Goodyear Tire & Rubber Co. v. Federal Trade Commission

• Decision Date: 16 February 1939
• Docket Number: No. 7369.,7369.
• Citation: 101 F.2d 620
• Parties: GOODYEAR TIRE & RUBBER CO. v. FEDERAL TRADE COMMISSION.
• Court: U.S. Court of Appeals — Sixth Circuit

101 F.2d 620 (1939)

GOODYEAR TIRE & RUBBER CO. v. FEDERAL TRADE COMMISSION.

No. 7369.

Circuit Court of Appeals, Sixth Circuit.

February 16, 1939.

Grover Higgins, of Cleveland, Ohio (Newton D. Baker, Grover Higgins, and H. Chapman Rose, all of Cleveland, Ohio, on the brief), for petitioner.

P. B. Morehouse and E. F. Haycraft, both of Washington, D. C. (W. T. Kelley, Martin A. Morrison, Everett F. Haycraft, Pgad B. Morehouse, and James W. Nichol, all of Washington, D. C., on the brief), for respondent.

Before HICKS, SIMONS, and HAMILTON, Circuit Judges.

SIMONS, Circuit Judge.

The cease and desist order sought to be reviewed charges the petitioner with violation of § 2 of the Clayton Act, 15 U.S.C.A. § 13, by discriminating in the price of tires between those sold in interstate commerce to Sears, Roebuck & Company on the one hand and to dealers on the other, with the effect of lessening competition and tending to create a monopoly in their manufacture and distribution.

The case is here for the second time. At the first hearing, upon learning that the offending practices of the petitioner which led to the order had been discontinued under compulsion of the amendment to § 2 of the Clayton Act made on June 19, 1936, by the Robinson-Patman Act, U.S.C.A. Title 15, § 13, and with complete comprehension of the rule that discontinuance of a condemned practice constituting a violation of the act does not render a controversy moot where the offender by the mere exercise of volition may resume them, United States v. Trans-Missouri Freight Ass'n, 166 U.S. 290, 309, 310, 17 S.Ct. 540, 41 L.Ed. 1007, and other cases, yet conceiving ourselves bound by the decision and reasoning in United States v. Hamburg-Amerikanische, etc., 239 U.S. 466, 36 S.Ct. 212, 60 L.Ed. 387, and by the analogy of present circumstances to those there adjudicated and the relief there granted, held the controversy moot, set aside the order, and remanded the case, but without direction to dismiss the complaint and without prejudice to the filing of a supplemental complaint under the amended law. Goodyear Tire & Rubber Co. v. Federal Trade Commission, 6 Cir., 92 F.2d 677. Neither side supporting our view, the Supreme Court, without indicating departure from the rule announced in the Hamburg-Amerikanische case, without pointing to aught inapposite in our analogy or citing the reference, reversed. Federal Trade Commission v. Goodyear Tire & Rubber Co., 304 U.S. 257, 58 S.Ct. 863, 82 L.Ed. 1326. Upon its remand the cause is before us for decision upon the merits after full reargument.

As indicated in our former opinion, the controversy involves principally an interpretation given by the Commission to § 2 of the Clayton Act. That section declares it to be unlawful to discriminate in price between purchasers of commodities where the effect of such discrimination may be to substantially lessen competition or tend to create a monopoly in any line of commerce, subject to the proviso: "That nothing herein contained shall prevent discrimination in price between purchasers of commodities on account of differences in the grade, quality, or quantity of the commodity sold, or that makes only due allowance for difference in the cost of selling or transportation, or discrimination in price in the same or different communities made in good faith to meet competition." The petitioner contends that a discrimination in price is permitted if based upon the quantity of the commodity sold, without respect to whether it makes only due allowance for difference in cost of selling or transportation. The Commission contends that while the proviso permits discrimination on account of differences in quantity, such discrimination is not permitted unless reasonably related to and approximately no more than the difference in cost, and that a price discrimination is contrary to § 2 unless it can be shown that it represents and fairly approximates lower costs.

Prior to 1926 the large mail order house of Sears, Roebuck & Company, with retail stores in many cities of the United States, bought its tires from one or more small manufacturers. Though doing a much larger general business than its principal competitor, Montgomery, Ward & Company, its tire business failed to keep pace with that of the latter. It set about to improve this condition by changing the personnel of its tire department and inaugurating a vigorous advertising campaign, and sought Goodyear as a source of tire supply. Its first contract with Goodyear in 1926 covered its requirements for a period of three years. The price was cost of manufacture plus a profit of 6%, later adjusted in some instances to 6½%. Sears was to do its own advertising and to sell the tires under trade-names of its own. In May, 1928, a second contract was concluded covering requirements to December 31, 1932, but terminable on that date by a year of advance notice. In the summer of 1931 Sears, signifying its intention to terminate, a new arrangement was made by which a ten year contract was entered into upon Goodyear paying to Sears a consideration in cash and common stock amounting to $1,250,000. Like preceding arrangements, the contract called for a price of cost plus profit.

Under its several contracts with Sears, Goodyear manufactured and sold to Sears during the eight-year period, 1926-1933, more than 19,000,000 tires, for which Sears paid to it a gross sum of $129,252,984, and a net sum of $116,359,367. The Commission made an exhaustive study of the cost of tires sold by Goodyear under the Sears contracts and that of tires sold to its independent dealers upon a similar volume of business. It found that based upon the profit and loss statement of Goodyear adjusted as the result of such study, Goodyear realized on its sales to Sears during the entire period a total net profit of $7,715,794.56, and on its sales of equal volume to service-station dealers a net profit of $20,425,807.21. The difference of $12,710,012.65 in net profit it found to be the aggregate net price discrimination not accounted for by differences in cost of transportation and selling according to the respondent's own calculations and based upon the method which it itself suggested. It concluded that this price discrimination in favor of Sears against independent service-station dealers was not justified by differences in cost of transportation or selling. Conceding that quantity discounts are exempt because they involve some economic utility that should be preserved, the Commission asserts that the quantity exception does not permit price discrimination without limit or restraint, that while a difference in quantity of the commodity sold must be given reasonable weight in determining whether the discriminatory price is warranted, yet in arriving at a price on account of quantity it is necessary that the difference in price be reasonably related to the difference in cost, though remote and unsubstantial differences in cost may be disregarded.

The petitioner, conceding that price discrimination on account of quantity does not mean discrimination without limit, denies that such discrimination must be based on difference in cost or be reasonably related to such difference. It points to the value to Goodyear of the Sears requirements in removing hazard and insuring stability, the avoidance of profit fluctuation inevitable in its other business, and the casting upon Sears of the risk which Goodyear normally bore of raw material price decline and credit losses. It asserts that these advantages, over and above mere savings in costs, are substantial and real, even though they may not readily be measured in terms of dollars, and that the statute by its language permits a discrimination that will measure economic advantage of quantity sales beyond mere savings in cost.

The Commission dismissed from its consideration all intangible economic advantages of quantity sales over and above savings in cost as being too speculative and remote to justify price discrimination. Accepting the finding that the $12,000,000 difference in profit between tires sold to Sears and an equal volume of business with independent dealers measures its discount in excess of savings, the petitioner points out that this discrimination amounts to but 6.96% of the gross price to Sears. The Commission's counsel, however, contends that this calculation is erroneous, in that the profit differential should be related not to the gross selling price of tires to Sears but to the cost of their manufacture, and that so computed the discrimination not accounted for by savings is 11.89%. So it is argued on the one hand that the discrimination on account of quantity is reasonably related to the economic advantages of quantity sales in the volume made to Sears and on the other that discrimination on account of quantity even if permitted by the statute is too great to be so related.

Primary consideration must necessarily be given to the meaning of § 2 of the Clayton Act. It will be observed that by the proviso, nothing contained in the section is to prevent discrimination in price between purchasers of commodities (1) "on account of differences in the grade, quality, or quantity of the commodity sold," or (2) "that makes only due allowance for difference in the cost of selling or transportation," or (3) "discrimination in price in the same or different communities made in good faith to meet competition." With the third exception of the proviso we are not concerned, and as to the meaning of the second exception there is no dispute. It is conceded that there may be a discrimination in price based upon quantity, but the Commission would read the second exception as a limitation or qualification of the first. We see no warrant for such construction and the structure of the proviso as well as the history of the section repel it.

The three exceptions of the proviso would seem to be mutually exclusive. If the second qualifies...