The Federal Anti-Trust Law 9780231893770

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THE FEDERAL ANTI-TRUST LAW BY CHARLES WESLEY

DUNN,

OF T H E NEW Y O R K

M.A.,

BAR

Lectures delivered at the School of Business of Columbia University on November 20 and 27 and December 4 and 11,

NEW COLUMBIA

YORK

UNIVERSITY I

9

3

O

PRESS

1929

Copyright 1930 COLUMBIA U N I V E R S I T Y

Published January, 1930

PRESS

CONTENTS x. The Sherman Act. A consideration of what is illegal monopoly and whether the act should be amended

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2. The Clayton Act. A consideration of section 2, defining unlawful price discrimination

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3. The Federal Trade Commission Act. A consideration of section 5 and the trade practice conference procedure thereunder

4. Conclusion

. . . .

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44

i. T H E S H E R M A N

ACT

A consideration of what is illegal monopoly and whether the act should be amended. I Perhaps the most striking and significant characteristic of the presentday grocery business is the large and increasing concentration in it. This is equally true of the manufacturing industry and the dealer trade and relatively more true of the latter. In the manufacturing industry the concentration is due to business growth and consolidation. The reasons for the business growth are apparent. The basic reason is the essential character of the grocery business and the vast buying market in which it is conducted, which market is constantly expanding. The particular reason is the development of canned and packaged foods and grocery products of various sorts and their intensive brand advertisement. A further reason is the building of an important export trade. When it is recalled that this industry as now constituted is the creation of a generation still living, its growth is marvelous, as also its achievements in food conservation and improvement and in scientific production and secured distribution. A s to business consolidation in this industry it is a relatively recent movement and the underlying reasons are several. They are principally economic and financial. The asserted reason is to reduce costs and increase operation efficiency and effectiveness. It is yet too early to determine whether and to what extent that result has been accomplished. In its economic conception the movement will be judged upon the basis whether it improves the production and distribution position of the consolidated businesses, on the one hand, and is influential to lower prices and increased product and merchandising service to the consumer, on the other hand. Certainly the consumer will not benefit unless the latter result follows. The extent of the concentration in this industry is evidenced by the size of the business of the larger corporations, respectively, and also by the brand and corporate composition of the holding companies. A s to the holding companies: General Foods, Inc., controls the brands of the Postum, Jell-O, Igleheart, Minute Tapioca, Walter Baker, Sanka Coffee, Franklin Baker, Log Cabin Products, Maxwell House Products, Richard Hellmann, Calumet Baking Powder, Certo, L a France Manufacturing, Diamond Crystal Salt and Fish and Oyster Corporations; its sales in 1928 were 101 millions and for the first 9 months in 1929, 95 millions; Standard Brands, Inc., controls the brands of the Fleischmann, Royal Baking Powder, E . W . Gillett, Chase and Sanborn,

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and Widlar Food Products corporations; the sales of the Fleischmann corporation are reported and were 64 millions in 1928; Gold Dust, Inc., is said to control 16 corporations the sales of which are not reported; International Quality Products Corporation is not yet effective but is directed to control the brands of the K r a f t Phenix Cheese, Hershey Chocolate and ColgatePalmolive-Peet corporations having estimated annual sales between 150 and 200 millions. A s to other leading grocery manufacturing corporations listed on the Stock Exchange I am advised that their 1928 sales were: Armour & Co., 900 millions (est.); Cudahy Packing Co., 251 millions; Procter & Gamble, 179 millions; Swift & Co., 970 millions; Wilson & Co., 295 millions ; Borden & Co., 180 millions. In the dealer trade the concentration is due to the development and consolidation of the chain store business and to the consequent organization of the wholesalers and retailers and the retailers alone for cooperative buying and selling. The reason for the chain store is patent. It is to secure the buying and selling advantages of a multiple store plan. In a distribution sense the chain store is an inevitable economic development, effective to improve the art of grocery retailing by all engaged in it. As to the reasons for chain store business consolidation they are principally economic and financial. What has been said about the consolidation of the manufacturing business may be broadly said equally to apply here. The reason for dealer organization is of course to secure the buying and selling advantages of group operation. Such organization is now an essential competitive action by many if not by the majority of the individual retailers acting alone or with their wholesalers. And it has proven effective greatly to strengthen their trade and competitive position. Its success is indicated by the fact of its extensive and successful operation. The extent of the concentration in the dealer trade is evidenced by the size and division of the chain store business and by the scope of dealer organization. A s to the size and division of such business; its percentage in relation to the whole retail grocery business is estimated to range from 30 to 44 per cent, with a lower percentage in the south and west and a higher percentage in leading eastern cities; it is estimated that the largest chain does an annual business in excess of 1 billion or over 25 per cent of the whole grocery chain store business; it is estimated that the 5 largest chains do an annual business approaching 2 billions or over 50 per cent of the whole grocery chain store business. A s to the scope of dealer organization: it is general throughout the country and one organization claims an annual business exceeding 500 millions. This statement of grocery business concentration suffices to indicate its extent and the broad reasons for it. In comment upon it I may say: First: However far this concentration may have gone it is certain to go farther. This not only because additional business growth is indicated, but also because business consolidation and dealer organization are manifestly in the intermediate stage. The successful businesses annually report increasing sales. Consolidation in the manufacturing industry goes on and there is a [ 2 ]

constant pressure for it. Consolidation in the chain store business progresses and is still regional. Dealer organization is yet in its formative or experimental period and is now local for the most part. Whether and to what extent such organizations will transcend local limitations or develop into regular chain systems, remains to be seen. W e can only say, at this time, that there are undefined expansion possibilities in each case, the realization of which the future will disclose. Second: This state of concentration is apparently a permanent one, because of the underlying economic and financial considerations that induce it; because it is a part of a general concentration movement in all business; because it is an accomplished fact. In a country of large economic opportunity, large business is an economic consequence. In a market supporting large production business, such business is bound to exist. In a distribution situation permitting large distribution business, such business is inevitable. In short, if and to the extent mass production and distribution are economic, they are certain accordingly. Third: The result of such concentration is big business in the grocery business, with all that it implies in its modern significance as to organization, operation and effect. T h e result is increasingly to place the manufacturing industry upon the basis of a competition principally between a relatively few large corporations. T h e result is increasingly to place the retailer trade upon the basis of a competition principally between chain systems of one kind or another, upon the basis of a competition principally between a relatively few large chain and dealer organizations. II T h e foregoing statement is made to introduce a brief discussion of two important—perhaps the two most important—legal questions presented by the large and increasing business concentration and the consequent general trade cooperation in modern merchandise distribution. T h e questions are these: First, what is illegal monopoly under the Sherman A c t ? Second, should that act be amended ? A n answer to the first question is required to prevent a misunderstanding and misstatement of it. There is considerable loose and inaccurate talk about actual or prospective illegal monopoly in "big business," which is mischievous. A n answer to the second question is required by the fact that constructive trade cooperation is necessary in distribution as now organized. I shall broadly discuss these t w o questions in sequence. T h e Sherman Act was enacted on July 2,1890. It outlaws action in undue restraint of trade or involving offensive private monopoly. In doing so it makes the common law the federal law. T h e Federal T r a d e Commission and Clayton Acts of 1914 are supplemental statutes, with which I shall deal in subsequent lectures. Suffice it now to say that they are designed to nip in the bud the undue restraint of trade and intolerable monopoly condemned in the Sherman Act by outlawing what experience has established are the major [ 3 1

means of such restraint and monopoly. Together the three acts constitute the principal federal antitrust law. T h e purpose of the Sherman A c t is plain upon its face and has been repeatedly defined by the Supreme Court. It is to maintain a natural flow of trade and freedom of competition in the channels of interstate and foreign commerce. It is "in a word to preserve the right of freedom to trade." (Colgate case, 250 U . S. 300.) That is to say, the act declares the public policy to preserve the individual right of freedom to trade existing at common law and thus to secure the fundamental right of an equal opportunity for each promised by our free institutions. It is directed, on the one hand, to protect the public from the evils of unreasonable restraint of trade and hurtful private monopoly and, on the other hand, to enable the public to enjoy the benefits of a state of open and free competition in commerce. In short and as the Supreme Court pointed out in the Standard Oil case (221 U. S. 1 ) , the main cause which led to this legislation was the thought that it was required by the multiplied organization of combinations known as trusts in order to prevent the wrongful abuse of the resulting trade power for the suppression of competition to the detriment of the individual and the injury of public generally. T h e Sherman A c t is entitled " A n Act to protect trade and commerce against unlawful restraints and monopolies." Its main text is comprised in two short sections. T h e first section provides that "every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states or with foreign nations, is hereby declared to be illegal." In the Standard Oil case the Supreme Court held that the clause "in restraint of trade or commerce" is to be construed subject to the rule of reason and as so construed means "in undue (i.e. unreasonable) restraint of trade or commerce." Action in undue restraint of trade or commerce is that which, either because of its character or under the circumstances of its pursuit, may be fairly said to have been taken not with a legitimate purpose of reasonably forwarding a proper personal trade interest but rather with a wrongful purpose of unjustly restricting competition by others whereby freedom of competition is denied to them and their trade is injuriously restrained. T h e second section then goes on to provide that "every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons to monopolize, any part of the trade or commerce among the several states or with foreign nations, shall be guilty of a misdemeanor," etc. T h e words "any part" are construed to have both a geographical and a distributive significance. Hence they mean any part of the United States or any part of the classes of things forming interstate or foreign commerce. (Standard Oil case.) Construing this section the Supreme Court said in the Standard Oil case: "Undoubtedly, the words 'to monopolize' and 'monopolize' as used in the section, reach every act bringing about the prohibited results. T h e ambiguity, if any, is involved in determining what is intended by monopolize. But this ambiguity is readily dispelled in the light

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of the previous history of the law of restraint of trade to which we have referred and the indication which it gives of the practical evolution by which monopoly and the acts which produce the same result as monopoly, that is, an undue restraint of the course of trade, all came to be spoken of as, and to be indeed synonymous with, restraint of trade. In other words, having by the ist section forbidden all means of monopolizing trade, that is, unduly restraining it by means of every contract, combination, etc., the 2d section seeks, if possible, to make the prohibitions of the act all the more complete and perfect by embracing all attempts to reach the end prohibited by the ist section, that is, restraints of trade, by any attempt to monopolize, or monopolization thereof, even although the acts by which such results are attempted to be brought about or are brought about be not embraced within the general enumeration of the ist section. And, of course, when the 2d section is thus harmonized with and made, as it was intended to be, the complement of the ist, it becomes obvious that the criteria to be resorted to in any given case for the purpose of ascertaining whether violations of the section have been committed is the rule of reason guided by the established law and by the plain duty to enforce the prohibitions of the act, and thus the public policy which its restrictions were obviously enacted to subserve. And it is worthy of observation, as we have previously remarked concerning the common law, that although the statute, by the comprehensiveness of the enumerations embodied in the ist and 2d sections, makes it certain that its purpose was to prevent undue restraints of every kind or nature, nevertheless by the omission of any direct prohibition against monopoly in the concrete, it indicates a consciousness that the freedom of the individual right to contract, when not unduly or improperly exercised, was the most efficient means for the prevention of monopoly, since the operation of the centrifugal and centripetal forces resulting from the right to freely contract was the means by which monopoly would be inevitably prevented if no extraneous or sovereign power imposed it and no right to make unlawful contracts having a monopolistic tendency were permitted. In other words, that freedom to contract was the essence of freedom from undue restraint on the right to contract." It is clear, therefore, that the Sherman Act does not prohibit monopoly in the concrete. Its provision is that no one shall monopolize or attempt to monopolize or combine or conspire with another to monopolize any part of interstate or foreign trade or commerce. And in their practical application the words "monopolize or attempt to monopolize", as so used in the act, may be broadly said to mean "control or attempt to control" any part of such trade or commerce by wrongful action in suppression of competition. The root idea of monopoly is exclusion. The offence defined by the act is the wrongful exclusion of competition. So translated the act is effective to provided that no one shall control or attempt to control or combine or conspire with another to control any part of interstate or foreign commerce by the wrongful abuse of trade power for the exclusion of competition. We are now in a position to answer the question under consideration, [ 5 1

namely, what is illegal monopoly under the Sherman Act ? The answer has been indicated. In the interest of a clear understanding the answer may be stated as follows: to make out a monopoly case under the act the government must establish two things—first, the existence in the defendant or defendants of actual power to control any part of interstate or foreign commerce; second, the wrongful exercise of that power to suppress competition. If such trade power does not exist manifestly there can be no monopoly of trade in reality. And the law only deals with realities. If such trade power does exist the act does not apply unless and until the power is wrongfully exercised to suppress competition by others. This is to say that the act does not operate upon the basis of a fear or an expectancy or a possibility of an illegal monopoly. It only operates upon the basis of conduct actually involving monopoly as and under the circumstances described. In the Steel case (251 U . S . 4 1 7 ) the Supreme Court said: " * * * the corporation did not achieve monopoly * * * and it is against monopoly that the statute is directed; not against an expectation of it, but against its realization," etc. It follows that the Sherman Act does not make the mere size of a business or its possession of large or dominating trade power in itself an offence. It only steps in if and when that power is wrongfully abused to drive out competition and therefore to deny the right of freedom to compete. It follows that a business does not involve illegal monopoly for the reason alone that it is big, however big it may be, and bigness itself is not a crime. The only law governing bigness, as such, is the economic law. That the foregoing construction of the Sherman Act is the only reasonable one is too plain for argument. This because the opposite construction would be subversive of its very purpose and result in penalizing personal initiative and sagacity and in making economic success itself a crime. This purpose, as hereinbefore indicated, is to maintain a state of open and free competition in trade in order that each may have an equal opportunity in it and enjoy the success he deserves. Having accomplished its purpose to maintain such a state of competition the act leaves each trader to work out his own destiny in it as best he may and he may go as far as he can. It is certain that some will go farther than others. That is contemplated by the act. It is certain that in this country of big business opportunity, big business is a normal and inevitable economic consequence. That is also contemplated by the act. It does not distinguish between trade opportunities or prefer one to another; it is only concerned to preserve the right of equal trade opportunity. How can it be said, therefore, that the act prohibits the mere successful exercise of the very trade right it was enacted to preserve? How can it be said, therefore, that the act prohibits the mere realization of the very economic opportunity it contemplates ? T o state these questions is to answer them. In short, the act is only purposed and effective to prevent the wrongful suppression of competition; it in no way abrogates the economic law or qualifies its normal working; it does not interdict or penalize business success attained in pursuance of a purely legitimate purpose and by wholly economic means, however great that success may be.

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Ill There can be no doubt of this construction of section 2 of the Sherman Act because it was affirmed by the Supreme Court in the Steel case (251 U.S. 4 1 7 ) , decided in 1920, and again in the Harvester case (274 U.S. 693), decided in 1927. In the former case it was held that the United States Steel Corporation, a holding company combining competing iron and steel manufacturers, does not offend against the act for the reason alone that it does approximately 50% of the iron and steel production business of the country. The court said: "The corporation is undoubtedly of impressive size, and it takes an effort of resolution not to be affected by it or to exaggerate its influence. But we must adhere to the law, and the law does not make mere size an offence, or the existence of unexerted power an offence. It, we repeat, requires overt acts, and trusts to its prohibition of them and its power to repress or punish them. It does not compel competition, nor require all that is possible." In the latter case it was held that the International Harvester Company, combining harvesting machinery manufacturers, does not offend against the act for the reason alone that it does over 60% of the harvesting machinery production business in the country. The court said: "The law * * * does not make the mere size of a corporation, however impressive, or the existence of unexerted power on its part, an offence when unaccompanied by unlawful conduct in the exercise of its power." The decisive question in each case was whether the corporation wrongfully abused its trade power to suppress competition. And because it did not the judgment was favorable. In the Steel case it was found that the corporation did not achieve monopoly, had discontinued any objectionable practices before this suit was brought, and was engaged in genuine, vigorous and fair competition in production and prices. In the Harvester case it was found that since the entry of the consent decree in 1918 "there had been established and then existed, a free, untrammeled, keen and effective competition in harvesting machinery that was in no wise restrained or suppressed by the International Company." Speaking for the court in the Steel case Mr. Justice McKenna said: "Its (the government's) assertion is that the size of the corporation being the result of a 'combination of powerful and able competitors' had become 'substantially dominant' in the industry and illegal. * * * Its contention is based on the size and asserted dominance of the corporation—alleged power for evil, not the exertion of the power in evil. Or, as counsel put it, 'a combination may be illegal because of its purpose; it may be illegal because it acquires a dominating power, not as a result of normal growth and development, but as a result of a combination of competitors.' Such composition and its resulting power constitute, in the view of the government, the offence against the law * * The government, therefore, is reduced to the assertion that the size of the corporation, the power it may have, not the exertion of the power, is an abhorrence to the law, or, as the government says, 'the combination embodied in the corporation unduly restrains competition by [ 7 1

its necessary effect, and therefore, is unlawful regardless of purpose.' 'A wrongful purpose,' the government adds, is 'matter of aggravation.' The illegality is statical; purpose or movement of any kind only its emphasis. To assent to that, to what extremes should we be led ? Competition consists of business activities and ability—that make its life; but there may be fatalities in it. Are the activities to be encouraged when militant, and suppressed or regulated when triumphant, because of the dominance attained? To such paternalsim the government's contention, which regards power, rather than its use, the determing consideration, seems to conduct. Certainly conducts we may say, for it is the inevitable logic of the government's contention that competition must not only be free, but that it must not be pressed to the ascendency of a competitor, for in ascendency there is the menace of monopoly. We have pointed out that there are several of the government's contentions which are difficult to represent or measure, and the one we are now considering—that is, the power is 'unlawful regardless of purpose'— is another of them. It seems to us that it has for its ultimate principle and justification that strength in any producer or seller is a menacc to the public interest and illegal, because there is potency in it for mischief. The regression is extreme, but short of it the government cannot stop. The fallacy it conveys is manifest. The corporation was formed in 1901, no act of aggression upon its competitors is charged against it, it confederated with them at times in offence against the law, but abandoned that before this suit was brought, and since 1 9 1 1 no action in violation of law can be established against it, except its existence be such an act. * * * shall we declare the law to be that size is an offence, even though it minds its own business, because what it does is imitated ?" What is a wrongful abuse of trade power to suppress competition the court indicates in the Steel case. Referring to Judge Wooley's opinion below Mr. Justice McKenna said: "The corporation, it was said, did not at any time abuse the power or ascendency it possessed. It resorted to none of the brutalities or tyrannies that the cases illustrate of other combinations. It did not secure freight rebates; it did not increase its profits by reducing the wages of its employes—whatever it did was not at the expense of labor; it did not increase its profits by lowering the quality of its products, nor create an artificial scarcity of them; it did not oppress or coerce its competitors— its competition, though vigorous, was fair; it did not undersell its competitors in some localities by reducing its prices there below those maintained elsewhere, or require its customers to enter into contracts limiting their purchases or restricting them in resale prices; it did not obtain customers by secret rebates or departures from its published prices; there was no evidence that it attempted to crush its competitors or drive them out of the market, nor did it take customers from its competitors by unfair means, and in its competition it seemed to make no difference between large and small competitors." And in the Harvester case Mr. Justice Sanford speaking for the court said: "It does not appear that since the entry of the consent decree the International Company has used its capital and resources—which, although

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much larger than those of any single competitor, are but little larger than the aggregate capital and resources of all its competitors, and are in large part employed in its foreign trade—its subsidiary companies or incidental advantages, for the purpose or with the effect of restraining and suppressing the interstate trade in harvesting machinery; that it has at any time reduced the prices of harvesting machines below cost, for the purpose of driving out its competitors; or that it has at any time controlled and dominated the trade in harvesting machinery by the regulation of prices. * * * A n d the fact that competitors may see proper, in the exercise of their own judgment, to follow the prices of another manufacturer, does not establish any suppression of competition or show any sinister domination." T h e court concludes its opinion in the Steel case by distinguishing it from the Standard Oil (221 U . S . 1 ) and American Tobacco (221 U . S . 106) cases, wherein illegal monopoly was found. M r . Justice M c K e n n a said: " T h e Standard Oil Company had its origin in 1882 and through successive forms of combinations and agencies it progressed in illegal power to the day of the decree, even attempting to circumvent by one of its forms the decision of a court against it. And its methods in using its power was of the kind that Judge Wooley described as 'brutal,' and of which practices, said, the Steel Corporation was absolutely guiltless. W e have enumerated them, and this reference to them is enough. A n d of the practices this court said no disinterested mind could doubt that the purpose was 'to drive others from the field, and to exclude them from their right to trade, and thus accomplish the mastery which was the end in view.' It was further said that what was done and the final culmination 'in the plan of the N e w Jersey corporation' made 'manifest the continued existence of the intent * * * and impelled the expansion of the N e w Jersey corporation.' It was to this corporation, which represented the power and purpose of all that preceded, that the suit was addressed and the decree of the court was to apply. W h a t we have quoted contrasts that case with this. T h e contrast is further emphasized by pointing out how in the case of the N e w Jersey corporation the original wrong was reflected in and manifested by the acts which followed the organization, as described by the court. It said: ' T h e exercise of the power which resulted from that organization fortifies the foregoing conclusions (as to monopoly, etc.), since the development which came, the acquisition here and there which ensued of every efficient means by which competition could have been asserted, the slow but resistless methods which followed by which means of transportation were absorbed and brought under control, the system of marketing which was adopted, by which the country was divided into districts and the trade in each district in oil was turned over to the designated corporation within the combination and all others were excluded, all lead the mind up to a conviction of a purpose and intent which we think is so certain as practically to cause the subject not to be within the domain of reasonable contention.' T h e Tobacco Company case (31 Sup. Ct. 632, 55 L. Ed. 663) has the same bad distinctions as the Standard Oil case. T h e illegality in which it was formed (there were two

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American Tobacco Companies, but we use the name as designating the new company as representing the combinations of the suit) continued—indeed, progressed in intensity and defiance to the moment of decree. And it is the intimation of the opinion, if not its direct assertion, that the formation of the company (the word 'combination' is used) was preceded by the intimidation of a trade war 'inspired by one or more of the minds which brought about and became parties to that combination. In other words, the purpose of the combination was signaled to competitors, and the choice presented to them was submission or ruin, to become parties to the illegal enterprise or be driven 'out of the business.' This was the purpose, and the achievement, and the processes by which achieved, this court enumerated to be the formation of new companies, taking stock in others to 'obscure the result actually attained, but always to monopolize and retain power in the hands of the few and mastery of the trade; putting control in the hands of seemingly independent corporations as barriers to the entry of others into the trade; the expenditure of millions upon millions in buying out plants, not to utilize them, but to close them; by constantly recurring stipulations by which numbers of persons, whether manufacturers, stockholders, or employes, were required to bind themselves, generally for long periods, not to compete in the future. In the Tobacco case (31 Sup. Ct. 632, 55 L. Ed. 663), therefore as in the Standard Oil case, the court had to deal with a persistent and systematic law-breaker masquerading under legal forms, and which not only had to be stripped of its disguises but arrested in its illegality. A decree of dissolution was the manifest instrumentality and inevitable. We think it would be a work of sheer supererogation to point out that a decree in that case or in the Standard Oil case furnishes no example for a decree in this." IV The second question is now in order for consideration. It is this: Should the Sherman Act be amended ? That act is today in precisely the same form in which it was enacted in 1890, in its definitive sections 1 and 2. But it has been substantially modified in application by supplemental legislation containing exemptions of one sort or another in favor of agricultural, labor and export associations and also banks, railroads and steamship lines. And legislation containing additional exemptions is pending and proposed. The agricultural marketing act of 1929 is effective to place the agricultural industry outside the Serman Act, since it authorizes the organization of producers into marketing associations or corporations under their own control and defines a plan to prevent and control surplus production. The Webb-Pomerene Act of 1918 provides that the antitrust law shall not be construed to declare illegal an export association or an agreement made by it in export trade, subject to certain provisos. The Newton Bill (H.R. 8927), proposing a similar law as to associations of importers of particular raw materials, will doubtless be reintroduced when Congress convenes in regular session. The Clayton Act of 1914 provides that nothing contained [

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in the antitrust laws shall be construed to forbid the existence and operation of labor (also agricultural and horticultural) organizations instituted for the purpose of mutual help and not having capital stock or conducted for profit, or to forbid or restrain individual members of such organizations from lawfully carrying out the legitimate objects thereof; nor shall such organizations or their members be held or construed to be illegal combinations or conspiracies in restraint of trade under the antitrust laws. But the Supreme Court has ruled that this provision does not exempt labor unions from the prohibition of the Sherman Act against undue restraint of trade. (Duplex Printing Press case, 254 U. S. 443.) The American Federation of Labor proposes legislation prohibiting a court of the United States from enjoining, inter alia, a refusal by union labor to handle or use any product made by non-union labor. Labor has favored such legislation since the Danbury Hatters case decided in 1908. (Lawlor case, 208 U.S. 274.) In that case the Supreme Court held that a combination by members of labor organizations to destroy an interstate business in hats by a boycott against their manufacture and sale violates the Sherman Act. The transportation act provides that railroad consolidation approved by the Interstate Commerce Commission is exempted from the antitrust laws. The Parker Bill (H.R. 3208), now pending in Congress, authorizes the unification of carriers engaged in interstate commerce and relieves them from the operation of the antitrust laws. The Federal Reserve Act of 1913 contains an antitrust law exemption in favor of a national banking association doing a foreign business. The Shipping Board Act of 1916 provides that any agreement lawful under it shall be excepted from the antitrust law. In the last Congress Senator Copeland introduced a bill (S. 2029) declaring cooperative action in the mining and marketing of bituminous coal to be lawful and not subject to the antitrust law. I understand that the Secretary of Labor has advocated a study of the application of the Sherman Act to the coal and textile industries to determine whether it contributes to overproduction. The President's Oil Conservation Board resulted in recommended legislation exempting oil conservation agreements between oil producing states from the operation of the Sherman Act. The Capper-Kelly Bill (H.R. 1 1 ) , now pending in Congress, validates the resale price maintenance agreements condemned in the Miles case (220 U.S. 373) as illegal at common law and under the Sherman Act. The Federal Trade Commission has twice recommended to Congress the enactment of such legislation, if amended to empower a governmental agency to review and revise the agreements. (Doc. No. 145, House of Representatives, 66th Congress, 1st Session.) The Committee on Radio Law of the American Bar Association has recommended the repeal of the section forbidding the combination of wire and wireless communication organization. It states: "It (the section) rests upon a misconception as to the nature of radio communication and its relation to wire communication. No extended argument is necessary to demonstrate that the natural development of the communications business seems to be in the direction of monopoly, regulated, of course, by the government. Our telephone system, at least in

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interstate commerce, approaches to being very close to a complete monopoly without appreciable complaint on the part of the public. In many parts of the country the telegraph system is in the hands of only one corporation. There is just as much excuse for the development of such a tendency in radio communication, since the total number of channels is so limited and competition necessarily means a severe reduction in the number of places between which communication may be had. * * * A very important consideration is raised by the fact that foreign nations permit such combinations," etc. These citations suffice to establish that it has been found necessary progressively to relax the application of the Sherman A c t to particular businesses in which unification or constructive cooperation is required by the attending economic circumstances. It has been found that railroad unification is conducive to increased transportation efficiency and effectiveness. A n d the consolidation law is an advance over the Trans-Missouri Freight Association decision ( 1 6 6 U . S . 290), condemning an agreement between competing railroads to fix reasonable freight rates as illegal under the Sherman Act. It has been found that constructive cooperation in the production and marketing of agricultural products is necessary to prevent over and wasteful production and inefficient distribution and destructive competition in both. It has been found that trade cooperation is necessary to meet foreign competition and raw material control. Hence the Sherman A c t has given away as stated. But the act remains in full force and effect as to the ordinary business of trade, with which w e are concerned. Whether the act should be amended in its application to such business has been the subject of Congressional investigation and has provoked much business and legal discussion and resulted in various opinions. T h e Congressional investigation arose out of a resolution adopted by the United States Senate on July 26, 1911, directing the Senate Committee on Interstate Commerce to inquire into and report what changes are necessary or desirable in the laws of the United States relating to corporations and others engaged in interstate commerce. A f t e r holding hearings for more than three months the committee made its report. (Senate Report No. 1326, 62nd Congress, 3rd Session.) In its report the committee expressed the opinion, first, that the Sherman A c t should stand as the fundamental law upon the subject and any supplemental legislation should be in harmony with its purpose; sccond, that a federal incorporation law as to interstate commerce is neither desirable nor necessary at this time; third, that it is desirable to impose upon corporations and others engaged in interstate commerce further conditions affecting organization and conduct. W h a t any supplemental legislation or such conditions should be the committee did not say. It indicated that the legislation should be directed to define what is unlawful restraint of trade and to create a commission for the better administration of the law and in aid to its enfocement; that the conditions should be of a character that will tend to preserve reasonable competition or substantially competitive conditions and to compel independence in both organization and conduct. It will be observed that the subsequent Federal

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Trade Commission and Clayton Acts, enacted in 1914, constitute supplemental legislation of the general character so indicated. The present business and legal opinions upon the act have a wide range. There is the opinion, at the one extreme, that the act is economically out of date and therefore should be repealed, since the state of competition it contemplates and attempts to enforce does not and cannot obtain in the circumstances of modern business involving as it does more or less business cooperation ; that there should be substituted a legislative policy of government regulation of interstate business and cooperation in it; that such regulation should consist of the requirement of a government license to conduct the business and the empowering of the Federal Trade Commission to inquire into and supervise it. There is the opinion, at the other extreme, that the act is adequate as it stands, since it is construed to run only against undue restraint of trade and not to interfere with the economic development of business, however big it may become. There is the opinion, in between, that the act is only subject to the objection it is incidentally effective to prevent constructive cooperative action in furtherance of constructive competition; that it should be amended to permit such action and as so amended is sufficient to meet all the requirements presented by the attending and prospective economic conditions of business and distribution. It seems to me that a due consideration of the act, in the light of its purpose and application, leads to the following conclusions, at least: First: It should not be repealed. Manifestly it is not in the public interest to relieve the ordinary business of trade from the obligation imposed by the act to refrain from conduct involving undue restraint of trade or offensive private monopoly. The more the business concentration the greater the need of the act and its protection against such conduct, from the standpoint of all concerned. The act is certainly not out of date in its prohibitions. Moreover the first and basic principle of public and legislative policy upon business of this kind is to preserve and safeguard the competitive principle upon which our economic order rests. This is subject to two qualifying considerations. The first is that the competition should be fair. The second is that any business action to promote constructive competition should be permitted. It is too plain for argument that what the public is interested and benefited to have is a state of active, fair and constructive competition in the manufacture and sale of the ordinary articles of trade. It was to insure a state of trade open to active competition that the Sherman Act was enacted. It was to insure fair competition that the Federal Trade Commission Act was enacted. It remains to make certain that business action to promote constructive competition is unquestionably permitted. From whatever direction the question of repeal is approached the conclusion appears as clear now, as it was to the Senate Committee on Interstate Commerce in 1911, that the Sherman Act should continue to stand as the fundamental law upon the subject and any additional legislation should be in the form of an amend-

[ 13 ]

ment or supplemental legislation consistent with its prohibitions and the foregoing qualifications. Second: It should not be repealed in favor of a law placing all interstate business under government control. That is neither necessary nor desirable. It is not necessary because the act is effective to prevent the undue restraint of interstate trade, as the cases abundantly establish. It is not desirable because such a law is suppressive of business and inconsistent with our free institutions. The traditional legislative policy in this country, as to the regulation of the ordinary business of trade and subject to incidental necessary exception, is to outlaw wrongful conduct and otherwise leave business independent. It is the sound policy in the circumstances. T h i s policy is in harmony with the spirit and purpose of our free institutions; the other policy directly offends them. This policy leaves business free to make the most of itself; the other policy lays a heavy and oppressive government hand upon it. This policy is constructive and promotes the welfare of business; the other policy is destructive and hinders it. This policy keeps the government out of business; the other policy puts the government into business. This policy results in the simplest, least interfering and yet an effective regulatory l a w ; the opposite policy results in an inquisitive, meddling and negative bureaucratic control of business, with all that it implies. It is difficult to imagine what greater calamity could come to business than to place it in a bureaucratic control straight jacket. Such control is a final emergency step to be taken when necessary, when every other remedy has been exhausted and there is no other recourse. T h e prevailing situation does not call for this step. However unsatisfactory the present law may be the proposed law is worse. Whatever else may be said upon the question this much is apparently certain that the country is in no mind to abandon the competitive principle or to substitute government control of ordinary business for the freedom of it, subject to wrongful conduct prohibition. Third: It should be amended to permit any business or trade action the purpose and effect of which are to promote constructive competition. This because the competition the public is interested to have is constructive competition. It does not benefit by destructive competition. This because the act is now incidentally effective to prevent constructive business cooperation to eliminate destructive competition and thus to promote constructive competition. The purpose of the act, as has been stated, is to maintain a state of open and free competition; it does not distinguish between destructive and constructive competition; and it is necessarily construed accordingly. That is to say, while the act is constructed not to prohibit reasonable restraint of trade what is a reasonable restraint of trade must be defined in pursuance of its purpose to maintain a state of competition. Hence cooperative action effective to limit competition is condemned, notwithstanding the limitation is only to eliminate destructive competition. This is clearly indicated in the recent Trenton Potteries case (273 U . S . 392), decided in 1927, wherein it was held that a trade agreement to fix reasonable prices violates the Sherman

[ 14 ]

Act and the court said: "That only those restraints upon interstate commerce which are unreasonable are prohibited by the Sherman Law was the rule laid down by the opinions of this court in the Standard Oil and Tobacco cases. But it does not follow that agreements to fix or maintain prices are reasonable restraints and therefore permitted by the statute, merely because the prices themselves are reasonable. Reasonableness is not a concept of definite and unchanging content. Its meaning necessarily varies in the different fields of the law, because it is used as a convenient summary of the dominant considerations which control in the application of legal doctrines. O u r view of what is a reasonable restraint of commerce is controlled by the recognized purpose of the Sherman law itself. Whether this type of restraint is reasonable or not must be judged in part at least, in the light of its effect on competition, for, whatever difference of opinion there may be among economists as to the social and economic desirability of an unrestrained competitive system, it cannot be doubted that the Sherman law and the judicial decisions interpreting it are based upon the assumption that the public interest is best protected from the evils of monopoly and price control by the maintenance of competition." The enactment of this amendment would not disturb the prohibition of the act against actual undue restraint of trade and would only permit cooperative conduct in furtherance of constructive competition. Therefore the competitive principle, in its true conception of constructive competition, is maintained and the necessary prohibitory application of the act is in no way qualified. The merit of the amendment is apparent upon the consideration of its application. Business is now a vast and complex system in which the interests of those who deal and compete with one another are interrelated and interdependent. One is not independent of the other. One cannot act without affecting another. Wrongful conduct by one hurts another and breeds conduct in kind. This situation induces constructive business cooperation to secure proper trade relationship, right policy and economic conduct. In addition, modern business presents the conditions of overproduction, excessive competition, a volume policy backed by intensive advertising and enforced by high pressure salesmanship, and the disorder attending a drastic evolution in distribution, which result in the seriously injurious trade abuse of unfair and uneconomic practices. This situation induces and compels self regulation to eliminate such practices. And in consequence business is generally organized in one form or another. In their broad conception, such organizations constitute the most constructive force in business today and are unquestionably in the public interest. They emphasize ideals and responsibility, define fundamental principles, and point toward progressive policies and liberal action. They permit the exercise of business conscience and the guiding expression of the best trade opinion. They inspire an enlightened leadership in the common and general interest. They work to place business upon a sound economic basis and to elevate it to the highest plane of economy, efficiency and service. More and more individual business looks to organized business for constructive leadership and action. More [ 15 ]

and more the government looks to organized business for economic progress and stability. More and more the general public looks to organized business for greater social service. In view of all this will it be said that constructive business organization is not to be encouraged? In view of all this will it be said that constructive self regulation is not in the public interest? If and to the extent such organization and self regulation are abused to accomplish undue restraint of trade, there is effective remedial law in the Sherman Act. It is ample protection against such abuse. The difficulty is that the act at the same time incidentally prevents self regulation purposed and effective but to eliminate destructive competition and so to promote constructive competition. A n excellent illustration is the situation presented by the trade practice conference plan instituted by the Federal Trade Commission. It is designed to effect the self elimination of unfair practices by trade agreement. The plan is sound in principle, sponsored by one of the agencies for the administration of the federal antitrust law, generally endorsed by business and potential for incalculable trade and public service. Y e t there may be and are vicious trade practices unquestionably detrimental to the trade and public interest which cannot be legally eliminated by trade agreement and to make such an agreement invites the enforcement of the Sherman A c t and the imposition of its penalties. Another striking illustration is the application of the similar state law to cooperative merchandising action by the individual retail grocers. Many are in the position where they should and do cooperate to meet chain store competition. Because of its legal entity a chain store business may lawfully pursue a plan of uniform store operation. But the pursuit of a similar plan by the individual retail grocers which necessarily involves their cooperation is almost certain to result in a trespass upon such law. T h e consequence is that the law which was enacted to preserve competition by protecting the small trader in it becomes an instrument potential for his detriment. This situation has been met by either side or both sides ignoring the law. It is not a proper situation. T o sum up: I believe that the Sherman Act and each similar state law (where such an amendment is necessary) should be amended by adding a brief affirmative declaration reading in substance as f o l l o w s — " I t shall be lawful to take any business or trade action the purpose and effect of which shall be to promote constructive competition." There is precedent for such an amendment. T h e California antitrust law now provides: " I t 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 any trade or industry, or which are in furtherance of trade." This provision was added as far back as 1909 and goes beyond the amendment here suggested. In support of the amendment I submit: first, it preserves unimpaired the competitive principle which underlies our economic order and to safeguard which the antitrust laws were enacted; second, it preserves unimpaired the prohibition of the act against conduct involving undue restraint of trade or offensive private monopoly; third, it is simply effective to say that the act shall not be construed or applied to prevent business or

[ 16 ]

trade action to promote constructive competition, which is the only competition the public is interested to have; fourth, it will encourage business to take such action and protect it in doing so. It may be said that this amendment will place upon the courts the responsibility of determining what action promotes constructive competition. The reply is: that is so and as it should be. The courts now have the responsibility of determining what is unreasonable restraint of trade. The courts now have the same responsibility with respect to the construction of all regulatory laws prohibiting unfair methods of competition, the adulteration and misbranding of foods and drugs, unjust price discrimination, etc. It is in the public interest that the final responsibility of interpreting such laws reside in the courts. It has been said that this amendment runs only in favor of the small retailers, particularly the small retail grocers. That is a misstatement and misunderstanding of it, as we have seen. It is a broad amendment to validate any business or trade action to promote constructive competition. And my experience with the application of the Sherman Act to business has indicated that its effect to prevent such action is its defect. I predict, with confidence, that the adoption of such an amendment will introduce a new era of antitrust law jurisprudence, an era of a law adequate to meet the requirements of existing and changing economic conditions and its constructive application in furtherance of business welfare and in protection of the general public interest.

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2. T H E C L A Y T O N A C T A consideration of section 2, defining unlawful price discrimination. I On January 20th, 1914, President Wilson addressed Congress upon the subject of additional antitrust legislation, which he recommended. (House Doc. No. 625,63rd Cong., 2nd Sess.) In the course of his address the President said: "The business of the country awaits also, has long awaited and has suffered because it could not obtain, further and more explicit legislative definition of the policy and meaning of the existing antitrust laws. Nothing hampers business like uncertainty. Nothing daunts or discourages it like the necessity to take chances, to run the risk of falling under the condemnation of the law before it can make sure just what the law is. Surely we are sufficiently familiar with the actual processes and methods of monopoly and of the many hurtful restraints of trade to make definition possible, at any rate up to the limits of what experience has disclosed. These practices, being now abundantly disclosed, can be explicitly and item by item forbidden by statute in such terms as will practically eliminate uncertainty, the law itself and the penalty being made equally plain. And the business men of the country desire something more than that the menace of legal process in these matters be made explicit and intelligible. They desire the advice, the definite guidance and information which can be supplied by an administrative body, an interstate trade commission. The opinion of the country would instantly approve of such a commission. It would not wish to see it empowered to make terms with monopoly or in any sort to assume control of business, as if the Government made itself responsible. It demands such a commission only as an indispensable instrument of information and publicity, as a clearing house for the facts by which both the public mind and the managers of great business undertakings shall be guided, and as an instrumentality for doing justice to business where the processes of the courts or the natural forces of correction outside the courts are inadequate to adjust the remedy to the wrong in a way that will meet all the equities and circumstances of the case." In consequence Congress enacted the Federal Trade Commission Act, approved September 26, 1914, and the Clayton Act, approved October 15, 1914. They are component parts of a common legislative plan of supplemental antitrust legislation. The Commission Act outlaws all unfair methods of competition from interstate and foreign commerce and directs the Commission to prevent their use. This act I will consider in my next lecture.

[ 18 ]

The Clayton Act is named for its sponsor, the Honorable Henry D. Gayton, Member of Congress from Alabama and Chairman of the House Committee on the Judiciary, at the time. It is entitled "An Act to supplement existing laws against unlawful restraints and monopolies, and for other purposes." It comprises 26 sections. In sections 2 and 3 it defines two unlawful trade practices and prohibits their use. They are, first and in section 2, the practice of making a price discrimination between purchasers where its effect may be to substantially lessen competition or tend to create a monopoly in any line of commerce, subject to stated exceptions; second and in section 3, the practice or making a lease, sale or contract for the sale of goods or of fixing a price therefor or a discount from or a rebate upon such price, on the condition, agreement or understanding that the lessee or purchaser shall not use or deal in the goods of a competitor of the lessor or seller, where the effect of such lease, sale, or contract for sale or such condition, agreement or understanding may be to substantially lessen competition or tend to create a monopoly in any line of commerce. In section 1 1 the Federal Trade Commission is authorized to enforce compliance with sections 2 and 3, except as to common carriers, banks, banking associations and trust companies, by the same procedure as that defined for the enforcement of section 5 of the Commission Act. It is clear that sections 2 and 3 satisfy President Wilson's recommendation of definitive prohibition. The explanation of the selection of these two practices is that they were deemed to be especially offensive because of their common and effective use to suppress competition. But it is not clear how it can be said that these sections satisfy the President's recommendation that the antitrust law be made plain and certain, since their conditional language is as general and therefore as ambiguous as that of the Sherman Act. And, it may be added, the Federal Trade Commission Act does not create the advisory administrative body President Wilson recommended, since it does not empower the Commission to advise business upon the meaning and application of the antitrust law. Moreover, the Clayton Act has not proven to be the entire success anticipated. Section 2, as we shall see, has been practically inoperative. Section 6, providing that nothing contained in the antitrust laws shall be construed to forbid the existence and operation of labor organizations, has been held by the Supreme Court not to exempt such organizations from the prohibition against undue restraint of trade in the Sherman Act. (Duplex Printing Press case, 254 U. S. 443.) Section 7, forbidding a corporation from acquiring the stock of another corporation or of two or more corporations where the effect may be to substantially lessen competition between the former and latter corporations, respectively, etc., has been largely qualified by the decision of the Supreme Court in the Thatcher and Swift cases (272 U.S. 554). In these cases it was held, by a 5 to 4 decision, that the Commission is not empowered to order a corporation to divest itself of a competitor's property and business acquired through illegal stock ownership, if they were acquired prior to the Commission's action. "The result is," the Commission states in its 1928 report, "that a [ 19 ]

corporation may purchase the stock of a competitor in violation of section 7, and if it can use the stock thus acquired to complete the acquisition of the physical assets of the corporation before the Commission files complaint, then the situation is beyond the corrective power of the Commission." The limitation of time does not permit more than the foregoing passing reference to section 3. And section 2 is relatively more important. This because it deals with the most important problem of trade relationship presented by the present-day concentration in the distribution of the ordinary articles of commerce.

II Section 2 reads as follows: "That it shall be unlawful for any person engaged in commerce, in the course of such commerce, either directly or indirectly, to discriminate in price between different purchasers of commodities, which commodities are sold for use, consumption, or resale within the United States or any Territory thereof or the District of Columbia, or any insular possession, or other place under the jurisdiction of the United States, where the effect of such discrimination may be to substantially lessen competition or tend to create a monopoly in any line of commerce: Provided, That nothing herein contained shall prevent discrimination in price between purchasers of commodities on account of differences in the grade, quality, or quantity of the commodity sold, or that makes only due allowance for difference in the cost of selling or transportation, or discrimination in price in the same or different communities made in good faith to meet competition: And provided further, That nothing herein contained shall prevent persons engaged in selling goods, wares, or merchandise in commerce from selecting their own customers in bona fide transactions and not in restraint of trade." This section is manifestly to be construed in the light of the purpose of the Clayton Act and applied to effectuate that purpose. "The Clayton Act," the Supreme Court said in the Standard Fashion case (258 U.S. 346), "as its title and the history of its enactment disclose, was intended to supplement the purpose and effect of other antitrust legislation, principally the Sherman Act of July 2, 1890." The purpose of the Sherman Act, as stated in the first lecture, is to maintain a natural flow of trade and freedom of competition in the channels of interstate and foreign commerce. It is, in effect, to preserve a state of open and free competition in trade. This the Supreme Court plainly declared in the Standard Fashion case: "The construction since regarded as controlling was stated in the Standard Oil Case, 221 U.S. 1, * * * wherein this court construed the act as intended to reach combinations unduly restrictive of the flow of commerce or unduly restrictive of competition. It was said that the act embraced. 'All contracts or acts which were unreasonably restrictive of competitive conditions, either from the nature or character of the contract or act or where the surrounding circumstances were such as to justify the conclusion that they had not been entered into or performed with the legitimate purpose of reasonably forwarding personal interest and de-

[ 20 ]

veloping trade, but on the contrary were of such a character as to give rise to the inference or presumption that they had been entered into or done with the intent to do wrong to the general public and to limit the right of individuals, thus restraining the free flow of commerce and tending to bring about the evils, such as enhancement of prices, which were considered to be against public policy.' " It follows that section 2 is broadly designed to prevent price discrimination between purchasers which involves an unreasonable restriction of competition. And price discrimination between purchasers involves an unreasonable restriction of competition, in the meaning of the antitrust law, if it is made not with the legitimate purpose of reasonably forwarding a proper personal trade interest but on the contrary with the wrongful purpose of restricting competition by others whereby freedom of competition is denied to them. Whether a particular price discrimination does involve an unreasonable restriction of competition is a question of fact to be determined in the light of the attending circumstances. In short, the application of the section, as in the case of all the antitrust laws, is subject to the rule of reason. This is necessarily so, since every price discrimination has some effect upon competition. Hence the Clayton Act, in prohibiting price discrimination between purchasers because it was used and to the extent it is used as a means of undue restraint of trade, seeks to reach and prevent in its incipiency what the Sherman Act embracively outlaws. Or, to repeat the statement in the first lecture, the Clayton Act (with the Commission Act) is directed to nip in the bud the offence defined by the parent Sherman Act. While it is broadly designed to supplement the purpose and effect of the Sherman Act and must be construed accordingly, the Clayton Act in section 2 sets up statutory tests of its own and is its own glossary. This is patent since the Sherman Act prohibits contracts, etc.. "in restraint of trade or commerce," whereas the Clayton Act in section 2 prohibits price discrimination between purchasers "where the effect of such discrimination may be to substantially lessen competition or tend to create a monopoly in any line of commerce." It is necessary, therefore, to construe this last clause which conditions and defines the application of the section. The first question presented is this: what is the meaning of the word "may." The question is answered by the Supreme Court in the Standard Fashion case, wherein it construed the similar clause in section 3. The word "may," as here used, means a "probability" (i.e., a "reasonable probability") —and not a mere "possibility"—of the consequences described. In using this word Congress intended to prevent such price discrimination between purchasers as would, under the circumstances and in the conception of the antitrust law, probably lessen competition, or create an actual tendency to monopoly. That it was not intended to reach every remote lessening of competition is shown in the requirement that such lessening must be substantial. So construed the clause reads : "where the effect of such discrimination may probably be to substantially lessen competition, or create an actual tendency to monopoly in any line of commerce." That is to say, the section is directed [

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to prevent price discrimination between purchasers where its circumstances create the reasonable probability that it is purposed wrongfully to limit or suppress competition and that its consequence will be a substantial lessening of competition or an actual tendency to illegal monopoly. The second question presented is this: what is the meaning of the word "monopoly"? The question was answered in the first lecture. The third question presented is this: what is the meaning of the words "in any line of commerce" ? The question is answered by the Supreme Court in the recent Van Camp case (278 U.S. 245), wherein it ruled that these words mean what they literally say. In that case the court was called upon to decide whether section 2 applies to a price discrimination the effect of which may be to substantially lessen competition, not in the line of commerce in which the discriminator is engaged, but in the line of commerce in which the purchasers from the discriminator are engaged. And the court held that it does. This question arose out of the fact that in the Mennen (288 Fed. 774) and National Biscuit (299 Fed. 733) cases the Circuit Court of Appeals construed the words "in any line of commerce" to mean only the particular line of commerce in which the discriminator is engaged. Hence said cases are to this extent overruled. To quote from the opinion in the Van Camp case: "These facts bring the case within the terms of the statute, unless the words 'in any line of commerce* are to be given a narrower meaning than a literal reading of them conveys. The phrase is comprehensive and means that if the forbidden effect or tendency is produced in one out of all the various lines of commerce, the words 'in any line of commerce' literally are satisfied. The contention is that the words must be confined to the particular line of commerce in which the discriminator is engaged, and that they do not include a different line of commerce in which purchasers from the discriminator are engaged in competition with one another. In support of this contention, we are asked to consider reports of congressional committees and other familiar aids to statutory construction. But the general rule that 'the province of construction lies wholly within the domain of ambiguity,' Hamilton v. Rathbone, 175 U.S. 414 * * is too firmly established by the numerous decisions of this court either to require or permit us to do so. The words being clear, they are decisive. There is nothing to construe. To search elsewhere for a meaning either beyond or short of that which they disclose is to invite the danger, in the one case, of converting what was meant to be open and precise, into a concealed trap for the unsuspecting, or, in the other, of relieving from the grasp of the statute some whom the Legislature definitely meant to include. Decisions of this court, where the letter of the statute was not deemed controlling and the legislative intent was determined by a consideration of circumstances apart from the plain language used, are of rare occurrence and exceptional character, and deal with provisions which, literally applied, offend the moral sense, involve injustice, oppression or absurdity, United States v. Goldenberg, 168 U.S. 95 * * * ; or lead to an unreasonable result, plainly at variance with the policy of the statute as a whole, Osawa v. United States, 260 U.S. 178, * * *. Nothing of this kind [

22

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is to be found in the present case. The fundamental policy of the legislation is that, in respect of persons engaged in the same line of interstate commerce, competition is desirable and that whatever substantially lessens it or tends to create a monopoly in such line of commerce is an evil. Offense against this policy, by a discrimination in prices exacted by the seller from different purchasers of similar goods, is no less dear when it produces the evil in respect of the line of commerce in which they are engaged than when it produces the evil in respect of the line of commerce in which the seller is engaged. In either case, a restraint is put upon 'the freedom of competition in the channels of interstate trade which it has been the purpose of all the anti-trust acts to maintain.' Federal Trade Comm. v. Beech-Nut Co., 257 U.S. 441 * * *. We have not failed carefully to consider Mermen Co. v. Federal Trade Commission (C.C.A.) 288 F. 744 (followed in National Biscuit Co. v. Federal Trade Commission—C.C.A.—299 F. 733), cited as contrary to the conclusion we have reached. The decision in that case was based upon the premise that the statute was ambiguous and required the aid of committee reports, etc., to determine its meaning, a premise which we have rejected as unsound." The Van Camp decision has a large significance. It is significant, first, because it saves the life of section 2. Manifestly the section was practically killed by the Circuit Court of Appeals' construction of it, in view of the resulting evidential difficulty in enforcing it and the fact that complaints of its violation principally come from purchasers. That this is so is proven by the resulting failure of the Commission in the courts. The case is significant, second, because it makes the section run also in favor of purchasers, as it should if it is to be effective, whereby the Commission is empowered to enforce it for their protection and any purchaser injured in his business by an illegal price discrimination is authorized to bring suit to enjoin it and to recover threefold the damages by him so sustained and the cost of suit, including a reasonable attorney's fee. This last is infportant not only because it gives purchasers a private remedy for the denounced wrong but also because it permits vexatious suits by them to intimidate and coerce sellers, regardless of the merit and outcome of the suits. Such suits are to be severely condemned. The case is significant, third, because it will lead to a renewed and vigorous effort by the Commission to enforce the section. Assuming that the Commission and courts can and do overcome the difficulty of its application, later described, I predict that the enforcement of this section will eventually present the most influential application of the antitrust law to business in its trade relationship conception. Ill We now have before us the broad purpose and application of section 2. And since it is only directed against price discrimination involving an unreasonable restriction of competition, there can be no doubt of its constitutionality. What the Supreme Court said in the Standard Oil case upon the constitutionality of the Sherman Act applies with equal force here. We [

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have next to note the further definition of its application in the section. This may be summarily stated as follows: ( 1 ) The section applies only to price discrimination in sale. It does not apply to price discrimination in purchase, against which there is some state law. Hence it does not apply to a lease. {United Shoe Machinery case, 264 Fed. 138, affirmed in 258 U.S. 451.) (2) The section applies only to the seller who makes the price discrimination. It does not apply to the buyer who may induce or compel it, except to the extent he may be otherwise reached under a conspiracy charge. Why the buyer who solicits, induces or compels an illegal price discrimination is not also made subject to the section is difficult to understand. And his exemption operates to undermine whatever value it may have. This defect suggests legislative correction. Compare the drastic law against the inducement of common carrier discrimination. ( 3 ) The section applies only if the discriminator is engaged in interstate commerce, if the discrimination is made in the course of interstate commerce, and if its effect may be to substantially lessen competition or tend to create a monopoly in any line of interstate commerce, as distinguished from intrastate commerce. The latter in subject to state law. Within the field of interstate commerce the section is without limitation as to person, commodity or place. In this it is distinguished from the state law which runs against locality price discrimination. (4) The section applies to an indirect as well as to a direct price discrimination subject to it. Hence its application cannot be avoided by the subterfuge of a payment or an allowance, made separate from the price and its settlement, which" in purpose and effect works the price discrimination forbidden. (5) The section expressly exempts a price discrimination between purchasers based on a difference in the grade, quality or quantity of the commodity sold or on a difference in the cost of selling or transporting it; also a price discrimination between purchasers in the same or different communities made in good faith to meet competition. Hence quantity discounts and price differentials based on any difference in selling cost are expressly declared to be lawful. But it is to be observed that these exemptions cannot be abused to defeat the purpose of the section and its intended application. A price discrimination to meet competition must be made in good faith. A price differential asserted to be based on a difference in selling cost must square with that rule. A quantity discount plan cannot be used to work the discrimination condemned. In this connection I venture to express the opinion that the safest price variation plan, in a legal sense and aside from one based only on a difference in transportation cost, is a quantity discount plan published and open to all purchasers alike. [ 24 ]

Upon this statement of section 2 and its application it is clear that the section does not denounce all price discrimination between purchasers or require a uniform selling price. It has no application to any direct or indirect price discrimination made by the seller with a purely legitimate purpose and for a wholly economic reason arising out of his own business. It has no application to any price discrimination within the exemptions stated. It only applies to a price discrimination otherwise within its stated application and where its circumstances create the reasonable probability that it is purposed wrongfully to lessen competition and that its consequence will be to substantially lessen competition or create an actual tendency to illegal monopoly.

IV Having defined the purpose and application of section 2 it remains to state the particulars of its enforcement. With respect to action by the Commission its secretary in a letter dated November 26, 1929, advises: " T o date the Commission has issued fifty complaints involving Section 2 of the Clayton Act; forty-four of these also cite violation of the Commission's organic act. Ten orders to cease and desist involving Section 2 of the Clayton Act have been entered; all of these cite violation of the Federal Trade Commission Act. Three complaints involving Section 2 of the Clayton Act are now pending; these also cite violation of the Commission Act." It is significant to note that only ten cease and desist orders have been made under this section in the more than fifteen years of its existence. This limited number is principally significant of the deadly effect of the Circuit Court of Appeals' construction of the section in the Mennen and Biscuit cases. It is also significant to note that all the orders and pending complaints under section 2 also involve section 5 of the Commission Act. This fact suggests the conclusion that what section 2 condemns is also within the condemnation of said section 5. The other underlying facts permit of no other conclusion. With respect to the reported cases under section 2 it is to be said that they are 6 in number. 4 involve a private statutory suit and 2 involve an order by the Commission. Of the former, 1 was successful; of the latter, each resulted in a decree reversing the order. The private suit cases were : ( i ) Great Atlantic & Pacific Tea Co. v. Cream of Wheat Co., 227 Fed. 46, affirmed in 224 Fed. 566. This was the first case under the section and decided in 1915. It was held that a branded food manufacturer does not violate the section by refusing sales to a retailer for price cutting. (2) Baran v. Goodyear Tire £if Rubber Co., 256 Fed. 571. This case was decided in 1919 and held that a manufacturer of automobile tires and accessories does not violate the section by selling its products to automobile manufacturers at lower prices than it charges dealers, since such manufacturers and dealers do not compete. ( 3 ) S. S. Kresge Co. v. Champion Spark Plug Co., 3 Fed (2) 415. This case was decided in 1925 and held that the manufacturer of an automobile equipment part does not violate the section by selling said part at less than cost to automobile manufacturers

[ 25 ]

and at a higher price to dealers for replacement sale, since there is no consequent lessening of competition in such sale. (4) Porto Rican American Tobacco Co. v. American Tobacco Co., 30 Fed. (2) 234. This case was decided in 1929 and held that the American Tobacco Company violated the section in selling its Lucky Strike cigarettes at a lower price in Porto Rico than in the United States, since under the attending circumstances this was done with the wrongful purpose of suppressing the Porto Rican Company's competition and the exemptions do not apply. The Commission order cases were : ( 1 ) Mennen Co. v. Federal Trade Commission, 288 Fed. 774, certiorari denied in 262 U.S. 759. This case was decided in 1923 and held that the Mennen Company did not violate section 2 by selling to wholesalers at one price and to retailers at another and by classifying retailer buying organizations as retailers. The decision of the court was apparently based on two grounds. The first ground is that the section does not apply to a price discrimination effective to lessen competition between purchasers from the discriminator, which is the effect alleged here. That the court erred in so construing the section the Van Camp case establishes and we have seen. The second ground is that the Mennen action is within the broad principle of the right of customer selection declared by the Supreme Court in the Colgate case (250 U.S. 300). "In accordance with these opinions we have no doubt that the Mennen Company had the right to refuse to sell to retailers at all, and if it chose to sell to them that it had the right to fix the price at which it would sell to them, and that it was under no obligation to sell to them at the same price it sold to the wholesalers. It did not discriminate as between retailers but sold to all retailers on one and the same scale of prices. And it did not discriminate as between wholesalers, but sold to all wholesalers on one and the same scale of prices. There is nothing unfair in declining to sell to retailers on the same scale of prices that it sold to wholesalers, even though the retailers bought or sought to buy the same quantity the wholesalers bought." (2) National Biscuit Co. v. Federal Trade Commission, 299 Fed. 733, certiorari denied in 266 U.S. 613. This case was decided in 1924 and held that the Biscuit Company did not violate the section by using its quantity discount plan open to chain stores but not to retailers buying in combination. The court apparently based its decision upon its construction of section 2 in the Mennen case, upon the quantity discount exemption, and upon the Colgate case. Because the Supreme Court declined to review the judgment in each of these cases it is res adjudicata. But the Van Camp decision will undoubtedly lead in due course to a reconsideration of the whole question of the application of section 2. V In its legal conception section 2 is unquestionably sound legislation since it is purposed and effective to apply only to price discrimination involving an unreasonable restriction of competition, which price discrimination alone [ 26 ]

should be prohibited. But in its enforcement conception the section presents a difficult problem. The difficulty lies in bringing a price discrimination within the condemnation of the section and at the same time keeping it without the exemptions. This situation has resulted in the suggestion that the section be amended. The amendment suggested is the elimination of the exemption in favor of a price discrimination based on a difference in quantity or selling cost, generally. It is said for this amendment that so long as such an exemption remains in the section it is practically nullified; that as a rule the state locality price discrimination laws exempt only a price discrimination based on a difference in grade, quality or transportation cost. It is clear that this amendment presents serious constitutional and economic questions. Congress has no power to enact any law that is unreasonable in its application or that unduly infringes the right of freedom to contract. It is further clear that this amendment cannot be seriously considered unless and until the underlying economic questions are duly investigated and answered. Their answer will determine both the merit of the amendment and its validity. It has also been suggested that the section be amended by the addition of a provision requiring the publication of terms of sale. This upon the theory that such publication is the most effective preventive of the price discrimination against which the section is directed. And it is pointed out, in support of this amendment, that the trade itself has required such publication by trade practice conference resolutions. VI In its economic conception section 2 was undoubtedly drawn according to established economic pattern. Price variation of some sort and to some extent has always been a universal trade practice. And the price variations exempted were generally accepted as sound economic practices. Moreover, when the section was enacted distribution was pursued along traditional and established trade lines from manufacturer to wholesaler to retailer, and price discrimination was not a general problem. The manufacturer sold to one class of trade at an acceptable price. But when evolution broke down this system of distribution, class distinctions no longer obtained and manufacturers were confronted with large buyers demanding preferential price consideration, price discrimination became an important economic and legal problem. This is the situation today. Broadly speaking there are two opinions in the grocery trade upon a discount by the manufacturer for quantity or for lower selling cost, generally. The one opinion favors it. The argument is this: a primary function of distribution is to reduce its cost and the consumer price; such a discount is effective for that reduction; therefor it should be given. The other opinion is opposed to the discount. The argument is this: while the discount is theoretically sound yet its practice in a strong buyer's market (which we now have) inevitably degenerates into unsound price barter, unjust price dis[

27

]

crimination and uneconomic price competition, which is detrimental to the trade and therefor is against the public interest. It is against the public interest because the public does not benefit by any price reduction at the expense of sound business, just dealing and fair competition. The proponents of this opinion go on to say that the desirable state of distribution is one in which there is an economic competition between manufacturers and between dealers, respectively, effecting the lowest price and the highest distribution service by each in each class, with a single price between the manufacturer and those who purchase from him, insuring fair dealing between buyer and seller, equal opportunity for all buyers and economic competition between them. The single price to be subject to a transportation cost and other incidental economic exception. To these opinions and arguments the consumer bystander listens and then asks: who is right ? And the question should be answered. To answer it requires a due economic investigation. That investigation is now in order.

[ 28 ]

3.

THE FEDERAL TRADE COMMISSION

ACT

A consideration of section 5 and the trade practice conference

procedure

thereunder.

I A s stated in the last lecture the Federal Trade Commission A c t of September 26, 1914, and the Clayton A c t of October 15, 1914, were enacted in pursuance of President Wilson's recommendation of supplemental antitrust legislation, made in his address to Congress on January 20, 1914. T h e recommendation was that Congress definitely outlaw the practices known to be used as means of unlawful restraint of trade and monopoly and create an interstate trade commission as an "instrument of information and publicity, as a clearing house for the facts by which both the public mind and the managers of great business undertakings shall be guided, and as an instrumentality for doing justice to business where the processes of the courts or the natural forces of correction outside the courts are inadequate to adjust the remedy to the wrong in a way that will meet all the equities and circumstances of the case." W e have seen that the Clayton A c t definitely outlaws two trade practices, namely, price discrimination (subject to the stated exceptions) and "tying" sales, contracts and leases, where their effect may be to substantially lessen competition or tend to create a monopoly in any line of interstate or foreign commerce. It also defines illegal intercorporation stock ownership and illegal interlocking corporation directorates. W e have now to consider the Federal Trade Commission A c t . This act is entitled " A n A c t to create a Federal T r a d e Commission, to define its powers and duties, and for other purposes." It comprises 11 sections. It creates a Federal Trade Commission of 5, appointed by the President with the consent of the Senate. N o more than 3 commissioners may be members of the same political party. T h e normal term of office is 7 years. The annual salary is $10,000. No commissioner may engage in any other business, vocation or employment. A n y commissioner may be removed by the President for inefficiency, neglect of duty, or malfeasance in office. Section 5 is the most important section. It declares that unfair methods of competition in interstate and foreign commerce are unlawful and directs the commission to prevent their use. T h i s declaration is the new substantive law contained in the act. Section 6 empowers the commission ( a ) to gather and compile information concerning and to investigate the organization, business, conduct, practices and management of any corporation engaged in such commerce (except banks and common carriers )and its relation to others; ( b ) to require such t 29 ]

corporations to file annual or special reports or answers in writing to specific questions, furnishing to the commission such information as it may require as to the organization, business, conduct, practices, management and relation to others; ( c ) to investigate compliance with final decrees under the antitrust acts, upon its own initiative or upon application by the Attorney General; ( d ) to investigate and report the facts of alleged violations of the antitrust acts by any corporation, upon the direction of the President or either House of Congress ; ( e ) to investigate and make recommendations for the readjustment of the business of any corporation alleged to be violating the antitrust acts in order that it may thereafter maintain its organization, management and conduct of business in accordance with law, upon the application of the Attorney General ; ( f ) to make public such portions of the information obtained by it hereunder, except trade secrets and names of customers, as it shall deem expedient in the public interest : to make annual and special reports to Congress and to submit therewith recommendations for additional legislation : to provide for the publication of its reports and decisions ; ( g ) to classify corporations and to make rules and regulations for the purpose of carrying out the provisions of this a c t ; ( h ) to investigate trade conditions in and with foreign countries where associations, combinations, or practices of manufacturers, merchants or traders, or other conditions, may affect the foreign trade of the United States, and to report to Congress thereon, with such recommendations as it deems advisable. Section 7 authorizes the court to refer a suit in equity under an antitrust act to the commission as a master in chancery to ascertain and report an appropriate form of decree. Section 9 provides that for the purpose of this act the commission, or its duly authorized agent or agents, shall at all reasonable times have access to, for the purpose of examination, and the right to copy any documentary evidence of any corporation being investigated or proceeded against ; that the commission shall have power to require by subpoena the attendance and testimony of witnesses and the production of all such documentary evidence relating to any matter under investigation, etc. Section 10 provides that any officer or employe of the commission w h o shall make public any information obtained by the commission without its authority, unless directed by a court, shall be guilty of a misdemeanor. Upon this statement of the act it is clear that the powers of the commission are broadly these : ( a ) to administer section 5 ; ( b ) to make the investigations, reports and publications defined in section 6 and 7 ; ( c ) to require the reports and answers defined in section 6 ; ( d ) to examine the records of corporations investigated or proceeded against, as provided in section 9 ; ( e ) to classify corporations; ( f ) to recommend additional legislation; and ( g ) to make rules and regulations for carrying out the act. It is also clear that the powers conferred by sections 6 and 7 are expressly or impliedly directed to be exercised to secure compliance with the antitrust acts, as the principal purpose. Sections 6, 7 and 9 will not be further considered at this time other than to note the important decision of the Supreme Court in the case of Federal

[ 30 ]

Trade Commission v. American Tobacco Co., 264 U.S. 298 (1924). This case presented petitions by the commission for writs of mandamus to require two tobacco manufacturers to produce for inspection and copying all customer correspondence for the year 1921. The petitions were brought under section 9 and in alleged pursuance of a senate resolution directing the commission to investigate the tobacco situation with particular reference to market price to producers. The petitions alleged that complaints had been filed with the commission charging the manufacturers, respectively, with using unfair methods of competition, set forth the senate resolution and resolutions by the commission to conduct an investigation under sections 5 and 6 (a) and in pursuance of the senate resolution into the business, conduct and practices of each manufacturer. The District Court denied the petitions and the Supreme Court affirmed the denial. Speaking for the latter court Mr. Justice Holmes said: "The Senate resolution may be laid on one side as it is not based on any alleged violation of the Anti-Trust acts, within the requirement of section 6 (d) of the act. * * * The complaints, as to which the Commission refused definite information to the respondents, and one at least of which, we understand, has been dismissed, also may be disregarded for the moment, since the Commission claims an unlimited right of access to the respondents' papers with reference to the possible existence of practices in violation of section 5. The mere facts of carrying on a commerce not confined within State lines and of being organized as a corporation do not make men's affairs public, as those of a railroad company now may be. * * * Anyone who respects the spirit as well as the letter of the Fourth Amendment would be loath to believe that Congress intended to authorize one of its subordinate agencies to sweep all our traditions into the fire * * *, and to direct fishing expeditions into private papers on the possibility that they may disclose evidence of crime. W e do not discuss the question whether it could do so if it tried, as nothing short of the most explicit language would induce us to attribute to Congress that intent. The interruption of business, the possible revelation of trade secrets, and the expense that compliance with the Commission's wholesale demand would cause are the least considerations. It is contrary to the first principles of justice to allow a search through all the respondents' records, relevant or irrelevant, in the hope that something will turn up. The unwillingness of the Court to sustain such a claim is shown in Harriman v. Interstate Commerce Commission, 211 U.S. 407, * * * and as to correspondence, even in the case of a common carrier, in United States v. Louisville Nashville R.R. Co., 236 U.S. 318 * * *. The question is a different one where the State granting the charter gives its Commission power to inspect. The right of access given by the statute is to documentary evidence—not to all documents, but to such documents as are evidence. The analogies of the law do not allow the party wanting evidence to call for all documents in order to see if they do not contain it. Some ground must be shown for supposing that the documents called for do contain it. Formerly in equity the ground must be found in admissions in the answer. * * * W e assume that the rule to be applied here is more liberal but still a ground must

[ 31 ]

be laid and the ground and the demand must be reasonable. * * * A general subpoena in the form of these petitions would be bad. Some evidence of the materiality of the papers demanded must be produced. * * * In the state case relied on by the Government, the requirement was only to produce books and papers that were relevant to the inquiry. * * * The form of the subpoena was not the question in Wheeler v. United States, 226 U.S. 478 * * *. The demand was not only general but extended to the records and correspondence concerning business done wholly within the State. This is made a distinct ground of objection. We assume for present purposes that even some part of the presumably large mass of papers relating only to intrastate business may be so connected with charges of unfair competition in interstate matters as to be relevant, * * * but that possibility does not warrant a demand for the whole. For all that appears the corporations would have been willing to produce such papers as they conceived to be relevant to the matter in hand. * * * If their judgment upon that matter was not final, at least some evidence must be offered to show that it was wrong. No such evidence is shown. We have considered this case on the general claim of authority put forward by the Commission. The argument for the Government attaches some force to the investigations and proceedings upon which the Commission had entered. The investigations and complaints seem to have been only on hearsay or suspicion—but even if they were induced by substantial evidence under oath the rudimentary principles or justice that we have laid down would apply. We cannot attribute to Congress an intent to defy the Fourth Amendment or even to come so near to doing so as to raise a serious question of constitutional law." See also Federal Trade Commission v. Claire Furnace Co., 274 U.S. 160 (1927). II Section 5 provides: That unfair methods of competition in commerce are hereby declared unlawful. The commission is hereby empowered and directed to prevent persons, partnerships, or corporations, except banks and common carriers subject to the acts to regulate commerce, from using unfair methods of competition in commerce. Whenever the commission shall have reason to believe that any such person, partnership, or corporation has been or is using any unfair method of competition in commerce, and if it shall appear to the commission that a proceeding by it in respect thereof would be to the interest of the public, it shall issue and serve upon such person, partnership, or corporation a complaint stating its charges in that respect and containing a notice of hearing upon a day and at a place therein fixed at least thirty days after the service of said complaint. The person, partnership, or corporation so complained of shall have the right to appear at the place and time so fixed and show cause why an order should not be entered by the commission requiring such person, partnership, or corporation to cease and desist from the violation of the law so charged in said complaint Any person, partnership, or corporation may make application, and upon good cause shown may be allowed by the commission, to intervene and appear in said proceeding by counsel or in person. The testimony in any such proceeding shall be reduced to writing and filed in the office of the commission. If upon such hearing the commission shall be of the opinion that the method of competition in question is prohibited by this act it shall make a report in [ 32 ]

writing in which it shall state its findings as to the facts and shall issue and cause to be served on such person, partnership, or corporation an order requiring such person, partnership, or corporation to cease and desist from using such method of competition. Until a transcript of the record in such hearing shall have been filed in a circuit court of appeals of the United States, as hereinafter provided, the commisson may at any time, upon such notice and in such manner as it shall deem proper, modify or set aside, in whole or in part, any report or any order made or issued by it under this section. If such person, partnership, or corporation fails or neglects to obey such order of the commission while the same is in effect, the commission may apply to the circuit court of appeals of the United States, within any circuit where the method of competition in question was used or where such person, partnership, or corporation resides or carries on business, for the enforcement of its order, and shall certify and file with its application a transcript of the entire record in the proceeding, including all the testimony taken and the report and order of the commission. Upon such filing of the application and transcript the court shall cause notice thereof to be served upon such person, partnership, or corporation and thereupon shall have jurisdiction of the proceeding and of the question determined therein, and shall have power to make and enter upon the pleadings, testimony, and proceedings set forth in such transcript a decree affirming, modifying, or setting aside the order of the commission. The findings of the commission as to the facts, if supported by testimony, shall be conclusive. If either party shall apply to the court for leave to adduce additional evidence, and shall show to the satisfaction of the court that such additional evidence is material and that there were reasonable grounds for the failure to adduce such evidence in the proceeding before the commission, the court may order such additional evidence to be taken before the commission and to be adduced upon the hearing in such manner and upon such terms and conditions as to the court may seem proper. The commission may modify its findings as to the facts, or make new findings, by reason of the additional evidence so taken, and it shall file such modified or new findings, which, if supported by testimony, shall be conclusive, and its recommendation, if any, for the modification or setting aside of its original order with the return of such additional evidence. The judgment and decree of the court shall be final, except that the same shall be subject to review by the Supreme Court upon certiorari as provided in section two hundred and forty of the Judicial Code. Any party required by such order of the commission to cease and desist from using such method of competition may obtain a review of such order in said circuit court of appeals by filing in the court a written petition praying that the order of the commission be set aside. A copy of such petition shall be forthwith served upon the commission, and thereupon the commission forthwith shall certify and file in the court a transcript of the record as hereinbefore provided. Upon the filing of the transcript the court shall have the same jurisdiction to affirm, set aside, or modify the order of the commission as in the case of an application by the commission for the enforcement of its order, and the findings of the commission as to the facts, if supported by testimony, shall in like manner be conclusive. The jurisdiction of the circuit court of appeals of the United States to enforce, set aside, or modify orders of the commission shall be exclusive. Such proceeding in the circuit court of appeals shall be given precedence over other cases pending therein, and shall be in every way expedited. No order of the commission or judgment of the court to enforce the same shall in anywise relieve or absolve any person, partnership, or corporation from any liability under the antitrust act. Complaints, orders, and other processes of the commission under this section may be served by anyone duly authorized by the commission, either ( a ) by delivering a copy thereof to the person to be served, or to a member of the partnership to be served, or the president, secretary, or other executive officer or a director of the corporation to be served; or ( b ) by leaving a copy thereof at the principal office or place of business of such person, partnership, or corporation ; or ( c ) by registering and mailing a copy thereof addressed to such person, partnership, or corporation at his or its principal office or place of business. The verified return by the person so serving said complaint, order, or other process setting forth the manner of said service, shall be proof of the same, and the return post-

[ 33 ]

office receipt for said complaint, order, or other process registered and mailed as aforesaid shall be proof of the service of the same.

Section 5 is not a penal law, since it contains no penalty for its violation or for the violation of an order by the commission. T h e commission has no power itself to enforce its order. T o secure the enforcement of an order the commission must apply to the circuit court of appeals and it is a violation of said court's enforcement decree that is subject to a penalty, elsewhere prescribed and duly effective. In this connection it may be observed that on January 17, 1929, the court imposed its first penalty for contempt of an enforcement decree, a $500 fine. (See 16 Fed. ( 2 ) 1019.) Section 5 is a preventive law, and so states. T h e commission is an administrative body, its action is prophylactic, and the sanction of an order is its authority and the fact that it may be enforced by the court, upon application. T h e framers of the act believed that as a rule a cease and desist order by the commission would be effective in and by itself, because of the circumstances of it. Experience has justified this belief. Only about 10% of the commission's orders have been taken to the court for review. In his dissenting opinion in the Gratz case (253 U . S . 4 2 1 ) Mr. Justice Brandéis defines the character of section 5 in this expressive language: " T h e proceeding is not punitive. T h e complaint is not made with a view to affording compensation for any injury alleged to have resulted from the matter charged, nor with a view of protecting individuals from any such injury in the future. T h e proceeding is strictly a preventive measure taken in the interest of the general public. * * * T h e order is not self-executory. Standing alone it is only informative and advisory. T h e commission cannot enforce it. If not acquiesced in by the respondents, the commission may apply to the circuit court of appeals to enforce it. * * * T h e federal trade commission act created an administrative tribunal * * * Its action was to be prophylactic." Section 5 broadly declares that all unfair methods of competition in interstate and foreign commerce are unlawful. T h e words "unfair methods of competition" are not defined. Definition was proposed and defeated in Congress. It was wisely concluded to make a general declaration. This because unfair methods of competition are multifarious and their comprehensive definition is impracticable; because a general declaration is inclusive and permits each question of its application to be determined on the basis of the attending facts. A s the Supreme Court said in the Beech-Nut case (257 U . S . 4 4 1 ) : " W h a t shall constitute unfair methods of competition denounced by the act, is left without specific definition. Congress deemed it better to leave the subject without precise definition and to have each case determined on its own facts, owing to the multifarious means by which it is sought to effectuate such schemes." A n d in his dissenting opinion in the Gratz case Mr. Justice Brandéis said: "Instead of undertaking to define what practices should be deemed unfair, as had been done in earlier legislation, the act left the determination to the commission. Experience with existing laws had taught that definition, being necessarily rigid would prove embarrassing, [ 34 ]

and if rigorously applied, might involve great hardship. Methods of competition which would be unfair in one industry, under certain circumstances, might, when adopted in another industry or even in the same industry under differet circumstances, be entirely unobjectionable. Furthermore, an enumeration, however comprehensive, of existing methods of unfair competition must necessarily soon prove incomplete, as with new conditions constantly arising novel unfair methods would be devised and developed." It is for the commission, in the first instance, and for the circuit court of appeals (whose judgment is subject to review by the Supreme Court), ultimately, to define what are unfair methods of competition within the meaning of section 5. " T h e words 'unfair methods of competition' are not defined by the statute * * *. It is for the courts, not the commission, ultimately to determine as matter of law what they include." (Gratz case.) " T h e commission, in the first instance, subject to the judicial review provided, has the determination of practices which come within the scope of the act." (Beech-Nut case.) The commission's definition is necessarily subject to court review, since it presents a legal question. On the other hand, the commission's findings as to the facts are conclusive, if supported by the evidence. This distinction indicates the essentially fact-finding character of the commission. The wisdom of the plan of section 5 whereby the commission is empowered to issue a cease and desist order, upon hearing, but is denied the power to enforce the order except through the court and upon its review of the application of the law to the facts, with the commission's findings as to the facts conclusive if supported by the evidence and the court's decision as to the application of the law to such facts in each instance final, is apparent upon the statement. It basically confines the commission to fact finding, gives it the power it needs and should have in the circumstances, and at the same time provides against the abuse of that power. And it makes the section conform to the fundamental principle of " a government of laws and not of men," at the bottom of our political economy. That the court may be relied upon to prevent any abuse of its power by the commission the cases establish. The commission's annual report for the year ended June 30, 1929, states that n o orders by the commission have been taken to the circuit court of appeals for review with the result of a decision for the commission in 34 cases and against the commission in 36 cases. (Petitions f o r review were withdrawn in 8 cases and 32 cases pend.) Of the 10 reported decisions by the Supreme Court upon certiorari, 6 are against the commission, 2 are for the commission and 2 are partially for and partially against the commission. That is to say, the commission has lost over 50% of the cases decided under section 5. This is not surprising since the section contains new law and the application of it is inevitably subject to experiment. It is clear that the words "unfair methods of competition" are to be construed in the light of the purpose of the commission act and to effectuate that purpose. As in the case of section 2 of the Clayton act, section 5 of the commission act sets up its own statutory test, principally contained in the word "unfair." That word requires construction. Manifestly the rule of its con-

[ 35 ]

struction is the purpose of the act. And there is no doubt as to that since the commission act, with the Clayton act, is designed to supplement the purpose and effect of the previous antitrust legislation, principally the Sherman act. This the Supreme Court states in the Beech-Nut case. The purpose of the Sherman act, as we have seen, is to maintain a natural flow of trade and freedom of competition in the channels of interstate and foreign commerce. This purpose it effects by outlawing action involving undue restraint of trade and offensive private monopoly. Hence section 5 is directed to prevent the use of methods which introduce or constitute the means of the restraint of trade and monopoly condemned in the Sherman Act and thus to prevent the latter in their inception. A s so construed, section 5 is unquestionably a valid enactment. (See the discussion of the validity of section 2 of the Clayton act in the preceding lecture. See also 258 Fed. 307 ; 260 Fed. 472 ; 268 Fed. 705 ; 268 Fed. 874 ; 280 Fed. 45 ; 283 Fed. 999.) In short, the Sherman Act is effective to say that there shall be a state of open and free competition in trade, in order that each may have an equal opportunity in it. The Commission Act is effective to say that to have such a state of trade fair methods of competition must be used in it and are therefore required. In his dissenting opinion in the Eastman Kodak case (274 U . S . 688) Mr. Justice Stone said : "That ruinous competition or the threat of it when the aim is monopoly or the suppression of competition may be the dominant factor in a violation of the Sherman Act is no longer fairly open to question. In determining the meaning of 'unfair methods of competition' it should be borne in mind that the trade commission's function is to discourage certain trade tendencies before violation of the Sherman Act have occurred. The advised use of the phrase 'unfair methods of competition' for the more familiar 'unfair competition' of the common law indicates the unmistakable congressional intent to confer on the commission the power, subject of course to the judicial review provided for in the act, to prevent unfair trade practices not included in the prohibition of the Sherman Act and of the common law." In his dissenting opinion in the Gratz case Mr. Justice Brandeis said : " T h e proceeding is thus a novelty. It is a new device in administrative machinery, introduced by Congress in the year 1914, in the hope thereby of remedying conditions in business which a great majority of the American people regarded as menancing the general welfare, and which for more than a generation they had vainly attempted to remedy by the ordinary processes of law. It was believed that widespread and growing concentration in industry and commerce restrained trade, and that monopolies were acquiring increasing control of business. Legislation designed to arrest the movement and to secure disintegration of existing combinations had been enacted by some of the states as early as 1889. In 1890 Congress passed the Sherman L a w * * *. It was followed by much legislation in the states and many official investigations. Between 1906 and 1913 reports were made by the Federal Bureau of Corporations of its investigations into the petroleum industry, the tobacco industry, the steel industry, and the farm implement industry. A special committee of Congress investigated the affairs of the United States Steel Cor-

[ 36 ]

poration. And in 1911 this court rendered its decision in Standard Oil Co. v. United States, 221 U.S. 1, * * * and in the American Tobacco Co. v. United States, 221 U.S. 106, * * *. The conviction became general in America, that the legislation of the past had been largely ineffective. There was general agreement that further legislation was desirable. But there was a clear division of opinion as to what its character should be. Many believed that concentration (called by its opponents monopoly) was inevtitable and desirable ; and these desired that concentration should be recognized by law and be regulated. Others believed that concentration was a source of evil; that existing combinations could be disintegrated, if only the judicial machinery were perfected; and that further concentration could be averted by providing additional remedies, and particularly through regulating competition. The latter view prevailed in the Sixty-Third Congress. The Clayton Act (Act. Oct. 15, 1914, c. 323,38 Stat. 730) was framed largely with a view of making more effective the remedies given by the Sherman law. The Federal Trade Commission Act (Act Sept. 26, 1914, c. 3 1 1 , 38 Stat. 717) created an administrative tribunal, largely with a view to regulating competition. Many of the duties imposed upon the Trade Commission had been theretofore performed by the Bureau of Corporations. That which was in essence new legislation was the power conferred by section 5. The belief was widespread that the great trusts had acquired their power, in the main, through destroying or overreaching their weaker rivals by resort to unfair practices. As Standard Oil rebates led to the creation of the Interstate Commerce Commission, other unfair methods of competition, which the investigations of the trust had laid bare, led to the creation of the Federal Trade Commission. It was hoped that, as the former had substantially eliminated rebates, the latter might put an end to all other unfair trade practices, and that it might prove possible thereby to preserve the competitive system. It was a new experiment on old lines; and the machinery employed was substantially similar. In undertaking to regulate competition through the Trade Commission, Congress (besides resorting to administrative as distinguished from judicial machinery) departed in two important respects from the methods and measures theretofore applied in dealing with trusts and restraints of trade: ( 1 ) Instead of attempting to inflict punishment for having done prohibited acts, instead of enjoining the continuance of prohibited combinations and compelling disintegration of those formed in violation of law, the act undertook to preserve competition through supervisory action of the commission. The potency of accomplished facts had already been demonstrated. The task of the commission was to protect competitive business from further inroads by monopoly. It was to be ever vigilant. If it discovered that any business concern had used a practice which would be likely to result in public injury—because in its nature it would tend to aid or develop into a restraint of trade—the commission was directed to intervene, before any act should be done or condition arise violative of the Anti-Trust Act. And it should do this by filing a complaint with a view to a thorough investigation; and, if need be, the issue of an order. Its action was to be pro[ 37 ]

phylactic. Its purpose in respect to restraints of trade was prevention of diseased business conditions, not cure." It follows that " u n f a i r methods of competition," within the meaning of section 5, are methods of competition which, either by reason of their character or under the circumstances of their use, have a dangerous tendency wrongfully to interfere or to wrongfully interfere with the natural flow of trade and freedom of competition in the channels of interstate and foreign commerce. Methods which are inherently wrongful because opposed to good business morals, such as those characterized by fraud, deception and oppression, are manifestly within the classification of the section. Likewise methods are within its classification if, while they are not inherently wrongful, the circumstances of their use create the reasonable probability that they are purposed wrongfully to lessen competiton and have a dangerous tendency to do so. This construction of section 5 the Supreme Court affirmed in the Gratz case. " T h e y (the words 'unfair methods of competition') are clearly inapplicable to practices never heretofore regarded as opposed to good morals because characterized by deception, bad faith, fraud or oppression, or as against public policy because of their dangerous tendencies unduly to hinder competition or create monopoly." Upon this analysis it is apparent that the practices definitively outlawed by sections 2 and 3 of the Clayton A c t are within the condemnation of section 5 of the commission act. Hence there is duplication of law to this extent. There is no reason for it, other than that of emphasis, since all three sections are administered by the commission. It also follows that section 5 does not confer any power upon the commission to regulate business in its purely economic conception or in its normal legitimate working. A n d the Supreme Court has had occasion to say so. " T h e powers of the commission are limited by the statute. It has no general authority to compel competitors to a common level, to interfere with ordinary business methods or to prescribe arbitrary standards f o r those engaged in the conflict for advantage called competition. T h e great purpose of both statutes was to advance the public interest by securing fair opportunity for the play of the contending forces ordinarily engendered by an honest desire for gain. A n d to this end it is essential that those who adventure their time, skill, and capital should have large freedom of action in the conduct of their own affairs." (Sinclair case, 261 U . S . 463.) " T h e act was certainly not intended to fetter free or fair competition as commonly understood and practised by honorable opponents in trade." (Gratz case.) "Effective competition requires that traders have large freedom of action when conducting their own affairs. Success alone does not show reprehensible methods although it may increase or render insuperable the difficulties which rivals must face." (Curtis case, 260 U . S . 568.) In the recent Klesner case the Supreme Court refers to the fact that in the performance of its administrative duties under section 5 the commission incidentally exercises the functions of both prosecutor and judge. A n d this fact gives rise to the severest criticism of the commission. It is said that

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under such circumstances the commission cannot act impartially and as intended. Its failure in more than 50% of the decided cases is cited as proof. In my opinion the criticism is not sound. In the first place the commission is required to exercise these functions to administer the section. In the second place their exercise is wholly incidental to the commission's performance of its primary administrative duties. It is primarily a fact-finding agency, as hereinbefore indicated. In the third place whatever order the commission may issue in the exercise of these functions is subject to court review and confirmation. Ip the fourth place a similar combination of functions is common to other administrative bodies. In illustration: the Interstate Commerce Commission, the United States Tariff Commission, the Federal Reserve Board, the Food, Drug and Insecticide Administration, the Bureau of Internal Revenue, and the Bureau of Pensions. Whatever want of success the commission has had in the courts is not due to its exercise of the functions stated, but to its misinterpretation of the declaration in the section. My own experience in proceedings under the section indicates a tendency by the commission at times to overemphasize its prosecution function and to underemphasize its primary fact-finding character. This tendency should be checked. Ill The commission's procedure under section 5 to prevent the use of unfair methods of competition in interstate and foreign commerce, is threefold. It is by formal proceeding or by stipulation or by trade practice conference. The formal proceeding is defined in the section. It provides that whenever the commission shall have reason to believe that any person has been or is using an unfair method of competition in such commerce and if it shall appear to the commission that a proceeding by it in respect thereof would be to the interest of the public; it shall issue and serve upon such person a complaint stating its charges and containing notice of a hearing; that if upon the hearing the commission shall be of the opinion that the method is prohibited by the act, it shall make a written report of its findings as to the facts and issue a cease and desist order to the respondent. It also provides that if the respondent fails or neglects to obey the order the commission may apply to the circuit court of appeals to enforce it; that the respondent may obtain a review of the order by said court upon petition to it; that the judgmen of said court is in each instance subject to review by the Supreme Court, upon certiorari. It will be noted that a formal proceeding is mandatory under the circumstances described. It will be further noted that the commission is not authorized to institute a formal proceeding unless it is in the public interest, as distinguished from a private interest. Hence the commission cannot use this proceeding to settle a purely private controversy. This the recent Klesner case, decided on October 19, 1929, establishes. In that case the Supreme Court held that an order directing a Washington interior decorator to dis[ 39 ]

continue the use of the name "shade shop" to identify his business, which name he adopted as a result of his controversy with another who used the same name and to spite him, must be set aside because the proceeding was not in the public interest. Speaking for the court Mr. Justice Brandeis said: "Section 5 of the Federal Trade Commission Act does not provide private persons with an administrative remedy for private wrongs. The formal complaint is brought in the commission's name; the prosecution is wholly that of the government; and it bears the entire expense of the prosecution * * *. But to justify the Commission in filing a complaint under section 5, the purpose must be protection of the public. Public interest may exist although the practice deemed unfair does not violate any private right. * * * In determining whether a proposed proceeding will be in the public interest the commission exercises a broad discretion. * * * T o justify filing a complaint the public interest must be specific and substantial. Often it is so, because the unfair method employed threatens the existence of present or potential competition. Sometimes, because the unfair method is being employed under circumstances which involve flagrant oppression of the weak by the strong. Sometimes, because, although the aggregate of the loss entailed may be so serious and widespread as to make the matter one of public consequence, no private suit would be brought to stop the unfair conduct, since the loss to each of the individuals affected is too small to warrant it. The alleged unfair competition here complained of arose out of a controversy essentially private in nature. * * * the proceeding was not one in the interest of the public." It is the practice of the commission, subject to exception in its discretion, to grant the respondent an informal hearing before a compliant is issued, whereby he is afforded an opportunity to show cause why the complaint should not issue. This is a wise and constructive practice. On December 2, 1929, the commission advised that to date 1725 complaints have been issued, resulting in 572 orders of dismissal and 900 orders to cease and desist. In comment upon the formal proceeding I may say that the commission is at times dilatory in prosecuting a formal proceeding instituted; that the act should be amended to contain the usual rule of statutory limitation and to require the commission to file a written opinion in support of each final order by it, which it does not now do. As to dilatory action by the commission, I may cite the fact that I am now defending against a formal proceeding instituted in 1925 in which the hearing was not held until 1929. The conduct principally complained of was pursued in 1922. The first amendment speaks for itself. A s to the second amendment, it is in the public interest to require such a written opinion by the commission. The respondent is entitled to know all the reasons in fact and law for the cease and desist order against him; the court should know them, when the order is before it for review; and the public is entitled to know them. It is intended that the opinion shall define the principles underlying the order. And their definition will be an influence for the due administration of the act and a deterrent against its misapplication.

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The stipulation procedure is not defined in the section. It was devised by the commission upon its own motion. Its authority must be implied. What is later said upon the authority of the conference procedure applies equally here. Certainly business will not challenge the authority of the stipulation procedure, which it long advocated and generally endorses. This procedure is informal. It is used when the commission believes that a method before it violates the act, if the commission is of the opinion that the public interest does not require a formal proceeding, and the respondent is willing to stipulate the facts and formally agree to discontinue the method. In stating this procedure it should be again emphasized that any preventive action by the commission under section 5 must be in the public, as distinguished from a private interest. And it should be noted that if the respondent violates his agreement, the commission is free to institute a formal proceeding against him and to apply for a court enforcement of the resulting order. On December 3, 1929, the commission advised that to date 506 stipulations have been made. The wisdom and value of the stipulation procedure are self-evident. It means an expeditious, effective and economical administration of the section; it accomplishes an immediate discontinuance of the method; it avoids the time, effort and expense of a formal proceeding; it proportionately reduces the number of such proceedings. The monetary saving is indicated by the fact that the estimated average cost of a formal proceeding to the commission is $2500, whereas that of a stipulation procedure is less than $500. T o the respondent this procedure has the additional value that it avoids the personal publicity of a formal proceeding. The stipulation publication is impersonal. The trade practice conference procedure is likewise not defined in section 5. It also was devised by the commission upon its own motion. Its implied authority is apparent, as hereinafter indicated. Its purpose is to encourage and enable industry to self-eliminate unfair methods by conference and agreement, to the extent the antitrust law permits such an agreement, with the commission helping it to do so to the extent the commission is empowered to act in the circumstances. The procedure is as follows. Upon a representative application by an industry for a trade practice conference the commission calls it. It is a purely voluntary conference open to all members of the industry. A commissioner presides over it. At the conference the representatives of the industry who are present, upon discussion, adopt resolutions defining unfair methods used in it, and perhaps condemning and affirming other methods. Thereupon the commission reviews the resolutions. It rejects any resolution believed to be against the public interest or contrary to the public policy declared by the antitrust acts. It may revise a resolution to improve its form. The acceptable resolutions it arranges as rules and divides them into two groups. The Group I rules are affirmatively approved by it. This means that they define unfair methods deemed by the commission to violate the act, wherefore it will enforce such rules. The Group I I rules are accepted as expressions of the industry. This means that they are not [ 41 ]

deemed by the commission to be within its enforcement power, either because of their form or substance or both. The commission then publishes the rules and submits to each member of the industry for signature a written agreement to abide by such rules (in both groups) in consideration of like action by others in the industry. It is noted that the agreement is with the commission. The trade practice conference was originally known as a "trade practice submittal." The first conference was held in 1919. Its conception arose out of the commission's investigation of an industry which disclosed that certain unfair methods were generally used in it, that a restraining order against the members listed for complaint would place them at a competitive disadvantage, that it was more desirable and effective to cooperate with the industry for a common discontinuance of the methods than to proceed separately against the individual members of the industry to prevent their respective use of such methods. The success of this conference led to others. Thir success confirmed the value of the procedure and it became a fixed policy in 1926 when the commission organized a division of trade practice conferences. The conference record is this: 81 conferences held, 1 3 approved and pending. 1 in 1 9 1 9 ; 8 in 1920; none in 1 9 2 1 ; 2 in 1 9 2 2 ; 2 in 1 9 2 3 ; 3 in 1924; 4 in 1925 ; 4 in 1926; 7 in 1 9 2 7 ; 15 in 1928; 37 in 1929. These figures evidence the increasing business interest in and use of conference procedure. And a statement of the industries which have held such a conference is indicative of the importance of this procedure. While section 5 contains no reference to the conference procedure the commission's authority to devise and use it to prevent illegal methods may be reasonably implied. This because the section broadly directs and empowers the commission to prevent the use of all unfair methods of competition in interstate and foreign commerce; because section 6 empowers the commission to make rules and regulations to carry out the provisions of the act. The opposing argument is that section 5 expressly defines but one procedure to administer it, the formal proceeding, and thiis by implication excludes any other. This construction is rejected because it limits the broad powers which the act confers upon the commission; because the section should be liberally construed to accomplish its great purpose. The act is not penal and its strict construction is not required. But since the question is debatable the act should be amended expressly to authorize the conference (and also the stipulation) procedure. A s a matter of public policy the procedure used to administer an act of this importance should be defined in it. Especially is this true in the case of a procedure largely relied upon. IV The trade practice conference is the most constructive and potentially the most effective procedure used by the commission. It is the most constructive procedure because it substitutes cooperation with business for what is in effect the prosecution of it; because it encourages and promotes self[ 42 ]

regulation by business. By self-regulation alone can the purpose of the act be most effectively realized. It is potentially the most effective procedure because it is directed to secure a general, as distinguished from an individual, discontinuance of unfair methods; because it is used to promote the discontinuance of all uneconomic and unethical methods, whether illegal or not. In short, the trade practice conference procedure presents a practical and safe plan of self-regulation and a preventive of commission proceeding and government regulation otherwise required. If and to the extent it fails, the fault is not in the procedure or in the commission. It is in business itself. The commission can do no more than to offer business the opportunity and means of self-regulation. And it should do no less.

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4- C O N C L U S I O N I I began this series of lectures with a broad statement of business concentration in the grocery industry. I did so f o r several reasons. I am professionally affiliated with this industry as general counsel for the Associated Grocery Manufacturers of America, the National Association of Retail Grocers, and prominent grocery manufacturers, individually; it is the most important of all our industries in character and volume; it is the pioneer and leader in distribution business concentration; its business concentration is indicative of general business concentration. I did so for the reason, in particular, of introducing a broad study of the principal antitrust acts—the Sherman, Clayton and Commission Acts—in their application to business concentration and the resulting m a j o r problems of trade relationship. As to the Sherman Act, I undertook to answer the primary legal question presented by business concentration, namely, what is illegal monopoly ? In answering it I pointed out that business does not offend against this act merely because it is big, no matter how big it may b e ; that it only offends against the act if and to the extent it uses wrongful conduct involving undue restraint of trade or offensive private monopoly. I suggested that this act and similar state laws be amended by the addition of a declaration that it shall be lawful to take any business or trade action the purpose and effect of which shall be to promote constructive competition. This suggestion is based on two facts, first, the public is only interested t o have constructive competition; second, the act and similar state laws are incidentally effective to prevent constructive cooperative action which has no other purpose and effect than to promote constructive competition. T h e explanation of the second fact is this: such legislation is directed to maintain a state of open and free competition in t r a d e ; it does not distinguish between destructive and constructive competition; hence it prevents cooperative trade action limiting competition, notwithstanding it is only limited to the extent of eliminating destructive competition and promoting constructive competition. T h e significance of such an amendment is evidenced by the fact that the circumstances of modern business, with its interrelated and interdependent interests, induce constructive self-regulation to eliminate destructive competition and the public benefits accordingly; also by the fact that small business is compelled to take cooperative action to meet a concentrated business competition, action having no other purpose and effect than to preserve a state of competition and to promote constructive competition. In suggesting this amendment I stated that there is precedent for it. T h e California

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antitrust law now contains such a declaration, drawn in even broader language. As to the Clayton Act, I undertook to define the application of section 2, in particular, which outlaws certain price discrimination. This because price discrimination is a major problem of intertrade relationship presented by distribution business concentration. I drew attention to the exemptions in the section permitting a price differential based on a difference in grade, quality or quantity of product or on a difference in the cost of selling and transporting it or one made in good faith to meet competition. I discussed the suggested amendment of the section to eliminate the exemption in favor of a quantity and selling cost differential and indicated that it raises important economic questions that must be duly investigated and answered before any such amendment can be properly considered. A s to the Commission Act, I undertook to define the application of section 5, in particular, which outlaws unfair methods of competition. This because such methods are a major problem of competitive relationship presented by business concentration in both manufacture and distribution. I suggested several amendments of the section for its improvement and outlined the three methods of procedure by the commission under it. I emphasized the opportunity for effective and safe self-regulation, within the limitations of the Sherman Act, offered by the trade practice conference procedure, the greatest opportunity for self-regulation that has yet been offered to American business, in my opinion. The importance of this opportunity is evidenced by the essential character and public value of constructive self-regulation in business. Having completed this broad study we are now back where we started, contemplating business concentration as an established fact. And I will conclude these lectures by stating the fundamental principle of public policy relating to the ordinary business of trade and its regulation. II The principle is essentially this: such business must not be so concentrated or conducted in itself or regulated by statute as to deny or impair the basic individual right of an equal opportunity and freedom in trade guaranteed by our free institutions. This basic right is a common law right. The people of the United States have made it a constitutional right. It is one of the great rights of individual liberty the Constitution of the United States was ordained to maintain, in order to establish justice, secure the blessings of liberty for ourselves and our posterity, and to promote the general welfare. The Fifth Amendment protects this right from undue infringement by federal statute. The Fourteenth Amendment protects it from undue infringement by state statute. The antitrust acts are designed to protect it from undue infringement in the course of trade. Manifestly it is the natural and an essential right of a free people. Manifestly its security is a paramount concern of a government directed to preserve indi[ 45 ]

vidua! liberty and to enhance individual happiness and welfare. It is subject only to the limitations necessarily imposed by the equal right of others and reasonably required in the general interest. The right of an equal opportunity and freedom in trade is the very first consideration in our economic order and at the bottom of it. All that we economically are or hope to be, we owe to its existence. It means an equal opportunity for all in the daily race of life and special privilege to none. It means that each has an equal chance to make the most of himself and his opportunity, however humble may be his birth or however modest may be his circumstances. It means a square deal to the common man and the masses. It means economic justice to the smaller and weaker. It means hope for him who aspires and security for him who succeeds. It means full play for personal initiative and individual ability. It calls to the genius of the people for its exercise and realization. Consequently so long as the door of an equal opportunity and freedom in trade is kept open for all to enter we may look to the future with confidence and be reasonably assured that the people in their wisdom will duly solve whatever economic and social problems arise, however difficult and complex they may be, and will duly work out their own rightful destiny. It is clear that to preserve this right, in its practical conception, the wrongful trade abuse of it must be prevented and a state of open, free and fair competition must be maintained. And it was to prevent such abuse and to maintain such a state of competition that the antitrust acts were enacted. Their enactment was occasioned by concentration in business and the wrongful abuse of resulting trade power. The Sherman Act outlaws private monopoly that is intolerable and excludes all competition; also restraint of trade that unduly interferes with the natural flow of trade and freedom of competition in the channels of the commerce subject to the act. The main cause leading to its enactment, as has been stated, was the thought that it was required by the multiplied organization of combinations known as trusts to prevent their wrongful abuse of resulting dominating trade power, whereby freedom of competition is lessened or suppressed to the detriment of the individual and the general public interest. But the experience of the enforcement of the act disclosed that it was neither sufficient nor wise to await the development of undue restraint of trade and offensive private monopoly to reach and stop them; that such restraint and monopoly should be prevented in their inception by forbidding the use of the principal means to effect them, namely, unfair methods of competition. Hence the Commission and Clayton Acts were enacted, outlawing such methods in general and particular. Undoubtedly the antitrust law is within the constitutional requirement of reasonable legislation, since it only prohibits wrongful conduct. And the Supreme Court has so held. Undoubtedly this law is in harmony with the traditional legislative policy of a free government, since it otherwise leaves business free to develop and take care of itself. It is also clear that to preserve this right of an equal opportunity and freedom in the ordinary business of trade, for its intended individual reali-

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zation, the government must not be permitted either to engage in such business—subject to any necessary exception—or to control it beyond regulation reasonably advisable or necessary in the general interest. The Fifth and Fourteenth Amendments are effective to guarantee that. Manifestly government competition in private business—subject to the exception stated —is inconsistent with individual opportunity in it. Manifestly trade freedom does not exist in that business if its exercise is enslaved by government regulation beyond the limitation stated. What is reasonable regulation is a question of fact to be determined in the light of the circumstances of each case. Regulation to prevent wrongful conduct or to protect the public health is patently reasonable, in principle. Another situation is presented by a business of a public character, such as a public utility, which is reasonably and customarily subject to more or less government control. It follows that the suggested repeal of the federal antitrust acts and the substitution of a law placing all interstate corporate business under government license and control offends against the spirit, purpose and assurance of our free institutions. In my opinion, there is no justification for it in principle or fact. This aside from any constitutional question. I cannot imagine anything worse for ordinary private business than a bureaucratic control of it. It is further clear that the existence of the right of an equal opportunity and freedom in trade naturally and inevitably results in its exercise in pursuance of the economic opportunity presented and its realization in proportion to that opportunity. That is to say, if the opportunity is small, small business results. I f it is large, large business results. I f it is local, local business results. I f it is national, national business results. I f it is international, international business results. In the earlier days of our history when the population was sparse, sectional communication and transportation were difficult, and the community was a self-contained unit, all business was small and local. But as the population increased and sectional communication and transportation became practical, the manufacturers' market expanded accordingly. In the grocery industry this expansion was permitted and encouraged by the development of canned and packaged foods. Today the manufacturers' market is subject to no geographical limitation and their domestic market is measured by the purchasing capacity of over one hundred million people enjoying unprecedented prosperity. The consequence is great business concentration in manufacture represented by manufacturing institutions the names of which are household words. In contradistinction, the retail business is and always will be essentially local in character. But in the course of time it was found advantageous to operate a multiple retail store plan. The success of the plan led to its extension and the development of the chain store systems familiar to all. It also induced the organization of competing retailers for cooperative buying and selling. The consequence is great business concentration in distribution. In each instance the concentration is basically the economic consequence of economic opportunity realized by the exercise of the individual right of an equal opportunity and freedom in trade. Concentration by business consolidation is supplemental.

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COLUMBIA UNIVERSITY PRESS COLUMBIA UNIVERSITY NEW YORK

Foreign

Agent

OXFORD UNIVERSITY PRESS H U M P H R E Y MILFORD AMEN HOUSE, LONDON, E. C.