Doubleda Y and Company, Inc.

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IN THE MATTER OF DOUBLEDA Y AND COMPANY, INC.

Docket 589"1. Order and opinions, Sept. , 1953 Before Mr. Frank Nier hearing examiner.

Mr. Fleteher G. Cohn and Mr. Lewis F. Depro for the Commission. Satterlee, Warfield Stephens of New York City, for respondent. ORDER AFFlRMIKG IN PART AND SETTING ASIDE IK PART 'l' HE HEARING EXAMINER S RULINGS ON RESPOKDENT S MOTIONS TO DISMISS, AND REMANDING PROCEEDING TO HEARING EXAMINER This matter having come on to be heard by the Federal Trade Commission upon the appeal of counsel supporting the complaint from the hearing examiner s ruling on respondent's motion to dismiss Count I of the complaint herein to the extent that it grants said motion and from his initial decision dismissing Count III, and upon briefs in support of and in opposition to this appeal and oral argument of counsel; and The Commission, upon consideration of the entire record herein having decided, for the reasons stated in the written opinion of Chairman Howrey which is being issued simultaneously herewith, that the hearing examiner correctly ruled that respondent's practice of granting excl sive book club publishing rights is not in violation of the Federal Trade Commission Act, but crroncously ruled that its practice within thewith reference to thc fixing of publication dates comes protection of the Copyright Act; and The Commission being of thc opinion that thc hearing examiner initial decision dismissing Count III of the complaint should be set aside (Commissioners Spingarn and Carretta each having set out in a separate opinion their reasons for this action, which reasons differ from those stated in the opinion of Chairman Howrey and concurred in by Commissioner Mead) ; and The Commission being of the further opinion that this proceeding should be remanded to the hearing examiner for completion of the taking of evidence and for such other action as may be necessary to finally dispose of the case, with leave to respondent, however, to renew its motion for dismissal of Count III at the close of the taking of evidence;

It is ordered That the hearing examiner s ruling as to Count I of the complaint herein be, and it hereby is, affrmed insofar as it holds that respondent's practice of granting exclusive book club publishing Opinion 50 F.

rights is not in violation of the Federal Tracie Commission Act, and that said ruling be, and it hereby is, set aside insofar as it relates to Tcspondent's practice of fixing publication dates. It i8 further ordered. That the initial derjsion of the hearing examiner dismissing Count III of the complaint he, (tnd it hereby is sct aside.

It is further o-rde1' That this matter be, and it hereby is, remanded to the hearing examiner for further proceedings in regular course with leave granted to respondent to renew its motion to dismiss Count III at the close of the taking of evidence. Commissioner Mason not participating.

Chairman HOWIU;Y delivered the opinion of the Commission with reference to Count 1.

counsel supporting the com- This is an interlocutory appeal by s decision granting respondent' plaint from the Hearing Examiner motion to dismiss Count III and from his rulings granting in part respondent's motion to dismiss Connt 1.

Respondent is one of the major publishers of trade books 1 in the l'country. In number of titlcs published it ranked second among American publishers in 1952. In the course of its business it enters the respondent into agreement.s wit.h authors of books under which covering such books. becomes the licensee or assignee of the copyrights These agreements provide that respondent is t.o receive the exclusive rights to milke, publish and sell the bock, of the copyright holdcr. In addition, respondent receives rights to exploit the copyrighted material in arrangements with newspapers, magazines, motion , J'adio and television broadcasters, and others. picture producers Respondent sells books pnblishcd by it to independent. rebtil book stores throughout. the country. It also furnishes books to twentylive wholly-owned retail book shops located in vllrious states. With respect to the literary works covered by its agreements with authors, respondent enters into further agreements with so-called book clnbs.' Under t.these agreements, or sub-licenses, thc book clubs obtain exclusive rights to publish and sell "book club editions." In addition to these intangiblc rights, respondent undertakes to furnish print.ing plates for the work. No resale price requiremcnts are imposed upon the book clubs and it is agreed that they shall be expressly excluded from t.he operation of any fair trade agreement entered into with others.

1 Popular fiction and non-fiction books are known as trade books. 2 See Commission Exhibits 8 (a) to (d).

DOUBLEDAY AND CO. , H'",.

263 Opinion Respondent is also engaged in the business of publishing and distributing the same books as "publisher s editions." These cditions are sold by respondent to independent retail book sellers for thc purpose of resale, oftentimcs under fair trade agrcemcnts fixing minimum resale prices under applicable State laws. Respondent also furnishes the same publisher s editions to its own retail book shops. As a part of a typical agrecment or sublicense with respect to a book club edition, the book club and respondent agree that the publication date of the publisher s edition wil not precede that of the book club.

The case as to Count I depends upon the contention that the following operative facts establish violations by respondent of Section 5 of the Federal Trade Commission Act:

(a) Its failure to extcnd the same publication rights to retail book stores as granted to book clubs;

(b) Its agreement with book clubs that it will not print, publish or release to retail book sellers copyrighted publisher s editions prior to the date by which the book clubs are able to print, publish, or distribute book club editions; and (c) Its fixing of resale prices under the fair trade laws as to publishcr s cditions sold to independent retail stores while lmwing the book clubs frcc from any resale price requirements. The Hearing Examiner held that (a) and (b) above did not violate Section 5 of the Act for thc reason that such practices did not extend or increase the legal copyright monopoly; that "a copyrightec or his licensee may legally agree or do anything which accomplishes no more than to preserve or exploit the monopoly given him, but that he may not by restrictions or rcstraints add to that monopoly, extend it or increase its effective orbit of operation. iHercoid Co?'pomtion v. lVfid Oontinent Co. 320 U. S. 661." (Rulings, p. 2. As to (c) above, the Hearing Examiner held that this practice was illegal in that "such an undertaking docs not merely preserve intact to the respondent its copyright, that is, its exclusive right to print and publish free from duplication, but instead restricts price-wise one avenue of distribution thereby holding a price umbrella over another and competitive avenue, and cxtends restraint of competition below and beyond the orbit of thc licensee s own field" (I ulings, p. 2). Since there was no intcrlocutory appeal from the ruling described in (c) above, this practice is not now before the Commission for decision. The facts in the partial record now before us seem to prescnt a case of competitive disadvantage to retail book sellers. The Hearing Examiner thought it. obvious "that a retail bookscller, paying respondent $2.10 for a book hc must resell at $3.50" might have diff- , p.

H" TliADE COMMISSION DECISIONS Opinion 50 F. T. C.

culty . in selling "to potential purchasers who may obtain the same book for anywhere from nothing, in case it is a premium or gift or " 3bonus, up to $2. 00 or so, merely by subscribing to a book club * * * The question for decision is whether this competitive situation results from practices which are violative of law. Competitive disadvantage, in and of itself, docs not necessarily create ilegality. The fact that the retail bookseller has lost sales to a book club or cannot successfully compete with a book club for the patronage of certain types of readers is of no legal consequence unless this result springs from some improper and unfair act on the part of respondent. "The mere fact that a given method of competition makes it diffcult for competitors to do business successfully is not of itself suffcient to brand the method of competition as unlawful and unfair. Federal Trade Oommission v. Paramount Famous-La8key Oorp. (C. A. 2 1932) 57 F. 2d 152, 157. "Success alone does not show reprchensible methods, although it may increase or render insupcrable the diffculv. Ourtisties which rivals must face. Federal Trade Oommission Publishing 00. 260 U. S. 568, 582.

Counsel supporting thc complaint attempt to equate respondent' licensing practices with discriminatory pricing practices under the Robinson-Patman Act. They say:

When it (respondents does lease the plates to the book clubs (4 with the knowledge and intention that the book clubs utilize the plates to print book club editions to be sold in competition with the publisher editions of the same title, and with both editions being of the same grade and quality, then in so leasing at such figures as make it impossible for the retail book sellers to compete with the book clubs, the respondent certainly is discriminating against its retail bookseller customers." (brief 14) This, they admit, is not a violation of the Robinson-Patman Act in that the granting of book club rights and the leasing of plates constitute a license to manufacture and sell, not a sale of commodities. They contend, however, that it is a form of discrimination which can be corrected under Section 5 of the Federal Trade Commission Act. This argument conveniently ignores the very question the Commission is called upon to decide. namely, whether the factors contributing to the alleged discrimination arc themselves ilegal acts. Thus, we come back to the question decided by the Hearing Examiner: Is the granting of an exclusive license of publication rights in copyrightcd property a violation of law? 'V'e think not. We agree 3 Rulings, p. l.

4 The heart of the matter is not the leasing of plateR but rather the licensing of publication rights.

, . DOUBLEDAY AND CO, ) INC. 267 263. Opinion with the Hearing Examiper that exclusivity is the essence of a copyright (35 Stat. 1075, 17.U. S. C. sec. 1), and that a licensee (such as respondent) has the right arbitrarily to sublicense one and refuse to sublicense another. A holder of a patent or copyright may clearly license one party to the exclusion of other parties. Extractal Process Ltd. Hiram Walker&80n8 Ltd. (C. 1946) 153 F. 2d264, 268. Economic effect in such a situation is immaterial. As the Hearing Examiner said Copyrights and patents, being monopolies, of necessity produce economie disadvantage to non-sharers. The very nature .of the grant prevents competition and restrains commerce and the exclusive enjoyment thereof is an inherent and fundamental part of the grant itself." (Rulings, p. 2) The book club, instead of using independcnt distributors or retail book stores, sells its books. primarily by mail direct to readers. The presence of two publishers in the field, each using different distributional methods, results in a duality in consumer price. While the impact of this dual price is felt by the retail bookseller, its mere existence is not violative of law.

While the foregoing disposes of the first issue raised under Count I we are not unmindful of the issue of public interest. . Disadvantage to retail booksellers may be perpetuated by the decision we have been compelled to make. On the other hand, a contrary decision would have an adverse effect on authors, publishers, book clubs, and a large section of the reading public. On balance, the overriding public interest (as well as the law) seems to lie with the views held by the Hearing Examiner.

The second issue under Count I concerns respondent' s agreement with book clubs with reference to publication dates. The Hearing Examiner found that respondent "contracts that it wil not print publish or release to its distributive outlets, the copyrighted trade .edition, prior to the date which the book club can print, publish or distribute to its members" (Rulings, p. 1). He held, however, that this was a valid use by respondent of its copyright monopoly; that the postponement of distribution of the copyrighted book to its own customers was "no imposition on the activities of another but is solely a voluntary restriction upon itself" (Rulings, p. 2). This conclusion we think, is unrealistic; it disregards the purpose and effect of the agreement.

Obviously the prohibition against pri9r publication and sale is for the benefit of the book club. . It "effectively insulates" the latter from prepublication competition. It prevents competitors, including retail booksellers, from offering ;their higher priced edition to the public prior to the date when the lower priced book club edition hits the Opinion 50 F.

market. The retail booksellers are thus deprived, by agreement between respondent and the book club, of any opportunity of reaching the market first. The prohibition has the purpose and effect of restraining not only the respondent but also third parties (respondent' customers) who are competitors of the book club. Without dcciding whether or not this violates the Federal Trade Commission Act, it seems to fall within the class of contractual provisions not protccted by thc Copyright Act (35 Stat. 1075 , 17 The distribution of books inu. S. C. 1).6 the open market is restrained in ordcr to protect the book club from advance eompctition, or, to put it another way, from a eompctitive advantage the retail booksellers might otherwise enjoy.

,Ye want to make it cleal' that the fa.cts in the insta.nt case a.rc in no wise analogized to those in the Intet8tate Oircuit case. lye rely on that case merely to indicate the type of agreement which we think is beyond the protection of the Copyright Act. We expressly reserve jndgement on the question as to whether or not the agreement involved here constitutes an unreasonable restraint of trade or an unfair method of competition.

Clearly the prior publication prohibition is not ilcgal pel' 8e. Cf. U. S. v. P(f:am.count Picttll' 334 U. S. 131, 145, affrming G6 F. Supp. 323, 3,11. In determining whether thc prohibition is unreasonable the following factors (among others) are relevant: (1) Thc simultaneous publication by trade publishers and licensed book club;

(2) Thc chamctcr and location of book club re:tders as compared with those who buy from retail book stores; (3) The character of the competition involved-potential versus actu:tl competition;

(4) The fact that the largest sale of a popul:tr book takes place shortly after its publication and gr:tdually dwindles thereaftcr; (5) The policy of operation of book clubs, such as the purchase of books by subscribers which they might not voluntarily purchase a retail book store, etc.

The evidence should be reviewed by the Hearing Examiner in the light of these and other appropriate standards in order to determine whether the simultaneous publication clause is reasonable or unreasonable.

5 See Interstate Circuit v. United. States 306 U. S. 208, 227. We think the Hearing Examiner misread portions of the Interstate Circuit opinion. He said it "'ag not in point because Th ere the contract involved the use of un copyrighted films and there war an agreement among all distributors thateaeh severally would enter into the same Individual restrictive contract with its exhibitors." The part of the opinion on which we rely (306 U. S. ), beginning at page 227, deals specifically with the protection afforded' by the Copyright Act to the separate agreements between the distributor and the exhibitor. DOUBLEDAY A."ND CO. , INC. 269 263 Opinion With respect to. Count I, we affrm the ruling of the Hearing Examiner to the effect that the grants to book clubs of exclusive book club publication rights are not in restraint of .trade and do not constitu1: unfair methods of cOllpetition or unfair acts or practices within the meaning of Section 5 of the Federal Trade Commssion Act. The remaining issue under Count I is remanded to the Hearing Examiner for further consideration in conformity with this opinion. Commissioner MASON took no part in the consideration or decision of this Count.

Separate opinion of Chairman HOWREY, with whom Commissioner MED concurs, with reference to Count III.

At issue under Count III is the relationship of the McGuire Aet (66 Stat. 631, 15 U. S. C. 45) to respondent' s activity of selling publisher s editions direct to the public, thr6ugh its wholly-owned or controlled retail book shops, while selling the same editions to independent retail book stores under fair trade eon tracts. It is not disputed that respondent owns or controls some 25 retail shops located in various parts of the country.

The principal purpose of the MeGwre Aet is to exempt vertical resale price maintenance contracts from the operation of federal antipredecessor the Miler-Tydings Amend-trust statutes-as did its ment-where such contracts are lawful under State Jaws in their ap- (House Report No. 1437, 82ndplication to intrasta1: transactions Con g., 2nd Session). It was the purpose of both Acts to withhold from horizontal arrangements any immunizing effect." The McGuire Act, which is the same as the Miler-Tydings Amendment in many respects, went beyond the statutory provisions of the Jatter to the extent felt necessary by the Congress to remove any doubt as to the binding effect of fair trade contracts upon nonsigners who willfully and knowingly" advertise, offer for saJe, or sell the commodity at a lower price (see Section 3 of the McGuire Act). The Supreme Court had held in the Schw6gmann case (341 U. S. 384) that the Miller- Tydings Amendment did not authorize the enforcement of resale price contracts against dealers who were not signatories to such contracts, where the commerce involved was interstate. Thus for purposes of the present case, there are no significant differences in the application of the two statutes.

The question raised by this count is whether respondent, being partially engaged in the business of selling books at retail, is author- 6 Senate Report No. 879, 75th Cong., 1st Sess., as to the Miller Tydings Amendment, and House Report 1437, 82nd Cong. , 2nd Sess. , on the McGuire .Act. Also see General Electric v. Klein On Square, Inc., 1953 CCll 'l' trade Cases, para. 67 443 (N. Y. Sup. Ct. 1953) decided l1"ebruary 20, 1953; Sunbeam v. Payles8 Dru(J Stores 1953 CCH Trade cases, para. 492.

270 FIWERAL TRADE COMMISSION DECISIONS Opinion 50 F. T.

ized by the McGuire Act to specify minimum resale prices in fair trade contracts entered into with independent retailers. In view of the fact that respondent sells books through the 25 stores which it owns or controls, it is contendcd that its resale price maintenance contracts with independent retail stores are "between retailers " and therefore respondent's contracts are beyond thc protective limits of the McGuire Act.' Section 5 (a) (5) of the Act reads as follows: Nothing contained in paragraph (2) of this subsection shall make lawful contracts or agreements providing for the establishment or maintenance of rnnimwn or stipulated resale prices on any commodity referred to * * * between manufacturers or between producers, or between wholesalers, or between brokers, or between factors, or between retailers, or between persons, firms, or corporations in competition with each other.

The Hearing Examiner held that Section 5 (a) (5) docs not apply to contracts between retailers who are not shown to be in competition with each other or where the retailing operation is incidental to a different major cndeavor.

While these two factors arc pertinent to the issue under consideration, the ultimate question for decision was not reached by thc Hearing Examiner.

The purpose of the McGuire Act, as we have said, was to exempt from thc operation of the Federal Trade Commission Act and the antitrust acts vertical agreements prescribing minimum or stipulated resale prices. Horizontal agreements of the same type were expressly iWt exempted. Thc ultimate question for consideration, therefore, is whether the agreements under scrutiny are "vertical" or "horizontal." When negotiating thc fair trade agreements with retailers was respondent acting in its capacity as a manufacturer-publisher or in its' capacity as a retailer? 7 Respondent also o,vns, through a subsidiary corporation, one of the largest book clubs, the Literary Guild, which in 1947 had about 900,000 members. However, neither brief nor argument raised the question as to whether the Literary Guild was a retailing opera tion within the IIuning of the McGuire Act. a Senator Humphrer. the leading proponent for the enactment of the McGuire Act in the Senate, explained that the test of :

whether a resale price maintenance contract is vertical is if the contract is between a seller and buyers who reseH the original seller s product;, whereas, the test of whether a resale price maintenance contract is horizontal is if it is between competing sellers between whom the relation of buyer and seller or reseller d'Ocf! not exist as to the product involved. It is important to keep this distinction in mind, because many producers of trademarked items sell them to consumers, retailers, and wholesalers alike. Under the bin, such firms may make resale price-maintenance contracts with both wholesalers and retailers because such contracts are vertical, that Is, between sellers and buyers. While in onc sense firms in this position function not only a producers but also as wholesalers and retailers, they 'l;Y still la wfull:r make ..

DOUBLEDAY AKD CO, ) INC. 271 263 ! Opinion In other words, it is necessary to study the particular agreement examine its form, economic purpose, intent and effect and then decide whcthcr it is a vertical or horizontal resale price-maintenance agreement. Form alone, of course, is not conclusive-the vertical form must not be used as a sllbterfllge or as a cloak to cover an arrangement having all the effects of a horizontal agreement in restraint of trade. The fact that respondent functions in a dllal capacity-as a publisher and as a retailer-is not determinative of the issue." The practice of manufacturers of selling their products direct to consumers through their own outlets., while at the same time selling to independent wholesalers and retailers is a widespread marketing practice.

N cither the Miler-Tydings amendment nor the McGuire Act, nor their legislative histories, show that Congress intended to discriminate between integrated and nonintegrated manufacturing enterprises in securing the benefits of resale price maintenance for themselves or their customers. In fact, some of the testimony at the Hearings on the McGuire Bill indicates that one of thc purposes of contracts with other wholesalers and retailers, when in making such contracts they act as producers of a trademarked or branded commodity, rather than as wholesalers and retailers entering into forbidden horizontal resale price malntenance contracts with other wholesalers or other retailers, While floor remarks of the proponent need not necessarily be considered pre suasive of legislative intention, the foregoing statement is of interest in view of the fact that Committee reports are silent on the point.

9This basic QuestioIl, while undecided directly by any court, has been anticipateu in legal i- :dodicaI8. One writer has said: "It would seem consistent with the spirit of the legislation that its benefits should be denied only where there is a substantial degree of horizontality between the contracting parties." 32 Harv. L. Rev. 287. It has also been stated: "All of the legislation is expressly made inapplicable to hori zontal price-fixing contracts, but this provision has not been deemedl to prohibit contracts between a retailer and a manufacturer with a retail outlet, or between a manufncturer and a manufacturing retailer. Williams, Resale Price Maintenance and Minimum Price Legislation (1950 Institute on Antitrust Laws and. Price Regulations, page 141). See also Callman Unfair Competition and Trade Marks Vo1. 1, page 377. Cf. Statement hurmond Arnold appearing in Finallleport and Recommendations of the TNEC (1941), page 238.

o For a discussion of the economic purposes that are frequently served by such m.ethods, see Phillips, Marketing by Manufac-turers (1946), Chicago, Illinois, particularly page 144. where it is explained:

'The third type of selling directly to consumers is that in which the manufacturer owns and operates retail stores. Such retail stores may be operated in limited number, as, for example, those owned by the Dennison Manufacturing Company; in larger number but limHed to the larger cities, as by the Eastman Kodak Company; or as large chains extending over a broad area, as exemplified by such organizations as the Melville Shoe Corporation, Thorn mean stores) and the United- Rexall Drug Company (Liggett, Owl, and Sontag stores). Retail 8stores have been opened by manufacturers for a variety of reasons, including, among others, the following: (1) to secure distribution for the manufacturers' product under conditions that the manufacturer desires, as, for example, the control of prices; (2) to enable the manufacturer to 'keep his fingers' on the pulse of the market, so to speak; (3) to act as laborn tories in which to test market reactions to certain products, policies, procedures, and so on; and (4) to act as ' service stations' for the manufacturers' products.

. .

272 FEDERAL TRADE COJ'imission DECISIONS Opinion 50 F.

the proponents of the Act was to place nonintegrated businesses on the same footing as integrated enterprises. This is shown by thc colloquy between Congressmen Patman and I-laIc-Mr. Patman on the stand:

Mr. Hale. Mr. Patman, I infer from what you have said that you thought the vertical pricing was all right and horizontal price fixing objectionable. ",Vill you explain the philosophical difference between t.hc two? Mr. Patman. "'Veil I am talking about this particular case only. * * * But. in t.his particular ease, vertical price fixing is all right and is all this bin permits. In other words, the IJlltional chains now engage in vertical price fixing and they are engaging in it. Noone objects t.o it. It is perfectly lcgal under our existing laws be.cause they own the manufacturing plant and they own the wholesale houses the retail outlets, and fix the prices from the manufacturer of thc product, or the producer, right on down to where it is sold over the counter.

The theory behind this bin is to give the small independent merchant the same privilege and opportunity as thc big man, from the lInLnufacturer to the middlenu1., and right on down to the retail outt . .." (Hearings, p. 13).

There have been several occasions on which the courts have passed upon resale price maintenance contracts between integrated concerns and retailers. In none that we have seen has it been held that a manufacturer or producer having retail functions has gone beyond t.he protective limits of either the Miner-Tydings Amendment or t.he Mc- Guire Act merely by concluding resale price contracts with independent retailers. See, for example Gene' lal Electric 00. v. R. H. 111.acy 00. 103 N. Y. S. (2d) 440 (1951) General Electric 00. S. Klein On Square, Inc. 1953 CCIl Trade Cases, para. 67 443 (N. Sup. Ct. 1%3) decided February 20, 1953.

The theory of counsel supporting the complaint involves, it seems to , a direct administrative nullificat.ion of Congressional intent. Under their intcrpretation any retail selling-regardless of degree, i. e. the volume of retail sltles as compared with lion-retail activitieswould disqualify a manufacturer and his customers from the benefits of fair trade protection. Presunmbly the same theory would apply to manufacturers sellng at wholesale.

It is common knowledge that rmllY manufacturers engage to a lcsscr or g-reater degree in some wholesaling or retailing activity.l1 Con- :l In 1989, according to the Census of Business, manufacturers made 2. 8 percent of their sales through their own retail stores, 1.8 percent of their sales direct to consumers fln(1 4,3.7 percent of their sales direct to retailers or through their own wholesale branches. qy DOUBLEDAY AND CO. , INC. 273 :263 Opinion ;scquently the cffed would be to nullify the newly passed McGuire Act dis-insofar as large segments of our economy are concerned. Such a regard of Congressional intent is neither logical nor necesary. .does violence to the fundamental principle that legislation should be ,construed in the light of its basic purpose. In this connection we cannot close our eyes to the long and controversial history, both legislative and litigious, of resale price maintenance. Certainly Congress, in enacting the McGuire Bil by an overwhelming vote, left us in no doubt concerning the basic purpose and intent of thc legislation. It approved resale price maintenance and it is not the Commission s business to nullfy that approval'" One further contention of counsel supporting the complaint requires brief comment. They urge that a horizontal agrecment between retailers to fix resale prices comes under Section 5 (a) (5) of the Act irrespective of whether or not said retailers are in competition with each other" (brief, p. 16). This may be t.rue-although we do not now decide the question-blit it does not necessarily follow that such :1 per 8e violation of Section 5 of the Fedcralan agreement constitutes Trade Commission Act.

Section 5 (a) (5) does not contain any tdIinnative prohibit.ion or create any new categories of ilegality. Horizontal price fixing agreements are merely left to bc tested wlder the general principles of antitI1st law. Ordinarily such agreements are betwccn (or relate to) competitors and for that reason the courts have in some cases eonsidcred them illegal per se. IVe seriously doubt, however, that the per 8e doctrine ean bc stretehed to cover a situation where the parties affected by the agreement are not in competition with each other. How can injury to competition be presumed where no competition exists ? Commissioner Mead and I believe that the issues raised tllls appeal under Count III should bc remtmded to the Hearing Examiner Except in the case of sales direct to consumers, these percentages had increased since 1929. Subsequent informiltion is available only for wholesale levels, but it indicates that direct wholesaling by manufacturers has increased further since 1939. \Vholesale and retail distribution by manufacturers varies willel ' jn importance from industry to industry. In many industries there appears to be a considerable amount of direct distribution alongside sales to independent wholesalers and retailers. In J 939 wholesale branches o,vned and operated by manufacturers of distilled liquors made 1'3. percent of the sales of such manufacturers. In the same year, such wholesale branches made 43 percent of the sales of rectified or blended liquors, and, in addition, direct sale by manufacturers to retailers amounted to 12% percent of manufacturers' sales. In the case of perfumes and cosmetics, manufacturers made 32.4 percent of their sales dir('ctly to independent retailers and an additional 15. 7 percent through manufacturer-(\ylled r:-wholesale outlets. Moreover, manufacturers made 7.2 percent of their sales to con:-lllll: at retail. In the case of drugs and medicines, lnanufactllfers made 29.4 percent or their sales through their own wholesale branches and an additional 16.4 percent direct to -retailers.

12 The Congress also reiterated the policy of preventing illegal horizontal agreements, and we should be eql1al1y careful to observe this part of the Congressional intent. 403443--57-- Opinion 50 F. T. C.

for further consideration and action in conformity with this opinion. that Count III should beCommissioners Spingarn and Carretta agree remanded but for different and separate rcasons. Because of this , Count III has been remanded to the Hearingconflict of opinion procced in the regular course, withExaminer with instructions to leave to respondent to renew its motion to dismiss at the close of the evidence.

Commissioner MASON took no part in the consideration or decision of this count.

SEPARATE OPINION OF COMMISSIONER SPINGARN I concur with the action of the Commission as to the appeal from the hearing examiner s ruling relating to Count I of the complaint. I also concur with its action reversing the hearing examiner s ruling dismissing Count III of the complaint-the count involving the construction of the ncw resale price maintenance law-and remanding the case to thc hearing examiner 1'01' further consideration. However with respect to Count III I arrive at this result by a course of reasoning substantially different than that of two of my colleagucs who sharc the same views (which are incorporated in the separate opinion of Commissioner Howrey). I believe that the adoption of their views would direct the hearing examiner down the wrong road; one which wil inevitably result in his returning to the Commission with another ruling again dismissing Count III of the complaint. I believe that my two collcagues crroneously make the form of thc agreements and the economic purpose and intent of the respondent dcterminativc factors to be considered by the hearing examiner in deciding whether the agreements between retail book stores and a publisher who operates book stores are legal resale price fixing agreements or whether they are illegal price fixing agreements between retailers. In my opinion, propel' deeision of this case requires a determination as to whether the effect of these agreements lias been to restrict price competition between respondent' s book stores and their competitors in the retail market. To the extent that these agreements have such a restrictivc effect on competition, they are ilegal and should be prohibited regardless of their form and regardless of the economic purpose or intent of thc parties to the agreements. The record shows that among the retail stores owned and operated by respondents, 16 are located in States in which respondent has entered into resale price maintenance agreements and in which all retailers are bound by such agreements whether they have signed an agreement or not. Respondent admits that wherevcr its fair trade &:

DOUBLEDAY AND CO. , INC. 275 263 Opinion contracts were executed, nonsigners were duly notified as required by State law, resulting in valid and binding fair trade protection on a substantial number of its book titles. Respondent admits that it sells to other retail stores in each of the cities in which its abovereferred to retail outlets are located. Testimony as to three of these retail outlets located in N ew York City, Philadelphia, and Boston respectively, shows they are in dose competition with retail stores buying from respondent. All of the book stores in New Yark, Pennsylvania, and Massachusetts are bound by respondent' s fair trade contracts. Thus, the record dearly shows that respondent's fair trade contracts have fixed prices of competitors of its retail outlets. . It is settled law that any agreement fixing prices between competitors is an unreasonable restraint on trade. (UnitedStates v. Trenton Pottene8 Co. 273 U. S. 392 (1927), Ethyl Oa80line COTporation, et al. v. United States 309 U. S. 436 (1940), United States v. Socony- Vacuum Oil Co. 310 U. S. 150 (1940), United States v. Bausch Lomb Optical Co. 321 U. S. 707 (1944), United States v. Franlcfort Di8tilerie8 324 U. S. 293 (1945).

It is wclJ established that agreements in unreasonable restraint of trade are unfair methods of competition within the meaning of that term as used in Section 5 of the Federal Trade Commission Act. (Fedeml Trade Com/mission v. Cwrncnt Institute, et al. 333 U. S. 683 (1948) .

Therefore, to the extent that respondent's agreements Jix prices between its retail outlets and competing retailers, they are in violation of Section 5 of the Federal Trade Commission Act unless they fall within the cxemption provided by the McGuire Act. This act which legalizcs certain resale price maintenance agreements, spcciJically states that it does not legalize agreements between retailers establishing their resale prices. I agree with my two colleagues that it would void the obvious desirc of Congress in passing this act to interpret it as not legalizing any resale price fixing agreement if the producer of the goods also sold at wholesale or retail even through one outlet. However, I feel that it would likewise be contrary to the c1car meaning of the cxemption to the McGuire Act to interpret it as legalizing agreements which Jix prices between respondent' retail outlets and competing retailers. Also I believe it is immaterial whether the agreement is signed both by respondent and the competing retailer (as respondent admits in its answer is the fact in certain cases) or if the competing retailer is bound to obscrve the Jixed prices as a non-signer by respondent's agreement with a different retailer within the same State.

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276 FEDERAL TRADE COMMISSIOK D ;CISIONS Opinion 50 F. T. C.

Companies engaged in the dual functions of producing and sailing at retail who wish to avail themselves of thc protection of the Mc- Guire Act must avoid agreements which bind their retail competitors from engaging in price competition with them. Respondent in this matter has entered into tlgreemcnts fixing t.he prices at which its retail competitors can sell certain books in competition with its retail stores. In my opinion, such agreements are outside the exempt.ions of the McGuire Act and arc in violation of Section 5 of the :Federal Trade Commission Act.

Therefore, I believe that the present record contains a prima facie case upon which, if no further evidence were presented, the Commission could issue an order prohibiting respondent from entering into agrecmcnts ,with retailers of books which agreements would fix the resale prices of books sold by retail stores in competition with respondent.' s retail stores. In my opinion, the hearing examiner should be so instruct.cd and thc case returned to him for appropriate action in accordance with these instructions. SEPAIL\TE OPINJON OF coJ'unssIONER ALRER'l A. CARlmTrA This nmtter is before the Commission upon an intcrlocutory appeal hy counsel supporting thc complaint from the I-Tearing Examiner s nlling granting in part respondent's Ilotion to dismiss COllt J and from his Initial Decision granting respondent's motion to dismiss Count III ot t:le complaint herein.

As to the Hearing Examiner s ruling relative to respondent' motion to dismiss Count I of the complaint, I am in agreement with the reasonillg and with the conclusion expressed in the opinion of the Commission as prepared by Chairman Howrcy. As to the Hearing Examiner s Initial Decisioll granting respondcnt's motion to dismiss Count III of the complaint herein, I agrec with thc other Commissioners that the I-Tearing Examiner should be niversed and that. the case should be remanded to sa.id Hearing Exlminer with instrudions to procced in the usual course, reserving to thc respondent the privilcge of renewing its motion to dismiss a Her t.he introduction of evidence by all parties to t.his proceeding. 1-10',ever, ily rcasons for arriving at this conclusion tue not exactly the Sample as those set forth by Chairman HO\\Tey in his Separate Opinion and by Commissioner Spiugurn in his Separate Opinion. 13ccause of the importance of this case, ill addition to reading all of t.hc pleadings in this proceeding as well as the excellent briefs filed bv all counsel in this case. 1 have seen fit to review the legislative histon' of both the Miller-T'ocling' s Act awl of the .McGuire Ad. DOUBLEDAY AND CU. , '"'v.

263 Opinion Section 5 (b) of the Federal Trade Commission Act provides the Commission shalllwve reasonamong other things, that "'YVhenever to belie've that any such person, partnership, or corporation has been or is using any unfair method of competition or unfair or deceptive aet or practice in commerce, * * * it shall issue and serve upon such person, partnership, or corporation a complaint stating its charges in that respect * * *". 1Vhen the Commissioners of the Federal Trade Comn-:ission on June 29, 1951, decided to issue the complaint herein (which complaint contained four separate and distinct counts), they undoubtedly, in their individual minds "had 'reason to belie, that the respondent herein had been using unfair methods of competition in commerce within the intent and meaning of Section 5 (a) of the Federal Trade Commission Act. (By the passage of the Mc- Guirc Act amendment to the Federal Trade Commission Act on July 1952, Section 5 (a) was redesignated as Section 5 (a) (1). Thc record indicates that counsel in support of the complaint has submitted his evidence in support of the allegations contained in the complaint. Counsel for respondent, under date of December 1, 1952 fied a motion with the Commission requestiug that each of the four counts contained in the complaint herein be dismissed upon the ground that the Commission had failed to establish a "prim L facie case of violation. The Hearing .Examiner, among other things, saw s motion with respect to Count III of thc com-fit to grant respondent' plaint, and counsel in support of the complaint then appea.led said decision to the full Commission.

I am of the opinion that the Hearing .Examiner was in error in granting respondent' s motion to dismiss Count III of tbe complaint and in finding tlmt there was no showing of competition between respondent' s retail stores and customers of the respondent. 1Vhile I do not now pass upon the merits of this case, I am of the opinion that counsel in support of the complaint has established a prima facic case in violation of Section 5 (a) (1) of the Federal Trade Commission Act. In other words, based upon the present record before the Comto believe that respondent's practices, insofarmission I have r-reason as Count III of the complaint is concerned, are in violation of Section 5 (a) (1) of the Federal Trade Commission Act. It is now up to the respondent to introduce evidence to rebut this prima facie case. This case, for thc first time, makes it necessary for the Commission to interpret the words of Section 5 (a) (2) and of Section 5 (a) (5) of the Federal Trade Commission Act, which sections were added to said Act by the passage of the McGuire Act. There is no doubt in my mind that by the enactment of the McGuire Act amendment to the Federal Trade Commission Act, the Congress of the United States M'AL TRADE COMMISSION DECISIONS Opinion 50 F. T.

did not label as illegal any method of competition, or any aet or practice, which had not theretofore been labeled as illegal under either the Federal Trade Commission Act or any of the antitrust acts. What Section 5 (a) (2) of the McGuire Act amendment to the Federal Trade Commission Act did was to provide that whenever certain pricing agreements defined therein were lawful under a State statute in its application to intrastatecommcroe, those specified pricing agreements were not to be deemed illegal in violation of either the Federal Trade Commission Act or any of the antitrust acts. In effect this section of the McGuire Act amendment to the Federal Trade Commission Act provides an exemption of oertain pricing agreements from the operation of the Federal Trade Commission Act and from other Federal antitrust acts.

After providing this exemption, the Congress of the United States further included in Section 5 (a) (5) of the McGuire Act amendment of the Federal Trade Commssion Act a provision which, in effect is an exception to the exemption provided in Seetion 5 (a) (2) of the same amendment. Paragraph 5 (a) (5) reads, specifically, as follows:

Nothing contained in paragraph (2) of this subsection shall make lawful contracts or agreements providing for the estwb1ishment or maintenance of minimum or stipulated resale prices on any commodity referred to in paragraph (2) of this subsection, between manufacturers, or between producers, or between wholesalers, or between brokers, or between factors, or between retailers, or between persons firms, or corporations in competition with each other. The foregv ng quoted subscction of the McGuire Act amendment is the one which has caused most concern to the Commission and which must be carefully analyzed in conjunction with the legislative history affecting this subsection. In my opinion, in order to better understand the intent of Congress in enacting this particular subsection, we should divide it into two parts. The first part would read as follows: Nothing contained in paragraph (2) of this subsection shall make lawful contracts or agreements providing for the establishmcnt or maintenance of minimum or stipulated resale prices on any commodity referred to in paragraph (2) of this subsection, between manufacturers, or between producers, or between wholesalers, or between brokers, or between factors, or between retailers. (The last phrase of Section 5 (a) (5) has been omitted.

Thc second part would read as follows:

Nothing contained in paragraph (2) of this subsection shall make lawful contracts or agreements providing for the estab1isluent or naintenance of minimum or stipulated resale prices on any cO.rod- DOUBLEDAY AND CO, ) INC. 279 263 Opinion ity referred to in paragraph (2) of this subsection, * * * between persons, firms, or corporations in competition with each other. (There has been omitted therefrom that section of 5 (a) (5) which refers to tbc various classifications of businessmen. statcthat insofar as the pricing What Section 5 (a) (5) docs is to agreements referred to therein are concerned, no one can point to Section 5 (a) (2) of the McGuire Act amcndment and say that by reason of its enactment, the pricing agreements set forth in Section 5 (a) (5) are legal. Section 5 (a) (5) in and of itself does not specifically say that the pricing agreements specified therein are "illegal." In my opinion, all that it says is that insofar as the pricing agreements enumerated in Section 5 (a) (5) are concerned, this Commission must continue to look to the provisions of Section 5 (a) (1) of the Federal Trade Commission Act to determine whether such enumerated practices are illegal. As to t1!ese particular enwmeratem pricig agrreements, it i8 just as thougl! the McGuire Act amendment was never enacted.

In view of the foregoing, if any minimum resale price fixing agreement is entered into between one manufacturer and another manufacturcr, or between one retailer and another retailer, in connection with a trade marked product, such an agrecment does not come within the exemption provided in Section 5 (a) (2) of thc :McGuire Act amendment. However, this failure to come within such exe\mption does not, in and of itself, cause such an agreement to be an illegal ,"g;reement. 1V' e must the\n look to the provisions of Section 5 (a) (1) of the Federal Trade Commission Act to determine\ whether the\ contracting parties\s are in competition with each other. If they are, the Commission may find such an agreement to be in violation of the Federal Trade Commission Act. If they are not in competition, as, for example, when one retailer doing interstate business is located in San Francisco and another retailer doing interstate business is located in New York City, then the pricing agreement very probably would not be held to be in violation of Section 5 (a) (1) of the Federal Trade Commission Act.

In support of this opinion, I rely some\what upon the definition of Senator Humphrey, wherein he stated that "the test of whether a resale price maintenance contract is horizontal is if it is between competing sellers between\n whom the rE\lation of buyer and seller or resller does not cxist as to the product involved. (Italics added. Now, with regard to a minimum resale price-fixing agreement affecting a trade marked commodity which is entered into between persons, firms, or corporations in competition with each other " the test appears to be that there must be competition between the con- Opinion 50 F.

tracting parties. It appears to be of no importance whether the' contracting parties arc both of the same class or of different classes. For example, if a manufacturer enters into a minimum resale pricefixing agreement with a retailer, and that manufacturer is also in competition with that retailer, such agreement is not made lawful by anything contained in Section 5 (a) (2) of the McGuire Act amendment. Here, then, we must look to Section 5 (a) (1) of the Federal Trade Commission Act to dctcrmine whether such an agreement is illegal. There is nothing in the McGuire Act amcndment which makes it either legal or illegal We next come to the situation in which one of the contracting parties operates in a dual capacity, that is, either as a Iuanufacturerwholesaler, or as a manufacturer-retailer, or as a wholesaler-retailer. Regardless of whether such contracting party is more of a manufacturer than he is a wholesaler, or whether he is more of a manufacturer than a retailer, if that manufacturer-wholesaler or manufacturer-ret.ailer is actually in competition with the other contracting party, then such manufacturer-wholesaler or manufacturer-retailer cannot claim t.hc exemption provided in Section 5 (a) (2) of the McGuire Act amendment. This is due to the language of Section 5 (a) (5) of the McGuire Act amcndment. This position I hold whether the manufacturer conducts his wholesaling activity.ies or his retailing activities as an incidental adjunet of his manufacturing enterprise or whether such manufacturer conducts his wholesaling operations or his retailing operations through the medium 01 whoDy owned subsidiary corporations or where the record is clear t.lmt even if such manufacturer does not wholly own the subsidiary corporation, such manufact.urer dominates the control and operation of such subsidiary. Of course the competition envisaged by Congress, in my opinion cannot be merely de minimis. It will suffce if t.he compet.ition offered by one contracting party to the other is somet.hing more than casual or incidental competition.

DICTOGRAPH PRODUCTS, INC. 281 Syllabus