CALLAWAY MILLS CO. 25. Callaway Mills Co. and Cabin Crafts, Inc. v. F.T.C., 362 F.2d 435 (a) Court Action: Order vacated. (b) Commission Action: 1. On August 11, 1966 directed that Solicitor General be requested to file petition for certiorari. Vote: 4-0, Commissioner Elman not participating. 2. On October 25, 1966, after receiving letter from Solicitor General that he would not file petition for certiorari, approved letter to Solicitor General stating that Commission adhered to views in letter of August 11, 1966 and did not desire a conference. Vote: 4-0, Commissioner Elman not participating. SEPTEMBER 7, 1966. (176) Callaway Mills Company, et al. v. Federal Trade Commission, 5th Cir., No. 21,499 (Docket 7634-Callaway Mills Company, et al.) Cabin Crafts, Incorporated v. Federal Trade Commission, 5th Cir., No. 21,500 (Docket 7639-Cabin Crafts, Incorporated) Memorandum of August 4, 1966, from Acting General Counsel Truly with reference to the judgments and consolidated opinion of June 13, 1966, of the United States Court of Appeals for the Fifth Circuit vacating the Commission's orders in Dockets 7634 and 7639. For the reasons recited, Mr. Truly recommended that the Solicitor General be requested to file petition for writ of certiorari limited to the indicated question; and, in accordance with his recommendation, transmitted draft of letter to the Solicitor General. In his special-matter circulation of August 10, 1966, Mr. Dixon concurred in Mr. Truly's recommendation, but recommended that the submitted redraft of letter to the Solicitor General be forwarded instead of the draft submitted by Mr. Truly. On August 11. 1966, Mr. Dixon, Mr. MacIntyre (by direction to Mr. Dixon's office). Mr. Reilly, and Miss Jones (a) directed that the Solicitor General be requested to petition the Supreme Court for a writ of certiorari limited to the indicated question; and (b) approved the letter to the Solicitor General making such request and transmitting pertinent material, as submitted by Mr. Dixon, and ordered the letter forwarded after signature by the Chairman. Mr. Elman did not participate in the foregoing action. OCTOBER 25, 1966. (1) Callaway Mills Company, et al. v. Federal Trade Commission, 5th Cir., No. 21,499 (Docket 7634-Callaway Mills Company, et al.) Draft of letter, prepared by the Office of the General Counsel, addressed to Hon. Thurgood Marshall, The Solicitor General, Department of Justice, in response to his letter of October 19, 1966, stating that Mr. Marshall has concluded not to file a petition for a writ of certiorari in the above matter. Mr. Dixon presented the letter for consideration by the Commission. After consideration, on motion of Mr. Dixon, the letter in reply to Mr. Marshall was approved and ordered forwarded after signature by the Chairman. The letter included advice that the Commission continues to believe that its application of the law to the facts of this case accords with the Supreme Court's decision in Stalay and the other cases cited in the Commission's letter of Aug ust 11, 1966, and that the Commission believes that its views, which it still holds, were adequately presented in that letter, and for that reason the Commission does not request a conference. Mr. Elman did not participate in the foregoing action. AUGUST 11, 1966. Re Callaway Mills Company, et al. v. Federal Trade Commission, 5th Cir. No. 21,499-FTC Docket 7634; Cabin Crafts, Incorporated v. Federal Trade Commission, 5th Cir. No. 21,500-FTC Docket 7639 Hon. THURGOOD MARSHALL, The Solicitor General, Department of Justice, Washington, D.C. DEAR MR. SOLICITOR GENERAL: On June 13, 1966, the United States Court of Appeals for the Fifth Circuit rendered its judgments and its consolidated opinion vacating the Commission's order to cease and desist in the above cases. For the reasons stated below the Commission requests that a petition for certiorari be filed in the Supreme Court. In 1959 the Commission issued complaints under Section 2(a) of the Clayton Act against 12 major carpet manufacturers, including Callaway and Cabin Crafts. On September 8, 1961, the Commission issued an order to cease and desist negotiated by consent against James Lees and Sons Company, 59 F.T.C. 418. Eight of the remaining eleven cases were settled by the negotiation of identical consent orders to cease and desist, adopted and approved by the Commission on Febru ary 10, 1964 (see 29 Fed. Reg. 3358 (March 13, 1964)). In addition to the instant cases, formal adjudicative hearings were had in Philadelphia Carpet Co., Docket 7635, wherein that respondent offered a "cost justification" defense. The Commission's rejection of this defense was affirmed by the Third Circuit. Philadelphia Carpet Co. v. Federal Trade Commission, 342 F.2d 994 (1965). On April 2, 1964, the Commission issued its superseding orders postponing the time within which the nine respondents who negotiated consent orders shall file reports of compliance until after the latest date of any final judicial determination in the Philadelphia Carpet Co., Callaway Mills or Cabin Crafts cases. On May 14, 1965, the Commission issued a similar superseding order in the Philadelphia Carpet Co. case pending final judicial determination in the instant cases. All of the above companies are manufacturers of textile products including carpeting, and they sell and distribute carpet products nationwide (Slip Opinion. pp. 2, 8). Carpet products are designed to sell at retail at particular price points, and manufacturers usually will produce more than one carpet product to sell at any one price point. These price points range from $2.95 to $49.95 per square yard in progressive increments of $1.00 per square yard. At each price point there are many different styles of carpeting from which a customer may choose (Slip Opinion, p. 14). Each manufacturer establishes a list price for each carpet product, which is the base price or billing price at which the carpeting is sold to the retailer. These list prices for carpeting to be resold by retailers at any one price point vary widely, and one manufacturer may offer several carpet products at different list prices for resale at a single price point (see Callaway Record, pp. 27–40). Callaway and Cabin Crafts entered the carpet market in 1950, introducing a revolutionary and relatively inexpensive tufting process instead of the more expensive weaving process used up to that time by the other so-called “old line" carpet manufacturers (Slip Opinion, p. 2). After 1950, the “old line” carpet manufacturers also began producing tufted carpeting in addition to woven carpeting. Before 1950 and up until the present time, the established or "old line" carpeting manufacturers offered cumulative annual retroactive volume discounts to their purchasers. These discounts ranged from 1 to 5 percent depending on the annual volumes, although the purchase volume required by the manufacturers for a given discount varied (Slip Opinion, p. 3). After these carpet manufacturers also began producing tufted carpeting in addition to woven carpeting in 1950, they included purchases of tufted carpeting in the volumes qualifying for the various discounts. In 1955 and 1956, respectively, Callaway and Cabin Crafts also adopted cumulative annual retroactive discount schedules (Slip Opinion, pp. 4. 8). Thus, the actual net price per unit paid by the retailer to each carpet manufacturer is the list price less any discount received by the retailer from the manufacturer at the end of the year based on the retailer's annual purchases (Slip Opinion, p. 7). In all of the above cases, the Commission challenged the price discriminations between competing retailers resulting from these discounts. Both Callaway and Cabin Crafts stipulated that such discriminations had the probable effect upon customer competition proscribed by Section 2(a), but defended the discriminations on the ground that the lower prices were made in good faith to meet the equally low prices of a competitor, as provided in Section 2 (b) of the Act. The examiner held that both Callaway and Cabin Crafts had established the Section 2(b) defense. The Commission, with Commissioner Elman dissenting, reversed the examiner and, substituting its findings and conclusions for those of the examiner, held that neither respondent had satisfied the burden of establishing that the discriminations were good faith efforts to meet the equally low prices of competitors. In so doing, the Commission in its Callaway opinion (incorporated by reference into its Cabin Crafts decision) stated (Callaway Record, p. 310): "The record here clearly shows that respondents' prices are not responsive to individual competitive situations but are set to be generally attractive to large volume customers. This is not a situation where departures from an otherwise lawful pricing formula are intermittently made to retain a customer being enticed by a competitor's lawful low price or to obtain a new customer by matching the price of the customer's former supplier. As a matter of fact, the net price to be paid on any one purchase is not even deterined until a purchaser's year end volume is determined. Respondents are not offering prices to buyers and prospective buyers but a formula permitting them to set their own prices, and such a procedure does not fulfill the requirements of Section 2(b).” The Commission further held that there was insufficient evidence upon which to base a finding that the products of Callaway's and Cabin Crafts' competitors generated saleability substantially equal to their own products to which the adopted discount schedules were applied and that without such information, proof that their discounts met their competitors' discounts was meaningless. Thus, the Commission concluded that it was impossible to determine whether these sellers had reason to believe that their lower discriminatory prices met the equally low prices of competitors applicable to competitive products within the meaning of Section 2(b). The Commission also held that Callaway, by granting volume discounts on lower purchase volumes than required by its competitors for similar discounts, had in effect undercut its competitors' prices, and that it was impossible to determine whether Cabin Crafts' net prices met or undercut its competitors' prices because Cabin Crafts had not adduced its list prices or the list prices of its competitors. In reversing the Commission, the court of appeals held that there is nothing wrong per se with adopting a volume discount schedule in response to similar schedules of competitors and that the volume discount schedules adopted by Callaway and Cabin Crafts were “. . . thoughtfully tailored by both petitioners to meet their individual problems in the market" (Slip Opinion, p. 16). As a result of its complete failure to understand the Commission's conclusion that there was insufficient evidence upon which to decide whether the petitioners' products which were subject to the adopted discount schedules were or were not superior in grade and quality and whether, therefore, of more appealing "saleability" than the products of their competitors or not, the court stated (Slip Opinion, p. 13): "Moreover, the Commission completely ignored abundant unrebutted testimony in both cases which clearly demonstrated or would support the inference that petitioners' products at the various price levels possessed qualities of saleability' comparable to that of its competitors' products." The court also reversed the Commission's finding that Callaway undercut the prices of competitors and held that the evidence showed that the effect of Callaway's adoption of lower volume levels for similar discounts was to meet rather than undercut competition (Slip Opinion, p. 17). Finally, the court held that Cabin Crafts was not required to introduce in evidence its list prices and those of competitor to “. . . show facts which would lead a reasonable and prudent person' to believe that the granting of lower prices would in fact meet the equally low price of a competitor" (Slip Opinion, p. 18). The Commission believes that certiorari is warranted on the question of whether a seller who adopts a discriminatory volume discount schedule in response to similar volume discount schedules of competitors is, as a matter of law, responding to such competitors' prices within the meaning of Section 2(b). The other questions resolved by the court, as to which we do not request certiorari, are essentially factual in nature. Although the court of appeals' substitution of its judgment for that of the Commission on these questions is patently unwarranted, especially on the question of whether the products of petitioners' competitors generated saleability substantially equal to the prod ucts of petitioners, the resolution in the Commission's favor of the legal question presented would dispose of the Section 2(b) defenses and justify affirmance of the Commission's orders. In reversing the Commission's conclusion with respect to the issue in question, the court of appeals held that Callaway and Cabin Crafts had no "workable alternative" other than to adopt a cumulative annual retroactive volume discount schedule, and, since the statute does not place an impossible burden upon sellers. their use of a volume discount schedule as a response to their competitors' volume discount schedules was a "mature and reasoned approach to a very real and difficult competitive problem." Stating that it "found no authority which holds that in all circumstances the allowance of volume discounts according to a plan or 'system' as distinguished from 'individual competitive' responses is condemned per se," and distinguishing the authorities relied upon by the Commission as involving "basing point" systems of pricing, the court held that Callaway and Cabin Crafts had carried their burden of showing "good faith" (Slip Opinion, pp. 14–16). The Commission believes that the qeustion of the availability of the Section 2(b) defense in the situation where a seller adopts a volume discount schedule as a response to competitors' similar schedules, instead of making a good faith effort to meet the lower prices of competitors on an individual basis, is controlled by the Supreme Court's decisions in Federal Trade Commission v. A. E. Staley Mfg. Co., 324 U.S. 746 (1945), and Federal Trade Commission v. Cement Institute, 333 U.S. 683 (1948). In Staley, the Court, speaking through the Chief Justice, said (324 U.S. at 753) : 66 Thus, it is the contention that a seller may justify a basing point delivered price system, which is otherwise outlawed by Sec. 2. because other competitors are in part violating the law by maintaining a like system. If respondents' argument is sound it would seem to follow that even if the competitor's pricing system were wholly in violation of Section 2 of the Clayton Act, respondents could adopt and follow it with impunity. This startling conclusion is admissible only upon the assumption that the statute permits a seller to maintain an otherwise unlawful system of discriminatory prices, merely because he had adopted in its entirety, as a means of securing the benefits of a like unlawful system maintained by his competitors. But sec. 2(b) does not concern itself with pricing systems or even with all the seller's discriminatory prices to buyers. It speaks only of the seller's "lower" price and of that only to the extent that it is made "in good faith to meet the equally low price of a competitor." The Act thus places emphasis on individual competitive situations, rather than upon a general system of competition. . . .” The Commission interprets these cases as limiting the Section 2(b) defense to "individual competitive situations," and as not permitting that defense as protection in cases where, as here, a cumulative volume discount schedule is adopted to meet a competitor's similar schedule. The Commission further believes that this interpretation is in accord with both the majority and minority opinions in Federal Trade Commission v. Standard Oil Co., 355 U.S. 396 (1958). In that case the Court accepted without question the principle that the defense is limited to individual competitive situations and that a discrimination pursuant to a price system would preclude a finding of good faith. The Court did not limit the definition of "system" to a "basing-point" pricing system, as had the Court of Appeals for the Seventh Circuit (see Standard Oil Co. v. Federal Trade Commission, 233 F.2d 649, 653 (1956)). but instead sustained the lower court's decision on the ground that "Standard's prices to these four 'jobbers' were reduced as a response to individual competitive situations rather than pursuant to a pricing system." Several decisions of courts of appeals also support the Commission's interpretation and application of Section 2(b) in the instant cases. See Standard Motor Products v. Federal Trade Commission, 265 F.2d 674, 677 (2d Cir. 1959), cert. denied, 361 U.S. 826; Exquisite Form Brassiere, Inc. v. Federal Trade Commis sion, 360 F.2d 492 (D.C. Cir. 1965), cert. denied, 384 U.S. 959 (1966). See also Forster Mfg. Co. v. Federal Trade Commission, 335 F.2d 47, 56 (1st Cir. 1964), cert. denied, 380 U.S. 906 (1965), affirmed after remand to Commission, Forster Mfg. Co. v. Federal Trade Commission, F.2d (1st Cir., decided May 24, 1966). The Commission believes that the present cases are an appropriate vehicle for presenting to the Supreme Court for authoritative resolution the question of whether the adoption of a volume discount schedule to meet a competitor's similar discount schedule is outside the protection of Section 2(b). First, with respect to this issue, there is no factual dispute. The method of pricing employed in the carpet industry is substantially uniform; there is no doubt that cumulative annual retroactive volume discounts were adopted by Callaway and Cabin Crafts as a response to the competition of competitors who had used and continued to use similar discount schedules. Secondly, the court's justification of Callaway's and Cabin Crafts' use of diseriminatory volume discount schedules on the theory that there was no rea onable alternative is incorrect. The Commission interprets the previously cited Supreme Court cases as requiring sellers who wish to claim the shelter of the Section 2(b) defense as a minimum to establish nondiscriminatory prices not violative of Section 2(a) of the Act and then to deviate from such prices when necessary for a good faith effort to meet a competitior's prices. The nondiscriminatory prices may be part of a pricing schedule if the seller so desires, but the schedule in operation must not be inherently discriminatory. The fact that such an alternative may be difficult in application does not, according to the Commission's interpretation, justify the adoption of a discriminatory volume discount schedule which is applicable to all sales. If the seller cannot establish such nondiscriminatory prices, either pursuant to a pricing schedule or otherwise, and then deviate from these priese in individual situations when necessary, other possibilities should be considered. Such possibilities would include the initiation of a private treble damage action against the competitor and the filing of a complaint with the Commission. As the Supreme Court noted in Federal Trade Commission v. A. E. Staley Mfg. Co., supra (324 U.S. at 754, n. 3) : The Chairman of the House Conferees, in presenting the Conference Report, emphasized with illustrations, that 'this procedural provision cannot be construed as a carte blanche exemption to violate the bill so long as a competitor can be shown to have violated it first, nor so long a sthat competition cannot be met without the use of oppressive discriminations in violations of the obvious intent of the bill.'" See 80 Cong. Rec. 9418. Thirdly, the rationale of the court's opinion represents the position of those antitrust commentators who challenge the Commission's limitation of Section 2(b) to individual competitive situations, a position which should be resolved by the Supreme Court as soon as practicable. See, c.g., Rowe, Price Discrimination Under the Robinson-Patman Act, 234–238 (1962). Finally, and perhaps most important, it is undisputed that the volume discounts challenged in these cases are granted in response to the demand of the large buyers (Slip Opinion, pp. 4, 6, 9). This is a classic example of the application of economic leverage by large buyers to obtain price concessions that Congress specifically intended to regulate and curb by means of the Robinson-Patman Aet amendments to the Clayton Act. See Federal Trade Commission v. Morton Salt Co., 334 U.S. 37, 42-43 (1948); Federal Trade Commission v. Sun Oil Co., 371 U.S. 55 (1965). Moreover, in Sun Oil, the Supreme Court made it abundantly clear that Section 2(b) was to be narrowly interpreted, and the Court rejected the Fifth Circuit's philosophy (again resurrected in these cases) that realities of competitive conditions prevailing in particular industries affect the interpretation and application of the statute. The Commission is not unmindful of the fact that Callaway and Cabin Crafts are the smaller of the large manufacturers of carpeting, ranking perhaps eleventh and twelfth in an industry comprising from 50 to 60 manufacturers. And the Commission has not overlooked the fact that it has issued cease-anddesist orders against ten of these larger manufacturers, compliance with which will be required at the conclusion of judicial proceedings in the instant cases, or that it can be anticipated that upon cessation of quantity discounts by those ten manufacturers, Callaway and Cabin Crafts will, as they represented to the court of appeals and subsequently to the Commission, cease granting such discounts themselves. Nevertheless, unless the orders against them are reinstated |