F. T. C. v. Lonning, 75-1176

Decision Date24 June 1976
Docket NumberNo. 75-1176,75-1176
Parties, 1976-1 Trade Cases 60,942 FEDERAL TRADE COMMISSION, v. J. E. LONNING, President, and Kellogg Company, a corporation, Appellants.
CourtU.S. Court of Appeals — District of Columbia Circuit

Edwin S. Rockefeller, Washington, D. C., with whom Richard Haddad, Washington, D. C., was on the brief, for appellants.

Denis E. Hynes, Atty., F.T.C., Washington, D. C., for appellee. Gerald Harwood, Asst. Gen. Counsel, F.T.C., and Karl H. Buschmann, Atty., F.T.C., Washington, D. C., were on the brief for appellee.

Before MacKINNON and ROBB, Circuit Judges, and BRODERICK, * United States District Judge for the Eastern District of Pennsylvania.

BRODERICK, District Judge:

This is an appeal by J. F. Lonning and Kellogg Company (Kellogg) 1 from an order of the district court dated January 3, 1975, granting enforcement of two specifications of a subpoena duces tecum issued by the Federal Trade Commission (FTC) in an administrative proceeding entitled In the Matter of Kellogg Company, et al. The district court ordered that Kellogg appear before a duly designated representative of the FTC upon not less than five days notice to testify and produce the documents requested in specifications I.10 and II.10 of the subpoena duces tecum issued by the Commission on February 14, 1973. Kellogg contends that the district court should have denied enforcement of the subpoena duces tecum because the documents sought by the FTC contain confidential "trade secrets" which are subject to discovery through an agency subpoena only upon a showing by the agency of relevance and immediate need. Kellogg contends that there can be no finding of immediate need until consideration is given as to whether the less sensitive substitute information offered by Kellogg meets the asserted needs of the FTC. Kellogg contends that neither the district court nor the Administrative Law Judge considered whether the substitute documents offered meet the needs of the FTC and that therefore the requirement of a finding of immediate need has not been met. Kellogg further contends that even if the district court did not err in ordering enforcement of the agency subpoena, the protective order issued by the Administrative Law Judge does not adequately protect Kellogg's trade secrets that the district court abused its discretion in ordering disclosure without a more restrictive protective order.

The Federal Trade Commission is an administrative agency of the United States and is authorized by Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45, to prohibit unfair methods of competition in commerce and unfair or deceptive acts or practices in commerce. Kellogg is a Delaware corporation with its principal place of business located in Battle Creek, Michigan and is the largest producer of ready-to-eat cereals in the United States.

The present controversy arises out of an administrative proceeding pending before the FTC. On April 26, 1972, the FTC issued a complaint alleging that Kellogg, along with the other three leading manufacturers of ready-to-eat cereals, General Mills, General Foods, and Quaker Oats, have engaged in certain conduct and practices which violate Section 5 of the Federal Trade Commission Act. 2 The complaint alleges that Kellogg, along with the three other major producers of ready-to-eat cereals have a "shared monopoly" in the ready-to-eat cereal markets. 3 The admittedly novel complaint alleges inter alia: that respondents have introduced into the market a profusion of ready-to-eat cereal brands; that these cereals are promoted by intensive advertising aimed primarily at children, which advertising conceals the true nature of these cereals; that the respondents produce "basically similar" ready-to-eat cereals which are artificially differentiated by emphasizing and exaggerating trivial variations, which practices result in high barriers to entry into the ready-to-eat cereal market. The complaint further alleges various unfair methods of competition in advertising and product promotion, including allegations that the advertising is false and misleading; that Kellogg's program of shelfspace allocation controls the exposure of breakfast food products; that the respondents have made numerous acquisitions the effect of which have been to eliminate competition in the ready-to-eat cereal market and which have enhanced the shared monopoly structure of the ready-to-eat cereal market. Finally the complaint alleges that the respondents, collectively and individually, have exercised monopoly power in the ready-to-eat cereal market by refusing to engage in price competition or other forms of consumer directed promotions. The complaint alleges that these acts and practices on the part of the respondents have resulted in artificially inflated prices for ready-to-eat cereals, profits for the respondents in excess of those which would have been possible in a competitive market, and a lack of price competition in the ready-to-eat cereal market. 4

Pursuant to Section 9 of the Federal Trade Commission Act, 15 U.S.C. § 49, 5 as supplemented by § 3.34 of the Commission's On May 1, 1973, a prehearing conference was held during which the problem of possible revelation of trade secrets was argued before the Administrative Law Judge. In an order dated May 3, 1973, the Administrative Law Judge accepted the position of Kellogg that trade secrets need be revealed only when necessary to a proper adjudication of the controversy and stated that:

                Rules of Practice, 16 C.F.R. § 3.34, 6 complaint counsel for the FTC applied to the Administrative Law Judge for the issuance of a subpoena duces tecum against the four firms, including Kellogg.  The Administrative Law Judge issued the subpoena against Kellogg on February 14, 1973.  Specification I.10 of the subpoena calls for the quantitative formulas of Kellogg's ready-to-eat cereals, 7 and specification II.10 calls for the annual individual brand costs of each of Kellogg's ready-to-eat cereals.  8  On March 16, 1973, Kellogg responded to the issuance of the subpoena by a motion to limit, 9 in which Kellogg argued that it should not be compelled to produce the documents requested in specification II.10 requesting individual brand cost data.  10  Kellogg further stated in its motion that it "intends to object to the production of the documents or tabulations called for by specification II.10 on the grounds that such documents or  
                information are irrelevant, that compliance would be unreasonably burdensome, and that disclosure of the information involved would do great injury to Kellogg and to competition in the industry."  (J.A. 59).  In an order dated April 26, 1973, the Administrative Law Judge granted several of Kellogg's requests to limit the subpoena and granted Kellogg ten days to particularize its position on specification II.10 with respect to relevance, burden and confidentiality.  (J.A. 75-77)
                

(T)he disclosure of alleged trade secrets should be required only if those trade secrets are not only relevant to the issues presented by the complaint, but are also necessary for a proper disposition of this controversy. It may be that something less than that called for by the movant in the subpoena is needed and can be supplied by the subpoenaed party without revealing matters that are more sensitive and which are, therefore, maintained as trade secrets. (J.A. 78).

The Administrative Law Judge then ordered counsel for the FTC to submit "a statement demonstrating the need of the information sought as well as its relevance to a proper adjudication of this controversy." Counsel for the subpoenaed parties were directed to respond to the FTC's statement of need. (J.A. 79). On May 11, 1973, the FTC filed a detailed statement of need setting forth the relevance and need for the several categories of documents requested in the subpoena. (J.A. 80-97). The response of Kellogg to the FTC statement of need was filed on June 8, 1973. In its response, Kellogg argued that the FTC had not established a need for the alleged trade secrets and suggested alternatives for the subpoenaed documents which Kellogg contended would fulfill all of the FTC's needs. (J.A. 98-148). The FTC filed a second statement of need on June 6, 1973, in which it amplified the relevance and need for the subpoenaed documents. (J.A. 149-155). On June 29, 1973, the FTC filed its reply to Kellogg's response of June 8, 1973, in which Kellogg had suggested alternatives. In its reply the FTC set forth its reasons why the proposed alternatives and substitutes offered by Kellogg were inadequate for FTC purposes. (J.A. 156-204). Oral argument was held before the Administrative Law Judge on December 10, 1973, during which the Administrative Law Judge heard arguments by all parties in connection with the FTC's need for the subpoenaed documents and the adequacy of Kellogg's offered alternatives. During the oral argument, the Administrative Law Judge requested suggestions from counsel as to the type of protective order which should be entered in connection with an order to produce the alleged "trade secret" information. (J.A. 249). Kellogg took the position that the individual brand cost data, which would reveal the profitability of Kellogg's various brands, should be disclosed only to counsel of record who are "outside" counsel and should not be revealed to any counsel of record who is inside or house counsel for a respondent. (J.A. 250, 252). The Administrative Law Judge responded to Kellogg's argument by saying that in order to secure even-handedness, the subpoenaed document supplied to the FTC should be available to all counsel of record. (J.A. 254). In an order dated February 12, 1974, the Administrative Law Judge ruled:

As respects cereal formulas . . . I find that complaint counsel have demonstrated the need for such data and will order disclosure. As respects costs...

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