Shulton, Inc. v. Hogue & Knott, Inc.

• Citation: 364 F.2d 765
• Decision Date: 18 August 1966
• Docket Number: No. 16459.,16459.
• Parties: SHULTON, INC., Plaintiff-Appellant, v. HOGUE & KNOTT, INC., Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

364 F.2d 765 (1966)

SHULTON, INC., Plaintiff-Appellant, v. HOGUE & KNOTT, INC., Defendant-Appellee.

No. 16459.

United States Court of Appeals Sixth Circuit.

August 18, 1966.

W. Rowlett Scott, Memphis, Tenn. (Armstrong, McCadden, Allen, Braden & Goodman, Memphis, Tenn., of counsel), for appellant.

A. Longstreet Heiskell, Memphis, Tenn. (Frierson M. Graves, Jr., Heiskell, Donelson, Adams, Williams & Wall, Memphis, Tenn., on the brief), for appellee.

Before WEICK, Chief Judge, O'SULLIVAN, Circuit Judge, and CECIL, Senior Circuit Judge.

O'SULLIVAN, Circuit Judge.

Plaintiff-Appellant, Shulton, Inc., appeals from a judgment of the District Court for the Western District of Tennessee which dismissed its complaint asking that defendant-appellee, Hogue & Knott, Inc., be enjoined from selling Shulton products at prices below those scheduled on Shulton's Fair Trade contract.

Shulton is one of the leading national manufacturers of toilet articles and cosmetics. By extensive advertising, amounting to about one-fifth of its yearly gross receipts, it has established a wide public acceptance of such brand names as "Old Spice," "Shulton" and "Desert Flower." In order to have the full benefit of its national advertising, Shulton considers it important that retail outlets prominently and attractively display its products. This, in turn, requires that Shulton products be profitable for the retail merchants, and as a result Shulton has adopted a stringent Fair Trade policy to maintain retail profit margins where possible.

Defendant-appellee, Hogue & Knott, Inc., is a retail supermarket in Memphis, Tennessee. It operates on a small profit margin, relying on a large volume obtained by giving substantial cash discounts on all the products it handles. Hogue is in competition with several other large-volume, low-profit retailers in Memphis. Unlike Hogue, these competitors do not give direct cash discounts, but rather offer such concessions as bonus trading stamps or combination sales. Thus, by giving 100 bonus stamps (with a stipulated value of .025 cents) on a $2.50 purchase, a store effectively establishes a 10% discount. Similarly, by offering a 51 cent bag of sugar for 1 cent if accompanied by a $5.00 purchase, a 10% discount is set up.

Prior to February, 1964, the Shulton Fair Trade contract in force in Tennessee forbade giving any trading stamps or other concessions in connection with Shulton products. In February, 1964, the contract was changed to allow such discounts up to 3% of the list price.¹ This provision was adopted to make allowance for the fact that trading stamps had become a way of life in supermarket merchandising. With the adoption of the new contract, Shulton began a vigorous enforcement campaign, including the action against Hogue here involved.

Hogue does not deny that it sold, and continues to sell, Shulton's products below the Fair Trade prices established therefor; however, it asserts two defenses: (1) that the 3% clause has brought Shulton's Fair Trade contract outside the coverage of Tennessee's Fair Trade statute, and (2) that Shulton has made no bona fide effort to enforce compliance with its Fair Trade contract. The District Judge in giving judgment for defendant sustained both such defenses. We reverse.

1. The 3% clause.

The Tennessee Fair Trade statute provides:

"No contract relating to the sale or resale of a commodity which bears, or the label or content of which bears, the trade-mark, brand, or name of the producer or owner of such commodity and which is in fair and open competition with commodities of the same general class produced by others shall be deemed in violation of any law of this state by reason of any of the following provisions which may be contained in such contract:

(1) That the vendee will not resell such commodity except at the price stipulated by the vendor." T.C.A. § 69-203

Hogue argues that Shulton, by permitting a sliding scale of prices from the list price down to 3% below the list price, has failed to stipulate a price, and further, that if the contract be read as establishing a fixed minimum price of "list" less 3% with allowance for sales above such a minimum, it would also violate the Tennessee statute, which, it asserts, was passed "to prevent price gouging of the public, as well as price cutting in a cutthroat manner by retailers." Contrary to this argument, Fair Trade acts are designed to permit a restricted area of "price gouging" by creating an exemption to the general prohibition of resale price maintenance. The McGuire Act, 15 U.S.C.A. § 45, which exempts Fair Trade laws from the proscription of the Antitrust Act, refers to contracts "prescribing minimum or stipulated prices." It is true that the Tennessee Act in defining the contracts permitted, refers, in T.C.A. § 69-203, to "the price stipulated" but in its enforcement section, T.C.A. § 69-204, it makes actionable only "wilfully and knowingly advertising, offering for sale or selling any commodity at less than the price stipulated" (emphasis supplied.) While not essential to its decision, the Tennessee Supreme Court, upholding the constitutionality of the State's Fair Trade Act, referred to contracts made thereunder "which have minimum retail prices established." McKesson & Robbins v. Government Emp. Store, 211 Tenn. 494, 497, 365 S.W.2d 890, 891 (1962). It is our view that, given the total context and purpose of the Tennessee Act, a prohibition against selling at less than a fixed price does no violence to the statutory language permitting contracts which prohibit resale "except at the price stipulated by the vendor."

The only case in point cited by appellees, Mennen Co. v. Krauss Co., 37 F.Supp. 161 (D.C.La.1941) construing a parallel Louisiana statute, was subsequently reversed by the Fifth Circuit, Mennen Co. v. Krauss Co., 134 F.2d 348 (CA 5, 1943), on the basis of an intervening decision by the Supreme Court of Louisiana, Pepsodent Co. v. Krauss Co., 200 La. 959, 9 So.2d 303, which construed the statute to allow the fixing of a minimum price.

In holding that the Shulton contract's allowance of a 3% discount by use of trading stamps and other concessions disqualified it for the protection of the Tennessee Fair Trade Act, the District Court cited the case of Jantzen, Inc. v. E. J. Korvette, Inc., 219 F.Supp. 604 (S.D.N.Y.1963). We point out that the contract there involved put no limitation on the amount of discount that could be allowed through giving trading stamps and like benefits.

Tennessee has decided that the giving of trading stamps and like benefits is the equivalent of a cash discount. Hogue v. Kroger Co., 213 Tenn. 365, 373 S.W.2d 714 (Tenn.1963). We are of the opinion that the 3% limitation on such benefits in Shulton's contract qualifies it for enforcement under the Tennessee statute.

2. Lack of enforcement by Shulton.

Prior to adopting its 3% clause, in February, 1964, Shulton's Fair Trade contract forbade altogether the giving of trading stamps and like benefits. There was little evidence of earlier attempts to enforce this contract although Hogue was notified in late 1963 that it was in violation. Notwithstanding the fact that the constitutionality of the Tennessee Act had been upheld by the decisions of Frankfort...