Federal Trade Commission v. Henry Broch & Company/Dissent Whittaker

by Charles Evans Whittaker

United States Supreme Court

363 U.S. 166

FEDERAL TRADE COMMISSION, Petitioner,  v.  HENRY BROCH & COMPANY.

 Argued: Jan. 14 and 18, 1960. --- Decided: June 6, 1960

Mr. Justice WHITTAKER, with whom Mr. Justice FRANKFURTER, Mr. Justice HARLAN and Mr. Justice STEWART join, dissenting.

The Court holds, in effect, that the action of an independent broker, engaged by a seller, in reducing his contract rate of commission for the purpose of enabling the seller to make a sale to a buyer at a reduced price, constitutes the granting of an allowance in lieu of 'brokerage' by the broker to the buyer, in violation of § 2(c) of the Clayton Act, as amended by the Robinson-Patman Act, 15 U.S.C. § 13(c), 15 U.S.C.A. § 13(c).

Respondent, an independent broker of Chicago, Illinois, was engaged by Canada Foods, Ltd., of Kentville, Nova Scotia, to procure orders for its products upon a commission or 'brokerage' basis of 5% Of the amount of the sales made. Other independent brokers in the United States were similarly engaged by Canada Foods, but upon a commission or brokerage basis of 4%. Canada Foods had announced a price of $1.30 per gallon for its apple concentrate. Respondent and another independent broker, both acting on behalf of Canada Foods, separately solicited the J. M. Smucker Company of Orrville, Ohio, for an order for that product. Smucker was willing to purchase a quantity of the product, but would pay only $1.25 per gallon for it. Finally, respondent agreed with Canada Foods to reduce its commission or brokerage to 3% In order to permit the latter to accept the Smucker order. Thereupon, Canada Foods accepted and filled the order, and thereafter paid respondent a commission of 3% As agreed. Smucker, the buyer, was not advised that respondent had agreed to reduce its commission charge to the seller.

Thereafter, in what appears to be the first proceeding of this type, the Federal Trade Commission charged respondent with granting and allowing the buyer a portion of its brokerage fee, in violation of § 2(c) of the Clayton Act, as amended by the Robinson-Patman Act, 15 U.S.C. § 13(c), 15 U.S.C.A. § 13(c), and, after hearing, entered a cease-and-desist order against it. The Court of Appeals reversed, holding that respondent, an independent seller's broker, was not covered by § 2(c), and moreover had not paid anything of value as a commission, brokerage, or other compensation to the buyer. 261 F.2d 725. We granted certiorari, 360 U.S. 908, 79 S.Ct. 1297, 3 L.Ed.2d 1259.

In reversing the Court of Appeals, the Court now holds that § 2(c) 'clearly applies to payments or allowances by a seller's broker to the buyer, whether made directly to the buyer, or indirectly, through the seller.' In my view, no such question is presented on the admitted facts of this case, and the Court's holding is not supported by the terms nor the object of § 2(c), but is actually opposed to its declared purpose as shown by its legislative history.

Section 2(c) makes it 'unlawful for any person * * * to pay or grant * * * anything of value as a commission, brokerage, or other compensation, or any allowance or discount in lieu thereof, except for services rendered in connection with the sale or purchase of goods * * * either to the other party to such transaction or to an agent, representative, or other intermediary therein where such intermediary is acting in fact for or in behalf * * * of any party to such transaction other than the person by whom such compensation is so granted or paid.' ^[1] (Emphasis added.)

The phrase 'any person' in § 2(c) includes, of course, even a truly independent seller's broker. But that only poses the true question, which is whether an agreement by such a broker to reduce his commission charge to the seller, thus enabling the seller to reduce its price, constitutes the paying or granting by the broker of 'anything of value as a commission, brokerage, or other compensation,' or an 'allowance or discount in lieu thereof,' to the buyer.

There is no contention here that the buyer made any claim for 'anything of value as a commission, brokerage, or other compensation * * * for services rendered in connection with the * * * purchase of (the) goods,' either directly or through any intermediary. Rather, it is conceded that the buyer did not even know that respondent had agreed with the seller to reduce its commission charge. Nor is there any claim that respondent was 'acting in fact for or in behalf * * * of any party to such transaction other than the (seller) by whom (the concession in price was) granted.' Rather, it is conceded that it was not. Nor, indeed, is there any claim that respondent actually paid 'anything of value as a commission, brokerage, or other compensation' to the buyer or to any intermediary who was 'acting in fact for or in (its) behalf.' What and all respondent did was to reduce its charge to the seller for its services from 5% To 3%. It much surely be clear that this did not constitute a violation by respondent of the terms of § 2(c). For if it did, then all legitimate commission rates are frozen in destruction of competition, and in actual violation of the antitrust laws.

I turn now to the purpose of § 2(c) as shown by its legislative history. The motivating factor behind the enactment of § 2(c) was the elimination of the practice by large buyers of demanding and receiving price concessions in the guise of 'dummy brokerage' payments and 'allowances' for 'services' claimed to have been rendered to sellers, but which were not actually performed. ^[2] It was Congress' purpose to eliminate that evil. Accordingly, it designed § 2(c) to prohibit payments or allowances of 'anything of value as a commission, brokerage, or other compensation' by a seller to a buyer, directly or through an intermediary, 'where such intermediary is acting in fact for or in behalf (of the buyer).' ^[3] Although Congress took the view that neither a party to the transaction nor his intermediary could perform legitimate services for the other party, § 2(c) was not intended to and did not proscribe payments by a seller or a buyer to his own broker for services actually rendered to him, nor did Congress intend to fix or freeze brokerage rates or otherwise interfere with such legitimate brokerage operations. ^[4] The purpose of § 2(c), as shown by the legislative history referred to, was not to embrace or affect legitimately negotiated rates of commission for brokers' services.

As I have pointed out, this is not a case where the buyer has claimed or received, either directly or through its intermediary, any 'brokerage' 'allowance,' or discount in price, as compensation for services. ^[5] Nor has the buyer obtained any allowance or discount because of any 'savings' claimed to have been effected for the seller through elimination by the buyer or his broker of services normally performed by the seller or his broker. ^[6] I am, therefore, unable to see or understand how it may be thought that the action of respondent in reducing its charge to the seller from 5% To 3% Constituted the granting, either directly or indirectly, of 'a commission, brokerage, or other compensation, or any allowance or discount in lieu thereof' to the buyer, within the meaning of those terms as used in § 2(c). Since this case does not in any way involve any payment or allowance for services claimed to have been performed by the buyer or his intermediary, it is simply not the type or kind of case that is covered and governed by § 2(c). Inasmuch as the legislative history of § 2(c) shows that Congress did not intend that section to affect negotiated charges for legitimate brokerage services, I submit that the Court ought not so extend it by construction.

Until today, it seems always to have been generally understood that a truly independent broker, such as respondent, was free to negotiate the rate or amount of his commissions with this principal without fear of violating § 2(c). ^[7] Such was the expressed congressional intention. ^[8] Surely if the rate or amount of respondent's commissions for services rendered to Canada Foods had been left to negotiation on each sale, no one would contend that an agreement by respondent to accept a commission of 3% For the sale in question would violate § 2(c). Likewise, there could be no violation of § 2(c) if, instead of dealing through a broker who charged a 5% Commission, the seller had dealt through a broker who charged only 3%. But the Court now holds that an independent seller's broker who has once agreed with the seller on a general rate of commission may not renegotiate that rate with his principal in order to effect a sale that would otherwise be lost to him. The fact that respondent and the seller had previously entered into an agreement concerning commission rates should not, in my view, be controlling, for I can see no sound reason why the seller and his broker must regard such an agreement as establishing an irrevocable floor under commission rates or amounts in order to avoid antitrust consequences. The Court's holding appears to me to be an unwarranted interference with legitimate brokerage operations, in direct contravention of congressional intent.

Quite obviously, the Court's real concern in this case is with the price reduction which this particular buyer has received. But, while it was the aim of the Robinson-Patman Act to eliminate discriminatory price advantages which particular buyers might obtain through unfair means, it should be borne in mind that Congress did not choose to condemn all price differences between purchasers. Section 2(a), designed to deal with outright price discriminations between purchasers which may lessen competition, contains, for example, a proviso to the effect that 'nothing * * * shall prevent differentials which make only due allowance for differences in the cost of manufacture, sale, or delivery resulting from the differing methods or quantities in which such commodities are to such purchasers sold or delivered.' ^[9] This proviso was incorporated for the purpose of 'preserving for the public the benefits of efficient marketing methods while at the same time subjecting to the prohibitions of the statute those 'unearned' price differentials which could not be reasonably related to some savings in the seller's costs of manufacture, sale, or delivery.' Report of the Attorney General's National Committee to Study the Antitrust Laws (1955), p. 171. See also H.R.Rep.No. 2287, 74th Cong., 2d Sess., pp. 9-10.

It was the evident intention of Congress in § 2(a) to permit sellers to pass through to buyers, in the form of reduced prices, any true savings in the cost of distribution of their goods. There appears to be no basis for ascribing to Congress an intention by § 2(c) to require a seller who uses the services of a broker in some sales to do so in all sales, or to require that brokerage rates be static. Yet this would be the effect of the Commission's contention that a sale made directly by such a seller to a buyer at a price that does not include any brokerage constitutes the granting by the seller to the buyer of brokerage or an allowance in lieu of brokerage under § 2(c). ^[10] Since a reduction (or even elimination) of legitimate brokerage fees paid by the seller to an independent broker representing him might well constitute a true saving in the cost of one phase of the marketing process, such a reduction may, in proper circumstances validly justify a reduction in price to a particular buyer. ^[11] Once this fact is recognized, and is coupled with an understanding that the real purpose of § 2(c) was to prohibit allowances by a seller based on services claimed to have been performed, to the benefit of the seller, by the buyer or his broker, I would think there is no choice but to conclude that the transaction here in question was one which Congress contemplated would be actionable only in a proceeding under § 2(a), subject to any valid 'cost justification' defense. The high standards of proof required to sustain a 'cost justification' defense in a § 2(a) proceeding eliminate any possibility of establishing as a true cost saving any reduction in brokerage commissions made as a subterfuge for the granting of an allowance or discount as a rebate to a buyer, whether or not as the result of coercive pressure of the buyer upon the seller or his broker. ^[12]

However, under the expansive reading which the Court now gives § 2(c), in opposition, I believe, to its legislative history, this provision may now be applied to prohibit a price reduction granted by a seller to a buyer, even though such price reduction may be well based solely on true savings arising from a reduction in the cost of legitimate brokerage services performed by the seller's own broker. I am unable to perceive any basis for a conclusion that respondent's reduction of its brokerage charge to the seller, and the seller's consequent reduction in price to the buyer, violated the provisions of § 2(c). That conclusion seems to me to be an obvious thwarting of the intention of Congress to allow true cost savings to be passed through to buyers.

Indeed, the Court itself seems to display some concern for the potential sweep of today's decision. It declares that its interpretation of the statute includes 'an independent broker's allowance of a reduced brokerage to obtain a particular order,' and it is at pains to point out that 'the reduction in brokerage was made to obtain this particular order and this order only and therefore was clearly discriminatory.' The Court also asserts that its holding in this case should not be understood to mean 'that every reduction in price, coupled with a reduction in brokerage, automatically compels the conclusion that an allowance 'in lieu' of brokerage has been granted,' indicating that 'whether such a reduction is tantamount to a discriminatory payment of brokerage depends on the circumstances of each case.' Even further, the Court makes it clear that it does not intend to approve any absolute rule that § 2(c) is violated in every case where savings in brokerage are passed on to buyers-justifying its holding in this case by stating that 'the 'savings' in brokerage were passed on to a single buyer who was not shown in any way to have deserved favored treatment.'

To me these efforts by the Court to so limit its holding represent a clear recognition of the fact that in some cases a reduction or elimination of brokerage costs might well justify a valid reduction in price by a seller to a particular buyer, and, in such cases, the Court is apparently quite prepared to hold that § 2(c) would not be violated. But as I read § 2(c), either its terms are not applicable to any case where a price reduction results from a reduction in the seller's legitimate brokerage costs, or they are applicable to all such cases. Section 2(c) does not expressly require discrimination between purchasers as an element of its proscriptions, nor does it provide any defenses based on legitimate savings in brokerage costs; only § 2(a) contains such provisions. And as we said just last Term, in construing § 2(e) of the Act, '(w)e cannot supply what Congress has studiously omitted.' Federal Trade Comm. v. Simplicity Pattern Co., 360 U.S. 55, 67, 79 S.Ct. 1005, 1012, 3 L.Ed.2d 1079.

I can only conclude that, by leaving the door open for cases in which a reduction in price based on a saving in the seller's brokerage costs may, in its view, be validly justified, the Court has done one of two things. Either it has, in this § 2(c) case, recognized and applied the true purposes and policies underlying § 2(a), tested the validity of a 'cost justification' defense in this case under that section, and concluded sub silentio that none could be made out here, or it has, despite our holding in Simplicity Pattern, supra, and notwithstanding its own disclaimer, fused the provisions of § 2(a) with those of § 2(c) and thereby weakened materially the per se thrust which Congress intended that § 2(c), when applicable, would have.

In my view, § 2(c) is not applicable to any case of this type, for in such a case there is no payment of 'brokerage' or an 'allowance or discount in lieu thereof' to the buyer, as I understand the meaning of those terms as used in the statute. For me, every case presenting this type of situation is actionable only under § 2(a), for it seems clear that § 2(a), which is expressly concerned with discrimination between purchasers, with effects on competition, and with the possible existence of true cost savings, was designed by Congress to cover this type of case. And in a § 2(a) proceeding, the challenged party will be afforded an opportunity to establish the validity of the price reduction in question-an opportunity not afforded under the terms of § 2(c). The Court's adroit footwork in this regard serves quite effectively to illustrate the reasons why I think the case before us is one which Congress intended should be actionable under § 2(a), rather than § 2(c), and I would therefore affirm the judgment of the Court of Appeals.

Notes

1. Section 2(c), 15 U.S.C. § 13(c), 15 U.S.C.A. § 13(c), provides in full that:
2. 'Among the prevalent modes of discrimination at which this bill is directed, is the practice of certain large buyers to demand the allowance of brokerage direct to them upon their purchases, or its payment to an employee, agent, or corporate subsidiary whom they set up in the guise of a broker, and through whom they demand that sales to them be made. Whether employed by the buyer in good faith to find a source of supply, or by the seller to find a market, the broker so employed discharges a sound economic function and is entitled to appropriate compensation by the one in whose interest he so serves. But to permit its payment or allowance where no such service is rendered, where in fact, if a 'broker,' so labeled, enters the picture at all, it is one whom the buyer points out to the seller, rather than one who brings the buyer to the seller, is but to permit the corruption of this function to the purposes of competitive discrimination. The relation of the broker to his client is a fiduciary one. To collect from a client for services rendered in the interest of a party adverse to him, is a violation of that relationship; and to protect those who deal in the streams of commerce against breaches of faith in its relations of trust, is to foster confidence in its processes and promote its wholesomeness and volume.' S.Rep. No. 1502, 74th Cong., 2d Sess., p. 7. See also H.R.Rep. No. 2287, 74th Cong., 2d Sess., pp. 14-15.
3. 'Section ((c)) permits the payment of compensation by a seller to his broker or agent for services actually rendered in his behalf: Likewise by a buyer to his broker or agent for services in connection with the purchase of goods actually rendered in his behalf; but it prohibits the direct or indirect payment of brokerage except for such services rendered. It prohibits its allowance by the buyer direct to the seller, or by the seller direct to the buyer; and it prohibits its payment by either to an agent or intermediary acting in fact for or in behalf, or subject to the direct or indirect control, of the other.' H.R.Rep. No. 2287, 74th Cong., 2d Sess., p. 15. See also the Conference Committee Report, H.R.Conf.Rep. No. 2951, 74th Cong., 2d Sess., p. 7.
4. As stated by Senator Logan on the Senate floor:
5. See Biddle Purchasing Co. v. Federal Trade Comm., 2 Cir., 96 F.2d 687; Oliver Bros., Inc., v. Federal Trade Comm., 4 Cir., 102 F.2d 763.
6. See Great Atlantic & Pacific Tea Co. v. Federal Trade Comm., 3 Cir., 106 F.2d 667, and Southgate Brokerage Co., Inc., v. Federal Trade Comm., 4 Cir., 150 F.2d 607, in which the buyer claimed to have effected a 'saving' in distribution costs for the seller because of services performed by the buyer's purchasing organization. Such cases must be distinguished from those in which the nature of the seller's own operation, without more, enables it to effect legitimate savings in brokerage and other distribution costs.
7. See, e.g., Report of the Attorney General's National Committee to Study the Antitrust Laws (1955) 190-191; Oppenheim, Federal Antitrust Legislation: Guideposts to a Revised National Antitrust Policy, 50 Mich.L.Rev. 1139, 1207, n. 178.
8. See note 4.
9. Section 2(a) of the Clayton Act, as amended by the Robinson-Patman Act, 15 U.S.C. § 13(a), 15 U.S.C.A. § 13(a), provides, in pertinent part:
10. The Commission has expressed such a view in several early proceedings, see, e.g., Albert W. Sisk & Son, 31 F.T.C. 1543 (1940); C. F. Unruh Brokerage Co., 31 F.T.C. 1557 (1940); W. E. Robinson & Co., 32 F.T.C. 370 (1941); Ramsdell Packing Co., 32 F.T.C. 1187 (1941); Custom House Packing Corp., 43 F.T.C. 164 (1946), but that view is in conflict with the terms of § 2(c) and does not accord with the congressional intent.
11. When § 2(a) emerged from the Senate Committee, the 'cost justification' proviso contained an addition to the clause, permitting:
12. I intimate no view on whether a valid 'cost justification' defense would be available in a § 2(a) proceeding on the facts of this case.

The Court of Appeals for the First Circuit has recently recognized the fundamental differences between § 2(a) and § 2(c), discussed here. Robinson v. Stanley Home Products, Inc., 1 Cir., 272 F.2d 601. See generally, Note, 57 Mich.L.Rev. 926.

Of course, § 2(f) of the Clayton Act, as amended by the Robinson-Patman Act, 15 U.S.C. § 13(f), 15 U.S.C.A. § 13(f), Which makes it 'unlawful for any person engaged in commerce, in the course of such commerce, knowingly to induce or receive a discrimination in price which is prohibited by this section,' may be applicable in a proceeding against the buyer.