Federal Trade Commission v. Simplicity Pattern Company/Opinion of the Court

This case presents, for the first time in this Court, issues relating to the availability of certain defenses to a prima facie violation of § 2(e) of the Clayton Act, 38 Stat. 730, as amended by the Robinson-Patman Act, 49 Stat. 1526. The Federal Trade Commission has found that Simplicity Pattern Co., Inc., one of the Nation's largest dress pattern manufacturers, discriminated in favor of its larger customers by furnishing to them services and facilities not accorded to competing smaller customers on proportionally equal terms. The Commission held that neither the presence of 'cost justification' nor the absence of competitive injury may constitute a defense to a § 2(e) violation.

The Court of Appeals found that competition existed between thee larger and smaller customers of Simplicity and, with one judge dissenting, held that an absence of competitive injury would not constitute a 'justification' rebutting a prima facie showing of a § 2(e) violation. Through a different majority, however, it remanded the case on the 'cost justification' defense under § 2(b), holding that Simplicity might rebut the prima facie case by showing that the discriminations in services and facilities were justified by differences in Simplicity's costs in dealing with the two classes of customers. 103 U.S.App.D.C. 373, 258 F.2d 673. The Commission, in No. 406, and Simplicity, in No. 447, filed cross-petitions for certiorari which we consider together. We granted both petitions because of the fundamental significance of these issues in the application of an important Act of Congress. 358 U.S. 897, 79 S.Ct. 221, 3 L.Ed.2d 148. We have concluded that, given competition between the two classes of customers, neither absence of competitive injury nor the presence of 'cost justification' defeats enforcement of the provisions of § 2(e) of the Act. The action of the Commission in issuing the cease-and-desist order is, therefore, affirmed.

Simplicity manufactures and sells tissue patterns which are used in the home for making women's and children's wearing apparel. Its volume of pattern sales, in terms of sales units, is greater than that resulting from the combined effort of all other major producers. The patterns are sold to some 12,300 retailers, with 17,200 outlets. For present purposes, these customers can be divided roughly into two categories. One, consisting largely of department and variety stores, comprises only 18% Of the total number of customers, but accounts for 70% Of the total sales volume. The remaining 82% Of the customers are small stores whose primary business is the sale of yard-good fabrics.

About 600 different patterns are made available to Simplicity's customers. New patterns are added at the rate of 40 per month, while three times annually the obsolete designs are discontinued so as to maintain the number of designs at a relatively constant level. The different designs are displayed in a catalogue which is changed monthly in order to reflect the changes in available designs. The patterns themselves are stored and displayed in steel cabinets. The catalogues and storage cabinets are both furnished by Simplicity.

The variety stores handle and sell a multitude of relatively low-priced articles. Each article, including dress patterns, is sold for the purpose of returning a profit and would be dropped if it failed to do so. The fabric stores, on the other hand, are primarily interested in selling yard goods; they handle patterns at no profit or even at a loss as an accommodation to their fabric customers and for the purpose of stimulating fabric sales. These differences in motive are reflected in the manner in which each type of store handles its patterns. The variety stores devote the minimum amount of display space consistent with adequate merchandising-consisting usually of nothing more than a place on the counter for the catalogues, with the patterns themselves stored underneath the counter in the steel cabinets furnished by Simplicity. In contrast, the fabric stores usually provide tables and chairs where the customers may peruse the catalogues in comfort and at their leisure.

The retail prices of Simplicity patterns are uniform at 25$, 35$, or 50$. Similarly, Simplicity charges a uniform price, to all its customers, of 60% Of the retail price. However, inthe furnishing of certain services and facilities Simplicity does not follow this uniformity. It furnishes patterns to the variety stores on a consignment basis, requiring payment only as and when patterns are sold-thus affording them an investment-free inventory. The fabric stores are required to pay cash for their patterns in regular course. In addition, the cabinets and the catalogues are furnished to variety stores free while the fabric stores are charged therefor, the catalogues averaging from $2 to $3 each. Finally, all transportation costs in connection with its business with variety stores are paid by Simplicity but none is paid on fabricstore transactions.

The free services and facilities thus furnished variety store chains are substantial in value. As to four variety store chains, the catalogues which Simplicity furnished free in 1954 were valued at $128,904; the cabinets furnished free which those stores had on hand at the end of 1954 were valued at over $500,000; and their inventory of Simplicity's patterns at the end of 1954 was valued at more than $1,775,000, each of these values being based on Simplicity's usual sales price. Simplicity's president testified that it would cost over $2,000,000 annually to give its other customers the free transportation, free catalogues, and free cabinets furnished to variety stores.

Simplicity does not dispute these findings. Assuming that the existence of competition between purchasers is a necessary element in a § 2(e) prosecution, it insists that no real competition in patterns exists between the variety and the fabric stores. It also contends that even if competition is present its conduct may be justified by a showing that no competitive injury resulted or, alternatively, that the discriminations are not unlawful if it could be shown that the differential treatment was only reflective of the differences in its costs in dealing with the two types of customers.

1. EXISTENCE OF COMPETITION.

The unanimous conclusion of the Examiner, the Commission, and the Court of Appeals on this point was, as stated by the Court of Appeals, that the variety and fabric stores, 'operating in the same cities and in the same shopping area, often side by side, were competitors, purchasing from Simplicity at the same price and then at like prices retailing the identical product to substantially the same segment of the public.' 103 U.S.App.D.C. 378, 258 F.2d at page 677. Simplicity argues that 'motivation' controls and that since the variety store sells for a profit and the fabric store for accommodation that the competition is minuscule. But the existence of competition does not depend on such motives. Regardless of the necessity the fabric stores find in the handling of patterns it does not remove their incentive to sell those on hand, especially when cash is tied up in keeping patterns on the shelves. The discriminatory terms under which they are obliged to handle them increase their losses. Furthermore, Simplicity not only takes advantage of the captive nature of the fabric stores in not granting them these advantages but compounds the damage by creating a sales outlet in the variety stores through the granting of these substantial incentives to engage in the pattern business. Without such partial subsidization the variety stores might not enter into the pattern trade at all.

Nor does it follow that the failure here to show specific injury to competition in patterns is inconsistent with a finding that competition in fact exists. It may be, as Simplicity argues, that the sale of patterns is minuscule in the overall business of a variety store, but the same is true of thousands of other items. While the giving of discriminatory concessions to a variety store on any one isolated item might cause no injury to competition with a fabric store in its overall operation, that fact does not render nonexistent the actual competition between them in patterns. It remains, and, because of the discriminatory concessions, causes further losses to the fabric store. As this Court said in Federal Trade Comm. v. Morton Salt Co., 1948, 334 U.S. 37, 49, 68 S.Ct. 822, 829, 92 L.Ed. 1196.

'There are many articles in a grocery store that, considered     separately, are comparatively small parts of a merchant's      stock. Congress intended to protect a merchant from     competitive injury attributable to discriminatory prices on      any or all goods sold in interstate commerce, whether the      particular goods constituted a major or minor portion of his stock. Since a grocery     store consists of many comparatively small articles, there is      no possible way effectively to protect a grocer from      discriminatory prices except by applying the prohibitions of      the Act to each individual article in the store.'

2. APPLICATION OF THE JUSTIFICATION DEFENSES OF § 2(b).

Simplicity contends that an absence of competitive injury constitutes a defense under the justification provisions of § 2(b) and further that it should have been permitted, under that subsection, to dispel its discrimination in services and facilities by a showing of lower costs in its transactions with the variety stores. We agree with the Commission that the language of the Act, when considered in its entirety, will not support this construction.

Section 2(a) makes unlawful price discriminations

'where the effect of such discrimination may be substantially     to lessen competition or tend to create a monopoly in any      line of commerce, or to injure, destroy, or prevent      competition *  *  * .'

This price discrimination provision is hedged with qualifications. An exception is made for price differentials 'which make only due allowance for differences in the cost of manufacture, sale, or delivery.' Care was taken that price changes are not outlawed where made in response to changing market conditions. Finally, § 2(a) codifies the rule of United States v. Colgate & Co., 1919, 250 U.S. 300, 39 S.Ct. 465, 63 L.Ed. 992, protecting the right of a person in commerce to select his 'own customers in bona fide transactions and not in restraint of trade.' Subsections (c), (d), and (e), on the other hand, unqualifiedly make unlawful certain business practices other than price discriminations. Subsection (c) applies to the payment or receipt of commissions or brokerage allowances 'except for services rendered.' Subsection (d) prohibits the payment by a seller to a customer for any services or facilities furnished by the latter, unless 'such payment * *  * is available on proportionally equal terms to all other (competing) customers.' Subsection (e), which as noted is the provision applicable in this case, makes it unlawful for a seller

'to discriminate in favor of one purchaser against another     purchaser or purchasers of a commodity bought for resale *  *      * by *  *  * furnishing *  *  * any services or facilities      connected with the processing, handling, sale, or offering      for sale of such commodity so purchased upon terms not      accorded to all purchasers on proportionally equal terms.'

It terms, the proscriptions of these three subsections are absolute. Unlike § 2(a), none of them requires, as proof of a prima facie violation, a showing that the illicit practice has had an injurious or destructive effect on competition. Similarly, none has any built-in defensive matter, as does § 2(a). Simplicity's contentions boil down to an argument that the exculpatory provisions which Congress has made expressly applicable only to price discriminations are somehow included as 'justifications' for discriminations in services or facilities by § 2(b), which provides that

'Upon proof being made, at any hearing on a complaint under     this section, that there has been discrimination in price or      services or facilities furnished, the burden of rebutting the      prima-facie case thus made by showing justification shall be      upon the person charged with  vi olation of this section, and      unless justification shall be affirmatively shown, the      Commission is authorized to issue an order terminating the      discrimination: Provided, however, That nothing herein      contained shall prevent a seller rebutting the primafacie      case thus made by showing that his lower price or the      furnishing of services or facilities to any purchaser or      purchasers was made in good faith to meet an equally low      price of a competitor, or the services or facilities      furnished by a competitor.' (Emphasis added.)

We hold that the key word 'justification' can be read no more broadly than to allow rebuttal of the respective offenses in one of the ways expressly made available by Congress. Thus, a discrimination in prices may be rebutted by a showing under any of the § 2(a) provisos, or under the § 2(b) proviso -all of which by their terms apply to price discriminations. On the other hand, the only escape Congress has provided for discriminations in services or facilities is the permission to meet competition as found in the § 2(b) proviso. We cannot supply what Congress has studiously omitted.

Simplicity's arguments to the contrary are based essentially on the ground that it would be 'bad law and bad economics' to make discriminations unlawful even where they may be accounted for by cost differentials or where there is no competitive injury. Entirely aside from the fact that this Court is not in a position to review the economic wisdom of Congress, we cannot say that the legislative decision to treat price and other discriminations differently is without a rational basis. In allowing a 'cost justification' for price discriminations and not for others, Congress could very well have felt that sellers would be forced to confine their discriminatory practices to price differentials, where they could be more readily detected and where it would be much easier to make accurate comparisons with any alleged cost savings. Biddle Purchasing Co. v. Federal Trade Comm., 2 Cir., 1938, 96 F.2d 687, 692. And, with respect to the absence of competitive injury requirements, it suffices to say that the antitrust laws are not strangers to the policy of nipping potentially destructive practices before they reach full bloom. Cf. Klor's Inc., v. Broadway-Hale Stores, 1959, 359 U.S. 207, 79 S.Ct. 705, 3 L.Ed.2d 741.

Our conclusions are further confirmed by the historical setting of the Robinson-Patman amendments to § 2 of the Clayton Act. As originally worded in 1914 (38 Stat. 730), § 2 applied only to price discriminations, and then only where the effect of such discrimination was 'to substantially lessen competition or tend to create a monopoly in any line of commerce.' Furthermore, a proviso excepted price discriminations based on 'differences in the * *  * quantity of the commodity sold,' regardless of whether the differences in quantity resulted in corresponding cost differentials.

A lengthy investigation conducted in the 1930's by the Federal Trade Commission disclosed that several large chain buyers were effectively avoiding § 2 by taking advantage of gaps in its coverage. Because of their enormous purchasing power, these chains were able to exact price concessions, based on differences in quantity, which far exceeded any related cost savings to the seller. Consequently, the seller was forced to raise prices even further on smaller quantity lots in order to cover the concessions made to the large purchasers. Comparable competitive advantages were obtained by the large purchasers in several ways other than direct price concessions. Rebates were induced for 'brokerage fees,' even though no brokerage services had been performed. 'Advertising allowances' were paid by the sellers to the large buyers in return for certain promotional services undertaken by the latter. Some sellers furnished special services or facilities to the chain buyers. Lacking the purchasing power to demand comparable advantages, the small independent stores were at a hopeless competitive disadvantage.

The Robinson-Patman amendments were enacted to eliminate these inequities. The exception to price discriminations based on quantitative differences was limited to those making 'only due allowance for difference in * *  * cost.' As noted above, false brokerage allowances and the paying for or furnishing of nonproportional services or facilities were banned outright. The portion of § 2(b) preceding the proviso, on which Simplicity relies, was inserted in the House bill for the sole purpose of laying down 'directions with reference to procedure including a statement with respect to burden of proof.' It was clearly not intended to have any independent substantive weight of its own.

We hold, therefore, that neither 'cost-justification' nor an absence of competitive injury may constitute 'justification' of a prima facie § 2(e) violation. The judgment of the Court of Appeals must accordingly be reversed insofar as it set aside and remanded the Commission's order and affirmed as to the remainder.

It is so ordered.

Judgment of Court of Appeals reversed in part and affirmed in part.