General Elec. Co. v. Thrifty Sales, 8268

• Decision Date: 22 September 1956
• Docket Number: No. 8268,8268
• Citation: 5 Utah 2d 326,301 P.2d 741
• Parties: d 326 GENERAL ELECTRIC COMPANY, Plaintiff and Appellant, v. THRIFTY SALES, Inc., d/b/a Broadway Merchandising Company, a corporation, Defendant and Respondent.
• Court: Utah Supreme Court

Page 741

301 P.2d 741

5 Utah 2d 326

GENERAL ELECTRIC COMPANY, Plaintiff and Appellant, v. THRIFTY SALES, Inc., d/b/a Broadway Merchandising Company, a corporation, Defendant and Respondent.

No. 8268.

Supreme Court of Utah.

Sept. 22, 1956.

Fabian, Clendenin, Moffat & Mabey, Peter W. Billings, Albert J. Colton, Spencer L. Kimball, Sanford H. Kadish, Salt Lake City, for appellant.

George E. Bridwell, Salt Lake City, for respondent.

Sherman P. Lloyd, H. Wright Volker, George L. Nelson, Charles Welch, Jr., Salt Lake City, amici curiae.

E. R. Callister, Jr., Atty. Gen., for the Trade Commission.

CROCKETT, Justice.

The district court dismissed plaintiff's petition for an injunction against defendant selling its fair-traded products at cut-rates on the ground that the Utah Fair Trade Act ¹ is invalid insofar as it applies to persons who have not signed any agreement under the act. Plaintiff appeals, asking us to reverse that ruling and confirm the act as valid.

The facts were agreed upon. Plaintiff (General Electric Company) is a manufacturer and distributor on a national scale of various electrical appliances which it sells to dealers throughout the country, including the state of Utah. They bear the plaintiff's trademark 'General (G.E.) Electric' and are in free and open competition with other products of the same general type. Plaintiff annually spends several million dollars in national advertising of its trademark and products. For the stated purpose of protecting the investment it has in its trademark and the good will the public has for its products, plaintiff has entered into written agreements with numberous dealers in Utah fixing minimum retail prices at which they shall sell its various products in accordance with authorization under the Fair Trade Act, Sec. 6, which provides that a manufacturer may contract with a dealer for minimum retail sales prices, which prices then become binding upon all dealers within the market area.

Defendant (Thrifty Sales, Inc.) operates a 'discount house' in Salt Lake City. It signed no such agreement and has 'wilfully and knowingly' continued to advertise and sell such trademarked 'fair-traded' items at below the prices agreed upon between manufacturer and other dealers in the area. Such practice is admittedly in direct conflict with the 'nonsigner' provision of the Utah Fair Trade law, which provides:

'Wilfully and knowingly advertising, offering for sale or selling any commodity at less than the price stipulated in any contract entered into pursuant to the provisions of this act, whether the person so advertising, offering for sale or selling is or is not a party to such contract, is unfair competition and is actionable at the suit of any person damaged thereby.' U.C.A.1953, 13-4-6.

The principal contentions as to unconstitutionality of the Fair Trade Act are (1) that it deprives defendant of its property without due process of law, and (2) that it authorizes price-fixing in contravention of the anti-monopoly and price-fixing provisions of the Utah Constitution.

Defendant argues for the untrammeled right to deal freely with property it has purchased by selling it for any price it is willing to accept, claiming such privilege as part of the property right. ² Whereas it is plaintiff's position that by unrestrained price cutting, retailers can take unfair advantage of its trademark and tend to destroy the value thereof, and also to ultimately destroy competition in that the big and the ruthless drive out small dealers which in the long run is detrimental to the best interests of business generally and the consuming public; that the act affording protection from such practices is not contrary to the antiprice-fixing and monopoly clause but in actual effect carries out its purpose. In support of the foregoing, the plaintiff, and amicus curiae joining it, present an argument having various facets.

The basic tenet of the plaintiff's support of the act is that it has a property right in its trademark as distinguished from the physical thing, the product. It avers that it has devoted many years to creating and developing superior products, and maintaining their quality, spending millions of dollars in advertising and service to build the reputation of the trademark, upon which the whole structure of its business and its potential for successful continuation depend.

The method of operation which plaintiff asserts gives dealers an unfair advantage of its trademark is known as 'loss leader' selling. It follows this pattern: The dealer advertises the manufacturer's product (generally nationally advertised trademarked commodities) at prices lower than those set by the manufacturer, and often lower than the cost to the dealer, not in a genuine effort to sell the product at a fair profit, but for his own ulterior purposes, to take what the plaintiff terms a 'free ride' on the manufacturer's trademark to the latter's disadvantage for various reasons.

One reason assigned for this is that the uniform price is part of the reputation for high quality of its products, which selling at cut-rates undermines by making them appear 'cheap' in the eyes of consumers and not of a quality to justify the plaintiff's standard price, inducing buyers to reason that if one merchant can sell at the cutrate price, then merchants selling at the fixed price must be making an excessive profit, or that the manufacturer must have set an exorbitant price, or both. Another is 'switch selling.' That is, the trademark and low price are advertised to lure buyers into the dealer's store to use them as prospects to sell other competitive products of less quality on which the dealer can make a profit, which benefits the dealer, but is of no benefit to the manufacturer.

A more fundamental difficulty is the claim that cut-rate selling can be used to intrude into the control of the manufacturer's business. This is based on the reasoning that cut-rate pricing of such products can be used by retailers to develop monopolies, and that it actually was one of the effective tools of the trusts and combines which were in existence at the time the Sherman Anti-Trust Act, 15 U.S.C.A. §§ 1-7, 15 note and the Utah antimonopoly provisions were enacted. Using the 'loss leader' method to get business, the dealer will absorb losses until competition is eliminated. Inasmuch as only large retailers or chains do enough volume of business to absorb such losses, small dealers are unable to compete and are driven from the field, leaving the large dealers to then gouge consumers with high prices safe from competition. One of the main arguments in favor of fair trade is that it helps small dealers by allowing them to compete with large dealers and chain stores.

A further ramification of cut-rate selling which tends toward giving the retailer leverage in controlling the manufacturer is that it results in actual diminution of the manufacturer's sales and concentration of the outlet for his products in the particular dealer. His selling at cut-rates makes it unprofitable for other retailers to handle the product, so they refuse to do so. This reduces the sales outlets, limiting the sales potential and diminishing the flow of the manufacturer's production, meanwhile increasing the percentage of the manufacturer's product which is handled by the particular cut-rate retailer. This often happens with chain stores or discount houses. The greater the portion of the product they handle, the more the manufacturer becomes subject to their control. E. g., if the dealer gets to handling a relatively high percentage of the manufacturer's product, he can threat to discontinue the line unless the manufacturer reduces the price. Under such pressure from the retailer, the manufacturer is compelled either to cheapen his product to meet the dealer's demand as to price, or to curtail his production, which is often not economically feasible, or to close down entirely. Whichever alternative he chooses has a serious detrimental effect upon his business and tends to destroy the value and good will in his trademark.

It is urged that the 'loss-leader' operation is obviously not sound in that it gives no fair return for doing business on such products and therefore cannot be used as a basis for doing a healthy business; and that by destroying competition, and permitting the retailer to exercise control, it has a bad effect upon business generally, and the consuming public. ³

It was during the economic depression of the early 1930's, when there was a widespread belief that the 'loss leader' tactics of certain retailers threatened the economic well-being of the nation, that legislatures moved to alleviate the evils just referred to by passing Fair Trade Acts. This stated purpose was to permit manufacturers to protect the value and good will of trademarks and trade names, assure a reasonable margin of profit, stabilize production of manufacturers and to prevent large cut-rate retailers from gaining monopolistic control of such business.

California adopted the first Fair Trade Act in 1931. ⁴ When it was claimed that the act was unworkable if limited to those who signed it was amended in 1933 to apply to nonsigners. ⁵ Most other states of the Union followed suit within a few years. ⁶ The Utah Act, passed in 1937, is patterned after the California and other Fair Trade Acts.

The California Act and a similar one in Illinois, were upheld against attack as to their constitutionality by their respective Supreme Courts in 1936. ⁷ These decisions were affirmed by the Supreme Court of the United States in the landmark case of Old Dearborn Distributing Co. v. Seagram Distillers Corp., ⁸ in which Justice Sutherland, speaking for the unanimous court, held (1) that the act does not have the effect of taking property without due process of law because its primary purpose is to protect a property right which is entitled to protection, namely, the good will of the...