Ash Grove Cement Co

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IN THE MATTER OF ASH GROVE CEMENT CO.

ORDER, OPINION, ETC., IN REGARD TO ALLEGED VIOLATION OF SEC. I) OF THE FEDERAL TRADE COMMSSION ACT AND SEC. 7 OF' THE CLAYTN ACT Docket 8785. Complaint, July 1969-Decision, Jwne 2.4. 1975 Order requiring a Kansas City, Mo., manufacturer and seller of lime and portland ccment, among other things, to divest itself of two producers of ready mixed concrete in the Kansas City marketing area, and for a ten-year period, not to acquire, without prior Commission approval, ready mixed concrete companies whose purchases of portland cement exceed designated amounts. The Commission also decided that a third acquisition of a quarring business wa.c; not anticompetitive.

. Forapp!aqncP eep, 9!;9, herein Complaint 85 F.

COMPLAINT The ederal Trade Commission, having reason to believe that the above-named respondent has violated the provisions of Section 7 of the Clayton Act, as amended, and Section I) of the Federal Trade Commission Act, 15 U . C. 9918 and 41) and that a proceeding in respect thereof would be in the public interest, issues this complaint stating its charges as follows:

I. DEFINITIONS 1. For the purose of this complaint the following definitions shall apply:

through V of portland a. "Portland cement" includes Tys I cement as specifed by the American Society for Testing Materials. Neither masonry nor white cement is included. b. "Ready mixed concrete" includes all portland cement concrete which is manufactured and delivered to a purchaser in a plastic and unhardened state. Ready mixed concrete includes central-mixed concrete, shrink-mixed concrete and transit-mixed concrete. c. "Kansas City area" consists of the counties of Ca.o;s, Clay, .J ackson and Platte, Mo., and the counties of Johnson and Wyandotte, Kans. II. ASH GROVE CEMENT CO.

2. Ash Grove Cement Co. (hereinafter "Ash Grove ) is a corpmtion organized and existing under the laws of the State of Delaware with its principal office located at 10 Main Center, Kans"., City, Mo. 3. Ash Grove is principally engaged in the manufacture and sale of lime from plants in Portland, Ore., and Springfeld, Mo. and tbe manufacture and sale of portland cement from plants in Louisvile Neb. and Chanute, Kans- In 1966, Ash Grove had net sales of $24 1)14 383 net earings of $4,445 389, and as of Dec. 31, 196, ".,sets of $51 260 681.

4. The Kansas City area is one of the principal markets for portland cement manufactured at Ash Grove s Chanute, Kas. plant. Ash Grove has sold portland cement in the Kansas City area since approximately 1908 and, since 1962, h"., operated a portland cement transfer station in Kansas City, Rans. to better serve its customers by truck in and around s Chanute, Kas- plant the Kansas City area. In 196, Ash Grove shipped almost 2.1 million barels of portland cement of which almost . million barels were shipped to customers in the Kansas City area. Ash Grove has been one of the three leading portland cement suppliers to the Kansas City area since at le". t 1961.

5. At all times relevant herein, Ash Grove was engaged in sellng \.. ... :..

1\.ojl1 1., UHl' -,n. \JU. 1123 Complaint and shipping portland cement in interstate commerce and was a corporation engaged in commerce, as "commerce" is defined in the Clayton Act and Federal Trade Commission Act. II. FORDYCE CONC ETE, INC.

6. Fordyce Concrete, Inc. (hereinafter "Fordyce ) wa.s, prior to Nov. 8, 1966, a corporation organized and existing under the laws of the State of Kansas with its principal offce located in Kansas City, Kans. 7. Since 1961, Fordyce had been engaged in the production and sale of ready mixed concrete in the Kansas City area and on Nov. 8, 1966 was operating two ready mixed concrete plants in the Kansas City area. For the fiscal year ended Jan. 31 , 1!J66, Fordyce had sales of 804 068, net profit of $:H 91O, and as of Jan. ;U, 196, total assets of 21)9 003.

8. Fordyce has been one of the leading producers of ready mixed concrete and consumers of portland cement in the Kansas City area since its organization in 1961 and, in 196, sold over 216 00 cubic yards of ready mixed concrete and consumed over 299 00 barels of portland cement.

9. At all times relevant herein, Fordyce was engaged in sellng and shipping ready mixed concrete and purchasing portland cement in interstate commerce and was a corporation engaged in commerce, as commerce" is defined in the Clayton? Act.

IV. ACQUISITION 10. On June 1, 1964, Ash Grove purchased 5 225 shares of authorized but previously unissued share of Fordyce for $100 00 which resulted in its ownership of 1)0 percent of the outstanding stock of ordyce. On Nov. 8, 1966, Ash Grove purchased the other 5 225 outstanding shares of Fordyce for $300 , giving Ash Grove 100 percent ownership of Fordyce.

v. L S SJJMMIT READY-MIXED CONCRETE & MATERIALS COMPANY II. Lee s Summit Ready-Mixed Concrete & Materials Company (hereinafter Lee s Summit) wa.-., prior to ,Jan. 4, 196, a corpordtion organied and existing under the laws of the State of Missouri, with its principal offce located in Kansas City, Mo. 12. Since 191)1), Lee s Summt had been engaged in the production and sale of ready mixed concrete in the Kansa., City area and, on Jan. 4 1966, was operating two ready mixed concrete plants in the Kansas City area. Lee s Summit wa.' also eng-dged in the production and sale Complaint 85 I".T.

ready mixed concrete in Springfeld, Mo. from about September 196 through about May 1966. For the fiscal year ended Feb. 28, 1966, Lee , Summit had sales of $1 603 751 , net profit of $21 593, and as oO' eb. 2B 1966, total assets of $459 750.

13. Lee s Summit has been one of the leading producers of ready mixed concrete and consumers of portland cement in the Kansas City area since 1961 and in 1966 sold over 66 00 cubic yards of ready mixed concrete and consumed over 91 000 barrels of portland cement. 14. At all times relevant herein, Lee s Summt was engaged in selling and shipping ready mixed concrete and purchasing portland cement in interstate commerce and was a corporation engaged in commerce, as "commerce" is defined in the Clayton Act. VI. UNION QUARRIES 15. Prior to ,Jan. 4, 1966, Union Quarres was a division of Union Construction Company, Kansas City, Mo. The owners of Union Construction Company also owned two-thirds of the outstanding stock of Lee s Summit. Union Quarries operated rock quarrying and crushing operations at the two Kansas City area locations on which Lee Summit also operated ready mixed concrete plants. Union Quares also had a third Kansas City area location in Lenexa, Kans. It sold cruhed stone and portland cement treated base rock in the Kansas City area from all three locations. In 196, it consumed over 26 00 barels of portland cement.

16. At all times relevant herein, Union Quares was eng-dged in sellng and shipping crushed stone and portland cement treated base rock and purchasing portland cement in interstate commerce and wa. engaged in commerce, as "commerce" is defined in the Clayton Act and Federal Trade Commssion Act.

VII. ACQUISITION 17. On Aug. : , 1962, Ash Grove purcha. ed one-thid of the outstanding common and preferred stock of Lee s Sumt for $47 1)00. On Jan. 4, 1966, Ash Grove purchased the other two-thids of the outstanding common and preferred stock of Lee s Summt for $200 00. Also, on .J an. 4, 1966, as par of the same transaction and agreement by which the Lee s Summt stock was acquired, Ash Grove purchased from six individuals, real estate, machinery, equipment and other property used in the Union Quarres quaring business for $1 050 00. On Jan. , 1966, Ash Grove assigned all of the rights and obligations with regard to the assets used in the opemtion of Union Quares to its .

'HJ' ....U. L. '--'''~.L.L'' ' 1123 Complaint newly organized wholly-owned subsidiar, Union Inc. a Quares, Missouri corporation, which now owns the assets. VIII. MERGER 18. 'On Apr. 25, 1966, the -name of Lee s Summt was changed to Sumt Ready Mix Co. (hereinafter "Sumt"). Ash Grove transferred the assets of Summt to Fordyce, its wholly-owned subsidiar on Dec. , 1966 and liquidated Summt as of Dec. 31, 1966. As of Dec. 31, 1966 Fordyce had assets of over $1 700 00 and operated four ready mixed concrete plants in the Kansas City area (two former Lee s Summt plants and two former Fordyce plants) under the trade name Fordyce-Summit. IX. NATURE OF TRADE AND COMMERCE 19. Portland cement is a material which in the presence of water binds aggregates, such as sand and gravel, into concrete. Portland cement is an essential ingredient in the manufacture of concrete and it represents about 60 percent of the material cost and over one-third of the total cost of manufacturng, distributing and sellng ready mixed concrete, the only form in which concrete is sold as a commodity. 20. The portland cement industry in the United States is substatial. In 19(jj, there were about 1)0 portland cement companies in the United States operating approximately 184 plants. Total shipments of portland cement in that year amounted to approximately 390 milion barels, valued at about $1.2 billion.

21. Portland cement manufacturers sell their portland cement to consumers such as ready mixed concrete companies, concrete product manufacturers, contractors and building material dealers. On a national basis, approximately 60 percent of all portland cement .is shipped to firms engaged in the production and sale of ready mixed concrete. However, in heavily populated metropolitan areas, the percentage of portland cement consumed by ready mixed concrete companies is generally higher. In general, portland cement consumers have not been integrated or affiiated with portland cement manufacturers. Each bas operated independenUy on a vendor-vendee basis. 22. In recent year, there has been a signficat trend of merge"s and acquisitions by which ready mixed concrete companies in major metropolitan markets in varous portions of the United States have become integrated with portland cement companies. Since 1959, there have been at least 40 such acquisitions.

2R Each vertical merger or acquisition which occur in the portland cement industry potentially forecloses competing portland cement Complaint 85 F.

manufacturers from a segment of the market otherwse open to them and places great pressure on competing manufacturers likewise to , acquire portland cement consumers in order to protect their markets. Thus, each such vertical acquisition may form an integral part of a chain reaction of such acquisitions-contributing both to the share of the market already foreclosed, and to the impetus for further such acquisitions.

24. I n the Kansas City area the trend toward vertical integration is well advanced. Four of the leading ready mixed concrete sellers and portland cement consumers in this area have become integrated with portland cement companies since 1963 through acquisition. More than 40 percent of the market for portland cement in the Kan as City area has been potentially foreclosed by vertical integration. X. EF"ACTS OF THE ACQUJSITIONS 25. The effect of the acquisitions of Fordyce and Lee s Sumit and their merger into one operation and the acquisition of the assets used in the operation of Union Quarres, both in themselves and by aggravating the trend of vertical mergers and acquisitions, may be substantially to lessen competition or to tend to create a monopoly in the manufacture and sale of (1) portland cement and (2) ready mixed concrete in the United States as a whole and various pars thereof, including the Kansas City area, in the following ways, among others: a. Ash Grove s competitors have been and/or may be foreclosed from a substantial segment of the market for portland cement. b. The ability of Ash Grove s non-integrated competitors effectively to compete in the sale of portland cement and ready miJ;.ed concrete has been and/or may be substantially impaired. c. The entry of new portland cement and ready mixed concrete competitors may have been and/or may be inhbited or prevented. d. The production and sale of ready mixed concrete, usually a decentralized, locally controlled, small business industry, has become concentrated in the hands of a relatively few manufacturers of portland cement.

XI. VIOLATIONS CHAGED 26. The acquisitions by Ash Grove of Fordyce and Lee s Sumt and their merger into one operation constitute separately and collectively violations of Section 7 of the Clayton Act, as amended, and the acquisition of the assets used in the operation of Union Quarres constitutes a violation of Section 5 of the Federal Trde Commission Act.

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IJ23 Initial Decisi(jn INITIAL DECISION BY ADMINISTRATIVE LAW JlIE ANDREW GOODHOPE SEPTEMBER 23, 1974 STATEMENT OF PROCEEDINGS The Federal Trade Commission on July 8, 1969, issued its complaint in this proceeding charging Ash Grove Cement Company ("Ash Grove ), a corporation, with having violated Section 7 of the Clayton Act, as amended (11) C. 918), by its acquisition of Lee s Summit Ready-Mixed Concrete & Materials Company ("Lee s Summit"), and Fordyce Concrete, Inc. ("Fordyce ). The complaint furher charged Ash Grove with violation of Section 5 of the Federal Trade Commission Act, as amended, (11) U. c. 945), by its acquisition of certain assets from individuals, which assets were formerly a division f Union Construction Company of Kansas City, Mo. The complaint was duly served on respondent Ash Grove and respondent appeared by its counsel and filed an answer admitting certain of the alleg-dtions of the complaint by denying that it had violated Section 7 of tbe Clayton Act or Section 5 of the Federal Trade Commission Act. Extensive hearings were thereafter held, at which time testimony and documentar evidence were offered in support of and in opposition to the allegations of the complaint. At the close of all the evidence and pursuant to leave granted by the administ.:ative law judge, proposed findings of fact, conclusions of law, briefs and proposed orders were fied by counsel supporting the complaint and counsel for the respondent.

Proposed fimlings not herein adopted either in the form or substance proposed are rejected as not supported by the evidence or as involving immaterial matters. Having reviewed the entire . record in this proceeding, including the proposed findings and briefs, the administrdtive law judge, based upon the entire record, makes the following: FINDINGS OF FACT THE RESPONDENT I. Ash Grove Cement Company is a corporation org-dnized and existing under the laws of the State of Delaware, with its principal offce located at 10 Main Center, Kansas City, Mo. 2. Ash Grove is principally engaged in the manufacture and sale of lime from plants in Portland, Ore., and Springfeld, Mo., and the manufacture and sale of portland cement from plants in Louisville , The ,, scntjal juri~didi("'al facts and f"et enne"tT;ng- the various "eq"visit.i"n~ were aUe!'ed in the complaint and admitted inr"Hp"nd"'IIL'~all wcr ;,H9- 7'1'J ()- /r..

11ao FEm RAL TRADE COMMISSION DECISIONS Initial Dccision 85 F, Nebr., and Chanute, Kans. In 1966, Ash Grove had net sales of $24 1)14 388 net earnings of $4,445 389 and as of Dec. :n, 1966, assets of , $51 260 681.

8. At all times relevant herein, Ash Grove was a corporation engaged in commerce, as "commerce" is defined in the Clayton Act and the Federal Trade Commission Act.

Fordyce Concrete, Inc.

4. On June 1, 196, Ash Grove purchased 5 225 shares of authoried but previously unissued shares of Fordyce for $100 00 which resulted in its ownership of 50 percent of the outstanding; stock of Fordyce. On Nov. 8, 1966, Ash Grove purchased the other 225 outstanding shares of Fordyce for $:500 000 giving Ash Grove 100 percentuwnership of Fordyce.

5. Prior to Nov. 8, 1966, Fordyce was a corporation orgaed and existing under the laws of the State of Kansas, with its principal offce located in Kansas City, Kans.

6. Since 1961, Fordyce had been engaged in the production and sale of ready mixed concrete in the Kansas City metropolitan area KCMA") and on Nov. 8 1966 was operating two ready mixed concrete plants there. For the fiscal year ended Jan. 31, 1966, Fordyce had sales of $2 804 068, net profit of $:M 91O and as of Jan. 31 196, total assets of 7. At all times relevant herein, Fordyce was a corpration engaged 21)9003. in commerce, as "commerce" is defined in the Clayton Act. Lee s Summit Ready-Mixed Concrete & Materials Company 8. On Aug. 31, 1962, Ash Grove purchased one-thid of the outstanding common and preferred stock of Lee s Summit for $447 500. On ,Jan. 4, 1966, Ash Grove purchased the other two-thids of the outstanding common and preferred stock of Lee s Sumt for $200 00. 9. Lee s Summt was, prior to Jan. 4, 196, a corporation org;anied and existing under the laws of the State of Missour, with its principal offce located in Kansas City, Mo.

JO. Since 1955, Lee s Summit had been engaged in the production and sale of ready mixed concrete in the KCMA and on Jan. 1, 1966, was operating two ready mixed concrete plants there. Lee s Summit was also engaged. in the production and sale of ready mixed concrete in Springfield, Mo., from about September 1963 through about May 196. For the fiscal year ended Feb. 28, 196, Lee s Summit had sales of 603 71)1 net profit of $21 59: and total assets of $41)9 750. II. At all times relevant herein, Lee s Summt was a corpomlion engaged in commerce, as "commerce" is defmed in the Clayton Act. 12. On Apr. 25, 196, the name of Lee s Summit was changed to Summit Ready Mix Co. (hereafter "Summit"). Ash Grove transferred J-0rl \TI\VVI', v!"lnr..l'11 tAJ. 1M1 1123 Initial Decision the assets of Summt to Fordyce, its wholly-owned subsidiary, on Dec. , 1966, and liquidated Summit as of Dec. 81, 1966. As of Dec. 31, 1966 Fordyce had assets of over $1 700 000 and operated four ready mixed concrete plants in the KCMA (two former Lee s Summit plants and two former Fqrdyce plants) under the trade name Fordyce-Summt. Union Quarries 13. On Jan. 4, 1966, as par of the same transaction and agreement by which the Lee s Summt stock was acquired, Ash Grove purchased from six individuals, real estate, machinery, equipment and other property used in the Union Quarries quarng business for $1 050 00. On Jan. 13, 1966, Ash Grove assigned all of the rights and obligations with regard to the assets used in the operation of Union Quares to its newly organized wholly-owned subsidiar, Union Quarres, Inc., a Missouri corporation, which now owns the assets. 14. Prior to Jan. 4, 1966, Union Quares was a division of Union Construction Company, Kansas City, Mo. The owners of Union Construction Company also owned two-thirds of the outstanding stock of Lee s Summit.

11). Union Quares operated rock quarng and crushing operations at the two Kansa., City locations on which Lee s Summit operdted ready mixed concrete plants. Union Quares also had a thi Kansas City area location in Lenexa, Kans. It sold crushed stone and portland cement treated ba.,e rock in the Kansas City area from all three locations. In 1965, it consumed over 26 00 barels of portland cement. 16. At all times relevant herein, Union Quares was engaged in commerce a." "commerce" is defined in the Clayton Act and Federal Trade Commission Act.

Lines of Commerce 17. The complaint alleges that the effect of the acquisitions of Fordyce and Lee s Sumit and the acquisition of the assets of Union Quares may be substantially to lessen competition or to tend to create a monopoly in the manufacture and sale in two lines of commerce: (1) portland cement and (2) ready mixed concrete. The respondent denies this allegation.

18. Portland cement is a material which in the presence of water binds aggregates, such as sand and grvel, into concrete. Portland cement is an essential ingredient in the manufacture of concrete and is the most predominant cement manufactured in the United States (Admitted, Ans. Para. 19; CX 98).

19. The portland cement industry in the United States is substantial. In 19f;6, there were about 50 portland cement companies in this country operating approximately 184 plants. Total shipments of portland cement in that year amounted to approximately 390 millon , p.

Initial Decision 85 F.

1)3 , 1)1)barrels, valued at about $1.2 billon (CX 46, 47, 49, 1)0, 51, 52 and 68).

20.' Portland cement manufacturers sell their product to consumers such as ready mixed concrete companies, concrete product manufacturers, contractors, and building material dealers (Admitted, Ans. Para. 21).

21. On a national basis, approximately 60 percent of all portland cement is shipped to firms engaged in the production and sale of ready mixed concrete. However, in heavily populated metropolitan areas, the percentage of portland cement consumed by ready mixed concrete companies is generally higher (CX 19, Table 16; 1)0, Table 17; 51 and 52 Table 15; 53 and 55, Table 14, and 94).

22. In general, portland cement consumers have not been integrted or affiliated with portland cement manufacturers. Each has operated independently on a vendor-vendee basis (CX 99; Tr. 1640-4 2549).

23. Durng the late 1950' s and into the 1960' , there has been a signficant trenq of mergers and acquisitions by which ready mixed concrete compames in various markets throughout the United States have become integrated with portland cement companies. Since 191)9 there have been at least 40 suchacquisitions (CX 74). 24. Portland cement is a homogehous product manufactured to standard specifications of the American Society for Testing Materials (ASTM). Generally, the product of one manufacturer is physically substitutable for the product of another (Tr. 2103, 2112, 2208, 2308- 2365, 2472, 2627; CX 39C, CX 54, p. 3). There are five basic types of portland cement included in the ASTM specifications. Whle these five types are used by concrete manufacturers, Types 1 and II are the most predominantly produced and used, accounting for more than 90 percent of the sales of portland cement (Table 4 of CX 49 and 50; Table 3 of CX 53 and 55; Tr. 2105- , 2203-04). The same manufacturing process and raw materials are used in producing Tys I through V of portland cement. Differences in types occur in the composition of the raw materials, burning temperature, and the fmeness of grinding (CX 54 3; 11Q; Tr. 2105-07, 2181, 2203-01), 2270, 2308, 2365). 25. Durng the 1960' , portland cement was sold in units of sacks representing 94 pounds and barels representing four sacks or 376 pounds. The majority of portland cement was shipped in bulk (CX 41 0 , pp. 4 and 13; 'IT. 2119- , 2205, 2458). 26. Portland cement is a hydraulic cement which means it will harden under water. However, it is distinguishable in its characteristics and uses from other hydraulic cements such as masonr and natural cements. Masonry cement has a portland cement base but it is not i\;J11 lil'tUV t-; Ct.lVU:';NT LU. 11; 1I2:J Initial Decision portland cement. Masonry cement is used to lay bricks or block Masonry cement is usually shipped in sacks rather than bulk and a barrel of it weighs 280 pounds compared to a barel of portland cement which weighs 376 pounds. Masonry cement ha.o; different customers and prices than portland cement (CXM, p. 4; Tr. 2107- , 2205). 27. Portland cement is manufactured from raw materials such as limestone, clay, shale and alumna, which are combined, bured and ground with gypsum to an extreme fineness (CX 54, p. 3; CX 41E; Tr. 2103- 2202).

28. The portland cement industry is a highly capital intensive industry ('fr. 2627 , 2112-I:i). In addition to requiring large amounts of raw materials, a portland cement plant needs large blending tan loading and conveying facilities, primary and secondary crushers, kilns finished grinding equipment and varous shipping devices. Only portland cement and subtyps have been made with this specialed equipment (CX 41; Tr. 2112- , 2209). Due to the high IlXed costs experienced by the industry, a plant must be operated at high levels of capacity in order to reduce unit costs sufficiently to break even or mae a profit (Tr. 214:i, 2240-41, 2315, 2627). Dung the period 1961- , if a plant was only selling at 1)0 percent of its capacity, it would not be running profitably (Tr. 21 2240-41 , 226.'1, 2419). A plant would have had to be producing at 81)-90 percent of its capacity to make a profit at that time (Tr. 2144). In addition to the large investment in equipment, a new plant faces preoperating costs. There i' an initial staup period during which costs are high and profits are not expected. It was not unusual in the portland cement industry for a new plant to experience a starup period of 2 or 3 year before achieving profitability (Tr. 2,'l- , 2:i60).

29. Ready mixed concrete producers have been the most important purchasers in terms of regularty and quantity of purchases (CX 181 39D; Tr. 2113 2111)- 2209- , 2312- , 23(;&7). Although beavy contractors are large purchasers of cement, their purchases were more seasonal, sporadic and geographically dispersed than those of the ready mixers (Tr. 2161-62, 2192, 2366).

30. The principal use of portland cement is in the manufacture of concrete; it has no utility by itself (CX 41E, 54, p. 6; Tr. 2104, 2202 2602). There is no practica substitute for portland cement in the manufacture of concrete (CX 38G, 54, p. 7; Tr. 2104, 2202- , 245, 2502; Stipulation re Shaw and Davis, Tr. 2514- , 2602). :U. In the sale of their product, manufacturers of portland cement consider their competitors to be other manufacturers of portland cement (Tr. 2113, 2367, 2210, 2313). On construction projects, owners architects and engineers determine what materials wi be used. It is Initial Decision 85 F.

only after that determnation is made that contractors, who actually purchase the materials, will solicit bids from the suppliers of the , materials specifed (Tr. 2113-14). The primar functions of the sales organiations of portland cement manufacturers were the promotion and sale of portland cement. Although salesmen of some manufacturers sold both portland and masonry cements, Universal Atlas, for example separated portland cement from other cements by organiing two sales deparments (Tr. 2118, 2214, 2264, 2369- , 2390). 32. The price of portland cement was determined on the basis of the value at the mill (mill base) plus freight cost to destination. A manufacturer would determe his price in relation to prices charged by competing portland cement producers in a particular market. If his mil was farther away from the market than that of a competitor but his mill base was the same, he would have to absorb freight in order to remain competitive. Prices were thus determined without reference to the prices of other products (Tr. 2119- , 2370, 2391- , 2220). In addition, the lowering of cement prices would not increase the tota demand for that product over other products because the demand for cement is derived from the level of construction activity generally and is inelastic (Tr. 2281, 2606).

33. Portland cement is a relevant line of commerce within the meaning of Section 7 of the Clayton Act, as amended, and a relevant product market for purposes of Section I) of the Federa Trde Commission Act. This conclusionar finding is in accord with previous Commssion and cour decisions to the same effect, which are, of coure, binding on the administrative law judge. Pernente Cement Company, 67 F. C. 334 (196); Diarrnd Alkali Co., 72 F. C. 700 (1967); U.S. Steel Cor. 74 F. C. 1270 (196), rev' On other grounds 426 F.2d 592 (6th Cir. 1970); Mississippi River Fuel Cor. 75 1". C. 813 1972); Mi13smLri Portland (1969), affrmed 454 F.2d 10&1 (8th Cir. Cem,"nt Co., (1967-1970 Transfer Binder) Trde Reg. Rep. Paragrph 805 (l96!J) (76 F. C. 10641; Marquette Cement Manufacturing Co. 75 F. C. ; 2 (1969); OKC Cor. 77 F. C. 1342 (1970), affrmed, 455 2d 1159 (10th Cir. 1972). There is nothing in the arguents to the contrary of respondent which indicate that a reversal of these decisions should be made at this time.

:M. Ready mixed concrete is a material produced by combining portland cement, aggregates such as rock and sand, water, and occasionally certain admitures (CX 381"; Tr. 2441, 2502; Stipulation re Shaw and Davis, Tr. 2514-15). Of these essential raw materials portland cement is the most expensive and no other cement is considered to be a prdctical substitute (CX 38G; CX 54, p. 7; Tr. 24 2502; Stipulation re Shaw and Davis, Tr. 2514- 11); Tr. 2602). Portland , LiKUV 1'; L;1';lV1';Nl L;U. ll;ih JI23 Initial Decision cement represents approximately 60 percent of the raw material cost and 35 percent of the total cost of producing, distributing, and selling ready mixed concrete (Tr. 2446-47, 2502; Stipulation re Shaw and Davis Tr. 21)14-15). Coarse aggregate is the second most costly raw material in ready. mixed concrete accounting for 25 percent of the raw material cost (Tr. 2447, 2502; Stipulation re Shaw and Davis, Tr. 2514-15). a5. There are three methods by which ready mixed concrete can be produced. In a central-mix operation all the raw materials are completely mixed at the plant, and the concrete, which is ready to be poured at the time it is loaded into the hauling vehicles, is then transported to the point of usage. In a transit-mix operation, the dry ingredients arc measured and loaded into the hauling vehicles. Water is added on the way to the job site. Shrink-mixing is the process by which the ingredients are parially mixed at the plant and furher mixed at the point of usage (CX asf, CX 4: , p. 32D-2; Tr. 241-42). The ready mixed concrete produced by any of these methods is delivered to purchasers in a plastic, unhardened state (CX 3SZ2; Tr. 2441, 246 21)17).

36. The equipment used to produce ready mixed concrete consists of conveyors, bins, scale hoppers, and trucks equipped with revolving drum bodies to mix and haul the concrete. This equipment is specialized and cannot readily be used for any purpse other than the production and dislribution of ready mixed concrete (CX 3SF-G; Tr. 24441; Stipulation re Shaw and Davis, Tr. 2514-15). - 37. Producers of ready mixed concrete generally do not manufacture and sell any other products (CX 38D, CX 4.1, p. 32D-2; Tr. 241 2501 2516; Stipulation re Shaw and Davis, Tr. 2514-15). as. Ready mixed concrete is produced to meet specifications which require the concrete to withstand certin pounds of pressure per square inch. These different pressure levels are known as ' strengths. The strength is increased usually by increasing the amount of portland cement per cubic yard of ready mixed concrete to be produced, and reducing the amount of water and/or aggregate. Increased strengths of concrete require the use of increased quantities of portland cement resulting in higher production costs and sales prices. (CX 381, J; Tr. 244 2455-58; Stipulation re Shaw and Davis, Tr. 2514- , 1862, 1758 lR:M).

a9. Ready mixed concrete is sold principally to contractors or subcontractors for use in the construction of cOnTercial buildings, schools, residential structures, foundations, sidewalks, bridges and roads. Mter the concrete is delivered lo the job site, the contractor or builder is responsible for puttng it in place (CX 3SW; 'l". 249, 2503 16R2, Ino, 1732; Stipulation re Shaw and Davis l". 2514-15). , 11;36 FEDERAL TRADE COMMISSION DECISIONS Initial Decision 85 F.T. 40. On sizeable construction projects, architects and structural engineers, together with the owners, determine which building material , will be used and the specifications are submitted to general contractors for bids. The general contractor in turn receives bids from suppliers of the designated materials. Where the use of concrete is specified, only ready mixed concrete companies will compete for that portion of the project. Whenever concrete was required on any project in the KCMA contractors and builders obtained their concrete almost entirely from ready mixed concrete producers (CX ; , X; Tr. 2451- , 2454; Stipulation re Shaw and Davis j'r. 21)14- 11) 1728-;)0 1887 1773). 41. In the KCMA, all ready mixed concrete producers competed with each other for both commercial and residential jobs with the exception of very large construction pours which could be handled only by the larger multiplant companies (Tr. 2449- , 248- , 25m, 2510 2574, 1682, 1735, 1916- , 1862-6:3, 188). However, when identifying their suppliers, contractors specified both small and large concrete companies (Tr. 1818- , 1937-41, 186:1-B7). Furhermore, small ready mixed concrete producers considered themselves to be in competition with the larger companies (Tr. 2504- , 2522, 2548, 190- , 1922-23). 42. Producers of ready mixed concrete are not infuenced in their determination of prices to be charged for their product by price changes of other building materials (Tr. 175I), 1856). 4R Ready mixed concrete companies have standard day-to-day prices which usually apply to their smaller classifications of jobs. On most other jobs, ready mixed concrete is ,generally priced on an individual quotation basis. The price quoted by producers is influenced by the cost of materials, the specifications of the job, tbe size ofthe job the distance from producing plants and the expected price of competitors (Tr. 241)2 2456, 2462-f'; ; Stipulation re Shaw and Da\is, 1'r. 2514-15; Tr. 1700, 1710- 1728-32).

44. Ready mixed concrete producers in the KCMA produce concrete of equal quality. Price is the primary basis of competition between them and is the principal determinative factor in the sale of ready mixed concrete. During 1961-196, a price differential of 21) cents or less per yard could have caused a customer to switcb suppliers (CX 38Z3-4; Tr. 2458-60; Stipulation re Shaw and Davis, Tr. 2514- 15; Tr. 1712, 19:16, 1822, 1862, 1879 171)3, 1758). 45. Other factors which may influence the selection of a concrete supplier are the ability to provide good service, prompt delivery, terms of payment offered and business relationships (CX 38Z4; Tr. 2453 2458-60; Stipulation re Shaw and Davis, Tr. 21)14- 11); Tr. 175.3, 1937 1942).

46. Producers of ready mixed concrete considered themselves A;:11 GltUV 1' C1'Ml':NT co. 1137 112:J Initial Decision members of the ready mixed concrete industry. Ready mixed concrete producers in the KCMA formed a trade association (Tr. 2463; Stipulation re Shaw and Davis, Tr. 2514- 11)). 47. The Bureau of the Census of the U.S. Department of Commerce recozrzed ready mixed concrete as a separate and distinct industry' and has assigned it a separate Standard Industrial Classifcation code (CX 43 and 99).

48. Ready mixed concrete is a relevant line of commerce within the meaning of Section 7 of the Clayton Act, as amended, and a relevant product market for puroses of Section 5 of the Federal Trade Commission Act. This conclusionary finding is also supported by the varous Commission and court cases cited above in Finding 33. Tbe respondent makes several arguments to the effect that the larger multiplant ready mixed companies do not compete with smaller single plant operations. It is true that the multiplant operations get the bigger jobs; however, there is ample evidence of competition among all ready mixed companies requiring that such arguent be rejected. Respondent presents nothing else that would cast any doubt upon the prior Commission and cour decisions involving this same line of commerce. Section of the Country 49. The complaint alleges that the effects of the merger "may be substantially to lessen competition or to tend to create a monopoly in the manufacture and sale of (1) portland cement and (2) ready mixed concrete in the United States as a whole 'and various pars thereof including the Kimsa.s City area, *" The evidence, however, was primarily directed to establisbing the effects in the Kansas City area. The Kansas City area was defined in the complaint as consisting "of the Counties of Cass, Clay, Jackson and Platte, Mo., and the Counties of Johnson and Wyandotte, Kans." Respondent urges that the six counties surrounding Kansas City, Mo., and Kansas City, K3ns., are not a realistic market area within which to measure the effects of the merger upon the sale of either portland cement or ready mixed concrete. 50. Portland cement is not generally shipped more than 300 miles from the location of the mi in which it is produced, except where water transportation is available. Consequently, the geogrphic markets served are limited because of portland cement's high shipping cost in relation to its low product value and high product weight (CX , pp. 12, 13; Tr. 2120- 211)0 2158, 2164-65). Metropolitan markets have been recogred as important markets for the distribution of portland cement because of the concentration of population and the resulting construction activity and the continuous portland cement demand and consumption. These metropolitan markets include such 1138 n:mmal TRADE COMMISSION DECISIONS Initial Decision 85 F.

cities as Kansas City; Topeka, Kans.; Lincoln and Omaha, Nebr. Oklahoma5t, MetropolitanCity and Tulsa,marketsOkla.differ(CX 96C,since39E;thetr.various2122- producing, 2317-22). companies shipping portland cement into the varous markets will differ depending upon the location of their plant and prices vary from one metropolitan market to another. Competing suppliers of portland cement must offer timely delivery of their products since ready mixed concrete producers, the most important class of portland cement customers, have limited storage facilities. Unless a mill is within a metropolitan area, such as Kansas City or located nearby, it will generally have a distribution terminal to which the porthnd cement is shipped and then reshipped to the customer promptly upon the receipt of orders (Tr. 2122- , 2228- , 2322- , 2392- , 2191- , 2126-27, 2317- , 2396).

52. The Kansas City marketing area (KCMA) as defined in the complaint consumed substantial quantities of the shipments made by those competitors which had mils or terminals located within it. In 1965, 49.4 percent of all shipments made by the Sugar Creek, Mo., mill of Missour Portland Cement Company were made to destinations located within the KCMA. In the same year, 31.6 percent of all shipments made by tbe Bonner Sprigs, Kans., mill of Lone Sta Cement Corporation were made to customers located within the KCMA. In 1965, respondent, Universal Atlas Cement Division of U. Steel, General Portland Cement Company and Mississippi River Corporation, each operated a distribution terminal within the KCMA. In that year, 86.7 percent, and in 1966, 79.9 percent of all shipments from the terminals were made to destinations located within the KCMA. In 1965, 6H.1) percent and in 196, 72.0 percent of all portland cement shipments to all destinations located within the KCMA were made from the Kansas City area mills of Missour Portland Cement Company and Lone Star Cement Corporation and the Kansas City area terminals of respondent, Universal Atlas Cement Division of U. Steel, General Portland Cement Company and Mississippi River Corporation (CX 77, 78 80; Tr. 2677, 3135, 325: 53. In 1961, eight companies shipped portland cement to customers located within the Kansas City area. In 196, these same eight companies and two new entrants were the only companies shipping portland cement to destinations located within the Kansas City area and were the only practicable sources of supply for portland cement recogned by consumers in that area (CX 79, 80; Tr. 2473; Stipulation re Shaw and Davis, Tr. 2514- 15).

54. Respondent served the Kansas City area from a mill located at Chanute, Kans., and from a terminal located within tbe KCMA In 1965 ..

.l' vnv :'.dnlJl vV. 112 Initial Decision 7 percent of all shipments from respondent's Chanute, Kans., mill were made directly to Kansas City area destinations. In the same year 87.5 percent of all shipments from respondent' s Kansas City, Kans. terminal were made to destinations within the Kansas City area (CX , 6B, HI; 17H, 18G, 77, 7H; Tr. Hi25). .

1)1). The Kansas City area was an important portland cement market, consuming 17.3 percent of all shipments by the mills and terminals of the companies serving that area in HJ65. The KCMA was defined by portland cement suppliers as the densely populated area surrounding Kansas City (CX 39E, 77, 78, 94; Tr. 959- , 1625, 2169 2221- , 2322, 2373).

56. Prior to the acquisition of Fordyce, Lee s Summit and Union Quarres, respondent recognzed a trend towards vertical integration to be occurrng within the Kansas City area (CX 18B, a!JQ). 57. Respondent considered the KCMA market area, as defined in the complaint, as an important market and outlet for its portland cement production (CX 39E, 96C; Tr. 164, 1650 3185 3268). 5H. The Kansas City area, as defined in the complaint, is an appropriate and relevant section of the country within the meaning of Section 7 of the Clayton Act, as amended, in which the effects of the challenged acquisitions in the manufacture and sale of portland cement may be determined, and is an appropriate market for puroses of Section 5 of the Federal Trade Commssion Act. 59. The effective marketing area for ready mixed concrete produced from plants within the KCMA vary, but generdlly do not exceed 21) miles of the producing plant and nearly all of the ready mixed concrete produced by competitors within the KCMA was sold to customers also located within that area. Ths market is limited by the perishability of the product, transportation costs, delivery time licensing restrictions, radio communications with delivery units, and service requirements of customers (CX asQ- , T, S; Tr. 175:, 1709 17R5, 2502- , 2517- , 2542).

fio. Some producers of ready mixed concrete located within the KCMA utilized more than one plant so as to get better coverdge of the metropolitan area. These producers all identifed their competitors as those other producers of ready mixed concrete also located in the KCMA and all producers competed with one another on the basis of price, quality and servce (Tr. 1710- 2521- 258-9 24- 2517- , 2543).

fil. The prices at which ready mixed concrete was sold within the Kansas City area are different than the prices in other market areas and were highly competitive and uniformly depressed during the period 1961 to 1961) (Tr. 162:3, 1720- 1751), 21)1)0-51). During 1965, the 1140 FEDERAL TRAIn: COMMISSION DECISIONS 1 nitial Decision 85 F. producers of ready mixed concrete within the KCMA consumed 73. percent of all portland cement shipped into the area (CX !J4). 62. , Prior to their acquisitions, Fordyce and Lee s Summit were major competitors in the ready mixed concrete market in the KCMA and Union Quarres sold aggregates in the KCMA and was one of the largest suppliers of aggregates in the area (CX SP, R, 17C, 37C, 37E IOJ).

fi;J. The respondent recogned Kansas City as a separate and distinct market when it purchased Fordyce and Lee s Summit and included in the purchase agreements covenants not to compete within 20 or 30 miles of the Kansas City, Mo., City Hall (CX 23D, G, ;J2Q and 20C).

64. The Kansas City area, as defined in the complaint, is an appropriate and relevant section of the country within the meaning of Section 7 of the Clayton Act, as amended, in which the effects of the challenged acquisitions in the manufacture and sale of ready mixed concrete may be determined and is an appropriate market for purposes of Section I) of the Federal Trade Commission Act. 61). Respondent urges that there are other much wider areas which should be included in any attempt to measure the effects of the acquisition insofar as the sale of portland cement is concerned. The thrust of respondent's arguent is pricipally that the suppliers of portland cement to the Kansas City area sell to a much larger area than just Kansas City and that the effect upon competition must be measured through the entire areas of any of the competing cement producers who ship cement. Respondent first stars with a 23-State area into which the various companies supplying Kansas City ship, then reduce this to a 15-State area and then to a 6-Statearea which include the six contiguous States closest to the Kansas City area and finally to a 2-State, Kansas-Missour, market (Resp. Prop. Finds. 28, 286, 28 293). The argument is that the shipments made to the Kansas City area are so small when compared with shipments made to the larger areas that the Kansas City shipments must be considered insignficant or rrtln-tmu;.

fi6. In the first place, the Commssion has had occasion to judge the relevant market for portland cement in several prior cases. In each of these, the finding has been that metropolitan areas are distinct and well-defined local markets within broader geographic markets, and are the relevant markets for the purose of measuring the effects of an acquisition by portland cement producers of ready mixed concrete producers. Marquette Cement Manujadunng C(yrnpany, supra; Mi, sissippi River Fuel Corp. supra; U.s. Steel Corp. , supra; and OKC Corp., supra. On appeal, the Sixth Circuit upheld the Commission I\;:n lX.tUV l;r..dV1 lY1 LU. 11'11 112:J Initial Decision determnation in Docket 861)1), U.S. Steel Corp. in which the New York metropolitan area was found to be a relevant geographic market for the sale not only of portland cement, but also of ready mixed concrete. U.S. Steel Corp. v. Federal Trad Commission, 12G F.2d 1)92 596 (6th Cir. 1970). Adijitionally, in Diamnnd Alkali Company, Docket 81)72 T.C. 700, 716 (1964), the hearng examiner found that a metropolitan area was "probably the most important single local market " within a well-defined broader market area consisting of 2a counties. 67. In the Mississippi River Corp. case supra both the Commssion and the Eighth Circuit Court of Appeals found that the metropolitan areas of Kansas City, Cincinnati and Memphis comprised relevant areas in which to measure the competitive effects of the acquisition for both portland cement and ready mixed concrete. An identical finding was made in the OKC Corp. case supr, when it was found that the New Orleans metropolitan area wa.' a relevant submarket within which to measure the effects of the merger. A similar holding was made in the U.s. Steel Corp. case supra which found that the New York metropolitan area constituted a relevant submarket which wa., approved by the Sixth Circuit Court of Appeals. Consequently, respondent's contentions that the Kansa., City area is not an appropriate market are rejected.

Effects of the Acquisitions Portland Cement 68. During the period 1961 to 1966, the majority of shipment of portland cement in the KCMA by Ash Grove, as wen as other portland cement suppliers, were made to ready mixed concrete companies. Ash Grove s shipments to ready mixed concrete companies during that period of time were between 72.8 percent and 82.2 percent of its total shipments in the KCMA market (CX 94).

69. In 19GI, the KCMA was served by eight portland cement companies an directly from their plants. In 1962, Ash Grove and General Portland established distribution terminals within the KCMA. In 19m, OKC Corp. entered as the ninth supplier to that area. Universal Atlas established a transfer station in the KCMA during 196. Mississippi River became the tenth portland cement supplier to the KCMA in 1965 and established a distribution terminal there in that year. There were no entries or exits among portland cement suppliers during 1966 (CX 75, 76, 77, 78, 79 and 80). 70. In 1961, when all portland cement shipments to the KCMA were made directly from the suppliers' plants, concentration was very high. The top two suppliers accounted for 68.1 percent of all portland cement shipments into the KCMA. These suppliers were Lone Star and Missour Portland whose plants were located in the KCMA. The top 11,*6 L'L'.J1.JIJ1"\ftl, 1 l"ftVL'.. v\.lnlnl "k"H\Jl VIJ\,l "l\Jl Initial Decision 85 F, four suppliers accounted for 86.9 percent of shipments into the KCMA (CX 71) , 93; Tr. 2250-1)1).

71. In 1961, delivery of bulk cement by trucks became prevalent and created a demand by KCMA customers for faster delivery. Ash , GrQv and General Portland reacted to that demand by establishing distribution terminals in the KCMA and thereby reduced the delivery time by truck to their customers. Ash Grove s terminal required an investment of two to three hundred thousand dollar. As a result, both Ash Grove and General Portland increased their shipments into the KCMA and their shares of that market in 1962, whereas the share of the two local suppliers dropped to 61.4 percent (CX 39F- , 76, 79 and 93; Tr. 2:175).

72. Top four concentration of suppliers to the KCMA continued to decline during 1963, 196 and 1965 even though the identities and positions of the top three remained the same. The fourth ranked position changed back and forth between General Portland and Universal Atlas (CX 93).

73. Vertical integration between portland cement suppliers and consumers in the KCMA began in August 191;2, when Ash Grove acquired one-third of the outstanding common and preferred stock of Lee s Summit, the sixth largest portland cement consumer among ready mixers (Ans. Par. 17; CX 83).

74. In 196;J, Mississippi River Corp. announced that it had acquired Stewart Sand & Materials Co., the largest ready mixer in the KCMA and the largest portland cement consumer among ready mixers. Stewart consumed 528 00 barrels of portland cement in 1961 or 2R5 percent of an shipments into the KCMA and 31 percent of all purchases by ready mixed producers in that market. Mississippi at that time was building its own cement plant (CX 19B, 3!JK, 81, S: 75. In 1964, Ash Grove acquired 1)0 percent ownership of Fordyce Concrete, Inc., the third largest cement consumer among: ready mixers and Missouri Portland acquired a preferred stock interest in Denny Concrete Co. in retur for a 5-year portland ccmcnt requirements contract (Ans. Par. 10; Tr. 2506).

76. Missouri Portland, in 1!J65, acquired Botsford Ready Mix Company which wa. the second largest cemcnt consumer among ready mixers. Botsford purchased 371 000 barels of portland cement in 196 which was 17.a percent of the total consumed by ready miers and 12. percent of the total shipped into the KCMA (CX 84, 8(;; Ans. Par. 24). 77. In 1966, Ash Grove acquired the remaining ownership in Lee Summit and Fordyce. These companies individually were the seventh and third largest cement consumers among ready mixers, consumng 00 and 299 00 barels of portland cement, respectively, in 196 A::li lih,UV 1: G.IN1I;NI GU. 114;1 1I2 I nitial Decision which were 1) pcercent and 14J; percent of the total consumed by all ready mixers, and a. l percent and 10.2 percent of all shipments into the KCMA (CX 84, 86).

78. At the time of its acquisition, Fordyce represented the largest single .mmaining ready mixed concrete company and the largest remaining regular purchaser of portland cement in the KCMA market not wholly owned by a cement supplier (CX S; , 84, 86). 79. Also in 1966, Ash Grove acquired certain assets, including quarry sites and equipment. These assets were formerly the Union Quares Division of Union Construction Company. The business of Union Quarres included the regular purchase of portland cement. Such purchases amounted to 24 00 barrels in 196, 26 00 barrels in 1965 and 18 000 barrels in 1966 (CX 8-0).

80. The businesses acquired by Ash Grove purchased a total of 409 00 barrels of portland cement in 1966 which was 13.9 percent of the total shipped into the KCMA market (CX 8- , 80, 92). 81. Sometime during 1967 or 196, a financial affliation was created between Monarch and Concrete Materials, Inc. (CMI). Such an affiiation would Influence the purchasing patterns of CMI for its portland cement supply. In 196, CMI purchased 208 00 barels of portland cement from Monarch which represented 83 percent of its total purchases (RX 56, pp. 12, 13; Tr. 3357, 2.389, 2473-74). 82. In May 1968, Lone Star, the third largest portland cement supplier to the KCMA, expended some $500 00 to enter the ready mixed concrete business in the KCMA through internal expansion (RX 30; Tr. 2233, 2241-42).

83. From 1962 to 1968, a trend toward vertical integration developed in the KCMA. Durng that time, five of the ten cement suppliers to that market became vertically integrated with substantial cement consumers. Three of these did so by acquiring Jour leading ready mixers, a fourth through a financial arrng;ement and the fifth by internal expansion. By 1968, the five larg;est portland cement suppliers were vertically integrated with the five largest ready mixed concrete companies. Ash Grove s acquisitions of Fordyce, Lee s Summit and Union Quares were a substantial par ofthat trend (CX 19B; Tr. 1640- , 2325).

84. Fordyce Concrete purchased between 4.1 percent and 10. percent of all portland cement shipped into the KCMA durng the years 1961 to 1966. Since 1!Jf, it was the third largest portland cement conSWTer among ready mixed concrete companies making between 11.0 percent and 14.6 percent of all such purchases (CX 83, 84, 8.\ 86). 85. Lee s Summit purchased between 3.1 percent and 5.2 percent of all portland cement shipped into the KCMA durng tbe year 1961 Initial Decision 85 F.

1966. It consistently ranked as the fifth to seventh largest portland cement consumer among ready mixed concrete companies, purchasing , between 4.4 percent and 8:0 percent of all such purchases (CX S: , R4, 85 86).

86. During the years 1!J64, 1965 and 1966, Union Quarries purchased 00 barrels, 26 00 barrels and 18 00 barrels of portland cement respectively. These were substantial amounts and would qualiy Union Quarres as a large consumer of portland cement in the KCMA (CX 8- Tr. 2115- , 2211- , 2368- , 2321). 87. Fordyce, Lee s Summit and Union Quarries each had multiple sources of supply for their portland cement durng the years prior to their acquisitions by Ash Grove (Tr. 1669-70; CX 8- , 87; 88, 89, 90, 91 92).

88. When a portland cement consumer becomes owned by a portland cement supplier, the latter has the power to foreclose other competing suppliers and the former will, where possible, obtain its portland cement requirements from the parent company regaless of the fact that competing suppliers offer to sell portland cement on a comparable basis of price, servce and quality (CX 39L, R, S; Tr. 1635 1640-43, 2133- , 2229- , 2325- , 2:i77-82). 89. Competing portland cement suppliers to the KCMA testified about their decline in sales to the acquired companies subsequent to the latter's acquisitions even though they were competitive price, service and quality-wise with the acquiring companies, Mississippi River Missour Portland and Ash Grove.

90. Dewey Portland Cement Company had been developing Stewart as a customer and had increased its sales to a high of 70 00 barrels in 1964. When Mississippi River began supplying Stewart in 196 Dewey s sales were cut in half in that year and completely foreclosed in 1966 1967 and 196 (CX 87-92; RX 21) p. 12). 91. In 1965, Universal Atlas sold 92 00 barels of portland cement to Stewart. Sales declined to 12 196 barels and 2 940 barrels in 1967 and 196, respectively. Some sales were made to Botsford in each of the four years prior to its acquisition by Missouri Portland. No sales were made subsequent to the acquisition. Prior to its acquisition by Ash Grove, Fordyce purchased as much as 58 00 barrels. Sales declined to 31)5 barrels and 88 barrels in 1967 and 196, respectively, and these sales were forced upon Fordyce due to Universal Atlas cement being specifed for use on a particular job. Due to the foreclosure from sales Universal Atlas, one of the Gas Belt plants which had a lower mil base than the plants in the KCMA, and which had supplied the KCMA for 50 year, considered making its own vertical acquisition. Instead, it widened its overdll market area, shipping cement to the company AtiH GH.UV J: G lVlr.N. LX). 1l4b 1123 Initial Decision Green Bay, Wise., distribution terminal. Such shipments incurred much higher freight costs than shipments to the KCMA and, therefore returned lower mill net profit. They were necessar, however, to maintain the Independence plant' s capacity utilization and thereby avoid theaouble penalty of low"r net profit and higher unt costs (Tr. 2111) 2136- 2296 , 3120).

92. Lone Star, with a manufacturng plant located in the KCMA, sold as much as 103 00 barrels of portland cement to Stewart. However, no sales were made during 1961) 1966 and 1967, and only 00 barrels in 196. The experience with Botsford was similar to that with Stewart; namely, no sales in 1967 and nine barels in 196. Sales to Fordyce dropped 50 percent in 1967 from 196(; and declined to only 00 barrels in 196. Lone Sta continued to solicit after the companies had been acquired and attributed the inability to make sales to the internal power of requiring the acquired companies to obtain their portland cement from their respective parents. Realizing that it was running out of large companies to solicit in the market due to vertical integration, Lone Star chose to respond by becoming vertically integrated itself through internal expansion (Tr. 2232-36). 93. General Portland considered Stewar, Botsford, Fordyce, Lee Summt and Union Quarres as large consumers of portland cement. It sold as much as 115 00 barels of portland cement to Stewar however, sales declined to 21) 00 barels in 1966 and 1967 and dropped to just 2 00 barels in 196R. Sales to Botsford and Lee s Sumit were completely cut off after their acquisitions with Genera Portland' salesmen being told by those companies that it was a waste of time in continuing to solicit them. Sales to Fordyce declined to 10 00 barrels in 1967. No sales would have been made in 196 unless C..ner.u Portland acceded to the demand of Norman Fordyce, President of Fordyce Concrete and also the owner of Fordyce Materials, Inc., an independent ready mier. General Portland was required to give Fordyce Materials a secret price cut in return for which Mr. Fordyce agreed to buy 32 barels for Fordyce Concrete (CX 87-92; RX 25, pp. 34, 35; Tr. 2369 2377- , 2.'J2- , 2.18-86).

94. OKC Corp. entered the KCMA in 196 with sales of 43 barels of portland cement to Botsford. Sales to that account increased in 196 to 125 00 barels. In 196, when Botsford was acquired by Missour Portland, sales by OKC fell to 1) 00 barels. No sales were made to Botsford in 1966, and total KCMA sales were 6 00 barrels. OKC withdrew from the KCMA at the end of 196 (CX 79, 80, 89-94; RXI9).

95. Dundee Cement Company completed construction of a new 45 to 50 million dollar portland cement plant in Clarksvie, Mo., in mid- 5B9- 7Y!) 0 - 76 - 73 1l4G FEDBRAL TRADB COMMISSION DECISIONS Initial Decision 85 F.

1967. That plant contained the largest kiln in the world and was highly automated. Dundee had planned to enter the KCMA since it was considered to be an important market and to make the sizeable investment required to construct a distribution terminal there capable of receiving delivery of portland cement by barge, the lowest cost form of transportation. Dundee, in 1967 and 1968, attempted to make sales in the KCMA, but was unable to sell to Stewar, Botsford and Fordyce/Lee s Summit due to their control by competitive cement manufacturers. Dundee was not able to successfully enter the KCMA and consequently no distribution terminal wa$ established (Tr. 2:U:,- 2317- 2321)-26).

96. Concentration among the top four portland cement suppliers to the KCMA, which had been declining, increased from 75.2 percent in 1965 to 81.3 percent in 1966. In B)67 and 196, Ash Grove increased its market share to 20. 1 percent and 19.0 percent, respectively, and became the second largest supplier in the KCMA market. By 196, the top four (Missouri Portland, Lone Star, Ash Grove, Universal Atlas) concentration was 76.5 percent and the top five (including General Portland) concentration was 81). percent. The two nonintegrated suppliers General Portland and Universal Atlas, which were among the top five in 1965 were no longer there. Three of the 196 top five, Ash Grove Mississippi River, Missouri Portland, had vertically integrated by acquisitions of consumers, a fourth, by internal expansion (CX 93). 97. Entry into the portland cement industry is difficult because the manufacture of portland cement is a high fixed cost operdtion requiring cement plants to be operated on a continuous twenty-four hour basis in order to achieve the necessar level of capacity utilition for profitable operation. One of the chief entry barers is the fact that construction of a cement plant costs between $2. millon and $SO million depending on the production capacity desired. Distribution terminals vary in cost from $175 00 to $3 millon (Tr. 2143-45, 2209, 226 2311) 2320).

98. It is, therefore, clear that the KCMA market for portland cement is highly concentrated and entry into that market has become virtually impossible because of the high barers and the difficulties in penetrating the market as a result of the substantial foreclosure of the market due to the merger trend. Thee portland cement manufacturers were directly affected by the varous mergers in the KCMA. These were Dundee Cement Company, OKC Corp. and Lehigh Portland Cement Company. Lehigh attempted to penetrate the KCMA in mid- 1967, but was forced to change its marketing strategy, including abandoning construction of a distribution terminal in the KCMA. This was attributed to the fact that substatial consumers of portland , _ a. '- .HU"-''' '- 1123 Initial Decision cement were removed from the market as a result of the vertical integrations in the KCMA (''r. 2309- 30). OKC Corp. attempted to penetrate the Kansa., City market, but after three year it was forced to withdraw from the market. Lehigh who had supplied the KCMA for sOIIe time. likewise withdrew as a supplier a.' a result of a vertical integration. In addition, General Portland which had served the KCMA since 190, described the situation as desperate and considered withdrawing from the market (CX 79- , 89-94; 1'r. 2309-30 , 2: , 2: , 2422-2B).

Ready Mixed Concrete 99. Durng the period 1961- 1966, some 20 ready mixed concrete companies operated at varous times in the KCMA. Twelve such companies operated throughout the time period. Two companies began business in 1962, one in 196, two in 1965 and one in 19(jii. Two other companies went out of business at the end of 19f (CX 81, 82, 1(6). 100. Concentration, during the same period, was very high and had been increasing. The top four ready mixers increased their market shares from 60.5 percent in 1961 to a bigh of 67.7 percent in 1964, and ended the period with 66.4 percent. Between 1962 and 1966, the identities of the top four companies remained the same, the only change being among the positions in 1962. From 1961 through 1966, there were no changes in positions (CX 81, 82).

101. Fordyce Concrete, which began operations in April 1961, and which developed into a two-plant company serving the Kansas City metropolitan area, was consistently the thid largest seller of ready mixed concrete between 19(;2 and 1966. Fordyce increased its market share from 6.6 percent in 1961 to 14.0 percent in 196, durg which time the overall market increased 28 percent (CX 2C and D; 8N; 38Z6; 82).

102. Lee s Sumt was among the largest of the remaig ready mixed companies which competed for the 32_3 percent to B!J.5 percent of the KCMA ready mixed concrete market not controlled by the top four sellers in 1961 through 1966. In 196, the year prior to their acquisitions by Ash Grove, Fordyce and Lee s Summit combined accounted for 18.5 percent of ready mixed concrete sales in the KCMA and 18.: percent in 196 (CX 81, 82).

103. The largest ready mixed concrete companies, with their multiple plant locations, competed with each other as well as the smaller sellers located throughout the KCMA (CX : 8R and V; Tr. 2478 2504- 2521- 254 190- , 1916-2.1, 182: , 1937-41). 104. Ready mixed concrete business is obtained by offering favorable prices, good service and prompt delivery and maintaing , Initial Decision 85 F.

good personal relations with contractors (CX 38W, X, Z34; Tr. 2458-60; Stipulation re Davis and Shaw fr. 2514- 11)). ) 0.1). Other factors being equal, purchasers of ready mixed concrete will buy from the producer who offers the lowest price per cubic yard. A reduction of 21) cents or less per cubic yard might cause a customer to switch' ready mix suppliers (CX 38X, Z34; Tr. 2459, 1822). 106. During the period 1961-1966, the overall cost of producing ready mixed concrete in the KCMA had increased. Prevailing prices for ready mixed concrete, however, had not kept pace with the rising costs. This situation resulted in low profitability or no profit at all for ready mixed companies (Tr. 2492- , 16.39-4).

107. By the end of 1966, the three largest sellers qf ready mixed concrete in the KCMA, together with Lee s Summit, had been acquired by portland cement suppliers to that market. The acquired companies accounted for 1)8.1) percent of ready mixed concrete sales in the KCMA (CX82).

108. Prior to their acquisitions, Lee s Summit was operated as a separate corporation, totally apar from Union Construction Company which operated the acquired quarying assets as a division. Two of these quarres were at the same locations as Lee s Summit's ready mixed concrete plants (Tr. 1671).

109. Aggregates, such as those produced by Union Quares, are one of the raw materials used in the manufacture of ready mixed concrete. They are the second most costly raw material accounting for about 25 percent of the total cost of raw materials (CX IlIE and 112D; Tr. 24.3- , 247, 2502).

110. In addition to Lee s Summit' s ability to obtain the costliest raw material, portland cement, at Jess than prevailing_mwket prices, it has the double advantage of obtaing its aggregates from its parent also at a reduced price. The vertically integrated Lee s Summt, therefore, has decisive cost advantages over its nonintegrted competitors, which if passed on in the form of lower concrete prices, could result in prices lower than competitors' costs, and force those competitors out of business (Tr. 252: 21)26 21)51- 1686 1700 163-34). Ill. The actual effects of the vertica integrdtion in the KCMA is forcefully demonstrated by the history of Fordyce Concrete. Fordyce Concrete began in 1961 with $fi OO cah, leased equipment and property, and lines of credit with sand and rock suppliers. Within a month, Fordyce needed more cash. In less than two year, Fordyce bon-owed an additional $150 00 to build up its truck fleet and secure additional working capital in order to pay bils. By 196, Fordyce had no net worth and could not bon-ow from a bank Cash needed was estimated at $60 00 to purchase equipment and furnish the truck a'.. H' UHV'.L V.L..J.J.H' J. '-JU. 1123 Initial Decision fleet. Fordyce was backed against the wall. At the beginning of 196 Fordyce was ready to sell and get out of the ready mixed business. This new entrant had to keep borrowing money but had a financial statement which would not warant a bank loan. Ash Grove purchased dyce for $300 000 (CX 19C 8Z7, 8- , 14, 17): 112. In the two years subsequent to its acquisitions of Fordyce and Lee s Summit, Ash Grove furshed additional financial aid. Lee Summit was acquired on ,Jan. 4, 1966, for $1 250 00 and by Feb. 28 1966, had been advanced $39 000. Fordyce received advances from Ash Grove in 1967, totalling $1 057 226, which increased in 196 to 654 44.98. Also in 1968, Fordyce increased the KCMA ready mixed capacity by purchasing 9 new mixer trucks (CX 19C, 34, 971). 113. Another example is Botsford Ready Mix Company. Botsford the second largest ready mixer in the KCMA was acquired by JVissour Portland in 1965, durng which year it made a net profit of $84 846. Thereafter, that vertically integrated comp""ny operated at net losses which increased from $15 789 in 1966, to $75 71)1 in 1967, and $136 1)17 19(i8 (CX 82, 114C).

114. Concrete Materials, Inc. (CMI) had consistently been one of the top four ready mixed companies in the KCMA At the end of 196 CMI was the largest remaining independent ready mixed company the KCMA. CMI had come under new management in mid-l96'3 , which in two years was able to bring the company from a net loss of over $145 000 to a net profit of over $92 00. However, with the price of concrete being so low, CMI ended 196 with a net loss of almost $91 , and its management was fearul about CMI's ability to meet the drain on its reserves over a long enough period of time (CX 81, 82; RX 12; Tr. 2477- , 2496 1643).

111). Clayco Concrete Company and Denny Concrete Company are examples of two ready mixed concrete firms which wer" forced out of business in 1968 as a result of the low sellg prices for concrete and thehigh production costs. These were independent 1= which were not vertically integr.ltcd and consequently did not have the advantages which respondent was able to give to Fordyce and Lee s Summit, but out ofwere forced to leave the cement business when they ra operating capital (CX 81; Tr. 25-1)7, 21)04-07). 116. Entry into the ready mixed concrete business in the KCMA should be comparatively easy since the cost of the necessary equipment is not prohibitive and concrete technology, whie not simple, can be acquired without great difficulty. However, without adequate financing, entry would be very difficult since costs were high and prices and profits were low. Any new entrant would have to take business from its competitors by cutting prices (Tr. 227, 2303, 2499, 1903, 1914, 1639 1150 EDleRAL TRADE COMMISSION DECISIONS Initial Decision 85 F, 164). The record makes it clear that as a result of the vertical integration, including the acquisitions ofB'ordyce and Lee s Summit by Ash Grove, entry would be virtually impossible in view of the fact that the integrated ready mixed companies were able to rely upon the help of a large cement parent company who could disregard profits on concrete sales and advance the concrete companies money when needed and the fact that the cement suppliers were under pressure to utilie their production capacities at a high level and that the large sellers of concrete bad added to their truck fleets which furher increased ready mixed capacity in the KCMA (CX 19A- 38Y, 381:3 38Z7- , 38Z16-17; Tr. 2143-41) 2233-41, 2328, 238, 16:J9-4, 1914, 1781- , 184!J-53). 117. When faced with similar situations as demonstr"ted in this record, the Commssion has consistently held in the past that mergers in the same ready mixed market contravene Section 7 of the Federa Trade Commission Act. Such findings have been made in Marquett Cement Manufacturing Company, 75 F. C. 32 (1969); Mississippi Ri'uer Corp., supm and OKC Cor., supra.

CONCLUSIONS 1. The Feder"l Trade Commssion has jurisdiction of the subject matter of this proceeding and of the respondent, and this proceeding is in the public interest.

2. The manufacture and sale of portland cement and ready mixed concrete are each proper lines of commerce for purpses of this proceeding.

3. The Kansas City market area is a proper section of the country within which to consider the effects of the acquisitions by the respondent found above.

4. The effects of the acquisitions found above may be substantially to lessen competition in the manufacture and sale of portland cement and ready mixed concrete in the Kansas City marketing area. I). The acquisitions of the stock of Fordyce Concrete, Inc. and of Lee s Summit Ready-Mixed Concrete & Materials Company by Ash Grove Cement Company violate Section 7 of the Clayton Act, a., amended.

(i. The acquisition of the assets used in the operation of Union Quarries by Ash Grove Cement Co. violates Section I) of the Feder.l Trade Commission Act, as amended.

ORDER It is ordered That respondent, Ash Grove Cement Company, a ___ .

_na- _u_ "U Initial Decision corporation, and its offcers, directors, agents, representatives, employees, subsidiaries, affiliates, successors and a.ssigns, within one (1) year from the date this order becomes final, divest, absolutely, subject to the approval of the Federal Trade Commssion, all stock, assets, properties rights and privileges, tangible and intangible, including, but not limited , all plants, equipment, machinery, inventory, customer lists, trade names, trademarks and goodwil, acquired by respondent, as a result of the acquisitions of the stock of Fordyce Concrete, Inc., Lee s Summit Ready-Mix Concrete & Materials Company, and of the assets used in the Union Quarres quarrng business, together with all additions and improvements thereto and replacements thereof of whatever description, so as to assure that there is established separate and viable competitor(s) engaged in the business of producing and selling ready mixed concrete and aggregates.

It is furthered ordered That pending such divestitures respondent shall not make or permt any deterioration or changes in any of the plants, machinery, equipment, buildings, or other property or assets to be divested which would impair their present capacity or market value. It is further ordered That none of the stock, assets, properties, rights or privileges required to be divested be 'transferred, directly or indirectly, to any person who is at the time ofthe divestiture an offcer director, employee, or agent of, or under the control or direction of, A.sh Grove Cement Company, or any of its subsidiares or affiliates or who owns or controls, directly or indirectly, more than one (1) percent of the outstanding shares of voting stock of Ash Grove Cement Company, or any of its subsidiares or affiliates.

It is further ordered That with respect to the divestitures required herein, nothing in this order shall he deemed to prohibit respondent from accepting consideration which is not entirely cash and from accepting and enforcing a loan, mortgage, deed of trut or other securty interest for the purse of securing to respondent full payment of the price, with interest, received by respondent in connection with such divestitures; Prod, luever That should respondent by enforcement of such security interest, or for any other reason, regain direct or indirect ownership or control of any of the divested plants, land or equipment, said ownership or control shall be 1152 FEDEItAL TRADE COMMISSION DECISIONS Initial Decision H5 F redivested subject to the provisions of this order, within one year from the date of reacquisition.

It is furth"r ordered That either (a) for a period of two years from the dates of divestitures of any ready mixed concrete plant or group of plants or other assets required by this order, or (b) for so long as respondent retains, directly or indirectly, a bona fide lien, mortgage deed of trust, or other securty interest in any of the property, plants or equipment divested, whichever is longer, respondent may provide no more portland cement to that plant or group of plants or quarry operation than an amount, in tons, equal to thirty percent (30%) of the portland cement consumed by the plant or group of plants during the calendar year immediately preceding that in which divestiture is made; provided, however, that if the purchaser elects, and the Commssion approves, respondent may supply up to 75 percent of such consumption of portland cement.

It is further ordered That either (a) for a period of two years from the dates of divestitures required by this order, or (b) for so long as respondent retains, directly or indirectly, such a bona fide lien mortgage, deed of trust, or other security interest in any of the property, plants, or equipment divested, whichever is longer, respondent shall not sell or deliver, directly or indirectly, ready mixed concrete in the Kansas City area as defined in the complaint. VII It is further ordered That respondent shall not install or operate any additional ready mixed concrete plant in the Kansas City area as defined in the complaint for a period heginnng with the date this order becomes final and continuing unti two years from the date of the final divestiture required by this order.

VIII It is further ordered That for a period of ten (10) year from the date this order becomes final, respondent shall cease and desist from acquiring, directly or indirectly, without the prior approval of the Federal Trade Commssion, the whole or any part of the sbare capital or other assets of any corporation engaged in the sale of ready mixed concrete or concrete products within respondent's present or future marketing area for portland cement or which purchased in excess of rt0 unv I"J 'vide :'H AI.

1123 Dissenting Statement 000 barrels or 1 880 tons of portland cement in any of the five (5) years preceding the merger.

it is further ordered That respondent shall, within sixty ((iO) days from the date of service of this order, and every sixty (60) days thereafter until the divestitures are fully effected, and every one hundred eighty (180) days thereafter until it ha., fully complied with the provisions of this order, submit to the Commission a detailed written report of its actions, plans, and progress in complyin with the divestiture provisions of this order, and fulfilling its objectives. All reports shall include, among other things that will be from time to time required, a summar of all contacts and negotiations with any person or persons interested in acquiring the stock, assets, properties, Tights or privileges to be divested under this order, the identity of each such person or persons, and copies of all wrtten communications to and from each such person or persons.

Respondent shall also submit to the Commssion within ninety (90) days of the close of each calendar year a full report of all facts required by the Commission to determine whether respondent is complying with Paragraphs V, VI, and VII ofthis order.

It is further ordered That respondent provide a copy of this Order to each purchaser of plants and assets divested pursuant to this order at or before the time of purcha.se.

DISSENTING STATEMENT OF COMMISSIONER MAYO J. THOMPSON JUNE 24 1971) Antitrust ranks alongside the flag, motherhood, and sliced bread in the national popularity sweepstakes and undoubtedly deserves much if not all of the vote of confidence it repeatedly receives in the opinion polls. Like all other good things, however, it can be overdone. The Federal Trade Commission, understadably concerned with a large-scale merger wave that rolled across much of American industry in the boom years of the 1960' , developed a special concern with the way things were going in the concrete industry, the one that makes our building blocks and paves our roads. In brief, the F. C. found that the major suppliers to this industry, the leading cement producers, were buying up all their customers, the local ready-mix folks. Economists call , 1154 F,;ImRAL TRADE COMMISSION DECISIONS Dissenting Statement 85 F. such supplier-custumer marrages "vertical integration" and worr about the possibility that, after two or three big cement firms have bought up all the ready-mixem ina particular town, price fixing will replace competition all along the line and the price of both cement and concrete will rise to inflated levels.

This is an understandable fear and I have no quarel with the application of the principle in question to one of the acquisitions this agency bas condemned today. Reviewing an order by one of our administrative law judges that would have required Ash Grove Cement to divest itself of three concrete firms it had bought up earlier in Kansas City, the Commission here decides that the acquirer can keep one of them but must give up the other two. The one it. is permitted to keep is Union Quarries, a firm that makes roadbed concrete and uses, in its production of that product, less than I percent of the cement shipped into Kansas City each year. This amount, says the Commission is de minimis and hence can, as the statute requires substantially lessen competition in any meaningful economic market. So far, so good. And the Commission similarly kept its eye on the ball when it affirmed the trial judge s decision that Ash Grove must sell another of these three firms, Fordyce, a purchaser of some 10.2 percent of the cement shipped into Kansas City. One can hardly deny that, if each of the 4 largest cement flrms doing business in a given city is allowed to buy a customer holding 10 percent of the local concrete market, other cement producers are going to be foreclosed from at lea.,t 40 percent of the total business in town and hence that one of the major arteries feeding into the competitive life-line of that particular market might well suffer some significant amount of clogging. Those are the kinds ' numbers that can leave the competition gasping for breath. My Bretbren lose their grip on the realities of the competitive arena however, when they let their justifable concern with the probable effects of such a substantial merger spill over onto the third one involved in this proceeding, Ash Grove s acquisition of a small ready mixer called Lee s Summit. This two-plant operation was bought in 1966 for a price of $247 000 and accounts for 3.1 percent of the cement shipped into Kansas City. Its net profits in that year were, a., the majority notes, $21 000.

Men of keener discernment than I may be able to see in these numbers a threat to the hydraulics of the Kansas City concrete market but, try as I might, I cannot make it out. To be sure, this market is already concentrated and the law is reasonably intended to deal not just with the kind of monopolization that leaps upon us in great bounds but the kind that enters in small increments and sneaks in on litte cat feet in the middle of the night. But 3. 1 percent of a market'! While .

11.:O UJ:V V \.J I:"nr:. 1. \.v. 11;);) 1123 Disscnting Statcmcnt many economic phenomena-including monopoly pricing-are said to depend in the last analysis on events transpiring "at the margin " I cannot persuade myself that the Commission has not today shaved it all a bit too close. When the bologna is sliced so thin that it bas only one sid, there;s not likely to be much nou1shment in it. And if a profit of $21 000 on an investment of $247 000 represents the fruts of monopoly, then the latter is clearly an overrated grove. One further point needs to be made here, the matter of allocating this agency s enforcement resources. The F. C.'s legal juggernaut has been rollng over these Kansas City transgressions for some six years now, a period longer than the one consumed by World War II. And while a substantial part of the $150 000 in attorney salares that we have expended on this case to date would probably have been required in any event, surely a lesser sum would have been suffcient if. we had elected to challenge only the key acquisition in the case, the one involving the 10 percent market share.

Nor is it an adequate answer to say that, whatever the wisdom of the choice we made in 1966, the costs associated with them are "sunk" now and thus should be ignored. Since there are no aditional costs to our current budget in making this firm divest itself of two ready-miers rather than one, the argument is naturally made that we have nothing to lose from making our divestiture order as comprehensive as the law will permit. Not so. Our staff uses our past decisions as guides to the kinds of cases it can expect us to look favorably on in the future. If we let this one pass without disapproval, more like it wil surely appear on our calendar again. The final cost of today s decision is thus not the dollars that have been or will be spent on this particular matter but those that will be diverted away from more constructive areas in the years to come. The cost of what we do includes, as our economist friends have been telling us for year, the things our Jess productive expenditures have forced us to leave undone. The F. C. is uniquely qualifed, for example, to launch a sophisticated attack on what is clearly the single most damaging offense aganst the American consumer, price fixing by agreement among ostensible competitors. I Yet we have allocated a tiny percentage of our budget next year to this problem, a deficiency that stems not from the overall inadequacy of our total budget but from the priorities we set for the staff in our planning sessions and in the decisions we hand down in the routine course of business.

, Se.., for pXHmple, my review of this problem in "Price Fixing, Con~umer Injury, and th.. Rf'gio"al Offi"e" Iu"" 2i1. 1974. A~ I noted there: lfwea,,~u1Te Lhatthcsecunspiracies raise prices by say 10 )WUf'nt on thf'averag,'- a figun. that ag-in ~seems fairly cunservative i" vi..". "fthe l"p..rce"t to7. I""C""t figure"srf'j)Ort,'d in th.. f..w cas..histori.." we have ~ecn so far- the" we are talking about an aggrpgaLe consumer h,ss here of ~omp10 billion or more p..r y..ar A"titr".,t L"..& Ec"",,,..ic., R(';crc Vo1. 7. !\o. 2 097"J, p. 9Ii 1156 FBDBRAL TRADE COMMISSION DECISIONS Opinion 85 T.c. I will be departing from this agency soon. If I leave no other legacy here, I hope at lea.,t one idea I have advocated will survey, the notion that. real economic benefis to the consumer, not legal indignation, will ultimately hecome the touchstone of our case-selection process. An antitrust ca. that doesn t promise lower onsumer prices as I have had occasion to say before, is like a cow that doesn t give milk and is too stringy to eat.

Again, I see no consumer nourishment in the divestiture of a. percent of the Kansas City concrete market and would admonish the staff to strike such trivial issues from our future pleadings. This agency bas the important responsibility of seeing that competition, the mother of all that gives vitality to the economy of a free nation, is not allowed to perish. With so solemn a duty to attend to, the talented and dedicated men who staff and lead the Federal Trade Commission cannot afford the luxury of picking economic daisies along the roadside. Alas, we have picked part of one today.

CONCURRING STATEMENT By ENGMAN CmHwissioner:

JUNE 24, 1975 I agree that Ash Grove s acquisitions of Lee s Summt and Fordyce violate the Clayton Act, and I further believe the public interest requires a divestiture order. But I would not be so ertin of the public interest if Ash Grove had ccedcd in convincing me, a.s it attempted to do in its brief, that these mergers fostered price competition. As the Comnlssion opinion recognizes, a vertical merger ,may foreclose a portion of a market, and it may give leveragc to discipline umntegrdted competitors. Yet a vertical merger may also, in some cases, bring desirable cfficien ies to a stagnating market, or inject a dose of needed price competition, and I would be hard pressed to support a divestiture in such a case. While I do not consider Ash Grove s consumer benefit arguments to be irrelevant, I do consider them unpersuasive and I concur in the Commission decision.

OPINION OF THE COMMISSION By HANFORD Commissioner:

This matter is before us on respondent's appeal from the initial decision of the administrative law judge, fik'd Sept. 23 , 1974. In that rlecision, respondent, Ash Grove Cement Company (Ash Grove), was found to have violated Section 7 of the Clayton Act, as amended, with respect to two separdte acquisitions, and Section 5 of the Federal Trade .

.u,.. '"~.". '-H"

1123 Opinion Commission Act, with respect to a third. As to each, divestiture was ordered, along with certain other relief. On appeal, respondent has challenged aspects of the law judge s findings as to liability and remedy in the case of each acquisition. Upon a full review of the record in this pro!,eeding, including extensive briefing and oral argument on appeal we must modify the initial decision and accompanying order as set forth below.

The following factual summary, amply supported by the record indeed, substantially uncontested, provides a background for our disposition of this case. At the time of the challenged acquisitions respondent, a Delaware corporation, wa.s principally engaged in the manufacture and sale of lime and portland cement. In varying degrees the company was marketing its cement in the eight States of Kansas Missouri, Arkansa.s, Oklahoma, Texas, Iowa, South Dakota and Minnesota. During the years preceding the acquisitions, respondent' total average annual shipments were in the;) millon barrel range. Respondent ha.s sold portland cement in the Kansas City area for well over sixty years. It maintains one of its two portland manufacturing facilities in Chanute, Kans., and, since 1962, it ha.s operated a portland cement transfer station in Kansas City, Kans.' In the year 1!J61 through 1966, respondent shipped an annual averdge of some 104 lf;(; barrels ' of portland cement in the Kansas City metropolitan area (KCMA),' raking consistently among the top- four suppliers. As a percent of total shipments in the area, this volume ranged from 12. , in 1961, to a preacquistion high of 18.0 in 1961; in 196, the year of the challenged acquisitions, respondent's percent of area shipments was 16.

In June 1964, Ash Grove purcha.sed 1)0 percent of the outstanding stock of Fordyce Concrete, Inc. (Fordyce), a Kansa.s corporation engaged in the manufacture and sale of ready-mixed concrete in the Kansa.s City area since 1961. On Nov. 8 196, the respondent purchased the remaining outstanding shares of Fordyce, thereby gaining total ownership." At that time, Fordyce wa.s operating two ready-mixed concrete plants in the area; and, for the fisca year ending Jan. 31, 1966 , ex 28. In eomparrlble yea"", the nationwide total porllanrl cement shipm,'nts by all rnanufactur..rs annually av..raged some:1J:\ OO barrelsCX 51 "t6 , The "transfer station " or "distributi,m tenni"al " is a pn"luc..r.contrull,'rllocal distributiun facility of fairly recentadve"t , C.X 19a"d ex RO , """"ote 11 ,,,Jra , C.X 79anrl ex RO . Ash Crov.. paid $loo OOO for ib 196 purch"'e of 5,lli authori,..'d but pn'vinusly unissued share~ a"rl, in 19(,.; i'l $.!OIJ OOO for t.he t.hen rprnaininj! , 225 share, , ( Opinion 85 F.

the company demonstrated sales of over $2.8 milion, with net profits of $34 Blo, and total assets of $1 25B 003. By the end of IB(j6 Fordyce was the third ranking ready-mixed' company in the KCMA with 14. percent of the market in that year. As a leading factor in the ready mixed market-and the largest, not wholly owned by a cement supplier- Fordyce consumed, in IB66, 10.2 percent of all shipments of portland cement in the market area.

On .Jan. 6, 1%6, having previously acquired a one-third interest respondent purchased the remaining outstanding stock in Lee Summit Ready-Mixed Concrete & Materials Company (Lee s Summit), a Missour corporation also in the ready mixed market in the Kansas City area.' At that time, Lee s Summit was operating two ready-mixed plants in the KCMA. For the fiscal year ending Feb. 28, IB(i6, the company demonstrated sales of $1 603 751, with net profits of $21 I)B3 and total assets of $45B 750. At tbe time Ash Grove acquired the remaining stock in Lee s Summt, the ready-mixed company ranked seventh in its market, with 4. percent of sales in 1%6. '" In that year Lee s Summit consumed 3.1 percent of all shipments of portland cement in the market area. II Subsequently, Lee s Summit operations were merged into those of Fordyce with business continuing under the trade name "Fordyce-Summit.

As a part of the Lee s Sumt transaction, Ash Grove also acquired certain real property and an extensive arrdY of quarrng equipment. These assets had evidently been those of a corpordtion, Union Construction Company, owned by tbe same individuals who held the outstanding stock in Lee s Sumt. It would appear that the assets of Union Construction Company had been distributed to the stockholders; they, in turn, sold them to respondent for $1 01)0 00. The "Union Quarries" operated these assets in the production and sale of cruhed stone and portland cement treated baserock in the Kansas City metropolitan area. The record reflects that in 196 Union Quares , ex H2. In 1!1f - I. he year r" po"dent made iL initial stock acqui iti"n in In,' company Fordyc(' wa." also ,.Inked third, with !:. L perc"lit of the market . eX&;.

, !n 1962, re pondent made it initial one-third stock aeql1isition paying $47 tlIO. Tn.. r,.maining two- lhird~ ,,'ere pun,ha.o.d ror$200 OO.

'0 ex 8'l.

" ex H6.

" It could he argued that Lee s Summit and these " Un;on Quarre " ,,,'sds constituted but a sinr;l" acquisition Both are incorporated into th" H"mp purchase and ;;ale pontra('t; both involved the ""m(' parti(' in thp huyer- lier relatiun hip; aild, it may well be that the purch""" of oneerved a partial ('on~id('ration for thp alp of the oth..r Nevertheles, the entire record ha. t",pn built on. the theory, ~pt forth in th.. complaint, that thp acquisit.ion,; were ;;epanlte; and since our jwlj,'Iwnt concpming thp competitive ~iJ1nificanc" of t.he "\inion QL"lmes" am,mgement would rernain unaltered whether vipw.'" spparatPly or togdhpr with Lpc Summit, WI' arp incline.1 to Uike th.. p!..arlingo a. we find them on thi sue );

ASH GROVE CEMENT CO, 1159 112:J Opinion purchased some 17 890 barrels of portland cement, presumably for use in the production of baserock.'" These purchases were approximately 9 pere(mt of the some 2 924 000 barrels of portland cement shipped in the KCMA that year.

On July 8, 1969 the complaint in this matter was issued charging that (tjhe acquisitions by Ash Grove of Fordyce and Lee s Summit and their merger into one operation constitute separately and collectively violations of Section 7 of the Clayton Act, "'" amended, and the acquisition of the assets used in the operation of Union Quarries constitutes a violation of Section 5 of tbe Federal Trade Commission Act.

A delineation of relevant product and geogrdphic market(s) is a necessary threshold to analysis and evaluation of the likely impact of an acquisition on competition. In the case before us, the administrative law judge determined that there are two product markets ("lines of commerce ) relevant to the issue of liability in each of the challenged acquisitions: (i) the manufacture and sale of portland cement; and (ii) the manufacture and sale of ready-mixed concrete. We note, "'" did the law judge, that such market definitions have been adopted by the Commission in a number of instances in the past. u; Additionally, the law judge found that the appropriate geographic area ("section of the country ) in which to analyze tbe competitive impact of each acquisition is the "Kansas City metropolitan area" (KCMA).17 Based upon a consideration of the record, we agree with these conclusions. " SUboCqUl'TlL lo the acq\li ition, A~h (;r()v conveyed the"" a."""L to a newly ,,tab1i hcd ol1h~idiary, Onion QU"rrie(:Xk, Inc., a Misle\lri corporation. While I.he r('cord i" sil..nt a." to the volume of portland cement consumptioTl by that company after the first quart('r of 1!1f7 , it does renect that 2:YI harre15 ",ere acquired in the initial ,5 months ex H- "" Such a conHidHatinTl of ,.nmp"t.il.iv errl'''!. , in turn, pr"vidp~ th" b""" (or a determioation of lq,ality. Section 7 of thcCiayton Act, as amPlld,'d provideHin rplevantpart IN 10 cnrporation engaged in commerce shall aC'1uir.. , directly or imJir"ctly, thc whole or any parttuckufth., or other hare capital and nu col,or..tion ~ubj"ct to the juri diclion uf the Fedcr..1 Trade C()mmis~ion ~hall acquire the who\" or any part of the a ",ts of another corpor..tion engaged also in commerce, wher.. in any line uf connncrc" in any sectiun of thc countl"' , th" effect of ueh acquisition may b€ substantially to less"n eomp',titiun, or tu Lcnd to cr..at.. a monopuly 15 J:.sc. !jlr This focu on cumpetitive impact i,;, ofcours e'1ual1y applicable lo acqui,;itions chal1.'ng"d und,'rSectiun "of the F"d"r..J Tr..de Cummission Aet, e. , Rn,lriet. Fo"d., Co., 61 F. C. 47: (1!16')); F()r m(J.,1 Dairi " fllc.EiO F.T.C. 944 (1%2) u. /'1'1"",,""'..1.' C""'C/II Cu., 61 F, C. :J;\(196,); Dia",,,,'! IIlkali Co. 1" F. C. 700 (191,7); S. SI..", C"rp F.T C. 1270 (!9I rc, "11r,,, y",uml. 426 F.2d 59 (fith Cir. 197(J; Mi. ",,,,",I'P; Ri,'cl' 1",,,,1 C",7", 7:, F' f.C fn: (1%9), u.ffd '0 F.2d 1OR: (Rth Cir. 1972):Ma'Q"elll' CCIIIl'''1 Ma""forr"ri..g ro. C. :12 (1%9); OKC C",7". C.l:142(1!J70), affd 4:", F'.2rli15!J(JOth Cir. 1972) ,. The KCMA i d,'fined, buth in the complaint and hy the "dministrativ!' law judge, a con"i ting of "* . * I. Counties uf Cass, CJay, .1achun amll'Iaue ouri, and t.he Cuunti,,~ ur ,Iohn~on and Wyandotte, Kan~as " (complaint at I: initial d..cision at 1.1) This geogr..phic rm"k"t, t"o, h s been previously adopted by the Cr"'rrnis i()n Mi, "i. ,il',i l?ilt" fo,u'l C"rl'. "'prrr, not.. 16 It was additionally aU..gNI in th.. "complaint that the United Stat"s a. a whole wa. , a.'i well, all appropriate (("",lii"",'d) . . , .

1160 FEDERAL TRAm: COMMISSION DECISIONS Opinion 85 F.T.

Respondent only indirectly challenges the product markets adopted in the initial decision, urging essentially that the administrative law judg s conclusions as to "line of comerce" Were not based upon an independent consideration of the record." This contention is buttressed solely by reference to language in Findings :03 and 48 of the initial decision which points out inter alin adoption of both lines of commerce is "in accord with" and "supported by" prior administrative and judicial I!1 Respondent's position completely ignoresdecisions to the same effect. the wealth of record evidence supporting the adopted market definitions; moreover, it fails to acknowledge a number of quite specific findings made by the law judge leading readily to those definitions. The outer boundaries of a product market are detet:ned by the reasonable interchangeability of use or the cross-elasticity of demand Shoe Co. v. United States 370 U.S. 294 321) (1962). InbetweenBra the product itself and substitutes for it." (citation omitted) articulating this primary standard, the Supreme Cour indicated that even in situations where, by application of this test, a range of products or services might be found to appropriately constitute a broad market for analysis, "* * * within this broad market, well-defined submarkets may exist which, in themselves, constitute product markets for antitrust purposes." The Cour provided a number of "practical indicia for delineating such markets. These Include: "* * * industry or public recognition of the submarket as a separate economic entity, the product's peculiar characteristics and uses, unique production facilities distinct customers, distinct prices, sensitivity to price changes, and specialized vendors." (citation omitted)20 The manufacture and sale of portland cement was, at the time of the acquisitions, a principal enterprise of Ash Grove, the acquiring firm. This material, a fine gray powder produced by burng and grinding raw materials such as limestone and shale together with gysum provides a basic element in the production of concrete. Portland cement !!"ugrphir area ill which to m('a. ure the ('omp',titive pffecb of the ch:l\lenged a"'1"iRit;()n . The law judge, however cOlTectly concluded that th(' record faibupportto uch a contention. It is noted that eounsd supporting the complaint have not ought to appeal thi,;detl'nllillation. '" We notl' , in pa ing. that rl' I"mde"t ha. "itl'd other " examples in support of iL claim that thl' administr-..tive law judgegener-..Uy failerlto give therl'cord inthi;;ca;hi indl'l",mil'ntconsiderntion. S"" respondent' sapptalbridat :J9-46. We have /-.;ven thi r""orrl, now, our own indcl",,,llnt evaluation . While diff..ring in certin resl""'!. with the jaw judgl' , we think ;t clear that his work h.., bel''' nl'ditalJll' , as well a." independent. We vi..w ..'spondcnt s Iot1tention t.o the cont.....ry as whony withuut merit; thus 1' a dopt. and incorprat.e inw our final d"ci~ion, all finrlings of t.he administrative law jurlge"otj"cut\sistent",'ith thisolJinion "lnitialrlecisionatM ., :J70 U.S. 294. :\25. Such markl'!. within markd.s a..' ",eaninl6ul from an antitmst vil'w " lh 1 ..au;;I' IF of th.. Clayton Act prohihits any mngl'r which may U"ltia\ly le,;sen competition""!I'in linl' uf commerce ' (pmpha.. Hupplif'), IJlti nel'I's""ry ltherl'forl'j t" examinl' the dfed.,sofa "'f'rger in each such economically ~ignifjcant ,ubmarkd to determine if thf'rp is a reasonable probability that the m"qt.er\1bstantial1ywil ll' en con'lwt.iti"n If such a probability is founrl to exist, the meqO:l'r is prnocribed " itat iot\"",itted)/d " ex 1:tran"eriptat210:J41 1123 Opinion is never used in construction by itself; rather, as when used in concrete production, it functions as a binder of aggregates- As the administrative law judge found, portland cement, while classifed with other hydraulic'" cemfmts such as masonry cement displays distinguishable physical characteristics. Thus, it is markedly avier- than masonry cement." Portland cement prices are distinct from those of masonry cement." As well, there is no indication in this record that the price of portland cement displays a sensitivity, or responsiveness, to the price of any other type of cement. The production facilities required for the manufacture of portland cement are, as a practical matter, unique for that purose; 26 and competitors within the industry recognize the product as a separate line of commerce. Highly specialied customers, ready-mixed concrete producers, by far account for the greatest quantity of porthu d cement sales.'" Most significantly, portland cement' s end-use as a binder in the manufacture of concrete is, indeed, unique. The admistrdtive law judge determined, and the record is clear, that "( t there is no practical 29 Insubstitute for portland cement in the manufacture of concrete." short, the demand for portland cement is a function of the volume of construction activity underway at any given time and is generally inelastic with respect to the price of other related products- '!'s fundamental inelasticity is sufficient, we think to meet the broad market standard set forth in Brown Shoe, supra. Furhermore assuming arg' uend certain other cement- types did manest some cross-elasticity of demand with portland, the presence of viually all practical indicia" of a signJlcant antitrust submarket renders the administrative law judge s determnation of this issue patently correct- The facts of record are equally dispositive as to the ready-mixed market. Ready-mixed concrete is produced by combinng portland cement with varous aggregates, primarly, rock, sand. and water. Whether the mixture takes place, in wbole or par, in bins and scae hoppers'" at plant site, or in the revolving-d trucks so charcteristic of the industry, tbe concrete is mixed to stadard strength specifications requirig a given miure to withstad a specifed " ex 411' " A "hydraulic" cemenl is one ,,'h;ch hardens when combinerJ with water "ex 54 at4; transcript at210H "'Inscriptat220:, " ex 41; transcript at21!2 2209 " Trnscript at 2210 2.'!VJ " As respondent point...'out in its 191;1 Annual) Report: "Within the eight-stau, area in which we ship eemen!., the ready. mixed concrelp producers a lb,' largest volume user.. Approximately, 60 ".recent of our total cemcnt production went to the' rf'ady- mix concrete industry- . -" This W;Lcont.ra"ter with direct ""Ie" of Z; perc nt to ~t"tp and f r"ll"rge volump coostruction proj..cL A~h Grove s S'''OTHi- lar-K""t custumer categury. ex 1Hl ,. Initial rlecision at 7. ex :llg: ex ,A at 7; tran"cnpt 2104 22O'l. D:; 2fi2 ,. Concrete production radliti.... are specialized and not n' "daily 'jJ!apLable lo other production uses. CX : "IE)- 0- 76 - 7 , :

1162 F,;IJERAL TRADE COMMISSION DECISIONS Opinion 85 F.

pressure level. The product tends to be the single item manufactured and sold by ready-mixers; '" and sales are made principally to While some extremely'constrution contractors and "Suhcontractors.:l2 large construction "pours" are competed for by only multiplant producers, in the main, both large and small ready-mixers are considered by their customers, and themselves, to be in competition. Testimony of record indicates that although price is the primary basis of competition among ready-mixers, fluctuations in price are unrelated to price changes in other building materials.'" In sum each of these indicia - the peculiar characteristics and uses of ready mixed concrete; its unique production facilities, specialized vendors and customers; its pricing unrelated to other products; as well as industry and customer recognition of the market - provide abundant support for delineation of the manufacture and sale of ready-mixed concrete as an appropriate line of commerce.

Respondent' s arguments with respect to the geographic component of the portland cement market are no more compellng.:!5 In essence respondent contends that the administrative law judge erred in adopting the KCMA as appropriate on the grounds that: (i) not all shipments of portland cement in the KCMA originate there; and (ii) certain firs supplying the KCMA also _make shipments to locations outside the delineated area. Both of these contentions are correct; however, the argument they are designed to support fails to adequately consider the controlling standard for geogrphic market definition, as well as significant evidence of record.

The primary task in defining an approprate geogrphic market for Section 7 purposes is to determine where the competitixe effect of the particular merger under scrutiny wil be "direct and immediate. United States v. I'h'iadlphiJ1 National Bank 371 U.S. 321 57 (196.'. The Supreme Court has observed that "(tJhis depends upon 'the g-geographic tructure of supplier--customer relations."'3f; More specifically, the Cour has indicated that "* * * the 'area of effective competition in the known line of commerce must be chared by careful selection of the market area in whicb tbe seller operates and to which thl! purchaser can practicably turn for supplies,' ld. at ;359. See United Sla.tes v. Phillipsburg Na.lions11 Bank and Trut Co., 399 U. " ex :lld; ex 4:1at :\2().2; Tr,m~cript",t 241 2;,(11, 2,,14- 1;' CX:IHW;Tran criptat 16R21732 2449 ''' Transcriplat lH1H- , 1X6!-67, 19Z2- 1937-4I z;04-t),) 2f,2' ..X .. Transeriptat 1""" , IR,').

" Respondent apparently Cl"ccde the properiety of th" KCMA a: an appropri"te g..ogrphic market for ready mixed concr..t... Rp"pondent Rrid on Appeal at 5:\ Ch"tpd Slalc" v. I'h;l"dPl"h;o Nat,o"al Rank :!74 E_S. 321 , 3.'')7 (1 J.,.n Ind..I' , this i particulady tru" in a vertical mer!:er involving analy,;i of both u"plier and customer pr"duct mark('L , ,. ._ . . .

'U," ..'. ,uu 1123 Opinion 81)0 362 (1970); Tampa Electric Co. v. Nashville Coal Co., 365 U.S. ; 327 (1%1). Thus, a "pragmatic, factual approach""' requires consideration of the "demand side" of a market, as well as an analysis of supplier behavior. Only then can the geographic market selected "* * * both cprrespopd to the commercial realities' of the industry and be economically signcant." (citation omitted)'" Respondent' s endeavor to expand the geographic market adopted by the administrative law judge ignores facts pertaining to very real limitations on the supply options available to portland cement customers. For example, ready-mixers have limited storage capacity for raw materials. As a result, quick delivery from a portland cement supplier is of key importance. The fact that a majority of area suppliers have established production or distribution facilities within the KCMA at substantial cost, well bears this out. Additionally, apar fr()m crucial time delays involved in shipments from supply facilties more than marginally outside the metropolitan area, the high shipping costs of portland cement, in relation to its low product value per unit weight soon render incremental distances economically unacceptable. Respondent's argument does call attention to the behavior of suppliers; however, important facts relating to this aspect of the equation, too, are deemphasizd. Thus, while suppliers did sell outside the KCMA, the importance they, themselves, attached to the metropolitan area is noteworthy. For example, Ash Grove s president testified to the importance of the Kansas City market, characterizing it as a market worth protecting."" Highlighting the signficance of the market area to suppliers is the fact that by 196, four major suppliers in the market, including respondent, had established local distribution terminals in order to expedite delivery to area purchasers. Indeed, two suppliers actually had production facilities in the metropolitan area. In 1%6, 79.9 percent of all shipments from local distribution terminals were made to destinations within the deimed market; moreover, as the law judge pointed out, in that year "* * * 72.0 percent of all portland cement shipments to all destinations located within the KCMA were made from the Kansa.s City area mils of Missour Portland Cement Company and Lone Sta Cement Corporation and the Kansas City area terminals of respondent, Universal Atla.s Cement Division of U. Steel, General Portland Cement Company and Mississippi River Corporation. (CX 77, 78, 80, Tr. 2677, 3135, 825). Thus, we think a balanced analysis of the "commercial realties" of " Ur""." Shoe Co. . (j",tl'd Slut". , 370 U.S. 29, 3:'1 (L962). ld. at:J!f).

'" CX39F:

.0 Initial O ion at U- 14. We note that a prot'duN' dpvcloped recently by Ke"ndh G. ELzioga and Thoma. lIoF:rty, The f'mhln" of Geogrnphir Market De/meat'-Oll ,n Anti-merger S",'. 18 Antitru t Bull. 45 (1973), (C()lItin!l"d) Opinion 85 F, the portland cement market support the adoption of the KCMA as an appropriate "section of the country" for purposes of this case. In the case of each of the challenged acquisitions, Ash Grove, the acquiring firm, assumed ownership of a IlTm which, in the coure of its business, was a purchaser of one of A..,h Grove s principal products portland cement. Acquisitions of customers or potential customers, by suppliers, are categorized as "forward vertical" mergern. The "tying" of a customer to a supplier is always suspect from an antitrust perspective; 41 in the event of merger, a pennanent tie is established and the need for analyzing the competitive effect of such a relationship is all the more acute.

When a supplier gains permanent control over the purchasing decisions of a customer, the basic competitive factors of the free market - price, quality and service are no longer choice-determnative." As the Supreme Cour pointed out in Brown Sfwe The primar vice of a vertical merger * * * is that, by foreclosing the competitors of either pary from a segment of the market otherwise open to them, the arrangement may act as a 'clog on competition ' which 4depriver s 1 * * * rivals of a fair opportunity to compete.' " (citation omitted)" The Cour further stated: "Since the diminution of the vigor of competition which may stem from a vertical arrangement results primarily from a foreclosure of a share of the market otherwse open to competitors, an important consideration in determning whether the effect of a vertica arrangement 'may be substantially to lessen competition, or to tend to create a monopoly' is the size of the share of the market foreclosed. The foreclosure percentages with respect to both acquisitions of ready-mixers here are of signifcant proportion. As the administrative law judge found, in 1966, Fordyce consumed 10.2 percent of all portland cement shipments in the KCMA; 45 Lee s Summit, a smaller operation, rl..monstrates the ne"d to ass","" buth supply and demand factors to ""fin(' a g"ogTaphic market (noted by the Commission previously in H""lric" i"l)od., e" 81 C. 4tH , 524 n. Ii (1972). Elzinga ami Hogarty cspuu~c a conci!; method of defining gcogr..phic markets. According t" their analysis, if 75 perc1nt nr more of the demand for the product in the sckctcd arcais rnct by suppliers in that ar('a am! if75 peucnt or mo.-' oft.he"upplyof th..prouet emanating from the seleeted area i eun umed by u e,- in that ar..a, then th(' g"ojiaphie market ha. m,en properly defined. To tate theirt"stbriel1y, iflittleenten;anareafromoot~ideaod littl" l..aves the area from inside, that area is a relevant geographic markel " S Rmu." Shoe Co. UIlil,'d S/lic. 370 U.S. 29 ;!30-:n (1962). " As Commis~iuncr Dixon ha~ observed in analysis of a similar factual situation. "A subslantial share of "u,;tum in a market may m, oblained by a supplier through contractual exclusivity, not through competition ha.""d on "frerinV' of price, quality or service. Competitor. of the acquiring supplier may he competitively disadvanlaged through perma"ent foreclosure of custom O""e open to competitive biddin!,. U,,,led Slales Sled Cur-p, 74 F.T.c. 1270, 1289 (l!I6H). n R""'l Shoe . v. (J"ded SI"Ie. 370 U.S. 29, :J2;,-24 (1962). "fd. at328.

" Initial Decision at 19. This co"stituted 11.6 percent of all purcha.",s by ready mixed companies. .. , . _., . .,. _u_u ,- 112:1 Opinion accounted for 3.1 percent."; Yet, while these figures are, indeed important considerations" here and can, in no sense, be considered mini7nis there is no per se rule of ilegality in testing a vertical merger under Section 7." Rather lwJhether a particular vertical merger is illegal depends on the facts and the market setting in which it occur. Foreclosure marufests a paricularly anticompetitive character when it occurs as par of a trend toward forward integration in a concentrated market. For example, in such a situation, barers to entry, often already high, are raised in the supply market. As the percentage of foreclosed transactions grows, less of an open market remains to attract potential competitors of the integrated suppliers. The would-be entrant is thus faced with the choice of: (i) entering at the supply level to compete for a continually shrinking market dominated by oligopolists; (ii) entering at both the supply and .customer levels, facing the significantly increased costs integrated entry implies; or (iii) abandorung a1l thoughts of entering the market. To create this series of options for a potential entrant is clearly to impede entry. Nor in such a situation are the anticompctitive effects of forward integration limited to the supply market. The leverage created in the hands of integrated suppliers can a1l too readily be put to use to discipline, if not eliminate, enterprises competing only on the customer level. This phenomenon was explained in Marquette, supra: By narrowing the margin between the price at which they sell cement on the open market and the price at which they sell ready-mixed concrete, the integrated firms can limit the profits and' growth of the ready- mixed firm, many of which are small, local companies operating only in the NYMA, or perhaps even drive them out of business. It is of course, unlikely that the integrau. d companies would utilizc their leverage to drive independent ready-mixed finns out of the market. This kind of overt exercise of market power is unnecessary; nor is it essential that ready-mixed firms be kept in a state of complete dependency. All that is required is that unintcwated firms and prospective entrants be made aware of the ability of the integrated oligopoly group whether acting collectively or simply in "follow-the leader" fashion - to utilize its leverage- The net effect would be to keep any of the independents from competing too aggressively, to maintain prices above competitive levels, to keep out new entmnts - in short, to permit the readymixed market to function as a highly concentrated oligopoly. (citations omitted)"( In 1966, ten portland cement suppliers were servng the KCMA Thi p€rcenUlge amount,'d tn 4.5 percent. orally puuha~e by ready-mix,.d c"mpaT\i,, " Sce M"rq"dlc Ccmc"r Mfg. Co. 75 F'. C. :,2, 10:1 (1969). fd. at 11):-104.

.. Bru.tley,Oligopoly ""d"r Oil' Sh,' r",a" o"d Clay/"" Art. Fro", F.ro",,,,ic The".-y r" Leg"J P"lic!/,1!\ St.an. 1. , 2&"" :H9 (\967).

Sce M"rq"d/ Ccm"H' Mfg. Cn 75 F'. C. :J2, 96-97 (1969). "ld. ..tI02.

,, linn FEDERAL TRADE COMMISSION DECISIONS Opinion 85 F.

Four of those firms, including respondent, shared 81.3 percent of the total market:" Thus, the KCMA portland cement market was ,characterized as a highly concentrated oligopoly. Moreover, the ordyce and Lee s Summit acquisitions were par of a marked trend toward forward integration into the ready-mixed market. Thus, in 1963 a year after Ash Grove s initial investiment in Lee s Summit, the Mississippi River Corporation ,,' acquired Stewart Sand & Gravel Company, the largest ready-mixer in the KCMA at the time consuming some 23.1) percent of all portland cement shipments in the market.'" The following year, Ash Grove made its initial 50 percent investment in Fordyce, the third largest ready mixer. In 1961) Missour Portland Cement Company, the long-standing market leader, acquired Botsford Ready Mix Company, the second largest consumer of portland cement among ready-mixers with 12.7 percent of total shipments in the market." In 196, the Lone Star Cement Corporation, long a leading firm in the portland cement market, integrated by internal expansion into the ready-mixed market at a cost of some $500 00. In short, the Fordyce and Lee s Summit acquisitions took place in the concentrated oligopoly of portland cement manufacture and supply in the KCMA, a market in the process of integrating forward into the manufacture and sale of readycmied concrete, the business of its principal customer. Once the Fordyce and Lee s Sumt operations had been fully taken over by Ash Grove, integrated suppliers in the market controlled some 1)8.5 percent of ready-mixed concrete sales in the KCMA '" and bad, by vertical integration captured" over 40 percent of the total portland ccment market. 51 In this context, we conclude that Ash Grove s two ready-mixed acquisitions, in the long can have none other than an effect on ru competition proscribed by Section 7 of the Clayton Act. We must, however, take a different view of the "Union Quares transaction. In 1966 Union Quarries" was in the business 1:nl-€r abn producing and selling portland cement treated ba.,e rock. This required making certain purchases of portland cement; and, of course, the extent of those purchases constituted some foreclosure of the overall portland cement market. As pointed out above, the record indicates 1965 The record r"nccts that ",hil.. there hat! been son)" slight dcue,,-; in four-firm concentration in the Y'''' preceding the acquisitions, lh"n' was an increa.-; betwecl1 L96 and 191;( (CX 9;1); moreover, at no time in th" five ye.ar peri,," prior to the acquisitions cOllld the market be chardcterized a. less than "highly con""nlrat.(',L" (CX 94) .1 Whik Mississippi ! ;ver Corp. Woe not a factor in the supply market. prior to t.he St.ewart ""4ui itiun, by I9Iii; havior entered as an int.q,.-led finn, it ranked amu,,!, Uw t.up four (CX 9:1) .. ex &'i. This figure amounterlto; I per"""t of all purchases by ready-mix..1" ;. ex 8/;. This w"-, 17.;\ perc,,"t of total ready-mixereonsumption '" exr2 -. ex 8/;

..,.. ,, , , , Abli liKUV t. Lt.lVt.NT cu. II67 112:1 Opinion purchases by "Union Quarries" of some 17 R90 barrels. This amounts to less than 0.9 percent foreclosure. '" While we do not rue that such a small percentage will be in all cases insigncant " the record here fails to demonstrate that in this particular situation any effect on e.ompetition, in any market would be - other than de rninimis.t;u therefore reject the administrative law judge s conclusion that "(t)he acquisition of the assets used in the operation of Union Quarries by Ash Grove Cement Co. violates Section 5 of the Federal Trade Commission Act, as amended."r. The order win be modifed accordingly. In the notice of contemplated relief issued with the compl,pnt in this matter, the Comnrssion sought to provide for divestiture of the challenged acquisitions, together with the imposition of a limiterlduration ban on any further acquisitions of ready-mixers by respondent. The administrative law judge, in rendering his initial decision augmented these provisions with: (i) a post-divestiture limitation on respondent' s sales of portland cement to the divested firm; "2 (ii) a moratorium on ready-mixed concrete sales or deliveries by respondent into the KCMA; '" and (iii) a ban on respondent internally expanding, or in any sense operating, as a competitor in the ready-mixed market in the KCM A for at least two years after divestiture.''' On appeal respondent has objected to the inclusion of these three provisions in any final order we may issue here.

" hul,'cd, incomplete data for 1%7 suggc t a far smaUer amount pureha.wd in t.h.. year after the acquisition. ex R- 9 We note that. inBm"''' Shoe Co. /hrilcd S,,,I,,, :)70 l;.s. 29 (191;2), one of the pmduet.lin..~ in which a violat.ion was fnund to have oeeurn'd involved only I p.'rc..nt.forcclosure "" Unlik,' t.he portland ecment. and rl'ady-mixed concrete.e markets, in which " Union Quarries" ha. no di""ernible eHeet. thereisno portlandef'm..nt.treatedbascroek" mark..t.rJes('iUcdinthf'seproceerlin ;norislhcresuffjcient data to analy', Union quarries" in t..rms of backward integ-ration by a ready. mixer into aggr"gat..~ supply. "' Becallsc of our di~po"itio" of this aeqllisition on the m"ril . it is unneccs,;I" to pa. s on r"~p"nd..nt jurisdictional cont"nti"ns. We note, howcv..r, that the Commis.',ion s powf'r to challenge Tloneorporate acquisitions under S,'etion 5 is well. ~.'ttlcd. Uetll. Foud. Co., 70 C. IHfi (19(,1);Nnli"""l Tell Company, 6!! P. C. 216 (190); Bealnee Food. , 67 F. C. 47:J (196); FlJrn1lost D",ne" 'ne, 52 F C. 1480 (1956). (t p"ct.ion 5 power to order divc titur.. is ..equally dear. L. G. BoIJ,,,r Co. v. ftc, 442 F.2d 1 17th Cir. 1!!71); Goldcn Grain Mamr,,,i . v FTC, 4n F.2daa2 (9th (;ir. 1972), eerl. den;l'd 412 S. !jI8(1J7: ., Initial !)ecisionat:\1 (Par. V).

fri. at :J2 (Par. VI). The law judge would onler I.h"t this re~triction, a." "'I'lt a~ that contained in Par. V , b,. rnaiutaincdfortwoyeanafterdivestituIT or o long as re pondent retain a =curity iotere t in the divested prapprty, whichever is longer.

Id. (Pal VII) ." Respondf'nt ha~ al~o chaltenKcd that portion of pa"""grl'h J of th,' law jurlge order which wauld rf'quir" divestiture of the " Union Q",nrl"s" a set . In light ar our di~po ition1 of th"t a. P',ct of this cas" "'pru, respond,'nt objection to pa....gr.tph ! is moot That portion of p"ragn\ph I relating to " Union Qu.irre,," i not made a part af our finalordpr . .

!Hil 1:U.tKAL l'KALJl' L:UlVllVU;:;:lun UtAjlblUl..:: Opinion 85 F.

We are unable to find an adequate basis in this record to justify these additional provisions.

In support of limiting respondent's sales to Fordyce and Lee Sumt for a period following divestiture, counsel supporting the , complaint argue that there has been a prolonged "block-out of competitive effort"" in portland cement sales to the acquired readymixers. Simple divestiture will not be sufficient, so the arguent rus to eliminate the foreclosures which have long been maintained, and reinforced, by trading habit as well as corporate structure. Ths argument is not unreasonable on its face; and, indeed, it may be compellng in other market contexts - or on a stronger record demonstration of necessity. We think however, in the case of a homogeneous product such as portland cement, in a market admitted to manifest price competition, there appear little reason to foreclose respondent from any segment of that market. In ' this context customers, even those newly severed from a parent, can be expected to buy from the supplier making the best price and offering the best servce. Without a clear showing that this is not likely to occur in absence of the proposed competitive restriction, we are unwilling to order it here.

The argument advanced for keeping respondent out of the KCMA ready-mixed market for a time is equally unpersuasive. When asked during oral argument to cite record evidence justifying the competitive prohibitions of Paragraph VI and VII of the law judge s order, counsel supporting the complaint could allude only to testimony of readymixers to the effect that a vertically integrated competitor puts an independent" at a competitive disadvantage. Whle we receive such testimony as credible, we fail to see how it Tenders the order provisions in question in any way related to the offenses found. More importantly, we are simply at a loss to discern what relationship these provisions could bear to restoring the state of competitive vigor the market might have enjoyed but for the ilegal acquisitions. In the instant case we conclude that pargraphs V, VI and VII of the administrative law judge s order, on the record before us, have not been demonstrated as necessary to effectuate relief in this matter. Accordingly, these provisions are not made a par of our final order. It remains for us to dispose of respondent's contention that the .. In (',!percrofi Corp. FTC. 412 F2d !rl7 (7th Cir. 197:!) the Court of ApfKal pointed out that while divp titure order have included SIX i,,1 provisions d..signed to insu the survival of the divested business ' . ... it i:; e"""nti..!" that such onkn; be ba--erl upon ~supporting findinv; which demonstrat.. ... . . the ne "(1 for a "peeial pro!""t;.." provisiun." (citation ornitted) Jr!. aL 9:H-:12. We are unable Lo glean such findin from the record before us " Tn.n""ript "FOr..1 Argument at 54 ..

1123 Final Order issues in this case were prejudged by the Commission in " unauthoried trade regulation rule proceeding." In what must be considered a gross misconstruction of the Commission s involvement in the cement industry,"" respondent raises the question of prejudgment for our consideration yet a third time. Respondent puts forth no new argument' to convince us that the ' Commssion erred in deciding prejudgment" in its Interlocutory Opinion and Order in this matter Oct. 14, 1969."" Nor has any reason been suggested for abandoning the Commssion s subsequent determnation in response to respondent reraising the issue, along with its il-conceived ultm 1YiTeS argument Dec. I), 1972.'" Finally, there is absolutely no indication that the curent Commission, or any of its membership, ha. prejudged any issue in this case or shown bias in any way since the issue was last resolved. In short, the respondent's contentions as to prejudgment and Commission bias were baseless when previously adjudicated, and they are baseless now.

FINAL ORDER Ths matter hadng been heard by the Commission upon the appeal of respondent' s counsel from the initial decision, and upon briefs and ora argument in support thereof and in opposition thereto, and the Commission, for the reasons stated in the accompanying opinion, having denied, in par, and granted, in part, the appeal; accordingly, It is ordered That respondent, Ash Grove Cement Company, a corporation, and its officers, directors, agents, representatives, employees, subsidiares, affiliates, successors and assign", within one (1) year from the date of this order becomes final, divest, absolutely, subject to the approval of the Federal Trade Commission, all stock, assets properties, rights and privileges, tangible and intagible, including, but not limited to, all plants, equipment, machinery, inventory, customer lists, tmde names, trademarks and goowil, acquired by respondent, as a result of the acquisitions of the stock of Fordyce Concrete, Inc. and Lee s Summit Ready-Mix Concrete & Materials Company, together with all additions and improvements thereto and replacements thereof of whatever description, so as to assure that there is established one or more separate and viable competitors engaged in the business of producing and sellng ready-mixed concrete.

, He ponrl"nt Briefon ApfHal at 47-;:'2, pt.,s;m " A.,h Gr,,,,,C"""',,IC"'''IX)IIy, 7tif.T.C. 1076(1969). " Ash Gr"""Cc",,,,,IC"""p""y,HI T.C. 10,,1 (1972). 11' "l"U ltl\.L I\1-1.JI' Vlnlnlk1k"l\. 1.l1'..\.,IUIV"'- Final Order 85 j.

It is ju,rther ordered That pending such divestitures respondent shall not make or permt any deterioration or changes in any of the plants machinery, equipment, buildings, or other property or assets to be divestEid which would impair their present capacity or market value. It is further ordered That none of the stock, assets, properties, rights or privileges required to be divested be transferred, directly or indirectly, to any person who is at the time of the divestiture an offcer director, employee, or agent of, or under the control or direction of, Ash Grove Cement Company, or any of its subsidiares or affiiates or who owns or controls, directly or indirectly, more than one (1) percent of the outstanding shares of voting stock of Ash Grove Cement Company, or any of its subsidiaries or affiiates.

It is fu:rthkJr orred That with respect to the divestitures required herein, nothing in this order shall be deemed to probibit respondent from accepting consideration which is not entirely cash and from accepting and enforcing a loan, mortgage, deed or trust or other security interest for the purose of. securng to respondent full payment of the price, with interest, received by respondent in connection with such divestitures; provided, however, that should respondent by enforcement of such securty interest, or for any other reason, regain direct or indirect ownership or control of any of the divested plants, land or equipment, said ownership or control shall be redivested subject to the provisions of this order, within!1 one year from the date of reacquisition.

It is further ordered That for a period often (10) years from the date this order becomes final, respondent shall cease and desist from acquiring, directly or indirectly, without the prior approval of the Federal Trade Commssion, the wbole or any par of the share capita or other assets of any corporation engaged in the sale of ready-mixed concrete or concrete products within respondent's present or future marketing area for portland cement or which purchased in excess of 000 barrels or 1 880 tons of portland cement in any of the five (5) years preceding the merger.

. .

...... UC H'~.

1171 Order It is further O'rde-red That respondent shall, within sixty (60) days from the date of service of this order, and every sixty (60) days thereafter until the divestitures are fully effected, and every one hundred eighty (180) days thereafter until it has fully complied with the provisions of this order, submit to the Commission a detailed wrtten report of its actions, plans, and progress in complying with the divestiture provisions of this order, and fulfilling its objectives. All reports shall include, among other things that will be from time to time required, a summary of all contacts and negotiations with any person or persons interested in acquiring- the stock, assets, properties, rights or privileges to be divested under this order, the identity of each such person or persons, and copies of all wrtten communcations to and from each such person or persons.

VII It is further ordered That respondent provide a copy of this order to each purchaser of plants and assets divested puruant to this order at or before the time of purchase.

Commissioner Thompson dissenting.

IN THE MATTER OF GIFFORD-HILL & COMPANY, INC.

Do(;kel 8989. Onwr, June, 197.5 Complaint counsel's second request that Commission seek an all wrts injunction denied.

ORDER DENYNG SECOND REQUEST TO SEEK INJUNCTION This matter is before the Commission on the certification by the administrative law judge of complaint counsel's motion entitled Second Request for Action Pursuant to the All Writs Act." In a prior Request " counsel supporting the complaint asked the Commssion to seek an injunction to prevent the sale of one of the three ready-mixed firms, the acquisition of which is challenged in the complaint in the above-captioned matter. Since the sale had been consummated by the time the matter came before us, we considered the request for an injunction moot, and denied the motion. By this "Second Request complaint counsel ag-d.in asks the Commssion to seek an injunction . For al'p!ar.lnce, s(' 94f!, herein Order 85 F.

pursuant to the All Writs Act, but, in this instance, "" to the possible divestiture of all properties subject to the complaint except the ready- , mix pruperty which h"" been divested, In support of his motion, complaint counsel has fied an in camera affdavit affrming that two persons with affiliations in the cement and concrete business have volunteered information which has led complaint counsel to believe that respondent is undertaking a program to divest all or a portion of the assets which are the subject of the complaint. If the program is cared out, complaint counsel contends the Commission wil be denied an opportunity to "approve such contemplated" divestitures, and "an opporturty to order a particular divestiture plan which may identify a preferable purch",ser" so as to restorc competition in the relevant markets. By an answer fied June 20 1971) Gifford-Hill has opposed the Second Request " arguing that complaint counsel has failed to make a showing that there is "a reasonable probability of an antitrust violation * * * with respect to the acquisition of the companies to be subject to the requested injunction " and, more specifically, has failed to show that Gifford-Hil has any intention of irretrievably breaking up a formerly 'viable' company." Gifford-Hill does not deny that it is presently engaged in negotiating the sale of the acquired companies. Even if we assume the truth of what the persons reported to complaint counsel concerning the sale of the properties challenged in the complaint, we are without sufficient facts upon which to base a decision as to whether an All Writs injunction, as requested by complaint counsel, is warranted and should be sought. In the present posture of this matter, the administrative law judge is in a better position to ""certain these facts. If he determnes that a program such as is alleged by complaint counsel would make an "effective remedial order virtually impossible "* it is within the law judge s authority to grant a request for compulsory process if necessar to obtain information that would support a motion for an injunction pursuant to the All Writs statute before the Circuit Cour. Accordingly, It is ordered That counsel supporting the complaint's Second Request that the Commission seek as All Writs injunction be, and it hereby is, denied.

Commissioner Thompson not paricipating.

* FTC De"" f'"",i.. CU"'pllI!I, 38 V.S. 597, 60:, (1!1f) 117:J ADVISORY OPINIONS WITH REQUESTS THEREFOR Advertising and selling as "new" test automobiles used for e1"ission control tests, (File 7537005) Opinion Letter Mar. 7 1975 Dear Mr. Kik:

This is in response to your letter of Sept. 16, 1974 requesting the Commssion s opinion on the right of automobile manufacturers to advertise and sell as "new" those test automobiles used to demonstrate compliance with ai pollution control standards. Your letter indicates that the Environmental Protection Agency is developing a regulatory program under the Clean Ai Act that would require both domestic and foreign manufacturers to select and test annually a statistical sample of production vehicles. The sample would consist of a "few hundred" vehicles per model year per manufacturer. The proposed test itself requires that each selected vehicle be operated for the equivalent of about fifty miles. Manufacturers would be permtted to accumulate as much as 4 00 miles on each selected vehicle prior to testing if they thought such accumulation necessar to overcome the erratic emission performGe that is typical of new engines. The issue is whether manufacturers would have the right to advertise and sell any of these test vehicles as "new. Mter careful deliberation, the Commssion has determined that it cannot conclude, as a matter of law, that automobile manufacturers have the right to sell such test vehicles as "new." Each manufacturer's testing may raise unique questions. Therefore, the C()mmssion would prefer to defer a more definitive opinion until it receives a request from an auto manufacturer.

By direction of the Commission.

Lette of Request Sept. , 1974 Dear Mr. Tobin:

EP A is developing a regulatory progr under the Clean Ai Act, as amended, which wil require both domestic and foreign automobile manufacturers to demonstrate that production vehicles comply with applicable ai pollution emission standards. Because these regulations allow a manufacturer to accumulate up to 4 00 miles on production L..LJL.. .n.L ...n'-'- VV..U" H-'U'. V... "'''VH-''''''.J 85 F.

vehicles selected for testing, we are requesting an advisory opinion based on current FTC rules or decisions as to whether such mileage accumulated in accordance with the proposed program, as outlined below, wil affect the right of the manufacturer to advertise and sell sucht ted vehicles as new ilutomopiles.

The regulations will require a manufacturer to select and test upon request by EP A a statistical sample of production vehicles. Because the EP A testing requirement is imposed on a statistical sample of selected models only, it is anticipated that no more than a few hundred vehicles per model year per manufacturer will require testing based on EP regulations. Prior to the testing of such vehicles, the manufacturer may, if he so desires, accumulate mileage on the vehicles in order to stabilize exhaust emissions. This provision is intended as an accommodation to the manufacturers who claim that a new vehicle exhibits errtic emission performance during the first few miles of use until the engine and emission control system seWe into more predictable operating modes. This phenomenon is sometimes referred to as the green engine" effect. Such mileage accumulation prior to testing is solely at the option of the manufacturer. We anticipate that, in most instances, manufacturers will elect to accumulate the minimum mileage necessar to perform the emission test which is about 1)0 miles. In summary, the EP A regulations wil result in new vehicles being required to accumulate mileage prior to being delivered by manufacturers to their dealers. The accumulated mileage may range from minimum of about 1)0 to a maxmum of 60 mies. Your advice as to the status of such test vehicles as "new automobiles" and the manufacturers' right to sell them as such would be appreciated prior to the scheduled proposal of these regulations within the next thirty days.

Thank you for your cooperation in this matter. Very truly yours / s/ Alan G. Kik II Assistant Administrator for Enforcement and General Counsel (eg-329) No. 147. Granting of "back-haul" allowances to customers picking up their own orders. (72 F. C. 1050, 16 C.F. 915. 147) No. 483. "Backhaul" Allowances advisory opinion afirmed. (File No. 683 7026, releas Dec. 26, 1973, 8:J F. C. 1843, 16 R. 915.48.1) Clarification of Ruling (File No. 68.3 7026). . ..

..v "..H' '-, U,',--"-, .:U..u n~~"tuJ.,") .... 1 O.D1\. I:.l' UH. lub ClrLrif1Jing Opinion Letter Mar. , 1975.

Dear Mr. Silbergeld:

, Your letters of Nov. 8, and Dec. 12, 1974, have been considered by the Commission. The Commission is of the view that a useful purpose would be served by providing brief review and comment relative to the various points that you have raised.

Principally referenced in your initial letter was Commission Advisory Opinion No. 147, issued Oct. 24, 1967, relating to "backhaul" allowances. You characterie that opinion as constituting a form of government "regulation" and suggested inte alia that the opinion mandates waste and ineffciency in transporttion. Advisory Opinion No. 147 was directed to a rather narow issue whether General Foods Corpration, the company that requested the Commission s opinion, might violate Section 2(a) of the Claytn Act as amended, if it required its rank and me customers to continue to purchase from it pursuant to a uniform zone delivered price system while, at the same time, it offered varg freight-related allowances to private-carrer" customers positioned to take "dock" delivery. The allowances would vary according to whatever common carrer charge would apply if, in fact, delivery were mae to those customers' home locations.

That such deviations in customer pricing could result in ileg-dl price discrimination would seem faily apparent once the situation is examined. For example, different "private-cer" purcha.(;ers, even though purchasing the same goods, in the same quantities, by precisely the same method - i.e. by pick-up in their own trucks at Genera Food' dock or warehouse, would buy those goods at substantialy different net prices under General Foods' proposal. Substatial net price differentials would not only obtain among and between individual private-carrer" purchasers taking "dock" delivery, but those purchasers would be provided, in tur, varng net purchase price advantages over "delivered-price" customers of C'xenera Foos supplied from that same shipping point.

The Commission in connection with its responsibility to enforce the requirements of Section 2 of the Clayton Act, as amended, advised Geneml Foods that, assuming the presence of other elements necessar to a determination of violation of the statute, implementation of its proposal would probably result in a violation of law. The choice of the basic underlying pricing system, addressed in the opinion, was Genera Foods . The issue raised by Gener.u Foos was not with respect to the merits of its delivered price system but, mther, the 85 F.

legal consequences of particular deparures from that system. The Commission s opinion, accordingly, neither operated to approve or disapprove the premises on which . the matter was presented. The opinion, moreover, did not foreclose the possibility that means to insulate against or avoid ilegal discrimination, might be devised. No such measures were subsequently proposed to the Commission however.

In the period following the Commssion s 1967 Gener.ll Foods advisory opinion, it became increasingly apparent that the opinion was being divergently interpreted by the business community as well as other interested individuals and groups. On the basis of representations by a number of interested paries, including the Cost of I iving Council and National Commssion on Productivity, the Federa Tr.lde Commission very carefully reviewed and reconsidered the matter. On Dec. 26 1973, it issued a statement to clary Advisory Opinion No. 147. Many of the same points that you advanced also concerned the Commission. For example, you observed:

Nowhere in the Opinion, however, is there any considemtion a.c; to whether the delivered price" system may have anti-competitive or anti-consumer effects by disallowing the implementation of efficiencies which may lower prices to consumers. In fact, nothing in the Robinson-Patman Act or Section 5 of the Federal 'Idode Commission Act requires use of a "delivered price" system or prevents the supplier from selling goods B. plant"

1973 The Commission, in its claryig statement of Dec. 26, addressed some of these very concerns. It announced its intent to scrutinize delivered price systems in the food products industry in order to determine whether they are unfair to customers or to ultimale consumers, and thus violate Section 5 of the FTC Act. It additionally announced in that connection that it intended . to develop empirca information on the impact of delivered price systems on foo prices. Such an investigation was, accordingly, directed by the Commission. In its clarifying statement, the Commission also sought to make it clear that although the granting of "backhaul" allowances (based on the customer's actual freight costs) by a seller using a unorm zone delivered pricing system could indeed rase Robinson-Palman questions, a nondiscriminatory option offered by such a seller to all customers to purchase at a true f. b. shipping point price, would not. Some unfortunate confusion has arsen as a result of the Comms- In fact, no sion s use of the term "true Co.b. shipping point price." question of unlawful discrimination would arise so long as the f. price is (1) unform and (2) available to all customers on a nondiscriminatory basis. No legal requirement exists that the alternative f. price be of any particular amount or computed in any particular way. The availability to customers of such an option would preclude any , ru.J \l1QI.11\ I u1' H'I1Vl"1L1 fU'IU ltl'JIqU ;:1;:1t11"'JU' l'Uli 111' JJ73 legally recognizable competitive injury resulting from any customer's election to purchase at the higher "delivered" price. Antitrust enforcement is premised on the concept that the selfregulating forces of competition are preferable either to government ref$lationz on the one hand, or private )Jtilization of economic power . on the other; applied to gain control over, or to apply anticompetitive strictures within, competitive markets. . Antitrust, therefore, targets trade practices falling within the latter category. Neither the Commssion s Advisory Opinion No. 147 nor its clarying statement of Dec. 26, 1973 are viewed by the Commission as being "regulatory" in nature.

The Commission s investigation of the food products industry is actively in progress. That investig-ation is at once multi-faceted and complex. Included within its compass is the impact on prices and the fairness to customers and to ultimate consumers of delivered pricing systems operative in the food products industry. It is not possible at this stage of investigation to specify final completion dates for varous phases of this investigation. If and as constraints of an antitrust nature may be disclosed, however, the Commission wil take direct and affirmative action. If no such constraints are disclosed, it is not contemplated that the Commission would take any action which would serve to encroach upon the traditional prerogative of sellers to unilaterally determine their own prices and terms of sale. By direction of the Commission.

Letter of Request Nov. 8, EJ74 Dear Mr. Chairman:

This is a request, in accord with your higWy commendable speech in Detroit last Oct. 7, for the Commssion to take action to eliminate government-mandated waste in tbe trdIsporttion of goods. As you stated in your Detroit speech By the time you get a piece of meat from the pasture to the plate, it cares with it numerous trasportation charges." Consumers end up payig these charges, whether they are included in the price of meat for dinner or in the price of ball bearngs, metal tubing, electronic devices and other components contained in the refrigerator we use to store that piece of meat. The Federal Trade Commission s Advisory Opinion No. J47 is a form of government regulation which mandates the kind of waste in transporttion which increases the price of the hypthetical piece of meat (and the refrigerator). We hereby request, therefore, that the Commission repeal Advisory Opinion No. 147 and issue a policy jRg- " 0 - 7" - 7;' 85 F.

statement approving the kind of discount for backhauling which the Opinion now prohibits.

A:dvisory Opinion No. 147, released Oct. 24 1967, prohibits a company from receiving any discount from a supplier s "delivered price" if that company uses its own trucks to haul purchased goods from the supplier s warehouse or factory - even though (1) the company may be able to haul the goods more cheaply than the common carrer, and/or (2) the company may realize substantial savings by hauling the goods in trucks which will be in the supplier's vicinity in any event and which now return to the company garage empty because Opinion No. 147 makes such backhauls illegal.

In effect, the Advisory Opinion mandates the wasteful empty return trip plus any savings the company may be able to realize over the cost of carer transportation. This is precisely the kind of waste which your Detroit speech highlights as inflationary, and this is an opportune time for the Commission to eliminate this cause of waste of trasportation facilities and motor fuel resources.

The Advisory Opinion, in fact, concedes that the conclusion it reaches may seem unreasonable from one point of view" but detennines that this conclusion is a necessary result of the supplier's use of a " delivered price ' system. Nowhere in - the -Opinion, however, is there any consideration as to whether the 4'delivered price" system may have anti-competitive or anti-consumer effects by disallowing the implementation of efficiencies which may lower prices to consumers. In fact nothing in the Robinson-Patman Act or Section I) of the Federal Trade Commission Act requires use of a " delivered price" system or prevents the supplier from sellng goods " B. plant" aodadding a transportation charge to those customers which utilize common carers for transportation. The net result is simply an absolute disincentive to efficiency.

I hope that the Commission will be able to act on this request expeditiously and favorably, in the consumer's interest. Sincerely, /s/ Mark Silbergeld Supplernental Letter of Request Dec. , 1974.

Dear Mr. Chairman:

On Nov. 8 1974, I wrote to you regarding the Commission s Advisory Opinion No. 147, which appears to mandate certain ineffciencies in ADVISORY Opiniun:: Able tir."tul:dLV ' u.'---industrial transportation, while implementing Section 2(a) of the Robinson-Patman Act, as interpreted by the Commission. While awaiting your reply, r have discovered a Dec. 26, 1973, FTC. news release which "clarifies" Opinion 147, seemingly by authoriing the establishment and use of true " B. factory" prices by sellers which continue to use zone delivered pricing systems. The Dec. 26 statement continues, however, to prohibit allowances for backhaul. The statement also discloses the Commission s stated intent to: I. Scrutinize delivered pricing systems in the food products industry in order to determine whether they are unfair to customers or to ultimate consumers, and thus violate Section 5 of the F. C. Act. 2. Develop empirical information on the impact on food prices of such delivered price systems which wil enable it to make this determnation.

In view of continuing douhle-digit food inflation, the outcome of these inquies is, obviously, of great interest and signcance to consumers. Therefore, I would appreciate it if, in your forthcoming reply to my original letter, you could indicate some approximate target date by which the Commission anticipates that it will be able to take some action on or make some disposition of the delivered pricing system inquiry.

I look forward to your reply with interest, and appreciate your attention to this matter.

Sincerely, /s/ Mark Silbergeld Collection and distribution of cost production statistics from and to members in the printing industry. (Docket 41)9 - United Typothetae of America, et aI., 6 F. C. 345Y Opinion Letter Mar. 24 1971) Dear Mr. Fellman:

The Commission has considered the request in your letter of Dec. 19 1974, for advice as to whether your client, Prnting Industries of America, r nc.. (hereinafter referred to as " LA."), may engage in a proposed course of action without violating the cease and desist order issued by the Commssion in the above-captioned matter on Aug. 17 . Your letter states that your client, P.LA., is the successor to United Typothetae of America.

'00 n - 7" - c 11HO F'EDEHAL TRADE COMMISSION DECISIONS 85 F.

From your letter, it appears that P.I.A. proposes to collect certain statistics and disseminate them to the industry it represents. The proposal is referred to as the "Budgeted Hourly Cost Program" and wil. he available to both P.LA. members and non-members. The program will include three basic features: (1) seminar; (2) collection and dissemination of information; and (3) providing computerized data services. In regard to (I), P.LA. will hold a series of regional educational seminars to acquaint printers with the realities of cost accounting techniques as applied to the printing industry and inform them of the "Budgeted Hourly Cost Program." The seminar will be designed to sell printers the value of accurate cost accounting. In regard to (2), members joining the program will provide ba,ic cost data. This data will be compiled on a regional basis and average regional costs will be developed. Such costs will be returned to the members for comparison purposes. In regard to (:i), P. LA. wil transmit the sheets containing the members' basic cost data to a computer servce company for processing. P.LA. will receive back a printout by the computer of the Budgeted Hourly Cost Comparison Sheets. These sheets will be distributed to the regional affiiate association of members. P.I.A. will encourage the affiiates to hold their own educational seminars in conjunction with the distribution of the sheets. Thus, industry members wiu be provided "with a method of acclldtely computing their own costs of operation and with a means .of comparing an individual company s cost with an average of the costs that have been reported in the geographic region in which the industry member competes. The order in Docket No. 459 inter aha prohibits respondent: 2. From requiring or receiving from members and others using respondents' unifonn cost accounting Hystem, identified and itemized statements of production costs for the purpose of calculating average, nonnal or standard costs of prod action and from publishing them to members and the tmde generally as "Standard Pl;ce List" or Standard Guide" or association cost or price list under any other name. On the basis of the facts submitted, you are advised that the Commission is of the opinion that the operation of proposed "Budgeted Hourly Cost Program," particularly the publishing or dissemination to members and others of average costs of production, would violate the order issued in this matter.

By direction of the Commission.

Letter of Request With Exhdnts Dec. , 1974 Dear Sir:

We are writing to you on behal of our client Printing Industries of America, Inc., 1730 North Lynn Street, Arlington, Virginia 2209, and ...u. V. .V. D ftl LI J'C,"(lJ!:H:JJ.': lr1r J\l' rVl\ 1In requesting an advisory opinion under Section 3.61(d) of the Commission s Rules of Practice regarding the legality of our client's proposal to collect certain statistics and disseminate the same to the industry it represents.

Iyinting. Industries of America, I'1c. (hereinafter referred to as P.I.A.) is the largest trade association in the graphic arts industry. In the United States there are an estimated 35 00 commercial printers of which more than 700 belong to P. LA. Industry gross volume annually exceeds 10 billion dollars.

This year P.l.A. celebrated its 87th annversary. In serving its industry for this period of time, P.l.A. has seen many dramatic changes occur. Computer age technology has had a revolutionar effect in the printing industry. Increased demands for specialty printing has created a large number of printing houses devoting themselves excllL'i very to areas such as financial printing, label making, computer typ settng, binding, business forms, etc.

Today the printing industry, encompassing all facets of the graphic arts, is facing a new challenge.

Eighty per cent of the commercial printers in the United States are small businessmen with less than 20 employees. For these shops to compete against the larger printers, management must be able to fully utilize the new production machinery on the market from both a technical and economic standpoint.

l.A. is presently providing members With educational materials on new technical developments. P.l.A. tells its members that equipment is available and that such equipment is designed to function in a stated manner.

However, this information is not sufficient for the small printer. He can review P.LA.'s material; he can evaluate material provided by the varous manufacturers; but he mll,t be able to estimate the operating costs of the equipment in his own shop, and subsequent to purchase, he must have a way of developing cost figures to show whether or not be is using his equipment effciently.

P. LA. does not provide its members with a means of making this typ of cost analysis at present.

A management profie of the 28 00 printing shops having less than 20 employees would show remarkably similar executive structure. Management would consist of one individual, the owner ofthe business. This manager is usually a traned technician in printing in contrast to an individual with an M.B.A.

In the grphic ars industry, the owner of a small shop stated he typically as a pressman or printing salesman. Over the year, . .

-_u..- ..u,u -..

85 F.

acquires some good "seat of the pants" business knowledge but rarely becomes proficient in cost accounting.

This manager today is trying to compete against larger companies with highly sophisticated management teams. He is competing in a - marke,t place characterized - by many sellers, most of whom produce similar products. He is competing in an industry with a rapidly developing highly computerized technology placed in an economy attacked by rapidly rising infation and presently in a period of strong recession. Finally, there is a shortage of paper, his basic raw material. It is obvious that the small printer needs a quick, simple and yet thorough means of developing and analyzing information as to operational costs.

I.A. seeks to meet this need through its proposed "Budg-eted Hourly Cost Program.

Although we are of the opinion that the P.I.A. proposed program would not if instituted constitute a violation of the laws administered by the Commission; we request this advisory opinion because of the fact that P.I.A. is the successor to the United Typothetae of America I.A. was created 29 years ago and has not, to our knowledge been named as a party in any antitrust suit by the F. C. or the Department of Justice during its existence. However in 192.1, Idly-one years ago the F. C. entered an order against its predecessor, United Typothetae of America (See F. C. v. United Tyothetae of America, et. al, Docket 459 6 F. C. a45 (1923)).

Section 2 of the order entered into in that case limits certain statistical collection activities of the Association but not, we submit, the activities proposed herein.

The P.I.A. Budgeted Hourly Cost Program is designed to provide industry members with a method of accurately computing their own costs of operation and with a means of comparing an individual company s cost with an average of the costs that ha e been reported in the geographic reg-on in which the industry member competes. We emphasize that no information with reg-drd to prices will be par of this program. No statistics will be g-thered with reg-rd to profit profit ratios, prices, sales, cost ratios relating to gross sales volume or any other factor that would enable one to use this program to determine industry price levels.

The program will be available to both P.I.A. members and nonmembers.

The program includes three basic features:

(I) Seminars (2) Collection and dissemination of information (3) Providing computeried data services.

AUVI UKY UPINjUN ANU j,EQUE TS THER,:FOR 11H3 If the program is implemented, P. !.1\ wil hold a series of regional educational seminars to acquaint printers with the realities of cost accounting techniques as applied to the printing industry and inform them of the Budgeted Hourly Cost Program. These seminars will be designed tp sell printers the value of accurate cost accounting. If the program is implemented, P.!.1\ wil begin the collection of basic data. All data collected will be kept confidential. Noone competitor will be provided with data submitted by another competitor. Basic data will be collected via the Specification Sheets attached hereto as Exhibits " A" and "B." As explained by the definitions contained in Exhibit "C" in connection with data development, P.!.1\ expects that it will lean heavily on its regional affiiates. As a federation of regional associations, P. !.1\ is composed of individual company members who enter P.!.1\ by joining one of its ,regional affiliates. P.I.1\' s regional managers are in direct contact with members and have indicated widespread grass root demand for this type of a service. The proposed program would work as follows. In calculating individual company budgeted hourly costs based on their actual company information, P.!.1\ wil undertake the following: 1. Though direct mail, periodicals and meetings programs !.A. will make the availability of this servce known. 2. Printing companies that register for the progmm will be sent suffcient P.!.A. Budgeted Hourly Cost Specification Sheets (Exhibit A) to provide information on the cost centers for which they want calculations made. They wil also be sent definitions (Exhibit C). 3. The printing company then will send the completed P.!.1\ Budgeted Hourly Cost Specification Sheets to P.!.1\ 4. The Specification Sheets wil be reviewed for completeness and apparent consistency. If the data appears to be correct, it will be sent to a data processing firm for processing. If it appear to be incorrect, it will be returned to the respondent to recheck 5. When the data is sent to the data processing firm for processing, it will be sent under a code number so that the computer cannot be called on to printout confidential information about any printer except via a code number which will be controlled by P.!.1\ 6. The data service wil then compute the Budgeted Hourly Cost Comparison Sheets for the individual printing; company (Exhibit B).

7. The company data sheets will be forwarded to P. !.1\ for review and distribution.

S. P.!.A. wil then send the company s Budgeted Hourly Cost Comparison Sheets along with another set of definitions (Exhibit C) back to the company.

11&1 FEDERAL TRADE COMMISSION DECISIONS RG F.

9. Participating companies will be encouraged to resubmit data for recaJculation of budgeted hourly costs whenever significant changes in costs have been incurred:

The regional managers of the various P.I.A. affliated associations will meet with P.I.A. headquarters staff and review regional cost problems. Minor amendments to basic forms will be made if necessary to include local requirements.

Members joining the program will provide basic cost data. This data will be compiled on a regional basis and average regional costs will be developed. Such costs will be returned to the member for comparison purposes. This is the second facet of the program. It is necessary for a program of this nature to be regional as major costs such as labor, rent, electricity, etc. vary substantially in different regions of the country.

Cost centers would obviously have to be limited to the most common pieces of equipment used in an area so that adequate data bases would exist. Once a cost center is designated, information wil be compiled to provide regional averages for analysis. P.I.A. will review regional data for completeness and apparent consistency. Following its review of a region s Budgeted Hourly Cost Specifcation Sheets, P.I.A. will transmit the sheets to a computer service company for processing. The processing will consist of the following:

a. Input of the data from each Budgeted Hourly Cost Specification Sheet into the computer.

b. Mathematical manipulation of the data in accordance with the computer program.

c. Printout by the computer of the Budgeted Hourly Cost Comparison Sheets. (Exhibit B).

The computer printed Budgeted Hourly Cost Comparison Sheets will then be sent to P.I.A. for review and distribution to the regional affiiate association. The affliate can option either one of two methods of distribution.

a. It can either obtain the computer printout from P.I.A. and reproduce these for distribution among its regional membership; or b. P.I.A. will print and distribute the information directly to the affiiate s members.

The above will include incorporating definition of tenn and an explanation of the use of the averages being provided. (Refer to Definitions" Exhibit C).

I.A. will encourage the affiiates to hold their own educational seminars in conjunction with the distribution of the Budgeted Hourly Cost Comparison Sheets. Ths facet of the progrdm will enable members to determine how effciently they are using their equipment. 11n As was mentioned, the procedures which have been described are similar except for two important points. First, the regional/area averages are compilations of averages frmn a pmi.icular area; whereas with the company service aspect of the program, the data is based on data developed within and by individual companies. . geconcl, with regard to area averages the data wil be distributed to any and all interested companies. Distribution of individual company data will be restricted to just that company. It is the belief of PJ.A- that implementation of the proposed program wil strongly aid competition by providing the smaller printer with the economic analysis presently available to the lary;er printer. As the state of our economy is such that this information is becoming more and more necessary daily, it is respectfully requested that the Commssion give this matter top priority. The printing industry is the third biggest private employer in the nation based on U.S. Department of Commerce statistics and as this program is designed to primarily benefit more than 80 percent of that industry, it has sufficient importance to the economy to justify irrediatc considerdtion by the Commssion.

We have been requested by our client to inform the Commission that any additional information or explanation requested will be provided immediately in an effort to expedite this matter. Should any such additional information be necessa, it would be appreciated jf contact be made with tbe undersigned or .Jerald A. Jacobs ofthis firm.

Very truly yours COUNIHAN, CAgleY & LOOMIS /s/ Steven .John Fellman Exhibit "

PIA Budgeted Hour Cost Spec fic(lfinll." Shf'et 1. Cost Center Name 2. Description . Crew complement to be built into r.dte (No. of employee:;) 4. No. of productive hours available, one shift Hrs. 5. No. ofhrs. over _hr;. perwk., per shift, in compubtio . No. of shifts to be used in compuUitions 7. Investments in profit center, equipment only 8. Inw::tments in profit center, peripheral equipment 9. Method ami rate of depredation: _yr. life 10. Floor space, total square feet 11. Total hol"epo\\ er of all motors 12. Direct Jabor: _ Employee Employe ;; __ 8:: F.T.C.

Employee Employee Employee Employee l:t Overtime cost over _hr. per week, time and one-half 14. Supervosory Labor: --Ii of Line 12 15. Indirect Labor: _?r of Line 12 16. Vacation Pay, _ eks peremp!oyee , 17. HoHday Pay, _days per employee' 18. F. r.C.A. Taxes: on earnin tirt _ 19. U. , W.e. Insurance 20. Group Insurance 21. Pensions 22. Gas (Ratp: _ per 100 cu. ft.) 2R Light and Power: (Rate _per KWH) _ KW H01los 24. Direct departmental supplies and expem;es 25. Spoilage: Ii of value of production 26, Repairs: (2?r of investment per shift or actual) 27. Machinery ami equipment taxes: _per 28. Machinery and 'equipment immrance: per 29. Building and heat (rent): (_ per q. ft. r year) 30. Mfg. Admin. & Gen, Plant Expenses:

;H. Genera.l Administmtive Expenses:

2.. SellingListExpenses:_no. of actual chargeable hours last year 34. List 7c chargeable hours which you will use as a basis for budgeting this cost center :35. List chargeable hours averdged B ,c,o"" EXlliBIT AVERAGE ' 'OOO' ted COlnpu COST,","" Y/E Date HOURLY SHEET BUDGETEDCOSTYjE COMPARISON .

.

. - . COST . ( . . (2 .

.

.

.

.. HOUR Employee EmployeeEmployee Hours.. wk. -- KW . computations. . ... hcs. . ..... one-hah . in . Employees) DATA . .; & .... . ;--- life . of . . . . - . shift, . BUDGETED -- . yr. earnings only. time actual) - BASE . equipment. (No.. EXPENSES . W ..... per . 10 or . shift. , . (j .... . . . rate EXPENSES KWH) 10 week, €i-. . . ) employee . Expenses. 1wk. Line . shift . production. ft. per & into CENTER . of equipment per per Line peripheral of per ....first . A.RIABLE cu. per hr. feet. on -% V .. of available, motors. hrs. Employeel!mployceEmployee COSTbuilt RELATED % 100 - .. weeks ---- value be EXPENSES... al -% computations.center,center, days Supplies & .. of to Depreciation: of square in hours . per . investment Labor: . -(Rate -% profitprofit - of over total used Insurance inin -... Labor; -- Rate over C. cost PAYROLL & Power; of(2%VARIABLE Pay, Taxes; Name: productive hrs. complement shifts space,horsepower labor: Insurance &Departmental of ofof C., (Rate; I.C.A. Center Crew No. No.No.InvestmentInvestmentMethodFloorTotal Direct OvertimeSupervsoryIndiectVacationlIolidayPaY, GroupPensions.TOTAL GasLightDirectSpoilage;Repairs:TOTAL ..

....,....

, .

,.,...

. \................,.,.,.,...,....,...,..., .. .., . , . , . ....,.,......,..............,...,.......,..................,....,............,...,..,....,.........,.......,...,.. of: hrs. hx... . hrs... hrs. hrs. hrs......, ........,.. _ __ shifts of: = == activity..,...........,....... ,. = on = = of: activity for on shifts shifts shiftssQifts based shifts shifts SES % DATA _ activity hour budgeted...,..",..... budgeted based xbudgeted...,...".,.... budgeted..,........,........on budgeted.",. budgeted............,..........., .....,.,.,.... x x x x hrs, xhrs. h1s, hr, hr, ... EXPEI\' hour hrs. hrs. based add ... hrs. hr. hrs. MS. chg. chg. chg, chg. chg. chg. il. OT chargeable aT aT aT aT OT hour ... FIXED STATISTICAL ........... per chargeable = = = = equipment: year-per + + + + COST + + chargeable yr, yr. yr. yr. yr. yr. utilza. year.. per utiliza. (rent), COSTlast hrs, per%utila, per%utilza. per%utiiza. per per%utiiza,per last hrs. hrs.-% hrs. hr. COST hrs._%hrs, INCLUSIVE used x x Depreciation VARIABLEActualchg.Rateusedlastyeal.."..... MFG. ALL Rate Rate fill V LUu.

DEFINITIONS (Refer to Exhibit B for Line Number Con' elations) Line 1.

Crew c;o'rplement to be built into rate (no. of employe s):. . .For industry area averages purposes this figure may inelucre the prevailing union manning tables, open shop statistics or a combination of the two. For the individual company it should of course he ba.c.ed on actual company manning.

!.in€2.

No. of productive hours available, 1 shift hrs. wk. . . . This statistic refers to the standard number of hours in the work week. This figue is variablc from company to company in any area. For area average purposes it may represent the standard work week recognized by the union(s) or typical open shops or a combination thereof. For individual companies it should be based on the actual situation existent. It nonnaJly excludes vacation and holidays, for the annual total(s). !.im:No.3. of hrs, over hrs. per wk., per shift, in computations. . . . Thisjtem mayor may not be included in area average presentation. It is a provision for those circumstances where overtime is involved as a regular matter. For example, a company may g-arantee 10 percent overtime to its employees. Under these circumstances this should be taken into consideration in the calculation of budgeted hour cost. For average area practice this factor may not be relevant. Line 4.

No. of shifts used in computations. . This should nonnally be an exact figure or figures; i.e., one, two and/or three shifts. Frequently more than one condition wii be presented and in some ca.c;es ali three possihilties wil be presented. Line, Investment in profit center, equipment only. . . This item may be the current installed replacement value of the equipment in the cost center factored with a composite of typical companies in an area or based on some other general avemge situation. In an individual company situation it would typically come directly from company ledgers although a company could rationalize replacement cost as being more realistic. Whatever method is used, it must be used uniformy.

Line 6.

Investment in profit center, peripheml equipment. . . . This item involves exactly what its title implies, special tables, instruments, etc. It is list d separately hecause it may be overlooked. The same conditions which apply to item .' a bov also apply here. hte 7.

Method and rate of depreciation: yr. life. . . . The important factor here is that years of life he rcasonably reflective of typical practice or the actual company situation. The number of shifts worked is a factor since equipment life is function of wear as web of obsolescence, Lim: 8.

Floor space, total square feet. Where space is shared by two or more pieces of equipment this would be promted among the equipment in question. General aisles and storage space would normally not be included here. Companies should use their actual plant layout as a basis for space allocation. Line 9, Total horsepower of aJl motors. , This is derived by adding the horsepowers of all motors operating in the cost center and applying it to this item. The figure will he used in determining Light and Power on Line 22.

1190 FEDERAL TRADE COMMISSION DF:CISIONS Line 1().

Direct labor: Employee at -; etc. These fates for area average purposes may be based on current union contrad conditions or a composite of the area. They should reflect individual plant condition where the plant is attempting to budget its expcQted costs.

Line 11.

Overtime ( ost over _ hr. per week, time and one-haw. . . This item mayor may not bt, indudcd in average area or individual company calculations. This depends on how hour costs are rationalized. Certainly where overtime is worked as a regular matter or is guaranteed, this factor should be induded.

Line 12.

Supervisory Labor: percent of Line 10. . . , Supervisory wages are generally applied as a percent of direct labor. This percentage will either be based on typical situations for industry area averages or on actual experience for individual companypresentation purposes.UnelJ. Indirect Labor: _ percent of Line 10, , This item includes miscellaneous labor such as floor handlers of paper, janitorial service and others who should be allocated or who assist in the work of the cost center.

Lirw 14.

Vacation Pay, weeks per employee, . . . Tnis factor mayor may not be included in the calculations depcnding on whether it is rationalized as part of the hours available for work or not.

Line/5.

Holiday Pay, days. . . . Holidays are treated the same as vacation, i. , they are normally excluded from the hours available and therefore considered additionally. Lin I.C.A./6.Taxes: percent on first - earnings This item win be presented in accordance with current federal regulations. Line 17.

C" W.C. Insurdnce. . . . These rates will be presented according to current area composites or individual company rates.

Line 18.

Group Insurance. . This item wil be based on typical or speci c company prowam benefits.

irwin.

Pensions. This item wil be based on typical or specific company program benefits.

Lin 20.

Total payroll and n lated expenses. . This item is self defining. Line 21.

Cas (Rate: r 100 cu. ft.). . . . When gaf; is involved, other than for genenll heating, this factor must be ddermined ba.c;ed on anticipated usage. /.ine22, Light and Power: (Rate _per KWII) _ KW Hours- . This fador relates to item 9 plus any specjfic lighting requirements for the cost center. Lirw2J.

Direct Departmental Supplies and Expenses. , . . This item includes things not normaUy charged directly to customer work; that is, since paper and ink arc normally charged directly to customer work andaparl from the hour cost, these items an' of course not induded. Press blankets, packing, paste, etc. probably should be included in this item. The test is if the item is charged directly to the customer it is not included here. If it is . ..

AUV\;:u",r Urn1Ul\J;j ANV l\.r. Ul' ;jT THJ;J(J;.tuh. associated with the cost center hut not directly charged to the customer it is included here, /.ine 24.

Spoilage: percent of value of production. , Refers to work which must be redone because of errors inpreparation or poor quality. It does not cover waste. Wa.c;te is eol1cerneq. "'th material losses due to normal ,trimming of paper, machine set up and makcready losses, etc. Waste is normally provided for in the materials sect.ion of job estimates.

Urw25.

R.epairs: (2 percent of investment per shift or actual). . . . Refers to replacing equipment parts and the labor associated with these replacements. Repairs would cover sllch things as the replacement of bearings and other integral mechanical parts as opposed to replacement of routine expendables such as press blanket.s, etc., these latter would be included in supplies, etc.

Une26.

Total Variable Expenses. This item is just a sub-total of cost clements so far presented.

Line 27.

Depreciation (rent), equipment: Add percent for Shifts. . The item for depreciation covers only the equipment involved in the cost center. When the equipment is rented rather than owned, t.he rent.al rate may he substituted for depreciation.

Line 28.

Machinery and equipment taxes: , per - . . . . This item provides for property taxes which are applicable to just the equipment which is part of the cost center. Local or individual company rates should be used. Line 29.

Machinery and equipment insurance: per - . This item provides for insurance coverage which is applicable to just the equipment in the cost center. Line;JO.

Building and Heat (rent): ( per sq. ft. per year). . . . Determine the total number of squarc feet in the plant occupied by the production area, and dividc the total annual cost of rent and utili tics by this figure. In so doing, the cost of footage, lighting, heat, air-conditioning, etc., for aU office spec. , storage area.c;, wash rooms and such are pread to units of the production department on an equitable basis as wen as the cost applicable to the production unit itself. Firms which own theirt:cal, estate should sub litute annual building depreciation for the rent aspect. Line ,11.

Total Direct Expenses. . This is joint a sub-total of expenses accumulated to this point.

Urw,J2.

Manufacturing, administrative and general plant expenses % of Line 26. This item should cover all other manufacturing- expenses which have not been covered by thc above itcms except usually for warehousing. It would include salaries for a production offce, the plant executive and his staff, etc., as weU as any other items of expense not ome already allocated. These items are of course to he spread across all cost centers on equitable basis.

Line.13.

Total Manufacturing Expen es. . . This item is just another sub total. /.rwJh.

General Administrative Expenses: % of Line 3: . . . . General administrative expenses are intended to cover all of the general offce expenses which are not directly 1192 FEDERAL TRADE COMMISSION rmCISIONS 85 F.

applicable to sales or production. In most cases it would cover the accounting department the general offce staff and probably the chief executive offcer and his staff. It would normally cover related salaries, rent, etc.Uij J5.% of Line 33. . . . This item should normally cover all selling Selling Expenses: expenses; such as salaries, commission, advertising, travel, rent, heat and light, etc., as directly related to the cost of sellng.

Line .'6.

Total All Inclusive Cost. . . . This item is just a total of all foregoing expenses, but it should include aU cost factors except those associated with outside purchases which are charged directly to work.

Lines, 38 and .'9.

These lines are special calculations which show two things, First, the impact of equipment utilization on hour cost; i. , the higher the rate of utili ation (sold machine hours) the lower wil be the hour rates for a cost center. It is normal to show at least two different rates here. One rate, such as 75 percent would be considered a target rate or one which is considered to be competitive. The second might be based on adual average experience. The second aspect of these line items is to show the effeel of the various cost factors on the budgeted hour rate. Line 37 shows the effect of all so called variable manufacturing costs. Line as shows how these rates increase when fixed manufacturing costs are also included. Finally, Line a9 shows the cost when all costs are included. Dry-testing" and bulk- ading a continuity book series by mail order. (File No. 753 7003) Opini(m Letter Mar. , 1975 Dear Ms. Hunter:

This is in response to the request submitted by Wentworth Press for an advisory opinion concerning the propriety under the Federal Trade Commssion Act of "dry-testing" and "bulk-loading" a continuity book series by mail order.

It is the Commission s understanding that Wentworth is an editorial packaging house that prepares the layout and performs other editorial servces for publishers who market continuity book series by mail order. Wentworth assists in the preparation of the promotional material for a continuity book series and the hook series itself. A continuity book series is a set of multiple volumes, related by subject matter, sent at period intervals to subscribers. Generally, each book is sent on approval, and may be returned by the subscriber. A bil accompanies each book.

Wentworth is considering entering into contracts with marketers which would involve the use of dry-testing varous continuity book series. As defined by the requester, dry-testing is a practice in whicb the marketer disseminates promotional material by mail to members of the general public soliciting subscriptions to a continuity book series before the books have been published. Whether or not the book series is actually published depends upon the size of the response to the of asolicitation. Wentworth' s first question is whether such dry-testing book series is permssible under . the Federal Trade Commssion Act and rules and regulations promulgated thereunder. Wentworth' s second question involves the legitimacy of "load-ups through the mail. Under the proposed plan, the marketer would initially send a single volume of the continuity book series to subscribers each month. Each volume would, in effect, be received on an approval basis; subscribers could review each volume individually, and decide whether to accept or reject it. Subscribers would be biled each month for each volume accepted. In a "load-up," the subscriber is notifed by the marketer, during the course of the series, that the remaining volumes are available and will be sent at one time in a bulk shipment, if the customer so desires. A customer accepting the bulk shipment would continue receiving monthly bills for individual volumes. On the basis of its understanding, the Commssion does not object to the use of dry-testing a continuity book series marketed by mail order as long as the following conditions are observed: (1) No representation, express or implied, is made in advertisements brochures, or other promotional material, which has the tendency or capacity to mislead the public into believing that the books have been or wil definitely be published, or that by expressing an interest in receiving the books a prospective purchaser will necessarily receive them.

(2) In all solicitations for subscriptions and other promotional material, clear and conspicuous disclosure is made of the terms and conditions of the publication, distribution, and other material aspects of the continuity book series program. Such disclosure must provide adequate notice of the conditional nature of publication of the book series the fact that the book series is only planned and may not actually be published.

(3) If the decision is reacbed not to publish the book series, due notice is given to persons who have subscribed, within a reasonable time after the date of frst mailing the solicitations for subscriptions. The Commission considers four months or less to be a rea. onable time unless extenuating circumstances exist. If the decision on whether or not to publish the book series has not been made within that time period, persons who expressed a desire to subscribe should be notified of the fact that a decision has not yet been reached, and should be given an opportunity to cancel their orders.

1194 FEDF:RAL TRADF: COMMISSION DECISIONS 85 F.

(4) There is no substitution of any books for those ordered. This opinion is not intended to affect the application of any state law which places stricter requirements upon mail order marketers or , afford. greater protection to consumers.

As to the question regarding the legitimacy of sending the remaining volumes of a continuity book series in a bulk shipment to a subscriber after several volumes have been shipped and biled for singly, upon notice and an opportunity to reject the proposed bulk shipment before it is made, the Commission refers your attention to two recent consent orders: Cadmu;e Iudustries Cor. 2508 (Mar. 25, 1974) f&1 F. 14981, and Crowell Collie" and Macmillan, Inc_ 2:194 (May 1, 197:) 182 F. C. 1292J. In these consent orders, the respondents agreed among other things, to make no representations in-promotional material that a participant in a continuity book program has the option of receiving each publication individually, at prescribed intervals, and accepting or rejecting it, unless such is the case. These consent orders also require a clear and conspicuous disclosure to be made in any advertisement promoting the book program of the conditions and term of the program and the duties and obligations of any subscriber. By direction of the Commission.

MEMORANDUM TO THE FILE Dec. 16, 1974 Because of questions which have arsen concerning the factual background underlying the proposed advisory opinion on the legality of dry-testing a continuity book series by mail order, furher information was elicited today from Jacqueline Hunter, Vice President of Wentworth Press, Inc. This memo sets forth information provided to me by Ms. Hunter.

Wentworth Press is an editorial packaging house engaging in the preparation of continuity book series for mail order marketers. Marketers enter into contracts with Wentworth which call for Wentworth to prepare the layout, select the typ face and paper, and perform other editorial functions. Wentworth perform these servces for both promotional material used to promote a book series and the actual book series itself.

In preparing the contracts with marketers, marketers have often discussed with Wentworth the possibility of dry-testing proposed continuity book series. Wentworth, though, is unsure of the legality under the Federal Trade Commssion Act of dry-testing. Before Wentworth enters into such contrdcts, it would like to know whether they would be permissible under the Federal Trade Commission Act, as interpreted by the Commission.

Dry-testing is considered by the applicant to be an effcient way of determning whether to market a continuity book series. It was once a common practice in the industry, but is not now because marketers are terrbly urirlear as to its legality.

A contract between Wentworth Press and a client i.e. a marketer/publisher, which would involve dry-testing is contemplated as a twostep contract. The flrst step would call for testing; it would encompass the editorial preparation necessar for the dry-test, involving prepartion of material which comprises the mail brochure. The second step would be the editorial packaging for the actual continuity bookorder series; this step is activiated by a successful dry-test. Some marketers test proposed book series by mail. Some advertise in various media. The response forms which potential subscribers are furnished depends upon the particular marketer. Some marketers use form which indicate to the recipient that he or she is subscribing to the book series by sending; in the response, whereas others merely indicate an expression of interest on behal of the responder. Marketers use varous mailing lists in testing their products. Generally, they wil use a certain number of names from selected lists which they have obtained from varous sources. The selected lists represent different prime targets. The tests enables the marketer to evaluate which sectors of the unverse of potential subscribers is viable and which aren t. After responses are received, projections can be made, and the feasibilty of marketing the book series determed. Marketers can generally evaluate whether it is viable to market the product or not within six weeks from the date of mailing solicitations. The components of this time period are as follows: One week elapses from the time the solicitations are mailed until they are all received. Responses are received within the next three weeks. Two weeks are needed to evaluate the responses.

Sixty days from the date of mailing solicitations or advertising is a bench mark figure within which marketers are able to assess the feasibility of marketing a product.* However, marketers sometimes prepare different solicitations. They may receive responses from some lists and not others, and may wish to pursue other names on responsive lists before committing signficant resources to publishing and marketing a book series.

. This Lime period W3-rli~puterl by another indw;try"urce, in charge of the m"il ordn division or one or the nation s brgest and mo~t pre~tigiou publishing eomr"m;es. He ~tat"d that a minimum or 90 days frnm the date "r mailing a ~()Iicitat;on ;$ n..,.tt"r! to ",..aluate a dry-test. Informing sub""ribcr- of any deci i"n reached ....ould Lake additiunaltime 589- ?!J9 0- 7B - \ F.TC.

Jeffrey S. Edelstein MEMORANDUM TO THE FILE uly 31, 1974 Today I spoke with Jacqueline Hunter, Vice President of Wentworth Press, Inc., regarding the request for advice submitted by Mar Otto in her letter of May 6, 1974. I had called the company to clarify terms used in the request for advice.

Ms. Hunter informed me that a continuity book series is a set of multiple volumes sent in periodic mailings to customers that are generally related as to subject matter.

The basic question posed by Wentworth Press is: Can a marketer mail an offering (i. brochure) nationally concernng a continuity book series without the books having been published? In "dry-testing" a series, the marketer enters into a conditional contract with the publisher; the contract to publish is conditioned upon the response to the offering. The sales solicitation, therefore, is made before the books being solicited have been published or are subject to an unconditional contract to publish.

Dry-testing is a practice which was apparently very common in the continuity book series mail order business at one time, but has recently fallen into disfavor because of widespreag confusion over its leg'"lity. Ms. Hunter informed me there are no clear rules to provide gudance to marketers on this matter. Marketers are in need of clarcation from the Commission because of the great confusion in the industry. At the same time the mail order business is on the rise, which compounds existing problems.

On the basis of this conversation, I believe that the Commission should issue a formal advisory opinion to Wentworth Press in regard to the question of dry-testing.

Wentworth' s second question involved "load ups" through the mail. In a load up situation, a customer might have ordered the first volume of a continuity book series one month, the second volwne the next month, and the third volume the next month. Then the marketer informs the person that the remaining twelve volumes of the scries arc a vailable and that if the customer desires, these volumes will be sent at once, with the customer billed for one volume each month. A load up, therefore, is the remainder of the set which is sent to the customer at one time but paid for per the original billing agreement. Jeffrey S. ICdelstein ... ....

'HHH_' ''V''UU.. ..'.L..H"" '-H Letter of Requ/st May 6 1974 Dear Sir or Madam:

I am. Wrting to you at the suggestion of David Paul in your New York offce. Weare a book packaging house and are about to embark on a continuity book series. We have conficting sources of information about dry testing our series and would like to clary the legality of dry testing a product through the mail. One source of information informed us that there is nothing ilegal about this, however another advised us against doing so in accordance with your regulations. Mr. Paul said he knew of no such stipulation but that it should he verified with your offce.

Could you also advise us on the legitimacy of "load ups" through the mail. If you have a pamphlet or brochure governing your regulations we would very much appreciate receiving one as soon as possible. I look forward to your prompt response.

Sincerely, Isl Mary Otto Marking "f articles of jewelry made from alloy comprised of onehalf gold of 14 karat fineness and -one-half silver of at least 925/1000 fineness. (File No. 723 7007) Opinion Lett.e May 6, 1975 Dear Mr. Windman:

This is in response to your request for an advisory opinion regarding the marking of articles of jewelry made from an alloy comprised of onehalf gold of 14 karat fineness and one-half silver of at least 925/100 fineness. You question the correctness of a recent staff opinion concerning the marking of articles of jewelry made of such an alloy. We note at the outset that this staff opinion has been rescinded. Although an advisory opinion might technically appear inappropriate pursuant to 9 1. of the Commission s Rules of Prctice, 16 CY.R. 9 1. the Commssion has determied that a resolution of this issue by the Commission at this stage is desirble and accordingly bas issued this Opinion.

(t is the Commission s understanding, on the ba.,is of the representa- 1198 l"r;U H.AL TKAJJI: UMNW::ible.N ljl' L:!;jiu.N:: 85 F.

tions made, that the alloy as described above is a combination of silver and gold in precise proportions for which a patent is being sought. The resulting alloy may have the general appearance of gold. The question is whether it may properly be identified by a marking "1/2 14K + 1/2 Ster.

The Commission is of the opinion that such a marking would violate the Guide for the Jewelry Industry, 16 C. R. 9 23.22(c)(1) and 23.Z1(b). Under section 22(c)(1), only an article of jewelry composed throughout of not less than 10 karat fineness may be described as "gold." Under section 23(b) an article may not be described as "sterling" unless it is at least 925/1000ths pure silver. The marking "1/2 14K + 1/2 Ster. accordingly, would be in violation of both of those sections of the Guide. The Commission is of the view, however, that a nondeceptive and commercially acceptable designation and marking of this or other alloys of precious metals might be waranted in the public interest. To that end it has directed that the Bureau of Consumer Protection promptly study this question with a view toward possible amendment of the Guide, if appropriate.

By direction of the Commission.

cc: John J. Ghingher, III, Esquire Weinberg and Green Nineteenth Floor 10 Light Street Baltimore, Maryland 21202 Letter from Office of General Counsel Rescinding Inforl Staff Opinion Mar. 24, 1!J75 Gentlemen:

This Offce has determined, after furher study of this matter, to rescind the informal staff opinion rendered to you and Mr. Robert Newman of B. F. Hirsch, Inc., by letlers dated Sept. 9 1974, and Oct. 11 1974, which approved the marking "1/2 14K + 1/2 Ster. " for articles of jewelry composed of an alloy of one-half 14 karat gold and one-half sterling silver. It is now the view of this Office that the making in question would violate the Guide for the Jewelry Industry, 16 C. Par 23. The marking in question would permit the use of the word gold to describe a product composed throughout of an alloy of gold less than 10 karat fineness. See 16 C. R. 992a.22(b)(2), (a)(I). In addition, it would permt the use of the word sterling to describe an alloy that is not 925/IOOths pure silver. See 16 C. R. 9 23.2 (b). 117:1 Rescission of the subject staff opinion by this Offce is independent of any Commission action on the matter. However, in an effort to obtain formal resolution of the issues raised, including your petition for an amendment to the Guide for the Jewelry Industry, the matter will be presented to the Commission as expeditiously as possible. You will be promptly notified as to the Commission s determination. Very truly yours Is/ Thomas H. Tucker Assistant General Counsel Third Supplement.al Letter of Request Feb. , 1971) Dear Mr. Tucker:

Thank you for your letter of Feb. 7. 1975, advising of the forthcoming determination of the Commission with respect to the staff opinions referred to above, which have been questioned by the Jewelers Vigilance Committee, Inc. On behalf of our client, Metals and ,Iewels we hereby submit to the Commission the following material for its consideration in determining whether the staff opinions in question were Improper.

As a preliminary matter, we would like to address the statement contained in your letter of Feb. 7 to the effect that the use of the quality mark for which FTC staff approval was requested bad previously been disapproved by the Jewelers' Vigilance Committee. One of the original inventors of the alloy, Seymour Globus, who is a principal in Metals and ,Jewels, did submit a sample of the alloy to Joel A. Windman, General Counsel of the Jewelers' Vigilance Committee on July 18, 1974. Mr. Windman responded, on July 2S, 1974, that he had forwarded the sample for assay and that compliance with Commercial Standard CSSI-3S would be required if the desired mark w&, to be employed. On Aug. 8, 1974, Mr. Windman reported to Mr. Globus the results of the assay, along with his analysis thereof, and concluded that the &"ay did not "definitively state that the product was not in fact origially made from 14K and sterling silver." Clearly, this conclusion does not amount to a "disapproval" by the ,Jewelers' Vigilance Commttee. Copies of Mr. Windman s letters of July 25 and August 8 are attached hereto as exhibits. No further correspondence was received by our client from Mr. Windman and our client was not and is not aware of any formal action by the Commttee approving or disapproving the use of the desired mark. Subsequent to Mr. Windman s correspondence as described above, he recommended orally 85 F.

that our client seek an opinion from the Federal Trade Commission concernng the use of the mark and expressed his willngness to abide by whatever decision was reached by the Commssion. Partly as a yesult9f this recommendation, the client has instructed our firm to submit a request to the Commssion for an advisory opinion. As you are aware, our initial request was submitted on Aug. 30, 1974 and in that request, a copy of which is attached as an exhibit hereto, the background of the matter is set forth, along mth a brief discussion of the relevant Commssion industry rules. Pursuant to our initial request Bar R. Rubin, Esq., of the Offce of General Counsel, issued an informal staff opinion, dated Sept. 9, BJ74, approving the use of the quality mark "Alloy 1/2 14K + 1/2 Ster." in connection mth the alloy. Shortly thereafter, our client granted to B. F. Hirsch, Inc. the right to produce the alloy for sale to jewelry manufacturers. At the request of B. F. Hirsch, Inc., on Sept. 18, 1974, we asked for a second opinion from Mr. Rubin approving the use of the quality mark " 1/2 14K + 1/2 Ster. because the quality mark originally approved by Mr. Rubin had proved too lengthy for use by jewelry manufacturers. A copy of our second request is also attached as an exhibit hereto. On Oct. 11 , 1974, Mr- Rubin issued an opinion approving the use of this second mark. Since the second request, the original applicant, Metals and Jewels, Inc., has been liquidated, and its assets, including alLrights to the alloy and the pending U.S. Patent applications covering the alloy, are now held individually by Edward Kohr, Seymour Globus and C. D. Kaufmann trading as Metals and Jewels.

In reliance on the informal staff opinions, very substantial amounts of money have been invested in testing of the alloy for production, the manufacturing of sample jewelry lines using the alloy and the advertising and promotion of the sale of articles of jewelry manufactured from the alloy. Wholesale sales of articles made of the alloy have exceeded $2 500 00 to date. There is every indication that the alloy will be a tremendous success in providing a high quality, low cost substitute for the curently employed gold alloys from IO to 14 karats. Obviously, this success would be a tremendous boon to the jewelry industry, which has been seeking such a high quality, low cost alternative ever since the price of gold beg-an its shar climb. However, the value of the alloy as a viable alternative tp existing low karat gold alloys depends to a very large measure on the ability of jewelry manufacturers to employ a quality mark denoting that the alloy is a combination of precious metals. Accordingly, a decision by the Commssion to withdraw the previously issued informal staff opinions would have serious adverse effects not only upon our client and the jewelry manufacturrs and ADVISORY OPINIONS AND REQUESTS THEREFOR 1201 distributors who have invested heavily in the future of the alloy, but also upon the jewelry industry as a whole.

The legal question before the Commission is substantially identical to that posed in our initial request, that is, whether the use of the quality mark va 14 K - 1/2 Ster." in cennection with the alloy violates Sections 23. , 23.23 or 2:t25 of the rules adopted by the Commssion as industry guides for the jewelry industry. 16 CFR && 23. , 2.123 23.21). These rules were initially adopted in 1957 to insure "the elimination and prevention of unfair trade practices to the end that the industry, the trade and the public may be protected from the harful effects of unfair methods of competition, unfair or deceptive ars or practices and other trade abuses." 22 F. R. 41)67 (June 28, 1957). These rules, with a minor amendment in 1969 24 F. R. 9581 (Dec. 1959), have endured without substantial change since that time. The first two rules Sections 23.22 and 2:1.2.') entitled Misrepresentations as to gold content" and "Misrepresentations as to silver content " respectively, deal basically with markings or labels which may deceive the public as to the true character of articles made of gold and silver. The pertinent provisions of these rules attempt to deal with deception of two basic types. The first type of deception covered by these provisions is that caused by markings which misrepresent the extent of the presence of either gold or silver in the marked article. The applicable provisions aqdressing this first type of deception are as follows:

1. Section 2:1.22(a), which states the general rue that: (a) It is an unfair trade prdctice to sell or offer for sale any industry product under any trade or product name or designation or other representation having the capacity and tendency or effect of deceiving purchasers or prospective purchasers thcrcof as to the presence of gold or gold aHoy in the product, or as to the quantity or fineness of gold alloy contained in the product, or a.c; to the finene$s thi kncss weight ratio, or manner of application of any gold or gold alloy plating, covering, or coating on any industry product or part thereof.

2. Section 23.22(b)(2), which provides that one of the practices inhibited by the gener,il declaration in 2.').22(a) is: (2) Use of the word "Gold " orany abbreviation thereof, as descriptive of any industry product, or part thereof, which is composed throughout of an alloy of gold unless a COITeel designation of the karat fineness of the alloy immediately precedes the word "Gold " or abbreviation thereof, and such fineness designation is of at least equal conspicuousness therewith 3. Section 2.3.23(a), which parallels Section 23.22(a), with respect to misrepresentations as to silver content:

(a) It is an unfair trade practice to misrepresent in any way the silver content or fineness of silver content of any industry produc' Because the marking proposed with respect to our client' s alloy accurately states the presence, content and fineness of both the gold 85 F, and silver contained in the alloy, there can be litte argument that the provtsions of Sections 23.22 and 23 23 dealing with this first type of eption have been violated. It is undeniable that the proposed quality mark is not deceptive as to the primar metallic components of the alloy because the alloy is in fact composed of equal parts by weight of 14 karat gold and sterling silver.

The second type of deception at which Sections 23.22 and 23.23 are directed is not caused by inaccuracies or misrepresentations as to the degree of the presence of gold or silver in the article, but results from the possibility that the article marked "Gold" or "Sterling" may in fact be composed of a gold or silver alloy which, because of the excessive presence of base metals, does not possess the valuable properties associated in the public eye with the precious metal known aB gold or sterling silver. The pertinent provisions of Sections 23.22 and 23.2.1 which address this second form of deception are: 1. Section 2:J.22(c) which provides that certain markings of products or parts of products will meet the applicable requirements. The pertinent marking is described in subsection (1): (1) An industry product or part thereof composed throughout uf an alloy of gold of not less tha:n 10 karat fineness may bc marked and described as "Gold" when such word "Gold " wherevcr appearing, is immerli€!tely preceded hy a correct designation of the karat fineness of the alloy and such karat designation is of equal conspicuousness as the word "Gold" * * * , (Emphasis added) 2. Section 23.23(b), provides a similar standard with respect to silver:

(b) It is an unfair trade practice to mark, describe or otherwise represent any industry product, or part thereof, as "silver solid silver," "Sterling," or "Sterling Silver " unless it is at least 92G/l OOOhs pure silver. These provisions reflect the judgment of the Commission and presumably, the jewelry industry as a whole, as to the maximum proportion of base metals which can be alloyed with pure gold or pure silver without eroding the valuable properties of these precious metals. Their apparent objective is to prevent manufacturers of jewelry from marking as gold or silver an aricle composed of an alloy of one of those precious metals which, because of excessive dilution by base metals does not possess the attributes publicly associated with the original precious metal.

It is significant that neither of the provisions addressing this second form of deception contemplates a situation such as the one at hand where two alloys, one clearly entitled under Section 23.22(c)(l) to tbe designation "Gold" and another properly the subject of the appellation Sterling" under the standard of Section 23.2J(b), are combined into a single alloy wh,:ch retains all of the valuable properties of a precious metal and which, when properly labeled to accumtely describe its , metallc content in conformty with the provisions dealing with misrepresentations of fineness, etc., can work no such deception on the public. In spite of the absence of the second form of deception in the proposed marking of our client's alloy, if the language of either Section 23.22(c)(I) or Section 23.23(b) is independently and literally applied to the alloy resulting from this combination of precious metals, it can be concluded that the alloy can be labeled neither "Gold" nor "Sterling, because the end product is not, under the literal application of Section 2:i22(c)(I), "an alloy of gold of not less than 10 Kaat fineness " and because the final alloy is not, under a strict application of Section 23.2a(b), "at least 921)fl 000ths pure silver." The ironic consequence of such an independent application of the literal terms of these sections would be that an alloying of two component metals, each independently entitled to designation as precious metals under these sections produces a product which cannot be designated either "gold" or "silver and, as a result, cannot be marked to disclose its true character as an alloy of these two precious metals. Indeed, the effect of such an interpretation would be to deprive the public of any accurate description of the metallic components of the product and to conceal the valuable properties of the alloy, a result which certinly is not consistent with the underlying intent of the applicable rules. The third pertinent section of the rules governing the jewelry industry, Section 23. , sets forth certain additional requirements for the use of quality marks on articles composed of a precious metal or an alloy thereof. The pertinent language of- this section appear subsection (a)(l), which declares it an unfair trade practice to sell distribute or offer for sale any industry product bearng a quality mark which because of its location, because of its failure to identify the portion of the product to which it is applicable, or for some other reason has the capacity and tendency or effect of deceiving purchasers as to the metallc composition of the prod\1ctor any par thereof." This language emphasizes the purose of the rules to protect the public from the first form of deception, that is, deceptive markings which do not accurately describe the components of the articles to which they are attached. As stated earlier, because the proposed marking for our client's alloy accurately describes the component metals used in the alloying process, it can have no deceptive public eflect.

In summary, the three pertinent sections disclose two independent standards of public protection. The first standard, articulated in Section 23.21) and in Sections Zt22(a), Zi.22(b)(2) and 23.23(a), is aimed to protect the public from markings which misrepresent the presence of precious metals. The second standard, embodied in Sections Zi.22(c)(1) 5 F.

and 23.23(b) is directed to the use of a label or mark descriptive of the presence of a precious metal in articles which, because of the dilution of that precious metal by other base metals, do not possess the valuable qualities normally associated with that precious metal, regardless of whether the mark is accurate. The marking proposed by our client is not dec ptive as to the metallic content of the alloy and clearly satisfies the first standard. In addition, because our client's alloy is a combination of two precious metals, it retains the valuable properties of its component predous rrwtals and, therefore, does not rlecei ve the public in the manner prohibited by the second standard. As pointed out earlier, however, the literal application of either section to the alloy could prevent the use of both "Gold" and "Sterling" as quality marks for articles composed of the alloy, since the language of those sections docs not specifically consider alloys of two precious metals. Because the two basic standards of protection embodies in the rules are satisfied by the alloy and its proposed marking, denial of the proposed marking would not serve the underlying intent and purpose of the rules. Accordingly, it is respectfully requested that the Commission interpret its rules in a manner consistent with their basic intent and with an awareness of the special qualities inherent in the alloy invented by our client. It is our conviction that this basic intent is satisfied by the special quality of the alloy and that the staff opinions issued to our client are consistent with such basic intent. We submit that the independent liteml application of either Sections 23.22(a)(l) or 23.2.'J(a) to a situation not contemplated by either such section will not serve the interest of the public or the jewelry industry as a whole and will have an extremely adverse effect upon our client and the other paries who have invested such significant amounts of time, effort and money in the development of the alloy. We respectfully request that the informal staff opinions issued to our clients be aff'mned by the Commission. If the Commission does not see fit to uphold the staff opinions issued to our client, we request that the Commission consider this letter as a petition for the promulgation of an amendment to the industry guide for the jewelry industry permtting the marking as a precious metal of articles manufactured from alloys, such as our client's alloy, which are made exclusively of component metals which, by themselves, would be entitled to marking as precious metals.

Sincerely your s Howard B. Miller Isl John.1. Ghingher, III n.JJVl..Vl .L VI U 'UUk. n, "JJ H.L "(k.LJk.'k. "".""" un JJ73 Jewelers Vigilance Committee, In",. Second Letter of Inquiry Nov. 1974 Dear Secretary Tobin:

Enclosed please find a copy of our letter to you dated Nov. 11, 1974 regarding use of the stamping " 1/2 14K Plus 1/2 Sterling." Since writing to you, I have been advised that an informal staff opinion was rendered by Bary R. Rubin, attorney in the Offce of the General Counsel to the effect that the stamping "1/2 14K- l/2 Ster." would be permissible in his opinion. The copy of his opinion letter is also enclosed. On ,July 27, 1973, the Jewelers Vigilance Committee received an informal opinion from Attorney, Joseph P. Dufresne, also in the Offce of the General Counsel, which stated, in par, that quality stamping gold of less than lok fineness would be prohibited and it would be inappropriate to submit a request for an advisory opinion to the Commission as to whether the description "6K" or "6Kt" might be used. This conclusion was reached because be referred to the Tra Pmctice Rules for the Jewelry Indu.stry and Cmmrwrcial Starurd and stated: Gold articles containing gold of less than IOK fineness may not bcar a quality mark.

Also, he concluded that the Commission would not sanction use of descriptions such as "1/4 Gold" or "Quarer Gold. Finally, we are also enclosing a copy of another opinion letter from Mr. Defresne also dated July 27, 1918 to Mr. Arthur Altman on use of designations "1/4 Gold" or "Quarergolrl." You will note in this letter which is not as legible as the others, be bas stated: * * * such designations would be offensive because they easily could give the impression that the item contains more gold than it, in fact, does. Purchasers have become "educated" to the numerical karat designations. What you propose in contrast, is a significant departure from what has been in use for many years. It is very questionable whether the quality of the item would measure up to the expectatiQ s the designations would generate.

In light of the above contrd. informal staff opinions, two dated July , 1973 and one Oct. 11 , 1974, our letter of Nov. 11 requesting- the Commission review the matter of stamping something " 1/2 14K Plus 1/2 Sterling" becomes all the more imperative. A four-billion dollar industry has now been placed in the uncertain position reflecting upon its stabilty which governed it, at least since the days of the Commercial Standards in the mid 1930' It should further be noted contrary to Mr. Rubin's opinion permitting " the Cmnrnerdalthe stamping abbreviation of the mark "ster. Starurds dealing with markings of items containing jewelry, CS 118- 34 states:

The terms "sterling" and "coin" shall not be abbreviated. * * * 1206 FEDERAL TRAm: COMMISSION DECISIONS 85 F, Finally, unless a decision concerning this marking is reached fractional marking of gold and silver wil become commonplace and the . properties and qualities one expects from noble metals will, in tur, be affected.

Once again, I will make myself available to the Commission together with any experts which may be necessar for the Commssion to seek a fair and equitable decision in the matter.

Sincerely, /s/ Joel A. Windman General Counsel Jewelers Vigilance Committee, Inc. First LetiRr of Inquiry Nov. 1974 Charles Tobin Secretary Federal Trade Commission Washington, D.C. 201)80 Dear Secretary Tobin:

A firm by the name of Metals and Jewels, Inc. located at 1316-1318 W. Lexington St., Baltimore, Md. has a patent pending for a gold alloy comprised of 1)0 percent 14K gold and 50 percent sterling. They arc now attempting to market this patent-pending alloy as "One-Half 14K Plus Sterling" to the trade.

They have initially asked us for our opinion whether or not a metal so composed would conform to the U. S. Deparment of Commerce Commercial Standard CS 1)1-31) Marking Articles. Made In Silver In Combination With Gold," a copy of which we enclose herein as well as with the Federal Trade Commission Practice Rules for thr Tra Jewelry Industry, Rules 22 and 23 as well as the provisions of the National Gold and Silver Marking Act 15 U.sC., 29 et. seq. We had a sample of this alloy assayed and found the gold content of the alloy to be a litte over 7K and the silver to be 481.3 parts per thousand fine silver. Accordingly, we notifed this firm that it was our belief that their alloy could not be stamped 14K gold and sterling in accordance with any of thc aforesaid laws and/or rules. The Commercial Standards dealing with combinations of silver and gold which they are referrng to is subdivision 3(b). Please note however, that subdivision 5(c) states:

No quality mark indicating the presence of gold shall be applied to articles (made of sterling silver in combination with gold) composed in part of gold less than lok fineness.

Furher, Rule 22c(l) states that:

, , , An industry product or part thereof composed throughout of an alloy ofgoJd of not Jess than IOK fineness may he described as "gold""' * * Accordingly, although the alloy may have initially been composed of 14K gold, its "composition throughout" is only one-half of the required stamping and below the lok minimum, and, therefore, allegedly in violation of the rule. Further; according to the Nat';oral Gold and Silver Marking Act the stamping would allegedly be a violation since its "actual fineness" is allegedly less than the tolerances provided for 14K gold.

Furher, referrng to the onc-half "sterling," the Commercial Standards, paragraph 5(b) states:

No artidc containing metal or metals other than sterling silver and gold * * * shall have applied to it the quality marks as proscribed in paragraph three and four herein.

Since the composition indicates the silver content to be 1R1 parts per thousand fine silver, it would allegedly not be "sterling" which is 925. Along these lines, Rule 23 of the Federal Trade Commssion Rules states:

It is an unfair trade practice to mark, describe, or otherwise represent an industry product or part thereof * * * "sterling" unless it is at least 925/1 000 pure silver. Further, the prohibition of the National Gold aT/ii Silver Marking Act would allegedly apply here aB well.

The Commercial Standard, as you will note from reading them, deal with articles combined with silver and gold applied to jewelry in which the parts were made of two separate metals either entirely sterling in one part and entirely of a kardt gold above !'K in the other par, or to gold which was mechanically bonded to sterling (Rold filled on sterling) or where white gold, a minimum of 1/20 of the weight was bonded to sterling, and the metals could not be easily distingushed. The framers of this Commercial Standard specifically use the words "silver 'in combl:nation with gold " the word "combination" meaning the bringing together of articles already composed of sterling and karat gold of not less than !OK. It did not mean an "alloy" of silver and gold, for as the definitions state:

(c) "gold" means 24 karatf; gold or any alloy of the element gold of not less than IOK fineness.

(c) "sterling or "sterling silver" means an alloy of 92fi/l(x parts pure silver within the toler.mccs pennitted by the National Stamping Act. Thus, they are talking about a combination of metals already alloyed to their legal minimum and not an alloy of sterling and gold which would be a reduction from said leg-dl minimum. Further, the framers of the Commercial Standards specifically provided for alloys in Commercial Standard CS 67- Marking Articles Made of Karat Gold " CS 118- Marking of Jewelry and Novelties of Silver " CS 47- Marking of Gold Filled and Rolled Gold . , 1':\10 !' CHJ! '''n.U ...H")VU '-'',"'UULCJCJ. H.JU ""LJ~A R5 F.

Plate Articles Other Than Watchcases " and CS 66- Marking of Articles Made Wholly Or In Part of Platinum." Thus, it is believed that all alloys are adequately covered, namely, those providing for the minimum silver requirements of 925 and the minimum karat requirements of lok in conformance with the National Gold and Silver Markihg Act.

We had notified this firm, Metals and Jewels, Inc., of our conclusion and stated, since we believe promotion of the product would allegedly mislead, they should seek an advisory opinion from the Commission since our findings would not necessarily be conclusive. In the interim, we have found the f"rm is allegedly promoting its products to members of the trade and next month, in one of the trade publications, an alleged licensee will promote use of this mark Enclosed is a photocopy of an advertisement that has appeared in the trade press, specifically the Jewelers' Circular- Keystorw on page 105 in their November 1974 issue. To our knowledge, the product has not been sold. Accordingly, it is imperative that the Commssion review this matter to disseminate whether or not this marking would allegedly mislead the consumer who wil ultimately be purchasing this product. Failure to do so at this time would lead others, for example, to allegedly manufacture alloys one-quarter silver, one-quarter lok gold which would assay 2K and accordingly open a "Pandora s Box" to an industry which has attempted to live with Commercial Standards and within Rules and Guides promulgated by the Commssion.

I will make myself available to the Commssion together with any experts which may be necessary for the Commssion to seek a fair and equitable decision on this matter.

Respectfully, /s/ Joel A. Windman General Counsel ADVISORY OPINIONS AND REQUESTS THEREPOR 1209 lin A New Gold Alloy Retailing for Much Less Than 14K They said it cou!drd be Jom'. but here it is ' The A, H. Pond Company now offers ST ARFIRE Wedding Rings in a brand new gold idJoy for up to 40% less than thf'ir 14K counlerpdfts. A remark'1bJc new rnanufacturin process combines 14K gold ilnd sterling silver in approximately elJual parts. Ring'\made of this beautiful marriage of two precious mfl,lls look and fed like 14K. Customers who might otherwise be forced to settle fbf - Jesser quality can now get solid, fuJl-weighted..rings at substanti,ll savings Alloy 1/2 14K +1/2 Sterling- patent pending 480, 890 PRODUCED BY K('-p ake 85 F.T.

Staff Letter of Respo,,,e Oct: 11 1974 Dear Mr. Newman:

This is in response to John J. Ghingher, III, Esquie s letter of Sept. , 1974, requesting a furher staff opinion on behalf of his client Metals and ,I ewels, Inc. In my letter to him of Sept. 9, EJ74, I rendered an informal staff opinion to the effect that labelling of his client' product "Alloy 1/2 14K + 1/2 Ster." would not violate any of the laws administered by the Commission.

It is my understanding that Metals and Jewels, Inc. hW; granted to B. . Hirsch, Inc. the right to produce articles of jewelry composed of an alloy of one-half 14 karat gold and one-half sterling silver. B. F. Hirsch Inc., now proposes to use the quality mak "112 14K - 1/2 Ster." Ths mark would be displayed in type of suffcient size as to be legible to persons of normal vision and will be inscribed in a place likely to be observed by prospective purchasers. The word "alloy" would be dropped from the description because it would not be feasible to inscribe such a long phrase on most jewelry items. As long as the above conwtions are met, I do not believe that the new proposed description would violate any-of the laws administered hy tbe Commission. I do not think that the term "alloy" would add anything to the proposed disclosure. Please understand that the foregoing does not constitute an advisory opinion of the Commssion. If you have any questions, please call me at (202) 96-5089. Very truly your /s/ Barry R. Rubin Attorney cc: John ,J. Ghingher, III, Esquie Weinberg and Green 10 Light Street Baltimore, Maryland 21202 Second Supplement",l Letter of Request Sept. , 1974 Dear Mr. Rubin:

Recently you were kind enough to provide us with an informal staf opinion with respect to the marking of articles of jewelry composed of an alloy of one-half 14 karat gold and one-half sterling silver. We had requested, on behalf of the above client, an opinion that the making of ADVISORY OPINIONS AND REQUESTS THEREFOR 1211 117:

this alloy with the quality mark "Alloy 1/2 14K + 1/2 Ster" would not violate any rule or regulation of the Commssion applicable to the jewelry industry. By your letter of Sept. 9, ) 974, you rendered an informal staff opinion to this effect.

Since that time, our client bas granted to B. F. Hirch, Inc. the right to produce the alloy for sale to manufacturers of jewelry. Hirsch has advised us that it is highly impractical for a manufacturer of jewelry to employ such a lengthy marking. Because of the small size of articles of jewelry, the marking that we had requested would impose severe restrictions upon the design possibilities for such articles and would therefore greatly restrict the marketability ofthe alloy. or the above reasons, we request that you render a second informal staff opinion that use of the quality mark "1/2 14K - 1/2 Ster." will not violate any of the laws administered by the Commission. This quality mark will be displayed in type of sufficient size as to be legible to persons of normal vision and will be inscribed in a place likely to be observed by prospective purcha.,ers. The mark is not currently being used and the use of the quality mark is not the subject of a pending investigation or other proceeding by the Commission or any other governmental agency.

In support of my request I refer you to the "Background" and Discussion" sections of the letter dated Aug. 30, 1974 wherein Howard B. Miller and I submitted the originalrequest on behalf of this client. I have enclosed a copy of that letter for your convenience. I would greatly appreciate your addressing your opinion to Mr. Robert Newman, Vice President, B. F. Hirsch, Inc., 100 Avenue of the Americas, New York, N. , with a copy to me. If you have any questions or if I can provide any assistance, please do not hesitate to call me at 29:3-1807 on the District of Columbia exchange. Thank you once again for your very kind cooperation in this matter. Sincerely yours /s/ John J. Ghingher, III Staff Opinion Letter Sept. 1974 Gentlemen:

This is in response to your letter of Aug. 30, 1974, requesting an advisory opinion from the Commission reg-drding tbe proper labelling of jewelry composed of an alloy of gold and silver. Since you requested that this matter be handled a., expeditiously as possible, this letter is of 85 F, necessity only an informal staff opinion and does not constitute an advisory opinion of the Commission.

It is my understanding that your client, Metals and Jewels, Inc., will , market articles of jewelry composed of an alloy of one-half 14 karat gold and one-half sterling silver. These articles would have the same appearance as articles manufactured entirely of 14 kart gold. Your client proposes to imprint these articles with the following description: Alloy 1/2 14 K + 112 Ster." This mark will be displayed in typ of sufficient size as to be legible to persons of normal vision and will be inscribed in a place likely to be observed by prospective purcha.,ers. As long as the above conditions are met, I do not believe this description would violate any of the laws administered by the Commission. Please understand that the foregoing does not constitute an advisory opinion of the Commission. If you have any questions plea.,e call me at (202) 96: 5089.

Very truly your /s/ Barry R. Rubin Attorney Offce of General Counsel Letter of RequR.st Aug. , 1974.

Dear Sir:

On behalf of Metals and Jewels, Inc., a District of Columbia corporation, I hereby request an advisory opinion with respect to the following proposed course of action:

Background Edward L. Kohr and Seymour Globus conceived an invention consisting of an alloy of 14 karat gold and sterling silver, combined in equal parts. Messrs. Kohrn and Globus have applied for letters patent covering their invention and have assigned such application, and any letters patent which may issue thereon, to Metals and ,Jewels, Inc. Metals and Jewels, Inc. proposes to produce and sell quantitities of the alloy for use in the manufacture of articles of jewelry. Custom and usage in the jewelry industry is such that in order to sell quantities of the alloy to jewelry manufacturers, Metals and ,Jewels, Inc. must provide said manufacturers with assur,mces that articles of jewelry composed of the alloy may be stamped with a quality mark indicating that such article is composed throughout of an alloy of precious metals. , H' ..'-n.. H''' .nnv D"tVD""J.. .11.1Dhl:Jl'V1 1':1': Proposed Coure of Action It is proposed that articles of jewelry manufactured from the alloy described above and composed throughout of the alloy be imprinted with the quality mark" Alloy 1/2 14 K + 1/2 Ster." The quality mark will be of sufficient size type as to be legible to persons of normal vision and shall be so placed as likely to be observed by purchasers or prospective purcha.,ers. There will be no difference in the size of letters or words within the quality mark.

Discussion The general rules applicable to the proposed course of action are set forth in Title 16 of the Code of Federal Regulations paricularly in Sections 23. , 23.23 and 23.25 thereof. Those sections deal with misrepresentations as to the gold and silver content of an aricle of jewelry and the use of quality mark., with respect to the composition of articles composed of precious metals and alloys thereof. It is submitted that use of the proposed qualty mark will not misrepresent the gold content of the aricle of jewelry, wil not misrepresent the silver content of said article and will not deceive purcbasers or prospective purchasers of the aricle as to the metalic composition of the aricle. Attached is the report of Robert B. Pond, Jr., Ph. , analyzing an assay of the alloy. Dr. Pond concludes that the assay is consistent with the description of the alloy as being composed of equal parts of 14 kat gold and sterling silver. Based on Dr. Pond' s findings, use of the quality mark described above accurately represents the gold and silver content of the alloy and will not in any way deceive a purchaser of an aricle composed of the alloy as to the metallic composition thereof. Request for Advisory Opinion Metals and Jewels, Inc. hereby requests that the Commssion issue an advisory opinion that the coure of action proposed, on the basis of the facts submitted, will not violate any rue or regulation of the Commission applicable to the jewelry industry. The course of action is not curently being followed by the requesting pary and is not the subject of a pending investigation or other proeeding by the Commission or any other governmental agency. If any questions arse concernng this request for an advisory opinion, please call the undersigned at 293-1807 (on the District of Columbia exchange). C A conference is respectfuly requested if the Commission is considering an advisory opinion that the proposed course of action may not be implemented.

Sincerely yours 589-7990- ?h - , , 1214 FEn,:RAL TRADE COMMISSION DECISIONS H5 F.

/s/ Howard B. Miller /s! John J. Ghingher, II Attachment to Letter of Request Aug. 2!), 1974 Dear Sirs:

I have examined the report which you furnshed of a "Birmngham assay of a metal alloy allegedly produced by mixing 14kt gold and sterling silver in equal pars by weight.

I intend to show that the assay conflct that the alloy sample contains gold and silver in quantities consistant with a mixture of 14kt gold and sterling silver in equal pars by weight. 1. Note that the original 14kt gold must have contained not less than 14/24ths. or 581)/1000 pars gold by weight. 2. The original sterling silver alloy must have contained not less than 921/100 pars silver by weight.

The weight fractions of gold and silver in a mixture of 14kt gold and sterling silver in equal parts by weight would be one hal the original fractions. Therefore the final alloy must be composed of not less than 3. 1/2x585/IOOO 292.5/100 pars gold by weight, and 4. 1/2x925/100 462.5/100 pars silver by weight. The assay reported:

117.2mg gold 187.93mg silver 390.l)mg total The weight fraction of gold from the assay is 5. 117.2mg gold/390.l)mg total 300.1/100 parts gold by weight. This IS greater than the nummum gold requirement of 292.5/100( #3).

The weight fraction of silver from the assay is silver by 6. 187.93mg silver/390.5mg total 481.25/100 par weight.

This is greater than the minimum silver requirement of 462.1)/100 (#4).

By these calculations it is evident that the final alloy can be described exactly as being produced by mixing one half l1kt gold and one half stirling silver by weight.

Respectfully submitted /s/ Robert B. Pond Jr., Ph.

ADVISORY OPI:-IONS AKD REQUESTS THEREFOH 1215 !In Possible confict, as to notice requirements, between State law and FTC's Trade Regulation Rule Concerning A Cooling- Period for Door-to-Door Sales (16 C. R. 429) (File No. 753 7009) Opinion Letter May 20, 1975 Dear Mr. Feldman:

Ths is in response to your request for an advisory opinion regarding confict, as to notice requirements, between State law and the Federal Trade Commission s Trade Regulation Rule Concerrg a Cooling-Off Period for Door-to-Door Sales. The question posed is: Would printing of both the notice of the buyer's right to cancel a door-to-door transaction specified in the Commission s Rule and any such notice required by State statute or muncipal ordinance, identifying one as the Rule and the other as State law, violate the Rule where the statute or ordinance involved prescribes a mandatory fonn of notice which in some respects may be incompatible with the fonn of notice prescribed by the Rule? It is the Commssion s understanding, based upon the infonnation submitted, that you have requested the opinion for your own guidance and on behalf of the Major Finance Corporation, a company engaged in purchasing commercial paper from door-to-door sellers. Puuant to your advice, the company proposes to require door-to-door selling companies from which it purchases commercial paper to include in contracts for transactions subject to the Commission s Rule both the notice of the buyer s right to cancel required by State law or municipal ordinance and the notice specified in the Commission s Rule, identifying one as the Rule and the other as State law. The Commission h3-' no objection to the inclusion in such contracts of both the notice required by State law or municipal ordinance and the summar notice specified in the Commssion s Rule, identifyig one as the Rule and the other as State law, as long 3-' any language in the State or muncipal notice directly inconsistent with the Rule is stricken. Since the Commission s rule gives the consumer a uniatera right cancel a transaction within three days, \\without penalty or fee, language in a State notice misinformg the buyer of the existence of a penalty or fee (i.e. If you cancel, the seller may keep all or par of your cash down payment") is directly inconsistent with the Rule and, if included in the sales contract or receipt, must be stricken. Moreover, since the buyer's right to cancel transactions covered by the Rule is not limited 1216 FEDERAL TRADE COMMISSIOK DECISIONS to agreements solicited at or near the buyer s residence, does not require the buyer to furish any reason for cancellation, and may be exercised by mail or delivery of any wrtten notice or telegram, any language to the contrary in a state notice is similarly directly inconsistent with the Rule. Any other language in a state notice, the effect of which is to misrepresent in any manner the buyer s right to cancel under the Commission s Rule, must be omitted or stricken because directly inconsistent with the Rule. However, language in a State notice which informs buyers of State-created rights in addition to those conferred upon them by the Rule, or informs them how to be entitled to those rights, may be included in new contract or receipt forms, and retained in existing forms without being stricken. Cognizant that providing both the summar notice required by the Rule and the notice required by State law could result in needless duplication in a contract, the Commssion would not object to a seller using a composite notice containing elements of both the Rule s notice and the State notice, provided that the composite notice expressed no restrictions or limitations upon the buyer s right to cancel which are not contained in the Commission s Rule. A composite notice must also inform the buyer of a right to cancel at least as extensive as that described in the Commission s prescribed summary notice, including reference to the Notice of Cancellation form which must be attached to the contract.

By advising that it would not object to use of both the summa notice prescribed by the Rule and that required by State law, with inconsistent State language stricken, or to use of a composite notice the Commission, of course, does not intend to raise the implication that sellers may not use only the form of sumar notice prescribed by the Rule, where this would also satisfy State requirements. The Commssion is aware of the dimculty imposed upon seners who are subject to inconsistent State and Federal legal obligations. In the interest of national uniformity, the Commssion continues to encourge the States to eliminate or change the requirements of their laws which are inconsistent with the Rule, to the extent that they provide less protection to consumers. The Commission also encourges those states with a specified form of notice expressing restrictions or limitations which are not contained in the Commssion s Rule to consider use of contracts with only the notice prescribed by the Rule as satisfying State notice requirements, because it is the Commission s opinion shared by numerous State and local offcials who have consulted with the Commission, that the Rule s notice provides the buyer with the essential information concernng his or her unilateral right to cancel. Whether the notice of the buyer s right to cancel prescribed by the ADVISORY OPINIONS AND REQUESTS THEREFOR 1217 117:J Rule is printed alone, in a composite form or in addition to the state notice, the Rule s notice must be given in substantially the form specified and must comply with the minimum size and placement requirements of the Rule.

The Commission would consider it to be a violation of its Rule if a ;"pletel receipt or contract pertaini;"gto a sale subject to the Rule contained only a state-required notice if that notice did not inform the consumer of his or her unilateral right to cancel a transaction within three days, without penalty or fee, and appropriately refer to the attached Notice of Cancellation form for an explanation of that right. With enactment of the Magnuson-Moss Warranty-Federal Trade Commission Improvement Act, the Rule extends to door-to-door transactions, as defined in the Rule, in or affecting commerce. The basis of the Commission s opinion is that trade regulation rules have the force and effect of law, and, like other substantive federal administrative regulations, preempt conficting State law- The Commssion s Cooling-Off Rule preempts State laws and municipal ordinances to the extent that they do not accord the buyer the same or greater right to cancel a door-to-door sale than that provided by the rule, as well as State-required notices to the extent that they do not provide notice of the right to cancel the transaction in substantially the same form and manner as the sumar notice set forth in the rule. By including in a contract for a transaction covered by the rule a Staterequired notice of cancellation rights containing language directly inconsistent with the provisions of the - rule, the buyer would be misinformed of his or her right to cancel under the rue and the full effectiveness of the rule would be frustrated. The Commission emphasizes that the coordinated efforts of both the Commission and State and iocal officials are essential in providing the consumer with an effective right to cancel door-to-door transactions within a cooling-off period. The Commission s opinion that language in a State summary notice should be stricken if directly inconsistent with the provisions of the Commission s rule is not intended to annul or diminish any rights and remedies provided to consumers by State law and enforceable thereunder.

By direction of the Commission.

Letter of Request June 3 1974 Gentlemen:

This offce represents Major Finance Corporation and its subsidiaries (the "Company ), a company engaged (among other lending and 851' financing operations) in purchasing commercial paper from door-todoor sellers in the Washington, D.C. metropolitan area (including . nearby Maryland and Virginia areas). This request for advisory opinion is made on behalf of the Company and for our own guidance in the light of the facts set forth below.

The facts. The Company requested our opinion concerning conflict of State (Virginia, Maryland and the District of Columbia) laws (the statutes ) with the Rule and methods of compliance with the Rule and the statutes. After studying the statutes and the Rule and discussions with state enforcement authorities, we advised our client as is set forth in a copy of our opinion letter, annexed hereto as Exhibit I. On May 30, 1974, the undersigned received a telephone call from a member of your legal staff, Ms. Anne Fortney, who advised the undersigned that she had learned of our opinion and recommendations from a seller of commercial paper to the Company; that if the Company should adopt our recommendations to print, or require printing of, both the notice required by state statutes and the Rule, the F. C. would immediately bring suit against our client to require removal of statutory notices required by the States and for other unspecified violation(s) of the Rule, all on the ground that the addition of mandatory state notices would be contrary to the Rule, which she vehemently asserted supersede, annul and repeal all statutes in conflict therewith (notwithstanding the provisions of note 2(b) of the rule). The undersigned informed Ms. Fortney that this office could not accept her opinion; that we were aware of possible changes in the statutes which would permt the use of only the notice required by the rue (whicb, in the case of Maryland, has occurred); and that until such time as such changes should occur, we believed we had no alternative but to advise our clients as set forth in ;xhibit I hereto. Ms. Fortney agan threatened action against our client and after a somewhat difficult conversation, the undersigned requested that he be transferred to your 1974) and General Counsel's office. After discussion that day (May 30, on June 3, 1974 with Mrs. Mary Foldes, who, incidently, is more moderate and understanding in her approach to the problem and who has been both belpful and grcious, we have decided to request the Commission s opinion with respect to the confict of laws problem which presently exists. We respectfully call your attention to the fact adequately set forth in Exhibit I hereto, that the Company desires only to be in compliance with, and to have all sellers of commercial paper to it in compliance with, all applicable law. The Company does not desire to make test cases or become engaged in unnecessary litigation with the Commission or any State authority.

The basis of our opinion. We acknowledge that under present law ADVISORY Ol-lNLUN:- ANJJ J(l'.l:Ul' IC) 1 nC.J\.IrVl\ and recent court decisions, rules of the Commission have the force and effect of law and must be complied with, where applicahle. We do not acknowledge that a Commission rule can invalidate or repeal a State statute or a specific Act of Congress in its capacity as the legislative branch of. t\1e District of Columbia Government. State cour (including in such term the District of Columbia) judges are obliged to enforce the Jaws of their respective jurisdictions (or in some c""es, the jurisdiction wherein the transaction arose) and cannot simply defer to Federal rules, regulations or law unless the State law is unconstitutional or the matter involves interstate commerce, as to which the ederal law would generally be superior. It is impractical to think that in an area such as the Washington, D.C. metropolitan area, involving three jursdictions, a door-to-door seller could make a proper decision as to the use of separate forms, one complying solely with Federal law (on the ground that Federal law is superior since interstate commerce is involved) and one complying solely with State statute (on the ground that the transaction is solely intra-State). Where a Commission rule and a state statute are in confict with each other and both are applicable to our client, we see no alternative but to recommend compliance with both, which can be done in the instant situation, by simply not enforcing certain rights under State statutes retention of the deposit under the Marland statute. We believe that this is the thrust and force of note 2(b) of the rule.

Request for opinion. Your opinion is respectfully requested as to the following matters:

Will printing of both the notice required by the rue and the notice required by statute (see ,,;xhbit I recommendations as to the District of Columbia, Marland being no longer a problem), identifying one as the rule and the other as State law, violate the provisions of the rule where the statutes involved prescribe a mandatory fOrJn of notice and that form of notice is incompatible with the form of notice prescribed by the rule? We respectfully call to your attention our advice to our client to the effect that it is not to enforce provisions of State law which are less favorable to thc consumer than the provisions of the rue and vice versa if such situation should exist. Accordingly, the foregoing request is not to be interpreted as seeking an opinion which would permit the making of charges or use of other provisions of State law which are in confict with the rule and less beneficial to the consumer; nor should it be interpreted as a request for permission to omit the notice of cancellation required by the rule, since we have advised our client to see to it that such notice of cancellation is provided in accordance with the rule.

85 F.

Your early response wil be appreciated. Pending such response, we have advised our client to follow our recommendation with respect to the. District of Columbia and to follow the Rule only in both Virginia nd Maryland.

Respectfully submitted FELDMAN & ECKER /s/ Melville W. Feldman Exhibit I Atlnhment to Letter of Request May 17, 1974 Dear Mr. Sturt:

At your request, we have reviewed the statutes of Maryland Virginia and the District of Columbia for inconsistencies with the Rule which becomes effective June 7, 1974. We are informed that you have copies of the Rule and all statutes to which reference is hereinafter made and accordingly, wil not here set out each notice required by the Rule and each statute. We wil, of course, furnish the same upon request.

The Facts The Rule requires that a notice of the buyer s right of cancellation be printed in 10 point bold face typ in immediate proximity to the space reserved in the contract for the signature of the buyer, as well as other requirements which we will not here repeat. The Maryland Annotated Code, Aricle 83, Sections 28 through 35 (the "Home Solicitation Sales Act") covers, essentially, the same subject. Sections 80(2)(A) and (8) contain the form of notice of buyer's right to cancel required under Maryland law. , essentially The Virginia Code, 9959. 21.4, 59. 21.5 and 59. 21.6 cover the same subject, buyer's right to cancel notice requirements being contained in 959. 21.4(b).

The District of Columbia Code (1973 Edition), 92R3811 , covers home solicitation sales" in much the same manner as the Maryland law. Required buyer's right to cancel provisions are contained in 928- 3811(g)(2).

Only the Rule prescribes the form of notice of cancellation which must be delivered to the buyer for his use in case of his desire to exercise his right of cancellation. Local statutes permit any form of notice of cancellation and do not require delivery of a fonn for such useu- . ---- The Notice of Right of Cancellation.

Virginia. There is no problem, either as to criminal penalty or civil penalty. 959. 21.4(b)(ii) specifically provides that a notice given pursuant to federal law which contans at least the information prescribed by the notice specifed in 959.1-21.4(b)(i) and which is not in conflct with the Virginia law may be used in lieu of the prescribed notice. We are of the opinion that the notice prescribed by the rule will satisfy the requirements of the Virginia Code inasmuch a., the notice and notice of cancellation prescribed by the rule conta more information, are not inconsistent with, and are more protective of the buyer than the provisions of the Virginia Code. Rec01nmendtion: Use the notice suggested by the rue.

Maryland. The notice prescribed by the Marland law (see reference above) is mandatory and explicit. The Marland Attorney General' Offce (Miss Stevans) ha., orally advised that the attorney general will request a change in the Marland law which will adopt the requirements of the rule and that the attorney general will not seek to enforce any criminal penalties where there is compliance with the rule. Ths leaves two practical problems: (1) Since the attorney genera's opinions are not binding upon the cours of Marland or elsewhere, a cour of Maryland might, upon complaint by a county attorney, impose the penalty of up to $500 prescribed by Section 3,'; and (2) in any suit to enforce a contract, a cour (either in or out of Marland) might find that there had not been compliance with Marland law and that, therefore the civil penalty of retention of the goods by the buyer (Section m(4)J should be enforced. The "door-to-door" definition under Marland law relates to sales made in the home, while the definition under the rue is much more broad. Accordingly, at this time we have no choice but to advise you that in our opinion you should comply with both the rule and Maryland law. Recommendtion: You should print the notices required by both the Marland statute and the rue, identifying one as Maryland Law" and the other a., "Federal Law." The only alternative would be to follow the requirements of the rue, risking the civi penalty of the Marland law in cases where it might arse. We do not, in all candor, consider that, practically-not legaly, there is any real risk of criminal penalty for failure to adhere to tbe exact notice requirements of the Maryland law, if the rule is followed. This ba.,ically entals a business risk decision as to the number of situations or cases in which the civil defense might be raised prior to amendment of the Maryland law-if and when amended.

District of olumbin. The notice required by the District of Columbia law (see reference above) is mandatory and explicit. It is similar, but 1222 FgOF;HAL TRADE COMMISSION DECISIONS 85 F.

not identical (e. the notice requirements are slightly different) to the Maryland law and the basic principles of law are the same a., we have . set for:h with respect to Maryland, law. Mr. Willam Robinson, Chief of the Legislative Opinion Division of the Corporation Counsel's Offce of the District of Columbia (similar to Attorney General's Offce in Maryland) has orally advised that: his offce ha., been requested comment on the rule; his offce is aware of the notice requirement inconsistency (i. the rule is more broad than the D.C. notice requirement); no steps have been taken toward revision of the D. law; and, in his opinion the District of Columbia would not seek to enforce the D.C. law if there is compliance with the rule, notwithstanding that the D.C. law is enacted by the Congress of the United States and, as a general rule of law, would supercede and be superior to any regulation of a Federal agency (the F. C. in this ca.,e). Restating, the same principles as are applicable in Marland, the Corporation Counsel of the District of Columbia does not make or judge the law; he is basically the prosecutor of criminal violations of the District of Columbia law. Judges decide the law and if the Corpration Counsel's offce was pressed hard to fie a complaint, the judicial decision might well be one with which that office was not in sympathy. Secondly, that offce has no control over, or even jurisdiction to be a pary to, the civil aspects of any case wherein the buyer might raise a defense or counterclaim based upon non-compliance with the D.C. law. It is very practical to think that the cours might, in these days of "consumer protection " take the strict legal view in order to relieve a buyer of his obligation to pay, finding non-compliance with the D.C. statute, which as already stated, would normally be superior to the rue of a Federa agency. According, we have no choice but to state that in our opinion you should comply with both the D.C. statute and the rue. Recommendation: Print both notices, in the same manner as we have recommended for Maryland contracts. The same alternative is available to you, based upon your business judgment as to risk. The Notice of Cancellation.

As bereinabove stated, only the rule prescribes the form of notice of cancellation which you must give to the buyer. By its term, it is more broad and protective of the buyer than the law of Marland, which, for example, allows a cancellation charge under certain comlitions rSection 31(3)), and is in other respects more beneficial to the buyer than both the D.C. and Marland laws. It is our opinion that you must, in order to comply with the rule, supply to the buyer a notice of cancellation in the form prescribed by the rule. Regrettably, unless you wish to argue, in each case which may arise, that the particular contract in question is ..., , q 1"1. Uu.. V.L .LH''''''' '~~ . L~Lu'.-- --- II 73 not subject to the rule, but only to the state law (i. Marland, Virginia or the District of Columbia), you will be bound by the more broad protective aspects of the rule (e. you will not be able to charge the fee allowed by Section 31(3) of Aricle 83 of the Marland law). This could be the subject of a lengthy, legal discoure, but we do not consider it practical to review the whole subject of whether a particular contract is subject to the rule because it was or was not an interstate or intrastate transaction, or whether, regardless of that answer, the company (you) and/or the seller are so engaged in, or affect, interstate commerce as to require the application of the rule, etc., etc. As a practical matter operating in this metropolitan area of three separate jurisdictions, we are of the opinion that the buyer will "have the best of all worlds; namely the best advantages of both the rue and any other or additional advantage which he may find under local law. General.

We are not unmindful of the practical problems created by the foregoing opinions and recommendations.

For example, we have sought a means by which we could recommend to you some sort of "combination" notice of buyer's right to cancel. In this connection, the rule is not as rigid as the laws of Marland and the District of Columbia, permtting a statement "substantially" in the form suggested. Unfortunately, both the Marland and the D.C. law do II substantial"not permit compliance and the prescribed form would, in fact, limit or reduce the effect of the notice "suggested" by the rue. Conversely the notice required by the rule cannot be limited to a notice concernng sales 'Iat your residence" (Marland) or to sales made 'I at or near your residence" (D. ), since the rule more broadly defines definitely those sales which are "door-to-oor" sales. Weare also aware that the retail instalment contract used by you is already at its practical maxmum paper length and that the rue prescribes that the notice of cancellation be "attached to the contract* * *and ea. ily detachable." In this connection, we have contacted Mr. Wiliam Dixon of the, who supposedly is knowledgeable concerning the rue. Fray, he hedged, but be did state that the notice of cancellation could not be contained on a separate paper, attached by paper clip or staple. He did concede, however, that if multiple forms are used, it might" be acceptable to so prepare the form that the copy delivered to the buyer would contain the notice of cancellation fonn even though the same was not contaied on the first page of the form. This would ental a somewhat unusual set of forms, so that you would be delivering to the buyer three copies of the contract (to comply with all statutory requirements) and the original would, in fact, be different from the other form of the set. Frankly, we think this would be a poor practice, although possible, since the buyer s copies could cause considerable evouldJ;e at varance with the origin'l and dispute in the event of civil litigation. We have reviewed your forms and will be pleased to work with you to show you what can be done with the multiple fonn idea. However, ba ed on a "guestimate " you wil probably have less trouble and -question(sick and probably not much , more expense with forms which are supplied to the buyer (which under the rule must be in duplicate) containing the required notice of cancellation on a "tear off" perforated extension, which the form makers can probably fold in some manner so as to shorten tbe package. We will be pleased to work with you, by helping to design or reviewing any proposed forms. We do not think we can properly set out in this letter all of the necessary criteria for forms. In any event, we strongly urge that you keep your supply of new forms to a safe minimum, since it is likely that local jurisdictions and the F. C. will fursh us with better guidelines as the problems of compliance become better known and more acute.

We recognize that the foregoing does not satisfy your desire to comply with applicable law and the rule in a simple, straight-forward manner. However, given the existing, very apparent, conflict of laws we have had no choice but to make your task a bit more difficult than it really should be.

Sincerely yours /s/ Melville W. Feldman Statistical reporting program on prices charged hymembers of a watchmakers assodation for various watch repairs. (File No. 71)37002) Opinion Lett May 1971) Dear Mr. Neill:

This is in response to your letter of May 6, 1974 requesting; an advisory opinion from the Commission concernng a proposed statistical reporting program.

It is the Commission s understanding that the Texas Watcbmakers Association, Inc., an organization composed of twenty-one affiliated guilds, proposes to send each of its member watchmakers a copy of a survey questionnaire seeking an enmneration of retail charges for , AUVlt;UKY INIUN;: ANU 4Ur.;:1;: lur.lit'.. I'UH, 1;:;:;) watch repairs and parts. Data from the survey responses would be col1ated and average, high, and low prices computed for each item. In addition, the data might be broken down to reflect prices charged in different areas of the State of Texas. These aggregate figures would then be published in a trade journal. , The Commission cannot give its approval to the proposed survey. In the Commission s view, the exchange of price data may lend itself to price fixing and may result in the elimination of price competition. For example, if the published data were presented or regarded as cstablishing a suggested or recommended price range, it is the opinion of the Commission that such a suggestion or recommendation would be likely to constitute a violation of Section 1 of the Sherman Act (15 u.sc. 9 I) and Section 5 of the Federal Trade Commission Act (15 C. 945).

Although the survey questionnaire is designed to elicit price information which is curent as of the time the form is completed, it is doubtful that prices for watch repair servces are so volatile that the information could not be used to stabilze future price levels. Furhermore, the Association s acknowledgment that the published data might be broken down by areas within the State of Texas causes the Commission concern, since particular gulds may be made up of a relatively small number of watchmakers. When the number of sellers in a geographic market is not numerous, an exchange of curent price information among them is highly suspect under the antitrust laws. See United States v. Container Cor. of America 393 U.S. 33 (1969). The Commission does not mean to suggest that it will withhold its involving theapproval of al1 proposed statistical reporting progr collection of price information. The legality of such a program hinges on its purpose, implementation, and effects. However, where a request for an advisory opinion regarding such a program is not accompaned by a showing of a legitimate interest which warnts the collection of price data, the Commission will decline to approve the program. In the present case, the Association has failed to address the question of what useful, lawful purpse would be served by the collection and dissemination of data relating to retail watch repair charges. As the Supreme Court said in the Cont.aine Carportion case supra at 393 S. 338 Prce is too critical, too sensitive a control to allow it to be used even in an infonnal manner to restra competition. By direction of the Commission.

Letter of Request May 6 1974 85 F.

Gentlemen:

Please find enclosed a copy of the Tex,,, Watchmakers Charer along' with a copy of a survey that we intend to mail to our members concerning the prices that they charge for watch repair. It is our intent to gather this information and make it available through a trade joural and relate the average price, the high and low and may break it down as to different areas of the State of Texas. Can we legally do this and not break any laws? Thanks for your cooperation.

Yours truly, Isl Harold B. Neil President . For the rea on that. the copy furn;gh"d th.. cumpiler. of thb publication was. ilegible, as w.,11 a8 economy r!'ason the charh'r i" nut reprm\uccd here. However, it is avai\abl.. for insp,'ction and cupying at the Division of Lpg-al & Public Records, Federal Trade Commission Building. WashinKfon, D. .............. ..... AUVIC'lJH. l urU..IU1,,u lU"U ru urJulQ l1U:,nl:.d' TEXAS WATCHMAKERS ASSOCIATION , INC.

RETAIL WATCH REPAIR CHARGES. IF YOU DO NOT SERVICE AND/OR REPAIR SOME TYPES OF WATCHES LISTED; PLEASE LEAVE BLANK. THE SIGNING OF THIS SURVEY IS OPTIONAL.

RETURN IN ENCLOSED ENVELOPE.

Number 1. through V. should be considered to have water resistant cases. Regular stem-wind. . . A == parts only, no other services rendered. Date......... . B == parts with complete service to watch. Date-Day. . . .

Alarm II. Automatic. Regular stem Date.. piecestem ... Date-Day. . . . . Dress crown , Alarm.... DUst Proof Crown. . Date-Day Alarm Water-resistant crown Skin-diver crown. . .

III. Regular Electronic. . . Regular stem and Date......... . dress crown Date-Day. . . . . Regulat: stcm and water-resistant crown IV. Regular Electric. . . . . Regular stem and Date......... . Dustproof crown. Date.Day ., piece stem and water-resistant crown RegularDate.........Accutron .... regularSkin-diverstemcrown.......and Date.Day ..... Skin-diver crown and Phasing only. . piece stem. . . . . . Balance staff. . .

VI. Pocket; R.R. Qualty Mainspftng ....... Dial refinishing, VII. Chronograph. 30 min. cost plus ......... 30 min. & hour. . Setting bridge. . , Au tomatic ... Detent........ , Day-Date.. , Winding pinion Clutch.... -.VII. Antique-lever. . Clutch lever ....... Cylinder Clutch lever springs. Duplex Train wheels, cost Fusee... . plus what % . . .. . . . Other pars that do IX. High Grade Watches not require special "Uch as: fitting, cost of par Patck-Phiipe. plus what % . Vacheror Constan- Crystal, water-res. .. tine. & Audumar Crstal wiring Piquet. .. .... .. Crystal, glass.. . Crystal, fancy GS & Timer-stop watch 7 J suc. & ETC. . . . XI. Install cell & check rate Accutron . . . . . .

Electric. -. - GUARANTEE: I give a guarantee of Timex...... . months on complete Electronic. . . repair jobs.