2. Everybody Out of Step but the Government Lawyers

2. Everybody Out of Step but the GovernmentLawyers The productive power of American industry is the eighth wonder of the world. It is the continual astonish ment of Europe and the deterrent of Russia. The indus trial powerhouse of the United States has developed a voltage and is now putting out a current of economic energy such as has never been known before in human history. It is hard to believe that all this industrial power, avail able both for peace and for war, has been built on error and by criminals. When a young man shows great power in athletics or an old man holds together toward the century mark, people think there must have been something good in the makings of such a 'man. Not so, however, with American industry in the eyes of the federal courts and the government lawyers. It is full of original sin and needs to be taken apart and put to··· gether properly. Moseshad nothing on the Supreme Court. He handed down ten commandments. The Supreme Court is hand ing down ten thousand. And like. the ten that Moses brought down from Mount Sinai, they are nearly all "don'ts."

The highest court of the land, of course, doesn't go into thousands of detailed "thou shalt not's." It ,merely 9 10 EVERYBODY OUT OF STEP decides one way or the other on each case that comes before it. But the Court's decisions these days are up holding the hand of government officialsand the hand of government officialsis writing the ten thousand "don'ts" for American business and industry. The doctrine of original sin is now being applied to American business men and official "naughty-naughties" are being turned out for it in the Federal Trade 'Commissionand the Anti trust Division of the Department of Justice by mass production. There's a "new look" in the antitrust laws these days and it deservessome attention from every American citi zen who re~lizes that on American industry depends not only the comfort of his home, but its defense. The trouble isn't simply that almost every businessman in the United States could now, by the new rules, be haled into court l;>y government officials and be fined, branded a criminal for the most commonplace and ac cepted practices, and subjected to treble-damage suits by competitors and customers. It is that the policies and practices by which American business has grown so phenomenally productive have one and all in recent years been damned, discouraged, and suppressed.

The current civil suit of the government lawyers against the Great Atlantic & Pacific Tea Company is a case in point. It is not, in effect, against the Hartford brothers who own the chain, but against their methods. The proposed .breakup of the system would further en rich the Hartfords. The real significance of the attack on A&P is that a victory by the Antitrust Division lawyers would mean the end of the high-volume, low-margin, hard-hitting, penny-saving methods that A&P pioneered. American industry has developed its musclesina busi ness community that daily operates with quantity disEVERYBODY OUT OF STEP 11 counts, matched prices, freight absorption, horizontal and vertical integration, and the rapid-fire development of new, unheard-of products. Everyone of these prac tices, if not an outright crime under federal law, is now under a legal cloud. Take the matter of quantity discounts. Everybody knows them, at least in such forms as "Ten Cents Apiece: Three for a Quarter," "Cheaper by the Case," or, "I Can Get It for You Wholesale." Every householder can see on the back of his electric-light bill that the more electricity he·buys, the cheaper he gets it per kilowatt hour. If he ships freight he knows that the more he ships the less he pays per unit.

But quantity discounts are now in the shadow. In the Morton Salt case, a dissenting Justicesaid, "The case, in a nutshell, is that no quantity discount is valid which the [Federal Trade] Commission sees fit to attack." And the FTC, itself, commented that this was a "very radical interpretation. " Take the case of matched prices. Nobody is sur prised if he finds that ninety-nine times out of 100 if he·buys a can of orange juice or of smoking tobacco on one side of the street, and crosses the street, the price will be the same on the other side. When a merchant advertises "I will match any competitor's price," most people think well of him. Throughout American busi ness, nearly everybody's price for the same thing is the same at any particular time. But the government lawyers have begun to look into this .situation and now it's dangerous to match a com petitor's price consistently. Legally, in federal anti trust law, this can make one a conspirator, or something just as bad. "Identical pricing" has become highly dangerous.

12 EVERYBODY OUT OF STEP For instance, in October 1948 the Federal Trade Com mission, discussing a.case that had come before it, laid out the following verbal booby trap for competitors: The Commissionchose to rely on the obvious fact that the economic effect of identical prices, achieved through consciousparallelaction, is the same as that of similarprices achieved through overt collusion; and for this reason the Commission treated the conscious. parallelism of action as a violationof the Federal Trade CommissionAct. The catch here lies in the fact· that the matched prices of hard competition look superficially just like the matched prices of conspiracy. If three afternoon papers all charge the same nickel a copy, it might be because their managements all agreed, or it might be because their managements all disagreed. Similarly a still pic ture of two or three cats looking at a piece of meat might look like a conspiracy, and it might take a good deal of waiting round with a movie camera to "prove" other wise. But the burden of proof today is on private busi ness, not on the FTC, and in antitrust law the old Anglo Saxon rule that, if circumstantial evidence has an innocent as well as a guilty interpretation, the man goes free, has been talked away.

This FTC statement contains another joker for Ameri can business, in the phrase "conscious parallel action." This refers to the fact that it is now legally dangerous for American businessmen to know each others' price lists. It is generally assumed among businessmen that it is a good thing and a help to competition if everybody knows what everybody else is charging. Trade associa tions publish these figures, including premiums, discounts, payment terms, and so on. So do trade journals. No where in the world are the facts about who is·charging EVERYBODY OUT OF STEP 13 how much for what so well and widely known among competitors as in the United States. But this information, too, has come under suspicion. Government lawyers are against the general dissemina tion of such news. The Antitrust Divisionhad it stopped in the Sugar Institute easel and tried to force the Ameri can Iron and Steel Institute to quit publishing rate-books for its members.

Here the good of knowledge is in question. For com petitors each to know what the other is doing and to be able to make quick estimatesof what a cut or an increase means is to provide them a tool like a hatchet or a blow torch that can be used both for good and for evil. They can use such information to soften competition, or to compete harder. Tropismatically suspicious,the govern ment lawyers in the FTC and the Antitrust Division feel that businessmenwill use such information to avoid com peting. But by the same reasoning, of course, the com mon use of the English language, the decimal system, and of the old English nomenclature of ounces,pounds, and tons also contributes to the possibilitiesof "conscious parallel action" by businessmen. Still another standard practice of American business men is now legally dangerous. I t is "uniform delivered pricing." Everybody knows it in such forms as "Twenty-five Cents Everywhere" or"One Dollar Every where East of the Rockies" (zone pricing). But this is now questionable under the Federal Trade Commission's new concept of "mill-net" pricing.

The "mill-net" idea, which the Supreme Court appears to have confirmed 2 is that true "price," in the eyes of the law, is not what is charged, but what is received. Thus, for instance, a pair of gloves made in Gloversville, New York, and sold both in Gloversville and in Los 14 EVERYBODY OUT OF STEP Angeles for three dollars, produces a different "mill-net" to the maker from the two places, by the amount of the freight charge. This is important because the Clayton Act of 1914 (as amended by the Robinson-Patman Act of 1936) prohibits "price di~criminations, "which means the charging of different prices for the same goods to different customers (except in certain circumstances, the extent of which the Courts have been shrinking)." But the Federal Trade Commissionlawyers, with the "mill-net" interpretation, easily make it a violation of Federal law to charge the same price in Gloversville and in Los Angeles for the same pair of gloves. For it isn't, under the mill-net interpretation, the same price. Or, as the Supreme Court put it in the Cement case, the law "does not permit a seller to use a sales system which constantly results in his getting more money for like goods from some customers than from others."

This is practically a death-sentence anytime the FTC lawyers want to use it, for uniform delivered pricing, zone pricing, basing-point pricing, or any kind of freight absorption or phantom freight. Thus for instance if this book is sold at the same price in" Kansas City as in Jersey City, the publisher may be, by the now legally accepted "mill-net" theory, "using a salessystem which constantly results in his getting more money for like goods· from some customers than from others." (For, in someinstanceshe may pay the freight; and, unfortunately, this is probably heavy reading.) Another common practice of American businessmen is now in legal jeopardy, the "good faith" matching of competitors' price cuts. Under the law, as it was gener ally taken for granted until recently, a firm could at least cut its price to match a competitor's price reduction.

EVERYBODY OUT OF STEP 15 Such a cut would be made in "good faith competition," supposedly protected by Section 2(b) of the amended Clayton Act. But in a major case to be described in Chapter 5, the Federal Trade Commission tried to de stroy this kind of legal defense against a charge of illegal price discrimination. The accused Standard Oil Company of Indiana told the Circuit Court, on ap peal, that the lower court's decision would "necessitate nation-wide reconstruction of marketing procedures." But the Circuit Court upheld. Another common fornl of business is now apparently outlawed, through the recent decision of the Supreme Court in the Standard Oil Company of California case involving exclusive dealer contracts, which the company held with some 7,000 gasoline retailers. Such arrange ments have been a standard feature of American busi ness. The Court's 5-4 decision thus not only outlawed the 7,000 California contracts, and probably many thou sands more with other oil companies, but also made them hazardous in the distribution of many other products, like automobiles, farm machinery, hardware, and so on.

A natural alternative which manufacturers might choose for such contracts would be to go into the retail ing business themselves, perhaps taking on these now independent dealers as employees instead of dealing with them on contract. This, however, is a form of "vertical integration." And the face of the federal antitrust laws is being steadily hardened against industrial integration. The Antitrust Division has repeatedly claimed that ver tical integration is in itself ("per se") a crime under the Sherman Antitrust Act. A near majority of the Su preme Court was willing, a few years ago, to accept this view. These are not all the common practices of American 16 EVERYBODY OUT OF STEP business ,vhich are now legally questionable, if not out right criminal. Sales managers may yet run afoul of the government lawyers even if they (a) can completely justify quantity discounts by cost-accounting; (b) do not sell at the same price as competitors; (c) do not know competitors' prices; (d) never "absorb" any freight costs in their offering prices; (e) make no exclusive contracts; and (f) do not work for integrated firms. The new powers given the FTC and the Antitrust Division threaten new hazards" even in methods taken to avoid the present ones.

As the law is now interpreted, the Acting Chairman of the Federal Trade Commission felt able to tell a Senate investigating committee recently that "under. . . these .. . . decisions it is safe to say that we can take orders against 100,000 businessmen." 3 One of the hazards that sales managers must now take into account is that some policy followed today in the light of the best legal opinion may next year be re interpreted as illegal. In such case the crime and the penalty may be retroactive. This is as though an auto mobile driver who took a right tum on a red light during a month in which this was permitted by current traffic regulations, were subsequently found guilty for it because it was later ruled to be illegal. This, however, is in the "Nothing Can Be Done About It" Department, as many company officials have learned. Another kind of hazard consists in the possibility of treble damage suits, also possibly retroactive. Firms which, with the best of intentions, run afoul of the law on one of the above counts, are open to treble damage suits under the antitrust laws, even though their offense was a course of conduct that everyone considered, at the time, quite legal as well as ethical, but that a subseEVERYBODY OUT OF STEP 17 quent reinterpretation of the law found to be illegal.

A savinggrace in the law is its human side. This came out in Senate Committee hearings some years ago. The then Assistant Attorney-General Wendell Berge was on the stand and the transcript read as follows.4 Chairman (Senator Langer): How many men have you put in the penitentiary as a result of prosecutions under the Sherman Act? Mr. Berge: None for a generation. Chairman: I want to know why. Mr. Berge: I have no trouble answering the question. Frankly, we have to recognize that the community does not regard the antitrust violation as a moral violation in the same sense that they· would regard embezzlement. Chairman: Who says that? Mr. Berge: The courts and the juries. . .. Our problem, sir, in criminal casesis to get convictions of businessmenwho in the morals and traditions of the community are not criminals.