SCM Corp. v. F.T.C.

• Decision Date: 23 December 1977
• Docket Number: D,No. 53,53
• Citation: 565 F.2d 807
• Parties: 1977-2 Trade Cases 61,784 SCM CORPORATION, Petitioner, v. FEDERAL TRADE COMMISSION, Respondent. ocket 77-4078.
• Court: U.S. Court of Appeals — Second Circuit

Page 807

565 F.2d 807

1977-2 Trade Cases 61,784

SCM CORPORATION, Petitioner, v. FEDERAL TRADE COMMISSION, Respondent.

No. 53, Docket 77-4078.

United States Court of Appeals Second Circuit.

Argued Sept. 26, 1977.

Decided Dec. 23, 1977.

William E. Willis, New York City (Sullivan & Cromwell, New York City, James E. Tyrrell, Jr., New York City, of counsel, Milton Wolson, New York City, on the brief), for petitioner.

David C. Shonka, Atty., F. T. C., Washington, D. C. (Michael N. Sohn, Gen. Counsel, Gerald P. Norton, Deputy General Counsel, Jerold D. Cummins, Acting Asst. Gen. Counsel, Washington, D. C., on the brief), for respondent.

Before MOORE, FEINBERG and MULLIGAN, Circuit Judges.

FEINBERG, Circuit Judge:

This petition by SCM Corporation to set aside an order of the Federal Trade Commission raises an issue of first impression in this court: Whether section 8 of the Clayton Act, regulating interlocking directorates, applies to corporations as well as to individual directors. We hold that it does, but because the FTC may have applied the wrong legal standard in entering a cease and desist order against SCM, we remand for further proceedings.

I

This proceeding grows out of the circumstance that from 1967 to 1975 Richard C. Bond was a member of the board of directors of both SCM and Kraftco Corporation, which competed with each other in certain markets. SCM is a diversified company which manufactures and distributes such products as business equipment, home appliances, paint, food and chemicals. Its sales in the fiscal year ended June 30, 1975 were $1,287,000,000. Kraftco is a leading processor and distributor of cheese and dairy products. Its total sales in the year ending December 31, 1974 were $4,500,000,000. Both corporations sell margarine, barbecue sauce and edible oils. In fiscal 1975, SCM sold approximately $83 million of these products in competition with Kraftco. In the same period, Kraftco's sales of the same products, in competition with SCM, were approximately $258 million. The capital, surplus and undivided profits of both corporations aggregate more than $1 million.

In June 1975, the FTC issued a complaint against Kraftco, SCM and Bond, alleging that Bond's presence on the board of directors of both corporations violated section 8 of the Clayton Act, 15 U.S.C. § 19. ¹ Shortly after the complaint was issued, Bond resigned from the SCM board. Thereafter, he consented to the entry of a cease and desist order, as did Kraftco. SCM answered the complaint and moved for summary decision, arguing, among other things, that Bond's resignation from SCM had mooted the proceeding against it, that competition between SCM and Kraftco was insufficient to justify a section 8 proceeding, that the section does not apply to corporations, and that the FTC was enforcing the section in a discriminatory fashion. The FTC also moved for summary decision. The case was submitted to the Administrative Law Judge on a stipulated record. In June 1976, the ALJ filed an Initial Decision and Order against SCM, finding that section 8 had been violated and that a cease and desist order was justified. SCM appealed to the Commission, which in January 1977 issued a written opinion, affirming the decision of the ALJ. ² SCM then filed this petition for review.

II

In this court, SCM repeats many of the arguments made in the administrative proceedings below, and additionally contends that injunctive relief was both unwarranted and granted pursuant to an erroneous legal standard. ³ First, however, we turn our attention to the substantial issue concerning the scope of section 8, which provides in pertinent part:

No person at the same time shall be a director in any two or more corporations, any one of which has capital, surplus, and undivided profits aggregating more than $1,000,000, . . . if such corporations are or shall have been . . . competitors, so that the elimination of competition by agreement between them would constitute a violation of any of the provisions of any of the antitrust laws.

SCM maintains that the prohibition of this section applies only to individual directors and not to the corporations on whose boards the directors serve.

The question thus posed was noted, but not decided, by the Supreme Court in United States v. W. T. Grant Co., 345 U.S. 629, 634 n.9, 73 S.Ct. 894, 97 L.Ed. 1303 (1953). Surprisingly, the issue has received scant attention in decisions of the lower federal courts. We are cited to only two district court cases in point. In United States v. Sears, Roebuck & Co., ⁴ Judge Weinfeld held that the corporate defendants had violated section 8 by acquiescing in the interlocked directorship. Similarly, the court in United States v. Crocker National Corp., 422 F.Supp. 686, 705-06 (N.D.Cal.1976), appeal docketed, No. 76-3614 (9th Cir. Dec. 10, 1976), stated in dictum that the defendant corporations there would have been subject to injunction had they violated section 8. Perhaps the paucity of judicial writing on the point ⁵ is due to general acquiescence, despite the Supreme Court's express reservation of the issue, in what the FTC characterized below as "decades of Justice Department and Federal Trade Commission enforcement of the Clayton Act, via voluntary action, consent agreements, and litigation." ⁶ In any event, we have been unable to find any resolution of this issue by any court of appeals. ⁷

SCM contends that the language and legislative history of section 8 support its interpretation. SCM argues that only individuals can violate section 8 because it provides only that "(n)o Person at the same time shall be a Director . . .," (emphasis supplied) and not, for instance, that a corporation is prohibited from electing, or having, a director who is also on the board of a competitor. SCM further points out that section 8 as first enacted explicitly prohibited banking corporations, but not so-called industrial corporations, from having interlocking directors. ⁸ SCM also relies on committee reports to support its construction of the section as applying only to individuals. ⁹

The FTC argues to us primarily that this restrictive reading of section 8 ignores the policies behind it. The point was well made in the FTC's opinion below:

To absolve corporations of liability for sharing directors with competitors would, without question, severely undermine enforcement of the law, since any corporation could maintain such an interlocking directorate and, if detected, simply replace the ousted director with another interlocking board member, again without fear that detection could lead to anything more than the director's resignation. Sanctions against individuals alone are likely to be of limited effect, because there are hundreds of thousands of potential corporate directors at any given time. Sanctions against a much smaller number of corporations are far likelier to effectuate the purposes of Section 8, since an order against a corporation will prevent a far larger number of potential interlocks than one against an individual.

89 F.T.C. at 63. The FTC also relies on section 11(b) of the Act, which provides that whenever the Commission finds that any person ¹⁰ has violated any section of the Act, the Commission

Shall issue and cause to be served on such person An order requiring such person to Cease and desist from such violation, and . . . Rid itself of the directors chosen contrary to the provisions of (section 8) . . . . (Emphasis supplied). ¹¹

Since only a corporation can rid itself of a director, the FTC argues that section 8 must apply to corporations as well as to individual directors. SCM rejoins that section 11 is exclusively procedural and cannot add substantive obligations to section 8, and that the language stressed by the FTC is a vestigial remainder of the original section 8 provision that covered banking corporations. ¹²

We believe that the Commission has the better of these arguments and that section 8 applies to corporations as well as to individual directors. It is true that if the language of the section is considered alone, the result is not clear. ¹³ But the language of the section does not stand alone and should not be construed as though it did. Its prophylactic purpose was "to nip in the bud incipient violations of the antitrust laws by removing the opportunity or temptation to such violations through interlocking directorates." United States v. Sears, Roebuck & Co., 111 F.Supp. 614, 616 (S.D.N.Y.1953). We agree with the Commission that SCM's reading of the statute undermines it, since a corporation without fear of sanction could have the concededly prohibited "interlocking directorate and, if detected, simply replace the ousted director with another interlocking board member." Thus, policy supports a broad reading of section 8 and section 11 indicates that such a construction is reasonable. It is not at all clear that the language there relied on by the Commission is merely a meaningless vestige of an earlier version of the statute.

The sparse legislative history appears to support the FTC's position. The House Report accompanying the bill talks about "the corporations affected" and states that "(t)his section is divided into three paragraphs, each of which relates to the Particular class of corporations described, and the provisions of Each paragraph are limited in their application to the Corporations belonging to the class named therein." (Emphasis supplied). H.R.Rep. No. 627, 63d Cong., 2d Sess. 18 (1914). The paragraph involved in this case was apparently thought of as controlling interlocks among the "industrial corporations," id. at 19, and not just among directors. Furthermore, contrary to SCM's suggestion, it seems that Congress in enacting section 8 did not distinguish between the scope of the paragraph addressed to banks and that of the paragraph addressed to industrial corporations, since the Report appears to equate the approach taken by the statute as to...