United States v. McKesson & Robbins, Inc.

PETITIONER:United States
RESPONDENT:McKesson & Robbins, Inc.
LOCATION:

DOCKET NO.: 448
DECIDED BY: Warren Court (1955-1956)
LOWER COURT:

ARGUED: Apr 30, 1956
DECIDED: Jun 11, 1956

Facts of the case

Question

Audio Transcription for Oral Argument – April 30, 1956 in United States v. McKesson & Robbins, Inc.

Earl Warren:

Number 448, United States of America versus McKesson and Robbins.

Mr. Spritzer.

Ralph S. Spritzer:

Mr. Chief Justice, Your Honors.

We have in this case a question whether certain prize fixing agreements, more specifically, certain agreements providing for resale prize maintenance are exempted from the normal operation of the antitrust laws and that question is a narrow statutory one.

It turns on the language of the Miller-Tydings Act and of the subsequent McGuire Act.

Stated in what have become popular terms, the question is whether the particular agreements which the Government sought to enjoin here for within the so-called “fair trade” exemption.

Let me invite to the Court’s attention early, the specific words with which we are here concern.

And I might say preliminary that for all practical purposes, the words are the same in the Miller-Tydings Act of 1937 and in the McGuire Act of 1952.

Is this case came up on summary judgment or after the trial?

Ralph S. Spritzer:

It came up after trial.

Actually, it was a very limited trial in which the parties relied primarily on documents and on certain depositions.

The Government had previously moved for summary judgment on the theory that on the admitted facts or undisputed facts this could be enjoined.

That motion was denied.

Subsequently, it went to trial at which time the Government stood basically on its position that the District Judge had urged in denying the motion for summary judgement though it did as I point out later, suggest that it had something further provide on.

Now, Your Honors, of course, recall the federal fare trade legislation, to use that term, permits, broadly speaking, resale price maintenance in respect of branded or trademark goods which have competition from other goods of the same general character that permission from federal law being conditioned upon the particular agreement being legal under relevant state law.

But this authorization, this immunity from the effect of the Sherman Act is explicitly limited by a rather pointed proviso which is the center of controversy in this case.

And that proviso paragraph is setout among other places in the Government’s opening brief at page 38.

It begins by stating in substance that nothing in the exemption statute shall make lawful.

And then, I will quote the exact words which we have italicized there on printed page.

“Nothing contained in the paragraph shall make lawful agreements.”

Now, I’m quoting, “Between manufactures or between producers or between wholesalers,”

and that phrase particular important in this case and then going on, “Or between brokers or between factors or between retailers or — and again we emphasize specially, between persons, firms or corporations in competition with each other.”

Now, that language, as the Court will note by granting further down the page is identical for all practical purposes with the language of the proviso in Miller-Tydings.

Now, with that proviso in mind, let me —

Felix Frankfurter:

Sorry to interrupt you.

Ralph S. Spritzer:

Yes, sir.

Felix Frankfurter:

Wasn’t the entire Act contended to the clarification of what — what might call — some of the — they lack ambiguities, the lack of clarities (Inaudible)

Ralph S. Spritzer:

Yes.

But in this respect, there was no change.

Felix Frankfurter:

There’s no change.

Ralph S. Spritzer:

This proviso is identical.

As Your Honor will see on page 39, we go on and quote from Miller-Tydings and Your Honor will find the same proviso, “Noting shall make lawful agreements between wholesalers or between persons, firms or corporations in competition with each other.

This was not something which Congress chose to change when it passed the McGuire Act.

And if I may anticipate, the little in argument I will make later, that’s, perhaps, the particular significance because this suit was brought and publically announced before the McGuire Act was passed and Congress was told about a tendency by the Assistant Attorney General in charge of antitrust when he testified in relation with the McGuire Act.

But that — that is running ahead of my story, I would like to pause.

Now that we have the proviso in mind and before the Court to indicate just what McKesson’s operations are and what particular contracts are involved in this suit under the Sherman Act.

We’ve request the distribution to the Court of a — of a diagram, that I see Your Honors have.

This is something we prepared, it’s not in the nature of anything of record, and it’s purely to illustrate the facts as we understand them and I think they’re not substantially in dispute.

Now, McKesson is a manufacturer of drugs.

It is also a wholesaler of drugs.

It has various divisions but it’s one corporation with one president, one chairman, one management.

The wholesale divisions and actually there are some 70 odd such divisions operate in various sections of the country, McKesson doing a virtually nationwide business.

The wholesale divisions handle McKesson brand products which are prepared or package by the manufacturing division and they also handle the products of other drug manufacturers.

Indeed the volume of products of other drug manufactures handled by the wholesale division far exceeds the volume of the McKesson brand products.

McKesson, in other words, is in the general drug wholesaling business and is, indeed, the largest wholesaler of drugs in the United States.

Felix Frankfurter:

You mean the market in each products and all the rest of them?

Ralph S. Spritzer:

That’s right.

And as I say, their own brand products are only a small fraction of the total handle.

But we are concern in this case only with McKesson’s own branded products and hence for purposes of this litigation, the other products can be put completely to one side.

Now, let me indicate briefly on this diagram, the distribution channel so far as McKesson brand products are concerned.

Largest part of that merchandise — those as indicated by the arrow in the center of the page going downward, the largest part of McKesson brand products go — goes from the manufacturing division to the McKesson wholesale divisions which in turn, of course, resales to the retail trade.

Now, another segment, another portion of that merchandise shown by the arrow appearing on the righthand side of the diagram is distributed directly by McKesson manufacturing division to the retail trade.

Those sales have been made by McKesson’s to selected desirable attempt, largely or exclusively, I think, the large drug chains such as Walgreens or Peoples.

Do you claim that those violate the — the McGuire Act?

Ralph S. Spritzer:

No.

We are contending and I’ll come to that, Your Honor, in a moment.

That McKesson’s agreements with the independent wholesalers violate this proviso.

That brings me to the third channel of distribution which I hadn’t yet stated.

It’s represented by the arrow that appears on the lefthand side of the page.

That’s the third channel, sales by McKesson’s manufacturing division to independent wholesalers who in turn sell these McKesson brand products to the retail drug trade.

Ralph S. Spritzer:

There is an arrow moving from right to left in the center of the page which shows only that the independent wholesalers buy some of the McKesson brand products from McKesson wholesale division operating in the field.

So, they buy most of them from the manufacturing division which is in Connecticut.

Now, the independent wholesalers compete with McKesson in selling drugs to the retail trade.

There’s no question about that.

It was agreed by representatives of McKesson who testified on deposition.

It reflected in stipulations which are of record and the court below so found.

It appears that some of the independent wholesalers have trade territories which are virtually identical with trade territories served by individual wholesale divisions of McKesson.

As to others, it appears that there’s substantial overlapping and even as to those independent wholesalers who do not compete with McKesson wholesale division in selling to the retail trade.

There is still competition with McKesson because those independent wholesalers do compete with McKesson’s manufacturing division in seeking the patronage of these large retail drug chains.

Felix Frankfurter:

Just for the — the bear section of my eyes drug dealers if the arrow is going to the McKesson’s wholesale division, the arrows going to independent wholesalers (Inaudible) or reach are intended for to obtain drug dealers, is that it?

Ralph S. Spritzer:

Yes.

Felix Frankfurter:

It’s going to be a little difficult right (Inaudible) is that right?

Ralph S. Spritzer:

They — they both sell in the same retail trade.

Yes.

Felix Frankfurter:

That’s the market?

Ralph S. Spritzer:

Yes.

That represents the whole market and not any particular fragmentation of it.

Stanley Reed:

Well, then there is species of competition between McKesson wholesale divisions and McKesson manufacturing division in selling to the drug retailers?

Ralph S. Spritzer:

Well, how real that competition would be, one might, of course, question since normally to operating divisions of the same company.

Stanley Reed:

Your objection to McKesson’s manufacturing division agreeing that they use the same prices when the come to the drug retailers, same fix prices?

Ralph S. Spritzer:

Well, our —

Stanley Reed:

I don’t mean to sell at the same prices.

Perhaps, a variation in that but they — they get an agreement with the drug retailers that — that they will not sell below in this price.

Ralph S. Spritzer:

There is no question in this case at all about the legality of agreements with retails.

We don’t question that, we never challenge to.

It’s not an issue under the complaint.

Stanley Reed:

I understand that.

So that leaves the only thing the independent wholesalers at McKesson’s wholesale division?

Ralph S. Spritzer:

That’s right.

The only question is whether McKesson can fix the prices at which the wholesale competitors of McKesson may sell McKesson brand products.

Ralph S. Spritzer:

And we say that they cannot because by definition, McKesson’s agreement with the independent wholesalers is an agreement between wholesalers and if there any question as to that, it’s certainly clear that it’s an agreement between persons, firms or corporations in competition with one another.

Stanley Reed:

But if you cut out the wholesalers and had — merely McKesson agreeing with the independent wholesalers that the independent wholesalers would require drug retailers to sell at a fix prize?

Ralph S. Spritzer:

Yes.

Stanley Reed:

That would be alright.

Ralph S. Spritzer:

Provided McKesson itself was not doing business in competition with those independent wholesalers.

In other words, we have no objection to the proposition that a manufacturer may bind wholesalers under Miller-Tydings and McGuire.Of course, he can just as he combine retailers or — or anybody else in the line of distribution.

The question is, whether he is given that permission by the Federal Act when in some capacity or other, he is engaged in competition with the very persons whom he would bind by contract.

And if this proviso clause is to be given the plain effect of the words, it would seem that no such agreement is immune from the Sherman Act.

Could I ask you one question —

Ralph S. Spritzer:

Certainly, Your Honor.

— form this chart?

You say that both independent wholesalers and McKesson wholesaler divisions handle nonMcKesson products, products other than McKesson’s products as well as McKesson product —

Ralph S. Spritzer:

Yes —

— right?

Ralph S. Spritzer:

— they do.

Is there any fair trading with those products between the two wholesalers — two groups of wholesalers shown in here?

Ralph S. Spritzer:

Not involved —

Not at all.

Ralph S. Spritzer:

— the Government didn’t alleged that there was any consort of action between McKesson and independent wholesalers in respect of product of other manufacturers.

Right.

Ralph S. Spritzer:

It may be that many of those other drug manufacturers do fair trade but that of course has nothing to do with our problem here.

Well, that’s what I want to find out.

Ralph S. Spritzer:

With the other drug manufacturers?

No.

Whether there’s any fair trading as between McKesson wholesale divisions and independent wholesalers are nonMcKesson products?

Ralph S. Spritzer:

None that appears — none charge, none in this case.

Well, that’s only in this case?

Ralph S. Spritzer:

Yes, sir.

As I think I’ve already indicated, perhaps, without saying so explicitly.

McKesson has fair trade contracts with each and every one of the 90 odd independent wholesalers who handle McKesson drugs.

Ralph S. Spritzer:

And if those contracts and those along which are challenged by this suit —

Felix Frankfurter:

May I ask you one thing on this?

That was a (Inaudible)

Ralph S. Spritzer:

Yes, sir.

Felix Frankfurter:

Does the record show, I mean the — is it relevant whether McKesson as fair trade restriction against retailers who it supplies directly with the same economic consequence as the agreement which it speaks define, the independent also reselling (Inaudible)

Ralph S. Spritzer:

Well, that — that bring, it may do.

The point I just wish to call up Your Honors attention in stating the facts.

We’ve shown also on the chart the discounts which are permitted or given, as the case maybe, under the arrangements which McKesson had when this suit was brought.

As Your Honors will notice the independent wholesalers could buy from McKesson’s manufacturing division at 25% off the list, and list as here use means McKesson’s wholesale list.

Then when they sold in turn to the drug retailers, they were required to charge a minimum price which was no less than 14.5% off list.

Now, if you’ll compare, you will see on the right side of the diagram that McKesson’s manufacturing division, when it sold to these selected large chains gave on quantity purchases up to 20% off list as contrasted with the 14.5% which the independents could get.

That was the maximum, the independent to give in those circumstances could they give anymore no matter how big the order.

I should add in fairness to appellee here that on the eve of trial in March 1955, some three years after the complaint in this case was brought.

McKesson did abandon this last mentioned practice and said that henceforth, the independent wholesalers could give equivalent discounts on equivalent quantity.

But apart from that question as to whether McKesson was undercutting the prices which it established for its competitors, we say that we have here a pure legal issue.

We say that we thank these words say without any qualification and as pointedly as they can, that nothing in federal fair trade legislation shall make lawful resale price maintenance agreements between wholesalers or between persons, firms or corporations in competition with each other.

And McKesson’s a wholesaler.

It’s the largest in the country.

The independent wholesalers are also, by definition, wholesalers.

And apart from that, there’s no dispute that the independents do compete with McKesson with both of its manufacturing and its wholesale divisions in selling McKesson brand products to the retail trade.

Now, it was on that basis, deeming it clear, that these agreements were not within the exemption of the McGuire Act, that the Government moved for summary judgment in the District Court.

That was in the Southern District and that motion was denied by Judge Murphy who wrote in extended opinion.

I think the gist of that opinion maybe conveyed by this single sentence which I will quote from it.

It appears in the record of 21.

Judge Murphy said, “This Court is unwilling at this stage of case law development of legislatively sanctioned resale price fixing to hold illegal per se fair trade agreements because the producer is also a wholesaler in the absence of a showing of some injury inchoate or consummate to competition.”

Many said further on the following page that he would not apply the doctrine that price fixing is per se illegal absent a factual showing of illegality.

Then on that basis, he said that the case should go to trial.

He also stated that if it appeared, for example, that McKesson’s agreements with the independent wholesalers were — and again I’m quoting from the opinion, this time from record 23, “If It appeared that the agreements were a first step toward and with the intent to gauge consumers, that might suffice prima facie as violation of the Sherman Act outside the privilege of the fair trade statutes.”

Felix Frankfurter:

I don’t understand the tenor of this.Do I infer from the quotation, I’m going to the opinion that he rejected the rulings of this Court that price fixing is in it of itself violates the (Inaudible) law?

Ralph S. Spritzer:

Yes.

Ralph S. Spritzer:

He took it and I think erroneously that the per se doctrine didn’t apply to — to resale price maintenance agreements any longer.

He thought that since Congress has dealt with the subject of resale price maintenance that such agreements had to be considered in each case on their facts to find out if there was some additional restraint as he put it.

Indeed, the — the first sentence which I quoted earlier, I think, is the clearest reflection of that (Voice Overlap) on record 21.

Felix Frankfurter:

I think the Government’s position is that the McGuire Act merely lifted that bar to the extent that it lifted it — to the extent that (Inaudible) the law today.

Ralph S. Spritzer:

Exactly.

Felix Frankfurter:

That’s — is that your —

Ralph S. Spritzer:

That — that’s our full argument on that branch of the case.

I’m not going to attempt to detail the cases here in which this Court has for 40 or more years said that price fixing agreements are per se illegal and in which it is held that particularly in relation to resale price maintenance agreements.

Those cases extend from the Dr. Miles decision in 1911, certainly down through the Schwegmann case.

And —

Felix Frankfurter:

In other words Judge Murphy’s opinion as I gather from your (Inaudible) per se illegal has been replaced by (Inaudible) and then on and therefore, the — nothing is per se anymore violated.

Ralph S. Spritzer:

Nothing is per se in the field of resale price maintenance.

Now, we think it’s perfectly plain from cases like the (Inaudible) case and the Schwegmann case, other cases which post date their trade legislation.

But the question is whether you’re within the exemption or whether you’re outside of it.

And we don’t think that Congress changed preexisting law in respect of agreements which are outside the exemption.

And from that view, I may say, I don’t think there’s ever been any dissent by any single justice of this Court.

Now, McKesson does not, as I have read their brief, rely on Judge Murphy’s position in this Court.

They have somewhat different argument to which I’ll come in a moment.

But before I do, perhaps I should say a word about what occurred at the trial.

After summary judgment was denied — was denied, the matter went to trial before Judge Clancy.

The Government had taken depositions of two officers of McKesson and they’re also on file in connection with the papers filed in support and in opposition to the motions for summary judgment, various interrogatories and answers and various stipulations.

No oral testimony was taken.

The Government reasserted its position that these agreements were per se illegal on the admitted facts.

It also made the argument that if some peculiar injury to competition had to be shown beyond that which is presumed to result from price fixing generally, there was a showing of such additional injury or restraint in as much as it appeared that McKesson had undercut in dealing with the large drug chains, the prices which it had bound the independent wholesalers to charge in dealing with the same trade.

Now, Judge Clancy rejected the Government’s legal theory, expressed his agreement with Judge Murphy stating incidentally that he thought that Judge Murphy had established the law of the case and then he found insufficient to show, as he put it additional restraint, this factor of undercutting which I have just mentioned.

Now, as I indicated a moment ago, I think, McKesson’s position in this Court is somewhat different from Judge Murphy’s reasoning in denying summary judgment.

As I understand its brief, it doesn’t argue that the per se rule is now inapplicable to resale price maintenance as such.

What it does argue is that it is within the statutory exemption.

It says that the words or rather the prohibition on agreements between wholesalers is not to be applied when the wholesaler is also a manufacturer.

It says in other words, “We sell to the independent wholesalers in our manufacturing capacity.”

Ralph S. Spritzer:

Therefore, the Court should not consider our fair trade contracts with the independent wholesalers as constituting agreements between wholesalers.

It also argues, and I think this is essentially the same argument differently expressed, that the proviso should not be applied where there is a buyer-seller relationship as between the parties to the agreement, which is really tantamount to saying, we think, the proviso should not be applied to resale price maintenance as ordinarily conceived.

Now, we think, there are number of objections to this theory or suggestion that McKesson may, for purposes of application of the statute change its character or identity at will.

In the first place, Congress did not add after the phrase between wholesalers, the words which McKesson would interpolate, i.e. unless one of the parties is also a manufacturer.

Moreover, McKesson did not —

Felix Frankfurter:

But it wouldn’t have to — it wouldn’t have to interpolate that, there might be another word between all the wholesalers.

Ralph S. Spritzer:

Yes.

My argument would be the same.

Now, McKesson, moreover, did not cease to be a wholesaler merely because the fair trade contracts which he executed with independent wholesalers were signed by an officer in the manufacturing division rather than in the wholesaling division.

The fact remains that it competes with these people and competes with them in its capacity as wholesalers.

I should also mention, I think, that even we go along with the suggestion that you can somehow divorce the manufacturing and wholesaling operations here, the fact remains that both its manufacturing division and its wholesaling division sell to the retail trade and they both compete with the independent wholesalers.

So, whatever possible question one might have, and we hardly think it would be a serious one as to the application of the between wholesalers phrase, we don’t see how there can be any real question as to the application of the final phrase in the proviso paragraph between persons, firms or corporations in competition with each other.

Are these wholesaler divisions, are they separate corporations?

Ralph S. Spritzer:

No, sir.

They are operating divisions of the same corporation which has a unified management.

I don’t mean to imply or concede that the case would necessarily be different if it were — if they were subsidiary corporations but they’re not.

McKesson also claims support for the view that Congress wouldn’t have wanted to preclude the dual manufacturer, that is the manufacturer who operates also as a wholesaler, wouldn’t have wanted to preclude it from using fair trade, claims support for that in legislative history.

Now, before turning, as I will very briefly, in a moment to the committee reports and the debates, I would like to emphasize two background facts which we think are key importance if there’s any necessity at all in this case of looking the legislative history.

The first is, that all of the states which have fair trade laws, have in those laws phrases similar to what appears in this proviso paragraph.

All of them state, that agreements between wholesalers, between producers, between retailers are not permitted.

There’s some — there are some variations in language.

Some say between wholesalers, others between, and among, and so on.

But they all have comparable language.

The Federal Act took over that language and it added the further final phrase or between persons, firms, or corporations in competition with each other.

Now, that last phrase was added, as Senator Tydings stated, was added to the Miller-Tydings bill at the suggestion of the Attorney General to remove certain objections which he had and for purposes of clarity.

But the point I would emphasize particularly here, is that we don’t have, in this case, a situation like — well, a situation where it can be argued as it was in the Schwegmann case.

That the Federal Act needs to be broadly interpreted in order to give play to the basic scheme of the state laws, because the fact here is, that all of the state laws have comparable language and have had since their inception.

Now, there’s a second point which stands out from the standpoint of history.I’ve already alluded to it.

And that is that the present suit was filed in 1951 and it was publicly announced by the Attorney General at that time.

It was filed, that is to say, after Miller-Tydings and before McGuire.

Ralph S. Spritzer:

And as I’ve also indicated the Assistant Attorney General in charge of antirust called the attention of this suit to the congressional committee in the course of his testimony which dealt with many faces of the McGuire Act.

Now, the Committee didn’t comment on that, didn’t comment on this suit and we don’t —

What was the — what was his comment that call your attention (Inaudible)

Ralph S. Spritzer:

I don’t think that I — that the context clearly shows that.

He was talking about many aspects of fair trade and he did in the course of his testimony and we’ve given the full references to the Court in our brief, refer to this suit and indicate its nature.

Now, I’m not attempting to put more weight on that than it can bear.

I don’t say that Congress said we approved.

It’s a fine thing you brought a suit.

It didn’t.

It didn’t make any comment one way or the other in the committee report.

Now, all we’re saying is that Congress was on notice and that this was one aspect of the Miller-Tydings Act that it didn’t choose to change.

We’ve discussed in our brief at some length the committee reports and the debate on Miller-Tydings and the McGuire Act, I only attempt to indicate very briefly here of what we think is shown.

The proviso paragraph wasn’t added to Miller-Tydings until the bill reached the floor.

And probably, as a result of that, there was very little comment in the committee report.

In any event all that the committee report say is that — well, it paraphrased the proviso and then add the comment that horizontal contracts are not authorized.

I didn’t understand those words —

Ralph S. Spritzer:

They had the comment that horizontal agreements are not authorized.

Judge Murphy summarized the legislative history in his opinion.

He said he found it wholly unilluminating.

He stated, and we think quite correctly on this point, that the committee reports have language, such that I’ve just indicated, reflecting a general disapproval of agreements between competitors, but they do not have anything concretely discussing the situation in which the dual entrepreneurs, that is the company like McKesson finds it here.

Now, McKesson doesn’t find anything either to support its position in the committee reports.

Hasn’t cited anything.

In them in, we don’t think there is anything.

It relies rather on statements of two individual legislators.

One statement made when Miller-Tydings was before Congress and another statement made when the McGuire Act was before Congress.

The first of these doesn’t, in our view, support McKesson’s position at all.

The second is entirely favorable to McKesson’s position but it represents, we submit, nothing more than the views of one legislator, not concurred in or disagreed with for that matter by any other legislator who had no official connection with the bill.

Let me turn first, however, to the first statement.

We set that forth in the Government’s brief in a long footnote appearing at pages 59 and 60.

The first sentence of that statement, and it’s a statement by Representative McLaughlin who was a member of the House Judiciary Committee.

Ralph S. Spritzer:

The first sentence is a paraphrase of the proviso.

And then on page 60, there is the italicized language upon which McKesson relies.

Representative McLaughlin said, “As an example, the Act would not allow two manufacturers of similar trademark articles” — as for instance and I’ll skip some of that, “to agree between themselves as to the prize at which their respective article shall be sold.”

Now, we have no disagreement with that statement.

We think it’s perfectly clear that the proviso clause would forbid two manufacturers, let us say, of different branded items, the manufacture of Calox Tooth Powder and Dr. Lyons Tooth Powder from getting together in saying that each of them would follow a certain price fixing program in relation to the product of each.

But it doesn’t follow from that, that the proviso has no application to agreements by two manufacturers or two wholesalers in relation to a single trademark commodity.

Indeed, Representative McLaughlin said at the outset of that sentence as an example.

Now, turning to the second statement upon which McKesson relies, and this one is relevant though we don’t thinks authoritative.

That set forth at pages 66 and 67 of the Government’s brief.

It’s a statement by Senator Humphrey.

It was made on the floor of the Senate during the debates on the McGuire bill.

And he quite specifically mentioned the case of a producer who sells to consumers, retailers and wholesalers alike.

Excuse me.

Not only did he mention the case but he went on to say, “Such firms may make resale price maintenance contracts,” I’m now quoting him, “with both wholesalers and retailers.”

Well it’s perfectly plain that Senator Humphrey didn’t think that the between wholesalers phrase ought to be applied to a wholesaler who is also a manufacturer.

We note that he did not discuss how one reads that of the statute, the other phrase which we think important between persons, firms, and corporations in competition with one another.

But in any event, we submit, that this is a statement which can hardly overcome the express language of the statute.

Senator Humphrey was not a — an author of Miller-Tydings or of McGuire.

He was not a member of any committee which considered either of those bills.

There’s no indication as to whether anybody else in the Senate or in the House agreed with Senator Humphrey’s position that the Attorney General’s suit against McKesson was unjustified and we hardly think in the circumstances that such a statement coming from an individual legislator can have great weight.

Felix Frankfurter:

Mr. Spritzer, I’m sure that it has been relevant and you referred to it but (Inaudible) appear this remark by Senator Humphrey wherein most of the colloquy (Inaudible).

Ralph S. Spritzer:

Yes, that is correct.

Felix Frankfurter:

The colloquy Senator — Senator Sparkman classification shed any light on our —

Ralph S. Spritzer:

No, because Senator Sparkman’s participation was passive rather than active in this at the time of this discussion.

Felix Frankfurter:

But,he was — Senator Sparkman at that time on judiciary?

Ralph S. Spritzer:

I —

Felix Frankfurter:

All I’m saying —

Ralph S. Spritzer:

I don’t really recall —

Felix Frankfurter:

— to my mind is that if this is a remark made by an individual member that is non-authoritative as you have indicated to a man in charge of the bill, (Inaudible) the Senate would have a great (Inaudible) that it’s just a spontaneous intervention.

Ralph S. Spritzer:

Well, this bill was originated in the House and it was taken over by the Senate.

Ralph S. Spritzer:

So, no one in the Senate was in any sense an author of this bill, whether Senator Sparkman was at that time a member of the Judiciary Committee (Voice Overlap) I couldn’t tell you Your Honor.

Felix Frankfurter:

(Inaudible)

Ralph S. Spritzer:

No.

There are no basis.

Felix Frankfurter:

(Inaudible)

Ralph S. Spritzer:

He was not in charge with the bill at that time.

Whether he was a member of the Committee, I — don’t recall but it is perfectly clear that while a question more generally in nature, he listed at this comment by Senator Humphrey that it seems clear enough that Senator Sparkman didn’t affirm it or disaffirm it after the statement was made.

Our position in short on the legislative history is that there is nothing authoritative and that the language here which is clear can hardly be disregarded especially since this is a case in which the familiar canon that exemption provisions are not to be extended beyond their plain terms is clearly applicable.

Earl Warren:

Mr. McGrath.

John P. McGrath:

Mr. Chief Justice, Your Honors.

It is our position here today that the present status of the fair trade controversy can fairly be said to be that Congress intends to permit or condone, if you will, price fixing and the elimination of price competition where trademark or brand competition exist under certain circumstances.

The circumstances being that it says to each state, “You are at liberty to fix your public policy on this subject.”

And it says to each manufacturer of trend — trademark or branded goods, “You are at liberty to fix your business policy on this subject, namely, to impose price maintenance contracts down the stream of commerce or to withhold the imposition of such price maintenance contracts.”

Now, regarded in that light we have the situation of McKesson and Robbins which, of course, in addition to having 74 wholesale divisions where it sells products manufactured by all the people in the drug business, manufactures and markets through a segment of its organization known as — as McKesson Laboratories at Bridgeport, a volume of — of its own manufactured and branded products which in the year in question here, amounted to approximately $11 million.

And those branded trademark products manufactured by McKesson is price fixed.

Now, this chart, I have no serious difficulties with it, but I would like to point out that with regard to the $763,767 shown as McKesson manufacturing sales to independent wholesalers, only 283,000, approximately, of that amount or about one-third where to divisions or to wholesale dealers whose trading areas overlapped, trading areas of McKesson and Robbins wholesale divisions.

The other 480,000 were sold to wholesale dealers whose trading areas did not overlap.

With regard to the $200,000 of sale, showing — shown in the middle of the chart between independent wholesalers and McKesson wholesale divisions, the testimony is that these were courtesy sales.

In other words, if wholesaler, an independent wholesaler needed a McKesson brand product in a hurry and didn’t want to get it from Bridgeport, he could conveniently get it from the nearest wholesale division, he would do it.

But I think the average was $1600 a year with each of these.

So it’s really a de minimis situation and a courtesy situation.

Now with regard to this column on the right where one-and-three-tenth million are sold to selected chains, that should be viewed with the reservation that no challenges made to the retail sales of McKesson since it does not operate at the retail level.

But it also should be born in mind that the reason why we abandoned that 20% discount, three years after this case was started, is because no point was made of the fact that we were making direct sales to retailers in the complaint or at anytime prior to the decision of the District Court.

And when the District Court said, “I reject the per se doctrine with respect to fair trade price fixing and I ask you to produce some proof of an additional restraint other than a restraint which exist from the mere authorization to price fix.”

In other words, some restraint that flows from the integrated nature of the distributive process as performed by McKesson, then they seized upon this 20% discount as a differential in treatment by McKesson Laboratories to retailers from that accorded retailers by the wholesale divisions of McKesson and by independent wholesalers.

And they said here, we point out, is the additional restraint which Judge Murphy said would have to be produced and rather than confuse where up to that point was an issue of law by this contention that we were giving a 20% discount to retailers who bought direct certain quantities from McKesson Laboratories, we abandoned the term, the discount term because it was meaningless.

Felix Frankfurter:

20% off produced by (Inaudible) the selected chain would still be less either of the wholesalers would —

John P. McGrath:

Yes, sir.

The — the point we make about — about this 20% discount is that really a chain store is a hybrid operation.

They perform not only a retail function but they also perform at least part of the wholesale function.

John P. McGrath:

Now, this Court has recognized in one of these Walling cases, Phillips against Walling, that at times the — there is a — an overlapping.

The Court said some agency must provide a machinery to move all merchandise form the producer to the retailer.

Regardless of what this function is called, it is essentially the same as wholesale chain stores.

Once they assume enough importance to justify a warehouse are engaged in wholesaling as well as retailing.

That’s the reason for the 20%.

The average sale, believe it or not, from a wholesale — from a wholesale drug firm to a drugstore is $45.

They served on almost the daily basis if not completely on a daily basis by their wholesalers.

And this 20% discount applies only to purchasers, single orders of $1000 or more.

And in the drug business, anybody who buys from a wholesale house $1000 or more is buying because it is — is able to warehouse and its servicing a number of stores and not merely one.

So that we think this million — three is out of the case.

And I come now to — to the situation with respect to McKesson setup and the development of this case.

Actually, the McKesson Laboratories is operated completely independently of each one of its wholesale divisions.

The personnel is different, top management, yes, the same.

But each one of these McKesson wholesale divisions operates as an independent wholesale house.

The price fixing contracts are vertical contracts in the sense that they are all — they all have their origin at the source of the product with the manufacturer and they are all in a transaction of sale between a buyer and a seller.

There is no horizontal dealing between wholesale divisions as such and wholesale — independent wholesalers that has any relation to the fixing of prices.

The price is already fixed when the product enters the stream of commerce when it leaves the door of the manufacturer.

And we say that the subsequent relationship or the subsequent circumstance that would respect to other products, McKesson maybe in competition wholesale with other independent wholesalers is irrelevant and does not relate back to taint the validity of the original transaction.

Now, of course —

Stanley Reed:

Is it — is it a written contract that McKesson has of the independent wholesalers?

John P. McGrath:

Yes, sir.

Stanley Reed:

And do they have the same contract with — with their own wholesale divisions?

John P. McGrath:

I — I would — I would believe so but I can’t answer that question categorically.

They don’t have a — actually this — the price, the retail price is fixed, and everything is done with reference to that retail price.

In other words, the wholesale price is 25 off the retail and then the wholesaler has the privilege of giving discounts depending upon quality purchases by retailers, not however, to exceed certain stated amounts.

10% and 5% or overall of —

Stanley Reed:

14.5% is off the list.

John P. McGrath:

Sir?

Stanley Reed:

14.5% is off the list of price.

John P. McGrath:

Yes.

John P. McGrath:

Off the — off the retail sales price.

Now, I had the impression that when the Schwegmann case was decided, it represented a reassertion by Congress of its approval of the fair trade philosophy when that philosophy met the approval of the legislatures of the respective states.

I didn’t think that it could be successfully argued that the failure to change certain language in the reassertion of that philosophy could give any comfort to the plaintiff in this case.

Apparently, it has.

This suit was started before the McGuire Act was passed.

We believe that when the McGuire Act was passed, despite the fact that it represented a reassertion of congressional approval in the form that Congress indicated that it could be permitted.

The Department of Justice took the view that if a sufficiently now interpretation of the language could prevail, that then, its lawsuit might survive.

Now, in order to have the lawsuit survive, of course, it has become necessary for the Government to ask this Court to repudiate the exposition of congressional intention which was expressed by Senator Humphrey.

And before we dismiss it as the view, what he said as the view of a single individual and not necessarily the collective view of Congress and not necessarily indicating that the President adopted it and all the other criticism that can be made, I think we must recognize that we should look at what — what was said and the circumstances under which it was said in order to determine what weight is to be given to it.

Because after all, that is the question.

What weight should be given to it?

Now, what Senator Humphrey said, he said on the floor of the Senate and he said it in reply to an inquiry by Senator Sparkman which appears on page 14 of our brief.

Senator Sparkman said, “Mr. President, I should like to ask the Senator from Minnesota one or two questions in order to be absolutely clear in my own mind that in order that the record maybe absolutely clear.

I propound these questions to the Senator from Minnesota because I know of the great interest he has in this proposed legislation, the work he has done on it and his understanding of the facts and the background.

Therefore, I should like to ask his opinion on these two questions.”

Now, as I understand it, Senator Humphrey led the fight for this bill on the floor of the Senate.So, that it was quite a logical thing for these questions to be addressed to him.

And it is in that context in — in those circumstances that Senator Humphrey said, and I think what he said as it appears in the middle of page 16 where we’ve italicized it bears repetitions.

While in one sense firms in this position function not only as producers but also as wholesalers and retailers, they may still lawfully make contracts with other wholesalers and retailers when in making such contracts they act as producers of a trademark or branded commodity rather than as wholesalers and retailer.

And that we submit is the situation we have here.

And if this Court has in mind that immediately or very shortly following that colloquy, a vote was taken on the bill and the vote was 64 in favor and 16 Senators against, I think, and we have further in mind, that not a single Senator took issue with the views expressed by Senator Humphrey as to what the bill was intended to accomplish.

I think it’s reasonably fair to say that what Senator Humphrey said represented the intention of the Senate.

Felix Frankfurter:

Mr. McGrath, may I ask you as I hope that (Inaudible)

May I ask you from your point of view what is the economic justification or position that you’re taking as I hope you will tell us what the objection is apart from the 20% discount (Voice Overlap) —

John P. McGrath:

Well, I would — I would like to say that I think the economic justification from my point of view is the fact that fair trading as a philosophy won the argument in Congress over the outlawing of price fixing whatever its purpose.

I say I’m therefore, not called upon to justify a — a philosophy which Congress has authorized the States to adopt.

Now, I think that’s all I have to do here.

I say this that —

Felix Frankfurter:

Put (Voice Overlap) upon the statute of this doctrine, did it not?

John P. McGrath:

Yes, sir.

And I say that the limitation that it put on this doctrine was to prevent horizontal price fixing by dealers at whatever functional level so long as they are at the same functional level.

John P. McGrath:

And I say that is not what we do here and I invite examination of the intention of Congress and of our action under this statute by the test whether any greater economic danger, any greater restraint of competition exist by virtue of the fact that we are wholesalers as well as manufacturers then would exist if we were not.

And I say that if — I say if McKesson did know wholesale business but was merely a producer, its price fixing policy would eliminate price competition among all wholesalers distributing its products, no greater consequence follows under the present situation.

Felix Frankfurter:

Would you give the same answer if the sale of your wholesale division have 30% off of this as against 25% to the others and the discount allowed for your retailers, the retailer from your wholesale division are up to 20% as against the restricted 14.5%.

John P. McGrath:

I don’t see how a manufacturer could discriminate in fixing prices between two different dealers at — at the same level of distribution.

And therefore, I would say I couldn’t possibly give the same answer and I think the crux of the situation lies in the difference between the situation you point out and the one that confronts us.

Now, I don’t see how we can attribute to Congress an intention to discriminate against the so-called “integrated manufacturer” who occupies another level by — in a stream of distribution as well as the manufacturing end, when no greater economic consequence flows from the existence of such integration.

And we have a situation in the Doubleday, Doran case which was before the Federal Trade Commission which presented another aspect of this problem, and I think helps to put it in proper focus.

And there, it was not a question of manufacturer and wholesaler.

The integration there was between a publisher of books, the source of the product and a retail store maintained by the publisher.

And it was said — it was contended that since the publisher was in competition at the retail level with other retailers that therefore, there was a violation of the McGuire Act proviso.

And in passing on that, the Federal Trade Commission, which we recognized as having some expert capacity in this field, unanimously rejected such a — a proposed interpretation of the statute.

And they said, “We can take judicial notice.”

This is at page 21 and 22 of our brief, “We can take judicial notice of the fact that many manufacturers are partially integrated and engaged to a lesser or greater degree in some form of wholesaling or retailing activity.”

And the fact is that integration is a widespread practice in almost every line of business and it is free throughout the United States.

It goes on to say, in determining congressional intent, there’s a strong presumption that Congress does not act in a vacuum and knows what’s going on contemporaneously.

And he points out that no — no economic basis for the interpretation contended for by the Government is — is obvious from the facts.

Points out that it would require vast changes in the manufacturing and distribution practices of firms throughout the country if such a construction would be place upon it.

And concludes that there is nothing in the legislative history to suggest that Congress intended to discriminate against partially integrated concern.

Now, I think that since we have to recognize a condonation on the part of Congress of the elimination of price competition, and certainly, the likelihood of the effect of price fixing at the source being — having an impact at the subsequent levels of distribution was pointed out quite clearly in the Schwegmann case by Mr. Justice Douglas when he urged that — that the limitation that retailers be at least given the privilege of voluntary — voluntary agreement or acquiescence in the price fix before they were bound by it.

That it seems to me indicate the fact that Congress, after the caveat contained in the Schwegmann case, saw fit to reassert its approval of price fixing, both with respect to signers of agreements and non-signers is an indication that militates against the argument that Congress intended to discriminate against the partially integrated producer.

Now, against these arguments, we are confronted by the Government with the invocation of the per se doctrine.

As I understand the Government’s argument, they say yes but price fixing is traditionally invalid, illegal per se and therefore you have the burden of showing facts which take you out of the condemnation contained in the Sherman Act.

Now, I — I proceed to make this argument with some trepidation but I make it — I confess with conviction also.

I think the per se doctrine is gone.

That is the traditional doctrine.

As I understand the concept, that price fixing is inherently bad to use the language in the Government brief or to use other languages by the Government that is conclusively presumed to be unreasonable.

When you say that price fixing is illegal per se, you’re using an absolute like purity or perfection when soap as 99% and 44% percent pure, it’s not pure.

Similarly, if price fixing is inherently illegal, you can’t do it.

You don’t’ as the Government suggests embark on an inquiry to determine — I forgot the language — says, “In determining the legality of any given price fixing agreement.

Well, you don’t inquire to determine the legality of a price fixing agreement.

John P. McGrath:

If it’s illegal per se, you just inquire — is it a price fixing agreement and if it is, it’s bad.”

Now it’s in that sense that I say that when such a doctrine is invoked, its full power should be appreciated and I doubt that the Government counsel have fully appreciated the significance of the concept to which they’re urging.

I think they did in certain language, at page 31 of their brief, where they take Judge Murphy to test by saying it is a contradiction in terms to say as the Court did that the per se doctrine is in applicable “absent a factual showing of illegality.”

The whole import, says Government counsel, of the per se doctrine is that no such factual showing of illegality need be made.

Well, I agree.

If I have the concept of — of the per se doctrine correctly, I agree.

But then how do we account for what they say at page 27 of their brief, the bottom, when they say, “In short absent, a special exemption by Congress, price fixing agreements in or affecting interstate commerce are not only illegal but illegal per se.”

It seems to me they commit the same offense for which they take Judge Murphy to test.

I say that if there is anything left of the per se doctrine, it’s a water down version and it isn’t the inherent illegality, the — the very essence of wrong and taint which cannot be rationalized into something right.

William O. Douglas:

Well, what make it disappear?

What (Inaudible)

John P. McGrath:

I think the bill that created the exemption killed the doctrine.

William O. Douglas:

You mean the exemption (Voice Overlap) —

John P. McGrath:

The Miller-Tydings Act put an end to the per se doctrine because it said it’s — it’s no longer wrong if the State — they delegated to the States the right to say it was right.

(Inaudible)

John P. McGrath:

Well, you don’t inquire.

As I understand the concept —

(Inaudible)

John P. McGrath:

As I understand the concept, you can’t inquire the circumstances.

Now, in —

William O. Douglas:

You’re not dealing (Inaudible)

John P. McGrath:

You’re dealing with an absolute.

The fact that there are circumstances it’s all right, other circumstances not all right rebuts the notion of — of absolute wrong.

William O. Douglas:

I understood all Congress (Inaudible) under circumstances (Inaudible)

John P. McGrath:

I think the problem that we have here and I — I see no point in laboring the doctrine of per se or not per se where not for the fact that the — as I see the Government’s position an attempt is being made here to convert, what started as a conclusive presumption of illegality into a rule of evidence by which the Government can shift the burden of proof to us by saying we now have —

William O. Douglas:

— cut down the exemption if (Inaudible)

John P. McGrath:

Well, I say per se illegality and exception can’t coexist.

And I say that if there’s a conclusive presumption of illegality and Congress removes that by statutory mandate, the Government has no right to say that upon the ashes of that conclusive presumption they can write a rebuttable presumption so as to shift the burden of proof to us to justify what we are doing when — when Congress said what we’re doing is alright.

But —

William O. Douglas:

That’s the question, wasn’t it?

William O. Douglas:

I think you’re arguing somebody — I don’t know who you’re arguing (Inaudible)

John P. McGrath:

Well, I hope I’m not arguing with anybody but I think —

You confuse me because I thought the only issue in this case is whether these contracts were not within — were — were not within the McGuire Act.

John P. McGrath:

Well —

Isn’t that in the case on both sides whatever they (Inaudible)?

John P. McGrath:

I think so, but I think that the Government counsel has introduced the question of burden of proof here.

At — at the top of page 25 of the Government brief, they mentioned that their position is set forth in terms of two basic propositions, this is at the bottom of page 24.

One, that the agreements are illegal per se unless exempt under the Miller-Tydings and McGuire Acts, another at page 25, they say the first relates to the Government’s burden of proof.

Now, I say that when — when you talk about illegal per se unless exempt, you’re talking about contradiction of terms, number one, and I say I won’t stand for the Government employee shifting.

It’s burden of proof onto me by saying that they have the right to arrive on the curtails of a doctrine that no longer exist and say that we’re doing something wrong.

William O. Douglas:

Well, to be specific how do you get around (Inaudible)

John P. McGrath:

Is that the (Inaudible)

William O. Douglas:

I’m asking if (Inaudible)

John P. McGrath:

Well, I say —

William O. Douglas:

(Inaudible)

John P. McGrath:

I say that it’s entirely possible that — that a horizontal contract between two wholesalers neither of whom is a producer could be a violation but I say that — that when the price fixing occurs at the manufacturing level, the mere fact that the — the — there maybe a wholesale activity of the manufacturer does not vitiate a price fixing agreement to which was between buyer and seller was vertical and perfectly and perfectly legal.

Actually, Judge Murphy —

William O. Douglas:

That’s your conclusion, I know.

That’s where the obvious (Inaudible)

But how do you illuminate that?

The factual setting here (Inaudible)

John P. McGrath:

Well, actually the competition occurs at a later stage in the stream of commerce after the (Voice Overlap) —

William O. Douglas:

The same (Inaudible)

John P. McGrath:

Well, I — I’d like to test it this way.

I don’t say that it’s impossible for the Government to make out a case against the manufacturer who’s also a wholesaler.

And perhaps that illustrates the point that I’ve been trying to make.

It maybe conceivable that practices may develop which one factually proven frustrate the intention of Congress as expressed in this statute and upon the introduction of — of proper proof indicating that, a case would be made out of violation.

But I say we’re not violating as a matter of law and the burden is on the Government to — to demonstrate that we’re doing something more than we would be doing if weren’t in the wholesale business at all.

That puts our finger right on the — on the crux of the argument.

I don’t think we’re required to say here that the wholesalers, that no activity between us and independent wholesalers could be — could be a violation of the statute.

John P. McGrath:

I think it’s possible that there could be violation by — by some illicit agreement between the wholesalers which might relate back to control the action of the manufacturer upon proof of such a situation, there would be a violation.

But Judge Murphy said, “You can’t rely on the rule of evidence but you have to come forward and show additional proof of restraint.”

Some restraints which exist above and beyond that which is inherent in the price fixing which Congress says, is proper.

We say, we concur in that.

The Government has not come forward with any proof of any such abuse, and for that reason, there is no — there is no violation of the statute.

Now, I agree that if the statute is read and construed, as Senator Humphrey said it was intended, that should be the end of the case and I would be perfectly content to stop there where not for the point that is made by the Government with respect to the invocation of this per se doctrine as a rule of evidence.

Could, perhaps, I ought to address this to the Government but since it’s throughout your business practice, would you look at this chart for a minute.

I want to ask you a question?

What I want to ask you is this, Mr. McGrath.

Take the line that from manufacturing division through McKesson wholesale division through the drug retailers.

John P. McGrath:

Yes, sir.

Which indicates, there are some sales that are ultimately made to drug retailers from the — by that rule.

What’s the difference between that method of sale and the — and the line that goes straight down from the manufacturing division to the drug retailers, leaving out this question, the special discount, what’s the difference of the two operations?

John P. McGrath:

Well, the — the other sales are made by the wholesale divisions of McKesson which there were 74 of those throughout the United States setup geographically by area.

The McKesson manufacturing division is just one out setup on Bridgeport —

(Inaudible)

John P. McGrath:

Sir?

Or just one.

These are simply distribution of it.

Aren’t they?

John P. McGrath:

That’s right.

So, that in essence there’s not difference in — in between those two methods of sale and they were made directly from a — from a —

John P. McGrath:

Well, there’s (Voice Overlap) there’s an organizational difference —

Right.

I mean —

John P. McGrath:

But actually —

— is there economic difference?

John P. McGrath:

I — I know of no economic difference.

No, sir.

The McKesson wholesale divisions are just as much bound by the price fixed originating at the manufacturing level as the independent wholesalers are.

John P. McGrath:

I think that concludes my argument.

Earl Warren:

Mr. Spritzer.

Ralph S. Spritzer:

I like to address myself brief to the question which Mr. Justice Frankfurter raised as to the possible economic objections which Congress might have which reasonable men might have to price fixing between competitors which would perhaps not be applicable in equal degree to other types of resale price maintenance agreements.

Before doing that, however, I would say that we do think this is a case in which the Court actually need not go beyond the plain words of the statute either to legislative history or to speculation about economic policy.

Because it is an exemption provision and these are words which are as plain as words can be persons in competition with one another and we have confession that they compete.

But if one does go to this question of economic theory, I would suggest that there are a variety of considerations which Congress might reasonably feel, would make it more dangerous to allow price fixing in this area.One of these is this.

If you allow competitors to get together to fix the price of product A, it may be that the understandings which are reached there will not stop at that point and that they’ll flow over into forbidden territory

There — is every indication throughout the discussion of this proviso that Congress was afraid about getting together competitors that was enactment to it.

Maybe it felt that if competitors got together at (Inaudible) that you couldn’t confine it within the boundaries of — of purely trademark products.

Then there are other considerations which we think might lead to similar conclusions.

We think that they are dangerous when an integrated manufacturer price fixes at the wholesale level which are not present with a nonintegrated manufacturer, it does so.

Because if a manufacturer who was also an important wholesaler, price fixes at the wholesale level, he is in a position to offer the wholesalers the advantage of price rigidity if they buy from him while threatening them at the same time with impressive competition if they buy from other manufacturers.

Now, we think that that is closely analogous to the situation which the Court had before it in (Inaudible)

Hugo L. Black:

May I ask you —

Earl Warren:

If you want to finish —

Hugo L. Black:

Well, there’s a — if — if one should accept Senator Humphrey’s interpretation as being correct, what would be your position?

Ralph S. Spritzer:

Well, I think it best, one could take Senator Humphrey’s statement as an understanding by an individual legislator as to what effect he thought the Act would have.

Now, I would seriously doubt that such an expression of an opinion by an individual legislator even if he where in some more direct connection with the legislation, and Senator Humphrey was, could prevail as against language which is this —

Hugo L. Black:

Would you accept —

Ralph S. Spritzer:

— explicit.

Hugo L. Black:

— do you accept it as being oppose to your view?

Ralph S. Spritzer:

Yes.