[Federal Register Volume 62, Number 28 (Tuesday, February 11, 1997)]
[Notices]
[Pages 6255-6261]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-3341]
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FEDERAL TRADE COMMISSION
[File No. 951-0106]
American Cyanamid Company; Analysis To Aid Public Comment
AGENCY: Federal Trade Commission.
ACTION: Proposed consent agreement.
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SUMMARY: In settlement of alleged violations of federal law prohibiting
unfair or deceptive acts or practices and unfair methods of
competition, this consent agreement, accepted subject to final
Commission approval, would prohibit, among other things, the
Parsipanny, New Jersey-based company from conditioning the payment of
rebates or other incentives on the resale prices its dealers charge for
its products, or from otherwise agreeing with its dealers to control or
maintain resale prices. The complaint accompanying the consent
agreement alleges that the company violated antitrust laws by fixing
the resale prices of its agricultural chemical products.
DATES: Comments must be received on or before April 14, 1997.
ADDRESSES: Comments should be directed to: FTC/Office of the Secretary,
Room 159, 6th St. and Pa. Ave., NW., Washington, DC 20580.
FOR FURTHER INFORMATION CONTACT:
William J. Baer, Federal Trade Commission, H-374, 6th and Pennsylvania
Ave, NW., Washington, DC 20580. (202) 326-2932. Mark Whitener, Federal
Trade Commission, H-374, 6th and Pennsylvania Ave, NW., Washington, DC
20580. (202) 326-2845. Michael E. Antalics, Federal Trade Commission,
S-2627, 6th and Pennsylvania Ave, NW, Washington, DC 20580. (202) 326-
2821.
SUPPLEMENTARY INFORMATION: Pursuant to Section 6(f) of the Federal
Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46, and Section 2.34 of
the Commission's Rules of Practice (16 CFR 2.34), notice is hereby
given that the above-captioned consent agreement containing a consent
order to cease and desist, having been filed with and accepted, subject
to final approval, by the Commission, has been placed on the public
record for a period of sixty (60) days. The following Analysis to Aid
Public Comment describes the terms of the consent agreement, and the
allegations in the accompanying complaint. An electronic copy of the
full text of the consent agreement package can be obtained from the
Commission Actions sections of the FTC Home Page (for January 30,
1997), on the World Wide Web, at ``http://www.ftc.gov/os/actions/htm.''
A paper copy can be obtained from the FTC Public Reference Room, Room
H-130, Sixth Street and Pennsylvania Avenue, NW., Washington, DC 20580,
either in person or by calling (202) 326-3627. Public comment is
invited. Such comments or views will be considered by the Commission
and will be available for inspection and copying at its principal
office in accordance with Section 4.9(b)(6)(ii) of the Commission's
Rules of Practice (16 CFR 4.9(b)(6)(ii)).
Analysis To Aid Public Comment on the Proposed Consent Order
The Federal Trade Commission (``the Commission'') has accepted an
agreement to a proposed consent order from American Home Products
Corporation (``AHP''), through its wholly-owned subsidiary, American
Cyanamid Company (``American Cyanamid''), located in Parsippany, New
Jersey. The agreement would settle charges by the Commission that
[[Page 6256]]
American Cyanamid violated Section 5 of the Federal Trade Commission
Act by engaging in practices that restricted completion in the domestic
markets for crop protection chemicals, which are herbicides and
insecticides widely used in commercial agriculture.
The proposed consent order has been placed on the public record for
sixty (60) days for receipt of comments by interested persons. Comments
received during this period will become part of the public record.
After sixty (60) days, the Commission will again review the agreement
and the comments received and will decide whether it should withdraw
from the agreement or make final the agreement's proposed order.
The purpose of this analysis is to invite public comment concerning
the consent order and any other aspect of American Cyanamid's alleged
anticompetitive conduct relating to its C.R.O.P. and A.P.E.X. rebate
programs. This analysis is not intended to constitute an official
interpretation of the agreement and order or to modify its terms in any
way.
The Complaint
The complaint prepared for issuance by the Commission along with
the proposed order alleges that American Cyanamid has engaged in acts
and practices that have unreasonably restrained competition in the sale
and distribution of crop protection chemicals in the United States. In
1995, the Commission's proposed complaint alleges, American Cyanamid
sold at retail more than $1 billion of its crop protection chemicals
and was the market share leader in three domestic crop protection
chemical markets: soybean broadleaf herbicides, soybean grass
herbicides, and corn soil insecticides, as well as being the second-
largest domestic producer of cotton grass herbicides.
According to the complaint, American Cyanamid operated two cash
rebate programs for its retail dealers for approximately five years.
From 1989-1992, the plan was called the ``Cash Reward on Performance''
(``C.R.O.P.'') program, and was renamed the ``Award for Performance
Excellence'' (``A.P.E.X.'') program in late 1992 through August 1995.
The complaint states that American Cyanamid entered into written
agreements with its dealers under these programs, pursuant to which
American Cyanamid offered to pay its dealers substantial rebates on
each sale of its crop protection chemicals that was made at or above
specified minimum resale prices. According to the complaint, the
dealers overwhelmingly accepted American Cyanamid's rebate offer by
selling at or above the specified minimum resale prices.
The complaint further alleges that the wholesale prices in the
agreements were set at a level equal to the specified minimum resale
prices, and because a dealer received no rebate on sales below the
specified prices, those sales were made at a loss to the dealer.
The complaint further states that although American Cyanamid
included certain non-price performance criteria in its rebate programs
that could increase the amount of the rebate, a dealer's compliance
with these performance criteria was neither necessary nor, by itself,
sufficient to obtain rebates. As examples, the complaint alleges that
if a dealer met all of American Cyanamid's performance criteria, but
sold the product for less than American Cyanamid's specified minimum
resale price, that dealer received no rebate on the sale. On the other
hand, if the dealer met none of the performance criteria, but sold the
product at or above American Cyanamid's specified minimum resale price,
the dealer nonetheless received a rebate on that sale.
American Cyanamid's conditioning of financial payments on dealers'
charging a specified minimum price amounted to the quid pro quo of an
agreement on resale prices. In cases where this issue has arisen, both
before and after the Supreme Court examined the per se rule against
resale price maintenance in Monsanto and Sharp,\1\ courts have treated
such agreements as per se illegal. See Lehman v. Gulf Oil Corp., 464
F.2d 26, 39, 40 (5th Cir.), cert. denied, 409 U.S. 1077 (1972) (stating
that `` * * * adherence to a suggested price schedule was the quid pro
quo for Lehrman's receiving Gulf's TCAs [temporary competitive
allowances]'' and ``there is no comparable justification for
conditioning wholesale price support upon adherence to a schedule of
minimum retail prices.'' (emphasis in original)); Butera v. Sun Oil
Co., Inc. 496 F.2d 434, 437 (1st Cir. 1974). By offering financial
inducements in return for selling at specified minimum prices, a
manufacturer seeks the ``acquiescence or agreement'' of its dealers in
a resale price-fixing scheme. Monsanto, 465 U.S. at 764 n. 9. The
dealer, in turn, accepts the manufacturer's offer by selling at or
above the specified minimum prices. See Isaksen v. Vermont Castings,
Inc., 825 F.2d 1158, 1164 (7th Cir. 1987) (Posner, J.) (an ``obvious''
resale price-fixing agreement is found `` * * * if [the manufacturer]
had told [the dealer] that it would reduce its wholesale price to him
if he raised his retail price, and [the dealer] had accepted the offer
by raising his price.''). See also Khan v. State Oil Co., 93 F.3d 1358,
1360-61 (7th Cir. 1996) (Posner, J.), petition for cert. pending No.
96-871 (agreement on price found where dealership agreement on its face
allowed dealer to charge any resale price it wished, but distributor
tied financial consequences to dealers' not charging the resale prices
it suggested). As a result, incentives to reduce price below the
specified level were substantially affected by American Cyanamid's
rebate scheme.
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\1\ Business Electronics Corp. v. Sharp Electronics Corp., 485
U.S. 717 (1988); Monsanto Co. v. Spray-Rite Service Corp., 465 U.S.
752 (1984).
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The rebate programs challenged in this case are unlike situations
where manufacturers are permitted to condition a discount or other
incentive on that discount being ``passed through'' to consumers, which
prevents a dealer form simply ``pocketing'' the discount. In these
types of cases, the dealer is free to sell at even lower prices than
the amount of the direct ``pass through'' of the discount or other
incentive. Discounts cannot be conditioned, therefore, on the dealers'
adherence to specified minimum price. See AAA Liquors, Inc. v. Joseph
E. Seagram and Sons, Inc., 705 F.2d 1203, 1206 (10th Cir. 1982), cert
denied, 461 U.S. 919 (183) (Seagram's requirement of passing through
its discount ``[did] not prohibit the wholesaler from making greater
reductions in price that the discount provides.'') See also Acquaire v.
Canada Dry Bottling Co., 24 F.3d 401, 409-10 (2d Cir. 1994); Lewis
Service Center, Inc. v. Mack Trucks, Inc., 714 F.2d 842, 845-47 (8th
Cir. 1983) (because dealers could discount more than Mack's sales
assistance, the court found that ``the purpose of Mack's discount
program [was] not to force adherence to any particular price scheme of
Mack's.'').
The Proposed Consent Order
Part I of the proposed order covers definitions. These definitions
make clear that the consent order applies to the directors, officers,
employees, agents and representatives of American Cyanamid. The order
also defines the terms product, dealer and resale price.
Part II of the order contains two major operative provisions: Part
II(A) deals with the specific conduct at issue in this case. It
prohibits American Cyanamid from conditioning the payment of rebates or
other incentives on the resale prices its dealers charge for its
products. Part II(B) prevents American Cyanamid from otherwise agreeing
with its dealers generally to control or maintain resale prices.
[[Page 6257]]
Neither of these provisions should be construed to prohibit lawful
cooperative advertising programs or ``pass through'' discount programs
that are not otherwise part of an unlawful resale price maintenance
scheme. The Commission has previously determined that order provisions
prohibiting agreements on resale prices do not restrict a company's
ability to implement otherwise lawful cooperative advertising and
``pass through'' rebate plans because such programs do not, in
themselves, constitute agreements on resale prices. See, e.g., In Re
Magnavox Co., 113 F.T.C. 255, 263, 269-70 (1990).
Part III of the order requires that for a period of three (3) years
from the date on which the order becomes final, American Cyanamid shall
include a statement, posted clearly and conspicuously, on any price
list, advertising, catalogue or other promotional material where it has
suggested a resale price for any product to any dealer. The required
statement explains that while American Cyanamid may suggest resale
prices for its products, dealers remain free to determine on their own
the prices at which they will sell American Cyanamid's products.
Part IV of the order requires that for a period of three (3) years
from the date on which the order becomes final, American Cyanamid shall
mail the letter attached to the order as Exhibit A and a copy of this
order to all of its current dealers, distributors, officers, management
employees, and agents or representatives with sale or policy
responsibilities for American Cyanamid's products. American Cyanamid
also must mail the letter and order to any new dealer, distributor or
employee in the above positions within thirty (30) days after the
commencement of that person's affiliation or employment with American
Cyanamid. All of the above dealers, distributors and employees must
sign and return a statement to American Cyanamid within thirty (30)
days of receipt that acknowledges they have read the order and that
they understand that non-compliance with the order may subject American
Cyanamid to penalties for violation of the order.
Part V of the order requires that American Cyanamid file with the
Commission an annual verified written report giving the details of the
manner and form in which American Cyanamid is complying and has
complied with the order. In addition, Part V of the order also requires
American Cyanamid to maintain and make available to the Commission upon
reasonable notice all records of communications with dealers,
distributors, and agents or representatives relating to sale prices in
the United States, as well as records of any action taken in connection
with activities covered by the rest of the order. Finally, American
Cyanamid must inform the Commission at least thirty (30) days before
any proposed changes in the corporation, such as dissolution or sale.
Donald S. Clark,
Secretary.
Statement of Chairman Robert Pitofsky and Commissioners Janet D.
Steiger and Christine A. Varney in the Matter of American Cyanamid,
File No. 951-0106
The Commission today accepts a proposed consent agreement with
American Cyanamid prohibiting it from engaging in conduct designed to
prevent its dealers from making discounted sales below the minimum
price that American Cyanamid specified. American Cyanamid entered into
written agreements with its dealers that provided dealers with
``rebates'' each time they sold their product at or above a certain
resale price (the floor transfer price). For dealers who sold at the
specified price, this rebate constituted their entire profit margin.
The Commission believes that this conduct amounted to an illegal resale
price maintenance agreement.
Commissioner Starek, in his dissent, criticizes this enforcement
action for a number of reasons. As explained below, we disagree with
Commissioner Starek's reasoning.
First, the dissenting statement appears to conclude that a
situation where a manufacturer and a dealer enter into an express
agreement that the manufacturer will pay the dealer to adhere to the
manufacturer's specified resale price, is not an ``agreement on resale
prices'' but rather some form of voluntary behavior. Judge Posner
responded to similar arguments in Khan v. State Oil.\1\
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\1\ 93 F.3d 1358 (7th Cir. 1996).
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In Khan, the court declared a maximum resale price arrangement per
se illegal where the manufacturer permitted dealers to charge above a
maximum price, but required them in such case to provide any resulting
profit above the maximum price to the manufacturer. The ``voluntary''
nature of the arrangement did not detract from the finding that there
was an agreement. Judge Posner noted that the arrangement was
indistinguishable from an agreement not to exceed the maximum price,
because the dealer was sanctioned for violating the agreement by having
to remit any resulting profit to the manufacturer. In responding to
State Oil's argument that there was no price fixing agreement, Judge
Posner observed: ``The purely formal character of the distinction that
it urges can be seen by imagining that the contract had forbidden Khan
to exceed the suggested resale price and had provided that if he
violated the prohibition the sanction would be for him to remit any
resulting profit to State Oil.'' \2\
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\2\ Id. at 1361. See also Isaksen v. Vermont Castings, Inc., 825
F.2d 1158, 1164 (7th Cir. 1987) (in finding a violation based on
economic coercion, Judge Posner noted, ``It is as if Vermont
Castings had told Isaksen that it would reduce its wholesale price
to him if he raised his retail price, and Isaksen had accepted the
offer by raising his price.'').
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We agree with Judge Posner. In this case, the sanction was loss of
the rebate for sales made below the floor transfer price. If an
agreement to forego one's entire profit margin if one departs from the
specified price does not constitute a price maintenance agreement, then
nothing remains of the per se rule.
Second, the dissent seems to suggest that this case is one where
agreement is being inferred from unilateral conduct. We cannot concur.
American Cyanamid entered into written agreements which offered
financial incentives for adherence to a minimum price schedule. Courts,
both before and after Sharp,\3\ have held such arrangements unlawful
where adherence to a suggested price was the quid pro quo for the
financial inducements. Judge Posner's decision in Khan is consistent
with this approach.\4\
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\3\ Business Electronics Corp. v. Sharp Electronics Corp., 485
U.S. 717 (1988).
\4\ 93 F.3d at 1362.
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Third, the dissenting statement, relying in large part on recent
economic literature, argues that American Cyanamid's program should not
be condemned without proof of a supplier cartel, dealer cartel, or
market power.\5\ That view is inconsistent with the Supreme Court's
view that resale price maintenance continues to be illegal per se and
we reject the idea that the Supreme Court can be overruled by scholarly
contributions to economic journals.
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\5\ Although we do not fully detail our disagreement with the
description of the facts in the dissent, we believe that a full
trial would have shown that an overwhelming portion of sales were
made at or above the minimum resale price. Moreover, a dealer's
advisory council voted to advise American Cyanamid to retain the
program in order to protect its margins.
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Finally, we cannot agree with the suggestion that this enforcement
action somehow creates uncertainty about the Commission's treatment of
pass through rebates or cooperative advertising programs. As the
analysis to aid public comment explains, pass through programs have
always been permitted,
[[Page 6258]]
as long as the dealer is free to discount to an even greater extent
than the pass through amount. Similarly, both the courts and the
Commission have judged cooperative advertising cases under the rule of
reason, as long as the arrangements do not limit the dealer's right:
(1) To discount below the advertised price, and (2) to advertise at any
price when the dealer itself pays for the advertisement. Unlike those
programs, American Cyanamid's rebate program controlled the actual
prices charged and was structured to prevent dealers from pricing below
the floor transfer price.
Concurring Statement of Commissioner Mary L. Azcuenaga in American
Cyanamid Co., File No. 951-0106
I concur in the decision to accept the consent agreement for public
comment but decline to join the separate statement of the majority. The
consent agreement, which includes the consent order and the complaint
on which it is based, constitutes the decisional document of the
Commission. My substantive views on this matter are contained entirely
within the four corners of the decisional document. If the majority
wants to revise or expand its decision, the proper course is to revise
the decisional document. See Dissenting Statement of Commissioner Mary
L. Azcuenaga in Dell Computer Corp. at 21-23 (Docket No. 3658, May 20,
1996).
Dissenting Statement of Commissioner Roscoe B. Starek III, in the
Matter of American Cyanamid Company, File No. 951-0106
I respectfully dissent from the Commission's decision to accept a
consent agreement with the American Cyanamid Company (``AmCy''), a
producer of agricultural chemicals. The proposed complaint claims that
certain aspects of AmCy's compensation arrangement with its dealers
constitute per se illegal resale price maintenance (``RPM''), in
violation of Section 5 of the Federal Trade Commission Act, 15 U.S.C.
45. I do not agree that AmCy's dealer rebate policies constitute the
functional and legal equivalent of RPM agreements. Consequently, I
conclude that the decision to challenge AmCy's distribution policies
would expand substantially the range of activities condemned by the
Commission as Illegal per se. This policy is ill-advised and runs
contrary to twenty years of case law in which the scope of vertical
arrangements subject to per se condemnation has been steadily narrowed.
This case is an especially poor vehicle for expanding the scope of the
per se rule, for it would be difficult to find conduct that better
exemplifies the economic deficiencies of that standard.
Condemning certain conduct as illegal per se normally is
rationalized by the belief that the conduct in question is so
frequently pernicious that one cannot justify the cost of attempting to
identify the few instances in which it is not. Whether RPM warrants
characterization as per se illegal conduct has increasingly been called
into question by antitrust scholars; \1\ indeed, it would be difficult
to find an antitrust economist who would defend this enforcement
standard.\2\ RPM remains illegal per se, however, and, consistent with
this standard, I have voted to support enforcement actions against RPM
agreements when I have been convinced that (1) the conduct in question
plainly constituted an illegal agreement on price (as construed by
contemporary case law), and (2) the relief was appropriately tailored
to deter future illegal conduct.
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\1\ There is a substantial body of economic literature
demonstrating that RPM frequently can be socially beneficial. See,
e.g., Michael L. Katz, ``Vertical Contractual Relations,'' in
Richard Schmalensee and Robert D. Willig, 1 Handbook of Industrial
Organization 655 (1989). The existing empirical literature fails to
find evidence supporting an anticompetitive characterization of RPM.
See e.g., Pauline M. Ippolito & Thomas R. Overstreet, Jr., ``Resale
Price Maintenance: An Economic Assessment of the Federal Trade
Commission's Case Against the Corning Glass Works,'' 39 J.L. & Econ.
285 (1996) (evidence convincingly rejects anticompetitive theories
and suggests instead that RPM increase sales of Corning's products);
Pauline M. Ippolito, ``Resale Price Maintenance: Empirical Evidence
from Litigation,'' 34 J.L. & Econ. 263 (1991) (empirical evidence
cannot support a collusive explanation for the use of RPM).
\2\ I also emphasize that in none of the RPM actions brought by
the Commission during my tenure could one have plausibly
characterized the condemned conduct as having an anticompetitive
effect (indeed, in several instances, procompetitive rationales for
the restrictions were plainly evident). In only one instance,
Nintendo of America Inc., 114 F.T.C. 702 (1991), could one have
plausibly ascribed market power to the manufacturer that was party
to the agreement. Without manufacturer market power, RPM agreements
between a single manufacturer and its dealers cannot harm consumers.
Of course, it cannot be overemphasized that market power is only a
necessary, but not a sufficient, condition for vertical restraints
to reduce consumer welfare; by itself, market power does not
establish that the conduct is anticompetitive. Even when a
manufacturer possesses substantial market power, all of the
procompetitive rationales for vertical restraints remain potentially
valid.
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Notwithstanding the continued per se treatment of RPM--and my
willingness to support RPM cases in the limited circumstances
identified above--I cannot ignore the persistent accumulation of
economic evidence demonstrating the potentially procompetitive (or, or
worst, economically neutral) nature of RPM agreements. At minimum, this
evidence counsels against expanding the boundaries of per se illegal
conduct to envelop activities that (at best) only weakly satisfy the
legal criteria for finding the existence of an ``agreement'' and, more
important, appear to be procompetitive in both purpose and effect.
Under these evaluative criteria, the present matter is a poor candidate
for an enforcement action.
The Supreme Court set forth the legal standard for finding an
illegal RPM ``agreement'' in Monsanto Co. v. Spray-Rite Service
Corporation: \3\
\3\ 465 U.S. 752 (1984).
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The correct standard is that there must be evidence that tends
to exclude the possibility of independent action by the manufacturer
and distributor. That is, there must be direct or circumstantial
evidence that reasonably tends to provide that the manufacturer and
others had a conscious commitment to a common scheme designed to
achieve an unlawful objective.
Monsanto, 465 U.S. at 768. The Court stated further that the ``concept
of `a meeting of the minds' or `a common scheme' * * * includes more
than a showing that the distributor conformed to the suggested price.
It means as well that evidence must be presented both that the
distributor communicated its acquiescence or agreement, and that this
was sought by the manufacturer.'' Id. at 764 n. 9 (emphasis added).
While it is true that AmCy entered into contracts with its
distributors providing for compensation for sales at or above the
wholesale purchase price, it is clear that there was no ``meeting of
the minds'' or ``common scheme,'' and thus no illegal agreement, to
maintain resale prices. At no time did AmCy tell its distributors that
they must sell agricultural chemicals at specific prices or risk losing
supplies; AmCy did not attempt to coerce or intimidate its distributors
into selling at specific price levels; distributors did not communicate
an agreement to sell at specific prices; no distributors were ever
terminated for selling at prices below the wholesale price; and
distributors remained free (explicitly provided by contract) to resell
products at any price of choosing. That distributors sometimes sold at
prices below the wholesale level without loss of supply or termination
is testament to the unilateral nature of the distributors' pricing
decisions and to the absence of any agreement to maintain resale
prices.\4\ In this instance, all of the
[[Page 6259]]
hallmarks of a per se illegal RPM agreement are lacking.
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\4\ Evidence suggests that distributors in fact sold specific
products covered by the AmCy program at retail prices both above and
below the wholesale transfer price. Wide variation in distributor
resale prices runs contrary to usual evidence of a minimum resale
price fixing agreement. As Chairman Pitofsky has stated: ``The one
point that emerges clearly in any debate concerning the per se rule
is that minimum vertical price agreements lead to higher, and
usually uniform, resale prices.'' Robert Pitofsky, ``In Defense of
Discounters: The No-Frills Case for a Per Se Rule Against Vertical
Price Fixing,'' 71 Geo. L.J. 1487, 1488 (1983). The Commission's
proposed compliant does not allege, nor provide supporting evidence,
that the rebate program resulted in higher retail prices for AmCy's
products. Moreover, the wide dispersion in resale prices
demonstrates the absence of the type of uniformity believed to be an
indicator of a minimum resale price agreement. This dispersion in
retail prices suggests that distributors were engaging in loss-
leader programs out of a desire to increase future sales of AmCy
products. In addition to encouraging distributors to provide
valuable pre-sale services, AmCy's rebate program may have
encouraged distributors to engage in loss-leader programs as a means
of persuading customers to switch to AmCy products.
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Evidence that dealers did in fact resell AmCy products at or above
the wholesale purchase price does not relieve the Commission of its
obligation to demonstrate the existence of an illegal agreement. As
made clear by Colgate,\5\ a unilateral, self-motivated decision by a
distributor to accept a manufacturer's pricing policies, and thus sell
products at a suggested retail price, does not constitute an illegal
RPM agreement. In Monsanto, the Supreme Court stated: ``Under Colgate,
the manufacturer can announce its resale prices in advance and refuse
to deal with those who fail to comply. And a distributor is free to
acquiesce in the manufacturer's demand in order to avoid termination.''
465 U.S. at 761. As Monsanto and Colgate make clear, something more
than mere acquiescence by a distributor in a manufacturer's pricing
policies is necessary to convert a unilateral decision by a distributor
into an agreement to maintain resale prices.
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\5\ United States v. Colgate & Co., 250 U.S. 300 (1919).
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I am therefore puzzled why the majority is so quick to infer the
existence of a per se illegal RPM agreement from evidence that many
distributors found it in their self-interest unilaterally to sell at or
above the wholesale price and thereby receive rebates from AmCy. To
infer the existence of a per se illegal RPM agreement in this context,
when AmCy never announced minimum resale prices nor sought a commitment
from distributors to sell at or above certain price levels, violates
the fundamental legal principle of RPM law announced in Colgate. How
can the majority find a per se illegal agreement here--under arguably
weaker factual circumstances than existed in Colgate--and believe that
it still seeks to enforce the rule announced in Colgate, and reiterated
in Monsanto, that mere acquiescence by a distributor in the pricing
policies of a manufacturer is insufficient as a matter of law to
warrant inference of the existence of a per se illegal RPM agreement?
\6\
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\6\ Although the majority's reply emphasizes ``written
agreements'' pursuant to which dealers were offered compensation for
sales at prices above the wholesale transfer price (Statement of
Chairman Robert Pitofsky and Commissioners Janet D. Steiger and
Christine A Varney in the Matter of American Cyanamid, at 2), the
proposed complaint in this case indicates that the Commission is
willing--despite the clear warnings of Colgate and Monsanto to the
contrary--to infer the existence of per se illegal RPM
``agreements'' solely from the dealers' unilateral acceptance of
AmCy's ``offer.'' Proposed Complaint, at para. 6 (``The dealers
overwhelmingly accepted AmCy's offer by selling at or above the
specified minimum prices.'').
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The majority's finding that AmCy entered into illegal RPM
agreements with its distributors is nothing less than a retreat from
the principles of vertical restraints analysis laid down by the Supreme
Court in Colgate, Monsanto, Sylvania,\7\ and Sharp.\8\ In cases
involving allegations of concerted price fixing, ``the antitrust
plaintiff must present evidence sufficient to carry its burden of
proving that there was such an agreement. If an inference of such an
agreement may be drawn from highly ambiguous evidence, there is a
considerable danger that the doctrines enunciated in Sylvania and
Colgate will be seriously eroded.'' Monsanto, 465 U.S. at 763. I
conclude that the standard set forth by Supreme Court for the finding
of a price-fixing agreement has not been met. That the majority is
willing to infer the existence of an agreement in this instance on the
basis of such ambiguous evidence, and to rely primarily on pre-Sharp
case law and post-Sharp dicta and one case not on point \9\ to justify
its conclusion, represents an effort to circumvent the law of RPM (and
of vertical restraints in general) laid down by the Supreme Court over
the last twenty years.\10\
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\7\ Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36
(1977).
\8\ Business Electronics Corp. v. Sharp Electronics Corp., 485
U.S. 717 (1988).
\9\ The majority relies heavily on Judge Posner's opinion in
Khan v. State Oil Co., 93 F.3d 1358 (7th Cir. 1996). Besides the
obvious difference that Khan deals with maximum rather than minimum
RPM, the facts of Khan are fundamentally different. The contract
between State Oil (the supplier) and Khan (the dealer) provided that
State Oil would announce a suggested retail price for gasoline and
sell it to Khan for 3.25 cents per gallon less. The contract further
required Khan to rebate to State Oil any profit received for sales
above the suggested retail price. As Judge Posner noted, the
contract eliminated any incentive for Khan to charge above the
suggested retail price. Since absolute compliance was thus
guaranteed under the facts of Khan, it is not surprising that a
dealer challenged the program. AmCy, on the other hand, never
announced suggested retail prices to its dealers, never established
an explicit mark-up, and never required dealers to seek permission
before lowering their price. The fact that AmCy's dealers frequently
lowered retail prices below the wholesale purchaseprice indicates
that AmCy did not implement its rebate program in order to eliminate
dealers' incentives to reduce prices (e.g., to develop new
customers, to increase business with existing customers, or to
encourage switching by customers from other manufacturers'
agricultural products to AmCy's products). The majority's reliance
on Khan is therefore of doubtful relevance to this case.
\10\ Today's action by the Commission has by no means
established a clearer and more certain legal rule for RPM cases than
exists under the rule of Colgate and other Supreme Court decisions.
Whereas a supplier before today's decision might know with certainty
that mere voluntary adherence by a distributor to a unilaterally
announced resale price policy does not constitute illegal RPM, the
same supplier must now worry that the Commission may henceforth use
such voluntary adherence as evidence of a per se illegal agreement
to maintain resale prices. Moreover, as a result of today's
decision, the business community may be left wondering how the
Commission can--and whether it will--maintain the functional
distinction it currently draws between, on the one hand, rebate-
pass-through provisions and cooperative advertising programs--
programs that the Commission generally does not consider to be per
se illegal--and, on the other hand, other types of rebate programs
that similarly impose restrict conditions on the buyer.
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The majority's decision to accept a consent agreement here also
cannot be supported on economic grounds. The per se treatment of RPM
usually is justified by the assertion that such agreements almost
invariably are used to support collusion, either among manufacturers or
among distributors.\11\ RPM could support manufacturer collusion for
two reasons.\12\ First, RPM may make it easier to detect cheating on a
cartel agreement, because resale prices (presumably) are easier to
observe than wholesale prices, and successful monitoring of prices is
necessary for any successful collusive price agreement to work.\13\
Second, RPM may reduce the incentive to cheat on a cartel because a
manufacturer cutting its wholesale price will not increase sales by
very much if the corresponding resale price cannot fall.\14\ If RPM is
being used to facilitate manufacturer collusion, we would expect to see
other manufacturers adopting similar price restrictions; collectively,
these manufacturers would
[[Page 6260]]
have to account for sufficient total output to give them power over
price.\15\
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\11\ Of course, much of the empirical literature on the actual
uses of RPM (see note 1, supra) casts serious doubt upon the
validity of this proposition.
\12\ See Lester G. Telser, ``Why Should Manufacturers Want Fair
Trade?,'' 3 J.L. & Econ. 86 (1960).
\13\ See George J. Stigler, ``A Theory of Oligopoly,'' in The
Organization of Industry 39, 43 (1968) (``In general the policing of
a price agreement involves an audit of the transactions prices.'').
\14\ This argument is subject to the obvious limitation that a
manufacturer wishing to cheat on the collusive arrangement would
have little incentive to enforce the RPM agreement.
\15\ Of course, all of the standard factors used to analyze
market power and the ability to implement and maintain collusive
pricing (e.g., ease of entry, heterogeneity of the products, and so
forth) would also be relevant to judging the likelihood of
successful supplier collusion.
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As far as I can tell, the ``manufacturer cartel'' theory is not
relevant to the present case. The Commission's proposed complaint does
not allege, let alone provide supporting evidence, that AmCy has
attempted to collude with other agricultural chemical makers, such as
DuPont, Monsanto, Ciba-Geigy, or BASF. There is also no evidence that
these other firms used RPM, as is required for the theory to work. But
even putting aside the absence of such evidence, it is difficult to
imagine an arrangement less suited to cartel stability than that which
existed between AmCy and its distributors. Specifically, under the
terms of AmCy's C.R.O.P.TM and A.P.E.X.TM programs, a
dealer's compensation was tied explicitly to the share of chemical
sales accounted for by AmCy's products. Given that a crucial element of
cartel enforcement is the discovery of some means by which each member
can commit credibly to maintaining--but not increasing--its market
share,\16\ how could a program that explicitly rewards market share
expansion plausibly be characterized as a cartel enforcement tool?
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\16\ As Stigler (supra note 13, at 42) noted, ``[f]ixing market
shares is probably the most efficient of all methods of combating
secret price reductions.''
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Furthermore, the available evidence suggests that the
C.R.O.P.TM and A.P.E.X.TM programs were extraordinarily
successful in expanding AmCy's sales and market share, which grew
substantially while the program was in use. Certainly, other factors
(e.g., the successful introduction of several new product lines) may
have accounted for a portion of this increase; \17\ nevertheless, it is
difficult (if not impossible) to reconcile the behavior of AmCy's
output--or of total market output--during this period with any coherent
theory of competitive harm involving collusion with other chemical
makers.
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\17\ The likelihood of successfully maintaining collusion in the
face of product innovation (as was occurring in this instance) is,
of course, quite small. Collusion is more likely to be successful,
the greater the degree of similarity (e.g., in terms of cost,
demand, and product characteristics) among the parties to the
agreement.
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In the alternative, per se treatment sometimes is predicated on the
characterization of RPM as an aid to dealer collusion. Under such a
scenario, a group of dealers pressures the supplier to adopt RPM to
achieve and maintain a collusive resale price arrangement among the
dealers. When RPM is used for this purpose, we would expect to see
coordinated pressure on the manufacturer to adopt RPM from a group of
dealers with sufficient market power to credibly threaten the
manufacturer. Moreover, to be effective, the dealer cartel must enter
into similar arrangements with enough manufacturers to be able to
affect market price; otherwise, the collusive retail price of price-
maintained products would be undermined by competition from products
not subject to RPM agreements. Under such conditions, we would expect
the manufacturer to be a reluctant participant in the scheme, though it
would enforce the RPM agreement if the dealer threats were credible.
Finally, it is unlikely that the colluding dealers would carry
competing products not subject to RPM agreements, as that would be
equivalent to cheating on the collusively-determined resale margin.
This second anticompetitive theory fits the facts of this case no
better than the first. The Commission's complaint does not allege, let
alone provide supporting evidence, that AmCy is the victim of a dealer
cartel. As I already have noted, it does not appear that other
manufacturers had similar arrangements with the members of any putative
``dealer cartel,'' or that this ``cartel'' eschewed the products of
rival manufacturers.\18\ Had AmCy been the victim of a cartel, its
attitude toward the Commission and numerous state investigations should
have been one of grateful acquiescence, because the enforcement
agencies would be rescuing it from the clutches of its rapacious
dealers. In fact, of course, AmCy unilaterally terminated the
challenged provisions of the C.R.O.P.TM and A.P.E.X.TM
programs several years ago. so much for ``dealer coercion.'' \19\
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\18\ This is unsurprising, because over 2500 dealers
participated in the C.R.O.P.TM and A.P.E.X.TM programs. It
is fanciful to believe that a cartel could have been formed from
among such a large number of dealers. If such a cartel exists, one
might reasonably ask why the dealers that belong to it are not also
named in the Commission's complaint.
\19\ In its reply, the majority appears to suggest that the
existence of a dealer cartel can be inferred from the allegation
that ``a dealer's advisory council voted to advise American Cyanamid
to retain the program in order to protect their margins.'' Statement
of Chairman Robert Pitofsky and Commissioners Janet D. Steiger and
Christine A. Varney in the Matter of American Cyanamid, at note 5.
Even if an advisory council furnished this advice to AmCy,
communications of this nature between dealers and manufacturers do
not establish that the dealers acted collusively. Moreover, the fact
that dealers may have communicated this advance says nothing about
the competitive effects of AmCy's rebate program. One would expect
dealers to provide this same ``advice'' if AmCy's program were
designed to prevent discounters from free-riding on the pre-sale
services provided by other dealers.
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Given that neither of the two traditional anticompetitive theories
can be reconciled with the terms of the AmCy program, could the
Commission's action be justified on some other basis? The Commission
might attempt to seek refuge in some unilateral theory of market power,
under which a manufacturer with substantial pre-existing market power
is hypothesized to use vertical restraints because, for some reason, it
cannot extract the full value of its market power simply by raising its
wholesale price. The economics literature certainly acknowledges such
possibilities, but these theories provide a fragile basis for antitrust
enforcement.\20\ As such models show, vertical restraints often can
improve consumer welfare even when adopted by firms with substantial
market power; \21\ the models fail, however, to provide empirical
criteria by which enforcers can distinguish anticompetitive from
procompetitive effects.\22\ Thus, the practical utility of these
theories is questionable even for conduct judged under the rule of
reason; their inability to justify a policy of per se illegality
appears self-evident.
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\20\ See, e.g., Remarks of Commissioner Roscoe B. Starek, III,
``Reinventing Antitrust Enforcement? Antitrust at the FTC in 1995
and Beyond,'' before a conference on ``A New Age of Antitrust
Enforcement: Antitrust in 1995'' (Marina del Rey, California, Feb.
24, 1995).
\21\ As I noted earlier (supra note 2), market power is a
necessary, but not a sufficient, condition for vertical restraints
to reduce consumer welfare.
\22\ As Katz (supra note 1, at 713-14) notes, ``[m]uch of the
literature on vertical restraints has been conducted with the
express aim of deriving policy conclusions. But in many, if not
most, instances there is no widespread agreement on whether a
particular vertical practice is socially beneficial or harmful. This
unhappy state of affairs is due, in part, to the fact that all of
the practices can be beneficial in some instances and harmful in
others, and it may be extremely difficult to distinguish between the
two cases.''
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On several grounds, therefore, acceptance of the consent agreement
in this matter represents a poor policy choice by the Commission. From
a legal perspective, AmCy's conduct does not constitute an illegal
agreement to maintain resale prices; from an economic perspective, the
evidence points to the conclusion that AmCy's conduct was
procompetitive; and from a policy perspective, the Commission's
decision hardly delineates a clearer distinction (and in fact seriously
blurs the line) between conduct likely to be subject to per se
condemnation and conduct that is not. Instead of reaching for ways to
expand the application of the per se rule to conduct that is plainly
procompetitive, enforcers should
[[Page 6261]]
reserve their heavy hand for conduct that falls within standards for
per se illegality clearly enunciated by the Supreme Court. Accordingly,
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I cannot support the proposed enforcement action made public today.
[FR Doc. 97-3341 Filed 2-10-97; 8:45 am]
BILLING CODE 6750-01-M