American Cyanamid Company; Analysis To Aid Public Comment

FEDERAL TRADE COMMISSION

[File No. 951-0106]

American Cyanamid Company; Analysis To Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed consent agreement.

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SUMMARY: In settlement of alleged violations of federal law prohibiting

unfair or deceptive acts or practices and unfair methods of

competition, this consent agreement, accepted subject to final

Commission approval, would prohibit, among other things, the

Parsipanny, New Jersey-based company from conditioning the payment of

rebates or other incentives on the resale prices its dealers charge for

its products, or from otherwise agreeing with its dealers to control or

maintain resale prices. The complaint accompanying the consent

agreement alleges that the company violated antitrust laws by fixing

the resale prices of its agricultural chemical products.

DATES: Comments must be received on or before April 14, 1997.

ADDRESSES: Comments should be directed to: FTC/Office of the Secretary,

Room 159, 6th St. and Pa. Ave., NW., Washington, DC 20580.

FOR FURTHER INFORMATION CONTACT:

William J. Baer, Federal Trade Commission, H-374, 6th and Pennsylvania

Ave, NW., Washington, DC 20580. (202) 326-2932. Mark Whitener, Federal

Trade Commission, H-374, 6th and Pennsylvania Ave, NW., Washington, DC

20580. (202) 326-2845. Michael E. Antalics, Federal Trade Commission,

S-2627, 6th and Pennsylvania Ave, NW, Washington, DC 20580. (202) 326-

2821.

SUPPLEMENTARY INFORMATION: Pursuant to Section 6(f) of the Federal

Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46, and Section 2.34 of

the Commission's Rules of Practice (16 CFR 2.34), notice is hereby

given that the above-captioned consent agreement containing a consent

order to cease and desist, having been filed with and accepted, subject

to final approval, by the Commission, has been placed on the public

record for a period of sixty (60) days. The following Analysis to Aid

Public Comment describes the terms of the consent agreement, and the

allegations in the accompanying complaint. An electronic copy of the

full text of the consent agreement package can be obtained from the

Commission Actions sections of the FTC Home Page (for January 30,

1997), on the World Wide Web, at ``http://www.ftc.gov/os/actions/htm.''

A paper copy can be obtained from the FTC Public Reference Room, Room

H-130, Sixth Street and Pennsylvania Avenue, NW., Washington, DC 20580,

either in person or by calling (202) 326-3627. Public comment is

invited. Such comments or views will be considered by the Commission

and will be available for inspection and copying at its principal

office in accordance with Section 4.9(b)(6)(ii) of the Commission's

Rules of Practice (16 CFR 4.9(b)(6)(ii)).

Analysis To Aid Public Comment on the Proposed Consent Order

The Federal Trade Commission (``the Commission'') has accepted an

agreement to a proposed consent order from American Home Products

Corporation (``AHP''), through its wholly-owned subsidiary, American

Cyanamid Company (``American Cyanamid''), located in Parsippany, New

Jersey. The agreement would settle charges by the Commission that

[[Page 6256]]

American Cyanamid violated Section 5 of the Federal Trade Commission

Act by engaging in practices that restricted completion in the domestic

markets for crop protection chemicals, which are herbicides and

insecticides widely used in commercial agriculture.

The proposed consent order has been placed on the public record for

sixty (60) days for receipt of comments by interested persons. Comments

received during this period will become part of the public record.

After sixty (60) days, the Commission will again review the agreement

and the comments received and will decide whether it should withdraw

from the agreement or make final the agreement's proposed order.

The purpose of this analysis is to invite public comment concerning

the consent order and any other aspect of American Cyanamid's alleged

anticompetitive conduct relating to its C.R.O.P. and A.P.E.X. rebate

programs. This analysis is not intended to constitute an official

interpretation of the agreement and order or to modify its terms in any

way.

The Complaint

The complaint prepared for issuance by the Commission along with

the proposed order alleges that American Cyanamid has engaged in acts

and practices that have unreasonably restrained competition in the sale

and distribution of crop protection chemicals in the United States. In

1995, the Commission's proposed complaint alleges, American Cyanamid

sold at retail more than $1 billion of its crop protection chemicals

and was the market share leader in three domestic crop protection

chemical markets: soybean broadleaf herbicides, soybean grass

herbicides, and corn soil insecticides, as well as being the second-

largest domestic producer of cotton grass herbicides.

According to the complaint, American Cyanamid operated two cash

rebate programs for its retail dealers for approximately five years.

From 1989-1992, the plan was called the ``Cash Reward on Performance''

(``C.R.O.P.'') program, and was renamed the ``Award for Performance

Excellence'' (``A.P.E.X.'') program in late 1992 through August 1995.

The complaint states that American Cyanamid entered into written

agreements with its dealers under these programs, pursuant to which

American Cyanamid offered to pay its dealers substantial rebates on

each sale of its crop protection chemicals that was made at or above

specified minimum resale prices. According to the complaint, the

dealers overwhelmingly accepted American Cyanamid's rebate offer by

selling at or above the specified minimum resale prices.

The complaint further alleges that the wholesale prices in the

agreements were set at a level equal to the specified minimum resale

prices, and because a dealer received no rebate on sales below the

specified prices, those sales were made at a loss to the dealer.

The complaint further states that although American Cyanamid

included certain non-price performance criteria in its rebate programs

that could increase the amount of the rebate, a dealer's compliance

with these performance criteria was neither necessary nor, by itself,

sufficient to obtain rebates. As examples, the complaint alleges that

if a dealer met all of American Cyanamid's performance criteria, but

sold the product for less than American Cyanamid's specified minimum

resale price, that dealer received no rebate on the sale. On the other

hand, if the dealer met none of the performance criteria, but sold the

product at or above American Cyanamid's specified minimum resale price,

the dealer nonetheless received a rebate on that sale.

American Cyanamid's conditioning of financial payments on dealers'

charging a specified minimum price amounted to the quid pro quo of an

agreement on resale prices. In cases where this issue has arisen, both

before and after the Supreme Court examined the per se rule against

resale price maintenance in Monsanto and Sharp,\1\ courts have treated

such agreements as per se illegal. See Lehman v. Gulf Oil Corp., 464

F.2d 26, 39, 40 (5th Cir.), cert. denied, 409 U.S. 1077 (1972) (stating

that `` * * * adherence to a suggested price schedule was the quid pro

quo for Lehrman's receiving Gulf's TCAs [temporary competitive

allowances]'' and ``there is no comparable justification for

conditioning wholesale price support upon adherence to a schedule of

minimum retail prices.'' (emphasis in original)); Butera v. Sun Oil

Co., Inc. 496 F.2d 434, 437 (1st Cir. 1974). By offering financial

inducements in return for selling at specified minimum prices, a

manufacturer seeks the ``acquiescence or agreement'' of its dealers in

a resale price-fixing scheme. Monsanto, 465 U.S. at 764 n. 9. The

dealer, in turn, accepts the manufacturer's offer by selling at or

above the specified minimum prices. See Isaksen v. Vermont Castings,

Inc., 825 F.2d 1158, 1164 (7th Cir. 1987) (Posner, J.) (an ``obvious''

resale price-fixing agreement is found `` * * * if [the manufacturer]

had told [the dealer] that it would reduce its wholesale price to him

if he raised his retail price, and [the dealer] had accepted the offer

by raising his price.''). See also Khan v. State Oil Co., 93 F.3d 1358,

1360-61 (7th Cir. 1996) (Posner, J.), petition for cert. pending No.

96-871 (agreement on price found where dealership agreement on its face

allowed dealer to charge any resale price it wished, but distributor

tied financial consequences to dealers' not charging the resale prices

it suggested). As a result, incentives to reduce price below the

specified level were substantially affected by American Cyanamid's

rebate scheme.

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\1\ Business Electronics Corp. v. Sharp Electronics Corp., 485

U.S. 717 (1988); Monsanto Co. v. Spray-Rite Service Corp., 465 U.S.

752 (1984).

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The rebate programs challenged in this case are unlike situations

where manufacturers are permitted to condition a discount or other

incentive on that discount being ``passed through'' to consumers, which

prevents a dealer form simply ``pocketing'' the discount. In these

types of cases, the dealer is free to sell at even lower prices than

the amount of the direct ``pass through'' of the discount or other

incentive. Discounts cannot be conditioned, therefore, on the dealers'

adherence to specified minimum price. See AAA Liquors, Inc. v. Joseph

E. Seagram and Sons, Inc., 705 F.2d 1203, 1206 (10th Cir. 1982), cert

denied, 461 U.S. 919 (183) (Seagram's requirement of passing through

its discount ``[did] not prohibit the wholesaler from making greater

reductions in price that the discount provides.'') See also Acquaire v.

Canada Dry Bottling Co., 24 F.3d 401, 409-10 (2d Cir. 1994); Lewis

Service Center, Inc. v. Mack Trucks, Inc., 714 F.2d 842, 845-47 (8th

Cir. 1983) (because dealers could discount more than Mack's sales

assistance, the court found that ``the purpose of Mack's discount

program [was] not to force adherence to any particular price scheme of

Mack's.'').

The Proposed Consent Order

Part I of the proposed order covers definitions. These definitions

make clear that the consent order applies to the directors, officers,

employees, agents and representatives of American Cyanamid. The order

also defines the terms product, dealer and resale price.

Part II of the order contains two major operative provisions: Part

II(A) deals with the specific conduct at issue in this case. It

prohibits American Cyanamid from conditioning the payment of rebates or

other incentives on the resale prices its dealers charge for its

products. Part II(B) prevents American Cyanamid from otherwise agreeing

with its dealers generally to control or maintain resale prices.

[[Page 6257]]

Neither of these provisions should be construed to prohibit lawful

cooperative advertising programs or ``pass through'' discount programs

that are not otherwise part of an unlawful resale price maintenance

scheme. The Commission has previously determined that order provisions

prohibiting agreements on resale prices do not restrict a company's

ability to implement otherwise lawful cooperative advertising and

``pass through'' rebate plans because such programs do not, in

themselves, constitute agreements on resale prices. See, e.g., In Re

Magnavox Co., 113 F.T.C. 255, 263, 269-70 (1990).

Part III of the order requires that for a period of three (3) years

from the date on which the order becomes final, American Cyanamid shall

include a statement, posted clearly and conspicuously, on any price

list, advertising, catalogue or other promotional material where it has

suggested a resale price for any product to any dealer. The required

statement explains that while American Cyanamid may suggest resale

prices for its products, dealers remain free to determine on their own

the prices at which they will sell American Cyanamid's products.

Part IV of the order requires that for a period of three (3) years

from the date on which the order becomes final, American Cyanamid shall

mail the letter attached to the order as Exhibit A and a copy of this

order to all of its current dealers, distributors, officers, management

employees, and agents or representatives with sale or policy

responsibilities for American Cyanamid's products. American Cyanamid

also must mail the letter and order to any new dealer, distributor or

employee in the above positions within thirty (30) days after the

commencement of that person's affiliation or employment with American

Cyanamid. All of the above dealers, distributors and employees must

sign and return a statement to American Cyanamid within thirty (30)

days of receipt that acknowledges they have read the order and that

they understand that non-compliance with the order may subject American

Cyanamid to penalties for violation of the order.

Part V of the order requires that American Cyanamid file with the

Commission an annual verified written report giving the details of the

manner and form in which American Cyanamid is complying and has

complied with the order. In addition, Part V of the order also requires

American Cyanamid to maintain and make available to the Commission upon

reasonable notice all records of communications with dealers,

distributors, and agents or representatives relating to sale prices in

the United States, as well as records of any action taken in connection

with activities covered by the rest of the order. Finally, American

Cyanamid must inform the Commission at least thirty (30) days before

any proposed changes in the corporation, such as dissolution or sale.

Donald S. Clark,

Secretary.

Statement of Chairman Robert Pitofsky and Commissioners Janet D.

Steiger and Christine A. Varney in the Matter of American Cyanamid,

File No. 951-0106

The Commission today accepts a proposed consent agreement with

American Cyanamid prohibiting it from engaging in conduct designed to

prevent its dealers from making discounted sales below the minimum

price that American Cyanamid specified. American Cyanamid entered into

written agreements with its dealers that provided dealers with

``rebates'' each time they sold their product at or above a certain

resale price (the floor transfer price). For dealers who sold at the

specified price, this rebate constituted their entire profit margin.

The Commission believes that this conduct amounted to an illegal resale

price maintenance agreement.

Commissioner Starek, in his dissent, criticizes this enforcement

action for a number of reasons. As explained below, we disagree with

Commissioner Starek's reasoning.

First, the dissenting statement appears to conclude that a

situation where a manufacturer and a dealer enter into an express

agreement that the manufacturer will pay the dealer to adhere to the

manufacturer's specified resale price, is not an ``agreement on resale

prices'' but rather some form of voluntary behavior. Judge Posner

responded to similar arguments in Khan v. State Oil.\1\

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\1\ 93 F.3d 1358 (7th Cir. 1996).

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In Khan, the court declared a maximum resale price arrangement per

se illegal where the manufacturer permitted dealers to charge above a

maximum price, but required them in such case to provide any resulting

profit above the maximum price to the manufacturer. The ``voluntary''

nature of the arrangement did not detract from the finding that there

was an agreement. Judge Posner noted that the arrangement was

indistinguishable from an agreement not to exceed the maximum price,

because the dealer was sanctioned for violating the agreement by having

to remit any resulting profit to the manufacturer. In responding to

State Oil's argument that there was no price fixing agreement, Judge

Posner observed: ``The purely formal character of the distinction that

it urges can be seen by imagining that the contract had forbidden Khan

to exceed the suggested resale price and had provided that if he

violated the prohibition the sanction would be for him to remit any

resulting profit to State Oil.'' \2\

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\2\ Id. at 1361. See also Isaksen v. Vermont Castings, Inc., 825

F.2d 1158, 1164 (7th Cir. 1987) (in finding a violation based on

economic coercion, Judge Posner noted, ``It is as if Vermont

Castings had told Isaksen that it would reduce its wholesale price

to him if he raised his retail price, and Isaksen had accepted the

offer by raising his price.'').

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We agree with Judge Posner. In this case, the sanction was loss of

the rebate for sales made below the floor transfer price. If an

agreement to forego one's entire profit margin if one departs from the

specified price does not constitute a price maintenance agreement, then

nothing remains of the per se rule.

Second, the dissent seems to suggest that this case is one where

agreement is being inferred from unilateral conduct. We cannot concur.

American Cyanamid entered into written agreements which offered

financial incentives for adherence to a minimum price schedule. Courts,

both before and after Sharp,\3\ have held such arrangements unlawful

where adherence to a suggested price was the quid pro quo for the

financial inducements. Judge Posner's decision in Khan is consistent

with this approach.\4\

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\3\ Business Electronics Corp. v. Sharp Electronics Corp., 485

U.S. 717 (1988).

\4\ 93 F.3d at 1362.

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Third, the dissenting statement, relying in large part on recent

economic literature, argues that American Cyanamid's program should not

be condemned without proof of a supplier cartel, dealer cartel, or

market power.\5\ That view is inconsistent with the Supreme Court's

view that resale price maintenance continues to be illegal per se and

we reject the idea that the Supreme Court can be overruled by scholarly

contributions to economic journals.

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\5\ Although we do not fully detail our disagreement with the

description of the facts in the dissent, we believe that a full

trial would have shown that an overwhelming portion of sales were

made at or above the minimum resale price. Moreover, a dealer's

advisory council voted to advise American Cyanamid to retain the

program in order to protect its margins.

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Finally, we cannot agree with the suggestion that this enforcement

action somehow creates uncertainty about the Commission's treatment of

pass through rebates or cooperative advertising programs. As the

analysis to aid public comment explains, pass through programs have

always been permitted,

[[Page 6258]]

as long as the dealer is free to discount to an even greater extent

than the pass through amount. Similarly, both the courts and the

Commission have judged cooperative advertising cases under the rule of

reason, as long as the arrangements do not limit the dealer's right:

(1) To discount below the advertised price, and (2) to advertise at any

price when the dealer itself pays for the advertisement. Unlike those

programs, American Cyanamid's rebate program controlled the actual

prices charged and was structured to prevent dealers from pricing below

the floor transfer price.

Concurring Statement of Commissioner Mary L. Azcuenaga in American

Cyanamid Co., File No. 951-0106

I concur in the decision to accept the consent agreement for public

comment but decline to join the separate statement of the majority. The

consent agreement, which includes the consent order and the complaint

on which it is based, constitutes the decisional document of the

Commission. My substantive views on this matter are contained entirely

within the four corners of the decisional document. If the majority

wants to revise or expand its decision, the proper course is to revise

the decisional document. See Dissenting Statement of Commissioner Mary

L. Azcuenaga in Dell Computer Corp. at 21-23 (Docket No. 3658, May 20,

1996).

Dissenting Statement of Commissioner Roscoe B. Starek III, in the

Matter of American Cyanamid Company, File No. 951-0106

I respectfully dissent from the Commission's decision to accept a

consent agreement with the American Cyanamid Company (``AmCy''), a

producer of agricultural chemicals. The proposed complaint claims that

certain aspects of AmCy's compensation arrangement with its dealers

constitute per se illegal resale price maintenance (``RPM''), in

violation of Section 5 of the Federal Trade Commission Act, 15 U.S.C.

45. I do not agree that AmCy's dealer rebate policies constitute the

functional and legal equivalent of RPM agreements. Consequently, I

conclude that the decision to challenge AmCy's distribution policies

would expand substantially the range of activities condemned by the

Commission as Illegal per se. This policy is ill-advised and runs

contrary to twenty years of case law in which the scope of vertical

arrangements subject to per se condemnation has been steadily narrowed.

This case is an especially poor vehicle for expanding the scope of the

per se rule, for it would be difficult to find conduct that better

exemplifies the economic deficiencies of that standard.

Condemning certain conduct as illegal per se normally is

rationalized by the belief that the conduct in question is so

frequently pernicious that one cannot justify the cost of attempting to

identify the few instances in which it is not. Whether RPM warrants

characterization as per se illegal conduct has increasingly been called

into question by antitrust scholars; \1\ indeed, it would be difficult

to find an antitrust economist who would defend this enforcement

standard.\2\ RPM remains illegal per se, however, and, consistent with

this standard, I have voted to support enforcement actions against RPM

agreements when I have been convinced that (1) the conduct in question

plainly constituted an illegal agreement on price (as construed by

contemporary case law), and (2) the relief was appropriately tailored

to deter future illegal conduct.

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\1\ There is a substantial body of economic literature

demonstrating that RPM frequently can be socially beneficial. See,

e.g., Michael L. Katz, ``Vertical Contractual Relations,'' in

Richard Schmalensee and Robert D. Willig, 1 Handbook of Industrial

Organization 655 (1989). The existing empirical literature fails to

find evidence supporting an anticompetitive characterization of RPM.

See e.g., Pauline M. Ippolito & Thomas R. Overstreet, Jr., ``Resale

Price Maintenance: An Economic Assessment of the Federal Trade

Commission's Case Against the Corning Glass Works,'' 39 J.L. & Econ.

285 (1996) (evidence convincingly rejects anticompetitive theories

and suggests instead that RPM increase sales of Corning's products);

Pauline M. Ippolito, ``Resale Price Maintenance: Empirical Evidence

from Litigation,'' 34 J.L. & Econ. 263 (1991) (empirical evidence

cannot support a collusive explanation for the use of RPM).

\2\ I also emphasize that in none of the RPM actions brought by

the Commission during my tenure could one have plausibly

characterized the condemned conduct as having an anticompetitive

effect (indeed, in several instances, procompetitive rationales for

the restrictions were plainly evident). In only one instance,

Nintendo of America Inc., 114 F.T.C. 702 (1991), could one have

plausibly ascribed market power to the manufacturer that was party

to the agreement. Without manufacturer market power, RPM agreements

between a single manufacturer and its dealers cannot harm consumers.

Of course, it cannot be overemphasized that market power is only a

necessary, but not a sufficient, condition for vertical restraints

to reduce consumer welfare; by itself, market power does not

establish that the conduct is anticompetitive. Even when a

manufacturer possesses substantial market power, all of the

procompetitive rationales for vertical restraints remain potentially

valid.

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Notwithstanding the continued per se treatment of RPM--and my

willingness to support RPM cases in the limited circumstances

identified above--I cannot ignore the persistent accumulation of

economic evidence demonstrating the potentially procompetitive (or, or

worst, economically neutral) nature of RPM agreements. At minimum, this

evidence counsels against expanding the boundaries of per se illegal

conduct to envelop activities that (at best) only weakly satisfy the

legal criteria for finding the existence of an ``agreement'' and, more

important, appear to be procompetitive in both purpose and effect.

Under these evaluative criteria, the present matter is a poor candidate

for an enforcement action.

The Supreme Court set forth the legal standard for finding an

illegal RPM ``agreement'' in Monsanto Co. v. Spray-Rite Service

Corporation: \3\

\3\ 465 U.S. 752 (1984).

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The correct standard is that there must be evidence that tends

to exclude the possibility of independent action by the manufacturer

and distributor. That is, there must be direct or circumstantial

evidence that reasonably tends to provide that the manufacturer and

others had a conscious commitment to a common scheme designed to

achieve an unlawful objective.

Monsanto, 465 U.S. at 768. The Court stated further that the ``concept

of `a meeting of the minds' or `a common scheme' * * * includes more

than a showing that the distributor conformed to the suggested price.

It means as well that evidence must be presented both that the

distributor communicated its acquiescence or agreement, and that this

was sought by the manufacturer.'' Id. at 764 n. 9 (emphasis added).

While it is true that AmCy entered into contracts with its

distributors providing for compensation for sales at or above the

wholesale purchase price, it is clear that there was no ``meeting of

the minds'' or ``common scheme,'' and thus no illegal agreement, to

maintain resale prices. At no time did AmCy tell its distributors that

they must sell agricultural chemicals at specific prices or risk losing

supplies; AmCy did not attempt to coerce or intimidate its distributors

into selling at specific price levels; distributors did not communicate

an agreement to sell at specific prices; no distributors were ever

terminated for selling at prices below the wholesale price; and

distributors remained free (explicitly provided by contract) to resell

products at any price of choosing. That distributors sometimes sold at

prices below the wholesale level without loss of supply or termination

is testament to the unilateral nature of the distributors' pricing

decisions and to the absence of any agreement to maintain resale

prices.\4\ In this instance, all of the

[[Page 6259]]

hallmarks of a per se illegal RPM agreement are lacking.

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\4\ Evidence suggests that distributors in fact sold specific

products covered by the AmCy program at retail prices both above and

below the wholesale transfer price. Wide variation in distributor

resale prices runs contrary to usual evidence of a minimum resale

price fixing agreement. As Chairman Pitofsky has stated: ``The one

point that emerges clearly in any debate concerning the per se rule

is that minimum vertical price agreements lead to higher, and

usually uniform, resale prices.'' Robert Pitofsky, ``In Defense of

Discounters: The No-Frills Case for a Per Se Rule Against Vertical

Price Fixing,'' 71 Geo. L.J. 1487, 1488 (1983). The Commission's

proposed compliant does not allege, nor provide supporting evidence,

that the rebate program resulted in higher retail prices for AmCy's

products. Moreover, the wide dispersion in resale prices

demonstrates the absence of the type of uniformity believed to be an

indicator of a minimum resale price agreement. This dispersion in

retail prices suggests that distributors were engaging in loss-

leader programs out of a desire to increase future sales of AmCy

products. In addition to encouraging distributors to provide

valuable pre-sale services, AmCy's rebate program may have

encouraged distributors to engage in loss-leader programs as a means

of persuading customers to switch to AmCy products.

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Evidence that dealers did in fact resell AmCy products at or above

the wholesale purchase price does not relieve the Commission of its

obligation to demonstrate the existence of an illegal agreement. As

made clear by Colgate,\5\ a unilateral, self-motivated decision by a

distributor to accept a manufacturer's pricing policies, and thus sell

products at a suggested retail price, does not constitute an illegal

RPM agreement. In Monsanto, the Supreme Court stated: ``Under Colgate,

the manufacturer can announce its resale prices in advance and refuse

to deal with those who fail to comply. And a distributor is free to

acquiesce in the manufacturer's demand in order to avoid termination.''

465 U.S. at 761. As Monsanto and Colgate make clear, something more

than mere acquiescence by a distributor in a manufacturer's pricing

policies is necessary to convert a unilateral decision by a distributor

into an agreement to maintain resale prices.

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\5\ United States v. Colgate & Co., 250 U.S. 300 (1919).

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I am therefore puzzled why the majority is so quick to infer the

existence of a per se illegal RPM agreement from evidence that many

distributors found it in their self-interest unilaterally to sell at or

above the wholesale price and thereby receive rebates from AmCy. To

infer the existence of a per se illegal RPM agreement in this context,

when AmCy never announced minimum resale prices nor sought a commitment

from distributors to sell at or above certain price levels, violates

the fundamental legal principle of RPM law announced in Colgate. How

can the majority find a per se illegal agreement here--under arguably

weaker factual circumstances than existed in Colgate--and believe that

it still seeks to enforce the rule announced in Colgate, and reiterated

in Monsanto, that mere acquiescence by a distributor in the pricing

policies of a manufacturer is insufficient as a matter of law to

warrant inference of the existence of a per se illegal RPM agreement?

\6\

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\6\ Although the majority's reply emphasizes ``written

agreements'' pursuant to which dealers were offered compensation for

sales at prices above the wholesale transfer price (Statement of

Chairman Robert Pitofsky and Commissioners Janet D. Steiger and

Christine A Varney in the Matter of American Cyanamid, at 2), the

proposed complaint in this case indicates that the Commission is

willing--despite the clear warnings of Colgate and Monsanto to the

contrary--to infer the existence of per se illegal RPM

``agreements'' solely from the dealers' unilateral acceptance of

AmCy's ``offer.'' Proposed Complaint, at para. 6 (``The dealers

overwhelmingly accepted AmCy's offer by selling at or above the

specified minimum prices.'').

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The majority's finding that AmCy entered into illegal RPM

agreements with its distributors is nothing less than a retreat from

the principles of vertical restraints analysis laid down by the Supreme

Court in Colgate, Monsanto, Sylvania,\7\ and Sharp.\8\ In cases

involving allegations of concerted price fixing, ``the antitrust

plaintiff must present evidence sufficient to carry its burden of

proving that there was such an agreement. If an inference of such an

agreement may be drawn from highly ambiguous evidence, there is a

considerable danger that the doctrines enunciated in Sylvania and

Colgate will be seriously eroded.'' Monsanto, 465 U.S. at 763. I

conclude that the standard set forth by Supreme Court for the finding

of a price-fixing agreement has not been met. That the majority is

willing to infer the existence of an agreement in this instance on the

basis of such ambiguous evidence, and to rely primarily on pre-Sharp

case law and post-Sharp dicta and one case not on point \9\ to justify

its conclusion, represents an effort to circumvent the law of RPM (and

of vertical restraints in general) laid down by the Supreme Court over

the last twenty years.\10\

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\7\ Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36

(1977).

\8\ Business Electronics Corp. v. Sharp Electronics Corp., 485

U.S. 717 (1988).

\9\ The majority relies heavily on Judge Posner's opinion in

Khan v. State Oil Co., 93 F.3d 1358 (7th Cir. 1996). Besides the

obvious difference that Khan deals with maximum rather than minimum

RPM, the facts of Khan are fundamentally different. The contract

between State Oil (the supplier) and Khan (the dealer) provided that

State Oil would announce a suggested retail price for gasoline and

sell it to Khan for 3.25 cents per gallon less. The contract further

required Khan to rebate to State Oil any profit received for sales

above the suggested retail price. As Judge Posner noted, the

contract eliminated any incentive for Khan to charge above the

suggested retail price. Since absolute compliance was thus

guaranteed under the facts of Khan, it is not surprising that a

dealer challenged the program. AmCy, on the other hand, never

announced suggested retail prices to its dealers, never established

an explicit mark-up, and never required dealers to seek permission

before lowering their price. The fact that AmCy's dealers frequently

lowered retail prices below the wholesale purchaseprice indicates

that AmCy did not implement its rebate program in order to eliminate

dealers' incentives to reduce prices (e.g., to develop new

customers, to increase business with existing customers, or to

encourage switching by customers from other manufacturers'

agricultural products to AmCy's products). The majority's reliance

on Khan is therefore of doubtful relevance to this case.

\10\ Today's action by the Commission has by no means

established a clearer and more certain legal rule for RPM cases than

exists under the rule of Colgate and other Supreme Court decisions.

Whereas a supplier before today's decision might know with certainty

that mere voluntary adherence by a distributor to a unilaterally

announced resale price policy does not constitute illegal RPM, the

same supplier must now worry that the Commission may henceforth use

such voluntary adherence as evidence of a per se illegal agreement

to maintain resale prices. Moreover, as a result of today's

decision, the business community may be left wondering how the

Commission can--and whether it will--maintain the functional

distinction it currently draws between, on the one hand, rebate-

pass-through provisions and cooperative advertising programs--

programs that the Commission generally does not consider to be per

se illegal--and, on the other hand, other types of rebate programs

that similarly impose restrict conditions on the buyer.

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The majority's decision to accept a consent agreement here also

cannot be supported on economic grounds. The per se treatment of RPM

usually is justified by the assertion that such agreements almost

invariably are used to support collusion, either among manufacturers or

among distributors.\11\ RPM could support manufacturer collusion for

two reasons.\12\ First, RPM may make it easier to detect cheating on a

cartel agreement, because resale prices (presumably) are easier to

observe than wholesale prices, and successful monitoring of prices is

necessary for any successful collusive price agreement to work.\13\

Second, RPM may reduce the incentive to cheat on a cartel because a

manufacturer cutting its wholesale price will not increase sales by

very much if the corresponding resale price cannot fall.\14\ If RPM is

being used to facilitate manufacturer collusion, we would expect to see

other manufacturers adopting similar price restrictions; collectively,

these manufacturers would

[[Page 6260]]

have to account for sufficient total output to give them power over

price.\15\

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\11\ Of course, much of the empirical literature on the actual

uses of RPM (see note 1, supra) casts serious doubt upon the

validity of this proposition.

\12\ See Lester G. Telser, ``Why Should Manufacturers Want Fair

Trade?,'' 3 J.L. & Econ. 86 (1960).

\13\ See George J. Stigler, ``A Theory of Oligopoly,'' in The

Organization of Industry 39, 43 (1968) (``In general the policing of

a price agreement involves an audit of the transactions prices.'').

\14\ This argument is subject to the obvious limitation that a

manufacturer wishing to cheat on the collusive arrangement would

have little incentive to enforce the RPM agreement.

\15\ Of course, all of the standard factors used to analyze

market power and the ability to implement and maintain collusive

pricing (e.g., ease of entry, heterogeneity of the products, and so

forth) would also be relevant to judging the likelihood of

successful supplier collusion.

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As far as I can tell, the ``manufacturer cartel'' theory is not

relevant to the present case. The Commission's proposed complaint does

not allege, let alone provide supporting evidence, that AmCy has

attempted to collude with other agricultural chemical makers, such as

DuPont, Monsanto, Ciba-Geigy, or BASF. There is also no evidence that

these other firms used RPM, as is required for the theory to work. But

even putting aside the absence of such evidence, it is difficult to

imagine an arrangement less suited to cartel stability than that which

existed between AmCy and its distributors. Specifically, under the

terms of AmCy's C.R.O.P.TM and A.P.E.X.TM programs, a

dealer's compensation was tied explicitly to the share of chemical

sales accounted for by AmCy's products. Given that a crucial element of

cartel enforcement is the discovery of some means by which each member

can commit credibly to maintaining--but not increasing--its market

share,\16\ how could a program that explicitly rewards market share

expansion plausibly be characterized as a cartel enforcement tool?

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\16\ As Stigler (supra note 13, at 42) noted, ``[f]ixing market

shares is probably the most efficient of all methods of combating

secret price reductions.''

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Furthermore, the available evidence suggests that the

C.R.O.P.TM and A.P.E.X.TM programs were extraordinarily

successful in expanding AmCy's sales and market share, which grew

substantially while the program was in use. Certainly, other factors

(e.g., the successful introduction of several new product lines) may

have accounted for a portion of this increase; \17\ nevertheless, it is

difficult (if not impossible) to reconcile the behavior of AmCy's

output--or of total market output--during this period with any coherent

theory of competitive harm involving collusion with other chemical

makers.

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\17\ The likelihood of successfully maintaining collusion in the

face of product innovation (as was occurring in this instance) is,

of course, quite small. Collusion is more likely to be successful,

the greater the degree of similarity (e.g., in terms of cost,

demand, and product characteristics) among the parties to the

agreement.

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In the alternative, per se treatment sometimes is predicated on the

characterization of RPM as an aid to dealer collusion. Under such a

scenario, a group of dealers pressures the supplier to adopt RPM to

achieve and maintain a collusive resale price arrangement among the

dealers. When RPM is used for this purpose, we would expect to see

coordinated pressure on the manufacturer to adopt RPM from a group of

dealers with sufficient market power to credibly threaten the

manufacturer. Moreover, to be effective, the dealer cartel must enter

into similar arrangements with enough manufacturers to be able to

affect market price; otherwise, the collusive retail price of price-

maintained products would be undermined by competition from products

not subject to RPM agreements. Under such conditions, we would expect

the manufacturer to be a reluctant participant in the scheme, though it

would enforce the RPM agreement if the dealer threats were credible.

Finally, it is unlikely that the colluding dealers would carry

competing products not subject to RPM agreements, as that would be

equivalent to cheating on the collusively-determined resale margin.

This second anticompetitive theory fits the facts of this case no

better than the first. The Commission's complaint does not allege, let

alone provide supporting evidence, that AmCy is the victim of a dealer

cartel. As I already have noted, it does not appear that other

manufacturers had similar arrangements with the members of any putative

``dealer cartel,'' or that this ``cartel'' eschewed the products of

rival manufacturers.\18\ Had AmCy been the victim of a cartel, its

attitude toward the Commission and numerous state investigations should

have been one of grateful acquiescence, because the enforcement

agencies would be rescuing it from the clutches of its rapacious

dealers. In fact, of course, AmCy unilaterally terminated the

challenged provisions of the C.R.O.P.TM and A.P.E.X.TM

programs several years ago. so much for ``dealer coercion.'' \19\

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\18\ This is unsurprising, because over 2500 dealers

participated in the C.R.O.P.TM and A.P.E.X.TM programs. It

is fanciful to believe that a cartel could have been formed from

among such a large number of dealers. If such a cartel exists, one

might reasonably ask why the dealers that belong to it are not also

named in the Commission's complaint.

\19\ In its reply, the majority appears to suggest that the

existence of a dealer cartel can be inferred from the allegation

that ``a dealer's advisory council voted to advise American Cyanamid

to retain the program in order to protect their margins.'' Statement

of Chairman Robert Pitofsky and Commissioners Janet D. Steiger and

Christine A. Varney in the Matter of American Cyanamid, at note 5.

Even if an advisory council furnished this advice to AmCy,

communications of this nature between dealers and manufacturers do

not establish that the dealers acted collusively. Moreover, the fact

that dealers may have communicated this advance says nothing about

the competitive effects of AmCy's rebate program. One would expect

dealers to provide this same ``advice'' if AmCy's program were

designed to prevent discounters from free-riding on the pre-sale

services provided by other dealers.

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Given that neither of the two traditional anticompetitive theories

can be reconciled with the terms of the AmCy program, could the

Commission's action be justified on some other basis? The Commission

might attempt to seek refuge in some unilateral theory of market power,

under which a manufacturer with substantial pre-existing market power

is hypothesized to use vertical restraints because, for some reason, it

cannot extract the full value of its market power simply by raising its

wholesale price. The economics literature certainly acknowledges such

possibilities, but these theories provide a fragile basis for antitrust

enforcement.\20\ As such models show, vertical restraints often can

improve consumer welfare even when adopted by firms with substantial

market power; \21\ the models fail, however, to provide empirical

criteria by which enforcers can distinguish anticompetitive from

procompetitive effects.\22\ Thus, the practical utility of these

theories is questionable even for conduct judged under the rule of

reason; their inability to justify a policy of per se illegality

appears self-evident.

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\20\ See, e.g., Remarks of Commissioner Roscoe B. Starek, III,

``Reinventing Antitrust Enforcement? Antitrust at the FTC in 1995

and Beyond,'' before a conference on ``A New Age of Antitrust

Enforcement: Antitrust in 1995'' (Marina del Rey, California, Feb.

24, 1995).

\21\ As I noted earlier (supra note 2), market power is a

necessary, but not a sufficient, condition for vertical restraints

to reduce consumer welfare.

\22\ As Katz (supra note 1, at 713-14) notes, ``[m]uch of the

literature on vertical restraints has been conducted with the

express aim of deriving policy conclusions. But in many, if not

most, instances there is no widespread agreement on whether a

particular vertical practice is socially beneficial or harmful. This

unhappy state of affairs is due, in part, to the fact that all of

the practices can be beneficial in some instances and harmful in

others, and it may be extremely difficult to distinguish between the

two cases.''

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On several grounds, therefore, acceptance of the consent agreement

in this matter represents a poor policy choice by the Commission. From

a legal perspective, AmCy's conduct does not constitute an illegal

agreement to maintain resale prices; from an economic perspective, the

evidence points to the conclusion that AmCy's conduct was

procompetitive; and from a policy perspective, the Commission's

decision hardly delineates a clearer distinction (and in fact seriously

blurs the line) between conduct likely to be subject to per se

condemnation and conduct that is not. Instead of reaching for ways to

expand the application of the per se rule to conduct that is plainly

procompetitive, enforcers should

[[Page 6261]]

reserve their heavy hand for conduct that falls within standards for

per se illegality clearly enunciated by the Supreme Court. Accordingly,

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I cannot support the proposed enforcement action made public today.

[FR Doc. 97-3341 Filed 2-10-97; 8:45 am]

BILLING CODE 6750-01-M