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CHAPTER V

PRACTICES WHICH RESTRAIN TRADE

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HE practices to be considered in the present chapter do not lend themselves readily to orderly analy

sis or logical formulation. The traditional phraseology of the common law of restraint of trade and monopoly is, as I have previously shown, sorely lacking in precision, and the language of the Clayton Act and Trade Commission Act did not greatly improve matters. As applied to an act which is not dishonest or deceptive, the term "unfair method of competition" indicates no more than a state of mind toward the conduct in question, and the state of mind may obviously vary according to the point of view. To a loyal trade unionist, all non-union competition is of itself "unfair"; materials made by "scab" labor are technically known as "unfair" materials. To the "legitimate" dealer who sells standard products at fixed prices, the competitor who sells below the set price is "unfair." In business terminology, the phrase often indicates no more than a violation of a rule of trade ethics or of a traditional trade practice. Yet it hardly seems necessary to point out that Congress did not intend, in Section 5 of the Trade Commission Act, to give the sanction of law to all existing trade practices and to brand as illegal any violation of such a practice in the course of interstate or foreign commerce. The uncertainties presented by the unfortunate language of the Clayton Act I have already referred to. Without accurate phraseology any attempt at legal analysis is obviously difficult.

There is, nevertheless, both in common law and civil law countries, a body of law which governs the permissible limits of competition and cooperation among

business men, and which lies outside the scope of the law of fraud, and outside the scope of the usual tort categories, such as assault and battery, libel and deceit, trespass and conversion. Upon what legal principles this body of law rests and what are its precise limits and outlines, it is not easy to tell. The poverty of language in which the discussion is couched of itself renders analysis almost hopeless. A manufacturer is the sole judge of the price he shall set on his products, but he must not fix a low price with the improper purpose of driving a competitor out of business. Two manufacturers may combine if the object is efficiency, but not if the object is control of the market. A manufacturer may refuse to sell to a dealer for any reason that seems to him sufficient; but he must not use this right of selection, coupled with adequate lists and records, to induce dealers to maintain set prices in reselling his product. A person engaged in commerce may discriminate in price, so long as the effect may not be to substantially lessen competition or tend to create a monopoly. Such is the jumble of words in which current legal discussion is couched. The reader will forgive me, therefore, if I forego any attempt to define the scope of the present chapter, or to give logical expression to the principles of substantive law with which the Commission must deal in the cases considered therein. This study is not intended to be a contribution to analytical jurisprudence, but is primarily concerned with procedure and administrative methods, and with the practical and juristic results achieved thereby.

UNFAIR PRICE TACTICS

IN examining the work of the Commission within the scope of this chapter, it will be convenient to begin by segregating a group of cases in which the charge is that a concern, engaged in commerce, has injured one or more competitors by what may be called unfair price tactics.

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Putting aside for the moment a definition of the word 'unfair," it is obvious that a case involving such practices may be dealt with, according to the circumstances, under Section 5 of the Federal Trade Commission Act, or under Section 2 of the Clayton Act, or under both sections. If the price tactics involve discrimination, a question arises under Section 2 of the Clayton Act, which prohibits discrimination in price where the effect may be to substantially lessen competition or tend to create a monopoly. If the discriminatory price tactics are aimed against one or more competitors, the same state of facts may also give rise to a proceeding under Section 5 of the Federal Trade Commission Act. If no discrimination is involved, but merely an "unfair" manipulation of the general price level, the case can be dealt with, if at all, only under Section 5 of the Federal Trade Commission Act. The typical case, however, could be dealt with under either section, and it is the usual practice of the Commission, unless there are special reasons to the contrary, to include in the same complaint a count charging discrimination under the Clayton Act, and a count charging an unfair method of competition.

In the political discussion which ushered in the antitrust legislation of 1914, the practice of local price cutting received much attention. The situation which seems to have been assumed was about as follows: A large and financially powerful corporation or "trust" sells its output, say, of petroleum products, throughout the country, and at a substantial profit. In a certain locality, however, a small competitor finds himself able, by dint of superior efficiency or because of advantages of location, to undersell the "trust" and yet make a profit. The board of strategy of the "trust" determines that the competitor must go out of business. A war fund is appropriated, and orders are sent to the local agent to under-cut any price the competitor may make. A price war ensues, and for a

while both the trust and the local competitor lose money on each gallon sold. In time, of course, superior financial resources tell, and the competitor either goes out of business, a ruined man, or is absorbed by the trust on its own terms, or at best is allowed to continue in business on good behavior. Thereupon prices resume their former level, and the costs of the war are recouped at the expense of the consumer.

This is a dramatized version, but it serves to bring out the legal principle, and is probably not an inaccurate description of the methods used by some of the large industrial combinations in the heyday of their power.1 It is obviously desirable that such tactics be forbidden. It is not in the public interest that brute force and financial power alone should determine the outcome of the economic struggle.

I have found one case among the decisions of the Federal Trade Commission in which the findings clearly show that buccaneering methods of this sort were involved. It seems that a number of concerns, engaged in rendering and refining animal fats in the city of Philadelphia, had for some years held meetings at which prices were agreed upon which were to be paid to butchers for bones, fats, and similar waste material, and agreements made as to division of territory in making such purchases. Competition seems to have been virtually eliminated. In 1915, a small concern in Trenton, New Jersey, determined to invade the Philadelphia market, and sent a wagon each day to collect materials in that city. A meeting was held by the Philadelphia renderers, ways and means were discussed by which the intruder could be shut out, and finally an ultimatum was served on the Trenton company that if it did not cease buying in Philadelphia, the Philadelphia

1 See the illustrations given by Stevens in Chap. 1 of his Unfair Competition.

2 F.T.C. v. United Rendering Co. et al., 3 F.T.C.D. 284 (1921).

companies would retaliate by entering the Trenton field. A corporation was then formed, with $10,000 capital, to which all but one of the Philadelphia companies contributed pro rata, the other agreeing to share the losses of the company on an agreed basis. Under the management of a former employee of the Trenton company this corporation set out to buy raw materials from Trenton butchers. It had no rendering plant, but shipped the materials by rail and water to Philadelphia, where they were disposed of by competitive bidding to the stockholding companies and the guarantor. In due course the Trenton company sustained financial losses and was forced to sell out. The new owner, however, continued his purchases in Philadelphia, refusing an offer of $35,000 if he would get out. Thereupon the Philadelphia renderers raised the prices they were paying to Philadelphia butchers; the new Trenton company sustained a loss of $30,000 in a period of four months, and then sold out to the American Agricultural Chemical Company. Whether or not the new purchaser discontinued the Philadelphia business does not appear.

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The use of a "fighting" company of this sort, with the sole purpose of forcing a competitor out of the field, seems to be clearly unlawful. The use of "fighting ships" was condemned by the Supreme Court in the steamship combination case, and is specifically prohibited in the Shipping Act of 1916.* "Fighting" brands used twentyfive years ago by the old American Tobacco Company, and "knocker" machines at one time used by the National Cash Register Company to punish competitors, illustrate different aspects of the same practice." The separate corporation formed by the Philadelphia renderers was

3 Thomsen v. Cayser, 243 U.S. 66 (1917).

4 39 Stat. at L. 733.

5 See Chap. 3, entitled "Fighting Instruments," in Stevens, Unfair Competition.

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