FEDERAL TRADE COMMISSION, THE (U.S.A.) This was created by Federal legislative enactment in 1914 in response to a demand on the part of the public that the growth of monopoly in the United States should be checked. Ever since colonial days, "special privilege" in one form or another has organized itself into combinations that have contended with the public at the seat of the Government at Washington as well as in the business world for unfair preferences. The utterances of Washington, Jefferson, Lincoln, T. Roosevelt, and Wilson teem with philippics against them. At certain periods in the country's history, the pressure and revolt of the public has been so great that it has registered itself in Federal legislation. The reason for Federal legislation in addition to State legislation is due to the fact that "special privilege" lays its burden particularly upon interstate commerce over which State laws have practically no control. Moreover, the form which monopoly takes is generally that of a holding company which dominates or entirely controls a great group of subsidiaries who were formerly competing coen panies. The actions of the holding company seldom, if ever, come under the jurisdiction and control of State laws, since it is usually outside and beyond their jurisdiction and having to do with inter state commerce. The result has been that when the public found it could not get relief or redress from combinations in restraint of trade under their State laws, they have descended upon Con gress and demanded some Federal relief.
In 189o, economic concentration in the form of mergers and combines in the railroad and industrial world became so threaten ing that Congress enacted what has been called the Sherman Act which prohibited under severe civil and criminal penalties every contract or combination of interstate or foreign commerce and every monopolization or attempt to monopolize. The law in cluded criminal penalties, suits in equity to restrain such corn binations and actions at law for triple damages by private parties injured thereby. The Sherman Act was strictly interpreted by the U.S. Supreme Court for a number of years, but was not always strictly enforced by the administrative departments of the Federal Government. The result was that while somewhat held in check, monopolies still grew so that in 1902 under the administration of Theodore Roosevelt the public demanded further relief. It was Roosevelt's idea that publicity could cure or at least hold in check the growth of monopoly. This idea also was an outgrowth of an investigation by the Industrial commission, created by Congress in 1898, which recommended greater publicity regarding the operations of corporations and the establishment of some organ of publicity in the Federal Government. The result was the creation of the bureau of corporations, organized in 5903, under the Department of Commerce and Labor. The commissioner of corporations was required to investigate the organization and conduct of corporations and combinations engaged in interstate commerce, excepting common carriers, and to give information about the same to the President, in order to enable him to make recommendations to Congress.
The bureau functioned with reasonable success, but in 5907, when the country was in the throes of a panic, the United States Steel corporation was permitted to absorb its southern competitor, the Tennessee Coal and Iron Company, on the theory that unless this were done, a business panic of tremendous proportions would result.
Moreover, the decision of the United States Supreme Court in 191O in the case of the Standard Oil Company v. the United States, setting up what has been called the "rule of reason" in determining the legal character of a monopoly made it much more difficult for the Government to enforce the anti-trust laws. There followed another period of similar concentration, mergings and combinations in other lines of industry which again caused the public to demand some greater protection on the part of the Fed eral Government. The demand was recognized by planks in the platforms of both the Democratic and Republican parties in the campaign of 1912.
In response to the Party platform, on Jan. 20, 1914, President Wilson made an address before a joint session of Congress, rec ommending the establishment of a Federal Trade commission. He said he did not wish to see the commission empowered to make terms with monopoly or in any way to assume control of business. He asserted that the public demanded a commission as an indis pensable instrument of information and publicity. It was to be a clearing house for facts by which both the public mind and the mergers of great business undertakings should be guided. It was to be an instrument for doing justice to business where the proc esses of the courts or the natural forces of correction outside the courts were inadequate to adjust the remedy to the wrong in a way that would meet all the equities and circumstances of the case. Congress, in turn, enacted the necessary legislation and in I I words defined the commission's jurisdiction. It declared "that unfair methods of competition in commerce are hereby declared unlawful," and it gave the commission two distinct powers. The first was couched in language similar to that given to the bureau of corporations. In fact, the bureau had been transferred to and became a part of the commission. Under this power, the com mission could investigate corporations and business and report its findings to Congress, the President or the public at large. It could also, at the request of Congress or either House, or the President or the attorney general make investigations and report the results. The commission, in the industrial world, was to keep the public and the administrative and legislative departments of the Govern ment informed of the conditions in the several industries, and to make special economic and legal studies and inform Congress.
The second great power entrusted to it came into play when, in the interest of the public welfare, the commission deemed it necessary to issue a complaint against any offending business unit that was practising an unfair method of competition against a competitor. It then required the offender to reply and when issue was thus joined, testimony was taken, under oath, relative to the issue involved.
The statute required the commission either to dismiss the com plaint in the event that the testimony was insufficient to establish an unfair method of competition in interstate commerce, or if a case was made out, to issue an order to cease and desist from the offending method. Approximately 95% of the complaints that have been issued have been based upon charges made by one com petitor against another.
It was thought that with this additional power of stopping un fair methods of competition at their very inception, monopoly would thus be checked since most monopolistic tendencies start with unfair methods.
The commission had no more than set up the machinery for carrying out its jurisdiction, than it was deluged with complaints by business interests, and has been ever since. The policy of the commission in its earliest days was not to name the offender pub licly, but to make findings and issue an order to cease and desist. As this did not seem to halt the practices complained of, the corn mission changed its procedure and named the offenders publicly when a complaint was issued.
The reaction caused considerable protest in the business world because those desiring "special privileges" and those offending against the statute were fearful of the publicity that resulted in an order declaring them unfair.
Simultaneously with the passage of the Commission Act, Con gress passed what is known as the Clayton Act, approved Oct. 15, 1914. Under it Congress entrusted the commission with the pre vention of unlawful price discriminations, tying contracts, stock acquisitions in competing corporations and interlocking director ates. The purpose of these provisions was to prevent certain practices which were regarded as lessening competition or tending to monopoly, but which it was feared would not always in them selves be sufficient to bring the person who practised them within the scope of the Sherman Anti-Trust Act.
In 1918 Congress passed the Webb-Pomerene Act and gave the commission jurisdiction over it. This law permits American business interests to associate themselves solely for the purpose of selling their goods abroad as a single unit and without the restrictions of the anti-trust laws.
The commission was not long in finding that when one competi tor in an industry violated the legal rules of practice it was soon followed by many others. This frequently resulted in a deluge of complaints which would have absorbed more time than the legal section could spare, so a procedure formerly called the Trade Practice Submittal was inaugurated. The name has now been changed to that of Trade Practice Conference. These conferences, in which members of the industry concerned are assembled to consider and adopt fair trade practice rules to be submitted to the commission for its approval, are held under the auspices of the commission.
These rules, after being subjected to public hearing and full consideration, are approved and accepted by the commission in the form found proper to meet the requirements of the law and to provide protection to the industry and the purchasing public. They are then promulgated by the commission.
The trade practices in the particular industry which are unfair, unethical, or harmful to business or the public are defined and catalogued in the rules.
Provision is made for their elimination and prevention and, through co-operative effort on the part of the members of the industry in collaboration with the commission, for adherence to the rules and for maintenance of competition free from unfair methods and trade abuses. Provision may also be made for the promotion of recommended practices which serve the best in terests of industry and the public.
To receive the approval of the commission, the rules must not sanction or promote practices which are contrary to law, or which work injury or hardship upon any concern or group. Care is taken. to see that the rules protect the consuming and purchasing public as well as business. The protection of the public interest is a matter of prime concern in commission functioning under the law. Consumer groups are afforded opportunity to participate in the proceedings and to have their views fully considered by the commission and their rights protected in the provisions of the rules.
Rules, when finally approved and accepted by the commission, are classified into two groups. In "Group I" are placed the com pulsory provisions, that is, those provisions against unfair trade practices which, under the law, members of the industry are ob liged to observe in the conduct of their business in interstate commerce.
"Group II" rules specify recommended practices, the provisions as to which are to be observed by the members of the industry on a purely voluntary basis in the interest of promoting desirable business methods not necessarily required by law.
Group I rules include provisions against such methods as false or misleading advertising over the radio, in newspapers, periodi cals or other media ; misbranding or improper labelling; deceptive concealment of material facts through failure to make proper disclosure on labels or otherwise ; false invoicing; deceptive use of so-called free goods deals; deceptively imitating competitor's trademarks or brands, and many other forms of deception or unfair selling methods; inducing breach of contract; commercial bribery; adulteration or loading of product; nondisclosure of harmful or cheapening ingredients or of sub-standard character of product; harmful discriminations in prices, discounts, refunds, advertising allowances, or services; granting of improper broker age fees; following the practice of selling below cost as a monop olistic device ; abuse of consignment distribution ; various types of combinations in restraint of trade; use of unfair threats; coer cion and intimidation in trade, and many other types of unfair practices which are from time to time found to exist in trade or commerce.
This conference method established by the commission has been in operation for many years, its early beginning going back as far as 1919. In the proceedings the commission has held about 200 industry trade practice conferences, and many rules for dif ferent trades or industrial groups have been placed in effect. These cover industries whose capital investment and annual volume of sales total several billions of dollars.
An outstanding advantage of this method of regulating business practices is that it effectuates the wholesale abandonment and prevention of unfair methods of competition and trade abuses voluntarily, co-operatively and simultaneously. Correction is thus brought about on a friendly basis and at substantial saving of time and expense to the Government and to business, and, at the same time, the public and industry generally are shielded from harmful effects of bad practices.
So well has this plan worked that in some instances it has brought about general correction of harmful practices throughout an entire industry, without incurring the expenditure of time and money which would otherwise be required to eradicate these evils by compulsory action through legal proceedings instituted against individual offenders.
Moreover, this procedure of the commission affords industry a means of proper self-regulation and co-operative effort with the assistance and supervision of the Government. Under the rules, industry and trade receive official guidance and assurance as to the inhibitions of the law. The rules constitute a convenient and authoritative code whereby manufacturers, distributors, and buyers may readily be informed as to what the legal requirements are as they apply to the particular industry or trade. Law ob servance is promoted.
The rules operate as an effective deterrent to violations which result from ignorance, carelessness, or even indifference, besides assisting in making compulsory correction more efficient. Con sumer rights are carefully protected, and members of the industry who desire to serve the public conscientiously and with increased satisfaction are aided. The trade practice conference procedure is widely recognized as an official activity productive of great public good.
In order to speed up action with respect to complaints filed and to offer the respondent the privilege of disposing of his case without the cost of a trial, the commission devised a procedure before issuance of a complaint and trial of permitting the respon dent to sign a statement of fact and agreement to discontinue the alleged unfair method of competition or practice. The subject matter and form of the stipulation are prepared under supervision of the commission in accordance with the facts as disclosed by its investigation. If the respondent cannot agree to the facts disclosed the only procedure is to issue a complaint and try the issue.
This stipulation method, where applicable, simplifies the com mission's legal procedure and has saved both the Government and the respondent time and expense.
Often it appears that a violation occurs through ignorance or misunderstanding and that the attention of the offender has only to be called to it, to discontinue the practice. Under such cir cumstances, the respondent is given an opportunity to sign a statement admitting the facts disclosed and an agreement to cease and desist from the practices charged. This suspends action before trial.
Stipulations are not entered into in all types of cases. They are not allowed where a fraudulent business is concerned; or where a legitimate business is conducted in a fraudulent manner; or where the commission has reason to believe that an agreement entered into with the party involved will not be kept; or where a violation of Section 14 of the Commission Act, or of certain sections of the Clayton Act, or the criminal sections of the Sher man Act, or any other statute is believed to have occurred. The commission reserves the right in all cases, for any reasons which it regards as sufficient, to refuse to extend the privilege of stipula tion, and all stipulations are made a matter of public record.
Administration of the Clayton Act had for some time demon strated its inadequacy as a restraint upon the growth of monopoly. The result was an amendment by the Robinson-Patman Act on June Designed to eliminate certain unfair and discrim inatory practices not prohibited by the Clayton Act and believed by Congress to be injurious to commerce, the purpose of the Robinson-Patman Act, broadly speaking, was to promote equality of opportunity in business and check a tendency toward monopoly disclosed as a result of the Federal Trade Commission's chain store investigation, the investigation by a special committee of the House of Representatives of the lobbying activities of certain groups, and Congressional committee hearings held during con sideration of the Act itself.
The Act is not directed at any particular type or size of busi ness organization, but applies to all merchants, large and small alike. It prohibits discriminations in price to purchasers of com modities of like grade and quality where the effect of such dis criminations is to substantially lessen competition, in any line of commerce, unless such discriminations are justified by savings attributable to economies of operation effected by the particular method in which commodities are manufactured for, or are sold or delivered to, the purchaser receiving the discrimination. This passing on of savings by sellers to buyers is permissive, however, not mandatory.
As a safeguard against possible injury to competition resulting therefrom, the Act empowers the commission, after investigation and hearing, to fix quantity limits "where it finds that available purchasers in greater quantities are so few as to render differen tials on account thereof unjustly discriminatory or promotive of monopoly." The Act applies to both buyers and sellers, and the inducement and receipt of a known price discrimination, as well as its al lowance, are prohibited.
The Act also prohibits certain indirect price discriminations effected by methods which were regarded as being inherently un fair methods of competition, such as the payment of brokerage to buyers or to buyers' agents upon the buyers' own purchases and inequality of treatment in the making of advertising al lowances.
It forbids the payment of brokerage and the making of any allowance or discount in lieu thereof, to a buyer upon his own purchases, or to any agent representing, or subject to the control of, the buyer. It has been held that this prohibition is absolute, that it is not conditioned upon an injury to competition resulting from such payments or allowances and that such payments and allowances cannot be niade or justified as a savings or differential in cost.
The Act does not require or prevent the granting of advertising allowances or facilities, but contemplates equality of treatment of competing customers in that connection, prohibiting the pay ment of allowances and the furnishing of facilities to one cus tomer, unless granted upon proportionally equal terms to his competitors.
The Act also contains provisions making certain forms of price discrimination criminal offences. These provisions, however, are enforced by the Department of Justice, not by the Federal Trade Commission.
Unlike the Federal Trade Commission Act, as amended, neither the Clayton Act nor the Robinson-Patman Act provides that the commission's orders thereunder become final if not appealed with in a certain time. Under the Act, respondents may appeal to the courts from the commission's orders to cease and desist, and the commission may apply to the courts for a decree commanding obedience to its orders.
A number of formal complaints have been issued under this Act. They cover quite a wide field, including charges of unlaw ful price discrimination, violation of the brokerage provisions, unlawful advertising allowances and use of facilities, and price discrimination. The courts have been and are now considering appeals from a few of the cases.
The Federal Trade Commission Act was broadly amended March 21, 1938, by what is known as the Wheeler-Lea Act. There were several reasons which induced Congress to make these amendments. In a case before the Supreme Court of the United States in 1931, involving what was considered by the commission to be a dangerously misleading and false advertisement, the court held that the commission had no authority to ban the false ad vertising because it did not appear that the unfair practices were "methods of competition in commerce." Congress accordingly amended the act so as to make unfair or deceptive acts or practices in commerce unlawful as well as unfair methods of competition, thus granting the purchasing or consuming public the same protection against unfair practices that a merchant or manufacturer already enjoyed against the un fair methods of a dishonest competitor. Congress also provided definite and substantial civil penalties, through suits to be brought by the attorney general, for violation of the commission's orders to cease and desist after they have become final. The review by the courts of the commission's orders to cease and desist, through the filing of petitions to review or set aside the same was amended so as to thereafter require the petition to be filed within 6o days. Otherwise, the commission's order becomes final, and its viola tion thereafter subjects the offender to suits for civil penalties.
Prior to the passage of the recent amendments, there was no penalty for violation of the commission's orders, unless they were violated after they had been affirmed by a Circuit Court of Ap peals of the United States. Proof of such violation, after the order had been affirmed by the Circuit Court of Appeals, formed the basis for contempt proceedings. Such proceedings may still be brought in cases where, on review sought by the respondent, the courts affirm the commission's orders, if such orders are thereafter violated.
In response to the demand for greater consumer protection in the case of the deceptive advertising of commodities whose use might affect the public health, Congress specifically prohibited the dissemination of the false advertisements of food, drugs, cos metics, and therapeutic devices.
Where the use of such commodities might be injurious to health, or where they are falsely advertised with fraudulent intent, criminal penalties are imposed.
In a further effort to grant adequate protection to the public during the period pending the issuance of and final action upon the commission's complaint, the commission is authorized to bring suit in the several U.S. District courts, or in Territorial courts, to enjoin, temporarily, the dissemination of the false advertisements of food, drugs, devices, or cosmetics. Such temporary injunction is to remain in effect until the order of the commission to cease and desist has become final, unless the complaint is dismissed by the commission or the order to cease and desist is set aside by the court on review.
During the first year after the Wheeler-Lea amendments be came effective, a number of such injunctions were sought by the commission and granted by the Federal courts in various States of the Union.
As conditions change in the business world and the methods practised therein continue to unfold, it becomes necessary for the commission to add new divisions or to reorganize and develop the procedure of already existing divisions in order to meet such new conditions.
In recent years, advertising over the radio has become so ex tensive and has so constantly necessitated the determination of what is fair and unfair in advertising through that medium that the commission, in 1938, established a Radio and Periodical divi sion. This division took over the duties theretofore handled by the commission's Special Board of Investigation and, at the same time, its supervision was extended so as to cover mail order catalogues and foreign language newspapers.
The Radio and Periodical division scans yearly thousands of pages of magazine and newspaper copy and thousands of radio continuities and keeps in close touch with radio broadcasters and their clients.
It has been found necessary for the commission in the field of medicinal advertisements to add to its staff medical men as con sultants, whose knowledge and experience are used in determining the safety, efficacy, and characteristics of proprietary medicines and appliances. (H. TH.)