Callaway Mills Company v. FTC, 21499
| Decision Date | 13 June 1966 |
| Docket Number | 21500.,No. 21499,21499 |
| Citation | 362 F.2d 435 |
| Parties | CALLAWAY MILLS COMPANY and Callaway Mills, Inc., Petitioner, v. FEDERAL TRADE COMMISSION, Respondent. CABIN CRAFTS, INCORPORATED, Petitioner, v. FEDERAL TRADE COMMISSION, Respondent. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Paul M. Carruthers, LaGrange, Ga., Paul C. Warnke, Washington, D. C., for petitioner, Callaway Mills.
John Izard, Atlanta, Ga., William Simon, J. Wallace Adair, John H. Quinn, Jr., of Howrey, Simon, Baker & Murchison, Washington, D. C., King & Spalding, Atlanta, Ga., for petitioner, Cabin Crafts, Inc.
J. B. Truly, Asst. Gen. Counsel, Miles W. Brown, Atty., F. T. C., James McI. Henderson, Gen. Counsel, Washington, D. C., for respondent.
Before JONES, WISDOM and GEWIN, Circuit Judges.
These two cases present petitions to review certain orders and opinions of the Federal Trade Commission filed pursuant to Section 5(c) of the Federal Trade Commission Act, 15 U.S.C.A. § 45(c), and Section 11 of the Clayton Act, 15 U.S.C.A. § 21. The petitions present common questions of law and substantially similar facts and therefore are considered together in this opinion.1
The facts surrounding the petition of Callaway Mills Company and Callaway Mills, Inc.2 (Callaway) may be outlined as follows: Callaway is a Georgia corporation which manufactures a wide variety of textile products. Prior to 1950 it was engaged primarily in the manufacture of cloth goods such as towels, draperies, industrial fabrics and similar products. In the manufacture of some of those products, such as bedspreads and bathmats, it used a process known in the industry as "tufting." Instead of weaving an entire piece of cloth at one time, a machine pushes a continuous loop of yarn through a previously manufactured backing and secures it by applying a coating of latex to the underside. During 1950, Callaway successfully adapted this process to the manufacture of carpeting. This accomplishment had a pronounced effect on the carpeting industry, since the tufting process is much more rapid and thus less expensive than the standard weaving process which had been used by older carpet manufacturers for many years. Very soon Callaway began producing tufted carpeting in competition with the "old line" manufacturers who also began using the tufting process along with their weaving process.
For years prior to 1950 and continuing until these proceedings were instituted, the "old line" manufacturers had been granting annual graduated volume discounts to their purchasers who were mostly retail department and home furnishing stores. These discounts ranged from 1 to 5 per cent depending upon the total dollar amount a retailer purchased during a given year. They were usually granted on the total sales of all products from the manufacturer; and "chains" or "buying groups" were allowed to "pool" their purchases to benefit from a higher volume. Naturally, the more a retailer purchased, the less the carpeting cost per square yard. The important effect of the discounts was that they gave a competitive advantage to those retailers who were large enough to buy in volumes which qualified for the higher discount percentages.
This litigation brings into focus a rather unusual situation in two respects. First, the record clearly demonstrates an effort on the part of small manufacturers to enter the market and compete with large companies who have been in the carpeting business for many years. Usually, cases of this type reveal an effort on the part of large, powerful and dominant manufacturers to exert economic pressure on small ones. Secondly, the record further shows clearly that the carpet industry has been entrapped to a degree by the well established practice of granting volume discounts which they all apparently wish to discontinue. As early as 1939 there was a concerted effort by the industry to end the practice. This effort was nullified, however, when the Justice Department filed suit seeking to enjoin the manufacturers from terminating the practice on an industry-wide basis. A consent decree was obtained which forbade any agreement or conspiracy "to refrain from giving volume allowances or rebates to purchasers of rugs and carpets." United States v. Institute of Carpet Manufacturers et al., 1 F.R.D. 636 (S.D.N.Y.1941). Thus, the situation has persisted, and buyers have continued to demand the discounts. No manufacturer has been able to abandon the system alone. It is obvious that all competitors must follow the system or abandon it together, but they are forbidden to do so by the above-mentioned decree. The existence of the practice, full knowledge as to the amount of the discounts, the fact that such discounts are a real and vital factor in the carpeting business, and that customers demand such discounts is a matter of common knowledge to all who are acquainted with the industry.
Prior to 1955 Callaway had refused to give its purchasers volume discounts. However, the record reveals that the purchasers were exerting increasing pressure on it to do so. As a result, Callaway adopted the following schedule of discounts:
Aggregate Annual Purchases Discount
$ 5,000- 7,999 1%
8,000-14,999 2%
15,000-29,999 3%
30,000-49,999 4%
50,000 and over 5%
The dollar volume levels at which the discount percentage figures were set in Callaway's schedule were appreciably lower than those of its competitors, but the schedule of its competitors embraced woven as well as tufted carpets as hereafter discussed.
In 1959, the Federal Trade Commission filed a Complaint against Callaway (and a number of the other manufacturers; see footnote 1) charging it with violation of Section 2(a) of the Clayton Act, as amended by the Robinson-Patman Act, 15 U.S.C.A. § 13(a),3 because it had discriminated in price between purchasers of commodities of like grade and quality to the detriment of competition between them.4 Prior to the hearing below, Callaway and Counsel supporting the Complaint entered into a written stipulation whereby Callaway admitted the Section 2(a) violation and agreed to limit its case to proof of a "meeting the competition" defense as set out in Section 2(b) of the Act.5 The parties also agreed to limit the scope of the inquiry to the sample trade areas of Cleveland, Ohio; Cincinnati, Ohio; and Boston, Massachusetts.
During the hearing Callaway produced as witnesses a number of agents for purchasers who testified substantially to the following: Callaway's line of tufted carpeting was "competitive" with the tufted carpeting in the competitors' lines when sold at comparable list prices. Callaway's competitors had been giving annual volume discounts for a number of years prior to Callaway's entry into the market. Prior to its granting of discounts, Callaway's carpeting cost more per square yard than comparable carpeting in competitors' lines. The retailers could not pass the higher cost of Callaway's carpeting to the customer because carpeting sells at established pricing points usually 5 cents under the dollar, i. e., $4.95, $6.95, $7.95 per square yard. The retailers pressured Callaway to give discounts by warning that they would otherwise discontinue buying from it.
Callaway officials testified that Callaway had resisted giving discounts. Officers of the company spent a great deal of time considering the proper system of discounts. They arrived at the decision to grant them only in order to maintain their present position in the market. The officials also clearly explained why they set the percentage discount figures at lower volume levels than the competition by showing that (1) Callaway makes only tufted carpeting which has never accounted for more than 40-45% of the total carpeting market, while the competition sold both tufted and woven carpeting which accounts for the remainder of the market;6 (2) Callaway sold in the $4.95 to $13.95 price range while competitors sold carpets which retailed as high as $49.95 and more. Because of resulting smaller volume sales to each customer Callaway had to reduce its volume levels in the schedule to a point where the net per unit price after discounts of any given style of carpet would be approximately the same as that of comparable carpeting of the competition. Finally, Callaway produced extensive charts showing that net prices for its carpets of essentially the same style, design and other similar factors, (less discounts and early payment allowances) were substantially equal to those of the competition. There was no rebuttal evidence whatsoever presented by Counsel supporting the Complaint.
The hearing examiner found that Callaway had made out a defense under Section 2(b) and dismissed the Complaint. The Commission, with Commissioner Elman dissenting.7 reversed the hearing examiner on the grounds that Callaway (1) failed to carry its burden under the Section 2(b) defense because it failed to show that its products were of "like grade and quality" as those of the competition; (2) had adopted a "formal pricing system" instead of meeting each individual competitive situation as it arose; and (3) had actually undercut the competition by granting discounts at lower volume levels. Callaway Mills, Docket No. 7634, .... FTC .... (1964). Callaway then perfected this appeal.
Cabin Crafts, Inc. (CC) is also a Georgia corporation, which prior to 1950 had been in the textile business. After Callaway adapted the tufting process to the manufacture of carpeting, CC also entered the tufted carpeting field. CC's pre-Complaint experience was similar to Callaway's in most respects except that after an actual decline in sales during 1955, it offered the following lower discount schedule after Callaway:8
Aggregate Annual Purchases Discount
Up to $ 9,999 0%
$10,000- 19,000 1%...To continue reading
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