Snap-On Tools Corporation v. FTC

• Decision Date: 30 July 1963
• Docket Number: No. 13592.,13592.
• Citation: 321 F.2d 825
• Parties: SNAP-ON TOOLS CORPORATION, Petitioner, v. FEDERAL TRADE COMMISSION, Respondent.
• Court: U.S. Court of Appeals — Seventh Circuit

321 F.2d 825 (1963)

SNAP-ON TOOLS CORPORATION, Petitioner, v. FEDERAL TRADE COMMISSION, Respondent.

No. 13592.

United States Court of Appeals Seventh Circuit.

July 30, 1963.

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Harry C. Alberts, Chicago, Ill., Kermit N. Caves, Kenosha, Wis., Theodore A. Groenke, Chicago, Ill., John C. Brezina, Chicago, Ill. (Samuel Weisbard, McDermott, Will & Emery, Chicago, Ill., of counsel), for petitioner.

J. B. Truly, Asst. Gen. Counsel, J. Lane Morthland, Atty., Federal Trade Commission, James McI. Henderson, Washington, D. C., Gen. Counsel, for respondent.

Before HASTINGS, Chief Judge, and DUFFY, and SWYGERT, Circuit Judges.

SWYGERT, Circuit Judge.

This is a petition to review a cease and desist order issued by the Federal Trade Commission against Snap-On Tools Corporation, a Delaware corporation with its principal office and place of business located at Kenosha, Wisconsin. The order is based upon a Commission complaint charging petitioner with unfair acts and practices and unfair methods of competition in violation of Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45.¹

The issue concerns Snap-On's nationwide distribution system based on dealerships established by contract which the Commission found limited and suppressed competition by fixing resale prices, geographically restricting markets, limiting customers, and restricting dealers' rights to compete after ceasing to be dealers.

Snap-On is a large manufacturer and distributor of mechanics' hand tools and related equipment. Its complete line of tools comprises some 4,000 items for use in the mechanical trades, principally in the automotive and aircraft fields. Snap-On distributes its products through independent, territorially-franchised dealers who sell on routes out of mobile, walkin trucks.

The Commission's complaint, issued on April 10, 1958, charges that petitioner's dealers were required to enter into a standard form, printed, bilateral contract, containing restrictive terms and conditions. Paragraph five of the complaint sets out the objectionable provisions of the contract.²

The complaint further alleges that petitioner has enforced the Paragraph Five covenants, and that petitioner sells or attempts to sell to some customers in direct competition with its dealers, and sells to some customers whom its dealers are restricted from selling. The complaint summarized the effect of the restrictions by charging that petitioner's distribution scheme unduly restrains trade in commerce.

In its answer, filed June 30, 1958, petitioner denied that its sales and distribution system violated the Act. It admitted that its dealer agreements had contained the restrictions complained of, but alleged that the required practices and operations are fair methods of competition and are reasonable and necessary to protect its dealers, customers, and its property rights and tend to intensify competition in the sale of petitioner's products. The answer admitted that prior to January, 1958, the dealer agreement contained the provisions described in Paragraph Five of the complaint; it alleged, however, that the provisions, except the one providing for the establishment of restricted territorial limits for dealer sales, had been abandoned in practice long before the issuance of the complaint.

At the close of the introduction of evidence by counsel supporting the complaint, petitioner moved to dismiss for failure to establish a prima facie case. The hearing examiner considered separately the issues as to the legality of the restrictive covenants and practices disclosed by the record as of that date; he did not consider the over-all effect of petitioner's practices. He granted the motion to dismiss on the issues of restricted territories and restricted customer contracts, but denied it on the issues of resale price maintenance and the covenant prohibiting a terminated dealer from engaging in a similar competing business for one year in the state in which his former territory was located.

Counsel supporting the complaint appealed. The Commission vacated the examiner's order and remanded the proceeding, stating that "the complaint, in addition to challenging the legality of each of the restrictive conditions * * included in the contracts, strikes generally at the petitioner's over-all" sales distribution system, "and places in issue the broad question of whether the petitioner's entire method of doing business," including the terms of its dealer contracts, and "all of the acts and practices engaged in pursuant thereto, considered together, constitute a restraint of trade in violation of the Federal Trade Commission Act." It directed the examiner to consider the over-all effect of petitioner's method of distribution, and to determine whether petitioner's challenged practices considered together constituted an unlawful restraint on competition.

Upon remand petitioner introduced evidence in defense of the charges of the complaint.

Once again the hearing examiner considered the evidence, and made findings of fact; he thereupon rendered an initial decision dismissing the complaint.

Upon appeal by counsel supporting the complaint the Commission reversed the examiner, made its own findings and issued its order requiring petitioner to cease and desist from engaging in each of the challenged practices. The Commission filed an opinion which contained an admonition to the hearing examiner for having failed to consider the restrictive provisions of the dealer contract in toto rather than seriatim.

The facts covering the operations of Snap-On are important to a discussion of the findings of the Commission particularly in view of the Supreme Court's recent decision in White Motor Co. v. United States, 372 U.S. 253, 83 S.Ct. 696, 9 L.Ed.2d 738 (1963), wherein it was determined that vertical allocations of dealer territory are not per se violations of the Sherman Act. Such a holding necessitates an inquiry into the reasonableness of Snap-On's dealer arrangements and precludes any automatic finding of illegality based merely on a finding that exclusive territories were assigned to Snap-On's dealers.

The nature of the mechanics' hand service tool business is such that regular calls on customers, at the customers' places of business, by route salesmen or dealers, are essential. Purchasers of such tools include mechanics, repair shops, manual workers and others, who purchase individual tools, generally in limited quantities and often on impulse, or because a special tool is required for a current job. Where expensive equipment is needed, the salesman or dealer usually rents or leases the equipment to the customer and makes periodic collections and calls for the purpose of servicing and adjusting such equipment. A substantial portion of sales of mechanics' hand service tools is made on credit, and it is customary for the dealer or salesman to collect the purchase price in weekly or bi-monthly installments.

Because of the continual demand for newly designed tools, capable of performing operations on complex, everchanging models of automobiles and machinery, on-the-spot, physical demonstration of such tools in the customer's place of business, and frequent assistance and guidance to the customer in the use and application of the tools is necessary, as is regular and uninterrupted availability of service and replacement parts for the items supplied.

With the tools and other types of mechanics' servicing equipment sold by Snap-On and its competitors, the sale of a tool establishes a continuing relationship with the mechanic-user. The mechanic expects such a relationship with his supplier and will deal elsewhere unless this relationship is established and maintained by frequent and regular calls upon him at his place of business. Also, rentals and installment sales and collections would not be feasible without such regular and continuous calls.

Snap-On products have been sold, from the inception of its business, almost exclusively by route salesmen and, later, by route dealers regularly and systematically calling upon automotive service, mechanics', and industrial establishments, where they demonstrate, service, repair, and sell tools; advise as to their use; and collect time payment accounts and rent payments on large equipment rentals.

Until 1950, Snap-On sold its products directly to the mechanic and industrial trade through route salesmen employed by the company. In 1950-51, however, Snap-On discontinued direct selling to these trades through its own employeesalesmen, and began distributing through independent, franchised dealers, who purchase tools from Snap-On's branch warehouses and, in turn, resell out of mobile, walk-in trucks covering routes in assigned territories. The territories are defined as a result of surveys and experience to make possible the quick, efficient service, necessary in a highly competitive industry. Most dealers own and operate walk-in trucks in which are contained an inventory of merchandise, repair and replacement parts, and facilities for Snap-On products, and on which is a sign bearing a "Snap-On" legend. During the initial stages of a dealer's franchise, by way of financial assistance, Snap-On sells to him on consignment. After a dealer builds up an account equal to the value of his inventory, the company sells to him on a cash basis. As financial assistance to the dealer, Snap-On accepts assignments of the dealer's accounts receivable in lieu of cash.

In recent years, Snap-On's dealer organization has consisted of approximately 900 dealers at any one time. There is a high rate of turnover among them. For example, in the short space of one and a half recent years, petitioner had a turnover of between 350 and 700 dealers. The dealers are encouraged to call on every potential account in their territories, including industrial firms,³ and the degree of their success is directly proportional to the thoroughness with which ...