Thompson Products, Inc.

Text (OCR of the scan at left; may contain errors)

IN THE MATTER OF THOMPSON PRODUCTS , INC.

ORDER, ETC., IN REGARD TO THE ALLEGED VIOLATION OF SEC. 2(3) OF THE CLAYTON ACT Docket 5872. Complafnt, Apr. 1951-lJeci..,ion, Feb. , 1959 Order requiring a manufacturer in Clevelann, Ohio, to cease violating Sec. 2(a) of the Clayton Act by selling its automotive products and supplies at higher and less favorable prices to numerous small businessmen than to various larger purchasers competing with them and with purchasers from its competitors.

M1'. Eldon P. 8ch1'u)) and llit. Robe1. t E. Vaughan for the Commission.

.Jones, Day, Cocleley Rerwis of Cleveland, Ohio, by M1'. Curtis C. Williams, .J. and IVIT. Thomas O. Nevison for respondent. INITIAL DECISIO:- BY EARL.J. KOLB , HEARING EXAMINER This proceeding is before the undersigned hearing examiner for final consideration upon the complaint, answer thereto, testimony and other evidence, proposed findings of fact and conclusions, and brief in support thereof Died by counsel for respondent, proposeo findings of fact and conclusion fried by counsel supporting the complaint, and reply brief filed by counsel for respondent. The hearing examiner has given considerat.ion to the proposed fmdings of fact and conclusions submitted by both parties and briefs in support thereof. Rnd R1I findings of fact ann conclusions of law proposed by the parties, respectively, not hereinafter specifically fOllno or concluded, are here\with rejected and the hearing examiner having considered the record herein and being now fully advised in the premises makes the following findings as to the facts, conclusions drawn therefrom and order:

1. In General 1. Respondent Thompson Products, Inc. , is a corporation organized under the laws of the State of Ohio. It is now, and during the times mentioned herein has been, engaged in the manufacture and in the sale and rli tribution in interstate commerce of diversified products for use or resale in three principal markets within the United States. During the year 1955 such sales were as follows :

THOMPSON PRODUCTS , INC. 1253 1252 Decision To manufacturers of automotive, marine and industrial products $ 84 603 000 To jobbers and others principally for automotive replacement use -- m m -- -- 425 000 To manufacturers and users of aircraft and aircraft engines - 172,201 000 Total $286 229 000 2. This proceeding- involves automotive parts manufactured and sold by respondent for replacement purposes under both the Thompson " and "Toledo" lines. These parts consist of certain automotive engine and chassis parts including valves and tie rods, tie rod sockets or ends and other front-end steering and suspension parts. In addition, respondent distributes automotive engine and chassis parts, including friction type bearings, which it purchases from other manufacturers. In the sale and distribution of its automotive parts, respondent is in active and substantial competition \with other corporations and firms selling and distributing comparable automotive products and supplies in interstate commerce.

3. Respondent Thompson Products, Inc., began the manufacture of automotive parts, consisting of engine valves, in 1904 , exclusively for the use of original equipment manufacturers. In 1924, the respondent, in addition to sales to original equipment manufacturers, beg-an the distribution and sale of a Jine of engine and chassis replacement parts to independent distributors located throughout the United States. In 1935, respondent acquired the Toledo Steel Products Company, another company engaged in the manufacture and distribution of a line of valves to independent distributors. As of December 31 , 1951 , the marketing activities of Toledo Stec1 Products Company were transferred to the Heplacement Division of the respondent. That Division now carries on respondent' s activities with respect to the marketing, distribution and sale of the "Thompson " and "Toledo" lines of automotive replacement parts to independent distributors. II. Price Differences Arising- Under the Purchase Bonus Provision of the Thompson Distributor Franchise Agreements 4. The respondent enters into franchise agreements with certain independent wholesalers who are designated as Thompson distributors. With the consent of the respondent, the distributor may designate as a Thompson jobher a jobber who executes a Decision 55 F. T.

Thompson Jobbers Franchise, which franchise has been accepted in writing by the respondent. Both the Thompson distributor and the Thompson jobber rcse1l respondent's automotive replacement parts at wholesale. The Thompson j obbcr accounts are not sold directly by the respondent. Each such account deals primarily with the Thompson distributor with whom it has the Thompson Jobbers Franchise Agreement. The Thompson jobber account is billed by the distribut.or, who in turn is hired by the respondent. A redistribution allowance is paid by respondent to each distributor in an amount equal to 10 percent of the distributor s cost of parts resold by it to Thompson jobber accounts. No purchase bonus or rebate is paid by respondent to Thompson jobber accounts on the annual volume of business done by them. Sales by Thompson distributors to Thompson jobber accounts are normally at distributor s list prices. 5. In the course and conduct of its business, respondent has s01d and sells its automotive replacement parts of like grade and quality, including valves, front-end parts and bearings, at varying prices (a) among Thompson distributors and (b) between Thompson distributors and Thompson jobbers. These varying prices have resulted from the varying rebates granted to Thompson distributors under the purchase bonus provision of the Thompson distributor franchise agreements. In general, Thompson distributors and Thompson jobbers compete in the resale of such products.

6. For many years the franchise agreement between respond:. ent. and its distributors has provided for a purchase bonus to be paid by respondent to its distributor based upon the distributor annual volume of purchases of parts subject to the plan. The purchase bonus provision in respondent' s 1951 distributor s franchise was applicable to the distributor s purchases of all parts in the franchised line and provided for the following nonretroactive schedule of rebate payments:

:\ON-RETROACTIVE A11nunl P"n;hu ,:s Vwrc"". Ii01!1l.' 'i;, Up to $10 000 None $10, 001 to $25 000 $25 001 to $40 000 - 3 $40 001 lo $00 000 $60 001 to $80,000 S80 001 to $100 000 Over SlOO OOO THOMPSON PRODUCTS, INC. 1255 1252 Decision 7. The discount was nonretroactive in that the percentage of discount set out in the schedule with respect to a particular bracket of purchases was applicable only to the purchases falling within the specified range and not to the purchases within lesser volume rang-es, these latter purchases carrying- only the lesser discounts set out in the lower brackets of the schedule. 8. In 1953, respondent modified the purchase bonus provision of its distributor franchise by changing the percentages of discount and the quantities required for the various discount brackets. A separate purchase bonus schedule was provided with respect to bearings, connecting rods and shims. The other products in the line remained subject to the principal1 bonus schedule. The discount schedules set out in respondent's 1953 full line distributor s franchises were identical1 for distributors handling either the "Thompson Products " or " Toledo Steel Products" brand of the company s replacement parts, and were as follows: CO'lNECTING RODS, ENGINE BEARINGS AND SHEilS NONRETROACTIVE An1!ual r'iTCha8" Purclwsc Bonus . 0 $0 -$7fio $750 - 000 000- 000 . 5 000-$10 000 -- 7% Over $10 000 - ALL OTHER PRODUCTS KONRETROACTIVE Annual.l r1lrr:hase, Purchase R01"''' 'i" 000 $0 - 000 - 000 000 -$12 000 $12 000-$18 000 $18 000-$24 000 $24 000-$30 000 $30 000-$36 000 . 7 $36 000- $48 000 $48 000-$00 000 -- 9 Over $60 000 9. The respondent offered in evidence a cost study made by a firm of certified public accountants for the purpose of showing that the different prices paid by respondent' s distributors as a result of the nonretroactive purchase bonus plan were cost justified in that they made due allpwance for differences in cost of manufacture, sale and delivery resulting from the differing meth- 1256 FEDERAL TRADE COMMISSION DECISIO!\S Decision 55 F.

ods or quantities in which such commodities were sold and dejivered to such distributors. The assistant chief accountant for the Federal Trade Commission was called as witness and testified that he had checked the cost study oftered by the respondent and that in his opinion the fact that the cost study did not show complete arithmetical justification in some instances docs not necessarily mean that there was a failure of cost justification and that in some ins Lances the failure of cost justification is not significant in terms of percentages of sales or of rebate c1ifrcrentials. In the absence of evidence to the contrary, the hearing examiner must accept the cost justification offered as correct, and conclude that the differing prices at which respondent sold its distributors resulting from the nonretroactive purchase bonus plan have becon cost justified. III. Price Differences Arising from Sale of Common Parts to Original Equipment Manufacturers and to Thompson Distributors 10. In 1955 the respondent sold automotive parts consisting of certain valves and front-end parts to 2G automotive vehicle manufacturers for use in the original production of the vehic1c and for repah' or so-called replacement use. The prices at which respondent sold such automotive parts to vehicle manufacturer \were lower than the prices at \which respondent sold automotive parts of like grade ancl quality to its distributors. Replacement part sales have constituted a subshlntial part of the business of the automoti\'e vehicle manufacturers. During 1955 , the replacement parts sales of General iotors (Buick, Oldsmobile, Pontiac) were $139 000 000; Chrysler sold $100 000,000 ancl Ford sold $200 000 000. Included in these sales were substantial clol1ar amounts of various replacement parts manufactured by the respondent but s01d under the trade name of General Motors Chrysler and Fore1.

11. Automotive vehicle manufacturers who purchase replacement parts from Thompson, inc1ucling Gcnera1 Iotors. Chrysler and Ford, are competitively engaged with Thompson distributors and jobbers in he sale of said replacement parts to their respective franchised neVi'- car rlealers. It is the general practice of the vehicle manufacturers to allo\\ wholesale compensation to their car dealers for replacement parts sold at wholesale to other dealers, garages, etl. In making such sales, the car dealer is in THOMPSON PRODUCTS , INC. 1257 1252 Decisjon competition with Thompson distributors and jobbers. During J 955, Buick paid out $4 500, 000; Oldsmobile, $3 500 000; and Pontiac, $3 000, 000 in wholesale compensation to their franchised new-car dealers.

12. The automotive vehicle manufacturer buying parts from outside manufacturing sources for production use, uniformly also selects these particular sources for the purchase of these same parts for replacement use. Such vehicle manufacturers in buying these so-calleel "common parts " for replacement use also attempt to purchase at a price suffciently 10w to enable their resale to the franchised nc\v-car dealer at a dealer net price, \which after payment of all intervening packaging, \varehousing, distributing, sales promotion and advertising expenses, will place the car dealer in \vhat they term a "competitive" position. This means that a buying price is being obtained from the independent parts manufacturers such as respondent that is so low it will allow not only for all the foregoing concurrent sale and promotional expenditures and enable the automotive vehicle manufacturer to set a new-c.ar dealer price on the part which the Thompson wholesaler cannot profitably meet or compete with as against the franchised new-car dealer, but also that such buying price is so low that it stil further provides for the payment of a wholesale compensation by the automotive vehicle manufacturer to the car dealer, for competing with the Thompson \vholesa1er for the lauer s replacement parts wholesale business. 13. The favorable price advantages granted to the vehicle manufacturers by respondent gave a substantial eompetilive advantage to these favored vehicle manufacturers and their franchised nevin-car dealer customers. This price ac1vantage thus g-ainecl from Thompson not only in large part contributed to the foreclosure by the vehicle manufacturer of the franchised nc\\'car dealer as a replacement parts customer of the Thompson distributor and jobber, but further set up the franchised newcar dealer as a powerful \\'h01e8aler competitor on these parts in the place of a former actual or potential customer. Originally, parts could be obtained at a cheaper price from the jobber, but subsequent to the use of the who1resale plan, the car dealer now of the car sells at the same or lower price. The who1csa!e sales dealer are not inconsequential or sporadic. Among the car dealers called as witnesses in this case were- Decision 55 F.

A. Buick dealers who gave thc foliowing comparison of their wholesale versus retail parts sales during 1955: (a) Wholesale sales of $76 825 , representing 92. 3 percent of sales;

(b) Wholesale sales of $142,440 , representing 82. 1 percent of sales; and (c) Wholcsa1e sales of $29 901 , representing 33. 7 percent of sales.

B. Four Oldsmobile dealer witncsscs who testified to figures as follows:

(a) Wh01resale sales of $90 081 , representing 89.0 percent of sales;

(b) Wholesale sales of $39 470, representing 42.3 percent of sales;

(c) Wholesale sales of $21,592 , representing 37. 8 percent of sales; and (d) Wholesale sales of $105 193 the percentage of which to the total is not available because the record fails to disclose total retail sales of this dealer.

C. With regard to the five Pontiac dealer witnesses, the figures were:

(a) Wholesale sales of $54,489 , representing 31.8 percent of sales;

(b) Wholesale sales of $30 734 , representing 26. 1 percent of sales;

(c) Wholesale sales of $47 301 , representing 25.7 percent of sales;

(d) Wholesale sales of $17 534 , representing 22. 0 percent of sales; and (e) Wholesa1c saks of $11 ,918 , representing 17.3 percent of sales.

D. With regard to the six Ford dealer \vitncsscs, the figures were:

(a) Wh01resale sales of $500,336, representing 81.8 percent of sales;

(b) Wholesale sales of 5218,749 , representing 64.9 percent of sales;

(c) Who1resale sales of $242 570 , representing 56.2 percent of sales;

(d) Wholesale sales of $195 596, representing 51.2 percent of sales;

THOMPSON PRODUCTS, INC. 1259 1252 Decision (e) Wholesale sales of $196 225, representing 53.7 percent of sales; and (f) Wholesale sales of $117,902, representing 40.3 percent of sales.

14. Thompson distributors in the sample trade areas of Washington, D. , Baltimore, Md., Norfolk, Va., and Richmond, Va., when called as witnesses in this proceeding, uniformly testified regarding the competitive disadvantages they encountered both in attempting to seJl Thompson replacement parts to new-car dealers as well as when competing with such car dealers acting as wholesalers of these parts.

15. Respondent provides its distributors and jobbers with suggested resale prices in their attempts to sell Thompson replacement parts to new-car dealers as well as to others in the retail repair trade. The Thompson suggested new-ear dealer price is a lower price than the wholesale price suggested for others in the retaij repair trade. These witnesses testified to the effect that they could not profitably seJl to the new-car dealer on the basis of the Thompson suggested new-car dealer price and could profitably do so only on the basis of the Thompson suggested wholesale price, at which latter and higher price the new-car dealer would not buy. The new-car dealer in turn, when acting as a wholesaler, was also selling in many instances to other potential and actual customers of the Thompson distributor on a price basis the same as the suggested Thompson new-car dealer price. This competition could only be met by the Thompson distributor at profit loss, and when done, the sale was made only to keep the customer because of accompanying sales of more profitable items. In many instances, however, the Thompson distributor was unable to meet or refused to meet this nonprofit situation. 16. The competitive effect of the disparity in prices paid by the original equipment manufacturer and prices paid by Thompson distributors can be readily recognized when compared with effect ofthe distributors net margin of profit and the competitive the amount represented by the 2 percent cash discount. Distributors of respondent who testified in this proceeding stated that they invariably took advantage of the 2 percent cash discount as being essential in the conduct of their respective businesses, and that such discount reduced the cost of acquisition of respondent's replacement parts. Several1 of the distributors and jobbers of respondent testified that the overall net profit of their companies after taxes ran from 1 to 4 percent. By the Decision 55 F.

very nature of the businesses operated by the various distributors of respondent, their profit was necessarily based upon an accumulation of small margins of profit on many items. Practically all of respondent's distributors extend the same cash discount they receive to their customers, however, on a markup of acquisition cost, the discount actually given by such distributor to its purchaser on resale \vil be greater than the 2 percent cash discount.

17. In connection with the differing prices as between original equipment manufacturers and Thompson distributors on automotive parts for replacement, the respondent.s offered a defense of cost justification.

18. In order to cletermine if the price differences exceed any allovnlble cost differences a standard of comparison was established wherein the goods can be stated to be of like grade and quality within the statutory meaning, and in comparable amounts in Quantities purchased. The procedure for the establishment of this standard of comparison \vaf: developed and agreed upon by the accounting staff of the Commission and the accountants for respondent.

19. A list of "common pars" sold both to the original equipment manufacturer and to respondent' s di tributors was agreed upon by the accountants. All replacement parts \were eliminated from further consideration by the accounting studies as not being so-called "common parts" of like grade and quality, for cost and sales price comparison, where there was a manufacturing cost difference to respondent in excess of 10 percent as between any such parts, even though such pari s might. have a 1JOssible common replacement use. \i\There the manufacturing cost difference was 10 percent or le, arijl1stmcnt were made in the accounting studies to reflect the necessary cost differences in order that the comparable actual gross price differences in the sale of sllch like grade and quality replacement parts by respondent could be established.

20. 1n order to determine the comparable quantity in amount of purchases of sllch like grade and quality replacement parts the actual quantity amounts of such parts which were sold by respondent to its distributors was compared ,,,ith like amounts only, of the greater quantity oJ such parts which were sold by respondent to original equipment manufacturers. Fina1Jy to establish the cxiRting- net price differences, the negotiated price to each different manufacturer which was subject to 110 further \ \ :\, ,, .:: .(;,).:;,! !) j(, , ,,, , ) ,, :) ; . ,: \!; .: ;:j ,!; ,.. THOMPSON PRODUCTS, INC. 1261 1252 Decision discount, was compared against the net price of respondent to its disiributors for the respective common parts, whicb distributor price was obtained after crediting the necessary payment by respondent of the 8 percent Federal excise tax, the granting of the normal 2 percent cash discount for prompt payment, and the aJlovi'ance of the so-called average volume rebate of 3.37 percent on total sales as determined in the accounting studies.

21. The fo1Jowing tabulation based upon Commission Exhibit Nos. 33 and 42 shows the result of the foregoing procedures (including failures of cost justification hereinafter explained) to be as fo1Jows:

:-:dts\ L!t(' '\u. , Pe:crnt. (, , 1 c:-n1lnum r1l"t" """,S Pl'lCL'""I. 111lj(,f,d;J'f IlOtC' j.j1l,tj!",.cJ l'' nJ'Tl", IJi,j,. I1J('llt UrigllJni ' fcLl- f:!"'Jl' ' 1':' t)il".Jlfr rl' lip. I O. . I E.;"jl I O- \!li CkLiJJJ('I' : 11 H .,!I AJJlnjc"n :'1"\,-, 2:;.' 1111 I;'! - I LJ 1 III 1:3r;"-"s (\. S:r:lt!OrL I : ,S. (if!J, (Cns, :3, )1' 11_ (::11 I,ill:11 \ 1 R,," 1'1 (:::1,\":"" ,11 :, 1 0, I c I ,() " -;:1 :-\!I , 71:: Cun tiJJf'I t,, 1 : . 7'., I I. (;! , ,-II)FLnd "17 I 'I ::,-;7 (;""f'J':Li:l1"t" -1\17 1b, . I J . , ,,h:J K,lis('I- Will\ I!;:3 :-;1;, 0'.8 2- lli. 1\) :'1'lsq.,' JInrL', nod,,,':1 1.'1, i (; , ,(I ! 17 tllcJ,.1 ':! k (, ,!1 UJ 1- 01;;, lI, (; 1'.1i all k ,' 1':1 111 J Ii n S:, Ii, :,(1 40 10 ,1:-\1\ 2, I, II .! , , Oii 1:; 10 T"tal 1 1 c'R , Ii, I , "'" d l',.i,' P"' (,11t " :-J. I eIIFt"nH' DlIIILnll p,. i ('co d j f . "stj'l.'tjf:"rI r(. l'd r,,(' i:cinni dil:,ni"" fa"urj"" pan. JJi,t..jllllttH. " 1"1:' O.E:\J 01-:.\J. nlll" llLJ'' Di:l", md T :!I II (, , 2i r; Ii Din' 7(IIJ 2111 I J , t l'l II , : j, IIJ :11 Iial 'l": 1\1," :::i ,I " L,' n, ,(11 :J;:'J:, lio ' I!' ' 01" S!I "1\\ill 1'. il; 1,11 '\\11:11' :11 !il!.' , '.i:3 I 1:) ,1!1 ,:j i ilil; ' j\,t:: b ' I- Ch(' :J 1 '. " 1 Coot 'I1rj,UI()1O; i J . ; I lOriginaJpljlJipmentmanllfncturpl' 2D('notes deduction.

\\ _. , ., . , : \. (,, Decision 55 F.

22. In order to ascertain the extent of any cost justification for the foregoing pricing by the respondent, it was necessary to ascertain the operating cost differential applicable to sales by respondent to its distributors. The Thompson Service Division handled all warehousing, packaging, sales and deliveries to respondent' s distributors. In order to obtain an operating cost differential the gross and net sales were determined for the year 1955. Next, the total allowances and expenses were determined finally arriving- at an operating cost differential of 38.15 percent. Respondent' s accountants following the same procedure made substantially the same computation, arriving at an operating cost differential of 38. 87 percent. This difference 72 percent, was due to allocation of engineering expense previously excluded by the hearing examiner. This expense consisted of eng-ineering research and development projects primarily concerning nollautomotive products or with experimental and research work on products not currently sold by respondent. This .72 percent difference does not reflect any actual sales cost attributable to 1955 sales costs alone. The computations to arrive at the operating cost differential are set out as follows: Thompson Se1'vice Division-1955 Percent of Amo\l"t !let s:de"

Gross Side, ':J7. 325 OGO 2'7n c:l h dj,coil1t . 24(;. . O I R'io Fed"r 1 exri " bx . 8\1.1708 l'urrhll"ebonusrebnt" 415:94(, T''el nles o c_ oo-oos"le,; ",1I"'l"u)(' !lnd dedllction Fr:!nch; " discolLflt " 2I'Hi 7;,g 2 CG TrHflSf)Portation Ililowed 12- 1(, f'twrild !J1t(J\\"nre 10: Tr,msportr.lij1\ t"1\"llreiLoUliCs I 110,5888IV J Total ,,!I()waneco r.nd rledllcti(m Exrwn !,s nreiLolLH' Sellin), 71;, ;)10 G, C"talog- and fldl'erti" ;ng 211 JR, 2 1.'; (;elJemll1nd admjnj tnLtin: 337 :o:t; 3. 1:\ Tubl 421 001 Told 111:o\\!Nlle,!:xpen(''iand exi)Cn e:i 11!), 4(Hi 8 2 (; Add"

Far:torv billing and 81\1('5 ex pens" HllPlieahle to TIj(m;Jso!. Sen"ll'eTotal expense j)i,"ioflIlpplical,I., tD distrihl:tors :\8. ss"

llif)g" eX",(sells"s !!Pp:icl,L:e tlJ UIE" to original np;ipment manufacturer' Operating eostdiiTprenti1i1 38, 1;) \)(; (j, : (;), , THOMPSON PRODUCTS, INC. 1263 1252 Dccision 23. For the purpose of determining the extent of cost justification of the lower prices for replacement parts allowed original equipment manufacturers, the operating cost differential of 38. percent was applied to the percent of price difference with the following results:

Ext"nt of cost were nt of I Operating Original Ertuipment :;I;nllfacturel" priG" Gost differ!'uG" difIercnt: 1-- 38 101" crcen! Pcr r.nt All; Chal","r 49. 11.,11 AmeriCffj Mutors . 44. \14 Bri""s& Stmtbn 22. 43 - 9 :1.77 Cease. . CfLt"rpillarChrysler... . 4!I, 05 I 10.Cc.nt;n"nbl i\lutors 22 'Ford J\lohr C". 4"77 i Gelleral J\llJtnr B,!;ek Divisi'", :,2, 1J7 Chevrokt ni\'i ion I:: 12. (LJ 1'\'1.c. Truck &: C,mrh JJj\' 3017 \)1' 01,hs1Hohile Divj,;un ;-11 ;;1 ontiac Djvisi,m :-Jij 10 !J!; KDiSGr-Willys 10 J. l\laosey- lJarrio 48. 10, J!JHod " ell . 42:'1. 4014 Huctebakcr 4() 10 I 1 n!)\1;; \V""k,,'dm Diamond T. 14 (;2 2:3, :'0 Divco. 1241: 62. 2(; Intern ti')Jlld Iun. ter ;-\J.'n fi. 1!1 :,i.Le H"i :-1:! fil .ilac;k 1\Ifp;. Cu. 1:'1. Oliver 1:'182 21:,3 Twin C()a 277G 10. :19 I \"-white l\lotor J:;;:;;9 2"16 1 Denoles red figure.

24. The accounting studies of the Commission and the accounting studies of respondent while agreeing on the mathematical correctness of each, do conflict, however, with regard to certain cost allocations proposed by respondent which. if found acceptable, would negate in full or further lessen respondent' failures of cost justification in this proceeding. These allocations by respondent involve:

the costs of (a) A claimed allowance of the right to "average" serving all the manufacturers herein concerned, nohvithstanding the significant competitive realities involved in the marketing of these replacement parts.

(b) A claimed allowance of a so-called " return on investment" as a cost to be included in respondent's sales to the jobbing trade notwithstanding it is to be computed on a comparable profit Deeision 55 F.

basis with that occurring in unrelated matters such as respondent' s aircraft, industrial products, export, and various other sales. 25. The averaging of the costs of serving aU the manufacturers is not an element of cost analysis acceptable under Section 2 (a) of the Clayton Act. It has been contended by respondent that the right to so average is authorized by the proceeding before the Commission in the matter of Sull' ania Elect?'ic Products, Inc. Docket K o. 5728. The price discrimination involved in that proceeding was the sale of tubes by Sylvania to its distributors at prices higher than it charged Philco which \vas in competition with said distributors in the sale and distribution of replacement tubes. In making a cost justification, Sylvania compared the aggregate price difference on the entire complement of tubes with the aggregate cost difference. Oniy one area of competition was involved, namely, competition between Sylvania distributors and Philco.

26. In the present case, during the year 1955, the respondent sold Hutomotive parts to 26 original equipment manufacturers for both original equipment and fur resale a replacement parts. Instead of one, there \\'ere approximately 26 areas of competition. Respondent's distributors, for example, must compete with the Thompson manufactured General Motors part against Geneyal 1\.101.01'8 and the General IVlotors franchi ed new-car dealer not against the Ford or Chrysler organizations with regard to these particular replacement parts. Similarly, (m Thompson manufactured Ford and Chrysler parts, respondent' s distributors \vould be in competition with the Ford or Chrysler organizations and their franchised new-car dealers and not against other uriginal equipment manufacturers with regard to these particular replacement parts.

27. The Hobinson-Patman Act was designed to prohibit price discrimination between favored and nonfavored buyers, having an anverse effect on competition. The tabulation hereinbefore set out shows that Chrysler had a price advantage of 45.06 percent over the Thompson nistributor; Ford, 42. 77 percent; and General IvIoiors, 41.22 percent. These lower prices can be j ustified on1)' to the extent of the 38. 15 percent or the operating cost difterential. Permilting- the averaging of the costs of a1l 26 customers :1n(l using the 11 customers whose prices \were overjustified \vOllld result in permitting the re pondent to continue to sell certain vehicle manufacturers, including Chrysler, Ford and THOMPSON PRODUCTS , INC. 1265 1252 Decision General Motors, at discriminating prices to the detriment and injury of respondent's distributors. In effect such procedure would permit the use of higher prices charged nonfavored customers to cost justify the lower prices granted the favored customers with the nct result in certain instances of nul1ifying the provisions of Section 2 (a) of the Clayton Act and defeat the purpose for which it was intended.

28. The attempt by the respondent to use "return on invesl- 111ent" as an element of cost is so far removed from the sphere of actual cost differences that it cannot be accepted as applicable to a cost justification defense. In order to arrive at this "return on investment," the respondent has determined that the rate of return or profit, before Federal income taxes, for the company total business operations was 20.8 percent for 1955. This rate of return included income from all activities of the company operations which vvoulc1 embrace aircraft, marine, and industrial products, as \vell as automotive products, in addition to the Replacement Division s sales of automotive replacement parts. 29. The respondent claims that in 1955 it had an average investment of $8, 810 912. 00 in its Domestic Replacement Division Jacilities which are used only in the sale and distribution of its products to its distributors. It claims that since these facilities do not eontribute in any way to its business \with original equipment manufacturers, it is entitled to in lude as a cost differential between the two clas e3 01' business the return on investment in these Jacilitie,-. Respondent would compute and arrive at its so-called "return on investment" in its Replacement Division as follows:

Investment in RephH'ement Division- $ 8 810 912 Return on invest.ment in l'company as a whalen 20. Return on investment in Replacement Division $ J .S:J2, G70 Net sales of Replacement Division 817 219 1!J'1 Return on investment in HeplaccHlent Division 10.(;4 ( This percentage of J 0. 64 was then applied to the Replacement Division net sales value of common pads in 1955 to arrive at $166 623.00 which the respondent usee1 as a cost differential, but which, in fact, was an allocated portion oJ the total profits of the company from all sources, including export sales, cleJense contract sales and sales of parts that were not common to original equipment manufacturers or distribuiors.

Order 55 F.

30. The cost justification must be 1limited to the differential in price between sales of common automotive replacement parts sold to original equipment manufacturers and to respondent' wholesaler yustomers. This so-called "return on investment" claimed by respondent was calculated on the basis of the net profit before deduction of Federal income taxes from its total operations as shown above. In other words, respondent claims that the difference between its price to wholesaler customers and its price to original equipment manufacturer customers should be suffciently large to cover not only the actual1 additional distribution expenses, but should also include a conjectural but nonetheless equal profit of 20.8 percent on the investment in its Replacement Division distribution fact1ities as well. 31. This whole concept of return on investment is contrary to the legislative intent of the Congress. The Senate Committee of the Judiciary in reporting on the Robinson-Patman Act (S. Rept. No. I502-74th Cong., 2d Scss. ) stated that the phraseology of the Act, "* " * resulting from differing methods or quantities in which such commodities are to such purchasers sold or delivered" precluded "differentials based on allocated or imputed as distinguished from actual differences in cost." Similarly, the Committee of the Judiciary of the House of Representatives (Rept. No. 2287-74th Cong. , 2d Sess. ) stated that the Act limits the use of quantity price differentials to the sphere oJ actual cost differences.

32. For the rcasons above stated, the hearing examiner finds that there has been a failure by the respondent to cost justify the lower prices for automotive replacement parts granted to certain original equipment manufacturers, including General Motors . Chrysler and Ford.

CONCLUSION Respondent' s discriminations in price in the interstate sale of replacement parts of like grade and quality between automotive vehicle and other manufacturer purchasers and respondent' s distributor and wholesaler purchasers of said parts for competitive resale as hereinbefore found are in violation of Section 2 (a) of the, Clay ton Act, as amended.

ORDER It is ordered That the respondent Thompson Products, Inc. , a corporation, and its offcers, representatives agents and em- THOMPSON PRODUCTS, INC. 1267 1252 Opinion ployees, directly or through any corporate or other device, in connection with the sale for replacement purposes of automotive replacement parts in commerce, as "commerce" is defined in the Clayton Act, do forthwith ccasc and desist from discriminating in the price of such products of like grade and quality: By scl1ng said replacement parts to any manufacturer of automotive vehicles or any other original equipment manufacturer at net prices which are lower than the net prices paid by any other direct or indirect purchaser who, in fact, competes with said manufacturer in the resale and distribution of such replacement parts; provided, however that nothing herein shall prohibit the respondent from showing as a defense in any proceeding instituted for enforcement of this order that its diIrering prices make only due allowance for differences in the cost of manufacture, sale or delivery resuJiing from the differing methods or quantities in which such products are sold or delivered.

OPINION OF THE COM MISSION By AJ\DERSON, Commissioner:

In the initial decision filed after the hearings were concluded the hearing examiner found that respondent Thompson Products Inc., had discriminated in price between purchasers of its automotive parts in violation of Section 2 (a) of the Clayton Act, as amended" The respondent has appealed from that decision including its order which would require cessation of the practices held unlawful.

The respondent manufacturers and purchases from others equipment parts which are distributed to over 4 000 franchised independent distributors and jobbers for resale for replacement purposes. The distributors are automotive parts wholesalers who annually execute distributor franchise agreements for purchases of respondent' s merchandise. The distributors are served through the replacement division of respondent where the parts are packed J ". . . it shall be unlawful for filly I)('r on engaged if' commerce, in the course of \Je11 r.Otnruerce, either directly or indirecUy, to digcriminate in I)ric betwPf'n different !Jurchasers of commodities of Eke grade and Quality, where either or any of the purchttses iT1volved in such discriminntiun are in commerce and where the effect of such discriminr.i011 may be subtantiaJly to lessen competition or tend to create a monopoly in any line of commerce, or to injure, destroy, or prevent competition with any person who either grants or knowinldy receive the benefit of such discrimination, or with customers of either of them: l'mvided That nothing herein contained shall prevent differentials which make only due allowance for differences in the cost of manufacture, sale, or delivery resulting from the differiI1g methous or Quai1title which such I'ommoditiea are to such purchasers sold or delivered: ,. ,. ,." 1268 FEDERAL TRADE COM IISSION DECISIONS Opinion 55 F.

in boxes suitable for resale. The Thompson jobbers are wholesalers signing respondent's jobber franchise agreements who thereby agree to maintain an average inventory of $1 000 on certain lines of Thompson merchandise. Parties to the jobber 'cgreements are the respondent, the jobber, and the distributor who recommends him and from whom the jobber is to purchase his requirements of Thompson products. The distributors and jobbers engaging in the resale of respondent' s products are col- 1active1y referred to hereafter as Thompson wholcsa1ers. In 1955 and for many years prior, the respondent was selling parts to vadous vehicle manufacturers for production use and also for replacement purposes. As found by the hearing examiner the objective of the automotive manufacturer is to obtain a buying price on bulk purchases of parts low enough to bear packaging, distributive and other promotional expense and permit t resale of the parts to garages and others in the repair trade by the car manufacturers' dealer or distributor affliates. In the case of Chrysler Corporation. approximately 90'", of the part.s manufactured by it for replacement purposes or purchased from others including the respondent., are sold to franchised MapaI' distributors. There are approximately 135 l\'lopar distributorships. Some of then1 also operate as franchised dealers for Chrysler s cars and 1Ymintain repair garages or are owned by interests holding such car franchises. The remaining 10( ;: of the replacement parts distributed by Chrysler Corporation are sold direct to !'ranchised car dealers. ": The lVlopar distributors resell to car dealers, franchised by Chrysler Corporation and to dealers selling other makes of cars, independent garages, filling stations and fleet O\vner5. The repair parts distributed by the various divisions of General 1\1motor5 arc sold to their respective franchised car dealers. On sales of parts by a franchised ear dealer to a qualified wholesale custo111er, the dealer becomes eligible to receive a \vh01resale allowance or compensation from General 1\'1motor8. This approximates " on many items. Ford :',101.01' Company s distributional program in selling to ib franchised dealers, including payments of wholesale allo\vances, is broadly similar to that used by General 1\Totors. The replacement parts sold by the vehicle manufacturers are branded under their respective names. The parts sold by respondent' s wholesalers carry respondent's brand names, Thompon or Toledo.

FubJbhe,l us JnodifLed by Comn,i sion order of July 7 , 195 THOYIPSOJo PRODUCTS , INC. 1269 1252 Opinion There is no dispute in this proceeding that the prices at which the respondent sold its parts to various vehicle manufacturers including Chrysler, General Motors and Ford, were substantially lower than those received by it for parts of like grade and quality purchased by the respondent' s independent distributors and jobbers. The hearing examiner conducted that such lower prices constituted discriminations in price having the adverse competitive effects proscribed in the statute. Having additionally determined that the differing prices in instances were not fully justified by differences in costs of sale or delivery or other1"Nisc within the contemplation of the statute s cost proviso " the hearing examiner found that the respondent' s pricinp; practices accordingly were violative of Jaw.

The respondent contends that the record does not show competitive injury, actual or potential, to Thompson distributors re- ::mlting from its lower prices to original equipment manufacturers. One of the arguments relied on in this connection is that findings of competitive injury are entirely refuted by the fact that Thompson distributors purchase parts at less than the prices paid their respective car makers by Chrysler s Mopar distributors and Ford and General :l1motors franchised car dealers reselling as \vholesalers. This comparison primarily relates to Thompson distributors purchasing in certain volume brackets and eligible for rebates or bonuses which reduce their net prices for merchandise. In J955, Thompson had 2,439 franchised distributors and 002 jobbers, and a rebate program similar to that \vhieh was in effect in J953. In 1953 , 57.87S' of the distributors did not receive any rebates; and the franchised jobbers \were ineligible for any rebates whatsoever. ' lIenee, approximately three-fourths 2 See nute 1, 8111J)"1I :I As previously noted, t)H' parties to tile jo1Jij(r franchise greelJenls IHe tlle jolJber, thp res,Jundent, and the distributor from whom the jobheJ' is to purchase hi, requin'ments of 'Thompson rnercbandise. The jobbers normally buy !it the distriiJ1tor s pric,' anu a redistribution allo' vance of JO'l is paid by respondent on such aJes. Distrihutors ,M!he out !l monthly rejJort form respecting their saJf'S to such " approved c\lslomers . AIt110ugh purchasing indirectly through di trib\ltol"s, the jobbers \:nder respond"nt's meJ"lmnuising prugTam must 1)( ,j"em,'d P\H h!\ e\' " from it within" tlw me"ning of Hue' Act. Additional issuh with wbieh the hearing;s were eoneel' ned ,Jertllined to t!1e respond;"nt s sai",o of its replac,enwnt ,Ja!"s at varying price' (n) fJmong" Thompson distributors, H;Jd (b) lwtwt'en Thompson distrn'llt.oJ"S and TllUmpson frm:lhi (1 jobbe,' s. Such rliftf'ring prices TeSlllted from varying febat"s granted to Thompson distributors 11lhi"r reqJOT1de1ll.s IH1rch1lS.. bum1s jJl'or:n\lns. Thesf' Tlonnlmubtive discounLo rflnped in 195:-1 from 2';;' UT' to 10' anti "'''1"e accorde!1 to distrib1Jtor who e annmll purchases e-xc,eed"d specifiec1 ammmts and attained the vOJ,Jmc. brackets vrescribeu unuer the sched1.1Jcs. Based on the te timony received 1"erating- to an JJPColmtj))g study introduced by the respondent "oTJcernjng cost of sales to distributors, the he,lting e-xamrncr 1270 FEDERAL TRADE COMMISSIO;' DECISIONS Opinion 55 F.

of the Thompson wholesalers have not shared in the lower prices paid by some independent distributors.

Furthermore, tabulated comparisons appended to the brief counsel supporting the complaint relating to the net prices paid in 1955 by Thompson wholesalers purchasing at distributor net prices and receiving no rebates and those paid by Chrysler Mopar distributors to Chrysler indicate that Chrysler s prices were lower on 29 of the 30 common parts there tabulated. These variations ranged from small up to mure substantial percentages. General Motors' net prices to wholesaling new-car dealers (redistribution net prices) were lower on 17 common parts and higher on 4 than the comparable net prices paid by such Thompson wholesalers; and as to 26 Ford common parts, its net prices to wholesaling car dealers were lower on 11 , equal on 9 and higher on 6. It would be erroneous to conclude, therefore that Thompson s wholesalers have purchased at prices gcnera11y lower than the net amounts paid for like parts by distributor and wholesaling dealer affliates of the automobile manufacturers to their respective car proclucers.

Respondent also argues that even if it were true that Chrysler Mopar distributors and General :votors' and Ford' s wholesaling parts' dealers resell their parts at prices below those which Thompson distributors can profitably resell them, such circumstance is irrelevant and nowise supports inferences of actual or potential injury to competition. This contention appears to assume that violation of the Act cannot occur in any competitive situation unless the favored buyer passes on the discriminations by resellng the wares to his dealers at prices lower than those charged competing dealers by the person granting the discrimination. It is not necessary, however, that a price advantage be used to lower the resale price and thereby attract customers away 3 Contin,ued reached eoncJusions that the differing prices at which tJ,,' H' sIHmrlent sold its TI,ercn:mdist' between Ilnd among- distributors WI,re cost justifi",d. His view ;n that regard h"H not been challenged by counsel supporting the complaint and no further cO),sidenttion of this aspect of the proceeding appears warraIlted, However, the findings conl;lined in tte initild decision include none evaluating record matters specifically ndressed to the legal status of the differing price!; between distributors and jobber . We have duly considered tilt feCOld and deem the record insuffcient for informed decision on the charge ofar as tht'', relatc tn the differing'vricco paid uy re l1ondent' s franchilled jobher purchasers and certain of its distributols. 4 It IIhould be noted in this connection al,o t.hat the principal volume of purdHlse by TbomJ) whulestllers is shown by the record to be in the c"lpg-ory of parts for whir.h they paid the hi"her comparative prices. On the Ford lines of parts, fur example, Thompson wholesalers purchased 225 186 units of the hil/ber priced parts, 15 528 of the equally priced parts, ami only 3 S59 of the lower priced part.

THOMPSON PRODUCTS, INC. 1271 1252 Opinion from disfavored competitors. E. Edelmann Co. v. Federal Tmde Commission. 2:J9 F. 2d 152 (C. A. , 1956). That a discriminatory price enables a buyer to resell1 the merchandise at prices sufficiently low to force his disfavored competitors to sell the seller wares at prices reflecting abnormally low profit levels or to refrain from selling is a relevant and material factor in determining whether such discrimination constitutes a substantial threat to competition. Corn Products ReFning Co. v. Fedeml Tmde Commission 324 U.S. 726 (1945).

The respondent further states (1) that new-car dealers are not a potential market for Thompson wholesalers for parts usable on the cars which they are franchised to sell and hence no injury to competition between respondent' s wholesalers and vehicle manufacturers in that area can result, and (2) that the record additionally shows that Thompson distributors compete on favorable terms with automobile manufacturers and their affliated distributors and dea1crs in selling repair parts to other retailing segments of the repair trade.

As to the first contention, it is, of course, true that there are various commercial considerations encouraging the franchised dealer to regard his car manufacturer as a preferential source for parts. These include the fact that such parts bear the car manufacturer s name and are advertised as genuine paris and that dealer protection against obsolescence of parts may be increased. While these factors may tend to handicap the independent parts distributor in varying degrees in individual competitive situations, they nowise signify that ne\v-car dealers \were not formerly and do not now represent a potential market for the independent distributor as to parts designed for use on the dealer make of car. It is clear that franchised car dealers both use and resell automotive parts and their franchise agreements do not stipulate that they purchase their requirements for repair parts exclusively from the car manufacturer. The various versions of the so-caned "wholesale plan " including t.hose whereby c1ea1ers may earn redistribution commissions on sales to other dealers and Chrysler s c1istributiona1 program through Mopar representatives and volume discounts to dealers, implicitly recognized the potential market for the independent parts distributor represented by the franchised dealerships. In the light of the foregoing, we reject the contentions that the new-car dealer is not a poten- Opinion 55 F.

tial customer for independent parts distributors selling parts of merchantab1e quality for franchised dealers' makes of cars. Also rejected is the respondent' s previously mentioned companion argument, namely, that the respondent' s distributors compete on favorab1c terms with distributors and franchise dealers engaged in wholesaling the parts of their respective car manufacturers. The respondent provides its distributors and jobbers with suggested resale prices. The Thompson sug-g-ested newcar dealer prices, also referred to in the COU:1"8e of the proceedings as "pink sheet" prices, are 1m,ver than the wholesale prices suggested for use in selling others in the repair trade. The sale of automotive replacement parts is a keen1y competitive field. There can be no doubt but that the respondent's wholesalers frequently must offer their parts in competition with others whose regular resale prices arc equivalent to rcsponclcnt'E; pink sheet or lowest recommended resale prices. Respondent states that in such situations its distributors have a gross profit margin of 27. /t, and that this materially exceeds the industry s nationwide average operating- cost,s of 24.4 % of sales and the 25. average sales costs for certain of the Thompson distributors who testified in this proceeding- respecting- costs in that regard. On respondent's parts for use on certain General Motors cars and the Ford and Chrysler lines, however, the pink sheet margins afforded on certain common parts to vvholesalcrs vvho pay respondent' s distributor net prices and receive no rebates average approximately 24. 7r_. As the hearing examiner in effect found, sales by respondent's wholesalers at Thompson s lowest recommended prices when duly reextending the customary 2 % cash discount to purchasers constitute sales at or below cost for those lines, that is merchandising costs plus operating costs. The profits of automomotive parts wholesalers nccessadly are based on an accumulation of small margins of profit. Wholesalers uniformly try to take advantage of the 2 % cash discount accorded by their suppJicrs, their cost of merchandise is reduced thereby, and the 'i AJ1ho\;gh one of the Thompson di tTiblJtOl"R testified to the effec tll! new-car deal.,r knl' ne',er been customers for Th(Jmp o-cl!lled hard parts. other evidence fully SLIJ,pons inforn, determinations of com!,ditioll between car makers unci independent whulpsdj"r5 in 5dJir:g I1Hrb to fr"nchi ed dealers. For example, a Thompson dealer witnt"'s t tib'd t!JHt I", forn",rl.\ rt' gilrrlpd the new-car de1!le1" a olle of his best cus omers; ind nDlher stat.ed that. tilt f cto)' rliff"rentinl precluded him from sellinr: Ford dealer . The te jimony of " deal.,,. WI)(l st.ate(! t.hat IIf adhered to t.he respondent' s higher E'uggested wholesale price :ist fen tilt rq1air t!"d" in li,,'1 of the Thomp8n!l lower list suggested for \151' ir. 5€;lng new-car dealers additionally shows that he had some bu iness, albeit R nq:;ligible volume. with car ,1ealprs 011 l,arts manufactlJred for the cars which they wpre frnnchised to har.dlc. /;) TIlOMPSON PRODUCTS, INC. 1273 1252 Opinion material effect of that discount on profit margins is clearly evident from the record. We think the hearing examiner s findings respecting the reduced margins resuliing to Thompson wholesalers had sound record basis.

Certain cost studies for the year 1955 were received into the record concerning the respondent's salcs of parts of like grade and quality or so-called common parts to its wholesalers and 22 original equipment manufacturers. Thompson catalogues approximately 20 000 parts but a standard was established and agreed upon by the accountant witnesses for determining whether parts having- a common replacement use were of like grade and quality. Thus, 312 paris sold in 1955 by Thompson s replacement division and purchased by the original equipment manufacturers from respondent' s manufacturing divisions comprise and have been treated in the studies as the common parts or parts of like grade and quaJiiy. As to Chrysler, Ford and General Motors the record showed an average percentage of price differences favoring Chrysler of 45. 067" Ford 42. 7770 and General Motors 41.22%. In the cases of Chrysler, Ford and General Motors the nonjustified differentials, respectively, represented 6.91 %, 62?c and 3.07:;, fi Assuming but not conceding- the correctness of these percentages, respondent argues that the excess or unjustified amounis of the price differences are de 'Ininimis and therefore, should be disregarded. In other words, it is the respondent' s position that for a1l practical purposes the price differences shown by the record have been fully justified. In support of this argument, the respondent refers to the Commission decision in United States RnlJlJeT Co. 46 F. C. 998. In that case 'vve \were considering excess price differentials over cost differences ranging from 0.0047 to 0.0480 per dollar of gross sales, and held that the differentials in the amounts of 0.0064 , 0. 0047 and 0092 per dollar of gross sales would be considered de minimis. We further held, however, that the other amounts by which the differences in cost failed to justify the price differences were substantial. As noted above the nonjustified differentials on common parts included in those here considered amount to 3. 07 ( (! The bearing examiner found that the OIwratiDg cost differential uPJJ!icable tu sales by repo"dent to the independent di tributors tl'.OUgh its relJiflcen1fllt (\;Yi,j"" ,u"J to the Bales of like repl1J!'ement IJarts to the origin"J eqllil'mCJlt rn"n\1facturer J-"presented 3B. ;. 'This the f,gl.re applied by him to the re';J"' .ive percfonta(!,'s of pri"e difference for each eC)uipment manufadur"r ill determining the extent of cost justificatin" f(jr eadl . As discllssed hereafter, the respondent excepts to the figure of 38. 15,/;, as the actual oJH' rHtiTl'; "ost differential and claims it improperly excludes certain CORtR allocable to its replacement division. Opinion 55 F.

in the case of General Motors, 4. 62 % in the case of Ford, and 91 % in the case of Chrysler. In this industry where competition is unusually keen, where margins of profit on individual items are exceedingly small, and where even the 2% cash discount allowed by the respondent is so important to its distributor customers these unjustified price differences obviously are not de minimis in character.

The business of the independent wholesalers is not limited to the resale of common parts purchased from the respondent. Respondent' s wholesalers must sell competitively the balance of the parts in the Thompson lines and other lines of automotive products against their counterparts in the vehicle manufacturers' replacement lines irrespective of whether the balance is supplied the car manufacturers by the respondent or other replacement parts manufacturers. Competitive handicaps on the handling of one merchandise category have no legal sanction by reason of the fact that the disfavored competitors sell other wares. As stated by the Snpreme Court in the Morton Salt case, supra:

There are many articles in a grocery store ihai, considered separately, arc comparatively small parts uf a merchant' s stock. Congress intended to protect a merchant from competitive injury attributable to discriminatory prices on any or all goods sold in interstate commerce, whether the particular goods constituted a major or minor portion of his stock. Since a grocery store consists of many comparatively small articles, there is no possible way effectively to protect a grocer from discriminatory pdces except by applying the prohibitions of the Act to each individual article in the store.

The contended insignificance of the unjustified differentials notwithstanding, purchases for competitive resale of the common parts here involved have been verysubstantia1. With respect to 77 common parts for the Chrysler and Ford lines and certain General Motors cars, Thompson distributors in 1955 purchased 172, ) units Jar which they paid $885 756. The comparable price, had such purchases been made by the respective car manufacturers, would have been $455 029. , a difference of $880 727. The three car makers paid $1 511 480 for the respective common parts purchased by them. Their cost to Thompson distributors would have been $2 756 105, a difference oJ $1 244 625. THOMPSON PRODUCTS, INC. 1275 1252 Opinion In that year, aggregate sales of all automotive replacement parts by Chrysler and Ford were $100 000, 000 and $200 000,000 respectively. Total sales by General Motors on Buick, Oldsmobile and Pontiac parts represented $139,000 000. Included in such sales were substantial dollar amounts of various replacement parts manufactured by the respondent. The granting of redistribution or wholesale allowances to car dealers on replacement parts sold at wholesale to other dealers was widespread. Buick paid out four and one-half million dollars, Oldsmobile three and one-half million dollars and Pontiac three million dollars in wholesale compensation to their franchised car dealers. Everything considered, it is evident that the discriminations accorded by respondent to the vehicle manufacturers not only have contributed to foreclosure of the franchised car dealer as a replacement parts customer for the respondent's wholesalers, but additionally contributed to setting up the car dealer as a powerful wholesale competitor in place of a former actual or potential customer. think there is sound record basis for the initial decision s holding that the respondent' s discriminations represent substantial threats to competition. This aspect of the appeal is denied. The respondent further excepts to the hearing examiner s action in rejecting certain elements of cost justification which it requested be recognized in the operating cost differential. The first of these concerns an accounting aJIocaiion to the replacement division of 72( for staff engineering expense. This company outlay consisted of engineering research and development projects primarily concerning nonautomotivc products or related to experimental or research work on products not being sold in 1955. We have considered the arguments advanced by the respondent on this aspect but find no error in the hearing examiner s ruling declining to recognize this item as an element of cost differential A second exception urges error through the hearing examiner failure to include as a differential cost a "return on investment" factor on sales to the jobbing trade on a comparable profit basis to that rca1ized by the respondent on sales of other company products. The respondent states that, in 1955, it had an average investment of $8,810 912 in its domestic rep1accment division facilities used solely in selling to distributors. It further states that rate of return or profit (before federal income taxes) for total company operations was 20.8 %. Respondent computes its Opinion 55 F.

claimed "return on investment" for the rep1aeement division as follows;

Reiurn on investment in replacement division (20. 8% x $8 810 912)n $ 1 832,670 et sales of replacement division - -- -- -- u 2UJ 194 Percentage of return on investment in replacement division to net sales 10.64% The respondent would apply the percentage of 10. 64 to the division s net sales value of common parts to \vholesalers to arrive at $166 623 which the respondent argues should be recognized as a proper cost differential. This amount is essentially an allocated portion of the total profits of the company from a1l sources including export sales, defense contract sales and sales of automotive parts. The Act's pertinent proviso is limited to permittng cost differentials making only due allowances for differences in cost of manufacture, sale and delivery resulting from the difierent methods or quantities in which the commodities are sold or delivered to purchasers. The return rate factor element here claimed is thus entirely outside the sphere of actual1 cost differences. Respondent' s request for recognition of such return rate factor was properly denied by the hearing examiner. The sales to the original equipment manufacturers of replacement parts for their respective makes of vehicles were negotiated by the manufacturing divisions of the respondent with the vehicle makers individually and prices have varied greatly. The percentage differences between the prices paid by the independent \vholesalers and the different vehicle manufacturers similarly have varied. The respondent contended that the prices of all common parts sold to equipment manufacturers should be averaged to thereby afford a weighted average price rJitIerential to be cost justified. The hearing examiner in effed held that such proposed balancing of overjustification as to some equipment manufacturers against underjustification in cases of others was not a valid procedure. The respondent contends error and argues that the hearing examiner s ruling contravenes principles controlling in the Commission s decision in Sylvania Electric Products, Inc. Docket 5728 (decided September 23 , 1954). In that proceeding, a radio tube manufacturer was charged with discriminating in price between its disfavored distributors and a radio set manufacturer purchasing tubes for resale nationally to the replacement trade. That case dealt with comparisons of ag- THOMPSOX PRODUCTS, INC. 1277 1252 Order gregate price differences with aggregate cost differences on the entire complement of tubes sold and presented a competitive situation entirely dissimilar to the instant one. As we noted there, the particular tube types on which the price differences favoring the national reseller ':v"ere larger, were those in least demand. Here, the price differentials relate to replacement parts having marked demand including common parts for the cars sold by General :'l1motors, Ford and Chrysler Corporation. Furthermore, the respondent's distributors and jobbers must compete in as many areas oJ competition with vehicle manufacturers as there arc manufacturers buying the common parts and not with a single hypothetical original equipment manufacturer. We conclude that the respondent's contentions that it has justified the differences in price between Thompson wholesalers and the original equipment manufacturers lack sound basis. We also have considered the objections, raised by the respondent under Part III of the brief, together with the exceptions set forth in the brief's appendix. The hearing examiner s rejection of various of respondent's requested findings appears sound and free from substantial error. Error is claimed also in the brief re.specting other rulings including those whereby the hearing examiner, in instances, received evidence over respondent' s objections and, in others, excluded evidence offered by the respondent. The great majority of those rulings related to matters calling for exercise of the hearing examiner s sound discretion. No showing has been made by the respondent of abuses in that respect. Based on our study of these exceptions, we find no prejudice under those rulings to respondent' s right to full and fair hearing.

As a result of our review here, ,ve adc1itional1y have determined that the order to cease and desist contained in the initial decision should be modified to more clearly extend its bans to discriminations between original equipment manufacturers and disfavored indirect jobber customers ,vho, like respondent's direct buying distributors, are purchasers within the meaning" of the Act. In the light of the facts of this case, we approve in principle the hearing examiner s recognition of the availability to the respondent of the statutory cost defense in circumstances envisioned by the Act. In this connection, however, we feel that the language of the order should be revised to more clearly relate this to any future proceedings instituted for judicial enforcement. Order 55 F.

The appeal of the respondent is denied. With the order to cease and desist modified in respects noted in the preceding paragraph, our order issuing herewith adopts the inHial decision as the decision of the Commission.

FINAL ORDER This matter having been heard by the Commission upon the respondent' s appeal from the initial decision of the hearing examiner and upon the briefs filed in support of and in opposition to the appeal; and the Commission having rendered its decision denying the appeal and having determined, for reasons stated in the accompanying opinion, that the order to cease and desist should be modified:

It is ordered That the following order be, and it hereby is substituted for the order contained in the initial decision: It is (J'dated That the respondent Thompson Products, Inc. , a corporation, and its offcers, representatives, agents and employees, directly or through any corporate or other device, in connection with the sale for replacement purposes of automotive replaeement parts in cummerce, as " commerce" is defined in the Clayton Act, do forthwith cease and desist from discriminating in the price of such products of like grade and quality: By selling said replacement parts to any manufacturer of automotive vehicles or any other original equipment manufacturer at net prices which are lower than the net prices paid by any other direct or indirect purchaser who, in fact, competes with said manufacturer in the resale and distribution of such replacement parts; provided, howe"eT that nothing herein shall prohibit the respondent from sho\ving as a defense in any proceeding instituted for enforcement of this order that its differing prices make only due allowance for differences in the cost of manufacture, sale or delivery resulting from the differing methods or quantities in which such products are sold or delivered. It i8 fv.TtheT Q1'dered That the respondent shall, within sixty (60) days after service upon it of this order, file with the Commission a report, in writing, setting forth in detail the manner and form in which it has complied with the order to cease and desist.

It ':s further ordered That the initial decision, as modifier! herein, be, and it hereby is adopted as the decision of the Commission.

D. & N. AUTO PARTS CO. INC., ET AI,. 1279 Decision