Federal Trade Commission v. Texaco, Inc

• Decision Date: 16 December 1968
• Docket Number: No. 24,24
• Citation: 21 L.Ed.2d 394,393 U.S. 223,89 S.Ct. 429
• Parties: FEDERAL TRADE COMMISSION, Petitioner, v. TEXACO, INC., et al
• Court: U.S. Supreme Court

393 U.S. 223

89 S.Ct. 429

21 L.Ed.2d 394

FEDERAL TRADE COMMISSION, Petitioner,

v TEXACO, INC., et al.

No. 24.

Argued Nov. 13, 1968.

Decided Dec. 16, 1968.

Daniel M. Friedman, Washington, D.C., for petitioner.

Milton Handler and Edgar E. Barton, New York City, for respondents.

Mr. Justice BLACK delivered the opinion of the Court.

The question presented by this case is whether the FTC was warranted in finding that it was an unfair method of competition in violation of § 5 of the Federal Trade Commission Act, 38 Stat. 719, as amended, 15 U.S.C. § 45, for respondent Texaco to undertake to induce its service station dealers to purchase Goodrich tires, batteries, and accessories (hereafter referred to as TBA) in return for a commission paid by Goodrich to Texaco. In three related proceedings instituted in 1961, the Commission challenged the sales-commission method of distributing TBA and in each case named as a respondent a major oil company and a major tire manufacturer. After extensive hearings, the Commission concluded that each of the arrangements constituted an unfair method of competition and ordered each tire company and each oil company to refrain from entering into any such commission arrangements. In one of these cases, Atlantic Refining Co. v. FTC, 381 U.S. 357, 85 S.Ct. 1498, 14 L.Ed.2d 443 (1965), this Court affirmed the decision of the Court of Appeals for the Seventh Circuit sustaining the Commission's order against Atlantic Refining Company and the Goodyear Tire & Rubber Company. In a second case, Shell Oil Co. v. FTC, 360 F.2d 470, cert. denied, 385 U.S. 1002, 87 S.Ct. 705, 17 L.Ed.2d 541, the Court of Appeals for the Fifth Circuit, following this Court's decision in Atlantic, sustained the Commission's order against the Shell Oil Company and the Firestone Tire & Rubber Company. In contrast to the decisions of these two Courts of Appeals, the Court of Appeals for the District of Columbia Circuit set aside the Commission's order in this, the third of the three cases, involving respondents Goodrich and Texaco. 118 U.S.App.D.C. 366, 336 F.2d 754 (1964).¹ The Commission petitioned this Court for review and, one week following our Atlantic decision, we granted certiorari and remanded for further consideration in light of that opinion. 381 U.S. 739, 85 S.Ct. 1798, 14 L.Ed.2d 714 (1965). The Commission, on remand, reaffirmed its conclusion that the Texaco-Goodrich arrangement, like that involved in the other two cases, violated § 5 of the Federal Trade Commission Act. The Court of Appeals for the District of Columbia Circuit again reversed, this time holding that the Commission had failed to establish that Texaco had exercised its dominant economic power over its dealers or that the Texaco-Goodrich arrangement had an adverse effect on competition. 127 U.S.App.D.C. 349, 383 F.2d 942. We granted certiorari to determine whether the court below had correctly applied the principles of our Atlantic decision. 390 U.S. 979, 88 S.Ct. 1100, 19 L.Ed.2d 1275.

Congress enacted § 5 of the Federal Trade Commission Act to combat in their incipiency trade practices that exhibit a strong potential for stifling competition. In large measure the task of defining 'unfair methods of competition' was left to the Commission. The legislative history shows that Congress concluded that the best check on unfair competition would be 'an administrative body of practical men * * * who will be able to apply the rule enacted by Congress to particular business situations, so as to eradicate evils with the least risk of interfering with legitimate business operations.' H.R. Conf.Rep. No. 1142, 63d Cong., 2d Sess., 19. Atlantic Refining Co. v. FTC, 381 U.S. 357, 367, 85 S.Ct. 1498, 1505, 14 L.Ed.2d 443. While the ultimate responsibility for the construction of this statute rests with the courts, we have held on many occasions that the determinations of the Commission, an expert body charged with the practical application of the statute, are entitled to great weight. FTC v. Motion Picture Advertising Serv. Co., 344 U.S. 392, 396, 73 S.Ct. 361, 364, 97 L.Ed. 426 (1953); FTC v. Cement Institute, 333 U.S. 683, 720, 68 S.Ct. 793, 812, 92 L.Ed. 1010 (1948). This is especially true here, where the Commission has had occasion in three related proceedings to study and assess the effects on competition of the sales-commission arrangement for marketing TBA. With this in mind, we turn to the facts of this case.

The Commission and the respondents agree that the Texaco-Goodrich arrangement for marketing TBA will fall under the rationale of our Atlantic decision if the Commission was correct in its three ultimate conclusions (1) that Texaco has dominant economic power over its dealers; (2) that Texaco exercises that power over its dealers in fulfilling its agreement to promote and sponsor Goodrich products; and (3) that anticompetitive effects result from the exercise of that power.

That Texaco holds dominant economic power over its dealers is clearly shown by the record in this case. In fact, respondents do not contest the conclusion of the Court of Appeals below and the Court of Appeals for the Fifth Circuit in Shell that such power is 'inherent in the structure and economics of the petroleum distribution system.' 127 U.S.App.D.C. 349, 353, 383 F.2d 942, 946; 360 F.2d 470, 481 (C.A. 5th Cir.). Nearly 40% of the Texaco dealers lease their stations from Texaco. These dealers typically hold a one-year lease on their stations, and these leases are subject to termination at the end of any year on 10 days' notice. At any time during the year a man's lease on his service station may be immediately terminated by Texaco without advance notice if in Texaco's judgment any of the 'housekeeping' provisions of the lease, relating to the use and appearance of the station, are not fulfilled. The contract under which Texaco dealers receive their vital supply of gasoline and other petroleum products also runs from year to year and is terminable on 30 days' notice under Texaco's standard form contract. The average dealer is a man of limited means who has what is for him a sizable investment in his station. He stands to lose much if he incurs the ill will of Texaco. As Judge Wisdom wrote in Shell, 'A man operating a gas station is bound to be overawed by the great corporation that is his supplier, his banker, and his landlord.' 360 F.2d 470, 487.

It is against the background of this dominant economic power over the dealers that the sales-commission arrangement must be viewed. The Texaco-Goodrich agreement provides that Goodrich will pay Texaco a commission of 10% on all purchases by Texaco retail service station dealers of Goodrich TBA. In return, Texaco agrees to 'promote the sale of Goodrich products' to Texaco dealers. During the five-year period studied by the Commission (1952—1956) $245,000,000 of the Goodrich and Firestone TBA sponsored by Texaco was purchased by Texaco dealers, for which Texaco received almost $22,000,000 in retail and wholesale commissions. Evidence before the Commission showed that Texaco carried out its agreement to promote Goodrich products through constantly reminding its dealers of Texaco's desire that they stock and sell the sponsored Goodrich TBA. Texaco emphasizes the importance of TBA and the recommended brands as early as its initial interview with a prospective dealer and repeats its recommendation through a steady flow of compaign materials utilizing Goodrich products. Texaco salesmen, the primary link between Texaco and the dealers, promote Goodrich products in their day-to-day contact with the Texaco dealers. The evaluation of a dealer's station by the Texaco salesman is often an important factor in determining whether a dealer's contract or lease with Texaco will be renewed. Thus the Texaco salesmen, whose favorably opinion is so important to every dealer, are the key men in the promption of Goodrich products, and on occasion accompany the Goodrich salesmen in their calls on the dealers. Finally, Texaco receives regular reports on the amount of sponsored TBA purchased by each dealer. Respondents contend, however, that these reports are used only for maintaining Texaco's accounts with Goodrich and not for policing dealer purchases.

Respondents urge that the facts of this case are fundamentally different from those involved in Atlantic because of the presence there, and the absence here, of 'overt coercive practices' designed to force the dealers to purchase the sponsored brand of...