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FTC v. Henry Broch & Co. :: 363 U.S. 166 (1960) :: Justia U.S. Supreme Court Center Log In
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FTC v. Henry Broch & Co. 363 U.S. 166 (1960)
U.S. Supreme CourtFTC v. Henry Broch & Co., 363 U.S. 166 (1960)FTC v. Henry Broch & Co.No. 61Argued January 14, 18, 1960Decided June 6, 1960363 U.S. 166CERTIORARI TO THE UNITED STATES COURT OF APPEALS
261 F.2d 725, reversed. Page 363 U. S. 167
The J. M. Smucker Co., a buyer, negotiated with another broker, Phipps, also working for Canada Foods, for apple concentrate. Smucker wanted a lower price than $1.30, but Canada Foods would not agree. Smucker finally offered $1.25 for a 500-gallon purchase. That was turned Page 363 U. S. 168 down by Canada Foods, acting through Phipps. Canada Foods took the position that the only way the price could be lowered would be through reduction in brokerage. About the same time respondent was negotiating with Smucker. Canada Foods told respondent what it had told Phipps, that the price to the buyer could be reduced only if the brokerage were cut; and it added that it would make the sale at $1.25 -- the buyer's bid -- if respondent would agree to reduce its brokerage from 5% To 3%. Respondent agreed and the sale was consummated at that price and for that brokerage. The reduced price of $1.25 was thereafter granted Smucker on subsequent sales. But on sales to all other customers, whether through respondent or other brokers, the price continued to be $1.30 and, in each instance, respondent received the full 5% Commission. Only on sales through respondent to Smucker were the selling price and the brokerage reduced.
The Robinson-Patman Act was enacted in 1936 to curb and prohibit all devices by which large buyers gained discriminatory preferences over smaller ones by virtue of their greater purchasing power. A lengthy investigation revealed that large chain buyers were obtaining competitive advantages in several ways other than direct price Page 363 U. S. 169 concessions, [Footnote 2] and were thus avoiding the impact of the Clayton Act. [Footnote 3] One of the favorite means of obtaining an indirect price concession was by setting up "dummy" brokers who were employed by the buyer and who, in many cases, rendered no services. The large buyers demanded that the seller pay "brokerage" to these fictitious brokers, who then turned it over to their employer. This practice was one of the chief targets of § 2(c) of the Act. [Footnote 4] But it was not the only means by which the brokerage function was abused, [Footnote 5] and Congress, in its wisdom, phrased § 2(c) broadly not only to cover the other methods then in existence, but all other means by which brokerage could be used to effect price discrimination. [Footnote 6] Page 363 U. S. 170
It is urged that the seller is free to pass on to the buyer in the form of a price reduction any differential between his ordinary brokerage expense and the brokerage commission which he pays on a particular sale because § 2(a) [Footnote 7] of the Act permits price differentials based on savings in selling costs resulting from differing methods of distribution. From this premise, it is reasoned that a seller's broker should not be held to have violated § 2(c) for having done that which is permitted under § 2(a). We need not decide the validity of that premise, because the fact that a transaction may not violate one section of the Act does not answer the question whether another section has been violated. Section 2(c), with which we Page 363 U. S. 171 are here concerned, is independent of § 2(a), and was enacted by Congress because § 2(a) was not considered adequate to deal with abuses of the brokerage function. [Footnote 8]
Before the Act was passed, the large buyers, who maintained their own elaborate purchasing departments and therefore did not need the services of a seller's broker because they bought their merchandise directly from the seller, demanded and received allowances reflecting these savings in the cost of distribution. In many cases, they required that "brokerage" be paid to their own purchasing agents. After the Act was passed, they discarded the facade of "brokerage" and merely received a price reduction equivalent to the seller's ordinary brokerage expenses in sales to other customers. When haled before the Commission, they protested that the transaction was not covered by § 2(c), but, since it was a price reduction, was governed by § 2(a). They also argued that, because no brokerage services were needed or used in sales to them, they were entitled to a price differential reflecting this cost saving. Congress had anticipated such a contention by the "in lieu thereof" provision. [Footnote 9] Accordingly, Page 363 U. S. 172 the Commission [Footnote 10] and the courts [Footnote 11] early rejected the contention that such a price reduction was lawful because the buyer's purchasing organization had saved the seller the amount of his ordinary brokerage expense.
In Great Atlantic & Pacific Tea Co. v. Federal Trade Comm'n, 106 F.2d 667 (C.A. 3d Cir. 1939), a buyer sought to evade § 2(c) by accepting price reductions equivalent to the seller's normal brokerage payments. The court upheld the Commission's view that the price reduction was an allowance in lieu of brokerage under § 2(c) and was prohibited even though, in fact, the seller had "saved" his brokerage expense by dealing directly with the select buyer. The buyer also sought to justify its Page 363 U. S. 173 price reduction on the ground that it had rendered valuable services to the seller. The court rejected this argument also. Although that court's interpretation of the "services rendered" exception in § 2(c) has been criticized, [Footnote 12] its conclusion that the price reduction was an allowance in lieu of brokerage within the meaning of § 2(c) has been followed [Footnote 13] and accepted. [Footnote 14]
We are asked to distinguish these precedents on the ground that there is no claim by the present buyer that the price reduction, concededly based in part on a saving to the seller of part of his regular brokerage cost on the particular sale, was justified by the elimination of services normally performed by the seller or his broker. There is no evidence that the buyer rendered any services to the seller or to the respondent, nor that anything in its method of dealing justified its getting a discriminatory price by means of a reduced brokerage charge. We would have quite a different case if there were such evidence, and we need not explore the applicability of § 2(c) to such circumstances. One thing is clear -- the absence of such evidence and the absence of a claim that the rendition of Page 363 U. S. 174 services or savings in distribution costs justified the allowance does not support the view that § 2(c) has not been violated.
Congress enacted the Robinson-Patman Act to prevent sellers and sellers' brokers from yielding to the economic pressures of a large buying organization by granting unfair preferences in connection with the sale of goods. The form in which the buyer pressure is exerted is immaterial, and proof of its existence is not required. It is rare that the motive in yielding to a buyer's demands is not the "necessity" for making the sale. An "independent" broker is not likely to be independent of the buyer's coercive bargaining power. He, like the seller, is constrained to favor the buyers with the most purchasing power. If respondent merely paid over part of his commission to the buyer, he clearly would have violated the Act. We see no distinction of substance between the two transactions. In each case, the seller and his broker make a concession to the buyer as a consequence of his economic power. In both cases, the result is that the buyer has received a discriminatory price. In both cases, the seller's broker reduces his usual brokerage fee to get a particular contract. There is no difference in economic effect between the seller's broker splitting his brokerage Page 363 U. S. 175 commission with the buyer [Footnote 15] and his yielding part of the brokerage to the seller to be passed on to the buyer in the form of a lower price. [Footnote 16]
We conclude that the statute clearly applies to payments or allowances by a seller's broker to the buyer, whether made directly to the buyer, or indirectly, through the seller. The allowances proscribed by § 2(c) are those made by "any person" which, as we have said, clearly encompasses a seller's broker. [Footnote 17] The respondent was a necessary party to the price reduction granted the buyer. His yielding of part of his brokerage to be passed on to the buyer was a sine qua non of the price reduction. This is not to say that every reduction in price, coupled with a reduction in brokerage, automatically compels the conclusion that an allowance "in lieu" of brokerage has been granted. As the Commission itself has made clear, Page 363 U. S. 176 whether such a reduction is tantamount to a discriminatory payment of brokerage depends on the circumstances of each case. Main Fish Co., Inc., 53 F.T.C. 88. Nor does this "fuse" provisions of § 2(a), which permits the defense of cost justification, with those of § 2(c) which does not; it but realistically interprets the prohibitions of § 2(c) as including an independent broker's allowance of a reduced brokerage to obtain a particular order.
The applicability of § 2(c) to sellers' brokers under circumstances not distinguishable in principle from the present case is supported by a 20-year-old administrative interpretation. Beginning in 1940, four years after the Act was passed, the Commission restrained the Page 363 U. S. 177 practice of brokers who, whether buying and selling on their own account or acting on behalf of the seller, sold goods to purchasers who bought through them direct at a reduced price reflecting the savings made by the elimination of the services of a local broker. This practice was held to be a violation of § 2(c), not § 2(a). [Footnote 19]
The Court holds, in effect, that the action of an independent broker, engaged by a seller, in reducing his contract rate of commission for the purpose of enabling the seller to make a sale to a buyer at a reduced price, constitutes the granting of an allowance in lieu of "brokerage" by the broker to the buyer, in violation of § 2(c) of the Page 363 U. S. 178 Clayton Act, as amended by the Robinson-Patman Act, 15 U.S.C. § 13(c).
Thereafter, in what appears to be the first proceeding of this type, the Federal Trade Commission charged respondent with granting and allowing the buyer a portion of its brokerage fee, in violation of § 2(c) of the Clayton Act, as amended by the Robinson-Patman Act, 15 U.S.C. § 13(c), and, after hearing, entered a cease and desist order against it. The Court of Appeals reversed, holding that respondent, an independent seller's broker, was not covered by § 2(c), and moreover had not paid anything of value as a commission, brokerage, or other compensation to the buyer. 261 F.2d 725. We granted certiorari, 360 U.S. 908. Page 363 U. S. 179
The phrase "any person" in § 2(c) includes, of course, even a truly independent seller's broker. But that only poses the true question, which is whether an agreement by such a broker to reduce his commission charge to the seller, thus enabling the seller to reduce its price, constitutes the paying or granting by the broker of "anything Page 363 U. S. 180 of value as a commission, brokerage, or other compensation," or an "allowance or discount in lieu thereof," to the buyer.
I turn now to the purpose of § 2(c) as shown by its legislative history. The motivating factor behind the enactment of § 2(c) was the elimination of the practice by large buyers of demanding and receiving price concessions in the guise of "dummy brokerage" payments and "allowances" for "services" claimed to have been rendered to sellers, but which were not actually performed. [Footnote 2/2] It Page 363 U. S. 181 was Congress' purpose to eliminate that evil. Accordingly, it designed § 2(c) to prohibit payments or allowances of "anything of value as a commission, brokerage, or other compensation" by a seller to a buyer, directly or through an intermediary, "where such intermediary is acting in fact for or in behalf [of the buyer]." [Footnote 2/3] Although Congress took the view that neither a party to the transaction nor his intermediary could perform legitimate services for the other party, § 2(c) was not intended to, and did not, proscribe payments by a seller or a buyer to Page 363 U. S. 182 his own broker for services actually rendered to him, nor did Congress intend to fix or freeze brokerage rates or otherwise interfere with such legitimate brokerage operations. [Footnote 2/4] The purpose of § 2(c), as shown by the legislative history referred to, was not to embrace or affect legitimately negotiated rates of commission for brokers' services.
As I have pointed out, this is not a case where the buyer has claimed or received, either directly or through its intermediary, any "brokerage" "allowance," or discount in price, as compensation for services. [Footnote 2/5] Nor has the buyer obtained any allowance or discount because of any "savings" claimed to have been effected for the seller through elimination by the buyer or his broker of services normally performed by the seller or his broker. [Footnote 2/6] I am, Page 363 U. S. 183 therefore, unable to see or understand how it may be thought that the action of respondent in reducing its charge to the seller from 5% To 3% constituted the granting, either directly or indirectly, of "a commission, brokerage, or other compensation, or any allowance or discount in lieu thereof" to the buyer within the meaning of those terms as used in § 2(c). Since this case does not in any way involve any payment or allowance for services claimed to have been performed by the buyer or his intermediary, it is simply not the type or kind of case that is covered and governed by § 2(c). Inasmuch as the legislative history of § 2(c) shows that Congress did not intend that section to affect negotiated charges for legitimate brokerage services, I submit that the Court ought not so extend it by construction.
Until today, it seems always to have been generally understood that a truly independent broker, such as respondent, was free to negotiate the rate or amount of his commissions with this principal without fear of violating § 2(c). [Footnote 2/7] Such was the expressed congressional intention. [Footnote 2/8] Surely, if the rate or amount of respondent's commissions for services rendered to Canada Foods had been left to negotiation on each sale, no one would contend that an agreement by respondent to accept a commission of 3% for the sale in question would violate § 2(c). Likewise, there could be no violation of § 2(c) if, instead of dealing through a broker who charged a 5% Commission, the Page 363 U. S. 184 seller had dealt through a broker who charged only 3%. But the Court now holds that an independent seller's broker who has once agreed with the seller on a general rate of commission may not renegotiate that rate with his principal in order to effect a sale that would otherwise be lost to him. The fact that respondent and the seller had previously entered into an agreement concerning commission rates should not, in my view, be controlling, for I can see no sound reason why the seller and his broker must regard such an agreement as establishing an irrevocable floor under commission rates or amounts in order to avoid antitrust consequences. The Court's holding appears to me to be an unwarranted interference with legitimate brokerage operations, in direct contravention of congressional intent.
This proviso was Page 363 U. S. 185 incorporated for the purpose of
It was the evident intention of Congress in § 2(a) to permit sellers to pass through to buyers, in the form of reduced prices, any true savings in the cost of distribution of their goods. There appears to be no basis for ascribing to Congress an intention by § 2(c) to require a seller who uses the services of a broker in some sales to do so in all sales, or to require that brokerage rates be static. Yet this would be the effect of the Commission's contention that a sale made directly by such a seller to a buyer at a price that does not include any brokerage constitutes the granting by the seller to the buyer of brokerage or an allowance in lieu of brokerage under § 2(c). [Footnote 2/10] Since a Page 363 U. S. 186 reduction (or even elimination) of legitimate brokerage fees paid by the seller to an independent broker representing him might well constitute a true saving in the cost of one phase of the marketing process, such a reduction may, in proper circumstances validly justify a reduction in price to a particular buyer. [Footnote 2/11] Once this fact is recognized, and is coupled with an understanding that the real purpose of § 2(c) was to prohibit allowances by a seller based on services claimed to have been performed, Page 363 U. S. 187 to the benefit of the seller, by the buyer or his broker, I would think there is no choice but to conclude that the transaction here in question was one which Congress contemplated would be actionable only in a proceeding under § 2(a), subject to any valid "cost justification" defense. The high standards of proof required to sustain a "cost justification" defense in a § 2(a) proceeding eliminate any possibility of establishing as a true cost saving any reduction in brokerage commissions made as a subterfuge for the granting of an allowance or discount as a rebate to a buyer, whether or not as the result of coercive pressure of the buyer upon the seller or his broker. [Footnote 2/12]
However, under the expansive reading which the Court now gives § 2(c), in opposition, I believe, to its legislative history, this provision may now be applied to prohibit a price reduction granted by a seller to a buyer, even though such price reduction may be well based solely on true savings arising from a reduction in the cost of legitimate brokerage services performed by the seller's own broker. I am unable to perceive any basis for a conclusion that respondent's reduction of its brokerage charge to the seller, and the seller's consequent reduction in price to the buyer, violated the provisions of § 2(c). That conclusion seems to me to be an obvious thwarting of the intention of Congress to allow true cost savings to be passed through to buyers. Page 363 U. S. 188
To me, these efforts by the Court to so limit its holding represent a clear recognition of the fact that, in some cases, a reduction or elimination of brokerage costs might well justify a valid reduction in price by a seller to a particular buyer, and, in such cases, the Court is apparently quite prepared to hold that § 2(c) would not be violated. But, as I read § 2(c), either its terms are not applicable to any case where a price reduction results from a reduction in the seller's legitimate brokerage costs or they are applicable to all such cases. Section 2(c) does not expressly require discrimination between purchasers as an element of its proscriptions, nor does it provide any defenses based on legitimate savings in brokerage costs; only § 2(a) contains such provisions. And, as we said just last Term in Page 363 U. S. 189 construing § 2(e) of the Act, "[w]e cannot supply what Congress has studiously omitted." Federal Trade Comm'n v. Simplicity Pattern Co., 360 U. S. 55, 360 U. S. 67.
"* * * *" "I shall now speak of the matter of brokerage. Let me say in the beginning that the bill does not affect legitimate brokerage, either directly or indirectly. Where the broker renders service to the buyer or to the seller, the bill does not prohibit the payment of brokerage. It is not aimed at the legitimate practice of brokerage, because brokerage is necessary. The broker has a field all his own, and he should not be interfered with."