FEDERAL TRADE COMM'N v. BROCH & CO.

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Argument of Daniel M. Friedman

Chief Justice Earl Warren: Number 61, Federal Trade Commission, Petitioner, versus Henry Broch & Company.

Mr. Friedman, you may proceed with your argument.

Mr. Daniel M. Friedman: Mr. Chief Justice and may it please the Court.

This case here on writ of certiorari to the Court of Appeals for the Seventh Circuit brings before this Court for the first time since the enactment of the Robinson-Patman Act in 1936, the meaning of Section 2 (c) of that Act, the so-called, “brokerage section.”

Generally speaking, that section makes it unlawful for any person to pay or grant any brokerage or any allowance or discount in lieu thereof, to the other party to a purchase and sales transaction except for services rendered.

The two questions which are presented by this case are first, whether the prohibitions of this provision apply to a seller's broker who engages in conduct otherwise prohibited by the Act, that is a seller's broker as distinguished from the seller himself.

And the second question presented is whether the particular conduct engaged in by the respondent in this case involve a grant or allowance in lieu of brokerage within the meaning of those provisions.

The basic facts in the case are not in dispute.

They were found by the examiner, accepted by the Commission and the Court of Appeals itself in setting aside the Commission's order, accepted those findings.

The respondent, Henry Broch & Company, is a broker engaged in selling food products for roughly 25 principals.

He is compensated on the basis of a percentage of the sales made and the amount he receives may vary from particular seller to particular seller.

This particular case grows out of sales which the respondent made on behalf of a Canadian processor of apple concentrate, a firm called, Canada Foods.

And they involved the sale of the apple concentrate that was processed in 1954 to affirm in the United States called Smucker.

In the spring of 1954, Canada Foods appointed Broch as its broker and at that time, entered into an understanding that Broch would be paid 5% as a commission.

Thereafter, the -- Canada Foods entered into agreements with other brokers to represent it and in those instances, they agreed to pay the brokers 4%, the explanation being that the Broch firm stored the goods in advance.

Chief Justice Earl Warren: Bought from what?

Mr. Daniel M. Friedman: Stored the goods, kept goods in its warehouse.

Chief Justice Earl Warren: Yes.

Mr. Daniel M. Friedman: In October of 1954, Canada Foods announced to its brokers that the 1954 pack of apple concentrate would be ready shortly and sent samples out and indicated that the price on this concentrate would be made available.

And around the 11th or 13th of October, they sent out an announcement to the trade brokers, the price would be $1.30 per gallon in 50-gallon drums.

Promptly upon receipt of this information, another broker who was getting 4% on the sales, a firm called Kenser & Phipps got in touch with the Smucker firm and suggested they might interested in this concentrate.

There was good deal of discussion back and forth.

The upshot of it was that the Smucker firm indicated they would be interested in taking 500 barrels.

Now, this is concededly a very large order, because each barrel contains 50 gallons, so the result of this is approximately 25,000 gallons at the price of $1.30, is better than a $30,000 order.

But they further indicated to Mr. Phipps that they didn't want to pay that much money and Mr. Phipps said he would get in touch with Canada Foods and see what he could do about it and there was further discussions back and forth between Canada Foods and Phipps and Canada Foods said, “No, they wouldn't cut the price.”

At this point on, the 26th day of October, Smucker made a specific offer to Phipps.

They said they would buy 500 barrels of their stuff at $1.25.

Phipps promptly wired this offer to the Canadian seller.

The next morning, the Canadian seller called Phipps and advised Phipps that they would not sell for less than $1.30 and went on and stated the only way we could do something about it, would be if the brokerage was cut.

Phipps had no inclination to do this and that was the end of matter insofar as those negotiations were concerned.

Now, the respondent, Henry Broch & Company, entered the picture, a couple days before these last events, when it too, attempted to sell this concentrate to Smucker.

It got in -- its representative got in touch with the Smucker man telling he was interested in it and the Smucker man said that they already had an offer to buy this concentrate at $1.30, but they wanted to do something better.

Smucker told them they were interested in this large order of 500 barrels and Mr. Broch indicated he would see what he could do about it.

He then sent a telegram -- he -- I'm sorry.

He called Canada Foods and indicated that he could sell 500 barrels at $1.25.

The Canada Foods man said he'd sharpen his pencil.

The next morning he called him back and said, “All right, you can get this order at $1.25, but your brokerage will have to be 3%” and this was accepted by Mr. Broch and the sale was consummated at $1.25.

The $1.25 price was given by Canada Foods to this one seller throughout 1954 and 1955.

At the same time, Broch sold this product to 18 other customers at the regular price of $1.30 and on the sales to the 18 other customers they received their regular commission of 5%.

Similarly the three other brokers who represented Canada Foods during this period also sold at $1.30 and received their regular agreement price of 4%.

So that was only on sales to this particular purchaser, Smucker, that the lower price and the lower brokerage were involved.

And I want to emphasize that there's no question that this was a very large purchaser.

In fact, the manager of Canada Foods, when he was conducting his negotiations with Broch about appointing the broker said, he didn't think anyone in this country to take more than 250 barrels of this.

The Commission held, on these facts, first that the statute -- its prohibitions do apply to the seller's broker, not just to the seller and secondly, that Broch, by giving up a part of the brokerage, to which it was entitled under its agreement with Canada Foods, in order to make possible the giving of a lower price to this particular buyer, had given an allowance or discount in lieu of brokerage in violation of Section 2 (c).

The Court of Appeals set aside the Commission's order on two distinct grounds.

First, it said that Section 2 (c) does not apply to seller's brokers and secondly, it said, “In any event, Broch did not directly or indirectly pay anything to Smucker.”

We believe that both of these rulings of the court below are erroneous.

Now, in construing Section 2 (c), we have to look to the basic purpose of the Robinson-Patman Act.

And as we have detailed in our reply brief and as this Court has indicated in the Simplicity case to think the basic purpose and also I might refer to the Morton Salt case, the basic purpose of the Robinson-Patman Act was to make sure that large purchases did not get a competitive advantage in purchasing over the smaller people, solely because of the fact that they had this mass-buying power.

The original Clayton Act in 1914 had suffered from a serious deficiency that it only dealt with actual price discriminations.

And as this Court detailed last term in the Simplicity case, the large buyers were able to find other methods by which they could obtain the same kind of preferences and one of the most prevalent devices involved was that of brokerage.

Now, the legislative history indicates that the concern of Congress in the brokerage clause, the problems that were presented to it was things known as bogus brokerage, the situation in which the seller either set up a dummy corporation or appointed a clerk in his office and said he is my broker pay him the brokerage.

That is we -- we concede that is the basic problem that was called to the intention of Congress in dealing with brokerage.

But --

Justice Felix Frankfurter: There's no suggestion that this case is a mere efficient brokerage case.

Mr. Daniel M. Friedman: Not in that sense.

Justice Felix Frankfurter: Well, in any sense?

Mr. Daniel M. Friedman: No.

Justice Felix Frankfurter: I'm not -- I'm not questioning the general proposition.

I just want to know if your general proposition may slip this case presented.

I just want to know if the contention here is -- if this is a blind of an evasive -- a factually evasive --

Mr. Daniel M. Friedman: Oh no, no.

No, the -- the contention here is that when the --

Justice Felix Frankfurter: Commercially innocent, prior concern.

Mr. Daniel M. Friedman: Commercially innocent, but we think in violation of --

Justice Felix Frankfurter: I understand (Voice Overlap) --

Mr. Daniel M. Friedman: -- provisions, yes.

Justice Felix Frankfurter: -- but I mean commercially it didn't (Inaudible)

Mr. Daniel M. Friedman: In that sense.

Justice Felix Frankfurter: In -- in that sense?

Mr. Daniel M. Friedman: Yes, Mr. Justice.

Justice Felix Frankfurter: All right.

Justice Charles E. Whittaker: Mr. Friedman, I understand also Justice Frankfurter that (Inaudible)

Mr. Daniel M. Friedman: That is correct, Mr. Justice.

Justice Charles E. Whittaker: Totally dependent that these facts may lead you and make yourself this far after $1.25 that is $1.30 if this broker would reduce his commission from 5% to 3%.

Mr. Daniel M. Friedman: That is correct.

Justice Charles E. Whittaker: You don't think there was any kickback now worth probably to the Canada Company, or I would say device (Inaudible)

Mr. Daniel M. Friedman: Well, we don't claim a kickback in that sense, but we do claim that indirectly, in effect, the American broker passed part of his brokerage over to the buyer by the device of a lower price made possible.

Justice Charles E. Whittaker: (Voice Overlap) but not to its own.

Not to present it with the broker.

Mr. Daniel M. Friedman: The broker, yes.

We don't reach in this case whether the Canada seller had violated the Robinson-Patman Act.

The Commission didn't proceed against it because of the fact that the Canada Company is possibly subject to its jurisdiction, but there'd be no effective way of enforcing an order against it.

Justice Charles E. Whittaker: But do you concede that there is (Inaudible)

Mr. Daniel M. Friedman: The seller was Canada Foods.

Justice Charles E. Whittaker: Not -- not Broch?

Mr. Daniel M. Friedman: No.

Broch was just a broker.

Justice John M. Harlan: (Inaudible) against Canada it must've mean you have it drawn two ways?

Mr. Daniel M. Friedman: Well, I think --

Justice John M. Harlan: -- discrimination to be subject to (Inaudible) absence and what go to that section which you don't buy (Inaudible)

Mr. Daniel M. Friedman: Well, to some extent at least it -- it's I -- it's a difficult question to what extent 2 (a) and 2 (c) overlap.

Certainly, to whatever extent the reduction in price by the Canada company did not reflect the savings in brokerage.

To that extent, of course, it's subject to all of the defenses --

Justice Charles E. Whittaker: (Inaudible) and if I understand firm, to get down to the -- may this broker give a part from his commission to his (Inaudible) and under the -- without violation of the second, is that right?

Mr. Daniel M. Friedman: Where the giving of the commission was designed and enabled to result in a lower price to this particular broker.

Justice Charles E. Whittaker: Well you wouldn't -- it would necessarily result into a price to the extent of this -- if you have production such as these.

Mr. Daniel M. Friedman: Yes.

We -- we think analytically, Mr. Justice, this case is no different than if the seller had charged his full price, $1.30, but then the broker together with the -- the buyer had gotten into an arrangement and the broker had rebated part of his commission.

We think in terms of the basic purpose of the Robinson-Patman Act that wouldn't make any difference.

Justice Charles E. Whittaker: The broker, not the seller?

Mr. Daniel M. Friedman: The broker, that's right.

We think if a broker -- if a broker rebates part of his commission directly to the seller, that is one of the things that the Robinson-Patman Act prohibits.

Justice Charles E. Whittaker: And assuming his broker is not an agent, hasn't been a defendant here.

Mr. Daniel M. Friedman: He is an -- he's an independent broker.

Chief Justice Earl Warren: Yes.

Mr. Daniel M. Friedman: That is -- we're not claiming, in this case, any liability on behalf of the broker vicariously through the seller.

This -- the means by which we think this violation was accomplished was, in effect, the passing through in this roundabout case.

Justice Felix Frankfurter: I'm not questioning any of your legal objections or indications you draw, but you said same as those of a rebate, but you gain out of his own -- he's an independent agent.

He's an independent functionary in the -- in the industrial process and his rebates that you call it out of his own pocket, out of his own money.

Mr. Daniel M. Friedman: That's right.

If in this case the 5% had been paid over to he broker and then the broker had turned around and given --

Justice Felix Frankfurter: Without any -- without any conspiratorial or cooperative participation by the seller.

Mr. Daniel M. Friedman: By the seller.

That is correct.

Justice Felix Frankfurter: That is correct.

Mr. Daniel M. Friedman: That is --

Justice Felix Frankfurter: That is that -- is an insulation and he is the conduit of the seller.

Mr. Daniel M. Friedman: Well, we think that when --

Justice Felix Frankfurter: I don't mean as end result.

I -- I wonder, if I get --

Mr. Daniel M. Friedman: That -- that is --

Justice Felix Frankfurter: -- what is the concrete, naked prospect on which legal conclusion is drawn.

Mr. Daniel M. Friedman: Yes.

That is correct, Mr. Justice.

Justice Felix Frankfurter: Alright.

Mr. Daniel M. Friedman: Now, we think the reason for that is again in terms of the basic purpose of the Robinson-Patman Act which is to protect the small buyers from the fact that the large buyers with their mass purchasing power are able to exert pressure upon the sellers to get concessions not available to others.

In terms of the end result of what happens in these cases where brokerage is passed by, as far as the buyer who is not the beneficiary of this thing -- it really doesn't matter, we don't believe, whether the brokerage is paid over directly by the seller himself.

In other words, he actually gives part of it back or whether it's the buyer, the broker himself who splits it.

In either event, the next consequence of this type of arrangement is that the buyer who is the large buyers in this case by virtue of putting pressure upon the seller demanding concessions is able to get something that the smaller buyer cannot receive.

Justice William J. Brennan: (Inaudible) the absolute only pressure the buyer put on anyone here was to pay $1.25 and not $1.30.

Mr. Daniel M. Friedman: That is correct.

Justice William J. Brennan: And actually the extent of which that five-cent difference is made up was that the vendor absorbed, in effect, half of it than the broker --

Mr. Daniel M. Friedman: That is correct.

Justice William J. Brennan: -- absorbed the half.

Mr. Daniel M. Friedman: That's right and we claim it's the half that the broker has absorbed that is involved in this case.

That -- that is what we claim the allowance that the broker has made.

Justice William J. Brennan: But the issue is whether that does violence (Voice Overlap) --

Mr. Daniel M. Friedman: That's correct.

And the --

Justice Charles E. Whittaker: (Inaudible) and you have used -- used whether this was -- the money was passed over to the buyer was why the Canada Food or by the broker that the consequence is the same, did I understand you to say that?

Mr. Daniel M. Friedman: Well I -- what I meant to convey was that in terms of the violation of this section of the Act, it would equally be a violation, whether the seller passed brokerage over or whether the broker passed brokerage over, because in terms of the ultimate effect, it makes no difference to the recipient, the form in which he gets back some part of the brokerage that was --

Justice Charles E. Whittaker: Well, in fact, (Inaudible) is dollars in the buyer's option, but it would be positive violation of law would it not, for the seller to make a reduction to this particular buyer and does not sell to him on substantially equal time.

But would it be, if this -- the broker out of his own goodness of heart may give -- paid his own money --

Mr. Daniel M. Friedman: Well --

Justice Charles E. Whittaker: -- over to the buyer.

Mr. Daniel M. Friedman: We -- we think it would, Mr. Justice, because we think the record here shows that the broker as you say did not do it out of the -- his own goodness of his heart, he did it because this was the only way he could close this large deal.

Justice Charles E. Whittaker: How could this at my point have a half the whole price is there's none?

Mr. Daniel M. Friedman: That's right.

And we think that Congress has prohibited that kind of thing in this situation because of what we believed to be the deleterious effect upon competition.

I'd like to turn now to Section 2 (c) of the Act.

Justice Potter Stewart: Before, well -- that -- that's just as you're right here and I -- on these facts would the -- would the buyer, Smucker be guilty of violation of 2 (c)?

Mr. Daniel M. Friedman: That is a -- a difficult question, Mr. Justice.

Let me say that the Commission has never proceeded against a buyer under 2 (c), unless there was anything -- something to indicate that he was a knowing participant in the situation.

In this case, that the evidence is uncontradicted that the Smucker, the buyer, did not know what the broker's arrangements were.

There have been cases, of course, in which the Commission has proceeded against brokers where they were a party parcel about --

Justice Potter Stewart: Against -- against buyers.

Mr. Daniel M. Friedman: Against -- against --

Justice Potter Stewart: You said brokers.

Mr. Daniel M. Friedman: Against -- against buyers too, where the buyer has received it.

But there it would have to be, we think, something more than the mere passage over without any knowledge on the part of the buyer.

Justice Potter Stewart: The buyers -- did the buyers' conduct here be covered by the literal language of the proceeding?

Mr. Daniel M. Friedman: Well, to -- to say -- to me, is the -- a very --

Justice Potter Stewart: The literal language was a flattering language, I'm not sure.

Mr. Daniel M. Friedman: There's not -- there's no -- there's not in here that makes it -- puts on a requirement of knowingly on the part of the buyer.

On the other hand, we don't think that Congress intended in this section to penalize the innocent buyer who gets the brokerage in -- in circumstance where he didn't know it was an allowance in lieu of brokerage.

Justice Potter Stewart: The purpose is like, what's behind my question to this?

You -- you in your argument stated in your brief, and rely very heavily on the literal language of the statute saying that the particular -- particular evils calling the attention of Congress are not the relevant on the language of the statute, literally covers the situation and my question was whether the literal language of the statute didn't also cover the buyer?

Mr. Daniel M. Friedman: Well, the literal language of this statute might possibly be construed to cover the buyer, but we think in the light of the congressional purpose that there's one purpose to be served by applying this statute to the seller and to the broker and that it's a different situation when you deal with the buyer, because we think what Congress intended to do in making it applicable to the receipt of brokerage or an allowance was to catch the situation where the buyer knowingly participates in this situation.

Now, the statute insofar as the first question of whether it applies to the sellers' broker and not just to the seller, and broadly would seem to cover it, at least, on the face of it which is -- it says, “Any person engaged in commerce,” this is page 2 of our brief, “makes it unlawful for any person to pay or grant, anything of value at the commission, brokerage or any allowance or discount in lieu thereof, to the other party to a purchase and sales transaction.”

Well any person certainly includes a broker, isn't limited to the seller and we think that the -- on the side of the transaction, the other party, the transaction this situations of the buyer.

Now, we also believe that this construction is further supported by the legislative history of the Act and also by what we think would be a serious loophole in the Act, if it were held not applicable to sellers' brokers.

As we have indicated in our brief, one other thing that the legislative history indicates is that the Congress was concerned with the basic act of passing over brokerage.

Justice William J. Brennan: (Inaudible)

Mr. Daniel M. Friedman: The significance is to make -- to make it clear that it's intended to reach the passing over of brokerage between the seller side on the one hand and the buyer side on the --

Justice William J. Brennan: And (Inaudible) specific to our facts, passage over by the broker himself --

Mr. Daniel M. Friedman: To the buyer.

The other party to the transaction here is the buyer.

The theory is that the broker in this case granted an allowance in lieu of brokerage to the buyer when he accepted a lower price.

And --

Justice William J. Brennan: So the buyer and not the seller.

Mr. Daniel M. Friedman: Even though the buyer knew nothing of it.

And that was my answer to Mr. Justice Whittaker's question as to whether, in this situation, the buyer was -- had violated this section whether it's very dubious.

Justice Charles E. Whittaker: (Inaudible) to proceed without letting both the parties in this transaction.

Mr. Daniel M. Friedman: Well, I think, in a sense, you may say there were three parties to this transaction.

On the one side is the buyer and on the other side is the seller and the broker.

Justice Charles E. Whittaker: The broker (Inaudible) this and you said the broker in making the sale in this Canada Foods and the market?

Mr. Daniel M. Friedman: Well, he's -- he's just a broker, but he was certainly a party in the sense that he was an active participant in it.

It doesn't -- Mr. Justice, this does not limit it to sellers or buyers.

It uses broader language and now we think that it was intended to get everyone of these situations.

Justice Charles E. Whittaker: (Inaudible)

Mr. Daniel M. Friedman: That's right.

And we think the other party to -- if it speaks of the other party to such transaction and the other party to such transaction to the sale transaction, we submit, is the buyer and if the buyer to whom the brokerage was paid over.

Now, if the decision of the Seventh Circuit is correct and that this only applies to a seller, and not to a seller's broker, this could lead the way, we think, to a serious loophole in the Act because as I've indicated previously, if all that is prohibited here is the passing over of brokerage by the seller, a seller can charge the buyer his regular price, but then an arrangement can be entered into without knowledge to the seller between the broker and the buyer.

In other words, the broker can say to the buyer, “Well you make the transaction at $1.30 at the regular price, but after I get my commission, I'll pass some of it over to you.”

Now, this, it seems to me, is -- is precisely again the kind of thing that Congress was concerned with in the Robinson-Patman Act.

This business of a large buyer being interested in getting a lower price and he doesn't care how we gets it and the seller because of the large size of the order, because of the fact that he's dealing with the big buyer, gives him a concession which is not available to the others.

Now, it's the same basic policy which we think further supports the Commission's alternative point here, the other ground which was objected by the Court of Appeals, that in the circumstance to this case, Broch actually granted an allowance in lieu of brokerage, when in order to make possible the sale to this particular large buyer, he accepted less than his agreed upon rate of commission.

Several things are -- must be recognized here that he did have an agreed upon rate of commission.

The contention was made before the Commission that there was no fixed 5% rate of commission.

That it was subject to confirmation and negotiation in each sale, but didn't apply to large sales --

Justice William J. Brennan: (Inaudible)

Mr. Daniel M. Friedman: That is correct.

Justice William J. Brennan: And the way there'd be a conflict in it by the views of the seller or by a deduction.

Mr. Daniel M. Friedman: That's right.

Justice William J. Brennan: That he accepts 3% instead of the 5%.

Mr. Daniel M. Friedman: That‘s right.

In circumstance, if I may add one thing Mr. Justice, in circumstances where it's clear that the acceptance of the lower brokerage was the sine qua non of the lower price from the seller to the buyer.

Now, I -- I think it's significant to point out that in this very case, at the -- the same day that this arrangement was entered into with Broch, the seller rejected the offer of Phipps, the other broker for $1.30 and said to him, you'll have to cut the brokerage.

That was the end of it.

So that, this is not a case where there's just a coincidental reduction of brokerage and then at some later time there is a reduction in price.

This is directly and intimately connected.

That one would not have happened without the other.

Justice John M. Harlan: Supposing the broker has asked (Inaudible)

Mr. Daniel M. Friedman: In this particular -- and then there was a reduction.

No, I don't think so Mr. Justice because the Commission's position is that whenever a brokerage is -- whenever an allowance is made to the seller requesting a lower price in lieu of brokerage, when you'd find this causal connection between the reduction in brokerage and the passing on that is what is prohibited by Section 2 (c).

Justice Charles E. Whittaker: And not because of (Inaudible)

Mr. Daniel M. Friedman: We -- we don't think so, Mr. Justice, because we think that the Court's justification provisions must be read in the light of 2 (c) and if a particular allowance in lieu of brokerage is prohibited by 2 (c), we don't think they can then turn around and treat it as an item of cost saving under 2 (a).

Justice Charles E. Whittaker: (Inaudible)

Mr. Daniel M. Friedman: No, Mr. Justice.

In this -- in this very case for example, Broch received 5% and the other brokers received 4%.

It depends basically on what the arrangement is.

A seller is perfectly free to enter into an arrangement with his broker to negotiate from transaction to transaction.

Justice Charles E. Whittaker: But what he makes the rate is (Inaudible) adjusted from sale to sale.

Mr. Daniel M. Friedman: He cannot adjust it from -- he cannot adjust it from sale to sale if what he is doing is passing on the particular savings in brokerage in the particular case.

He can, of course, enter into any arrangements he wants with his broker.

He can say to a broker, “On large sales you're only going to get 3%.”

Justice Charles E. Whittaker: (Inaudible)

Mr. Daniel M. Friedman: No, Mr. Justice.

As long as the price is the same, as long as he charges $1.30 to everybody, it doesn't matter what he pays this particular broker on a particular sale, but as soon as he takes the savings to the brokerage on a particular sale and uses that as the means for passing over a reduction, a lower discriminatory -- lower price to a particular buyer, then, we think, he runs afoul of Section 2 (c).

Justice John M. Harlan: There's no doubt that Mr. Broch can make his (Inaudible)

Mr. Daniel M. Friedman: Yes, if we could have gotten --

Justice John M. Harlan: You could've and you say that because that would be a pure price discrimination in your view, unless, it was justified under the 2 (a) defenses is that right?

Mr. Daniel M. Friedman: Well, we suggest that the seller, in this case, may also have violated Section 2 (c).

Now, as he -- he also was a participant in passing over this brokerage.

Justice John M. Harlan: You mean as sort of a conduit type?

Mr. Daniel M. Friedman: Well, he -- he was the one who himself, of course, made the lower price avail -- no, they both had to pass over.

Justice John M. Harlan: Well, he gave -- the seller gave this customer a price reduction.

There's no doubt about that --

Mr. Daniel M. Friedman: He gave him a part of the --

Justice John M. Harlan: -- of price discrimination and the question under 2 (a) would have been whether it was a justifiable price discrimination?

Mr. Daniel M. Friedman: But we don't --

Justice John M. Harlan: And you say that because the -- of the presence who have broker here and the transaction between the seller and the broker that economically, that price discrimination was made feasible or easier for the seller that that brings the transaction under 2 (c).

Mr. Daniel M. Friedman: Because we believe that Congress has made the judgment that when you -- because brokerage in the past had been so susceptible of abuse, has been so abused, Congress, we think, has made the determination that when it comes to brokerage, you cannot pass it on directly or indirectly to the other party.

And --

Justice Felix Frankfurter: That you may not (Voice Overlap) --

Justice John M. Harlan: We'll have to do some reading in the Act.(Voice Overlap) --

Mr. Daniel M. Friedman: No, it hasn't.

On the other hand, the Committee Reports which we cite in our brief do use that.

It hasn't said it indirect -- directly or indirectly but --

Justice Felix Frankfurter: And the statute doesn't serve your purpose, you go the Committee Report, that's the end of the line.

Mr. Daniel M. Friedman: Now, we think that in the light of the Committee Reports, we think that fairly read, granting brokerage or an allowance or discount in lieu thereof includes not just a payment over of money, but also this kind of thing --

Justice Felix Frankfurter: You say in lieu thereof?

Mr. Daniel M. Friedman: Yes.

Justice Felix Frankfurter: Even that, of course, doesn't say directly or indirectly.

Mr. Daniel M. Friedman: No, but it's a --

Justice Felix Frankfurter: But indirectly has different scope and connotations than in lieu thereof.

Mr. Daniel M. Friedman: But we think that the -- this --

Justice Felix Frankfurter: Indirectly, it doesn't hit this kind of an arrangement.

Mr. Daniel M. Friedman: We -- we suggest that this indirect payment is, in fact, an allowance in lieu of brokerage.

Justice Tom C. Clark: Suppose they have paid the brokerage (Inaudible)

Mr. Daniel M. Friedman: You paid the full brokerage?

Justice Tom C. Clark: (Inaudible)

Mr. Daniel M. Friedman: Well, there wouldn't be -- you mean if the seller had reduced his price by five cents.

Justice Tom C. Clark: Claim cost justification.

Mr. Daniel M. Friedman: Well he couldn't -- I don't think, Mr. Justice, he could claim cost justification, unless he showed that he was paying less brokerage.

Now, the -- the problem of cost justification arises where the broker takes a lower commission and then the seller reduces his price accordingly and claims of a cost justification that his cost will lessen this sale because he paid less brokerage.

Now, I also want to emphasize something.

Justice Tom C. Clark: (Inaudible)

Mr. Daniel M. Friedman: Pardon?

Justice Tom C. Clark: You explain it by (Inaudible)

Mr. Daniel M. Friedman: That is right and we don't -- we don't believe in this -- in this kind of situation that the seller can cost justify, can't treat as a -- item of cause which may be justified, the fact that he pays a lower brokerage, which in then in turn is passed on (Voice overlap) --

Justice Tom C. Clark: I was saying as (Inaudible) Are you saying that then the (Inaudible)?

Mr. Daniel M. Friedman: Apple concentrate.

Justice Tom C. Clark: Apple concentrate, (Inaudible) so he just passed that on --

Mr. Daniel M. Friedman: That would be --

Justice Tom C. Clark: -- in case -- in case the brokerage -- the brokerage but that would be flowing --

Mr. Daniel M. Friedman: Oh, no, because that would be cost -- cost justifying, but in this situation what he did was -- this is a situation which we think that there are no inherent economy that manufacturer a production.

This is a case where the brokerage which is when element of the transaction was reduced and it was reduced from a situation where in effect, the broker we think has part of it in over.

Justice Tom C. Clark: Half of it.

Mr. Daniel M. Friedman: Half of it, yes.

Justice Tom C. Clark: (Inaudible)

Mr. Daniel M. Friedman: Well, we don't know because we didn't proceed against the seller and, of course, the seller is a Canadian company.

Now, I'd like to make one other point -- two other points briefly.

The first of it is that Broch repeatedly suggests that called this an open discrimination, one which he said is apparent from the face of the invoices, not a case were they purported to pay -- charge $1.30 and then secretly sneak something in under one guise or the other.

Here, admittedly, they cut it down to $1.25 and he suggests, this is not the kind of thing that the brokerage clause was intended to reach.

Justice Charles E. Whittaker: Does he use the word, discrimination?

Mr. Daniel M. Friedman: Pardon?

Justice Charles E. Whittaker: Because you said an open discrimination, does he use the --

Mr. Daniel M. Friedman: No.

He says an open price reduction, I'm sorry.

Justice Charles E. Whittaker: (Voice Overlap) --

Mr. Daniel M. Friedman: Now, of course, when he said this was open, this wasn't open in the sense that anybody knew about it.

When this kind of favoritism takes place, it's not generally announced and in fact, after the buyer, the competing broker Phipps discovered what it happened when he found out that his sale had been lost to other broker, he wrote to the seller and asked him whether he said he was very surprised with this and he said he hoped that all the other brokers were getting the same price.

And they weren't being treated on more favorably and at this point, the seller justified that the he didn't answer this, but Phipps subsequently testified that in a later phone conversation with the broker he asked the broke -- the seller rather, Phipps asked the seller whether in fact the price was still $1.30, if anyone would get less and this man said, “No, everyone's paying $1.30.”

Now, finally, I want to discuss the arguments strongly pressed here by the respondent and relied on by a Court of Appeals which is that -- they said that -- and they argue here that this construction of the statute by the Federal Trade Commission contravenes what they call broad general national antitrust objectives.

The argument is that this has the effect of freezing brokerage commission.

That since you can't adjust them down and wouldn't pass it on, this is directly contrary to the basic premise of the Sherman Act, favoring free and vigorous competition.

The answer, we think, to that is basically a simple one which is that while there's this general policy of favoring vigorous competition, nonetheless, Congress has made the determination that there is certain types of competition that in the long run will harm rather than further the competitive system.

Types and practices which result in the large buyer being able to get a competitive advantage over the smaller one, and thus we think that what Congress has done in this statute is to say that there's an exception to the general policy of competition, the exception is that there are certain types, certain specific practices which must be proscribed.

And one of those practices is the passing on of brokerage directly or indirectly, we think, the passing of brokerage to the buyer, to the large buyer in this situation where the buyer is able to get this benefit not accorded to the others, not as the result of any superior efficiency of its own operation, but solely as the result of his superior purchasing power.

Thank you.

Chief Justice Earl Warren: Mr. Bison.

Argument of Henry J. Bison, Jr.

Mr. Henry J. Bison, Jr.: Mr. Chief Justice, may it please the Court.

I wish to express my appreciation to this Court and to the Solicitor General and to my colleague, Mr. Friedman, for these 10 minutes to address you.

The burden of my argument here this afternoon is to examine the practical competitive effects of the decision below within the framework of the structure and the marketing practices in food distribution and to deal here with practical results.

I'm representing here, Your Honors, the independent operators of supermarkets and food stores across this land.

The membership of this association is composed of local and community food store operators who operate small stores, supermarkets, superettes of all kinds.

Some of them operate more than one store, but all are community business people and they buy their merchandise through voluntary groups, through cooperative groups or retailers affiliated together to get cost-efficiency, so they can buy merchandise on a plane of relative equality with the large chain.

Some of our members also buy through independent wholesalers.

Some of them buy through -- with manufacturer direct.

So, what I'm doing here is really representing the broad group of independent retailers as we known to be today whether they operate supermarket or one or two stores, they're ultimately business people.

Justice William O. Douglas: Do -- any of your people do joint purchasing pooling all their quarters?

Mr. Henry J. Bison, Jr.: Yes, Mr. Justice, a great many of our people -- the majority of our members are members of what is called the voluntary buying group or cooperative buying group.

And that, of course, resulted because there's a retailers affiliate together and they're buying and they're purchasing that makes it possible for them to buy merchandise on a -- on a better basis.

Justice William O. Douglas: Or does -- does the joint purchasing power of your group, is that comparable to the purchasing power of the respondents?

Mr. Henry J. Bison, Jr.: No, it is not.

I might say that the largest buying group in the country today, Your Honor, sells to its 1446 members, wholesale $300,000,000.

Whereas, the largest chain -- largest food chain in United States, they sell at retail $5 billion and has some 4777 stores and operates in 37 states.

So there's no comparison between the purchasing power of the buying groups through which independent purchaser merchandise and the large corporate chain.

The retailers that we represent here, Your Honor, are buyers and they are interested as much as anyone else in purchasing their merchandise at the lowest possible cost.

And if we thought that the price reduction that's taken place in this case, would come to the independent merchants and they would share on some basis of equality with the large chain, we wouldn't be here today.

But we know, we know from history and we know from experience that the price cut that we're talking about here today, went by the facts of this case, to the one tremendously large buyer of apple concentrate, 500 barrels.

And the burden of our argument today is simply this that if there's to be a price cut which is going to be made on the basis that all the customers of this supplier going to share and it -- and so they can all compete with each other on some plane of equality at the retail level, we want it.

But if this is to be a price concession given to a favored mass buyer by reason only of his mass purchasing power and not by reason of his efficiency, then we know that the community store operators, the community supermarket operators are going to be placed at very severe competitive disadvantage.

Justice Potter Stewart: So this is the price that in this case, the buyer was Smucker or some name like that?

Mr. Henry J. Bison, Jr.: The buyer was Smucker.

Justice Potter Stewart: That was a -- a manufacturer.

Mr. Henry J. Bison, Jr.: That was a manufacturer.

But this --

Justice Potter Stewart: Manufacturer of what, apple butter or what?

Mr. Henry J. Bison, Jr.: Apple butter and jams, jellies, that sort of thing, but the principle here would apply to a large chain and community store operators buying apple butter or buying any other because the same principle would apply.

That is if the Seventh Circuit's ruling is upheld, that seller's brokers are not covered by the Section 2 (c), then it's clear that the large buyer can demand and receive from a seller's broker, a substantial direct rebate as a part of that -- of his commission.

And our -- burden of our argument, Your Honors, is simply this, that we, the community food merchants of this country will not get this price cut.

Justice Felix Frankfurter: You've introduced another factor when you said the big buyer will -- will demand.

Mr. Henry J. Bison, Jr.: That's right.

Justice Felix Frankfurter: -- the actions of this case.

Mr. Henry J. Bison, Jr.: Well, the big buyer in this case, Mr. Justice --

Justice Felix Frankfurter: I am not speaking of the small (Voice Overlap) --

Mr. Henry J. Bison, Jr.: I --

Justice Felix Frankfurter: -- the participations of the buyers, that leaves another element.

Mr. Henry J. Bison, Jr.: I understand.

Now, the big buyer, in this case, simply said, we won't buy at anything but $1.25.

Well, the point that we want to make here is that if the Seventh Circuit's ruling is upheld, then the large chains can say the same thing knowing that the seller's broker representing tanners and representing processers in the industry, is not covered by that section and he can make a direct payment to the mass buyer and do so outside of the provisions of the Robinson-Patman Act.

Justice Charles E. Whittaker: (Inaudible)

Mr. Henry J. Bison, Jr.: In some items, Mr. Justice, it is, in some it is not.

It depends upon the sales practice of the manufacturer involved.

For instance, in soap, many cases a -- an organization, a store that has its own warehouse can buy direct.

It depends on the manufacturer's sales practices.

Justice Charles E. Whittaker: (Inaudible)

Mr. Henry J. Bison, Jr.: That's correct, Your Honor.

Justice Charles E. Whittaker: Just like Mr. Broch.

Mr. Henry J. Bison, Jr.: Just like -- just like Mr. Broch did and that's the point.

You see, here's the mass buyer with this tremendous purchasing power saying to the broker, “Well, sure I will give you this order.

I'd be happy to give this order, only I want so much.”

Well, now all we're saying Your Honor is simply this.

If this was a cost justified price cut, so that it went and reached community food store operators across the country equally, so that they could compete with the large chain, at the retailer, fine, we want to buy our merchandise at the lowest possible cost, but we know that this will never reach the community food store operator because it's only mass purchasing power which brings about this rebate from the broker.

Now, these are the realities that Your Honors that you have to consider in -- in dealing with this law because this law was passed to cure an economic problem and mainly in from distribution, where competition between the tremendous buyer of $5 million annual sales and here's a little store across the street with sales of $350,000 or $500,000 in competing against a unit like that.

What you conceive they weren't rules, there'd be no possibility of -- of any -- any competitive race.

I believe my time is up.

I appreciate this opportunity and thank you.

Chief Justice Earl Warren: Mr. Rowe.

Argument of Frederick M. Rowe

Mr. Frederick M. Rowe: Mr. Chief Justice and may it please the Court.

In the brief time available to me, I would like to bring back the somewhat atmospheric discussion to the issues presented by this case before the Court and try to cover briefly some of the points raised by the questioning of several of the Justices.

First, both the Commission and the amicus curiae supporting the Commission on this case, have invaded vigorously and vehemently against the so-called big buyer, his exactions, his discriminations and his coercions.

I think this makes it all -- almost conspicuous and prominent in this case that is not a case against the big buyer.

The Commission on the -- in this case, in fact, desisted and refrained from invoking the applicable prohibitions of the Act on the price differentiations and cases against buyers and sellers and instead resorted here after 20 years of administration of the Robinson-Patman Act to an unprecedented theory never before even tendered to a court whereby a broker accepting a smaller rate of commission in a competitive situation is charged with in making -- making a so-called indirect payment by him over to the seller, over to the buyer and all the time, the buyer didn't know it and the seller didn't know it.

The Court inquired as to the possibilities of the cost justification, if a case had been brought against the seller on these facts and I believe it was Mr. Friedman's explanation that in a case of --

Justice William J. Brennan: Mr. Rowe (Inaudible)

Mr. Frederick M. Rowe: Yes, sir.

In the statute, there is a section governing the receipt of price variations by buyers, Section 2 (f) which was before this Court in the Automatic Canteen case 2 (f), yes.

And once again, just in the case of a suit against the buyer for paying a lower price if a suit had been brought against the seller for receiving a lower price, it would have been perfectly obvious that there would have been no violation whatsoever of the statute, because the open price reduction here at bar, had all the earmarks of legality, if tested by the standards of these provisions.

Namely, it is clear in the record that there were significant cost economies to the seller in making this transaction and in making this sale, because as he testified and there's no contradiction of that in the record, they were savings in freight, savings in processing, savings in customs and saving in the brokerage commission.

Justice John M. Harlan: Are those defenses available under 2 (f)?

Mr. Frederick M. Rowe: Yes, sir.

They are available under 2 (f), because under the law of 2 (f), it requires an illegal transaction by the seller to the buyer to also charge the buyer with the legality.

I believe that there was also a suggestion that the price, the lower price given to the buyer could not have been cost justified.

I don't know whether there was any further explanation of why not, but certainly the theory that a price reduction could not be cost justified by reference to savings and brokerage commissions would read out of the Act the express proviso whereby Congress guaranteed that the economies of distribution could be reflected on lower prices to the consumer and there was no exception for these economies insofar as brokerage commissions were concerned.

As a matter of fact, there was a proposal to that effect addressed to Congress in 1936 at the time the Act was passed, there was a proposal before the Committee to accept from the permissible cost savings, those costs attributable to broker's fees and that provision was stricken from the statute in conference.

I have in our brief the explanation for the action by Senator Logan who was the Chairman of the Subcommittee considering the bill and who was the Senate Manager of the bill.

Senator Logan explained to the Senate at that time, in the second section of this Committee amendment of the provision that in making the -- a discrimination or differentials or whatever who may choose to call them, all costs other than brokerage shall be allowed and it has been said that the words, “other than brokerage,” in that section ought to go out.

I have thought a good deal about that suggestion.

I think that perhaps legitimate brokerage ought to be allowed as a part of the costs and I think when the bill was drafted, I did not write the bill, perhaps in the amendment which was inserted by the Committee we had in mind dummy brokerage, sham brokerage.

In other words, this provision was stricken out by the Conference Committee and we believe completely deflates the suggestion which has been tendered here that a seller's price reduction for some reason unexplained in the statute and perhaps referenced to the basic policy rather than a text, may not be justified by reference to cost economies just as any other economies of distribution when a seller makes a price to a buyer.

What we have in this case Your Honors is in effect, an unprecedented issue of statutory interpretation whereby the Commission would, in effect, render illegal a competitive price reduction which would be cost justified and lawful under Section 2 (a), if it had been proceeded against, as it should have been properly, against the parties to the transaction.

And it has done this by invoking this novel theory whereby a seller's broker is charged with making an illegal rebate by accepting a lower commission and then this lower commission then somehow gets on over to the buyer through the instrumentality of the lower price by the seller.

We believe this is the first case in which this theory has been urged.

We believe this theory has no relationship to the text of the statute, to the congressional purpose as expressed in the legislative reports as we have it and also to the policy of the Robinson-Patman Act which has been adverted to -- by counsel for the Commission.

This Court very recently --

Justice Potter Stewart: Mr. Rowe, if I may, you said that the conduct here has no relationship to the text of the statute.

Do you mean by that to say that it is not covered at all by the literal language of the statute?

Mr. Frederick M. Rowe: It is not covered at all by the literal language of Section 2 (c).

Justice Potter Stewart: That's (Voice Overlap) --

Mr. Frederick M. Rowe: It was an open competitive price reduction, Mr. Justice Stewart, which if at all, should have been proceeded against under the provisions of the statute governing price variations.

Justice Potter Stewart: Well, I'm accepting for a moment the finding of the Commission, I understood -- I understand that they found that what in fact happened here was that the broker, the respondent, your client, passed along part of his brokerage.

Now, accepting for the purposes of the argument that finding, if there was one, would that constitute a violation of the literal words of the -- on Section 2 (c) or wouldn't it not?

Mr. Frederick M. Rowe: Mr. Justice Stewart, we do not agree with the Commission's premise that this was a finding of fact because the Commission when it rendered its opinion treated this as a legal conclusion on a question of statutory interpretation as to the Court of Appeals.

Justice Potter Stewart: Making analysis by it, that's a better word.

Mr. Frederick M. Rowe: Yes, sir.

If there had been in truth and fact, in this case, which there was not, an actual taking of money by the broker out of his pocket and paying it over to the buyer who obviously in such a situation would be in connivance with the broker, we say that the broker in such a situation could be charged with having accepted -- having accepted money from the seller on behalf of the other side of the transaction.

And this is also our reason for saying that some of these evils which have been described here which might be permissible if the Court of Appeals were affirmed, simply are remote from the holding below, because in such a situation where the buyer coerces brokerage fees from the broker, there is no question, but that there could be liability under the statute as it had been construed over a period of many years.

The departure comes in where the Commission says that the broker's acceptance of a lower commission is in fact a payment to him -- payment to the buyer by the broker.

Of some significance also generally to this case, we believe that this is the first case in many years in which the Federal Trade Commission in presenting a case to this Court involving one of the Antitrust Laws has been joined by a private group of businessmen and not by the Antitrust Division of the Department of Justice, which is charged with parallel enforcement of the Clayton Act and which customarily signs the Commission's brief, but has declined to do so in this case.

The petition of the Solicitor General in this case, has an express notation that the Department of Justice in this case is appearing merely as the legal representative of the Commission and is expressing no views of its own as to the policy issues that may be involved.

We think that it is quite significant, Your Honors, because we have urged in this case from the outset that the net effect and the sum and substance of the Commission's theory of this case would be to prevent the reduction of broker's commissions in competitive transactions and in effect, to freeze and stabilize and maintain the levels of broker's fees against competitive adjustment in the course of normal price bargaining.

The Justice Department, in similar situations involving mechanisms to stabilize brokerage commissions, has consistently prosecuted such conduct as an illegal restraint of trade in violation of the Sherman Act and, in effect, is prohibiting and prosecuting the very type of conduct which the net effect of the Commission's theory as urged here, before this Court would promote.

Justice John M. Harlan: In fact, the situation (Inaudible) the effort of the seller's brokerage pays (Inaudible)

Mr. Frederick M. Rowe: Mr. Justice Harlan, if there was an actual payment again of money which there was not in this case, we believe that the broker again might be and no court has done so today, because the case is never arisen before a court, in such a case, the broker might be charged with having taken money from one side for the benefit of the other side, but once again this was the fact of this case.

And so far as the policy of the Robinson-Patman Act is concerned, only last term, this Court's Simplicity Pattern opinion had occasion to discuss the policy of the Robinson-Patman Act and as I understand the discussion and analysis of the Court in that case, it is that the Robinson-Patman Act intends to foster and preserve open and competitive price reductions, because when price reductions are open such as they are here, they can be measured against cost economies which accrue from such transactions, so that benefit of more economical processes may be passed on from the seller to the customer and ultimately to the consumer.

In this case, where there has been much discussion about the benefits to the small dealers, we think it is highly significant that after the main briefs in this case were filed, the Brookings Institution published a scholarly survey and study prepared by the Federal Trade Commission's former Chief Economist, Dr. Corwin D. Edwards, which has come to the conclusion that the Commission's enforcement of this particular section, the so-called, “brokerage clause,” has in fact, been more harmful and detrimental to the best interests of the independent and smaller dealer than it has been to the interest of the chain stores against whom so much has been said here today even though the facts of the situation have no remote relationship to chain stores and no chain store's a respondent in this case and the party to the case before this Court.

We believe the sole beneficiaries really of this type of enforcement of the Robinson-Patman Act which was never, never contemplated by Congress so far as we can discover, are the organized food brokers whose -- whose commission rates would be insulated and protected by the Commission's theory from competitive price reduction and who have boasted about this case and whose on the presence we believe pervert -- pervade the entire proceeding before the Court.

This is the classic conflict, if Your Honors please, of a strained interpretation of the Robinson-Patman Act by the Commission beyond the congressional text and beyond the congressional purpose in direct conflict with the principle of competition codified in the Sherman Act.

Notwithstanding this Court's admonitions to the Federal Trade Commission in the Automatic Canteen case to reconcile the Robinson-Patman Act with broader antitrust policies insofar as the text of the statute permits.

I don't believe I have time to detail the salient facts and to go into the legal arguments as framed by the Commission, accepted to say that there is no issue before this Court and the facts of this case of any rebate payment or of any kickback payment.

Any discussions about the legal status of rebates or kickbacks or coercions by big buyers are purely hypothetical and have no relation to the issue before the Court.

What is more, there is no contest between us and the Federal Trade Commission on these points.

We have pointed out to the Court of Appeals in our briefs and we have reiterated in our briefs before this Court that in such situations as have been painted by the amicus curiae for the Commission and by the Commission itself, we do not contest that there may be liability, but those are simply not the facts at issue in this case before this Court.

Thank you.

Chief Justice Earl Warren: Mr. Friedman.

We'll -- we'll finish this afternoon.

We only have short time, I think.

Rebuttal of Daniel M. Friedman

Mr. Daniel M. Friedman: Well --

Chief Justice Earl Warren: (Inaudible)

Rebuttal of Frederick M. Rowe

Mr. Frederick M. Rowe: I thought that Your Honor the case will be continued if --

Chief Justice Earl Warren: Well, I thought you would quit --

Mr. Frederick M. Rowe: I thought it was 4:30, sir.

I -- I can continue on to finish the case, if I may.

Chief Justice Earl Warren: Well -- no, I don't know.

I don't want you finish, but you said thank you and offered to sit down.

I thought you finished your argument.

Mr. Frederick M. Rowe: I'm -- I'm very sorry, sir, if I gave that impression.

Chief Justice Earl Warren: All right we'll go until 4:30 and --

Mr. Frederick M. Rowe: Yes.

Chief Justice Earl Warren: -- then we'll recess.

Mr. Frederick M. Rowe: Yes.

The Commission's theory of liability against the respondent in this case rests on two legal premises, both of which we believe are erroneous and invalid and contrary to the statute.

The first premise by the Commission is that even though this is an open competitive price reduction, there is still a so-called allowance in lieu of brokerage here, which falls within the text and falls within the prohibitions of Section 2 (c).

Justice William J. Brennan: Well, what do you mean by falls (Inaudible)?

Mr. Frederick M. Rowe: We mean, sir, that in this transaction as reflected in the record the price is set forth in the invoices of the parties and -- and open to inspection, so that comparisons maybe made by the Commission with alleged cost savings, if the occasion should arise.

Chief Justice Earl Warren: We'll recess now --

Mr. Frederick M. Rowe: I'm sorry.

Print this transcript Transcript: 

Argument of Frederick M. Rowe

Chief Justice Earl Warren: Number 61, Federal Trade Commissioner -- Commission, Petitioner, versus Henry Broch & Company.

Mr. Rowe.

Mr. Frederick M. Rowe: Mr. Chief Justice and may it please the Court.

This case continued from last Thursday, presents a novel and unique issue of statutory interpretation by the Federal Trade Commission of Section 2 (c), the so-called brokerage clause of the Robinson-Patman Act.

Briefly, what we have here was an open and competitive price reduction by a seller to a buyer coupled with the acceptance by a broker of a lower rated commission, a price which has the earmarks of legality under those provisions of the statute relating to prices, the grant by sellers and the receipt by buyers.

Instead of proceeding or invoking the provisions of the statute relating to prices by buyers and sellers under the statute, the Federal Trade Commission in this case invoked for the first time in the history of the Robinson-Patman Act over two decades, the theory under Section 2 (c), the brokerage clause, that the broker in this case by accepting a lower rate of commission on this transaction was guilty of having paid indirectly a so-called allowance in lieu of brokerage to the buyer.

Justice John M. Harlan: Is this the first complaint, you say, that's been filed of this character?

Mr. Frederick M. Rowe: Yes, sir.

This is a unique situation.

It was the first complaint of this sort filed in the history of the statute where the charge was that the broker's acceptance of a lower rate of commission was tantamount to his having paid over an indirect allowance in lieu of brokerage to the buyer.

The argument of the Commission to which we addressed ourselves on Thursday was principally the policy justification by the Commission for bringing this type of proceeding and for vindicating it, rather than the statutory basis and the -- the precedence which bear on the problem.

To summarize very briefly, on Thursday, we stated that the position of the Commission, namely, that its interpretation of the statute here was compatible with the policy of the Robinson-Patman Act against discrimination and in favor of the small merchant.

Our position was that this was not the fact in neither event because the policy of the Robinson-Patman Act as interpreted by this Court quite recently in the Simplicity Pattern opinion and also previously in the Morton Salt case was to promote and foster open price reductions based on cost economies for the benefit of the customer and ultimately the consumer.

And moreover, that the contention -- that the policy of this case was in favor of the small merchant was rather paradox in view of the fact that the respondent here was a small brokerage partnership against which the Commission has proceeded rather than invoking the pertinent provisions of the statute against either the buyer or the seller.

And moreover, in view of the fact that a brokerage institution survey and study prepared by the Federal Trade Commission Chief Economist after the main briefs in this case were filed and which we have referred to in our supplemental brief has come to the conclusion that the Commission's application of this particular provision, the so-called brokerage clause has been more prejudicial and detrimental to the small independent distributor than it has been to the Chain-Store against which purportedly the Commission's objectives in enforcing this section or directive.

Chief Justice Earl Warren: Mr. Rowe, while you're on the position of the Commission, Thursday, you made some statement as to the position of the Solicitor General, as I understood you, but I -- I didn't understand quite what it was, would you mind repeating that?

Mr. Frederick M. Rowe: Yes, sir.

I stated on Thursday that the Antitrust Division of the Department of Justice in -- in this case had not signed the brief of the Federal Trade Commission although it customarily does so in cases involving one of the antitrust laws and moreover that the --

Chief Justice Earl Warren: (Voice Overlap) sufficient that the Solicitor General himself does send an assistant here, isn't it?

Mr. Frederick M. Rowe: Mr. Chief Justice, in this case, I also pointed out that the petition filed by the Solicitor General in this case carried a special and -- as I consider, unusual notation, at page 12 in the petition for certiorari which states, if I may read it quickly, “That in appearing herein as legal representative of the Commission, the Department of Justice intimates no views of its own as to the underlying policy consideration that maybe involved,” that is on page 12 in the footnote of the Solicitor General's petition.

We deem as particularly significant, Mr. Chief Justice, in view of the fact that we had urged from the outset of this proceeding that the net effect of the Commission's application of the statute would be in effect to prevent brokerage commissions from being reduced in the course of competitive price bargaining and we felt would interpolate into the Robinson-Patman Act in effect, the principle of fair trade or resale price maintenance even though there was no such objective by the Congress and even though similar arrangements where by in other industries such as among real estate brokers where brokerage commission had been stabilized that such mechanism for stabilizing brokerage commission had been outlawed as unlawful and unreasonable restraints of trade in suits brought by the Antitrust Division by the Department of Justice and of course, the case of the real estate brokers was affirmed here by this Court in 1950.

In short, we attempted to point out in our argument on Thursday that this case, by virtue of its unprecedented and unique interpretation of the Robinson-Patman Act, which was not authorized by the text and of the cases as I shall hope to develop in my argument here also, produced a collision and a conflict between the Robinson-Patman Act as construed here by the Federal Trade Commission and the overall policy of the antitrust laws incorporated in the Sherman Act not withstanding the admonitions by this Court to the Federal Trade Commission most recently in the Automatic Canteen case to avoid such collisions and to reconcile the Robinson-Patman Act insofar as the text of that statute permitted with a broader antitrust policies laid down by the Congress in the antitrust laws as a whole.

Before I proceed --

Justice Hugo L. Black: (Voice Overlap) what do you understand the -- the methods -- policies involved by the Solicitor General here and I would suppose that this is -- the Government tried to -- tried to follow whatever policy Congress had said?

Mr. Frederick M. Rowe: That would be my view of the matter, Mr. Justice Black that we are dealing here with the matter of statutory interpretation exclusively.

But certainly, as the Court's opinion pointed out in the Automatic Canteen case in resolving matters of statutory interpretation, as I would understand the Solicitor's footnote, the policies of the antitrust laws as a whole of which the Robinson-Patman Act is a part should be taken into consideration so that they should be a harmonious whole rather than conflicting parts which at are at odds with each other.

Before proceeding to the text of the statute as interpreted in the past two decades, I would like to briefly summarized the salient facts which highlight what the issue presented by this case is and perhaps also with the issue presented by this case is not.

First, we have here, and it was, I believe, agreed to by Mr. Friedman on Thursday, an honest commercial transaction.

There was no subterfuge or connivance, but rather an open price reduction by the seller to the buyer in circumstances where there were cost economies available to the seller and in circumstances where the seller had to meet competitive offers on pain of losing the sale to the particular buyer here in question.

From the seller's viewpoint therefore, the price, which he gave, had the earmarks of legality under the basic provisions of the Robinson-Patman Act because related to cost economies and because related to competitive circumstances.

From the buyer's view point, he merely asked for a lower price because he had equally low price offers available from other sources.

There is no evidence in the record or anywhere else of coercion or exaction or any untoward conduct on the buyer's part other than his request to receive a lower price because he simply did not want to pay more to this seller than he had available to him from other sellers.

In the case of the broker, the respondent here, his acquiescence in taking a lower rate of commission than he originally had hoped to get from the seller was a perfectly reasonable situation as he saw it because first of all, the seller put it up to him on a take it or leave it basis and so, unless he took the reduced commission, he would have loss the sale and secondly, because this transaction was of an unusual size and dimension which saved him a lot of long distance calls, as he put it on the record, and save him a lot of work, he in effect realized more money for less work from this transaction than others.

Also --

Justice Charles E. Whittaker: -- may I ask you -- may I ask you, I don't know whether this should enlighten or is not but it's running through my mind and I'm somewhat confused about it.

What if a broker or a seller waives or reduces his commission in some sales to some purchasers, but not to others?

Does that result in the -- and it's passed along, we'll say, the saving by the seller to the customer?

Is that result in the seller selling on less than substantially equal terms to all?

Mr. Frederick M. Rowe: It may, Mr. Justice Whittaker, and of course that would be the province of the pricing provisions of the statute, Section 2 (a) governing price quotations by sellers and Section 2 (f) governing the receipts of prices by buyers and if in such a situation this price differentiation could not be justified either by reference to cost economies or by competitive consideration, it might well be held a violation, but of course, in this case, we did have evidence of cost economies and competitive conditions even though the Commission did not proceed against the appropriate parties we feel to this price differentiation and this evidence was rejected by the Commission as immaterial as a matter of law.

Justice Charles E. Whittaker: In this very case, the Canada Foods Company, the seller by re -- did on -- in accepting this 25-cent price even though there was reduction in the broker's commission from 5% to 3% actually receive less than it would have, had it sold it at the standard price of 30 cents a gallon and paid a 5% commission, isn't that right?

It actually received less for the goods.

Mr. Frederick M. Rowe: Yes, it did and I would like to state one point merely to illuminate the record here.

There was no standard price as such because the price of the apple contemplated at issue here had at first been $1.85 per gallon and had then come down to $1.35 per gallon and then $1.30 per gallon, so it wasn't a commodity which had in variable fix price but certainly, it is correct that the seller in this situation received less that he expected to, at the outset, when he authorized price quotations of $1.30.

Justice Charles E. Whittaker: So he could not justify the whole reduction, cost justify?

Mr. Frederick M. Rowe: There was evidence in the record, Mr. Justice Whittaker, pointing to the fact that he might well have because the seller, who is the witness in this case, he never had the opportunity, of course, to vindicate his price because he was not made a respondent, but he did testify that in this transaction, he realized considerable economies from packaging, processing, freight and customs at the boarder in making a transaction such as this.

Justice John M. Harlan: Your point is that this has to be tested under 2 (a) and does not become a per se violation in effect under 2 (c)?

Mr. Frederick M. Rowe: That is exactly correct, Mr. Justice Harlan.

We believe the Commission cannot, by a pleading device, convert an open price reduction which is lawful under Section 2 (a) and to a so-called indirect allowance in lieu of brokerage which is illegal per se under Section 2 (c).

Yes, sir.

Chief Justice Earl Warren: Mr. Rowe, I was wondering if a seller could employ a -- a broker at a 5% commission and then, between them, they would agree that in all large sales, the -- the broker would only charge 3% instead of 5% and pass that on to the -- to the buyer because he was not put to so much work, would that be legal?

Mr. Frederick M. Rowe: Mr. Chief Justice, in such a situation where you might say there was actual connivance by the seller and the broker to pass on broker's commission to the buyer such as, we do not have in this case, there might well be the point made under the statute that the seller was, in fact, arranging for kickbacks to the buyer and we do not defend that situation under the statute, but we do not believe that the principle of our case is -- as sweeping as to comprehend that particular situation.

Chief Justice Earl Warren: Let us -- let us just say then that there is no agreement between the seller and the broker, but broker as a matter of his own convenience, wherever he gets a -- a large sale reduces his brokerage by 2% or 3% and passes it on to the -- to the buyer in order to get the -- the business, would that be a -- would that be legal?

Mr. Frederick M. Rowe: Mr. Chief Justice, the normal economic interest of the broker as anyone else's including the seller would, of course, be not to give a lower price because unless he had to, he wouldn't do it.

In a situation, where an order to make a sale in the heat of the competitive contest, the broker had to reduce his commission and the seller had to reduce his price, it is our position that Section 2 (c) of the Robinson-Patman Act cannot be used to make this competitive situation, this above board, non-connivance transaction, illegal per se when there are directly governing provisions in the statute which cover lower prices by sellers to buyers which say a price which is competitively justified and a price which is economically justified, is a lawful price.

Chief Justice Earl Warren: Well -- well, was this lower -- lower price economically or competitively justified?

Mr. Frederick M. Rowe: The evidence in the record, Your Honor, to the extent, it is in the record, indicate --

Chief Justice Earl Warren: I understood, there was nothing to -- nothing on that issue to --

Mr. Frederick M. Rowe: Yes, there was, Your Honor.

The broker testified and the seller testified as witnesses.

And as the matter of fact, the broker's answer pleaded that the seller's price reduction was cost justified and competitively justified.

There was substantial evidence in the record by the broker and the seller that there was cost justification insofar as they were savings in packaging, freight and transportation and there was also evidence that there were competitive offers available to the buyer from other sources.

In our proposed findings of fact conclusions of law, we again put this matter up to the Commission, but this was rejected by the Commission as immaterial as a matter of law.

Justice John M. Harlan: I suppose putting your position, in other way if I understand it, you could concede arguendo that this violated two-way, you don't -- in other words, for the purposes of this case, it's immaterial, wasn't it?

Mr. Frederick M. Rowe: I might concede and say it is immaterial but I -- I would hesitate to do so, Mr. Justice Harlan, because in view of the facts, all the earmarks of the record show that the price would have been lawful under Section 2 (a).

Justice John M. Harlan: Well, but you could -- I didn't mean to -- naturally you don't concede anyway -- anything away, but it's immaterial to your position here in this case as to what the effect of this was under 2 (a)?

Mr. Frederick M. Rowe: It is immaterial to my position, yes.

The Commission's unprecedented, as I said, and unique interpretation of 2 (c) for the first time after 23 years or so of the Robinson-Patman Act is based on two premises really, two statutory legal premises, one being that where a seller grants a lower price to a buyer and at the same time, that lower price is coupled with a reduced commission by the seller's broker that in such a situation, a seller is granting a so-called allowance in lieu of brokerage to the buyer even though its price be open which is in violation of Section 2 (c), the brokerage clause.

That is the first premise.

The second premise of the Commission is that a broker's participation in such a transaction where the seller gives an open lower price and the broker takes a smaller commission that the broker's participation constitutes a so-called indirect payment by the broker to the buyer of an allowance in lieu of brokerage.

The theory being that by accepting a lower rate of commission, the broker in effect gives the money to the seller, who then gives it to the buyer and that is an illegal allowance in lieu of brokerage.

Now, as to that first premise that the seller's conduct in giving the lower price openly to the buyer is an allowance in lieu of brokerage, we believe that this assertion is contrary to the basic premise of this Court's opinion and the Simplicity Pattern case, only last June, is contrary to a ruling by the First Circuit Court of Appeals, only last month in the Robinson case and is contrary to the congressional objective in Section 2 (c) as detailed fully and amply in the legislative history which we have included as an appendix to our brief.

Justice Felix Frankfurter: What was the Robinson case, Mr. Rowe?

Mr. Frederick M. Rowe: In the Robinson case, Mr. Justice Frankfurter, a seller had first employed a broker to find sales outlets for him to a certain customer who bought paper cups.

After a while, the seller realized that he would prefer to do business directly with these buyers and so he let the broker go.

After he left the broker go, he reflected the savings and the broker's commission in a lower price to the buyer.

Thereupon, the broker brought suit against both the seller, in one case and against the buyer, in the other case, charging that the seller's lower price which reflected the savings and broker's commissions was a so-called allowance in lieu of brokerage in violation of Section 2 (c) of the Robinson-Patman Act.

In other words, precisely, the first premise of the Commission's legal theory here, as it has spelled it out on page 26 of its brief, page 27 which says, “If a seller dispensed with his broker services in making a particular sale and then openly reduce to selling price by the exact amount of brokerage involved, this would constitute an allowance in lieu of brokerage by the seller to the buyer in violation of Section 2 (c).”

Chief Justice Earl Warren: Well, I understood you to say in the Robinson case, that -- that he dispensed with all services of his broker --

Mr. Frederick M. Rowe: He let him go completely.

Chief Justice Earl Warren: -- and dealt -- and dealt with everybody on the same basis.

Mr. Frederick M. Rowe: There was only one transaction in the controversy of that case.

I don't know of course what the --

Chief Justice Earl Warren: It would make the difference, wouldn't it?

Mr. Frederick M. Rowe: It might make a difference insofar as the seller might or might not be discriminating and insofar as the Commission then proceeded against the seller, it might certainly plead that there was discrimination, but insofar as the Commission has taken the position that regardless of the situation as between one buyer or another buyer whenever a seller reflects in his lower price brokerage fee savings, there is an allowance in lieu of brokerage which is the Commission's position as expressed in its brief here, then we believe the Robinson decision is directly to the contrary because it says, as we say that whenever there is a lower price, such as we have here, the Commission cannot simply convert it into allowance in lieu of brokerage which is illegal per se particularly when that lower price is competitively motivated, as we have indicated in the record here, and as responsive to cost economies of the kind, which Congress time after time said in the legislative history, it wished to preserve for the consumer in the form of lower prices.

And as we point it out of course, also, the Commission takes the position here that there cannot be a cost justification available to the seller in such a situation even though Congress expressly, in 1936, rejected the proposal that the cost justification should not be permitted to include economies and brokers commissions.

The Simplicity Patterns case which the -- which we believe really spells out the basic design of the statute in the context of which this case occurs, that opinion stressed and emphasized the fundamental distinction in the statute between the open prices, the open prices which were treated by Congress as being lawful depending on whether they were injurious to competition or whether they could be cost justified or whether they could be justified by competitive responses, that was one fundamental premise of the Robinson-Patman Act.

The other thing that Congress provided for in the statute was certain and to use this Court's words false and concealed transactions which were automatically unlawful regardless of competitive consequences, regardless of cost justifications and among those concealed transactions, which the Court's opinion in the Simplicity case, pointed out were, “secret brokerage payments” and “false brokerage payments”.

The purpose of that distinction made by Congress in the Robinson-Patman Act and as pointed in its legislative history also was by making this prohibition on the secret and concealed transactions absolute and unqualified to thereby drive prices out into the open with the aim, and again to quote the opinion's language, “with the aim of bringing these prices out into the open so that they could be measured and so that they could be compared with possible cost economies.”

In this situation, in the case at bar, we have precisely such a lower open price reduction forced out into the open in effect which could be compared on the record with cost economies available to the seller and which could be compared with the competitive situation rather than being concealed -- concealed transactions or rather than being arrived at by any kind of connivance or subterfuge as the Commission does not contest in this case.

And nevertheless, the Commission has taken the position that this open price transaction is an allowance in lieu of brokerage.

We feel this interpretation is directly contrary to the purpose of Congress in enacting Section 2 (c) of the statute as expressed in the Congressional Reports, which we have quoted in excerpt in our brief.

For example, the Report of the Senate Judiciary Committee, on page 22 of our brief, states that the purpose of Section 2 (c) of the statute, the so-called brokerage clause was to bar “the practice of certain large buyers to demand the allowance of brokerage direct to them upon their purchases or its payments to an employee, agent or corporate subsidiary, whom they set up in the guise of a broker and through whom they demand that sales to them be made.”

And I may say that the legislative history repeatedly and consistently reflects the tenure that secrecy, connivance, concealment and subterfuge whether vices of which the brokerage clause were directed because it was an absolute prohibition whereas the basic provision of the statute, governing price dependant on competitive injuries, competitive showings and permitted the justification of a lower price by the seller so that the economies of efficient distribution would not be denied to the customer and ultimately to the American consumer.

As I pointed out, the Commission's elimination of the cost justification in an open price situation of this time is contrary to the action of the Senate House Conference Committee which, in 1936, deleted and struck out this precise proposal when it was advanced by some of the proponents.

And as a matter of fact, Senator Logan who was the Senate manager of the legislation and who was the Chairman of the Senate Subcommittee in charge of the legislation pointed out that this was one of these fantastic ideas by which someone had tried to discredit the legislation, namely, to suggest that a seller could not lower his price so as to reflect cost economies predicated on brokerage savings.

The meaning and the intention of Congress in this particular provision was illustrated, we believe, quite clearly by the A & P case which was before the Courts in the 1930s.

This case, one of the landmark applications of the Robinson-Patman Act, was addressed against A & P which previous to the enactment of the statute had secured, coerced rebates and exacted secret -- secret brokerage commissions by the device of setting up so-called field buying agents.

A & P set up these field buying agents who collected brokers commissions from sellers, masquerading as independent businessman and after they had collected these rebates, they kicked them back and passed them over back to the A & P which thereby was able to collect discriminatory price favors which were concealed from you and which were hidden and could not be detected.

And it was this type of thing which Congress was aiming against in passing this provision shortly after the Robinson-Patman Act, the A & P converted this field buying deal whereby these field buying agents collected rebates and it told these field buyers to go out and negotiate with the seller to convert the previous rebate payment and to compute a false price based on the exact amount of the rebate and reflecting that amount of the rebate.

And it was this --

Chief Justice Earl Warren: (Voice Overlap) the difference to, Mr. Rowe, that it was done -- instead of being done secretly, it was done openly, but defiantly of the Act?

Mr. Frederick M. Rowe: If there were any defiance, no, sir.

It would make a basic difference --

Chief Justice Earl Warren: (Voice Overlap) --

Mr. Frederick M. Rowe: -- if the matter were done in defiance of the Act.

Chief Justice Earl Warren: -- secrecy and so forth isn't terribly important to us here, is it, if -- if it is -- if it should be open but defiant of the Act, it would still be proscribed, would it not?

Mr. Frederick M. Rowe: It would be, but the Simplicity Pattern opinion by the Court last June pointed out that there was a fundamental distinction in the statute between open transactions on the one hand which could be compared with cost economies such as we have here and secret and false and concealed transactions which prevented the comparison of cost savings with a lower price.

We also don't believe Mr. Chief Justice that there was any trace of defiance here because --

Chief Justice Earl Warren: Oh, I don't say -- I don't say there was.

I was just testing you --

Mr. Frederick M. Rowe: Yes.

Chief Justice Earl Warren: -- the abstract more or less but -- no, I don't do -- I don't suggest that.

Mr. Frederick M. Rowe: And we wouldn't advocate it and certainly wouldn't defend it.

Chief Justice Earl Warren: Yes.

Justice Felix Frankfurter: Mr. Rowe, may I revert back to this Logan or Logan opposed legislation in 1936, was it?

Mr. Frederick M. Rowe: 1936.

Justice Felix Frankfurter: Was -- what decision or ruling or practice give rise to the proposal?

Is there any antecedent enclosed to us?

Mr. Frederick M. Rowe: There was no decision that I'm aware of that led to this particular proposal, but I think it is a well-known fact and reflected throughout the legislative history that the National Association of Food Brokers was a very effective instrumentality in the passage of this legislation and their objective was at that time quite frankly stated in the hearings to prevent brokerage commissions from getting squeezed and they wanted to preserve and maintain brokerage commission at -- what thought reasonable levels.

Justice Hugo L. Black: Where is that proposal?

Mr. Frederick M. Rowe: We have cited, Mr. Justice Black, in our brief.

Justice Hugo L. Black: Quoted it, you quoted it?

Mr. Frederick M. Rowe: Yes.

We have -- we have the -- a proposal which said that cost justification should be permitted in economies other than brokerage.

The words “other than brokerage” was subsequently deleted because Senator Logan pointed out --

Justice Hugo L. Black: Where is that?

Mr. Frederick M. Rowe: We have that on page 30 -- 31 of brief.

Senator Logan explained to the Senate, I have -- “I think perhaps legitimate brokerage ought to be allowed as part of the costs, and I think when the bill was drafted, I did not write the bill.

Perhaps in the amendment which was inserted by the Judiciary Committee of the Senate we had in mind dummy brokerage, sham brokerage.

It may be that something should be done about that.”

And then in the conference, this provision was deleted and stricken out.

Justice Hugo L. Black: What -- what do you think he meant by the legitimate brokerage, brokerage that was actually charged?

Mr. Frederick M. Rowe: Brokerage, Mr. Justice Black, paid by a seller to his agent rather than brokerage paid by the seller over to the buyer or to the false front or dummy of the buyer because that was device at which Congress was legislating and which was prominent at that time.

A & P having set up a false front, a dummy broker in the form of a subsidiary or field buying agent and these people collected broker's fees and kicked them back and rebated them back to the buyer who then collected a secret discrimination in that guise.

Justice Hugo L. Black: Well, I suppose agreeing with you that -- that was what stimulated the (Inaudible), that doesn't settle our problem, does it?

Mr. Frederick M. Rowe: No, sir, it only illuminates the problem but we feel that this clear cut congressional intent, when read in the light of 23 years of interpretation where the Commission never even urged this peculiar theory, we suggest upon the Courts or never ever incorporate this unique theory in a complaint notwithstanding, I'm sure, complaints by various affected parties such as brokers who lost a sale such as competing broker in this case, lost a sale to the respondent that nonetheless, the Commission never even brought such a case in 23 years and moreover, since the theory which the Commission's case here incorporates has been rejected by the First Circuit Court of Appeals that that is a very firm indication that the Commission's premise of this case is, we respectfully submit, untenable.

Justice Hugo L. Black: What was the practical effect of what happened here?

Mr. Frederick M. Rowe: The practical effect, Mr. Justice Black, of the transaction here was that a seller gave an open price reduction to a buyer in a situation where the record indicates, he was meeting competition and where the record indicates that he was reflecting cost economies in that lower price.

In other words, what the seller did in this case was to implement, as I understand, the objectives of the Robinson-Patman Act as set out in this Court's Morton Salt opinion and this Court's Simplicity Pattern opinion, namely, to foster open prices which are cost justified for the benefit of the consumer, whom Congress did not wish deprive of the economies of efficient distribution.

Justice Hugo L. Black: Why you say cost justified?

I thought that was not involved in this case that you're talking about.

Mr. Frederick M. Rowe: I did not mean to suggest, Mr. Justice Black, that this -- this price was in fact cost justified but that the earmarks, that the record indicates and so far as it indicates anything because the evidence was rejected as immaterial, that the evidence insofar as it is in the record shows that there were significant and palpable economies to the seller in the form freight savings, in the form packing savings and in the form of processing savings.

Justice Hugo L. Black: Well, I can't quite understand if that is the case and that is the issue that was not tried out, was it?

Mr. Frederick M. Rowe: Well, the Commission rejected that as immaterial as mater of law.

The Commission did not permit that to affect its decision because it said, “We did not proceed under the pricing provisions, we proceeded under brokerage provisions, and when we proceed under the brokerage provisions, it is illegal per se and all of this evidence about cost savings and all of these evidence about competitive response is immaterial as a matter of law.”

Justice Hugo L. Black: Suppose there was no cost savings justified, what is the practical result, what would that get in?

Mr. Frederick M. Rowe: There was a --

Justice Hugo L. Black: If we assume there was no cost of justification.

Mr. Frederick M. Rowe: There was a competitive price reduction by the seller to the buyer of the type which this Court has held and --

Justice Hugo L. Black: Which seller is that?

You mean the broker or the other man?

Mr. Frederick M. Rowe: No, sir.

The seller --

Justice Hugo L. Black: Seller.

Mr. Frederick M. Rowe: -- to the buyer.

The seller to the buyer of the type which this Court has held in interpreting the Robinson-Patman Act to be lawful, namely, a lower price where there was -- from all the evidence we have in the record, a meeting of competition in good faith.

If --

Justice Hugo L. Black: Meeting a competing price?

Mr. Frederick M. Rowe: Meeting a competing price, yes, sir.

Because on top of the cost savings, there was even that in the record although --

Justice Hugo L. Black: Were there findings to that effect?

Mr. Frederick M. Rowe: The -- there were propose findings and conclusions submitted by us of that effect, Mr. Justice Black, which the Commission rejected as immaterial as a matter of law.

Justice Hugo L. Black: We have not either of those findings, but suppose if they haven't been tested out, assuming that neither of those things are correct, as you say, what is the practical result here, as to these things?

Mr. Frederick M. Rowe: The practical effect is one -- one customer for apple concentrate.

A man named Smucker in Orrville, Ohio buying apple concentrate for 5 cents a gallon less from a seller rather from this seller then from other seller who would have given him this lower price as the record indicates.

If I may proceed quickly to the second premise, the derivative premise of the Commission's theory here, namely, that a broker who participates in an open price reduction from a seller to the buyer is guilty of paying a so-called indirect allowance in lieu of brokerage by accepting a lower commission via the seller's retention of the balance by way of the seller's lower price to the buyer is guilty of a so-called indirect payment in Section 2 (c) of the Robinson-Patman Act.

First, I believe the Commission has recognized that the text of Section 2 (c) provides that a person may not pay a brokerage commission to the buyer or to the buyer's intermediary.

It says “A person may not pay to the other party.”

As I understood the Commission's argument, it took the position that the broker was in fact a party and so, a payment by the broker was a payment in violation of Section 2 (c), but once again, it is clear from the Committee Reports, which we have excerpted in our brief, that Congress was not legislating against payments by brokers, it was rather legislating against payments by sellers to buyers and by sellers to the false fronts and intermediaries of buyers.

The statutory prohibition does run as we pointed out in our briefs against a broker receiving from the seller a commission which he then turns over or kicks back to the buyer.

There is no question about that, and there is no controversy between us and the Commissioner on that account, but there simply is not in Section 2 (c) as it is now written a provision saying that apart from this receipt of illegal brokerage which would make a kickback unlawful, apart from that, there is a further prohibition on so-called payments by brokers.

And in any event, the only payment that there is in this case that there is alleged to be in this case is this acceptance by the broker of a lower rate of commission.

There was no money changing hands.

There was no passing over or rebating or kickbacking.

All the broker here did was to accept when the seller told him, “Take or leave it, 3%,” he accepted 3% and this is the theory of indirect payment.

We think it's very significant in this connection that the examiner's initial decision for the Federal Trade Commission in this case, very candidly, we think, put it that what the Commission was doing in predicating liability against the broker here was to filling a -- an omission what it thought was an omission in the text of the statute as passed by Congress.

We feel -- and moreover, on --

Justice Hugo L. Black: Is it your -- is it your -- I -- I don't -- I want to see if I get clear in my mind.

Is it your position that wholesaler or manufacturer whatever it is, sells to a broker, and that broker fixes here a fixed commission and that broker cuts the commission and absent of kickback or connivance or some kind, there can be no liability under 2 -- under 2 (c)?

Mr. Frederick M. Rowe: Yes.

If there is no kickback and if there is merely the acceptance of a lower rate of commission, as here, there is no liability under Section 2 (c) because what we have is an open price reduction which Congress specified in Section 2 (a) -- 2 (a) and 2 (f) of the statute to be governed by this criteria whether it is cost justified or whether it's competitively injurious, whether it is made to meet competition in good faith because otherwise, Section 2 (c), the limited provision governing brokerage, would in fact supersede and override the basic provision of the statute governing price variations between sellers and buyers.

Justice Hugo L. Black: Do I understand then that means that this statute just doesn't cover brokers first and second that he -- he act -- the seller acting through the broker is insulated unless there's some connivance between them?

Mr. Frederick M. Rowe: No, sir.

We do not say that the statute exempts a seller's broker.

We merely say that since the statute holds liable, a seller's broker who accepts from the seller a commission which he kicks back to the buyer and since the statutory text is clear and since the reports of Congress documents point that there is no further special liability for so-called payments by a broker and furthermore, there was no payment in any conventional sense of that term in the case at bar.

I would also, in this connection, not neglect to point out that Senator Logan once again, who was the Senate manager of the bill, pointed out to the Senate that there was no prohibition in the statute against deduction of legitimate brokerage.

There was nothing again -- in the statute against the payment or deduction of legitimate brokerage.

It was rather sham brokerage and dummy brokerage with which the statute was concerned.

Finally and basically, we feel that the Commission's theory of this case of this unique interpretation of the statute, 23 years after its enactment, has the necessary and inevitable effect of preventing the reduction of brokerage commissions in competitive situations and as a necessary consequence, we feel, of stabilizing and maintaining the level of brokerage fees at unnatural levels to the detriment of the American consumer because what the Commission does here in effect is to foster the very type of stabilization of commissions which the Antitrust Division of the Department of Justice as indicated in the Real Estate Board case has consistently pursued as unlawful restrain of trade.

We feel basically that the antitrust laws to quote the classic phrase of Mr. Chief Justice Hughes are -- “our charter of economic freedom comfortable to constitutional provisions.”

For this reason, this Court has never lightly presumed departures and exemptions to the antitrust laws.

Most recently in this Court's opinion in the McKesson and Robinson case involving resale price maintenance, a so-called principle of fair trade, this Court's opinion pointed out that resale price fixing is a privilege restrictive of a free economy and must be narrowly construed.

We feel in this particular situation, the danger to the policy of antitrust and to the principle of competition is graver because it is more insidious in the field of resale price maintenance, the clash between the price fixing and the antitrust policy is manifest, it is open.

What we have here is unprecedented and we submit an untenable interpretation of the Robinson-Patman Act by the Federal Trade Commission which would in fact stifle competition in the name of protecting it.

We feel that this Court should not permit such a perversion of antitrust.

Chief Justice Earl Warren: Mr. -- would you please comment first, Mr. Friedman, on the -- the purpose and the effect of that footnote on -- on page 12?

Is that -- is that in anyway water down the -- the argument of the Solicitor General or his enthusiasm for the case or his belief in this case or -- or just what does it do?

What does it mean?

Argument of Daniel M. Friedman

Mr. Daniel M. Friedman: No, Mr. Justice.

I think the clearest evidence of the Solicitor General's support of this case is the fact that he saw in the brief and that I'm arguing this case.

I think all of this was intended to mean was that in supporting the Commission's position in this case, in indicating what we believe to be the legislative purpose in this Act, the Department of Justice was not indicating any views of its own as to the wisdom or lack of wisdom of the policy consideration that underlies this legislature.

Justice Felix Frankfurter: How often you've done that?

Mr. Daniel M. Friedman: I don't know of any particular comment like this, but the Solicitor General on the past has indicated certain reservations as to the positions taken.

I don't --

Justice Felix Frankfurter: How -- how often what we ask to keep in mind the policy of the statute as construing it?

Are those -- is that a -- a greater dichotomy between the words of the statute and the policy it supposed to convey?

Mr. Daniel M. Friedman: No, no.

I think, Mr. Justice, it was only intended to indicate that the Department of Justice is not taking any sides in this basic controversy.

It has assisted for long time as to the wisdom or unwisdom of many of the features of the Robinson-Patman Act.

Justice Felix Frankfurter: I don't know how long I should be here but I don't expect that statement to be repeated (Inaudible) it has to construe a statute to fill up.

Mr. Daniel M. Friedman: I don't think so.

Justice Felix Frankfurter: Well, doesn't your (Inaudible) argued in that exception.

Justice Charles E. Whittaker: Well, Mr. --

Justice Felix Frankfurter: No, sir.

We're here --

Justice Charles E. Whittaker: (Inaudible)

Justice Felix Frankfurter: No.

Justice Charles E. Whittaker: -- you're explaining the Court?

Mr. Daniel M. Friedman: No, Mr. Justice.

We are here as counsel for the Federal Trade Commission.

We're presenting to the Court what we believe to be the policy reflected in the Robinson-Patman Act and we believe that the policy reflected in the Robinson-Patman Act is furthered by the Commission's construction of the statute in this case.

We are here as an active litigant not as an amicus.

Chief Justice Earl Warren: Well, just other thing that Mr. Rowe suggested that there might be some significance to the fact that the Antitrust Division does not attach itself to this -- to your petition or your briefs, is there any significance to that?

Mr. Daniel M. Friedman: I think there is not an unprecedented event before this Court, Mr. Chief Justice.

The Antitrust Division has in the past sometimes not appeared in Federal Trade Commission cases.

Two recent cases, I might mention the Automatic Canteen case and the National Casualty Insurance case two years ago.

Now --

Justice John M. Harlan: Is there a difference between the Antitrust Division's view on the antitrust laws and Federal Trade Commission's (Inaudible)?

Mr. Daniel M. Friedman: No.

I don't think so, Mr. Justice.

I think the -- for example, the Attorney General's Committee has been somewhat critical of the position taken by the Federal Trade Commission in various aspects of Robinson-Patman Act administration.

Justice Felix Frankfurter: Even the matter of law is that like all lawyers, government lawyers should come in and argue their cases with lawyers would read all -- all implications or expectations or what (Inaudible) is good policy and bad policy.

I suppose there might be some difference of opinion in Mann Act cases, (Inaudible) was saying, it doesn't mean that we subscribe to the policy of this Act.

It quite might not.

I know many Attorney Generals who didn't.

Mr. Daniel M. Friedman: I think it's the duty of the Department to administer the Acts as they appear.

Now, I would like to first answer a point that Mr. Rowe has made several times.

He refers to the statement by Senator Logan in which Senator Logan re-explained why the early draft of the bill which contained an exception for other than brokerage in connection with cost justification, why that was deleted and he refers in his brief at pages 30 and 31 to this statement by Senator Logan on the floor of the Senate.

Unfortunately, we had not quoted the material that I am about to read to the Court but it is set forth in the Conference Committee Report which we have cited in our brief, its House Report Number 2951 in the 74th Congress, 2nd Session page --

Justice Hugo L. Black: Where is that cited in your brief?

Mr. Daniel M. Friedman: It cited in other context, Mr. Justice.

It's cited pages 17, for example -- I'm sorry -- page 8 -- top of page 18.

Justice Hugo L. Black: You're reading apart from another page?

Mr. Daniel M. Friedman: Yes, Mr. Justice.

Justice Hugo L. Black: What page?

Mr. Daniel M. Friedman: Page 6 of the Conference Committee Report.

Justice Hugo L. Black: Instead of page 15 as cited on page 7?

Mr. Daniel M. Friedman: Mr. Justice -- at the top of page 18 --

Justice John M. Harlan: (Inaudible)

Mr. Daniel M. Friedman: -- Report Number 2951, where we say page 7.

I'd like to read one sentence from page 6 of that Report and that statement states that “The words other than brokerage which appeared in the Senate Amendment immediately after the word cost are eliminated for the reason that the matter of brokerage is dealt with in a subsequent subsection of the bill.”

Now, we think that this statement means only and can mean only one thing that Congress found it unnecessary to specify other than brokerage as a cost defense because it was dealing with the problem of brokerage in a specific section.

And in a specific section, it took up the problem of brokerage and imposed a blanket prohibition that a grant or allowance of brokerage or an allowance in lieu thereof was to be prohibited.

Now, Mr. Justice Black inquired of my opponent, what the practical affect of what was done here is.

Well, I think the practical effect is very clear.

It's undisputed from this record what the practical effect is.

One buyer, only one buyer and admittedly, a large buyer was true, as Mr. Rowe indicates, this isn't a mass of chain store but this is the only buyer in this industry who could make a purchase of this size.

This one buyer got a lower price which was not given to anyone else, neither to anyone else by Mr. Broch, who had 18 other customers or by any of the other brokers.

So the practical effect, I think, of this action here is very clear.

This is, we think, is precisely the kind of thing the Congress wished to reach under the brokerage clause of the Robinson-Patman Act.

The use -- the manipulation of brokerage as a device to give a large buyer with greater purchasing power a competitive advantage, a lower price which is not available generally to all of the other buyers.

Justice Felix Frankfurter: Mr. Friedman, is it true that this is the first case in the history of the Act?

Mr. Daniel M. Friedman: This is the first case of this kind.

There have been at least three other cases in which the Commission has proceeded against sellers' brokers but this to --

Justice Felix Frankfurter: (Voice Overlap) in this kind of thing?

Mr. Daniel M. Friedman: This is, to my knowledge, the first --

Justice Felix Frankfurter: Well, I'm well aware that this (Inaudible) a strong use of -- about the propriety of using none action by a commission that it has some significance, I mean the Court has attached significance to it.

But I want to know does a situation as -- as unique as the proceeding.

In other words, if this kind of a thing not happened so as to bring into play the Commission's power.

Mr. Daniel M. Friedman: I -- I don't know, Mr. Justice, but I -- I can suggest this, that the record shows that when the other broker in this case had it suggested to him by the seller that the only the price could be reduced would be if the brokerage was cut.

He refused to do that and wrote a letter to the buyer in this case stating that the only way we could confirm would get us in trouble under the Robinson-Patman Act.

And I suspect that one reason for the paucity of these proceedings maybe the previous general view we believe in the industry that this kind of thing was prohibited, that the broker could not take a lower price which was the means a lower commission, which was the means of giving a price discrimination to a favored buyer.

But I -- I can't answer specifically as to how extensive this practice --

Justice Hugo L. Black: (Inaudible) effect is, isn't it, that you get your right, that brokers are not allowed to compete with one another, the law upon making lower prices.

Mr. Daniel M. Friedman: No -- no, Mr. Justice.

If the seller can give a lower price on the --

Justice Hugo L. Black: I'm -- I'm talking about the broker.

Mr. Daniel M. Friedman: You mean in dealings with the sellers?

Justice Hugo L. Black: Yes.

Mr. Daniel M. Friedman: Well, the broker --

Justice Hugo L. Black: In dealing with the sellers.

Mr. Daniel M. Friedman: A broker can -- can do any -- when he is employed by a seller, he can say, “I want 6% commission, I'm willing to work for 4% or 3%.”

That -- that's perfectly would -- completely up to the broker and the seller, whatever arrangement they make as to commission, but our point is once they have reached an agreement as to commission and here they --

Justice Hugo L. Black: You mean with the seller.

Mr. Daniel M. Friedman: With -- with the seller.

Once they have reached that agreement, they cannot then take part of that commission in dealing with the favorite purchaser and pass part of it back.

Justice Charles E. Whittaker: (Inaudible) orders over a certain price, the commission (Inaudible) would that be offered?

Mr. Daniel M. Friedman: I would think in -- in that case, Mr. Justice, I doubt that you have an allowance in lieu of brokerage because they are your basic brokerage statement but in this case, we're dealing with a situation where you had an agreement for 5% and in every other transaction except for this one purchase, 5% was paid.

I think --

Justice Charles E. Whittaker: (Inaudible)

Mr. Daniel M. Friedman: Well, the -- but the statute -- insofar as the broker is concerned, the statute prohibits the allowance in lieu of brokerage and where you have situation where there's nothing to be in lieu of, in other words, where there is no brokerage to be passed over but in -- as I repeat in this case, we do not have that situation.

Also I like to refer very briefly to the Robinson case which my opponent relies on.

There again is a case where we think its clear that there was no violation of -- to see charge because there was nothing to show any correlation between the brokerage passed on and the lower price.

The Court specifically stated in the opinion.

There is -- incidentally the Court says, “No allegation of any correlation and amount between the reduction in price in plaintiff's former commission.

Furthermore, the Court says, “Since there is no indication that employer employed other brokers, we take plaintiff's stated claim to be that all customers thereafter are not merely (Inaudible) purchased direct.

Justice Hugo L. Black: Has that been officially reported there?

Mr. Daniel M. Friedman: I do not have the official report.

My adversary cites the Trade Regulation Service citation in his --

Justice Felix Frankfurter: You give his aid we can get (Inaudible) if you give the date we can get it from the (Inaudible)

Mr. Daniel M. Friedman: December 10th, 1959, an opinion by Judge Aldrich and in that opinion, incidentally in the footnote, Judge Aldrich expresses some doubt.

Justice Hugo L. Black: Judge who?

Mr. Daniel M. Friedman: Judge Bailey Aldrich, expresses some doubt as to the Broch decision in the Circuit Court in this case.

So that -- one final word, in -- in recapitulation, we've been accused in this case of construing the statute in a way it leads to it -- stabilizing brokers, it's claimed.

This is in effect condoning price fixing by the Federal Trade Commission.

Now, Congress, we think, has made the determination that there are certain kinds of price practices which in the long run is so injurious to the competitive system that they must be prohibited outright, and we think one of those prohibitions made by Congress is that when you get into the brokerage field, the broker cannot take and pass over some of his brokerage to the favorite purchaser.

Justice Charles E. Whittaker: (Inaudible)

Mr. Daniel M. Friedman: I said -- yes, Mr. Justice.

Justice Charles E. Whittaker: (Inaudible)

Mr. Daniel M. Friedman: That's right.

As -- as a -- in a -- in practical effect, Mr. Justice, we think it's the same in terms of the ultimate effect on the purchaser whether he has done that or whether he's actual taken the money and passed it over in so many -- so many terms.

Justice Felix Frankfurter: If you -- if you think of this Act, you wouldn't describe this transaction as passing over, do you -- do you (Inaudible)

Mr. Daniel M. Friedman: No.

But I --

Justice Felix Frankfurter: The phrase wouldn't naturally come out to the tip of your tongue of -- at the end of your pen was he (Voice Overlap) --

Mr. Daniel M. Friedman: No, Mr. Justice, but I think the phrase in the statute and allowance in lieu of brokerage.

Justice Felix Frankfurter: The statute says all right.

But all I'm saying is you're using -- you're taking some liberties in make it (Inaudible)

Mr. Daniel M. Friedman: I -- I -- if -- if I am, Mr. Justice, it's an attempt --

Justice Felix Frankfurter: Statutorily -- legitimately (Inaudible)

Mr. Daniel M. Friedman: Yes.

Justice Felix Frankfurter: All right.

Justice Hugo L. Black: You mean he eventually and he originally agreed to take 5%.

Mr. Daniel M. Friedman: Yes, Mr. Justice.

Justice Hugo L. Black: But (Inaudible)

Mr. Daniel M. Friedman: That's so found and that finding -- was accepted by the Court.

Justice Hugo L. Black: -- then he sold, didn't he?

Mr. Daniel M. Friedman: Then he's --

Justice Hugo L. Black: And did he tell the manufacturer why he accepted the 3%?

Mr. Daniel M. Friedman: No, he didn't.

To all that is shown by the record is that he came to the manufacturer and said to the manufacturer, “I can sell a large order at $1.25.”

The manufacture said, “Well, let me figure about this.”

And then he -- manufacturer came back the next morning and said, “You can make the order -- sell the order at $1.25, but you'll have to take 3% brokerage on this order,” that's all that we have here.

Chief Justice Earl Warren: Instead of 5%.

Mr. Daniel M. Friedman: Instead of 5% and it --

Justice Hugo L. Black: (Voice Overlap) makes on about what brokerage he was giving to other (Inaudible)

Mr. Daniel M. Friedman: Yes, Mr. Justice.

There is no question that on all other transactions through this broker and through every other broker, the stated agreed upon brokerage was paid 5% from Mr. Broch, 4% through all the other brokers, which was their agreement.

Justice Hugo L. Black: It was before and after that?

Mr. Daniel M. Friedman: Before and after, before and after on the dealings by Mr. Broch, he paid 5% with all his other customers.

Thank you.

Chief Justice Earl Warren: Very well.