of a reliable insurance mechanism. State laws vary, some permitting competitive pricing and some not.

The Antitrust Division study attempted to determine whether state regulation of the insurance business has succeeded in providing the public with efficient, low cost, innovative insurance services. We attempted to compare the more restrictive state regulatory schemes with the more competitive situation found in some states and in some lines of insurance generally. We found that in many respects regulation has not been of benefit to the consumers. For example, we found that rigid rate regulation in auto insurance has fostered adherence to bureau rates, discouraged rate reductions, contributed to instability of insur ance company operations, established various forms of cross-subsidization be tween good and bad drivers, and aggravated the difficulty which high risk drivers have in obtaining coverage.

Some states have responded to years of experience with strict regulation by changing to an "open competition" system of rate regulation which permits more indeepndent pricing. Our study found that full price competition can be an effective substitute for regulation as a means of achieving reasonable prices, maximum efficiency and flexibility, and a stable, reliable insurance mechanism. We also found that the major portion of the property-liability insurance industry is favorably structured for competition. It has a large number of competitors, relatively moderate concentration, ease of entry, a standardized serv ice, a relatively simple and short-term contract, and an increasingly price sensitive consumer market. The available evidence suggests that unrestricted price competition would be an effective alternative to state regulation and would be compatible with the regulatory objective of a reliable insurance mechanism.

We found no evidence that the insurance industry would be unable to conduct its business in the absence of a special exemption from the federal antitrust laws. Current antitrust precedent, for example, would not prevent insurance companies from pooling their statistical loss experience or arriving at predictions of future losses on a composite basis through independent advisory organizations. Nor would the antitrust laws prohibit the voluntary sharing of risks where such sharing was necessary to the conduct of business or where it served some legitimate business purpose without substantially lessening industry competition.

After this study, we outlined a proposal for an alternative to a highly regulated insurance industry exempt from competitive forces and antitrust constraints. Under this proposal, a dual system of regulation, analogous to that currently found in the depository sector of our economy, would be established. Insurance companies would have the option of seeking a federal charter, under which they would participate in a federal guarantee system and would be exempt from state rate regulation, state restrictions on collective merchandising and direct writing of insurance, state guarantee funds, and state solvency regulations. Federally chartered insurance companies would thus be free to compete in a much less restricted fashion than is currently possible in most states. They would also be subject to the federal antitrust laws, to preserve a fully competitive environment. We think there is merit in this idea, and we hope Congress and other interested groups will give it due consideration.

Mr. Chairman, this concludes my very brief capsulization of the work, the findings, and the recommendations of the Task Group on Antitrust Immunities. The full texts of our Report, and its accompanying working papers have been provided to the Subcommittee and we would request that they be received for the record. We have also provided a copy of the Department's recent study of the Robinson Patman Act. Permit me to close with the following thoughts.

Antitrust immunities, or exemptions, are with us today for a variety of reasons—some sound, some questionable, some outrageous. There is good reason to sift through them and weed out those which are not serving any public interest. But existing immunities and a look at the past and present are not the whole story. These are changing economic times. The world's economic communities are being drawn closer together. Society is placing new values on such things as its environment. And new and better ways of bringing products and services to the consumer are being developed. I believe strongly that we must rededicate ourselves to a competitive, free enterprise system. We must be wary, more so than we were in the 1930's, of proposals to eliminate competition as a means to some currently popular end.

Every session of Congress sees efforts by special interest groups to undermine the antitrust laws. Sometimes it is argued that competition is inherently incompatibile with some supervening goal of society-which often translates into a goal of the industry. Sometimes it is argued that the courts cannot be trusted to apply our flexible antitrust laws to current business practices reasonably. We have all heard such arguments repeatedly, for example in support of the socalled "Bottler's Bills," which would make it impossible or at least more difficult to prosecute agreements creating exclusive, non-competitive territories for sellers of foods and beverages.

Competition is the backbone of our economy, and is deeply rooted in our social and political heritage. The antitrust laws are our primary defense of the competitive system, and I am confident that the inevitable continuing efforts to penetrate this defense with antitrust exemptions will meet with the skeptical, very hard look that they deserve.

Thank you for the opportunity to appear this morning. I will be glad to answer to the best of my ability any questions the Subcommittee may have.

Chairman RODINO. Thank you very much.

We are now going to hear from Mr. Owen M. Johnson, Jr., Director of the Bureau of Competition of the Federal Trade Commission. Mr. Johnson, would you please proceed with a summary of your statement. We will insert your written statement in the record.

We will then direct questions, since some of the questions overlap the jurisdictions you both serve.

TESTIMONY OF OWEN M. JOHNSON, JR., DIRECTOR, BUREAU OF COMPETITION, FEDERAL TRADE COMMISSION

Mr. JOHNSON. Thank you, Mr. Chairman.

I think I can summarize my statement for purposes of the committee's work this morning.

At the outset I should say that we do appreciate this opportunity to talk about antitrust exemptions and immunities. We feel that it's a very important subject and well worth the time of this committee. Antitrust exemptions and immunities insulate industries from the watchfulness of the FTC and the Justice Department for one simple reason: they reflect a legislative determination that something must substitute for the usual market forces of consumer choice.

Unfortunately, the result of exemptions and immunities is all too often a higher price to consumers, and far less choice of quality and service, than would prevail in the free market. This result can have a ripple effect-an inflationary effect-on the entire economy.

In order not to overlap the testimony of the Assistant Attorney General, Mr. Baker, I would like to focus this morning on five areas of primary concern to the FTC.

First, the Capper-Volstead exemption for agricultural cooperatives; cond, the Packers and Stockyards Act; third, the Webb-Pomerene exemption for export trade associations or cartels; fourth, the immunity of nonprofit institutions from FTC scrutiny; and fifth, the McCarran-Ferguson exemption for State regulated insurance carriers. Taking only those five items, will I think, serve our purposes since the Antitrust Division, with its task group, has done a commendable job of surveying the universe of antitrust exemptions, and you have the benefit of their study.

These five items, I should add, are somewhat modified in that they include two items that are not strictly antitrust exemptions. They are

exemptions only in the sense that they keep the Federal Trade Commission from enforcing the antitrust, or, for that matter, its consumer protection laws, against the affected activities. By that I have in mind the Packers and Stockyards Act and the immunity of nonprofit institutions from the FTC Act.

The third exemption that I'll be discussing, Webb-Pomerene, is somewhat unique in that it is an antitrust exemption that is overseen by one of the antitrust enforcement agencies, the Federal Trade Commission itself.

The fourth and fifth items, the McCarran-Ferguson exemption for the business of insurance and the Capper-Volstead exemption, are very significant exemptions, and we do have strong feelings about them.

Turning to agricultural cooperatives, section 6 of the Clayton Act and the Capper-Volstead Act allows producers of agricultural commodities to have a limited antitrust exemption to form associations, that is, agricultural cooperatives, to market their products. These statutes provide that producers may associate for the purpose of marketing their products if certain limited conditions regarding the form of

association are met.

In late 1975, the Bureau of Competition issued a staff report on agricultural cooperatives. This report has been provided to the committee. I think it probably constitutes our most significant contribution to the literature on antitrust exemptions in the last few years. That report analyzes the scope of the antitrust exemption, briefly reviews the significance of agricultural cooperatives in a number of sectors of the food industry, and also discusses Federal marketing order programs. The report reached several major conclusions:

First, we concluded that agricultural cooperatives have the same responsibilities under the antitrust laws that are imposed upon other businesses. The Capper-Volstead Act enables producers of agricultural commodities to associate into cooperatives; but it does not allow the cooperatives to restrain trade through agreements with other parties, acquisitions, mergers, or other devices which would violate the antitrust laws if carried out by ordinary business corporations.

Second, we concluded that most agricultural cooperatives are, in fact, small, local operations, or operate in industries that are domi nated by noncooperative firms. Only in a relatively small number of industries, notably milk, citrus fruit, and some specialty crops, are agricultural cooperatives large enough, in our view, to warrant serious

antitrust attention.

Third, we concluded that there was a serious question as to whether large agribusiness corporations should be permitted to join agricul tural cooperatives having the protection of the Capper-Volstead Act. On December 31, 1975, the Commission, in a letter to the Congress, recommended that you examine that question.

Fourth, we concluded that the Federal marketing order programs do raise serious questions of the cost of regulation to consumers in terms of restricted food supplies and possible distortions of economic incentives. Again, we recommended, on December 31, 1975, that Congress might well fund additional studies into this subject of Federal

marketing orders.

I should add that in our report we had to concede that our interpretation of the law as applied to cooperatives is not definitely estab

lished. In particular, there are no court decisions now dealing with the status of a merger between agricultural cooperatives and the legality of such a merger under either section 7 of the Clayton Act or section 5 of the Federal Trade Commission Act. Also, in candor, we have to admit that there are decisions involving price-fixing conspiracies between agricultural cooperatives which have concluded that these activities do not violate the antitrust laws. We disagree with those decisions. I should turn now to the meat industry exemption. I think the only point to be made there, as I indicated at the outset, is that we regard it as an anomalous, limited exemption because it only keeps the Federal Trade Commission from pursuing anticompetitive activities in the meat industry at other than the retail level.

We question the rationale for this limitation, and we have supported a bill, H.R. 3816, that would have the effect of doing away with that limitation on our jurisdiction.

The third area I identified at the outset was the Webb-Pomerene Act. The purpose of that act is to permit the formation and operation of export trade associations, in effect, cartels, by American firms. The restrictions of section 1 of the Sherman Act do not apply to such export cartels under certain conditions. The exemption applies only to activities of an association exclusively in export trade, and may be lost when those activities unduly enhance or depress prices within the United States or otherwise restrain trade in domestic markets. In addition, an export trade association is prohibited from using unfair methods of competition against other American exporters.

These export trade associations must register with the FTC and provide requested information. The number of such associations has remained steady over the recent years, and it now stands at approximately 30. While our figures are not altogether reliable, we estimate that the amount of commerce involved in these cartels may be as high as $1.7 billion. The largest associations, as of 1974, were the Pulp, Paper & Paperboard Exporters Association, the Motion Picture Exporters Association of America, and the Phosphate Rock Exporters Association. Together, these three accounted for over 70 percent of reported exports under the Webb-Pomerene Act in 1974.

Now, the FTC did conduct a study of this antitrust exemption, a 50year study, in 1967. We pointed out that a special set of circumstances is generally necessary in order for businessmen to view a WebbPomerene association as offering significant advantages. These circumstances are a standardized product, a reasonably small number of producing firms, and a resource base which yields a comparative advantage over competing producers in other parts of the world. Generally, the U.S. position as a world supplier of the product must be sufficiently strong to make a cartel arrangement sensible. We projected that the significance of Webb-Pomerene in the future would not increase.

The chief concern of the FTC in this area is that Webb-Pomerene activities should not influence domestic markets. The FTC can investigate such suspicions under its broad, investigative authority, and can also make recommendations to Webb-Pomerene associations for changes in their operations.

Recently, the Commission has directed our staff to revise an existing annual questionnaire which we send to these associations. With that, we should obtain better information than in the past as to their operations.

We have no specific proposals for changes in the Webb-Pomerene Act at this time. It is probably true, however, that the existence of this law makes it difficult for our country to persuade other nations to abandon restrictive trade practices adversely affecting American firms and American import trade.

My fourth item is the nonprofit organization exemption under which we labor at the Federal Trade Commission. Our basic statute, section. 5 of the Federal Trade Commission Act, allows us to prohibit unfair methods of competition or deceptive acts or practices engaged in by "persons, partnerships and corporations." However, "corporation" has been defined in section 4 of the Federal Trade Commission Act as "any *** organized to carry on business for its own profit or company that of its members."

This statutory limitation, preventing us from acting directly against nonprofit corporations, seems anomalous since the Department of Justice is not similarly limited in its antitrust enforcement. Beyond that, however, the limitation is doubly unfortunate, because it also inhibits us in our consumer protection activities.

We feel, in short, that the definition of "corporation" in section 4 of the Federal Trade Commission Act should be amended to eliminate any immunity for nonprofit organizations. Again, H.R. 3816, now pending, would contain such an amendment.

Finally, I would like to say a few words about the insurance exemp tion under the McCarran-Ferguson Act. This provides, in general, that the Federal Trade Commission Act and the other antitrust statutes apply to the business of insurance only to the extent that such business is not regulated by State law. Only acts of boycott, coercion, or intimidation are outside the purview of this exemption.

Extensive litigation has centered on the meaning of the phrase "business of insurance." Not all activities engaged in by insurance companies are protected by the act, and, conversely, some activities of noninsurers can be covered if they are, nonetheless, part of the "business of insurance."

There is also disagreement on the scope of the requirement that the business must actually be regulated by a State before the act applies. Permissive State legislation and toothless State regulation should not be sufficient to displace the Federal antitrust laws. Certainly, the mere existence of State antitrust laws and State "little FTC acts" should not constitute such regulation as to oust the Federal antitrust laws. Presumably, these laws are complementary and are not mutually repugnant.

The vacuum created by the removal of Federal antitrust law from the insurance field is frequently not filled by State regulation. Many States have not chosen, and others have simply been unable, to police the insurance industry for behavior that in other contexts would be clear violations of both the antitrust laws and consumer protection standards.

Notwithstanding this limitation, the two enforcement bureaus at the FTC, the Bureau of Competition and the Bureau of Consumer Protection, have endeavored to explore areas of the insurance industry that are, in our view, outside the McCarran-Ferguson exemption. Now on appeal to the Commission is a decision of an administrative