Federal Trade Commission v. Sinclair Refining Company/Opinion of the Court

Mr. Roy T. Osborn, of Chicago, Ill., for respondent Sinclair Refining Co.

Mr. C. D. Chamberlin, of Cleveland, Ohio, for respondent Maloney Oil & Mfg. Co.

Mr. R. T. Batts, of Pittsburgh, Pa., for respondent Gulf Refining Co.

Mr. J. H. Hayes, of New York Ciry, for respondent Standard Oil Co. (New Jersey).

Mr. Justice McREYNOLDS delivered the opinion of the Court.

In separate proceedings against 30 or more refiners and wholesalers, the Federal Trade Commission condemned and ordered them to abandon the practice of leasing underground tanks with pumps to retail dealers at nominal prices and upon condition that the equipment should be used only with gasoline supplied by the lessor. Four of these orders were held invalid by the Circuit Courts of Appeals for the Third and Seventh Circuits in the above entitled causes (Sinclair Refining Co. v. Federal Trade Commission, 276 Fed. 686; Standard Oil Co. v. Federal Trade Commission, 282 Fed. 81), and like ones have been set aside by the Circuit Courts of Appeals for the Second and Sixth Circuits (Standard Oil Co. v. Federal Trade Commission, 273 Fed. 478, 17 A. L. R. 389; Canfield Oil Co. v. Federal Trade Commission, 274 Fed. 571). The proceedings, essential facts, and points of law disclosed by the four records now before us are so similar that it will suffice to consider No. 213 as typical of all.

July 18, 1919, the commission issued a complaint charging that respondent, Sinclair Refining Company, was purchasing and selling refined oil and gasoline and leasing and loaning storage tanks and pumps as part of interstate commerce in competition with numerous other concerns similarly engaged, and that it was violating both the Federal Trade Commission Act (38 Stat. 717 [Comp. St. §§ 8836a-8836k]), and the Clayton Act (38 Stat. 730 [Comp. St. §§ 8835a-8835p]).

The particular facts relied on to show violation of the Federal Trade Commission Act are thus alleged:

'Paragraph 3. That respondent in the conduct of its business,     as aforesaid, with the effect of stifling and suppressing      competition in the sale of the aforesaid products, and in the      sale, leasing, or loaning of the aforesaid devices and other      equipments for storing and handling the same, and with the      effect of injuring competitors who sell such products and      devices, has within the four years last past sold, leased, or      loaned, and now sells, leases, or loans, the said devices and      their equipment for prices or considerations which do not      represent reasonable returns on the investments in such      devices and their equipments; that many such sales, leases,      or loans of the aforesaid devices are made at prices below      the cost of producing and vending the same; that many of such contracts for the lease or loan      of such devices and their equipments provide or are entered      into with the understanding that the lessee or borrower shall      not place in such devices, or use in connection with such      devices and their equipments, any refined oil or gasoline of      a competitor; that only a small proportion of the dealers in      gasoline and refined oil under such agreements and      understandings deal also in similar products of respondent's      competitors, and that only a small proportion of such dealers      require or use more than a single pump outfit in the conduct      of their  aid business; that there are numerous competitors      in the sale of such products, who are unable to enter into      such lease agreements or understandings because of the large      amount of investment required to carry out such lease      agreements as a competitive method of selling refined oil and      gasoline; that there are numerous other competitors of      respondent engaged in the manufacture and sale of said      devices and their equipments, who do not deal in refined oil      and gasoline, and therefore do not sell or lease said devices      and their equipments for a nominal consideration on a      condition or understanding that their products only are to be      used therein; that the said numerous competitors who were      unable to enter into such lease agreements or understandings,      as aforesaid, have lost numerous customers in the sale of      refined oil and gasoline to respondent, because of the      business practices of respondent hereinbefore set forth; that      the said numerous other competitors of respondent who      manufacture and sell said devices and their equipments, but      do not sell refined oil and gasoline as aforesaid, have lost      numerous customers and prospective customers for the purchase      of their devices and equipments, because of the said business      practices of respondent, as hereinbefore set forth.'

To show violation of the Clayton Act the complaint alleged: 'Paragraph 3. That the respondent, for four years last  past, in the conduct of its business as aforesaid, has   leased and made contracts for the lease, and is now   leasing and making contracts for the lease, of said   devices and their equipments to be used within the   United States, and has fixed and is now fixing the price   charged therefor on the condition, agreement, or   understanding that the lessees thereof shall not   purchase or deal in the products of a competitor or   competitors of respondent, and that the effect of such   leases or contracts for lease, and conditions,   agreements, or understandings, may be and is to   substantially lessen competition and tend to create a   monopoly in the territories and localities where such   contracts are operative.'

Respondent answered and evidence was taken. In October, 1919, the commission announced its report, findings, and conclusions, the substance of which follows:

'1. That the respondent is a corporation organized, existing,     and doing business under and by virtue of the laws of the      state of Maine, with its principal business office located at      the city of Chicago, in the state of Illinois, and is now and      has been engaged in the business of purchasing and selling      refined oil and gasoline, hereinafter referred to as      products, and is largely engaged in refining crude petroleum,      and that it is now and has been since January 25, 1917, in      connection with the aformentioned business, engaged in the      leasing and loaning, but not in the manufacture, of oil      pumps, storage tanks, and containers and their equipment,      hereinafter referred to as devices, in various states of the      United States, but not in the District of Columbia, in      competition with numerous other persons, firms, corporations,      and copartnerships similarly engaged; that prior to the 25th      day of January, 1917, the corporate name of respondent was      the Cudahy Refining Company.

'2. That the respondent, in the conduct of its business, as     aforesaid, and as hereinafter more particularly described, extensively refines petroleum and its products and purchases      refined oil and gasoline, all hereinafter referred to as      'products,' and also purchases all pumps, storage tanks, or      containers, hereinafter referred to as 'devices,' the said      devices being used to contain said products, the said      products and devices then being handled and stored in the      various states of the United States and transported in      interstate commerce; that the aforesaid products are sold and      the aforesaid devices are leased or loaned by respondent to      various persons, firms, corporations, and copartnerships;      that in the conduct of its business of purchasing and selling      such products, and selling, leasing  or loaning such devices,      the same are constantly moved from one state to another by      respondent, and there is conducted by respondent a constant      current of trade in such products and devices between various      states of the United States; that there are numerous      competitors of respondent, who, in the conduct of their      business in competition with respondent, purchase similar      products and purchase and manufacture similar devices, the      said devices being used to contain said products, the said      products and devices then being handled and stored in the      various states of the United States and transported in      interstate commerce; that the aforesaid products are sold,      and the aforesaid devices sold, leased, or loaned, by such      competitor of respondent to various persons, firms,      corporations, and copartnerships; that in the conduct of      their business, as aforesaid, competitors of respondent      constantly move such products and devices from one state to      another, and there is conducted by said competitors a      constant current of trade in such products and devices      between the various states of the United States; that      respondent has conducted its said business in a similar      manner to that above described since January 25, 1917.

'3. That respondent now leases and loans, and has for the     period of its business existence leased and loaned, devices and equipment for storing and handling its products,      and that the monetary considerations received by respondent      do not represent reasonable returns upon the investment in      such devices and equipment; and also that such leases and      loans of said devices and equipment are made for monetary      considerations below the cost of purchasing and vending the      same, when the business of leasing or loaning said devices      and equipment and the returns received thereon are considered      separate and apart from the general business and sales policy      of the respondent; that respondent's form of contract with      the users of such devices and equipment provides in substance      that the devices and equipment shall be used for the sole      purpose of storing and handling gasoline supplied by      respondent, and that the uniform contract used by respondent      for leasing such devices and equipment is in form, tenor, and      substance as follows: [The ordinary form of contract (printed      in the margin ) is here set out. It recites the customer's desire to install certain equipment, and, among     other things, provides that this shall be used only for      storing and handling gasoline supplied by the lessor; that if put to any other use the lessee's right therein shall      terminate; and that upon termination of the lease, by      whatever means effected, the lessee may purchase the      equipment for a specific sum.]

'4. That the contracts mentioned in the preceding paragraph     also provide that such equipments shall be used by the lessee      only for the purpose of holding and storing the respondent's      petroleum products; that a small proportion of such lessees      handle similar products of respondent's competitors, and that      only a small proportion of such lessees as handle similar      products of respondent's competitors require or use more than      a single pump outfit in the conduct of their said business;      that the practice of leasing such devices requires a large      capital investment; that many competitors of respondent do      not possess sufficient capital and are not able to purchase      and lease devices as respondent does as aforesaid, partly by      reason of which such competitors have lost numerous customers      to respondent; that the effect of the practice of leasing by      contract such equipments, where such contracts contain the      said provision restricting the use of the same to the storage      and handling of respondent's products as aforesaid, may be to      substantially lessen competition and tend to create for the      respondent a monopoly in the business of selling petroleum      products.

'Conclusions. That the methods of competition and the     business practices set forth in the foregoing findings as to      the fa ts are, under the circumstances set forth therein,      unfair methods of competition, in interstate commerce, in      violation of the provisions of section 5 of an act of      Congress approved September 26, 1914 (Comp. St. § 8836e),      entitled 'An act to create a Federal Trade Commission, to      define its powers and duties, and for other purposes,' and      are in violation of section 3 of an act of Congress approved      October 15, 1914 (Comp. St. § 8835c), entitled 'An act to      supplement existing laws against unlawful restraints and      monopolies, and for other purposes." Thereupon the commission ordered that respondent cease and desist from—

'1. Directly or indirectly leasing pumps or tanks or both and     their equipments for storing and handling petroleum products      in the furtherance of its petroleum business, at a rental      which will not yield to it a reasonable profit on the cost of      the same after making due allowance for depreciation and      other items usually considered when leasing property for the      purpose of obtaining a reasonable profit therefrom, and from      doing any matter or thing which would have the same unlawful      effect as that resulting from the practice herein prohibited      and by reason of which this order is made.

'2. Entering into contracts or agreements with dealers of its     petroleum products or from continuing to operate under any      contract or agreement already entered into whereby such      dealers agree or have an understanding that as a      consideration for the leasing to them of such pumps and tanks      and their equipments the same shall be used only for storing      or handling the products of respondent, and from doing      anything having the same unlawful effect as that resulting      from the practice herein prohibited any by reason of which      this order is made.'

'Sec. 3. That it shall be unlawful for any person engaged in     commerce, in the course of such commerce, to lease or make a      sale or contract for sale of goods, wares, merchandise,      machinery, supplies or other commodities, whether patented or      unpatented, for use, consumption or resale within the United      States or any territory thereof or the District of Columbia      or any insular possession or other place under the      jurisdiction of the United States, or fix a price charged      therefor, or discount from, or rebate upon, such price, on      the condition, agreement, or understanding that the lessee or      purchaser thereof shall not use or deal in the goods, wares,      merchandise, machinery, supplies or other commodities of a competitor or competitors of the      lessor or seller, where the effect of such lease, sale, or      contract for sale or such condition, agreement or      understanding may be to substantially lessen competition or      tend to create a monopoly in any line of commerce.' Comp. St. § 8835c.

Respondent's written contract does not undertake to limit the lessee's right to use or deal in the goods of a competitor of the lessor, but leaves him free to follow his own judgment. It is not properly described by the complaint and is not within the letter of the Clayton Act. But counsel for the commission insist that inasmuch as lessees generally-except garage men in the larger places-will not incumber themselves with more than one equipment, the practical effect of the restrictive covenant is to confine most dealers to the products of their lessors; and we are asked to hold that, read in the light of these facts, the contract falls within the condemnation of the statute. Standard Fashion Co. v. Magrane-Houston Co., 258 U.S. 346, 42 Sup. Ct. 360, 66 L. Ed. 653, and United Shoe Machinery Corporation v. United States, 258 U.S. 451, 42 Sup. Ct. 363, 66 L. Ed. 708, are relied upon.

In the Standard Fashion Co. Case the purchaser expressly agreed not to sell or permit sale of any other make of patterns on its premises. It had a retail store in Boston and sales elsewhere were not within contemplation of the parties. This court construed the contract as embodying an undertaking not to sell other patterns. In United Shoe M chinery Corporation v. United States, when speaking of certain 'tying' restrictions, this court said:

'While the clauses enjoined do not contain specific     agreements not to use the machinery of a competitor of the      lessor, the practical effect of these drastic provisions is      to prevent such use. We can entertain no doubt that such     provisions as were enjoined are embraced in the broad terms      of the Clayton Act, which cover all conditions, agreements, or understandings of this nature. That such     restrictive and tying agreements must necessarily lessen      competition and tend to monopoly is, we believe, equally      apparent. When it is considered that the United Company     occupies a dominating position in supplying shoe machinery of      the classes involved, these covenants, signed by the lessee      and binding upon him, effectually prevent him from acquiring      the machinery of a competitor of the lessor, except at the      risk of forfeiting the right to use the machines furnished by      the United Company, which may be absolutely essential to the      prosecution and success of his business. This system of     'tying' restrictions is quite as effective as express      covenants could be, and practically compels the use of the      machinery of the lessor, except upon risks which      manufacturers will not willingly incur.'

There is no covenant in the present contract which obligates the lessee not to sell the goods of another, and its language cannot be so construed. Neither the findings nor the evidence show circumstances similar to those surrounding the 'tying' covenants of the Shoe Machinery Company. Many competitors seek to sell excellent brands of gasoline and no one of them is essential to the retail business. The lessee is free to buy wherever he chooses; he may freely accept and use as many pumps as he wishes and may discontinue any or all of them. He may carry on business as his judgment dictates and his means permit, save only that he cannot use the lessor's equipment for dispensing another's brand. By investing a comparatively small sum, he can buy an outfit and use it without hindrance. He can have respondent's gasoline, with the pump or without the pump, and many competitors seek to supply his needs.

The cases relied upon are not controlling.

Is the challenged practice an unfair method of competition within the meaning of section of 5 of the Federal Trade Commission Act? Reviewing the circumstances, four Circuit Courts of Appeals have answered, No. And we can find no sufficient reason for a contrary conclusion. Certainly the practice is not opposed to good morals, because characterized by deception, bad faith, fraud, or oppression. Federal Trade Commission v. Gratz, 253 U.S. 421, 427, 40 Sup. Ct. 572, 64 L. Ed. 993. It has been openly adopted by many competing concerns. Some dealers regard it as the best practical method of preserving the integrity of their brands and securing wide distribution. Some think it is undesirable. The devices are not expensive ($300 to $500), can be purchased readlly of makers and, while convenient, they are not essential. The contract, open and fair upon its face, provides an unconstrained recipient with free receptacle and pump for storing, dispensing, advertising, and protecting the lessor's brand. The stuff is highly inflammable, and the method of handling it is important to the refiner. He is also vitally interested in putting his brand within easy reach of consumers, with ample assurance of its genuineness. No purpose or power to acquire unlawful monopoly has been disclosed, and the record does not show that the probable effect of the practice will be unduly to lessen competition. Upon the contrary, it appears to have promoted the public convenience by inducing many small dealers to enter the business and put gasoline on sale at the crossroads.

The powers of the commission are limited by the statutes. It has no general authority to compel competitors to a common level, to interfere with ordinary business methods or to prescribe arbitrary § andards for those engaged in the conflict for advantage called competition. The great purpose of both statutes was to advance the public interest by securing fair opportunity for the play of the contending forces ordinarily engendered by an honest desire for gain. And to this end it is essential that those who adventure their time, skill, and capital should have large freedom of action in the conduct of their own affairs.

The suggestion that the assailed practice is unfair because of its effect upon the sale of pumps by their makers is sterile and requires no serious discussion.

Affirmed.