Baum v. Investors Diversified Services, Inc.
| Decision Date | 18 April 1969 |
| Docket Number | No. 17051.,17051. |
| Citation | 409 F.2d 872 |
| Parties | Bernard M. BAUM and Daniel S. Shulman, Plaintiffs-Appellants, v. INVESTORS DIVERSIFIED SERVICES, INC., Defendant-Appellee. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Ira Marcus, Donald A. Mitchell, Morrie Much, M. I. Mishkin, Chicago, Ill., for appellants.
Milton H. Cohen, W. Donald McSweeney, William A. Montgomery, Chicago, Ill., Breck P. McAllister, John E. Tobin, Richard L. Bond, New York City, Schiff Hardin Waite, Dorschel & Britton, Chicago, Ill., Roger W. Kapp, Donovan Leisure Newton & Irvine, Joseph F. Grinnell, New York City, of counsel, for appellee.
Before KILEY, FAIRCHILD and KERNER, Circuit Judges.
This is a class action seeking treble damages for alleged unlawful price discrimination in violation of Sec. 2(a) of the Clayton Act, as amended by the Robinson-Patman Act, 15 U.S.C. § 13(a). The district court dismissed the complaint for failure to state a claim upon which relief can be granted. Rule 12 (b) (6), Fed.R.Civ.P. We affirm.
The well pleaded allegations of the complaint are admitted: Defendant, Investors Diversified Services, Inc. (IDS) acts as the sole investment adviser and exclusive underwriter and distributor of five open-end investment companies, collectively known as the "Investors Group" mutual fund. It has established a schedule of "cumulative quantity discounts" to its customers when selling Investors Group mutual fund shares.
The cumulative quantity discount practice is a sales load,1 or commission, schedule, available to everyone, whereby lower sales loads are charged to large purchasers or holders of large blocks of Investors Group shares. The criterion for determining the lower rates is not merely the size of the block which an investor purchases at one time, but rather the size which he has accumulated. For example, a purchaser of a $500,000 block is charged the same commission rate as a purchaser of a $1,000 block who has already purchased an aggregate of $499,000 shares of Investors Group funds.
The sales load schedule established by IDS is:
Present Quantity Discount Former Quantity Discount
Represented As Represented As
Sales Charges From Sales Charges From
Per Cent Of Public Per Cent Of Public
Aggregate Amount of Offering Price Since Offering To October
Purchases October 15, 1964 15, 1964
To $14,999 8% 7½%
$15,000 to $19,999 7½% 7%
$20,000 to $24,999 7% 6½%
$25,000 to $29,999 6% 6%
$30,000 to $39,999 6% 5½%
$40,000 to $49,999 6% 5%
$50,000 to $74,999 4% 4½%
$75,000 to $99,999 4% 4%
$100,000 to $199,999 2½% 3½%
$200,000 to $399,999 2% 3%
$400,000 to $699,999 1½% 2½%
$700,000 to $999,999 1% 2%
$1,000,000 and over 1% 1½%
This type of cumulative sales load schedule has been approved by the Securities and Exchange Commission under its Rule 22d-12 which was issued under Sec. 22(d)3 of the Investment Company Act of 1940.
The two named plaintiffs purchased an aggregate of $4,000 in shares and have been charged the maximum sales load. Under Rule 23, Fed.R.Civ.P., they represent all other buyer investor customers of IDS who were charged more than the minimum sales load. The alleged price discrimination basis of the action is directed against the cumulative quantity discount schedule set out above.
The district court dismissed the complaint on the ground, inter alia, that a mutual fund share is not a "commodity" within the meaning of Sec. 2(a) of the Clayton Act, as amended by the Robinson-Patman Act.
Section 2(a) of the Act, as amended, is literally limited to commodities. That section provides:
It shall be unlawful for any person engaged in commerce, in the course of such commerce, either directly or indirectly, to discriminate in price between different purchasers of commodities of like grade and quality, where either or any of the purchases involved in such discrimination are in commerce, where such commodities are sold for use, consumption, or resale within the United States or any Territory thereof or the District of Columbia or any insular possession or other place under the jurisdiction of the United States, and where the effect of such discrimination may be substantially to lessen competition or tend to create a monopoly in any line of commerce, or to injure, destroy, or prevent competition with any person who either grants or knowingly receives the benefit of such discrimination, or with customers of either of them * * *.
The question narrows to whether a mutual fund share is a "commodity" and therefore subject to the Act's proscription.
A mutual fund share represents a fractional ownership in a large investment account. It is, in essence, a service contract between the investor and the investment company whereby the investor places his money in the hands of the investment company in expectation of realizing a financial gain. See Weisenberger Services, Investment Companies, Mutual Funds and Other Types 15-19 (1968). See also Carter, Mutual Investment Funds, 27 Harv.Bus.Rev. 715 (1949). The investment company is in turn bound to invest the entrusted funds and to conduct itself in a manner regulated by law. 1 Loss, Securities Regulation 144-153 (2d ed. 1961).
The word "commodity" is defined in two ways: (1) something of use, advantage or value, and (2) an article of trade or commerce, especially a product distinguished from a service. Random House Dictionary of the English language, 296. We think that Congress intended to limit the scope of the Act to the second definition of commodity, namely, a product as distinguished from a service.
Representative Patman explained the Act in these terms, which clearly emphasize the Act's application to tangible products:
Moreover, an application of the Act to mutual fund shares would render absurd its requirement in Sec. 2(a) that the commodities be of "like grade and quality," and its proviso in that section to allow prices to reflect "differences in the cost of manufacture, sale or delivery" and its proviso exempting price changes reflecting the "marketability of the good concerned. * * *"4 See Rowe, Price Discrimination under the Robinson-Patman Act, 59-62 (1962).
We think, moreover, that the word "commodity" has the same meaning in both Sec. 2(a) and Sec. 3 of the Act. Section 3 of the Clayton Act, 15 U.S.C. § 14, renders illegal certain tying clauses in leases or sales of "goods, wares, merchandise, machinery, supplies, or other commodities * * *." Under the principle of ejusdem generis the word "commodities" is restricted to the same class of articles previously enumerated, all of which are tangible products.
This court has indicated that the word "commodity" as used in the Clayton Act is restricted to products, merchandise or other tangible goods. In Columbia Broadcasting System, Inc. v. Amana Refrigeration, Inc., 295 F.2d 375 (7th Cir. 1961), cert. denied, 369 U.S. 812, 82 S.Ct. 689, 7 L.Ed.2d 612 (1962), this court held that the word "commodity" as used in both Sections 2(a) and 3 of the Clayton Act did not include a contract right for television sponsorship. Judge Castle, speaking for a panel of this court, stated:
We are of the opinion that the most reliable guide to the meaning of the word "commodity" is the context in which it is employed and in our considered judgment the context here — goods, wares, merchandise, machinery and supplies — does not permit an application of the term which embraces the contractual right or privilege of sponsorship identification with the broadcast of a television program * * *. Id. at 378.
Other courts have similarly restricted the scope of the word "commodity."...
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