4. The Morton Salt Case

+. The Morton Sa/tease 1 In 1914 President Wilson urged Congress to pass some improvements in the antitrust laws. He wanted· some thing clearer than the Sherman Act of 1890. Congress agreed and passed both the Clayton Antitrust Act and the Federal Trade Commission Act. Business people wanted something more definite about what kinds of competition were fair and what were not and, also, some body to administer such a law. The Sherman Act was too broad a charter.2 When a firm cut prices, for in stance, it was hard to say whether this was fair or unfair competition, or in fact, whether it actually contributed to competition or.detracted from it. In the Clayton Act, Congress tackled for the first time the paradox in the system of free competition. That paradox is that when businessmen are completely free to compete, some get put out of business. So it looks like a poker game in which so many players may get wiped out that it may narrow down to no game at all.

The strength of the Clayton Act lay in Section 2, which said in part, "It shall be unlawful . . . to dis criminate in price between different purchasers ... where the effect. . . may be substantially to lessen com petition or tend to create a monopoly in any line of commerce . .." To "discriminate in price between different purchasers" means merely to charge them differ ent prices for the same goods. 2; 26 THE MORTON SALT CASE If the law, however, had stopped here, it might have called in question nearly all quantity discounts. Quan tity discounts have long been a fundamental part of American business operations. Every housewife knows them in such forms as "One package, 10 cents; three packages, 25 cents." Virtually every business quotes them. Railroads use them in complicated form. Per haps their most conspicuous use is by the electric power companies, whose rates vary as much as from ten cents a kilowatt-hour down to a third of a cent, depending on the quantity taken.

So Congress put a proviso in the Act which said "that nothing herein contained shall prevent discrimination in price. . . on account of differences in the grade, quality, or quantity of the commodity sold . . ." The law so stood until 1936, with this blanket exemp tion of quantity discounts. But in the 1930's, two de velopments began to close in on this exemption. For one, the mail-order and chain stores began to blow a strong wind of new methods through the traditional methods of wholesale and retail distribution. They not only cut down retail selling margins, but also-through quantity buying and selling, among other methods often by-passed wholesalers and were able to undersell independent retailers. The other influence was the depression. The country became less interested in "hard competition" and wanted to get prices up, not dowh. With the National Indus trial Recovery Act, Congress tried to support prices and protect competitors. And when NRA was struck down by the old Supreme Court, its spirit lingered on.

Organized associations of wholesalers, jobbers, and independent retailers began pushing various kinds of laws to stop the price cutting and to protect their margins.

THE lUORTON SALT CASE 27 Among these were state laws requiring minimum markups and prohibiting the use of "loss-leaders." One of the chief drives was for punitive state taxes on the large chains, aimed chiefly at the grocery chains. It was almost inevitable, in the circumstances, that quantity discounts should come under fire. The first notable attack on them came from the Federal Trade Commission. It sued the Goodyear Tire and Rubber Company for its large sales, at substantial quantity dis counts, to Sears, Roebuck Company. It argued that these discounts were illegal because the Goodyear people had not justified them on the basis of savings in cost.3 But the Circuit Court threw this out on the ground that the quantity discount proviso in the Clayton Act did not require a cost-saving defense.4 Meantime, however, Congress sharply amended the Clayton Act in 1936, by passing the Robinson-Patman Act. It put into the law what the FTC had tried to enforce in the courts against ·Goodyear. It changed the quantity-discount proviso to read: ". . . that nothing herein contained shall prevent differentials which make only due allowance for differences in the cost of manu facture, sale or delivery resulting from ... differing methods or quantities . . ."

This meant that quantity discounts would be illegal if, in effect, they hurt competition, unless they could be justified on cost savings. But this is a vastly oversimpli fied statement of the meaning as we shall see. It was some time before the change got a thorough test in the courts. But in 1940 the Federal Trade Com mission filed a complaint against the Morton Salt Com pany for certain quantity discounts. When the company resisted, the slow machinery of the law finally produced a Supreme Court decision on May 3, 1948.

28 THE MORTON SALT CASE This decision was so sharp and drastic that it went through the ranks of the antitrust lawyers almost like an earthquake. Even the FTC lawyers called it a "very radical interpretation of the law" and the Commission went so far, after reading the decision, as to say that it would not use all the powers it got from it. The Morton Salt Company sold·its top brand of table salt, called "Blue Label," on a standard quantity discount system. Its prices per case (after allowances for rebates and discounts) were as follows: Less-than-carloadpurchases $1.60 Carload purchases 1.50 5,000-casepurchasesin any consecutive12 months. . 1.40 50,000-casepurchasesin any consecutive 12 months 1.35 The two discounts here chiefly under fire were at the top and bottom. Less than one per cent of Morton's customers were so small they bought in less-than-carload lots, but the Court took them particularly into account.

On the other hand the Court noted that "only five com panies have ever bought sufficient to obtain the $1.35 per case price. These companies could buy in such quantities because they operate large chains of retail stores in various parts of the country." (They were American Stores Company, National Tea Company, Kroger, Safe way, and A&P.) The Morton Salt people had tried to show cost-savings to the FTC, in the original hearings, to justify these dis counts. To most businessmen these discounts, including even the 25-cent lower price received by the big chains below the price to the scattering of less-than-carload buyers [15 cents or 10 per cent below the carload buy ers] would seem easily justified on the lower costs of selling, billing, and so on. But the Commission ruled out this defense at the start as inadequate. So the quesTHE MORTON SALT CASE 29 tion did not come up before the Supreme Court. (We shall consider.later in this chapter the difficulties·in the task of proving cost-savings to the FTC's satisfaction.) Thus the main argument before the Supreme Court was whether Morton's discounts "had in fact caused in jury to competition." That is, had they run afoul of the clause ". . . \vhere the effect . . . may be substan tially to lessen competition ... or to injure, destroy, or prevent competition. . ."

The Supreme Court used to have the custom, when in doubt about the meaning of a law, to examine what was said in Congress about it during its passage. The "new" Supreme Court, as told in previous chap ters, has often departed from this custom. 1~hus when it apparently banned the use of basing-point pricing in the Cement case, it read back into the law what Congress had read out of it. But in the Morton Salt case the Court went right back to the Congressional record on the Robinson-Patman Act. And here it pointed out not only what a radical change the law made but also added its own "very radical interpretation." The Court maintained: the legislative history of the Robinson-Patman Act makes it abundantly clear that Con gress considered it to be an evil that a large buyer could secure a comp.etetive advantage over a small buyer solely because of the large buyer's quantity purchasing ability ...

(it) was especially concerned with protecting small busi nesses which were unable to buy in quantities, such as the merchants here who purchased in less-than-carload lots. The new provision . . . was intended to justify a finding of injury to competition by a showing of "injury to the com petitor [author's italics1 victimized by the discrimination." The Court quoted the above from the report of the Senate Judiciary Committee on the Robinson-Patman bill and in a footnote it gave a longer quotation. The Com30 THE )'vJ.ORTON SALT CASE mittee said that the Clayton Act had previously been "in practice . . . too restrictive [on the FTC-ed.] in re quiring a showing of general injury to competitive con ditions . . . whereas the more immediately important concern is in injury to the competitor [author's italics]. . .. Only through such injuries, in fact, can the larger general injury result, and to catch the weed in the seed will keep it from coming to flower." 5 Then the Court said, "We think that the language of the Act, and the legislative history just cited, show that Congress meant . . . that in a case involving com petitive injury between a seller's customers the Commis sion need only prove that a seller had charged one purchaser a higher price for like goods than he had charged one or more of the purchaser's competitors."

But the finding that really jolted the lawyers of both sides was that the law "does not require that the dis criminations must in fact have harmed competition, but only that there is a reasonable possibility that they 'may' have such an effect . . . The Commission is author ized 'by the Act to bar discriminatory prices upon the 'reasonable possibility' that different prices for like goods to competing purchasers may have the defined effect on competition. " These three statements, put together, seem to add up as follows; that a quantity discount is illegal if there is a reasonable possibility that it has hurt a competitor. Now it was this little word "possibility" that astonished the lawyers because most had assumed that the law re quired a reasonable "probability." And there is a vast difference between "possibility" and "probability" in both common sense and in law. Thus if a man drives off in his cal', there is a reason able possibilitythat he may have an accident-but (if he THE MORTON SALT CASE 31 is a good driver) no.reasonable probability. Most people would agree that· if there were a reasonable probability of his doing damage, his license ought to be revoked.

But if drivers' licenses were granted only to drivers who could prove there was no reasonable possibility of their hitting anybody, the roads would be empty. Said Justice Jackson, dissenting, While I agree with much of the Court's opinion ... I cannot accept its most significant feature, which is a new interpretation . . . that will sanction prohibition of any discounts "if there is a reasonable possibility that they 'may' have the effect to wit: to lessen, injure, destroy or prevent competition . . . I think the law as written by the Congress and as always interpreted by this Court requires that the record show a reasonable probability of that effect . . . The law rarely authorizes judgments on proof of mere possibilities.. .. This Court has, at least three times and as late as 1945, refused to interpret these laws as doing so . . . I know of no other instance in which this Court has ever held that administrative orders applying drastic regula tion of business practices may hang on so slender a thread of evidence . . .

But the Supreme Court in the Morton Salt case made one more important decision which the lawyers are just beginning to discuss. It concerned "functional dis counts." A "functional discount" is one that a buyer gets because he is a "wholesaler," a "jobber," or a "re tailer." It does not concern quantities. In fact it tends to cross up quantities. Thus a chain buying 50,000 cases a year would be entitled (on a quantity discount basis) to a far higher discount than what most wholesalers or jobbers get, let alone independent retailers; but on a functional discount basis it ,,,ould, since it is a retailer, have to pay more than the wholesaler or jobber (who bought in smaller quantities) unless of course its supplier could prove a cost-saving to the FTC.

32 THE !vl0R1"ON SALT CASE Congress did not require functional. pricing in the Robinson-Patman Act. But in the Morton Salt case the Supreme Court seems to have done so. Thus it said, "Theoretically, these discounts are equally available to all, but functionally they are not." And it approved those parts of the FTC order which "would absolutely bar (Morton) from selling its table salt, regardless of quantities, to some wholesalers and retailers at prices dif ferent from that which it charged competing wholesalers and retailers for the same grade of salt." And it upheld the order which forbade Morton's ". . . selling. . . to any retailer at prices lower than. . . charged wholesalers whose customers compete with such retailer. " Whether or not the Supreme Court stretched the meaning of the Robinson-Patman Act here, the consumer seems like the goat. He is mentioned only once in the whole decision and there only by implication. That is where the Court criticized the fact that Morton's dis counts" did result in price differentials between compet ing purchasers sufficient to influence their resale price of salt . .." That means that the discounts were partly handed on to customers.

Why Morton Salt couldn't satisfy the FTC on the cost-saving of large orders may be partly explained by the following remarks of a well-known certified public accountant, formerly associated with the FTC. . . . It is in the distribution functions where most cost differences may be found . . . Distribution cost accounting is .... still in its piopeering and experimental stages ... a number of cost reports . . . have been rejected by the Commission for the reason that the costs· had not been properly developed ... Measuring factors such as salesmen's calls, number of THE MORTON SALT CASE 33 orders, numbers of invoices, number of invoice lines, etc., are often used ... The cost defense advanced in the Morton Salt case is a splendid example of the results of mere office calcula... tions. . .. The FTC will not accept costs based largely upon unsupported estimates. . .. To try to make a survey of costs all over the country in the case of nation-wide distribution is an enormous. task . . . 6 5'. The Forgotten Consumer Long before World War I, w-hen the Sherman Anti trust Act was in its infancy, a group of retail lumber dealers were angered by a number of wholesale lumber men. The wholesale firms were edging into the retail business and they were not respecting the usual retail markup. In other words, they were cutting prices.