Court Opinion

ID: 8874552
Source: CourtListenerOpinion
Date Created: 2022-11-26 18:48:29.782497+00
Date Added: 2024-06-11T17:06:17.515896
License: Public Domain

MOORE, Circuit Judge
(dissenting).
Since the majority concedes that no brokerage relationship existed between American and the jobbers awarded the discounts, the crucial issue raised is whether the legality of the discounts was properly tested under Section 2(c), the brokerage clause. The majority assert without citation of authority that the discounts are within the purview of Section 2(c) since it covers all discounts “which are granted in connection with sales brought about by the persons who receive the discounts.” Moreover, they urge that Congress intended to invalidate payments such as those involved here because Section 2(c) is aimed at brokerage devices utilized to conceal price discrimination. Yet, rather than delineate the “brokerage” aspects of American’s discounts, the majority merely assume that such a characterization is appropriate. Finally, the majority, as does Empire, rely in part on a 1945 Fourth Circuit decision, South-gate Brokerage Co. v. FTC, 150 F.2d 607 (4th Cir. 1945), where the court held that discounts granted to a distributor who purchased and sold for his own account were unlawful under Section 2(c). However, as Judge Weinfeld noted in his opinion on the first motion in this case, in Southgate the applicability of Section 2(c) to the discounts granted was not in issue, i. e., there was no dispute as to whether they constituted an allowance in lieu of brokerage, as the situation is here. Empire Rayon Yarn Co. v. American Viscose Corp., 160 F.Supp. 334, 336 n. 5 (S.D.N.Y.1958). The sole issue in Southgate was whether the payments were made “in return for services rendered” to the seller and, thus, excepted from Section 2(c).1 In view of these analytical deficiencies and recent FTC and court decisions which reject interpretations of Section 2(c) as a rule of per se illegality, exemplified by the Southgate decision, and which refuse to apply Section 2(c) indiscriminately to any and all price concessions, I find the majority’s formalistic application of Section 2(c) to the discounts granted by American completely unjustified.
As early as 1956 the FTC made clear that the applicability of Section 2(c) depends on the circumstances of each case when it refused to apply the section to price concessions admittedly coupled with *189the elimination of brokerage fees on the ground that the evidence failed to establish a connection between them. See Main Fish Co., 53 F.T.C. 88 (1956). A similar inclination to examine the substance of allegedly invalid price variations was demonstrated by the First Circuit in 1959 when it held that no violation of Section 2(c) occurred where a seller terminated broker services and changed to direct sales at reduced prices. Robinson v. Stanley Home Prods., Inc., 272 F.2d 601 (1st Cir. 1959). The court noted that “ [t]he matter covered by section 2(c) is unearned brokerage, per se, not discrimination. * * * If * * * a manufacturer improperly discriminates between customers, section 2 (a) will accomplish the purposes of the act.” Id. at 604. Cf. H. R. Rept. No. 2966, 84th Cong., 2d Sess. 97-98 (1956). Both of the above decisions were cited with approval by the Supreme Court in FTC v. Henry Broch & Co., 363 U.S. 166, 175-176, & n. 18, 80 S.Ct. 1158 (1960) where the Court held that under appropriate circumstances services rendered to a seller may justify a grant of price concessions. Id. at 173, 80 S.Ct. at 1163. Moreover, the Court pointed out that the “in lieu of” provision of Section 2(e) is aimed at outright price reductions based on the partial or total elimination of brokerage services. Id. at 169 n. 5, 80 S.Ct. at 1160. Thus, it is apparent that in adjudging the appropriateness of applying Section 2(c) to particular transactions “[t]he question must be, what was the purpose of, or the reason for, the * * * [price variation].” Robinson v. Stanley Home Prods. Inc., supra at 603. See In re Whitney & Co., 273 F.2d 211, 215 (9th Cir. 1959); Thomasville Chair Co. v. FTC, 306 F.2d 541, 545-546 (5th Cir. 1962), 51 Calif.L.Rev. 215 (1963); Rowe, Price Discrimination Under the Robinson-Patman Act, 340-341 (1962).
The above mentioned “purpose and effect” test was applied in two recent decisions, one by the Seventh Circuit, Central Retailer-Owned Grocers, Inc. v. FTC, 319 F.2d 410 (7th Cir. 1963), and one by the FTC, Edward Joseph Hruby, Trade Reg. Rep. (Transfer Binder, FTC Complaints, Orders, Stipulations 1961-1963) j[ 16225 (1962), wherein Section 2(c) was deemed inapplicable to price discounts granted directly to distributors in consideration of their performance of distribution services. These decisions illustrate well the impropriety of the majority’s application of Section 2(c) to the discounts granted by American in the present case and demonstrate “a willingness to discard the subservience to form and nomenclature that dominated past brokerage enforcement.” Comment, 38 N.Y.U.L.Rev. 768, 777 (1963); see Rowe, Price Discrimination Under the Robinson-Patman Act (1964 Supplement) 69-78 (1964); Comment, 42 N.C.L.Rev. 457 (1964). In Central, Retailer-Owned Grocers, Inc., a cooperative purchasing organization, the members of which were associations of independent grocers, purchased materials from a supplier and obtained repayment from the members plus a markup to cover its operating costs. It received price concessions from the suppliers which were not granted to brokers selling directly to Central’s members. At the end of each year, if any funds had accumulated, Central passed them on to the members in the form of patronage dividends. The court held that the concessions did not violate Section 2(c) because they were not based on savings in brokerage expenses but, rather, were made in consideration of the savings inherent in Central’s method of doing business. In particular, the court noted that Central obtained the favorable prices because it assured the suppliers of a steady volume of business; removed credit risks; and eliminated billing expenses by providing a central office for payment. Central Retailer-Owned Grocers, Inc. v. FTC, supra, at 414. Similarly, the FTC in Edward Joseph Hruby looked to the distribution services performed by a distributor receiving price discounts to exonerate him from liability under Section 2(c). Commissioner Elman’s opinion characterized the price concessions as “functional discounts” *190which did not pass on brokerage savings to the distributor and stressed the fact that the distributor performed “a legitimate and useful economic function in the channels of distribution” by assuming risks of collection and loss in transit; by servicing small unit purchasers [he took title to the goods and resold them on his own account]; and by maintaining and operating warehouses stocked with substantial quantities of the suppliers’ products. Edward Joseph Hruby, supra at 21051-21052. The FTC also noted that the discount enabled the distributor to resell to customers at a profit. Id. at 21052.
These decisions demonstrate that a price discount should not be treated as “an allowance ‘in lieu of’ brokerage if it is causally conceived in considerations other than a saved commission or fee.” Rowe, supra, 341 (1962). The reliance by the Seventh Circuit and the FTC on evidence of a distributor’s business methods and the resultant advantage to the supplier of gaining entrance to an otherwise impractical market to rebut inferences that discounts were causally related to a reduction in brokerage services is sound, especially in light of the “purpose and effect” test enunciated in Robinson v. Stanley Home Prods., Inc., supra, and approved by the Supreme Court in FTC v. Henry Broch & Co., supra. See Comment, 32 Geo.Wash.L.Rev. 663, 669 (1964); cf. Rowe, 1964 Supplement, supra, 74-75. See generally 38 N.Y.U.L. Rev. 768 (1963). Moreover, approval of the compensation of a distributor by a supplier for distribution services rendered, in effect constitutes a rejection of Southgate Brokerage Co. v. FTC, supra, and undermines its value as a precedent.2 See Edward Joseph Hruby, supra at 21054-21056 (MacIntyre, Comm., dissenting) ; 38 N.Y.U.L.Rev., supra at 775-776; Rowe, 1964 Supplement, supra at 75 n. 56.
Recognition of the vital economic functions performed by distributors reselling to small wholesalers by the courts and the FTG is long overdue. Comment 42 N.C.L.Rev. 457, 465; see Comment 51 Calif.L.Rev. 215, 219 & n. 31 (1963). Edwards, The Price Discrimination Law 150-52 (1959). “The refusal to recognize this distributive function results either in depriving small buyers of a source of supply or in compelling them to pay a higher price than their competitors in buying from a distributor * * * to whom the manufacturer is forced to sell at the same price as direct buyers.” Austin, Price Discrimination and the Small Business Man, in 16 ABA Section of the Antitrust Law 94, 102-103 (1960). Business realities and the necessity for competition in the channels of distribution demonstrate the desirability of assessing the competitive effect of discounts granted to distributors with refernce to the less restrictive standards that have developed under Section 2(a), the general price discrimination provision, rather than Section 2(c). See Comment, 42 N.C.L.Rev., supra at 465.
The jobbers receiving discounts from American here performed distribution services identical to those referred to in Central Retailer-Owned Grocers, Inc. and Hruby, Edward Joseph, i. e., they assumed credit risks; serviced small unit purchasers; and maintained and operated warehouses storing American’s products. In effect, they provided the means by which American was able to reach a *191market which, in the absence of the services rendered, it would not have been economically feasible to enter. Empire contends that the conditional nature of the discounts, i. e., the fact that they were not granted outright to the jobbers, conclusively demonstrates that they were not granted outright to the jobbers, conclusively demonstrates that they were not granted in consideration of the jobbers’ functional utility. However, it should be noted that the resales were made at American’s list price at the time of resale so that the jobbers’ profit margin was subject to change in accordance with American’s price changes. Moreover, the record supports a finding that the jobbers were engaged to service a particular market, to wit, small wholesalers. The mere fact that the discount was granted “after the fact” does not render unreasonable the conclusion that they were granted to provide an incentive and compensation for the performance of a vital economic function.
In sum, the majority’s disposition does not comport with the facts and “stretches Section 2(c) * * * far beyond the limits of its language and manifest purpose, to a point where it now threatens to swallow up much of the territory covered by the more general stautory provisions which it was intended to supplement.” Central Retailer-Owned Grocers, Inc., Trade Reg.Rep. (FTC Complaints, Orders, Stipulations 1961-63) fí 15896 at 20717 (1962) (Elman, Comm., dissenting). As the majority concede, there is no problem of “dummy” brokerage in this case. Moreover, the discounts do not come within the “in lieu of brokerage” provision of Section 2(c) for they were not demonstrated to be direct price reductions “based on the theory that fewer brokerage services were needed in sales to these particular buyers, or that no brokerage services were necessary at all.” FTC v. Henry Broch & Co., supra, 363 U. S. at 169 n. 5, 80 S.Ct. at 1160. As in Edward Joseph Hruby and Central, Retailer-Owned Grocers, Inc. the discounts were “proximately caused,” i. e., causally related, by the performance of legitimate distribution functions and services.3
It is apparent, as Judge Murphy noted below, that Empire’s objection to the discounts is in essence a claim of price discrimination which, contrary to the majority, was not effected by “brokerage devices” and is not cognizable under Section 2(c). This is not to say, however, that the price differentials are exempt from scrutiny under Section 2(a). Their legality depends on the criteria governing price discriminations by sellers under Section 2(a) and their receipt by buyers under Section 2(f), i. e., if they are anti-competitive in effect and if the defenses of cost justification or good faith meeting of competition are not established, they would be unlawful. However, “where, as here, the allegations of fact *192relate only to a § 2(c) violation * * * [it would be improper to] read in the possibility that the venture complained of may * * ’* amount to a § 2(a) price discrimination * * Empire Rayon Yarn Co. v. American Viscose Corp., 238 F.Supp. 556, 560 (S.D.N.Y.1965).
In final analysis, from the correspondence between the parties and the record, the purpose of this lawsuit is all too clear. By its abandonment of its section 2(a) claim, i. e., price discrimination, Empire impliedly recognized that it did not wish to risk the factual defenses which American might successfully interpose thereunder. Empire’s sole purpose was to force itself upon American as a distributor performing the functions of Malina, Gutner Brothers and Shawmut. American, exercising its supposed right (which might well be denominated constitutional) to select its own appointees in this particular field, had advised Empire that as a matter of business judgment “for the present at least' this Corporation will not appoint any additional jobbers.” Empire then resorted in effect to the in terrorem position or threat of — unless you add us as a distributor, we will sue you. Empire’s real complaint was a price discrimination, section 2(a), violation which it originally alleged. Unwilling to pursue its action under that section and relying upon the label “5% discount” as bringing it under section 2(c), (e) and •(f), Empire sought to mold the factual situation to the contour of these sections.
The courts should be ever zealous to enforce the laws designed to promote active and healthy competition which, in theory at least, should redound to the benefit of the public and the various business organizations serving the public. However, the courts should be ever watchful lest under the guise of law enforcement bodies they become the instrumentalities of special interests which seek to use the law and the courts for their own particular benefit. This aspect of the present case was noted by a most discerning judge as appears in his decision upon the original summary judgment motion, wherein he said: “Somewhat anomalously, based upon its assertion that it has the necessary facilities and qualifications to perform for American the jobbing services to the same extent as the jobber defendants, the plaintiff seeks the same discount which, if in fact is discriminatory, would in turn discriminate against other customers of American who might claim to be qualified to be accorded a jobber classification.” Weinfeld, D. J., in Empire Rayon Yarn Co. v. American Viscose Corp., 160 F.Supp. 334, 336 (S.D.N.Y.1958).
Because I believe that the decision of the majority is at variance with the purpose of section 2(c), with the facts which govern the relationship between American and its three distributors, with the decisions of the courts and the FTC interpreting this phrase of section 2 (c) and with what should be the policy of the courts of not forcing unwanted distributors upon unwilling business organizations, I dissent and would affirm the order appealed from.

. See also Western Fruit Growers Sales Co. v. FTC, 322 F.2d 67, 68 (9th Cir. 1963). Other decisions relied on by Empire are also not controlling here for they involved (a) the admitted receipt of brokerage payments by buyers’ agents and raised issues concerning whether the buyers actually controlled the recipients of the payments or whether the payments were justifiably granted “for services rendered” the seller, see Modern Marketing Service Inc. v. FTC, 149 F.2d 970 (7th Cir. 1945); Webb-Crawford Co. v. FTC, 109 F.2d 268 (5th Cir.), cert. denied, 310 U.S. 638, 60 S.Ct. 1080, 84 L.Ed. 1406 (1940); Quality Bakers of America v. FTC, 114 F.2d 393 (1st Cir. 1940); Oliver Bros. v. FTC, 102 F.2d 763 (4th Cir. 1939); Biddle Purchasing Co. v. FTC, 96 F.2d 687 (2d Cir.), cert. denied, 305 U.S. 634, 59 S.Ct. 101, 83 L.Ed. 407 (1938); and (b) payments made directly to a buyer in lieu of illicit brokerage previously paid to his agent. Great Atlantic & Pacific Tea Co. v. FTC, 106 F.2d 667 (3d Cir. 1939), cert. denied, 308 U.S. 625, 60 S.Ct. 380, 84 L.Ed. 521 (1940).

. This decision and its progeny have not only been criticized for adopting an inflexible construction of Section 2(c), see Rowe, Price Discrimination Under the Robinson-Patman Act 357-59 (1962); Austin, Price Discrimination and Related Problems Under the Robinson-Patman Act 114-116 (1959); Law, The Performance of Distribution Functions as Legal Justification for Price Differentials Under the Robinson-Patman Act, 69 Dick.L.Rev. 39 (1964), but also for adopting a construction which is inconsistent with broader antitrust principles in that it granted a legal monopoly to one type of middleman, clogged competition in distribution channels and exacted a tribute “from the consumer for the beneft of a special class.” Att’y Gen. Nat’l Comm. Antitrust Rep. 191-193 (1955) ; Edwards, The Price Discrimination Law 151 (1959).

. The “for services rendered” proviso in § 2(c) could have been invoked to dispose of this appeal for FTC v. Henry Broch & Co., 363 U.S. 166, 80 S.Ct. 1158 (1960) “indicated sympathy with some reassessment of the ‘for services rendered’ clause,” Bowe, supra at 353 (1962), which many considered a dead letter in view of Southgate Brokerage Co. v. FTC, 150 F.2d 607 (4th Cir. 1945), see Rowe, supra at 350 (1962) ; Austern, Section 2 (c), CCH Bobinson-Patman Act Symposium 37 (1946). The discounts here, moreover, could, properly be treated as granted “for services rendered” to American. That avenue of analysis, however, has been rejected because it is too circuitous and prevents the inquiry from focusing on the ultimate issue, viz., at what point should § 2(a), the general price discrimination provision, yield to § 2(c), the brokerage provision? This issue should be resolved by restricting the operation of § 2(c) to those payments demonstrated to be causally related to either partial or total elimination of brokerage services, with the caveat that legitimate variations in brokerage fees, i. e., those based on genuine differences in cost, may be passed on in the form of lower prices. Thomasville Chair Co. v. FTC, 306 F.2d 541 (5th Cir. 1962) ; cf. FTC .v. Henry Broch & Co., supra., This rule embodies a frank recognition, of the legitimate economic function performed by intermediate distributors and the need for fostering competition in the channels of distribution which is best-served by testing discounts under the less; restrictive standards of § 2(a).