Roux Distributing Co., Inc.

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IN THE MATTER OF ROUX DISTRIBUTING CO., INC.

ORDER, ETC., IN REGARD TO THE ALLEGED VIOLATION OF THE FEDERAL TRADE Commisslon ACT Docket (Ja,1G. Complahd, SelJf. 14, 1f56-0nfel lvlar. 4, 1959 Order dismissing for failure of proof, complaint charg-ing a New York City distributor of beauty prepan tjons fot" the hail' with requiring its wholesale customers to restrict their sales to a limited class of accounts. Before !vT. J. Eaxl Cox hearing examiner. !vr. Jerolnc Garfinkel and !v,. Lel"is F. DeJJ1" for the Commission.

1111. William J. Hayes of 1\ew York City, for respondent. OPINION OF THE COI\ fISSIO!\ Ey ANDERSON , Commissioner:

This matter has come before the Commission upon the appeal of counsel in support of the complaint from the hearing examins initial decision dismissing the complaint for failure of proof. The complaint charges that respondent has required its wholesale customers to agree to restrict their sales to a 1limited class of accounts and that the practices involve(l are in violation of Sec tion 5 of t.he Federal Trade Commission Act. The issue before us is \vhether the examiner properly dismissed for in ;uffciency of evidence.

The essential facts as to the methon of distribution employed by respondent are not in dispute. Respondent, Raux Distributing Co. , Inc. (sometimes hereinafter referred to as Houx), is nov;: and has been engaged in the sale and distribution of beauty preparations for the hair in interstate commerce. Its customer accounts include direct rptailers, beauty schools, drug wholesalers and beauty supply dealers.

On Mareb 18 , 1953, Raux notified all its wholesale accounts that a nev./ discount schedule uf off trade price (it '"vas then 35Si) wou1c1 be initiated April 1 , 1953. The follo\ving classifications VI'ere set up :

1. Jobber-one who subjobs, sells to, trades or exchanges Uonx products with drug wholesalers or beauty supply dealers or other jobbers.

ROUX DISTRIBUTING CO., INC. 1387 Opinion 2. Drug wholesaler-one wbo sells Roux products to drug stores, toilet goods counters of department stores and similar retailers only.

3. Beauty supply dealer-one who sells Roux products to beauty salons, beauty schools and beauty operators only. The beauty supply dealer, under the new schedule, could receive an additional 10% (a total of 35/\) in consideration for an agreement, among other things, to resell only to beauty shops beauty schools and beauty operators and not to subjob, sell to, trade or exchange Raux products with drug wholesalers, jobbers or other beauty supply dealers.

On April 28, 1953, respondent sent its customers a further notice announcing it would benceforth seIJ its products only to those of its wholesale customers whose Roux sales unmistaJ.ably fact into bl,t one of the three classifications defined by respondent ("drug wholesaler beauty supply dealer " or "jobber ). AIJ wholesale customers were requested to sign and return the notice, signifying that they would operate exclusively \within the classification they had chosen.

It is quite clear that the wholesale customers signing and returning either of the aforementioned notices, or both, agreed to confine their sales to particular customer classifications. Primarily \yhat this meant "iva,s that drug wholesalers were limit.ed 1.0 seIJing Houx products to drug stores and toilet goods counters of department stores and similar retailers; the beauty supply dealers were limited to seIJing Raux products to beauty salons beauty schools and beauty operators. Many of respondent.' s customers signed and returned these notices. The record shows that as a result. of this method of seIJing, customers of Raux formerly selling in several classifications had to give up accounts outside their chosen classification. Respondent vigorously enforced its sales policy and discontinued customers v/which \vould not classify themscJves or ,which sold outside of their classification.

The hearing examiner in his initial decision cites Um:ierl SfaU' v. Co/yate Company, 250 U. S. 300 (1919), and other cases involving "refusal to sell," concluding, among other tbings, that none of the factors necessary to take this case out from under the general rule relating to freedom of a ITwnufacturer to select its customers are shown to c;dst in this proceeding. It should be clear, however, that this matter contains a more fundamental issue than whether or not the respondent may re- Opinion 55 F.

fuse to deal with certain of its customers failing to comply with its conditions of sale; the issue here is whether the agreements with customers containing the restrictions as to resale of Raux oducts are lawful. If the agreements are lawful, then a refusal to sell for failure to comply with the terms of such agreements is not in violation of Section 5.

Certain restrictions as to the resale of a product may violate the Sherman Act as well as Section 5 of the Federal Trade Commission Act. For example, under some circumstances a distributor of a trademarked article may not lawfully limit by agreement the persons to whom its purchaser may resell, particularly where the agreement is tied in with a system of distribution which includes the unlawful fixing of resale prices. United Sta.tes Douseh Lomb Co. 321 U. S. 707, 721 (1944). We do not believe, however, that a restriction or limitation as to whom a purchaser may resell is illegal pe,. se. Cj. Fosl",,.gh v. Colifo,.nio & Howoiian 5'.1g"". Refining Co. 291 Feel. 29 (1923); Chicago 5"go,. Co. v. Ame,.icun Snga,. Refining Co. 176 F. 2d 1 (1949), cert. den. 338 U.S. 948 (1950).

The question bere is whether respondent's practices constitute unfair methods of competition or unfair acts or practices in violation of Section 5 of the Federal Trade Commission Act. It "\vell settled that practices violating thi:: Act are not confined to those condemned by the Sherman Act. Federal Trade Commission. v. 11lotion P'ictuf'c Advm' tising Se?"uice Co. , Inc. 344 U. 392 (1953). But, in a caee of this kind, a violation of Section 5 is not shcJ\vn unless the record contains some evidence of the competitive effect of the practices. This does not mean there must be a showing of some actual elimination or suppression of competition, but ihere at least should be some basis in the record for a finding that competition may be substantially lessened. The complaint speciflcally alleges that respondent' s practices have a dangerous tCJ1rlency only to eliminate competition among respondent' s cl1 .tomers in the sale and distribution of Roux products. Thuo"., al1 the evidence received concerning the alleged ef :fects relates to the competition among respondent' s customers. There is no evidence that competition otherwise has been lessened or of any other restraint on trade. This evidence, hOlvever, concerning competition among respondent' s customers and the alleged tendency to eliminate such competition is ven inconclusive. It is true, as alleged by the complaint ane! admitted, that respondent, among ite 1700 customers, ROUX DISTRIBUTING CO. , INC. 1389 1386 Opinion had approximately 550 drug- wbolesalers and 500 beauty supply dealers. It is also admitted that prior to April, 1953 , eacb of respondent' s wholesale customers competed fn,ely with each other such customer selling in the same trade area. This alone, however, does not support a finding- of competition between drug wbolesalers on the one hand and beauty supply dealers on the other. The competition so admitled may have been only that among the customers within a class located in a given trade area. Trade areas are not defined and there is no development of the competition which existed in any particular locality. It is uncertain from this record that drug \vholesalers and beauty supply dealers, the two principal classes of customers involved, \were ever in substantial competition, since it is not sho\vn that they engaged in business in the same trade areas. Thel' c is evidence that respondent's practices caused some of its customers to lose sales (primarily beauty sllpply dealers losing drug store accounts) and caused certain customer1:s or former c-ustamers to suffer reductions in profits. This, however, does not prove that an)' competition has been adversely airedcl1. lVerely io show a Joss of sales or proflts by individual customers has no necessary competitive significance in the circumstances. As heretofore indicated, it has not been shown clearly that competition existed bet,veen drug v,'wholesalers and beauty:)' supply dealers; consequently it cannot be determined to vv hat exteni competition has been or may be harmed by respondent' s practices. The position of ('ounse) in support of the complaint appears to be that the limitations on resale imposed by respondent all its vlhoJesale customers means that competition is necessarily diminished among sllch customers and that this is enough to violaie Section 5. To accept such reasoning would be to consider resale restrictions of this nature " unfair methods of competition " in themselves, regardless of their effects on competition. \Ve do not so view,1 the law.

In the circumstances, we concur in the hearing examiner holding that the charges in the complaint are not sustained by the record. Although normally the matter ,vould be remanded to the hearing examiner to receive any proper evidence concerning the competitive effect of the practices, such action will not be taken in this instance. The Commission assumes that this evidence if available to counsel in support of the complaint ,vould have been adduced into the record and, therefore, that upon a remand it \vould have to be originally obtained. Respondent 1390 FEDERAL TRADE CO"IMISSION DECISIONS Order 55 F.

however, has instituted a new program under which it sells two distinguishable Jines of products. In connection with this program, operating since August, 1956, the beauty supply dealer is not precluded from selling to drug accounts. The discounts now follow the line of products rather than the customer classification. The evidence in question, since it would concern practices engaged in prior to the present prog-ram and more than two and one-half years ago, clearly would be diffcult to develop at this late time. Under all the circumstances, we do not believe that it would best serve the pu blic interest to remand the case to the hearing examiner.

The appeal of counsel in support of tbe complaint is denied. It is directed that an order be issued herewith dismissing the complaint in this proceeding without prejudice. Chairman Gwynne concurred in the result. ORDER DISMISSING COMPLAINT This matter having come before the Commission upon the appeal of counsel in support of the complaint from the hearing examiner s initial decision dismissing the complaint; and The Commission for the reasons set forth in the accompanying opinion, having denied the aforesaid appeal, and having directed the issuance of an ordcr dismissing the complaint without prej udice:

It -is onlcred That the complaint in this proceeding be, and it hereby is, dismissed, without prejudice, however, to the right of the Commission to issue a new complaint or to take such further or other action against the respondent at any time in the future as may be warranted by the then existing circumstances. Chairman Gwynne concurring in the result. KEYSTOKE MANUFACTURING CO., INC., ET AL. 1391 Complaint