs-Merrill v. Straus, 310 U.S. 333 ( a digest of this case 

appears in Sec. II, page 13 r -'-t seq). Also Scribner v. Straus, 
210 U.S. 352. 

9726 



- 300 - 

In the. so-called propriety medicine cases, lower Federal courts 
upheld the validity of price contracts by likening secret processed goods 
with patented articles and applying the patent infringement rule. (*) 
Thus, prior to 1911, industry could point to many court decisions uphold- 
ing resale price maintenance contracts. 

In 1911, however, the U.S. Supreme Court, in the Dr. Miles 1 and sub- 
sequent cases, rejected the entire patent infringement basis for price 
maintenance and held such contracts void because they involved a re- 
straint on the alienation of title and a restraint on competition, and, 
therefore, were against the public interest. (**) 

The outlawing of these contracts merely challenged the ingenuity of 
industry to invent new methods of attaining the same goal. Notice to 
the retailer from the manufacturer that the article was not to be sold 
below a "suggested" price, plus a refusal-to-sell to those who did not 
adhere strictly to the "suggested" price, was a method employed by the 
Colgate Company. The Department of Justice challenged the legality of 
this plan, but the Supreme Court ruled in favor of Colgate on the theory 
that the Sherman Act "doe-j not restrict the long recognized right of a 
trader or manufacturer engaged in an entirely private business freely to 
exercise his own independent discretion as to the parties with whom he 
will deal." (***) Other manufacturers attempted other price maintenance 
plans. One, commonly used, was the consignment plan of the General 
Electric Company, described in detail in the Supreme Court decision up- 
holding its validity. (****) The court decided distribution of the company's 
products through "agents" who maintained the price, was not illegal. 
The court laid down a test for determining what set of facts constituted 
an agency as distinguished from a contractual arrangement but this test 
wa.s by no means clear, (*****) nevertheless, the distinction was of 
paramount importance because the legality of these plans hinged on the 
Court's finding in this regard. 

Man]/- felt the decision in the Colgate case to have overruled, 
or at least to have modified substantially the Dr. Miles' decision. 
They also regarded it as ail indication of a trend on the part of the 
Court to uphold any price maintenance plan short of actual contracts 



(*) See in Re Park , 138 Fed. 421 (1905) 

Dr. Miles' Medica l Co. v. Piatt (1905) 142 Fed. 506 

Wells & Richardson v. Abraham (1905), 146 Fed. 190 aff. 149 F. 404 

Jayne v. Loder (CCA. 3rd Ct) F.E. 21 

Dr. Miles' Medical Co. v. Jayne Drug 149 F.H, S33 

(**) The restraint of trade phase of this and other important cases is 
presented in another section of this paper, infra. 

(***) See digest of Colgate case, Section II, pa :e 13 et seq, 

(****) For a digest of this case, see Section II, page 13 et seq. 

(*****); See Ford Motor Co. v. Union Motor Sales Co. 244 Fed 156 (CCA. 
6th-1917 of Curtis Publishing Co. v. Federal Trade, "60 U.S. 
568; 43 Sup Ct. 210 

9726 



- 301 - 

or agreements between the manufacturer and his distributors. The 
Schrader case and Beech-Nut Packing case finally cleared this miscon- 
ception. (*) 

The Schrader case involved the execution of actual contracts re- 
quiring price maintenance. The argument stressed to the court was that 
the Colgate case overruled the Dr. Miles' case. The court, however, 
rejected this contention and held that the plan violated the Sherman Law. 

In the Beech-Hut case the Court enumerated just what a irmuf pcturer 
could not do to effectuate a price maintenance plan. In addition to 
the previous decisions outlawing express agreements, the. Court forbade 
(1) the practice of reporting names of recalcitrant dealers (?) enrolling 
of dealers on "undesirable" lists until assurances were given that they 
would maintain a designated price (3) employing of salesmen to report 
such undesirable dealers (4) utilizing of numbers and symbols on products 
in order to detect offenders (5) utilizing of "any other eouivalent co- 
operative means of accomplishing the maintenance of prices fixed by 
the Company". 

On December 11, 1935 the United States Supreme Court in denying the 
petition for certiorari filed by the Armand Company, Inc., (**) upheld 
a decision of the Circuit Court of Appeals (2nd. Circuit, II. Y.) which af- 
firmed a Federal Trade Commission order directed against the maintenance 
by the petitioner, through agreement, express or implied, of the resale 
prices of its products. The recentness of the Supreme Court's action 
on this case is sufficiently indicative of its present attitude. 

I. Restrictive 

Although, in the legal sense, great similarity exist.s between the 
conditions imposed on the sale of r^al estate and chattels (***), and 
those imposed on the resale of goods und.er various ^rice maintenance plans, 
and despite the fact that each interferes in exactly the same way with 
the free alienation of title, the courts have held the former of these 
restrictions vnlid while holding the latter invalid. The courts have 
not directly explained this striking anomoly, but there is some indica- 
tion that the novnble char.acter of the articles involved is the basis 
for distinction. They have used the word "movable" (****) in the text 
of decisions concerning price maintenance plans; staf ing in one case: 



(*) For digest of these cases see Section II, page 13 et seq. 

(**) See Armand Co. Inc. pet. v. Federal Trade Com., Section II, 
page 13 et seq. 

(***) Technically referred to as "eauitable restrictions" such a 

requiring that a house of a specific description be built on 
land sold, or requiring that houses be built a certain distance 
from a street, etc. Tnese restrictions have "been held good 
for thirty years after title to the land has passed. 

(****) See John D. Park & Sons v. Hartman 153 F.K. 24, 39 

9726 



- 302 - 

"The right of 'alienation is one of the essential incidents of a 
right of general property in movables and restraints upon aliena- 
tion have been regarded as obnoxious to public policy, which is 
best subserved by great freedom of traffic in such things as 
passed from hand to hand." (*) 

II. Restrictive Agreements and Anti- Trus t Laws 

A restrictive agreement preventing the free alienation of title to 
property, according to the Supreme Court, prevents the free flow of com- 
merce, the channels of which the anti-trust laws are supposed to keep 
clear. The anti-trust laws, consisting principally of the Sherman Act, 
Federal Trade Commission Act, and Clapton Act, do not specifically out- 
law resale price control. It is the Supreme Court's interpretation 
that such a device unduly hinders trade that brings certain types of 
price maintenance within the control of these statutes*-* However, the 
Court declared this practice to be not only an unlawful restraint of 
trade under the anti-trust laws, but also an illegal restraint of trade 
at common law. (**) The Sherman Act was designed to codify the common law 
of restraint of trade, adding only punitive provisions for the violation 
thereof. The Federal Trade Commission Act created a regulatory body, with 
affirmative authority to prevent unfair methods of competition as a purge 
for the evils of business competition. The purpose of the Clayton Act 
was to empower the Federal Trade Commission to arrest and control the 
growth of trusts and thus correct the deficiencies apparent in the opera- 
tion of the Sherman Law. 

III. Restrictive Agreements and the Law of Restraint of Trade 

As stated before, prior to the decision of the Supreme Court in the 
Dr. Miles' Medical Company v. Pa rk case, a majority of the inferior federal 
courts and even the Supreme Court, in cases involving patented articles, 
adopted the view that price maintenance restrictions on the resale of 
goods were valid. In several of these cases, attorneys agreed that these 
contracts illegally restrained trade, but for the most part, except in 
cases of copyrighted articles, the Courts declared the contracts with- 
in the scope of the patent monopoly 'and, therefore, outside the scope of 
the Sherman La 1 "'. Because there was a widespread belief in the validity 
of resale price contracts, it was only natural for lawyers preparing 
cases uoon 'this question to follow the beaten path of legal precedent. 
Thus, when the Dr. Miles case arose, they confined their preparation to purely 



(*) See Z. Chaffee, Jr. , Equitable Servitude on Chattels, 41 Harvard 
Law Review at 982 et seq for a criticism of the price maintenance 
ca.se s, ' ' 

(**) Dr. Miles v. Park. The Common law is supposedly the body of law in- 
herited from England by the Colonies developed by our courts, and sub- 
sequently, unchanged oy statute. An involved discussion of the anti- 
trust laws will not be attempted here. The historical background of 
these la"'S has been adequately treated elsewhere. For a few refer- 
ences see: Thornton "Federal Anti-trust laws;" Oliphant "Cases on 
Trade Regulation; McLaughlin "Cases on Federal Anti-trust laws" 
Levine and Feldman "Doe's 'Trade Need 'Anti-trust laws'"; 'Torksheet 
#1, Cases on Unfair Competition and Restraint of Trade ^oy George Feldman, 

9726 



„~ 30.3,.- 

legalistic issues. In other words, the validity of an inportant 
merchandising practice widely employed "by manuf acturers and involving 
a factual situation capable of economic appraisal, --'as allowed to depend 
on the technical legal interpretation of whether or not proprietary 
medicines and secret processed goods were in the same classification as 
patented articles. (*). 

Only when lavyers, economists, and "business men understand that 
price maintenance is a device vri.th definite economic effects on the 
manufacturer, the distributor, labor, and the consumer and that these 
effects are capable of factual .determination, will they appreciate the 
barren nature of the record before the Supreme Court in the hiles' case. 
With no evidence before it on the econonic effects of price mai nte nance 
contracts, it is no v o ruler that the Coart, speaking through Justice Hughes, 
condemned these contra.cts as being in restraint of trade. However, the 
Court indicated that not all contracts or plans that restrain trade are 
illegal, saying: - 

"With. respect to contracts in restraint of trade, the earlier 
doctrine of comnon law has been substantially modified in adap- 
tation to modern conditions. But the public interest" is still 
the first consideration. . To sustain the restraint, it must be 
found to be reasonable .both with respect to the public and to 
the parties and that it i,s limited to what is fairly necessary, 
in the circumstances of the particular case, for the protection 
of the covenantee. Otherwise, restraints of trade are void 
against ;oublic policy. As was said by this Oourt in G-ibbs v. 
Baltimore Gas Co.,' 130 U.S. 409, 'The decision in Mitchel v. 
Reynolds, S.D. Smith Leading Cases:, 407, 7th £ng. Ed, 3th Am *ed. 
756," is the foundation of the rule in' relation to the invalidity 
of contracts in restraint of trade: .' but as it was made under a 
condition .of things, and a. state of society, different from 
those which now prevail, . the rule laid down is not regarded as 
inflexible and has be.en .considerably modified. Public welfare 
is first considered, . and if it.be hot involved, and the re- 
straint upon one party is not greater than protection to the 
other party requires, the cqntra.ct may be sustained. The ques- 
tion is, whether under the particular circumstances of the case 
and the nature of the particular contract involved in it;, the 
contract is, or is not, unreasonable. Rouraillon v. Rousillon, 
14 Ch. D. 351: Leather Cloth Co., v. Lorsont, L.R. 9 Eq. 345." 

"The true vie^ at the present time" said Lord McHaughton in 
Nordenfelt v. Maxim llord, etc., Co. 1904 A.C.'p. 365, "I think 
is this: The public have an interest in ever;'- person's sCarry- 
ing on his trade feely; so has the individual. All inter- 
ferences with individual libery of action in trading, and all 
restraints of trade of" themselves, i f there is nothinr more , 
are contrary to^PUBLIC policy, and therefore void. That is t 



.(*) For a detailed discussion of facets in this case see digest in 
Section II, page x.3 et seq. 



9726 



- 50-. - 



the general rule. But there are exceptions; restraints of 
trade and interference with individual liberty of notion may 
he justified by the special circumstances of a particular case. 
It is sufficient justification, end indeed it is the only 
justification if the restriction is reasonable - reasonable, 
that is, in reference to the interests of the parties concerned 
and reasonable in reference to the interests of the public, so 
framed and so guarded as to afford adequate protection to the 
party in whose favor it is improved, while at the same time 
it is in no w:-y injurious to the public,' 1 

, This quotation admirably reflects the evolution of the law as 
a function of economic conditions and economic theory. It sets 
forth that contracts in restraint of trade should be adjudged in the 
light of the surrounding economic conditions. 

The persuasive frets in the early court cases nay be help- 
ful in showing how courts arrive at the conclusion that given contracts 
do or do not restrain .trade. In what economic setting did the first 
court cases arise, and in what way did changed conditions influence 
the courts? ".Then the case of the Toilers, -etc., of Ipswich arose in 
1614 (*), society had just left feudalism behind. The economic struc- 
ture of the community was comparatively simple, principally because 
inter-community commerce scarcely existed. Each member of the com- 
munity was dependent upon the other for his livelihood. Each town 
had its butcher, its baker, and its candlestick maker, and enforce- 
ment of la v- s against "engrossing- 1 ^**) "regrating" and "forestalling" 
was strict.. The producer sold directly to the consumer and the public 
regarded middlemen a.s base criminals. It was under such -conditions 
that a craftsman agreed with his only competitor in the community not 
to engage in his craft for a period : of six months, 'Then the competi- 
tor brought suit to enforce this contract, it is not difficult to 
understand, in vie-r of the conditions, why the Court became profane and 
threatened to thro 1 .,' the plaintiff in jail. The deprivation of a man's 
right to ply his trade was a deprivation of his livelihood and meant 
that he was likely to become a public charge, (***) 



(*) 11 CO. 53, 53A 

(**) These laws, briefly stated, made it a crime to purchase foodstuffs 

for the purpose of reselling them to the public narket or otherwise, 
or to do specific acts which might have enhanced the price. For 
detailed explanation, see Oliphant "Cases on Trade Regulation." 

(***) In 1434, it was written that "the crafts have been devised for this 
purpose, that everyone should earn his doily bread, and nobody shall 
interfere with the craft of another. By this, the world gets rid 
of its misery and everyone may find his livelihood," See Oliphant 
"Cases on Trade Regulation" (1923). 



9726 



-. 305 - 



The early courts were concerned not only \i th the fact that . 
such a contract tended to burden the community with a public charge, 
but also with the fact that the community was deprived of the product 
of a skilled craftsman. Furthermore, the remaining craftsman was in a 
position to exercise monopoly control. These points of inquiry into 
basic economic. conditions not only form the ingredients making up the 
public interest, but also influence the legal validity of contracts and 
devices in restraint of trade. . ".Tnen, as the court said, the "condition 
of things" and "state of society" changed, the courts, notwithstanding 
arguments based on older authorities, modified thoir -previous rulings. 
What wa.s the "state of society'. 1 when this change c-me about? Inter- 
community travel and- commerce, due principally to better roads, began 
to thrive. ".Then the guild system disintegrated, with the accelerating 
growth of trade in the commercial revolution, the impact of covenants 
on the public welfare changed drasticMly. The increased mobility of 
product, craftsman and interprise altered both the possibility that the 
covenantee would become a public charge and the monopolistic position df 
the covenantor. The covenantee could move to a new location, and products 
such as he made could move more freely into the locus of the covenant. 
The courts, taking this change into consideration, modified their pre- 
vious rulings with respect to such covenants. 

Despite these radical developments., however, the courts were 
still concerned with the same basic factors regarded as essential to the 
]irot°ction of the public interest, consequently they examined with unusu- 
al care the actual value of the consideration given in return for a cove- 
nant not to engage in a craft in a particular place. (*) They were con- 
cerned chiefly with determining whether the consideration was sufficient 
to take care of the covenantee during the life of the covenant , and when 
it was appeared conclusively that this was ample, the court no longer 
viewed the covenant as bad per se. 

In these later cases it nppeared that the development of inter- 
community commerce properly safeguarded the public welfare. The covenant 
could not deprive the community of the products of the skilled craftsman, 
because similar products came in. from other communities. For the same 
reason the public was .protected against possible monopoly abuse. 

In Mitchel v. Reynolds (**), generally regarded as the forerunner 
of the modern law of restraint of trade the court held valid as contract 
assigning the lease of a bake house for five years and an agreement not 
to trade as a baker in the parish during the term. In this case, the 
Court made the following comprehensive review of the contemporary eco- 
nomic situation: -,.'., 



(*) See Broad Jelleff GEO. Inc. (N.3. 1620) 

(**) 1. P. 131 (1711). Note discussion of this case in Quotation from 
Justice Hughes' opinion m Miles case. 



9726 



(Mitchel v, Reynolds:) 

"Affirmatively: the true reasons of the distinction noon 
which the judgments in these cases of voluntary restraints 
are founded are, first, the mischief which may arise from 
them, first, to the party, 'by the loss of his livelihood, 
and the subsistence of his family; secondly., to the pub- 
lic, by depriving it of an useful member. 

"Another reason is, the great abuses these voluntary 're- 
straints are liable to; as for instance, from corporations, 
who are perpetually labouring for exclusive advantages in 
trade, and to reduce it into as few hands as possible; as 
likely from masters, who pre apt to give their apprentices 
much vexation on this account, and to use many indirect 
practices to procure such bonds from them, lest they should 
prejudice them in their custom, when they come to set up 
for themselves. 

"Thirdly, Because in a great many instances, they can be 
of no use to the obligee; which holds in all cases of 
general restraint throughout England; for what does it 
signify to a tradesman in London, what another does at 
Newcastle? and surely it would be unreasonable to fix 
a certain loss on one side, without any benefit to the , 
other. The Rom-m law would not inforce such contracts 
by any action. See Puff. lib. 5, c, a. 3; 21 H.VII, 20. 

"Fourthly, the fourth reason is in favour of these contracts, 
and is, that there may happen instances wherein they may 
be useful and beneficial, as. to prevent a town from being 
overstocked, with any particular trade; or in case of an 
old man, who finding himself under such circumstances either 
of body or rnind, as that he is likely to be a loser by 
continuing his trade, in this case it will be better for 
him to part with it for a consideration, that by selling 
' his custom, he may procure to himself a livelihood, which 
he might probably have lost, by trading longer. 

"Fifthly, the la - ;/ is not so unreasonable, as to set aside 
a man's own agreement for fear of an uncertain injury to 
him, and fix a certain damage upon another; as it must do, 
if contracts with a consideration were made void. Barrow v. 
Wood, March, Rep. 77; Mich 7£d. IIIS5; Aleyn, .67, 8 Co. 121. 

"But here it may be made a question, that suopose it does 
not appear whether or -no the contract be made upon good 
consideration, or be merely injurious and oppressive, what 
shall be done in this cnse? 

"Resp. I do not see why that should not be shpwn by pleading; 
though certain the law might be settled either way without 
prejudice; but as it now stands the rule is, that wherever 

9726 



307 ~ 



such contract stat in&iff erenter , and for ought 
appears, may be either good or had, the law 
presumes it prima facie to be had, and that for 
these reasons: 

"First, in favor of trade and honest industry. 

"Secondly, For that there plainly appears a mischief, 
hut the benefit (if any) can be only presumed; and in 
that case, the presumptive benefit shall he overborne 
by the apparent mischief. 

"Thirdly, For that mischief (ps I have shewn before) is 
not only private, but public. 

/ 
"Fourthly, There is a sort of presumption, that it is 
not of any benefit to the obligee himself, because, it 
being a general mischief to the public, everybody is 
affected thereby; for it is to be observed that tho it 
be not shewn to be the party's trade of livelihood, or 
that he had no estate to subsist on, yet all the books 
condemn those bonds on that reason, (viz) as trk ing away 
the obligor's livelihood, which proves that the la'.? pre- 
sumes it; and this presumption answers all the difficul- 
ties that are to be found in the books. 

"As first, that all contracts where there is a bare re- 
straint of trade and no more, must be void; hut this taking 
place only where the consideration is not shewn can he no 
reason why, in cases where the special matter appears so 
as to make it a reasonable and useful contract, it should 
not be good 

"Secondly, it answers the objection, that a bond does not 
want a consideration, but is a. perfect contract without it; 
for the law allows no action on a nudum pactum, but every 
contract r.ust have a consideration, either expressed, as 
in assumpsits, or implied, as in bonds and covenants, but 
these latter, tno they are perfect as to the form, yet may 
be void as to the matter; as in a covenant to stand 
seised, which is void without consideration, tho it be 
a compleat and perfect deed. 

"Thirdly, it shews way a contract not to trade in any 
part of England, tho with consideration is boid;. for 
there is something more than a presumption against it, 
because it can never be useful to any man to restrain 
another from trading in all pLaces, tho it may be, to 
restrain him from trading in some unless he intends a 
monopoly, which is a crime. 



9726 



"Fourthly, This shows why promises in restraining of 
trade have been held good; for in those contracts it 
is always necessary to show the consideration so that 
the presumption of injury could not take place, hut it 
must be governed by the special natter shewn. And it 
also accounts not only for all the resolutions, but 
even all the expressions that are used in our books 
in these cases; it at least excuses the vehemence of 
Judge Hall in 2 II. V. fol. quinto; for suppose (as that 
case seems to be) a poor weaver, having jiist met with a 
great loss, should, in a fit of passion and concern, 
be exclaiming against his trade, and declare that lie 
would not follow it any more, etc., at which instant 
some designing fellow should work him up to such a pitch, 
as, for a trifling matter, to give a bond not work at it 
again, and afterwards, when the necessities of his family, 
nnd the cries of his children, send him to the loo, should 
take advantage of the forfeiture, nnd put the bond in suit; 
I must own, think this such a piece of villainy, as is 
hard to find a name for; and therefore cannot but approve 
of the indignation that Judge exprfssed, though not his 
manner of expressing it 

"The application of this to the- case at bar is very plain; 
here the ^articular circumstances and consideration are 
set forth, upon which the- Court is to judge, whether it 
be a reasonable and useful contract. 

"The plaintiff took a : bnker's house and the question is, 
whether he or the dpfendant shall have the trade of this 
neighbourhood? The concern of the public is equal on 
both sides. 

"What makes this the more reasonable is, that the restraint 
is exactly proportioned to the consideration, (viz) the 
term of five years. 

"To conclude: In all restraints of trade, where nothing 
more appears, the law presumes them bad; but if the cir- 
e\unstances are set forth, that presumption is excluded, 
and the Court is to judge of those circumstances and 
determine accordingly; and if upon them it appears to 
be a just and honest contract, it ought to be maintained. 

"For these reasons we are of opinion, that the plaintiff 
ought to have judgment". 

As economic facts and theories continued to change, so also 
changed the view of the courts. The arrival of the industrial 
revolution and the development of the laissez faire theory of 
competition, gave rise to very different court opinions from those 



9726 



- 309 - 



discussed heretofore. In Horner v. Groces (*) a dentist assistant en- 
tered into an agreement to serve for five years. One of the provi- 
sions in the agreement was that his services night he terminated on 
three months' notice. This agreement also contained a provision to 
the effect that the assistant would not practice within a hundred 
miles of York after his employment ended. The Court in holding 
the agreement had because it was more extensive than necessary to 
protect the employer, said: 

"We do not see how a better test can be applied to the 
question whether reasonable or not, than by considering 
whether the restraint is such as to afford a fair pro- 
tection to the interest of the party in favour of whom 
it is given and not so large as to interfere with the 
interest of the public." (**) 

The Court also said: 

"Unless the case was such that the restraint was plainly 
an obviously unnecessary the court - r ould not feel it- 
self justified in interfering." (***) 

In Hitchcock v. Coker (****) the plaintiff too]: the defendant as an 
assistant in the druggist business at a stipulated annual salary. 
In return, the defendant agreed not to do business as a druggist 
in Taunton or within three miles thereof at any time. The Court 
held that this condition was reasonably necessary to the protec- 
tion of the plaintiff's good will and that, consequently , the con- 
dition though unlimited in time, was valid. Previously, the rule 
was that only contracts limited as to time and spree were valid. 
The court also departed from the original practice of examining the 
adequacy of the consideration, applying the rule that any considera- 
tion enough to support a simple contract was sufficient. This depar- 
ture is attributable directly to changed economic conditions. In 
Nordenfeld v. Maxim, etc. , Co. (*****) the court abandoned the rule requir- 
ing that contracts be limited as to time and space, in favor of a 
general standard of reasonableness. The Court upheld and enforced 
by injunction a contract involving a world-wide restraint for 
twenty-five years in connection with the sale of a business with 
a world market. 

The simple structure of society of the earlier periods may have 
enabled the courts to scrutinize and evaluate more efficiently the 



(*) 7. Sing. 735 (1831) 

(**) See page 743 of opinion 

(***) See page 744 of opinion 

(****) 6 Ane 436 (1837) 

(*****) A. C. 535 (1894) 

9726 



- 310 - 



economic effects of restrictive agreements. Our modern courts, in 
passing upon the validity of price maintenance plans, have not 
measured or evaluated the facts in a corresponding manner. This 
failure may he caused in part hy the constantly increasing com- 
plexities of the present social pattern or the fact that there is 
no crystallized current economic philosophy. Whatever the reason, 
the fact remains, and no one has taken steps to see that essential 
facts appear in the record. (*) On the contrary our courts have 
reached conclusions concerning the economic effect of restrictive 
devices without the existence of supporting factual data. (**) 

The conclusion that price maintenance by restrictive agreement 
is in restraint of trade and hence against the public interest, 
but that price maintenance through "agents", or the use of one's 
market position to refuse to sell, is not in restraint' of trade and 
hence not against the public interest, is based upon legal distinc- 
tions derived from a succession of cp.ses. Many of these cases' il- 
lustrate earlier forms of economic organization and hence earlier 
phases of the conflict between public and private interests. The 
present economic relation of distributors to manufacturers raises 
a question whether the accredited legal distinction remains a suf- 
ficient guide to the reasonableness of contractual restraints. 



(*) They could remand cases to the Court of first instance, or the 
Federal Trade Commission for essential data. 

(**) In addition to the fact that the Dr. Miles Medical Co. v. Park 
case arose and was decided on legal technicalities, the other 
principal cases before the Supreme Court were likewise barren 
of factual information which would enable the court to determine 
the economic effects of the respective plans before them. The 
Colgate case (U.S. v. Colgate Co. see digest of case in Section- 
II) was based on the conclusion of the lower court's interpreta- 
tion of the indictment against the company. The Beech- Hut case 
(T.T.C. v. Beechnut Co., see digest of this case in Section II) 
went uo on an agreed statement of facts. The only materials 
that might be classified as economic appearing in the record 
were speculative conclusions based entirely on opinion 
evidence, none of which related to the economic effect of the 
plan on employment, production, or the existence of monopoly 
control. The records in the other important cases before the 
Supreme Court were just as poverty-stricken except in T.T.C. 
v. Curtis Publishing Company where 2,600 pages of testimony 
-/ere taken relating to the operation of the company's mer- 
chandising plan and to its erection of a vast employment sys- 
tem at a cost of over $5,500,000. In this case the Commission's 
finding that the plan was an unfair method of competition was 
rejected. (See digest of case in Section II , page 13 et seq. ) 



9726 



- 311-3 



Restraint of competition on products sold "by the General Electric 

Company through the use of 21,000 so—called "agents" which has been 
declared legal appears to "be at least as great as that resulting 
from the Dr. miles' contracts. (*) 

Courts and administrative "bodies charged with the duty of passing 
on such questions, and thereby with the duty of protecting the public 
interest, ^ould he in a much "better position to sustain or condemn 
a price maintenance plan or device if they had available for their 
use a factual record presenting its economic effects. 

The public today is just as much interested in employment 
problems, the ability to buy quality merchandise, and the prevention 
of monopoly control, as was the public of other periods. Thether a 
particular price maintenance plan enables a manufacturer to lessen 
fluctuation in employment; whether such a plan affects the quality 
of his product; whether price maintenance plans prevent or give 
rise to unfair or deceptive tracie practices (such.as sub-standard 
packaging, etc.); and whether the manufacturer occupies a monopoly 
position; are all questions upon which evidence could be had. 
Obviously, if the Court had before it ample information of this char- 
acter, it wouKl be in a much better position to determine whether 
or not a particular orice maintenance device did or did not unduly 
restrain trade. Thus the doctrine of past decisions j that resale 
price contracts are bad per se, may not stand inflexibly as precedents 
for future cases if the Court has before it factual data proving that a 
given system of such contracts are reasonable ana not inimical to the 
public, interest, using as a method for measurin g the ingredients of the 
public interest a modern manifestation of the older principle's. 



(*) These c^ses are discussed hereafter and also in Section II, page 
et seq. 



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SECTION II CLASSIFICATION OP I'.IPOP.TANT RESALE 
FBICB UHHTEKAUCE DECISIONS IHIO DILUTED GROUPS 



I. DECISIONS DY'PEDEPaL COUPTS : 

A. Decisions concerning Patented Articles. 

The early cases regarded a price maintenance provision in a patent 
license agreement as subject to the patent statute. Hence a violation 
of such a provision was construed to he an infringement of patent rights; 
hut this rule was changed by later decisions. The cases discussed here- 
after show how this change was made. 

HEATON BUTTON PA5TENER CO. v. EUREKA SPECIALTY CO . 
77 P. H. 2SS (1SS6) 

In this case the complainant was the holder by assignment of patents 
covering machines for fastening buttons on shoes. It had a virtual 
monopoly in this field. The machines were me.de specifically to be used 
with a certain type of staple manufactured ^j the same company and they 
also bore on s. metallic plate the inscription: 

"This machine is sold and purchased to use only with fasteners 
made by the Peninsular Novelty Company to whom title to said 
machine immediately reverts upon violation of the contract of 
sale." 

The Court decided that the above condition was a reasonable exercise of 
the rights enjoyed by a patentee having exclusive monopoly rights in his 
invention. In this regard the Court said: 

"The patentee, if he see fit, may reserve to himself the ex- 
clusive use of his invention discovery. If he will neither 
use his device, nor permit others to use it, he has but sup- 
pressed his own. That the grant is made upon the reasonable 
expectation that he will either put his invention to practi- 
cal use, or permit others to avail themselves of it upon 
reasonable terms is doubtless true. This expectation is 
based alone upon the supposition that the patentee's interest 
will induce him to use, or let others use, his invention. 
The public has retained no other securit;.' to enforce such 
expectations. A suppression can but endure for the life of 
the patent and the disclosure he has made will enable all to 
enjoy the fruit of his genius. His title is exclusive, and 
so clearly within the constitutional provisions in respect 
of private property, that he is neither bound to use the 
discover;'' himself, nor permit others to use it." 

This case is commonly referred to as the Button Pastener case, and 
is the origin of the principle that a patentee, by notice, can validly 
prohibit buyers of his machine from using with the machine any un- 
patented supplies except those made by the patentee. The Court in the 

9726 



- 313 - 



text of its opinion speaks of the "novel restrictions" and says that it 
is called upon "to mark another boundary line around the patentee's 
monopoly which will debar him from engrossing the market for an article 
not the subject of the patent." This, as v:e have seen, it declined to 
do. 

The reasoning ~oy the Court in this case was upheld by the Supreme 
Court in Henry v. Dick Co. 22k U. S. 1, (1912). In this case the A. B. 
Dick Company of Chicago, manufacturers of a rotary mimeograph, sold one 
of their machines to a Miss Skou. Upon the machine appeared the follow- 
ing inscription? 

"License Restrictions, 
This machine is sold by the A. B. Dick Co. with the license 
restriction that it may be used only with the stencil paper, 
ink and other supplies made by the A. 3. Dick Co., Chicago, 
111." 

The defendant, Henry, sold to Miss Skou, a can of ink suitable for use 
upon the mimeograph with knowledge of the license agreement set forth 
above and with the expectation that it would be used in connection with 
the Dick Company mimeograph. The ink in question was not covered by 
the mimeograph patent. The Dick Company brought suit alleging that the 
use of this ink with their patented mimeograph was an infringement of 
the patent rights. The Court finding for the complainant held that the 
statutory rights of the patentee, to make, use and sell the article con- 
taining or embodying his invention gave him a lawful right to restrict 
others from the manufacture, use and sale of the article. These re- 
strictions were regarded in the nature of a conditional sale, the 
purchaser buying the 'goods with knowledge .of the restrictions. However, 
the Court did hold' that wherever the restrictions were not mentioned in 
the sale the pa-tehtee had no rights with respect to the future dispo- 
sition of the goods. In this connection the Court said: 

"An absolute' and unconditional sale operates to pass the 
patented thing outside the boundaries of the patent, be- 
cause such a. sale implies that the patentee consents that 
the purchaser may use the machine so long as its identity 
is preserved. This implication arises, first, because a 
sale without reservation of a machine whose value consists 
in its use, for a consideration, carries with it the pre- 
sumption that the right to use the particular machine is to 
pass with it." 

With regard to the conditions which may lav/fully be imposed upon the 
purchaser, the Court said: 

"To begin with, the purchaser must have notice that he buys 
with only a qualified right of use." 

While this case does not specifically concern price maintenance, 
the Court in reaching its conclusion used the identical reasoning of 
the Court in the B utton Fa.stener case and that used in a whole series 

9726 



— '1 A — 

of cases previ ously decided by inferior federal courts. (*) 

The following are digests of the important earl;/ decisions involv- 
ing similar questions: 

EDI SON PHONOGRAPH CO. v. KAUFMAN 
105 P. 36O (C.C.7.3. Pa. 1901) 

■The court issued s preliminary injunction against a price cutter 
as a patent infringer; the complainant required its jobbers to agree 
to maintain resale prices; defendant was not a party to such an agree- 
ment but bought -rath notice that such restrictions were imposed. (**) 

BEMEHT v. NATIONAL HARROW COMPANY 

136 u. s. 70 (1920) 

The plaintiff wa.s the owner by assignment and purchase of a large 
number of United States letters patent covering inventions embodied in 
the "float spring tooth harrow." By special contracts based on valid 
considerations, the national Harrow Co. granted to the Bement Co., the 
license and privilege of using the rights under those patents in its 
business of manufacturing, marketing and bending to others to be used, 
float spring tooth harrows and attachments. In the agreement between 
the two companies it was specified that Bement should allow no rebate 
or reduction frou the price or prices fined in the license. When the 
articles of contract were broken by Bement, the national Harrow Company 



(*) Tub. Rivet ": Stud Co. v. O'Brien . 93 P. (C. CD. Mass, 1S9S) 
Rupp & Witt : -;enfcld v. Elliott . 131 P. 730 (C..C.A.6th, I90U) 
Leeds & Catlin Co. v. Victor Talking Machine Co . 154 F. 58 

(C.C.A.2, 1907) 
Aeolian Co. v. Juelg Co . 155 S 1 . 119 (CCA. 2nd 1907) 
A. B. Dick Co. v. Milwaukee Office Specialty Co . l6g F. 930 

(CCE.D.U.Y. 1908) 
Crown Cork& Seal Co. v. Brooklyn Bottle Stop-ocr Co . 172 P. 

225 (C.C.E.D.N.Y. 1909) 
Crown Cork £■ Seal Co. v. Std. Brewery . I7U P. 252 (CCN.D.lll. 

1906) 
Commercial Acetylene Co. v. Autolux Co . 181 P. 337 (C.C.E.D. Wis. 

1910) 
Other inferior federal courts rejected this rule in the following 

ca.ses: 
Cortelyou v. Johnson & Co . 1U5 P. 933 (CCA. 2d, 1906) reversing 

13S P. 110 (S.D.N.Y. 1905) 
Individual Drinking Cup Co. v. Errctt , 297 P. 733, 727-3 (CCA. 

2d, I92H). 

(**) Accord. (llotice affixed to chattel). Edison Phonograph Co. v. 

Pike lib P. 3b3 (CCD. Mass. 1902) ; Victor Talking Machine Co. v. 
■ Pair 122 P. k2k (CCA. 7th 1903) ; Winchester Repeating Arms Co . 
Olmstead , 2.03 P. U93 (CCA. 7th 1913) . 

9726 



- .315 r :. 

brought suit, and the case (*) finally reached the United States Supreme 
Court. The defendants maintained that the contracts- with plaintiff were 
illegal because against public policy and contrary 'to the spirit and 
letter of the She man Law. 

In a decision favorable to the plaintiff, the Court developed the 
following argument. 

"...the general rule is absolute freedom in the use or sale of 
rights under the patent laws of the U. S» The very object of 
these laws is monopoly and the rule is, with few exceptions, 
that any conditions which are not in their very nature illegal 
with regard to this kind of property, imposed by the patentee 
and agreed to by the licensee, for the right to manufacture or 
use or sell the article, will be upheld by the courts. The 
facts that the conditions in the contract keep up the monopoly 
or fix prices does not render them illegal." 

The Court admitted that the contracts were in restraint of trade 
and commerce between the states, but held that such restraint is not in 
violation of the Sherman Law, because it arises from reasonable and 
legal conditions imposed by the owner of a patent. The Court further 
admitted that the contract resulted in keeping up the prices of the 
commodities, but "this the parties were legally entitled to do. The 
owner of a patented article can, of course, charge such price as he 
may choose, and he may assign it or sell the right to manufacture and 
sell the article patented, upon the condition that the assignee shall 
charge a certain amount for such articles." (**) 



(*) The complainant was beaten in the Circuit Court of Appeals when it 
brought suit against two of its licenses, the Court holding that 
the license agreements were illegal. See National Harrow Co. v' « 
Hench S3 T. 36 (C.C.A. 2nd, 1897) affirming 76 Fed, 667. The 
plaintiff sued the licensee as an infringer but without success. 
National Harrow v. Hen ch, SH F. 226 ( O.C.i/.D.N.Y. 1S°,S) . Another 
member of the combination was permitted to rescind his entry into 
the trust on the ground, that it was an illegal combination. 
Straight v. national Harrow Co . IS N.I.S. 22k (lggi) But after 
withdrawal he became a stranger and could not enjoin an infringe- 
ment suit. Straight v. National Harrow Co . 51 P» S19 (C.C.D.N.D. 
N.Y.) and although a stranger, defendant prevailed in the District 
Court of Indiana on the ground that the Coiirt could not aid an 
illegal trust. National Harrow Co. v . Quick , 67 F. 130 (C.C.D. 
Ind. i.395) The Circuit Court of Appeals is not prepared to sub- 
scribe to that doctrine by affirming the judgment on the ground 
that the patent in suit was void. 7U F. 236 (C.C.A.7, 1296) . 

(**) The Court seemed to emphasize the fret that it did not appear from 
the record that the license agreement sued on was a mere part of 
a general scheme for the elimination of competition between com- 
petitors. This case was at the time it was rendered, commonly 
regarded as making the Sherman Act ineffective in combinations 
where patents were involved. 

9726 



- 31* - 



NATIONAL FHOi"DC-^AP II CO. v. SCXJLEflAL 
128 P. 733 (CCA. Sth, 1904) 

The complainant was the exclusive licensee fcr the sale of Edison 
phonographs and records. In 1901 it entered into a contract in writing 
called "jobber* s agreement" with the defendants. The terms of the con- 
tract in the main were; (l) to sell only at certain named prices; 
(2) to sell only to reta.il dealers who signed a prescribed and similar 
agreement governing and controlling sales by retail dealers; and (3) 
to sell all Edison phonographs and records under the condition that the 
license to use and vend them implied from such sale was dependent upon 
the vendee's compliance with the foregoing conditions. Upon the breach 
of any of then, the license to use or vend the said phonographs or 
records immediately ceased and any vendor or user thereafter became an 
infringer of said patent and could be proceeded against by suit for in- 
junction or damages. Although the defendants consented to a decree 
against them, the lover court refused to enter it on the ground that 
the contract was against public policy out the Circuit Court of Appeals 
in reviewing the lower Court's decision held the resale contract price 
enforceable and said: 

"In this case the exclusive right to sell has been transferred 
to complainant, and to that extent it has and controls the 
monopoly granted \>j the letters patent. An unconditional or 
unrestricted sale by the patentee, or by a licensee author- 
ized to make such sale, of an article embodying the patented 
invention or discovery, passes the article without the limits 
of the monopoly, and authorizes the buyer to use or sell it 
without restriction; but to the extent that the sale is sub- 
ject to any restriction upon the use or future sale the 
article has not been released from the monopoly, but is with- 
in its limits and, as against all who have notice of the 
restriction is subject to the control of whoever retains the 
monopoly. * * * 

"The condition against sales to retail dealers who do not 
sign a similar agreement governing sales by them was imposed 
by complainant in the legitimate exercise of its property 
right in the monopoly, and fcr the purpose of rendering it 
valuable. The complainant had the sane right to require 
that such an agreement be exacted from defendants' vendees 
that it had to demand it from defendants.. Any sale by de- 
fendants outside of the terms of their u nder-li cense or 
contract was an invasion of complainant's lawful monopoly. 

"The contract which the parties had made, and which de- 
fendants were violating, was a valid one,"* * * 

N. J. PATENT CO. v. SCRAPPER 
159 P. 171 (CC.E.D. Pa. 190S) 

A stranger procured a confederate to become a licensed dealer and 
get goods for him to sell at cut prices; this conduct was enjoined as 
an infringement. 

9726 



- 317 - 



THE FAIR v. D01CT. V J 3.7JFA.C2V3.im CQl IPANY 
166 -P. 117 (C.C.A.Tta 190S) 

Sales to dealers were conditional on maintaining prices. A 
stranger with actual notice of the condition is enjoinable. A notice 
affixed to the chattel is immaterial. 

THOHAS A. ZDISOiT INC. v. SKITK iiPHCANTILD COiPAIiY 
1S8 F. 925 (C.C.h.D. Mich. 1911) 

Goods were first sold to dealers with resale price maintenance con- 
tracts. Defendant bought from a, salvage company who had "bought at a 
fire sale. Held plaintiff's right to an injunction depends upon estab- 
lishing its patent, the court remarked that the Dr. Miles case and 
Bobbs-Merrill Publishing Co. v. Straus , "have tended to indicate that 
some limits will be placed upon the now customary practice." But it 
was still thought that the last mentioned cases did not apply to 
patented articles. See Automatic Pencil Sharpener Co. v. Goldsmith 
Bros. 190 P. 205 (C.C.S.D.N.Y. 1911) ; Motion Picture Patents Co. v . 
Universal Film Manufacturing Co. et. al., 243 U. S. 5 02 , (1917) • It 
was not until the so-called Motion Picture Pat ents case that "his prac- 
tice was held invalid. ( Motion Picture Corporation Co. v. Universal 
Pilm Mfg. Co. 2U3 U. S. 502 (I917). 

In this case the Motion Picture Patent Company was the assignee of 
a patent granted in 1902 for improvements in projecting Rinetcscopes, 
and in accordance with its rights as assignee had by a ''license agree- 
ment" granted to the Precision Machine Conpany the right and license to 
manufacture and sell machines embodying the invention described in the 
patent. In this agreement the Precision Machine Company agreed to sell 
its machines only on condition that they be used "solely for exhibiting 
or projecting motion pictures containing the invention. .. .leased by a 
license of the licensor while it owns said patents and upon other terms 
to be fixed by the licensor and complied with by the user while the 
said machine is in use and while the licensor owns said patents." 

Another condition agreed to by the precision Machine Company was 
to affix to every machine sold the following Notice: 

"Serial No. 



Patented. 

The sale and purchase of this machine gives only the 
right to use it solely with moving pictures containing the 

invention of reissued patent number leased by a 

licensee of the Motion Picture Patents Co., the owner of 
the above patents and reissued patent, while it owns said 
patents, and upon other terms to be fined by the Motion 
Picture Patents Co. and complied with by the user while it 
is in use and while the Motion Picture Patents Company owns 
said patents. The removal or defacement of this plate 
terminates the right to use this machine." 



9726 



- 318 - 



The agreement further provided 


that the Precision Machine Company 


should not sell any Machine at less 


than the list price fixed by the 


Motion Picture Patent Co. except to 


.jobbers and others for the purpose 


of resale and that it would require 


such .jobber and others to sell at 



not less than the stivulated list price , 

In compliance with the terms expressed in the agreement the Pre- 
cision Company sold to the 72nd Street Amusement Company a machine 
bearing the license notice quoted above. Soon after the patent re- 
ferred to in the notice and which affected only the films being used 
in the machine exoired, and somewhat later the playhouse with the 
machine was leased to the Prague Amusement Company, which proceeded to 
use in the leased machine unpatented films acquired indirectly from 
the Universal Pilm Manufacturing Company. The Motion Picture Patent 
Company notified the Prague Amusement Company that its use of the 
leased machine without license constituted an infringement of the 
patent and on the same day notice was also sent to the Universal Pilm 
Manufacturing Company charging infringement of the sajne patent by 
supplying films for use upon the machine in ruestion. Suit was brought 
and the court was squarely confronted with the question of whether or 
not a patentee or his assignee may license another to manufacture and 
sell a patented ma.chine and by notice attached to the machine restrict 
the use by the purcha-ser to films which are not covered by the patent- 
ed machine and arc not patented. Also whether or not the assignee of 
a patent which has licensed another to make and sell the machine 
covered by it can by notice attached to said machine limit the use of 
it by the purchaser or oy the purchasers, to terns which do not appear 
on the notice but which are to be fixed after sale by such assignee in 
its discretion. TTith respect to those questions the Court said: 

"The exclusive right to vend a patented article is derived 
from the same clause of the section of the sta.tute which 
gives the exclusive right to 'use' such an a.rticle, and 
following the decision of the Button Fa.stener ca.se, it was 
widely contended as obviously sound that the right existed 
in the owner of a, patent to fix a price a.t which the patent- 
ed article night be sold and resold under penalty of patent 
infringement. But this Court in Bauer v. O'Donnell. . .re- 
fused to give such a construction to the Act of Congress 
and decided that the owner of a patent is not authorized by 
either the letter or the purpose of the lav; to fix, by 
notice, the price at which a patented a.rticle must be sold 
after the first sale of it, declaring that the right to vend 
is exhausted by a single unconditional sale, the article 
sold being thereby carried outside the monopoly of the 
patent law, and rendered free of every restriction which the 
vendor may attempt to put upon it. The statutory authority 
to grant the exclusive right to 'use' a patented machine is 
not greater, indeed is precisely the same, a.s the authority 
to grant the exclusive right to 'vend* and, looking to that 
authority for the reasons stated in this opinion we are con- 
vinced that the exclusive right granted in every patent must 
be limited to the invention described in the claims of the 

9726 



- 319 - 



patent and tliat it is not competent for the ovmer of a patent 
by notice attached to its machine to, in effect, extend the 
scope of its patent monopoly "by restricting the use of it to 
materials necessary in its operation out which are not part 
of the patented invention, or to send its machines forth into 
the channels of trade of the country subject to conditions as 
to use or royalty to "be imposed thereafter at the discretion 
of sxich patent owner. The patent law furnishes no warrant 
for such a practice and cost, inconvenience and annoyance to 
the public, which the opposite conclusion would occasion for- 
bid it. 

"It is argued a.s a merit of this system of sale under a 
license notice that the public is benefitted by the rule of 
the machine at what - is practically its cost, and by the 
fact that the owner of the pa.tt.nt makes its entire profit 
from the sale of the supplies with which it is operated. 
This fact, if it be a fact, instead of commending, is the 
clearest possible condemnation, of the practice adopted, for 
it proves that under color of its patent the owner intends 
to and does derive its profit, not from the invention upon 
which the lav; gives it a monopoly, but from the unpatented 
supplies with which it is used and which are wholly without 
the scope of a patent monopoly, thus in effect extending the 
power to the owner of the patent to fix a price to the public 
of the unpatented supplies as effectively as he may fix the 
price on the patented machine. 

"We are confirmed in the conclusion which we are announcing 
by the fact that since the decision of Henry v. Dick Co. 
23U U. S. I. the Congress of the U. 3., the source of all 
rights under patents, as if in response to this decision has 
enacted a law making it unlawful for any person engaged in 
interstate commerce 'to lease or make a sale or contract for 
the sale of goods.. •machinery,' supplies, or other commodities 
whether patented or unpatented for use, consumption or resale 
...or to fix a price charged therefcr. ...on the condition, 
agreement or understanding that the lessee or purchaser there- 
of shall not .use. . .the goods. . .machinery, supplies or other 
commodities of a competitor or conrpetitors of the lessor or 
seller where the effect of that lease, sale or contract for 
resale, or such condition, agreement or understanding may be 
to substantially lessen competition or tend to create a 
monopoly in any line of commerce.' (23 Stat, at Large p. 730). 

"Our conclusion renders it unnecessary to make the application 
of this statute to the c.^se at bar which the Circuit Court of 
Appeals made of it but it must be accepted by us as a most 
persuasive expression of the public policy of our country with 
respect to the question before us. 



9726 



- o? r ) ~ 



"It is obvious that the conclusions arrived at in this opinion 
are such th t the decision in Henry v. Dick Co. 2'5U U. S. I, 
mast be regarded as overruled." 

The Court criticized the reasoning errpressed in the decisions up- 
holding the right of a pateiitee to impose restrictive agreements in the 
f ol lo wi ng 1 angtu , /e : 

"The defect in this thinking springs from the substituting of 
inference and argument from the language of the statutes and 
from failure to distinguish between the rights which are given 
to the inventor by the patent law and which he may assert 
against all the world through an infringerent proceeding and 
rights which he may create for himself by private contract 
which, however, are subject to the rales of general, as dis- 
tinguished from thoce of the patent law. TThile it is true 
that un'.er the statutes as they were (and now are) a patentee 
might withhold his patented machines from public use, yet if 
he consented to use it himself or through others, such use 
immediately fell within the terms of the st-.tute and, as we 
have seen, he is thereby restricted 'to the use of the in- 
vention as it is described in the claims of his patent and 
not as it may be expended by limitations as to materials and 
supplied necessary to the operation of it imposed by mere 
notice to the public." (*) 

Digests of important Supreme Court decisions involving price main- 
tenance in connection with patented articles since the Motion Picture 
Patents case are set forth below in chronological order: 

BOSTON ST05E v. .dZPICAN GRAPHAPhOhE CO . 
2k6 U. S. 8, (1. IS) 

The Graphaphone Company manufactured a patented article, and re- 
quired from dictrioutors contracts to maintain resale prices. It 
brought a suit to enjoin violations of the contract by defendant, a 
distributor. Chief Justice white, speahing for the Court said at 
page 25: 

"Applying the cases thus reviewed there can be no doubt that 
the alleged price-fixing contract disclosed in the certifi- 
cate was contrary to the general law and void. There can be 



(*) The iiotion Picture Patent Case was decided in 1917* In 1320 the 
District Court of Delaware in Coco Cola Bottling Co. v. Coco Cola 
Company . 2'oy Ped. 7^9, issued a temporary injunction forbidding 
the breach of an agreement where a syrup company gave the com- 
plainant the exclusive right to bottle the s\ r rup with carbonated 
water and sell the product in an exclusive territory notwith- 
standing the defense that the agreement was illegal. 

9726 



- 321 - 



equally no doubt that the power to make it in derogation of 
the general law was not within the monopoly conferred "by the 
patent lav, and that the attempt to enforce its apparent ob- 
ligations under the guise of a patent infringement was not 
embraced within the remedies given for the protection of the 
rights. which the patent law conferred." (*) 

UNITED STA T ES v. A SCHRADER'S SON. INC. 
252 U. S. b5 (I? 20) 

This case involved an indictment under the Sherman Act, which 
alleged the execution of actual contracts,, for price maintenance. The 
Court, through Justice KcReynolds, explained that the Colgate Case was 
not intended to overrule the Dr. Miles Iledicine Case , and said at p. 99s 

"It seems unnecessary to dwell upon the obvious difference be- 
tween the situation presented x;l\en a manufacturer merely indi- 
cates hie wishes concerning prices and declines further deal- 
ings with all who fail to observe them and one where he enters 
into agreements - whether express or implied from a course of 
dealing or other circumstances - with all customers throughout 
the different states, which undertake to bind them to observe 
fixed resale prices. In the first, the manufacturer but exer- 
cises his independent discretion concerning his customers, and 
there is no contract or combination which imposes any limita- 
tion on the purchaser. In the second, the parties are combined 
through agreements designed to take away dealers' control of 
their own affairs, and thereby destro;" competition and restrain 
the free and. natural flow of trade amongst the states. (**) 



(*) "Whether a producer of goods should be permitted to fix by con- 
tract, empress or implied, the price at which the .purchaser may 
resell the::., and if so, under what conditions, -is an economic 
•question* To decide it wisely, it is necessary to consider the 
relevant facts, industrial and commercial, rather than established 
legal principles." Per J. Brandies dissenting in Boston Store v . 
Am. Gre,~j3h. Co . ' • ... 

(**) The indictment in this case alleged that defendant sold patented 
automobile tire valves and accessories to tire manufacturers and 
jobbers upon uniform contracts whereby purchasers promised to 
maintain separate specified schedules of prices on resales to 
other jobbers, retailers and consumers. The judge of the federal 
district court, (?„6k F. 175, 179-lSS, 1919) sustained a demurrer 
to the indictment because it failed to allege any purpose to 
monopolize. He rejected an argument that the- Dr. Miles and Colgate 
cases were to be reconciled by reason of any distinction between 
' formal and informal contracts, and cane to the conclusion that 
attempt to monopolize was an essential element of the crime alleg- 
ed. Prom the transcript of Record before the Supreme Court it 
appears that prices to manufacturers, jobbers and retailers, re- 
spectively, averaged about U0$, 50^ r - n ^- &5^ of prices to consumers. 
See U. S. S. Ct. Oct. Tei-m 1919, No. 567, Indictment, Exh. A. 
Transcript of Record. 6. 
9726 



J. S. v. G £J.'£hAL fiLSCTRlO CU PANY, et al 
272 U. S. 476; 47 S. Ct. 192 (1926). 

In this case the Supreme Court refused to find g violation of the 
Anti-Trust Act in the price maintenance scheme of the General Electric 
Company, which distributed its- patented articles through 21,000 agents. 
The holding of the Coa.rt apoeaxs at page 483: 

"7?e 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 before us, however, comprehensive as a mass or 
whole in their effect, are violations of the Anti-Trust 
Act. The owner of nn 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 consumer." (*) 

E. Decisions concerning Prooriety I.edicine and so-called Secret 
Process Goods: 

Until the Supreme Court decided the Dr. Files v. Park case (discussed 
hereafter), price maintenance Dlans in which title to articles under 
this classification passed from maker to wholesaler and then from 
wholesaler to purchaser were repeatedly recognized and protected (by 
inferior federal courts) upon the ground of direct analogy between the 
rights and monopolies of patent and trade secret articles: 

Dr. Miles ! edical Co. v. Goldthwiate, 133 Fed. 798 

Dr. 'i.ules Ledic aj Co. v. Jayne, 14S F. R. 838 

Hart man v. Park . 145 Fed. 358 

Dr. Iv:i l es kedi c al Co. v. Plat t 142 Fed. 606 

Park v. Sruen ,"~139 F. E. o90 

Part man v. Piatt , 142 Fed. 606 

'world's Disp ensary ; e dical Assoc iati on v . Pi att , 142 Fed. 6 06 

In Ee Park, 138 "Fed". 421 

Veils (x. R ic hardson Co. v. Abraham t 146 Fed. 1»0 

Jay ne v. Loder ~(C. C. A. 3rd Ct.) 149 F. E. 21 (**) 



(*) "The question of the nature of the contract between plaintiff and 
its dealers, whether one of absolute or conditional sales of au- 
tomobiles, lies at the threshold of the controversy". For a 
discussion of the cases involving contract of sale and agency see 
Ford Loto r C o. v. Uni o n Motor Sales Co ., 244 ^ed. 156 (C. C. A.6,1917) 
affirming 235 Fed. 373 (S.D.Uhio 1914).. Eut cf. Curtis Publish- 
ing Co. v. F. T. C . 250 TJ. S. 568 (1923). For a discussion of 
this problem, with particular reference to the principal case 
from the point of view of marketing, credit burdening, etc., 
see 27 Columbia L a - Review 567 (1926). 

(**) The Court dissolved the Tripartite agreement, ruling that a 
vertical price maintenance agreement was illegal. 

9726 ' ' 



- 323 - 

It should be noted from the above list that these include three 
cases in which the Dr. Miles Medical Co. was the -plaintiff. 

Dr. Miles Medical Co. v.. Soldt hw aite : this case should have been 
regarded as rather weak and unauthoritative because the decree was not 
resisted. 

Dr. Miles Medical Co. v. Jayne was decided by the same Judge as 
decided the Goldthwaite case, which probably lessened its effect as an 
authoritative precedent, and 

Dr. Miles Medic a l Co. v. Piatt . This case was followed by Wells & R: 
Richardson v. Abraham in which the legality of the contracts was not de- 
nied b ir the defendant, thus lessening tiie value of the ooinion as a basis 
for the legality of price maintenance contracts. The ground upon which 
the two above cited contested cases relied wasthe identity between the 
rights of a patentee and those of the owner of a trade secret or private 
formula with respect to the product or manufactured article. 

In Dr. Miles Medical Co. v. Jayne cited above the court said: 

"The contention of the defendants is that these contracts are un- 
lawful because they are in restraint of trade. In support of this 
they do not rely so much upon the common lav.' rule as upon the Fed- 
eral Statute (26 Stat. 209) (this statute relates to patents). 
The bill alleges that the complainant is the exclusive owner of 
these secret formulae and the exclusive manufacturer of these 
remedies. It follows that until voluntary disclosure or lawful 
discovery the complainant has an exclusive right of property in 
these tra.de secrets and has the right to make, use and sell the 
articles patented thereunder. . Exclusive right of property in a 
trade secret is of necessity a monopoly the same as a patent or 
copyright. The complainant may make these articles or refrain 
from making them. It may sell them to one person and not to 
another at such prices and under such, conditions as it may deem 
advantageous. Contracts like those set out in the bill concerned 
articles made under trade secrets, the same as similar .contracts 
concerning articles made under a patent or copyright, are outside 
the rule of restraint of trade whether at comnon law or under the 
federal statute." (Numerous cases cited.) : 

In Dr. Miles v. Piat t the Judge said: 

"These suits are brought for. an infringement or violation of the 
property right of the complainants in the secret process owned or 
controlled by them. The right of a patentee, owner of a copyright, 
or owner of a secret process is merely the right of exclusion. 
The holder of such a property right is said by the court in the 
Victor Talking Machine cases.... a czar in his own domain. He may 
sell, or not, as he chooses. He may fix such prices as he pleases. 
He may sell at one price to one person and another to another per- 
son, he isnot required to givs reasons or deal fairly with purchas- 
ers. Why is it material then, in a suit to prevent infringement of 
complainants' rights in the secret process, to inquire whether 
complainants have entered into a combination or conspiracy to con- 
trol everything thev are lawfully entitled to control?" 
9726 



-' 324 -' 

Ih Jayne v. Lode; - , an action was brought under Section 7 of the 
Sherman Act against a combination of three large associations; that of 
the wholesale druggists; that of retail druggists and the Association 
of Manufacturers of Proprietary l.iedicines. The object of the combination 
was to exclude from trading in proprietary medicines ever;,'- dealer who 
would not consent to sell to members of the combine only, and at prices 
named by it. 

The Court among other things stated: 

"It is true, as claimed by the defendants, that any proprietor of 
a patent medicine or goods such as those' involved in this suit, 
has a right to sell them to whomsoever he may see fit, and he may 
lawfully say who shall handle his goods at wholesale and upon what 
conditions the wholesaler may dispose of them to the retailer, and 
prescribe the condition upon which the retailer shall sell them to 
the consumer and. in case of any violation of his agreement by 
either the wholesaler or retailer the proprietor has a. lawful right 
to refuse to sell his goods in the future to either. And so the 
Wholesaler has the right to purchase or refuse to purchase, goods 
from a proprietor, or to sell, or refuse to, sell to a retailer 
and the wholesaler or proprietor has a lawful right to refuse to 
sell to a retailer whom he finds is cutting the price below what 
either of them contracted with the .retailer to sell the goods. " 

This case was appealed and in passing on the various questions the 
Circuit Court of Appeals ( Jayne v. Loder , 149 P. R. 21) after stating 
the conditions and arguments on behalf of both parties said: 

"Undoubtedly the originator and compounder of a proprietary 
med-icine may choose his own policy and sell or withhold from 
selling as he pleases according to supposed self-interest, 
fixing the prices and naming the terms and conditions at and 
upon which alone he will do so, refusing to those who will 
not comply. And so far as this is confined to his own goods, 
and pursued by independent and individual action It cannot 
be challenged. " 

But this reasoning which was urged upon the Circuit Court of 
Appeals (6th Circuit) in Park v. Hart man, 153 P. R; 24, was rejected 
and Judge Lurton in his opinion stated: 

"If we are right in our conclusion that the manufactured 
product cf a trade secret or private formula is not immune 
from the common law rules forbidding monopolies and unreason- 
able restraints of trade, the cases above referred to must be 
disapproved, at least insofar as they are grounded upon the 
cases which deal with articles made under patents or copy- 
rights. " (*) 



(*) Footnote continued on next nage . 



9726 



- 325 - 

This brings usup to the leading cr.se on the subject of price main- 
tenance. 

DR. i.IILZS ■MEDICAL CO. v. JOffiJ PAHKS CO . 
.220 IT. S. 3,^3; 31 S. ct. 373 (1911) 

The petitioner, a manufacturer or medicines prepared "by secret for- 
mulae, reciuired every wholesaler and retailer through whom its products 
were distributed to sign agreements to sell at prices specified by the 
manufacturer, Defendant, a wholesaler dealing in drugs, secured a supply 
of petitioner's medicines through wholesalers at prices which violated the 
agreement exacted by petitioner, and sold the medicines at similar "cut- 
prices.". Petitioner sought to enjoin the defendant from inducing the 
former's distributors to violate their contracts and from selling its 
medicines at less than the established resale prices. The Supreme Court 
refused the injunction, on the ground that the policy pursued by the pet- 
tioner was in violation of the Sherman Act, Mr. Justice Hughes, speaking 
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 free- 
dom 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 com- 
bination and endeavored to establish the same restrictions, and 
thus to achieve the same result, by agreement with each other.*** 

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

( * ) Footnote from preceding - page . 

Judge Lurton 1 s reasoning in tais case was accented in toto by the 
Supreme Court in Dr. Miles liedical Company case wnich was handed down 
soon afterwards. (See discussion of this case hereinafter.) "The 
mere fact that one article or class of articles is made under an 
unknown or private formula and another class is not, is an undeniable 
fact which may serve for some nurooses to differentiate them. But 
that single fact does not afford an economic reason , rnd still less a 
legal reason, for saving that it operates to exenvot such articles 
from rules against unlawful restraint of trade." A close examination 
of the transcript of record that r, as submitted to the Supreme Court in 
the Dr. Miles case indicates that the factual data submitted to the 
court is confined exclusively to a discussion of the right flowing from 
trade secrets and whether or not the price maintenance arrangement 
involved an agency or contract of sale. In other words, there was ab- 
solutely no economic data in the record f'hich would "afford an economic 
reason" and giv.e the court the basis for saving that it (the "olan) 
"operates to exempt such articles from rules against unlawful restraints 
of trade. 



- 32fi - 

"*** The complainant having solr 1 its -products at prices satisfactory 
to itself, the public is entitled to whatever advantage may be de- 
rived from co.moetition in the subseauent traffic." (*) 

BAUHR v. ' DOi-UBLL 
229 U. S. 1 (1913) 

The plaintiff was sole agent and licensee for the sale of Sanatogen 
in the United States by virtue of a contract with 3auer & Cie, of Berlin, 
Germany, the holders of the United States letters patent u~>on Sanatogen. 
On the original Sanatogen packages as sold by the 3auer Chemical Co urn any 
was the following inscription: 

"Fotice to the Retailer 

This size package of Sanatogen is licensed by us for sale 
and use at a price of not less than one dollar, Any sale in 
violation of this condition, or use when so sold, will con- 
stitute an infringement of our patent, under which Sana.togen 
is manufactured, and all persons so selling or using packages 
or contents Will be liable to injucti'on and damages." 

A purchase is an acceptance of this condition. All rights revert 
to the undersigned in the event of violation. 

TH3 BAUER CHELIGAL CO." 

O'Donnell, the proprietor of a retail drug store in the City of 
Washington ignored the stipulations of this notice and sold at a cut price. 
The ensuing suit was one of very great interest, for uoon its result de- 
pended apparently the last hope of manufacturers to control resale prices 
through patent rights. The plaintiffs we^e aided in their struggle by 
special counsel on behalf of the Gillette Safety Razor Company and the 
Victor Talking Machine Company who filed briefs in their support; 

The Court bvsed its opinion in the form of an answer to this formal 
question: "May a patentee by notice limit the price at which future 
retail sales of the patented articles may be ma.de, such article being in 
the hands of a retailer bv purchase from a jobber who has paid to the agent 
of the patentee the full price asked for the article sold'' 1 * 

No question exactly similar to this had before been presented to 
the Supreme Court. 

The chief reliance of the plaintiff in this case was uoon the decis- 
ion in the Die 1 : case. The restriction that was sustained in that case, 
however, was one arising solely from the right to use, and it served to 
qualify in that case the title to the mimeographs, giving a right to use 
the machine only with certain specified supplies. 



(*) In addition to the cases set forth above this case overruled 

Authors & News-paper Ass ociation v. C Gorman, 147 Fed. 516 (D.R.F. 
1906) and cf. Straus v. American Publ i shing Ass ociation. 177 F.Y. 
474; 69 N..E. 1107 (1304).; Par 1 .": T:- Sons'CV. v.' Tat. Wholesale Drug- 
gist .Association 175'N.Y f lj 67 N.E. 136 (1903) • 



9726 



- 327 - 

Now in the Sanatogen case the plaintiffs attempted to qualify the title by 
granting a right to use only under specified conditions, namely, the 
maintenance of the price at one dollar. The Court held this a mere play ' 
upon words. 

"It is contended tr*- argument that the notice in the case deals 
with the use of the invention, because the notice states tha„t 
the package is licensed 'for sale and use at a price of not 
less than one dollar, ' that a purchase is an acceptance of the 
conditions, and that all rights revert to the patentee in event 
of the violation of restriction. 3ut in view of the facts cer- 
tified in this case, as to what took piece concerning the arti- 
cle in auestion, it is a perversion of terms to call the trans- 
action in airy sense a license to use -the invention. The jobber 
from whom the appellee purchased had previously 'bought, at a 
price which must be deemed to have been satisfactory, the 
packages of Sanatogen afterwards sold to the appellees. The 
patentee had no interest in the proceeds of the subsequent 
sales, had no right to any royalty thereon, or to participating 
in the profits tuereof . The packages were sold with as full 
and complete title as any article could have when sold in the 
open market, excepting only the attempt to limit the sale or use 
when sold for not less than one. dollar. In other words, the 
title transferred was full and complete with an attempt to re- 
serve the right to fix the price at which subsequent sales could 
be made. There is.no showing of a Qualified sale for less than 
value for limited use with other articles only as was shown in 
the Dick case. There was no transfer of a limited right to use 
this invention and to call the sale a license to use is a mere 
play upon words. " 

The powers granted under the right to use clause of the patent 
statute being manifestlv insufficient to support the contention of the 
plaintiff, the question arose, did the right to vend as granted by the 
patent statute afford .supoort to the contention? The Court held that 
it did riot, , stating that, "upon such facts as are now presented we 
think the right to vend secured in the patent statute is not disting- 
uishable from the right of vending given in the copyright act", and 
that accordingly the right to vend having been exercised by the plain- 
tiffs in their sales to the giobbers, it could not be further extended 
to cover subsecuent sales. In conclusion, the Court summed up as follows: 

"The patentee or his assignee having in the act of sale re- 
ceived all the royalty or consideration which he claims for the 
use of his invention in that particular machine or instrument, 
it is open to the use of the purchaser without further re- 
striction on account of the monoool"' - of the pa-tentee. " 



9726 



- G28 ~ 

C. Decisions Concerning Trade -marked and Copyrighted Articles. 

B0BBS-M5KRILL v. STRAUS 
210 U. S. 339 

The court held that the owner of a copyright did not have the 
right to fix the resale price of copyrighted "books and rejected the 
argument that price maintenance contract rights arising under a 
copyright were similar to those incidental to patent ownership. (*) 

In this connection the Court said (page 351). 

"The owner of the copyright in this case did sell 
copies of the 'book in quantities and at a price 
satisfactory to it. It has exercised the right 
to vend. What the complainant contends for em- 
braces not only the right to sell the copies, hut 
to correct the title of a future purchase "by the 
reservation of the right to have the remedies of 
the statute against an infringer "because of the 
printed notice of its purpose so to do unless pur- 
chased at the price fixed in the notice. To add to 
the right of exclusive sale the authority to control 
all future retail prices, by a notice that such sales 
must "be made at a fixed sum, would give a right not 
included in the terms of the statute, and, in o"ur 
view, extend its operation "by construction, "beyond 
its meaning, when interpreted with a view to ascertain- 
ing intent in its enactment." 

D. Decisions Concerning Other Identified Products. 

U. S. v. COLGATE & CO. 

250 U. S. 300; 395 S. Ct. 465 (1919) 

This is one of the landmarks on the law of price maintenance. 
This case arose on an indictment for violation of the Sherman Act. 
The indictment, as construed "by 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 distributers who did not charge 
such prices until they gave assurances of compliance with defendent's 
policy. The Supreme Court accepted this construction as conclusive 
and distinguished the Dr. Miles case on the ground that in the case 
under adjudication the manufacturer had made no contracts for price 
maintenance, and said at p. 307: 

"In the absence of any purpose to create or maintain 
a monopoly, the act does not restrict the long 



(*) Accord. Scribner v. Straus, 210 U. S. 352 (1910) 

Overruling Authors' and newspaper Association v. O'Gorman, 
147 Fed. 616 (1906) 

9726 



- 329 - 

recognized right of trader or manufacturer engaged 
in an entirely -private "business, 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. * * * (*) 

FREY Cc SON v. CUDAHY PACKING CO. 



256 U. S. 408; 41 S. Ct. 451 (1921) 

The plaintiff, in 1917, recovered a judgment under Section 7 
of the Sherman Act for damages suffered as a result of a combination 
between the defendant and its jobber to maintain resale prices. This 
decision was reversed by the Circuit Court of Appeals in July, 1919. 
A majority decision of the Supreme Court affirmed the judgment of the 
Circuit Court of Appeals on the ground that the trial Judge had charged 
the jury that if the great majority of jobbers actually cooperated in 
the plan between themselves selling at the prices named, the jury might 
reasonably find an agreement or combination forbidden by the Anti Trust 
Act. The Court referred to the Colgat e and Schrader cases, stating, 

"Apparently the former case was misapprehended. The 
latter opinion distinctly stated that the essential 
agreement, combination or conspiracy might be implied 
from a course nf dealing or other circumstances." 

But the Court went on to hold that the facts brought in this 
case standing alone would not suffice to establish such an agreement or 



(*) In the body of the Seoch-ilut case ( F.T.C. v. 3ccch-IIut Packing Co ., 
infra) the Court made the following statement: "In referring to 
the Colgate Case we said: 'The Court below misapprehended t he 
meaning and effect of the opinion and judgement in that cause'". 
There appears no evidence that any other court apprehended the 
Colgate case before these explanations were made by the Supreme 
Court. The District Judge's instructions on the second indictment 
filed in the Colgate case seem unintelligible, possibly the Court 
was puzzled by the appearance for the defendant of Mr. Hughes who 
wrote the opinion in the Dr. Miles case. The second indictment 
expressly named two firms and one corporation who, as dealers, 
agreed in Petersburg, Virginia, on or about Feb. 6, or 7, 1917, to 
resell the defendant's products at the prices fixed by it. The 
demurrer was expressly overruled as to the form of the indictment 
and sustained as to the substance thereof "for the reason stated" 
in the Judge's opinion on the first indictment. The crucial reason 
given in the former opinion apparently was that there was no aver- 
ment of any such agreement. See U. S. S. Ct. Oct. Term, 1918, #828, 
Transcript of Record 5,12, 15 to 17, 21, 24. Also see C. W. Dunn, 
32 Yale Law Journal at 687 & 688 (1923) 



9726 



- 350 - 

combination. (*) 

F. Federal Trade Commission Decisions. 

F. T. C. v.- BFFCH-FUT PACKIITS CO . 
257 U. S. 441; 42 S. Ct. 150 (1932) 

This was the first case to come before the Court in which 
resale nrice maintenance was alleged to he an unfair method of 
competition within the Federal Trade Commission Act. The Beech- 
Hut Company did not make formal contracts with its distributors. 
It announced, however, that it would refuse to sell to any dealer 
who failed to maintain priced indicated by the company. It urged 
dealers to report cases of violation, and instructed its salesmen 
to the same effect. The company maintained lists of "undesirable" 
dealers, who had been reported as selling below the indicated 
prices, and removed the names from the list only when the dealer 
gave "satisfactory assurances" that it would comply with the 
company's wishes. In order to enforce its policy the company em- 
ployed a system of symbols or key numbers by which any package 
sold at exit prices could be traced to the offender. The Court 
found that the activities pursued by the Beech-Hut Company amounted 
to a violation of the Sherman Act, since the elaborate methods 
were equivalent to "agreements express or implied". Mr. Justice 
Day, speaking for the Court said at pp. 454-455: 

" * * * The f-acts found show that the Bcech-i'Tdt 
system c _oes far beyond the simple refusal to sell 
^oods to persons who will not sell at stated p rices, 
which in the Colgate Case was held to b c within the 
legal right of the producer. 

"The system here disclosed necessarily constitutes 
a scheme which restrains the natural flow of commerce 
and the freedom of competition in the channels of 
interstate trade which it has been the purpose of all 
the anti trust acts to maintain. In i ts o ractical 



(*) The decision of the District Court in this case was b etween t he 
Dr. Miles and Colgate decisions' in the Supreme Court, (1917). 
The decision by the Circuit Court of Appeals was between the Col - 
gate and Schrader decisions in the Supreme Court (1919). The Sup- 
reme Court opinion (citation above) does not explain how or where 
this reference of fact -was held improper for the consideration of 
the Jury in the Col,- ate case. Justices Pitney, Day and Clark, who 
dissented in this case did so not only on 'the ground that the charge 
to the jury was proper but also because no proper exception was 
taken to said charge so that the Judge might have an opportunity 
to correct his mistake, if any. 116 r does it appear from the brief 
of the racking Company that they found fault with the charge. Vol- 
untary trying of the case for the defense by the Supreme Court is 
very difficult to explain, ' except that, of the six Judges for the 
majroity, four were definitely opposed to the prevailing law of 
resale price maintenance as evidenced by their dissent in the Eeech- 
Ilut case. 
9736 



- 331 - 

- operation it necessarily constrains the trade if 
they would have the products of the Beech-Nut Company 
to maintain the prices 'suggested' by it. * * *" 

"Nor is the inference overcome by the conclusion stated 
in the Commission's findings that the merchandising 
conduct of the company does not constitute, a contract 
or contracts whereby resale prices are fixed, main- 
tained, or enforced. The specific facts found show 
suppression of the freedom of competition by methods 
:'.n which the company secures the cooperation of its 
distributors and customers, which are quite as ef- 
i'ect-ual as agreements expressed or implied intended 
to accomplish the same purpose. * * *" 

The Court declared, however, that the order of the Commission 
forbidding any form of price maintenance was too broad. It directed 
that the company be enjoined from its policy of price maintenance 
(l) by the practice of reporting the names of recalcitrant dealers; 
(2) x by enrolling dealers on "-undesirable" lists until assurances were 
given to maintain the designated price; (5) by employing salesmen to 
report such undesirable dealers; (4) by utilizing numbers and symbols 
in order to detect offenders; (5) "by utilizing any other equivalent 
cooperative means of accomplishing the maintenance of prices fixed by 
the company^. 

The Court distinguished between the relative position of price 
maintenance cases coming under the Sherman Act and the Federal Trade 
commission Act in the statement quoted below: 

"* * * it is settled that in prosecutions 
under the Sherman Act a trader is not guilty o f 
violating its terms who simply refuses to sell to 
others, and he may withhold his goods from those who 
will not sell them at the price which he fixes for their 
resale, He may not consistently with the Act, go beyond 
exercise of this right and by contracts or combinations, 
express or implied, unduly hinder or obstruct the free 
and natural flow of commerce in the channels of inter- 
state trade." 

"The Sherman Act is not involved here except insofar 
as it shows a declaration of public policy to be con- 
sidered in determining what are unfair methods of 
competition, which the Federal Trade Commission is 
empowered to condemn and suppress. The case now b efore 
us was begun under the Federal Trade Commission Act 
which was intended to supplement previous anti-trust 
leglislation * * *Tha_t act declares unlawful unfair 
methods of competition and gives the Commission authority 
after hearing, to make orders to compel the discontinuance 
of such methods. What shall constitute unfair methods 
of competition announced by the Act, i.s left without 
specific definition. Congress deemed it better to leave 
the subject without precise definition and to have each 
case determined upon its own facts owing to the mul- 

9726 



- O: a 



tifarious means by which it sought to effectuate such 
schemes. The Commission in the first instance, subject 
to the judicial review provided, has the determination 
of practices which come within the scope of the Act."(*) 

Systems similar to the Beech-Hut Plan were involved in the 'cases 
appearing hereafter. 

MILLS B20S. v. F. T. C. 

9 Fed. (2d) 431 (C. C. A. 9, 1936). 

The Company encouraged its customers to report instances of 
price cutting and instructed its salesmen to do likewise; i t maintain- 
ed a "do not sell" list; it attempted to exact from price cutters p ledges 
of future adherence to the price plan in order to again "be eligible to 
receive the product of the Company. In this connection the Court said: 

"This brings us to the principal contention of the 
petitioner, namely that it has simply fixed a minimum 
resale price for its coffee, and has refused to sell to 
dealers who will not maintain the minimum price, and that 
in so doing it has acted within its rights and kept 
within the lav,-. If the petitioner has done nothing more 
than this, it will readily be conceded that the charge 
of unfair competition has failed .... what a person may 
lawfully do individually he may not always do lawfully 
by combination, or through cooperation with others .... 
it clearly appears from the testimony that the petitioner 
has in large measure succeeded in fixing and controlling 
the retail price of its coffee in interstate trade; that 
this result has^ been accomplished, not through individual 
effort alone, but by combination -and through cooperation 
with its salesmen and customers, and that this latter 
element renders the method of competition unfair." 

0PPZNH5IM, OBSHIIDOIiF L CO. v 7. T. C. 
5 F. (2d) 574 (C. C. A. 4th 19:35). 

The Company manufactured underwear. It undertook to maintain the 
price at which jobbers would resell its product by means of "do not sell" 
lists, pledges, exhortations and refusal to sell. The Court upheld t he 
Commission's action in condemning this scheme as an unfair method o f 
competition on the authority of the Beechnut Case. 



(*) The Beechnut caaeis not the first which gave rise t o t he principle 
that a resale price maintenance system might be a violation o f t he 
anti trust laws without any attempt to make an enforceable contract. 
This doctrine found origin in U. S. v. Kello,-g Toasted Corn Flake Co. 
222 F. 725 (E. D. Mich 1915). In that case such a system was held to 
be a violation of the Sherman Act. But cf. C-t. Atlantic & Pacific 
Tea Company v. Cream of '"/heat Co . 224 Fed. 5 66 (S. D. N. Y. 1915) 

9726 



— 333 — 

CR3AM OF WH2A.T CO. v F. T. C. 14 F. (2d) 40 (C. C. A. 8th, 1926) 

The Federal Trade Commission ordered the Company to cease 
and desist from maintaining prices "by cooperative effort. The 
Coxvrt ordered the Corrroany to cease soliciting information concerning 
who did not maintain prices, without condemning the practice of re- 
fusing to sell to those who were not maintaining resale p rices where 
such information 'was obtained without solicitation. There i s no 
finding in this case regarding a systematized "do not sell" list.(*) 

J. W. Kobi v. F. T. C. ■■••.-,. 



23 F. (2d) 41 ( C. C. A. 2, 1927) '. • ' 

The Company procured written assurances from price cutters 
that they would adhere to stipulated resale p rices. W ith reference 
thereto the Court said: 

"What was proven here established offences of 
agreements or understanding either in obtaining, 
directly or indirectly from its customers, promises 
or assurances that the prices fixed by the petitioner 
would be observed by such dealers and entering into 
contracts with the xindcr standing that the petitioner's 
products v/ould be resold by the dealers a t p rices 
specified or fixed by the petitioner. There was 
also a method employed in reporting on price cutters 
and a continuous request of dealers and j-obbers to 
report competitors who did not observe the resale 
prices suggested by the petitioner and a threat t o 
refuse sales to dealers so reported on. These prac- 
tices were offensive to the act and warrant the order 
entered below." (**) 

MOIR et al v. F. T. C. 

12 F. (2d) 22 (C. C. A. 1, 1926). 

Manufacturers of coffee required all dealers in a designated 
territory to sign post cards to the effect that they would maintain 
resale prices.- These assurances we're received both from wholesalers 
and retailers. The cease and desist order was upheld. The o rdcr 
included (l) entering into contracts, agreements o r understandings 
with dealers, or any of them, that respondents' products are to be 
resold by such dealers at prices specified or fixed by r espondents. 
(2) Procuring either directly cr indirectly from their dealers 
promises or assurances that the prices fixed by respondents will be 



(*) The court ordered a proviso to the Commission's order specifying 
what the Company might lawfully do to correct its resale price 
policy. (See page 48 of decision). 

(**) See also 27 Columbia Law Review 183 (1927) 
and 12 Iowa Law Review 324 (1927) 



9726 



— Ou-. — 



o"bsbrved by such dealers. (3) Requesting dealers to report names 
of other dealers who do not maintain respondents' resale p rices, or 
who are suspected of not maintaining the same. ( i) Seeking the co- 
operation of dealers in making effective their p rice maintenance 
policy, by manifesting to dealers an intention to act upon reports 
sent in by them of variations from the suggested p rices by the elimin- 
ation of the price cutter or by informing dealers that price cutters roport- 
ed, who would not give assurance of adherence to the suggested r esale 
prices, had been or would be refused further sales." 

Q. R. S. MUSIC CO. v. F. T. C . 
12 F. (2d) 330 (192G) 

The price maintenance scheme involved formal agreements f or a n 
exclusive agency. The Commission issued, and the Court upheld, an 
ordersubstantially the same as the order in the Loir case discussed 
above. 

F. T. C. v. AMERICAN TOBACCO CO . 
9 F. (2d) 570 ( C. C. A. 2d. 1925) 

Members of a wholesale tobacco association of Philadelphia 
agreed with one another to maintain resale prices suggested by t ho 
American Tobacco Company on the products of that company. The 
association kept the company notified of price cutters and the company, 
upon verifying the information, refused to sell such o ffenders. Fed- 
eral Trade Commission filed a complaint against the association and 
the company, the association then dissolved and an o rder to cease and 
desist was issued against the company. (*) 

"It appears that what the American Tobacco Company 
did, was not to enter into any price fixing agreement 

with any other manufacturers as to thep rice of its 
product to the wholesalers or to the retailers or 
to the public. It simply would not sell to any 
wholesaler or jobber in the Philadelphia territory 
if it found that he was selling to the retailers 
at a price less than that fixed by the Wholesale 
Tobacco and Cigar Dealers' Association of Phila- 
delphia. As we understand the record, the American 
Tobacco Company fixed the price at which it sold its 
products to the wholesalers and the jobbers and did 
not do anything more than refuse to sell its products 
to any wholesaler or jobber who sold to the retail 
trade at a price which the Wholesalers' Association 
fixed ?.s the price to be charged the retailers in 
order that their business as wholesalers might be 
carried on at a profit which would enable them to 



(*) Judge Hand concurred only on the ground that the controversy was 
moot. 

9726 



- 335 - 

continue in business. I7e have read this record 
carefully, and are constrained to hold that, in 
oursuing the course the American Tobacco Co. adopted 
we fail to discover anything 'unfair' o r 'unreasonable' 
or in any ray ;6ntrary to public policy." 

The Sunreme Court granted certiorari (270 U. S. 6.38; 4 6 S. C t. 
349, 1936) but later dismissed the writ (274 U. S . 543; 4 7 S . C t. 663 
1927) saying "the opinion of the Circuit Court of Appeals is of un- 
certain intendment and is not satisfactory as an exposition o f t he 
law". The ground for affirming the Circuit Court of Appeal's 
opinion appears from the following quotation from the opinion: 

ii* * * V'e adhere to the usual rule of non- 
interference where conclusions of the Circuit 
Court of Appeals depend on appreciation of 
circumstances which admit of different 
interpretations. And upon that g round a lone 
we affirm the judgment below." (*) 

HAEPJ2T HUKBAIC AYPR, TPC^v. F. T. C. 
15 ¥. (2d) 274 (1926) 

The Court held that it was not unlawful for the respondent to 
suggest resale prices and refuse to sell to those who did not maintain 
them. In this case the record did not show that the respondent con- 
ducted a campaign to seek out price cutters but acted o nly when such 
matters were brought to its attention. It further appears that the 
Company did not xxse its salesmen to investigate price cutting and 
acted only when information came to it from retailers who were b eing 
affected by price cutters. The instances i n which salesmen urged 



(*) When the Court granted certiorari it looked for a time as though 
the Circuit Court of Appeals would b e reversed. Query: Suppose a 
manufacturer exercises his privilege of refusing to sell because 
under pressure from his distributors to do so. His distributors 
take the initiative, of collecting evidence on price cutting; a 
real decision on this case would have been very helpful but the 
court seemed to intentionally duck the opportunity to deal with 
th*. problem foursquare. This Case was the result of a lengthy in- 
vestigation conducted by the Federal Trade Commission. 

See Report of Federal Trade Commission on Prices of Tobacco 
Products (1922). Further discussion also appears in 24 Mich. Lav/ 
Review 709 (1926). 

See also Federal Trade Commission v. P?ynon P P ros. £ Clark , 2 63 U . S. 
55: 44 S. Ct« 162 (1334). This case emphasizes concerted action 
among several to constrain another as being the feature distinguish- 
ing between the permitted and the forbidden. 



9726 



- 33fi - 

retailers to maintain the suggested price were few in number. There was 
no secrecy, subterfuge or conspiracy or cooperative effort with retail- 
ers to maintain prices (*) 

TOLEDO PIPE itlS 3IrC- MACKHTR COMPANY V. FEDERAL TRADE COMi.ISSION 
11 F. .(2d) 337 (1926) 

The Commission alleged the company was using unfair methods of 
competition in maintaining resale prices in the sale of tools. The 
company sold directly to retailers (1,000 to 1,200) and not through 
jobbers. The following conclusions of the commission were affirmed. 
1. Requiring from dealers assurance that they will be governed by the 
suggested resale discounts in the disposal of stock previously purchased, 
as a condition precedent to subsequent sales to them by respondent. 2. 
Reauiring from dealers placing orders assurance that the commodities so 
ordered will be resold at the suggested resale discoxints as a condition 
precedent to the acceptance' of such orders. 3. Requiring from dealers, 
generally, assurances that they will be governed by the suggested re- 
sale discounts in ail resales of respondent's products, under threat of 
discontinuance of relations. The following was vacated. 4. Seeking 
the cooperation of dealers in making .effective a resale price mainte- 
nance policy (1) by seeking the advice of dealers as to the location 
of a selling, territorial division line for the stated purpose of elimi- 
nating price competition among dealers (it appears this practice had 
been abandoned three years before the order); (2) by manifesting to 
dealers an intention to act upon all reports sent in by them of vari- 
ations from the resale discounts by the elimination of the price cutter; 
(3) by informing dealers that price-cutters reported who would not 
give assurance of adherence to the suggested prices, had been or would 
be refused further sales-; (4) by employing' its salesmen to investigate 
charges of -rice cutting reported by 'dealers and advising dealers of 
that fact, ~oy which means, aid of dealers is sought and obtained in the 
prevention Of departures from respondent's resale discounts. (*) 

SHAKESPEARE' COHPATTi, v. P. T. C. 
15 F. (2d) 758 (1931) 

In this case the Court further indicated how far manufacturers 
could go in pursuing a price maintenance policy. This appears from 
the following excerpt from the Court's decision: 

"The line of demarcation between the permissible and the 
prohibited, under principles already suggested, is indistinct 
and rather baffles definition. Perhaps it might be said that 
those contracts, or those cooperative efforts, which fall 
within the inhibition of the law, relate primarily to the 
fixing of prices for goods already in the hands of jobber or 
retailer, father than to a refusal by the manufacturer to make 
further sales' to those who cut prices. In this connection we 
are of the opinion that the petitioner, under the Commission's 
order, may refuse to sell to those customers who demoralize 
the market and may announce at its general policy an inten- 
tion to do so. If some customer cuts prices below the 



(*) See Comment 40 Harvard Law Review 139 (1926) Also 75 Fa. Law 
Review 248-255 (1927) 

9726 



-337- 

suggested minimum the petitioner may refuse to make addi- 
tional sales to such customers, .... .but may go no further. 
Assurances as to future conduct may not be solicited. 
Should sue:? assurances be given by the customer, notwith- 
standing the lack of solicitation, they must be considered 
as gratuitous and as not involving the petitioner in a 
violation of the Commission' s order. They would then 
amount to no more than persuasion on the part of the custo- 
mer that the petitioner resume its former relations." 

ARMA1TD CO. INC. v. P.. T. C. 



On December 11, 1935 the United States Supreme Court denied a 
petition for a writ of certiorari filed by the Armand Company, Inc. , 
of Des Moines, Iowa, manufacturer of toilet articles and cosmetics. 

In filing the petition the Armand Company, Inc., sought to obtain 
a review of the decision of the U.S. Circuit Court of Appeals for the 
Second Circuit (Hew York City), handed down on July 1 last, in which 
.decision that Court unanimously affirmed a cease and desist order by 
'the Federal Trade Commission directed against the maintenance by the 
Armand Company, Inc., through the medium of expressed or implied agree- 
ment, of resale prices for its products fixed at arbitrary levels im- 
posed by the company. 

Refusal of the Supreme Court to review the judgment of the Court 
of Appeals leaves the decision of the latter court as the last word 
in that case. In its opinion that Court said: 

"It was found as a fact by the Commission that the Chief objec- 
tive of petitioner's merchandising policy was the mainten- 
ance of the wholesale and retail prices suggested by the 
petitioner for its products, and that the direct effect of 
petitioner's practices had been and new is to suppress 
competition among wholesalers and between retail dealers 
engaged in the distribution and sale of petitioner's pro- 
ducts. The further effect was the constraint imposed 
upon wholesale and retail dealers in selling petitioner's 
products at prices fixed by the petitioner, and the pre- 
venting of. sale by such dealers of petitioner' s products 
at prices which such dealers desired, thereby depriving 
the ultimate purchaser of petitioner's products of that 
advantage of price which otherwise would be theirs in a 
natural and unobstructed flow of commerce under free com- 
petition. 

"The Commission concluded that the petitioner's practice were 
to the prejudice and injury of the public and constituted 
unfair methods of competition in commerce and a, violation 
of Sec. 5 of the Trade Commission Act. The findings of the 
Commission are amply supported by the evidence. The evi- 
dence supports the finding that ~ay agreements between peti- 
tioner and its dealers it maintained prices and prevented 
those who would not do so from securing petitioner 1 s products. 
The Policy in question had a tendency to stifle competition 
and was unlawful." 

FEDERAL TRADE COlu/ilSSIOII v. CURTIS PUBLISH I NG CO . 
260 U. S. 568 (1920) 

The Curtis Publishing Company at great exoense (35,500,000) and 
9726 



- 338 - 

over a long perior; of years built up a methofl of distributing its magazines 
through school boy3 . It entered into contracts with its distributors who 
were in charge of sciiool boys, which in substance prevented these distri- 
butors fro:.i handling the output of other publishers without prior approval. 
;5he record clearly indicated that there- were other outlets available to 
other publishers. One part of the Cou-.iiss ion's complaint charged the re- 
spondent with violating Section 3 of the Clayton Act by "selling and making 

contracts for the sale of its publications for use and resale and as 

fixing the price charged on condition — on understanding that the pur- 
chaser shall not sell other publications thereby substantially lessen- 
ing competition and tending to create a monopoly". The other part of the 
complaint charged the Curtis Publishing Company with "using unfair methods 
of competition contrary to Section 4" of the Federal Trade Commission Act. 
Said the Court with reference to the charge concerning violation of the 
Clayton Act; 

'■'Tie hove heretofore pointed out that the ultimate determination 
of what constitutes unfair competition is for the court, not 
the Commission; and the same rule must apply when the charge is 
that leases, sales, agreements or understandings substantially 
lessen competition or tend to create monopoly. Federal Trade 
Commission v. Gratz, 253 U.S. 421; 427; 40 S. Ct . 572. 

"I Manifestly, the court must inquire whether the Commission's 
findings are supported by evidence. If so supported, they are 

conclusive, But as the statute grants jurisdiction to 

enter, upon the pleadings, testimony and proceedings, a decree 
affi ruing, modifying or setting aside an order, the court must 
also have power to examine the whole record and ascertain for 
itself the issues presented and whether there are material 
facts not reported by the Commission. If there be substantial 
evidence re 1- ting to such facts from which different conclu- 
sions reasonably may be drawn, the matter may be and ordinarily, 
we think should be remanded to the Commission — the primary 
fact-finding-body — "ith direction to make additional findings, 
but if from all the circr.mstf.ices it clearly appears that in the 
interest of justice the controversy should be decided without 
further delay the court has full poy/er under the statute so to 
do. The language if the statute is broad and confers power of 
review not found in the Interstate Con lerce Act (24 Sta.379)... 

"The present record clearly disclose s the development of re- 
spondent's business, how it originated - the plan of selling 
through school-boys, the necessity for exclusive agents to 
train and superintend these boys and to devote their time and 
attention to promoting sales, and also contracts with 1,535 
such agents. The Commission's report suggests no objection 
as to 1,088 of these representatives, who prior to their con- 
tracts, had not been engaged in selling and distributing 
newspapers or periodicals for other publishers. There is no 
sufficient evidence to show that respondent intended to prac- 
tice unfair methods or unduly to suppress competition or to 
acquire monopoly, unless this reasonably may be inferred from 
maiding end enforcing the .... agreement with many important 
wholesale dcslars throughout the country. 

9726 



- 339 - 

"Judged "by its terms, we think this contract is one of agency, 
not of sale upon condition, and the record reveals no surround- 
ing circumstrnces sufficient to give.it a different character. 
• This, of cour'se, disposes of the charges under the Clayton Act." 

With reference to that part of the complaint charging that this plan 
constitutes unfair v method of competition, the Court said; 

" The engagement of competent agents obligated to devote their 
I time end attention to developing the principal's business, to 
the exclusion of all others, where nothing else appears, has 
long been recognized as proper and unobjectionable practice. 
The evidence clearly shov;s that respondent's agency contracts 
were made without unlawful motive and in the orderly course 
of an expanding "business. It does not necessarily follow be- 
, caus': many agents had h^-en general distributors, that their 
appointment and limitation amounted to unfair trade practice. 
And such practice cannot reasonably beinferred from the other 
disclosed cizeumstances. Having regard to the undisputed facts, 
the r asons advanced to vindicate the general plan are suffi- 
cient. 

"Effective competition requires that traders have large free- 
dom of action when conducting their own affairs. Success 
alone does not show reprehensible methods, although it may 
■•increase or render inseparable the difficulties r hich rivals 
must face. The mere selection of competent, successful and 
exclusive representatives in the orderljr course of develop** 
ment can give no jvst cause for, complaints, <and, when stand- 
ing alone, certainly affords no ground of condemnation under 
the statute.' 1 ' • . ' ( , 



9726 



- o-.:o - 

I I . DECISIONS BY STATE C OURTS 

State courts ha.ve subsequently sought to distinguish the Dr. Miles 
case. In Ghiradclli Co. v. Hunsicker, 164 Crl. 355; 128 Pac 1041 
(1912) resale price maintenance on ground chocolate was upheld, the 
Dr. Ililes and Hartman cases being explained on the ground that the 
proprietary medicines there in question were unique, while ground choco- 
late was plentiful. 

FISHER FLOURING HILLS CO. v. SffAirSOI" 76 Wash. 649; 664; 137 Pac. 164 
(1913) 

This is perhaps the state decision most widely cited "by the pro- 
ponents of price maintenance. The court advanced arguments which at- 
tacked the "basis of the Dr. ililes case, but sought to explain that case 
as resting upon the extensive contract system covering over 25,000 
dealers and involving "both jobbers and retailers. 

IITGERSOLL v. GOL DS TEIN. 83 N. J. Eq. 445; 93 A. 193 (1915) (*) 

The plaintiff lost because the statute invoked was strictly con- 
strued and the notice did not prohibit selling in violations of the 
statute out simply prohibited selling for less than the specified 
price. 

The manufacturer then annexed a notice to the chattel, for- 
bidding selling below a specified price without removing the name of the 
maker, the trade mark and guarantee, and refraining from using his name, 
good will or selling helps. An injunction was issued. In^ersoll & 
3ro. v. Hahne & Co . 83 IT. J. Eq. 222; 101 A. 1030 (1917). Same case, 
89 N. J. Eq. 332, 102 A. 123 (1918). See also ITew Century Hanufac- 
t urine: Co. v. Scheurer . 45 3. W. (2d) 560 (Te::. Com. App. 1932). 

CLARK v. jillAiiK 

17 Mo. App. 602 (1385) 

A manufacturer offered a discount rebate to dealers who had main- 
tained his announced resale prices. A dealer sued for the discount 
upon the theory that the condition was void as in restraint of trade. 
Judgment for the defendant. 

WALSH v. DWIG-HT 

40 App. Div. 513; 58 il.Y.S. 91 (1899) 

In this cane such a. rebate was held to be no violation of the 
New York Anti- Trust Law of 1893. 

(*) "It shall be unlawful for any merchant, firm or corporation to appro- 
priate for his or their own use a name, brand, trade mark, reputation 
or good will of any maker in whose product said merchant, firm or cor- 
poration deals, or to discriminate against the same by depreciating 
the value of such products in the public mind, or by misrepresenta- 
tion as to value or quality, or by price inducement, or by unfair 
discrimination between buyer?,, or in any other manner whatsoever, 
except in cases where said goods do not carry any notice prohibiting 
such practice, and excepting in case of a receiver's sale or a sale 
by a concern going out of business." IT. J. Laws 1916 c. 107 amend- 
ing L. 1913 c. 210 as amended by L. 1915 c. 376. 

9726 



( 



- 341 - 

GARST v. HARRIS 

177 Mass. 72; 58 H,E. 174 (1900) 

Liquidated damages' stipulated for the breach of a resale price 
maintenance contract '.'ere awarded to the plaintiff. In this connec- 
tion, C. J. Holmes Said: 

"This is an action 6f contract to recover $21 as liquidated 
damages for breach of an agreement not be sell Phengo-Caffein 
belo?; a stipulated price. Phengo-Caffein was a proprietary 
medicine purcased by the defendant of the plaintiff. At the 
time of the sale, and as a "part of it . a written statement of 
terms, containing this agreement was read to the defendant 
and delivered to him. One stipulation expressed in the docu- 
ment was that the acceptance of the goods, with the ntoice 
of the conditions of sale should be an assent to the terms. 
The defendant accepted the goods, and expressed no dissent. 
There is no question, therefore, • that he. agreed to those 
terms upon the consideration of the sale, which was. made with a 
deduction from the retail price. The defendant sold the goods 
so. -our chased below the stipulated grice, and broke his contract. 
So much of the defendant's argument as denies the agreement, the 
consideration, or applicability of the contract to the ;oods 
sold, needs no further discussion. 

"The res t t of the defense needs but a few words. It is said 
that the contract was unlawful, as in restraint of trade. 
Some limits were set to the inherited doctrine on this subject 
by the recent case of Electric Co. V. Hawkes, 171 Mass. 101; 
50 N. E. 509; 41 LiR.A. 189, 'as they had been in England before. 
When, as here, there is a secret composition, which the de- 
fendant presumably would have no chance to sell at a profit 
at all, but for the plaintiff's permission, a limit to the 
license, in the form of a restriction of the price at which he 
may sell, is proper enough." (citing cases). 

COMMONWEALTH v. GRIHSTEAD 

111 Ky. 203; 63 S. ¥. 427 (1901) 

Wholesale grocers, although organized into an association, had con- 
tracted individually with manufacturers of certain specialties to respect 
the manufacturers' named wholesale prices. In a. criminal proceeding, 
this was held no violation of the Kentucky Anti-Trust Act. 

GROGAN v. CHAEESE 

156 Cal. 611; 105 Pac. 745 (1909) 

A manufacturer of olive oil enjoined, as a breach of contract, price 
cutting by a retailer who had bought directly from him. (*) 

(*) Eor detailed description of importance of this case in the develop- 
ment of the California law on resale orice maintenance see Part III, 
B. 

9726 



- 342 - 

DQUBLEDAY- DORAN INC. et al v. P.. H» FA.CY et al (*.) 
(Decided by the N. Y. Court of Appeals, Jan. 7, 1936.) ' 

III. ENGLISH DECISIONS 

ELLIKAN. SOHS & CO. v. CaRRINGION & SPIT. Ltd . ' ' • 

(1901) 2 Oh. D. 275. 

A manufacturer maintained an. -action against a wholesaler who "broke 
his contract with the manufacturer "by failing to e:;act price mainten- 
ance contract fron a retailer ,to whom the defendant had sold. One 
pound damages were recovered, an, injunction being denied on the ground 
that the plaintiff had an adequate remedy for self-help in refusal to 
sell. , 

NATIONAL -PHONOGRAPH CO. LTD. v. EDISON BELL, etc . 
(1908) 1 Ch. D. 335. 

A manufacturer obtained an injunction against a stranger who 
procured factors to break their contracts with the plaintiff. 

..." ' 

IV. CANADIAN DECISIONS 

Maintenance of resale prices allowing unreasonably high profit 
margins has been held, to violate.s498 of the Crim. Code. ITampole & Co. 
v. Kara & Co. 11 Ont. L.R. 619 (1906-86$); Stearn v.Avery. 25 Can. 
C. C. 339 (1915). The validity of suoh maintenance schemes in general 
has been questioned only recently. 7th Rep. . of Registrat oif Combines 
Investigation Act (1930) 11, See note 32 Columbia Law Review . 324, 
329 (1932). 



(*) Discussed in Part. IV, Chapter I, Section IV, page 496 



9726 



- 343 - 



APPENDIX TO FART IV 



The material in this Appendix pertains to Fart IV - 
PLAY OF INTERESTS IN THE DRUG INDUSTRY. 



THE INTER- 



Federal Trade Commission Drug Industry Cases 



Name 

Chester Kent & Co . , 

Nat'l Wnlsle. Drug Ass'n, 

Eli Lilly & Co. 

Vapo-Cresoline Co., 

De Miracle Chem. Co., 

Marine llo Company 

T. M. Sayman Products Co. 

Pepsodent Company 

Herb Juice Medicine Co., 

Scott & Bowne 

Johnson & Jonnson 

Maryland Fhar . Co., 

Coty, Inc . , 

Meade, Johnson Co., 

Bristol-Myers Co., 

Yardley & Co . , Ltd. 



Complaint Order 
Entered Issued 
12/ 6/17 

6/29/18 

6/ 6/18 
12/ 2/18' 
10/ 8/18 
10/30/18 

6/17/24 

5/19/27 

7/16/27 

7/20/27 
11/ 6/28 

5/ 9/29 

8/23/29 

1/ 4/33 
11/27/34 

4/15/35 



4/30/18 

9/3/24 
5/27/19 

11/17/19 
7/20/22 
7/20/22 
6/26/25 
9/23/29 
4/10/28 

'7/26/28 
6/26/29 
6/27/29 
4/ 27./ 29 



F. T. C. 
Order 

Cease & desist 

Dismissed 

Cease & desist 

Dismissed 

Dismissed 

Dismissed 

Cease & iiesist 

Dismissed 

Cease & desist 

Cease & desist 

Cease & desist 

Cease & desist 

Cease & desist 

Fending 

Fending 

Fending 



Proposed Drug Manufacturing Codes 

Certain Provisions in the Original C : ode Filed by the 
Associated Manufacturers of Toilet Articles. 

Article VII - Sales Representatives - It is an unfair trade practice 
for a manufacturer in promoting sales to the public by persons who are 
employed or influenced to act as his agents to permit them to malign, 
disparage, or utter untruthful statements regarding competing merchandise. 
Recognizing that the majority of the retail stores of the United States 
are opposed to unfair substitution and maligning of competing merchandise 
and are endeavoring to correct such practices, it shall be the duty of 
manufacturers employing demonstrators or sales representatives in retail 
stores to exact from every such employee, as a prerequisite to employment, 
a written pledge that such employee will refrain from unfair substitution 
and maligning of competing merchandise. This pledge shall be signed in 
duplicate by the employee and one copy furnished to the retail store and 
the duplicate copy retained by the manufacturer. This pledge shall read 
as follows: 

"I hereby agree so long' as I am employed in (insert store's name) 
representing (here insert name of manufacturer) I will under no 
circumstances make disparaging or uncomplimentary remarks tending 
to create directly or by inference an unfavorable impression of 
competing merchandise or to retard its sale. 

"I also pledge myself to serve the public faithfully with 



9726 



- 344 - 

"merchandise asked for, and under no circumstances to 
resort to unfair substitution of the products I represent 
for those which are so requested. 

"I understand that the sales methods above forbidden are 
declared unfair trade practices under the NRA and that 
if found guilty of them my employment as a demonstrator 
or sales representative will be considered an unfair 
trade practice under this Act aid prohibited accordingly. 

"Signed Demonstrator." 

It shall be considered an unfair trade practice for a manufacturer 
to continue to employ a demonstrator or sales representative guilty of 
any of the unfair trade practices referred to in this pledge. 

Bribes, gratuities, gifts, F.M.'s and all forms of special com- 
missions paid by manufacturers directly or indirectly to influence retail 
employees to promote the sale of particular merchandise,' shall be con- 
sidered an unfair trade practice. 

Article VIII - Distribution. The sale of merchandise at' different 
prices to the same classes of distributors for similar quantities or any 
other method of price discrimination except for quantities and distance, 
shall be considered an unfair trade practice. 

The payment of the wages of a special sales representative by the . 
manufacturer in a retail establishment snail not be consid-ji -d a form of 
price discrimination, nor shall cooperative advertising, the expense of 
which is borne or shared by manufacturer and retailer, payment for window 
displays be considered a form of price discrimination. 

Article IX - Frice Stabilization. (Right to contract for Resale 
Prices) . It shall be lawful for any member of this association or manu- 
facturer licensed under this code to make agreements with his customers 
as t o the resale prices by said customers of the products of said manu- 
facturer, either at wholesale or retail. It shall also be lawful for 
the wholesalers of the products of said manufacturer to make agreements 
with tHeir* customers for the resale of the products of said manufacturer 
at retail. Such resale price agreements may include cost plus overhead 
and a reasonable profit. 

Certain Frovisions in the Original Code Files by the 
Perfumery and Cosmetic Institute. 

Article C. Rule 6. Code Relating to Prices. (Open Price System 
including the right to contract for resale prices.) The members of the 
industry who are manufacturers agree that where a commodity or article 
manufactured by them bears (or the label or container of which bears) 
the trade-mark,' brand or name of the producer or owner of such commodity 
or article, such manufacturers shall -publish and circulate to the pur- 
chasing trade their respective price-lists to wholesale purchasers, 
which price-lists shall also contain the terms of sale. The members of 

9726 



- 345 - 

the industry shall have the right to incorporate in such published price- 
lists the selling; price of the commodity or article to which they desire 
the retailer to adhece . In such case the wholesale purchaser shall fur- 
nish the retailer with the specified retail selling price. It shall be 
lawful for the members of the industry to provide by contract that the 
vendee will not resell such article or commodity except at the price or 
prices stipulated in such price-list or contract, or that the vendee 
shall require any retailer to whom he may resell such article or commodity 
to agree that he will not in turn resell except at the price or prices 
stipulated in such price-list or contract: Frovided, that prices stipu- 
lated in any such price-list or contract shall be uniform to all vendees 
in like circumstances, differing only as to quantity of such commodity 
sold, the point of delivery, and the manner of settlement. 

Rule 7. Any such agreement in a contract or stipulation or price- 
list affecting such article or commodity shall be deemed to contain the 
implied condition that such article or commodity may be resold without 
reference to such agreement, stipulation or price-list 

( 1) In closing out the owner's stock for the bona fide purpose of dis- 
continuing dealing in such commodity; or 

(2) In disposing of such commodity when damaged, deteriorated, or 
soiled, with prominent notice to the public that such is the 
case; or 

(3) By a. receiver, trustee, or other officer acting under the order 
of any court. 

Frovided, in any of the foregoing cases that such article or com- 
modity shall have first been offered to the manufacturer thereof by such 
vendee or the legal representative of such vendee, by written offer, at 
the price paid for same by such vendee, less the amount of the reasonable 
reconditioning charge necessary to restore to the original condition such 
article or the packing thereof, in cases of deterioration or obsolescence; 
and that such manufacturer , after reasonable opportunity to inspect such 
article or commodity, shall have refused or neglected to accept such 
offer. 

Such price lists, contracts or stipulations affecting the sale of 
such article or commodity may provide for disposal and/or seasonal sales 
at appropriate times, during which periods such article or commodity may 
be resold without reference to such price lists or agreement: Provided, 
that such articles or commodity shall have first been offered to the 
vendor by such vendee, by written offer, at the price paid for the same 
by such vendee, and that such vendor, not less than thirty (30) days 
prior to the date stipulated in such contract for the next such disposal 
and/or seasonal sale, after reasonable opportunity to inspect such article 
or commodity, shall have refused or neglected to accept such offer. 

The members of the industry shall have the right to refuse to sell 
to wholesalers or retailers, as the case may be, who fail to observe the 
indicated or stipulated selling price. 



9726 



- 346 - 



The members of the industry shall have the right to circulate inform- 
ation relative to retailers and others who fail to observe the provisions 
of this rule. 

Upon the request by a manufacturer a retailer shall be obliged to 
furnish such manufacturer with the names of the wholesaler from whom 
such retailer obtained the merchandise, the product of the manufacturer. 

Hule 8. The combination of articles or commodities embraced within 
this code with articles or commodities not within the same at a total 
price less than the usual indicated, or stipulated price or prices of the 
articles sold by members of the industry plus the. usual selling prices 
of the articles or commodities not embraced within this code shall be 
deemed an unlawful cutting of prices within the meaning of the code. 

Certain Provisions in the Original Code Filed by the Package 
M edicine Industry . 

Article II. Membership ( b) Every person, firm or corporation en- 
gaged in the manufacture, distribution and sale of drug products, toilet 
preparations and cosmetics, is eligible to membership in The Proprietary 
Association of America and United Medicine Manufacturers of America, Inc., 
and to participate in the operations and activities under this Code and 
any subsequent revision thereof or amendments thereto. 

Article V. Prices. On and after the effective date of this Code, 
manufacturers, wholesalers and retailers shall abide by the following 
standards of practices in marketing and selling merchandise in original 
consumer packages: 

(a) A "retail price" to the public should appear on the 
package.. "If hot,-. a fixed' price 'must be .-established- and'publlcly 
declared by the - manufacturer".. 

(b) A "wholesale price" to the retailer (a manufacturer's 
list price) must not be greater than 66/2-3$ of the "retail price" . 

(c) A "factory price" to the wholesaler must not be greater 
than 60$ of the "retail price" nor greater than 90$ of the "wholesale 
price" . 

(d) "Cash discounts" or "prompt payment discounts" by the 
wholesaler must not be greater than 2$ of the actual selling price. 

(e) "A 'cut price' by the retailer because of special sales, 
combination sales, volume business, or any other reason, must not be at 
a discount greater than 21$ of the "retail price". Items bearing a 
"retail price" of ten cents or less must be sold at full price. 

(f) A "cut price" or "quantity price" by the wholesaler 
because of special sales, combination sales, volume business, or any 
other reason, must not be greater than 33/l-3$ of the difference between 
the "wholesale price" and the "factory price". 

9726 



- 347 - 

(g) "Trading stamps", "coupons", and "rebate slips" as a 
result of purchases from the retailer "by the consumer are prohibited if 
they destroy or are contrary to the sales policies specified herein. 

(h) A "sale policy" established by a manufacturer covering 
the sale, terms and prices of his products must be adhered to, provided 
it is not detrimental to the above policies as. outlined. • ' 

(i) A "sales policy" established by a .manufacturer must be 
open and fair to all, with the same allowance, terms and prices as to 
products, quantities, or trade classifications. 

(j) Compensation paid, to wholesaler or retailer by manufactu- 
rer for cooperative advertising, counter displays, windown displays, 
salesmen's efforts, or any other special sales activities, should be 
uniform according to kind and scope of .services rendered, and not on a 
basis of Discounts on quantity purchases. 

(k) Added costs because of taxation by city, state or federal 
government cannot destroy the policies outlined above but must be con- 
sidered, as a part of costs of selling in applying these policies. 

( l) Retailers and wholesalers must allow a free, unrestricted 
market to merchandise sold in accordance with these standard practices, 
and are working contrary to the interests of the trade as a whole if they 
attempt to substitute or divert sales on such requested merchandise. 

(m) On and after the effective date of this code, no manufactu- 
rer shall sell to any customer at a price below his own cost of produc- 
tion or manufacture. 

Article VI. Trade Practices (d) Manufacture by Wholesalers. 
It is unfair competition and an undesirable and uneconomical practice 
for the wholesaler to carry on the manufacture or distribution of products 
in competition with nationally advertised products, and the manufacture 
of such competitive products by the wholesaler, or to his order, shall 
be prohibited. _ : 

Article VI. Trade Fractices (c) Imitation. It is unfair 'competition 
to produce or market a product which by its labels, packages or special 
designs or by simulation of advertising or of trade names is made to 
imitate the product of another manufacturer, or knowingly to sell,, handle 
or deal in, either at wholesale or retail, such imitations of any manu- 
facturer having prior legal rights. 

(f) Repackaging. Except when authorized by the owner of the 
formula or trade-mark, the repackaging or transferring of any article 
from the container of the manufacturer into another container, and the 
offering of such repackaged item for sale, in competition with the manu- 
facturer's own product, is an unfair trade practice. 

(g) Counterfeiting. In order te protect against the counter- 
feiting of packaged medicinal products, purchases of such products should 
be made only through legitimate channels, that is, from the manufacturer 

9726 



~ 348' -. 



or his recognized distributors. 

Article VI. Trade Practices (h) Substitution and Switching. 
Where a manufacturer, through enterprise, advertising or reputation, 
has built a trade for any article he i s entitled to profit therefrom, 
and any interference with the normal demand of trade or of consumers is 
unfair. A practice has developed in the drug trade known as "switching", 
Su^^pr^ctlce is the wilful furnishing by the dealer either with or 
without the knowledge of the purchaser, of goods other than those re- 
quested. Such practice is neither fair to the purchaser nor the manu- 
facturer of the article requested, and constitutes a reprehensible and 
unfair practice. 

(i) It is unfair to switch or substitute, or to attempt to 
switch or substitute, one product for another by either wholesaler or 
retailer, or to make false or disparaging statements regarding the pro- 
ducts or prices of a manufacturer, or concerning the method of business 
or integrity of any dealer or manufacturer. When a product is asked for 
by name, it shall be sold. 

(j) Any rebate, allowance, or discount given secretly by 
manufacturer to wholesaler or retailer, or by wholesaler to retailer, 
is unfair competition. Compensation paid to wholesaler or retailer by 
manufacturer for cooperative advertising, counter displays, window 
displays, salesmen's efforts, or other special sales activities, should 
be paid for uniformly according to kind and scope of services offered 
and not on a basis of discounts on purchases. 

Proposed Wholesale Drug Codes. ' . 

Correspondence Relating to an Informal Wholesale Drug Code. 

"Washington, D. C, 
July 25, 1935. 



Mr. A. D. Whiteside, 
• lioom, 4J330 , Commerce Building, 
Washington, D. C. * 

Dear Mr. Whiteside: 



< 



Enclosed is tentative memorandum suggested as a basis 
of discussion for a code for the wholesale drug industry. 

Sincerely yours, 

RJ:PB' . (signed) Robert Jackson." 



9726 



-* 349 ~ 



"July 27, 1933. 

ir '»Mr . Holier t Jackson, 
The Mayflower, 
Washington, D. C. 

Dear Mr. Jackson: 

I have your letter of June 25, inclosing the memorandum 
regarding a code for the wholesale drug industry. 

I have not had an opportunity to think it over carefully 
but I shall do so and get in touch again. 

Very truly yours, 



ADW/lmn A. D. Whiteside. " 

Tentative Memorandum as a Basis of discussion in re: "Code for 
Wholesale Drug Industry" Under the National Industrial Recovery Act, 



F RE AMBLE . , . 

"We, the National Wholesale Druggists' Association, established -. 
with a membership of , fully qualified and 

equipped to fulfill all the needs and requirements of the -medical pro- 
fession and approximately 60,000 retail druggists in the interest of the 
public health, realizing that individual members and associations as 
such cannot by independent action carry out effectively the policy of 
Title I of the National Industrial. Recovery Act , realizing also that 
cooperative action with enforceable performance offers the only practical 
solution in order to induce and maintain united action to improve the 
standards of labor, reduce unemployment, establish justice, equality and 
fair trade practices in our industry and in general, to effectuate in 
letter and spirit, the policies of the National .Industrial Recovery Act, 
do ordain and establish, subject to the approval of the President, the 
following code of fair trade practice for wholesale druggists in the 
United States of America and its possessions. 

Section 6. Wholesale Druggists' Relations with Manufacturers . 

(A) No Wholesale druggist or wholesale distributor within the mean- 
ing of this code snail purchase or distribute a product of any manufact- 
urer whose policy shall not conform to the following principles of fair 
trade practice: 

(l) Each manufacturer shall .establish two separate and dis- 
tinct price-lists or price . schedules covering each product manufactured, 
produced, packed or caused to be manufactured, ■ produced, or packed by 
him, one- strictly for wholesale druggists or wholesale distributors, 
and one - exclusively for retail druggists or retail distributors, 

9726 



~ 35G - 



establishing and making public at the same time, his sales policy which 
must be open and fair to all, with the same benefits, allowances, terms 
and prices as to products, quantities or trade classifications - made 
available to whoever fulfills the necessary requirements under said 
policy. 

No manufacturer shall by reason of quantity purchase or any other 
reason ^allp w,. .tp. a wholesale. purchaser or retail purchaser of his pro- 
duct, any rebates or concessions of any nature or descript ic.i that are 
not set forth and disclosed in his wholesale and/or retail price list 
or price schedule hereinbefore mentioned, or revisions thereof, and 
made available to any and all wholesale druggists and /or retail drug- 
gists as the case may be; particularly, special allowances for window 
and/or counter and store displays, the payment of bonus or other com- 
pensation to sales people or buyers, or contributing in whole or in part 
to any advertising or any other service of any nature or description that 
the wholesale druggist or retail druggist or their respective employees 
or agents can or may render a manufacturer, are condemned unless made 
available to any and all wholesale druggists and/or wholesale distribu- 
tors or retail druggists and/or retail distributors, as the case may be, 
under the same conditions. 

(2) A manufacturer's policy shall provide a minimum compen- 
sation to a wholesale druggist or wholesale distributor operating under 
this code of not less than 15$ trade discount and not less than 2p cash 
or prompt payment discount. 

(3) A retail price to the public should aprear on' the pack- 
age . If not, a fixed price must be established and publicly declared by 
the manufacturer. 

(4) Upon notice to the manufacturer by this organization 
that a wholesale druggist or wholesale .distributor or retail druggist 
or retail distributor has violated or is violating a manufacturer's 
policy as published by said manufacturer, said manufacturer shall cense 
and cause all his wholesale distributors or agents to cease supplying 
his product to the offender. 

(5) A manufacturer shall establish his price list or price 
schedule on the basis of prepaying freight to all points within. the 
United States so that prices quoted on his products to wholesale dis- 
tributors and retail distributors in said schedule are on an equal and 
uniform basis at all points within the United States. 

Section 7. Folicy on Manufacturers' Price Lists and Discount Sheets 
Covering Medicinal. Toiletry and Sundry Pr o prietaries. 

All discounts allowed to a wholesale druggist or wholesale distri- 
butor by a manufacturer as his compensation for performing the services 
of a wholesaler, whether they be trade, cash or otherwise, as well as 
any free goods, bonus or other compensation of any nature or description, 
shall be retained by said wholesale druggist or wholesale distributor 
and under no circumstances shall they be passed on to a retail druggist 

9726 



- 351 - 



or retail distributor for the purpose of inducing said retail druggist 
or retail distributor to patronize such wholesale druggist or wholesale 
distributor, by reason of preferential treatment or for other reasons, 
except as follows: 

Each wholesale druggist or wholesale distributor operating 
this code may allow to a retail druggist or retail distributor 
as defined herein, quantity discounts on the following basis, 
namely: 

On items of less than $2.00 "LINE EXTENSION" (as line extension 
is defined herein*) - l'i discount allowed: 

On items of $2.00 "LINE EXTENSION 1 ' 1 but not exceeding $7.99 
"LINE EXTENSION", a discount may be allowed not to exceed 25$ 
of the wholesale discount allowed to the wnolesale druggist or 
wholesale distributor by the manufacturer. 

On a "LINE EXTENSION" of $8.00 or over, a discount may be 
allowed not to exceed 33-l/3% of the discount allowed to the 
wholesale druggist or wholesale distributor by the manufacturer, 
but in no instance is the difference as computed above to show 
less than 8% gross profit to the wholesale druggist or wholesale 
distributor as compensation for his wholesale distributing 
services. 

In addition thereto, the following quantity bonus discounts may be 
allowed on the basis of total monthly purchases made by the retail drug- 
gist or retail distributor from the wholesale druggist or wholesale 
distributor, viz: 

l4> additional discount on total monthly purchases of $300 to $500; 

2$ additional discount on total monthly purchases of $501 to $1,000; 

3$ additional discount on total monthly purchases exceeding $1,000. 

All discounts hereinbefore mentioned to be considered as "Cash 
Discounts" as defined in Section 8 and shall be applicable to a standard 
discount list of Medicinal, Toiletry and Sundry Proprietary Items, con- 
taining in the aggregate, not less than 10,000 items prepared by the 
Board of Governors of this Association and filed as a public record for 
the benefit of all retail druggists and retail dealers, with the secre- 
tary of this association. 

No item shall appear in said standard discpunt list of a manufactu- 
rer whose sales policy is adverse to the granting of any such discounts 
as indicated above. 

Section 9. Elimination of Unfair Co mpet-iti oh ari "' Competitive Practices . 

No wholesale druggist or wholes;. le distributor as defined herein 
shall pass on to a buyer, any part of the compensation allowed him as a 



9726 



- 352 - 



wholesale druggist or wholesale distributor by any manufacturer ^except 
as herein provided) nor shall he pass on or accord to a buyer directly 
or indirectly, any advantages received by him from said manufacturer, of 
any nature or description, be they in the form of free goods or premium 
or other merchandise, article, coupon or other evidences of advantage or 
incudomcnt or benefit of any nature'. or description, whether they be pre- 
sent or in the future, unless such advantages, benefits or inducements 
have been accorded him by the manufacturer whose produet is involved for 
the .specjLfic purpose and with specific instructions and authority on the 
part of the manufacturer that they be passed on to the retail druggist 
or retail distributor by the wholesale druggist or. wholesale distributor. 

In all cases where manufacturers offer to a wholesale druggist or 
wholesale distributor any special advantages of any nature or description 
as set forth above with specific instructions that they be passed on to 
a retail druggist or retail distributor and said wholesale druggist or 
wholesale distributor retains same or fails to pass such advantages, 
benefits or inducements on to the retail druggist or retail distributor 
in violation of such instructions on the part of the manufacturer, such 
violation shall be deemed unfair competition and punishable by a fine of 
not less than $ for each specific offense, if upon majority vote 
of the Board of Governors of this Association,' the offender shall be 
found guilty of such practice. 

Section 10. The practice of manufacturers selling direct to retail 
druggists or retail distributors on the same discounts, terms and con- 
ditions as offered to the wholesale druggist or wholesale distributor, . 
shall be considered unfair practice and competition on the part of said 
manufacturer and a wholesale druggist or wholesale distributor operating 
under this code shall not be obligated nor required to purchase any pro- 
duct from any manufacturer on which the manufacturer .establishes a price 
differential between wholesale druggists' or wholesale distributors' and 
retail druggists' or retail distributors' prices of less than 15$. 

The practice of manufacturers according to retail chain store 
systems, department stores, mail order houses, syndicate stores and 
any and all other organized systems of distribution, the majority of 
whose ,b,usin < e w ss v is conducted, direct with the consumer, any prices, terms, 
conditions, special inducements or advantages and special allowances 
for window'iOr store display or advertising, without according the prices, 
terms, conditions and special inducements or advantages to any and all 
other independent retail druggists or independent retail distributors 
that desire to take advantage of same under the same terms and con- 
ditions, shall be considered unfair competition and discrimination 
against independent or individual retail druggists. or independent or 
individual retail distributors. 

Section 15. Policy with Respect to the Protection of the Independent 
Retail Druggists' or Retail Distributors' Interest 

The wholesale druggist or wholesale distributor recognizes as a 
fact, after diligent investigation and research over a period of years, 
that the total fair average cost of distributing to a retail druggist 

9726 



- 555 - 

or retail distributor is not less than 27$. Therefore, each wholesale 
druggist or wholesale distributor operating under this code is committed 
to a policy of purchasing, featuring and supporting the products of only 
those manufacturers whose sales policy, terms and conditions will insure 
and protect the independent retail druggist or retail distributor against 
loss caused "oy predatory price-cutting practices of retail distributors 
of proprietaries employing cheap labor, maintaining inferior retail dis- 
tributing outlets and general!;'", not recognized within the meaning of 
the laws of the several different states as duly authorized and licensed 
retail druggists, or even in cases where recognized as licensed retail 
druggist, adopt the policy of featuring standard and nationally adver- 
tised proprietary medicinals, toiletries, and sundries at cut prices on 
the basis of cose, or under cost, to attract an" entice trade to themselves 
in the localities in which they operate, all to the detriment and destruc- 
tion of other individual or independent retail druggists or individual 
or independent retail distributors. 

Certain Provis ions o f the Original Code Presented by the 
national T ir ols sal e Dru ^i-^ s 1 Association ; 

Article V - Section 1. -From tine to time after the effective date 
of this code, the Drug Institute of America, Inc., shall publish or 
cause to be published and shall furnish or cause to be furnished to 
each wholesale druggist who is a member of the code lists specifying 
the "cost-sold" of as many items and groups of items of merchandise as 
practicable, and from tine to time shall publish or cause to be published 
and shall furnish or cause to be furnished to each member of the code as 
promptly as practicable any amendment of the "cost-sold" of any such 
items and groups of items of merchandise when and as circumstances re- 
quire such amendment. Hie "cost-sold" of any such item or group of 
items of merchandise shall be calculated by the Drug Institute of America, 
Inc., in consultation with the Statistical Division of the National Whole- 
sale Druggists' Association and the Federal Wholesale Druggists' Associ- 
ation on the basis of their own research arid the economic, statistical 
and accounting reports submitted to them from time to time by members of 
the Code. In calculating the "cost-sold" of any merchandise, the cost 
to the entire Wholesale Drug Industry shall be approximately determined, 
including cost of acquisition or replacement of the merchandise, hand- 
ling charges, the allocable portion of overhead, including all general 
and administrative expense and taxes, the cost of sales and deliveries, 
and any other appropriate charges, all determined in accordance with 
good accounting practice. The "cost-sold" of any merchandise may, in 
the discretion of the Drug Institute of America, Inc., be published in 
the form of manufacturers' list prices with specified maximum discounts 
indicated. The "cost-sold" of any specified merchandise, or any 
amendment of such "cost-sold" shall go into effect on the tenth day 
following its publication, as above provided; and no member of the code 
shall sell any such specified merchandise at a price or prices below 
the "cost-sold" therefor in effect at the tine of the sale or of contra- 
cting to sell. All discounts allowed "oy members of the code shall be 
cash discounts and shall be allowed only if paid within the customary 
cash discount period; and no discount whatever shall be allowed which 
brings the net selling price to the purchaser of any merchandise below 
the "cost-sold" then in effect for such merchandise. 

9726 



- 354 - 

Section 2. Subject to such regulations as may be adopted in a code for 
the ehitre drug industry: (a) wholesale druggist's shall have the 
right to contract with manufacturers to observe the resale prices of 
proprietary and/or trade-marked merchandise at all times during the 
operation of this code; and (b) wholesale druggists shall the right 
to contract with retail drug ists Or other distributors of merchandise 
to observe the resale prices proprietary and. or trade-marked merchandise 
as established by the manufacturer 

CSRTAI17 r-ROVISI CI IS OF THE GRIG-IITAL CODS PRESEITTSD BY TED FEDERAL WHOLE* 
SALE DRU&GISTS' ASSOCIATION : 

Rules on Behalf of Manufacturers 

Rule 1. The distribution of drug products shall be confined to the 
essential channels of drug distribution 

Rule 2. The sale of merchandise below the cost of production and dis- 
tribution, plus the interest on the capital invested and a 
reasonable profit, is hereby declared to be an unfair method 
of competition withiiinthe meaning of the Federal Trade Commission 
Act and the> Industrial Recovery Act, 

Rules on Behalf of Cooperative and Mutual Wholesale Dru~;~ists 

Rule 4. The 'sale of merchandise below its cost plus, the cost of doing 
business, interest "erf the capital invested and a reasonable 
profit, is hereby declared to be an unfair method of compet- 
ition within the meaning of the Federal Trade Commission Act 
and the Industrial Recovery Act, because it reduces employment 
lowers the wage scale, precludes earnings on capital investment 
and payment of income taxes. 

Rules on Behalf of Retail Druggists 

Rule 1. To make possible the reemployment of registered pharmacists and 
all other employees of drug stores, a minimum price schedule 
shall be established as follows: Minimum price to be based on 
manufacturers 1 list price plus average cost of doing business 
in a retail drug store (22' P of ;;ross sales, which is <L$o less 
than St. Louis Survey); this schedule will provide for a reason- 
able net profit on sc.les for interest on capital invested, 
income, taxes and additional employment at higher wage scale.. 
The sale of merchandise, or services, at a price which does 
not allow for the foregoing 'considerations shall be an unfair 
method of competition within the meaning of the Federal Trade 
Commission Act and the Industrial Recovery Act. 

Rule 2. Ho medicinal preparations or drug products shall be sold at 

retail except through legitimate drug outlets, except in small 
towns not large enough to support a drug store. "Legitimate 
outlet" is hereby defined as a retail establishment under the 
supervision of a registered pharmacist , 



9726 



- .355 - 

Certain Provisions of the Original Code presen ted by the Independent 
Wholesale. Druggist ' s Association: 

Article IV. Selling Prices 

Section 1. In Order to provide, at least that labor shall be paid, 

wholesale druggist 3 shall sell all merchandise at not less 
than 5vj above net invoice cost (after all discounts, 
including cash discounts, have been deducted) or open 
market price, which ever is lower. 

Section 2. All discounts allowed by wholesale druggists shall be cash 
discounts and shall be allowed only if paid within the 
customary cash discount period; and no discount whatever 
shall be allowed which brings that net selling price below 
5',j above the wholesale druggists' net invoice cost nor 
below 5$ above the open market price, whichever is lower. 

Certain Provisions of t he Ori ginal Code Presented by the Allied Whole- 
sale Druggists' Associc.ti.rn 

Pule 1. The sale of merchandise by wholesalers below the cost of purchase 
and distribution, plus the interest on capital invested and a 
reasonable profit, is hereby declared to be an unfair trade 
practice. 

Rule 2. Arbitrary discrimination by manufacturers of nationally adver- 
tised products in the selection of their distributors is 
hereby declared to be an unfair trade practice. 

Pule 3. 'The refusal on the part of any manufacturer of nationally 

advertised ditrg products "to sell the same to any wholesalers 
or to impose discriminating conditions or restrictions on the 
sale of same, is hereby declared to be an unfair trade practice. 

Manuf ac tur e r s Fno adopted Refusal-tcS^l Policies in 1926; 



Allaire Woodward Company 

American Dry Ginger Ale Co., 

Armand Company, Inc., 

A. P. Babcock Co., Inc. 

The Bonnie B. Company 

Buffalo Spec. Company 

Chamberlain ivied. Co., 

Clinical Labs 

Clicquot Club 

Col ate & Co . , 

Coty, Inc., 

Deshell Labs, Inc. 

Devoe & Reynolds 

The Dodd Med. Co. Of U.S. 

Drug Store Products So., 

E. I. DuPont De Nemours, Inc. 

Mary T. Goldman Co., 

Hand Medicine Co. 



Merck & Company 

National 'Toilet Company 

Princess Pat, Ltd. 

Prophylactic Brush Co., 

Schneffel Brothers, 

Squibb & Sons Mineral Oil & Tooth Baste 

Sunbeam Chemical Co., 

The Swift Specific Co., 

United Toilet Goods Co., 

Van Ess Labs, Inc., 

Vivadou, Inc. 

Wildroot Co., Inc. 

Welch Grape Juice Co., Inc. 

Ze ni t e' Pro cue t s Co . , 

Bpurjois, Inc. 

Ayer Company 

Melba Company 

Boncilla Laboratories, 



9726 



■'- 35o - 



M^m-PAHTTm-^S WTTn ADOPTg JJ REFUSA L - t o- Se 11 Polici es in, 1935 (Cont) 



Edna Wallace Hopper, 

Houb i gant , I nc . 
International Prop. 
I o dent Co., 
Walt or Janvier Co., 
Jarnac e% Cie 
John son & Johnson 
Spencer Kellogg Co., 
The Kolynos Co., 
Larfes Corporation 
Lazell perfumer 
Ben Levy Company 
The Marinello Co., 
The Mennen Company 



Inc 



Henry Thayer & Company 

J. 17. i.ia.rllatt 

Pinex Company 

Othine Laboratories 

McEwen, Cameron, Ltd. 

Cellu-cotton Products Company 

Vichs Chemical Company 

U. J. Young Jr. (Absorbine, Jr.) 

Wells, Richardson Company 

Harold P. Ritchie & Co . , (Parfise, Inc.) 

Paris Medicine Company (G-rove) 

Blosser Company 

Denver Chemical Company 

Yardley & Company 



Pro-posed Executive Order Establishing the 
DruA' Industry Coordinating ^oujicil 

Pursuaiit to the authority vested in me by Title I of the National 
Industrial Recovery Act, and to effectuate the purposes of said Act, 
and of the several codes promulgated thereunder in or directly related 
to the Drug Industry, and to provide and Agency for planning and coor- 
dinating the action of the Code Authorities under the said several 
coedes, and for regularizing employment within the Drug Industry, I 
Franklin D. Roosevelt, President of the United States, hereby establish 
a Drug Industry Coordinating Council. The said Council shall have the 
following organization powers and duties: . ■ 

The Drug Industry Coordinating Council (hereinafter referred to 
as the Council) shall consist of representatives from the trades and 
industries hereinbelow aet forth and such other trades or industries 
as the Administrator for Industrial., Recovery may from time to time 
determine to be industries directly related to the Drug Industry. The 
Administrator, in his discretion, may appoint such additional members 
(not more than three(3) to serve upon the Council without vote and to 
represent the Government or such groups of interstate as the Adminis- 
trator may designate. ■ ...'.■ 

The following industries shall have membership on the Council, the 
number of members allotted to each, and the manner of their selection 
being hereinbelow set forth: 

The National Retail Drug Code Authority shall elect two members to the 
Council, of whom one shall be a member of such Code Authority, and the . 
otlier shall be a person identified with the Industry but not actively 
engaged in the retail drug business. 

The Wholesale Drug Code. Authority shall elect two members to the Council, 
of whom one shall be a member of such Code Authority and the other shall 
be a person identified with the Industry but not actively engaged in the 
wholesale drug business. 



9726 



- 657 - 

The Code Authority of each rf the following branches of the Manufacturing 
Drug Industry shall elect one of its member to the Council: 

Perfume, Cosmetic and Other Toilet Preparations Industry 
Package Medicine Industry 

Pharmaceutical and Biologiaal Industry 
Medicinal Chemical Industry 

Natural Organic Products Industry. 

Such manufacturing members of the Council shallrelec/tto the Council a 
person who is identified with the Manufacturing Drug Industry but who 
is not actively engaged in any branch of the Manufacturing Drug Industry. 

Pending the approval of a code for any constituent branch of the Drug 
Industry and the election by its Code Authority of a representative 
or representatives to the Council, the Administrator for Industrial 
Recovery shall appoint a temporary representative or representatives 
to serve on the council for such constituent branch of the Drug Indusfry. 

The Council shall have the following powers and duties; 

1. To adopt by-laws and rules and regulations for its procedure and for 
the aduiinist ration of this Order 

2. To Carry out such powers as are delegated to it by the several code 
authorities of the industries directly related to the Drug Industry 
in order to promote joint and harmonious action among such Indus- 
tries upon matter of common interest, and in order to coordinate 
the administration of the several codes for such Industries. 

3. To secure an eouitaole and proportionate payment of the expenses 
of maintaining the council and its activities f rom the several 
Code Authorities of the Industries directly related to the Drug 
Industry which are represented upon the Council. 

4. To cooperate with the Administrator and with the several Code Au- 
thorities of the Industries directly related to the Drug Industry 

in the enforcement and administration of the Codes for such industries. 

5. To report to the Administrator and the Several Code Authorities on the 
condition of the Drag Industry. 

S. To consider and make recommendations to the several Code Authorities 
nd the Administrator for the amendment of existing approved codes 
for industries directly related to the Drug Industry and to consider 
and recommend plans for coordinating and strengthening provisions in 
Codes for such industries in order to provide stabilization, regu- 
larize employment, better working conditions, make for more ethical 
competition, and to promo be the interests of the consumer, labor 
and the incus try. 

7. To decide subject to review by the Administrator, disputed cases of 
jurisdiction of the several codes in the Dru ; Industry. 

8. To establish a COi.UTTld Oil STATISTICS AhD PLAlJiTIiJG TO WHICH may be 
delegated the following offers and duties; 



- 558 - 

(a.) To gather from the several code authorities and from other 
sources, such statistical information as, in its discretion 
or in the discretion of the Administrator, is necessary to 
a proper coordination of the Drug Industry and to effect the 
purposes of the National Industrial Recovery Act; and to di- 
gest and analyze such statistics and to prepare reports and 
iuake recommendations cased thereon to the Council for its action. 

(b) To propose modifications or amendments of the provisions 

of the several codes for the industries directfely related to 
the Drug Industry. 

(c) To report to any Code Authority of an Industry directly 
related to the Drug Industry, upon its request, 

such statistical information a.s will assist such code 
authority in the administration and enforcement of 
its code. 



< 



Approval Recommended; 



Administrator 



The Fnite House 
A-oril 1934 



9726 



- 359 - 



National Recovery Administration 



E 



IVISION THREE 



c 



DIVISION FOUR 



CHEMICAL 
ALLIANCE, INC. 



MEDICINAL CHEMICAL 
CODE COUNCIL 



1 



I BOTANICAL DRUO ' 
^CODB COUNCIL _p v 

N 

"Tessential 0ILS~1 

' CODE COUNCIL j | -. ^ 

■ spirit and oil 

, soluble oums ■ 

, codb council j 

[water solublTJ " 

OUMS y 
[_ CODE COUNCIL J 

!~VANIL A BEANsTL'' . 

CODE COUNCIL • 
L. 1 



\ 









NATURAL OROANIC 

PRODUCTS 

CODE AUTHORITY 



/ 



PHARMACEUTICAL & 
BIOLOOICAL ' 
CODE AUTHORITY 



PACKAGE MEDICINE 
CODE AUTHORITY 



PERFUME, COSMETIC 
* OTHER TOILET 

PREPARATION 
CODB AUTHORITY 



WHOLESALE DRUOS 
CODE AUTHORITY 



RETAIL DRUOS 
CODB AUTHORITY 



>.. 



>■- 



i 



1 

L 



■--I 
1 

I 

A 

I 

-H 

I 

I 
i 

I 
— i 

A 

I 



__w 1 



DRUG I 

INDU5TRY 
COORDINATING 
COUNCIL 



Conalatlng of Rapreaant- 

•tlraa froa ttaa 

Coda Authorltlaa 

Shown at tba Laft. 





9726 



Open Price Provision of The Perfume. Cosnetic and Other Toilet preparations 
Code as Presented at the Public Hearing on January 17. 1934 . 

i 
Article VII - Trade Practice Provisions 

Section 1. (a) Where a commodity or article manufactured by a mem- 
ber of 'the industry "bears (or its label or container bears) the trade- 
mark, brand, or name of the producer or owner of such commodity or art- 
icle it shall be sold only on the basis of open -orices to those engaged 
as primary distributors of its products, clearly setting forth the basis 
for granting of discounts, i.e., specifying the particular function which 
must be performed or the quantities which must be purchased which are 
uniform to all trade buyers of the same class of distributbrs^Hrhich are 
strictly adhered to while effective. 

(b) The term "open prices", as used in this section means a price 
list which is published by each member of the industry for the equal 
information of all primary distributors in the separate or the several 
classes of primary distributors, and which states all the prevailing 
terms of sale for the separate or the several classes of primary dis- 
tributors. 

(c) This section shall be strictly construed to prohibit any direct 
or indirect price concession and/ or payment of compensation for the 
functions performed by those engaged as primary distributors which is 
not declared in the published price list. The term "indirect price con- 
cession" as used in 1 this paragraph means any price concession indirectly 
made by a member of the industry to a primary distributor or his agent 
through a rebate or allowance or commission or refund or payment or deal 
or gift or by any other means whatever. 

(d) Nothing in this section shall be interpreted so as to limit 
the right of a. member of the industry to select or classify his primary 
distributors as he shall see fit, 

(e) If the manufacturer's published price list includes a suggested 
price to the consumer it shall be lawful for him to include a maximum 
discount from this price which he desires to have observed in sales by 
the retailer. It shall be lawful for the terms of sale published by the 
manufacturer in accordance with this section to include a stipulation 
that such considerations concerning maximum discount from the suggested 
price be observed by the primary distributor and shall form p^art of the 
terms of sale of goods sold by him to other distributors. 

Section 2. Terms of sale shall permit of the disposal of an article 
or commodity without reference to such stipulations concerning resale: 

(a) In closing out the owner's stock for the bona fide purpose of 
discontinuing dealing in such article or commodity; or 

(b) In disposing of such article or commodity when damaged, deter- 
iorated, or soiled, with prominent notice to the public that such is the 
case; or 



9726 









t 



"mm- 



- 3 hi - 

(c) By a receiver, trustee, or other officer acting under the 
order of any court. 

..Provided, in any of the foregoing cases that such article or com- 
modity shall have first been offered to the manufacturer thereof "by such 
vendee or the legal representative of such vendee, by written offer, at 
the price paid for the same by such vendee, less the aiount of the reason- 
able reconditioning charge necessary to restore to the original condition 
such article or -the packing thereof, in cases of deterioration or obso- 
lescence; and that such manufacturer, after reasonable opportunity 'to in- 
spect such article or commodity, shall have refused or neglected to ac- 
cept such offer, 

(F) Each member of the industry or his agent shall file his cur- 
rent price list with the Code Authority within thirty (30) days after 
the approval of this Code. Each member of the industry shall file 
(by registered mail) any subsequent revision of such price list with 
said Code Authority five (5) days prior to its adoption. No member of 
the industry shall deviate from his prevailing price list filed with 
said Code Authority until five (5) days after a revised and substitute 
price list is mailed to said Code Authority. 

Clauses A, B, C, and F shall not apply as to private brands on con- 
tracts for the sale thereof, or to the sale of products for export or to 
bids submitted to governmental units. 

The following additional provision was presented by the -sponsoring 
committee during the Heari-ng. 

■ .-. G. That within thirty (30) days after the effective date of this 
.Code, every member of this industry shall file with, the Code Authority 
all brand, names owned or used by them. And thereafter no trade mark, 
brand or trs.de name may be used unless filed with the Code Authority 
within five (5) days after the adoption thereof. 

Certain Approved Proviisions in the Perfume. Cosmetic and Other 
Toilet Preparations Industry. 

Article VII - Trade Practice Provisions. 

The Code Authority shall collect evidence as to the effect of the 
following trade practice provisions in correcting the competitive abuses 
in this industry. The Code Authority shall report to the Administrator 
six months, after the effective date of this Code, or before if the facts 
warrant, on the. conditions in the industry. If the trade, practice pro- 
visions in this Code are not adequate to correct the competitive abuses, 
the Code Authority shall recommend such modifications of or additions 
to the trade practice provisions which *they deem necessary and upon ap- 
proval by the Administrator, after such hearings as he shall specify, 
such recommendations shall become operative as a part of this Code. 



9726 



- 3B2 - 

Section 1. (a) Where a commodity or article sold by a member of 
the industry bears (or its label or container bears), the trade-mark, 
brand, or name of the producer or ov/her of such commodity or article it 
shall be sold only on the basis of open prices to those engaged as pri- 
mary distributors of its products, clearly setting forth the basis for 
granting of discounts, (specifying the particular function which must 
be performed or the quantities which must be purchased) which are uni- 
form to all trade-buyers of the same class of distributors and which are 
strictly adhered to while effective. 

"To member if the industry shall offer a discount, payment, or al- 
lowance on a functional basis except where an effective means exists for 
assuring the Code Authority that the function for which the payment is 
made can be actually and faithfully performed. 

(b) The term "open prices" as used in this section means a price 
list which is published by each member of the industry for the equal 
information of all primary distributors in the separate or the several 
classes of primary distributors, and which states all the prevailing 
terms of sale for the separate or the several classes of primary dis- 
tributors, i 

(c) This Section shall be strictly construed to prohibit any 
direct or indirect price concession'' and/ or payment of compensation for 
the functions performed by those engaged as primary distributors which 
is not declared in the published price list. The term "indirect price 
concession" as used in this paragraph means any concession or payment 
indirectly made by a member of the industry to a primary distributor 

or his agent, or his employee, through a rebate or allowance or commis- 
sion or refund or P.M. or payment or deal or gift or by any other means 
whatever. 

(d) ITothing in this section shall be interpreted so a.s to limit 
the right of a member of the industry to select or classify his primary 
distributors as he shall see fit. 

(e) Each member of the industry shall file his current price list 
with the Code Authority within thirty (30) days after the approval of 
this Code. Each member of the industry shall file (by registered mail) 
any subsequent revision of such price list with said Code Authority 

(f) Within thirty (30) days after' the effective date of this Code, 
every member of this industry shall file with the Code Authority all 
brand names owned or used by them. And thereafter new trade marks , brands 
or trade names shall be filed with the Code Authority within five (5) 
days after the adoption thereof. 

This section shall not apply to the sale of private brand products 
on contract by a manufacturer or private brands to the owner of such 
private brand, nor to the sale of products for export, nor to bids sub- 
mitted to governmental units 



* o . 



9726 



"• 6^6 — 

Section 2. (a) No- member of the industry shall give, -oermit to he 
given, or directly offer to give, anything of value for the purpose of 
influencing or rewarding the action of any employee, agent or representa- 
tive of another in relation to the business of the employer of such em- 
ployees, the principal of such agent or the represented party, without 
the knowledge of such employer, principal or party. This provision shall 
not be construed to prohibit free and general distribution of articles 
commonly used for advertising except so far as such articles are actually 
used for commercial bribery as hereinabove defined. 

(b) No member of the industry or his agent shall pay P.M. ' s or 
commissions directly or indirectly to employees of retail dealers to in- 
fluence the sale of his products. 

(This paragraph (b) is stayed for a period of six months after the 
effective date of this Code, and shall go into effect at the end of this 
period only upon the approval of the Administrator after such hearing as 
he shall deem necessary, provided the Code Authority shall have presented 
to the Administrator sufficient evidence to justify such approval). 

Section 3. (a) No member of the industry shall employ or remit to 
be employed for him a,ny demonstrator or sales employee in a retail es- 
tablishment whose salary is wholly or partially directly or indirectly 
paid by the member of the industry or his agent to work in such retail 
establishment unless such demonstrator or sales enroloyee is clearly and 
openly identified to the public as the employee or agent of the member 
of the industry; provided, however, that the demonstrator shall be avail- 
able at all times for the sale of merchandise. 

(b) The payment of wages of a demonstrator or special sales repre- 
sentative by the member of the industry in a retail establishment whose 
identity is clearly and openly disclosed to the public as being an em- 
ployee or agent of the member of the industry shall not be considered a 
form of unfair trade -practice or of price discrimination. 

Section 4. (a) Cooperative advertising, the expense of which is 
borne or shared bjr the member of the industry and retailer, shall not 
be considered a form of price discrimination, but no payment shall be 
made for cooperative advertising until the member of the industry has re- 
ceived proof of insertion and statement of the cost of such advertising 
and the member of the industry's share thereof, 

(b) No member of the industry or his agent shall make payment for 
advertising, where stich payment is made for the purpose of paying for the 
services of a special demonstrator or for the payment of P.M. 's or other 
gratuities to a dealer's employees. 

Certain approved provisions in the Package Medicine Code . 

Definition of the Industry: 

Section 1. The term "Package Medicine Industry" as used herein shall 
mean the Industry, each member of which is engaged in the manufacturing 
and/or in having manufactured for him under his own brand and specifi- 
cations, and/or in importing in consumer prackages for resale, and/or 



9726 



ii 364 •* 

in packaging fron bulk materials under his name or brandj dentrifices, 
mouth washeci and medicinal preparations-, for the iit^rnal or external 
use of human beings or other animals and primarily offered for sale 
to the general public usually as a complete formula in packages with 
directions for ui-.e; and such related branches or subdivisions as may 
from ti:ie to time be included unr'er the provisions of this Code by the 
President of the United States, after such notice and hearing as he may 
prescribe. ... .? y r,;. 

Modification of definition included in Order of Approval. 

. , .provided, however, that there be added to Article II, Section 1 the 
following sentence: 

"This definition does not include any retailer operating tinder a 
retail code who performs any of the acts specified herein solely for the 
purpose of sale at retail to his or.-n customers, and not for the purpose 
of sale to other distributors; provided, however, that where a retailer 
operates a laboratory or plant distinct from his retail operations, and 
employs a special group of employees to '"or!: primarily in such laboratory 
or plant distinct from that group of his employees who work primarily in 
his retail establishment s) , and such laboratory or plant performs any 
of the acts specified herein, whether for sale to such retailer's own ■ 
customers or to other distributors, such laboratory or olant is subject 
to the provisions of this Code." 

Article VII - Trade Practice Provisions. 

Section 1 (a) A member of the Industry shall sell his products, 
commodities or articles to primary distributors on an open price basis 
that is fair to all, with the same allowances, terms and prices as to 
products, quantities or trade classif ica.tions. 

(b) The term "open prices" as used in this section means a price 
list which is published by each member of the Industry for the equal in- 
formation of all primary distributors in the separate or the several 
classes of primary distributors, and which states all the prevailing 
terms of sale for the separate or the several classes of primary dis- 
tributors. 

(c) Coiroensation mid to a primary distributor by a member of the 
Industry for cooperative advertising, counter displays, window displays, 
salesmen's efforts, or any other special sales activities, shall be uni- 
form according to hind and scope <~>f services rendered, and not on a basis 
of discounts on quantity purchases. 

(d) Each member of the Industry or his agent shall file his current 
price list with the Code Authority within thirty (30) days after the' ap- 
proval of this Code. Each member of the Industry shall file (by regis- 
tered mail) any subsequent revision of such price list Jwitfr said Cod© • 
Authority. 



2726 



- 3*5 - 

(e) This section shall not apply to the sale of private brand 
products on contract by a manufacturer to the ovner of such -orivate 
brand, nor to the sale of products for export, nor to bids submitted 
to governmental units. 



3726 



•< 3 ft n i 

CE RTAIN PROVISIONS 'iff THE PROPOSED WHOLESALE D RUG 
.; , ... .; CODE A S DRAFTED FOR PUBLIC HEARIIT&. MARCH 15, 1934 

A rticle VII. Section 12. - Selling below cost -pr ovision. The 
Code Authority shall cause to "be formulated an accounting system and 
methods of cost finding and/or estimating* capable of use by all 
members of the industry. After such system and methods have been 
formulated, with the approval of the Administrator, full details 
concerning them shall be made available to all members. Thereafter 
all members shall determine and/or estimate costs in accordance with 
the principles of such methods and it shall be an unfair trade 
practice for a wholesale druggist to sell or offer to sell any 
commodity at a price demonstrably below such cost to him. 

Article V II, S ec tion 10. - Trade Relations , (a) In these lines 
in which manufacturers, importers, mills, or other primary sellers 
sell coincidentally to several classes of buyers, the Wholesale Drug 
Code Authority, subject to the approval and with the advice of the 
Administrator, may arrange for a conference of all interested parties, 
including primary sellers or the Code Authority governing, for the 
purpose of defining and establishing price differentials which shall be 
fair and reasonable in relation to the nature and extent of the dis- 
tributing services and functions rendered by each buying class. Such 
differentials shall include all elements affecting the net price, such 
as discounts, terms, and allowances. 

The Wholesale Drug Code Authority, with the advice and consent of 
the Administrator and after all interested parties shall have been 
given an opportunity to be heard on the matter, shall formally announce 
the price differentials which are deemed fair on specific products. 
When the Wholesale Drug Code Authority announces that a fair wholesale- 
price differential has been established on any product (by sources 
competent to adequately serve wholesale druggists) then and thereafter, 
or until the Wholesale Drug Code Authority announces that such fair 
price differentials have been discontinued, it shall be an unfair trade 
practice for a wholesale druggist to handle such product unless the 
price at which it is sold to him allows or provides for such fair price 
differential. 

Nothing in this section shall be construed to interfere with the 
right of retailers to buy direct from manufacturers. 

Nothing in this section shall be construed to prevent fair price 
differentials from being allowed on the basis of quantity purchased or 
such other factors as the Administrator may deem proper. 



9726 



- 3^7 - 

FAIR TRA DE PR ACTIC E RULES AS AD OPTED BY THE ■ ■ 
FEDERA L TRADE C OMM ISSION - WHOLE SALE DRUG- CONFERENCE 

GROUP ONE ' ■■■• 

Rule 1. — False and Misleading Statements — . The making or pub- 
lishing of any false, untrue, or deceptive statement by way of ad- 
vertisement or otherwise concerning the merchandise handled by. the 
industry, having the tendency and capacity to mislead or deceive pur- 
chasers or prospective purchasers is an unfair trade practice. 

Rule 2. — Defamation of Competitors by falsely imputing to them 
dishonorable conduct, inability to perform contracts, or other false 
representations, or the false disparagement of the grade or quality 
of the goods sold, with the tendency to mislead or deceive purchasers 
or prospective purchasers, is an unfair trade practice. 

Rule 3. — Selling Below Cost — . The selling of goods below cost, 
with the intent and with the effect of injuring a competitor and where 
the effect may be to substantially lessen competition or tend to create 
a monopoly or to unreasonably restrain trade, is an unfair trade prac- 
tice. 

Rule 4. — Price Discrimination—. Price discrimination, as be- 
tween purchasers of merchandise, whether in the form of discounts, 
services, or otherwise contrary to Section 2 of the Clayton Act, is 
an unfair trade practice. 

Rule 5. — Commercial Bribery — . The granting of special or secret 
remuneration in one form or another to employees of customers or 
prospective customers, or to employees of competitors' customers- or 
prospective customers, without the knowledge of their .employers, to 
influence the purchase of industry products from the maker or giver 
of such secret remuneration is an unfair trade practice. 

Rule 6. — Secret Rebates — . The secret payment or allowance of 
rebates, refunds, commissions, or unearned discounts, whether in the 
form of money or otherwise, or secretly extending to certain pur- 
chasers special services or privileges not extended to all purchasers 
under like terms and' conditions, with the intent and with the effect 
of injuring competitors, and where the effect may be to substantially 
lessen competition or tend to create a monopoly or to unreasonably 
restrain trad^, is an unfair trade practice. 

Rule 7. — Altering Trade-Marked Merchandise, the Distribution of 
Trade-Marked merchandise, which merchandise or the containers thereof 
have been altered in a manner to deceive purchasers or public: health 
authorities, is an unfair trade practice. 

Rule 8. — Unlawful Discrimination — . The acceptance of orders by 
wholesalers for large quantities of merchandise and then making small 
deliveries at quantity prices to favored purchasers, with the effect 
of discriminating unlawfully between different customers of the same 
class, is an unfair trade practice. 



9726 



Rule 9. — Misrepresenting Character of Business — . For any member 
of the industry to hold itself out to the public as a wholesale 
druggist when such is not the fact, or in any other manner to mis- 
represent the character of his business with the tendency and capacity 
to mislead and deceive, is an unfair trade practice. 

Rule 10. — Imitation of Competitors' Marks — . The imitation of the 
trade marks, trade names, slogans, or other marks of identification of 
competitors, having the tendency and capacity to mislead or deceive 
purchasers or prospective purchasers, is an unfair trade practice. 

Rule 11. — 'Fictitious Prices — . Offering for sale merchandise at a 
price reduced from a marked up or fictitious price, with the tendency 
and capacity to mislea.d or deceive purchasers or prospective pur- 
chasers, is an unfair trade practice. 

Rule 12. — Threats of Suit for Patent Infringement — . The cir- 
culation of threats of suit for infringement of patent' or trade mark 
among customers of competitors, not made in good faith but for the 
purpose and with the effect of harassing and intimidating customers, 
is an unfair trade practice. 

Rule 13. — Substitution of Merchandise — . The substitution of any 
drug product or allied products such as cosmetics and supplies for 
other products ordered without permission, having the tendency and 
capacity to mislead or deceive purchasers or prospective purchasers, 
is a practice dangerous to the public health and is an unfair trade 
practice. 

Rule 14. — Publishing Misleading Price Lists — . Publishing and 
circulating false and misleading price lists, having the tendency and 
capacity to mislead purchasers or prospective purchasers, is an un- 
fair trade practice. 

Rule 15. --Selling Below Cost in Competitors' Territory — . The 
practice of certain wholesale druggists of shipping and selling certain 
classes of merchandise into the marketing territories of competitors, 
below cost, where the effect may be to greatly injure competitors, to 
substantially lessen competition, or tend to create a monopoly, is an 
unfair trade practice. 

Rule 16. —Price Discrimination Involving Free Trucking Charges'--. 
Secretly granting free trucking or transportation charges (not within 
city limits) to certain favored customers, and not allowing same to all 
customers under like terms and conditions, where the effect may be to 
substantially lessen competition or tend to create a monopoly or to 
unreasonably restrain trade, is an unfair trade practice. 

Rule 17. — Regular Prices Designated as "Special" — . To represent 
certain prices and terms as "special", when they are in fact regular 
prices and regular terms, with the tendency and capacity to mislead 
and deceive purchasers is an unfair trade practice. 



9726 



~. 3^9 - 

Eule 13.— Trade Marked Items at Fictitious Prices.--. The selling 
-or offering for sale "by a wholesaler of any nationally advertised -orod- 
uct or trade-marked item of the drug industry, the prices of which are 
known to the purchasing public at greatly reduced prices under a mis- 
representation as to his ability to sell such goods at said reduced 
prices, and also when the quantity of said goods is entirely in- 
adequate to supply the reasonable trade of the said wholesaler with 
the tendency and the capacity to mislead or deceive customers or 
prospective customers, is an unfair trade practice. 

Eule 19. — Granting Unreasonable Discounts — . The gra,. ;ing of 
unreasonable discounts or terms of sale to some buyers and not to others, 
where such favoritism amounts to or effects an unlawful discrimination 
in price, is an unfair trade practice. 

Rule 20. — Conditional Purchase — . The practice of coercing the 
purchase of several or a group of products, as a condition to the 
purchase of one or more products under the exclusive control of the sell 
sellers, is an unfair trade practice. 

Rule 21 — Interference with Competitor's Right to Purchase and 
Sell. — . The interference with a competitor's right to purchase his 
products and supplies from whomsoever he chooses or to sell the same to 
whomsoever he chooses or to engage in any monopolistic practices what- 
soever through combination, conspiracy, coercion, boycott, threats, or 
any other unlawful means is an unfair trade practice. 

GROUP TWO 

Rule A — Shipping Goods on Consignment — . The abuse or misuse of 
the practice of shipping goods on consignment is condemned by the 
industry. 

Rule B— Cost Finding—. It is the judgment of the industry that^ 
an accurate knowledge of costs is indispensable to intelligent and fair 
competition, and the general adoption of accurate and standard methods 
of cost finding is recommended by the industry. 

Rule C — Return of Merchandise — . Purchasing merchant ^e.arid 
then without good reason returning same to seller creates waste and 
loss, increases the cost of doing business to the detriment of both 
the industry and the public and is condemned by the industry. 

Rule D — Invoice — . Withholding from or inserting in the invoice, 
bill of lading or other document of title, statements which the in- 
voice, bill of lading or other document of title a false record wholly 
or in part, of the transaction represented on the face thereof, is 
condemned by the industry. 

Rule E— Scientific Research—. It is the judgment of the industry 
"That the public interest is served by the gathering and dissemination, 
in the widest possible manner, of information with respect to the pro- 
duction and distribution cost and prices in actual sales of market 
commodities, because the making available of such information tends to 
stabilize trade and industry, to produce fairer price levels and to 



9723 



f 

-_o70 -.., 

avoid the waste which inevitably attends the .unintelligent conduct of 
economic enterprise."' (Maple Flooring Association vs. United States, 
268 U. S. 582, 583) 

Unjustifiable criticism of the lawful conduct of such research 
activities of the industry, whether conducted by individual members 
thereof or by an association, is condemned by the Industry. 

Rule ? — Credit Information. — The Industry records its approval of 
the distribution among members of the Industry of information covering 
delinquent and slow credit accounts in so far as it may be lawfully 
done. • ' 

Rule G — Free Cvoods. — The abuse of the practice relating to the 
distribution and use of free goods, prizes, premiums, gifts and the 
like, affecting injuriously wholesalers, retailers, and consumers, is 
condemned by the Industry. 

Rule H — Abuse of Buying Power. — The abuse of buying power to force 
uneconomic or unjust terms of sale unon sellers and the abuse of selling 
power t6 force uneconomic or unject terms of sale upon buyers, are con- 
demned by the Industry. 

Rule I. — Costs of Distribution of Uerchandise. — It is the sense of 
this Industry that the Federal Trade Commission investigate the costs 
of distribution of merchandise for the Wholesale Drug Industry, taking 
into consideration the' cost of wages, ta.xes, rent, insurance, and other 
carrying costs, as with this information attempts to reduce wages or to 
increase the hours of labor or to sell drug products below cost will 
furnish some evidence of a violation of Rule 15 of the conference rules 
for the Wholesale Drug Industry. 



9726 



.- 371..- 



PROPOSED FEDERAL PRICE COFTROL LEGISLATION FROM 1914 to -1933* 

The hearing's on the Clryton ano allien acts left no doubt in the 
minds, of manufacturers as to the restrictive intent of the anti-trust 
lays. The book industry and the -atcl! industry, both producing dis- 
tinctive, differentiated products, were publicly, on the floor of Con- 
gress, accused of being trusts. The Suoreme Court decisions vere cur- 
tailing the devices b Tr which manufacturers could control their resale 
prices, "1th the result that a more persistent drive for -oermissive 
legislation was instituted. The Stevens Bill, the first bill intro- 
duced, was designed to enable manufacturers of trcde-marke r " or special 
brand goods to contract for the sale of such articles of commerce with 
all the subseouent vendees. A notice of the orice and conditions of 
sale ha.d to be attached to the commocit"'. The anti-discrimination 
sentiment of the Congress was incorporated in the act. Price discrim- 
ination among vendors of the same distributive level was prohibited; 
filing of price lists with the Commissioner of Corporations was re- 
quired. An amendment was proposed requiring annual certification of 
non-monopoly status. The Ketz Bill was an act authorising price con- 
trol by notice affixed to the "uniform commodit",'-" . "Uniform, commoditjr" 
was defined as an article in interstate commerce which is uniform as 
to size,-, grade and quality with other articles of same price and pro- 
prietor. The Act further recuires that --;rice lists be filed with the 
Bureau of Corporations. 

c 

Seven bills were introduced in the 64th Congress. All permitted 
resale price maintenance contracts. Two of the bills reouired uniform 
prices, and the a^fixin- of notice to the goods. All seven reouired 
the filing of price lists with either the Bureau of Corporations or the 
Federal Trade Commission. Three bills orohibited price discrimination 
among vendors of the same distributive levels. In every instance re- 
sale price maintenance contracts were prohibited "hen a monopoly exis- 
ted. 

7 
The ten bills that were introduced during the 65th through 68th 

Congresses all provided for resale price maintenance contracts. All 

bills prohibited resale price maintenance contracts 'here monopoly 

existed. Only two" reouired the affixing of notice to the goods. Of 

the remaining bills, seven specified the filing of price lists with the 

Federal Trade Commission or the Secretar- of the Department of Commerce. 

1. Hearings on Trust Legislation, House Judiciary Committee, 63rd Con- 
gress, Parts 1 through 35. 

2. See Page 298 et sec. this Aopendix. 

3. H. P. 13303 (63:2) * 

4. S. 5195 (63:2) 

5. H. R. 13860 (53:2) 

6. H. P. 3572, H. P. 4715, H. P.. 9571, H. R. 13568; S. 3945, S. 5064, 
S. 5991 (64:1) 

7. H. P. 44 and H. P. 212 in (65:0.), H. R. 1702 (56:1), H. R. 14426 
(66:2), H. R. 115 (87:1), H. P. 13494 (67:4), H. P. 6, 11, 5088 and 
6531 (68:1). 

;8. H. R. 13494.(67:4) and H. a.. 6 (68:1). 

'* Prepared by Anne Golden. 

9726 



- 373 ~ 

The eighth had only one restriction: the right to promulgate resale 
price maintenance contracts "as forbidden where a monopoly controlled 
prices. Contracts vere to be negotiated individually, i'o uniform 
price among the contracts need prevail. 

7Iith:; the 89th Congress (1925-1927) there was a decided shift in 
the contents of the legislation. Ant i -discrimination clauses were no 
longer included. Instead of prohibiting resale price maintenance con- 
tracts where monopolies existed, the use of contracts among manufacturers, 
or among retailers, or wholesalers, was prohibited. Clauses providing 
for the filing of price lists were eliminated entirely. The trend was 
toward legislation granting the right to contract for resale price, un- 
encumbered by restrictions of price policy or operation. 

Only one bill of the 30 bills presenter" in Congress from 1914 to 
1935, bearing on resale price maintenance legislation ever got further 
than being "in Committee". This 3111, known as "li.^. 11", was passed 
in the House of "Representatives on January 29, 193.1. It reouired a 
producer to affix a. notice to his product for the resale price contract 
to be enforceable. The products, to be controlled oy resale orice main- 
tenance contra.cts were greatly restrictec 1 . "ro necessities of life as 
meat and neat products, flour and flour products, agricultural imple- 
ments, tools of trade, canned fruits and vegetables, all clothing, 
shoes and hats could be controller" b" - contract." 

Another bill eliminating these restrictions was introduced, but 
never passed. ^-0 This, commonl- known as the "Capper-TCelly Fair Trade,, 
Act," "became the model for later State Fair Trade Laws. The Bill, 
introduced in 1933, gave the producers of trade-marked goods the right 
to contract with subseauent vendees for the price at which they would 
sell his products without in any way controlling the a.ction of the con- 
tractor. 

Thus, starting with legislation designee" to permit resale price 
maintenance agreements, but circumscribed by all the restraints then 
being advocated in the legislature, proposed resale price maintenance 
legislation had gradually shifted to a, totally unencumbered freedom to 
enter into resale price contracts. ?he advent of the i'.R.A. temporarily 
halted proposals in Congress. However, the experience under the codes 
resulted in renewed agitation for resale price maintenance enabling 
legislation. 

This is current experience, and the texts of the proposed legisla- 
tion are treated fullv in the chapter on interplay of forces in the Drug 
Industry, 



9. H.R. 3531 (68:1) 

10. H.H. 11 (72:1) 

11. See page 285, et sea. Part IV 

12. S. 299~(73:l) 

13. See Part -IV, Chapter II, page 29. 1-, : et sea. 

'^he following pertinent hills were introduced since the 69th Congress: 
H.P..11 and S. 1448 in (69:1); H.P. 11 and S. 14 18 in (70:1); H.P.. 11 
and S. 240 in (71:1); H.R. 11' (71:2'); H.H. 11 (71:3); H.2. 11 (71|l); 
S. 299, S. 497, H.H. 3100 and H.'R. 3577 (73:1) 
9726 



- 373 



THE CONNECTICUT RETAIL DRUG CONTROL ACT 



An Act Providing for the Prevention of the Sale of Inferior Drug 
and Cosmetics Merchandise: 

Be it enacted "by the Senate and House of Representatives in 
General Assembly convened: 

SECTION 1. This act may be cited as the "Retail Drug Control Act." 
The following terms shall have the following meanings, when used in this 
act, unless the context otherwise indicates: (a) "Retail drug trade" 
shall mean the selling to the consumer, not for the purpose of resale, 
of any form of drugs, medicines, cosmetics, toilet preparations, drug 
sundries or allied articles, but shall not include the dispensing of 
drugs, medicines and medical supplies by a physician, dentist, surgeon, 
or veterinary in the legitimate practice of his profession; (b) "drug 
retailers" shall mean any individual, firm or corporation engaged wholly 
or partially in the retail drug trade; (c) "retail drug establishment" 
shall mean any store or department of a store engaged in the retail drug 
trade; (d) "drug" shall mean any substance or preparation, except soaps, 
intended for external or internal use in the cure, mitigation, treatment, 
remedy or "prevention of disease or ailment in man or any other animal, 
and any substance or preparation intended to affect the structure or 
function of the body of man or any other animal, not including food but 
including medicinal or quasi-medicinal preparations; (e) "cosmetics" and 
"toilet preparations" shall mean toilet articles and perfumes, toilet 
waters, face powders, creams, lotions, rouges, shaving creams, denti- 
frices, bath salts and all other similar preparations and substances, 
except soaps, designed and intended for application to the person for 
the purpose of cleansing, improving or changing in any way the appear- 
ance of the person or of refreshing or preserving the person; (f) "drug 
sundries" shall mean such articles as are used in conjunction with, but 
not included in, drugs, cosmetics or toilet preparatitns. 

SECTION 2. (a) No drug retailer shall use advertising whether 
printed, radio or display or of any other nature, which is intention- 
ally inaccurate in any material particular or misrepresents merchan- 
dise, in respect to its use, trade-mark, grade, ouality, Quantity, size, 
origin, material, content or preparation; and no drug retailer shall use 
advertising or selling methods which tend to deceive or mislead the cus- 
tomer, (b) No drug retailer shall use advertising which refers inac- 
curately in any material particular to any competitor or his merchandise, 
prices, values, credit terms, policies or services, (c) No drug retailer 
shall use advertising which lays claim to a policy or a continuing prac- 
tice of generally underselling competitors, (d) No drug retailer shall 
secretly give anything of value to a customer or to the employee or 
agent of a customer for the purpose of influencing a sale or, in fur- 
therance of a sale, render a bill or statement of account to the em- 
ployee, agent or customer which is inaccurate in any material particular. 



072n 



- 374 - 

(e) No drug retailer shall sell or offer for sale any merchandise upon 

a condition which involves a lottery, gamble, or other element of chance. 

(f) No drug retailer shall permit any demonstrator or sales employee 
whose salary is wholly or partially paid by a manufacturer or distribu- 
tor to work in his establishment unless such demonstrator or sales em- 
ployee is clearly and openly identified as the agent of such manufac- 
turer or distributor. 

SECTION 3. No drug retailer shall sell any drugs, medicines, cos- 
metics, toilet preparations or drug sundries at a 'price below the manu- 
facturer's wholesale list price per dozen; nor, in the case of biologi- 
cal s or other of the above mentioned products which are not customarily 
sold in dozens or greater lots, sell such products at less than the manu- 
facturer's wholesale list price per unit. Notwithstanding the provisions 
of the preceding sentence, any drug retailer may sell at less than the 
prices specified above, imperfect- or actually damaged merchandise or bona 
fide discontinued lines of merchandise; if advertised, marked and sold as 
such; merchandise sold upon the complete final liquidation of any busi- 
ness; 'merchandise sold or donated for charitable purposes or to unem- 
ployment relief agencies, and drugs or drug sundries sold to physicians, 
dentists, veterinarians or hospitals, but not for the purposes of resale 
by them. 

SECTION 4, Any person responsible for a wilfull violation of the 
provisions of this act shall be fined not more than p500. 

- Passed June 13, 1935 



9726 



- 375 - 

STATUS OF "MIR TRADE 1 '. LEGISLATION 
Ey States-, as of Feb. 7, 193R 



: S tate ... _ 

Alabama. 
Arizona 
Arkansas 
California 



Colorado 
Connecticut 



Delaware 
Florida 
Greorgia 
Idaho 
Illinois 
Indiana 
Iowa 
Kansas 
Kentucky- 
Louisiana 
Maine 
Maryland 
Massachusetts 
Michigan 
Minnesota 



Date of 
Passage 



Passed 1931 
Amended - 
May, 1935 

Retail Drue 

Control 
Bill Junclo 



July 8,1935' 
May, 1935 •' 



May 17, 1935 



Date 
"f active 



Amend. Eff. 

August 22, 
1935 • 



(1935) 
July 1 



July 8,1935 



Dill 
Pend- 
ing 



1935 
Sill 

Dead 



x 
x 



X 

x' 



Hew : No 
Dill to be Bill 
Presented: Presented 



x 



x 
x 
x 



x 
x 
x 



No Data 



/ 



*Fitch Control Plan. See page 379, this Appendix 



9726 



- 37K - 



State 



Mississippi 
Missouri 
Montana 
Nebraska 

Nevada 

New Hampshire 
New Jersey 

New Mexico 
New York 

North Carolina 
North Dakota 
Ohio 

Oklahoma 
Oregon : 

Pennsylvania 

Rhode Island 
South Carolina 
South Dakota 
Tennessee 
Texas : 
Utah •' 
Vermont 
Washington 

West Virginia 

Wisconsin 

Wyoming 



Date of 
Passage 



March 12, 
1935 

May 17, : 
• 1935' 



March 13, 
• 1935' 
June, 1935 



March 25, 
1935 : 

April, 1935 



Date 
Effective 



March 12, 
1935 

May 17, 
1935 



June fi , 
' 1935 



March 25 
: 1935 



Bill 
Pending: 



SFF 



1935 
Bill 
Dead 

x* 
x 

X 
X 



X 
X 
X 
X 



CTIVS UNTIL 



New Bill 

to "be 
Presented 



x 



JULY, 1937 
x 



No 

Bill 

Presented: 



972« 



- 377 - 




9726 



- 378 - 



THE NET? JERSEY UIIEAIR COLtPETITIQIT LA17 

An Act to nrevent unfair competition and unfair tro.de practices. 

Be it enacted "by the Senate and General Assembly of the State of 
Hew Jersey: 

SECTIOIT 1. It shall he unlawful for any merchant, firm or corpora- 
tion, (for the rurpose of attracting trade for other goods,) (*) to 
appropriate for his or their oral use (**) a name, "brand, trade-»mark, 
reputation or good will of any maker in whose product said merchant, 
firm, or corporation deals, or to