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For P. M. Release on" Tuesday August 13, 1959

REMARKS OF

WILLIAM C. KERN, COMMISSIONER

FEDERAL TRADE COMMISSION

Before the

NATIONAL CONGRESS OF

PETROLEUM RETAILERS, INC.

August 18, 1959

Jung Hotel

New Orleans, Louisiana

Mr. Chairman and Members of the National Congressof Petroleum Retailers, Inc.: I am delighted at thisopportunity to address your convention. I am told thatabout 30,000 individual retail service station operatorsbelong to the various groups that make up your Congress.That certainly makes this meeting wonderfully representativeof independent small business. I believe that independentsmall business is at the very heart of the political andeconomic traditions of America. Our free enterpriseeconomy will remain viable and strong so long as theaverage citizen is free to start a new business, tomake his own business decisions without coercion orintimidation, and to succeed, if possible, in makinghis business grow into big business by dint of his owninitiative and hard work. It is the duty of all of usto keep it that way; that is what we at the Federal TradeCommission are trying to accomplish. However, as I shallpoint out later, in my Judgment the spokesmen of manybusinesses, both small and big, are asking our Government .to do more for them than they legitimately should askwith the result that individual initiative and hard workmay, like the Indian, be vanishing from the American scene.Government handouts, special purpose and privilege legis-lation, and the curse of subsidies may be causing aspiritual atrophy that endangers our very existence asa nation. Too many demands are being made both upon theCongress for legislation and through the Congress uponthe public treasury for the solution of every difficulty.It is about this that I wish to speak to you today.

But before I discuss this subject may I assure youthat the Commission is thoroughly aware that your lineof business has its troubles — and plenty of them. TheFederal Trade Commission has been alive to those problemsfor a long time and has tried to do something about them.Indeed perhaps our activity in this area has been dis-proportionate to our overall responsibilities. Let usreview that activity for a moment.

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As early as 1915, the Commission made its firstgeneral investigation of gasoline prices and of competitionin the marketing of gasoline. From that time, over theyears, there have been no fewer than twelve generalinvestigations of various aspects of petroleum distribu-tion and a number of other investigations on relatedsubjects. In addition to such general inquiries, therehave been a great many specific investigations ofsuspected law violations and a considerable number ofthese have ended in formal Commission proceedings.There has never been a time when matters involvingsome aspect of your industry were not pending beforethe Commission.

I am sure that you are just as familiar as I amwith the situation out of which these problems arise.The major oil companies are competing more-or-lessvigorously among themselves for shares of the brandedgasoline market. At the same time they are also com-peting with the unbranded products in the total marketfor gasoline. The supplier of gasoline frequently maybe strongly tempted to reduce prices in particularterritories or to particular stations -- for example,to meet the price of a local competitor or cut intohis volume, or to dump a temporary and localizedsurplus of gasoline without disturbing prices over abroad area. If the supplier is able to discriminatein price among his customers, it is obvious that hisindividual customers who do not receive the favoredprice will absorb most of the hard knocks of thiscompetition.

Now the Commission has no business interferingwith legitimate competition, even though a competitormight be injured or even destroyed as a result of it.Risk is inherent in business. But the Commission doesstep in when any of the laws it is charged with enforc-ing is violated. In relation to the pricing of gasoline,the competitive situation has frequently given rise to

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charges of price discrimination and price fixing —practices which do violate those laws.

The Standard Oil!!!/ case was one of the Commission'smost frustrating experiences. The essential facts arethat in the Detroit market the Standard Oil Company soldgasoline to so-called "jobber" customers, who resold bothat wholesale and also at retail. These "jobber" customerswere charged l-l/2£ a gallon less than regular servicestations which competed directly with the so-called "jobbers'for retail business. The Commission's complaint chargedthat this price difference violated the Robinson-PatmanAct. After long litigation, however, the Supreme Courtdecided that this was a price discrimination but did notviolate the Act because Standard Oil's lower price fellwithin an exception to the Act that permits a seller tomeet its competitor's price in good faith.

Depending upon one's point of view, the SupremeCourt's decision either created or revealed a vast loop-hole in the Robinson-Patman Act. The price-meetingdefense was held to be absolute. Thus, under this decisiona supplier is perfectly free to discriminate in favor ofa customer once that customer has been offered a lowerprice by a competing supplier — and this is true eventhough the discrimination might have a disastrous effectupon competition with the seller or with the buyer.Likewise, the powerful buyer is free to solicit dis-criminatory prices from various suppliers by the useof offers from other suppliers.

It goes without saying that the Standard Oil decisionwas completely contrary to the Commission's interpretationof the Robinson-Patman Act. From the beginning I strongly

•/ Standard Oil Company v. Federal Trade Commission,340 U.S. 231

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favored new legislation to close this loophole and supportedthe bill known as S. 11 or the "equality of opportunity"bill. In supporting that bill before the Senate Committeeon the Judiciary I stated:

"It would be folly to permit a zeal forpreserving an abstract 'meeting competition1

concept to overshadow the main purpose of theClayton Act, which was to outlaw practicesleading to unlawful trade restraints or nur-turing monopoly. That legislation of thiskind should contain an exemption which, inthe name of 'meeting competition in goodfaith,' actually lessens competition on thesmall-business level is an inexcusable anomalyqalHng for the correction offered by 8,XX,whiah would pei'tnit the absolute defenseexcept where the effect may be substantiallyto lessen competition or tend to create amonopoly in any line of commerce. In myopinion, a complete defense should not begranted to discriminatory practices that willsuppress competition or foster monopoly."

However, I would be less than frank if I did not tellyou that a well organized opposition to this bill has madeit so controversial that in my judgment its chance offavorable consideration by the Congress is not very bright.

Meanwhile, the Commission continues its efforts tohalt illegal pricing practices in the petroleum industry.

The Sun Oil—' case, which we decided this year,involved two charges arising out of a price war inJacksonville, Florida. Without lowering prices to itsother dealers in the vicinity, Sun cut one dealer's priceby 1.7$ a gallon to assist him in reducing the gap betweenhis price and that of a neighboring off-brand station.

*/ Matter of Sun Oil Company, F.T.C. Docket 6641 (Jan. 5,1959).

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From all the evidence and the circumstances surroundingthe transaction, the Commission concluded that the dealerin return agreed to reduce his price by 3£. On thesefacts, the Commission found that Sun's price discriminationviolated the Robinson-Patman Act. We held that the defenseof "good faith meeting" of a competitor's price was notavailable to a supplier who discriminated to permit itsciistomor to meet the price of tho customer's competitor.We also held that the agreement between Sun and itsdealer to fix and maintain the 3£ lower price was aprice fixing conspiracy in violation of the FederalTrade Commission Act.

The Sun case presented some of the typical problemsof the price" war. I think that it is a significantdecision. It is particularly important because it limitsthe "good faith meeting" defense to the strict boundariesof the Act.

Several other gasoline price cases are pending beforethe Commission. Generally they arise out of price wars.In addition to charges of price discrimination betweencompetitors, some of thorn also involve such charges asterritorial price discrimination, the use of temporaryconsignment contracts to coerce uniform prices and variouskinds of pressure by suppliers to control retail prices.You will understand that it would be improper for me todiscuss the merits of cases such as these while they arestill under consideration. I mention them only to indicatethat gasoline pricing problems continue to be among theCommission's major concerns.

Entirely aside from the pricing matters I have beendiscussing, another type of antitrust problem is commonin your industry. This problem is caused essentially bythe vast contrast in the economic power and trading positionsof the oil companies and their service station customers.One aspect involves the use by the supplier of its economicleverage in one commodity, or as a landlord, to influenceor coerce the business choices of its customers or lesseesin another field which the supplier does not dominate. Thefamous Standard Stations]!/ case decided that an express

•/ Standard Oil Company v. United States, 337 U.S. 293

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contract between the supplier and dealers for the purchaseof their "full requirements" of gasoline and TBA itemsviolated Section 3 of the Clayton Act when the effectwas to foreclose a substantial part of the market tocompetitors. Following that case, the Federal TradeCommission became very active in preventing such con-tractual arrangements and I, as a trial attorney, trieda number of the more important cases in this field. Asa result of this litigation, suppliers are no longer veryapt to put full requirements, exclusive dealing or tyingarrangements into written contracts.

Evidence is now being taken by Commission examinersin three important matters known as the TBA cases. Thecomplaints allege that oil companies supplying certainservice stations and distributors exercise their influenceand control over those stations and distributors topersuade them to purchase their TBA supplies from certaintire manufacturers. In return for this service, thecomplaints allege that the tire manufacturers pay the oilcompanies "override" commissions of varying amounts up to10% on TBA items sold to stations and distributors dealingin the products of those oil companies. Once again, youwill understand that I am unable to comment on the meritsof these cases before they have been decided by theCommission.

In addition to economic problems of the kind I havebeen discussing, the Commission also protects the consumingpublic from the false and misleading advertising andlabeling of products sold in commerce. Such phony orexaggerated claims by over-zealous sellers are "deceptivepractices" within the meaning of the Federal Trade CommissionAct and may be prevented by cease and desist orders.

The reprocessed oil cases are typical exampales ofsuch practices touching on your business. There respon-dents distributed reclaimed and reprocessed oil incontainers just like those in which new oil is marketed.They either did not disclose at all or disclosed inadequatelythat the contents of the cans had been previously used inautomobile crankcases. The respondents argued that theirproduct was just as good as new oil and, therefore, thatthe public was not injured by the practice. The Commission

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dld not agree. We held that the consumer is entitledto know what he is buying and issued orders requiringclear and conspicuous disclosure, both on the oil con-tainers and in advertising. -

There is a constant procession of such cases fromyour line of business. Some deceptions that the Commissionhas proceeded against recently include —

A seller who advertised as "new" tiresthat had been previously used and then cleanedand painted to look new.

A manufacturer that falsely representedthat its gasoline and oil additives areapproved or recommended by the United StatesGovernment.

A dealer who represented as "top-qualitysnow tires" ordinary tires that merely hada few additional grooves cut in them.

I could add many more examples. The Commission isconstantly vigilant against such practices and the volumeof our work in this field is steadily increasing. Whilewe will never be able to put a halt to all false and mis-leading advertising, our persistent campaign againstdeception will restrain the more blatant offenders.

I hope I have not bored you with too much lawyer'stalk. My point is that the Federal Trade Commission isacutely aware of the serious problems in the petroleumdistribution industry. In fact we have an unprecedentednumber of pending cases involving your industry.

At the same time, we are experimenting with new meansof securing voluntary compliance with fair advertisingstandards in your field of activity. The Tire AdvertisingGuides are an example. The public has been very muchconfused by the flamboyant advertising claims of tiremakers and dealers. Last year the Commission attempted torelieve this confusion by issuing twelve specific guidesto give the industry detailed notice of what the Commission

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considers to be deceptive about tire labeling and advertising.We hope that they will eliminate much of the deceptioncaused by these claims. For those who persist in deceptiveadvertising, of course, the Commission's mandatory pro-cedures will still be available.

Now let us leave your own industry problems andconsider the vastness of our overall responsibilities.At present these include the Federal Trade CommissionAct of 1914, as amended by the Wheeler-Lea Act of 1938and the Oleomargarine Act of 1950; Section 2 of theClayton Act, as amended by the Robinson-Patman Act of 1936;Sections 3 and 8 of the Clayton Act; Section 7 of theClayton Act as amended; the Export Trade Act known asthe Webb-Pomerene Act; the Wool Products Labeling Actof 1939; the Lanham Trade-Mark Act of 1946; the FurProducts Labeling Act of 1951; the Flammable FabricsAct of 1953; and most recently the Textile Fiber ProductsIdentification Act passed by the last Congress.

The sum and substance of all this legislation is aCongressional mandate to the Commission to prevent unfairmethods of competition and other unfair trade practices,to correct and prevent commercial deception of the Americanpublic, and to keep the channels of commerce free from thetypes of undue restraints and tendencies to monopoly con-demned by these various statutes: a broad mandate indeed.

To accomplish this mandate we have an annual appro-priation of some six million dollars which enables us tohire a small staff of some seven hundred employees. Yetthe economy we are expected to police has increased itsnational product from approximately $100 billion in 1940to $483 billion in 1959. But lest you think that I am atypical bureaucrat seeking additional appropriations toaugment an already swollen bureaucracy, let me state thatI would gladly accept even a cut in our meager appropriationif I could by so doing bring about a cessation of what Ihave at the outset referred to as government handouts,special purpose and privilege legislation, and the curseof subsidies which are threatening to engulf our entirefree enterprise system. You and I as representatives of

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the great American middle class may well be the principalvictims caught between high taxes on the one hand and acheapened dollar on the other. Of course, many factorscontributing to this problem do not come within thepurview of the Federal Trade Commission. Neverthelessas a citizen and, I hope, a patriotic one, and as amember with you of that great middle class, and as anofficial close to the Washington scene, I am disturbed— and I feel that if I can alert intelligent groups likeyours to the problem, perhaps your influence and theinfluence of others like you may be brought to bear onthe power centers in Washington. This is not or shouldnot be a partisan matter and both great parties might notonly take heed but even join forces to combat the evil.For if foreign policy is traditionally considered bi-partisan, why should not the preservation of our freeenterprise system be viewed with a similar bi-partisanapproach? The leadership of both our great politicalparties might well join in a blueprint plan for a victorioussolution of this problem of keeping our economy strong.Now what might that blueprint consist of? The overridingpublic interest in controlling threatened inflation,strengthening the dollar, balancing the budget andeventually reducing the tax burden on our people must begiven paramount priority. Special handouts, subsidies(both domestic and foreign) must be eliminated in allareas, except those absolutely vital to national security.Small buainoBB and ita sponsors can play a vital part, Ibolievo you should have the right to a oompotitivo positionwhich permits you to fight it out fairly and oponly withyour competitors both large and small in the marketplace.But you should have no more than that. Nor do I believethat you require any built-in special security. I onlywish that some of your small business champions had thesame confidence in you that I do. We at the Commissionare concerned about many legislative proposals grantingspecial exemptions which would break down the antitrustlaws. For example, several bills have been introducedto limit manufacturers in selling direct to retail outletsunless price differentials are established to protect theprofit margins of competing wholesalers. Under suchproposals the Federal Trade Commission would be requiredto investigate every wholesaler whose business would be

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affected and determine what his profit margin should be.This would put the Government in the price fixing businessand eliminate price competition at the wholesale level inthe businesses affected. Such proposals are inconsistentwith the free enterprise system and with the basicprinciples of antitrust law.

Other bills introduced seek to give auto dealers avirtual monopoly to sell cars at probably higher pricesin territories assigned to them by the manufacturers,and any dealer selling outside his own territory wouldbe required to pay a commission to the dealer in whoseterritory the sale was made. It seems clear to me thatsuch special privilege legislation providing for built-interritorial monopolies would not be in the best interestsof the consumer nor does it foster the principle ofvigorous competition at the retail level. Other bills oflike character have been introduced; and, of course, wehave as always a fair trade bill with us in some form orother. Yet lot U B not ignoro so-called lUr? business, orMia fitrmia', m< tltu union* trim a aiiiiMidttrublon »f Lhieli'tilyiuUv** Mfjitrtili "In! fftffc Uwii'w11, Hubftiuieft to tit? ftiflinos, subsidies to ihd shipping linos, oil and gasdepletion allowances and subsidies, and farm subsidiesrun into billions. Sometimes I wonder if there is anyorganized group in our economy that is without benefitof some subsidy. It seems to me there is only one for-gotten group without some subsidy — the American Taxpayer.

The unions continue to benefit by immunities grantedunder the antitrust laws at a time when labor was weakand fighting for its life. They should be continued tobe fostered as an indispensable part of our economicfabric. However, now that labor is as powerful in theindustrial arena as any combination of capital, surelythe public interest suggests that these immunities bereexamined. Yet current criticism of some of the activitiesof some unions, such as "union feather bedding", bring tomind similar abuses on the part of industrial management.For example, I am reasonably certain that many corporatemanagements have successfully insulated themselvesagainst some of the more serious effects of our presentvery burdensome tax structure by the creation of various

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schemes which may well be described as "executive featherbedding" such as overly liberal executive retirement andpension plans, stock option agreements, executive incentiveplans and the like.

Nor are our state governments beyond blame for anothertremendous drain upon the public treasury. Increasinglyvast sums are going out as grants in aid to the states.Even the most ardent states righters are agreeable, andindeed receptive, to federal largess to the states.While federal grants in aid for everything from highwaysto free lunches may seem desirable, certainly theseexpenditures should be weighed against the old-fashionedquestion "where do you find the money"? In my judgmentonly when disaster or emergency creates a situationbeyond the control of local communities or the statesshould the powers of the federal government be broughtinto action; somehow and soon there must be a return tostate, local and individual responsibility. The wholearea of grants to the states should be reexamined.

Finally, the Federal Government itself must bearits full measure of blame. Failure to resist the pressureof the farm lobby, the union lobby, yes, and the smallbusiness lobby, is a part of the story; failure torecognize that it is more important to keep our Nationstrong than to attempt to win dubious allies by the ineptuse of vast sums in foreign aid is also part of the story;Hnri «Uove nil i fpilnra %& m » N n vw) effort lo «imiinhthese pf&etie&i == failure to think iH kimm «l thepublic interest as a whole, completes the story.

Now do you think I am a disillusioned cynic andview the situation as hopeless? No, I don't. Americanshave always been able to rise to any crisis once theyrecognize it. None of us would tolerate for a momentseeing America reduced to a second-class power or, worse,to a slave state. With leaders brave enough to riseabove political expediency and show us the way, we canand will remain indomitable. But the leadership musttruly represent a resurgence of the public conscience —a conscience which recognizes that subsidies must bevastly curtailed or limited, a conscience which recognizes

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that special purpose and special privilege legislationmust be abandoned, a conscience which recognizes thatthere should never be allowed to exist peculiar favoritesof the Government at the expense of the general public.

I firmly believe that what this fine group and otherimportant groups in our economy need is not more legis-lation to protect them and insulate them from competitionor from price declines. Needed, instead, is the will tofight it out fairly as vigorous competitors in themarketplace, protected only by being assured that thecompetition required to be met is itself fair, free,and open. This leads me back to the thought I expressedat the outset of these remarks, namely, that I conceiveit as the paramount duty of the Commission to preserveand foster such a wholesome competitive climate. Toaccomplish this requires not a relaxation, but a morevigorous enforcement of the antitrust laws.

I am satisfied that the greatest boon to business,both small and large, would be a sizable reduction in thepresent burdensome tax structure. You want to get theGovernment off your backs. But you will never accomplishthis unless all the pressure groups get off the back ofGovernment.

In closing may I say that above all else we need acourageous leadership, able to rise above sectionalism andpolitical pressures. The type of leadership I envisage |(and don't misunderstand me, for there are quite a few |of them in this category in Washington today — for example, |the names of Rayburn and Johnson stand out as veritable |towers of strength and patriotic courage) — the kind of |leadership which I envisage is happily expressed in a fewlines of verse which I read to you now:

"God give us men. The time demandsStrong minds, great hearts, true faith, and willing hands;Men whom the lust of office does not kill;Men whom the spoils of office cannot buy;Men who possess opinions and a will;Men who have honor; men who will not lie;Men who can stand before a demagogueAnd damn his treacherous flatteries without winking;Tall men, sun-crowned, who live above the fogIn public duty and in private thinking."