MARCH 28 (legislative day, MARCH 4), 1940.-Ordered to be printed

Mr. TYDINGS, from the Committee on the District of Columbia, submitted the following

REPORT

[To accompany H. R. 3838]

The Committee on the District of Columbia, to whom was referred the bill (H. R. 3838) to protect trade-mark owners, producers, distributors, and the general public against injurious and uneconomic practices in the distribution of competitive commodities bearing distinguishing trade-mark, brand, or name through the use of voluntary contracts establishing minimum resale prices and providing for refusal to sell unless such minimum resale prices are observed, having considered the same, report favorably thereon and recommend that the bill do pass.

Forty-four States have already adopted State fair-trade acts. Thus, only 4 States have so far no State fair-trade acts. The present bill is to give to the District of Columbia a District Fair Trade Act patterned substantially after those already adopted by 44 States.

There is a widespread misapprehension and great misinformation as to the purposes and the effect of fair-trade laws. It is claimed that they sanction and protect monopoly. The exact opposite of this is true. It is said that such laws stifle competition and injure the consuming public. This is likewise untrue. It is said that such legislation is in the interest of big business. In fact, its chief opponents have been big business. Such laws are backed by the small independent retailers and the act is in the interest of continued competition and opposed to the spirit of monopoly, which ends are obtained by eliminating unfair trade practices by powerful predatory competitors. The selfish predatory price cutter, often selling his articles below cost, is usually an opponent of this bill. The selfish predatory price cutter, in order to entice customers, habitually dealing elsewhere, into his store and to secure a temporary advantage over his fellow

S. Repts., 76-8, vol. 2– -7

retailers, frequently cuts prices on goods below their cost to him in order to drive his competitors out of business. Thus, he damages the cause of fair competition, the goodwill of the producer, the goodwill of the distributor and ultimately he damages the consuming public, as will hereafter be shown.

Incorporated immediately following this report is a copy of an article written by Mr. Justice Brandeis before he became a member of the Supreme Court, which appeared in Harpers Weekly for November 15, 1913. This article was inspired by the prophetic dissent of Mr. Justice Holmes, in the case of Dr. Miles Medical Company v. Park & Sons Company ((1911), 220 U. S. 409), and presents briefly the case for price maintenance from the three-way standpoint of the producer, the retailer, and the consumer.

There is following a statement by Governor Lehman at the time he approved the New York Fair Trade Act, after an extended hearing. Governor Lehman said:

The purpose of this bill, as expressed in its title, is to protect trade-mark owners, distributors, and the general public against injurious and uneconomic practices in the distribution of articles of standard quality under a trade-mark, brand, or

name.

The bill is in no sense a general price-fixing act. Under no condition does it authorize a contract or agreement between manufacturers and producers or between wholesalers or between retailers as to the sale or resale prices of any commodity.

Nor does the bill prevent the resale of a commodity at any price where one is closing out his stock of goods for the purpose of discontinuing that line, or where the goods have been damaged or have deteriorated in quality and proper notice has been given to the public.

It is important to note that this bill applies only to commodities which are in fair and open competition with commodities of the same general class produced by others. If this essential factor is not applicable to a certain commodity, then the bill has no force or effect whatsoever with respect to it.

This bill in no way sanctions monopoly, monopoly prices, or combinations in restraint of free competition between commodities.

It seems to me to be sound economy to devise a method whereby a manufacturer or producer may protect himself against undue slashing of the price of his product, with the consequent destruction of the value of his trade-mark and goodwill and with unnecessary loss to others.

Moreover, I believe this bill will protect the small independent merchant, retailer, and businessman. It should offer some protection against devastating cut-price practices such as the ruthless method of loss-leader articles.

The bill will also serve to discourage falsification and adulteration of commodities.

In the Old Dearborn case (299 U. S. 183), the Court, in sustaining the validity of the Illinois Fair Trade Act, said (p. 193):

* * *

The primary aim of the law is to protect the property-namely, the good willof the producer. The price restriction is adopted as an appropriate means to that perfectly legitimate end, and not as an end in itself.

The Court then goes on to describe the nature and importance of goodwill, as follows (p. 194):

* * * goodwill is property in a very real sense, injury to which, like injury to any other species of property, is a proper subject for legislation. Goodwill is a valuable contributing aid to business-sometimes the most valuable contributing asset of the producer or distributor of commodities.

The importance of goodwill, and its susceptibility to damage, have been understood by the courts for many years. Courts of equity, upon their own initiative and with growing liberality, have afforded relief from a variety of offenses against goodwill, as illustrated in the voluminous jurisprudence upon trade-mark infringement, unfair com

petition by deceit, trade libel, and the like. Increasingly the courts have declared that the relief given in these categories is intended to safeguard goodwill against assault by unfair means.

For many years, also, the question has been widely agitated: Whether destructive price cutting, under some circumstances, is sufficiently unfair and damaging to proprietary goodwill, to require restraint by law. In some instances, but not generally, courts have validated and enforced contracts between producers and marketers, that obliged the latter to maintain prices on the producers' goods. Beyond that (with negligible exceptions) the courts have not undertaken to exercise general equity powers against price cutting. It remained for the fair-trade acts to announce public policy in this connection, and, in effect, to invite the courts to take cognizance of price cutting, under defined conditions, as an additional species, in the class of offenses against goodwill, from which proprietors should be protected.

GOODWILL AND PRICE-CUTTING

A business that deals with a consumable commodity (like articles of infant nutritional diet) depends for its success, initially, upon acceptable products salable to consumers at feasible prices, and upon a source of supply of the products. The business cannot succeed, however on a substantial scale, unless it can command a widespread and loyal demand for the products among consumers, and an elaborate machinery for distribution to meet the demand. The demand will not arise or endure, and the distribution machinery will not operate, unless a favorable reputation for the products is created and diffused throughout the territory of expected sales. When such a reputation has been established, marketing agencies (wholesalers and retailers) and the purchasing public respond to it by asserting their desires to trade in the products, and to buy and consume them. The total sum of such desires constitutes the producer's "goodwill"; his expectancy of continued and increasing profitable sales, which he is entitled to enjoy because people want to sell and to buy his products.

Goodwill must be created, for any extensive business, by sales promotion and advertising. The trade and public must be familiarized with the products and persuaded to make their first experimental tests. Then, if the products have merit and prices are within reason, goodwill evolves steadily-especially when nourished and stimulated by more and more sales promotion and advertising. When operating efficiently, goodwill is the stabilizer of sales, earnings, and net profit; it is likely to be the producer's most valuable asset, because it acts by continuous suction to draw his products into the markets and along the innumerable trade channels that radiate in all directions toward the ultimate buyers. Often, a producer spends more money for goodwill than for all his physical plant and equipment together. He does so in order to create and maintain goodwill as a living and active organism that grows and spreads over his entire marketing territory, and, if undisturbed, generates, augments, and protects the flow of profitable sales. Goodwill is a working asset of the highest importance.

At the same time, it is extremely sensitive and vulnerable. It is composed of a multitude of minute fractions, each of which is a unit of approval in the mind of an individual marketer or consumer. Each such unit is a point at which goodwill may be attacked. If

numerous units of approval are blighted, in any area, goodwill is gravely threatened at least locally, and the contagion is likely to extend into other areas.

The cultivation of the consumer's approval is largely the direct responsibility of the producer. If he offers meritorious products at proper prices, and makes them familiar to the public, consumers will want to buy. If the producer fails in these respects, it is usually his own fault, and he has no valid claim to goodwill. But, however successful a producer may be in inspiring the favor and loyalty of consumers, that is not enough.

The producer, in order to profit from the consumers' demand, must necessarily maintain the desire to sell his goods, throughout all those marketing channels by which alone his products can be made accessible, at a multitude of destinations, for conveniently satisfying the consumers' demand. It is just as important to perpetuate the marketers' desire to sell, in order to procure distribution, as it is to produce commodities or to create consumer's demand. Production. and demand are useful only in proportion to the degree of success with which they are conjoined by distribution. If numerous otherwise-active marketers lose the desire to sell, they offer just so much resistance to distribution and the normal efficiency of the producer's goodwill is correspondingly decreased. Obviously, one of the producer's most serious concerns is to protect his marketing agencies against disappointing or injurious experiences in the handling of his products.

For one thing, the producer must enable his marketing agencies to profit from the sale of his goods. To that end, he may set up a pricing system that should allow fair profits to all his marketers: Otherwise they will not want to sell (disregarding here those dealers who prefer to sell some items without profit, in order to attract customers). If margins of profit are adequate, then all levels of marketers will be induced to sell and their favor will add largely to the producer's goodwill. Their favor, however, will vacillate, or subside altogether, if their margins of profit are unreliable; if today they may make money but tomorrow must sell at cut prices or not at all; if the producer's pricing system represents only an ideal to which no one is obliged to conform.

The weakest points in the producer's pricing system, and therefore the most sensitive spots in his goodwill, are at the retailers' counters. There the consumers' demand is focused, and it will be stimulated and satisfied, or discouraged and rejected, according to the disposition of each retailer. However well-disposed consumers may be toward any preferred product, the retailer is present in person to exert a strong influence for or against his customer's preference-while the producer's influence is remote and easily ignored. If a retailer disfavors the producer's product, he will desire to sell a competitor's, and too often the customers acquiesce because the retailer persuades them or merely because it is more convenient than to argue or go elsewhere. Retailers are by far the most numerous class of marketers, and they are farthest removed from any reassuring persuasion by the producers; they are widely scattered. Hence, they are the most difficult class to govern, while at the same time each retailer holds literally in his own hands, for good or evil, a definite fragment of the producer's goodwill which he may misuse not only in dealing with his own customers but also