# Schwegmann Bros. Giant Super Markets v. Eli Lilly & Co.

> Court of Appeals for the Fifth Circuit · October 19, 1953 · 205 F.2d 788

URL: https://www.frixlaw.com/law-library/cases/9443830

## Case

- **Full name:** SCHWEGMANN BROS. GIANT SUPER MARKETS Et Al. v. ELI LILLY & CO.
- **Court:** Court of Appeals for the Fifth Circuit
- **Decided:** October 19, 1953
- **Citations:** 205 F.2d 788
- **Precedential status:** Published
- **Opinion:** Dissent by Holmes
- **Judges:** Holmes, Strum, Rives
- **Cited by:** 44 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/9443830

## Opinion text

HOLMES, Circuit Judge
(dissenting).
The question presented on this appeal is as to the constitutionality of the Louisiana Fair Trade Law, LSA-R.S. 51:391-396, insofar as it imposes price-fixing agreements upon persons who are not parties to a fair-trade contract. The appellants contend that such so-called fair trade price-fixing under a federal law violates the Fifth Amendment, and under a state law violates the Fourteenth Amendment. The federal statutes here involved are the Federal Trade Commission Act, as amended by the Act of July 14, 1952, 66 Stat. 631 , 15 U.S.C.A. § 45 ; and the Sherman Act, as amended by the Act of August 17, 1937, 50 Stat. 673 , 693, 15 U.S.C.A. § 1 .
The appellants contend that the Louisiana Fair Trade Act and the above-cited federal act of July 14, 1952, separately and as they relate to each other, constitute an improper delegation of legislative power to private individuals to fix prices without legal standards or governmental supervision. A diabetic, they say, pays $2.08 for a bottle of Lilly’s insulin at Schwegmann’s, $2.83 for an identical bottle at so-called fair trade prices. There is no suggestion that the appellants are using the appellee’s products as loss leaders, though they sell below the prices of identical commodities in the manufacturer’s contract with other retail dealers. As well stated by the court below [ 109 F.Supp. 270 ]: “The defendants simply are efficient retailers who pass on the fruits of that efficiency to the buying public in the form of lower prices. Enforcement of the fair trade act would protect other retailers from this type of competition.”
We are not necessarily concerned with the alleged unconstitutionally of any phase of the federal act, because a much narrower issue is presented to us with reference to the Louisiana statute, the determination of which might dispose of this case. The vulnerable part of the state statute is that provision of Section 394, Title 51, which denounces, as unfair competition and actionable, the sale of any identified commodity by a person not a party to the contract at less than the minimum contract price. The Congress may use its power over interstate commerce to support local policies of the states, but it cannot authorize state regulation of commerce except by methods that are consistent with due process, that have a substantial relation to the public weal, and that are not arbitrary or capricious. The use of pri *794 vate property and the making of private contracts are generally free from governmental interference, but they are subject to public regulation when the public interest requires it. These limitations apply to the power of a state to regulate prices in commercial transactions between individuals.
The appellants did not sign the contract that fixed the prices involved in this controversy, and they did not expressly or impliedly agree to the contents of that instrument; but the judgment under review restrains them from offering for sale or selling the commodities manufactured by appellee at less than the minimum prices stipulated in contracts entered into by ap-pellee with other retailers, pursuant to the Louisiana Fair Trade Law, “or at prices less than those which may be shown in any future retail resale price schedules” issued by the appellee in connection with such contracts; and it further enjoins them from making any rebates, refunds, discounts, or concessions of any kind or character for the purpose of, or which will result in, decreasing the said stipulated retail prices, save in four special cases not pertinent here. These prices may be raised or lowered by the appellee in contracts with other retailers, and the appellants must conform to any changes in prices that affect their merchandise. Not only that, the appellants must keep posted as to the retail resale minimum prices of all other commodities handled by them which bear,' or the labels or containers of which bear, the trade mark, brand, or name of the appellee, and which are in fair and open competition with commodities of the same general class produced by others; and they must require an agreement from the second vendee that he will not, in turn, resell any such commodity at less than the minimum price stipulated by the vendor or by the vendee.
In Old Dearborn Distributing Co. v. Seagram Distillers Corp., 299 U.S. 183 , at page 191, 57 S.Ct. 139 , at page 143, 81 L.Ed. 109 , the court said: “In respect of the due process of law clause, it is contended that the statute is a price-fixing law, which has the effect of denying to the owner of property the right to determine for himself the price at which he will sell. Appellants invoke the well-settled general principle that the right of the owner of property to fix the price at which he will sell it is an inherent attribute of the property itself, and as such is within the protection of the Fifth and Fourteenth Amendments [citing authorities]. These cases hold that, with certain exceptions, which need not now be set forth, this right of the owner cannot be denied by legislative enactment fixing prices and compelling such owner to adhere to them. But the decisions referred to deal only with legislative price fixing. They constitute no authority for holding that prices in respect of ‘identified’ goods may not be fixed under legislative leave by contract between the parties. The Illinois Fair Trade Act does not infringe the doctrine of these cases.”
The above case and The Boys, Manny, Moe & Jack of California, Inc., v. Pyroil Sales Co., Inc., 299 U.S. 198 , 57 S.Ct. 147 , 81 L.Ed. 122 , would require an affirmance of the lower court’s decision in the instant case; but the later decision of Schwegmann Bros. v. Calvert Distillers Corp., 341 U.S. 384 , 71 S.Ct. 745 , 95 L.Ed. 1035 , has opened the door for a reconsideration of the constitutionality of fair trade laws as price fixing statutes. Assailing the constitutionality of the Old Dearborn case, the appellants contend that price-fixing imposed on non-signers under the Louisiana Fair Trade Law is invalid as to them, because the legislation prescribes no legal standards, is wholly coercive as to non-signers, and affords them no opportunity to be heard. They quote as follows from a later decision: “If a distributor and one or more retailers want to agree, combine, or conspire to fix a minimum price, they can do so if state law permits. * * * When they seek, however, to impose price fixing on persons who have not contracted or agreed to the scheme, the situation is vastly different. That is not price fixing by contract or agreement; that is price fixing by compulsion. That is not following the path of consensual agreement; that is resort to coercion. * * * Contracts or agreements convey the idea of a cooperative arrangement, not a program whereby recaí- *795 citrants are dragged in by the heels and compelled to submit to price fixing.” Schwegmann Bros. v. Calvert Distillers Corp., 341 U.S. 388 and 390, 71 S.Ct. 747 .
Alter the Schwegmann decision, supra, which dealt with the Louisiana Fair Trade act, the above-cited act of July 14, 1952, was passed. The latter is known as the Federal Fair Trade Act; and, if it did not drag the appellants in by the heels, it sought to remove them from the sanctuary of the Sherman Anti-Trust Act. A non-signer provision was included and a provision whereby a state may be blanketed with resale price-fixing if only one retailer wants it, provided this feature of the Louisiana statute is constitutional. Nevertheless, we think it was not. the intention of the federal statute to delegate to the states any power but merely to free commerce from some of the federal statutory restrictions that were mentioned in the Schwegmann case. The federal constitutional harriers remain. In Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S., 373 , at pages 405 and 409, 31 S.Ct. 376 , at page 384, 55 L.Ed. 502 , Mr. Justice Plughes said:
“Whatever right the manufacturer may have to project his control beyond his own sales must depend not upon an inherent power incident to production and original ownership, but upon agreement. * * * The complainant having sold its product at prices satisfactory to itself, the public is entitled to whatever advantage may be derived from competition in the subsequent traffic.”
The reasoning of the Old Dearborn decision was predicated upon the assumption that non-signers had consented to the arrangement. Price-fixing between the parties by agreement is very simple to the extent that anti-trust statutes are relaxed; but it would he a fabrication to assume that the Schwegmanns have consented to the prices fixed by the appellee. Mr. John Schwegmann testified: “When I went into the drug business the mark-up in that business was so high you wouldn’t believe one man would overcharge his fellow-man that kind of a mark-up.” His testimony is that his mark-up is dependent on the cost of doing business, that he is making money in his drug department, and that all fair-trade articles are sold for less than fair-trade prices except the appellee’s, upon which the court ordered him to raise the prices. He explained how he arrived at the cost of his merchandise (to which he added the profit he wanted to make), and he said: “We have done that every year since we have been in business, and I have made more money than I ever dreamed I could make.” He asked: “If I could do it, why couldn’t the drug stores do it ?”
The appellee is engaged in the manufacture, distribution, and sale of pharmaceutical products. There are more than a hundred other companies in this same field. Many of them manufacture products that are identical or equivalent to those of appel-lee. The latter makes almost one-thousand products in some seven thousand different pharcaceutical forms, and promotes their sale and distribution on a nation-wide scale. It spends millions annually for this purpose, including advertisements. If the prices were fixed by it by consent on all of its trade-marked merchandise, and the same were done not only by all of the one-hundred other drug manufacturers but by all other makers of trade-marked articles in forty-five states having fair-trade laws, it is apparent that we would have not only consensual vertical but consensual horizontal price-fixing on a nation-wide scale except in three states.
If the appellee may agree with a single retailer to fix minimum prices on innumerable branded commodities, a thousand other trade-mark owners may do the same thing. These prices may he changed at will by the parties without giving non-signers a hearing. Legal standards are still required for a state or federal governmental agency to fix prices, however eroded may be the maxim that a delegated authority cannot he delegated (Delegata postestas non potest delegan). Panama Refining Co. v. Ryan, 293 U.S. 388 , 415 et seq., 55 S.Ct. 241 , 79 L.Ed. 446 . Fair trade laws, which have been given an exemption from anti-trust statutes to validate them, remain subject to constitutional requirements. Even joint state and federal action is limited by those provisions *796 of the constitution that forbid action altogether. Prudential Ins. Co. v. Benjamin, 328 U.S. 408, 434 , 66 S.Ct. 1142 , 90 L.Ed. 1342 .
Price-fixing, like rate-making, is a legislative function, but no legislature has fixed any prices in this controversy. The federal legislature has taken its hands off of it, and left the states free to act. The Louisiana legislature has fixed no prices as to trademarked commodities, but has authorized the vendors and vendees to do it. All of which was within the police power of the state; but when it dragged in every retailer, alive and kicking, that had notice of the contract, the Louisiana law went too far. If it did not make each of the contracting parties a judge in his own case, it made the vendor and vendee of one commodity the arbiters of the property rights of every stranger to the contract who owned commodities of the same brand.
The office of a trade-mark is to give notice of the identity of the producer of an article. It should be distinguished from a trade name, which is more properly allied with the good will of a business. In the Old Dearborn case, the court held, as to non-signers with notice, that the unfair competition consisted in their reselling, under the trade-mark of the producer, below the minimum price of a contract to which they were not parties. The answer to this is that the manufacturer used his trademark to induce the original sale. He had his name and brand, on the original package when he sold his product and put it into the channels of trade. If a non-signer should pse that trade-marked container to sell some other product, he would be guilty of unfair competition, but if he sells the same product, in the same container, under the same name, that was used by the manufacturer, he breadles no contract, commits no fraud or deception, and practices no unfair competition, merely by taking a smaller profit than some other retailer was willing to accept. Such competition is not unfair; it is the life of trade; and to stifle trade in any commodity is to foster a monopoly, which the law abhors. Sunbeam Corp. v. Wentling, 3 Cir., 192 F.2d 7 .
It does not appear from whom the appellants acquired or may acquire the appellee’s products, nor how the good will of the manufacturer’s business was or will be injured by free competition among retailers. There is no proof or presumption of wrongdoing on the part of the appellants. They have lowered prices in trade-marked commodities; this is,the extent of their offending. To make it a tort per se for retail druggists and whiskey dealers to compete with eadi other openly and fairly in trademarked commodities is fanciful and arbi-tra ry; and to say that horizontal price-fixing contracts are unlawful but vertical price-fixing agreements are legal though monopolistic is to summarize the effect of the Louisiana law, the title to which is an attractive misnomer.
As to forty-five states and several Congresses having complacently approved in principle the constitutionality of the fair-trade statutes, the answer is that it is true;, they have done this sub silentio; but the constitutional reasoning of all of them is found in the Old Dearborn opinion. It is brief, and is no better or worse than it was when written in 1936. It holds that prices in respect of trade-marked goods may be fixed by contract between the parties. It adopts a rule that was “upset * * * in a series of cases, of which Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 , 31 S.Ct. 376 , 55 L.Ed. 502 , is an example.” [ 299 U.S. 183 , 57 S.Ct. 142 .] It tacitly admits that if any state legislature or any delegated state agency should fix prices as these contracting parties have done, the right of the owner to fix his own prices would be violated; but, it says, this constitutes “no authority for holding that prices in respect of ‘identified’ goods may not be fixed under legislative leave by contract between the parties.” When it comes to non-signers, the opinion confuses the use of a brand or trade-mark with the good will of a business. It proceeds upon the theory that the sale of identified goods at less than •the prices fixed by the owner of the mark or brand is an assault upon the good will of the manufacturer’s business. If that premise is false, the whole structure of fair- *797 trade statutes tumbles like a house of cards. If a satisfied customer is the best advertisement, and good will is the disposition of a pleased customer to return to the place where he has been well treated, which are almost aphorisms, then sales below the minimum contract prices will enhance the good will not only of the retailer hut of the producer of trade-marked commodities. If water runs down hill and the property of fire is to burn, monopolistic prices injure good will and cause resentment in the hearts of the people who arc oppressed by them. They feel like those of old who were required to make brick without straw. The average man or house-wife will find no comfort in the fact that the prices of food or drugs are kept high by vertical rather than horizontal agreements.
Trade-mark and good will are not synonymous terms; but the Old Dearborn opinion says: “Appellants own the commodity ; they do not own the mark or the good will that the mark symbolizes.” The court ignored the fact that the producer put its name and mark on the container (sometimes on the product) and launched it in commerce. The court said that there was nothing to prevent a purchaser from selling the commodity alone at any price, and nothing to preclude a purchaser from removing the mark or brand and then selling the commodity at his own price, with a vague proviso that the good will of the producer must not be used to aid the sale. This proviso must be distinguished from the three statutory conditions wherein sales are excepted from minimum price agreements. The statutory exceptions are not involved here, and the Old Dearborn opinion maintains that the retailer may separate the physical property, which he owns, from the good will of the manufacturer’s business, which is the property of another, and then sell the commodity at his own price, provided, etc. The court says ownership of the good will “remains unchanged, notwithstanding the commodity has been parted with”; and then it says that the fair-trade statute inter feres “only to protect that good will against injury.” Let us now ascertain what physical property was sold by the ap-pellee, and what incorporeal property was retained by it.
The appellants bought more than the loose, disattached, commodity; they bought the package, bottle, or container, in which it was delivered, with the inscriptions on the same. This tangible property was put into the channels of trade by the producer, and title to it passed to the retailers; but the latter acquired nothing intangible, like the good will of the vendor’s business, or the right to use the trade mark on other commodities sold by them. No covenants ran with the sale of the merchandise like covenants sometimes run with the. land conveyed. The doctrine of caveat emptor did not require the buyers to beware of price-fixing agreements between the vendor and some other retailer. If the appellants made no contract, they did not need to underwrite the covenants of their competitors. A trade mark is not always evidence of good quality or symbolic of good will; hut ordinarily is only representative of the origin of a commodity or the identity of its maker. Marks that simply indicate the quality of articles do not constitute a valid trade mark, and no property may be acquired therein.
We have here sales, for the purpose of resale, of commodities in trade-marked containers ; and it was not unfair competition, injurious to the producer’s good will, for retailers who had agreed to no prices to resell the same commodities in the same containers at their own prices without defacing the trade mark. Without mentioning the practical impossibility of removing the trade mark from all aspirin tablets and from all the containers of drugs in stock, there are state and federal statutes forbidding the obliteration or concealment of trade marks, and even requiring the display of the manufacturer’s, packer’s, or distributor’s name on drugs. 27 U.S.C.A. § 205 (e); 21 U.S. C.A. §§ 331, 352. 21 U.S.C.A. § 352 (a) says: “A drug * * * shall he deemed, to be misbranded — (a) If its labeling is false or misleading in any particular”, * * * or 352(i) (3) “if it is offered for sale under the name of another drug.”
*798 A sine-qua-non of the constitutionality of the Louisiana Fair-Trade Law is the right of a non-signer to remove the trade mark of the manufacturer and sell the commodity at his own price. If that right is unduly restricted by law or by impractical factual conditions, it may fairly be regarded as non-existent, both of which postulates are true in the instant case. To hold otherwise with reference to the trade mark on every aspirin tablet would give the husks of justice to the retailer and minimum price control to the manufacturer. Whiskey was the product involved in Old Dearborn, the defacing of the trade mark on which is now prohibited by state and federal laws. The same is true as to some drugs involved in this case and covered by the injunction. It is a legal, factual, and economic impossibility for the owner of tangible personal property to part completely with the possession thereof and the title thereto, and yet retain control of the price thereof in perpetuity. The effort of dead hands to control the disposition of real estate was thwarted at common law by the rule against perpetuities; and the effort of living hands, or corporate hands that never die, to control the price of commodities in the hands of remote purchasers should suffer a similar fate. If distillers and drug manufacturers may make consensual vertical price fixing agreements with retailers that are binding on non-signers, there are plenty of trade-marked breakfast foods, canned goods, and other edible commodities, the producers of which might blanket the nation with vertical minimum price-fixing agreements. What a tangled web this would be! Cf. LSA-R.S. 40:608 ; 40:617; 40:622 ; 40:627; 51:242 ; 51:243 ; 51:522.
With the anti-trust statutes out of the Way, there is no unlawful delegation of price-fixing authority under the Louisiana Fair-Trade Statute so long as it is consensual; but, to the extent that it is coercive, it is lacking in due process, confiscatory, and void. Being entirely coercive as to the appellants, the judgment appealed from should be reversed; otherwise the original Sherman Act may be whittled away 'by legislative exemptions and exceptions, administrative orders and processes, trade-mark devices, patent rights, judicial decisions, and consensual price-fixing under brigaded state and federal legislation. Therefore, I respectfully dissent.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/9443830. Public record. Not legal advice.