LaPeyre v. FTC

Decision Date25 November 1966
Docket NumberNo. 21787.,21787.
Citation366 F.2d 117
PartiesEmile M. LaPEYRE et al., Petitioners, v. FEDERAL TRADE COMMISSION, Respondent.
CourtU.S. Court of Appeals — Fifth Circuit

Hancock Griffin, Jr., John J. Loflin, Jr., W. D. Keith, Guy W. Shoup, New York City, Louis B. Claverie, New Orleans, La., Joseph H. Smith, New York City, Kelley, Drye, Newhall, Maginnes & Warren, Keith, Johnston, Isner & Desmarais, New York City, Phelps, Dunbar, Marks, Claverie & Sims, New Orleans, La., for petitioners.

J. B. Truly, Asst. Gen. Connsel, Gerald Harwood, James Mel. Henderson, Gen. Counsel, Frederick H. Mayer, Richard C. Foster, Attys., F. T. C., Washington, D. C. for respondent.

Before JONES and GEWIN, Circuit Judges, and HUNTER, District Judge.

EDWIN F. HUNTER, Jr., District Judge:

Section 5(a) (6) of the Federal Trade Commission Act empowers and directs the Commission "to prevent persons, partnerships or corporations * * * from using unfair methods of competition in commerce and unfair or deceptive acts or practices in commerce."1 Proceeding under this authority the Commission filed a complaint against Peelers Corporation, Grand Caillou Packing Company, and members of the LaPeyre family. Through Peelers, the family, by virtue of holding certain patents, enjoys a monopoly of the manufacture and distribution of shrimp processing machinery used in shrimp canning. Through Grand Caillou, the family is engaged in the shrimp canning business on the Gulf Coast. The complaint was issued on May 13, 1960 and charged in substance that petitioners' practices in leasing and selling shrimp processing machines have the tendency to unduly hinder competition and have injured competition in the sale of shrimp and constitute unfair methods of competition and unfair acts and practices within the intent and meaning of Section 5.

Following the conclusion of all hearings, the Examiner, on April 25, 1963, issued his initial decision in which he found Peelers had charged discriminate and substantially higher rental rates to canners located in the States of Oregon, Washington and Alaska than to competing canners located in other states of the United States, thereby violating Section 5 of the Act. He accordingly included in his initial decision an order directing petitioners to cease and desist from discriminating between lessees in the rental charge for their shrimp processing machines. All other allegations of the complaint were dismissed, as was the complaint in its entirety against Grand Caillou. Cross-appeals were taken to the Commission. The Commission, with Commissioner Elman concurring in part and dissenting in part, issued its decision in which it set aside and vacated the initial decision. The Commission made its own findings as detailed in Grand Caillou Packing Company, No. 7887. F. T. C. June 4, 1964, and concluded that petitioners had violated Section 5 by charging shrimp canners in the Northwest a substantially higher rental rate than that charged to canners on the Gulf Coast, and by selling shrimp processing machines to foreign shrimp processors, while refusing to sell them to domestic canners who competed with or were potential competitors of the foreign shrimp processors.2 We have before us the petition to review these conclusions and to set aside the cease and desist order.

The records show the following facts relevant to our decision. Prior to the availability of petitioners' shrimp peeling machinery in 1949, the domestic canners, who were then all located in the Southern part of the United States, utilized hand labor for peeling shrimp. Hand peeling, of course, had many disadvantages, not the least of which was the number of handpickers required to produce a given quantity of peeled shrimp. By 1949 petitioners had perfected their machinery and subsequently offered it to the canning industry. In view of the limited demand, Peelers decided that it would be more profitable to lease than sell the machines to domestic shrimp canners. In order to establish a price which would induce shrimp canners to use their machines in lieu of hand labor, petitioners had a study prepared which compared the cost of hand peeling with that of machine peeling. Utilizing this study, and drawing upon their own knowledge of the industry, they set a lease fee or rate of fifty-five (55¢) cents for each 100 cycles of the machine's roller. The machines represented such a tremendous advantage and improvement over the hand peeling that eventually all Gulf Coast canners became lessees. The installation of the machines so dramatically lowered the peeling cost that to Gulf Coast canners it became necessary to have their use in order to stay in the shrimp canning business. The decisive advantage over hand peeling was attributable mainly to the machines' capability of peeling smaller shrimp. In using petitioners' machines, it cost no more to peel the tiny shrimp than it did to peel the larger sizes.

In the latter part of 1953, James M. LaPeyre traveled to the West Coast and visited several individuals connected with the fishing industry for the purpose of determining the potential for petitioners' machines in that area. While no final conclusions were reached as a result of the trip, some individuals expressed a definite interest in leasing petitioners' machines. Thereafter, petitioners obtained samples of raw pandalid shrimp,3 a species different from the shrimp caught in the Gulf of Mexico. These samples were tested on the machines, and it was found that with minor modification the equipment could satisfactorily peel the pandalid shrimp. The first lease in the Northwest was in the Fall of 1956 to Edward Kaakinen. The rental rate was fixed at $1.10 per unit increase (100 cycles of the roller), or exactly twice the rate of 55 per unit increase which was being charged the Gulf Coast canners. When petitioners subsequently leased their machines to other shrimp canners in the Northwest, they adhered to this practice of charging twice the rental rate paid by the Gulf Coast canners. They justify the difference on the basis that it was set in order to adhere to petitioner's policy of charging a rate in proportion to labor saved. Stated succinctly, the explanation of the differential is that this charge was warranted, because the shrimp processed by the Northwest canners require — because of smaller size — about twice as much hand labor per pound to process as the larger shrimp processed in the Gulf Coast canneries, and petitioner's machinery is a substitute for hand labor.4

Foreign interest in the peeling machines became evident. Accordingly, in order to protect their patent rights abroad, petitioners either obtained patents or else have applications pending on their peeling machinery and shrimp deveiners in some 42 foreign countries where the availability of shrimp indicates a potential demand. In October of 1956 the machines were offered abroad on a lease basis only. In February of 1958 petitioners changed their policy of only leasing their machines abroad and instead decided to sell them in all foreign countries except Mexico and Canada where the machines were still offered on a lease basis. As of January 1, 1962, the machines, with one exception, were all offered for sale abroad and petitioners sold twenty peeling machines, seventeen separators, and sixteen cleaners to customers in eleven foreign countries.

Under the circumstances of this case, is it a violation of Section 5 of the Act for Peelers to charge the Northwest canners twice as much as the Gulf Coast canners for rental of identical machines? The source of the discriminatory effects and of the consequent injury to the Northwest canners is not inequality of bargaining power among customers. It is, rather, the conjunction of two factors: the cost differential in the processing of shrimp by hand as between the Northwest canners and the Gulf Coast canners; and Peelers' monopoly of shrimp processing machinery, which enables the differential in shrimp processing costs to be maintained notwithstanding the substitution of machinery for hand labor. If petitioner did not have a monopoly of shrimp processing machinery, presumably competition would drive the price of such machinery to the Northwest canners down toward the level of the Gulf Coast canners, since the cost of processing shrimp by machine is the same regardless of the size of the shrimp. Conceptually, then, the problem of this case is not one of Robinson-Patman-type discrimination, but of the duty of a lawful monopolist to conduct its business in such a way as to avoid inflicting competitive injury on a class of customers. The Commission found the price differential to be discriminatory, ascertained the requisite adverse effect on commerce, rejected Peelers' claim of justification, and consequently issued a cease and desist order. The majority found that petitioners were attempting to protect their own interests as shrimp canners (Grand Caillou) from the competition of the Northwest canners. Commissioner Elman did not agree on the question of motive. His rationale was that the petitioners were simply attempting to maximize their profits, and that they were charging what the traffic would bear with, as it happens, discriminatory results. We need not resolve these contrary findings as to motive.

Both the majority and Commissioner Elman found that the central characteristic was the same — the utilization of monopoly power in one market resulting in discrimination and the curtailment of competition in another. The Commission's approach is consistent with the broad scope of a Section 5 proceeding. The words "unfair practices" and "unfair methods of competition" are not limited to precise practices that can readily be catalogued. They take their meaning from each case and the impact of particular practices on competition and monopoly. Without further belaboring the issue, it suffices to say that there is abundant...

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