FTC v. Henry Broch & Company

PETITIONER:FTC
RESPONDENT:Henry Broch & Company
LOCATION:Approximately half-way between Santa Marta, Colombia and Miami. Florida (by water)

DOCKET NO.: 61
DECIDED BY: Warren Court (1958-1962)
LOWER COURT: United States Court of Appeals for the Seventh Circuit

CITATION: 363 US 166 (1960)
ARGUED: Jan 14, 1960 / Jan 18, 1960
DECIDED: Jun 06, 1960

Facts of the case

Question

  • Oral Argument – January 14, 1960
  • Audio Transcription for Oral Argument – January 14, 1960 in FTC v. Henry Broch & Company

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

    Earl Warren:

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

    Mr. Rowe.

    Frederick M. Rowe:

    Mr. Chief Justice and may it please the Court.

    This case continued from last Thursday, presents a novel and unique issue of statutory interpretation by the Federal Trade Commission of Section 2 (c), the so-called brokerage clause of the Robinson-Patman Act.

    Briefly, what we have here was an open and competitive price reduction by a seller to a buyer coupled with the acceptance by a broker of a lower rated commission, a price which has the earmarks of legality under those provisions of the statute relating to prices, the grant by sellers and the receipt by buyers.

    Instead of proceeding or invoking the provisions of the statute relating to prices by buyers and sellers under the statute, the Federal Trade Commission in this case invoked for the first time in the history of the Robinson-Patman Act over two decades, the theory under Section 2 (c), the brokerage clause, that the broker in this case by accepting a lower rate of commission on this transaction was guilty of having paid indirectly a so-called allowance in lieu of brokerage to the buyer.

    Is this the first complaint, you say, that’s been filed of this character?

    Frederick M. Rowe:

    Yes, sir.

    This is a unique situation.

    It was the first complaint of this sort filed in the history of the statute where the charge was that the broker’s acceptance of a lower rate of commission was tantamount to his having paid over an indirect allowance in lieu of brokerage to the buyer.

    The argument of the Commission to which we addressed ourselves on Thursday was principally the policy justification by the Commission for bringing this type of proceeding and for vindicating it, rather than the statutory basis and the — the precedence which bear on the problem.

    To summarize very briefly, on Thursday, we stated that the position of the Commission, namely, that its interpretation of the statute here was compatible with the policy of the Robinson-Patman Act against discrimination and in favor of the small merchant.

    Our position was that this was not the fact in neither event because the policy of the Robinson-Patman Act as interpreted by this Court quite recently in the Simplicity Pattern opinion and also previously in the Morton Salt case was to promote and foster open price reductions based on cost economies for the benefit of the customer and ultimately the consumer.

    And moreover, that the contention — that the policy of this case was in favor of the small merchant was rather paradox in view of the fact that the respondent here was a small brokerage partnership against which the Commission has proceeded rather than invoking the pertinent provisions of the statute against either the buyer or the seller.

    And moreover, in view of the fact that a brokerage institution survey and study prepared by the Federal Trade Commission Chief Economist after the main briefs in this case were filed and which we have referred to in our supplemental brief has come to the conclusion that the Commission’s application of this particular provision, the so-called brokerage clause has been more prejudicial and detrimental to the small independent distributor than it has been to the Chain-Store against which purportedly the Commission’s objectives in enforcing this section or directive.

    Earl Warren:

    Mr. Rowe, while you’re on the position of the Commission, Thursday, you made some statement as to the position of the Solicitor General, as I understood you, but I — I didn’t understand quite what it was, would you mind repeating that?

    Frederick M. Rowe:

    Yes, sir.

    I stated on Thursday that the Antitrust Division of the Department of Justice in — in this case had not signed the brief of the Federal Trade Commission although it customarily does so in cases involving one of the antitrust laws and moreover that the —

    Earl Warren:

    (Voice Overlap) sufficient that the Solicitor General himself does send an assistant here, isn’t it?

    Frederick M. Rowe:

    Mr. Chief Justice, in this case, I also pointed out that the petition filed by the Solicitor General in this case carried a special and — as I consider, unusual notation, at page 12 in the petition for certiorari which states, if I may read it quickly, “That in appearing herein as legal representative of the Commission, the Department of Justice intimates no views of its own as to the underlying policy consideration that maybe involved,” that is on page 12 in the footnote of the Solicitor General’s petition.

    We deem as particularly significant, Mr. Chief Justice, in view of the fact that we had urged from the outset of this proceeding that the net effect of the Commission’s application of the statute would be in effect to prevent brokerage commissions from being reduced in the course of competitive price bargaining and we felt would interpolate into the Robinson-Patman Act in effect, the principle of fair trade or resale price maintenance even though there was no such objective by the Congress and even though similar arrangements where by in other industries such as among real estate brokers where brokerage commission had been stabilized that such mechanism for stabilizing brokerage commission had been outlawed as unlawful and unreasonable restraints of trade in suits brought by the Antitrust Division by the Department of Justice and of course, the case of the real estate brokers was affirmed here by this Court in 1950.

    In short, we attempted to point out in our argument on Thursday that this case, by virtue of its unprecedented and unique interpretation of the Robinson-Patman Act, which was not authorized by the text and of the cases as I shall hope to develop in my argument here also, produced a collision and a conflict between the Robinson-Patman Act as construed here by the Federal Trade Commission and the overall policy of the antitrust laws incorporated in the Sherman Act not withstanding the admonitions by this Court to the Federal Trade Commission most recently in the Automatic Canteen case to avoid such collisions and to reconcile the Robinson-Patman Act insofar as the text of that statute permitted with a broader antitrust policies laid down by the Congress in the antitrust laws as a whole.

    Before I proceed —

    Hugo L. Black:

    (Voice Overlap) what do you understand the — the methods — policies involved by the Solicitor General here and I would suppose that this is — the Government tried to — tried to follow whatever policy Congress had said?

    Frederick M. Rowe:

    That would be my view of the matter, Mr. Justice Black that we are dealing here with the matter of statutory interpretation exclusively.

    But certainly, as the Court’s opinion pointed out in the Automatic Canteen case in resolving matters of statutory interpretation, as I would understand the Solicitor’s footnote, the policies of the antitrust laws as a whole of which the Robinson-Patman Act is a part should be taken into consideration so that they should be a harmonious whole rather than conflicting parts which at are at odds with each other.

    Before proceeding to the text of the statute as interpreted in the past two decades, I would like to briefly summarized the salient facts which highlight what the issue presented by this case is and perhaps also with the issue presented by this case is not.

    First, we have here, and it was, I believe, agreed to by Mr. Friedman on Thursday, an honest commercial transaction.

    There was no subterfuge or connivance, but rather an open price reduction by the seller to the buyer in circumstances where there were cost economies available to the seller and in circumstances where the seller had to meet competitive offers on pain of losing the sale to the particular buyer here in question.

    From the seller’s viewpoint therefore, the price, which he gave, had the earmarks of legality under the basic provisions of the Robinson-Patman Act because related to cost economies and because related to competitive circumstances.

    Frederick M. Rowe:

    From the buyer’s view point, he merely asked for a lower price because he had equally low price offers available from other sources.

    There is no evidence in the record or anywhere else of coercion or exaction or any untoward conduct on the buyer’s part other than his request to receive a lower price because he simply did not want to pay more to this seller than he had available to him from other sellers.

    In the case of the broker, the respondent here, his acquiescence in taking a lower rate of commission than he originally had hoped to get from the seller was a perfectly reasonable situation as he saw it because first of all, the seller put it up to him on a take it or leave it basis and so, unless he took the reduced commission, he would have loss the sale and secondly, because this transaction was of an unusual size and dimension which saved him a lot of long distance calls, as he put it on the record, and save him a lot of work, he in effect realized more money for less work from this transaction than others.

    Also —

    Charles E. Whittaker:

    — may I ask you — may I ask you, I don’t know whether this should enlighten or is not but it’s running through my mind and I’m somewhat confused about it.

    What if a broker or a seller waives or reduces his commission in some sales to some purchasers, but not to others?

    Does that result in the — and it’s passed along, we’ll say, the saving by the seller to the customer?

    Is that result in the seller selling on less than substantially equal terms to all?

    Frederick M. Rowe:

    It may, Mr. Justice Whittaker, and of course that would be the province of the pricing provisions of the statute, Section 2 (a) governing price quotations by sellers and Section 2 (f) governing the receipts of prices by buyers and if in such a situation this price differentiation could not be justified either by reference to cost economies or by competitive consideration, it might well be held a violation, but of course, in this case, we did have evidence of cost economies and competitive conditions even though the Commission did not proceed against the appropriate parties we feel to this price differentiation and this evidence was rejected by the Commission as immaterial as a matter of law.

    Charles E. Whittaker:

    In this very case, the Canada Foods Company, the seller by re — did on — in accepting this 25-cent price even though there was reduction in the broker’s commission from 5% to 3% actually receive less than it would have, had it sold it at the standard price of 30 cents a gallon and paid a 5% commission, isn’t that right?

    It actually received less for the goods.

    Frederick M. Rowe:

    Yes, it did and I would like to state one point merely to illuminate the record here.

    There was no standard price as such because the price of the apple contemplated at issue here had at first been $1.85 per gallon and had then come down to $1.35 per gallon and then $1.30 per gallon, so it wasn’t a commodity which had in variable fix price but certainly, it is correct that the seller in this situation received less that he expected to, at the outset, when he authorized price quotations of $1.30.

    Charles E. Whittaker:

    So he could not justify the whole reduction, cost justify?

    Frederick M. Rowe:

    There was evidence in the record, Mr. Justice Whittaker, pointing to the fact that he might well have because the seller, who is the witness in this case, he never had the opportunity, of course, to vindicate his price because he was not made a respondent, but he did testify that in this transaction, he realized considerable economies from packaging, processing, freight and customs at the boarder in making a transaction such as this.

    Your point is that this has to be tested under 2 (a) and does not become a per se violation in effect under 2 (c)?

    Frederick M. Rowe:

    That is exactly correct, Mr. Justice Harlan.

    We believe the Commission cannot, by a pleading device, convert an open price reduction which is lawful under Section 2 (a) and to a so-called indirect allowance in lieu of brokerage which is illegal per se under Section 2 (c).

    Yes, sir.

    Earl Warren:

    Mr. Rowe, I was wondering if a seller could employ a — a broker at a 5% commission and then, between them, they would agree that in all large sales, the — the broker would only charge 3% instead of 5% and pass that on to the — to the buyer because he was not put to so much work, would that be legal?

    Frederick M. Rowe:

    Mr. Chief Justice, in such a situation where you might say there was actual connivance by the seller and the broker to pass on broker’s commission to the buyer such as, we do not have in this case, there might well be the point made under the statute that the seller was, in fact, arranging for kickbacks to the buyer and we do not defend that situation under the statute, but we do not believe that the principle of our case is — as sweeping as to comprehend that particular situation.

    Earl Warren:

    Let us — let us just say then that there is no agreement between the seller and the broker, but broker as a matter of his own convenience, wherever he gets a — a large sale reduces his brokerage by 2% or 3% and passes it on to the — to the buyer in order to get the — the business, would that be a — would that be legal?

    Frederick M. Rowe:

    Mr. Chief Justice, the normal economic interest of the broker as anyone else’s including the seller would, of course, be not to give a lower price because unless he had to, he wouldn’t do it.

    In a situation, where an order to make a sale in the heat of the competitive contest, the broker had to reduce his commission and the seller had to reduce his price, it is our position that Section 2 (c) of the Robinson-Patman Act cannot be used to make this competitive situation, this above board, non-connivance transaction, illegal per se when there are directly governing provisions in the statute which cover lower prices by sellers to buyers which say a price which is competitively justified and a price which is economically justified, is a lawful price.

    Earl Warren:

    Well — well, was this lower — lower price economically or competitively justified?

    Frederick M. Rowe:

    The evidence in the record, Your Honor, to the extent, it is in the record, indicate —

    Earl Warren:

    I understood, there was nothing to — nothing on that issue to —

    Frederick M. Rowe:

    Yes, there was, Your Honor.

    The broker testified and the seller testified as witnesses.

    And as the matter of fact, the broker’s answer pleaded that the seller’s price reduction was cost justified and competitively justified.

    Frederick M. Rowe:

    There was substantial evidence in the record by the broker and the seller that there was cost justification insofar as they were savings in packaging, freight and transportation and there was also evidence that there were competitive offers available to the buyer from other sources.

    In our proposed findings of fact conclusions of law, we again put this matter up to the Commission, but this was rejected by the Commission as immaterial as a matter of law.

    I suppose putting your position, in other way if I understand it, you could concede arguendo that this violated two-way, you don’t — in other words, for the purposes of this case, it’s immaterial, wasn’t it?

    Frederick M. Rowe:

    I might concede and say it is immaterial but I — I would hesitate to do so, Mr. Justice Harlan, because in view of the facts, all the earmarks of the record show that the price would have been lawful under Section 2 (a).

    Well, but you could — I didn’t mean to — naturally you don’t concede anyway — anything away, but it’s immaterial to your position here in this case as to what the effect of this was under 2 (a)?

    Frederick M. Rowe:

    It is immaterial to my position, yes.

    The Commission’s unprecedented, as I said, and unique interpretation of 2 (c) for the first time after 23 years or so of the Robinson-Patman Act is based on two premises really, two statutory legal premises, one being that where a seller grants a lower price to a buyer and at the same time, that lower price is coupled with a reduced commission by the seller’s broker that in such a situation, a seller is granting a so-called allowance in lieu of brokerage to the buyer even though its price be open which is in violation of Section 2 (c), the brokerage clause.

    That is the first premise.

    The second premise of the Commission is that a broker’s participation in such a transaction where the seller gives an open lower price and the broker takes a smaller commission that the broker’s participation constitutes a so-called indirect payment by the broker to the buyer of an allowance in lieu of brokerage.

    The theory being that by accepting a lower rate of commission, the broker in effect gives the money to the seller, who then gives it to the buyer and that is an illegal allowance in lieu of brokerage.

    Now, as to that first premise that the seller’s conduct in giving the lower price openly to the buyer is an allowance in lieu of brokerage, we believe that this assertion is contrary to the basic premise of this Court’s opinion and the Simplicity Pattern case, only last June, is contrary to a ruling by the First Circuit Court of Appeals, only last month in the Robinson case and is contrary to the congressional objective in Section 2 (c) as detailed fully and amply in the legislative history which we have included as an appendix to our brief.

    Felix Frankfurter:

    What was the Robinson case, Mr. Rowe?

    Frederick M. Rowe:

    In the Robinson case, Mr. Justice Frankfurter, a seller had first employed a broker to find sales outlets for him to a certain customer who bought paper cups.

    After a while, the seller realized that he would prefer to do business directly with these buyers and so he let the broker go.

    After he left the broker go, he reflected the savings and the broker’s commission in a lower price to the buyer.

    Thereupon, the broker brought suit against both the seller, in one case and against the buyer, in the other case, charging that the seller’s lower price which reflected the savings and broker’s commissions was a so-called allowance in lieu of brokerage in violation of Section 2 (c) of the Robinson-Patman Act.

    In other words, precisely, the first premise of the Commission’s legal theory here, as it has spelled it out on page 26 of its brief, page 27 which says, “If a seller dispensed with his broker services in making a particular sale and then openly reduce to selling price by the exact amount of brokerage involved, this would constitute an allowance in lieu of brokerage by the seller to the buyer in violation of Section 2 (c).”

    Earl Warren:

    Well, I understood you to say in the Robinson case, that — that he dispensed with all services of his broker —

    Frederick M. Rowe:

    He let him go completely.

    Earl Warren:

    — and dealt — and dealt with everybody on the same basis.

    Frederick M. Rowe:

    There was only one transaction in the controversy of that case.

    I don’t know of course what the —

    Earl Warren:

    It would make the difference, wouldn’t it?

    Frederick M. Rowe:

    It might make a difference insofar as the seller might or might not be discriminating and insofar as the Commission then proceeded against the seller, it might certainly plead that there was discrimination, but insofar as the Commission has taken the position that regardless of the situation as between one buyer or another buyer whenever a seller reflects in his lower price brokerage fee savings, there is an allowance in lieu of brokerage which is the Commission’s position as expressed in its brief here, then we believe the Robinson decision is directly to the contrary because it says, as we say that whenever there is a lower price, such as we have here, the Commission cannot simply convert it into allowance in lieu of brokerage which is illegal per se particularly when that lower price is competitively motivated, as we have indicated in the record here, and as responsive to cost economies of the kind, which Congress time after time said in the legislative history, it wished to preserve for the consumer in the form of lower prices.

    And as we point it out of course, also, the Commission takes the position here that there cannot be a cost justification available to the seller in such a situation even though Congress expressly, in 1936, rejected the proposal that the cost justification should not be permitted to include economies and brokers commissions.

    The Simplicity Patterns case which the — which we believe really spells out the basic design of the statute in the context of which this case occurs, that opinion stressed and emphasized the fundamental distinction in the statute between the open prices, the open prices which were treated by Congress as being lawful depending on whether they were injurious to competition or whether they could be cost justified or whether they could be justified by competitive responses, that was one fundamental premise of the Robinson-Patman Act.

    The other thing that Congress provided for in the statute was certain and to use this Court’s words false and concealed transactions which were automatically unlawful regardless of competitive consequences, regardless of cost justifications and among those concealed transactions, which the Court’s opinion in the Simplicity case, pointed out were, “secret brokerage payments” and “false brokerage payments”.

    The purpose of that distinction made by Congress in the Robinson-Patman Act and as pointed in its legislative history also was by making this prohibition on the secret and concealed transactions absolute and unqualified to thereby drive prices out into the open with the aim, and again to quote the opinion’s language, “with the aim of bringing these prices out into the open so that they could be measured and so that they could be compared with possible cost economies.”

    In this situation, in the case at bar, we have precisely such a lower open price reduction forced out into the open in effect which could be compared on the record with cost economies available to the seller and which could be compared with the competitive situation rather than being concealed — concealed transactions or rather than being arrived at by any kind of connivance or subterfuge as the Commission does not contest in this case.

    And nevertheless, the Commission has taken the position that this open price transaction is an allowance in lieu of brokerage.

    Frederick M. Rowe:

    We feel this interpretation is directly contrary to the purpose of Congress in enacting Section 2 (c) of the statute as expressed in the Congressional Reports, which we have quoted in excerpt in our brief.

    For example, the Report of the Senate Judiciary Committee, on page 22 of our brief, states that the purpose of Section 2 (c) of the statute, the so-called brokerage clause was to bar “the practice of certain large buyers to demand the allowance of brokerage direct to them upon their purchases or its payments to an employee, agent or corporate subsidiary, whom they set up in the guise of a broker and through whom they demand that sales to them be made.”

    And I may say that the legislative history repeatedly and consistently reflects the tenure that secrecy, connivance, concealment and subterfuge whether vices of which the brokerage clause were directed because it was an absolute prohibition whereas the basic provision of the statute, governing price dependant on competitive injuries, competitive showings and permitted the justification of a lower price by the seller so that the economies of efficient distribution would not be denied to the customer and ultimately to the American consumer.

    As I pointed out, the Commission’s elimination of the cost justification in an open price situation of this time is contrary to the action of the Senate House Conference Committee which, in 1936, deleted and struck out this precise proposal when it was advanced by some of the proponents.

    And as a matter of fact, Senator Logan who was the Senate manager of the legislation and who was the Chairman of the Senate Subcommittee in charge of the legislation pointed out that this was one of these fantastic ideas by which someone had tried to discredit the legislation, namely, to suggest that a seller could not lower his price so as to reflect cost economies predicated on brokerage savings.

    The meaning and the intention of Congress in this particular provision was illustrated, we believe, quite clearly by the A & P case which was before the Courts in the 1930s.

    This case, one of the landmark applications of the Robinson-Patman Act, was addressed against A & P which previous to the enactment of the statute had secured, coerced rebates and exacted secret — secret brokerage commissions by the device of setting up so-called field buying agents.

    A & P set up these field buying agents who collected brokers commissions from sellers, masquerading as independent businessman and after they had collected these rebates, they kicked them back and passed them over back to the A & P which thereby was able to collect discriminatory price favors which were concealed from you and which were hidden and could not be detected.

    And it was this type of thing which Congress was aiming against in passing this provision shortly after the Robinson-Patman Act, the A & P converted this field buying deal whereby these field buying agents collected rebates and it told these field buyers to go out and negotiate with the seller to convert the previous rebate payment and to compute a false price based on the exact amount of the rebate and reflecting that amount of the rebate.

    And it was this —

    Earl Warren:

    (Voice Overlap) the difference to, Mr. Rowe, that it was done — instead of being done secretly, it was done openly, but defiantly of the Act?

    Frederick M. Rowe:

    If there were any defiance, no, sir.

    It would make a basic difference —

    Earl Warren:

    (Voice Overlap) —

    Frederick M. Rowe:

    — if the matter were done in defiance of the Act.

    Earl Warren:

    — secrecy and so forth isn’t terribly important to us here, is it, if — if it is — if it should be open but defiant of the Act, it would still be proscribed, would it not?

    Frederick M. Rowe:

    It would be, but the Simplicity Pattern opinion by the Court last June pointed out that there was a fundamental distinction in the statute between open transactions on the one hand which could be compared with cost economies such as we have here and secret and false and concealed transactions which prevented the comparison of cost savings with a lower price.

    We also don’t believe Mr. Chief Justice that there was any trace of defiance here because —

    Earl Warren:

    Oh, I don’t say — I don’t say there was.

    I was just testing you —

    Frederick M. Rowe:

    Yes.

    Earl Warren:

    — the abstract more or less but — no, I don’t do — I don’t suggest that.

    Frederick M. Rowe:

    And we wouldn’t advocate it and certainly wouldn’t defend it.

    Earl Warren:

    Yes.

    Felix Frankfurter:

    Mr. Rowe, may I revert back to this Logan or Logan opposed legislation in 1936, was it?

    Frederick M. Rowe:

    1936.

    Felix Frankfurter:

    Was — what decision or ruling or practice give rise to the proposal?

    Is there any antecedent enclosed to us?

    Frederick M. Rowe:

    There was no decision that I’m aware of that led to this particular proposal, but I think it is a well-known fact and reflected throughout the legislative history that the National Association of Food Brokers was a very effective instrumentality in the passage of this legislation and their objective was at that time quite frankly stated in the hearings to prevent brokerage commissions from getting squeezed and they wanted to preserve and maintain brokerage commission at — what thought reasonable levels.

    Hugo L. Black:

    Where is that proposal?

    Frederick M. Rowe:

    We have cited, Mr. Justice Black, in our brief.

    Hugo L. Black:

    Quoted it, you quoted it?

    Frederick M. Rowe:

    Yes.

    We have — we have the — a proposal which said that cost justification should be permitted in economies other than brokerage.

    The words “other than brokerage” was subsequently deleted because Senator Logan pointed out —

    Hugo L. Black:

    Where is that?

    Frederick M. Rowe:

    We have that on page 30 — 31 of brief.

    Senator Logan explained to the Senate, I have — “I think perhaps legitimate brokerage ought to be allowed as 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 Judiciary Committee of the Senate we had in mind dummy brokerage, sham brokerage.

    It may be that something should be done about that.”

    And then in the conference, this provision was deleted and stricken out.

    Hugo L. Black:

    What — what do you think he meant by the legitimate brokerage, brokerage that was actually charged?

    Frederick M. Rowe:

    Brokerage, Mr. Justice Black, paid by a seller to his agent rather than brokerage paid by the seller over to the buyer or to the false front or dummy of the buyer because that was device at which Congress was legislating and which was prominent at that time.

    A & P having set up a false front, a dummy broker in the form of a subsidiary or field buying agent and these people collected broker’s fees and kicked them back and rebated them back to the buyer who then collected a secret discrimination in that guise.

    Hugo L. Black:

    Well, I suppose agreeing with you that — that was what stimulated the (Inaudible), that doesn’t settle our problem, does it?

    Frederick M. Rowe:

    No, sir, it only illuminates the problem but we feel that this clear cut congressional intent, when read in the light of 23 years of interpretation where the Commission never even urged this peculiar theory, we suggest upon the Courts or never ever incorporate this unique theory in a complaint notwithstanding, I’m sure, complaints by various affected parties such as brokers who lost a sale such as competing broker in this case, lost a sale to the respondent that nonetheless, the Commission never even brought such a case in 23 years and moreover, since the theory which the Commission’s case here incorporates has been rejected by the First Circuit Court of Appeals that that is a very firm indication that the Commission’s premise of this case is, we respectfully submit, untenable.

    Hugo L. Black:

    What was the practical effect of what happened here?

    Frederick M. Rowe:

    The practical effect, Mr. Justice Black, of the transaction here was that a seller gave an open price reduction to a buyer in a situation where the record indicates, he was meeting competition and where the record indicates that he was reflecting cost economies in that lower price.

    In other words, what the seller did in this case was to implement, as I understand, the objectives of the Robinson-Patman Act as set out in this Court’s Morton Salt opinion and this Court’s Simplicity Pattern opinion, namely, to foster open prices which are cost justified for the benefit of the consumer, whom Congress did not wish deprive of the economies of efficient distribution.

    Hugo L. Black:

    Why you say cost justified?

    I thought that was not involved in this case that you’re talking about.

    Frederick M. Rowe:

    I did not mean to suggest, Mr. Justice Black, that this — this price was in fact cost justified but that the earmarks, that the record indicates and so far as it indicates anything because the evidence was rejected as immaterial, that the evidence insofar as it is in the record shows that there were significant and palpable economies to the seller in the form freight savings, in the form packing savings and in the form of processing savings.

    Hugo L. Black:

    Well, I can’t quite understand if that is the case and that is the issue that was not tried out, was it?

    Frederick M. Rowe:

    Well, the Commission rejected that as immaterial as mater of law.

    The Commission did not permit that to affect its decision because it said, “We did not proceed under the pricing provisions, we proceeded under brokerage provisions, and when we proceed under the brokerage provisions, it is illegal per se and all of this evidence about cost savings and all of these evidence about competitive response is immaterial as a matter of law.”

    Hugo L. Black:

    Suppose there was no cost savings justified, what is the practical result, what would that get in?

    Frederick M. Rowe:

    There was a —

    Hugo L. Black:

    If we assume there was no cost of justification.

    Frederick M. Rowe:

    There was a competitive price reduction by the seller to the buyer of the type which this Court has held and —

    Hugo L. Black:

    Which seller is that?

    Hugo L. Black:

    You mean the broker or the other man?

    Frederick M. Rowe:

    No, sir.

    The seller —

    Hugo L. Black:

    Seller.

    Frederick M. Rowe:

    — to the buyer.

    The seller to the buyer of the type which this Court has held in interpreting the Robinson-Patman Act to be lawful, namely, a lower price where there was — from all the evidence we have in the record, a meeting of competition in good faith.

    If —

    Hugo L. Black:

    Meeting a competing price?

    Frederick M. Rowe:

    Meeting a competing price, yes, sir.

    Because on top of the cost savings, there was even that in the record although —

    Hugo L. Black:

    Were there findings to that effect?

    Frederick M. Rowe:

    The — there were propose findings and conclusions submitted by us of that effect, Mr. Justice Black, which the Commission rejected as immaterial as a matter of law.

    Hugo L. Black:

    We have not either of those findings, but suppose if they haven’t been tested out, assuming that neither of those things are correct, as you say, what is the practical result here, as to these things?

    Frederick M. Rowe:

    The practical effect is one — one customer for apple concentrate.

    A man named Smucker in Orrville, Ohio buying apple concentrate for 5 cents a gallon less from a seller rather from this seller then from other seller who would have given him this lower price as the record indicates.

    If I may proceed quickly to the second premise, the derivative premise of the Commission’s theory here, namely, that a broker who participates in an open price reduction from a seller to the buyer is guilty of paying a so-called indirect allowance in lieu of brokerage by accepting a lower commission via the seller’s retention of the balance by way of the seller’s lower price to the buyer is guilty of a so-called indirect payment in Section 2 (c) of the Robinson-Patman Act.

    First, I believe the Commission has recognized that the text of Section 2 (c) provides that a person may not pay a brokerage commission to the buyer or to the buyer’s intermediary.

    It says “A person may not pay to the other party.”

    As I understood the Commission’s argument, it took the position that the broker was in fact a party and so, a payment by the broker was a payment in violation of Section 2 (c), but once again, it is clear from the Committee Reports, which we have excerpted in our brief, that Congress was not legislating against payments by brokers, it was rather legislating against payments by sellers to buyers and by sellers to the false fronts and intermediaries of buyers.

    The statutory prohibition does run as we pointed out in our briefs against a broker receiving from the seller a commission which he then turns over or kicks back to the buyer.

    There is no question about that, and there is no controversy between us and the Commissioner on that account, but there simply is not in Section 2 (c) as it is now written a provision saying that apart from this receipt of illegal brokerage which would make a kickback unlawful, apart from that, there is a further prohibition on so-called payments by brokers.

    And in any event, the only payment that there is in this case that there is alleged to be in this case is this acceptance by the broker of a lower rate of commission.

    There was no money changing hands.

    There was no passing over or rebating or kickbacking.

    All the broker here did was to accept when the seller told him, “Take or leave it, 3%,” he accepted 3% and this is the theory of indirect payment.

    We think it’s very significant in this connection that the examiner’s initial decision for the Federal Trade Commission in this case, very candidly, we think, put it that what the Commission was doing in predicating liability against the broker here was to filling a — an omission what it thought was an omission in the text of the statute as passed by Congress.

    We feel — and moreover, on —

    Hugo L. Black:

    Is it your — is it your — I — I don’t — I want to see if I get clear in my mind.

    Is it your position that wholesaler or manufacturer whatever it is, sells to a broker, and that broker fixes here a fixed commission and that broker cuts the commission and absent of kickback or connivance or some kind, there can be no liability under 2 — under 2 (c)?

    Frederick M. Rowe:

    Yes.

    Frederick M. Rowe:

    If there is no kickback and if there is merely the acceptance of a lower rate of commission, as here, there is no liability under Section 2 (c) because what we have is an open price reduction which Congress specified in Section 2 (a) — 2 (a) and 2 (f) of the statute to be governed by this criteria whether it is cost justified or whether it’s competitively injurious, whether it is made to meet competition in good faith because otherwise, Section 2 (c), the limited provision governing brokerage, would in fact supersede and override the basic provision of the statute governing price variations between sellers and buyers.

    Hugo L. Black:

    Do I understand then that means that this statute just doesn’t cover brokers first and second that he — he act — the seller acting through the broker is insulated unless there’s some connivance between them?

    Frederick M. Rowe:

    No, sir.

    We do not say that the statute exempts a seller’s broker.

    We merely say that since the statute holds liable, a seller’s broker who accepts from the seller a commission which he kicks back to the buyer and since the statutory text is clear and since the reports of Congress documents point that there is no further special liability for so-called payments by a broker and furthermore, there was no payment in any conventional sense of that term in the case at bar.

    I would also, in this connection, not neglect to point out that Senator Logan once again, who was the Senate manager of the bill, pointed out to the Senate that there was no prohibition in the statute against deduction of legitimate brokerage.

    There was nothing again — in the statute against the payment or deduction of legitimate brokerage.

    It was rather sham brokerage and dummy brokerage with which the statute was concerned.

    Finally and basically, we feel that the Commission’s theory of this case of this unique interpretation of the statute, 23 years after its enactment, has the necessary and inevitable effect of preventing the reduction of brokerage commissions in competitive situations and as a necessary consequence, we feel, of stabilizing and maintaining the level of brokerage fees at unnatural levels to the detriment of the American consumer because what the Commission does here in effect is to foster the very type of stabilization of commissions which the Antitrust Division of the Department of Justice as indicated in the Real Estate Board case has consistently pursued as unlawful restrain of trade.

    We feel basically that the antitrust laws to quote the classic phrase of Mr. Chief Justice Hughes are — “our charter of economic freedom comfortable to constitutional provisions.”

    For this reason, this Court has never lightly presumed departures and exemptions to the antitrust laws.

    Most recently in this Court’s opinion in the McKesson and Robinson case involving resale price maintenance, a so-called principle of fair trade, this Court’s opinion pointed out that resale price fixing is a privilege restrictive of a free economy and must be narrowly construed.

    We feel in this particular situation, the danger to the policy of antitrust and to the principle of competition is graver because it is more insidious in the field of resale price maintenance, the clash between the price fixing and the antitrust policy is manifest, it is open.

    What we have here is unprecedented and we submit an untenable interpretation of the Robinson-Patman Act by the Federal Trade Commission which would in fact stifle competition in the name of protecting it.

    We feel that this Court should not permit such a perversion of antitrust.

    Earl Warren:

    Mr. — would you please comment first, Mr. Friedman, on the — the purpose and the effect of that footnote on — on page 12?

    Is that — is that in anyway water down the — the argument of the Solicitor General or his enthusiasm for the case or his belief in this case or — or just what does it do?

    What does it mean?

    Daniel M. Friedman:

    No, Mr. Justice.

    I think the clearest evidence of the Solicitor General’s support of this case is the fact that he saw in the brief and that I’m arguing this case.

    I think all of this was intended to mean was that in supporting the Commission’s position in this case, in indicating what we believe to be the legislative purpose in this Act, the Department of Justice was not indicating any views of its own as to the wisdom or lack of wisdom of the policy consideration that underlies this legislature.

    Felix Frankfurter:

    How often you’ve done that?

    Daniel M. Friedman:

    I don’t know of any particular comment like this, but the Solicitor General on the past has indicated certain reservations as to the positions taken.

    I don’t —

    Felix Frankfurter:

    How — how often what we ask to keep in mind the policy of the statute as construing it?

    Are those — is that a — a greater dichotomy between the words of the statute and the policy it supposed to convey?

    Daniel M. Friedman:

    No, no.

    I think, Mr. Justice, it was only intended to indicate that the Department of Justice is not taking any sides in this basic controversy.

    It has assisted for long time as to the wisdom or unwisdom of many of the features of the Robinson-Patman Act.

    Felix Frankfurter:

    I don’t know how long I should be here but I don’t expect that statement to be repeated (Inaudible) it has to construe a statute to fill up.

    Daniel M. Friedman:

    I don’t think so.

    Felix Frankfurter:

    Well, doesn’t your (Inaudible) argued in that exception.

    Charles E. Whittaker:

    Well, Mr. —

    Felix Frankfurter:

    No, sir.

    We’re here —

    Charles E. Whittaker:

    (Inaudible)

    Felix Frankfurter:

    No.

    Charles E. Whittaker:

    — you’re explaining the Court?

    Daniel M. Friedman:

    No, Mr. Justice.

    We are here as counsel for the Federal Trade Commission.

    We’re presenting to the Court what we believe to be the policy reflected in the Robinson-Patman Act and we believe that the policy reflected in the Robinson-Patman Act is furthered by the Commission’s construction of the statute in this case.

    We are here as an active litigant not as an amicus.

    Earl Warren:

    Well, just other thing that Mr. Rowe suggested that there might be some significance to the fact that the Antitrust Division does not attach itself to this — to your petition or your briefs, is there any significance to that?

    Daniel M. Friedman:

    I think there is not an unprecedented event before this Court, Mr. Chief Justice.

    The Antitrust Division has in the past sometimes not appeared in Federal Trade Commission cases.

    Two recent cases, I might mention the Automatic Canteen case and the National Casualty Insurance case two years ago.

    Now —

    Is there a difference between the Antitrust Division’s view on the antitrust laws and Federal Trade Commission’s (Inaudible)?

    Daniel M. Friedman:

    No.

    I don’t think so, Mr. Justice.

    I think the — for example, the Attorney General’s Committee has been somewhat critical of the position taken by the Federal Trade Commission in various aspects of Robinson-Patman Act administration.

    Felix Frankfurter:

    Even the matter of law is that like all lawyers, government lawyers should come in and argue their cases with lawyers would read all — all implications or expectations or what (Inaudible) is good policy and bad policy.

    I suppose there might be some difference of opinion in Mann Act cases, (Inaudible) was saying, it doesn’t mean that we subscribe to the policy of this Act.

    It quite might not.

    I know many Attorney Generals who didn’t.

    Daniel M. Friedman:

    I think it’s the duty of the Department to administer the Acts as they appear.

    Now, I would like to first answer a point that Mr. Rowe has made several times.

    He refers to the statement by Senator Logan in which Senator Logan re-explained why the early draft of the bill which contained an exception for other than brokerage in connection with cost justification, why that was deleted and he refers in his brief at pages 30 and 31 to this statement by Senator Logan on the floor of the Senate.

    Unfortunately, we had not quoted the material that I am about to read to the Court but it is set forth in the Conference Committee Report which we have cited in our brief, its House Report Number 2951 in the 74th Congress, 2nd Session page —

    Hugo L. Black:

    Where is that cited in your brief?

    Daniel M. Friedman:

    It cited in other context, Mr. Justice.

    It’s cited pages 17, for example — I’m sorry — page 8 — top of page 18.

    Hugo L. Black:

    You’re reading apart from another page?

    Daniel M. Friedman:

    Yes, Mr. Justice.

    Hugo L. Black:

    What page?

    Daniel M. Friedman:

    Page 6 of the Conference Committee Report.

    Hugo L. Black:

    Instead of page 15 as cited on page 7?

    Daniel M. Friedman:

    Mr. Justice — at the top of page 18 —

    (Inaudible)

    Daniel M. Friedman:

    — Report Number 2951, where we say page 7.

    I’d like to read one sentence from page 6 of that Report and that statement states that “The words other than brokerage which appeared in the Senate Amendment immediately after the word cost are eliminated for the reason that the matter of brokerage is dealt with in a subsequent subsection of the bill.”

    Now, we think that this statement means only and can mean only one thing that Congress found it unnecessary to specify other than brokerage as a cost defense because it was dealing with the problem of brokerage in a specific section.

    And in a specific section, it took up the problem of brokerage and imposed a blanket prohibition that a grant or allowance of brokerage or an allowance in lieu thereof was to be prohibited.

    Now, Mr. Justice Black inquired of my opponent, what the practical affect of what was done here is.

    Well, I think the practical effect is very clear.

    It’s undisputed from this record what the practical effect is.

    One buyer, only one buyer and admittedly, a large buyer was true, as Mr. Rowe indicates, this isn’t a mass of chain store but this is the only buyer in this industry who could make a purchase of this size.

    This one buyer got a lower price which was not given to anyone else, neither to anyone else by Mr. Broch, who had 18 other customers or by any of the other brokers.

    So the practical effect, I think, of this action here is very clear.

    This is, we think, is precisely the kind of thing the Congress wished to reach under the brokerage clause of the Robinson-Patman Act.

    The use — the manipulation of brokerage as a device to give a large buyer with greater purchasing power a competitive advantage, a lower price which is not available generally to all of the other buyers.

    Felix Frankfurter:

    Mr. Friedman, is it true that this is the first case in the history of the Act?

    Daniel M. Friedman:

    This is the first case of this kind.

    There have been at least three other cases in which the Commission has proceeded against sellers’ brokers but this to —

    Felix Frankfurter:

    (Voice Overlap) in this kind of thing?

    Daniel M. Friedman:

    This is, to my knowledge, the first —

    Felix Frankfurter:

    Well, I’m well aware that this (Inaudible) a strong use of — about the propriety of using none action by a commission that it has some significance, I mean the Court has attached significance to it.

    But I want to know does a situation as — as unique as the proceeding.

    In other words, if this kind of a thing not happened so as to bring into play the Commission’s power.

    Daniel M. Friedman:

    I — I don’t know, Mr. Justice, but I — I can suggest this, that the record shows that when the other broker in this case had it suggested to him by the seller that the only the price could be reduced would be if the brokerage was cut.

    Daniel M. Friedman:

    He refused to do that and wrote a letter to the buyer in this case stating that the only way we could confirm would get us in trouble under the Robinson-Patman Act.

    And I suspect that one reason for the paucity of these proceedings maybe the previous general view we believe in the industry that this kind of thing was prohibited, that the broker could not take a lower price which was the means a lower commission, which was the means of giving a price discrimination to a favored buyer.

    But I — I can’t answer specifically as to how extensive this practice —

    Hugo L. Black:

    (Inaudible) effect is, isn’t it, that you get your right, that brokers are not allowed to compete with one another, the law upon making lower prices.

    Daniel M. Friedman:

    No — no, Mr. Justice.

    If the seller can give a lower price on the —

    Hugo L. Black:

    I’m — I’m talking about the broker.

    Daniel M. Friedman:

    You mean in dealings with the sellers?

    Hugo L. Black:

    Yes.

    Daniel M. Friedman:

    Well, the broker —

    Hugo L. Black:

    In dealing with the sellers.

    Daniel M. Friedman:

    A broker can — can do any — when he is employed by a seller, he can say, “I want 6% commission, I’m willing to work for 4% or 3%.”

    That — that’s perfectly would — completely up to the broker and the seller, whatever arrangement they make as to commission, but our point is once they have reached an agreement as to commission and here they —

    Hugo L. Black:

    You mean with the seller.

    Daniel M. Friedman:

    With — with the seller.

    Once they have reached that agreement, they cannot then take part of that commission in dealing with the favorite purchaser and pass part of it back.

    Charles E. Whittaker:

    (Inaudible) orders over a certain price, the commission (Inaudible) would that be offered?

    Daniel M. Friedman:

    I would think in — in that case, Mr. Justice, I doubt that you have an allowance in lieu of brokerage because they are your basic brokerage statement but in this case, we’re dealing with a situation where you had an agreement for 5% and in every other transaction except for this one purchase, 5% was paid.

    I think —

    Charles E. Whittaker:

    (Inaudible)

    Daniel M. Friedman:

    Well, the — but the statute — insofar as the broker is concerned, the statute prohibits the allowance in lieu of brokerage and where you have situation where there’s nothing to be in lieu of, in other words, where there is no brokerage to be passed over but in — as I repeat in this case, we do not have that situation.

    Also I like to refer very briefly to the Robinson case which my opponent relies on.

    There again is a case where we think its clear that there was no violation of — to see charge because there was nothing to show any correlation between the brokerage passed on and the lower price.

    The Court specifically stated in the opinion.

    There is — incidentally the Court says, “No allegation of any correlation and amount between the reduction in price in plaintiff’s former commission.

    Furthermore, the Court says, “Since there is no indication that employer employed other brokers, we take plaintiff’s stated claim to be that all customers thereafter are not merely (Inaudible) purchased direct.

    Hugo L. Black:

    Has that been officially reported there?

    Daniel M. Friedman:

    I do not have the official report.

    My adversary cites the Trade Regulation Service citation in his —

    Felix Frankfurter:

    You give his aid we can get (Inaudible) if you give the date we can get it from the (Inaudible)

    Daniel M. Friedman:

    December 10th, 1959, an opinion by Judge Aldrich and in that opinion, incidentally in the footnote, Judge Aldrich expresses some doubt.

    Hugo L. Black:

    Judge who?

    Daniel M. Friedman:

    Judge Bailey Aldrich, expresses some doubt as to the Broch decision in the Circuit Court in this case.

    So that — one final word, in — in recapitulation, we’ve been accused in this case of construing the statute in a way it leads to it — stabilizing brokers, it’s claimed.

    This is in effect condoning price fixing by the Federal Trade Commission.

    Now, Congress, we think, has made the determination that there are certain kinds of price practices which in the long run is so injurious to the competitive system that they must be prohibited outright, and we think one of those prohibitions made by Congress is that when you get into the brokerage field, the broker cannot take and pass over some of his brokerage to the favorite purchaser.

    Charles E. Whittaker:

    (Inaudible)

    Daniel M. Friedman:

    I said — yes, Mr. Justice.

    Charles E. Whittaker:

    (Inaudible)

    Daniel M. Friedman:

    That’s right.

    As — as a — in a — in practical effect, Mr. Justice, we think it’s the same in terms of the ultimate effect on the purchaser whether he has done that or whether he’s actual taken the money and passed it over in so many — so many terms.

    Felix Frankfurter:

    If you — if you think of this Act, you wouldn’t describe this transaction as passing over, do you — do you (Inaudible)

    Daniel M. Friedman:

    No.

    But I —

    Felix Frankfurter:

    The phrase wouldn’t naturally come out to the tip of your tongue of — at the end of your pen was he (Voice Overlap) —

    Daniel M. Friedman:

    No, Mr. Justice, but I think the phrase in the statute and allowance in lieu of brokerage.

    Felix Frankfurter:

    The statute says all right.

    But all I’m saying is you’re using — you’re taking some liberties in make it (Inaudible)

    Daniel M. Friedman:

    I — I — if — if I am, Mr. Justice, it’s an attempt —

    Felix Frankfurter:

    Statutorily — legitimately (Inaudible)

    Daniel M. Friedman:

    Yes.

    Felix Frankfurter:

    All right.

    Hugo L. Black:

    You mean he eventually and he originally agreed to take 5%.

    Daniel M. Friedman:

    Yes, Mr. Justice.

    Hugo L. Black:

    But (Inaudible)

    Daniel M. Friedman:

    That’s so found and that finding — was accepted by the Court.

    Hugo L. Black:

    — then he sold, didn’t he?

    Daniel M. Friedman:

    Then he’s —

    Hugo L. Black:

    And did he tell the manufacturer why he accepted the 3%?

    Daniel M. Friedman:

    No, he didn’t.

    Daniel M. Friedman:

    To all that is shown by the record is that he came to the manufacturer and said to the manufacturer, “I can sell a large order at $1.25.”

    The manufacture said, “Well, let me figure about this.”

    And then he — manufacturer came back the next morning and said, “You can make the order — sell the order at $1.25, but you’ll have to take 3% brokerage on this order,” that’s all that we have here.

    Earl Warren:

    Instead of 5%.

    Daniel M. Friedman:

    Instead of 5% and it —

    Hugo L. Black:

    (Voice Overlap) makes on about what brokerage he was giving to other (Inaudible)

    Daniel M. Friedman:

    Yes, Mr. Justice.

    There is no question that on all other transactions through this broker and through every other broker, the stated agreed upon brokerage was paid 5% from Mr. Broch, 4% through all the other brokers, which was their agreement.

    Hugo L. Black:

    It was before and after that?

    Daniel M. Friedman:

    Before and after, before and after on the dealings by Mr. Broch, he paid 5% with all his other customers.

    Thank you.

    Earl Warren:

    Very well.