of the Clayton Act as amended by the Robinson-Patman Act. You will recall, from our brief discussion of this act, that that section was aimed at price discriminations.

There were a few other problems before the Court, such as the question of jurisdiction and the fact that some of the sellers were not engaged in interstate commerce, but I believe you are primarily interested in what the Court said about the use of the multiple-point-basing system.

The Court discussed single- and multiple-basing-point systems and stated "the multiple and single systems function in the same general manner and produce the same consequences--identity of prices and diversity of net returns." The Court also said: "In the multiple-basing-point system, just as in the single-basingpoint system, freight absorption or phantom freight is an element of the delivered price on all sales not governed by a basing point actually limited at the seller's mill; and all sellers quote identical delivered price in many given localities, regardless of their different costs of production and their different freight expenses."

The Court said, further, "concerted maintenance of a basing-point-delivered price system is an unfair method of competition, prohibited by the Federal Trade Commission Act."

In addition, the Court pointed out that price discrimination that results from the use of a basing-point system is a violation of section 2 of the Clayton Act. Let me repeat that the Cement case applies to combinations of companies employing a basing-point system, and the Court laid down two principles: (1) that a combination of companies using a basing-point system violates section 5 of the Federal Trade Commission Act-unfair methods of competition; (2) that a multiple-basing-point system resulting in systematic price discrimination violates section 2 of the Clayton Act.

In

That is a brief summary of the finding of the Court in the Cement case. order to round out the picture on basing-point systems, it is necessary to refer you to cases previously decided by the Supreme Court a few years ago: namely, the Corn Products ease and the Staley Manufacturing Co. case, commonly referred to as the glucose cases, and another case which was recently decided by the circuit court of appeals here in Chicago dealing with the sale of rigid steel conduit. In the latter case, the Court followed the Cement case with respect to the adoption and use of a basing-point method of quoting prices by a group of sellers. That was not surprising in view of the Supreme Court's decision. However, in the Rigid Steel Conduit case, there was a further charge that each of the defendants violated section 5 of the Federal Trade Commission Act "through the concurrent use of a formula method of making delivered price quotations with the knowledge that each did likewise, with the result that price competition between and among them was unreasonably restrained." The allegation of that second count included a statement that nearby customers were deprived of price advantages which they would have naturally enjoyed by reason of their proximity to points of production. The respondents on this second count argued that individual freight absorption is not illegal by itself and that the Commission's order is a denial of the right to meet competition. The Court, in answering this contention, quoted language from the Cement case which, in the opinion of most lawyers, is dictum not essential to a holding on the specific question presented. That language quoted is: "Individual conduct * which fall short of being a Sherman Act violation, may, as a matter of law, constitute an unfair method of competition prohibited by the Trade Commission Act."

*

The Court, therefore, held that it could not say that the Commission was wrong in concluding that the individual use of the basing-point method, as here used, does constitute an unfair method of competition.

On the question that immediately arises in the minds of many of us as to where the unlawful discrimination exists if everybody is paying the same price, the courts and the Commission have taken the position that the test of unlawful discrimination is in the net price received by the seller after payment of transportation charges. This net prico is called the mill-net. Naturally, where there are uniform delivered prices, differences in transportation costs will result in different mill-nets.

Going back to the Cement case, there was another question raised in answer to which the Court referred to its decision in the Staley Co. case. That dealt with the contention by the respondents that the net-return differences were justified as having been made in good faith to meet competitors' prices. You will recall from our previous discussion that, if a seller can show that a different price to one buyer was made in good faith to meet a competitor's price, that

would be a defense to a charge of violation of the discriminatory-pricing provisions of the Clayton Act. The Court, in deciding that such claim was without merit in the particular instance, stated: "Section 2 (b) permits a single company to sell one customer at a lower price than it sells to another if the price is inade in good faith to meet an equally low price of a competitor. But this does not mean that section 2 (b) permits a seller to use a sales system which constantly results in his getting more money for like goods from some customers than he does from others. We held to the contrary in the Staley case. Each of the respondents

*

sold some cement at prices determined by the basing-point formula and governed by other base mills. Thus, all respondents to this extent adopted a discriminating pricing system condemned by the respondents as a practice rather than as a good-faith effort to meet 'individual competitive situations.' We think the Federal Trade Commission correctly concluded that the use of this cement basing-point system violated the act." Therefore, the Court upheld the Commission's conclusion that the "varying mill-nets received by respondents on sales between customers in different localities constituted a 'discrimination in price between different purchasers' within the prohibition of section 2 (b) (Clayton Act) and that the effect of this discrimination was the substantial lessening of competition between respondents." What did the Corn Products case decide? That case involved an alleged violation of section 2 of the Robinson-Patman Act. The company was using a basingpoint system whereby, although it had two plants-one in Chicago and one in Kansas City-its delivered prices were computed on the basis of Chicago prices plus freight from Chicago, regardless of whether the item was shipped from Chicago or Kansas City. Thus, when an item was actually shipped from Kansas City to a point having a lower freight rate from Kansas City than from Chicago, the delivered price contained unearned or so-called phantom freight; and, conversely, when the freight from Kansas City to the point of delivery is more than that from Chicago, the company absorbed the freight, to the extent of the difference. The item they sold-glucose-was sold to candy manufacturers, and the Commission found that customers for such candies may be diverted from one manufacturer to another by a difference in price of a small fraction of a cent per pound.

The Court held that the pricing system results inevitably in systematic price discriminations. The petitionsr pointed out that buyers at the same points of delivery paid the same price; hence, there was no price discrimination. The Court said: "The purchasers of glucose from petitioner are found to be in competition with each other, even though they are in different localities. The injury to the competition of purchasers in different localities is no less harmful than if they were in the same city."

Because of the great interest shown in the question of justifying a different price to customers on the grounds that it was made to meet competition, I will devote a little time to what the Court said in the Staley case. The Court, in that case, was concerned principally with the contention by the company that its use of the basing-point system and the prices derived therefrom were made in good faith to meet competitors' prices, including the Corn Products Co. The Court made these statements:

“Section 2 (b) (of the Clayton Act) does not concern itself with pricing systems or even with all the seller's discriminatiory prices to buyers. It speaks only of the seller's lower price and of that only to the extent that it is made in good faith to meet an equally low price of a competitor. The act thus places emphasis on individual competitive situations rather than upon a general system of competition. Respondents are here seeking to justify delivered prices which discriminate in favor of buyers in Chicago and of points nearer, freightwise, to Chicago than to Decatur, by a pricing system involving phantom freight and freight absorption. We think the conclusion is inadmissible, in view of the clear congressonal purpose not to sanction by section 2 (b) the excuse that the person charged with a violation of the law was merely adopting a similarly unlawful practice of another."

"The systematic adoption of a competitor's prices by including unearned freight in respondents' delivery price-or, what amounts to the same thing, the maintenance of a discriminatory and artificially high f. o. b.-factory price in order to take advantage of the correspondingly high prices of a competitor, based on its higher costs of delivery-is not sufficient to justify the discrimination, for re

spondents fail to show, as the statute requires, the establishment of a lower price made in good faith to meet the equally low price of a competitor."

"Section 2 (b) does not require the seller to justify price discriminations by showing that in fact they met a competitive price. But it does place on the seller the burden of showing that the price was made in good faith to meet a competitor's. The good faith of the discrimination must be shown in the face of the fact that the seller is aware that his discrimination is unlawful, unless good faith is shown, and in circumstances which are peculiarly favorable to price discrimination abuses. We agree with the Commission that the statute at least requires the seller, who has knowingly discriminated in price, to show the existence of facts which would lead a reasonable and prudent person to believe that the granting of a lower price would in fact meet the equally low price of a competitor. Nor was the Commission wrong in holding that respondents failed to meet this burden."

Let us see what we have. We have decisions by the Supreme Court saying (1) that a combination of companies using a basing-point system violates section 5 of the Federal Trade Commission Act; (2) the use by a combination of companies of a multiple basing-point system resulting in systematic price discrimination violates section 2 of the Clayton Act; (3) a pricing system involving both phantom freight and freight absorption violates section 2 (a) of the Clayton Act if under that system prices are computed for products actually shipped from the locality on the fiction that they were shipped from another; and (4) the systematic adoption of a competitor's prices by including unearned freight in respondent's delivery price or what amounts to the same thing, the maintenance of a discriminatory and artifically high f. o. b. factory price in order to take advantage of the correspondingly high prices of a competitor, based on its higher cost of delivery, is not sufficient to justify the discrimination.

We also have a circuit court of appeals decision to the effect that the individual use of the basing-point method, with knowledge that other sellers are using it, constitutes an unfair method of competition.

Why is all this important? It is important because of the possible conse quences on all delivered pricing practices, on the pricing and distributing systems of many industries.

What has happened since the Cement case? As Ed Koepenick told you, the so-called Capehart committee has started an investigation into the effects of the Supreme Court decision. In the course of the hearing some members of the Federal Trade Commission said, in substance, that selling on a delivered-price basis is not of itself unlawful. They indicated, however, that where delivered pricing results in discrimination as between buyers, or the customers of buyers, or tends to restrain or destroy competition, it becomes illegal. One of the Commissioners stated that in his opinion delivered-pricing practices involving freight absorption are also illegal.

The associate general counsel of the Federal Trade Commission said recently: "* there are those in industry, and even in the cement industry, who argue that the decision requires little change since it runs only against a combination or planned common course of action. Therefore, so the argument goes, individual sellers can independently continue to discriminate in their net factory prices to whatever extent is necessary to match the delivered prices of their competitors. The difficulty about this is that it assumes the good faith meeting of competition which the law requires and which the Supreme Court held in the Cement case and in the Glucose cases did not exist. The argument also overlooks the fact that the Supreme Court has now reiterated its pronouncement of 3 years ago in the Glucose cases that the law does not contemplate a meeting of competitors' delivered prices through systematic and reciprocal varia tions among sellers in their net factory prices even on a freight-absorption basis. So, as a practical matter, I see no way by which the status quo ante of identical delivered-price systems can be preserved by passing them off as individual, independent action. That attempt was made in the Cement case, and the courts have rejected it."

I obviously cannot foretell the results. To predict what Congress will do or what the courts will do would amount to no more than pure conjecture. Some smaller companies who seem to feel that some benefits would be derived from a requirement that all sellers go on an f. o. b. basis may fight any attempt to validate basing-point systems. On the other hand, any disruptive effect on current and hitherto considered valid pricing practices will bring about some very serious efforts to pass legislation to validate them.

I just want to leave one more thought with you. That deals with proceedings before the Federal Trade Commission. Many of the rules set down in the Administrative Procedures Act passed a few years ago were included for your protection. That act establishes ways and means for you to get declaratory orders to terminate controversies or remove uncertainties. It establishes rules requiring agencies to afford parties an opportunity to submit offers of settlement in controversies.

Also in the event the trade believes there are some practices in the industry which are unfair and are detrimental to the industry as a whole, the Federal Trade Commission has the mechanics for setting up a trade-practice conference for the purpose of formulating rules, with the cooperation of the industry, to provide for the elimination or prevention of unfair methods of competition, unfair or deceptive acts or practices, and other illegal trade practices.

The proceedings for the establishment of trade practice conference rules may be instituted upon application of members of an industry. After hearings are held, the FTC considers the rules, amends them to the extent it considers necessary, and finally promulgates them as the trade-practice rules for the particular industry.

An examination of trade-practice rules already adopted in other industries shows that the rules are usually browen down into two groups: One group is a list of unfair trade practices which are considered to be unfair methods of competition, etc., prohibited under the laws administered by the Federal Trade Commission. The second group is usually a list of those trade practices which would be conducive to sound business methods. Nonobservance of that list is not, per se, a violation of law.

That, briefly, is the story about trade-practice conference rules.

If there are any questions you would like to raise regarding the antitrust laws particularly with reference to the Court decisions we have discussed, please feel free to voice them now, and I shall try to answer them to the very best of my ability.

Thanks very much for the time and patience extended here today.

STATEMENT OF J. RENZ EDWARDS

Mr. BALLINGER. Give your full name for the record.
Mr. EDWARDS. J. Renz Edwards.

Mr. BALLINGER. What is your business?

Mr. EDWARDS. I am a wholesale tobacco distributor.

Mr. BALLINGER. What is the name of your company?
Mr. EDWARDS. The F. S. Edwards Co.

Mr. BALLINGER. You are president?

Mr. EDWARDS. Yes, sir.

Mr. BALLINGER. Do you wish to make a statement to the committee? Mr. EDWARDS. Yes, sir.

Mr. BALLINGER. You may proceed.

Mr. EDWARDS. We in the distributing business are sometimes called middlemen. We perform a very function of the distribution of manufacturers' products. Our main function throughout the United States is to distribute to approximately 2,000,000 retail outlets, which is broken down by our distributors in each community, giving a weekly or biweekly service to these small merchants.

America is founded on the premise of each person being able to run a business if he is able to do so. All large businesses today were founded by small operators. We distributors supply these small individual operators, such as the grocery stores, confectioners, drug stores, all types of outlets.

During the past 20 or 25 years there have grown up in the United States organizations called general stores that through the RobinsonPatman Act of 1936, I believe it was, were curtailed from receiving rebates. That made things rather difficult for them. But they have

gotten around those things by advertising arrangements and through policies of pressure on distribution of merchandise. It is noted for the record that they have never billed a brand, and when I say "brand," I mean a trade-mark brand or any brand brought out by any manu. facturer except one who has to pay through the nose in order to obtain the pressure to sell it.

I am going to take an item that is very popular with the selling field of the United States-cigarettes. Everyone of you is familiar with cigarettes. We have a situation here in Kansas City that is one of the saddest I have ever seen. One item costs the average retailer $1.43 per carton plus 20 cents for tax, or $1.63. The main competition, such as the chain stores, is selling them for 16 cents or $1.57 per carton. I ask you, how can the little individual retailer stay in business?

It has become so bad that we as distributors have suffered a very decided loss in volume because the independent dealer is unable to compete with the chains. How can they do it? I will tell you how.

Let us take one chain that has a large number of stores in Kansas City. They pay the tax. What tax do they pay? If you walk into their store in the downtown section of Kansas City, you pay 18 cents, two for 35 cents, for a package of cigarettes. If you go out 25 blocks to the suburban district where the competition is less, you pay 16 cents or $1.57 a carton, which is an absolute violation of all laws in the United States.

Why was this brought about? I will tell you why. They were not the first to start it. They wanted to sell at a profit. They needed the profit as bad or worse than anyone, but they started to handling a few grocery items. The grocery chain comes along and says, "Hey, you are in the drug business. You stop selling groceries and such items as that or we will cut the price of cigarettes," which they did, to 15 cents. That did not mean anything to them. They only sold a case or two a week anyway. It did not cost them anything and it was very cheap, free advertising. But it threw this market in a turmoil. There is not agreement between any chain and any independents. There should be a fair 10 or 15 percent mark-up and not a loss leader item constantly in effect.

What is happening? Credit losses are going up because of the inability of the drug store or grocer to operate his business on a profit taken from about 20 percent of his total volume. In other words, he has to borrow from one pocket to pay the other.

Anything else?

Mr. BALLINGER. I have no questions.
Chairman PLOESER. We thank you.
(Witness excused.)

STATEMENT OF HAROLD M. MORGAN

Mr. BALLINGER. Give your name.

Mr. MORGAN. Harold M. Morgan.

Mr. BALLINGER. What company do you represent?

Mr. MORGAN. The Morgan Co., exporters.

Mr. BALLINGER. Do you have a statement that you wish to make to the committee or a complaint?