Legal Developments / 117 about third

Legal Developments / 117
about third-party financing must be used
in department store charge account matters
and related cases which seemingly do not
apply.
In making his decision. Judge Gausch
noted that there exists little legal authority
on the issue of whether newspaper advertising is a "commodity" governed by the
Robinson-Patman Act. He then chose to
3.0 REGULATION OF
base his decision on a statement in the
PRICE COMPETITION
writings of Professor Phillip Areeda of
Harvard Law School and on judicial prece3.1 Price Discrimination
dents declaring broadcast advertising not
to be included within the term "commod1. National Tire Wholesale, Inc. v. The
ity" under the Robinson-Patman Act. The
Washington Post Co., CCH ^ 61,697 {D.C.
judge stated that he was unpersuaded by
N. Cal., October 1977); BNA ATRR No. 843
NTW's arguments that newspaper advertis(December 15, 1977), A-15. [Tower]
ing should not be equated with broadcast
Newspaper advertising is not a "com- advertising since printed advertising is a
modity" within the meaning of the tangible product.
ludge Gausch considered NTW's arguRobinson-Patman Act. So ruled the U.S.
ment
that the preferential treatment afDistrict Court for Northern California in
forded
Market, along with Market's willing
dismissing antitrust charges brought by
National Tire Wholesale (NTW) against The participation in the arrangement, constituted an illegal combination in violation of
Washington Post Company.
NTW, a retailer of tires and other related Section 1 of the Sherman Act. In dismisautomobile accessories and services, filed sing this second charge, the judge stated
this suit for damages allegedly resulting that an illegal combination could not be infrom the advertising practices of The Wash- ferred from the preferential treatment and
Market's willing participation since there
ington Post. The basis of NTW's complaint
was no allegation of a conspiracy between
was that The Post consistently granted
Market and The Post and since the advertisNTW's chief competitor. Market Tire Coming contract between Market and The Post
pany (Market), preferential advertising po- did not restrict either party's dealings with
sitions. NTW claimed that The Post con- others.
tinually refused to provide NTW "premium
Finally Judge Gausch dismissed the
paid positions" on the ground that space
breach
of contract claim by NTT/V for lack of
was not available, while The Post placed
federal jurisdiction over the subject matter
ads of Market in premium spots without
involved in the claim. Since the alleged
billing Market any additional charges.
federal violations had already been disFinally, NTW alleged that The Post admitmissed, the judge felt the breach of conted in September, 1976 that the position of tract claim was strictly a matter to be adads was not randomly selected and that The judicated under state law.
Post had and would continue to give MarThe case appears to be significant for two
ket favored treatment since it was a prerelated reasons: (1) the decision seemingly
ferred customer. NTW asserted that these
accepts lower federal court precedent in
facts constituted: (1) price discrimination in
dealing with newspaper advertising under
violation of the Robinson-Patman Act, (2) a
the Robinson-Patman Act; and (2) the FTC
combination in restraint of trade in viola- recently filed a complaint charging the
tion of Section 1 of the Sherman Act, and Times-Mirror Company with discrimina(3) a breach of contract.
tion in its volume discount advertising rate
In dismissing the Robinson-Patman structure. The outcome in the NTW case
claims, the court accepted the argument by vAU undoubtedly play a significant role in
The Post that the Robinson-Patman Act did the adjudicative proceedings of the FTC
not apply to the case since newspaper ad- case against the Times-Mirror.
vertising is not a "commodity." While
NTW acknowledged that nonprint advertising is not governed by the Act, NTW con- 2. North Carolina's Attorney General's
tended that printed advertising is tangible Opinion regarding the Applicability of the
and therefore a "commodity" under the Robinson-Patman Act to Sales to State and
Local Governmental Units, CCH ^ 61,797
Act.
(November 1977). [Tower]
The Robinson-Patman Act states:
It shall be unlawful . . . to discrimiAre sales to state and local governmental
nate in price between different purentities exempt from the Robinson-Patman
chasers of commodities of like and qual- Act? According to Rufus L. Edmisten, Atity . . . where the effect of such distorney General of North Carolina, the ancrimination may be substantially to
swer is "yes."
lessen competition or tend to create a
While stating that the majority of cases
monopoly in any line of commerce, or
and opinions regarding the applicability of
to injure, destroy, or prevent competithe Robinson-Patman Act sales to state and
tion . . . (italics added)
local governmental units have indicated
that such sales are exempt, Mr. Edmisten
noted that some case decisions and state
attorney general opinions have declared
such sales not to be exempt.
In this opinion offered by the N.C. Attorney General, he states that sales to governmental units should be exempt from the
Robinson-Patman Act. Essentially, his argument is that sales to state and local governmental entities either do not reduce
competition or involve costs considerably
less than sales to private firms. In making
his argument, he says that "even if not
exempted from the Act, it would seem that
lower prices for state agencies would be
permitted within the Act itself." He then
apparently comes to the conclusion that
since most sales would be permitted under
the Act, the sales are exempt.
It is difficult for one to accept the logic of
the N.C Attorney General since it is doubtful he would accept an argument that a
firm should be exempt from the
Robinson-Patman Act since most of its
sales would be found to not violate the
Act.
Situations have arisen in the past and
will arise in the future wherein discriminatory sales to state and local entities might
reduce competition with private enterprise
or might not be cost justified. Firms deserve the same competitive protection from
governmental units as from private enterprises. An argument for the exemption of
sales to governmental units from prosecution under the Robinson-Patman Act requires a more substantial basis than has
been provided in this opinion and in the
past.
3.2 Price Control
(Nfinimum and Maximum)
4.0 REGULATION OF
CHANNELS OF
DISTRIBUTION
4.1 Operating Features of
Marketing Institutions
4.2 Relations between Buyers and Sellers:
Exclusive Dealing Anangements, etc.
1. Sargent-Welch Scientific Co. v. Ventron Corp., CCH ^ 61,761 (CA-7, December 1977); BNA ATRR No. 844 (December 22, 1977), A-1. [Knapp]
Some conditions under which a supplier
can terminate a dealer and the dealer can
challenge the termination were reviewed
by the Court of Appeals for the Seventh
Circuit. The court also ruled in an interesting manner on market
definition,
monopoly power, and the use of monopoly
power. Because this was a review of a
lower court's decision, much detail includ-
118 / Journal of Marketing, July 1976
ing some which was quite technical was
omitted, with the decision of the lower
court only briefly affirmed in part and reversed in part.
Cahn, the relevant division of defendant
Ventron, sold two kinds of electromagnetic
devices for precision weighing. The more
expensive and sophisticated device called a
"microbalance" could weigh precisely to a
microgram (one-one millionth of a gram).
The other device, a "millibalance," also
weighed small fractions of a gram but not
as precisely as a microbalance, SargentWelch had been a dealer of Cahn balances
for many years until it was terminated in
1971.
In its letter of termination, Cahn gave
as reasons that it sought to "consolidate
sales among its more effective dealers,"
and that Sargent-Welch's performance had
been poor. However, and probably to its
later regret, Cahn also said that SargentWelch had refused to handle its miUibalances, thus opening the prospect of a
tie-in charge.
In challenging its termination, SargentWelch argued that Cahn's reasons were to
force tying and to monopolize. (It also
charged that Cahn was guilty of horizontal
price-fixing by its "fair trade" pricing policy, a matter reviewed by the court but not
considered here because of subsequent
legislation prohibiting fair trade rendered
the issue moot.)
The court rejected the dealer's tying
charge because Sargent-Welch did not contend it had an express tying agreement
with Cahn and because tying could not be
inferred from the circumstances. Testimony
from representatives of Sargent-Welch and
from another dealer terminated by Cahn
admitted that Cahn neither threatened
them nor conditioned sales of its microbalances upon an agreement to purchase millibalances. The essential element of agreement or understanding was absent for
finding violation of Section 1 of the Sherman Act, said the court.
However, the court said that Cahn could
still have violated Section 2 of the Sherman
Act, regardless of the absence of any tying
agreement, because that section proscribes
unilateral monopolizing action. For a private plaintiff to obtain relief under Section
2, two conditions must be met: (1)
monopoly power must be proven, and (2)
plaintiff must have suffered injury by misuse of that power.
Thus the issues of relevant market definition and Cahn's share of it became major.
The lower court rejected Sargent-Welch's
narrow submarket definition and found no
monopoly power. Typically, a plaintiff
seeks a narrow market definition and defendant a broad definition. Cahn had 8.2%
of the sales of the broad market of all precision balances. However it had 90% of the
sales in the submarket of electromagnetic
microbalances.
As is typical in these matters, when different courts analyze complicated details
bearing on the technical and economic factors defining products and markets, they
come to different conclusions based on the
same set of facts. The court here found the
lower court's definition of the relevant
market "clearly erroneous." For its decision, the court of appeals reviewed the
many indicia of relevant market definition
in numerous precedents and the technical
details of precision balances, and it concluded that microbalances constituted a
separate submarket.
In addition, it focused on some specific
issues. It warned that concentrating on
sellers and ignoring buyers is not meaningful for defining relevant markets. When it
analyzed the buyers of balances, it found
that microbalances served end-users and
purposes sufficiently specific to constitute a
relevant submarket.
The manner in which the court used
Cahn's own claims for its product was interesting. As has happened to other firms,
Cahn probably came to rue the day it had
boasted in public about its product's
uniqueness. The court quoted among other
statements from a speech by Cahn's parent
corporation president that in the microbalance field, "we are virtually alone in the
market." This might have impressed security analysts at the time, but eight years
later it came back to haunt Cahn.
As further evidence that microbalances
were a relevant submarket, the court noted
that Cahn did not sell to the whole spectrum of balance customers, that its microbalance pricing structure was apparently
unrelated to that of less precise balances,
and that demand was insensitive for microbalances but not for millibalances.
Holding that the supplier had monopoly
power, the court nevertheless found the
power was "lawfully acquired." Cahn
could stUl be guilty of Section 2 violation if it
had misused its power to injure a dealer by
termination, and this should be tested by
the purposes of the termination. Some of
the evidence suggested that Cahn's purpose was lawful. A supplier, even if it had
monopoly power, should be free to consolidate its dealers even by terminating
some of them, if its purpose was simply to
increase marketing efficiency. The court
noted Cahn's arguments that SargentWelch was terminated for being a poor performer, as were other similar dealers, suggesting that Cahn's purposes were not
aimed specifically at injuring SargentWelch.
However, the court also allowed for the
possibility that one purpose for terminating Sargent-Welch was its refusal to handle
millibalances. If this were true, then it was
misuse of monopoly power and unlawful,
according to the court. In order to judge
what in fact were the purposes, the court
of appeals remanded the case to the lower
court judge, who, it said, was in a better
position to decide.
2. Pitchford Scientific Instruments
v.
Pepi, Inc., et al, CCH ^ 61,741 (D.C.
W. Penn., July 1977). [Knapp]
Immediately following last year's landmjirk decision in the GTE Sylvania case (see
this section. Journal of Marketing, January
1978), that case has frequently surfaced in
many marketing antitrust cases, as judges,
lawyers, and businessmen grope to understand and apply its new rulings. In this
case, the court, in scrutinizing the scope of
GTE Sylvania, offered some interpretative
refinements of it. Only the legal interpretations relevant to marketers are examined
there. This district court was instructed by
its court of appeals to determine whether
the opinions of the court of appeals in a
case involving a manufacturer's restrictions
over a dealer, rendered before GTE Sylvania, were inconsistent with the later
overruling decision of the Supreme Court.
In rendering its decision, this district
court provided some interpretations of
what will surely be an endless raveling—
and unraveling—of the loose ends in GTE
Sylvania. The court gave three specifics of
what GTE Sylvania covered and did not
cover:
First, the court said last year's landmark
case dealt only with vertical restrictions in
relaxing the per se doctrine in favor of the
rule of reason. The per se rule still appbes
to horizontal restrictions, including the
situation where a supplier has an agreement with each dealer to divide territories.
Second, the court ruled that GTE Sylvania
dealt only with a "location" clause. It involved a "vendor restriction" and not a
"vendee restriction." In Sylvania, each
dealer was free to sell to any buyer he
chose from his authorized location. What
was at issue there was the restriction on a
dealer from opening an unauthorized location. A "vendee restriction," over which
Sylvania does not apply, forbids sales to
customers located outside the dealer's assigned territory, and this is different from
and more serious than the purely Iocational
restriction in Sylvania.
Third, the court said that Sylvania dealt
only with a location restriction standing
alone, and not with a situation of a location restriction connected with a larger
price-fixing scheme.
As this and other cases reveal, GTE Sylvania did by no means clarify and settle
once and for all the troubling issues started
by the Schwinn decision. It is interesting
that this court in interpreting Sylvania fo-
Legal Developments / 119
cused considerably on the niceties and
warnings in the dissenting and concurring
opinions, and on the fact that Sylvania
largely ignored other landmark cases. Distressing to those who thought Sylvania settled the muddy, turbulent waters of dealer
restrictions is the statement by this court,
coming just one month after Sylvania, that
"it is probable that the Continental T. V.
case [GTE Sylvania] will produce as much
confusion and controversy as the Schwinn
case which it superseded."
5.0 REGULATION OF
UNFAIR
COMPETITION
5.1 Advertising
1. In re Ford Motor Co., CCH ^ 21,373,
F,T.C, Dkt 9105 Oanuary 1978); BNA ATRR
No, 847 Oanuaiy 19, 1978), A-10, [Cohen]
A somewhat unusual approach to the designation of a false representation emerges
from a complaint issued by the FTC against
the Ford Motor Company based on the sale
of Ford automobiles that had the defect of
"piston scuffing," ("Piston scuffing" is excessive piston wear caused by inadequate
lubrication of the sides of the piston.)
According to the FTC, Ford was aware of
this problem and sold such cars without
disclosing the existence of the defect or the
existence of a compensation program for
this defect. These actions may cause consumers "substantial economic harm" because of their inabihty to avoid or prevent
substantial damage to the engine of the
vehicles. In addition, according to the FTC,
by offering its motor vehicles for sale. Ford
falsely represented that they do not have
any latent defect which substantially affects
their reliability, durability, or performance.
While an evaluation of this complaint requires additional information and interpretation, it suggests a new direction for the
FTC in its efforts to ehminate misrepresentation. There have been cases in the past in
which the FTC has declared that an advertisement which contains insufficient information is deceptive; generally, however,
these have related to health and safety considerations. Furthermore, companies are
now required to be able to substantiate
their performance claims.
The approach in this case differs in that
the FTC has indicated that by offering its
motor vehicles for sale. Ford represents
that "they do not have any latent defect
which substantially affects their reliability,
durability, or performance." Furthermore,
being aware of the defect makes the representation false, since it may cause "economic" harm. This appears to be a significant extension of product liability to the
regulation of deception. Although the FTC
has only issued an initial complaint and
the case is still to be tried by the full
Commission, its final resolution may establish a new standard for deception.
The alleged defect "piston scuffing" results from metal-to-metal contact between
the pistons and the cylinder walls because
of poor lubrication. According to the FTC,
by 1976 Ford knew that some of its four
and six-cylinder engines contained this defect, and had verified that it was due, in
part, to inadequate lubrication of such engines. Ford later modified its engine design
and by July 20, 1977 initiated programs
(not generally disclosed to the public) to
compensate purchasers whose engines developed piston scuffing. Some purchasers
were not compensated, according to the
FTC, because they did not know of the
programs, because compensation does not
extend to cars beyond a certain mileage or
model years, or because some dealers do
not abide by the programs.
Remedies proposed by the FTC include
restitution and affirmative disclosure.
Among other things. Ford would be required to compensate purchasers whose
motor vehicles are affected by the alleged
defect; to disclose to purchasers and current owners the existence of a defect that
may substantially affect durability, reliability, and performance characteristics of the
vehicle; and to disclose to purchasers and
current owners the existence of adjustment
programs to repair or compensate for these
defects.
2. National Commission on Egg Nutrition
and Richard Weiner, Inc. v. Federal
Trade Commission, CCH ^ 61,751 (CA-7,
November 1977); BNA ATRR No. 843 (December 15, 1977), A-11, F-1, [Cohen]
The First Amendment does not offer protection for false, misleading, and deceptive
advertising; however, it does preclude a
remedy broader than that which is necessary to prevent deception, according to the
Court of Appe^lls for the Seventh Circuit.
Thus, although the National Commission
on Egg Nutrition (NCEN) can be ordered
to stop making statements that there is no
scientific evidence of a relationship between dietary cholesterol (as found in eggs)
and heart disease, the trade association
cannot be required to present the "other
side of the argument" in any future advertisements or public statements it makes
concerning the relationship between eating
eggs and heart disease.
The NCEN was formed by members of
the egg industry to counteract what the
FTC described as "anticholesterol attacks
on eggs which had resulted in steadily declirung per capita egg consumption," The
NCEN instituted an advertising and public
relations program to convey the message
that eggs are harmless and needed in
human nutrition. The FTC filed a complaint charging the NCEN with false and
misleading advertising on the basis of the
fact that the trade association made representations that there is no evidence that
eating eggs, even in quantity, increases the
risk of heart attacks or heart disease.
After securing an injunction against such
advertising, the FTC ultimately issued a
cease-and-desist order prohibiting NCEN
and its advertising agency from making
certain specified representations. The order
directed the NCEN not to advertise the
statement, "There is no scientific evidence
that eating eggs increases the risk of . . .
heart disease." In addition, any representation made by NCEN concerning the relationship of dietary cholesterol (eating
eggs) to heart and circulatory disease was
permissible only if the NCEN also presented the other side. Many medical
experts believe that existing evidence indicates that increased consumption of dietary
cholesterol, including that in eggs, may increase the risk of heart disease. The order
also required that if the organization used
the name of the National Commission on
Egg Nutrition, it identify itself as a trade
association.
The NCEN requested a review of the
order focusing on the statement that there
is no scientific evidence linking the eating
of eggs to an increased risk of heart and
circulatory disease. The association declared, first, that these statements are true;
second, it contended that even if they were
misleading, the FTC's prohibition infringes
upon the NCEN's First Amendment rights;
and, finally, it argued that the order is unconstitutionally vague and overbroad,
going beyond what is necessary to remedy
the violation.
The court of appeals reviewed the order
and presented these findings:
Falsity. Where an advertisement conveys
more than one meaning, one of which is
false, the advertiser is liable for the misleading variation. Although some readers
might recognize the "no evidence" statement as opinion, others would not. Thus
the NCEN's message was held to be false
and misleading.
First Amendment protection. The First
Amendment does not preclude restraint of
false, misleading, or deceptive advertising.
Required additional statement. The court
declared that the NCEN should not be required to include "the other side of the argument" in any future advertisements it
makes concerning the relationship between
eating eggs and heart and circulatory disease. According to the court, NCEN should
only be required to make the statement
that many medical experts believe increased consumption of dietary cholesterol,
including that in eggs, might increase the