FTC v. Henry Broch & Company – Oral Argument – January 14, 1960

Media for FTC v. Henry Broch & Company

Audio Transcription for Oral Argument – January 18, 1960 in FTC v. Henry Broch & Company

del

Earl Warren:

Number 61, Federal Trade Commission, Petitioner, versus Henry Broch & Company.

Mr. Friedman, you may proceed with your argument.

Daniel M. Friedman:

Mr. Chief Justice and may it please the Court.

This case here on writ of certiorari to the Court of Appeals for the Seventh Circuit brings before this Court for the first time since the enactment of the Robinson-Patman Act in 1936, the meaning of Section 2 (c) of that Act, the so-called, “brokerage section.”

Generally speaking, that section makes it unlawful for any person to pay or grant any brokerage or any allowance or discount in lieu thereof, to the other party to a purchase and sales transaction except for services rendered.

The two questions which are presented by this case are first, whether the prohibitions of this provision apply to a seller’s broker who engages in conduct otherwise prohibited by the Act, that is a seller’s broker as distinguished from the seller himself.

And the second question presented is whether the particular conduct engaged in by the respondent in this case involve a grant or allowance in lieu of brokerage within the meaning of those provisions.

The basic facts in the case are not in dispute.

They were found by the examiner, accepted by the Commission and the Court of Appeals itself in setting aside the Commission’s order, accepted those findings.

The respondent, Henry Broch & Company, is a broker engaged in selling food products for roughly 25 principals.

He is compensated on the basis of a percentage of the sales made and the amount he receives may vary from particular seller to particular seller.

This particular case grows out of sales which the respondent made on behalf of a Canadian processor of apple concentrate, a firm called, Canada Foods.

And they involved the sale of the apple concentrate that was processed in 1954 to affirm in the United States called Smucker.

In the spring of 1954, Canada Foods appointed Broch as its broker and at that time, entered into an understanding that Broch would be paid 5% as a commission.

Thereafter, the — Canada Foods entered into agreements with other brokers to represent it and in those instances, they agreed to pay the brokers 4%, the explanation being that the Broch firm stored the goods in advance.

Earl Warren:

Bought from what?

Daniel M. Friedman:

Stored the goods, kept goods in its warehouse.

Earl Warren:

Yes.

Daniel M. Friedman:

In October of 1954, Canada Foods announced to its brokers that the 1954 pack of apple concentrate would be ready shortly and sent samples out and indicated that the price on this concentrate would be made available.

And around the 11th or 13th of October, they sent out an announcement to the trade brokers, the price would be $1.30 per gallon in 50-gallon drums.

Promptly upon receipt of this information, another broker who was getting 4% on the sales, a firm called Kenser & Phipps got in touch with the Smucker firm and suggested they might interested in this concentrate.

There was good deal of discussion back and forth.

The upshot of it was that the Smucker firm indicated they would be interested in taking 500 barrels.

Now, this is concededly a very large order, because each barrel contains 50 gallons, so the result of this is approximately 25,000 gallons at the price of $1.30, is better than a $30,000 order.

But they further indicated to Mr. Phipps that they didn’t want to pay that much money and Mr. Phipps said he would get in touch with Canada Foods and see what he could do about it and there was further discussions back and forth between Canada Foods and Phipps and Canada Foods said, “No, they wouldn’t cut the price.”

At this point on, the 26th day of October, Smucker made a specific offer to Phipps.

They said they would buy 500 barrels of their stuff at $1.25.

Phipps promptly wired this offer to the Canadian seller.

The next morning, the Canadian seller called Phipps and advised Phipps that they would not sell for less than $1.30 and went on and stated the only way we could do something about it, would be if the brokerage was cut.

Phipps had no inclination to do this and that was the end of matter insofar as those negotiations were concerned.

Daniel M. Friedman:

Now, the respondent, Henry Broch & Company, entered the picture, a couple days before these last events, when it too, attempted to sell this concentrate to Smucker.

It got in — its representative got in touch with the Smucker man telling he was interested in it and the Smucker man said that they already had an offer to buy this concentrate at $1.30, but they wanted to do something better.

Smucker told them they were interested in this large order of 500 barrels and Mr. Broch indicated he would see what he could do about it.

He then sent a telegram — he — I’m sorry.

He called Canada Foods and indicated that he could sell 500 barrels at $1.25.

The Canada Foods man said he’d sharpen his pencil.

The next morning he called him back and said, “All right, you can get this order at $1.25, but your brokerage will have to be 3%” and this was accepted by Mr. Broch and the sale was consummated at $1.25.

The $1.25 price was given by Canada Foods to this one seller throughout 1954 and 1955.

At the same time, Broch sold this product to 18 other customers at the regular price of $1.30 and on the sales to the 18 other customers they received their regular commission of 5%.

Similarly the three other brokers who represented Canada Foods during this period also sold at $1.30 and received their regular agreement price of 4%.

So that was only on sales to this particular purchaser, Smucker, that the lower price and the lower brokerage were involved.

And I want to emphasize that there’s no question that this was a very large purchaser.

In fact, the manager of Canada Foods, when he was conducting his negotiations with Broch about appointing the broker said, he didn’t think anyone in this country to take more than 250 barrels of this.

The Commission held, on these facts, first that the statute — its prohibitions do apply to the seller’s broker, not just to the seller and secondly, that Broch, by giving up a part of the brokerage, to which it was entitled under its agreement with Canada Foods, in order to make possible the giving of a lower price to this particular buyer, had given an allowance or discount in lieu of brokerage in violation of Section 2 (c).

The Court of Appeals set aside the Commission’s order on two distinct grounds.

First, it said that Section 2 (c) does not apply to seller’s brokers and secondly, it said, “In any event, Broch did not directly or indirectly pay anything to Smucker.”

We believe that both of these rulings of the court below are erroneous.

Now, in construing Section 2 (c), we have to look to the basic purpose of the Robinson-Patman Act.

And as we have detailed in our reply brief and as this Court has indicated in the Simplicity case to think the basic purpose and also I might refer to the Morton Salt case, the basic purpose of the Robinson-Patman Act was to make sure that large purchases did not get a competitive advantage in purchasing over the smaller people, solely because of the fact that they had this mass-buying power.

The original Clayton Act in 1914 had suffered from a serious deficiency that it only dealt with actual price discriminations.

And as this Court detailed last term in the Simplicity case, the large buyers were able to find other methods by which they could obtain the same kind of preferences and one of the most prevalent devices involved was that of brokerage.

Now, the legislative history indicates that the concern of Congress in the brokerage clause, the problems that were presented to it was things known as bogus brokerage, the situation in which the seller either set up a dummy corporation or appointed a clerk in his office and said he is my broker pay him the brokerage.

That is we — we concede that is the basic problem that was called to the intention of Congress in dealing with brokerage.

But —

Felix Frankfurter:

There’s no suggestion that this case is a mere efficient brokerage case.

Daniel M. Friedman:

Not in that sense.

Felix Frankfurter:

Well, in any sense?

Daniel M. Friedman:

No.

Felix Frankfurter:

I’m not — I’m not questioning the general proposition.

I just want to know if your general proposition may slip this case presented.

Felix Frankfurter:

I just want to know if the contention here is — if this is a blind of an evasive — a factually evasive —

Daniel M. Friedman:

Oh no, no.

No, the — the contention here is that when the —

Felix Frankfurter:

Commercially innocent, prior concern.

Daniel M. Friedman:

Commercially innocent, but we think in violation of —

Felix Frankfurter:

I understand (Voice Overlap) —

Daniel M. Friedman:

— provisions, yes.

Felix Frankfurter:

— but I mean commercially it didn’t (Inaudible)

Daniel M. Friedman:

In that sense.

Felix Frankfurter:

In — in that sense?

Daniel M. Friedman:

Yes, Mr. Justice.

Felix Frankfurter:

All right.

Charles E. Whittaker:

Mr. Friedman, I understand also Justice Frankfurter that (Inaudible)

Daniel M. Friedman:

That is correct, Mr. Justice.

Charles E. Whittaker:

Totally dependent that these facts may lead you and make yourself this far after $1.25 that is $1.30 if this broker would reduce his commission from 5% to 3%.

Daniel M. Friedman:

That is correct.

Charles E. Whittaker:

You don’t think there was any kickback now worth probably to the Canada Company, or I would say device (Inaudible)

Daniel M. Friedman:

Well, we don’t claim a kickback in that sense, but we do claim that indirectly, in effect, the American broker passed part of his brokerage over to the buyer by the device of a lower price made possible.

Charles E. Whittaker:

(Voice Overlap) but not to its own.

Not to present it with the broker.

Daniel M. Friedman:

The broker, yes.

We don’t reach in this case whether the Canada seller had violated the Robinson-Patman Act.

The Commission didn’t proceed against it because of the fact that the Canada Company is possibly subject to its jurisdiction, but there’d be no effective way of enforcing an order against it.

Charles E. Whittaker:

But do you concede that there is (Inaudible)

Daniel M. Friedman:

The seller was Canada Foods.

Charles E. Whittaker:

Not — not Broch?

Daniel M. Friedman:

No.

Broch was just a broker.

(Inaudible) against Canada it must’ve mean you have it drawn two ways?

Daniel M. Friedman:

Well, I think —

— discrimination to be subject to (Inaudible) absence and what go to that section which you don’t buy (Inaudible)

Daniel M. Friedman:

Well, to some extent at least it — it’s I — it’s a difficult question to what extent 2 (a) and 2 (c) overlap.

Certainly, to whatever extent the reduction in price by the Canada company did not reflect the savings in brokerage.

To that extent, of course, it’s subject to all of the defenses —

Charles E. Whittaker:

(Inaudible) and if I understand firm, to get down to the — may this broker give a part from his commission to his (Inaudible) and under the — without violation of the second, is that right?

Daniel M. Friedman:

Where the giving of the commission was designed and enabled to result in a lower price to this particular broker.

Charles E. Whittaker:

Well you wouldn’t — it would necessarily result into a price to the extent of this — if you have production such as these.

Daniel M. Friedman:

Yes.

We — we think analytically, Mr. Justice, this case is no different than if the seller had charged his full price, $1.30, but then the broker together with the — the buyer had gotten into an arrangement and the broker had rebated part of his commission.

We think in terms of the basic purpose of the Robinson-Patman Act that wouldn’t make any difference.

Charles E. Whittaker:

The broker, not the seller?

Daniel M. Friedman:

The broker, that’s right.

We think if a broker — if a broker rebates part of his commission directly to the seller, that is one of the things that the Robinson-Patman Act prohibits.

Charles E. Whittaker:

And assuming his broker is not an agent, hasn’t been a defendant here.

Daniel M. Friedman:

He is an — he’s an independent broker.

Earl Warren:

Yes.

Daniel M. Friedman:

That is — we’re not claiming, in this case, any liability on behalf of the broker vicariously through the seller.

This — the means by which we think this violation was accomplished was, in effect, the passing through in this roundabout case.

Felix Frankfurter:

I’m not questioning any of your legal objections or indications you draw, but you said same as those of a rebate, but you gain out of his own — he’s an independent agent.

He’s an independent functionary in the — in the industrial process and his rebates that you call it out of his own pocket, out of his own money.

Daniel M. Friedman:

That’s right.

If in this case the 5% had been paid over to he broker and then the broker had turned around and given —

Felix Frankfurter:

Without any — without any conspiratorial or cooperative participation by the seller.

Daniel M. Friedman:

By the seller.

That is correct.

Felix Frankfurter:

That is correct.

Daniel M. Friedman:

That is —

Felix Frankfurter:

That is that — is an insulation and he is the conduit of the seller.

Daniel M. Friedman:

Well, we think that when —

Felix Frankfurter:

I don’t mean as end result.

Felix Frankfurter:

I — I wonder, if I get —

Daniel M. Friedman:

That — that is —

Felix Frankfurter:

— what is the concrete, naked prospect on which legal conclusion is drawn.

Daniel M. Friedman:

Yes.

That is correct, Mr. Justice.

Felix Frankfurter:

Alright.

Daniel M. Friedman:

Now, we think the reason for that is again in terms of the basic purpose of the Robinson-Patman Act which is to protect the small buyers from the fact that the large buyers with their mass purchasing power are able to exert pressure upon the sellers to get concessions not available to others.

In terms of the end result of what happens in these cases where brokerage is passed by, as far as the buyer who is not the beneficiary of this thing — it really doesn’t matter, we don’t believe, whether the brokerage is paid over directly by the seller himself.

In other words, he actually gives part of it back or whether it’s the buyer, the broker himself who splits it.

In either event, the next consequence of this type of arrangement is that the buyer who is the large buyers in this case by virtue of putting pressure upon the seller demanding concessions is able to get something that the smaller buyer cannot receive.

William J. Brennan, Jr.:

(Inaudible) the absolute only pressure the buyer put on anyone here was to pay $1.25 and not $1.30.

Daniel M. Friedman:

That is correct.

William J. Brennan, Jr.:

And actually the extent of which that five-cent difference is made up was that the vendor absorbed, in effect, half of it than the broker —

Daniel M. Friedman:

That is correct.

William J. Brennan, Jr.:

— absorbed the half.

Daniel M. Friedman:

That’s right and we claim it’s the half that the broker has absorbed that is involved in this case.

That — that is what we claim the allowance that the broker has made.

William J. Brennan, Jr.:

But the issue is whether that does violence (Voice Overlap) —

Daniel M. Friedman:

That’s correct.

And the —

Charles E. Whittaker:

(Inaudible) and you have used — used whether this was — the money was passed over to the buyer was why the Canada Food or by the broker that the consequence is the same, did I understand you to say that?

Daniel M. Friedman:

Well I — what I meant to convey was that in terms of the violation of this section of the Act, it would equally be a violation, whether the seller passed brokerage over or whether the broker passed brokerage over, because in terms of the ultimate effect, it makes no difference to the recipient, the form in which he gets back some part of the brokerage that was —

Charles E. Whittaker:

Well, in fact, (Inaudible) is dollars in the buyer’s option, but it would be positive violation of law would it not, for the seller to make a reduction to this particular buyer and does not sell to him on substantially equal time.

But would it be, if this — the broker out of his own goodness of heart may give — paid his own money —

Daniel M. Friedman:

Well —

Charles E. Whittaker:

— over to the buyer.

Daniel M. Friedman:

We — we think it would, Mr. Justice, because we think the record here shows that the broker as you say did not do it out of the — his own goodness of his heart, he did it because this was the only way he could close this large deal.

Charles E. Whittaker:

How could this at my point have a half the whole price is there’s none?

Daniel M. Friedman:

That’s right.

And we think that Congress has prohibited that kind of thing in this situation because of what we believed to be the deleterious effect upon competition.

Daniel M. Friedman:

I’d like to turn now to Section 2 (c) of the Act.

Potter Stewart:

Before, well — that — that’s just as you’re right here and I — on these facts would the — would the buyer, Smucker be guilty of violation of 2 (c)?

Daniel M. Friedman:

That is a — a difficult question, Mr. Justice.

Let me say that the Commission has never proceeded against a buyer under 2 (c), unless there was anything — something to indicate that he was a knowing participant in the situation.

In this case, that the evidence is uncontradicted that the Smucker, the buyer, did not know what the broker’s arrangements were.

There have been cases, of course, in which the Commission has proceeded against brokers where they were a party parcel about —

Potter Stewart:

Against — against buyers.

Daniel M. Friedman:

Against — against —

Potter Stewart:

You said brokers.

Daniel M. Friedman:

Against — against buyers too, where the buyer has received it.

But there it would have to be, we think, something more than the mere passage over without any knowledge on the part of the buyer.

Potter Stewart:

The buyers — did the buyers’ conduct here be covered by the literal language of the proceeding?

Daniel M. Friedman:

Well, to — to say — to me, is the — a very —

Potter Stewart:

The literal language was a flattering language, I’m not sure.

Daniel M. Friedman:

There’s not — there’s no — there’s not in here that makes it — puts on a requirement of knowingly on the part of the buyer.

On the other hand, we don’t think that Congress intended in this section to penalize the innocent buyer who gets the brokerage in — in circumstance where he didn’t know it was an allowance in lieu of brokerage.

Potter Stewart:

The purpose is like, what’s behind my question to this?

You — you in your argument stated in your brief, and rely very heavily on the literal language of the statute saying that the particular — particular evils calling the attention of Congress are not the relevant on the language of the statute, literally covers the situation and my question was whether the literal language of the statute didn’t also cover the buyer?

Daniel M. Friedman:

Well, the literal language of this statute might possibly be construed to cover the buyer, but we think in the light of the congressional purpose that there’s one purpose to be served by applying this statute to the seller and to the broker and that it’s a different situation when you deal with the buyer, because we think what Congress intended to do in making it applicable to the receipt of brokerage or an allowance was to catch the situation where the buyer knowingly participates in this situation.

Now, the statute insofar as the first question of whether it applies to the sellers’ broker and not just to the seller, and broadly would seem to cover it, at least, on the face of it which is — it says, “Any person engaged in commerce,” this is page 2 of our brief, “makes it unlawful for any person to pay or grant, anything of value at the commission, brokerage or any allowance or discount in lieu thereof, to the other party to a purchase and sales transaction.”

Well any person certainly includes a broker, isn’t limited to the seller and we think that the — on the side of the transaction, the other party, the transaction this situations of the buyer.

Now, we also believe that this construction is further supported by the legislative history of the Act and also by what we think would be a serious loophole in the Act, if it were held not applicable to sellers’ brokers.

As we have indicated in our brief, one other thing that the legislative history indicates is that the Congress was concerned with the basic act of passing over brokerage.

William J. Brennan, Jr.:

(Inaudible)

Daniel M. Friedman:

The significance is to make — to make it clear that it’s intended to reach the passing over of brokerage between the seller side on the one hand and the buyer side on the —

William J. Brennan, Jr.:

And (Inaudible) specific to our facts, passage over by the broker himself —

Daniel M. Friedman:

To the buyer.

The other party to the transaction here is the buyer.

The theory is that the broker in this case granted an allowance in lieu of brokerage to the buyer when he accepted a lower price.

And —

William J. Brennan, Jr.:

So the buyer and not the seller.

Daniel M. Friedman:

Even though the buyer knew nothing of it.

And that was my answer to Mr. Justice Whittaker’s question as to whether, in this situation, the buyer was — had violated this section whether it’s very dubious.

Charles E. Whittaker:

(Inaudible) to proceed without letting both the parties in this transaction.

Daniel M. Friedman:

Well, I think, in a sense, you may say there were three parties to this transaction.

On the one side is the buyer and on the other side is the seller and the broker.

Charles E. Whittaker:

The broker (Inaudible) this and you said the broker in making the sale in this Canada Foods and the market?

Daniel M. Friedman:

Well, he’s — he’s just a broker, but he was certainly a party in the sense that he was an active participant in it.

It doesn’t — Mr. Justice, this does not limit it to sellers or buyers.

It uses broader language and now we think that it was intended to get everyone of these situations.

Charles E. Whittaker:

(Inaudible)

Daniel M. Friedman:

That’s right.

And we think the other party to — if it speaks of the other party to such transaction and the other party to such transaction to the sale transaction, we submit, is the buyer and if the buyer to whom the brokerage was paid over.

Now, if the decision of the Seventh Circuit is correct and that this only applies to a seller, and not to a seller’s broker, this could lead the way, we think, to a serious loophole in the Act because as I’ve indicated previously, if all that is prohibited here is the passing over of brokerage by the seller, a seller can charge the buyer his regular price, but then an arrangement can be entered into without knowledge to the seller between the broker and the buyer.

In other words, the broker can say to the buyer, “Well you make the transaction at $1.30 at the regular price, but after I get my commission, I’ll pass some of it over to you.”

Now, this, it seems to me, is — is precisely again the kind of thing that Congress was concerned with in the Robinson-Patman Act.

This business of a large buyer being interested in getting a lower price and he doesn’t care how we gets it and the seller because of the large size of the order, because of the fact that he’s dealing with the big buyer, gives him a concession which is not available to the others.

Now, it’s the same basic policy which we think further supports the Commission’s alternative point here, the other ground which was objected by the Court of Appeals, that in the circumstance to this case, Broch actually granted an allowance in lieu of brokerage, when in order to make possible the sale to this particular large buyer, he accepted less than his agreed upon rate of commission.

Several things are — must be recognized here that he did have an agreed upon rate of commission.

The contention was made before the Commission that there was no fixed 5% rate of commission.

That it was subject to confirmation and negotiation in each sale, but didn’t apply to large sales —

William J. Brennan, Jr.:

(Inaudible)

Daniel M. Friedman:

That is correct.

William J. Brennan, Jr.:

And the way there’d be a conflict in it by the views of the seller or by a deduction.

Daniel M. Friedman:

That’s right.

William J. Brennan, Jr.:

That he accepts 3% instead of the 5%.

Daniel M. Friedman:

That‘s right.

In circumstance, if I may add one thing Mr. Justice, in circumstances where it’s clear that the acceptance of the lower brokerage was the sine qua non of the lower price from the seller to the buyer.

Now, I — I think it’s significant to point out that in this very case, at the — the same day that this arrangement was entered into with Broch, the seller rejected the offer of Phipps, the other broker for $1.30 and said to him, you’ll have to cut the brokerage.

That was the end of it.

Daniel M. Friedman:

So that, this is not a case where there’s just a coincidental reduction of brokerage and then at some later time there is a reduction in price.

This is directly and intimately connected.

That one would not have happened without the other.

Supposing the broker has asked (Inaudible)

Daniel M. Friedman:

In this particular — and then there was a reduction.

No, I don’t think so Mr. Justice because the Commission’s position is that whenever a brokerage is — whenever an allowance is made to the seller requesting a lower price in lieu of brokerage, when you’d find this causal connection between the reduction in brokerage and the passing on that is what is prohibited by Section 2 (c).

Charles E. Whittaker:

And not because of (Inaudible)

Daniel M. Friedman:

We — we don’t think so, Mr. Justice, because we think that the Court’s justification provisions must be read in the light of 2 (c) and if a particular allowance in lieu of brokerage is prohibited by 2 (c), we don’t think they can then turn around and treat it as an item of cost saving under 2 (a).

Charles E. Whittaker:

(Inaudible)

Daniel M. Friedman:

No, Mr. Justice.

In this — in this very case for example, Broch received 5% and the other brokers received 4%.

It depends basically on what the arrangement is.

A seller is perfectly free to enter into an arrangement with his broker to negotiate from transaction to transaction.

Charles E. Whittaker:

But what he makes the rate is (Inaudible) adjusted from sale to sale.

Daniel M. Friedman:

He cannot adjust it from — he cannot adjust it from sale to sale if what he is doing is passing on the particular savings in brokerage in the particular case.

He can, of course, enter into any arrangements he wants with his broker.

He can say to a broker, “On large sales you’re only going to get 3%.”

Charles E. Whittaker:

(Inaudible)

Daniel M. Friedman:

No, Mr. Justice.

As long as the price is the same, as long as he charges $1.30 to everybody, it doesn’t matter what he pays this particular broker on a particular sale, but as soon as he takes the savings to the brokerage on a particular sale and uses that as the means for passing over a reduction, a lower discriminatory — lower price to a particular buyer, then, we think, he runs afoul of Section 2 (c).

There’s no doubt that Mr. Broch can make his (Inaudible)

Daniel M. Friedman:

Yes, if we could have gotten —

You could’ve and you say that because that would be a pure price discrimination in your view, unless, it was justified under the 2 (a) defenses is that right?

Daniel M. Friedman:

Well, we suggest that the seller, in this case, may also have violated Section 2 (c).

Now, as he — he also was a participant in passing over this brokerage.

You mean as sort of a conduit type?

Daniel M. Friedman:

Well, he — he was the one who himself, of course, made the lower price avail — no, they both had to pass over.

Well, he gave — the seller gave this customer a price reduction.

There’s no doubt about that —

Daniel M. Friedman:

He gave him a part of the —

— of price discrimination and the question under 2 (a) would have been whether it was a justifiable price discrimination?

Daniel M. Friedman:

But we don’t —

And you say that because the — of the presence who have broker here and the transaction between the seller and the broker that economically, that price discrimination was made feasible or easier for the seller that that brings the transaction under 2 (c).

Daniel M. Friedman:

Because we believe that Congress has made the judgment that when you — because brokerage in the past had been so susceptible of abuse, has been so abused, Congress, we think, has made the determination that when it comes to brokerage, you cannot pass it on directly or indirectly to the other party.

And —

Felix Frankfurter:

That you may not (Voice Overlap) —

We’ll have to do some reading in the Act.(Voice Overlap) —

Daniel M. Friedman:

No, it hasn’t.

On the other hand, the Committee Reports which we cite in our brief do use that.

It hasn’t said it indirect — directly or indirectly but —

Felix Frankfurter:

And the statute doesn’t serve your purpose, you go the Committee Report, that’s the end of the line.

Daniel M. Friedman:

Now, we think that in the light of the Committee Reports, we think that fairly read, granting brokerage or an allowance or discount in lieu thereof includes not just a payment over of money, but also this kind of thing —

Felix Frankfurter:

You say in lieu thereof?

Daniel M. Friedman:

Yes.

Felix Frankfurter:

Even that, of course, doesn’t say directly or indirectly.

Daniel M. Friedman:

No, but it’s a —

Felix Frankfurter:

But indirectly has different scope and connotations than in lieu thereof.

Daniel M. Friedman:

But we think that the — this —

Felix Frankfurter:

Indirectly, it doesn’t hit this kind of an arrangement.

Daniel M. Friedman:

We — we suggest that this indirect payment is, in fact, an allowance in lieu of brokerage.

Tom C. Clark:

Suppose they have paid the brokerage (Inaudible)

Daniel M. Friedman:

You paid the full brokerage?

Tom C. Clark:

(Inaudible)

Daniel M. Friedman:

Well, there wouldn’t be — you mean if the seller had reduced his price by five cents.

Tom C. Clark:

Claim cost justification.

Daniel M. Friedman:

Well he couldn’t — I don’t think, Mr. Justice, he could claim cost justification, unless he showed that he was paying less brokerage.

Now, the — the problem of cost justification arises where the broker takes a lower commission and then the seller reduces his price accordingly and claims of a cost justification that his cost will lessen this sale because he paid less brokerage.

Now, I also want to emphasize something.

Tom C. Clark:

(Inaudible)

Daniel M. Friedman:

Pardon?

Tom C. Clark:

You explain it by (Inaudible)

Daniel M. Friedman:

That is right and we don’t — we don’t believe in this — in this kind of situation that the seller can cost justify, can’t treat as a — item of cause which may be justified, the fact that he pays a lower brokerage, which in then in turn is passed on (Voice overlap) —

Tom C. Clark:

I was saying as (Inaudible) Are you saying that then the (Inaudible)?

Daniel M. Friedman:

Apple concentrate.

Tom C. Clark:

Apple concentrate, (Inaudible) so he just passed that on —

Daniel M. Friedman:

That would be —

Tom C. Clark:

— in case — in case the brokerage — the brokerage but that would be flowing —

Daniel M. Friedman:

Oh, no, because that would be cost — cost justifying, but in this situation what he did was — this is a situation which we think that there are no inherent economy that manufacturer a production.

This is a case where the brokerage which is when element of the transaction was reduced and it was reduced from a situation where in effect, the broker we think has part of it in over.

Tom C. Clark:

Half of it.

Daniel M. Friedman:

Half of it, yes.

Tom C. Clark:

(Inaudible)

Daniel M. Friedman:

Well, we don’t know because we didn’t proceed against the seller and, of course, the seller is a Canadian company.

Now, I’d like to make one other point — two other points briefly.

The first of it is that Broch repeatedly suggests that called this an open discrimination, one which he said is apparent from the face of the invoices, not a case were they purported to pay — charge $1.30 and then secretly sneak something in under one guise or the other.

Here, admittedly, they cut it down to $1.25 and he suggests, this is not the kind of thing that the brokerage clause was intended to reach.

Charles E. Whittaker:

Does he use the word, discrimination?

Daniel M. Friedman:

Pardon?

Charles E. Whittaker:

Because you said an open discrimination, does he use the —

Daniel M. Friedman:

No.

He says an open price reduction, I’m sorry.

Charles E. Whittaker:

(Voice Overlap) —

Daniel M. Friedman:

Now, of course, when he said this was open, this wasn’t open in the sense that anybody knew about it.

When this kind of favoritism takes place, it’s not generally announced and in fact, after the buyer, the competing broker Phipps discovered what it happened when he found out that his sale had been lost to other broker, he wrote to the seller and asked him whether he said he was very surprised with this and he said he hoped that all the other brokers were getting the same price.

And they weren’t being treated on more favorably and at this point, the seller justified that the he didn’t answer this, but Phipps subsequently testified that in a later phone conversation with the broker he asked the broke — the seller rather, Phipps asked the seller whether in fact the price was still $1.30, if anyone would get less and this man said, “No, everyone’s paying $1.30.”

Now, finally, I want to discuss the arguments strongly pressed here by the respondent and relied on by a Court of Appeals which is that — they said that — and they argue here that this construction of the statute by the Federal Trade Commission contravenes what they call broad general national antitrust objectives.

The argument is that this has the effect of freezing brokerage commission.

That since you can’t adjust them down and wouldn’t pass it on, this is directly contrary to the basic premise of the Sherman Act, favoring free and vigorous competition.

The answer, we think, to that is basically a simple one which is that while there’s this general policy of favoring vigorous competition, nonetheless, Congress has made the determination that there is certain types of competition that in the long run will harm rather than further the competitive system.

Types and practices which result in the large buyer being able to get a competitive advantage over the smaller one, and thus we think that what Congress has done in this statute is to say that there’s an exception to the general policy of competition, the exception is that there are certain types, certain specific practices which must be proscribed.

Daniel M. Friedman:

And one of those practices is the passing on of brokerage directly or indirectly, we think, the passing of brokerage to the buyer, to the large buyer in this situation where the buyer is able to get this benefit not accorded to the others, not as the result of any superior efficiency of its own operation, but solely as the result of his superior purchasing power.

Thank you.

Earl Warren:

Mr. Bison.

Henry J. Bison, Jr.:

Mr. Chief Justice, may it please the Court.

I wish to express my appreciation to this Court and to the Solicitor General and to my colleague, Mr. Friedman, for these 10 minutes to address you.

The burden of my argument here this afternoon is to examine the practical competitive effects of the decision below within the framework of the structure and the marketing practices in food distribution and to deal here with practical results.

I’m representing here, Your Honors, the independent operators of supermarkets and food stores across this land.

The membership of this association is composed of local and community food store operators who operate small stores, supermarkets, superettes of all kinds.

Some of them operate more than one store, but all are community business people and they buy their merchandise through voluntary groups, through cooperative groups or retailers affiliated together to get cost-efficiency, so they can buy merchandise on a plane of relative equality with the large chain.

Some of our members also buy through independent wholesalers.

Some of them buy through — with manufacturer direct.

So, what I’m doing here is really representing the broad group of independent retailers as we known to be today whether they operate supermarket or one or two stores, they’re ultimately business people.

William O. Douglas:

Do — any of your people do joint purchasing pooling all their quarters?

Henry J. Bison, Jr.:

Yes, Mr. Justice, a great many of our people — the majority of our members are members of what is called the voluntary buying group or cooperative buying group.

And that, of course, resulted because there’s a retailers affiliate together and they’re buying and they’re purchasing that makes it possible for them to buy merchandise on a — on a better basis.

William O. Douglas:

Or does — does the joint purchasing power of your group, is that comparable to the purchasing power of the respondents?

Henry J. Bison, Jr.:

No, it is not.

I might say that the largest buying group in the country today, Your Honor, sells to its 1446 members, wholesale $300,000,000.

Whereas, the largest chain — largest food chain in United States, they sell at retail $5 billion and has some 4777 stores and operates in 37 states.

So there’s no comparison between the purchasing power of the buying groups through which independent purchaser merchandise and the large corporate chain.

The retailers that we represent here, Your Honor, are buyers and they are interested as much as anyone else in purchasing their merchandise at the lowest possible cost.

And if we thought that the price reduction that’s taken place in this case, would come to the independent merchants and they would share on some basis of equality with the large chain, we wouldn’t be here today.

But we know, we know from history and we know from experience that the price cut that we’re talking about here today, went by the facts of this case, to the one tremendously large buyer of apple concentrate, 500 barrels.

And the burden of our argument today is simply this that if there’s to be a price cut which is going to be made on the basis that all the customers of this supplier going to share and it — and so they can all compete with each other on some plane of equality at the retail level, we want it.

But if this is to be a price concession given to a favored mass buyer by reason only of his mass purchasing power and not by reason of his efficiency, then we know that the community store operators, the community supermarket operators are going to be placed at very severe competitive disadvantage.

Potter Stewart:

So this is the price that in this case, the buyer was Smucker or some name like that?

Henry J. Bison, Jr.:

The buyer was Smucker.

Potter Stewart:

That was a — a manufacturer.

Henry J. Bison, Jr.:

That was a manufacturer.

But this —

Potter Stewart:

Manufacturer of what, apple butter or what?

Henry J. Bison, Jr.:

Apple butter and jams, jellies, that sort of thing, but the principle here would apply to a large chain and community store operators buying apple butter or buying any other because the same principle would apply.

That is if the Seventh Circuit’s ruling is upheld, that seller’s brokers are not covered by the Section 2 (c), then it’s clear that the large buyer can demand and receive from a seller’s broker, a substantial direct rebate as a part of that — of his commission.

And our — burden of our argument, Your Honors, is simply this, that we, the community food merchants of this country will not get this price cut.

Felix Frankfurter:

You’ve introduced another factor when you said the big buyer will — will demand.

Henry J. Bison, Jr.:

That’s right.

Felix Frankfurter:

— the actions of this case.

Henry J. Bison, Jr.:

Well, the big buyer in this case, Mr. Justice —

Felix Frankfurter:

I am not speaking of the small (Voice Overlap) —

Henry J. Bison, Jr.:

I —

Felix Frankfurter:

— the participations of the buyers, that leaves another element.

Henry J. Bison, Jr.:

I understand.

Now, the big buyer, in this case, simply said, we won’t buy at anything but $1.25.

Well, the point that we want to make here is that if the Seventh Circuit’s ruling is upheld, then the large chains can say the same thing knowing that the seller’s broker representing tanners and representing processers in the industry, is not covered by that section and he can make a direct payment to the mass buyer and do so outside of the provisions of the Robinson-Patman Act.

Charles E. Whittaker:

(Inaudible)

Henry J. Bison, Jr.:

In some items, Mr. Justice, it is, in some it is not.

It depends upon the sales practice of the manufacturer involved.

For instance, in soap, many cases a — an organization, a store that has its own warehouse can buy direct.

It depends on the manufacturer’s sales practices.

Charles E. Whittaker:

(Inaudible)

Henry J. Bison, Jr.:

That’s correct, Your Honor.

Charles E. Whittaker:

Just like Mr. Broch.

Henry J. Bison, Jr.:

Just like — just like Mr. Broch did and that’s the point.

You see, here’s the mass buyer with this tremendous purchasing power saying to the broker, “Well, sure I will give you this order.

I’d be happy to give this order, only I want so much.”

Well, now all we’re saying Your Honor is simply this.

If this was a cost justified price cut, so that it went and reached community food store operators across the country equally, so that they could compete with the large chain, at the retailer, fine, we want to buy our merchandise at the lowest possible cost, but we know that this will never reach the community food store operator because it’s only mass purchasing power which brings about this rebate from the broker.

Now, these are the realities that Your Honors that you have to consider in — in dealing with this law because this law was passed to cure an economic problem and mainly in from distribution, where competition between the tremendous buyer of $5 million annual sales and here’s a little store across the street with sales of $350,000 or $500,000 in competing against a unit like that.

What you conceive they weren’t rules, there’d be no possibility of — of any — any competitive race.

I believe my time is up.

Henry J. Bison, Jr.:

I appreciate this opportunity and thank you.

Earl Warren:

Mr. Rowe.

Frederick M. Rowe:

Mr. Chief Justice and may it please the Court.

In the brief time available to me, I would like to bring back the somewhat atmospheric discussion to the issues presented by this case before the Court and try to cover briefly some of the points raised by the questioning of several of the Justices.

First, both the Commission and the amicus curiae supporting the Commission on this case, have invaded vigorously and vehemently against the so-called big buyer, his exactions, his discriminations and his coercions.

I think this makes it all — almost conspicuous and prominent in this case that is not a case against the big buyer.

The Commission on the — in this case, in fact, desisted and refrained from invoking the applicable prohibitions of the Act on the price differentiations and cases against buyers and sellers and instead resorted here after 20 years of administration of the Robinson-Patman Act to an unprecedented theory never before even tendered to a court whereby a broker accepting a smaller rate of commission in a competitive situation is charged with in making — making a so-called indirect payment by him over to the seller, over to the buyer and all the time, the buyer didn’t know it and the seller didn’t know it.

The Court inquired as to the possibilities of the cost justification, if a case had been brought against the seller on these facts and I believe it was Mr. Friedman’s explanation that in a case of —

William J. Brennan, Jr.:

Mr. Rowe (Inaudible)

Frederick M. Rowe:

Yes, sir.

In the statute, there is a section governing the receipt of price variations by buyers, Section 2 (f) which was before this Court in the Automatic Canteen case 2 (f), yes.

And once again, just in the case of a suit against the buyer for paying a lower price if a suit had been brought against the seller for receiving a lower price, it would have been perfectly obvious that there would have been no violation whatsoever of the statute, because the open price reduction here at bar, had all the earmarks of legality, if tested by the standards of these provisions.

Namely, it is clear in the record that there were significant cost economies to the seller in making this transaction and in making this sale, because as he testified and there’s no contradiction of that in the record, they were savings in freight, savings in processing, savings in customs and saving in the brokerage commission.

Are those defenses available under 2 (f)?

Frederick M. Rowe:

Yes, sir.

They are available under 2 (f), because under the law of 2 (f), it requires an illegal transaction by the seller to the buyer to also charge the buyer with the legality.

I believe that there was also a suggestion that the price, the lower price given to the buyer could not have been cost justified.

I don’t know whether there was any further explanation of why not, but certainly the theory that a price reduction could not be cost justified by reference to savings and brokerage commissions would read out of the Act the express proviso whereby Congress guaranteed that the economies of distribution could be reflected on lower prices to the consumer and there was no exception for these economies insofar as brokerage commissions were concerned.

As a matter of fact, there was a proposal to that effect addressed to Congress in 1936 at the time the Act was passed, there was a proposal before the Committee to accept from the permissible cost savings, those costs attributable to broker’s fees and that provision was stricken from the statute in conference.

I have in our brief the explanation for the action by Senator Logan who was the Chairman of the Subcommittee considering the bill and who was the Senate Manager of the bill.

Senator Logan explained to the Senate at that time, in the second section of this Committee amendment of the provision that in making the — a discrimination or differentials or whatever who may choose to call them, all costs other than brokerage shall be allowed and it has been said that the words, “other than brokerage,” in that section ought to go out.

I have thought a good deal about that suggestion.

I think that perhaps legitimate brokerage ought to be allowed as a part of the costs and I think when the bill was drafted, I did not write the bill, perhaps in the amendment which was inserted by the Committee we had in mind dummy brokerage, sham brokerage.

In other words, this provision was stricken out by the Conference Committee and we believe completely deflates the suggestion which has been tendered here that a seller’s price reduction for some reason unexplained in the statute and perhaps referenced to the basic policy rather than a text, may not be justified by reference to cost economies just as any other economies of distribution when a seller makes a price to a buyer.

What we have in this case Your Honors is in effect, an unprecedented issue of statutory interpretation whereby the Commission would, in effect, render illegal a competitive price reduction which would be cost justified and lawful under Section 2 (a), if it had been proceeded against, as it should have been properly, against the parties to the transaction.

And it has done this by invoking this novel theory whereby a seller’s broker is charged with making an illegal rebate by accepting a lower commission and then this lower commission then somehow gets on over to the buyer through the instrumentality of the lower price by the seller.

We believe this is the first case in which this theory has been urged.

We believe this theory has no relationship to the text of the statute, to the congressional purpose as expressed in the legislative reports as we have it and also to the policy of the Robinson-Patman Act which has been adverted to — by counsel for the Commission.

This Court very recently —

Potter Stewart:

Mr. Rowe, if I may, you said that the conduct here has no relationship to the text of the statute.

Potter Stewart:

Do you mean by that to say that it is not covered at all by the literal language of the statute?

Frederick M. Rowe:

It is not covered at all by the literal language of Section 2 (c).

Potter Stewart:

That’s (Voice Overlap) —

Frederick M. Rowe:

It was an open competitive price reduction, Mr. Justice Stewart, which if at all, should have been proceeded against under the provisions of the statute governing price variations.

Potter Stewart:

Well, I’m accepting for a moment the finding of the Commission, I understood — I understand that they found that what in fact happened here was that the broker, the respondent, your client, passed along part of his brokerage.

Now, accepting for the purposes of the argument that finding, if there was one, would that constitute a violation of the literal words of the — on Section 2 (c) or wouldn’t it not?

Frederick M. Rowe:

Mr. Justice Stewart, we do not agree with the Commission’s premise that this was a finding of fact because the Commission when it rendered its opinion treated this as a legal conclusion on a question of statutory interpretation as to the Court of Appeals.

Potter Stewart:

Making analysis by it, that’s a better word.

Frederick M. Rowe:

Yes, sir.

If there had been in truth and fact, in this case, which there was not, an actual taking of money by the broker out of his pocket and paying it over to the buyer who obviously in such a situation would be in connivance with the broker, we say that the broker in such a situation could be charged with having accepted — having accepted money from the seller on behalf of the other side of the transaction.

And this is also our reason for saying that some of these evils which have been described here which might be permissible if the Court of Appeals were affirmed, simply are remote from the holding below, because in such a situation where the buyer coerces brokerage fees from the broker, there is no question, but that there could be liability under the statute as it had been construed over a period of many years.

The departure comes in where the Commission says that the broker’s acceptance of a lower commission is in fact a payment to him — payment to the buyer by the broker.

Of some significance also generally to this case, we believe that this is the first case in many years in which the Federal Trade Commission in presenting a case to this Court involving one of the Antitrust Laws has been joined by a private group of businessmen and not by the Antitrust Division of the Department of Justice, which is charged with parallel enforcement of the Clayton Act and which customarily signs the Commission’s brief, but has declined to do so in this case.

The petition of the Solicitor General in this case, has an express notation that the Department of Justice in this case is appearing merely as the legal representative of the Commission and is expressing no views of its own as to the policy issues that may be involved.

We think that it is quite significant, Your Honors, because we have urged in this case from the outset that the net effect and the sum and substance of the Commission’s theory of this case would be to prevent the reduction of broker’s commissions in competitive transactions and in effect, to freeze and stabilize and maintain the levels of broker’s fees against competitive adjustment in the course of normal price bargaining.

The Justice Department, in similar situations involving mechanisms to stabilize brokerage commissions, has consistently prosecuted such conduct as an illegal restraint of trade in violation of the Sherman Act and, in effect, is prohibiting and prosecuting the very type of conduct which the net effect of the Commission’s theory as urged here, before this Court would promote.

In fact, the situation (Inaudible) the effort of the seller’s brokerage pays (Inaudible)

Frederick M. Rowe:

Mr. Justice Harlan, if there was an actual payment again of money which there was not in this case, we believe that the broker again might be and no court has done so today, because the case is never arisen before a court, in such a case, the broker might be charged with having taken money from one side for the benefit of the other side, but once again this was the fact of this case.

And so far as the policy of the Robinson-Patman Act is concerned, only last term, this Court’s Simplicity Pattern opinion had occasion to discuss the policy of the Robinson-Patman Act and as I understand the discussion and analysis of the Court in that case, it is that the Robinson-Patman Act intends to foster and preserve open and competitive price reductions, because when price reductions are open such as they are here, they can be measured against cost economies which accrue from such transactions, so that benefit of more economical processes may be passed on from the seller to the customer and ultimately to the consumer.

In this case, where there has been much discussion about the benefits to the small dealers, we think it is highly significant that after the main briefs in this case were filed, the Brookings Institution published a scholarly survey and study prepared by the Federal Trade Commission’s former Chief Economist, Dr. Corwin D. Edwards, which has come to the conclusion that the Commission’s enforcement of this particular section, the so-called, “brokerage clause,” has in fact, been more harmful and detrimental to the best interests of the independent and smaller dealer than it has been to the interest of the chain stores against whom so much has been said here today even though the facts of the situation have no remote relationship to chain stores and no chain store’s a respondent in this case and the party to the case before this Court.

We believe the sole beneficiaries really of this type of enforcement of the Robinson-Patman Act which was never, never contemplated by Congress so far as we can discover, are the organized food brokers whose — whose commission rates would be insulated and protected by the Commission’s theory from competitive price reduction and who have boasted about this case and whose on the presence we believe pervert — pervade the entire proceeding before the Court.

This is the classic conflict, if Your Honors please, of a strained interpretation of the Robinson-Patman Act by the Commission beyond the congressional text and beyond the congressional purpose in direct conflict with the principle of competition codified in the Sherman Act.

Notwithstanding this Court’s admonitions to the Federal Trade Commission in the Automatic Canteen case to reconcile the Robinson-Patman Act with broader antitrust policies insofar as the text of the statute permits.

I don’t believe I have time to detail the salient facts and to go into the legal arguments as framed by the Commission, accepted to say that there is no issue before this Court and the facts of this case of any rebate payment or of any kickback payment.

Any discussions about the legal status of rebates or kickbacks or coercions by big buyers are purely hypothetical and have no relation to the issue before the Court.

What is more, there is no contest between us and the Federal Trade Commission on these points.

We have pointed out to the Court of Appeals in our briefs and we have reiterated in our briefs before this Court that in such situations as have been painted by the amicus curiae for the Commission and by the Commission itself, we do not contest that there may be liability, but those are simply not the facts at issue in this case before this Court.

Thank you.

Earl Warren:

Mr. Friedman.

We’ll — we’ll finish this afternoon.

Earl Warren:

We only have short time, I think.

Daniel M. Friedman:

Well —

Earl Warren:

(Inaudible)

Frederick M. Rowe:

I thought that Your Honor the case will be continued if —

Earl Warren:

Well, I thought you would quit —

Frederick M. Rowe:

I thought it was 4:30, sir.

I — I can continue on to finish the case, if I may.

Earl Warren:

Well — no, I don’t know.

I don’t want you finish, but you said thank you and offered to sit down.

I thought you finished your argument.

Frederick M. Rowe:

I’m — I’m very sorry, sir, if I gave that impression.

Earl Warren:

All right we’ll go until 4:30 and —

Frederick M. Rowe:

Yes.

Earl Warren:

— then we’ll recess.

Frederick M. Rowe:

Yes.

The Commission’s theory of liability against the respondent in this case rests on two legal premises, both of which we believe are erroneous and invalid and contrary to the statute.

The first premise by the Commission is that even though this is an open competitive price reduction, there is still a so-called allowance in lieu of brokerage here, which falls within the text and falls within the prohibitions of Section 2 (c).

William J. Brennan, Jr.:

Well, what do you mean by falls (Inaudible)?

Frederick M. Rowe:

We mean, sir, that in this transaction as reflected in the record the price is set forth in the invoices of the parties and — and open to inspection, so that comparisons maybe made by the Commission with alleged cost savings, if the occasion should arise.

Earl Warren:

We’ll recess now —

Frederick M. Rowe:

I’m sorry.