DECEMBER 1, 1966. Re Spreckels Sugar Co., File 631 0072; Holly Sugar Corp., File 631 0073. To: Bur. of Restraint of Trade. I move that this be treated as a non-agenda matter. See attached memorandum. MEMORANDUM DECEMBER 1, 1966 To: The Commission. Subject: Spreckels Sugar Co., File 631 0072; Holly Sugar Corp. File 631 0073. These two sugar cases present different factual situations and perhaps should produce different recommendations. In Spreckels, I agree with the staff recommendation to close on the basis that there were no meaningful 2(d) or 2(a) discriminations and that the promotional schemes currently employed present no evidence of violation. Holly poses slightly different problems for there is stronger evidence here that discriminatory promotional allowances were made available to certain Holly customers during a period from 1961-65. In 1966, however, Holly adopted a uniform nondiscriminatory program comparable to the present Spreckels' offer. In light of the change in program and the necessity of further investigation of the earlier program to confirm that the allowances were discriminatory, to determine their competitive impact, and to ascertain the validity of a possible "meeting competition" defense, the staff, contrary to the field attorney, recommends closing. I am troubled by this recommendation. First, it was Holly who initially made the special promotional allowances which Spreckels was subse quently forced to counter. Second, unlike Spreckels, Holly apparently never attempted to make this allowance available on a nondiscriminatory basis to its various customers. Third, there is some evidence of injury to Holly's competitors (Spreckels lost Ralphs Grocery Co.'s business for about six months), and it should also be relatively easy to show injury to competitors of the retail customers, because sugar is one of the leading items used to lure customers to shop at a particular chain. Fourth, as the special allowances were offered to two of Spreckels' customers (and accepted by one), it will be difficult for Holly to show it was merely meeting competition. Statements made by the favored customers would seem to confirm this. On the other hand, Holly is a smaller competitor of Spreckels in the Los Angeles market (exact market share figures are not available), and, since Spreckels' merger with American Sugar Co. in 1963, is considerably smaller overall. Holly's special promotional allowances, while not offered to all its customers, were offered to one of its smallest customers as well as its largest, so its effect did not harm all small buyers. In addition, its willingness to offer these allowances exerted the competitive pressure which compelled Spreckels re increase its promotional allowances uniformly. Although such an increase in competitive behavior is desirable, it obviously is not a type which directly benefits the consumer with lower prices. Because of Holly's position in the sugar market and the fact that its current promotions are being offered on a non-discriminatory basis, I would not favor issuance of a complaint. However, since Holly appears to have violated 2(d) in the past, and may do so again in the future, I would prefer to seek an assurance of voluntary compliance rather than to close. I move that the matter be returned to the staff for that purpose. Re Giant Food, Inc., File 661 0153. From: Commissioner Elman. To: Bur. of Restraint of Trade. I move that this be treated as a non-agenda matter. See attached memorandum. NOVEMBER 29, 1968. MEMORANDUM NOVEMBER 29, 1966. To: The Commission. From: Philip Elman. Subject: Giant Food Inc., File 661 0153. For several reasons I believe that the Commission's interests would best be served by accepting Giant's assurances of voluntary compliance. First, it may be difficult to prove that the questioned terms are discriminatory. The file shows that some industry witnesses regard sales to individual stores within a chain as sales to a different customer from sales to a chain's central warehouse. If this argument prevails, Giant received no discriminatory terms in accepting the two-for-one offer on items which certain of its individual stores had already purchased. Similarly, the Commission would also be seriously challenged (but perhaps not as successfully) on the issue of whether the "bill and hold" terms were preferential. Second, even if the terms are discriminatory, it may be difficult to establish any adverse effect on competition arising from them. All chains received the initial two-for-one offer, and Giant, as the only customer to accept it, would inevitably be in a position to undersell its competitors. Although the 'bill and hold” terms may have enabled Giant to undersell its competitors over a longer period of time, the fact that after 21⁄2 years it had not sold a "one year's supply" and cancelled its contract with over 37% of San Georgio's products still credited to it, would make it difficult to establish substantial competitive injury. Third, since the bill and hold" terms were advantageous in the transaction mainly because macaroni is a spoilable product, all evidence points to this as a rather unique and isolated transaction. Finally, Giant was not the moving party in negotiating this transaction and has expressed its genuine concern to avoid further difficulty with the Commission by executing an assurance of voluntary compliance and initiating new buying procedures designed to avoid repetition of this situation. All things considered, I feel the public interest would be served by accepting Giant's assurances of voluntary compliance, rather than embarking on a long litigation that would in the end yield no better results. SEPTEMBER 19, 1967. Re American News Company, et al., Docket No. 7396; Johnson Publishing Co., Inc., Docket No. C-157; Hearst Corp., Docket No. 7391. From: Commissioner Elman To: Bur. of Restraint of Trade I move that this be treated as a non-agenda matter, and that the staff recommendation, in which I concur, be approved. See attached memorandum. To: The Commission. From: Philip Elman. MEMORANDUM SEPTEMBER 19, 1967. Subject: American News Company, et al., Docket No. 7396; Johnson Publishing Company, Inc., Docket No. C-157; Hearst Corp., Docket No. 7391. There appears to be reason to believe that respondents, American News Company and Union News Company, may not be complying with the order issued in Docket 7396, although the staff has been unable to uncover specific evidence of violation. For this reason, I think the Commission should not "approve" their compliance report, but should state that the report will be filed without further action. Accordingly, I move that the following changes be made in the letter: (1) The second and third paragraphs on the first page of the letter should be changed to read as follows: "The Commission has also reviewed your report of compliance and supplementary material submitted, and determined to file the report without taking further action at this time. The Commission has noted the following statement contained in your letter of April 28, 1967, and pertinent exhibits attached thereto :" (2) The last paragraph on page 2 of the letter should be changed to read as follows: 36-138-70-vol. 3- 93 "Accordingly, the Commission's determination to file your report of compliance without taking any further action at this time should not be construed as approval or condonation of the adequacy of your past practices in meeting the burden of inquiry imposed upon you by the order in Docket 7396." (3) Page three of the letter should be changed to read as follows: "Furthermore, the Commission's decision to file your report of compliance without further action at this time is based on the assumption that the information contained therein, and in supplementary materials submitted. is accurate and complete. However, you are advised that notwithstanding the filing of your compliance report, should it later appear that you have failed to comply with the order at any time, the Commission may take such action as the public interest may require." FEBRUARY 3, 1969. Re Marketers of Fresh Fruits and Vegetables-Unnamed, File 681 0040. I move that this be treated as a non-agenda matter, and that the staff recommendation, in which I concur, be approved. See attached memorandum. MEMORANDUM FEBRUARY 3, 1969. To: The Commission. From: Philip Elman. Subject: Marketers of Fresh Fruits and Vegetables-Unnanmed, File 681 0040. For years there has been a continuing controversy in the produce industry between the growers (sellers) and their retail food chain customers as to who should pay fees of the independent shipping point brokers who negotiate sales between them. Until the late 1950's the shipping point or "field" ("ground") brokers were compensated by the buyers but at about that time conditions of oversupply developed which prevailed throughout the early 1960's and probably persist today. Buyers were thus able to obtain merchandise of the quality and price desired fairly easily while shippers had to make increasingly active efforts to sell their produce at a satisfactory price and therefore came to depend heavily on the services of the field broker. It became common, even universal, for shippers to compensate the field broker. Unhappy with this arrangement and preferring. understandably, the former system, sellers attempted to get the Commission to intervene in their behalf under Section 2(c) of the Clayton Act, as amended. In April 1965, the Commission, by a vote of 3 to 1, with Commissioner Jones not participating, issued Trade Practice Rules for the Fresh Fruit and Vegetable Industry which purported to deal with this controversy and to explain the requirements of Section 2(c), but which were somewhat ambiguous and satisfied no one. Brokerage arrangements in the industry remained as they had been before the Rules issued. A collective (and probably unlawful) boycott by several sellers refusing to use the services of brokers or pay brokerage commissions was shortlived, at least in past because the realities of the marketplace dictated that sellers utilize the services of shipping point brokers. Individuals and collective action having proved futile, these sellers turned again to the Commission to enlist its aid in forcing buyers to pay brokerage. Charges were made that other shippers were violating the Trade Practice Rules by paying brokerage to field brokers who were acting as agents of the buyers. A staff-proposed complaint against one of the accused sellers was not issued by the Commission which instead directed the staff to reexamine whether action should be taken against field brokers and to support any recommendation that might be made with specific evidence concerning specific transactions alleged to be illegal. Two months later the staff recommended, and the Commission agreed, that, since the practices involved were industrywide, no complaints be issued but a broad investigation be instituted instead. More specifically, the staff argued : 1 The staff memorandum is unclear on the latter point. "At approximately the same time, representatives of several fresh fruit and vegetable growers associations met with the Chairman and representatives of this Bureau in order to discuss what they claim to be widespread violations of the Commission's Trade Practice Rules. This group left us with the distinct impression that it would serve no useful purpose for the Commission to file suits against a representative number of shippers and brokers. It was believed that unless there was a massive attack on the entire industry, buyers would be able to shift their purchases through brokers or shippers who are not under order. "As a result, this Bureau has come to the conclusion that the only possible way of solving the problem and getting some insight into what the precise market conditions are is to concentrate our attention on the larger buyers." (Memo, June 12, 1967) The proposed investigation has now been completed and the staff has forwarded the attached five complaints against various retail food chains and field workers, alleging violations of Section 2(c) of the Clayton Act, as amended. The Commission has vacillated, obfuscated and changed directions more than once in this matter and the time has come for a decision as to what enforcement policy makes sense. To reach that decision, we ought to have before us all the facts concerning the course of action proposed by the staff. Apart from the question of the relative importance of these matters-to what extent is the public interest involved in what seems to be essentially a private controversy, and how justified is the considerable investment of time, money and manpower that the Commission will have to make-there is serious doubt as to the economic impact of this enforcement action. Gaps in the information submitted make it difficult to asses the market setting in which these practices are occurring, the significance of Commission action on consumer prices, and the compatibility of such action with a rational economic policy. Obviously there are important legal obstacles to be hurdled before any orders ould issue. Since each Commissioner has by now developed his or her own view of Section 2(c), it is unnecessary to dwell on the point save to note that we do ot have here a dummy broker passing on his "commissions" to his principal, the buyer, but real independent brokers who render services and earn their commissions, which are paid by the seller, and who retain such earnings and do not ass them on, in whole or in part, to anybody else. This is simply not a price oncession masquerading as brokerage which is the essential evil at which Section (c) is aimed. Of necesity the case against these respondents depends on the allegation that he brokers are the buyer's agents in the sense in which that term is used in the aw of agency-i.e., that the brokers are acting exclusively on behalf of, and at he direction of, the buyer. There is considerable doubt that this is in fact the ituation prevailing in this industry. As I have noted, it was due to chronic conlitions of oversupply that sellers first began to need the services of brokers and o pay brokerage commissions. The staff memorandum does not indicate that this ondition has changed. Since the practice of paying commissions is followed by 11 sellers, and since the short-lived refusal of some sellers to use or pay brokers ft them at a competitive disadvantage vis-a-vis their rivals, it is as reasonable 9 suppose that the practice is dictated by the sellers' need for the services of hese brokers or by legitimate competitive pressures as it is to assume that there as been illegal or coercive conduct. Moreover, it is conceded that these brokers are independent, that all in fact act ́s genuine brokers and none was set up as a dummy. The staff nevertheless infers hat since they perform services for buyers, they perform no useful functions for llers. Yet, almost any independent broker can be regarded as performing serves for both buyer and seller, regardless of who pays his commission. For example, buyer may go to a real estate broker and enlist his aid in finding a house, yet he seller usually pays the broker's commission. Neither its language nor legislave history shows that Section 2(e) was intended to deal with the question of hich party the broker represents and who should be liable for his services. bsent some showing of markedly changed conditions in this industry, it is also estionable whether the broker performs no services for the seller for which › is entitled to be compensated. This whole proceeding is still subject to the terpretation that it is an effort by shippers to avoid being forced by competitive essures to assume the cost of brokerage. 2 I note in passing that Section 2(c) exempts from its proscription payments made "for rvices rendered in connection with the purchase or sale of goods." Citation by the staff of the Herzog case (memo, p. 21) is instructive. Accepting for present purposes the staff's assertion that "The parallel between Herzog and the field broker herein is obvious and complete," it is questionable whether the Commission would again want to follow the path it trod in Herog. It is true that the Commission "won" the Herzog case in the Court of Appeals, largely because respondent had filed an admission answer which the court regarded as costituting a stipulation that Herzog was the buyer's agent and not an independent broker like those in the instant matters. Subsequently, however, it became clear that resident buyers (brokers) in the fur industry perform a useful economic function, beneficial to buyers and sellers, and that who paid their commission is a matter of indifference to the public interest. As a result, the Commission, by minute of November 22, 1966, adhering to a position taken on April 2, 1952 determined that enforcement of the Herzog order would not be in the public interest. Which raises the question whether, if the instant matter parallels Herzog. as the staff asserts, and the Commission eventually issues an order after arduous and expensive litigation on the ground that there has been a technical violation of Section 2(c), the public interest and economic realities will dictate that this order, too, not be enforced. Another factual allegation that troubles me is the claim that all buyers pay the same price for produce regardless of whether they use a broker compensated by the seller, as the respondent food chains do, or themselves hire and pay at employee to perform this function as the larger national chains (Safeway, Kroger and A&P) do. Is it not somewhat bewildering to learn that Bohack with annual sales of $207 million procures its produce at a lower net cost than Safeway, Kroger and A&P? "Facts" like these are troublesome and suggest the need for a fuller economic analysis of the industry before the Commission jumps in with both feet. More fundamental than these objections is my doubt as to what would be accomplished even if the Commission should establish, after years of litigation. that these brokers are buyer's agents whose fees should be paid by the buyers and not the sellers. Suppose the Commission wins this case, what will be the result? Right now, according to the staff, these food chains pay, let us say, $! for lettuce; the seller substracts, let us say, 5 cents which he pays the broker and he retains the remaining 95 cents. If conditions of oversupply persist, an assumption which the staff tacitly denies when it concludes that the broker performs no services for the seller, after an order is entered the buyers will still have leverage vis-a-vis the sellers in this industry. The probable result? Buyer pays 5 cents to the broker plus 95 cents to the seller; in sum, the same net effect as now prevails except that by shuffling a few papers the source of the broker's payment is changed and except that it will have cost the Commission a considerable sum in time, money and manpower to get those papers shuffled. The economic impact would be nil. But, let us assume that the staff's implicit assumption is cor rect and conditions of scarcity prevail so sellers have some levarage. In that case the buyer will probably continue to pay the seller $1 and he will have the added cost of 5 cents to the broker. Will the retail food chain bear this added cost? Obviously not. The added costs will be passed on to consumers in the form of higher prices, adding to the inflationary spiral that has already become the principal concern of those charged with maintaining price stability in our economy.* It is is questionable whether an enforcement policy calculated to achieve, oz the one hand, useless or, on the other, negative and deleterious results is sensi ble or whether it comports with the economic policies of the Congress or the President. Recently, the antitrust agencies have been reminded of their obligation "to strive for realistic-as well as vigorous-enforcement, and . . . {t avoid dissipating their resources on matters of minor importance." There is a great danger, it seems to me, that action by the Commission on the instant coLplaints will be neither realistic nor significant but will be quixotic and wasteft. Before taking any action, the Commission should have the personal views af the Director of the Bureau of Economics on the economic policy questions involved. I so move. 8 But cf. Flotill Products, Inc., Docket No. 7226, 8-9 (separate opinion). See, e.g.. Council of Economic Advisers, 1969 Annual Report. 5 Staff of the Cabinet Committee on Price Stability, Study Paper Number 2, 84 (1969). |