FTC Comment to the Hon. Strom Thurmond Concerning S. 1445, The Retail Competition Enforcement Act of 1985

FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
OffiCE OF
THE CHAIRMAN
February 	14, 	1986
Honorable 	Strom 	Thurmond
Chairman
Committee 	on 	the 	Judiciary
United 	States 	Senate
Washington, 	D.C. 	20510
Dear 	Mr. 	Chairman:
The 	Federal 	Trade 	Commission 	welcomes 	the 	opportunity 	to
comment 	on 	S. 	1445, 	"The 	Retail 	Competition 	Enforcement 	Act 	of
1985." 	S. 	1445 	would 	amend 	the 	Sherman 	Act 	by 	providing:
An 	agreement 	between 	a 	seller 	and 	one 	or 	more
competing 	resellers 	to 	fix 	resale 	prices 	or 	to
terminate, 	~efuse to 	supply, 	or 	fix 	the 	prices
of 	another 	reseller 	in order 	to 	3~oid price
competition 	shall 	constitute 	a 	contract,
combination, 	or 	conspiracy 	in 	violation 	of
section 	1 	of 	this 	Act. 	Such 	an 	agre~ment may
be 	inferred 	from 	the 	termination 	or 	refusal 	to
supply 	a 	reseller 	following 	complaints 	by 	one
or 	more 	resellers 	concerning 	price
competition.
The 	Commission 	strongly 	opposes 	the 	enactment 	of 	S. 	1445,
designed 	to 	overturn 	a 	recent 	ruling 	by 	the 	Supreme 	Court 	in
Monsanto 	Co. 	v. 	Sprav-Rite 	Service 	Corporation,l! 	because 	it
would 	have 	adverse 	consequences 	for 	competition, 	economic
efficiency, 	and 	consumer 	welfare. 	More 	specifically, 	we 	have 	two
concerns 	a~out the 	bill's 	proposed 	conspiracy 	standard. 	First,
it 	permits 	a 	jury 	to 	infer 	conspira8y 	from 	potentially 	pro-
competitive 	communications. 	Second, 	it 	provides 	an 	incentive 	for
manufacturers 	to 	adopt 	different 	methods 	of 	distribution 	even
when 	~hese would 	oth~rwise not 	be 	efficient. 	In 	addition, 	the
bill 	in 	its 	present 	form 	raises 	the 	question 	of 	whether 	its
effect 	would 	be 	to 	alter 	vertical 	restraints 	law 	substantially
beyond 	the 	stated 	intentions 	of 	its 	original 	sponsor.
An 	example 	will 	illustrate 	that 	manufacturers 	and 	resellers
may 	have 	legitimate 	reasons 	to 	exchange 	information, 	not 	only
about 	price, 	but 	also 	about 	the 	reception 	of 	products 	in 	the
y 	465 	U.S. 	752 	(1984). 	The 	intent 	to 	overturn 	!'10nsanto 	was 	the
stated 	reason 	for 	introduction 	of 	the 	bill 	by 	its 	sponsor, 	Senator
Metzenbaum. 	Congressional 	Record, 	July 	16, 	1985, 	S. 	9579.

'. 	' .. 	-,
Honorable 	Strom Thurmond
market. 	Suppose 	a 	ski 	equipment 	manufacturer 	questions 	one 	of
its 	dealers 	about 	the 	dealer's 	declining 	sales. 	The 	dealer
responds:
First 	we 	have 	the 	problem 	with 	dealers 	who
sell 	the 	equipment 	without 	seeing 	that 	it 	fits
the 	customer 	or 	instructing 	the 	customer 	on
how 	to 	use 	it. 	In 	this 	business, 	if 	you 	donlt
give 	proper 	fitting 	or 	instructions 	the
customer 	might 	break 	a 	leg. 	Then 	you 	or 	I 	can
be 	sued. 	Another 	problem 	is 	the 	customer 	who
comes 	in 	end 	finds 	out 	what 	equipment 	is 	best,
receives 	instructions 	on 	its 	use, 	then 	buys 	at
some 	place 	like 	a 	temporary 	booth 	set 	up 	in 	a
shopping 	center 	from 	a 	seller 	he 	won't 	find
again. 	Providing 	service 	costs 	me 	money.
Dealers 	who 	donlt 	provide 	services 	can
undercut 	me 	because 	they 	don't 	have 	to 	hire
the 	number 	of 	trained 	salespersons 	necessary
to 	give 	custtomel s 	personal 	attention.
Here's 	what 	you 	should 	do. 	If 	you 	want 	to
improve 	your 	sales 	and 	my 	sales, 	try 	upgrading
the 	image 	of 	this 	product. 	You 	should 	find
and 	maintain 	only 	those 	dealerships 	that
provide 	good 	service 	and 	show 	this 	off 	as 	a
first-class, 	high-quality 	product.
2
\
At 	this 	point, 	the 	manufacturer 	wishes 	the 	dealer 	luck 	and 	walks
away. 	Several 	weeks 	later, 	the 	manufacturer 	terminates 	a 	number
of 	discounting 	dealers.
Under 	the 	proposed 	legislation, 	the 	above 	conversation,
coupled 	with 	a 	dealer 	termination, 	would 	permit 	an 	inference 	of
conspiracy. 	Yet 	the 	conversation 	is 	pro-competitive. 	The 	dealer
,is 	providing 	the 	manufacturer 	with 	important 	information 	about
'certain 	facts 	of 	retailing 	-- 	it 	costs 	money 	to 	provide 	valuable
services, 	and 	service-oriented 	dealers 	need 	sales 	and 	profit
margins 	sufficient 	to 	provide 	those 	services 	and 	hire 	trained
sales 	personnel. 	Moreover, 	the 	dealer 	is 	suggesting 	a 	marketing
strategy 	-- 	to 	concentrate 	on 	the 	upscale 	niche 	in 	the 	market
that 	might 	be 	effective 	in 	boosting 	sales. 	The 	dealer 	also
correctly 	notes 	that 	if 	these 	services 	are 	not 	provided, 	the
dealer 	and 	the 	manufacturer 	may 	be 	subject 	to 	tort 	liability. 	In
this 	case, 	it 	mig~t make 	perfect 	sense 	for 	the 	manufacturer 	to
protect 	his 	service-oriented 	dealers 	and 	minimize 	his 	own 	product
liability 	risk 	by 	terminating 	dealers 	that 	transship 	products 	to
dealers 	that 	provide 	no 	service.
Distributors 	are 	an 	important 	source 	of 	information 	for
manufacturers. 	As 	the 	Supreme 	Court 	noted 	in 	Monsanto, 	one

· ..
Honorable 	Strom Thurmond 	3
importanl~ 	type 	of 	information 	is 	simply 	how 	best 	"to 	assure 	that
their 	product 	will 	reach 	the 	consumer 	persuasively 	and
efficiently. fly 	Further, 	as 	the 	Court 	noted, 	manufacturers 	have
a 	legitimate 	interest 	in 	ensuring 	that 	their 	distributors 	earn
sufficient 	profit 	to 	pay 	for 	programs 	such 	as 	hiring 	and 	training
additional 	salesmen, 	or 	demonstrating 	the 	technical 	features 	of 	a
product.1/ 	To 	ensure 	this, 	the 	manufacturer 	may 	need 	to 	prevent
interference 	from 	"free 	riders."
The 	Commission 	recently 	endorsed 	precisely 	these 	principles
in 	an 	order 	granting 	a 	petition 	to 	modify 	a 	consent 	agreement
filed 	by 	Salomon/North 	America, 	a 	skiing 	equipment
m2nufacturer.~ 	The 	original 	order, 	inter 	alia, 	prohibited
Salomon 	from 	restricting 	"the 	class 	or 	type 	of 	customer" 	to 	whom
its 	dealers 	could 	sell 	its 	products 	(transshipment 	restrictions),
and 	from 	restricting 	the 	"site 	or 	location" 	at 	which 	its 	dealers
could 	sell 	its 	products 	(location 	restrictions).2/ 	In. granting
Salomon's 	request 	to 	delete 	these 	prohibitions, 	the 	Co~~ission
noted 	that 	transshipment 	and 	location 	restraints 	imposed 	by
Salomon 	would 	not 	th~eaten competition. 	The 	Commission
concluded:
Salomon's 	inability 	to 	ban 	transshipping
and 	sales 	from 	unauthorized 	locations 	would
likely 	cause 	Salomon 	significant 	competitive
injury 	by, 	among 	other 	things, 	lessening 	the
efficiency 	of 	Salomon's 	distribution 	system,
discouraging 	dealers 	from 	remaining 	with
Salomon, 	exposing 	Salomon's 	customers 	to
increased 	risk 	of 	injury 	and, 	consequently,
exposing 	Salomon 	to 	personal 	injury 	claims.iJ
, 	Communications 	from 	dealers 	that 	simply 	convey 	this 	sort 	of 	very
important 	and 	pro-competitive 	information 	to 	manufacturers 	should
y 	465 	u.s. 	at 	763-64.
1/ 	Id. 	at 	762-63.
i/ 	Salomon/North 	Ameri~a, 	Inc., 	Docket 	No. 	C-2859 	(P.T.C.
July 	30, 	1985), 	modifvinq 	Salomon/North 	America, 	Inc., 	89 	P.T.C.
24 	(1977) 	(consent 	order) .
2/ 	Salomon/North 	America, 	Inc., 	89 	P.T.C. 	at 	27.
if 	Salomon/North 	America, 	Docket 	No. 	C-2859 	(P.T.C. 	July 	30,
19 8 5), 	s 1 i p 	op. 	a t 	2.

Honorable 	Strom Thurmond
be 	encouraged, 	rather 	than 	characterized 	as 	the 	basis 	for 	an
inference 	of 	conspiracy.2f
4
The 	proposed 	legislation 	could 	also 	make 	distribution 	less
efficient 	and 	lead 	to 	the 	decline 	of 	retailing 	in 	its 	present
form. 	Facing 	the 	threat 	of 	treble 	damages 	liability 	for 	pro-
competitive 	8onduct, 	and 	uncertain 	when 	they 	could 	legally
terminate 	a 	dealer, 	manufacturers 	might 	decide 	to 	distribute
their 	product 	themselves. 	This 	probably 	would 	be 	less
efficient. 	Manufacturers 	presumably 	now 	sell 	predominantly
through 	independent 	dealers 	because 	that 	is 	the 	most 	cost
effective 	form 	of 	distribution. 	The 	legal 	impediment 	that 	would
be 	created 	by 	this 	legislation 	could 	lead 	manufacturers 	to 	a 	less
efficient 	means 	of 	distribution. 	The 	legislation 	thus 	would 	have
the 	ironic 	effect 	of 	hurting 	the 	retailers 	it 	purports 	to
protect.
Consequently, 	enactment 	of 	S. 	1445 	would 	unwisely 	overrule
th~ conspiracy 	standard 	the 	Supreme 	Court 	reaffirmed 	in
Monsanto. 	In 	Monsanto, 	the 	Court 	held 	that 	in 	distributor-
termination 	cases
there 	must 	be 	evidence 	that 	tends 	to 	exclude
the 	possibility 	of 	independent 	action 	by 	the
manufacturer 	and 	distributor. 	That 	is, 	there
must 	be 	direct 	or 	circumstantial 	evidence 	that
reasonably 	tends 	to 	prove 	that 	the
manufacturer 	and 	others 	had 	a 	conscious
commitment 	to 	a 	common 	scheme 	designed 	to
achieve 	an 	unlawful 	objective.~
The 	Monsanto 	Court 	thereby 	rejected 	an 	approach 	taken 	by 	a
minority 	of 	the 	circuit 	courts 	that 	"proof 	of 	termination
following 	competitor 	complaints 	is 	sufficient 	to 	support 	an
inference 	of 	concerted 	action."l1
The 	Supreme 	Court's 	approach 	to 	defining 	conspiracy 	in
Monsanto 	is 	consistent 	with 	a 	long 	line 	of 	well-reasoned 	federal
court 	cases. 	In 	one 	of 	its 	first 	efforts 	to 	address 	the 	elements
that 	constitute 	an 	agreement 	under 	Section 	1 	of 	the 	Sherman 	Act,
11 	See 	Overstreet, 	Resa12 	Price 	Maintenance: 	Economic 	Theories
and 	Em~irical Evidence 	(F~C Staff 	Report 	1983) 	at 	13-62 	for 	an
explanation 	of 	various 	anticompetitive 	and 	procoffi?etitive
rationales 	for 	imposing 	ver~ical price 	restraints.
~ 	465 	u.S. 	at 	768.
II 	Id. 	at 	758.

Honorable 	Strom Thurmond 	5
the 	Court 	indic3ted 	that 	the 	alleged 	conspirators 	must 	know 	th~t
concerted 	action 	is 	contemplated 	or 	invited, 	and 	must 	have 	given
"their 	adherence 	to 	the 	scheme 	and 	participated 	in 	it."~ 	The
Court 	later 	indicated 	that 	establishing 	the 	presence 	of 	an
agreement 	requires 	a 	showing 	that 	the 	defendants 	have 	"a 	unity 	of
purpose 	or 	a 	common 	design 	and 	understanding, 	or 	a 	meeting 	of
mind sin 	a nun 1 a wf u 1 	a r ran gem e n t. 	. 	. 	."1Jj 	On 	the 	bas i s 	0 f
these 	and 	other 	authorities, 	lower 	courts 	in 	more 	recent 	cases
have 	generally 	taken 	the 	position 	that" [t]he 	substantive 	law 	of
trade 	conspiracies 	r~quires some 	consciousness 	of 	commitment 	to 	a
common 	scheme. "gI
The 	proposed 	legislation 	is 	inconsistent 	with 	the 	basic
elements 	of 	conspiracy 	law. 	The 	Monsanto 	Court 	noted 	the
fundamental 	tenet 	of 	conspiracy 	law 	that 	there 	must 	be 	a
co:·scious 	commitment 	to 	a 	common 	scheme 	designed 	to 	achieve 	an
unlawful 	objective, 	i.e., 	"circumstances 	must 	reveal 	a 	unity 	of
purpose 	or 	a 	common 	design 	and 	understarlding, 	or 	a 	meeting 	of
minds, 	in 	an 	unlawful 	arrangement."Q/ 	These 	oft-repp.ated 	legal
formulations 	show 	conspiracy 	has 	two 	prongs: 	a 	meeting 	of 	minds
and 	an 	unlawful 	purpose. 	Under 	the 	proposed 	legislation, 	neither
prong 	would 	have 	to 	be 	present 	for 	an 	inference 	of 	conspiracy.
~ 	Interstate 	Circuit, 	Inc. 	v. 	United 	States, 	306 	U.s. 	208, 	226
(1939) i 	accord, 	~., 	United 	States 	v. 	Paramount 	Pictures, 	Inc.,
334 	U.s. 	131, 	142 	(1948) i 	In 	re 	Plywood 	Antitrust -Litigation, 	655
F.2d 	627,634 	(5th 	Cir. 	1981), 	cert. 	dismissed, 	462 	U.s. 	1125
(1983) i 	Gainesville 	Utilities 	Dep't 	v. 	Florida 	Power 	& 	Light 	Co.,
573 	F.2d 	292, 	300 	(5th 	Cir. 	1978), 	cert. 	denied, 	439 	U.S. 	966
(1978).
,11/ 	See, 	e.q., 	American 	Tobacco 	Co. 	v. 	United 	States, 	328 	U.S.
781, 	810 	(1946).
12/ 	Klein 	v. 	American 	Luggage 	Works, 	Inc., 	323 	F.2d 	787, 	791 	(3d
Cir. 	1963) i 	United 	States 	v. 	Standard 	Oil 	Co., 	316 	F.2d 	884, 	890
(7th 	Cir. 	1963) i 	accord, 	~., 	Edward 	J. 	Sweeney 	& Sons, 	Inc. 	v.
Texaco, 	Inc., 	637 	F.2d 	105, 	111 	(3d 	Cir. 	1980) i 	Virginia 	Academy
of 	Clinical 	Psychologists 	v. 	Blue 	Shield, 	469 	F. 	Supp. 	552, 	559
(E.D. 	Va. 	1979) i 	Duplan 	Corp. 	v. 	Deering 	Milliken, 	Inc., 	444 	F.
Supp. 	648, 	691 	(D.S.C. 	1977) i 	Harlem 	River 	Consumers 	Coop. 	v.
Associated 	Grocers 	of 	Harlem, 	408 	F. 	Supp. 	1251, 	1268-69
(S.D.N.Y. 	1976) i 	United 	States 	v. 	General 	Motors 	Corp., 	1974-2
Trade 	Cas. 	(CCH) 	~I 75,253, 	at 	97,670 	(E.D. 	Il;.ich. 	1974).
13/ 	465 	U.S. 	at 	764, 	citing 	American 	Tobacco 	Co., 	££. 	cit. 	at
810.

Honorable 	Strom 	Thurmond 	6
One 	can 	contrast 	the 	proposed 	statute 	with 	the 	application
of 	the 	current 	law 	of 	conspiracy 	by 	considering 	the 	example
discussed 	above, 	in 	which 	the 	ski 	equipment 	manufacturer 	does 	not
respond 	to 	the 	dealer, 	but 	at 	some 	future 	time 	terminates 	certain
dealers.liJ 	In 	this 	example, 	there 	is 	no 	apparent 	meeting 	of
minds 	and 	hence 	no 	conspiracy. 	The 	dealer 	probably 	would 	be
quite 	surprised 	to 	discover 	that 	it 	had 	"conspired" 	with 	the
manufacturer, 	rather 	than 	that 	it 	had 	simply 	attempted 	to
communicate 	valuable 	information. 	Indeed, 	the 	terminations 	might
have 	been 	occasioned 	by 	completely 	unrelated 	problems 	between 	the
terminated 	dealers 	and 	the 	manufacturer. 	Nonetheless, 	the
Jegislation 	would 	permit 	an 	inference 	of 	a 	conspiracy.
Moreover, 	the 	legislation 	permits 	the 	inference 	of
conspiracy 	even 	when 	there 	may 	be 	no 	unlawful 	objective. 	The
manufacturer's 	response 	in 	our 	hypothetical 	might 	have 	been 	to
renew 	contracts 	only 	with 	those 	dealers 	who 	would 	accept 	a 	non-
price 	contractual 	restriction 	such 	as 	a 	transshipment 	ban.l:2!
This 	conduct, 	judged 	under 	the 	rule 	of 	reason, 	could 	be 	entirely
lawful 	and 	pro-competitive.
Additionally, 	the 	language 	of 	the 	bill, 	suora, 	might 	be
interpreted 	to 	alter 	substantially 	vertical 	restraints 	law 	beyond
the 	stated 	intentions 	of 	its 	sponsor.l2! 	Although 	S. 	1445 	does
not 	state 	explicitly 	that 	the 	agreements 	that 	it 	condemns 	are
.illegal ~ se, 	it 	is 	sufficiently 	ambiguous 	that 	it 	might 	be
interpreted 	to 	declare 	all 	those 	agreements 	not 	merely 	unlawful
if 	unreasonably 	restrictive 	of 	competition 	but 	per 	se
~41 	The 	legislation 	offers 	no 	gUldance 	on 	how 	long 	an 	infere~ce
of 	conspiracy 	could 	~e 	drawn 	from 	the 	described 	communications.
It 	might 'permit 	a 	court 	to 	draw 	the 	inference 	even 	when 	several
years 	had 	passed 	between 	the 	conversations 	and 	the 	terminations.
151 	Non-price 	rest=aints 	such 	as 	transshipment 	bans 	are 	jUdged
under 	the 	"rule 	of 	reason." 	Continental 	T.V., 	Inc. 	v. 	GTE
SY1 van i a, 	Inc., 	4 33 	U. S. 	36, 	57- 5 9 	( 1977). 	Th e 	Co u r t 	the r e
overru:ed 	a 	decision 	it 	had 	imposed 	only 	ten 	years 	earlier 	that
such 	restraints 	were 	per 	se 	unlawful 	when 	imposed 	upon 	product
ourchasers. 	United 	stateS-v. 	Arnold, 	Schwin~ & Co., 	388 	U.s.
365, 	378-80 	(1967). 	Simply 	put, 	the 	Court 	decided 	that 	in
Schwinn 	it 	had 	misjudged 	the 	valid 	business 	purposes 	behind 	many
non-price 	restraints.
161 	See 	SU8ra' note 	1.
II

Honorable 	Strom 	T:lUrmond
unlawful.l2/ 	Indeed, 	the 	"refuse 	to 	supply" 	phrase 	in 	the 	first
sentence 	could 	be 	read 	to 	overturn 	Sylvania 	and 	reinstate 	the
~ se 	illegality 	rule 	of 	Schwinn.~ 	Further, 	the 	sweep 	of 	the
bill's 	conspiracy 	inference 	might 	engulf 	the 	important 	exception
to 	the ~ 	se 	rule 	contained 	in 	the 	venerable 	Colgate
doctrine.l2J 	If 	the 	Committee 	wishes 	to 	clarify 	the 	intent 	of
the 	bill 	on 	these 	points 	and 	receive 	the 	views 	of 	the 	Federal
Trade 	Commission, 	the 	Commission 	would 	be 	happy 	to 	respond
further 	on 	these 	possible 	legislative 	changes.
In 	sum, 	the 	Commission 	strongly 	opposes 	enactment 	of
~ 	1445. 	It 	would 	chill 	pro-competitive 	communications 	and
business 	practices, 	it 	would 	distort 	conspiracy 	law 	and 	send 	it
into 	uncharted 	territory, 	and 	it 	may 	well 	have 	consequences 	far
beyond 	the 	overturning 	of 	Monsanto.
7
By 	direction
dissenting.
Bailey
12/ 	S. 	1445 	could 	be 	construed 	as 	codification 	of 	the 	court-made
~ 	se 	illegality 	rule 	for 	vertical price-fixing. 	Dr. 	Miles
~edical Co. 	v. 	John 	D. 	Park 	& Sons 	Co., 	220 	U.S. 	373 	(1911)
~ 	Overturning 	Svlvania 	would 	obviously 	have 	serious
anticompetitive 	consequences. 	The 	Schwinn 	rule 	was 	short-lived;
the 	Court 	agreed 	wi~h 	economic 	analysts 	who 	argued 	that 	the
Schwinn 	rule 	interfered 	with 	procompetitive 	business
ar ranger.lents.
19/ 	United 	States 	v. 	Colgate 	& Co., 	250 	U.S. 	300, 	307 	(1919).
The 	Colgate 	doctrine 	permits 	a 	manufacturer's 	unilateral
announcement 	of 	suggested 	resale 	prices 	and 	its 	refusal 	to 	deal
with 	those 	who 	do 	not 	comply. 	The 	Supreme 	Court 	strongly 	(and
wisely) 	embraced 	the 	Coleate 	doctrine 	in 	Monsanto: 	"If 	an
inference 	of 	[a 	price-fixing] 	agreement 	may 	be 	drawn 	from 	highly
ambiguous 	evidence, 	there 	is 	considerable 	danger 	that 	the
doctrines 	enunciated 	in 	Svlvania 	and 	Colgate 	will 	be 	seriously
eroded." 	Monsanto 	Co. 	v. 	Spray 	Rite 	Service 	Corp., 	465 	U.S. 	at
763.