FTC V. SPERRY & HUTCHINSON CO.
| Decision Date | 01 March 1972 |
| Citation | 405 U. S. 233 |
| Court | U.S. Supreme Court |
CERTIORARI TO THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
The Federal Trade Commission (FTC) entered a cease and desist order against Sperry & Hutchinson Co. (S&H), the largest and oldest trading stamp company, on the ground that it unfairly attempted to suppress the operation of trading stamp exchanges and other "free and open" redemption of stamps. S&H argued in the Court of Appeals that its conduct was beyond the reach of § 5 of the Federal Trade Commission Act, which it claimed permitted the FTC to restrain only such practices as are either in violation of the antitrust laws, deceptive, or repugnant to public morals. The Court of Appeals reversed the FTC, holding that the FTC had not demonstrated that S&H's conduct violated § 5 because it had not shown that the conduct contravened either the letter or the spirit of the antitrust laws.
Held:
1. The Court of Appeals erred in its construction of § 5. Congress, as previously recognized by this Court, see FTC v. R. F. Keppel & Bro., 291 U. S. 304, defines the powers of the FTC to protect consumers as well as competitors, and authorizes it to determine whether challenged practices, though posing no threat to competition within the letter or spirit of the antitrust laws, are nevertheless either unfair methods of competition or unfair or deceptive acts or practices. The Wheeler-Lea Act of 1938 reaffirms this broad congressional mandate. P P. 239-244.
2. Nonetheless, the FTC's order cannot be sustained. The FTC does not challenge the Court of Appeals' holding that S&H's conduct violates neither the letter nor the spirit of the antitrust laws, and its opinion is barren of any attempt to rest its order on the unfairness of particular competitive practices or on considerations of consumer interests. Nor did the FTC articulate any standards by which such alternative assessments might be made. P P. 245-249.
3. The judgment of the Court of Appeals setting aside the FTC's order is affirmed, but, because that court erred in its construction of § 5, its judgment is modified to the extent that the case is remanded with instructions to return it to the FTC for
further proceedings not inconsistent with this opinion. P P. 249-250.
432 F.2d 146, modified and remanded.
WHITE, J., delivered the opinion of the Court, in which all Members joined except POWELL and REHNQUIST, JJ., who took no part in the consideration or decision of the case.
In June, 1968, the Federal Trade Commission held that the largest and oldest company in the trading stamp industry, [Footnote 1] Sperry & Hutchinson (S&H), was violating § 5 of the Federal Trade Commission Act, 38 Stat. 719, as amended, 15 U.S.C. § 45(a)(1), in three respects. The Commission found that S&H improperly regulated the maximum rate at which trading stamps were dispensed by its retail licensees; that it combined with others to regulate the rate of stamp dispensation throughout the industry; and that it attempted (almost invariably successfully) to suppress the operation of trading stamp exchanges and other "free and open" redemption of stamps. The Commission entered cease and desist orders accordingly.
S&H appealed only the third of these orders. Before the Court of Appeals for the Fifth Circuit, it conceded that it acted as the Commission found, but argued that its conduct is beyond the reach of § 5 of the Act. That section provides, in pertinent part, that:
"The Commission is empowered and directed to prevent persons, partnerships, or corporations . . . from using unfair methods of competition in commerce and unfair or deceptive acts or practices in commerce."
15 U.S.C. § 45(a)(6). As S&H sees it, § 5 empowers the Commission to restrain only such practices as are either in violation of the antitrust laws, deceptive, or repugnant to public morals. In S&H's view, its practice of successfully prosecuting stamp exchanges in state and federal courts cannot be restrained under any of these theories.
The Court of Appeals for the Fifth Circuit agreed, and reversed the Commission, Judge Wisdom dissenting. 432 F.2d 146 (1970). In the lower court's view:
"To be the type of practice that the Commission has the power to declare 'unfair,' the act complained of must fall within one of the following types of violations: (1) a per se violation of antitrust policy; (2) a violation of the letter of either the Sherman, Clayton, or Robinson-Patman Acts; or (3) a violation of the spirit of these Acts as recognized by the Supreme Court of the United States."
Id. at 150 (footnote omitted). Holding that the FTC had not demonstrated that S&H's conduct violated either the letter or the spirit of the antitrust laws, the Court of Appeals vacated the Commission's order.
The FTC petitioned for review in this Court. We granted certiorari to determine the questions presented in the petition. 401 U.S. 992 (1971).
S&H has been issuing trading stamps -- small pieces of gummed paper about the size of postage stamps -- since 1896. In 1964, the year from which data in this litigation are derived, the company had about 40% of the business in an industry that annually issued 400 billion stamps to more than 200,000 retail establishments for distribution in connection with retail sales of some 40 billion dollars. In 1964, more than 60% of all American consumers saved S&H Green Stamps.
In the normal course, the trading stamp business operates as follows. S&H sells its stamps to retailers, primarily to supermarkets and gas stations, at a cost of about .65 per 1200 stamps; retailers give the stamps to consumers (typically at a rate of one for each 10? worth of purchases) as a bonus for their patronage; consumers paste the stamps in books of 1,200 and exchange the books for "gifts" at any of 850 S&H Redemption Centers maintained around the country. Each book typically buys between .86 and .31 worth of merchandise depending on the location of the redemption center and type of goods purchased. Since its development of this cycle 75 years ago, S&H has sold over one trillion stamps and redeemed approximately 86% of them.
A cluster of factors relevant to this litigation tends to disrupt this cycle and, in S&H's view, to threaten its business. An incomplete book has no redemption value. Even a complete book is of limited value, because most "gifts" may be obtained only on submission of more than one book. For these reasons, a collector of another type of stamps who has acquired a small number of green stamps may benefit by exchanging
with a green stamp collector who has opposite holdings and preferences. Similarly, because of the seasonal usefulness or immediate utility [Footnote 2] of an object sought, a collector may want to buy stamps outright, and thus put himself in a position to secure redemption merchandise immediately though it is "priced" beyond his current stamp holdings. Or a collector may seek to sell his stamps in order to use the resulting cash to make more basic purchases (food, shoes, etc.) than redemption centers normally provide.
Periodically over the past 70 years, professional exchanges have arisen to service this demand. Motivated by the prospect of profit realizable as a result of serving as middlemen in swaps, the exchanges will sell books of S&H stamps previously acquired from consumers, or, for a fee, will give a consumer another company's stamps for S&H's, or vice versa. Further, some regular merchants have offered discounts on their own goods in return for S&H stamps. Retailers do this as a means of competing with merchants in the area who issue stamps. By offering a price break in return for stamps, the redeeming merchant replaces the incentive to return to the issuing merchant (to secure more stamps so as to be able to obtain a gift at a redemption center) with the attraction of securing immediate benefit from the stamps by exchanging them for a discount at his store. [Footnote 3]
S&H fears these activities because they are believed to reduce consumer proclivity to return to green-stamp-issuing stores, and thus lower a store's incentive to buy and distribute stamps. The company attempts to preempt "trafficking" in its stamps by contractual provisions
reflected in a notice on the inside cover of every S&H stamp book. The notice reads:
S&H makes no effort to enforce this condition when consumers casually exchange stamps with each other, though reportedly some 20% of all the company's stamps change hands in this manner. But S&H vigorously moves against unauthorized commercial exchanges and redeemers. Between 1957 and 1965, by its own account, the company filed for 43 injunctions against merchants who redeemed or exchanged its stamps without authorization, and it sent letters threatening legal action to 140 stamp exchanges and 175...
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